REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2024-Q3

[Kurt Levens, executive]

Good morning, and welcome to the Third Quarter 2024 Presentation. I'm Kurt Levens, CEO, and I'm here with Jack Yun, our CFO. And we're going to be taking roughly the next 45 minutes to an hour to present our results and also answer questions. We're going to be discussing Moses Lake facility update, compute operations update, briefly silane for silicon anode material, financial highlights and some market updates.

In the quarter, we had revenues of $33.8 million. Our EBITDA loss was $42.7 million. This was primarily due to start-up costs associated with Moses Lake, as well as weaker operational results from our Butte facility. Our cash balance at the end of the quarter was $23.6 million. Additionally, we had announced that our qualification of Moses Lake polysilicon was delayed. And as a result of that, we turned down our operation at our Moses Lake facility in order to conserve liquidity. Additionally, silane shipments were affected very much by the global PV slowdown, particularly around utilization and also due to trade concerns.

So I'd like to take you through a time line, which is going to kind of lead us up to where we are right now. If you recall, we started up nearly 1 year ago with the operations part -- with the FBR part of the operation. It took some time to clean up the system as we work through it. We thought and worked through a lot of different issues, which is typical for a continuous process that is all full of interconnected and related systems. We got to a point where we had most of the specifications where we could meet. However, there was still one primarily that was causing us issues. We continue to troubleshoot. We formed a task force from all disciplines, as I explained prior when we were first talking about this issue. The task force determined that the impurity came from surfaces in the product handling part of our system. We prioritized and attempted various methods to mitigate, including changing of materials, passivation, inerting, control parameter changes, all of these successively in priority for what was going to get us to the specification the quickest. Finally, we decided upon isolation. However, for this isolation to be effective, we needed to loosen some other specifications since we would not be operating that particular equipment until we had a new solution in place.

We proceeded to negotiate with our customer, where they accepted a change in the specification, conditioned upon successful qualification in a production environment. They then made arrangements with a company that was suitable for this purpose, and we prepared material to ship. We sent material, and we worked with our customer, forwarders and customs to answer questions, provide paperwork, data, whatever was required for us to get this process continuing to move. At some point, customs determined that they wish to test material themselves at another lab. This was not something that we had expected.

Please note that during this time period as well, there were at least 2 national holidays in the country in which we were doing this testing, which further expanded the amount of time and reaction from the authorities on this matter. We worked with all parties to determine if we could expedite or provide more data. We involved different expeditors as well to try to help us who we worked with in this country before. After exhausting all these mitigation efforts and trying to get a firm time line, we then realized that we would be unable to have that firm time line before we needed to communicate and understanding that this affects our business materially. We then communicated our delay and began taking measures for interim operations. We still continue to work with our customer to support as needed and determine a targeted time for release from customs. And I want to be clear that this is a completely within the purview of the customs agency. We do not have any sort of control over that other than to make sure we continue to provide information as requested in a timely fashion. And we will continue to look for other ways that we can move this through.

So, as I said, we went to a situation where we needed to put our operation into a turndown mode, primarily to conserve liquidity. So how we're operating now is that, we're operating 1 silane unit. We operate that unit intermittently. So we run it to fill storage tanks that are then going to feed our FBR reactors. We then turn it down. I want to note this is not the most optimal way to run a chemical process, but we're doing it because that's what's necessary at this time. We are running multiple FBR reactors. However, these reactors are running at very low flow rates at this moment. There are options to run less reactors at higher flow rates, and we will continue to observe and make the best decision for the situation and the data results that we're receiving.

We're then feeding into 2 different product handling systems, 1/2 of each system. And this is where we are really focusing on product quality improvement. If you recall what I said back in the previous slide, the reason why we are having this particular qualification right now is primarily driven by the change in specification that we desired. So another way to get there quicker is for us to hit the original specification that was agreed to. So what we're doing now is driving towards that, as well as running our reference line, which is, in fact, the line that has the isolation that we discussed earlier in it. So the line has -- one of the lines has modifications that we made that are there to address the original issue of impurity that we ran into. And then the other line is our reference line, which is the line, as I stated, that had the isolation measures put in place so that we could ship to the agreed upon specification conditional upon the qualification. And then we're running part of our packaging line. Everything is balanced with the system in front of it so that we are running extraneous systems that are not required at the current run rates.

