REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2021-Q4

[James A. May, President & CEO]

Good morning, and welcome to the REC Silicon Fourth Quarter 2021 Earnings Release Presentation. I'm James May, I'm the current CEO of REC Silicon. And today, I have with me Douglas Moore, our new CFO, who will review the company's financial performance during the fourth quarter; Kurt Levens, the Vice President and General Manager of our Semiconductor Materials Business, who will review the performance and the prospects for the Semiconductor Materials segment; and Chuck Sutton, the Vice President of Sales for FBR Polysilicon, who will review the prospects for our Solar Materials business. I will then cover the remaining topics on this morning's agenda.There's really no possible way that I can place the fourth quarter highlights on the slide and give each one of them adequate coverage. First, I'd like to recognize our long-term CEO, Tore Torvund, who was the CEO of REC Silicon for some 15 years, who joined the company at a time when we were completing the construction of the FBR facility in Moses Lake, and he helped us bring this plant up and prove the benefits of the FBR technology. Then guided the company through some pretty rough times as we lost access to markets and were focused -- were forced to shut down our operations in Moses Lake. Now, he has played no small part in setting up the circumstances, which we believe will allow us to restart this facility. He leaves a very large void and will be greatly missed.Now in terms of the fourth quarter results. We generated $43.2 million in revenue, increase compared to $36.2 million during the prior quarter, largely a result of higher sales volume. EBITDA for the quarter was a loss of $0.4 million compared to a loss of $3.7 million in the prior quarter. This increase was due primarily to the impact of planned maintenance activities in the prior quarter. Doug will provide additional information regarding our financial results in a few minutes.In our Semiconductor Materials segment, we shipped 750 metric tons of silicon gases and 481 metric tons of polysilicon. Kurt Levens will provide additional details regarding the markets for our Semiconductor Materials products in a few moments as well.As we announced during our last earnings release, we reached a settlement regarding the indemnification loans in October, and we expect to make a payment of $10.8 million prior to the end of February to resolve all remaining [ plaintiffs ] under these loans. Doug will talk about this payment specifically and the company's liquidity position in a few minutes.Finally, we completed a private placement of equity that resulted in the issuance of approximately 48.2 million shares and proceeds to the company of approximately NOK964 million on January 19, 2022. This will be reflected in our cash balances for our first quarter 2022 results. This transaction improves the company's liquidity position and is expected to give us the capital necessary to restart the FBR facility in Moses Lake and to make targeted investments and improve our product portfolio in the Semiconductor Materials segment.With that, I will turn the presentation over to Doug Moore to review our financial results.

[Douglas Moore, Acting CFO & Corporate Controller]

Thank you, James. Good morning. As James mentioned, my name is Douglas Moore, and I will be reviewing the company's financial performance for the fourth quarter. As James mentioned, total revenues for the fourth quarter were $43.2 million, which represents an approximate 19% increase compared to the $35.6 million reported for the third quarter. This increase is primarily the result of increased sales volume in polysilicon. We're reporting an EBITDA loss for the fourth quarter of $0.4 million compared to a loss of $3.7 million for the third quarter. This is an EBITDA increase of $3.3 million when comparing to the prior quarter. This increase can be attributed to higher EBITDA contribution in the Semiconductor Materials segment, which I will talk about next.[ Of ] revenues reported by the company for the fourth quarter in the Semiconductor Materials segment. Total polysilicon sales volumes were 481 metric ton, or 84 metric ton higher than the prior quarter. Total average polysilicon prices realized during the fourth quarter increased by 15% in the third quarter, primarily due to an increase in sales mix of higher-value products. Prices for each individual grade of semiconductor polysilicon increased slightly.Silicon gas sales volumes increased 3% to 750 metric tons in the fourth quarter, up from 728 metric ton in the third quarter.EBITDA contributed by the Semiconductor Materials segment was $9.3 million for the fourth quarter compared to $1.8 million in the third quarter. As James mentioned, we must recall that during the third quarter the company completed planned maintenance outage, which contributed to the lower EBITDA. Later in the presentation, Kurt will provide additional information with respect to our Semiconductor segment.Cash balances decreased by $15.9 million during the fourth quarter, ending at $110.5 million. Cash outflow from operations were negative $11 million and the result of a $1.1 million decrease in working capital, which consisted of a $5.2 million decrease in the inventory, a $5.5 million decrease in trade receivables, offset by a $1.4 million increase in accounts payable. The decrease in working capital was offset by cash outflows, which included an EBITDA loss of $0.4 million, interest payments totaling $9.4 million which was associated with payments on our long-term debt, and the interest on leases, previously received customer payments of $1.9 million that were recognized as revenue during the fourth quarter, and also contributions to the pension plan of $0.6 million. The remaining cash outflows can be attributed to changes in other assets and liabilities. Cash outflows from investing activities were $3.4 million and consisted of capital expenditures. Cash outflows from financing activities were $1.4 million and were the result of the repayment of long-term lease liabilities and the annual payment for the Grant County property tax note. Again, cash balances decreased by $15.9 million during the quarter, down to $110.5 million on December 31, 2021.Nominal debt decreased by $1 million during the Q4 to $197.5 million. Nominal net debt increased by $14.9 million to $87.1 million due to the decrease in cash of $15.9 million and the decrease of nominal net debt.I will now turn the presentation over to Kurt Levens to discuss our Semiconductor segment business. Thank you.

