Ferroglobe PLC (NASDAQ:GSM) Q3 2022 Earnings Call Transcript

Ferroglobe PLC (NASDAQ:GSM) Q3 2022 Earnings Call Transcript November 16, 2022

Ferroglobe PLC misses on earnings expectations. Reported EPS is $0.64 EPS, expectations were $0.68.

Operator: Good morning, ladies and gentlemen, and welcome to Ferroglobe’s Third Quarter 2022 Earnings Call. . As a reminder, this conference call is being recorded. I would now like to turn the call over to Anis Barodawalla, Ferroglobe’s Vice President of Investor Relations and Corporate Strategy. You may begin.

Anis Barodawalla: Thank you. Good morning, everyone, and thank you for joining Ferroglobe’s Third Quarter 2022 Conference Call. Joining me today here is Javier López Madrid, our Executive Chairman; Beatriz García-Cos, our Chief Financial Officer; Benjamin Crespy, our Chief Operating Officer; Benoist Ollivier, our Chief Technology and Innovation Officer and Deputy CEO; and Craig Arnold, our Chief Commercial Officer; Marco Levi, our Chief Executive Officer, is on the call but will not be speaking as he has laryngitis. Before we get started with some prepared remarks, I’m going to read a brief statement. Please turn to Slide 2 at this time. Statements made by management during this conference call that are forward-looking are based on current expectations.

Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe’s most recent SEC filings and the exhibits to those filings, which are available on our web page, ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted EBITDA margin, working capital, adjusted gross debt, net debt, adjusted net profit and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliation of these non-IFRS measures may be found in our most recent SEC filings. At this time, I would now like to turn the call over to Javier López Madrid, our Executive Chairman. Slide 4, please.

Javier López Madrid: Good morning or good afternoon, everyone. After a second — after a record second quarter, we reported solid results in Q3 despite a challenging market environment. During the third quarter, market prices for each of our product groups declined from record levels in the previous quarter. Higher and volatile energy costs in Europe continue to persist. During the third quarter, we actively managed our global asset footprint by reducing operations in higher-cost regions like Spain and reallocating volumes to other geographies. Higher raw material costs negatively affected our margins, too. Last month, in line with our new strategy, we announced the restart of our Polokwane plant in South Africa, which will start up in November and is ramping up according to plan and on budget.

This facility will provide up to 50,000 tons of high-quality and cost-competitive silicon metal capacity on an annualized basis, out of which 35,000 tons will be produced in 2023 and give us the flexibility to supply it globally. During the third quarter, we continued to execute on our primary financial objectives by deleveraging the balance sheet. During the quarter, we redeemed our $60 million, 9% super senior secured notes due 2025. We continue to progress on our transformation plan with our incremental EBITDA run rate objective of $225 million, which we expect to achieve by 2024, enabling us to be a stronger and more resilient company. Specific to the third quarter, our revenues declined 29% from record levels in Q2 to $593 million, and our adjusted EBITDA declined by 39% to $185 million.

Our adjusted EBITDA margin was 31% in Q3 compared to record margin of 36% in the prior quarter. Our adjusted EBITDA was the third highest in the company’s history, and our EBITDA margin was significantly higher than in any prior years. This is a direct result of successfully implementing our strategic plan over the last 2 years. Our earnings per share was $0.52 compared with $0.90 per share that we delivered last quarter. Our cash balance at the end of the third quarter was $237 million down from $307 million last quarter. The decline in cash was primarily driven by the repayment of the reverse $60 million super senior notes. Our total cash balance, combined with our undrawn facilities, provides total liquidity of $337 million, giving us ample flexibility to execute our business plan.

Our net debt of $194 million was flat versus the prior quarter, which is the lowest level in the company’s recent history. Overall, the third quarter highlights our ability to perform in a very volatile and challenging market environment. In addition, as part of our corporate update, we will provide details on specific actions being taken to actively manage our operational footprint. Moving ahead to Slide 5, please. Silicon metal revenues was $264 million in Q3, down 26% from the prior quarter. Our silicon metal business was down as a result of challenging market environment, primarily impacting volume, which declined to 50,545 metric tons, down 20% from the prior quarter. This had a negative impact on our EBITDA of approximately $43 million.