So summary-wise, operationally, we turned down to 15%. We want to highlight that this turndown will affect our ramp timing. We cannot just flip a switch, bring all the systems back online simultaneously and begin running full out. It will be a process to bring the systems back online, turn around systems, and it will take some time. As a result of this, the facility will not be at 100% by year-end. While we will have all of this equipment, as we had stated, we finished our construction activities, our project-related activities, the initial large project that we had. However, we're not going to be operating all of that by year-end.

In terms of the qualification and the quality, right now, we're still in a state where there's unknown timing and results. However, we're using this time to focus on improving the quality of our product so that we move towards the original specification and then continue to move beyond that original specification to our target benchmark specification that we have discussed in previous presentations because that's where we want to get to eventually.

So some things to talk about and to consider, I think is the understanding that we are working to determine new time line. We will communicate further updates when they're available. When we have any information that is material and actionable and understood, then we will pass that on. We are evaluating further financing requirements in a variety of scenarios. And we're prepared to negotiate for another qualification, if for some reason, qualification is unsuccessful. And that is not to say that it will be unsuccessful. We've also included on this slide an exert from our quarterly financial report that we would encourage everybody to go back and read through. But we are working diligently and positively towards this matter. However, we've noticed that we've received a lot of different questions, which have to do with the variability around the different outcomes and the unknown unknowns and potential situations. And we've done our best to highlight those so that everyone's understanding of what the situation is.

For Butte in silicon gases, as I touched upon before, primarily PV and flat panel display demand is affecting our volume rates right now. There is globally lower utilization rates in those particular segments, as well as facilities, which has been suspended. Why have those facilities been suspended? There has been concerns around trade issues, particularly with regards to the large cluster down in Southeast Asia, as well as rampant oversupply within the PV space and lower demand globally right now. In addition to that, there was lower utilization of some flat panel display facilities. And in fact, 1 facility that we supplied outside of China was closed. So that affected our volumes in Q3.

But if you look at the underlying demand for our target semiconductor market segment. The demand for all of our silicon gases is on track. Silane is growing, yet it's growing slower than we would like right now, and that is primarily driven by segmentation weakness in the semiconductor industry. A large demand driver for silane is, in fact, the memory market. And outside of memory related to AI, there are still some questions about ongoing utilization rates and what volumes are going to look like going forward. So that is affecting us. However, I'll say that, for our other silicon gases, we're seeing that demand is growing at a higher pace than it is for the underlying silane demand, which is good.

On our semiconductor-grade polysilicon, we are winding down this process as we had indicated before at the beginning of this year. Our target is still to clear our finished goods inventory by the end of the year. We're making progress towards that. There are still some restructuring activities ongoing as we go from operating a plant with 2 major business lines to a plant with a single business line and all of the related interconnected activities in that. Just to note that we will continue to run minimal amount of reactors in order to characterize our gas purity, and that will continue now into the foreseeable future.

We've hit upon this point before. However, when it comes to what we're trying to accomplish in Butte, it's to move from a situation where we were heavily dependent upon undifferentiated markets even for our silane gas, large volume undifferentiated markets and our electronic-grade polysilicon to more niche markets focused on chemical vapor deposition, particularly in semiconductors, but also in solar, depending upon where it's located, and the silicon anode material space. So there's a gradual shifting of our capacity and utilization from these other applications, regions, markets over time to more differentiated markets.

We'll just spend a little bit of time on this. I know that there has been a lot of questions regarding the status of silicon anodes. We did announce that we signed a multiyear contract with Sila, that is going to start next year. This contract is -- we are not disclosing some key information, and that is as a result of our agreement with our customer, as well as the fact that because of our presence in this particular market, regionally, our size, we don't feel that it would be proper to disclose certain parts of our contractual arrangements as well. We don't think that's best for the shareholders in terms of how we could create value, as well as sensitivities around the fact of our market size here in the United States. The overriding factor, of course, is the fact that we do have an agreement with the customer that says we won't as well. The value that is created by this is already been covered or considered in the guidance that we gave before of $100 million to $300 million EBITDA for the company at full ramp of our facilities.

We are still discussing supply and still supplying at least 6 companies. I'm not going to go into the names of all the different companies because I don't know that, that benefits, again, either of those companies, but more importantly, whether that benefits our shareholders and our position in discussions with them around where we're at and what the conditions are going to be of supply. However, we have been seeing consistent growth in the amount of silane that's going into silicon anodes. And as we get more information on our discussions or as we successfully are able to close on contracts, then we will make sure that we disclose and announce to the market what we were able to achieve. And I want to note that these contracts or supply modes are across the spectrum in range of cooperation, anywhere from potential for larger production, co-production to smaller container size to longer-term contracts to shorter-term contracts to shorter-term PO type arrangements. So it runs the gamut depending upon where the counterparty is in their life cycle as a company and what their plans are for how they're going to manage their value chain, their supply chain.

