Ferroglobe PLC (GSM) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Ferroglobe’s Third Quarter 2017 Earnings Investor Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call maybe recorded. I would now like to turn the conference to the CFO, Joe Ragan. You may begin.

Good morning. And thank you for joining the Ferroglobe third quarter of calendar year 2017 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 and adjusted EBITDA, and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliations of these non-IFRS 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 and good morning, everyone and thank you for joining us on the call today. Before we go into the details of the quarter, let me provide some context into the current environment on our strategy as we move forward, towards the end of 2017 and beyond. So, if we turn to slide four, Ferroglobe delivered a strong quarter with results that exceeded expectations, we posted a quarterly net profit on an adjusted basis and delivered a significant increase in both our earnings and EBITDA margin performance. We delivered a 6% increase in revenues, 28% increase in adjusted EBITDA and our EBITDA margin improved by 212 basis points at 12.4% for the third quarter compared to 10.3% for the second quarter of 2017. Our strong performance is driven both by significant improvements in the external environment, as well as actions taken by Ferroglobe during the past period. In the external environment, and mainly for silicon metal improved prices and volumes are driven mainly by the market impact of the ongoing trade cases in the United States. In silicon-based and manganese-based alloys, we continued to see a strengthening of demand across end markets, and an improved supply demand balance in the different geographies. Combined, these trends have resulted in a sustained price recovery and continued stabilization of shipments and volumes although with different pace and timing depending on products and geographies. At the same time, actions taken in this and prior quarters, ensure we were able to fully capture the benefits of these trends, our commercial strategy then to enhance our profitability. So, in addition to general price recovery, we continued to focus on delivering contracts above spot and index prices. This strategy has been performing well for us, and together with the market recovery, has allowed for the weighted average of our realized prices in the third quarter of 2017 to be up 3.6% compared to the second quarter from $0.79 per pound in the second quarter to $0.82 in the third quarter. The average selling price for silicon metal was up 5.4% from the second quarter. Similarly, the average selling price for silicon-based and manganese-based alloys increased 3.7% and 3.1% respectively from the second quarter. I would be analyzing the details of this price evolution product-by-product in a few minutes. As a result, we are now optimizing our production facilities and running close to full capacity utilization. In North America, the Selma facility in Alabama is now running at full capacity after a partial restart in August. The remainder of our plants across Europe and North America are running at full speed. And the only exceptions are Argentina at 50% utilization and South Africa at around 65% utilization where these lower utilization rates are due primarily to unfavorable local conditions. But we are planning to restart full operations in the near future. In what we call the KTM project we have begun the next phase of our ongoing review of our technical performance to make sure we are capturing best practices across all our plants. Next slide. As we had expected during the downturn in 2016, 2017 has represented a continued and sustained recovery quarter-after-quarter. Once again, we believe that the recovery trend is a result of a very disciplined approach to respond to the market dynamics by, on the on hand, ensuring focused commercial strategy and, on the other hand, adopting a flexible industrial operation, idling, loss making or non-performing facilities. Once the recovery is underway we are implementing the same flexibility and working towards full utilization of our plants. This disciplined approach has allowed us to generate positive cash flow even in the worse times of the downturn which is rather exceptional in an industry like ours. Next slide. Before I continue my discussion of the quarter, I would like to take a few minutes to share a brief update on corporate matters. First, I will discuss, in past quarters, we filed a petition earlier this year with the US Department of Commerce and the US International Trade Commission as well as a separate complain with the Canada Border Services Agency, seeking relief from unfairly traded low-priced imports in North America. On November 2, the Canadian International Trade Tribunal determined that there is no injury from dumping and subsidized imports. Ferroglobe is reviewing the CITT statement of reasons to evaluate next steps. On October the US Department of Commerce announced its affirmative preliminary determinations in the antidumping duty investigations of imports of silicon metal from Australia, Brazil and Norway. In addition to the previously issued preliminary determination on August imposing countervailing duties on silicon metal imports from Australia, Brazil and Kazakhstan. Now more than 63% of silicon metal imports into the US are subject to cash deposit requirements. We are confident that the affirmative preliminary determination issued are the first step in issuing a more competitive and fair silicon metal market in the United States and we look forward to receiving a favorable outcome. Final determination for both the countervailing duty and antidumping investigations are due by the first quarter of 2018. On November 21, Ferroglobe announced that it has entered into an agreement for the acquisition of a 100% interest in Glencore's manganese alloys plants in Dunkirk, France and Mo I Rana, Norway. The parties expect the transaction to close in the first quarter of 2018, subject to obtaining certain regulatory approvals in France, Germany and Poland and other customary conditions. The acquisition of the Glencore plants in France and Norway represents a unique opportunity for Ferroglobe to increase its size in the manganese alloys industry becoming one of the world’s largest producers with over 0.5 million tons of sales ferromanganese and silicon manganese. With this transaction, we continue to deliver on our stated commitment to developing our leadership and core products to value enhancing and immediately accretive acquisition. Also as part of our stated strategy going forward, we continue to pursue our ambition to leverage on our proprietary technology and new products development. We have initiated the construction of the first production facility for solar great silicon with our own mythological process. It is limited price 1,400 tons per year factory that will allow to test the validity of our costs expectations and should set the foundation for an exciting possibility of developing the value-added high-end product range. In terms of investment relations Ferroglobe recently hosted, its inaugural Investor Day as part of our ongoing efforts focused on increasing our communication with investors. And shareholders recently approved a new set of