REC Silicon ASA

OSE:RECSI

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Kurt Levens, executive]

Good morning. My name is Kurt Levens. I'm the CEO of REC Silicon. I'd like to welcome you to the third quarter 2023 results presentation.

Highlights for the third quarter. I think first and foremost, I'd like to point out that we started up our Moses Lake plant as we had previously communicated. And currently, all is on schedule and budget. And we plan to have first silicon in November.

Revenues were $34.8 million. Our EBITDA was negative $17.8 million. Market-wise, while Solar PV is still -- was still strong in terms of installation, the supply of components into Solar PV is undergoing a situation with a little too much inventory at this time.

Semiconductor market is stable, I think off of the lows that we saw at the end of last year into the beginning of this year, and we see potential for a second half recovery in 2024.

We were able to complete our high-purity granular polysilicon offtake, as announced previously, with very high-quality offtake counterparty, Hanwha QCells. And we were able to get our final 2 term loans in place in the third quarter, which, in fact, represented a final tranche of the funding that we require for the restarts of the Moses Lake facility and the high-value investments we're doing in Butte.

So I'd like to talk first a little bit about -- to reorient who REC Silicon is. I think that -- when in reality, our assets give us a unique exposure to several of the megatrends that are currently in place. We have the largest silane gas capacity outside of China. And we're able to use this silane gas capacity to create value and move into applications such as digitalization, renewable energy, energy transition and electrification, or in this case, specifically energy storage.

We're characterized by the fact that, again, as I mentioned earlier, we have the largest amount of silane in the world outside of China. This is, in fact, the most amount of product that we make, and it's the way that we create value.

We have a very strong position, long-term relationships with our customers. We have very -- lots of redundancy in terms of our capacity, high reliability, high quality. And with that goes the brand that allows us to make sure that we remain with these high-quality customers, particularly in these times when we're going to be expanding.

We also have immediate capacity available, both in the high-purity granular polysilicon that we're now in the process of bringing online as well as our silane that can be supplied to silicon anodes.

One of the things that's facing our industries right now, silane-based industries, is the fact that these markets and investments are shifting from overseas to more United States as well as in Europe due to reasons of supply chains efficiency, geopolitical tensions and concerns around ESG.

This is also backed by a firm commitment from governments, particularly in the U.S. via legislation, CHIPS and Science Act, Inflation Reduction Act, Uyghur Forced Labor Prevention Act and the Infrastructure Act. What this means is that there's a tremendous amount of investment happening right now going into the United States, and we happen to have a very good position given our location and capacity and the nature of our assets.

So then how do we get from where we were to where we're going to be once we're done ramping these assets? And that's the key part of this is that we're going to move from an exposure to more volatile markets and lower-value commodity products to changing the product mix to higher value products and a revenue profile that is more North American-centric and outside of China-centric.

Okay. So Moses Lake restart. As I noted, we started our restart. We started the plant and the activities prior to the date that we had announced before. Currently, our first silicon is planned this month, and we're still on track to have shipments out by Q1 of 2024. I want to state that this particular phase that we're entering into is going to be going on for the next year.

We are evaluating ways that we can potentially accelerate it. And as we go through that process, we will, of course, make note of it in any future discussions around this particular matter. But right now, everything is on budget and on schedule. We still plan to be at full capacity by Q4 of 2024.

In our Butte operation, we expect to make our first shipments of our DCS product in Q1 of 2024, and they will be ongoing as we qualify the product there and then as new capacity comes online to consume it and we are able to increase our shipments.

In addition to that, we should have all of our -- the majority of our, I should say, of our containers in place by the middle of next year. These will allow us to take advantage of a market for silicon gases around the time when we expect it to potentially recovery.

From an electricity standpoint, we have stabilized that input. And currently, we'll have hedging in place for 60% of our demand through the middle of 2024. And we balanced our business case and plan around that in terms of pricing, product mix and how much we're going to make.

Financially, as stated before, our revenues were $34.8 million, and EBITDA was negative $17.8 million. However, I would like to point out that if you look at between Q3 of '23 that we are now reporting on, the Semiconductor Materials segment was $6.1 million versus Q3 of '22 where it was negative $5.3 million.

