REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2022-Q2

[James May, executive]

Good morning, and welcome to the REC Silicon Second Quarter 2022 Earnings Release Presentation. I am James May, the CEO of REC Silicon. And today, I have with me Douglas Moore, our CFO, and will review the company's financial performance during the quarter. I will then cover the remaining topics on our agenda this morning.

Company's revenue for the second quarter was $45 million. This represents an increase of approximately $10.4 million compared to revenues of $34.6 million for the first quarter of this year.

This increase is due to higher sales volumes primarily higher polysilicon shipments, which increased from 267 metric tons in the prior quarter to 471 metric tons. EBITDA for the second quarter decreased to a loss of $1.1 million compared to EBITDA to income of $3.6 million for the prior quarter. Lower earnings are primarily a result of higher energy costs, especially electricity and higher manufacturing overhead costs.

Higher overhead spending is due to preparations for the maintenance turnaround planned for the third quarter at our Butte facility and increasing spending levels at our Moses Lake facility as we prepare to restart production. We will be providing additional information regarding second quarter revenues and earnings in a few moments.

During our first quarter release, we announced the restart of solar grade granular polysilicon production in our Moses Lake Washington facility. I can report that preparations to restart are well underway and are progressing according to plan.

We will achieve first production during the fourth quarter of 2023 and an increased capacity utilization to near 100% by the end of 2024. In addition, we have executed an MOU with hand wash solutions for the offtake of 100% of our solar grade polysilicon produced by the Moses Lake facility. We're now working to negotiate a final comprehensive supply agreement.

Now as I'm sure you are already aware, I am very pleased to report that President Biden signed the Inflation Reduction Act into law at 3:30 p.m. Eastern Time on Tuesday in Washington, D.C. This monumental long-awaited legislation will have a major impact on the solar industry.

Specifically for REC Silicon, this means that we will receive a refundable tax credit of $3 per kilogram for all solar grade polysilicon produced for use in the solar industry. This credit substantially improves the economics of restarting the FBR facility, and it clearly supports the company's decision to restart and utilize 100% of the available FBR production capacity.

We will provide some additional information regarding the impact of this legislation and the progress of activities to restart the Moses Lake facility later in the presentation.

With that, I will turn the presentation over to Doug Moore to review our financial results.

[Douglas Moore, executive]

Thank you, James. Good morning. My name is Douglas Moore, and I'll be reviewing the company's financial performance for the second quarter of 2022. As James mentioned, total revenues for the second quarter were $45 million, which represents an increase of approximately 30% compared to the $34.6 million reported for the first quarter.

This increase is the result of increased sales volumes for both silane and polysilicon. REC is reporting an EBITDA loss for the second quarter of $1.1 million compared to EBITDA of $3.6 million for the first quarter. The $4.7 million decrease can be attributed to higher energy costs and increased expenses related to restart activities.

Effectively, all revenues reported by the company for the second quarter were in the Semiconductor Materials segment. Total polysilicon sales volumes were 471 metric tons compared to 267 metric tons for the prior quarter. Total average polysilicon prices realized during the second quarter increased by 6% from the prior quarter. Prices for semiconductor grade polysilicon increased by 3%. Silicon gas sales volumes increased 12% to 852 metric ton in the second quarter, up from 764 metric tons in the first quarter.

Prices for silane gas were mostly unchanged from the previous quarter. EBITDA contributed by the Semiconductor Materials segment was $7.5 million for the second quarter compared to $10.7 million for the first quarter. The decrease compared to the previous quarter is primarily the result of increased energy cost. Q2 saw an increase in production volumes of both polysilicon and silane when compared to Q1. Later in the presentation, James will provide additional information with respect to our semiconductor segment.

Cash flows for the quarter. Cash balances decreased by $31 million during the second quarter. Cash outflows from operations were $17.6 million and were the result of the following: the EBITDA loss of $1.1 million, a $0.1 million decrease in working capital, which consisted of a $2 million decrease in inventories, a $5.3 million increase in trade receivables and a $3.2 million increase in accounts payable.

Interest payments for the quarter totaled $8.5 million, and were for the semiannual payment on the senior secured bond of $6.3 million, and then interest related to leases of $2.2 million.

Currency losses for the quarter totaled $7.9 million, and that was the result of a significantly stronger U.S. dollar and its impact on cash accounts in NOK, pension plan contribution for the quarter of $0.4 million. This was offset by a cash inflow of $0.4 million (sic) [ $0.3 million ] from changes in other assets and liabilities.