our articles of association, which provides or enhance corporate governance. Also, we are pleased that Pedro Larrea has joined our Board of Directors. Next slide. As I referenced earlier, we are continuing to benefit from our diversified product portfolio. Our three main product families are now providing almost equal contributions to EBITDA, which allows us to maximize our exposure to improved prices and ensure a more balanced and diversified business mix. Similarly, to last quarter, our revenue contribution is diversified across our three primary products with silicon metal still the largest contributor at 42% followed by silicon-based alloys at 26% and manganese-based alloys at 21% other products make-up the remaining 11%. Further, these diversified products serve an even more diverse group of end markets with silicon metal used for aluminum, silicones and solar products, while manganese-based alloys are used for steel and silicon-based alloys for different grades of steel and foundry. These three product areas have contributed differently to our revenue growth over the third quarter with silicon metal growing 6% over the prior quarter, while silicon-based alloys declined 2% over the prior quarter. Manganese-based alloys increased as much as 18%, as a result of strong demand from the steel industry in Europe. Next slide. Turning to discuss sequential contributions to sales growth in the third quarter of 2017, sales were $451.6 million, up 6% from the previous quarter. Selling prices for Ferroglobe’s key products continued to improve over the course of the quarter across both the U.S. and Europe. Silicon metal and manganese-based alloys prices and volume improvement were a key driver in the quarter. Silicon metal experience a significant improvement driven by strong demand particularly from North America. Manganese-based alloys volumes increased significantly as a result of strong demand from the steel industry in Europe. The strong improvement in prices together with continued strengthening of demand and improved volumes are deliver quarter-over-quarter growth and increased margins. Next slide. On the next three slides, we will discuss pricing and volume trends, earning contributions and market observations for each of our key products. Turning first to silicon metal, as you can see on the chart, market prices have continuously trended upward over the past several months and the market continues to move in this direction. Consistent with this trend, our average selling price increased by 5.4% from the second quarter to $2,330 per metric ton. We have seen significant improvement in silicon metal due to higher realized prices and increased volumes from new orders, especially in North America, driven mainly by the market impact of the ongoing trade cases in the United States. European prices during Q3 have been gaining positive momentum in light of increased costs and favorable exchange rates in different locations worldwide, particularly China. In terms of sales volume, silicon metal experienced a modest 0.7% increase quarter-over-quarter. Next slide. Now moving to silicon-based alloys. The average selling price increased 3.7% from the second quarter to $1,645 per metric ton, higher than at any point in Ferroglobe’s records. However, sales volumes experienced a 5.7% decrease quarter-over-quarter, resulting from unexpected downtime at two of our production facilities. Ferrosilicon prices remained at historically strong levels and some signals of a downward price correction at the end of the Q2 has actually not been confirmed with prices showing a lot of resilience as of lately. We are actively looking to fill up order books to take advantage of current levels and we remain positive with regard to demand strength and pricing trend for the coming quarters. Next slide. Turning now to manganese-based alloys. The average selling price for manganese alloys increased from the second quarter by 3.1% to $1,349 per metric ton, which remains the highest level in over five years. Manganese alloys has started to face pricing pressure towards the end of Q2 but have remained basically flat since while as manganese ore prices have been slowly trending down. We expect for both manganese ore and manganese alloys prices to continue to decline slightly in the coming months. Sales volumes were up significantly experiencing a 14.3% increase from the prior quarter. Our plants are now running at full capacity and we expect demand to continue to absorb all our production. Next slide. From an operating perspective, our focus is on continuing to create value through enhanced earnings and profitability. We have delivered a significant increase in our reported and adjusted EBITDA as well as the EBITDA margin. Our commercial strategy has successfully captured the recovery of the market and we expect it will yield additional results in the coming quarters. On costs side, Q3 has been affected by exchange rate, but we are now realizing the benefits of the synergies we captured in 2016 and early 2017 and we are launching an in-depth continuous improvement program that reviews and benchmarks a wide range of technical metrics, the KTM program. We have acted in several ways to normalize our business platform and streamline our operating performance. We have minimized the cost of idled facilities and have plans in place for these operations. We have shifted production to optimize our platform and we continue to focus on SG&A costs. As we have been describing in the previous slides, the growth has been supported mainly by increasing the price of our products. Next slide. So, before I hand the call over to Joe, I'd like to quickly touch on some of the key highlights of our financial performance in the third quarter of 2017. As mentioned, our adjusted EBITDA increased 28% in the third quarter of 2017 to $56.1 million, up from an adjusted EBITDA of $43.9 million in the second quarter. During the quarter we saw an $11.7 million decrease in working capital. This is primarily a result of securitization of accounts receivables. However, year-to-date, working capital increased by $8.6 million due to the recovery cycle. We continue to generate positive cash flows. During the third quarter, the company generated operating cash flows of $67.4 million, free cash flow of $52.7 million with total free cash flow of $58.5 million year-to-date. We have continued to maintain our strong balance sheet reported net debt of $394 million, down compared to $435 million at the end of the second quarter. Liquidities stood at $364 million at the end of the quarter. We remain focused on delivering long-term value to our shareholders in a number of ways and more specifically by evaluating business decisions like M&A and CapEx and pursuing them if they are immediately accretive to Ferroglobe. As such we will continue to maintain our conservative capital structure in order to put our company in a good position to act quickly on growth opportunities when they are attractive, but also providing flexibility in case of a downturn. We have successfully refinanced our debt, and continue to focus on deleveraging the balance sheet with the cycle leverage target of less than two times. Lastly, we remain committed to pursuing cost improvements through technical performance, portfolio optimization and SG&A streamlining. Let me hand over to Joe.