[Kurt Levens]

Hi. This is Kurt Levens, and I'm going to cover some items relating to the market going forward, as well as our performance in the last quarter. Semiconductor wafer production is forecasted to continue its relatively strong growth rate. This is a key driver for our business, from both the Silicon Gases, standpoint and that wafer fabs have a demand and therefore, throughput, which drives gas consumption, as well as polysilicon, wherein production drives the consumption of our polysilicon.Key demand drivers are similar to what they've been, and in fact, in some cases, we've seen stronger trends towards an even heavier emphasis on that application: data, 5G, automotive, Internet of Things, as well as general electrification and electricity consumption trends. The estimated demand growth for wafers is 6.4% compounded annual growth rate from '21 through '26. There is something that I would like to note, though, and that is that, there is not, in general, a lot of new capacity that is slated to come on regarding wafers. There have been recently some announcements. However, third parties, as well as semiconductor industry analysts have raised the specter that perhaps wafer tightness could cause at some point a further [ volume ] down the line.Semiconductor-grade polysilicon for us in Q4 was a relatively strong quarter. This was aided in some senses by a pull forward from customers at their request. And this was a clear sign in terms of how strong demand is from our perspective. Price decrease, however, that is mainly due to mix effect and not necessarily because underlying prices are going down. In fact, prices are increasing across the board and that will be a general trend through the remainder of this year. Demand is expected to remain strong. When we look at right now, our visibility on commitments, we have a very high level of backlog and assured commitments from our customers. Approximately 90% of our production is sold out at this point and we are working on various methods to increase our production where applicable on an incremental basis. In addition to that, we are executing on projects to increase our highest-value products in the polysilicon portfolio, and that's Float Zone. We had discussed this at last quarter and work continues on that project, and we hope to have full production out of that in due time.Silicon Gases, again, was a strong quarter, unfortunately, not as strong as it could have been, and this was related to the -- primary drag related to the logistics. Right now, the global logistics bottlenecks are, in fact, affecting our ability to put product into our customers' hands. And we find that the demand flow is much stronger than our ability at this point to service it. So that means that in reality the bottleneck ends up being booking and availability of our packages. And what we see right now? We see that demand is going to continue to be strong, based upon our customer forecasts, as well as customer commitments. In addition to that, we have very good visibility in terms of new wafer fab investments and when they're coming online and our involvement in there. We are also continuing our program that we had talked -- discussed in the last quarter about increasing our production capacity of key molecules, as well as our distribution capacity of key molecules, including our silane molecule, and this will help us to mitigate some of the effects of the logistics bottleneck.I'll now hand this over to Chuck Sutton.

[Chuck Sutton, Vice President of FBR Polysilicon Sales]

Thank you, Kurt. Looking at the chart, yes, converting PV Module production to polysilicon equivalent. You can see that Module Production and consuming polysilicon in the 2017 to 2020 time period did not increase to a large degree. In 2021, demand has finally surpassed the available polysilicon in China, which has now led to the highest prices we've seen in years. In 2021, global Module Production looked to be around 200 gigawatts, consumed an estimated 575,000 metric tons of polysilicon. In 2022, Module Production is expected to be around 240 to 250 gigawatts, consuming an estimated 650,000 metric tons of polysilicon. We all understand that China dominates the polysilicon supply, accounting for the majority in the past years. As we look at the announced expansions and what has been built and starting up this year, we believe the balance will stay throughout 2022 due to the ramping of the new capacity in the historical factory utilization rates. For the next few years, we see PV installations growing around 11% annually. And if already announced poly expansions happen, we could see an oversupply in 2023. We see polysilicon prices dropping down in the range of investment returns as that happens. It still remains to be seen whether all this capacity is built and brought on line.In the U.S., as we look at that, the Build Back Better Act is not going to pass in its current form. There is strong support for portions of the Bill, including the climate section that has the SEMA Act to support U.S. solar manufacturing. What is being discussed now is what portions of the Bill will be moved forward and how it will be done. The U.S. Senate is currently working on other issues around continuing the government funding, budget, how to work on the next Supreme Court nomination. All this has been moving the efforts on the Build Back Better portions to the side. This uncertainty may delay the restart of the Moses Lake FBR facility. Currently, we are working on the business case for restarting Moses Lake. Those efforts include what demand for our products would need to be, and as we continue to develop the business case, we'll maintain our flexibility to enable to restart for the plant in 2023. The timing of the restart is depending on market conditions for our products as those various opportunities unfold.And with that, I will pass it back to James.

