REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2022-Q3

[Kurt Levens, executive]

Hello, my name is Kurt Levens. I'm the CEO of REC Silicon. I'd like to welcome you to the Third Quarter 2022 Results Presentation.

We plan to cover, much like previous periods, highlights, financial review, semiconductor materials, solar materials and then discuss some key initiatives that we're currently engaged in.

During the third quarter of 2022, our revenues were $36.7 million. Our EBITDA was negative $13.8 million. Our cash balance at the end of the quarter was $146.8 million, which resulted in a cash decrease of $26.2 million. Silicon gas sales were weaker than previous quarters. However, our silicon gases price was increased 12.6% versus the previous quarter. Semiconductor polysilicon sales were decreased by 17.4% over the previous quarter. And the average price had a slight decline mainly due to mix effects.

Activities continued for the Moses Lake Restart, including modification of FBR reactors as well as ancillary facilities that are required to ensure that we meet the quality standards that we're setting for this project. First production target is still Q4 of 2023 and unchanged at this point.

Concerning MOUs and contracts under discussion to support the start-up of our Moses Lake facility, the polysilicon MOU with Hanwha is executed as we discussed last quarter and there's been no...

[Technical Difficulty]

Our EBITDA was negative $13.8 million and the primary impacts from that EBITDA were the fact that first, we have a large, very large scope planned maintenance outage. We have record high periodic energy costs. We had shipment deferrals and container logistics challenges that resulted in deferred shipments. Overall, as indicated previously, both polysilicon sales volume and our silicon gases volume decreased for different reasons.

Our Semiconductor Materials segment. Overall, we had a 19% decrease in revenues. And as indicated before, both our polysilicon sales volume as well as our silicon gas sales volume decreased. As well, it's important to note that our production volumes decreased primarily a result of our large planned shutdown.

Cash flows, we have a $26.2 million decrease in cash. The major drivers of that were our lower EBITDA and our capital expenditures in support of our investment activities that we have going on right now. Nominal debt is $185.6 million. Nominal net debt, $38.8 million, again, primarily driven by our decrease in cash.

As indicated earlier, silicon gas sales were lower than the previous quarter and the previous trends. The primary driver of this was declining demand from the thin film transistor market located in Korea and Taiwan. As a result of excessive supply starting to build in the value chain, there was a number of deferrals regarding the orders. And in some cases, some of those orders were canceled. In other cases, they were deferred. In any case, it resulted in a situation where we shipped less than even what we had expected going into the quarter.

There are still some supply chain constraints. They seem to be improving but they still tend to affect shipments and the timing of the shipments. So we're coming back into a regime where we have timing effects where shipments will move around as a result of our ability to get bookings.

There was a slight silane price increase of 0.6%. And again, that's primarily due to a mix in shipments. Going forward, we think that the shift in demand for silane gas is going to be persistent for at least the next 2 to 3 quarters. One thing that this will result in is that we can expect supply chain inventories to give a chance to balance out some. There's been a period here where we've been running very lean and due to the shipment issues, there have been imbalances throughout certain regions in terms of material that's in country.

On our Advanced Semiconductor Materials, the advanced semiconductor demand is still strong. We see no abatement in that demand, and it is entirely limited by our capacity to produce, to ship or to be able to put it in containers. We've also, at this point, settled on price increases for 2023 that are in place in order to bolster our financial performance and keep pace with cost increases for our various inputs.

Our long-term perspective -- mid- to long-term perspective, all of the key factors are still in place. Data, AI, mobility, automotive content, still there and in fact, that is a large reason why there's a lot of fabs being built across the world. Re-shoring of advanced semiconductor production back into the United States is still going, and there's been no stop in those projects. And we see further evidence that silicon inclusion in lithium batteries is advancing such as the recent grants that the United States government issued to several lithium-ion battery material producers.

Semiconductor-grade polysilicon, we had a decrease of 17%. This was entirely due to a lower production rate in Q3, which was related to two factors. Factor one is that we had a very large shutdown. And again, when I say that it's a very large shutdown, it means that it lasted a lot longer than what a normal shutdown would. This is a once every 18 years type of shutdown. We've only had to do this twice in the existence of the plant. It was planned. However, it does take longer. And as a result, we are not producing as much gas to feed our polysilicon and other operations.

The second reason for it is that even after shutdown activities were performed, the instability in electricity price was such that we opted to defer some of the startups on our more price-sensitive products, price sensitive to electricity products until such a time that we saw a profile that was different than the increasing profile or unstable profile available in the markets.

For 2023, we have very strong demand visibility. And again, we will be limited by our production capacity and utilization. We are finishing our commitments right now. We have rather aggressive price increases in place in order to help us mitigate the inputs primarily around electricity and other energy costs, coupled with an operational strategy that will allow us to avoid expected high powers -- I mean, high times of high-cost electricity, which should minimize the impacts in 2023.

Moses Lake Restart. As mentioned before, activities continue. We're still online for production in Q4 2023 and taking a full year to ramp up to 100% capacity utilization by Q4 2024.

Procurement of our long lead times and other equipment and materials is underway. Modification of FBR reactors is underway, as well as work on ancillary facilities is underway. We continue to hire for positions that are critical to restart activities and are completing our hiring plan for the initial startup at.

[Audio Gap]

We are in the phase right now where although we have had several iterations in terms of reviewing our cost and schedule, we are looking for ways to improve upon or mitigate the potential for cost increases or scheduled slippage. So there's still a little more time that we need to engage in this activity before we are -- we can say that we're done with the detailed engineering.

