Ferroglobe PLC (NASDAQ:GSM) Q4 2023 Earnings Call Transcript

Ferroglobe PLC (NASDAQ:GSM) Q4 2023 Earnings Call Transcript February 22, 2024

Ferroglobe PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning ladies and gentlemen and welcome to Ferroglobe’s Fourth Quarter and Full Year 2023 Earnings Call. At this time [Operator Instructions] I would now like to turn the call over to Alex Rotonen, Ferroglobe’s Vice President of Investor Relations. You may begin.

Alex Rotonen: Thank you, Heidi. Good morning, everyone and thank you for joining Ferroglobe’s fourth quarter and full year 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 our 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. 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 exhibits to those filings which are available on our web page at ferroglobe.com.

In addition, this discussion includes reference 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.

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. We are very pleased with our strong execution in 2023, where we improved our operations, strengthened our balance sheet and posted solid financial results of $315 million of adjusted EBITDA. While our end markets were extremely challenging in 2023, we focused on things that were within our control to position the company for the long-term success. I’ll discuss a couple of the highlights of our execution and strategy. Then Beatriz will discuss the great strides we have made in improving our balance sheet a little later. Overall, operations performed at a high level in 2023.

Our European plants set a new historical record for opening efficiency as measured by kilowatt hours per ton improving by more than 3%. In the third quarter, we completed a strategic acquisition of a high-quality quartz mine located in South Carolina which will ensure access to quartz needed to produce high-quality silicon metal in our U.S.-based silicon metal production plants. Aligned with our strategy to grow our advanced silicon metal business, we signed a term sheet for a global joint venture with a leading battery material company in Europe to develop advanced EV battery materials using silicon in the anode. We also signed an MOU with a U.S.-based advanced battery solutions company to pursue the next generation of silicon-rich battery technology.

As part of this venture we are currently testing a promising nano-layer coating technology which not only increases the performance and the range of EV battery but also lowers the cost of battery manufacturing. The silicon-based EV battery market is expected to go to 150,000 tons globally by 2030. We provide additional updates in the near term. In 2023, we also took action to protect our markets. Working with U.S. legislators, we had to introduce the bipartisan bill in Congress that assesses a 35% tariff on ferrosilicon imports from Russia and Belarus. If passed, this legislation is expected to have a positive impact on pricing as Russia is the largest importer of ferrosilicon to the U.S. We signed our first PPA in Spain during the year and have since added additional PPAs which now comprise roughly 20% of our needs for 2024 and beyond to enhance our ability to increase production in Spain which has suffered from uncompetitive energy prices over the past couple of years, increasing resilience and flexibility of our global footprint.

In response to the spike in energy prices in 2022, we executed a multiyear energy agreement with a French energy company that enable us to generate an incremental $186 million in EBITDA in 2023. This rebate was in exchange for optimizing our production in France to minimize our power consumption during the winter months. While the market in 2023 was very challenging we are seeing subtle signs that provide us optimism for 2024. There is still a lot of uncertainty in the market but we are seeing some improvements in pricing. U.S. silicon metal prices appear to have bottomed in December and have actually increased in late January. U.S. silicon metal price index increased from its recent low in early December of $140 per pound to $149 in early February, or up approximately 6%.

European price movements were even more pronounced, increasing from the low $2,049 per ton in late September to approximately $2,360 per ton in November to $2,909 in early February, an increase of 23% in 3 months. We believe that the European prices increased in part due to supply constraints as a result of a fire at a major silicon plant in Norway and shipping disruptions in the Red Sea. Looking at market pricing and associated production costs during those trough periods, it appears that the industry was operating at breakeven at best which is unsustainable. We believe marginal producers were operating at a loss, leading them to reduce capacity, thus improving the supply-demand dynamics ultimately driving higher prices; there are signs of a cycle trough.

As it relates to solar, we continue to position the company to take advantage of onshoring trends that are becoming a bigger focus of governments in U.S. and Europe. Ferroglobe as leading worldwide producer of silicon metal is set up to be a significant beneficiary of these trends. As an example of our market leadership, we recently signed a long-term supply agreement with LONGi, the world leader in the solar value chain to supply them with traceable silicon metal that can be sold in the U.S. to its growing solar market within the confines of Uyghur Forced Labor Prevention Act that affects Chinese access to the U.S. The main region of silicon metal and polysilicon production in China is Xinjiang, where many of Uyghur people reside. According to CRU estimates, the Xinjiang area accounts for approximately 40% of Chinese silicon metal production.

