REC Silicon ASA

OSE:RECSI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Kurt Levens, executive]

Good morning and welcome to the REC Silicon second quarter 2024 results presentation. My name is Kurt Levens and I'm the CEO of REC Silicon.

Chinese oversupply in Southeast Asia ingot and cell utilization due to trade actions affected silane volumes and shipments in the second quarter. Our higher EBITDA loss was due to increased startup costs at Moses Lake particularly as we ready and commission Silane IV and produce more product in the quarter, but lower value product.

Progress is moving forward in terms of exiting our poly production at the Butte site and we stopped production at the end of the quarter. And work is continuing in terms of advancing our mitigation efforts and we'll talk more about that on a subsequent slide.

So I'm going to spend some time here on the Moses Lake operating update, discussing where we're at, where the challenges are and what our plan is. I would like to remind everybody that it's a continuous process and all functional areas must perform in order to achieve the expected specification requirements.

As we've disclosed before, we've had an impurity contribution in the product handling system. Purpose of this system is to further enhance product quality by reducing levels of impurities that result from the polysilicon growth process such as hydrogen and fine powder. This is necessary to meet our specifications and the market requirements.

The process that we go through is in fact working as intended to achieve reduction in the levels of these particular impurities when operated as intended. However, in the journey through the system, the granular goes through a series of piping and vessels in order to accomplish this. In the process of going through these series of piping and vessels, the granular was picking up levels of a contaminant that was causing us to be out of specification for a singular impurity in the final product analysis.

To be clear we're not talking about gross levels of contamination. To give you some idea of what we're talking about it's -- from an illustrative sense it's the difference of having putting 10 drops of water in an Olympic-sized swimming pool versus putting say 15 drops. Those sort of magnitudes in terms of the impurity levels and where we're at.

In response to this we formed a task force to work through our options and remediations with a focus on what would be the quickest path to resolution. This team consists of multiple disciplines, experienced individuals who are very familiar with our process and processes such as our process in order to kind of hone in quickly on what would be the path forward.

Through this process, we determined that in fact the granular in its journey through was somehow interacting with surfaces in the process that were adding this or contributing this contamination. At first, we attempted to resolve this utilizing our typical cleanup process using time, flows, temperature modifications and while this improved matters and we could see that things were getting better, it also became apparent that it would not improve fast enough for us.

So rather than using more time to go ahead and try to continue to drive the process, it made more sense to look at other options in order to get us quicker to our stated goal and requirement of making our first shipment.

So what we've been currently working on is effectively creating barriers or physical barriers in this area, so that regardless of how that contribution happens, there is in fact the separation between the granular along its path and any potential contaminant source. We have a schedule and a time line and we were still on that time line and schedule for making our first delivery as previously communicated which is mid-September.

I would also like to note that we've stated that all construction activities are going to be complete by the end of August and in fact we have already started demobilizing some contractors as well as some trades.

Silicon gas price increased due to shipping higher volume product -- higher value product and not having a dilutive effect because of the PV sales really is evident when you look at the fact that our silicon gas sales price increased 16.5%. The Chinese cell plants are running at 40%, 50% utilization and between the AD/CVD concerns and their preferencing inside of China production, multiple Southeast Asia cell plants have stopped or running at very low utilization which affects demand for our product in that segment.

Semi is still stabilized. However, we do see a pickup in our other silicon gases that are supplied to advanced production nodes. We've not yet seen significant volumes from all the new fab construction as this is now appearing to be more of a 2025-2026 horizon.

Our semi-polysilicon sales were affected by some movement of our FC product into different reporting periods, thus creating less volume and a lower overall ASP due to the mix effect. Our exit plan proceeds as we have stated and we expect continued weak demand for our CZ and PV poly offering that comes out of our FC process.

As noted before, price inside of China has dropped by 44% since the beginning of the year driven by built-up Chinese capacity that is 2x the global demand. At this time we know that approximately 40% of capacity is currently shut down or in maintenance in China polysilicon capacity. We expect this situation to persist for several quarters in terms of low utilization of wafer and cell affecting pricing and demand for poly and silane in this particular segment.