During the third quarter, we have seen European aluminum producers curtailing production by 50% due to unsustainable energy prices causing a decline in demand for silicon metal and negatively impacting our market price. The aluminum sector continues to be adversely impacted by weaker auto demand. In contrast, silicon specialty grades continue to be the strongest contributor to our portfolio. The average realized price of our silicon metal sale was down 7.6% over the prior quarter, resulting in a negative impact to EBITDA of $11.1 million. Excluding GB shipments, average prices were down 4.7%. It’s important to note that we outperformed the market where index prices in the U.S. and Europe were down 18% and 22%, respectively, over the prior quarter.

In the — prices in Q3 in the EU have stabilized over EUR 3,600 per metric ton, while U.S. spot prices declined to USD 7,000 per metric ton. Since the end of Q3, U.S. index prices have further declined to USD 6,700 per metric ton, while EU index have held at the referred EUR 3,600 per metric ton. While adjusted EBITDA contribution for silicon metal of $130 million was down from last quarter record level, it remains strong compared to prior years. Adjusted EBITDA margins for the segment were robust at 43%. To put this in perspective, silicon metal adjusted EBITDA margin for 2019 and ’20 — and 2020 before we began to implement our plan were in the single digits. Costs from silicon metal negatively impacted adjusted EBITDA by $8 million driven by higher raw material costs, particularly coal and energy, which impacted costs by $6.4 million and $1.4 million, respectively.

Slide 6, please. Silicon-based alloys revenue was $170 million in Q3, down 24% over the prior quarter. Adjusted EBITDA was — for Q3 was $60 million, down 39% from the second quarter. Sales volume declined 15% over the prior quarter, negatively impacted EBITDA by $10 million, while average realized pricing was down 11% over the same period, negatively impacting EBITDA by $26 million. Costs had a slight negative impact of $1.3 million driven by higher coal price in Europe. Adjusted EBITDA margin for silicon-based alloys was 33% in Q3. While down from prior 2 quarters, Q3 was the third highest in the company history and significantly higher than 2021 level. Lower demand for silicon-based alloys were driven by the summer slowdown as well as weakness in end markets, particularly construction.

In addition, as a result of higher energy prices in Europe, there were capacity closures among various steel producers, driving a decline in demand for silicon-based alloys. Benefiting our margin was our strategy to focus on higher margin specialty and foundry product, which was enabled — which has enabled us to improve margins compared to commodity silicon alloys. Low visibility of steel demand persists and is pushing customers towards depleting inventories. Moving to Slide 7, please. On manganese alloys. Manganese base alloys revenues was $98 million in the third quarter, down 49% from the prior quarter. Sales volumes declined 37% over the prior quarter, negatively impacting adjusted EBITDA by $10 million, while average realized pricing was down 20% over the same period, negatively impacting EBITDA by $32 million.

This volume decline in the third quarter was partially impacted by a normally high demand in second quarter as customers focus on securing supply, which enable us to sell at higher prices. Cost was favorable primarily due to positive one-off mark-to-market adjustment related to the earnout provision of $25 million. Late in the second quarter, we purchased manganese ore reacting to a shortage of supply in the market. In response to significant changes in market conditions, including shutdown of European steel producers, we slowed down our production, and we expect to hold manganese ore longer and convert manganese-based alloys in line with demand. Overall, our sales for this segment declined 49% from the prior quarter while adjusted EBITDA declined by 55%, and our adjusted EBITDA margin declined to 51% from 71%.

Capacity closure among various steel producers in Europe and weakening end market have negatively impacted demand. We continue to actively monitor this market and manage our production accordingly. I would now like to turn the call over to Beatriz García-Cos, our Chief Financial Officer, to review the financial results in more detail.

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Beatriz García-Cos: Thank you, Javier, and good morning or good afternoon, all. Please turn to the income statement on Slide 9. Revenue for the third quarter was $593 million, down 29% from the second quarter due to volume declines and lower prices from record levels in the prior quarter across all our product categories. Raw material and energy consumption declined 23% from the second quarter, resulting in the raw materials and energy consumption as a percentage of sales increasing 4% from the prior quarter to 48%. While up from Q2, raw materials and energy consumption as a percentage of sales are down significantly from prior years. Other operating expenses declined 40% versus the prior quarter to 30% of revenues versus 16% in the second quarter.