But one thing that we hit upon last time was that when it comes to the amount of silane that's going to be available, we have a pathway to increasingly contribute silane to this particular market from where we are now to 2030. And there's even more ranges that we could look at beyond this. And it's all going to be dependent upon what the requirement is, and how we can align with those companies to supply. But one thing we don't feel there is, is a shortage of silane, particularly from us to be used in the silicon anode material space.

So just from a high level, when we talk about our earnings, we hit upon this in the initial slides, but our revenues were $33.8 million. Primary weakness is because we did -- we weren't shipping from Moses Lake any appreciable amounts. And we had weakness in our silane component of our silicon gas sales, primarily related again to the PV and flat panel displays. In addition to that, in our Semiconductor Materials segment, we had an annual planned outage that ran for a significant part of the quarter, which resulted in some increased costs and lower production quantities.

I just want to point out in terms of this slide when we look at the debt maturity profile. We did, subsequent to the quarter, close on some bridge financing, as well as extension of the August facility into February of '25.

Just a few comments on markets. What I want to draw your attention to is the U.S. semiconductor capacity increase in wafer starts per month. And when you look at that relative -- while some of the other markets right now are much larger and, of course, very important and material to us to supply into. You can see that the initiatives here in the United States are going to increase capacity by over 200%. And so, for us, this is directly scalable to an increase in demand for our silicon gases across the spectrum at differing levels, but for all of our silicon gases, increase in U.S. semiconductor capacity is going to have a direct effect on our opportunity.

The PV market, as we had stated, is right now in a bit of softness. All of the regions that we supply to are experiencing lower utilization from a production standpoint. Again, driven by demand, driven by their own overcapacity, driven by uncertainty around trade issues, driven by cost of money. I mean, there's just a number of different factors. But what it all results in is, if you look at this example that we have from a third-party provider, as well as some of our own market research. You can see there that an operating rate of an average of 45% which is far lower than what those rates were prior to the occurrence of these particular mechanisms. And that has a direct effect on those other markets we talked about where we ship into, although they're not our primary target markets, we do ship into them in order to take advantage of volume opportunities while our business grows here in the U.S. as the onshoring efforts continue.

In Chinese polysilicon, we do see some production decreases. They appear to be attempting to control inventory and balance their demand. There are a number of producers that are in maintenance shutdowns. By those, I mean, more than 10 that are in maintenance shutdowns in order to, again, try to control inventory. We are hearing about some rationalization, but I clearly -- we expect that there's going to be some rationalization in the industry.

And then here in the U.S., we're seeing that there's increased activity around reshoring. There were some additional announcements on capacity after some cancellations that were also announced. But the important thing for us is that, it includes wafer and cell capacity. And why that matters to us is that, wafers drive opportunity for, not just polysilicon, but also cells. Wafers for us in the materials business is the linchpin of the PV market. So it drives polysilicon, but it drives cell opportunities and cell opportunities drive silane demand.

So a quick update. This is the government situation as of today. Obviously, I know that we have had a election, and that's still being finished from -- for different parts of our government. And I'm sure that there will be more information to share at some point. We, at this point, do not know what sort of effects that this election may have outside of what's been everyone else's notes and what's been published and/or communicated by the various candidates. But there was a lot of activity in the last quarter. There was the finalization of definition on battery-grade materials, which directly affects 45X credits. Also some further definition around what is meant by the ingots and wafers in terms of their origin for them to be qualified for credit, which is good. It's explicit now that it must be in the U.S. There was a U.S. Commerce determination for CBD on Southeast Asia solar cells. And there is some -- at current information is that, there will be some additional information around the AD portion of that sometime towards the end of this month, beginning of next month, we'll have to see.

Additionally, U.S. solar wafer makers can now qualify for a 25% tax credit under the CHIPS Act, because of some of the way the wording was written between the IRA and the CHIPS, there was maybe some items that were working counter to each other. So by doing this, this should incentivize more ingot and wafer production here in the U.S.

USTR proposed a tariff increase from 25% to 50% for polysilicon and wafers imported from China. This is going to be something that, if put in place and when finalized, will be next year at some point. We don't understand yet when that may be.