Q3 of '22 was when we entered into the period of softness as well as the period of electricity imbalances and commensurate price volatility. So we've done a lot of work on our underlying EBITDA to make sure that we have sufficient leverage as our volumes return to improve our position there.

So specific, again, in our semiconductor materials, you can see that if we go back again and look and see how the 3 quarters went when we entered the downturn until Q2 of this year when we became positive again, our expectation is now, as we look at how we're performing, that we should be somewhere in that current range going forward for the next few quarters, given our visibility on orders and inputs.

Cash flows. I think the most important thing to note here, our cash balance was $121.7 million and, of course, greatly affected by the fact that we had $30 million advance payment for execution of our contract and $140 million term loans to finish out the final tranche of our financing. Nominal debt was $352.7 million. Nominal net debt was $231 million.

Our silicon gases, as noted, was down slightly from where we were in the previous quarter. And the thing is, is that we can expect to have a run rate somewhere around the average of what we had prior to entering into the period of downturn for the semiconductor industry. And then the reason we're able to do this is that we had been focusing on making up volumes through movement into other kind of noncore applications and geographies, and opportunistically, selling our products into those markets given less barriers to entry and our brand and strength within those areas when we choose to participate in them.

So I think that if you look at kind of the average of where things were before we entered into this period, and that's kind of where we're going to be here for the next foreseeable future, until we start seeing more about the potential recovery in the second half.

But underlying everything, the fact is this. As I noted, the investments in semiconductor, solar and battery materials are real. They have begun. Advanced processes in semiconductor and even in solar PV do result in an increase in silicon gases used per unit. Digitalization, data, electrification, energy transition, AI, all are still in place and all still need silicon gas to happen. So that hasn't changed. And in spite of the weakness that we're seeing now, we're still making sure that we're positioning ourselves so that when that weakness recovers, we'll be in a position to take those opportunities.

In terms of silicon, you see that we had -- it's relatively flattish to -- compared to -- for our semiconductor-grade polysilicon, which is really what we're focused on and not so much as much on the total. And I would say that we -- you can expect that we will be seeing sort of a relatively flattish portfolio going forward. More consistent shipments of lower volume. However, our focus is on higher value.

And so as noted with the hedging position we've taken and the way that we're going to try to optimize that particular product line, it means that while we'll be making less product, our focus will be on higher-value product. In this case, the Float Zone polysilicon, which visibility still remains strong and consistent, and it is primarily driven again by the energy transition and electrification.

PV polysilicon, as I noted before, while installation growth is still very positive, the fact is, is that there is tremendous oversupply in the value chain. And this includes from polysilicon in China through all components in China. You have cell manufacturers running at lower utilizations, module manufacturers running at lower utilizations, even some of the wafer manufacturers running at lower utilizations. And there's a lot of inventory in the value chain, particularly forward in some geographies.

However, having said that, demand for polysilicon outside of China is still strong. And I think that's also reflected when you look at what the price is relative to the price inside of China. You can see that, overall, that mono-grade polysilicon prices have, I would say, stabilized in a band. They go up a little, they go down. But until, I think, there's some more rationalization or forced maintenance within China, it's probably going to be within that band for a little bit.

So in summary, our Moses Lake restart has begun. We expect to make first deliveries in Q1 of 2024. Our offtake agreement's in place to secure those products. Our Butte operation, we've stabilized our polysilicon inputs and our product mix through mid-2024. We are starting to get some real signals about a market recovery possible in the second half in semiconductor, particularly some of the segments that use more of our materials.

We secured our long-term financing for the Moses Lake restart and Butte upgrades. We are still having ongoing discussions with silicon anode material producers and potential channel partners. And yes, this particular comment has not changed a lot, and that is simply because that process is more driven by where those producers are at in their evolution of new capacity and ability and desire to conclude on some of the discussions that we've had.

And the sales process for our interest in TR silicon is still ongoing. It's been progressing well. And at this point, we have passed every major hurdle. So I think we're getting very close to that particular process being completed. And again, in this particular case, we're dealing with the government through these phases. So they have a process, and we just need to make sure we continue to support what we can to move it along.

