REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2022-Q4

[Kurt Levens, executive]

Good morning. My name is Kurt Levens, and I'm the CEO of REC Silicon. I'd like to welcome you to the Q4 2022 Quarterly Results Presentation.

In the fourth quarter of 2022, our revenues were $31.6 million and our EBITDA was negative $23.6 million. Primarily during this quarter, we have reduced sales volumes of both silane silicon gases as well as polysilicon for different reasons, as I will cover in subsequent slides. However, the continued effects of our price increases were able to be positive relative to the previous quarters. Our restart activities continue in Moses Lake and our first production target of Q4 2023 remains unchanged. As we had announced earlier, our binding term sheet with Hanwha Solutions for polysilicon was executed. And it's important to note that within the silicon gases market, there's continuing inventory drawdown in corrections so that at some point we see some stabilization, but all of our focus segments are affected at this time.

As indicated before, we had a decrease in polysilicon sales volume. The decrease in polysilicon sales volume was driven by the fact that we produced less, not because demand was less. I think that the situation that started in Q3 with regards to the electricity spikes and unprecedented electricity increases and pressure unexpectedly continued through varying periods within Q4 and as such caught us by surprise in terms of what we were to do with regards to the production. So as a result of trying to manage the situation, we reduced production in order to manage any potential loss from it.

Silicon gas sales volume decreased. That function was relative to the market -- the consuming market and the overall economic weakness that currently exists in the semiconductor market, particularly in the memory market, and that exists in the flat panel display market. Additionally, we did have some onetime expenses as we will continue to have one-offs through the remainder of the time period before we start up our plant in Moses Lake.

Again in the Semiconductor Materials segment. Our overall EBITDA was $6.5 million. This was a decrease off of Q3 2022. What I would like to note in here is that again, you can see that there's a large effect from the decrease in our actual production, which was not driven by a lack of demand, rather driven by our desire to control costs given the unprecedented situation we are faced with power.

Cash flows. In the quarter, our cash balance was $105.3 million, which is a $26 million decrease in cash. Mainly that came from operating activities and our EBITDA performance as well as activities from our continuing CapEx for the Moses Lake restart as well as some of our high-value EBITDA activities. Nominal debt was $183.9 million and nominal net debt was $78.6 million, which is a 39.8% increase, and that was primarily driven by the fact that we had a 41.5% decrease in cash.

So I hit upon this a little bit in the beginning. However, in silicon gases, you can see that for the past 2 quarters, we've reached a run rate which is, in fact, below where we've been previously averaging. And this is primarily and totally due to the fact that semiconductor market and flat panel display markets, what started in Q3 with the system trying to draw down inventory has continued. We do see some signs that it can continue to stabilize in this regime, and then we should start to see some increases that begin happening that are going to be triggers of the fact that potentially utilization at our consuming sites is going to increase. Right now, our best estimate is that sometime by Q3, we should see this start to attenuate and there will then be potential for it to begin increasing. However, there's a lot of uncertainty right now based upon feedback we receive from end users and distribution partners.

We have put in place price increases for 2023 for all of our silicon gases.

But what I want to focus on here is the fact that this is a situation that is due to global economic forces, and what we're trying to do right now is really focus on the things that we can control and prepare for. Because the macro itself has not changed. The need for semiconductor devices is going to continue to grow. The reshoring efforts for advanced semiconductor production in the U.S.A. and other areas where we are the #1 supplier is in motion. So what we are doing is making sure that we are, during this time period, continuing to invest in container loading and production capacity so that we can take advantage -- full advantage of that growth when it returns to the trend line. If you recall from last year, the first half of the year and the previous year, we were constrained by our container capacity and, in some cases, our ability to load. So by removing those bottlenecks, when we do return to trend line, we're going to be able to achieve sales that are going to be potentially greater than what we had before. In addition to that, we executed on 2 supply contracts of 5-year duration which had contracted value of up to $180 million for our gas business. And finally, we are seeing that silicon inclusion in lithium batteries is advancing. Currently, we are tracking multiple companies that are projecting appreciable volumes to come online in 2024 that would require silane.

Semiconductor grade polysilicon, as I had indicated earlier, market demand remains strong because of the nature of how these contracts are entered into. However, for us, there was a decline in sales because we made less product in Q3 to avoid power, followed on by the fact that we made less product in Q4 again to avoid record-high electricity. For this year, our plan is to run at a reduced capacity and take advantage of the periods when power is going to be most affordable. However, we are working very steadily at doing something which is going to change the nature of how we engage in our electricity contracts. So there is potential that we're going to be able to run harder in our polysilicon production, provided that we have the adequate electricity pricing points and that we have commensurate sales prices in the market that will cover any of our higher electricity prices. We have made very significant price increases in place for 2023 on the base volumes that we've already committed to.

