Ferroglobe PLC (GSM) 2024 Q2 法說會逐字稿

Good morning, everyone, and thank you for joining Ferroglobe's second quarter 2024 conference call.

Joining me today are Marco Levi, our Chief Executive Officer; and Beatriz GarcÍa-Cos, our Chief Financial Officer.

Before we get started with some prepared remarks, I'm going to read a brief statement.

Please turn to slide 2 at this time.

Statements made by management during this conference call that are forward looking are based on current expectations.

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 at ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, and adjusted diluted earnings per share and among other non-IFRS measures.

Reconciliations of non-IFRS measures may be found in our most recent SEC filings.

Before I turn the call over to Marco Levi, our Chief Executive Officer, I want to announce that we'll be participating in Seaport Research Partners Annual Summer Investor Conference on August 20 and 21.

We hope to see you there.

Marco?

Thank you, Alex, and good morning, good day, and good evening to everyone.

Thanks for joining us on the call today.

We appreciate your interest in Ferroglobe.

Before I begin with our quarterly earnings update, I want to inform you with deep regret that Juan-Miguel Villar Mir, Founder and former Chairman of FerroAtlántica, our legacy company, passed away last month.

I would like to express our deepest condolences to his family.

In Q2, we continued to execute well driving strong financial performance with increased volumes, revenues, and adjusted EBITDA.

As we discussed in our first quarter call in May of this year, the U.S. International Trade Commission recognized that imports of ferrosilicon from Russia, Kazakhstan, Malaysia, and Brazil which represented approximately 70% of all imports in 2023, are injuring our US operation.

The substantial government subsidies are received in these countries and the low selling prices of these imports have adversely impacted US ferrosilicon market, [hurting] local producers and their ability to compete.

The ITC's final decision will be made in October.

On June 24, the US Department of Commerce announced preliminary anti-dumping and countervailing duties of 283% and 748%, respectively on all Russian importers of ferrosilicon.

As a result, all importers of Russian ferrosilicon are required to post cash deposits or bonds to cover these duties.

Russia represents approximately 35% of all ferrosilicon imports into the US in 2023.

This is a significant victory for our industry, allowing us to compete on a level playing field.

The mitigations of the remaining three countries Kazakhstan, Malaysia, and Brazil are still underway.

International Trade Commission will announce preliminary determinations for countervailing duties expected in August and anti-dumping duties in October.

We believe these decisions will have a positive impact on our business in 2025 as inventory in the channel is decreasing.

As you recall, during the first quarter, we signed an MOU with Coreshell to further develop batteries for EVs using silicon

(inaudible).

We are very excited about this relationship as it enables us to take part in the evolution of EV batteries.

In testing, Coreshell has achieved a high cycle lifetime using a 90% Ferroglobe silicon (inaudible) in a Coreshell battery.

This improvement in battery performance is an important milestone.

The benefit to consumers is the silicon [rechannel] significantly reduces the cost of batteries, speeds up the charging time to just 10 minutes, and increases the range up to 40%.

The next step is to produce a commercial size battery that OEMs can begin testing.

Coreshell has closed its financial round targeting the development of (inaudible) that reproduced larger 60 [ampere] sales for the OEM testings.

This project is on track with commissioning scheduled to begin in Q4 of this year and testing at OEMs expecting in early 2025.

We'll keep you informed as we continue to achieve new milestones.

In addition to develop silicon -- to developing silicon rechannels with Coreshell, we are working approximately with 70 EV battery companies who also develop other silicon-based technology such as silicon carbon composites and silicon monoxide anodes for batteries.

These technologies, while less efficient, (technical difficulty) batteries, are either in use or expected to enter the market in 2025.

(technical difficulty) while prices in general been strong during the first half of the year, they have been very, driven more by supply constraints than a fundamental improvement in demand.

Strong index prices in the second quarter should drive solid results in Q3.

However, we are still cautious about the fourth quarter given the uncertainty in the market, especially as it relates to the aluminum foundry and

(technical difficulty).

We continue to announce our capital return policy.

In addition to paying a quarterly dividend of 1.3% -- [$0.013] per share, our share buyback program was approved in June.

We are narrowing the adjusted EBITDA guidance range from $130 million to $170 million to $150 million to $170 million.

The strong second quarter combined with higher index prices should positively impact in the third quarter, which gives us more confidence for the second half of the year.

However, given the weak demand, we are still cautious about the fourth quarter.

And combined with the idling of French operations, we anticipate having the lowest adjusted EBITDA of the year in the fourth quarter.

Next slide, please.

Our second quarter performance was strong with total sales increasing by 15% from the prior quarter to $451 million and adjusted EBITDA reaching $58 million, up from $26 million, driven by strong pricing and sales volumes.

Operating cash flow and free cash flow were $2 million and negative $20 million, respectively, due to inventory build as we started from and made a calculated decision to purchase incremental tons of manganese ore in anticipation of price increases.

Beatriz will discuss this in more details as she reviews the financial results.

Next slide, please.

Silicon metal revenue in the second quarter was $204 million, up 22% from the prior year quarter.

This increase was a result of higher prices and higher volumes.

Average realized prices increased 2.8%, while shipments increased 18.2% to almost 63,000 tons, driven primarily by strong sales to the chemical sector in Europe.

The volume shipped in the second quarter was the highest level in the past two years.

Index prices in Europe, which were down slightly in the second quarter, were negatively impacted by lower-priced Chinese exports and weakened the markets, particularly the aluminum sector, which was affected by high energy prices in Europe.