Our significant advantage is that we can provide traceable non-Xinjiang silicon metal to China and Asia which can then be imported into the US as a verified product under the U.S. LPA. While we are cautious about 2024, we are very bullish about 2025 and beyond due to secular trends in the solar and EV battery markets, where we believe we have significant long-term growth opportunities. To give you a sense of the scale of these growth markets, according to CRU the worldwide demand for silicon metal for the solar and electronics segment is forecast to grow by approximately 70% to 3 million tons between 2023 and 2028. Within our primary markets, the U.S. and Europe the demand for silicon metal is expected to grow by roughly 40% to 947,000 tons during the same period, representing a huge upsurge for us as the larger Western producer of silicon metal.

We are introducing 2024 guidance, recognizing the exceptionally uncertain and volatile times in our end markets, elevated geopolitical risks, wide-ranging elections around the globe and elevated interest rates among other factors. Given the unpredictable environment, we are initiating our 2024 guidance with a range of $100 million to $170 million of EBITDA. The decline in our 2024 guidance relative to 2023 results is primarily driven by our French energy agreement which we expect to decrease materially in 2024. The 2024 guidance is also impacted by substantial price declines over the past several quarters. Indexes for most of our products declined by 30.5% from December 2022 to December 2023 with demand continuing to be soft in the early part of 2024.

It is important to note how sensitive our results are to price fluctuations, for example, a 5% change in annual price for silicon metal as a $35 million impact on expected EBITDA, all else being equal. We expect the weak pricing to be partially offset by strong volume growth, particularly in Asia. To counteract the weak demand and lackluster pricing, we remain vigilant in managing costs and looking for incremental productivity gains across all areas of the company. As discussed previously, we are introducing our capital return program with an initial quarterly dividend of $1.3 cents per share and plan to request our board of directors and shareholders as required to approve a share buyback program to be executed at the discretion of the management team.

The capital return program is part of our overall capital allocation strategy. Our priority is ensuring that our plants are well capitalized to run optimally as we seek to maximize our return on invested capital. Beatriz will provide more details on that. Next slide, please. Silicon metal revenue in Q4 was $168 million, a decrease of 16% from the third quarter. Adjusted EBITDA was $22 million, a decline of 73% over the prior quarter. Our average realized price for silicon metal decreased by 3% in Europe and 6% in the Americas compared to the previous quarter. Index prices increased 26% in Europe and decreased 8% in U.S. during the fourth quarter. There is typically a lag with realized prices trailing indexes by approximately 3 months for the portion of our contract that expect to an index.

Silicon metal prices have shown strength since year-end, with prices increasing 13% in Europe and 6% in the Americas. As for silicon metal outlook, it appears that the market is showing incremental improvement with U.S. prices bottoming in December and increasing since mid-January. European prices, after a strong increase in the fourth quarter continued their strength in 2024 and up 38% increase from the bottom at the end of Q3. The improvement in prices benefited from supply disruptions, production curtailments by some of our competitors and restocking. While we remain cautious about the demand environment, these improvements provide some optimism for 2024. Next slide, please. Adjusted EBITDA for Q4 for silicon-based alloys was $35 million, up 38% over the prior quarter.

Relative to the third quarter overall average realized pricing was down 7%, with prices in Europe declining 10% and Americas declining 2%. The silicon alloy segment was adversely affected by weak demand, primarily in construction and automotive. While the environment continues to be challenging we expect improvement in the second half of this year. Regarding the outlook for silicon-based alloys, prices have strengthened since year-end with index prices increasing 7% in Europe and the Americas. While demand remains sluggish, we are encouraged by the recent price improvements but there remains a lot of uncertainty in the market. Moving to Slide 7, please. Turning now to manganese-based alloys. Manganese-based alloys revenues was $60 million in Q4, up 3% over the previous quarter.

In Europe, index price appeared to a bottom in late September and have increased approximately 13% since year-end, adding to the 6% gain in the fourth quarter. The end market primarily still remain under pressure, we expect an incremental improvement throughout 2024. I would now like to turn the call over to Beatriz, Garcia-Cos, our Chief Financial Officer, to review the financial results in more detail. Beatriz?

