Ferroglobe PLC (NASDAQ:GSM) Q3 2023 Earnings Call Transcript

Ferroglobe PLC (NASDAQ:GSM) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning, ladies and gentlemen, and welcome to Ferroglobe’s Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call may be recorded. I will now like to turn the call over to Alex Rotonen, Ferroglobe’s Vice President of Investor Relations, you may begin.

Alex Rotonen: Thanks, Sandra. Good morning everyone and thank you for joining Ferroglobe’s third quarter 2023 conference call. Joining me today are Marco Levi, our Chief Executive Officer, and Beatriz García-Cos, our Chief Financial Officer. Before we get started with some prepared remarks, I’m going to read a brief statement. Please turn to slide number two at this time. Statements made by management during this conference call that are forward looking are based on current expectations. 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 website at ferroglobe.com. In addition this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, and adjusted diluted earnings per share among other non-IFRS measures, reconciliation of non-IFRS measures may be found in our most recent SEC filings.

At this time, I would like to turn the call over to Marco Levi, our Chief Executive Officer. Next slide, please.

Marco Levi: Thank you, Alex, and good morning, good day, and good evening to everyone. Thanks for joining us on the call today, we appreciate your interest in Ferroglobe. Since I joined Ferroglobe, almost four years ago, we have focused on revamping the business and operations by optimizing the cost structure, improving the balance sheet, and positioning the Company for growth. During this time to increase the adjusted EBITDA from $33 million in 2020 to $860 million in 2022 and we are on track to meet our 2023 guidance of $270 million to $300 million in a period of extremely weak demand, decline in market pricing for five quarters scenario coupled with unprecedented macro uncertainty. In addition, we reduced our gross debt from $473 million at the end of 2019, the level of $237 million, significantly strengthening our balance sheet and approaching the target that we indicated more than a year ago.

The dramatic improvement in performance has been the result of our cost cutting efforts and various initiatives focused on improving efficiencies and driving sales productivity, such as focusing on higher margin specialty products, which has ultimately made us more competitive in the marketplace. Also we continue emphasizing continuous improvement and further cost reductions. The initial optimization phase of our plan is essentially complete and our leverage objective has been reached. We are now focused on positioning the Company to lead the silicon metal industry in addressing the solar and the electric vehicle battery market, which we believe represents an enormous opportunity for Ferroglobe. Recent legislation in the U.S. and Europe has provided incentives to increase onshoring which will further benefit Ferroglobe with its strong presence in these regions and worldwide production capabilities.

At the same time, we are looking to maximize the value of our manganese and silicon based alloy businesses. On primary requirement to produce advanced silicon metal that is needed for this growth and market applications is access to high quality quartz. To access to reliable supply, we recently completed the acquisition of a high-quality quartz mine located in South Carolina. This quartz supply will support our silicon metal production plants in the U.S. as we position the Company to benefit from the secular growth in solar and EV batteries. The South Carolina mine has annual production capacity of roughly 200,000 tonnes with an expected reserve life of at least 10 years. Our current quartz mining Alabama has annual capacity of about 200,000 with approximately 10 years of mine life remaining.

We expect to be the new mine in the second half of 2024. Not only will this increase our self-reliance on cohorts, for our current needs but also for the coming years silicon metal demand in the U.S. is expected to grow significantly. In fact, we believe that North America will have structural shortage of silicon metal in the next two, three years. Our total investment is expected to be around $15 million, including $11 million for the property plus an additional $4 million for infrastructure mainly rail access, the processing facility, and the load out. We anticipate the cost structure to be favorable approximately 10% – 15% lower than the current cost in our Alabama mine and it’s proximity to our operations secures the long-term competitiveness of our U.S. footprint.

One of Ferroglobe key differentiators is our backward integration where we have access to critical materials needed for the production of our quartz. In addition to the quartz mine just purchased in South Carolina, we also have other mines supporting our production facilities around the world ensuring that we have access to high quality quartz. In Europe, we have the Serrabal quartz mine in Spain which supplies primarily to Spain and France. We have rights to operate this mine until 2038 and in South Africa, we have several quartz mine supplying our operations there. Overall, our mine supply over 70% of our impairment needs a key competitive advantage in managing our costs and assuring reliable availability of this key raw material. Having a stable supply of high quality quartz is essential in addressing the solar and EV battery market, which we expect to be a significant long-term opportunity for the Company.

