Earnings Call Transcript - GSM Q2 2021

Operator, Operator

Good morning, ladies and gentlemen and welcome to Ferroglobe’s Second Quarter 2021 Earnings Call. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Beatriz García-Cos, Ferroglobe’s Chief Financial Officer. You may begin.

Beatriz García-Cos, CFO

Good morning, everyone and thank you for joining Ferroglobe’s second quarter 2021 earnings conference call. Joining me today are Marco Levi, our Chief Executive Officer; Benoit Olivier, Ferroglobe’s Chief Operating Officer and Deputy Chief Executive Officer; Gaurav Mehta, our Transformation Director and EVP of Strategy and Investor Relations; and Jorge Lavin, Group Controller. Before we get started with some prepared remarks, I am going to read a brief statement. The statements raised 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 exhibits to those filings, which are available on our webpage. In addition, this discussion includes reference to EBITDA, adjusted EBITDA, gross debt, net debt 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. We will first review the highlights for the second quarter as well as our business and operating environment. Then I will provide some additional details on our financial performance and key drivers behind our results. Finally, we will provide an update on the execution of our strategic plan. I would now like to turn the call over to Marco Levi, our Chief Executive Officer.

Marco Levi, CEO

Thank you, Beatriz and welcome to our second quarter 2021 earnings call. We recognize that we are towards the end of summer and appreciate everyone carving out some time to participate in today’s call. This quarter marks an important inflection point for Ferroglobe and its turnaround. Since my joining of the company, one of the top priorities has been the return to profitability. I am pleased to report that we have delivered a positive net profit during the second quarter and our expectation is that we will continue to build on this momentum in the near future. Overall, we are beginning to see an acceleration of our financial performance. Our top line is benefiting from robust market conditions across all our key products, which are translating into higher demand and stronger pricing despite the lingering impact of fixed-priced contracts, which are significantly below current spot levels. The rolling off of a portion of these lower-priced contracts during the back half of the year further supports the acceleration in our performance. On the demand side, we now expect this momentum to continue for the remainder of the year. Customers across the chemical, aluminum and steel sectors are signaling strong demand into next year, and we remain in active discussions to meet their needs for the remainder of 2021 and are even engaged in discussions for 2022 with some larger customers, well ahead of the typical negotiation season. The cost side of the equation continues to present an area of challenge. On one hand, we are successfully executing numerous initiatives underlining the strategic plan, focused on driving down production and corporate overhead costs. On the other hand, we faced some cost pressures which are limiting our full potential. During the quarter, we were challenged by significantly higher energy costs in Spain, inflationary pressures in certain raw materials, and idling costs in France. Furthermore, from a cash perspective, we had some one-time non-recurring outflows related to the purchase of CO2 rights previously sold in 2020 and financing related costs. We remain extremely focused on cost management and seek to drive margin expansion as we stabilize the cost side of the equation and put the non-recurring items behind us. With regards to the financing, I need to acknowledge the hard work and contributions of our employees, our Board, our investors, and our advisers. This has been a long journey, and the aligning of the various components of the financing was certainly not an easy task. The successful closing of the financing, coupled with a strong market backdrop, sets the stage for an exciting back half of the year. We have several important initiatives tied to the strategic plan to complete and the financing provides the resources and the flexibility to execute these initiatives. At the midpoint of the year, I am pleased that we remain on course to deliver the turnaround we are systematically reconfiguring how we operate this business to ensure long-term competitiveness across the cycle and the recovery in value creation. This quarter’s financial results further validate the plan and overall execution, and we remain confident in the ability to accelerate our performance in the second half of this period of the year. Second quarter sales were $418.5 million, up 15.8% from the prior quarter, predominantly driven by higher average realized selling prices. During the quarter, our total volumes across all products were up 2.8%. We realized the benefit from the gradual ramp-up in silicon metal and silicon-based alloys while manganese alloys volume was adversely impacted by higher production costs in Spain, where we had to manage our production levels as well as being faced with some constraints in procuring manganese ore. We had strong improvement in our adjusted EBITDA. During Q2, our adjusted EBITDA was $34.1 million, which is an improvement of 54.5% from the prior quarter. During the quarter, we returned to profitability. The net profit for the quarter was $0.7 million compared to a loss of $68.5 million in the previous quarter. Our operating cash flow increased 107% from $18.3 million in Q1 to $37.8 million in Q2. And despite some significant one-time cash payments, we returned to positive net cash flow of $21.6 million during the quarter. Overall, Q2 was marked by improvement in our top line, coupled with improved fixed cost absorption across our operating footprint. During the quarter, we experienced some increase in the cost of key inputs. However, the largest single jump has been energy prices in Europe, particularly in Spain, where the market price of energy has increased from approximately €50 per megawatt hour in Q1 to approximately €80 per megawatt hour in Q2. Please note that these are our quarter end figures and do not reflect the pro forma impact of the incremental $20 million of the senior secured financing tranche, which closed in July. And finally, our