Beatriz García-Cos: Thank you, Marco. Please turn to Slide 9 for a review of the income statement. Sales declined 10% in the fourth quarter to $376 million from $417 million in the prior quarter, with annual sales declining 36% to $1.7 billion, mainly due to lower pricing and secondarily, lower volumes. Raw materials and energy consumption increased as a percentage of sales from 47% to 53% in Q4 and from 49% to 53% for the year. Despite declining prices, we posted solid EBITDA in the fourth quarter of $60 million for the year. For the year, our EBITDA was $350 million compared with our guidance rate of $270 million to $300 million. Excluding the impact of the French energy contract, good capital result in 2023 EBITDA of approximately $129 million versus our 2024 guidance of $100 million to $170 million.

In the fourth quarter, we recognized impairment of $24 million which was primarily related to our operations in the U.S. Net finance expenses for the year declined 50% to $29 million due to the partial redemption of the senior secured notes in July, true-up of accrued interest and extension of government loan maturity. Next slide, please. Our adjusted EBITDA in the fourth quarter was $60 million versus $104 million in the third quarter. Adjusted EBITDA margin declined from 25% in the prior quarter to 16% in the fourth quarter. Reduced shipments and lower realized prices contributed roughly equally to lower EBITDA. Prices in the fourth quarter were weak across the board with the overall average realized price declining 9%. Weakened markets with pricing pressure across our 3 segments resulted in a negative impact of $22 million on our adjusted EBITDA.

While volume had a negative impact of approximately $19 million of the Q4 EBITDA, cost had a negligible impact on EBITDA. Slide 11, please. Adjusted EBITDA for the full year was $315 million versus $350 million in 2022. EBITDA margin for 2023 was 19%, down from 33% in 2022. Average selling prices which declined 29% on average from historical high in 2022 had the biggest impact on our 2023 adjusted EBITDA, reducing it by approximately $722 million. Cost positively impacted EBITDA for the year by $244 million, driven by French energy agreement and CO2 compensation in France, with the energy agreement helping by $186 million. Next slide, please. We ended fourth quarter with a cash balance of $138 million, down from $166 million in the third quarter.

Net debt increased $30 million to $101 million, while our gross debt remained flat with the prior quarter. Post redemption of the senior secured notes, our pro forma gross debt is approximately $91 million. Next slide, please. During the fourth quarter, cash provided by operations was $25 million. CapEx outflows in the fourth quarter was $24 million versus $19 million in the prior quarter and $84 million for the year. We anticipate our 2024 CapEx to be similar to 2023 levels. As of January 31, our cash balance was nearly $600 million, including the full receipt of approximately $210 million from the energy French compensation, of which $56 million was received in December 2023 with the remaining $154 million received in January 2024. This cash balance excludes the redemption of our remaining senior secured notes of $152 million, including the coal premium and accrued interest.

These notes were redeemed on February 16. This is a significant achievement and a dramatic improvement from 2018 where we had net debt of $430 million. Our solid cash position combined with our ability to generate strong cash flows enabled us to declare a dividend. We plan to ask our board and shareholders to approve a share repurchase program which requires a shareholder board as we are a NASDAQ-listed company domiciled in the U.K. Next slide, please. At this time, I will turn the call back over to Marco.

Marco Levi: Thank you, Beatriz. It’s moving to the corporate update on Slide 15. We made great strides in 2023 and as promised, have initiated a new capital allocation policy that we return capital to our shareholders. We initiated a quarterly dividend of $1.3 cents and are currently working to implement a share repurchase program. Given the current uncertainty in the market, we are starting with a conservative dividend with the intention of increasing it as the environment improves. We ended the year with the strongest balance sheet in the history of Ferroglobe and achieved a net positive cash position in January. This is a dramatic improvement over the highly-levered balance sheet we had just a year ago. The partnerships we discussed earlier are an excellent way for us to take advantage of the tremendous opportunities in the advanced silicon EV battery market which is expected to grow to 150,000 tons by 2030.

This, combined with the second secular trends in the solar market that we are now serving globally is expected to drive long-term growth for Ferroglobe.