I'd like to talk a little bit about our silicon anode presence and how we are gearing ourselves to address this market. It seems like lately there I've seen a lot of communication around silane scarcity, particularly in North America with all the activity regarding silicon anode supply.

And what I want to say is that from our perspective, we don't think that's going to be the limiting factor. I think when you look at the amount of capacity that we have as a producer by the end of this year and you look at what we have as is with minor, minimal investment in terms of time for maybe some additional containers or additional throughput through our loading buildings, we can have within 18 months 8,000 metric tons, which is well above what we've seen in terms of forecasted volumes.

In addition to that overall longer time period, we could debottleneck the capacity we have, both in Moses Lake and in Butte, very capital-efficient, in some cases, just through optimization and more efficient processes, we could get additional capacity out of our assets as they are. And then if you go to the next kind of level, if there's a requirement for more silane plants, one, we have land -- adequate land at our Moses Lake and our Butte facility for us to build more facilities, more silane production at our current operating facilities.

In addition to that, we have a very self-contained process that is closed loop. We can pick up and move wherever it needs to be. So if for some reason, there is a need and it was commercially viable, we could go somewhere else to do this. So I think that -- while there's a lot of discussion about potentially utilizing other silane designs or utilizing government help in order to ensure that there's no scarcity of silane in the U.S. From an REC Silicon standpoint, we are ready to supply as much silane as needed as we've outlined there. And we can grow with the industry should they have that requirement.

And when we talk about basically why us, why REC Silicon? Well, to me, it comes down to risk. If I was somebody who was using -- who had this silane as a key feedstock, I would want to make sure that my investment in my production facility was covered to the degree that I had a very reliable, safe, high-purity, consistent supplier, who is a reliable trade partner and a reliable trade area who had adequate backup and facilities to make sure that I didn't run out of my material.

Otherwise, why would -- if it's a new -- let's just say, if you want to look at stacked risk, you have silicon anodes -- silicon inclusion in anodes, which is a developing market, inside of new companies that are developing to develop this product, inside of an EV industry that is still not on the maturity curve in terms of mature yet.

So do you really want to have to learn how to make silane when there's companies, in particular, ourselves who have the quality, the reliability, the assets in place now? Nobody's built more plants, nobody has made more bulk container shipments, nobody supplied more sites to more places around the globe. And we've already begun work on new generations of our next plant, should we have the ability to build those. So we are hopeful that the silicon anode opportunity does come to fruition and we are ready to supply it.

Our EBITDA of negative $38.2 million. Primary deviation from Q1 was a result of our restart costs, especially as I stated around volume of product and contractor work, non-capital contractor work around the preparation of silicon for and other production units on site. EBITDA did increase over the prior quarter in our Semiconductor Materials segment, primarily driven by lower energy costs and increased gas ASP due to the mix effect.

Additionally, as we look forward in Q3, we are already in the middle of a scheduled maintenance turnaround that's been ongoing for the past month and will last for a few more weeks. So that is something to consider. As we go forward, we don't expect it to -- it is part of our plan. So we don't expect to have effects in terms of our revenue profile over the course of the year.

Cash balance, again, is primarily affected by start-up costs and CapEx costs, again related to the finishing of our activities here at the Moses Lake facility. We continue to work on bridge financing alternatives in the case that we need them. CapEx spending is going to be ramping down in the second half of '24. Already, we have suspended any further CapEx in our Butte facility or frozen projects where applicable as we focus in on finishing this project and conserving our cash.

In terms of a governmental update, there has been some activity since the last time that we talked. Primarily around trade action by U.S. against companies that are in 4 countries in Southeast Asia. From our perspective, the reason why we're supportive of this is because we want to have ingot and wafer capacity as well as cell capacity here in the U.S.

And as long as ingot producers, wafer producers feel as if their investments are at risk due to the ability to circumvent current AD/CVD actions that are in place, then the chances of them investing are much less.

