Ferroglobe PLC (GSM) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, welcome to the Ferroglobe Fourth Quarter 2016 Earnings Investor Call. At this time, all participants' lines are in listen-only mode to reduce background noise. But later, we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] I would now like to introduce your first speaker for today, Joe Ragan, Chief Financial Officer. You have the floor, sir.

Good morning and thank you for joining the Ferroglobe fourth quarter of calendar year 2016 conference call. I'm going to read a brief statement and then hand the call over to Pedro Larrea. 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 Ferroglobe's most recent SEC filings and the exhibits to those filings, which are available on our webpage, www.ferroglobe.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 will turn the call over to Pedro Larrea, our CEO.

Thank you, Joe. Good morning everyone. Good afternoon here in London. Thank you for joining us on the call today and Happy St. Patrick's Day. Before we go into the details of the quarter, I wanted to provide some context on the current environment and our strategy and priorities for 2017. Market trends continue to improve and we entered this year confident that our market position and strategy will enable us to capture these pricing improvements. We have taken actions to address the challenges we have been facing during 2016 and we are now focused on driving long-term value creation and we also continue to deliver improvements on cost and working capital. We generate increasing positively free cash flow. We look forward to discussing our strategy and results in greater detail in the coming slides. So, on Slide 4, first please note that although the slide heading refers to spot prices, we are actually reporting Ferroglobe's selling prices, so apologies for the title. Net sales were $394 million in the fourth quarter and $1581 million for fiscal year 2016 down sequentially from $365 million in the third quarter and down from $2040 million for the prior year 2015. Our revenues was slightly below our expectations in the fourth quarter due to continued pressure from low price inputs reaching the bottom level or the selling price of silicon metal. We are still able to achieve an increase of more than 8% in revenues versus the third quarter thanks to strong demand in all of our products. Compared to the prior quarter, our selling price for silicon metal decreased 0.7% and we are now seeing the stabilization of prices. The selling price of silicon based alloys increased by 3.3% quarter-over-quarter, a significant volume increase of the lower priced products impacted the average price for silicon based alloys for the fourth quarter. The prices for each individual product did remain fairly stable in the fourth quarter compared to third quarter. These declines were partially offset by an increase in average selling price for manganese alloys of 3.1% versus the third quarter. Overall, fourth quarter 2016 average selling price, across all product lines was down 4.3% from the third quarter of 2016. Again, reflecting the stronger demand increase in the lower priced products such as ferrosilicon and manganese alloys. During the fourth quarter of 2016, we reached the bottom of the market and we have seen meaningful signs of recovery in the past three or four months. In terms of sales volume in tons in the fourth quarter, silicon metal experienced 3.5% increase quarter-over-quarter. Silicon alloys increased by 13.2% quarter-over-quarter and manganese alloys increased by 31.3% quarter-over-quarter reflecting solid recovery and demand. Next Slide please. On this Slide, we are providing you with more detail on the pricing trends that support our view that we are experiencing a solid price recovery in the U.S. and Europe. Overall, market trends continue to move in our favor. First, we have seen a higher price levels in ferrosilicon manganese alloys compared to one year ago. Manganese alloy margins have dramatically improved and more than doubled since September 2016. Additionally, for silicon spot prices have posted increases of more than $200 per ton in both Europe and North America since the third quarter of 2016. Turning to Silicon metal, while we saw a significant price decline in the first half of 2016 and a stabilization in the third and fourth quarters, we are now seeing gradual continued improved in spot prices in the U.S. and Europe. This improvement is supported by recent industry development including increased production cost in some important countries and reduced Chinese exports to Europe due to increased domestic prices and cost. On Slide 6, we turn our focus to what we are seeing today in the market and our outlook for the coming months. As mentioned, we are increasingly optimistic about the pricing outlook for this year. We are already seeing signs of meaningful improvements as spot prices for key products in the U.S. and Europe are gaining momentum. This is driven by a few factors. The market is starting to adjust increased production cost in importing countries due to increased energy cost and exchange rates. Additionally, we are seeing increasingly tight supply conditions across most of our products and geographies supported by a very healthy activity level in all of our end market. So we continue to see strong demand growth in our key end markets due to global trends for silicon metal, the trends driving demand include light weighting of vehicles and increased demand for solar energy. For other products demand is being driven by infrastructure development and increased industrial activity. We are seeing these trends translate into improved