So I've talked a little bit about electricity and I'm going to talk about it again because for us, obviously if you look at our results, you can see very starkly how this affects our operating conditions at Butte and our operating results. This situation caught us by surprise. If you look back at the historical data, you can see that there is from time to time you get spikes of some nature. However, those are generally well within the operating parameters of engagements that you make, and by and large, it stays fairly steady within that window. In Q3 of 2022 towards the end, we ran into a situation where it spiked as we were coming out of our shutdown, which then caused us to defer production volumes, followed by a spike again in -- that started in December and continued on through the beginning of January. That was again unprecedented in the absolute quantum of that spike and the duration of that spike.

So I'm not going to sit up here every quarter and talk about why results weren't as strong because of power. We are going to do something about this. We are -- obviously, we're in a new reality and a new regime when it comes to that and how it affects our Butte operation. We are working with outside consultants to evaluate options in terms of our strategy around how we can improve costs and also achieve more stability in this key FEED. So we will have more information, and our target on that is by Q3 of 2023.

I'd also like to point out that the DCS expansion that we had discussed earlier last year is well on track, and we are now starting up here at the end of this quarter to the first part of Q2. We already have our first customers lined up for product qualifications as well as clear visibility on when we expect to have our first sales. Additionally, we've anchored over 50% of this output of the anticipated capacity via contracts. This capacity will be 3x our current capacity. It will be improved in both quality and specification and will be improved in terms of the process control, stability and efficiency, all based upon how we have learned through our process as we've been operating our first phase production facility. This is going to result in cost efficiencies as well as product that is going to be very sufficient for today's needs and for future needs. Our ambition here is to return to a top 2 producer position, which is where we used to be prior to the time when we stopped investing.

In the polysilicon market, this year we expect another strong year in terms of installations with nearly 300 gigawatts forecasted. Now regarding polysilicon pricing, yes, there is currently expectation that there will be more polysilicon capacity released. And I would like to say that wafer capacity, however, is outpacing polysilicon capacity from what we see. Currently, the current pricing is in the mid-30s for mono grade polysilicon. Prior to the Lunar New Year, price was depressed as buyers tried to find points where they could put pressure on suppliers and -- in the thoughts that maybe further capacity would create a situation that was going to be more favorable for them to buy into. However, since the Lunar New Year, that situation flipped around. Prices increased in upwards of 30% in some cases. So what the trend will be for the remaining part of the year, I don't know. But I can say that capacity does not come on as a block. And based upon what we're seeing now, we don't expect that there's going to be rapid shifts either way in terms of pricing spiking up or falling down. So that is our best estimate at this time, and we will continue to monitor to see what happens as this polysilicon capacity comes online.

Just to touch again on what we had announced before. We have an offtake contract for 100% of the product from our Moses Lake high-purity granular polysilicon. So it's a 10-year take-or-pay. We'll be able to track the market. We will have a minimum and maximum that allows us some flexibility and some guardrails, so to speak, in terms of pricing. There will be a significant prepayment to provide contract security. We are continuing to work on a final supply agreement and we will have more to say about it when it is done.

In Moses Lake restart, as stated earlier, the project is currently on target to start up in Q4 of this year. We have completed some other items that are in support of this since the last time that we spoke. One is that we now have an MOU for silane offtake that's going to be used for silicon materials with Hanwha Corporation. We will continue to give more information as we have more concrete terms and contracts. Additionally, we currently estimated that our EBITDA at full run rates for the newly started up plant will be somewhere in the range of $100 million to $300 million. We have ordered all of our long lead time equipment and materials were well over 50% of commitments made, and we are moving into construction phase in every single one of our particular areas that we are focusing on. We have finalized our estimated target CapEx number of $160 million. This is an increase from pre-FEED estimates, and we do note that this is because this is over a 2-year period because this project as we ramp it will happen over a 2-year period.

We do have some more information about our JV in Yulin, China. They report that in 2022, they were profitable. They had 16,000 metric tons of FBR granular production as well as some bloated silane and some small amount of Siemens, but they have been working at steadily increasing in their production as well as their sales. Along with that, they reported that their production costs are lower than they expected. And from what we have observed, they were lower than what we expected. Additionally, they announced an 80,000 metric ton expansion. There is no more information on it as of this time, and we are currently in discussions with them over a number of matters. And as we have more information on this potential 80,000 metric ton expansion, we will be back to talk about it.

