Ferroglobe PLC (GSM) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ferroglobe Second Quarter of Calendar Year 2017 Conference Call.

(Operator Instructions)

I would now like to turn the call over to Joe Ragan, Chief Financial Officer.

Please go ahead.

Good morning, and thank you for joining the Ferroglobe Second 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 web page, 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.

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 and our strategy as we move through 2017.

On Slide 4, you can see Ferroglobe delivered a strong quarter, with results that exceeded expectations.

We posted a quarterly net profit, albeit a modest one, for the first time since our merger and delivered a significant increase in both our earnings and EBITDA margin performance.

We delivered an 8% increase in revenues, 42% increase in adjusted EBITDA, and our adjusted EBITDA margin improved 250 basis points at 10.3% for the second quarter compared to 7.8% for the first 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, we witnessed a significantly reduced inflow of low-priced imports as we are starting to see the impact of the ongoing trade cases.

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 this quarter and in prior quarters ensured we were able to fully capture the benefits of these trends.

Our commercial strategy's aim: to enhance our profitability.

In addition to general price recovery, we continue 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 second quarter of 2017 to be up 6.8% compared to the first quarter, from $0.74 per pound in the first quarter to $0.79 per pound in the second quarter.

The average selling price for silicon metal was up 6.3%.

Similarly, the average selling price for silicon-based alloys increased 7.7% from the first quarter of 2017, while manganese-based alloy prices remained largely flat at historically high levels.

I will be analyzing the details of this price evolution product by product in a few minutes.

We maintained our financial discipline, including carefully managing our cost structure.

This, combined with our focus on diversification across key products, has allowed us to fully capture the benefits of the improved environment and maximize our exposure to improving prices across the board with a more balanced business mix.

As a result, we are now optimizing our production facilities and running close to full capacity utilization.

In North America, the Niagara Falls and West Virginia alloys plants returned to full operation in Q2.

The Selma facility in Alabama has restarted in the month of August with 1 of its 2 furnaces running, although we do not expect a significant impact on our financial results while it remains in partial operation.

The remainder of our plants across Europe and North America are running at full speed.

The only exceptions are Argentina with around 50% utilization and South Africa, around 65% utilization, where these lower utilization rates are due primarily to unfavorable local conditions.

In addition, we have halted operations at our plant in Venezuela since May as we await further developments in the country.

Next slide, please.

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, as discussed in past quarters, we filed a petition earlier this year with the U.S. Department of Commerce and the U.S. International Trade Commission, as well as a separate complaint with the Canada Border Services Agency seeking relief from unfairly traded, low-priced imports in North America.

In both cases, the respective government agencies have decided to move forward with their investigations, leading to favorable first milestones.

Regarding the ongoing trade cases Ferroglobe filed in the U.S., the Department of Commerce issued preliminary determinations on August 7, imposing countervailing duties on silicon metal imports from Australia, Brazil and Kazakhstan.

The duties imposed ranged from 3.69% to 120%, with more than 54% of silicon metal imports into the U.S. being now subject to cash deposit requirement.

The company has also filed antidumping cases against imports from Australia, Brazil and Norway, which addressed unfairly low import pricing.

The Department of Commerce is expected to make preliminary determinations in the antidumping cases on October 4, 2017, which may result in the imposition of additional duties.

We are confident that these affirmative preliminary determinations issued on August 7 will be the first step in ensuring a more competitive and fair silicon metal market in the U. S., and we look forward to receiving a favorable outcome in the ongoing antidumping investigations.

Final determinations for both the countervailing duty and antidumping investigations are expected by the first quarter of 2018.

Regarding the ongoing trade case filed in Canada, the CBSA issued its preliminary determinations on July 5. The agency found dumping and/or subsidy margins for Brazil, Kazakhstan, Laos, Malaysia, Norway and Thailand.

It terminated the investigation against Russia on the basis of insufficient import volumes.

The final determination of the agency's investigations is expected to be issued on October 3, 2017.

The Canadian International Trade Tribunal hearing is expected to take place October 2, with a final finding expected to be issued November 2, 2017.

Second, as announced on July 26, the company did not receive the required regulatory approvals to complete the divestiture of the hydroelectric operations in Spain.