Cash outflows from investing activities were $12.8 million and were primarily associated with FBR upgrades for ultra-high purity granular production and also the dichlorosilane gas expansion project. James will go into more detail later surrounding our capital spending plan. Cash outflows from financing activities were $0.6 million and were the result of the repayment of long-term lease liabilities.

Again, cash balances decreased by $31 million during the quarter to $173 million on June 30, 2022. The company's nominal debt decreased by $0.6 million during Q2, down to $185.9 million due to the just mentioned payment on lease liabilities.

Nominal debt consists of our senior secured bond, leased liabilities and the Grand County, Washington property tax note. At June 30, nominal net debt is $12.9 million. Nominal debt is the contractual repayment amounts of interest-bearing debt, including our finance leases, minus our cash on hand.

During the quarter, net debt decreased -- increased by $30.4 million. This increase is due to the decrease in cash of $31 million and the decrease of nominal debt of $0.6 million. I will now turn the presentation back over to James to discuss our semiconductor segment business.

[James May, executive]

Thank you, Doug. Silicon gases during the second quarter, demand for our silicon gas products remain consistently strong compared to prior quarters. While global supply chain constraints have limited our ability to fill orders, we did see a higher rate of module returns during the quarter, which allowed us to fill more modules and resulted in the increase in shipment volumes to 852 metric tons during the quarter.

We continue to expect demand for silicon gas products to remain strong. However, we expect supply chain constraints to remain a challenge at least through the end of 2023.

In addition, we're beginning to see signs of a potential softening of demand for the third quarter due to a glut of flat panel displays, which may result in a lower-than-anticipated silicon gas sales for the third quarter.

However, this situation is expected to be temporary in nature and demand is expected to return to normal patterns relatively quickly. Over the long run, demand for our silicon gas products will be supported by the start-up of new semiconductor production in the U.S. as the impact of the CHIPS and Science acts are realized. And I'll talk about that in a few minutes here.

In terms of semiconductor grade polysilicon, as we indicated earlier, the increase in total polysilicon shipments to 471 metric tons was the primary driver for the higher revenues for the company for the -- during the second quarter.

Within this, shipments of our semiconductor grade polysilicon increased by some 145 metric tons to 333 metric tons during the quarter. This increase was primarily a result of a recovery from normal seasonal lows during the first quarter.

In addition, please recall from our first quarter earnings presentation, the sales volumes were accelerated into the fourth quarter of last year, which resulted in lower first quarter 2022 sales volumes.

Semiconductor-grade polysilicon prices increased by 3%, while average polysilicon prices during the quarter increased by 6%. This was due to the increases in prices realized for solar-grade polysilicon and a lower mix of lower quality polysilicon sales.

We continue to have very high order visibility and have sold out some 90% of our available volume for 2022 based on our equipment capabilities and the plant configuration. However, electricity prices are expected to increase during the third quarter. We'll take advantage of a planned maintenance outage during the third quarter to mitigate the impact of higher electricity costs by lowering production levels.

However, increases in energy as well as lower production utilization will adversely impact earnings during the third quarter of 2022. As I indicated earlier, activities are underway to restart the solar grade polygranular polysilicon production at the Moses Lake facility.

We're planning to realize first production during the fourth quarter of 2023, and then ramp to full capacity utilization by the end of 2024. These targets are unchanged from a restart plan announced with the first quarter presentation earlier this year.

Current activities include the procurement of equipment and materials necessary to restart production. The modification of FBR reactors to improve the quality of production has been initiated and we have begun to rehire our workforce and are currently focused on hiring those positions that will assist us in completing the improvement projects and the maintenance necessary to successfully restart production.

We've executed an MOU outlining the principles of the supply arrangement with Hanwha Solutions and are currently working to complete a long-term polysilicon contracts, supply contract for 100% of the solar grade polysilicon production. In the meantime, markets for solar grade polysilicon have remained very robust.

Current prices have increased to almost $40 per kilogram, while additional supply is expected to come online during the second half of 2022, analysts expect prices to remain relatively high well into 2023. Current analyst forecasts do not include the impact of the recently passed Inflation Reduction Act, which is expected to have a significant favorable impact on polysilicon market conditions.

In short, again, the decision to restart the production facility in Moses Lake is looking better and better. There are basically 3 sets of legislation in the United States that will have a favorable impact on REC Silicon's businesses. First, the Inflation Reduction Act.

As I've already indicated, this landmark legislation will have a significant favorable impact going forward. The legislation will drive substantial investments to create a U.S.-based solar supply chain and is expected to create a sizable domestic market for REC Silicon solar-grade polysilicon.