prices, well market trends are encouraging, we are continuing to take decisive action to address challenges in our markets. As n example, earlier this month we announced legal action that we are taking to address on fairly priced silicon metal imports in North America and we will discuss in more detail. We also continued to focus on delivering prices beyond current market and index levels and we are taking action in our contract negotiation and achieving prices 10% above index. As you know, we don't comment on our marketing strategies or customer negotiation, but to give you a sense of the quantum, we have entered into sales contract for 2017 that are 15% to 20% above fourth quarter spot prices. Moreover, we continue to be proactive to change our complex structure, removing all discounts for silicon metals, and we are also capitalizing on supply shortage to command higher prices and favoring fixed price contracts with shorter term agreement if necessary. Overall, there is consensus in the market that silicon metal and ferroalloy prices are recovering, they are growth leading market position and business strategy puts a company in a place to capture this market improvement and drive prices higher. Next Slide, now I would like to review with you some recent business updates. Earlier this year, we filed the petition with the U.S. Department of Commerce under U.S. International Trade Commission as well as separate complain with the Canada Borders Services Agency seeking relief from entirely traded low price imports in North America. The petitions with the U.S. Department of Commerce and the U.S. ITC were filed by our Globe's Specialty Metal subsidiary in March 8, 2017 and seek relief from entirely traded silicon metal import from Brazil, Kazakhstan, Norway and Australia. Those petitions outline deliberate practices by producers from these four countries to sell silicon metal at artificially low prices in the U.S. The Canada Border Service agency announced on February 20, the launch of its investigation into whether or not certain silicon metal originating in or exported from Brazil, Kazakhstan, Malaysia, Norway and Thailand being sold at a fair prices in Canada. The different trade authorities will also investigate whether or not subsidies are being granted to certain silicon metal producers who export from these five countries into North America. We are still very early in both of these processes but are optimistic about their outcome and of course favorable decisions in these proceedings will positively impact our profitability. Separately, as we noted in our February trading update, we have entered into a definitive agreement to sell the hydroelectric operation of our non-core energy segment in Spain for an estimated gross cash proceeds of €255 million or approximately $270 million. We continue to work with the relevant governmental authorities in order to obtain the necessary regulatory approvals and are making progress towards the different sanctions. Moving to Slide 8, for the quarter pricing stabilization along with strong demand resulted in an 8% revenue increase from the prior quarter. During the fourth quarter, we delivered adjusted EBITDA of $9.1 million and generated free cash flow of $20.3 million. We generated $75.9 million of free cash flow for the full year and I would like to emphasize how in the lowest part of the cycle, our financial discipline and focus on cash generation has allowed us to generate enough free cash flow to keep our net debt level flat through year 2016. Working capital was improved during the fourth quarter by a total of $54.7 million for a total of $191 million in working capital synergies for the fiscal year 2016. This is well ahead of our original three year projection of $100 million. This permanent working capital improvement results from a focus on improvement in inventory terms and reduction in accounts receivable days outstanding on a global basis. And finally, our balance sheet remained strong. Current net debt at the end of the quarter was $405 million as compared to $430 million at the end of the prior quarter. We ended the year flat versus the end of 2015. We maintain our expectation for synergy attainment of $85 million in an annual basis up from $65 million originally. The company achieved a total of $57 million of savings from synergies for the full year of 2016, on which $72 million in run rate synergies in the fourth quarter. The continued application of these synergy initiatives in 2017 will result in $28 million of incremental savings versus 2016 performance level. These synergies have been captured through a variety of initiatives in the technical purchasing and SG&A areas with more than 20 workstreams with a top five workstreams representing roughly 50% value captured. On Slide 10, now that I have discussed where we are and what we are seeing in the short-term, I would like to touch on where the company is going and how we plan on creating long-term value. As I mentioned, we continue to maintain our strong balance sheet enabling us to pursue both organic and inorganic growth both timely and opportunistic. As we noted in the past, we systematically review our asset portfolio and consider opportunities to improve our footprint and pursue value-enhancing, non-core asset disposals. Our recent example includes our announced sale of hydroelectric operations in Spain. We maintain a tight cost controls, which puts the company in the optimal position for our price recovery and finally we have multiple revenue in both levers to pull to create value given our product and geographic diversification. With that, let me turn the call over to Joe to go through the financial highlights.