While we intend to continue to explore all options, including alternative divestiture structures, we want to reiterate that this is not a material issue for our business or financial performance and that we continue to be convinced of the intrinsic value of these assets, which will be realized in one way or another.

We have turned the page and are now focused on continuing to drive performance across our entire business, including the energy assets themselves.

Lastly, the company has entered into a $250 million accounts receivable securitization to finance receivables generated in the U.S., Canada, France and Spain completed on July 31.

This arrangement provides several benefits, including risk mitigation, liquidity maximization and the ability to replace multiple factoring arrangements with one consolidated, centrally managed program.

Next slide.

As I referenced earlier, we are continuing to benefit from our diversified product portfolio.

Our 3 main product families are now providing almost equal contribution to EBITDA, which allows us to maximize our exposure to improve prices and ensure a more balanced and diversified business mix.

In terms of revenue contribution, our contribution of different products is diversified, with silicon metal still the largest contributor at 43%, followed by silicon-based alloys at 26% and manganese-based alloys at 20%.

Other products, including energy, make up the remaining 11%.

Further, these diversified products serve an even more diverse group of end markets, with silicon metal used for aluminum, silicons and solar products; while manganese-based alloys are used for steel and silicon-based alloys for different grades of steel and foundry.

These 3 product areas have contributed differently to our revenue growth over the first quarter, with manganese-based alloys growing 2% and silicon-based alloys 1% over the prior quarter.

These products continue to experience healthy demand momentum, and we have taken advantage of selecting specific products and market instances in which the supply-demand balance look favorable while running our facilities at full capacity.

Silicon metal has contributed the most to revenue growth in Q2 with a significant increase of 16% compared to Q1.

This healthy evolution reflects a strong demand environment and the success of the commercial strategy implemented for 2017.

Next slide.

Turning to discuss the sequential contribution to sales growth in the second quarter of 2017.

Sales were $425.8 million, up 8% 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 prices and volume were key drivers in the quarter, reflecting the positive momentum in the market and the good execution of a well-planned marketing strategy.

In the case of silicon-based alloys, prices have remained strong, but volumes have taken a seasonal dip.

Manganese-based alloys have shown a resilient price performance despite being at historically high levels and despite the overall reduction in manganese ore prices.

Next slide.

On the next 3 slides, we will discuss pricing and volume trends, earnings contribution and market observations for each of our [3] 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 6.3% from the first quarter at $1 per pound for the second quarter.

We have seen significant improvement in silicon metal due to higher realized prices and increased volumes from new orders, especially in North America as a result of decreased low-priced import volumes deterred by the trade case investigations.

Prices continued to increase in North America during Q2, ahead of the preliminary determinations in the trade cases, with brokers and traders backing away from new business.

European prices have remained basically flat during Q2, gaining certain positive momentum since the month of June in light of increased cost and favorable exchange rate in different locations worldwide, particularly China.

This trend has accelerated in the past few weeks, with prices in China booming and European prices [starting to react].

In terms of sales volumes, silicon metal experienced a 9.4% increase quarter-over-quarter.

Next slide, please.

Now moving to silicon-based alloys.

The average selling price increased 7.6% (sic) [7.7%] from the first quarter to $1,586 per metric ton, higher than at any point in Ferroglobe's records.

However, sales volumes experienced a 5.9% decrease quarter-over-quarter, which is a normal swing due to delays in specific shipments at the end of each quarter.

We experienced some cost pressures for our silicon-based alloys due to technical issues at Bridgeport facility and the conversion from silicon production to ferrosilicon of one furnace at Sabon.

These pressures are temporary, and we expect to normalize cost levels in the near future.

Ferrosilicon prices remain at historically strong levels, and during the month of August, they are gaining additional traction, especially in North America.

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-based alloys remain broadly flat from the first quarter at $1,308 per metric ton, which remains the highest level in over 5 years.

Manganese alloys have started to face pricing pressure towards the end of Q2, although this was offset with lower manganese ore cost from inventory.

However, since the month of July, prices seem to be recovering, coming back to the peaks of Q1 and particularly in the case of ferromanganese.