In batteries, high purity silicon provides significant advantages over graphite in battery anodes such as increasing battery capacity and reducing charging time. As a percentage of silicon content in the next generation batteries continues to increase, we expect to see a dramatic increase in demand for high-quality silicon fiber. In line with our focus on solar and EV batteries, we continue to actively develop partnerships and alliances to position us to maximize our participation in these growth opportunities. This prospective partnerships are aligned with our strategic vision and seek to enhance our capabilities within our core areas of expertise. Our focus with these partnerships to further enhance our position in developing high purity silicon metal that is used in advance and battery markets including vertical integration further advancing the technologies are using different approaches in our production process that improve our decarbonization initiatives.

Our objective in securing these partnerships is to enhance our market leadership in the value added silicon metal fiber. One recent developments, we’re paying attention to relates to China. The largest graphite producer recently announced that it is curbing exports of certain graphite materials used in batteries, putting upward pressure on graphite anode prices. We believe these restrictive action by China will accelerate the shift towards increased use of silicon in anodes, especially in light of its superior performance. In solar, we are positioning Ferroglobe to be the leading provider of silicon used in solar panels. Giving worldwide effort to transition to green energy, we expect significant demand in solar for years to come. Opportunity in solar is amplified by increasing concerning trends in North America and Europe to expand local supply of this critical materials..

Recent legislation including the Inflation Reduction Act, the Chips Act and the European green initiatives will drive significant demand in this market, Ferroglobe market leadership and worldwide distribution position us to benefit from these trends. In our ongoing efforts to access a stable supply of power in Spain, we signed an additional PPA that locks in an increased portion of energy for the coming years. This agreement has a term of 3.5 years and became effective on November 1st. This PPA combined with two, we signed last quarter are expected to allow us to produce higher volumes in Spain to serve our customers during the winter months when our facilities in France are idle. Our facilities in North America continued to benefit from favorable U.S. policies.

In September, Bipartisan bill was introduced in the U.S. Senate to enact a 35% tariff on imports of Russian and Belarusian ferrosilicon. We believe this is a very positive trend for the American industry and employees showing the U.S. commitment to increase reliance on friendly supply chain participants. While we are excited about the long-term outlook, the near-term visibility remains so bad. Prices for our products continued to be weak and demand remains subdued. Recently, there has been commentary from various market participants cheating weakness in the solar and EV market. Higher interest rates have negatively impacted demand for electric vehicles and recent commentary from auto manufacturers indicated very competitive market. We’ve increased pricing pressure.

While there is currently weakness in these markets, we are focused on the significant long-term opportunity. The EV market battery market sorry is expected to be driven more by the increasing content of silicon in the anode and less by short term supply-demand imbalances. The solar opportunity is expected to be driven by increased government incentives and the focus on onshore hang the supply of silicon metal, a critical material for solar cell production. Our integrated asset footprint combined with favorable long-term market trends and support for U.S. and European legislative actions paint the bright future for Ferroglobe future in the coming years. I am very pleased with our operations of how our operations has been performing in the third quarter, we are executing at a high level in nearly all our locations as evidenced by the fact that our plant efficiency is highest level in 30 years.

The efficiency of our furnaces is very strong and we are navigating with the energy landscape exceptionally well in all agents with the exception of Spain as we modulate production based on advantageous energy prices. This was made possible by the efficient management of our capital expenditures over the past couple of years after an extensive evaluation we have made the decision to implement a capital allocation policy and plan to announce details of our capital return in the first quarter of 2024. At the same time, we are reiterating our 2023 guidance of $270 million to $300 million. We are not immune to the current soft market conditions and anticipate the fourth quarter adjusted EBITDA to come in below the first quarter results. Next slide, please.

Silicon metal revenue was $199 million in Q3, up from $195 million in Q2, an increase of 2% adjusted EBITDA for this segment remaining strong down only 2% from the prior year quarter. Volumes increased 13% over the prior year quarter to approximately 57,000 tonnes, driven by strong shipments in North America. Our average realized price for silicon metal sales decreased by 10% compared to the previous quarter, driven by lower index pricing in U.S. and Europe. This price decline negatively impacted adjusted EBITDA by $19 million. We continue to benefit from our energy agreement in France and indirect CO2, which together contributed roughly half of the cost benefits with lower material costs being the next largest contributing factor primarily coal.

