Revasum (ASX:RVS): Interview with the new management team

September 30, 2022

Revasum, RVS, semiconductors

We spoke with the new management team at Revasum (ASX:RVS). CEO Scott Jewler and CFO Bruce Ray talked us through RVS’ near term challenges, including the supply chain issues the semiconductor industry is struggling with. Additionally, we talked about how RVS is seizing the longer term Silicon Carbide opportunity. Full transcription below.

 

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Also check out the research on RVS published by Pitt Street Research.

 

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Revasum (ASX:RVS): Interview with the new management team 1

 

 

Transcription

 

Marc: Hello and welcome to Stocks Down Under. My name is Marc Kennis, and today we’re joined by the new team, I dare say, at Revasum. So, we’ll jump straight into these questions. Scott, you’ve been at the firm for two months now, new to Revasum but not new to the industry, right? That’s really important. But can you, you know, tell us your thoughts on Revasum, where it sits, the products, the markets that it’s addressing? What are your thoughts after just the first two months?

Scott: Well, it’s a really interesting company. You know, Revasum, you know, was formed out of a predecessor company that has 40 years experience making grinders and polishers for the semiconductor industry. And then as Revasum, we’ve really focused narrowly into this silicon carbide market. So, we have a combination of a long legacy and history of building polishers and grinders for the broad semiconductor industry. And now the new incarnation, we’re focused in on a really high growth, early stage, I would say, segment of the market, which is really exciting. And silicon carbide, because it’s such a hard material, you know, really has some unique requirements for grinding and polishing that fit quite well with our intellectual property portfolio. So, you know, it’s been a really exciting couple of months and, you know, we’re pleased where we are and we see a lot of opportunity in the future.

Marc: All right. What do you consider the main drivers for the company, say, in the next, you know, three to five years?

Scott: You know, certainly the macro driver is the transition away from fossil fuels, right? That result in electrification of automobiles and the storage of electricity and transmission of electricity. So, obviously, silicon carbide, you know, for the end user, you know, silicon carbide means a longer range in electric vehicles and faster charging, which are two things that market really wants. But I think, you know, as I said, we’re really in the early stage, so, not only in the conversion to electric vehicles, but also in, you know, other industrial segments of the industry, renewables, and others. So, you know, the market’s really in its infancy, and our customers and the market as a whole are announcing huge investments to grow and supply the end markets with these silicon carbide devices.

Marc: Right now, though, the industry is going through a rough patch. We’ve had COVID, we’ve had supply chain issues that I don’t think are fully resolved just yet, but, you know, the industry is working through that. And then there’s a recession looming, probably not looming, it’s actually happening, I think, and it’s starting globally, basically. So, that will impact the overall semiconductor industry, obviously. How has it impacted Revasum up until now, and what do you think might happen with the company sort of in the next 6 to 12 months?

Scott: Over the last 18 months, lead times for critical components both mechanical components and electrical components extended significantly. You know, we had parts that were delivering on 20 weeks lead time that extended out to 50 weeks or greater. And, you know, that really limited the ability of the company to build and ship product and resulted in some unfortunate delays this year. You know, the parts that were ordered a year ago are starting to come in and more recently. And so, you know, our factory is quite busy right now, and you know, we’re building a lot of tools and hope to have a great fourth quarter as we ship those out. You know, I think in terms of a recession, you know, obviously recession is, typically, you know, the end market demand deteriorates, but I think, you know, in the EV space, which is the leading driver in silicon carbide right now, you know, we’re still in this…a replacement cycle, which is very early.

And so, you know, while there may be some slowdown in EV, there will likely, even in a recession, continue to be strong growth. So, I think for our business and our customer’s business the recession won’t be as, in fact, impactful as it will be in other segments of the semiconductor industry. You know, on the flip side, you know, a lot of the components that we buy are sold into other industrial segments. And so, in a way, you know, a recession would likely reduce lead times and allow us to build our products faster and more efficiently.