Sales volumes were slightly up compared to the first quarter, experiencing a 1.1% increase.

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.

This is the first quarter since the merger that we were able to post net profit and have delivered a significant increase in our reported and adjusted EBITDA as well as EBITDA margin.

As we have been describing in the previous slide, EBITDA growth has been supported mainly by the increase in the price of our products.

But it is also true that our commercial strategy has successfully captured the recovery of the market, and we expect it will yield additional results in the coming quarters.

On the cost side, we are now realizing the benefits of the synergies we captured in 2016 and early 2017.

We have acted in several ways to "normalize" our business platform and streamline our operating performance.

We have taken decisive action to optimize our production facilities and to minimize the impact of idled facilities.

We continued to streamline production plans to increase utilization rate, including the conversion of furnaces to capture market and product opportunities.

From a business and operational perspective, we continue to focus on operational excellence, identifying best practices and implementing these across our footprint.

And, as noted earlier, we remain focused on capturing and maximizing the benefits of our diversified portfolio and business mix.

Next slide, please.

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 second quarter of 2017.

As mentioned, our adjusted EBITDA increased 42% in the second quarter to $43.9 million, up from an adjusted EBITDA of $30.9 million in the first quarter of 2017.

During the quarter, we saw a $35.4 million increase in working capital.

This is primarily a result of the recovery cycle.

Year-to-date, working capital increased by $20.3 million.

Despite this, we continued to generate positive cash flows.

During the second quarter, the company generated operating cash flow of $20.1 million and free cash flow of $5.8 million.

We have continued to maintain our strong balance sheet and reported net debt of $435 million, up $28 million compared to $407 million at the end of first quarter of 2017.

Liquidity stood at $320 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 only 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 a leverage target of less than 2x.

Lastly, we remain committed to pursuing cost improvements through technical performance, portfolio optimization and SG&A streamlining.

Let me now hand over to Joe.

Thank you, Pedro.

Next slide.

Sales volume was 218,197 metric tons for the second quarter, up 1.6% from the first quarter.

And net sales were $428.8 million (sic) [$425.8 million], an 8% increase compared to the first quarter.

Average selling price across all products was $0.79 per pound, up from $0.74 per pound in the first quarter, an increase of 6.8%.

We posted a net profit of $1 million or a gain of $0.02 per share on a fully diluted basis.

On an adjusted basis, our net profit attributable to the parent was $6 million or $0.05 per share on a fully diluted basis.

We reported EBITDA of $36.8 million for the second quarter, up from $30.9 million in the prior quarter.

On an adjusted basis, EBITDA was $43.9 million, up 42% from the first quarter of 2017.

During the quarter, we continued to adhere to our strategy of realizing prices above the index, which, coupled with the continued strengthening of demand and improved volumes, resulted in a 10.3% EBITDA margin compared to a 7.8% margin for the first quarter of 2017.

Total working capital was $388 million, and free cash flow was $5.8 million.

Next slide.

We ended the second quarter with net debt of $435 million, slightly up compared to $407 million at the end of the first quarter of 2017.

Next slide.

On this slide, you'll see our debt evolution over time.

On a quarterly basis, net debt was up slightly from the prior quarter and currently stands at $435 million net and $618 million gross for the second quarter.

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 second quarter with working capital of $388 million.

Now I'll turn the call back to Pedro for some closing remarks.

Thanks, Joe.

In closing, Ferroglobe is capitalizing on its strong market position as we deliver quarter-over-quarter growth on improved profitability.

We have taken decisive action to manage our cost structure, identify markets and products that were experiencing an improved demand and pricing environment and execute our commercial strategy.

And we are now experiencing sustained benefits across our key products.

Additionally, our diversification strategy has positioned us to maximize exposure, to improve prices and ensure a more balanced business mix.

We expect prices to continue to improve through the year, and we remain focused on sustained performance across our business as we move into the second half of 2017.

We are pleased with the trend of our business, but we remain committed to improving profitability in the short and medium term to return our financial performance to where we all expect it to be.

With that, I'd like to open the call up for questions.

(Operator Instructions) Our first question is from Martin Englert with Jefferies.