As for silicon metal outlook, the market continues to show muted demand and the lack of liquidity due to macroeconomic uncertainties affecting both the chemical and the aluminum sector. While we are positive about long-term opportunities for silicon metal. We expect demand to remain weak in the near term, particularly western markets. This weakness is partially offset by our expansion into new markets such as Asia where we have started actively participating in their solar value chain. Next slide, please. Silicon based alloys revenue was $150 million in Q3 down from $103 million, a decrease of 14% primarily driven by weaker prices. Adjusted EBITDA for Q3 was $25 million down 20% from the prior year quarter. Sales volumes declined by 6% for the quarter, 246,000 tonnes and average realized pricing was down 8% over the same period, negatively impacting $10 million.

Relative to the prior quarter. Silicon alloys benefited from lower material costs, which was the largest contributor to cost improvement. The silicon alloys segment was adversely affected by the weak steel sector in U.S. and Europe, partially offset by the strong specialty ferrosilicon sales into the electrical steel market. In addition, our sales team to divest segments such as foundries have been more resilient. Next slide, please. Turning now to manganese based alloys, manganese based alloys revenue was $59 million in Q3 down 35% over the prior year quarter. Adjusted EBITDA for Q3 was $11 million, up from $1 million in the prior quarter. Sales volumes were down 10% over the prior year quarter, negatively impacting adjusted EBITDA by $43 million while the average realized pricing was down 16% at the same period, which negatively impacted EBITDA by $11 million.

This was offset by higher energy and CO2 compensation in France and lower manganese ore prices. The end markets premium steel remain under pressure with the lack of visibility in 2024. Within the construction segment, we expect incremental improvement in the first half of next year. As a result of a zonal uptick in demand. Now I would like to turn the call over to Beatriz García-Cos, our CFO review the financial results in more detail.

Beatriz García-Cos: Thank you, Marco. Please turn to Slide 9 for a review of the income statement. Sales in the third quarter declined approximately 9% from $456 million the prior quarter to $417 million. The decline in Q3 was primarily due to weak pricing and lower volumes in our Silicon Alloys and manganese alloys segment and we expect higher volumes in silicon metal. Silicon metal volumes was up 13% over the prior quarter. The increase in volumes in Q3 was primarily due to a stronger shipments in North America, while the clients in Silicon Alloys and manganese alloys for a result of weak end markets particularly Spain. Average realized prices lower across all product categories as a result of continued price decline in index prices.

For materials and energy consumption cost, improve during the third quarter. $196 million down from $229 million in the prior quarter or 47% of sales versus 50% perspective. This improvement was driven primarily by our energy agreement in France. The energy agreement provide a benefit of approximately $56 million in the third quarter. We expect an additional benefit in the fourth quarter. In addition, raw materials primarily coal benefit from lower prices in the third quarter. Staff cost in the third quarter increased to $84 million, up from $75 million in the second quarter. Operating profit in the third quarter was $75 million versus $63 million in the second quarter. Operating margins were 18% in Q3 up from 14% in the prior quarter. Net finance expenses in the third quarter were $9 million up from $1 million in the prior quarters.

The increase over the prior quarter was a result of the call premium related to the $150 million partial redemption of senior notes and the accounting impact. In addition, in the second quarter with time to of accrued interest of one of our government loans. We expect net financial expenses to decrease going forward. Consistent with the significant reduction of our gross debt. Next slide, please. Our adjusted EBITDA in the third quarter was $104 million versus $106 million in the second quarter. Adjusted EBITDA margins increased to 25% in the third quarter, up from 23% in the second quarter. Overall volumes provide a benefit of $5 million, primarily driven by higher volumes in Silicon metal, which increased 13% over the prior quarter, partially offset by volume declines and manganese alloys, which declined by 6% and 10% respectively.

Prices in the third quarter were weak across the board with the overall average realized price declining 11%. Weakened markets with pricing pressures across our three segments, results in a negative impact of $37 million on our assets EBITDA. Cost had a positive impact on adjusted EBITDA in the third quarter versus the second quarter, primarily driven by our energy agreement in France as well as lower raw material costs, primarily coal. Next slide, please. We ended the third quarter with a cash balance of $166 million, down from $363 million in the second quarter. This decline reflects the redemption of the $150 million of the 9.375 senior secured notes, during the third quarter. This redemption will save the Company approximately $14 million in annual interest cost.