[James A. May, President & CEO]

Thanks, Chuck. Next few slides I'll cover battery materials. In large part, the proliferation of electronic vehicles will drive the large-scale demand for highly efficient batteries. There are several companies that are pursuing initiatives to develop silicon anode materials for use in lithium-ion batteries. For most of these companies, silane has become the raw material of choice to introduce silicon and substantially improve the efficiency and performance of batteries that use this material. Some of these companies are in the process of qualifying their products for commercial use. In October of 2020, we announced the Group14 Technologies in REC Silicon, we're collaborating to develop a facility co-located with REC Silicon's operations in Moses Lake to produce silicon anode materials. Cooperation between our companies has been ongoing and we're continuing to work with Group14 to define requirements. Group14 is currently using REC Silicon's silane gas to produce silicon anodes at a facility in Woodinville, Washington for trials and commercial uses.One specific timing of commissioning a battery materials plant in Moses Lake continues to be uncertain. Battery materials forecast indicate that large-scale manufacturing will be required by 2025 and that very quickly the current capacity of silane gas production will not be sufficient to meet demand. This is expected to create a very good opportunity to deploy REC Silicon's current production capacity, as well as our expertise to meet this demand. We'll continue to work to develop these opportunities and ensure that REC Silicon has a seat at the table when the market takes off.Now I'll provide a short update with respect to our investment in the Yulin JV in China. The JV continues to increase capacity utilization and produce some 3,400 metric tons of granular polysilicon during fourth quarter and approximately 13,700 metric tons for the full year of 2021. Currently, the facility is sold out and sales are limited by production volumes. The granular product being produced by this facility has been qualified and is being used in monocrystalline PV applications. There have been no real changes with respect to our strategy with the Yulin JV. The $4.7 million equity settlement payment by REC continues to be delayed and we are continuing to work to resolve the outstanding issues. As a reminder, the option to increase REC Silicon's ownership in the JV expired in Q3 of 2021 and we currently expect to maintain our 15% ownership share.In closing, I'd like to provide a high-level review of our strategic plan. First, our Semiconductor business has provided us with stable cash flows and serves markets that are expected to exhibit strong growth going forward. As Kurt indicated, we're working to position our product portfolio to ensure that we can reap the benefits of this growth. Next, our FBR technology affords low-cost, high-quality, solar-grade polysilicon with an ultra-low carbon footprint. These are all characteristics that PV markets are looking for, and there's strong support to pass the SEMA Act [ if Chuck recess ]. The trend towards creating independent supply chains outside of China is not wholly dependent upon the passage of this Act. Companies are currently constructing wafer manufacturing outside of China, which may create opportunities for REC Silicon to restart the FBR facility.Lastly, REC Silicon is uniquely positioned to capture silane demand to produce silicon anodes. We are the only large-scale silane production facility in North America or in Europe.In summary, we're well positioned to benefit from the megatrend that will drive markets in which we participate. Our Semiconductor business produces materials that will be required to produce products that utilize new technologies, as the electrification of everything continues. Renewable energy, our facility in Moses Lake is capable of producing low-cost, low-carbon, high-quality polysilicon, which can be used to produce sustainable energy from the sun. And on our Silane Gas is well positioned to support the production of silicon anodes to store and transport that energy. We believe that these characteristics will help us achieve the restart of our manufacturing facility in Moses Lake. Make no mistake about it, we understand what our assignment is. Our prime objective is to restart this facility and we believe that we can put the necessary building blocks in place and accomplish that.With that, we'll now take any questions that you might have.

