Earnings Call Transcript - GSM Q1 2025

Operator, Operator

Welcome to Ferroglobe's First Quarter 2025 Earnings Call. I would now like to turn the call over to Alex Rotonen, Ferroglobe's Vice President of Investor Relations. You may begin.

Alex Rotonen, Vice President of Investor Relations

Thanks, Nadia, good morning everyone, and thank you for joining Ferroglobe's first quarter 2025 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 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 website at ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, adjusted net debt, and adjusted diluted earnings per share, among other IFRS measures. Reconciliation of non-IFRS measures may be found in our most recent SEC filings. Before I turn the call over to Marco, our Chief Executive Officer, I want to announce that we'll be participating in the B Riley Securities Conference in California on May 21st and 22nd. We hope to see you there.

Marco Levi, CEO

Thank you, Alex, and thank you all for joining us today. We really appreciate your continued interest in Ferroglobe. As we noted during our fourth quarter call, market conditions have remained challenging, significantly impacting our first quarter results. We saw continued declines in realized prices and weak demand across key segments. In particular, silicon metal, our largest segment, experienced a 27% drop in volume. Additionally, the US silicon metal index pricing as of March 31st was down 9% quarter over quarter and 22% from the third quarter. This was the primary driver of our first quarter negative adjusted EBITDA of $27 million. That said, we believe that we are at or near the bottom of the current cycle. Looking ahead, we anticipate a strong adjusted EBITDA in the second quarter, followed by continued momentum in Q3. We expect to deliver positive adjusted EBITDA in the second quarter. Accordingly, we are maintaining our full year 2025 guidance. Several regulatory trade measures are currently being introduced to curb the influx of low-priced imports that have been disrupting market dynamics and suppressing prices, negatively impacting our volumes. We expect these developments to stabilize the market and create a more constructive environment in the quarters ahead. Let me walk you through some of the key trade measures. In the US, the Department of Commerce announced its final determination in the anti-dumping and countervailing duty investigation of all pharmaceutical imports from Russia, Malaysia, Kazakhstan, and Brazil. Cheating on fair pricing practices and subsidies have harmed domestic producers. The newly imposed final duties are substantial, including the basic 10% tariff imposed on all countries. Russia's combined anti-dumping and countervailing duty is 1042%, Kazakhstan ranges from 33% to 281%, Brazil ranges from 14% to 73%, and Malaysia from 17% to 51%, all effective as of March 28. These actions are expected to significantly improve the US ferrosilicon market in both the near and long term. Imports from these four countries accounted for approximately 140,000 tons in 2023, representing 71% of total US imports, while domestic producers will benefit from this shift. Ferroglobe is particularly well positioned as the largest producer with operations that are nearly 100% backwards integrated. We expect a short lag as existing channel inventories are drawn down before demand begins to accelerate. Initial signs confirm this trend, with U.S. pricing firming since the beginning of April. We believe this will result in a healthier and more balanced market. In Europe, progress has been made to counteract the impact of subsidized imports. On December 19, the European Commission launched a safeguard investigation into silicon metal, silicon-based alloys, and manganese alloys, which is expected to benefit all our product segments. The investigation is now completed, with the European Commission working on its final recommendation. This will then be shared with EU member states, requiring approvals from at least 15 of the 27 countries representing 65% of the population. We believe this is a strong case, and we are optimistic that a favorable decision will be rendered. A provisional ruling is expected by the end of June with any associated measures effective immediately. These trade actions and safeguards, both in the US and Europe, are expected to begin benefiting the industry by the third quarter and have a positive lasting impact on our business. In addition, U.S. silicon metal producers filed a new petition on April 24 to stop unfairly priced silicon imports from Angola, Australia, Laos, Norway, and Thailand. This petition is seeking significant anti-dumping duties of up to 337% and additional countervailing duties. The Commerce Department is scheduled to initiate the investigation by May 14, with a preliminary ITC determination expected by June 9 of this year. Ferroglobe, as the largest producer in North America, would be a significant beneficiary of a positive ruling. As you know, there is a lot of uncertainty in various markets around the world as different tariff