So for us, we feel very strongly that we need to have the complete value chain here in the USA. The U.S. government is putting a lot of money behind that. Private companies are putting a lot of money behind that, ourselves included. And the linchpin of the value chain, so to speak, is, in fact, the wafer part of it. Because without demand or market signal or pull, you're not going to have polysilicon production. And from a cell perspective, without being able to source those wafers locally, you're not going to make that investment in cells from a longer-term perspective.

So we will continue to monitor this. And of course, as we stated, we've brought on record as being very supportive of it because we believe it supports our business purposes in order to supply polysilicon and silane gas into the reshoring of capacity here in the United States.

So in summary, we are continuing in all hands-on deck work towards our first shipment. We have a time line towards the mid-September shipment and are still on that time line. We still expect to have 100% of our equipment in place in capacity by the end of this year. PV markets are going to remain challenged, at least for the next following quarters. However, semi is stable and growing in some areas. We stopped our polysilicon production in Butte as we had communicated before and we'll continue to wind down operations over the upcoming quarters.

We're involved in constructive dialogue with multiple silicon anode material producers. We are targeting resolutions of these discussions over the next 5 months. However, as I've stated before, it is a commercial arrangement. It takes 2 parties and of course, their schedules and need dates also are inputs into this process.

So thank you very much and we'll take some questions.

[Unknown Analyst]

Okay. So moving into the questions. Assuming that you reached the first shipment target of mid-September, what kind of delivery ramp-up could be expected? Actually you touched on there, but would you be willing to give some more figures as far as tons expected in Q3 and Q4?

[Kurt Levens, executive]

No, we're not currently disclosing that simply because our focus is on the first shipment.

[Unknown Analyst]

And are you willing to guide on projected cash cost for Moses Lake once at full production?

[Kurt Levens, executive]

Not at this time. We've -- what we did do was guide upon an EBITDA range that we expected out of the Moses Lake facility.

[Unknown Analyst]

Could you disclose on the long-term purity risk and expectations in the offtake agreement with Hanwha?

[Kurt Levens, executive]

Yes, sure. So I mean, in terms of the long-term purity expectations, our target is to produce granular polysilicon that is usable in N-type wafers and cell processes. So everything we're doing is targeted towards that. Our road map is such that we will work towards that quality.

[Unknown Analyst]

How much more debt is expected to be taken on by the company? And is it possible that an equity issue would be in the future?

[Kurt Levens, executive]

We are monitoring the situation right now with regards to debt that we may need to take on, as I had stated in terms of alternatives for bridge financing. And we'll have more communication if we need to do that. Equity is not something that is being considered right now.

[Unknown Analyst]

And can you expand on the problems being experienced in product handling? Why does product handling affect the purity?

[Kurt Levens, executive]

Product handling is there to remove some of this -- as I stated in that particular slide, product handling is there to remove some constituents that are a result of the FBR reaction process where we grew the polysilicon beads.

[Unknown Analyst]

And Moses Lake restart has been postponed several times and often the communication related to the delays has come quite close to the communicated date. Is this due to low visibility and a high degree of uncertainty in the outcome?

[Kurt Levens, executive]

Yes. What we do is we set a target. We have a time line. We work towards that target. Until you're at the point where you need to make a decision, then the operating thesis is that you're progressing and you're going to make it. So as you track these things, until you get to the point where you are not going to be able to make that first shipment, you are on track to make that first shipment.

[Unknown Analyst]

And can you elaborate on the revenue potential from the semiconductor market for REC Silicon's high-quality silicon gas?

[Kurt Levens, executive]

Well, I'd just say that in terms of -- from a relative perspective, the ASPs that we achieve from our higher-quality products that go into the advanced nodes as well as from silane that we sell into the semiconductor market is on average contributed at a much higher percentage than the overall baseline silane price.

[Unknown Analyst]

In the market, expect REC Silicon to enter silicon gas contracts directly with customers in the semiconductor market? Or is REC strategy to serve these markets through agreements with distributors?

[Kurt Levens, executive]

Our strategy is to have a supply chain that makes the most sense for the ultimate end-user customer. And if that is us supplying direct and through that, the customer receives the most amount of value for what they're paying for, then that's the route we'll take. If it's us going direct, then that's the route we'll take. So there's no -- we're not precluding anything.

