Ferroglobe PLC (GSM) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ferroglobe's Third Quarter 2017 Earnings Investor Conference Call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to 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 the these forward-looking statements can be found in Ferroglobe's most recent SEC filings and the exhibit to those filings, which are available on our web page, www.ferroglobe.com.

In addition, this discussion includes the EBITDA, 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'll 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 with -- we turn to Slide 4. 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 continue 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 deterring pace and timing depending on products and geographies.

At the same time, actions taken in this and prior quarters ensured we were able to fully capture the benefits of these trends.

Our commercial strategy is aimed to enhance our profitability.

So in addition to general price recovery, we continue to focus on delivering contracts above spot and index price.

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, and similarly, the average selling price for silicon-based and manganese-based alloys increased 3.7% and 3.1%, respectively, from the second quarter.

I will 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, 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 ensure we are capturing best practices across all our plants.

Next slide.

As we had expected during the downturn in 2016, 2017 has represented a continuous 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 one hand, ensuring a focused commercial strategy and, on the other hand, adopting a flexible investment operation, idling loss-making or nonperforming 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 worst 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, 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.

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 U.S. 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 in August imposing countervailing duties on silicon metal imports from Australia, Brazil and Kazakhstan, now more than 63% of silicon metal imports into the U.S. are subject to cash deposit requirements.

We're confident that the affirmative preliminary determination issued are the first step in ensuring a more competitive and fair silicon metal market in the United States, and we look forward to receiving a favorable outcome.

Final determinations 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 100% interest in Glencore's manganese alloys plant 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 plant in France and Norway represent 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 ton of sales of ferromanganese and silicomanganese.

With this transaction, we continue to deliver on our stated commitment to developing our leadership in core products through a 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-grade silicon with our own metallurgical process.

It is a limited size, 1,400 tons per year factory, that will allow to test the validity of our cost expectations and should set the foundation for an exciting possibility of developing value-added, high-end product range.

In terms of investor relations, Ferroglobe recently hosted its inaugural Investor Day as part of our ongoing effort focused on increasing our communication with investors.

And shareholders recently approved a new set of our Articles of Association, which provides more enhanced corporate governance.

Also, we are pleased that Pierre Vareille has joined our Board of Directors.

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 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 3 primary products with silicon metals 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 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 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 equation 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 experienced 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, have helped us deliver quarter-over-quarter growth and increased margins.

Next slide.

On the next 3 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 in China.

In terms of sales volumes, 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 2 of our production facilities.

For silicon, prices remain at historically strong levels and some signals of a downward price correction at the end of Q2 have 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 5 years.

Manganese alloys started to face pricing pressure toward the end of Q2 but have remained basically flat since while 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 demands 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 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 the cost side, Q3 has been affected by exchange rates, 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 idle 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 slide, EBITDA growth has been supported mainly by the increase in 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 the securitization of account 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 and reported net debt of $394 million, down compared to $435 million at the end of the second quarter.

Liquidity 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 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.

Let's go to Slide 15.

Sales volume 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 basis.

We reported EBITDA of $54.3 million for the third quarter, up from $36.8 million in the prior quarter.

On an adjusted basis, the EBITDA was $56.1 million, up 28% from the second quarter of 2017.

During the quarter, we continued 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 net debt of 39 -- $394 million down compared to $435 million at the end of the second quarter of 2017.

Our net debt ratios continued to improve as profitability has increased sequentially.

Next slide.

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

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 at 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 actions since becoming a combined company to benefit from an improved market environment by managing our cost structure, identifying markets and products that were experiencing an improved 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're glad to see that we're being able to remain disciplined on communicating to our customers our view of the market evolution.

We're closing contracts at prices above current index prices and have completely eliminated any discounts from our index-based contracts.

All in all, we expect a sustained performance across our business as we move into the end of 2017 and into 2018.

We're glad 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 comes from the line of Vincent Anderson, Stifel.

Just real quick, what additional commentary could you provide at this time with regards to your 2018 silicon metal contracts?

So sort of how far along are you versus prior years?

Any color on mix of fixed 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 tons versus what we can observe in the spot market?

Well, thank you.

We are right now somehow midway in the contracting 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 a different dynamics, and 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 U.S. Now the proportion of fixed versus index is around -- nearly exactly 50-50, indexed and fixed price, and that applies both to Europe and on the U.S. Just note that -- though that most of the index contracts correspond to a specific big chemical customers that have multi-annual contracts.

In terms of where prices are, both in Europe and the U.S., prices are, I would say, $0.05 above where the index is today.