And then for the bonus domestic content, Treasury has indicated that it's likely going to have where U.S. wafers can be part of the domestic content calculation. Again, belts and suspenders between that -- between the CHIPS Act money going towards this between the 45X clarifications, this should give a lot of support and tailwinds to increased ingot and wafer capacity here in the U.S.

So in summary. The Moses Lake facility right now is in a minimal operation rate, 15%, and our focus is on improving our product quality. Qualification timing at this point is uncertain, but we are following it, and we will communicate as soon as we have further information on this matter. PV production utilization globally remains low, and this is affecting our sales, particularly our silane sales. The Butte restructuring process is progressing, and we were able to sign a contract for silane to supply the silicon anodes with Sila.

So thank you, and we'll take some questions.

[Unknown Executive]

Moving into the questions, there's numerous questions surrounding the qualification process and customs issues. I think you addressed quite a few of them. Some of the additional questions related to that are: was the testing facility and country where the testing takes place selected by REC Silicon? Or was that REC Silicon's customer?

[Kurt Levens, executive]

Yes. This is -- this process is controlled by our customer. That is something that is customary in these cases. I want to point out that for this to be a true production level test for it to be valid. There are only so many places where this capacity exists and only so many companies that have this competence. And we would say that our understanding is that, of all the options that are available to our customer, this is the one that was most favorable.

[Unknown Executive]

Okay. You kind of addressed the second part of that question is, are there any options for the testing to take place in another country?

[Kurt Levens, executive]

Not at current time.

[Unknown Executive]

Do you see the risk of the new U.S. administration doing anything with the tax credits?

[Kurt Levens, executive]

Yes. As I had stated during the presentation, I'm really not qualified to comment on that. I only know what maybe everyone else knows because I listen to the same news feeds. And we do have consultants who help us work through these issues. So to say there's a risk, I would have to say, of course, there's always a risk with that. However, we're not yet able to say that, that is something that's going to actualize or not.

[Unknown Executive]

Okay. Kind of sticking with the tax credits topic. Will REC receive the tax credits at the same time as when the polysilicon is sold from Moses Lake?

[Kurt Levens, executive]

That is a technical, I guess, accounting question in terms of how those are accounted for. Jack, do you want to...

[Jeong Yun, executive]

Yes. So when we sell and then we recognize the tax credit as income every month.

[Unknown Executive]

Okay. And then one more with the tax credits. And will REC Silicon receive a 10% tax credit on silane sold that is used for energy storage?

[Kurt Levens, executive]

Under the current interpretation now -- as I pointed out in the slide on government battery materials, it is our understanding that, that is the case.

[Unknown Executive]

Many questions, a lot of them as expected, are related to the testing and qualification. It has been noticed that open REC positions have been removed from job boards recently. Can you comment on that? And do you expect any layoffs?

[Kurt Levens, executive]

So regarding open job positions, as we stated, at this point, the focus in our operation is to conserve cash. And as such, and given the fact that we are in a turndown mode, it does not make sense for us to go ahead and continue hiring at this time. So we need to remain balanced with the amount of personnel that are required for us to run at our current rates and to conduct our business.

[Unknown Executive]

Okay. There's also many questions on the silicon anode. Group14 announced its intention to construct its own silane plant production facility. Was this announcement a surprise to REC Silicon? Do you expect REC Silicon to serve as a supplier of silane to Group14 until their facility is operational?

[Kurt Levens, executive]

Yes. So this announcement was not a surprise, although the timing was unknown as to when this may be. It has been known that Group14, as well as other anode material producers had, in fact, either procured other companies that produce silane or participated in programs with the U.S. government that would allow them to receive grants for the supply of silane. So in terms of how those companies want to balance their supply chain, it was not necessarily a surprise.

Having said that, are there opportunities for cooperation? Absolutely. I think I've said before, if anyone is going to build silane plants, we would like that opportunity, and we are prepared to participate given that all the parties can align on the terms and what that would mean for them.

[Unknown Executive]

In the report, it's noted that there's polysilicon production that occurred in the third quarter in Butte. Are we still producing polysilicon in Butte?

[Kurt Levens, executive]

Yes. As I noted in the section on our Butte operations, there's 2 things. First thing is, there's still some material that was harvested before that is now being finished, meaning we have a reaction. And then after the reaction part of it, which is the energy-intensive part, we then need to finish depending upon what type of material it is. So there are finishing activities that are winding down now and have been ongoing. We did that in a controlled manner so that we wouldn't spend a lot of money trying to get all that done in a very expeditious manner when that's not necessary.