Marc: Right. So, purely, you know, because silicon carbide is essentially on a secular growth path, you know, it’s so separate from the mainstream semiconductor market, I guess. Does that mean an opportunity for you guys, that you see sort of other things emerging right now? So, maybe even outside the EV space?

Scott: So, we have two main products shipping into the silicon carbide market, right? So, when we step back a little bit. So, you know, to make a silicon carbide wafer, which is the segment of the market that we participate in, there’s kind of five main steps, right? You have to make a ball, the ball has to be sliced and the perimeter ground to make the final wafer shape. And then the substrate is ground to a smooth surface, and then it’s polished to make a very flat, smooth surface. And currently, most of the production in silicon carbide is still in 150-millimeter diameter substrates. So, over the next 18 months, there’ll be a transition from 150-millimeter to 200-millimeter substrates. And, you know, if you look at some of the big integrated device manufacturers like ON Semiconductor and Wolfspeed, they’ve announced just tremendous expansions in their manufacturing capacity for silicon carbide wafers.

So, right now, the company’s grinding products are industry-leading. So, we’ve shipped, you know, quite a few of those tools, and they’re in high volume production on 150-millimeter wafers. The market for polishing has remained on traditional batch polishers at 150 millimeters. However, you know, our channel checks and discussion with customers, there’s a strong expectation that when that market transitions to 200 millimeters for reasons of quality and also for economics, they’ll transition to single way for polishers, which is the product that we’re shipping now, our 6EZ product.

Marc: Right.

Scott: I think we’re well positioned and we’ll be busy over the next couple of years just supporting the build-out of the facilities that our customers have announced. I think the other way to think about it, though, is as we discussed, you know, we’re still in the early stages of the silicon carbide market development. And as a result, you know, you have a number of different models and you have customers that are building, creating, fabricating wafers in a variety of different ways. And it was similar in silicon, you know, say 30 or 40 years ago. And what eventually happened is there was consolidation, and then there was a migration towards more standard processes for creating silicon substrates.

And so, what’s really important for us is to not only build great machines and service those, you know, in the field but also to be process experts. And so, we’ve recently made some very strong hires with CMP and grinding process experience. One of the focuses for the company is to be a leader in process technology development, working with the consumable suppliers, people who make slurries and grinding wheels and pads that are used on our tools, and to have the expertise to really continue to derive the process technology, in conjunction with our tools, to produce the best results for our customers.

And so, because we’re still in the early stages, I think there’s a lot of opportunities for companies like Revasum, to lead in process development and to leverage that capability to deliver better solutions to our customers and expand, you know, our penetration of the market.

Marc: Right. Bringing it back to the really short term, right? So, there was some pushouts of tool shipments in the first half of the year. What can investors look forward to, say, in the really short term, in terms of potentially catching up some of those lost revenues?

Scott: Well, we’re gonna have a busy fourth quarter, and we’re gonna ship a number of tools. You know, there’s still… A lot of the major components have come in, and the factory’s quite busy. There’s two tools running final acceptance in the factory this week and next week. And so, you know, we’re preparing to ship a lot of tools. You know, we have a lot of ground to make up, but I don’t think we’ll get there completely, but we should have a lot of tools shipped in the fourth quarter of the year.

Marc: All right. All right, good. Also, yeah, you announced, just a couple of weeks ago, that breach of covenant for the funding facility. Can you talk a little bit about that? What was behind that and, actually, how you see that sort of getting resolved in the near term?

Scott: Yeah, I think the company probably bet a little too big on the adoption of a single way for polish for 200-millimeter wafers. And that development of that market was a little bit later than what the company had anticipated, say, eight months to a year ago. And as a result, there was an inventory build for that particular product that didn’t flow through and generate cash. You know, that, combined with the supply chain issues related to the grinder, you know, really created challenges for the company. So, we’re in continuous contact with SQN, who has the note that was breached. And so, they’re very supportive of the company. They’re patient, they see the upside in the market, and we’re continuing to have dialogue with them in terms of how we’re gonna inject some capital on the company and, you know, fill the opportunity that’s ahead of the company longer term.