Thank you, Pedro. Let's go to Slide 12. Sales volume was 240,575 metric tons for the fourth quarter, up 14.6% in the third quarter and net sales were $394.4 million, up from $364.7 million in the third quarter. Average selling price across all products was $0.66 per pound, down from $0.69 per pound in the third quarter. For the full year of 2016, sales volume was 911,847 metric tons, down 5.1% from the full year of 2015 and net sales were $1.6 billion, down from $2 billion in the full year of 2015. Average selling price across all products was $0.69 per pound, down from $0.86 per pound in the full year of 2015. For Q4, we posted a net loss of $44.4 million or a loss of $0.23 per share on a fully diluted basis. Excluding tax related adjustments impairment charges and executives severance expense, the company posted an adjusted net loss of $16.9 million or a loss of $0.09 per share on a fully diluted basis. We reported an EBITDA loss of $23.3 million for the fourth quarter due to assets and inventory, impairments and executive severance expense excluding those charges, adjusted EBITDA was $9.1 million. Synergy attainment as well as cost controls help to offset the decline in pricing resulting in a 2.3% adjusted EBITDA margin. The working capital improvement was $54.7 million for Q4 and we generated free cash flow of $20.3 million for the quarter. For the full year of 2016, we posted a net loss of $156.7 million or a loss of $0.79 per share on a fully diluted basis, excluding transaction and due diligence expenses. Impairment charges and executive severance, the company posted an adjusted net loss of $40.6 million or a loss of $0.24 per share on a fully diluted basis. We reported an EBITDA loss of $51.9 million for the year of 2016 due to assets and inventory impairment and executive severance expense. Excluding those charges, adjusted EBITDA was $72.9 million. The working capital improvement was $191.2 million for the year and we generated free cash flow of $75.9 million for the full year of 2016. Now we will go to Slide 13, this slide illustrates the trends we are seeing in terms of quarterly volumes shift on a sequential basis. As you can see, we experienced higher volumes in silicon metal and our alloys businesses reflecting strong end market demand in both Europe and North America. Next Slide. As you may have seen, we completed an offering of $350 million of five year no cost to senior notes due in 2022 with the coupon of 9.375%. As we noted at the time of the transaction, the proceeds from the offering of the notes were used to primarily repay certain existing indebtedness. We also amended our revolving credit facility allowing for up to $200 million globally of borrowing. The amended revolving credit facility is higher than 2018. These two transactions are now completed the financial integration of the FerroAtlántica and the Globe Specialty Metals balance sheet improving the efficiency of the capital structure and consolidating the total number of credit facilities. We'll continue to optimize the debt structure going forward to allow maximum flexibility during the recovery of the business. Slide 15. As we discussed in the past, we are focused on lowering our cost base while aggressively seeking opportunities to drive incremental revenue as well as the velocity of working capital allowing us to generate enhanced free cash flow and maintain a strong balance sheet. We ended the fourth quarter with a net debt of $404.6 million down from $430 million at the end of the third quarter. Now, I'll turn the call back to Pedro.