So with that, thank you. We will be next reporting in February of 2024. We will have a specific date on that to follow later. Thank you. We'll take some questions.

[Unknown Executive]

So moving into the questions coming in on the Internet. There are multiple questions related to silicon anode partners, and you touched on it in the summary. But again, multiple questions related to, well, it's a well-known fact that there's 2 facilities being constructed near the Moses Lake plant, and if you're willing to elaborate further on any -- anything going on with those?

[Kurt Levens, executive]

Yes. There are, in fact, 3 facilities here at the Moses Lake plant, 2 that are, I would say, relatively larger than the third one, which is more of a small demonstration facility. So all of those are in progress of some sort. There's earth being moved, there's buildings being erected, but all are still a ways off in terms of when they think they're going to actually need silane. So as such, we're not at the point where they're willing to engage in some sort of longer-term agreements.

So all of those discussions are still going and all of that is still out there, and it's a third party that we're dealing with here. So I think that's -- that's really more a matter of, you have a willing party in our sense, and we'll continue to move along and expedite where we can. And the remainder of that is upon them when they're ready.

[Unknown Executive]

There's also multiple questions related to the Yulin JV and the transaction there. It seems to be a long process. Do you expect that this will be concluded in 2023?

[Kurt Levens, executive]

Yes. Our expectation is this should be concluded in 2023. But I guess I want to say that what our expectation is may or may not be what -- the government authority is approving everything complied to. So again, they have their own time line. However, everything that's been indicated is that this will be done this year.

[Unknown Executive]

Okay. Another question. That -- there's more than one person asked a similar question. Is the Oslo Exchange still is the right place for REC Silicon? Or are there plans to move to a U.S. exchange?

[Kurt Levens, executive]

There are currently no plans to move to a U.S. exchange. We're very focused right now on building our business, bringing up our assets and kind of completing the pieces that we need to have in place to grow the business and actually be profitable.

[Unknown Executive]

At the recent energy conference in Oslo, you stated that further contracts for the offtake of silicon gases from Butte are in process. Have these contracts been entered into? Or can you provide any update on this?

[Kurt Levens, executive]

Yes, they're not -- we have not completed those yet, but those are moving along. And we would expect that we should have most of those in place here as soon as possible. So I think that's progressing much quicker than what the silicon anode discussions are.

[Unknown Executive]

Just moving into questions surrounding the restart of Moses Lake. All right. I guess, well, I'll go to a question related to the offtake agreement from Moses Lake. And we stated that our $30 million advanced payment was received in Q3. And can you provide more detail on further advanced payments? And when do you expect these?

[Kurt Levens, executive]

Yes. We'll receive the remaining advanced payments once we make our first shipment facility.

[Unknown Executive]

And can you please elaborate on the offtake agreement with Hanwha? And is it consistent with the price range for polysilicon outside of China? Or is it closer to prices inside of China?

[Kurt Levens, executive]

I think what I've stated before and consistent with that is that it takes into account both factors. So it is neither the outside of China nor the inside of China. We use multiple indices in terms of coming up with the calculation.

So that there's a price that's still tied to what's happening inside of China and still tied to what's happening outside of China, and taking into account the fact that there's a certain premium for us being conflict-free, low-carbon, reliable, polysilicon supply.

[Unknown Executive]

So you have a target of 50% utilization within the second quarter of 2024 and 100% within the fourth quarter of '24. Would that mean you can sell close to 50% and 100% in those quarters? Or will there be a long lead time from production to sales?

[Kurt Levens, executive]

No. What it means is that as we -- there's a ramp up, you can think of it almost as linear at this point. As I said, we're looking at ways to accelerate different parts. But linear at this point, up to 50%, and then linear again, up to 100%.

And yes, it means that once everything is up in the system itself, so to speak, the supply chain itself is kind of -- has material moving in it, then the time between make and the time between delivery should be very consistent.

[Unknown Executive]

Okay. Switching here to the tax credits from the IRA. Is that going to be related to production volumes or sold volumes? And will the tax credits be booked as revenue in the income statement?