policies are being contemplated. While this poses a significant burden on exporters and importers, Ferroglobe benefits from its globally distributed facilities, which allow us to supply products locally, thus avoiding potential tariffs, giving Ferroglobe a competitive advantage over imported products. Beside the macro issues, we continue to focus on things that we can control. I will discuss a few of them. First, Sales and Operational Planning (S&OP) is a key initiative that will help us improve our demand forecasting and enhance our supply planning accuracy. This will enable us to manage working capital more effectively while improving our ability to deliver products more efficiently. We've made great progress on this front, evidenced by our strong inventory reduction in the first quarter. Our plan is to fully implement the S&OP by the end of 2025. Second, we are strengthening our commercial execution capabilities to make our sales organization more agile and effective. As part of this streamlining, we are optimizing our customer coverage to serve customers and segments better, while breaking down silos and driving better collaboration across teams as one company. Our goal is to align our sales efforts with the S&OP process to capitalize on market opportunities as they arise. Finally, despite challenging market conditions in the first quarter, we successfully generated positive free cash flow by efficiently managing our working capital, highlighting the resilience of our operating model. We used this free cash flow to pay our quarterly dividend, which was increased by 8%, and to repurchase shares, which we believe remain significantly undervalued. Next slide, please. As communicated on our last call, we expected the first quarter to be difficult, with weak demand and soft prices resulting in a negative adjusted EBITDA. Lower overall shipments and prices drove a 16% decline in revenue; the actual first quarter adjusted EBITDA of negative $27 million is in line with our budget. Despite the poor performance, we were able to generate $5 million of free cash flow in the quarter. Next slide, please. Moving to our segment update. I will start with silicon metal on slide 5. As expected, the first quarter was weak, with silicon metal shipments declining 27% due to weak demand. Operations in France and uncertainty related to trade measures and tariffs were also factors impacting our volumes. Another factor affecting our volumes was a significant increase in imports into the US and Europe. Imports from Brazil, Australia, Malaysia, Norway, Thailand, and Laos into the US grew by 68,000 tons in 2024 compared to 2023. Europe also experienced a surge of silicon imports caused by a collapsing polysilicon market in Asia. We expect this headwind to persist until the Asian polysilicon market recovers or safeguards become effective. Within the silicon segments, the chemical sector was also challenging as a result of increased low-priced imports to Europe. On the positive side, we are gaining traction in the aluminum market. We believe the first quarter marked the trough of this cycle, and anticipate improved shipments in the second quarter, with further volume pickup in the second half of the year. Increased imports also impacted pricing, which declined by 7% in Europe and 12% in the U.S. This makes the proposed anti-dumping and countervailing duty measures in the U.S. against Angola, Australia, Laos, Norway, and Thailand imperative for securing a robust domestic supply chain for critical industries. Next slide, please. The silicon beta market is exhibiting positive trends, with first quarter volumes up 9% over the fourth quarter. This improvement was driven by an increase of 38% in North America and 3% in Europe. Both of these regions experienced an uptick in steel production in March, while prices remained relatively flat during the first quarter. We see initial signs of the positive impact from the U.S. Phase A decision. Our dedicated effort to acquire new customers and regain past customers is paying off. Another positive sign is that index prices have improved by 17% since the beginning of April. This bodes well for the coming quarter. We expect additional firming of prices and incremental volumes as the impact of the U.S. basic case becomes more pronounced. The upcoming EU safeguard decision expected in June is anticipated to have a similar impact in Europe. Slide 7, please. Our manganese segment has been our strongest segment recently, with solid demand continuing in the first quarter. Unfortunately, we were unable to meet this demand due to a delay in receiving manganese raw materials, which negatively impacted our volumes. As a result of these delays, we expect to make up for those lost tons in the second quarter with substantial volume improvement overall. The manganese demand environment is quite constructive and potentially even stronger as we wait for the outcome of the EU safeguard decision. Now I would like to turn the call over to Beatriz García-Cos, our Chief Financial Officer, to review the financial results in more detail.