Thank you, Pedro. Let's go to slide 15. Sales volumes was 223,980 metric tons for the third quarter, up 2.7% from the second quarter and net sales were $451.6 million a 6% increase compared to the second quarter. Average selling price across all products was $0.82 per pound, up on average from $0.79 per pound in the second quarter, up 3.6%. We posted a net loss of $5 million or a loss of $0.02 per share on a fully diluted basis. On an adjusted basis, our net profit was $9.2 million, or $0.05 per share on a fully diluted share. We reported EBITDA of $54.3, up from $36.8 million in the prior quarter. On an adjusted basis, EBITDA was $56.1 million, up 28% from the second quarter of 2017. During the quarter, continue to adhere to our strategy of realizing prices above the index, which coupled the continued strengthening of demand and improved volumes, resulted in a 12.4% EBITDA margin compared to 10.3% for the second quarter of 2017. Total working capital was $377 million and free cash flow was $52.7 million in the quarter, and $58.5 million year-to-date. Next slide. We ended the third quarter with the net debt of 394 million down compared to 435 million at the end of the second quarter of 2017. Our net debt ratio is continue to improve as profitability as increased sequentially. Next slide. On this slide, you will see our debt evolution overtime. On a quarterly basis, net debt was down from the prior quarter and currently stands at 394 million net and 584 million gross for the third quarter. As noted, the bottom of the slide all amounts have been adjusted to show the impact of securitizing the accounts receivable program. We remain committed to reducing our nominal debt balance, as well as improving our leverage on a go-forward basis. Next slide. We remain focused on carefully managing our cost structure and ensuring strict control in our operations. As you can see, we ended the third quarter with working capital of 377 million. Now, I’ll turn the call back to Pedro for some closing remarks.