cash balance increased by $22.1 million, ending the quarter at $106 million. We are proud of these results but feel there is significant room for improvement due to the added benefit of our previously announced capacity restarts and the gradual price increases we are anticipating. Furthermore, we have now passed the point of incurring significant one-off expenses tied to specific transactions. All-in-all, these factors should contribute to an acceleration of our financial results and a return to stronger margins. Turning first to silicon metal, Ferroglobe’s realized average selling price for silicon metal was $2,347 per metal ton in Q2, an improvement of 2.7% versus the prior quarter. The index or spot pricing evolution in the U.S. increased by approximately 19% during the quarter, while the European spot index increased by 9% during the same period. At the end of Q2, we have approximately 65% of our silicon metal business contracted, excluding the JV volumes. Please keep in mind that many of these contracted volumes were at fixed prices, which were negotiated at the end of 2020 when the pricing environment was drastically different. Our average realized prices will not reflect the same pace of momentum as the index until these contracts roll off at the end of the year. The volume trend chart shows a 9.9% increase in silicon metal shipments over the previous quarter and approximately 67,300 tons. This is partly attributable to some incremental volume following the restart of one furnace at the Sabón, Spain facility and one furnace in Mauritius, France during the quarter. EBITDA from our silicon business improved from $14.8 million in Q1 to $17.8 million in Q2. Pricing and volumes contributed favorably while significantly higher energy costs in Spain and higher input costs in the U.S. more than offset the improvement in our fixed cost absorption. Overall, the supply-demand picture for silicon metal continues to be the best we have seen in years. Our customers continue to see strong demand for everyday consumer goods as well as the benefit of new residential and non-residential construction, supporting the demand for silicon. The demand has surpassed our customers’ earlier expectations for the year and has created a good tension in the marketplace going into next year. On the aluminum side, the pickup in activity is largely driven by the recovery in refueling of the automotive supply chain in both North America and Europe. However, the recovery in auto manufacturing is negatively impacted by the semiconductor chip shortage. We expect the demand on the aluminum side will continue to grow as the industry seeks to meet the backlog of demand. With the emphasis on renewable energy and the need to secure the value chain domestically, this sector is showing some positive signs for the first time in years. We will continue to monitor the developments and are hopeful of recovering sales in the coming years, which would further extend the demand surge. In addition to strong demand, bottlenecks in raw material sourcing and logistics have created additional buyers globally limiting supply and further supporting the higher price environment. As previously noted, we have started one furnace at Sabón in Q1 and another furnace in Mauritius in May. At the moment, we have not made any firm plans for additional capacity restarts and continue to assess the situation. A combination of our index-based contracts, which reset quarterly, and the renegotiated volumes, particularly with the capacity restarts, provide an attractive opportunity to capitalize on broader trends. Now, regarding our trade case, the silicon metal trade cases against Bosnia and Herzegovina, Iceland, Malaysia, and Kazakhstan have all concluded, with the final determinations presenting a successful outcome to ensure an even playing field. We achieved favorable results from both the U.S. Department of Commerce and the International Trade Commission sides. Even in the case of Malaysia, we obtained a significant increase from the preliminary margin to the final margin. While trade cases are not a core pillar of our competitive strategy, the results from this trade action reinforce the importance of ensuring that all global market participants compete on even terms, critical for protecting our workforce and assets. Turning to silicon-based alloys during the quarter, the average selling price increased by 9.9% to $1,830 per metric ton, up from $1,665 per metric ton in the first quarter. During the quarter, we realized a 5.9% increase in sales volumes. Sales volumes of silicon-based alloys were approximately 65,200 metric tons in Q2, about 4,200 tons higher than the prior quarter. Our silicon-based alloys are going into the steel market, which has shown strong demand in the first half of the year. Most of the quarterly improvement in this part of our product portfolio was driven by the ferrosilicon business, which had a strong pickup in volume as well as pricing during the quarter. EBITDA for our silicon-based alloys business was positively impacted by prices and volumes but offset by higher costs resulting in adjusted EBITDA of $12.8 million in Q2, up from $10.1 million in Q1. During the quarter, there was an adverse impact of approximately $7 million from higher energy costs in Spain as well as some material inflation. Additionally, with the adding of some capacity in France in line with our ongoing restructuring intent, we had lower fixed cost absorption, which negatively impacted the results by $1.6 million. Turning now to manganese-based alloys, during the quarter, the average selling price increased by 20.5% to $1,414 per metric ton. However, the quarter was adversely impacted by lower shipments, which were down 5.9% relative to the previous quarter. The decrease in volumes was primarily due to management of our operating times in the Spanish plants given the high energy costs. Furthermore, our previously stated plans to restart production in Moraña were also delayed with production commencing only in July. Despite these challenges, EBITDA from this business was up over 50%, contributing $15.7 million in Q2 versus $10 million in the first quarter. The increase in pricing more than offset the cost pressure from energy costs as the spread remained above historical high. I would now like to turn the call to Beatriz to review the financial results in more detail.