In addition, and maybe more importantly, this legislation includes a refundable production tax credit of $3 per kilogram of solar grade polysilicon that will have a direct and large favorable impact on REC Silicon's cash flows. Its credit is expected to result in approximately $48 million per year at full production rates. Obviously, the -- supports our decision to restart the facility.

Second, the CHIPS and Science Act, which was signed by President Biden on August 9. This legislation was designed to expand semiconductor production in the United States and to decrease reliance on less stable foreign sources for these critical supply chains.

While this legislation provides grants, loan guarantees and tax credits, it is most likely that REC will receive an indirect benefit from the resulting expansion of semiconductor production in the U.S. So this will result in increased demand for REC silicon's semiconductor grade polysilicon and silicon gases.

And third, the Infrastructure and Jobs Act, which was signed on November 5, 2020 -- excuse me, November 15, 2021. This act includes $6 million in the form of grants, which will support the development of supply chains critical to produce batteries, primarily for electric -- electronic vehicles. This will directly impact the development of a new market for REC Silicon's silane gas and could be very valuable to REC.

In addition, REC will benefit from the provisions in the act, which are designed to accelerate the adoption of clean energy technology. REC Silicon is well positioned to benefit from each of these legislative packages.

Now I will provide some perspectives on how we intend to obtain the capital necessary to restart the Moses Lake facility. While I cannot give you a complete picture of these plans because several significant variables remain undetermined, I can give you an indication of the magnitude of the capital expenditures required and a view to how we intend to fund the restart. I'd like to point out that we have a substantial amount of cash, $173 million, which is sufficient to fund a substantial portion of the restart activities.

However, we will be required to attain additional capital with the maturity of our senior secured bond in April of 2023. Our current estimate of total capital expenditures is approximately $150 million and includes the modification of all 12 FBR reactors, packaging and handling to support operation at full capacity and an analytical lab to reduce the ongoing cost of product analysis.

Compared to estimates previously provided by the company in October of 2020, this represents a substantial increase in estimated capital required for the restart, due to an increase in the scope of the restart from 7 reactor trains to 12 and new requirements to package our product and 10-kilogram bags. As I said a moment ago, the decision to restart 100% of the production is clearly supported by the newly passed Inflation Reduction Act.

The funding structure will depend upon the amount required as well as the cost of capital. The amount of financing will include results of ongoing operations, capital expenditures, the refinancing of the senior secured bond and offtake contract terms.

At present, the primary unknown is the terms of the potential offtake contract, which could have a material impact on the extent of financing required. Suffice it to say that given REC Silicon's planned operating profile and value proposition, we're confident that we can obtain the financing necessary to successfully place the FBR plant into operation.

In closing, I'd like to review the key mega trends, which support our strategic plans. First, technology. This need is filled by our semiconductor materials business, which serves market that will grow as a result of increasing trends for technological solutions in our global society. This trend is supported by the CHIPS and Science Act, which is designed to expand semiconductor manufacturing in the United States.

Second, renewable energy, this need is filled by the restart of our FBR production in most set. The FBR technology provides high-quality solar grade polysilicon with an ultra-low carbon footprint. This trend is supported by the Inflation Reduction Act, which is designed to drive investments in a U.S.-based solar supply chain.

And third, energy storage. This need is filled by REC Silicon's ability to produce silane and because the company operates the only large-scale silane production facilities in the United States and Europe. This trend is supported by the Infrastructure and Jobs Act, which is designed to support the development of critical battery supply chains.

In short, we are well positioned to benefit from the mega trends that will drive the markets in which we participate. It's also very refreshing to observe that we are positioned to benefit from government initiatives. These developments will support the successful restart of our manufacturing facility in Moses Lake Washington and will drive REC Silicon success as we move forward.

With that, I will now take any questions that you might have. Thank you.

[Douglas Moore, executive]

Okay. So I'll get into the questions. First question is -- why did Board member, Heike Heiligtag, leave the Board?

[James May, executive]

Heike participated in all the Board meetings coming up to the point where she submitted her resignation. When she submitted her resignation, she did not provide any reasoning and I'll leave that to the Board and to Heike to disclose anything associated with that resignation.

[Douglas Moore, executive]

So you indicate you estimate $150 million to restart Moses Lake? Is it possible to get into the timing of this spending?

