REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2024-Q1

[Kurt Levens, executive]

Good morning, and welcome to the REC Silicon First Quarter 2024 Presentation. My name is Kurt Levens, I'm the CEO; and I'm here with Jack Yun, our CFO.

So to talk about the highlights and updates that happened in the quarter. First, I want to point out that our revenues were $42.1 million, primarily driven by increased silane gas sales. This is the second consecutive quarter where we've had revenues of $40 million or greater out of our Semiconductor Materials segment.

Our EBITDA loss was roughly around the same as what we had last quarter, unfortunately, and this was primarily driven by the start-up costs at our Moses Lake facility. Additionally, we are currently looking at a potential increase for cost of completion of up to 10%, and we can talk about the primary drivers on -- when we get to that slide.

Our high-purity granular has achieved 5 of 6 key targeted parameters. This is very important for us as we move towards our first shipment. In addition to that, we extended a long-term silane contract with a major industrial gas distributor for 5 years. Finally, our Butte Polysilicon exit is still on schedule, and we plan to be out of that by the end of the year.

So regarding our restart in Moses Lake. Currently, we've been able to start a number of the reactors and run a number of the reactors. And what we have found is that current modification in our reactors allows us to reach high purity levels much quicker than our previous generation did. And when we find under stable operating conditions that we're able to demonstrate consistency in low PPB metals as well as very low levels of our other targeted parameters, including things such as carbon and hydrogen.

If you look on the right at the graph, that is a GB/T standard, which is a standard for polysilicon purity, that is utilized. And this is the actual performance off of 1 of our reactors showing the cleanup curve over time. So I think that's been very encouraging for us to see that from a purity standpoint out of our FBR reactor, that the product is modeling and actually coming out along the way that we wanted. When we look at overall in terms of the impurities, currently, we're at a level where we've achieved 5 of the 6 key targeted parameters.

Overall, for the entire plant, right now, silane gas is running stably. And our FBR reactors currently, we're running approximately 60% of them. We have actually started up more than that, but some of those are in turnaround or, in fact, are waiting to have some optimization or repairs done to them as we're working through the start-up phases.

The reason why we're moving forward on making sure we get our FBR reactors kind of ahead of the silane feed on our other processes that are downstream is because this allows us to have some capabilities around having -- being able to take the reactor down if it's not performing the way we want to do, anything that we need to do with it with regards to maintenance or tuning optimization, troubleshooting and yet still be able to keep the load that we want to keep on our gas facility and our other facilities that are downstream from the FBR reactors.

So we're going to move forward in trying to have those reactors at least up and available and in standby or have run as soon as possible, whether they're actually employed at that moment or not. Then we move down to our product handling, where currently, we have approximately half of that facility online, with the other ones that will be following along the schedule that we've already laid out and that I've discussed previously.

And then it goes into packaging. And I think what I want to point out here is the fact that our process is a continuous process. And every single 1 of these activities is continuous. Unlike a traditional Siemens process, it's a batch process. Each 1 of these processes is highly dependent upon the process before and the process after it. And there's no natural break. It's a flow.

So it is, in particular, 1 of the items that is a challenge in this sort of operation when you're starting it up is to make sure that you are able to run stable throughout the whole system. Because quite often, when you have upsets, the further upstream you have upsets, then that could actually affect performance downstream until everything clears.

So it's -- within that regard, it's a much more complex start-up, one that we've managed before. And although there are some new pieces that we've had -- we've added on, they are items that are in the process of performing or being tuned or where needed, improvements being made or new processes being introduced to make things go quicker and better.

What we're trying to do here is get to the point where we're able to consistently hit on all of those key parameters so that we can begin making shipments. I think I've said before that I don't want to focus on just putting the hammer down and making products that we have to sell out into the market at whatever the liquidating cost is.

What we want to focus on is making products that are differentiated, high purity that can be used by our customer in their processes. And that's really why we're making sure that, above all else, we have a lot of focus on this area, and we will continue to, even after we make our first shipment.

This process is going to take quite a while because even after we come and we meet all of our key specifications, we have a road map that we want to be able to follow that is going to then drive down our specifications from there continually until we are at a level that we feel is better than the current benchmarks out there.

I already talked a little bit about the estimated project cost to complete. And this is primarily due to the fact that we have had some escalation in contract labor as we've been finishing up the project, also due to the fact that we've had some delays. And then the efficiency that our contractors are able to achieve around a working operating plant is less than what they originally had expected.