A keynote here on the governmental initiatives was not much has changed except when you get down to that second paragraph in the CHIPS Act. And that is that we now have to have information that sometime in the late spring, the Department of Commerce plans to release another announcement under the CHIPS Act that is more focused on material suppliers and equipment manufacturers, key enablers of the semiconductor reshoring here in the United States. This, for us, could potentially include some of the high-value investments that we're currently engaged in or contemplating in the Butte facility. We will fully explore this opportunity. And if there are opportunities for us to utilize this, we will be back with more information about that.

Our financing plan. As we stated before, we have gone through the process of fully vetting, value engineering, trying to reduce costs, trade-offs of cost versus schedule so that we now have a good idea of what our requirements are for the restart of Moses Lake as well as what we want to do in the near term with the Butte operational improvements and high-value growth investments. Additionally, as is well known, we do have a bond repayment in mid-April time frame of $110 million. Currently, where we're at is that we have financing solutions that are underway to address these requirements. We will provide additional information as soon as we've finalized on these solutions. So we also have an expectation that our financing will be completed well before the bond maturity date.

With that, this finishes our presentation, and I'll open it up for questions.

[Douglas Moore, executive]

Thanks, Kurt. First question. Analysts are reporting that the global silicon supply will increase this year by up to 50% and is expected to keep -- or put pressure on silicon prices. And where do you see silicon prices going this year?

[Kurt Levens, executive]

Okay. I believe I commented on that somewhat. I would say that as of right now, we do not see pressure on silicon prices. However, I would think that, in general, should there be large blocks of capacity come online and not commensurate demand, then we would see that there should be pressure on prices.

[Douglas Moore, executive]

Then a follow-up on that. Are you also seeing the forecast of a 50% increase in global silicon supply in 2023?

[Kurt Levens, executive]

Yes. What I see is that there is a lot of projects that are announced and in progress. But what we don't see is that all of this is coming on monolithically in one block at one time. And in fact, there's still -- as proven by the pricing that you currently see in the market of the mid-30s, there's still a structural imbalance between wafer capacity and polysilicon demand and polysilicon supply.

[Douglas Moore, executive]

We have a couple of questions related to a similar topic here. When can we expect more details to come out from the deal with Hanwha? And since experts have confirmed it's an arms-linked transaction, investors are expecting more transparency.

[Kurt Levens, executive]

I will say that when we have the contract finalized, we will announce that we have a final contract as well as the relevant terms. As far as detail, we will be limited in terms of what detail we're willing to disclose because things such as pricing and other items, we consider to be confidential and we consider those to be -- as well as our counterparty considers them to be confidential. So it's not a practice. In fact, we don't see our competitors disclosing such items. So our practice and our desire is to not disclose that. However, we will disclose whatever is necessary and required of us by the regulations.

[Douglas Moore, executive]

Okay. Next question, will the 10-year take-or-pay agreement with Hanwha reduce the company's capacity to supply silane gas to battery material companies?

[Kurt Levens, executive]

Well, I mean, I will say this, yes and no. It will not reduce our desire or ability to build more capacity to supply battery and [ other ] companies. However, will it reduce potentially how much we have to supply out of Moses Lake? Yes. However, we still have our facility at Butte with a fair amount of extra capacity there that we can supply out of. And again, it's the world's largest silane manufacturer outside of China. If there's going to be silane plants built that need to be done to manage or grow in that particular industry should it evolve in that way, then we want to be involved in that.

[Douglas Moore, executive]

So moving to, I guess -- or continuing on to silicon gas. In the presentation, you stated the following. The company executed 2 supply contracts of 5-year duration, value up to $180 million. Why were these contracts not presented with a market exchange notice and who are the counterparties?

[Kurt Levens, executive]

We're not going to disclose who our counterparties are, and we're not aware of any requirement for us to disclose at the time when we signed contracts of those values. Keep in mind, these are a couple of contracts in aggregate that equal up to this amount.

[Douglas Moore, executive]

And I think going back to Hanhwa agreement. Can you elaborate on the minimum and maximum price range for the offtake agreement, which index will be used, potential size of prepayment?

[Kurt Levens, executive]

No, other than the fact that we will use indices, in fact, not just one but indices, that are currently available and currently utilized in the industry and accessible by anyone who wants to access them.

[Douglas Moore, executive]

Are you able to indicate what price increases we've been able to experience in 2023 versus 2022?

[Kurt Levens, executive]

Yes. I can indicate that on a general basis, we've had -- it's going to depend upon each product. But in our polysilicon, overall, price increases are greater than 40%. We've had some that have been increased more than that.

[Douglas Moore, executive]

Some clarification on the EBITDA guidance in the range of $100 million to $300 million. There's 2 questions surrounding this. Is it safe to assume that this is from Moses Lake only? And is the $3 per kilogram tax credit as part of the Inflation Reduction Act included in that figure?