Beatriz García-Cos, CFO

Thank you, Marco. Beginning with Slide 11, I will touch on a few specific line items on our income statement. Sales of $418 million during Q2 were 15.8% higher than the $361 million from the prior quarter. This increase in sales was driven by an 11% increase in average realized prices and a 2.8% increase in shipments across our portfolio. During the quarter, our gross margin improved to 36%, up from 31% in the prior quarter. The increase in other operating income by approximately $35 million is due to the accounting treatment related to the CO2 emission rights. This represents the current view of the 2021 free allocated allowance of CO2 rights in Europe. This is partially offset in other operating expenses, resulting in a minimal impact on our P&L. With regards to staff costs, Q2 has returned to a more normalized level as we had some one-off provisions relating to the restructuring in Europe. Operating expenses totaling $93.2 million were higher than the previous quarter, mainly because of the recognition of the 2021 CO2 emissions rights. We have reported EBITDA of $31.9 million in Q2, a significant improvement versus a negative $18.9 million in Q1. When accounting for the one-time cost related to the implementation of the strategic plan, the adjusted EBITDA was positive $34.1 million. Lastly, it is worth reiterating our return to positive net profit of $0.7 million during the quarter. Quarter-over-quarter, we did have a 55% increase in our adjusted EBITDA from $22.1 million in Q1 to $34.1 million in Q2. The improvement in our average realized selling price had the single largest impact, contributing $36.4 million. Additionally, strong demand resulted in increased volumes, contributing an additional $2.7 million. Partially offsetting these factors was the adverse impact on costs by $27.2 million. Approximately half of this impact is attributable to the higher energy rates in Spain, which impacted the quarter by $40 million. Additionally, we have been impacted by the raw material inflation on select inputs. The biggest contributors were manganese ore and coke in Spain, France, and Norway, which accounted for $7.1 million, as well as lower fixed cost absorption in France, which impacted the results by $1.6 million. In addition to this, we had a different mix of products in silica fuel and byproducts, representing a decrease of approximately $2 million compared to the previous quarter. Now turning to Slide 13. At the end of the quarter, our cash and restricted cash balance was $106 million, up from $84 million in Q1. Total available cash increased from $78 million in Q1 to $100 million in Q2. Total assets were approximately $1.4 billion at the end of Q2, an increase of $107 million over the prior balance at year-end due to the allowance of CO2 rights and the capitalization of deferred financing fees. The gross debt at quarter end was $464 million, up from $418 million. During the quarter, we raised $40 million of the $60 million of new super senior secured financing. Additionally, the impact of the interest accrual under the prior senior notes contributed to this. Please note that the additional financing, which closed in July, is not reflected in these Q2 balances. Net debt increased to $358 million, up from $334 million in Q1. Despite an increase in our overall activity, our working capital remained flat quarter-over-quarter. Overall, we continue to manage our working capital as part of the broader strategic plan. During the second quarter, we had a significant increase in our operating cash flow, which improved from $18.3 million in Q1 to $37.8 million. Unlike the prior quarter, this increase in operating cash flow is primarily driven by the improvement in reported EBITDA. While the cash impact from working capital remains relatively flat, cash flow from investing activities was negative $43.5 million, primarily attributable to the CO2 rights. Cash from financing activities contributed $27 million. While we raised $40 million, there was $11 million in debt issuance costs and $2.3 million ascribed for the interest payment relating to the reduced loan. Overall, this quarter marked a return to positive net cash flow, totaling $21.6 million. On July 30, we announced the occurrence of the transaction effective date under the lockup agreement, which marks the completion of the financing process. As part of the transaction, a significant percentage of the prior senior noteholders exchanged into the new senior secured notes, pushing out the maturity from 2022 to 2025. There is a small stub amount of approximately $5 million of the notes, which will need to be repaid in March 2022. Additionally, we received $40 million in aggregate proceeds from the issuance of ordination. Following the equity action, our share count is now approximately 187 million shares. Overall, we feel this is a good outcome for the company and the ongoing support by existing investors, as well as new investors, reinforces the broader confidence in our turnaround plan and execution.