So this is something that we're working on mitigating. We still have -- there's still more contracts that we're actually looking at and rebidding to work this issue. So this was something that was -- that came up as we look to do the final bidding for closing out the project. And so now we're working on mitigating.

One of the things that we're working on mitigating obviously is making sure that we get them off site and have all the construction activity done as soon as possible. And right now, we're looking at that by September. And the primary benefit of this obviously is, number one, we stop incurring the cost for mobilization costs.

But number two is also, from an operational freedom standpoint, much more conducive for us to operate and to continue with ramping up the plant without the complexity of having construction work going on in some areas that are working areas. We still are looking at full capability online by the end of the year.

So silicon gases. The volume that we shipped in silicon gases was in line with what we shipped the previous quarter, and again, also in line with that sort of stabilized volume level of 750 to 850 that we had indicated before that we've kind of come into after we went through the inventory correction caused by the semiconductor downturn.

One thing that it is important to note from our perspective is that spot volumes in China-related markets are coming under pressure due to currently a situation where there's reduced demand for PV-grade silane. So there is some of that, that is starting to occur as we see that their utilization in China is, at this moment, not as robust as it has been here, particularly last year.

We are starting to see some signs of the fact that the second half story, as we've indicated before, is still intact. Memory market continues to improve. They continue to increase utilization, and also, there's continual reports from memory producers that their prices are increasing, which is generally a harbinger for improved conditions for them. So we expect that, that will continue through the remainder of this year.

Additionally, there is some possible silicon anode production volumes later this year, the potential given where some of the silicon anode producers have indicated they're at in their construction processes. We'll continue to monitor that. And that's obviously upside if that occurs.

As I had indicated before, we extended a 5-year silane distribution contract. That's primarily for semiconductor, flat panel, PV, as well as potentially some anode volumes if it makes sense for the customers to be taken care of, depending upon the volumes that they're targeting.

So it's a fairly comprehensive agreement, and it's 1 with a partner that we've been involved with for quite a number of years. So it's a continuation of their confidence in us as well as our confidence in them.

We also expect 10 new bulk silane user locations to come online this year. These will be all over from the -- primarily here in the U.S., Europe and in Southeast Asia. And in addition to that, we are continuing discussions with silicon anode producers over potential silane supply beyond just what may come up later this year.

On semiconductor grade polysilicon, we shipped less than what we did the last quarter, and that's primarily driven by the fact that CZ-grade silicon that we make incidental to our flow zone process, we were not -- we had a lot of pushouts. So we were not able to sell as much as we had indicated.

That market is currently weak and tied in general to the semiconductor market. And in particular, it is used across various -- in technologies at the semiconductor market, and some of which are not necessarily in the recovery curve. So there's a lot of inventory in that particular product category right now.

However, our ASPs realized were increased, and this is because we simply we shipped more of a higher-value product. Currently, our exit plan is still on schedule. The next milestone is that we will cease all of our energy-intensive activities before the next period of forecasted high-cost electricity.

We just came through in Q1 and that was a period where there was some high-cost electricity which affected us even though we did have a hedge in place as we have indicated before as one of the mitigations. So we will fulfill all our commitments, and our goal is to clear all the inventories and release all that working capital back to us by year-end.

PV polysilicon. If you look over on the right, well, there's a lot to be said. But if you just look over the right, I think that's fairly explanatory. You see the bifurcation between the outside of China market and the inside of China market. Inside of China market is, at this point, really more about liquidation price than it is about PV's cash cost.

So we are monitoring that prices for the most part now are below most producers. In fact, it's arguable that it's below all producers' cash cost. But the price still has a bit of a downward tail to it. And this is going to, I think, continue for a little bit until the demand increases or somebody blinks there.

In any case, what we see outside of China is that while there was some adjustment, you can see that the level that where it's leveled off is much higher. This is consistent with what our channel checks and what our customer checks have told us with regards to what the prices are currently beyond what is coming from the PV insights that we're sourcing in this particular matter. We also have information from other consumers that put that price right about where it's indicated.

At the end of the day, until there's a slowdown in that capacity and until there is some rationalization, this is going to persist in China. So I don't know at this point how long that's going to take.

Originally, there was thought processes and indications that it could happen in the second half of the year. It could extend a little bit beyond that. But we are starting to see some projects that are, in fact, slowing down or getting canceled. However, we are seeing other projects that are, in fact, going to go ahead and start up in spite of the situation.