[Kurt Levens, executive]

That amount is the entire run rate for the company once we are at full capacity at Moses Lake. And yes, it would be inclusive of everything.

[Douglas Moore, executive]

And is the -- still expected to be approximately $48 million in tax credits at full production rates?

[Kurt Levens, executive]

Yes. I mean, the point being, right, it's a $3 IRA credit times our full production.

[Douglas Moore, executive]

Yes, yes, the question was in aggregate, yes. Okay. And then some further clarification on the $160 million CapEx figure. Let me read this right. Is this from the end of Q3 to the end of 2024? Or does this amount refer to the CapEx prior to first production only? Or basically, could you elaborate a little more on the $160 million?

[Kurt Levens, executive]

It's from Q4, inclusive of Q4, through -- inclusive of all of Q4 in '24.

[Douglas Moore, executive]

Okay. I'm trying to see which of these questions are the same, so I apologize here. So I think you've already touched on this one. But there's another question surrounding the minimum and maximum price levels with the Hanwha agreement and if there are hard caps on the upper and lower levels.

[Kurt Levens, executive]

Yes, there are hard caps on the upper and lower levels.

[Douglas Moore, executive]

How large will the prepayment be with Hanwha and when can we expect an announcement?

[Kurt Levens, executive]

When we have finalized the contract, we will make an announcement. At such time, we will disclose any of the items that we are required to disclose.

[Douglas Moore, executive]

What pricing are you expecting for polysilicon that is made in the United States?

[Kurt Levens, executive]

We expect that there will be a premium for polysilicon that's made in the United States. However, the fact that there's a premium does not mean that it's not tied in some way to polysilicon that's produced and consumed within China. But the reality is that you have between value-added tax in China, between freight, between tariffs here in the U.S., there isn't -- plus the fact that we have ultra low-carbon, conflict-free material means that there is, in fact, going to be a premium. That will most likely will move with that base load, that's, if you want to call it, Chinese capacity and cost.

[Douglas Moore, executive]

Can you expand on the silicon battery sector in relationship to REC Silicon?

[Kurt Levens, executive]

Okay. For us, it's obviously the potential of there being large amounts of silane to be consumed in the production of silicon anode material. It's a very interesting opportunity for us. It's a very important opportunity. And it's why we, in fact, are looking at ways that we can efficiently address that market. Hence, why we have an MOU. That's why we also have had numerous discussions with most of the companies that are going to be using silane as the route to which they're going to make that silicon material that goes into anodes.

[Douglas Moore, executive]

Okay. And are we expecting significant lower finance cost after refinancing of the bond?

[Kurt Levens, executive]

Well, I think it's a process. But our goal and expectation is that we are going to have lower financing costs.

[Douglas Moore, executive]

We've got similar questions surrounding the IRA and the tax credit. Will we see the tax credit as part of EBITDA? Or will we see this in another place in the P&L.?

[Kurt Levens, executive]

I don't -- yes, okay. Yes, it will show up in EBITDA. I was going to say I'm not an expert on -- in terms of taxation and how that works. But I'm told that it's going to show up in the EBITDA.

[Douglas Moore, executive]

And we had a follow-up to the question you answered on -- still on the tax credit. The potential for $48 million tax rate at full run rates, was this included in the $100 million to $300 million EBITDA figure?

[Kurt Levens, executive]

Yes, it was.

[Douglas Moore, executive]

I have a few more coming in here. Would the low level of the -- or the floor, I guess, of the take-or-pay agreement, the pricing floor, is it safe to assume that we would be approximately breakeven, including the tax credits at that level?

[Kurt Levens, executive]

I mean, obviously, we're not going to talk about what our cash cost is and what the floor is. However, I would say that, for us, we would not want to enter into a contract 10-year of duration in which our guaranteed minimum was below what we expected our cash cost to be. So that is the situation.

[Douglas Moore, executive]

Let me try to get through some of these. So I think most of these -- there are similar questions from different people, but I think we've covered loss of interest in the EBITDA figure of $100 million to $300 million, the CapEx amount of $160 million.

One question on Hanwha. How well funded is Hanwha? It will have full offtake of both silane and polysilicon for Moses Lake, plus they are building a wafer capacity in the U.S. for $2.5 billion. I guess the question is do they have the money?

[Kurt Levens, executive]

Well, I think that's really a question for Hanwha. But they are -- and many of their subsidiaries are publicly traded and you could probably look that up in terms of that.

[Douglas Moore, executive]

And that appears to have covered the questions that have come in. So I'm not seeing any additional new items.

[Kurt Levens, executive]

Okay. Are there any additional items before we close the call out?

And so the task that we've outlined, that we're to complete with regards to contracts as well as the finalization of more binding terms on MOUs. Thank you.