As a result of the redemption, total adjusted gross debt declined to $237 million, down from $400 million in the second quarter. This is a record low for Ferroglobe. The debt increased to $71 million, up from $37 million, primarily to increase working capital. Next slide, please. During the third quarter, cash used by operations was $9 million versus $24 million of cash generated in Q2. The primary factors impacting our cash flow include, our $51 million impact from working capital and non-cash items of $44 million. These non-cash items, mortgage energy benefits and expected to boost our cash position in the first quarter of 2024. CapEx in the third quarter was $19 million versus $23 million in the prior quarter. Lastly, cash flow from financing activities in the third quarter was negative $171 million versus positive $19 million in the second quarter.

The negative cash flow from financing activities, but the result of the bond redemption and associated premium core. Next slide, please. At this time, I will turn the call back over to Marco.

Marco Levi: Thank you, Beatriz. Moving to the corporate update on Slide 14, please. As we already discussed during the call, the strategic acquisition of high quality quartz mine ensures that we remain self-sufficient in North America, enabling us to take advantage of the significant solar and EV battery growth in the coming years. We completed an additional long term PPA in Spain to enable us to reduce cost and increase production in Spain. We are actively looking to add more PPAs. We are pleased to receive continued government and legislative support in the U.S., alighted by the recent introduction of the U.S. Senate bill to enact a 35% tariff on imported PureSilicon from Russia and Belarus. Also, the inclusion of silicon as a critical material, as discussed last quarter, is expected to benefit us going forward as it encourages local supply chain development.

In January of this year, we reached an agreement to divest the Chateau-Feuillet property in France to Swiss Steel group last week on October 31, the transaction was officially completed. This is the final step in the original footprint optimization process that we started three years ago. Through our innovation and technological advancement, we’re able to produce high quality silicon, which has enabled us to expand our market opportunity into the advanced technological portion of the silicon metal business. In line with this strategy, we recently added a new large global customer, increasing our presence in Asia. Finally, we’ll provide more details about our capital allocation policy on our first quarter earnings call in February.

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Q&A Session

Operator: [Operator Instructions] We will now take the first question from the line of Lucas Pipes from B. Riley Securities. Please go ahead.

Lucas Pipes: Thank you so much, operator. Good morning, everyone, and congratulations on good results in what I understand is a tough environment. Marco, Beatriz, My first question is on the capital allocation point. Marco, if I heard you right just there at the end, you expect to provide details on the fourth quarter results update call in February, and I wondered, can you maybe share at this time, what are some of the key items you’re still looking to address or determine, I assume with the Board, too, between now and then? Thank you very much.

Marco Levi: Well, in a nutshell, we believe that it is the right time to implement a prudent capital allocation policy. Our balance sheet is much stronger than it was in the past. Our gross debt is pretty close to the $200 million that we mentioned several times. We are in a difficult, extremely difficult market condition, but we are extremely confident on our medium and long term opportunities. So we really think is the right time to implement these policies. This implies, of course, two scenarios. Either we pay down the remaining bonds or we cut an agreement with the current bondholders. But we are going to do one of the two, and we are going to finalize our policy by February, I think it’s February 22 to date, when we are going to disclose our policy, which is going to be in place, I expect, starting second quarter of next year.

Lucas Pipes: That’s helpful. And so in terms of paying down the bonds is part of the dynamic here that you had some working capital uses during Q3, and that maybe cash flow is going to improve between now and then, that you have more flexibility to just pay those bonds down as an alternative to an agreement.

Marco Levi: Let me tell you. And then I will allow Beatriz to elaborate on that. But in a nutshell, we are going to be – we are in a healthy position. We’re going to be in a healthier position in the first quarter. And we think that when you consider the balance of the cash that we have available, the cash that we are going to generate, releasing working capital, we are going to be in a good position either to pay completely down the bonds or to pay most of this part and still have the right level of cash to run the company.

Beatriz García-Cos: Yes, maybe just Lucas to add on that point. I think the overall, what we plan to do in February, we are thinking in a nominal dividend and maybe an opportunistic share buyback. Right. But as Marco said, we will provide more details on our policy in February and over time, as we have been repeatedly saying, we expect share buybacks to be larger than dividends if our shares continue to be undervalued past the year today. This is helpful.