In terms of revenues, as I indicated, we have revenues of $42.1 million. It was our -- again, our second quarter -- consecutive quarter where from our Semiconductor Materials segment, we were able to get greater than $40 million in revenues. Our EBITDA, impacted by our restart activities at Moses Lake, was in line with the $31.2 million that we got the last -- the loss, I should say, EBITDA loss was in line with what we had the last quarter.

Semiconductor Materials segment is at $2.8 million, but you can see that, that was an improvement over the prior Q1, which was negative $3.4 million. So a lot of the improvements, and this is the second quarter in a row in which we've had a sequential improvement over the quarter-on-quarter from the previous year. And this is primarily due to the fact of all the mitigating efforts that we did there between cost reduction, hedging, price increases, mix changes and other adjustments that we made there to mitigate the higher energy situation.

So as I was saying, this gives you some better view of it when you look at it from quarter-on-quarter. Primarily, our revenue was driven by our silicon gas sales volume increasing. And also, as I said, the ASP increase in our semiconductor grade polysilicon. Overall, our volume decreased in semiconductor polysilicon, but that was -- as well as the semiconductor that was dealt by the fact that we had CZ that was pushed out.

There was also an increase from a production standpoint in terms of some old equipment that was not able to perform as well as it should be, and also some third-party supplier equipment that was not performing as well as it should be. So these also cost us in terms of volumes that we are producing some slight reduction.

Cash flow-wise, the 2 items here from cash flow. Obviously, in the same things that it has been for the past few quarters, negative EBITDA and our CapEx are the 2 heavy hitters with regards to that. And as long as we are not -- or until we start shipping, then that sort of run rate is what we've been experiencing. Again, from a financial position, when you look at the net debt, primarily driven by a decrease in cash.

So a little bit on government initiatives because there has been a lot of activity here in the United States around that. First of all, is that on the IRA, there's an expectation that there's going to be domestic content rules coming out, some rulings and some clarification on that within the next couple of months.

Of course, our interests and our hope, and there are some indications that there would be recognition for upstream materials in that. Not just polysilicon, but probably more importantly from our perspective, wafer and ingot or wafering, they are the same in our mind in terms of ingot and a wafer.

So if that is -- if there's a way that the government can find to incentivize more of the value chain to actually invest here, then that is going to be the most certain way that we can have the supply chain security that they're looking for, the energy security that they're looking for, and that we can find companies that are willing to invest and grow the value chain in those activities.

Trade action, of course, this is the same thing. I think if you aren't aware that there was the American Alliance for Solar Manufacturing Trade Committee did file a set of antidumping and countervailing duty petitions. These were primarily around companies located in Southeast Asia. The idea was that it was basically a vehicle for Chinese materials to go into and then circumvent the tariffs that are in the United States. We are monitoring that very closely because, again, it's the same thing.

I think that companies wanting to invest here in the United States and companies that have already invested are going to need to make sure that there's protection in terms of having a fair level playing field for them to want to continue to invest or for them to realize their investment potential. Otherwise, then that -- without having that, I think that it will limit the opportunity for producers such as ourselves, because then it will limit the amount -- our universe of users of our materials.

The CHIPS Act, the U.S. government finally has announced some awards to semiconductor producers. And some large ones, primarily to TSMC, Micron, Samsung and -- well, those are probably the -- and Intel, I'm sorry. So those are the 4 big ones. And there's still some left, but there's a lot of money they've already doled out. And we'll see if there's going to be more agreements that come out of this.

On the infrastructure bill, there's a second round of battery grants. Some of you might have followed that there was a first round in which some of the silicon anode producers that are located around us went ahead and were able to take advantage of that and were awarded grants. They are coming out with more, and some of this idea around this is to build out the supply chain a little bit, as well as maybe offer opportunities to others who missed that on the first round.

So again, we're not experts in it, but from our perspective, if this is going to help drive the adoption of battery materials and specifically silicon battery materials here -- adoption of production here in the United States, then it's something that we will make sure we follow very closely.

And that's the same thing when we come to the TRACED Act in terms of the DOE now looking at unlike the DOD before had looked at it, now the DOE is looking to evaluate their supply of critical materials for battery. And critical materials, meaning -- could mean anything from minerals to other materials that go into the battery -- battery value chain. And of course, the idea being that if it is a critical material, then it is something that has -- requires some very specific monitoring and specific protections here in the encouragements as well here in the United States.

So in summary, our Moses Lake restart progress continues. We've achieved most of the initial key purity targets. Our first commercial delivery is expected by the end of this quarter. 100% capacity expected by the end of the year. We are starting to see that second half story from the semiconductor silicon gas segment is having more potential that is going to actualize.