Do you have an estimate of the EBITDA impact for 2Q from the furnace conversion in Spain as well as the Bridgeport operational issues?

I don't have the exact number, but it is not very significant.

But it could be -- I really don't have an exact number for that.

Okay, that's fine.

And so far, we're seeing continued improvement in spot prices for silicon and alloys but also some shifts in FX.

Can you talk, generally what you're expecting as far as incremental EBITDA as we look into second half of this year versus where we're at in 2Q?

Martin, this is Joe.

I can talk to you about the relative impact of the pricing increases versus FX.

We're really not going to talk about the rest of the year because I'm not sure what the foreign currency forecast will be.

But I can tell you that out of the 6% that we reported -- 6% to 7% reported in price increase, about 1/3 of that was FX related.

So we saw real price improvements on a normalized basis, excluding the FX.

But there was some benefit.

About 1/3 of it was FX.

And that is total Ferroglobe.

And in terms of the factors going forward for the rest of the year, I think, well, each one could have its own expectations in terms of price evolution.

Both ferrosilicon and manganese alloys are at historically high levels, although in the past few weeks, they looked to be strengthening.

But one could say that prices going forward could remain at that level -- at those levels.

In the case of silicon metal, you have witnessed what the evolution has been.

And the question is that in silicon metal, around 50% of our business is one way or another indexed.

The rest is with fixed prices.

So we will be benefiting in Q3 and Q4 of the increased silicon metal prices for about half of our volume.

And in terms of volumes going forward, I think we have mentioned that we announced the -- we have stabilized our volumes.

I think there could be additional volumes in silicon metal in North America as the low-priced imports, I would say, retreat from this market.

So we could see some additional volume in silicon metal.

The rest of our products, we're running at full capacity and we are fully booked.

So I don't think we can expect significant volume increases in the rest.

That's very helpful.

And one last one here, just looking at financing expense.

Run rate was around $14 million quarterly in first half, and D&A around $27 million.

Are these reasonable run rates on a go-forward basis?

We had some higher expenses on the financial expense side.

They'll be a little bit lower by about $2 million on the financial expense.

D&A is about right.

Our next question is from Ian Zaffino with Oppenheimer.

Question with the -- and I'm trying to think through this because now you're an international company, and if you do get these antidumping duties, I guess originally, when you were domestic only, that would be really a win-win situation.

But now you're international, does that mean if you get the antidumping duties in the U.S., will the European prices go down?

And if they do go down, I mean, do you have the ability to then maybe ship your product from Europe into the U.S. and avoid those antidumping duties?

I'm just trying to figure out how the entire company might get impacted with a favorable antidumping ruling going your way.

Thank you, Ian.

That's actually the -- that's a very interesting question.

The fact is that if we look at import volumes into Europe in this first half of the year from Brazil for instance, they have actually already been going down.

The fact is, some of the -- I would say some of the importing countries are just becoming noncompetitive because of factors that affect their own cost structures.

So I think what we are seeing in this market is something we were expecting at the end of the day, which is a lot of people just losing money at the price levels we had last year.

And as we were also arguing, of course they were just dumping by selling below their own cost and unreasonable prices.

So the upward trend on prices is something we were expecting.

And it's just now the cost competitiveness of each player that will allow them to compete in each market.

So I don't think -- and then if we see what is happening now in China as well, we are today not -- and I don't think they -- our business is threatened by additional low-priced imports in Europe.

We don't see that happening right now.

It is also true that, at the end of the day, because we have several production platforms, we will decide how much we produce in each country and where we ship it, and we will optimize, I would say, market prices and our production cost across all our platform.

But right now, we are -- again, we are seeing very positive momentum both in Europe and North America in terms of prices, and we are conducting our business accordingly.

Okay.

And then, I guess, another question.

Maybe this is more for Joe.

Joe, can you give us an idea of maybe what run rate EBITDA truly is at these price levels?

Because it's a little hard to figure out what -- which contracts are being priced [at] which price, whether it's from 3 months ago or beginning of the year.

So as you think through, what is sort of the run rate EBITDA that you're doing right now if all your contracts were to reset today?

Thanks, Ian.

Appreciate the hard question.

Yes, so hard work, but thanks a lot.