[Kurt Levens, executive]

Yes. The tax credits are based upon sold volumes, and it is a revenue. I believe it will come as other income in our -- is that correct, Jack?

[Jeong Yun, executive]

Yes. So this is the income for the first 5 years when we received a direct cash payment. And then the -- and then just, I mean, the later -- I mean the -- and the tax credit, which is not a major revenue for [ the many ] years of the IRA.

[Unknown Executive]

A few quick questions related to the Butte facility. Are you able to say the capacity of polysilicon and silane gas we have in Butte? And to go along with that, I guess, do we expect to see revenue and EBITDA kind of normalize in 2024 and 2025, specifically for Butte?

[Kurt Levens, executive]

Yes, I think if we go to back in this presentation on one of the slides in there, we, in fact, covered what the capacity was for the Butte facility. And in terms of normalization, yes, that is -- our goal is probably to be fully normalized in 2025. However, we think that, at least for the near term, kind of in the range where we're at now, and then as we look at recovery in the second half, it could be better.

But I think that's why we've been working on issues around inputs and issues around making sure that we have our product mix. And we're not done yet, by the way. There's still more optimizing to do. So for that reason, I think '24 will still be transition.

[Unknown Executive]

Okay. And for deliveries from Moses Lake in 2024, are you willing to say what those will be? Will they be substantial?

[Kurt Levens, executive]

Yes, they will be substantial. And as of right now, I think we're not going to say anything. However, we will hear at some point next year. So I think that, first, we want to go through the process, finish up getting all the reactors we can here up and going as per the plan for this particular phase, and then we can come out with discussing what we think that will be.

[Unknown Executive]

There's a few more questions here I'm going through so. Are there any plans or expansion in Moses Lake?

[Kurt Levens, executive]

Well, I think as we had indicated in the last quarterly call, we did close on land in Moses Lake, so that we would have optionality around the ability to expand. We are open to expansions, obviously. It's going to be driven by how much consuming capacity comes online here in the United States as a result of all these initiatives and/or outside of China as a result of all these initiatives. So yes is the answer, but it's going to depend upon having a reliable, solid offtake partner.

[Unknown Executive]

And there's lots of questions related to silicon anode but I think you've addressed those, so let me scroll through these.

Are you able to elaborate any further, and you may have touched on this, the price inside and outside of China? And what are your expectations with that deviation going forward?

[Kurt Levens, executive]

Okay. Well, I think if you look at what third-party indices and analysts are reporting, you have a price inside of China that's somewhere between $8 to $10, depending upon what it is. You have a price outside of China that is north of $20. And as far as what the other part of the question was?

[Unknown Executive]

It was just the prices inside and outside and kind of the development going forward.

[Kurt Levens, executive]

Yes. I mean I think, as I had stated before, that is going to depend upon how fast that -- for inside of China, it's going to depend upon how fast that capacity rationalizes and/or goes into extended shutdowns. I'm confident from the fact of this, that every time this has ever happened before, that outcome is inevitable. It's just a matter of time and how long that takes.

And then outside of China, though, I think that outside of China, the situation is different. So we can expect that there is going to remain a premium, for the time being, on material that's made outside of China.

[Unknown Executive]

Okay. And this one -- it's been noted that REC Silicon recently purchased back a couple neighboring parcels. Is there any plan for this land?

[Kurt Levens, executive]

Yes, as I had noted before, I mean, the plan right now is to have optionality and to give us space. If there's opportunities and we have solid offtake on either high-purity granular or silicon gas or silicon anodes or whatever it may be, any other sort of investment that may be a part of our portfolio, then, yes, of course, we would want to do it.

And that's why it's really important for us to make sure that we move our business to a point where we're consistently profitable and we're generating a lot of cash so that we can then look at opportunities such as that should it present itself.

[Unknown Executive]

So the remaining questions, I mean, they're all similar to ones you've already addressed. I mean that's kind of it from the Internet questions. Okay.

[Kurt Levens, executive]

Okay. Well, thank you very much for your time, and have a nice day, and we'll see you in February.