[James A. May, President & CEO]

First couple of questions involve the Bill that Senator Warnick has introduced in the Senate. Will the incentives in the Bill be sufficient to reopen the Moses Lake facility? And then why are we waiting to open for the Warnick Bill to pass?So if you'd address that Chuck, I'd appreciate it?

[Chuck Sutton, Vice President of FBR Polysilicon Sales]

Okay. In itself, the Bill is not enough to open up the plant. So what the Bill is focused on is providing incentives to grow that manufacturing base. As you mentioned, there is several folks that would like to build manufacturing around our facility. And so, this Bill supports that and helps them get a start to doing that. In waiting for that Bill to pass, you want to make sure you get the proper incentives to help that foundation of manufacturing build-out. So until that passes, I don't expect anything to happen.

[James A. May, President & CEO]

Next question involves a discussion on forums that have been digging into the Internet and come across things that are happening in Moses Lake with respect to the restart and the expansion in the FBR project. I've taken several questions about this in the interim. We have normal ongoing activities to rezone land to make sure that we have the power necessary to conduct business in the way that we have in the past, and this is really no indication that there is an expansion or an imminent restart of the facility. So from that standpoint, those are things that we take care of as we go along to make sure that we have the land, the power, the water available to conduct business.There's a question about America COMPETES and the CHIPS Act, containing provisions to support domestic supply chain. Could you talk about that just a little bit, Chuck?

[Chuck Sutton, Vice President of FBR Polysilicon Sales]

Yes. So the CHIPS Act, there is 2 different ones, the USICA Bill that was passed last year by the Senate and then the current one that was passed by the House. Those need to go back to the Senate and being reconciled before they are finally passed. Once that's done, we will look at the opportunities as everybody else to see what can be done to expand semiconductor manufacturing in the U.S. and how that will -- REC can support that.With the America COMPETES Act, that's a smaller portion of a solar loan and grant funding. That's more on the investment side of things, which is, we've had similar to those in the past and we don't see that they will perceive that to be a large catalyst to start manufacturing in the U.S.

[James A. May, President & CEO]

I'll take the next question. Many countries are seeking to establish domestic PV value chains, including polysilicon production, for example, in India. Does REC Silicon see any international opportunities versus FBR technology through licensing and joint venture?We've already got the joint venture in China that we're working with. We haven't investigated any additional opportunities. We're always open to speaking to them. I think it's very inefficient for each country to invest all the assets necessary to complete a supply chain. We've got a plant that's located in the United States that's very competitive on a world basis, that is a -- can be used in those instances. So that's -- the best way to do it is to spread the supply chain across the globe and get the economies of scale that come with lower scale manufacturing to supply PV to the globe.Next question is, REC Silicon's sales of semiconductor-grade and Float Zone polysilicon have been on fixed-price contracts. Have these contracts have been renegotiated? And if so, what are the improvements in prices [ are ] achieved? And if you could address that a little bit?

[Kurt Levens]

Yes. Without being specific about the price increases, I will say that we have increased the price of our Float Zone offering this year. We started that process in Q4. And we continue that for the majority of our commitments for this year. So the price increase level is sufficient to, of course, mitigate some of the cost input increases that we consumed.

[James A. May, President & CEO]

Okay. We've mentioned -- it says we've mentioned discussions with U.S. Military in past years in regards to battery technology.We've never held discussions with the U.S. Military regarding the development of the battery. What we do know is that, Military is very much involved on the development of batteries and has this potential to drive the demand. So from that perspective that we'll have an influence on the market, but we haven't worked directly with them. What we do is, we'll work with the companies that demand the silane or the polysilicon in order to meet this new technology, ensure that they have the necessary raw materials.How do you see the polysilicon oversupply starting in 2023 impacting REC, keeping in mind Moses Lake production?This industry has very much a history of announcing expansions and not following through on it. Clearly, with the expansions that have been announced, there is enough polysilicon additions that create a substantial oversupply of polysilicon, it looks to begin in 2023. There are several of those announcements from credible companies that have announced expansions but they've announced expansions only if market supports those expansion. Clearly, if you more than double the demand for polysilicon, the price will come down and it won't support that.I think the other thing is that, what we see going forward is a bifurcation of the markets, more or less, that will have a market inside China and a market outside China, with some protection, especially if the SEMA Act passes. So, in those terms, what we want to do is use SEMA as a springboard and then create a very competitive supply chain that can compete on a global basis.And with that, I think we've answered the questions. I appreciate your time. Thank you for attending the call. If you need additional information, please contact the IR contacts on our release materials. We look forward to seeing you next time on May 11. Thank you.