(multiple speakers) Look, the current run rate EBITDA is where we are today will be consistent for the rest of the year.

So I want to make sure that everyone understands.

Although the pricing levels have increased, the indexes -- indices have increased.

And most of our production is contracted.

Some of it indexed, some it's not, some of it's fixed.

So our performance for the rest of the year will be slightly better than the Q2 results.

But the real change in results happens in 2018.

And the delta on a blended rate is probably $0.10 to $0.15 from globally...

Across all our products.

Across all products.

And we know that, let's just say, on a $0.10 improvement, that it's $15 million for every improvement across all the products.

So without any further price appreciation, that would increase annually $150 million in EBITDA, conservatively, at the current pricing levels.

Okay.

That's actually really helpful.

So I guess 2018 should be a pretty big year for you guys.

And I guess with that, what would you do with your -- the cash flow?

I know you used to pay a dividend.

I'm not so sure that's a great idea to resume it.

But what is sort of your thoughts on what you would do with that cash flow and how to deploy it?

Well, we certainly -- we talk about that a lot, Ian, and I think in the short term, we have some debt to pay down and we're going to bring down the leverage, as Pedro said, below 2x.

So that's what we'll do in the short term.

And Pedro is looking at many different options from capital allocation, on M&A opportunities as well as whether to restart the dividend.

Yes.

We are a company -- and of course, we've gone through a difficult year in 2016, but we are certainly a company that has an appetite for growth, and I think we have proven that we are successful at identifying opportunistic M&A transactions.

And we are -- I think we have mentioned this in different calls.

We are -- at any point in time, we are analyzing several opportunities for growth, and we are very strict in terms of the profitability of such acquisitions and making sure that they are immediately accretive.

But right now, we are looking at tangible, real growth opportunities of this kind, meaning really accretive, value-adding opportunities.

(Operator Instructions) Our next question is from Sarkis Sherbetchyan with B. Riley & Co.

So you spoke of the favorable demand environment, allowing you to return to close to full capacity.

I would think it was in North America for the most part.

And you also restarted 1 of 2 furnaces in Selma.

Can you maybe talk about your decision to either restart some of the furnaces and/or convert furnaces?

Well, yes, as I was mentioning, yes.

In -- well, in Europe, we are running all our furnaces at full capacity.

In North America, after we restarted one furnace in Selma, it's only really the second furnace in Selma that would remain idle.

But if demand evolves as we expect, we will probably even restart the second furnace in the coming weeks but, again, just analyzing the demand for that.

So we would be running full capacity in -- both in Europe and North America.

And then I think the only spot where we still have some idle capacity, which is South Africa, we have basically 2 furnaces out of 3 that are still stopped in our Polokwane facility.

In terms of allocating furnaces to silicon or ferrosilicon, and I think that is really the ones that sometimes we can decide whether we switch from one product to another, it is really a question of relative profitability of each product at a given point in time and also, of course, of the demand out there and our ability to capture market share in each demand.

I would say that as we are running right now, we don't expect further furnaces conversion in the coming weeks.

Understood.

And will there be something that would kind of cause you to reassess that decision as far as furnace conversion?

It sounds like the ferrosilicon market's pretty hot right now from a pricing perspective.

So what are you seeing from a demand perspective that may cause you to either make that decision or not?

Well, again, switching furnaces is possible.

It's technically possible.

It does take some time, and it's not always optimal from a technical point of view.

I would say that we still have some idle capacity around the world, in South Africa and in -- even one furnace in Argentina.

I would say that if prices and demand keep on going up, as we are seeing right now, we would first restart those furnaces and allocate those furnaces to the right products before switching capacity that right now is running at full speed and with the right allocation, I would say, of products and costs.

So I would say that in terms of switching, we would be looking more at the furnaces that are still stopped rather than the ones that are currently running.

And I'm showing no further questions.

I would now like to turn the call back to Pedro Larrea, CEO, for any further remarks.

Well, thank you, everyone, for joining us this morning.

And as I was saying, we are pleased with the evolution of the business, but we are also committed to returning our performance to where it should be in the coming quarters.

So thank you very much, everybody.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

You may all disconnect.

Everyone, have a good day.