Thanks Joe. In closing, Ferroglobe has a unique strong market position and we are already taking off in our growth trajectory. After one year as a combined company, we have integrated the organization, capital synergies beyond projection, strengthen our commercial strategy and successfully restructure our balance sheet putting us in the optimal position for a market recovery. With that, I'd like to open the call up for questions.

[Operator Instructions] We'll be taking our first question from the line of Vincent Anderson from Stifel. Your line is open.

Good morning. I was hoping you could discuss the commercialization strategy in the quarter around specifically the manganese alloys business, just what was the reason for such a large step up in tons when at the time your margins were lagging, where you're seeing in the spot market?

Thank you, Vincent. The manganese alloys business did have a significant jump in fourth and you are referring to fourth quarter versus third quarter. This is typically when you see such a jump had to do with specific shipments that argue at the end of one quarter and just a slip into the following quarter. And also that third quarter in Europe is typically also slightly lower activity quarter because of summer months in the steel consuming facilities. So nothing really very specific in terms of the change in strategy in the manganese alloys business. And of course, also the fact that little by little through the second half of the year and suddenly as we walk into the first part of this year is just increasing demand and increasing activity at steel mills that is just driving our augment.

Okay, thanks. And then if I could follow-up on, it looks like the strike of momentum concluded in the middle of February, are you maintaining your 1Q 2017 sales guidance and kind of and side to that. Are those loss sales due to the strike something that can be recuperated over the course of the year or is that basically forgone at this point?

Well, first of course as our customer consumes also existing stock and so on, we don't think that the restarting in mid February is going to have an effect in volumes in Q1, so really I mean I would say that situation is going to affect the entire quarter. And going forward we will be suddenly expect that they will get back to their usual consumption and in business as usual. Now the other point is that now we don't have hard evidence, but I think there is some evidence that part of the volume that was lost by this customer was also picked up with some other customers. So there is a -- I'd say a Q1 2017 that is slightly above what we expected, but nothing dramatic.

Great, thanks. If I could ask one quick modeling question, I'll let some other people have chat.

Go ahead.

With the new debt issued on the U.S. income, are you at a point or you could give us kind of a tax rate to model with in 2017?

Yes. I think 25% at the moment so it takes a little while for all the tax benefits to role through.

Okay. Thank you so much.

Thank you. Our next question comes from the line of Martin Englert from Jefferies. Your line is open.

Hi, good afternoon.

Hi, Martin, how are you?

Hi, Martin.

Any estimate on how much the gross profits were adversely impacted due to the elevated input in production cost in the fourth quarter there?

I'm not very sure I understood the question, sorry about that Martin, could you rephrase or repeat?

Sure. Yes, I assume that there was probably some inventory in selling price cost mismatch in the quarter as gross margin step-down quite a bit quarter-on-quarter. So as I just wanted to get it done if you normalize that out if gross margins would have been on par with like what we saw in 2Q and 3Q.

Yes. And Q4 did have some impact in gross margins mainly in manganese alloys, if you go to the time lag between the evolution of alloy prices and ore prices, so there was an erosion of margin in that side of the business. And some seasonal increase in energy prices in Spain, but those are -- none of those are structural, none of those are permanent, Q1 we are going to see in the case of manganese alloys exactly the opposite, which is a very, very significant increase in gross margin.

Okay. For 1Q, would you think overall gross margins would be on par with 2Q and 3Q 2016 or above that?

Yes. I mean, there is no reason why they shouldn't be I would say in par with what is typically our gross margin.

Okay. And then on the trade cases, any specific companies within the countries that you're targeting for duties excluded from this?

We can give no details on the cases and how they are structured, but typically the trade outflows within the case against the country they would open the case against all the producers in that country and then it's really the -- how far is it, I need to look at specific companies in that country.

Okay. And then, one more just to make sure, so in your trading update in early February there you provided some guidance on 1Q expectations for volume and some other metrics there, does everything still stand as it was before outside of your comments on the silicon metal demand due to the one consumer where they strike under there?

