Ferroglobe PLC (GSM) Q4 2015 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Globe Specialty Metals Fourth Quarter and Full Year Fiscal Year 2015 Earnings Results Conference Call. This call is being recorded. With us today from the company is Alan Kestenbaum, Executive Chairman; Jeff Bradley, Chief Executive Officer; and Joe Ragan, Chief Financial Officer. At this time, I’d like to turn the call over to Mr. Ragan. Please go ahead, sir.

Good morning and thank you for joining the Globe Specialty Metals fourth quarter fiscal year 2015 conference call. I'm going to read a brief statement and then hand the call over to our CEO, Jeff Bradley. Statements made by management during this conference call that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Globe's most recent SEC filings and the exhibits to those filings, which are available on our web page, www.glbsm.com. In addition, this discussion includes EBITDA, adjusted EBITDA and adjusted diluted earnings per share, which are non-GAAP measures. Reconciliations of these non-GAAP measures may be found in our most recent SEC filings. Now, I would turn the call over to Jeff Bradley our CEO.

Good morning and thank you for joining us on the call this morning. As I’m sure many of you know this is my last quarterly call with Globe, I’ve made a decision to leave the company for personal reasons and this my last week. My seven plus years with the company have been the best years of my carrier. I’ve developed great relationships with so many people including many of you on this call. I’m very proud of all that Alan and I and the entire Globe team have done to position Globe for continued growth. Financially, the company is stronger today than any time in the past. We will experience tremendous growth and opportunities in the future under the leadership of Alan. After my comments on the quarter, Joe is going to review the financials, and then Alan will give an update on the progress with the proposed merger with FerroAtlantica. For Q4, adjusted EBITDA was $33 million and adjusted EBITDA margin was 16.3%. Shipments of 72,151 tons and net sales of $202 million increased 4% over the third quarter. Consistent with our focus on cash generation and the emphasis on velocity of working capital, we are really pleased with the cash we were able to generate in the quarter of $59 million, which moves us to a position of $20 million in net cash. Global demand for silicons, our largest silicon metal end market continued to show improvement over last year driven by construction and automotive. The US automotive industry continues to improve. The seasonally adjusted annual rate for auto sales through July was 17.5 million units, the best July in 10 years. And as I think many of you know automotive is a major end market for our silicon metal and silicon alloys. At solar, semiconductor demand continues to grow. We have secured and shipped additional new silicon metal business for polysilicon customers that service those industries. The near and long term outlook for solar demand globally remains strong as installations are projected to continue increasing at double-digit rates. I’m pleased to report that we have started to secure silicon metal business for next year at prices higher than the reported spot market and higher than our current average selling price. And silicon alloy business has continued to produce very good results in the quarter. While spot prices for standard rates of ferrosilicon has softened, we continue to have a very large percentage of our business in the specialty grades. We expect this business to remain strong through the balance of the year and into next year. We idled our South African facility in the quarter because of high winter power rates. We are analyzing the market for the standard grade ferrosilicon we produce at this facility to determine when we will restart the plant. Alden coal continued to perform well and we continue to increase our reserves, and we remain very positive on the results we’re seeing out of our Yonvey electric facility in China in terms of productivity, quality, and cost. All in all, we are encouraged by the positive signs we are seeing for our business and look forward to the merger with FerroAtlantica closing in the fourth quarter. Our Board of Directors authorized the payment of a quarterly dividend of $0.08 per share payable on September 24 to shareholders of record at the close of business on September 13. Jeff?