Our Butte Polysilicon exit is on track, and we are still in discussions with silicon anode material producers. We expect resolution one way or the other this year, I think, at least with some of them, if we're to follow on what their timelines are.

So thank you. And our next -- we'll see at the next presentation, which will be on August 8 for the Q2 results. And with that, if there's questions?

[Jeong Yun, executive]

Okay. I'll get into the questions now. The first one is, based on the current forecast and production and sales, when do we expect positive EBITDA?

[Kurt Levens, executive]

I think that, as we've said before, we are really looking at being able to enter the regime sometime next year, where we are going to be a company that is able to produce positive results, but we're focusing right now on making our first shipments.

[Jeong Yun, executive]

Okay. And we've got multiple questions related to this. I'll try to combine these, but that's related to the $85 million silane agreement. And a couple of specific questions around this is why was this information not released to the public when it was signed? And secondly, in previous releases, it was mentioned that we were close to negotiating another contract. Was this the contract that was referenced in previous earnings release?

[Kurt Levens, executive]

Yes. This is the referenced contract. And the reason why we didn't release it separately is because unlike other specific material contracts, this was a contract that we felt came under the guise of our normal operating situation.

We enter into a number of contracts on different things, both supply and buy contracts as a matter of course. So that's the way we treated that. But then given that there was a lot of interest in the investor community learning about these things, we did say that we would then, therefore, release it at our quarterly earnings.

[Jeong Yun, executive]

Okay. Are the falling polysilicon prices in China affecting deliveries to Hanwha?

[Kurt Levens, executive]

No, they are not.

[Jeong Yun, executive]

And is there a specific quarter when we're expecting our sales volumes to equal production volumes?

[Kurt Levens, executive]

Right now, we're not -- we're not guiding on that. Right now, we're focusing on getting our first shipment out.

[Jeong Yun, executive]

And another topic that there's multiple questions is declining cash balance. And are you comfortable with the cash balance of near $100 million? And do you expect that we will need additional cash in the future?

[Kurt Levens, executive]

I think right now, with the plan we have, we're comfortable, but we'll monitor it. And if this changes, obviously, then we'll have to make sure that we communicate or have a plan to deal with it.

[Jeong Yun, executive]

And what polysilicon price would we expect to realize as of today with the current polysilicon prices in and out of China?

[Kurt Levens, executive]

I think we gave a range before of an EBITDA that we would expect between that $100 million and $300 million.

[Jeong Yun, executive]

And a couple of questions related to first delivery. We've first stated that it would be during Q1, and now it's either nearing Q2 or late Q2. Could you please clarify this?

[Kurt Levens, executive]

Yes, right now, our target is being able to deliver in Q2, but that could be inclusive up to the very end of Q2.

[Jeong Yun, executive]

And due to the delay of first delivery to Hanwha, what is the anticipated volume that we're expecting to Hanwha in 2024?

[Kurt Levens, executive]

We have not disclosed the expected volume to Hanwha in 2024.

[Jeong Yun, executive]

And do the prices inside of China impact the agreement with Hanwha at all?

[Kurt Levens, executive]

Only to the degree that it's part of how the mechanism works for setting the price. Outside of that, it has no effect on their commitment -- our commitment to supply or their commitment to take.

[Jeong Yun, executive]

Okay. And then a few questions related to the granular that's been produced in Q1. And you stated it met 5 out of 6 metrics. Is -- can you explain what the sixth metric is that has not been met?

[Kurt Levens, executive]

No, we're not talking about what that is, but it's another constituent of our specification. And it's something that while we've been making progress on, we're not there yet.

[Jeong Yun, executive]

And has the company applied for money from the Department of Energy?

[Kurt Levens, executive]

With regards to the -- with regards to this potential for grants, I assume, is what they're asking for?

[Jeong Yun, executive]

That would be my assumption, yes.

[Kurt Levens, executive]

Yes. We have not currently applied for any grant money. We did, however, put in a paper and state our interest. So we're monitoring the situation and should we -- that gives us then the right to come back later and apply for the grant.

[Jeong Yun, executive]

Next question. I believe you already touched on this, but are you willing to provide an approximate cash flow projection for the second quarter?

[Kurt Levens, executive]

No.

[Jeong Yun, executive]

And it's well known that Sila and G14 are co-located with the Moses Lake facility. Can you provide additional detail on securing anode contracts with either Sila or G14 -- or silane contracts for the anode, sorry?