The improvement in other operating expense was due to lower consulting fees, credit and the mark-to-market adjustment related to the earnout provision for the manganese-based alloys product group. Adjusted EBITDA in the third quarter was $185 million, down from a record adjusted EBITDA reported in the prior quarter of $303 million. Adjusted EBITDA margin was 31%, down from 36% in the prior quarter. Our earnings per share was $0.52 in Q3 compared with $0.98 reported in Q2. Next slide, please. Volume and price were the biggest contributors to our adjusted EBITDA, declining from $303 million in the second quarter to $185 million in the third quarter. Lower volumes across all 3 segments combined with price declined negatively impact adjusted EBITDA by $180 million.

Cost was favorable by $50 million mainly due to the positive impact of $25 million from the earn-out accrual, partially offset by higher raw materials and energy costs of $10 million. During Q3, the overall impact of energy prices in the Spain was unfavorable $2.8 million quarter-over-quarter, and our average realized unit cost of energy in Spain increased by approximately 11%. We continue to actively manage our global footprint to cope with volatility on energy prices. Slide 11, please. We end Q3 with a cash balance of $237 million, down from $307 million in the second quarter. If we layer in our new undrawn ABL, the liquidity was over $337 million at quarter end. Cash was used to pay down $60 million in debt, $20 million in interest expenses and $10 million related to CO2 purchases.

The remaining balance was primarily used to reduce our outstanding factoring debt. Our net debt remains at the lowest point in company history at $194 million, flat versus the prior quarter. The gross debt was $431 million at the end of Q3, down from $500 million in the prior quarter. The decline reflects the successful redemption of the $60 million of 9% super senior notes. One of our top priorities continues to be deploying our cash flow to further deleverage the balance sheet. Next slide, please. The value of our assets totaled $1.9 billion at the end of Q3, and our equity book value was $700 million. We have set a target for working capital as a percentage of sales at 21%. During the third quarter, we were above this level at 30%. The above working capital was driven by an increase in raw materials and finished goods, which will support our plan over the winter period.

We expect progressively decline over time on the coming months. Slide 13, please. During Q3, we generated $5 million — $55 million in operating cash flow, I repeat, $55 million versus a record level of $165 million in the prior quarter. It is the fourth consecutive quarter of positive cash flow. Our operating cash flow was driven by robust earnings, partially offset by cash consumption for working capital of around $87 million. During the quarter, we spent $50 million in CapEx versus $40 million in the prior quarter. At the end of Q3, we have spent $46 million in CapEx. We continue to expect our CapEx for the year to be on plan around $75 million. Please keep in mind that the timing of the actual cash flow impact of the CapEx expense may differ from the balance sheet impact.

In the third quarter, our cash balance declined by $69 million, mainly driven by the debt repayment and working capital investment. Free cash flow during the quarter was positive, $40 million. Our goal remains to keep working capital around 21% of sales across the cycle. Next slide, please, Slide 14. As we generate strong cash flows and lower our quantum of debt and cost of capital, the credit profile of our company is improving. In August, Moody’s upgraded the 9.375% senior notes due in 2025 to B3. This is a testament to the work we are doing and the execution of our plan. Through the third quarter, we were able to successfully manage through a demanding quarter, highlighting the structural improvements we have made to the company over the past 2 years.

At this time, I will turn the call back over to Javier Lopez Madrid for a few updates and sum up mostly corporate matters.

Javier López Madrid: Thank you, Beatriz. Now turning to Slide 16, please. I want to highlight a positive development relating to our energy costs, specifically in France for 2023. While we have competitive energy prices in France in 2022, we have successfully negotiated for next year, a favorable contract to reduce exposure to volatile energy markets. This allow us to get similar energy rates compared to 2022. However, the contract contains higher prices during the first quarter, which will be managed by idling production in France during that quarter and supply in Europe and our clients from lower-cost facilities such as Polokwane and Becancour, which have begun Ferroglobe global plants. While the environment is challenging due to lower global demand and volatile energy prices in Europe, we are successfully managing our business to maintain high margins and profitability.