Marc: Right, Okay. And again… So, it’s good to hear that they’re supportive longer term as well in the very short term because you mentioned in that announcement, there is a lack of liquidity, which triggered that breach of covenant. As a covenant, what does it mean in terms of, you know, funding the business, say to the end of the year? What’s that looking like at the moment?

Scott: You know, having Bruce come in has been a huge help. We’re scrutinizing all of our discretionary spend and, you know, finding opportunities. Frankly, we’re flattening out the organization. You know, we’re increasing our focus on the business that matters to us, and reducing costs where appropriate. You know, we’re able to manage the cash flow, but I think to get in compliance with the covenants and also to have sufficient funding to fuel the growth that we anticipate next year, you know, we will have to inject some new money into the company.

Marc: Right. All right. Well, lastly, because, you know, these are short-term issues, and I think silicon carbide has got a very big future, obviously. For you and the team, what do you see is the best way forward to capitalize on this sort of really big opportunity long term? What needs to happen, say, you know, between now and five years from now for Revasum really to be the dominant player in this space, a leading player?

Scott: I think we need to, you know, maintain a laser focus on creating great tools, you know. So, we need to enhance our relationship with our end customers and continue to listen to what they say and build products that meet their needs. And we’ve had a…even in the two months since I’ve joined, we’ve increased that kind of interaction. Particularly with COVID getting less prevalent in the U.S., we’re able to travel more and talk to customers more. And it’s really been enlightening to understand, you know, where we are in the market, what we do really well, you know, what customers would like to see us do better. And so, we need to maintain the laser focus on that and have happy customers that are satisfied with the tools. Not only the tool design but its performance in the factory, its uptime, its service, all those things are critically important.

I think secondly, as I mentioned, the process leadership will be the driver for the future growth of the company. So, as we develop leading-edge process… You know, our customers have a million things to do, right? Most of them are running these integrated fabs, they’re building wafers, they’re building devices, they’re designing devices, they run marketing, you know, they have a million things to do. So, the easier we can make it for them to produce high-quality substrates by, you know, evaluating different stories, different paths, different consumables, developing processes that are, you know, almost ready for high volume manufacturing so that when they get, they just make a few minor tweaks and can start running the tools in high volume. Those kind of things bring a lot of value to the customers and, you know, enable us to gain preference in the market, which is obviously what we need to continue to do.

And then I think the third thing, we talked about recession, and we talked about kind of the infancy of the silicon carbide market. Recessions drive innovation, and I think silicon carbide is still in the early stages, there’s gonna be a ton of innovation. So, while we keep this laser focus in the market segment, we need to continue to think big about other opportunities for the company. As I mentioned, there’s five major steps in making a silicon carbide wafer. You know, are there ways to collaborate or consolidate the industry and develop processes? You know, there are a number of different ways that we can work across that entire manufacturing flow. Because each of those processes interact with the next process, right? So, the more knowledge you have and the more understanding you have of how those processes work, then you can innovate and provide solutions that really streamline the industry and streamline the work that our customers need to do.

Bruce: Keep in mind, for the international investors, the United States just passed the Inflation Reduction Act, which is the largest climate legislation in the history of the United States. And on top of that, the CHIPS Act has recently passed. We don’t know how those will impact our business directly, but they can only serve as tailwinds and even in a recessionary environment, right?

Marc: Yeah. Because I think a major part of that spend is going to be on renewables, right?

Scott: Yeah, absolutely. And you know, there’s a play for silicon carbide and renewables. It’ll be more widely adopted in solar and in wind-based power. And so, you know, those things will also drive our end customers’ business, which in turn will drive our business.

Marc: Yeah, exactly. All right, Scott, Bruce, thank you very much for your time today. And yeah, there’s a lot to look forward to, by the sounds of it.

Scott: Thank you very much, Marc, it’s good talking to you.