Also in this -- over here in this area, and we're talking about the Moses Lake Restart, I would like to say within the context of this on the offtake agreements or the potential offtake agreements, as I indicated before, there's really no new news. We continue to work on them. These are complex agreements with long terms that are important for our business, as well as important for the value that we're going to create over the lifetime and next 10 years of operation. We need to make sure we take necessary time to ensure all relevant terms and conditions are consistent with our usual and customary practices, that we employ to maximize value for the company and our shareholders.

We have negotiated and completed numerous contracts over the years that included large volumes, contract security, multiyear terms as well as with related parties. This is no different from our perspective. Most importantly, I'd like to point out that we have a reliable and stable potential partner in this matter. In our experience, the contract is really only as good as the counterparty. We have numerous examples of counterparties that even though you have a good contract, if they're not a reliable stable partner, it's not really worth that much. So we're really focusing on the fact that we do have a reliable stable partner.

[Audio Gap] We also have a lot of experience with reliable strong partners, as evidenced by our large established channel partners in our silicon gases business. We will continue to go as quickly as necessary to complete this. However, we are not going to rush and jeopardize the quality of the agreements or give away any of our leverage that we may have in order to make sure this is a quality contract that's consistent with our generally accepted practices and previous practices that we've had depending upon the molecule.

So a little update on government initiatives. I think in some cases, it's because there has been a lot of activity in this, we just wanted to be clear about what each one means for REC Silicon.

So the Inflation Reduction Act, this -- the biggest part of this is the impact is the re-shoring of the PV value chain to the U.S.A., which then means the potential for ingot capacity in the U.S.A. has increased tremendously due to the fact that there will be incentives. So in addition to demand creation, there is also an incentive the fact that there is benefit to REC Silicon for the production of polysilicon for PV.

CHIPS and Science Act. While there's still more details to be rolled out in terms of how that affects our particular part of the value chain, it does create a large demand for our silicon gases due to the re-shoring of advanced semiconductor fabrication in the U.S.

And then the Infrastructure Investment and Jobs Act. Just recently, there was $250 million in grants that were made to silane-based silicon anode material companies, moving them closer to realizing the production of silane-based silicon anode material in the U.S.

Concerning restart funding. We are, as I mentioned earlier, we are finalizing our capital requirement for the project as well as for the company as a whole with a focus on the Moses Lake modification, packaging and handling and some Butte operational and high-value growth opportunities and the bond repayment. Right now, we are reviewing the time line. We are engaging outside resources, and we are solidifying on our various options. When we have more information, we will, of course, share it with you.

So in conclusion, I just want to say that regarding our particular assets, our molecules, where we're at right now, from a variety of reasons between -- the juxtaposition between demand, government incentives and policies at our location means that we sit very nicely in a position to be able to capitalize on this with our present portfolio and assets. We have the capacity to be able to create growth in all of these areas and take advantage of that to create value for our shareholders.

So with that, I'd like to thank you, and we'll take questions.

[Nils Kjerstad, executive]

So there's many questions around the offtake agreement. I think you did a good job covering the questions that came in. I don't know if there's anything else that you'd want to add to that. But on top of questions related to the offtake agreement, there's a few questions around the rezoning around the Moses Lake plant and Project Riser. Can you add anything to that?

[Kurt Levens, executive]

Sure. Okay. So the long and short of that is Project Riser is not our story to tell. That is other companies that are looking at opportunities for investments or for location. Our primary reason why we are interested in that property, which we, in fact, used to own, is that as an ongoing chemical operating plant, we're always looking for opportunities to be able to create buffer zones, space and give us future abilities to react to market conditions should we be in a position due to some of the reasons I described before, to engage in expansive activities. Or should there be potential partners who wish to locate close to us, then we have the ability to accommodate them and that's the primary reason there.

With regards to other companies and what they're doing and those projects, I can't say and I don't necessarily know.

[Nils Kjerstad, executive]

What is our outlook on pricing for solar silicon in the United States? And is it expected to be close to the Chinese market?

[Kurt Levens, executive]

Right now, what we see is that there's going to be some bifurcation between the Chinese market and the market outside of the United States or the market in United States. Obviously, that can't be a tremendously large differential because it is, in fact, a market. And the way that works, as everyone knows, is that the lowest cost will find its way somewhere, provided there is not some sort of artificial barriers such as were set up against us before.

So I think that the primary drivers of being in a lower cost position in the United States or, I should say, in a price differential position are going to be the advantage of initiatives such as our Ultra Low-Carbon Alliance that we're participating in, the emphasis on more energy-efficient Ultra Low-Carbon

polysilicon production, as well as the fact that there is a -- it's just the way things are written in terms of the legislative activities in some areas would give some advantages to a bi-local policy.

[Nils Kjerstad, executive]

Do you have any update on the Yulin JV?

[Kurt Levens, executive]

Yes. At this time, we don't have any update on the Yulin JV. It's -- things are going there. And when we have more, we will follow up with it.

[Nils Kjerstad, executive]

Can you add anything to the information request from BlackRock and a potential fifth Board member?

[Kurt Levens, executive]

At this time, I think we've been pretty clear in terms of our communication when requested to do so. We definitely encourage all of our shareholders to exercise their rights as they see them. We encourage our shareholders to be engaged and to see the value that we have as a company.

So in one sense, it is very encouraging that via the communication, you can see they have, like other investors, very strong ideas about our capabilities and our future as a company.

[Nils Kjerstad, executive]

I'm going through these, there's one question related to wafer capacity -- wafer production capacity in the United States and have there been any announcements on wafer production in the U.S.?

[Kurt Levens, executive]

There have not been any announcements yet.

[Nils Kjerstad, executive]

So like I said, any questions related to the offtake agreement. So -- and you covered the land around the plant rezoning, I think that's most all the questions that we've got from the online.

[Kurt Levens, executive]

Okay. Well, I guess that concludes our presentation and question period. Thank you very much, and we will see you next February.