Lucas Pipes: Thank you very much both of you, for those details. I want touch on another theme, and that is the market environment and your contract process. So if I understand correctly, you’re in the market with your customers, you negotiate offtake commitments. There might be ceilings, there might be floors. I understand there are always lag to spot prices, but in the current environment, how are those conversations going? What visibility do you have on the volume side, on the price side for 2024 at this stage? Thank you very much.

Marco Levi: Yes, this is a broad question, Lucas. Let me say that clearly we come from five quarters where in the market we have seen index deterioration and for most of the product, weakening demand, maybe with the affection of silicon metal. That I think was particularly low in the first quarter of this year. Based on what we could see. We don’t see the current market conditions improving short term in the coming couple of quarters, but we expect some improvement on demand and as a consequence of pricing in the second half of the year, we are fully involved in the contract negotiations for next year. Our overall balance between contracted volumes, spot volumes, has not changed. It’s more or less 50% contracted 50% in the open market.

In Silicon, when you exclude the joint venture volumes, the contracts cover 51%, the quarterly contracts, 12%, the six month contract, 24%. So there is very little left for the spot business, which tells you that the liquidity is not there. And the liquidity index for us in the west is mainly aluminum. In ferrosilicon, 63% is contracted like in manganese alloys. At the end, most of the volume goes to steel, 24%, 26% go to quarterly contracts and the rest is spot business. So this is the current picture. Customers are clearly extremely cautious in committing volumes, but we have already closed the contracts with most of our large accounts

Lucas Pipes: Thank you very much for that. And just to follow up, in terms of price, is it right to think that it is floating with various lags? But you’re not locked in to lower prices for next year due to the fact that prices are lower today when you’ve closed some of these negotiations.

Marco Levi: You’re right, Lucas. Silicon metal, we are still — the quarters are based on index and gets adjusted quarterly. So this is why I mentioned that we expect the last quarter being weaker than Q3. Same fate for ferrosilicon and manganese alloys. So the prices are under pressure. But when you look at the different value centers. When you look at the cost of materials, the energy cost, and the transformation cost overall in the industry, prices reflect pretty close to the cost position. Most of the players and I don’t think the pressure on coal is still there. The pressure on energy is still there in a lot of countries. So I expect that sooner or later prices are going to improve during 2024.

Lucas Pipes: Marco, I really appreciate your comments. I have more questions, but I’ll jump back in queue and in the meantime continue. Best of luck.

Marco Levi: Thank you, Lucas.

Operator: [Operator Instructions] We will now take the next question from the line of Martin Englert from Seaport Research Partners. Please go ahead.

Martin Englert: Hello, good afternoon, everyone.

Marco Levi: Hello, Martin.

Martin Englert: Thanks for a moment for questions here I wanted to discuss silicon metal ASPs. They did remain strong relative to market index prices. Can you discuss the components of this? Is there a bit more of a premium mix or something more favorable about the South Africa volume contribution or something else going on here?

Marco Levi: Yes, Martin, as you know, most of the price is linked to our contracts and most our contracts are in the chemical sector and now in solar sector. So the price dynamic is dictated mainly by these components. While we are less present, being less present in the spot transactional business, we are less exposed to the more commoditized business, which is aluminum related. So we suffer like anybody else out of the price pressure. But the index effect allows us to enjoy an overall better average price than others.

Martin Englert: Okay, thank you for that. Coming back to order books and what you’re seeing volumes and expectations around seasonality when thinking about fourth quarter across the business segments, can you discuss what you’re seeing there and expecting?

Marco Levi: In terms of time, I see a similar trend to Q4 of last year and Q1 of this year, with us slowing down some of the production in Western Europe already during this quarter, shutting down production in France in the first quarter of next year. This is in terms of operations, in terms of demand, we don’t see short term any selection of demand except for a couple of trends that we need to watch, which are related to the rebound of partial rebound expected in the old construction business that has been down for a long time. And we need to watch what happens in China with all the measures that they are taking to integrate the economy. So these two things might have a positive impact on overall demand. To be seen at this stage, we are quite conservative on our volume estimates, so highest we are planning for a volume level that we have seen in the recent quarters.

Martin Englert: Thank you for that. Could you review your comment on year to date EBITDA and then you had specific on fourth quarter, I think relative to first quarter EBITDA. I just didn’t catch that earlier.