Alex Rotonen: Operator, we’re ready for questions.

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Q&A Session

Operator: [Operator Instructions] We will take our first question. Your first question comes from the line of Lucas Pipes from B. Riley.

Lucas Pipes: Thank you very much, operator. Good morning, everyone. Marco and team, great to see that unlevered balance sheet and the commencement of a dividend. My first question is on the 2024 guidance for EBITDA, $100 million to $170 million. And Marco, if I heard you right, a 5% change in pricing is about $35 million EBITDA sensitivity, so should we kind of think of the guidance as in the current price environment? You had $135 and then you maybe put like a 5% sensitivity to the upside and to the downside to articulate that range or are there more dynamics at work would appreciate how you think about that?

Marco Levi: Thank you, Lucas and thank you for the question. I think it’s probably the most important question of today. First of all, the 5%, $35 million is related to silicon metal, you have different sensitivities for the rest of the product mix but I think it’s a good indicator, the 5%. We have decided on this guidance coming out of fourth quarter, where demand was extremely low and we only started seeing somewhere some price recovery. So when we decided about the guidance was pretty much coming from our bottom-up result of our budget. Since then, prices have shown some substantial improvement, they will materialize with the usual lag 2 months for alloys, in particular, manganese alloys and 3 months for silicon. Sustainability of this price level is a question because on one side, we don’t see any structure of change in terms of demand, on the other side, like I mentioned in my pitch, a lot of capacities are being curtailed.

There are difficulties in the supply chain and at the end, customers need to start filling their inventories. So we feel slightly optimistic, more optimistic than a couple of months ago. I think the guidance is still valid. I would say that based on the recent price moves, I would be optimistic on the high side of this guidance. The other comment that I can add on that, I mentioned that we drastically improved the performance of our operations by 3% in Europe this year and we started a new program to make sure that we were going to add additional EBITDA out of new initiatives that we plan to implement as we speak at operational level initiatives that are going to be totally under our control.

Lucas Pipes: That’s very helpful, Marco. And just to make sure that I got this right. So you have a bottom-up budget. You did that some time ago and that determined the range of $100 million to $170 million. And since then, the market improved and that’s not really — so that’s not really reflected yet in that range. Is that right?

Marco Levi: Correct.

Lucas Pipes: Okay, that’s very helpful. And then you mentioned in the release that you expect to be free cash flow positive. The way I read that comment, it sounded to me like at any point in your range, that statement would be true. But I wondered if you could maybe elaborate on that, if that’s the right conclusion and what sort of cash items we should be mindful of from sustaining capital to working capital, taxes, et cetera? I would appreciate the additional color.

Beatriz García-Cos: This is Beatriz speaking. So in terms of cash flow for 2024, a couple of elements to mention. The first — sorry, Lucas, the first element is the release of working capital that we’re going to be having in 2024. Second element to bear in mind is the gross debt is below $100 billion, right? So that’s the second element. And the element is in Q1, we are already proforma net cash positive $91 million, as you see on the slide. So we expect a very strong year from a net cash flow perspective. I know that there is from an EBITDA is what Marco has been explaining but on the other side from a cash perspective, I’m going to be, I think, a very, very significant year. The other element that you need to factor here is the $32 million of interest that we are saving, that’s a very significant item for us.

And then in terms of CapEx, of course, we plan to continue to take care of the health of our operations in terms of CapEx and we expect more or less to invest on a like-to-like basis versus 2024. I think at the end we decided as well to go ahead with this capital allocation policy that includes a dividend payment. We confirm 1.3% — $1.3 cents per share. So this is going to be a modest dividend, it will not have an impact and it shows how the company has been performed on the last year. So for us, how it crystallized on the payment of this modest dividend that we want to increase as we go. And then on the share buyback program, we plan to use or play this share buyback program in an opportunistic basis. But to do that, we need to get the approval of our shareholders on the AGM in June because we are a British company listed in NASDAQ.

Lucas Pipes: Thank you. And Beatriz I heard it right, that approval would come at the earliest in June?

Beatriz García-Cos: Right.

Lucas Pipes: So the Board could make an approval sometime before then but then it still takes the shareholder meeting in June to kind of get treat?

Beatriz García-Cos: Of course. Yes.