This is the result of a transformation plan that we have been implementing for the last 2 years to optimize our revenues and effectively manage our cost, making our business more efficient overall. . We continue to manage our business with the focus of using our cash flow to further strengthen our balance sheet by continuing to reduce leverage. Longer term, we’re focused on growing our silicon metal business and expanding even more into specialized high-growth markets to drive overall growth for the company. In that respect, we’re moving forward each day, capitalizing silicon metal as a critical material to the energy transition. We’re taking advantage of our technological expertise developing solar and advanced application materials during the last 15 years, and we believe we are ahead of the pack.

As a direct result, we’re now ramping up industrial scale production of 3N and 4N purity liquid silicon in our Puertollano facility in Spain. Our high-purity silicon will supply advanced technology solutions and, in particular, engineering materials for the fast-growing lithium-ion battery market. Moreover, we are in advanced discussion with leading silicon carbon composite producer, and we’re entering into joint development agreements across the EV value chain. Silicon metal is expected to be key to green energy transition driven by growth in electric vehicle demand, energy storage solutions and solar, providing us with exponential growth opportunities. Once again, a tremendous number of things going on that causes us to get excited about the future.

We have said from the beginning that it was going to be a slow, steady and purposeful journey focused on transformation, value recovery and value creation. Today’s solid earnings should be viewed as a firm validation of our team and our plan. There’s a lot more work that is left to be done, and we remain committed to reaching our goals while navigating a period of uncertainty as the macro picture evolves. At this time, I’ll ask the operator to please open the line for questions.

Q&A Session

Operator: . And your first question comes from the line of Lucas Pipes from B. Riley Securities.

Lucas Pipes: My first question is on the inventory build the third quarter. You touched on it a little bit in the prepared remarks. It sounds like there were some tactical reasons to build inventory here ahead of the winter. I would like you to maybe elaborate on that. And then also, is this a sign of potentially declining margins in Q4 and Q1 with higher costs flowing through the P&L? If you could comment on that as well, I would appreciate all that color.

Beatriz García-Cos: Thank you, Lucas, for your question. This is Beatriz. Yes, it’s true that working capital consumption has been increasing. The main reasons are as follows. So on the manganese ore side, we built up inventory due to changes on the macro environment, in particular, on the European steel producers’ shutdown. And on the other side as well, in response to the curtail of our Spanish operations. As well in response to our France winter stoppage, as you mentioned, right, we had to bid some inventories in silicon and ferrosilicon to account for the winter shutdown. And as a result as well of this volatile environment from Russia and Ukraine, we have hedged our position in electrodes and coal, yes. And as well, please remember that we are ramping up our plant in Polokwane, and this has been as well taking some of the working capital consumption.

Lucas Pipes: That’s very helpful. So in terms of returning the ratio of inventory to sales that you mentioned, Beatriz, what’s the timing of that? Should we expect sizable release already in Q4? Or do you think that, that ratio will normalize into Q1 2023?

Beatriz García-Cos: Thank you, Martin. I think for the reasons that we mentioned, particularly the winter stoppage, naturally, our inventory is going to be depleting, yes, so — because of that. So we expect to go back to normalized levels in the coming months.

Lucas Pipes: That’s helpful. And then two…

Javier López Madrid: I mean they have been — Lucas, it’s Javier here. As you say, it was tactical reasons on manganese, we reacted to market demand. And yes, we have an excess of manganese ore that will be used, will be manufactured over the coming months depending on demand. So there is like 2 sources: finished products and tactical supply of coal and electrodes and the manganese ore that we will be transformed into manganese alloys over the coming months depending on demand because as we mentioned in the call, we stopped our production in Spain.

Lucas Pipes: Got it. On the order approval of the new strategy, can you maybe shed a little bit more color on what the strategy entails? I assume it’s mostly about the silicon metal powders and high-end products and pursuing that market in a measured way but would really appreciate additional color on that, Board-approved plan.

Javier López Madrid: Lucas, thank you very much. Obviously, yes, silicon metal is our core business, and a great deal of our strategic plan relies on going deep into specialty and high-added value product. Together with us is Benoist, which is our Chief Technology Officer and maybe he can add a bit of color of what we’re trying — what we’re doing, what we’re currently doing in that respect, which I think would add a bit of color to what I just mentioned. Benoist?