Volumes are pretty much inline with what our guidance in the previous trade updates, nothing very significant different from that.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Ian Zaffino from Oppenheimer. Your line is open.

Hi, great, thank you. Pedro, you made the comment about it, I think it was supply either tightening of supply declining, can you give us maybe a little bit of color on what that meant maybe what countries you might be seeing that out or what producers are at least trying to any kind of meat on the bones you could give us? That would be helpful. Thanks.

Ian, well, really it is pretty much across all products that I'd say very significantly in the past couple of months we're seeing that happening with both for silicon and manganese alloys. Manganese alloys of course we are stronger on the European side of the Atlantic, silicon on both sides. And on those products, we are seeing a number of situations in which customers come to us, they ask for volume, we give them a price they say this is too high, we'll never take it and couple of days later they comeback and say well, I'll take it. And we are getting this feeling that there is a little alternative, little supply and we're being able to push prices up so I would say mainly on the steel sector we see a strong activity, strong demand. For Q1, we were basically sold out before the year started and now for Q2, we're just making sure that situation allows us to push prices up. So mainly on that side which is steel demand I think that is very, very significant. In the case of silicon metal, I'd say it's more of a gradual feeling, it's just little by little but again the different industries both aluminum, chemical, suddenly polysilicon are just increasing demand and that is tightening supply. So it's not so much tightening of supply on the supply side, but on the demand meaning the growth -- the demand growth rate is such that it is allowing for certain tightening in the supply demand balance.

Okay, thank you. And then also, I know this year you really made a move towards quarterly contracts, are you now negotiating for I guess your April 1st or those done and also this moves quarterly, help us maybe understand what the impact has been to maybe your selling price or the direction of your selling price and now how is being received and just kind of give us an idea effectively about quarterly prices and how we should expect see that kind of flow through it and how is going to hit the numbers and the nature of negotiation this far as when you might complete those, when you might start that? Thanks.

Yes. And of course that was mainly to silicon metal right, I mean the other…

Right.

The other products in one way or another are either negotiated on pretty much a short-term basis or on index kind of contracts. But, if we talk about silicon metal, first, we have always said that yes for 2017, there has been more of shorter than a contract, but I wouldn't say it necessarily a large majority. So we still have some early fixed prices and that would be -- I would say probably somewhere around 30% of our total sales, then we have another around third of our sales that is actually indexed and on the different this year as we have of course what way to a many kind of discount, but still index contracts and there is somewhere around another third that is -- those are quarterly contracts. And right now, yes, we are negotiating already of course our contracts for Q2 and prices are definitely going up versus prices in Q1. As we -- I think I've mentioned before Q1 versus Q4 2016, we are not necessarily going to experience a price increase because of legacy higher priced contracts in 2016. So again, Q1 versus Q4 should be flattish, I would say and Q2 suddenly prices going up.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Michael Gambardella from JPMorgan. Your line is open.

Yes, hello, Pedro and hello, Joe.

Hi, Mike.

Hi, Mike.

I have a question on just going back to the silicon metal business, maybe looking at it a different way in terms of your pricing exposure going forward, obviously fuel pricing is going up and you mentioned you're going to get kind of flattish prices in the first quarter, but second quarter pricing [indiscernible]. If we look at say second half from the end of June on what percent of your silicon metal book still have prices to be negotiated, just trying to get a feel for the back half of the year, how much exposure that have in the silicon metal book you see pricing go up?

Thank you, Michael. And I think as I mentioned before if you combine what our -- again with the one way or another index contracts and what is shorter than contracts somewhere around nearly two-thirds of our total volume in silicon metal is exposed to what we are seeing as increased prices going forward through the year. The proportion is slightly higher in Europe, slightly lower in the U.S., but nothing really very significant. And in the rest of the product as I said most of them are pretty much linked to the evolution of spot prices and maybe it's worth noting that spot prices right now are already at levels that are above our prices we were having in 2015, so prices and margins I would say are already at levels above 2015 levels.