Thank you, Jeff. I will start with slide one. Adjusted EBITDA for Q4 fiscal 2015 was $33 million. Adjusted EBITDA Q4 margin increased by 1% to 16%. Sales volume was 72,151 metric tons for the quarter and net sales of $202 million, which was a 4% increase sequentially. Cash generated through operations was $59 million in the fourth quarter as the net debt position moved to a cash position of $19.9 million as of June 30, 2015. Adjusted diluted earnings per share attributable to GSM for fiscal 2015 were $0.76, up 43% from the prior year. Adjusted EBITDA and adjusted EBITDA margin for fiscal 2015 increased 30% and 22% respectively from last year with adjusted EBITDA going from $110.3 million to $143 million, and adjusted EBITDA margin going from 15% to 18%. Sales volume and net sales for fiscal 2015 were up 3% and 6% respectively, compared to fiscal 2014. The Board of Directors authorized a quarterly dividend of $0.08 per share to be paid on September 24, 2015, to shareholders of record as of September 13, 2015, and the merger with FerroAtlantica remains on track to complete by year-end. Next slide. Sales were up 4% sequentially, but were down 1.6% from the prior year. Gross margin of 21% increased by 280 basis points year-over-year and increased by 10 basis points sequentially. This performance resulted in adjusted EBITDA of $33 million being flat year-over-year and decreasing 13% sequentially. Also adjusted operating income of $25.5 million improved 16% year-over-year and 3% sequentially, illustrating the strong overall operating performance of the company during the quarter. Next slide. The larger special items that occurred during the quarter were transaction and due diligence expenses, expenses incurred from idling our Siltech plant, and a business interruption claim. Approximately $8.2 million was spent for transaction costs related to the merger. $3.4 million was spent on idling Siltech plant and $2.9 million for the business interruption claim. The result of these adjustments and those that are on the slide was an adjusted EBITDA for the quarter of $33 million, down 13% sequentially. Next slide. On a reported basis, sales were higher than the third quarter of fiscal 2015. However, the higher cost of goods sold offset this positive sales variance and our EBITDA results, which were down 32% sequentially. When compared to the prior year, EBITDA was down 34%. Next slide. Looking at adjusted EBITDA further on the bridge you can see that this was also affected by competitive pricing on pricing and shipments from imports, higher operating costs, and higher SG&A expenses during the quarter. Next slide. As mentioned earlier, our net debt position changed to a net cash position of $19.9 million, driven by our working capital initiative, increasing cash by $3.3 million. We are projecting strong cash generation for the balance of the fiscal year. With that, I will turn the call over to Alan Kestenbaum, our Executive Chairman.

Thanks Joe and good morning everyone. First, I would like to take this opportunity to thank Jeff Bradley who will be leaving us at the end of the month. Jeff has been instrumental over the past seven plus years in working with me to do build this unusually interesting company. Jeff leads a legacy of hard work and perseverance and has made a mark on this company that will last well into the future. I know I speak for everyone when I wish you continued success in your career. As previously announced, I would be assuming the role of CEO in addition to my responsibilities as executive chairman. At the close of the proposed transaction with FerroAtlantica, Pedro Larrea current FerroAtlantica’s CEO will assume the role of CEO, and I will continue as Executive Chairman. Jeff has held build Globe into the world leading business it is today. Our results are testament to the strength of our flexible business model, allowing us to adapt quickly to changing market conditions and achieve strong sales, significant cash generation, and further improved margins. We are optimally placed to benefit from our proposed business combination with FerroAtlantica, which will create a new globally diversified leader in silicon and specialty metals. As we have said, the transaction with FerroAtlantica is about bringing together two industry leaders with highly complementary business profiles, management style, and growth strategies. Both of these companies have been built and run by entrepreneurs with a track record of disciplined acquisitions to create vertically integrated businesses with a strong emphasis on low cost production. It has been encouraging to see these cultural similarities manifested and the excellent working relationship developing between the parties. Further, the transaction will lead the company with an exceptionally strong balance sheet to enable it to go even faster as we continue our executive decade-long strategy of buying companies and assets opportunistically. Recent developments in the equity markets make these opportunities even more pronounced and I cannot think of a company better position to take advantage of this environment. As we approach the shareholder vote, I will provide a few updates. First you will have seen that we made our F4, which discusses the proposed merger in much more greater detail and includes a proxy card for voting purposes. Next, as we said in February, the merger is subject to customary closing conditions, including the aforementioned Globe shareholder approval, and receipt of regulatory approvals in the U.S. and other jurisdictions. To date, we have been cleared by the anti-trust authorities in Germany and South Africa and have been told by the Spanish authorities that no filing would be required. We are now working with the DOJ in the U.S. in the context of the Hart-Scott-Rodino merger review process, and we still expect the closing of the transaction in Q4 2015. Finally, to the extent appropriate at this stage, the management teams of both companies are working on integration planning to ensure that we are ready on day one to begin achieving our synergy targets following close. With that, I'd like to turn the call over to the operator who will open up the line for questions.

[Operator Instructions] Our first question comes from Ian Zaffino with Oppenheimer.