The second part is that, on an ongoing basis, we will have some small amount of reaction because we use the polysilicon as a way of characterizing impurities in our silane gas.

[Unknown Executive]

Can you expand on what specific optimizations we are working on in Moses Lake?

[Kurt Levens, executive]

Yes. What we've done is, again, we talked about isolation before. We also talked about some items that we had discussed when we first ran into the impurity issue around changing materials and construction. So this particular optimization variant is where we have different materials for construction utilized in the handling process that will mitigate this particular impurity from getting into our material.

[Unknown Executive]

Can you comment on if REC Silicon's customers, QCells, is able to accept product from REC at this time if it met specifications? And if their facility is not ready, do you know the timing of when that would be?

[Kurt Levens, executive]

Yes. So the first thing is, and I want to be clear about this because I've also heard some differing opinions. But this problem is not a QCells problem. This is an REC Silicon problem. It's not something that we take lightly, and it's certainly not something that we want to be in. But we have a contract to deliver product. And if we had material that was on specification, we would be delivering that product.

Regarding QCells project, our understanding is that, there has been a delay that was discussed, and that is going to be sometime into next year at this point.

[Unknown Executive]

Yes. Switching topics a little bit here. It's noted that Hemlock received over $300 million in funding this fall and Group14 was awarded $200 million. Can you comment on why REC Silicon has not received similar funding?

[Kurt Levens, executive]

Yes. The first thing is, is that, in order to receive this funding, you need to be engaged in an activity that would qualify for that particular funding. That's the first item.

The second thing is, just I want to say generally, we are very interested in government funding that is applicable to our operations and our business case. And I'll just say that as a matter of procedure, it would not be appropriate or permissible for us to discuss whether or not we are currently or anticipate being in such processes other than to say, if we can get assistance from the government and it fits within the business case, we will pursue it.

[Unknown Executive]

Can you comment on any more detail for contingency plans if the testing is not successful or is significantly delayed?

[Kurt Levens, executive]

Yes. I think right now, as we said, we are working on various scenarios to look for differing financing options under a number of different outcomes. So from a contingency standpoint, a number of items. First is the financial part of that. The second part of that is, of course, from a product quality. And that's one of the reasons why we're utilizing this time to try some of these modifications to get our product to the initial purity specifications, which then would allow us to begin shipping our product.

[Unknown Executive]

Can you comment on what additional funding or capital raises the company may need considering the current challenges?

[Kurt Levens, executive]

Not at this point. As I said, there's a range of scenarios. I do believe that there are some analysts who follow us, who have certain viewpoints on that. And I would recommend that perhaps you consult with those.

[Unknown Executive]

Okay. This one you may have already addressed, but it's going back to Group14, it's noted the factory is set to open, begin production in 2024. Does REC Silicon have an agreement with Group14 to supply silane?

[Kurt Levens, executive]

Are they talking about specific to that facility?

[Unknown Executive]

Correct.

[Kurt Levens, executive]

Because we do supply Group14 now to their other facilities.

[Unknown Executive]

Yes. This question is specific to the facility under construction in Moses Lake.

[Kurt Levens, executive]

Yes. As I had said before when I covered on that slide, we are in discussions with a number of different companies. So every company that's going to be using silane in their process we have discussions with. And when we have something that is finalized and are in a position where we can disclose something, then we will do that.

[Unknown Executive]

And do you have any more specific estimates on when the Moses Lake facility could reach 100% capacity? It's noted that it's been turned down to 15%. So the question is, when could it reach that 100% capacity? And do you know the restart cost that you might incur?

[Kurt Levens, executive]

At this time, we don't have that information because it is highly related to the specific scenarios. So first thing we need to do is determine when we should have a clear idea of when we will be qualified. And then from there, we can finalize or make more clear what the outcomes would be and have an idea of those matters.

[Unknown Executive]

Still questions that I'm going through here, but most of them are related to the issues with testing and customs.

[Kurt Levens, executive]

Okay.

[Unknown Executive]

I think most of these questions have been addressed either by the presentation or your comments afterwards.

[Kurt Levens, executive]

Okay. Well, thank you all for your questions and your interest. And when we have more information, we will disclose more information. We'll see you -- in the meantime, we'll see you next quarter.