So we're closing prices in the U.S. that are above $1.40 in all cases and in -- $1.40 per pound.

And in Europe, we are systematically closing all contracts above EUR 2,200 per ton -- per metric ton, which represents around $1.20, $1.21 per pound.

That's very helpful.

So you outlined at your Investor Day your plans to increase your base EBITDA by around 25% over the next 2 years, and I know there are a lot of moving parts to that.

But it would appear that with the Glencore acquisition, you're probably easily halfway there already.

So do you still believe it will be 2 years to reach 25%?

Or do you expect maybe the total to be higher or the 25% to be delivered sooner?

That's a very good question.

We're 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're analyzing several growth opportunities, 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's no way I would commit to anything different to what we said in the Investor's Day, but we are ambitious and we hope we can certainly improve both the quantity and the speed.

Great.

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, discuss and be approved by the board and by the shareholders.

Our next question comes from the line of Ian Zaffino of Oppenheimer.

I just wanted to maybe drill down a little bit on the dynamics of you guys and your customers.

And really, why I'm asking this is because you have the ruling in Canada that sort of went one way.

And I think the fear is maybe that the Canadian-U.

S. border is somewhat porous and, therefore, maybe some of the material would go through Canada and then come into the U.S. And maybe you can help us understand, as far as your customers, how important is security supply to them?

How important is it to have a high-quality supplier versus maybe just finding some stuff that's going to come over the border?

And then I have a follow-up.

Well, first -- I mean, there's -- what you described, so material of 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.

Well, I know it.

I don't remember it now in English.

But that is basically smuggling, if I may call it that way.

So that is illegal.

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 our security of supply.

And in our conversations with our customers, that is a very significant criteria for choosing supplier.

And we are very well positioned in that respect, and we are -- we're seeing that.

We are contracting with the 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.

I was trying to model out Glencore here and just trying to understand, I guess you're saying you doubled the size of the business.

And historically, it's done as high as -- your existing business has been as high as $20 million in EBITDA, roughly.

Does that mean Glencore is going to add $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 costs 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 -- maybe again 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 does the EBITDA actually look like for the quarter?

Well, I think that the consensus estimates would have it at the normalized pricing today of around $100 million a quarter, which would 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 cost increases as well that would bring that down.

And so those are costs for next year.

So if we're trying to project into next year, the pricing would have -- it's been $100 million but the cost it has is a little bit lower.

(inaudible), Pedro?

[Yes].

Okay.

Then $100 million will be at the prices you're contracting at today.

Correct.

Okay.

And then you'd add Glencore on top of that.

That's correct.

Our next question comes from the line of Martin Englert of Jefferies.

Looking at the 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 there, I guess, what you would think the maybe incremental deltas would be or headwinds there?

Yes.

And we're looking at -- I -- we talked about the electrodes situation several times already.

And suddenly, that is affecting costs significantly, and mainly, that will hit us on the second half of the year.

But -- and on our case, fortunately, it will not have an impact on availability, but it will have impact on costs.

And we see that as being probably some tens of millions of dollars.

So it could be $10 million, $20 million, just from the electrodes additional cost.

And then there is some additional costs in power in France.

Part of the French contract is subject to market prices, and those market prices are up in France.

So we're 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 will 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 we'll get back to you on that.

Okay.

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 (inaudible), 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.

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 -- remember -- and in South Africa, we have 2 running facilities, which are Polokwane, it's 100% silicon metal, and then we have in eMalahleni, which is running mostly on -- what, on ferrosilicon and foundry products.

The one that is -- again, Polokwane now is running with one furnace, and there are 2 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.

But as I was saying, we're 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.

So that's very helpful.

And then with regards to the markets served, would that be geared for the European area?

Well, we have some very -- we have one very important contract in Far East with very attractive 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 a 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 volume declined on some unexpected downtime in 2 facilities.

Mention maybe what that downtime is referring to and if that's been resolved and if you expect the volumes to rebound here.

Yes.

It was 2 incidents and that happened, one related to some electrodes breakages in Bridgeport in the U.S., and that was certainly resolved.

And the other was in our Dumbría 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.

Good.

One more from you regarding the trade case in Canada.

It sounds like you're trying to analyze the Statement of Reasons and potentially appeal here.

One, what basis do you have for appeal?

If you can comment on that.

And then two, maybe if you can highlight the fundamental differences between the U.S. case and the Canadian case?

Well, I cannot comment on what are the basis for appeal.

We're still analyzing it, and we haven't decided our way forward.

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, whilst 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.

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 would say at the beginning of the call, we have presenting -- we have presented strong, consistent results in Q3 as part of the plan 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.