Marco Levi, CEO

Now turning to Slide 17, in terms of our strategic plan, we remain on track to meeting our financial targets set this year. Underlying the various value creation areas are over 450 individual initiatives. Over the project of this size, there are areas where we are surpassing our target for the first half of the year and other areas that are lagging. Overall, on the EBITDA side, we have captured $16.5 million of benefit through specific initiatives, representing 30% of our $55 million target savings for the year, as well as 99% of our $49 million working capital target. It is worth reiterating that the savings are not expected to phase in linear throughout the year. In terms of noteworthy milestones, in Spain and France, discussions are ongoing surrounding the restructuring process, and we are confident that we can conclude negotiations in Q4. We continue to see positive results from new tenders launched during the quarter and conducted product-specific studies. We are also seeing strong contributions from commercial excellence, and as we go back to basics and continue to develop best practices, we will make improvements in operational decisions and optimization of our supply chain. While we have faced delays in monetizing new operational excellence initiatives, our plan is to fully reinitiate key technical matters in Q3. Overall, we are pleased with the transformation of the company, and we remain confident in our team’s ability to deliver on the various targets we have set for the year.

Operator, Operator

Thank you. Our first question comes from Patrick Chatkupt with Rubric Capital. Your line is open.

Patrick Chatkupt, Analyst

Thank you. In the second quarter, how much were the one-time CO2 costs embedded in adjusted EBITDA related to the repurchase of the 2020 credits you previously sold? And given you’ve completed the repurchase of the CO2 credits going forward, should we expect net CO2 cost to be a roughly zero impact to your adjusted EBITDA?

Beatriz García-Cos, CFO

Thank you, Patrick. The accounting impact on our financial statements over the past few quarters has reflected the unique situation related to our prior sales of credits in 2020 and the subsequent repurchase of those credits. In Q2, we had an $8 million charge relating to the mark-to-market impact for CO2 units, which we accrued for in Q1. We will not have any mark-to-market expenses relating to the CO2 going forward since all the CO2 repurchases are completed in Q2.

Patrick Chatkupt, Analyst

Got it. And then could you give any more color on just the silicon metal market dynamics and pricing outlook into the second half and into next year?

Marco Levi, CEO

Yes. The silicon market has been booming in terms of demand since quarter four last year, and we see it continuing into next year. Combined with strong demand, pricing has been extremely robust. Our fixed pricing last year provided benefit, while this year it has penalized us as contracts were set at lower prices. However, we believe next year we will be rewarded as the current price level is much more attractive than our current contract prices.

Operator, Operator

Thank you. And your next question comes from John Rolfe with Crescent Rock Capital. Your line is open.

Unidentified Analyst, Analyst

Yes, my questions actually already been answered. Thank you.

Operator, Operator

Your next question comes from John Segrich with ClearSky. Your line is open.

Unidentified Analyst, Analyst

Yes. Hi guys. Look, there has been a lot of discussion about the sourcing of silicon metal. In particular, the U.S. has banned imports from Hoshine. Most of the major polysilicon producers, Wacker and others, are all buying from Hoshine. Have you started to see much more interest in procuring silicon metal from yourselves, so that they can meet their requirements to be able to bring solar into the United States?

Marco Levi, CEO

At the moment, we are only talking about interest; we don’t have official volume requests. However, there are strong indications that demand in the U.S. will rise next year due to solar demand. We are in contact with major customers in the Western world and one key request is for secured volume for the foreseeable future.