[Unknown Analyst]

So in 2020, REC Silicon entered into an MoU with Group 14. Is this agreement still in effect or has it been terminated?

[Kurt Levens, executive]

That agreement has expired.

[Unknown Analyst]

In previous presentations, you mentioned ongoing discussions with 7 silicon anode companies regarding silane gas supplies. Could you provide more details on the total amount of silane gas these discussions represent for 2025 and beyond?

[Kurt Levens, executive]

I can just say that in total, if you were to look at that, the amount of silane that I was showing on the previous slide, at least from the -- in the debottleneck scenario and not brownfield plant scenario could be consumed if you believe some of the projections over time, over, say, 5, 6, 7 years out.

[Unknown Analyst]

REC Silicon has been criticized for lack of openness and transparency in its communication. Can you elaborate on management policy for interaction with the capital markets going forward?

[Kurt Levens, executive]

I think that we communicate as we're required to communicate. In addition to that, when we have something that is significant to say, we communicate that. And as stated before, we -- when we had opportunities, we participated in various either forums or conferences or communication events and we'll continue to do that as it makes sense. As stated before, though, our primary focus right now is to have something to communicate about.

[Unknown Analyst]

Can you expand on the revenues reported for the Solar Materials segment in the second quarter of $1.3 million? Who are the customers or customers or -- customers?

[Kurt Levens, executive]

Yes. We're not going to disclose the customers, but that's for materials that were either moved to off-spec or for other qualification purposes.

[Unknown Analyst]

REC has provided expected dates for the first shipment multiple times. How confident are you that this time you can meet the [indiscernible] date?

[Kurt Levens, executive]

We have a time line. We have a process. Right now we are on that time line and there's nothing in the process to say that we will not meet that date.

[Unknown Analyst]

So if there's a Republican sweep scenario this coming election, any chance that the Trump administration can reverse the existing tax credits?

[Kurt Levens, executive]

I'm probably not the best person to comment on that. However, I will say anything is possible, but in my experience and this is just, again, because I'm not an expert, but in my experience, it is rare that wholesale changes such as that are made by an incoming administration, particularly when you have a political process such as we have here and a lot of the beneficiaries of these investments, areas, states, regions might be opposed to a wholesale thing. Now that could affect pieces, it could affect whether it expands later, I don't know. But obviously it is a possibility. Anything, I guess, is possible in that sense.

[Unknown Analyst]

Okay. And there's a few questions related to the previous number of EBITDA guidance of $100 million to $300 million. So assuming that all markets that we are exposed to remain unchanged over the next years, is the low end of $100 million still valid?

[Kurt Levens, executive]

Yes.

[Unknown Analyst]

Go through, a lot of these we've touched on already. Can you expand on how many silicon anode contracts are currently under final negotiations?

[Kurt Levens, executive]

I will just say that we are in discussion with multiple silicon anode producers at this time. In addition to that, we do supply some of them now, smaller volumes for their smaller production and/or pilot requirements.

[Unknown Analyst]

And did the Yulin JV, did they reach N-type purity in their operation?

[Kurt Levens, executive]

We know that they do supply some material to N-type producers at this time. I can't speak to how much material, at what blend, that I don't know.

[Unknown Analyst]

And you mentioned that there is space in both Moses Lake and Butte for expansion. How realistic is a brownfield expansion?

[Kurt Levens, executive]

I think it's very realistic. I mean, up to certain sizes. But then again, you need to make sure that the counterparties and our interests are aligned and that it's something that would make sense from a financial perspective.

[Unknown Analyst]

There's a couple more that have come in. What is a realistic silane gas sales volume out of Moses Lake in '25 and 2026?

[Kurt Levens, executive]

I believe we've shown up there on that slide what we have available. And so it's going to be dependent upon our ability to actualize on these contractual commitments.

[Unknown Analyst]

There's quite a few questions that have come in, but many of them you've addressed, so -- yes, most items that I'm seeing here that you've addressed, so. Okay.

[Kurt Levens, executive]

Okay. Well, thank you very much and we will speak as soon as we have something to announce further or next quarter. Thank you.