Beatriz García-Cos, CFO

Thank you, Marco. Please turn to slide 9 for a review of the income statement. Sales decreased 60% sequentially in the first quarter to $307 million, while raw material costs declined only 5%, resulting in raw materials as a percentage of sales increasing to 77.6%, up from 68.2% in the prior quarter. More on that later. The decline in sales was driven by a 35% decrease in silicon metal revenue and a 5% decrease in manganese-based alloys, partially offset by a 7% increase in silicon-based alloys. The decline in silicon metal sales was the result of weaker volume and lower prices. Silicon-based alloys were a bright spot, with sales increasing 7%, while manganese alloy revenue declined by 5% due to lower prices. Average selling prices were down across the board, with the biggest contributor coming from silicon metal, which was down 11% from the prior quarter, followed by manganese based alloys down 4%, and silicon based alloys down 2%. Raw material increases as a percentage of sales from 68% to 78% were driven by lower fixed cost absorption and higher energy costs. The company reported an adjusted EBITDA margin of negative 9%, or a $27 million adjusted EBITDA loss, representing a $37 million decline versus the previous quarter, primarily due to the following factors: lower prices contributed $24 million to the decline, while costs had a negative $15 million impact on adjusted EBITDA compared to the fourth quarter. Next slide, please. Silicon metal revenue declined by 35%, which was driven by a 27% drop in volumes and lower average selling prices, which decreased by 11%. This resulted in adjusted EBITDA of negative $15 million, down from positive $17 million in the prior quarter, resulting in margins of negative 15% versus positive 10% in the prior quarter. The lower prices were the biggest factor in the P&L decline, with an impact of negative $18 million, followed by increased costs, which had a negative impact of $12 million. Next slide, please. Silicon-based alloys revenue increased 7% in the first quarter, driven by a 9% increase in volume, partially offset by a 2% decline in price. The increase in volume positively impacted adjusted EBITDA by $2 million, offset by negative $3 million from lower prices, driven by an increase in the sales mix of ferrosilicon standard. This resulted in adjusted EBITDA declining from $3 million in the prior quarter to $2 million in the first quarter of the year. Adjusted EBITDA margins were 3% in the first quarter versus 4% in the prior quarter. The product mix shift benefits the cost per ton as per silicon standard has a lower production cost. Next slide, please. Manganese-based alloys revenues were down 5% from the fourth quarter, driven by a 1% decline in volume and a 4% decline in average selling price. Lower volume negatively impacted adjusted EBITDA by $2 million, while price had a negative impact of $5 million. In addition, higher costs had a negative impact of $6 million, which was the result of higher energy costs and maintenance at plants in France. Next slide, please. Despite the challenging market environment, we generated $5 million of free cash flow driven primarily by a $25 million reduction in working capital as we continue to focus on improving operational efficiencies. We also collected an energy rebate of $32 million. Cash flow from operations was $19 million in the first quarter, down from $32 million in the prior quarter. CapEx in the first quarter was $14 million, down from $18 million in the prior quarter. For upcoming cash flow items, we expect to make the final loan principal repayment of $18 million in the second quarter. Next slide, please. During the first quarter, we maintained a strong balance sheet while increasing our dividend and continued to buy back shares. Our dividend was increased to $1.4 per share, or up 8% over the prior quarter. During the quarter, we repurchased 720,000 shares at an average price of $3.75 for a total of $2.7 million. Since the third quarter of 2024, when we initiated our share buyback, through the first quarter of 2025, we have repurchased 1.3 million shares for approximately $5 million. In addition, we made two strategic investments. The first was an additional investment of $3 million in our pilot plant in the first quarter, making our total investment $10 million for the pilot plant. Our increased investment is for the continued development of the pilot plant to scale production. The second investment of $8 million relates to our commitment to production in Norway. We remain net cash positive at the end of the quarter with a balance of $19 million versus $39 million at the end of the fourth quarter. Adjusted cash flow at the end of the first quarter was $110 million, up from $94 million in the prior quarter. Our CapEx declined by $4 million to $14 million in the first quarter, and we expect maintenance CapEx for the full year to be in the range of $60 million at this time. I will turn the call back to Marco.

Marco Levi, CEO

Thank you, Beatriz. Moving to the key takeaways on slide 16, we are maintaining our adjusted EBITDA guidance of $100 million to $170 million for the year, with the first quarter in line with our budget. We expect meaningful improvement in the second quarter and further strengthening in the second half of the year. With the U.S. silicon case now finalized and the EU safeguard decision nearing, we are confident that the trade measures will positively impact our business going forward. The silicon metal case petition was just filed in the U.S., so it is too early to speculate on how it plays out. However, we are optimistic about that case as well. Given this development, we believe our performance will improve for the remainder of the year. Importantly, we continue to maintain a strong balance sheet with a positive net cash position, demonstrating our resilience and allowing us to manage the business effectively in the current environment. Operator, we are ready for questions.

Operator, Operator

Now we're going to take our first question, and it comes from the line of Nick Giles from B. Riley Securities.