[Kurt Levens, executive]

No, I think as I said, we are, in fact, still pursuing discussions for contracts with different anode producers. I mean it's not -- I mean given the nature of the discussion, it's not really something that we're going to discuss who we're discussing it with.

[Jeong Yun, executive]

There's quite a few questions this morning. So there's multiple ones related to Group 14 and Sila, silane and anodes. I see some of these are duplicates. Should we expect the current negative EBITDA contribution from Moses Lake in the coming quarters?

[Kurt Levens, executive]

I think that we need to first start making deliveries. And then obviously, there's a point in which we're delivering enough that we will start not having a negative contribution out of Moses Lake.

[Jeong Yun, executive]

And then I see back to silane for anodes. Are we willing to state how much silane we anticipate shipping to the anode market in '25 and 2026?

[Kurt Levens, executive]

No, not at this point because we do not have any -- we understand what the magnitude of the opportunity is, should the companies actually be in a position to take what there's estimates of. However, we do not have contracts at this time with anode companies.

[Jeong Yun, executive]

And I guess, sort of switching into polysilicon, there's a new competitor in the U.S. polysilicon market. Highland Materials received a $256 million in tax credits to build a facility in Tennessee. And what are REC's views on this new competitor? And how do we plan to maintain or enhance our competitive advantage?

[Kurt Levens, executive]

Okay. Well, I would just say that this new competitor has been around for a while as other companies, the technology is pretty well known. They have the same technology they looked to build in Iceland before. So I think from our perspective, what they do is going to be their business, and we wish them well. We think that our technology is fully competitive and in fact, superior to that particular technology. So that's our viewpoint.

[Jeong Yun, executive]

New silane capacity is needed to serve the silicon anode producers in Moses Lake. Can joint ventures with these companies be an option in order to build a new silane plant?

[Kurt Levens, executive]

Sure. I think from our perspective, there's nothing off the table with regards to that. We said if this is -- if anyone is going to build a silane plant, then we would certainly like to be 1 of those doing it. We're open to that. However, I think it's just a matter of whether the market is, we're in, it's going to grow to that level.

[Jeong Yun, executive]

And can you elaborate on the CapEx spending for the rest of 2024?

[Kurt Levens, executive]

Yes. I mean we expect that it's going to begin tapering off, as we had indicated here. So by the end of this quarter, it will taper off through the remainder of the year.

[Jeong Yun, executive]

And is tax credits related to the IRA, the $3 per kilogram tax credit, is that finalized? Or are there uncertainties still on how this will work?

[Kurt Levens, executive]

So from our perspective, there's not any uncertainties, and we're fairly clear on it at this point.

[Jeong Yun, executive]

Is the range of $100 million to $300 million in EBITDA for the entire company or specifically Moses Lake?

[Kurt Levens, executive]

The entire company. Yes.

[Jeong Yun, executive]

And are we expecting to sell any silane gas from Moses Lake in 2024?

[Kurt Levens, executive]

It's not our plan right now to sell gas out of Moses Lake in 2024.

[Jeong Yun, executive]

It's quite a few questions here. So I'm trying to go through and combine some of these that are asking the same thing. Are you confident in the new first delivery timeline by the end of Q2?

[Kurt Levens, executive]

Yes, I'm confident. But again, every time we're involved in a process like this, there's always chances that something happens, which then sets us back. So given the situation now, I'm confident, but it's a process. And should we run into some items that aren't coming online quite like we want, then I think it could get pushed.

[Jeong Yun, executive]

And you noted that in the first quarter, Moses Lake produced 464 metric tons of polysilicon. And why was this -- why was it not on sales related from this production?

[Kurt Levens, executive]

So as we explained, because we were not on specification, that target specification we wanted to have, we were not selling that as part of the contract. Now that sort of material, which is all based on different start-up material, that sort of material will get moved at some point, and we will work on selling material that we have made. But that's not our primary target right now.

[Jeong Yun, executive]

And only a few more questions now. Back to the questions related to cash. Do we anticipate needing an equity raise? And if so, how much?

[Kurt Levens, executive]

No, as we said right now, our viewpoint is, we have a plan, we have a cash cost, we have a plan and when we're going to ship. Comfortable with that. If that changes, we'll monitor the situation. And if it changes, we'll make sure that we communicate what our new plan is.

[Jeong Yun, executive]

So that's gone through the questions that have been submitted. So there are not any further questions at this time.

[Kurt Levens, executive]

Okay. Thank you.