Thanks, Joe. Next slide, in closing, Ferroglobe is capitalizing on its strong market position as we deliver quarter-over-quarter growth and improved profitability. We have taken decisive action since becoming a combine company to benefit from an improved market environment, but managing our cost structure. Identifying market and products and we’re experiencing and improve demand and pricing environment and executing our commercial strategy. And we are now experiencing sustained benefits across our key products. We expect prices to continue to improve in the near future and we remain focused on effectively capturing this trend. We are now well into the contracting season for 2018 and we are glad to see that we are being able to remain disciplined on communicating to our customers, our view of the market evolution. We are closing contracted prices above current index prices and have completely eliminated any discounts from our index based contracts. All-in-all, we expect the sustained performance across our business as we move into the end of 2017 and into 2018. We are glad with the trend of our business, but we remain commitment to improving profitability in the short and medium-term to return our financial performance to where we all expected to be. With that, I’d like to open the call up for questions.

Thank you [Operator Instructions] Our first question comes from Vincent Anderson, Stifel. Your line is now open.

Just real quick. What additional commentary, can you provide at this time with regards to 2018 silicon mill contract? So how far along versus prior years any color on mix versus floating contracts in North America and Europe. And then are you seeing any significant difference between the EU price discount versus the U.S., in your contracted terms versus what we can observe in the spot market?

We are right now somehow midway in the contracted season. So, we will continue to be contracting basically until the end of the year. We are in line with previous years. So, we have secured volumes that now represent -- and by the way this is of course talking about silicon metal, the other products have different dynamics, when we can talk about that. But talking about silicon metal, we have already secured volumes that are close to 60% of our expected total sales, both in Europe and the US. Now the proportion of fixed versus indexed is around nearly exactly 50-50, indexed and fixed price, and that applies both to Europe and the US. Just note that though that most of the indexed contracts corresponds to specific big chemical customers that have multi-annual contracts. In terms of where prices are, both in Europe and the US, prices are I would say $0.05 above where the index is today. So, we are closing prices in the US that are above $1.40 in all call cases and in -- $1.40 per pound. And in Europe, we are systematically closing all contracts above €2,200 per ton -- per metric ton which represents around $1.20, $1.21 per pound.

That’s very helpful. Thank you. So, you outlined at your Investor Day your plans to increase your base EBITDA by around 25% over the next two years. And I know there are a lot of moving parts to that. But it would appear that with the Glencore acquisition you are probably easily half way there already. So, do you still believe it will be two years to reach 25% or do you expect may be the total to be higher or the 25% to be delivered sooner?

That’s a very good question. We are ambitious and we hope it will be more and it will be sooner. But of course, as you say there’s many moving pieces. What I can say is first that at any given point in time, right now, we are analyzing several growthopportunities, that is one. And second of course is we are also developing new products and new technologies like solar grade silicon. And when we will see the full benefits of that is also, there’s some degree of uncertainty. So, there is now way I would commit to anything different to what we said in the Investors Day but we are ambitious and we hope we can certainly improve both the quantity and the speed.