[James May, executive]

No, I'm not going to outline the exact timing of it. What you'll see is that as we move forward, capital expenditures will increase quarter-on-quarter as we get closer to the restart. In the beginning, there will be a relatively high level of expenditure simply because of the long lead equipment and other items that have been placed on order to reserve shop floor space and then after that time, capital expenditures should be relatively even as we come into the restart timing.

[Douglas Moore, executive]

We have a couple of questions related to Hanwha and wafer factory potentially in Moses Lake, can you further comment on that?

[James May, executive]

From our perspective, we're following the news on Hanwha's announcements with respect to that wafer facility. That's an item that is Hanwha's, REC is not directly involved at this point. And while we're very pleased to see that they're developing a wafer factory simply because of the demand that, that creates in the United States for polysilicon. I won't go into specifics and leave the answer to Hanwha.

[Douglas Moore, executive]

We have multiple questions related to Hanwha and the MOU. One of them being, will there be a prepayment as part of the agreement? And if so, how much?

[James May, executive]

Got it. Traditionally, long-term contracts in the polysilicon industry have relatively good prepayments in order to secure volumes required under the contract, given the nature of how long this contract is and Hanwha's credibility as a customer, it would be prohibitive to charge traditional rates. So we're still working out the amount of the prepayment. We do expect there to be a prepayment. We expect it to be material. Other than that, I won't comment on the exact amount.

[Douglas Moore, executive]

To go along with that topic, can you indicate what method the polysilicon offtake price will be determined with Hanwha?

[James May, executive]

Any contract that we enter into will have some kind of a market mechanism to adjust price. I'm sure that, that question comes from the standpoint that Hanwha is a related party. Because of that, we will be extra careful in ensuring that the transaction is conducted in an arm's length base.

[Douglas Moore, executive]

Okay. So in addition to the $150 million capital spend, can you elaborate on any additional working capital needs that the company may need?

[James May, executive]

The working capital is another variable that's dependent upon the offtake contract terms. Traditional terms for polysilicon when we shut the facility down were between 60 and 90 days of accounts receivable, which results in a substantial investment in working capital. Current contracts, in a lot of instances, have prepayment clauses, which, again, then you have very little investment, at least in the accounts receivable portion of the working capital. .

So we'll announce that as we complete the supply agreement. And the goal there is obviously to keep the investment in working capital to the minimum possible given the situation that we face. And how much that is will affect the amount of capital that we'll have to raise.

[Douglas Moore, executive]

There's a couple of questions related to silicon anode batteries and -- can you go into more specific on how the negotiations are progressing in the anode battery manufacturers?

[James May, executive]

Yes. At this point, we're still in discussions. No commitments have been made. I think that with the Infrastructure and Jobs Act and the grants that are available, it's beginning to have an impact. And companies are increasingly looking to secure silane supply. At this point, we haven't committed anything and we're still in discussions.

[Douglas Moore, executive]

Okay. switch a little bit into semiconductor segment. There's a couple of questions related to the Inflation Reduction Act and CHIPS and Science Act and how that will impact the Butte facility?

[James May, executive]

As I indicated earlier, it's a little difficult to estimate what that really means. We probably won't be able to take advantage directly of any grants, loan guarantees or tax credits because of the expansion. However, we will have increased we expect to see increased demand, and that's dependent upon the length of time it takes to invest and execute the commissioning of wafer fab facilities.

[Douglas Moore, executive]

So sticking with the [indiscernible] facility, the capital expansion projects, can you go into a little bit more detail on when you're expecting the completion of those?

[James May, executive]

These projects, we announced them in -- with Q4's release and Q1's is released. They're really the largest project there is the DCS expansion, some 240 metric ton expansion to our DCS capacity. We expect that to be online near year-end.

[Douglas Moore, executive]

So just a couple more. Now that the Yulin JV dispute is settled, what is REC strategy, JV?

[James May, executive]

At this point, -- my focus is going to be on restarting the Moses Lake facility. I believe that what we can do at this point is maintain our investment in the JV, continue to support it where we can, and then we'll determine what to do with that long term later on.

[Douglas Moore, executive]

Can you expand on when you're expecting a formal deal with Hanwha to be done in relation to silicon offtake?

[James May, executive]

Yes. I think that's really dependent upon how these negotiations going on, on a forward basis. My expectation is it probably won't be well into the latter part of Q3 and maybe into Q4.

I think that have -- I think that concludes the questions from the web. We thank you for your participation and interest in REC Silicon. If there are any questions that we can answer following this call, please contact our Investor Relations, which is listed on the press release associated with this morning's presentation. Thank you very much, and have a good day.