Hi, this is actually Rick Faulkner for Ian. I was hoping you could just quickly go over the business interruption claim, what’s behind it and how big of a concern it is? Thanks.

Good morning, Rick. It’s Joe Ragan. We had some issues with one of our suppliers related to electrodes, and we actually have made a claim that isn’t really disputed, so we are just working through that process now. That represents lost production, lost tonnage during the quarter.

Okay. So you think you’re going to get that sorted out going forward?

Yes.

Great. Thanks.

Our next question comes from Luke Folta with Jefferies.

Hi, good morning.

Good morning.

I guess a couple of things. First question, Joe, I think you mentioned this, I didn’t hear exactly but when you look at operating costs sequentially, what drove the increase?

We just had some outage costs that were a little bit higher in the prior quarter as a quarter-over-quarter bridge. So we had additional outages as well as some extended outages just on some more. Once you get in there, sometimes it takes a little bit longer. So it was furnace operations and tons produced.

Okay. And then I’m trying to get a sense of what effective capacity numbers would be because you had the furnace conversion to silicon from silicon alloy to silicon metal, and I guess I haven’t – it looks like the full impact of that might not be in the numbers yet. Can you just give us a sense of what your current capacity is for silicon metal and like what the utilization rate is just so we can kind of model it going forward?

Yes. Luke, currently, we are on a run rate of approximately 100,000 plus tons, and at any given time during the year, this year and past years, it’s not unusual for us to flip furnaces back and forth. One of the unique things about our company what we’ve been able to do is come up with a process that’s very efficient and low cost to toggle these furnaces back and forth as the market might change, demand might change. So, really it’s a moving number. But to answer your question today, we are in the neighborhood of 100,000 tons.

Okay. Alright. And then I saw the filings on FerroAtlantica first half numbers, it looks like relative to what the forecast had been for the year, if I just annualize the first half, it looks like the sales trend on a dollars basis is roughly in line. The EBITDA, I think it looks like about $100 million in U.S. dollar terms. I think the forecast was for almost $320 million for the year. Just any sense of what’s – I mean it seems like sales are in line and margins are coming in weaker. So can you give us some sense of what’s going on there to the extent you can. And is there anything that you would see in the second half that could drive, prices are on the way down at this point that could drive higher second half results versus the first half?

Luke, this is Joe. Just on the FerroAtlantica performance, we really have to direct you to FerroAtlantica. At this point, we really can’t answer questions about their business.

Okay.

But, however, the overall pricing environment as you’ve seen where the spot prices are today and directionally it’s come down, so we haven’t disclosed what our projection price is where you can imagine what they were when we did them essentially in January, it’s lower than it is today. So, we don’t update our projections in the F4, but the pricing environment has shifted since we originally did that and I think you are aware of what the $5 million across our products that have $0.01 reduction in price, and you’ve seen what that is on a consolidated basis as well on our presentation. So we just have to work with those numbers.

Okay. Alright and I guess lastly just thinking through – there has been some significant moves in currencies in the lot of the regions that are key producing regions for silicon metal and alloys. In terms of Brazil, they have had a significant cost disadvantage relative to power cost going up a lot this year, and I guess this sounds like it will apply to South Africa as well. Their currency though has significantly depreciated 50% or so relative to the U.S. dollar and South Africa has also seen pretty substantial depreciation. So just taking to the interaction between an improved local cost structure given the currency versus the higher power costs, have you seen any I know there is some capacity offline in Brazil, have you seen any announcements or are you starting to see an increased demand of supply coming out of there as a result of the currency benefit. And then as it relates to South Africa, I would have thought that power costs are higher but you would be getting a nice benefit from the depreciation of the currency there and that might help out Siltech a bit, but it sounds like at least for the time being it’s on idle. So I guess any discussion around that would be helpful.

Actually, Luke, we have not seen additional capacity coming out of the market. The currency has helped, the power rates were very high this past quarter as I mentioned, and we – as I said, we continue to analyze the market there. And as I’ve stated on previous calls, we also continue to make progress on the production of specialty grades out of that facility too. So we’ve idled it but we are taking a hard look at the market, at these specialty grades out of that plant and the ultimate future of the facility. It’s a great facility. It’s a very, very good facility.

Okay. I’ll turn it over. Thanks guys.

Our next question comes from Garrett Nelson with BB&T Capital Markets.