Great, thanks. And if I could sneak in just one more. Is there any plan to restart the dividend next year following the debt refinancing?

Well that is something that we still have to review, this can be approved by the Board and by the shareholders.

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

Hi, great. Thank you very much. I just want to may be drill down a little bit on the dynamics of you guys and your customers and really why I am asking this is because you have the ruling in Canada that sort of went one way. And I think the fear is may be that the Canadian US boarder is somewhat porous and therefore may be some of the material would go through Canada and then come in to the U.S. Maybe you could help us understand, as far as your customers, I mean how important the securities apply to them, how important is it to have high quality supplier versus maybe just finding some stuff that's going to come over the border? And then I have a follow up. Thanks.

Well, first, what you've described so material that would be subject to duties in the U.S. and that could be imported into Canada and then into the U.S. that is I don't know the technical name for that. I know it, I don't remember it, but that is basically smuggling if I may call it that way so that is illegal. So, it wouldn't happen and I don't think it ever happened. So that is not really a risk. And in terms of your question, I believe that customers do value security of supply. And in our conversations with our customers that is a very significant criterion for choosing supplier. And we are very well positioned in that respect, and we're seeing that. We're contracting with big customers ahead of time and we are increasing volumes with some significant customers. So, I think yes, we are a preferred supplier in North America. I have no question about that.

Okay. And then I guess this is a question for Joe. We trying to model out Glencore here. And just trying to understand, I guess you're saying you've doubled the size of the business. And historically it's not as high as -- just the business is not as high as $20 million EBITDA roughly. Does that mean that Glencore is going to add of $80 million of EBITDA into next year, or how do we think about the contribution from Glencore?

It will double the contribution, that is the way we're thinking about it. There could be some margin compression next year. So conservatively I might go a little bit lower than $80 million. But the Glencore deal itself allows us to actually stabilize the spreads through getting better raw material cost as well as better pricing from our customers. So, doubling the existing run-rate is a legitimate way to model it.

Okay. And then one last question would be and maybe I think this is for Joe, is if you look at the EBITDA the business did this quarter. If you were to write that up to maybe where the market is because I know you have some legacy contracts that are still being sold at lower prices. If you were to write that up, what is the EBITDA actually look like for the quarter?

Well, I think that the consensus estimates would have at these normalized pricing today of around $100 million a quarter which will give us $400 million. But the problem with that Ian is it does not account for any cost increases. And we are seeing cost increases related to electrodes and some power costs increases as well that would bring that down. And so those are cost for next year. So, if we're trying to project in the next year the pricing would have it at $100 million but the cost would have it a little bit lower.

Okay, and that $100 million would be at the prices you're contracting at today.

Correct.

Okay, and then you'd add like Glencore on top of that?

That's correct.

Alright.

Our next question comes from Martin Englert of Jefferies. Your line is now open.

Looking into 2018, you just briefly touched on that, but can you discuss some of the puts and takes regarding the production costs including electrodes, electricity and anything happening with coal or other major factors, I guess, what you would think maybe incremental deltas would be your headwinds there?

Yes. And we’re looking at -- we talked about the electrodes situation several times already. And suddenly that is affecting costs significantly. And mainly that will hit costs from the second half of the year. And on our case fortunately, it will not have an impact on availability, but it will have impact on costs. And we see that has been probably some tens of millions of dollars. So, it could be $10 million, $20 million just from the electrodes additional costs. And then there is some additional costs in power, in France, part of the French contract subject to market prices and those market prices are up in France so we are having some additional power price. Coal is up right now, we will need to see how it evolves through next year to have a correct understanding of the full impact of that.

Okay. And for the power costs overall for the full footprint, including assets outside of France, would you expect that increase to be about 10 million or 20 million annually for 2018 or would that be something different?