Unidentified Analyst, Analyst

Marco, you reiterated guidance, even though Q1 is negative. How should we think about the cadence of improvement in Q2, Q3, and Q4 in 2025? It would be helpful if you could provide some insight on volumes, costs, and pricing as well.

Marco Levi, CEO

Thank you for the question. First of all, the negative results were expected by us. As we underlined, they are in line with our budget for this year. We have kept our guidance of $100 million to $170 million, accounting for various scenarios that might develop in Q2, Q3, and Q4 of this year. We believe that the trade case will bring a little bit more balance in the market and will favor local producers like Ferroglobe in the Americas and in Europe. Additionally, we have evidence that when strong measures are applied, like in the case of ferrosilicon in the U.S., despite the rather weak demand, we see a positive reaction in terms of both index pricing and volumes. We are waiting for confirmation of the safeguards in Europe, but they are nearing, and we expect, as of July, more clarity on how the new anti-dumping and countervailing duty case on silicon metal will affect the market. These factors make us confident that our performance will definitely improve in the rest of the year, which is why we have decided to maintain the same guidance.

Unidentified Analyst, Analyst

Thank you. If I could expand on this one a little bit, a follow-up. I want to touch on end markets where you have seen the most trends and weakness in Europe or the U.S. and maybe Asia. So can we get an update on the outlook for the Asian polysilicon market? If you can, that would be very helpful. Thank you.

Marco Levi, CEO

Thank you for the question. I can start from Asia. Of course, there are measures on imports from Southeast Asian countries that are being implemented that block exports from these countries. However, some other countries, like Indonesia or India, may see their business increase as they will be allowed to export sales and modules to the U.S. How these changes will play out in terms of opportunities to supply silicon metal from Europe to polysilicon players to produce cells in Indonesia will probably need to be validated in the coming weeks, as the decision is relatively new. Concerning demand for steel, which is another key indicator for us, the indication from this year is that steel production is going to remain rather flat. Notably, India continues to see a positive increase in steel production, while Europe and the U.S. do not register any significant changes. For aluminum, we expect improved demand in the U.S. due to measures that will incentivize the production of aluminum in the U.S. In Europe, aluminum prices are increasing, and it is our understanding that aluminum producers are looking for protection, similar to what we are asking for in terms of safeguards. Overall, to summarize, we see a rather stable situation of demand for our alloys business while we wait for trade measures before seeing a significant improvement in silicon metal demand.

Unidentified Analyst, Analyst

I appreciate all this color, Marco. If you allow me to squeeze one more, it's nice to see share purchases, but my question is, what would you need to see to step up the magnitude in shareholder returns? Thank you.

Marco Levi, CEO

Let me start, and then I will allow Beatriz to elaborate. We are running the company under a very difficult and hostile environment, but we’re still generating cash. We expect to generate more cash in the coming quarters, and we will continue our opportunistic repurchase policy. The amounts of repurchase will really depend on the cash available. As you know, our priority is always to have enough cash around the company, and we will manage our assets effectively in the coming quarters. We need to maintain the minimum level of CapEx we have indicated, which is $50 million for this year. After addressing those priorities, we will have the opportunity to repurchase shares during the remainder of the year. Beatriz, anything to add?

Beatriz García-Cos, CFO

Yes, maybe just a couple of data points. So far, we have repurchased 720,000 shares in the first quarter of 2025 at an average price of $3.75. From Q3 2024 through Q1 2025, we have bought 1.3 million shares for a total of $5.1 million. In response to your question about whether we plan to ramp up share repurchases, it is our view that we will assess our cash position alongside market forecasts, as Marco was describing. Those forecasts are currently a mixed bag. We believe our share price reflects its valuation at the moment, and our ultimate goal is to maximize long-term shareholder value. On the other hand, it took us some time to achieve a strong balance sheet. Now that we are net cash positive, we want to maintain that position. We do not plan to leverage our balance sheet for share buybacks. Lastly, we have demonstrated over the past few years how we manage our cash prudently. Our first priority was to reduce the company's leverage, which we have accomplished, followed by a modest dividend they have been increasing this year and, of course, share buybacks. Hopefully, this answers your question.

Operator, Operator

Dear speakers, there are no further questions at this time. I would now like to hand the conference over to Marco Levi for any closing remarks.

Marco Levi, CEO

Thank you all again for your participation. We look forward to updating you on the next call in August. Have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a nice day.