Hi, good morning. You said the merger is subject to receipt of regulatory approvals in the U.S. and other jurisdictions. What are the other jurisdictions? I guess my understanding was that the DOJ was the only remaining approval that’s needed at this point.

Yes, your understanding is correct. The other jurisdictions were Germany and South Africa that have both cleared.

Okay. And then commodity markets have taken a turn for the worst over the last several months. Assuming that deal goes through as planned, I’m wondering how the current price environment, does that change your priorities post merger. For example, will it be more of an emphasis debt pay down or cost cutting in a lower price environment.

Well, let me say a couple of things about the pricing – general commodity environment. First of all, when we announced the deal, the deal really is about – was always about cost synergies. It was really the main emphasis and there was some other financial synergies and working capital release. All those things are always appropriate, we are always looking to cut costs and one of the things that make this deal even more attractive is we’ve been talking about the relative cost structure whether it’s in our plants in South Africa or in Europe, that has tremendously improved since initially even looking at this transaction. So when you take that into account and you take into account the synergies that we’ve announced and obviously as we’ve done some work here, we’ve been able to put a little bit more granularity around what we will be doing. This is really been two parts, one, cost reduction overall for our footprint and internationalizing our footprint that we are less subject to the movements of currency impact, but also taking out the synergies that exists between these companies. And the other thing is, you mentioned about debt pay down. We have that opportunity, we’ve talked about some working capital release and there were other opportunities that will be very, very low in this company. And when you look at our business plan, we’ve got a very, very unique business plan. Most companies load up and debt at the wrong time, we get hit with stuck with debt loads that they cannot manage through, and they get to a volatile time. Coming to work every day is a nightmare. For us, it’s exactly the opposite. As we look at this deal and we look at the pro forma debt levels and our expectation as the reduction of debt levels. And you also look at the economic cycles, the last one being 2004 and 2005, and then the ones pretty much from 2009 through early 2012, if you look at what Globe has done during those periods, those were our most important acquisitions at that time. We acquired the GMI facility, the alloy facility in the 2004, 2005 period and in the 2009 through 2012 we acquired the Core Metals and MPM facility, the Alden facility and Becancour. Those are our biggest growth console company when everybody else were settled with debt and forced to run away from growth opportunities. As we look at this up at the situation right now that we are in, we see what we saw in 2004 and 2005, 2009 through 2011 and we see the kind of opportunities that make us uniquely positioned. So when you ask about the pro forma balance sheet, we are very, very focused on cost reduction which will be achieved through currency diversification, through implementation synergies and we will also have the balance sheet I cannot think of another company in the entire industry, of course all sectors of this industry that will be have the size and the scale and the financial flexibility that we will have to not only execute on this merger once we get it approved, but also position the company and actually the timing is perfect for execution, a significant growth ahead of us. So we come into work extremely excited as we see the current environment and we see the opportunities just generating by themselves all around us.

Garrett, let me just add one thing to what Alan said. In terms of the cost reduction and the synergies, we have assembled operating teams on both sides and the FerroAtlantica teams have been to all of our facilities and our operating teams have been to their plants. And I can tell you as we sit here today after all those plants have been completed, we along with the operating people are even more excited about the cost reduction opportunities and the synergies after going to the plants.

Okay. Really appreciate that detailed responses. I concord with pretty much everything you said and realize the benefits of this combination. Joe, maybe some color on the positive working capital impacts which drove the big increase in cash during the quarter. It looks like Globe might have posted its highest quarterly operating cash flow ever during the quarter. Will some of those favorable working capital impacts reverse in future quarters?

No, we are actually deriving that number harder and so it’s not a one-time impact, the accounts receivable and accounts payable improvements will maintain. So those were the biggest moves in working capital. Now, we are working on is driving inventory. So, no, we are not going to see a reversal of that. We are expecting an improvement in additional cash generation.

And just to add a little bit to that, this is a cultural aspect of this company that we have viewed everybody with across the company from purchasing, finance, sales everything. We have achieved remarkable statistics on inventory. Our overall inventory almost 6 turns and finished goods inventory 14 turns, very, very rare sign of company with the margins that we earned on a fairly regular basis with a rapid type of inventory turnover and we see more upside to this and we’re very, very focused on improving even beyond where we are right now on the cash generation side from optimization of our assets and looking for a turn on invested capital.