Okay. And second question, in terms of the cash proceeds from the hydro deal, how would you break that down in terms of how you're going to use that cash?

Yes, it's correct. So Mike, this is Joe. We're going to pay down the existing net debt so there is really nothing other than that, that will occur of course subsequent to the hydro sale, we take our liquidity from where it is today which is about 200 million to about 400 million. So that's -- just to improve our liquidity by paying down debt.

And is there any update on the solar project?

Well, the solar project is still I'd say on the drawing board, it is -- as I think what I have described in previous occasions, we already have the process we have the product, we know the product works both technically and commercially and we are right now designing what would be the first factory where the size of around 3,000 tons per year of solar great silicon. We have not made the decision -- the investment decision yet and of course it is going to be also linked to our balance sheet situation and our ability to invest.

Okay. And finally, on the trade cases, just give us an access of the schedule of the North America, U.S., and the Canadian cases and is there anything going on in Europe on trade cases?

Well, the schedule we will start having some feedback from authorities in North America sometime probably around end of Q2 or beginning of Q3, when they would typically go through [indiscernible], but preliminary decisions or measures. And then, the final solution should be somewhere towards more towards the end of Q3, beginning of Q4. So that is of course it depends a lot on the process and the evidence that the authorities have. That would be a process that is typically around six to seven months in total, until we have the final ruling, but halfway through that ruling there are preliminary decisions being made. In Europe, we are analyzing all the possibilities, all the alternatives and once we made decisions or we file petitions of course will…

Mike, this is Joe. I just want to add to that as Pedro said they could do a preliminary ruling to some of it, they could also go retroactive mainly so the period where the duties could apply, could start as early as next month.

Okay. Thanks.

Thank you. Our next question comes from the line of Ian Corydon from B. Riley & Co. Your line is open.

Thank you. Just a follow-up on those, so in trade cases like this that have been pursued by other industries, would you typically see any reaction in terms of changing business practices from the company that might be affected by those duties, once you get a preliminary ruling or is it typically happen once there is a final ruling that's in effect.

Well, I think it depends a lot, I mean if the customers, what is the view of the customers, if they see that there could be retroactive decisions or once the preliminary ruling is made if there is a final positive ruling then the duties would apply from the preliminary duties they anyhow. So I think that customers typically could or may take a conservative view in things well due to maybe being applied right now. So I better be more cautious about my purchases from both countries. So, it depends a lot of course what is the view of each customer as the probability of the ruling being positive and the probability of that ruling being retroactive.

And we did see, Ian, I don't know if you recall the Canadian case, they actually did a preliminary ruling and there was pretty much an immediate impact from customer behavior.

That's very helpful. And then in the EU, I understanding that you've filed anything at this point. Can you maybe talk about is there any difference in market conditions there that would make that less likely that you would pursue that versus the U.S. and also what's the difference in the regulatory regime and then how long it might take for a decision in Europe versus the U.S.?

Well, right now, actually the rules are being -- the regulation is being revised although the revision is not yet approved. The timelines are not that different although a bit longer in the European union and that is what is now part of the revision is trying to sort in those periods and then there is some new ones in terms of the way or the dumping duties are calculated in the European union for instance there is what is called the lesser duty will which means that they calculate dumping margins on the one side, but they calculate during our margins separately and they actually take the lower of the two and it is also part of what is being revised or at least amended in the new regulation that is being right now negotiated.

Got it. I appreciate all that detail. Thank you.

Thank you.

Ladies and gentlemen, this now concludes today's question-and-answer session. I'd now like to turn the call back over to Pedro for closing remarks.

Well, thank you. Thank you very much everyone as I was saying I think after one year there has been a year of integration -- it was an organizational integration with our commercial integration used strategy in that front. I think we were also successfully in completing the financial restructuring and now we are just very optimistic about the market outlook and putting ourselves in the optimal position for benefiting from that market recovery. Again, thank you very much and Happy St. Patrick's.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now disconnect at this time. Everyone have a wonderful day.