I don’t have an exact answer right now, Martin, to be honest. So, let’s -- we’re still, I mean going through all the details. I’m not entirely sure, I cannot give you a detailed answer on that. But I’ll get back to you on that.

And one last one there. Just to confirm on the silicon metal annual fixed contracts that would be a proportional split about 50-50, both in the U.S. and European market. So that would be a bit of a step down, I guess from fixed annual contract mix that you saw in your calendar 2017. Is that correct?

Yes. That is correct. And as I was saying, the caveat there is that we are still halfway through the contracting season. So, to historic [indiscernible] the weighting, if you wish, of existing longer-term indexed contracts as of today is bigger, just by the fact that existing index contracts are there. So, we will see at the end of the contracting season what is the split.

[Operator Instructions]. Our next question comes from Sarkis Sherbetchyan of B. Riley. Your line is now open.

So, you mentioned the facilities in Argentina and South Africa are kind of underutilized here and it sounds like you’re planning to restart the full operations there in the near future. Can you maybe give us some thoughts around what near future means as far as the timetable is concerned? And then also if there are incremental costs associated with bringing those facilities online?

Well actually Argentina facility is starting up as we speak I would say and Polokwane which is the -- if you remember -- and in South Africa we have two running facilities which are Polokwane it’s 100% silicon metal and then we have eMalahleni which is running mostly on ferrosilicon and foundry products. The one that is -- again Polokwane now is running with one furnace under our two furnaces that need to start. Those furnaces are being started in January and February I would say as soon as we can. Given the logistics from South Africa we won’t see the benefits of those volumes until Q2 next year. Thus, I would think we are just restarting as soon as we can. In the case of South Africa entering our production base, it will actually have no impact on our average production cost because we have obtained or arranged a new power contract there in South Africa. With that new power contract and with exchange rate having moved slightly favorably, is now actually competitive vis-à-vis our European or North American plants. So, no impact in terms of production costs per ton.

That’s very helpful. And then with regards to the markets served, will that be geared for the European area?

Well we have some very -- one very important contract in Far East with -- at a very effective price and that will take around half of South African production. The rest of the South African production we will see where it is targeted depending on market conditions. That is the flexibility we can apply and it will be a bit on an ongoing basis we will evaluate where it goes.

That’s helpful. And then I think you mentioned in the silicon-based alloys business, the sales volumes declined on some unexpected downtime in facilities. Can you mention may be what that downtime is referring to and if that’s been resolved and if you expect the volumes to rebound here?

Yes, it was two incidents that happened. One related to some electrodes breakages in Bridgeport in the US and that was certainly resolved. And the other was in our Dumbria plant in Northwest Spain and that was also a technical incident that is resolved. So, both are resolved and volumes would get back to normal levels this Q4.

Just one more from me regarding the trade case in Canada. It’s sounds like you are trying to analyze the statement of reasons and potential appeal here. One, what basis do you have for appeal, if you can comment on that? And then two, may be if you can highlight the fundamental differences between the US case and the Canadian case? Thank you.

Well I cannot comment on what are the basis for appeal. We are still analyzing it and we haven't decided our way for what tells, so no comment on that. And well, the U.S., Canada, the European Union, they have just different processes and different basis of analysis. And part of the differences between the U.S. and Canada have actually to do with the way they look at injury, in the U.S., there is actually a preliminary analysis of injury before they go into the preliminary decisions on antidumping and countervailing, whereas in Canada they don't analyze injury until the end of the process. So, the fact is in the U.S., there has already been an analysis on injury and we are more confident that the final investigation will be positive because, again there was already a preliminary investigation on that.

Thank you. And I'm showing no further questions at this time. I'd like to hand the call back to Mr. Pedro Larrea for any closing remarks.

Well thank you very much. As I have said at the beginning of the call, we have presented strong consistent results in Q3 just as part of the trend of improving financials in our company and we remain very confident that this trend will remain going up in the coming quarters. And thank you very much for listening and attending this call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone have a great day.