Operator, Operator

Thank you. Our next question comes from Brian DiRubbio with Baird. Your line is open.

Brian DiRubbio, Analyst

Good morning Marco. Good morning Beatriz. A few questions for you, can you just remind us what your CapEx spend is going to be for 2021? And what are you still thinking for 2022?

Marco Levi, CEO

Our CapEx plan for this year is $40 million. We are running the budgeting exercise for 2022, aiming for a level of $75 million per year in combination with the improvement of the company's results.

Brian DiRubbio, Analyst

Okay. And then as it relates to silicon metal, you mentioned that having fixed prices helped you in 2020 and hurt you in 2021. Do you foresee your customers looking to index more going into 2022, given some of the volatility we have been seeing in raw material prices?

Marco Levi, CEO

We have started negotiations for 2022. The focus is on the security of supply. With some customers, we're evaluating different kinds of price mechanisms, but none of these new deals have been closed yet.

Brian DiRubbio, Analyst

Okay. That’s great. How can you help us better understand what percentage of your raw materials or your products represent as a percentage of your customers’ prices? Do you generally see silicon metals matching those price increases seen in their products, or do you expect to get better pricing relative to what their end products have done?

Marco Levi, CEO

We haven't made a direct correlation, but when you look at our downstream businesses, all of them have dramatically improved in terms of results this year. Pricing has been robust across the board due to increased activity.

Brian DiRubbio, Analyst

Okay. That’s helpful. And I missed this while you were speaking before, but could you just repeat what the impact from the shipping delays you had on the manganese-based alloys, how much of that was in terms of volumes and possibly EBITDA?

Marco Levi, CEO

In manganese-based alloys, our volumes were down 5.9% versus the previous quarter. This has been a combined effect of not restarting production in Mo I Rana in Norway and managing our capacity in Spain due to the high energy costs.

Brian DiRubbio, Analyst

Okay. Finally, you mention potential new demand from the solar industry. If that demand materializes, will that require the company to build new capacity either in the U.S. or in Europe?

Marco Levi, CEO

Yes, it requires new capacity. We have assets idled in the United States in Selma, Alabama, and additional capacity at an idled asset in Polokwane, South Africa. In case demand rises, these options will be considered.

Brian DiRubbio, Analyst

With the small remaining piece of the old notes, are you just going to wait for them to mature in March, or does it make sense to call them and get them off the balance sheet now?

Beatriz García-Cos, CFO

That is under discussion, and I can provide more details later. The latest would be about 2022.

Operator, Operator

Our next question comes from Brian Charles with R.W. Pressprich. Your line is open.

Brian Charles, Analyst

Good morning. Thanks for taking my question and congratulations on the quarter. I have a couple of quick questions. First, I think you said 65% of your silicon metal volume is contracted at prices negotiated in 2020 that will roll off by year-end 2021. Will these contracts roll off at the end of 2021, or gradually over the second half of the year?

Marco Levi, CEO

We have 65% of the silicon metal that we trade under contract, which is fixed price for the year. You will see new prices as of January 1, 2022.

Brian Charles, Analyst

Got it. Lastly, in the cash flow summary, you had about $11 million of debt issuance costs. In your recent filings, you estimated about $38 million of related cash and fees associated with the debt extension. Does it mean that about $27 million will be booked in the next quarter?

Beatriz García-Cos, CFO

You are correct. We spent $11 million in Q2, and the remaining will be incurred in Q3, along with some minor parts in Q1 2021 and Q4 2020.

Operator, Operator

Thank you for your questions. Our next question comes from Michael Lam with Janice. Your line is open.

Unidentified Analyst, Analyst

Yes. I wanted to go back to the contract question because in the press release, you say that it’ll roll off in the back half of the year. Does that mean some contracts roll off before year-end?

Marco Levi, CEO

It relates to the fact that when we contracted volumes for 2020, customer expectations were much lower than today. We supply the contracted volume at the agreed fixed price, while new volumes come at market price.

Unidentified Analyst, Analyst

Got it. One final question on the U.S. prices for silicon. How are those dynamics and shortages affecting your supply and potential pricing?

Marco Levi, CEO

For ferrosilicon, about 50% of the volume is contracted on annual index pricing, meaning prices adjust either quarterly or monthly. The market has strong pricing dynamics and our U.S. supply only comes from Bridgeport.

Operator, Operator

Thank you. And that concludes today's conference call. Thank you for participating. You may now disconnect.