Alright. Good luck as you move towards closing and best of luck Jeff also. I’ve really enjoyed working with you over the past few years and appreciate your support. Thanks.

Thank you, Garrett.

[Operator Instructions] Our next question comes from Paul Forward with Stifel.

Thanks and also I’d like to follow-up that up and say, thanks, Jeff and good luck on your future plans.

Thanks.

Looking at the silicon metal shipments in the quarter, just I think Luke had asked the question of what the capacity is there. You were a little under 40,000 tons shipped in the quarter which I think, it sounds like it might have been explained a little bit by, you talked about the - been able to switch back and forth between the alloys and metal, if you look at over the next few quarters, would you anticipate looking at the current demand situation for silicon metal and your current make up in terms of the number of furnaces you are operating in metal versus alloys, can you get up above, would you anticipate being about this 40,000 ton per quarter shipment rate in metals or would it be more in-line with what you had done in the latest quarter just under 40.

Yes, we would have the opportunity and let me just correct one thing that I said, I was specifically with the hundred thousand tons talking about the direct sales business and not including the 49% Dow Corning business out of both the plant. If you look at the total capacity, including the 49% output out of Becancour and alloy that goes to Dow Corning, we are looking north of 160,000 tons as a company, but I typically peal that out. But the answer to your question is, yes, we would have additional capacity. We’re also doing some things. We’ve got a couple of projects planned for the fourth quarter that we also think is in the company that we also think will help us achieve additional capacity out of the furnaces.

Great. And thinking about Siltech, you had mentioned that the power costs are high and that you are evaluating the situation, is there any, I know that you’ve got an approval from South Africa for the merger, I was just wondering under the conditions to that merger approval how long can you keep as Siltech idled?

We are not precluded from keeping it idle under the conditions with the approval. So, we’re really, we just need to make an economic decision.

And how, you’d mentioned that you have got high power cost there, how much will they have to improve in order to kind of consider getting that, getting that facility back up and online, is it, or are you way out of the money at this point or is it reasonably close.

The power concept that we have [indiscernible] we are not just advantaged to anybody else operating in South Africa and it’s a race between the power price increase and the currency devaluation. So by the day, they get more attractive, but we consider a lot of things here, we consider also maintaining our margin profile, we consider working capital investment and focused on, like a company should do and make investment, how do we take our assets, our capital and optimize returns. And so we not only look at power rates, we also look at the end markets, we look at profitability and where we can deploy this capital to better use. So, on power rate side we are in the same boat as everybody else and they are decreasing by the day due to the currency adjustments.

Great. I guess thinking about the merger, have you had the chance to test any of the Globe coal at FerroAtlantica facilities yet, and just wondering if you could talk about assuming that those are - that those tests come in favorably, how quickly can you ramp production to serve the FerroAtlantica plants?

Yes. We would put further news generally about synergy type activities at a later date, we are not in a position to talk about them now generally.

Okay. And then maybe lastly, I think Joe you talked a little bit about some of the quarter-on-quarter increase in cost as you look to the next fiscal year, will we look at that as being any of the cost increases that we saw in a unit basis in the latest quarter, how reversible do you see those costs as being?

They are reversible, certainly the one timer is related to the electrodes won’t repeat, we don’t expect and the others were just extended maintenance outages which we think will reverse as well.

Okay. Thanks very much.

Our next question comes from Ian Corydon with B. Riley & Co.

Thank you. It sounds like you started to book silicon metal contracts for next year, a little bit earlier than in past years, is that the case and then can you just talk about what your customers are asking for in terms of fixed price versus index contracts?

Hi we are really not in a position now to discuss the details. There have been instances in past years I think probably the year before last, we had started booking some in the summer time, so, but I really don’t want to give the details on pricing, what’s indexed and what’s firm. I think the most important thing that I mentioned is not only did we book business about the index; we booked it above our average price.

Got it, thank you.

And I’m not showing any further questions at this time. I’d like to turn the call back over to our host.

Thank you very much everybody. We really appreciate your interest and as I said when I started out, the company is in fantastic shape, the future for Globe is going to be incredible and I’m going to sit by the sidelines and just watch Alan and Joe lead this company. Thank you very much.

Ladies and gentlemen that concludes today’s presentation. You may now disconnect and have a wonderful day.