Prices in North America were strong in the second quarter as they benefited from supply constraints such as the Baltimore

(technical difficulty).

In addition, high tariffs make Chinese silicon metal imports [a known] factor in the US market.

Silicon metal adjusted EBITDA was $35 million, an increase of 115% over the prior year quarter, driven by strong volumes, higher prices, and lower costs.

Given the weak demand in end markets and easing supply constraints, we are expecting this prices to softer into the third and fourth quarters.

There were typical three-month lag in pricing.

We expect the first quarter results to be relatively stable but weaker in the fourth quarter.

In addition, we expect France to be idle toward the end of the year, which will also impact fourth quarter results.

Next slide, please.

Silicon-based alloys, revenue in the second quarter was $105 million, down 6% from the prior year quarter.

This revenue decline was a result of lower shipments, which were down 8% from the prior-year quarter, partially offset by 2.4% increase in prices.

Index prices in North America were up versus the first quarter while Europe was relatively flat during the second quarter.

Adjusted EBITDA was $10 million in the second quarter, down 29% from the first quarter.

This decrease was the result of higher costs due to the idling of French operation in the first quarter and lower absorption costs in the US.

Weak shipments were primarily driven by a 19% decline in North America, which has negatively impacted by high inventories due to Russia selling subsidized low price [easy] production in the US.

Excessive Russian shipments have led to a high level of inventory in the channel, which we expect will be depleted over the next couple of quarters.

This will negatively impact demand until inventory levels normalize.

However, as a result of the tariffs recently imposed on US imports [are phasing], we anticipate an increasing demand beginning in the first quarter of 2025 as imports from the [affected taxation] will be

(technical difficulty).

This is expected to give Ferroglobe an opportunity to expand these market share in the region.

Given the current economic uncertainty, we expect the [European and US yield] demand to remain soft for the second half of the year.

Next slide, please.

Turning now to manganese-based alloys.

Manganese-based alloy revenue in the second quarter was $98 million, up 48% from the prior quarter.

This revenue increase was a result of higher shipments of 80 to 1,000 tons, up 31% from the prior quarter (technical difficulty) realized prices, which increased

[13%].

We capitalized (inaudible) high-grade manganese ore mine shutdown, which was damaged by Cyclone Megan in late March by building higher inventory levels of manganese ore before the resulting shortage drove market prices higher.

This enabled us to ship the highest volume of manganese alloys in the past eight quarters.

Manganese alloy index price increased during the second quarter, driven by a shortage of high-grade manganese ore caused by the shutdown.

Adjusted EBITDA was $14 million, up from $6 million in the first quarter.

This represents an increase of over 150% price and to a lesser extent, volume drove the increase in EBITDA, partially offset by higher costs.

European end markets continue to be weak, and we expect our volume to normalize in the second half.

It is important to note that nearly all our end market for manganese alloys is in Europe.

Now I would like to turn the call to -- over to Beatriz GarcÍa-Cos, our Chief Financial Officer, to review the financial results in more detail.

Beatriz?

Thank you, Marco.

Please turn to slide 10 for review of the income statement.

Sales increased 15% in the second quarter to $451 million, up from $392 million in the prior quarter.

During the second quarter, we saw increased volumes in silicon metal and manganese alloy and higher selling prices across all three segments.

Raw material and energy consumption for production remain broadly flat and decreased as a percent of sales from 66% to 59% in the second quarter, primarily due to effective cost management and higher fixed cost absorption as a result of increased volumes.

Other operating expenses for the quarter increased by 64% to $86 million, primarily driven by a $19 million increase due to the fair value assessment of this (inaudible) credits.

It is fully offset by an increase in other income.

Staff costs decreased by $3 million in the second quarter to $67 million due to the profit sharing arrangement in Europe during the first quarter.

Adjusted EBITDA in the second quarter more than doubled to $58 million from $26 million in the prior quarter.

During the quarter, we earned approximately $8 million from our 2024 French energy agreement in line with the first quarter.

As a reminder, cash from these benefits is expected in early 2025.

Net financial expenses for the quarter declined 31% to $5 million due to the full redemption of the senior secured notes in February.

Going forward, we expect (technical difficulty) expenses to normalize below this level.

Next slide, please.

Our adjusted EBITDA margin increased from 7% in the first quarter to 13% in the second quarter, primarily due to increased pricing and volumes, which impacted EBITDA by $80 million and $11 million, respectively, relative to the first quarter.

The higher costs were driven by the mark to market (inaudible) in the manganese business, partially offset by higher fixed cost absorption in France and Spain.

Overall, average selling prices increased by 2.5%, positively impacting adjusted EBITDA by $80 million, $10 million dollars of which were from manganese-based alloys.

Total volume increased by 50% with an $11 million positive impact on adjusted EBITDA compared to the prior quarter. (technical difficulty) silicon metal sales to the chemical sector in Europe.

Head office and no core business contributed approximately $5 million to increase EBITDA driven by lower G&A costs.

Slide 12, please.

In the second quarter, we consumed free cash flow of $20 million, primarily due to the need to build up inventories from the end of Q1, during which the French plants were items and higher manganese ore prices following South32 mine shutdown.

Working capital was a use of 30 million of cash -- $30 million, driven by a $37 million inventory build as we restart operations in France.

In addition, after the South32 mine disruptions we purchased incremental inventories of manganese ore.

These inventory increase was partially offset by (technical difficulty) $6 million, an increase of $70 million on

(technical difficulty).

CapEx of note in the first quarter was $24 million versus $18 million in the prior quarter.

In addition, we paid cash taxes totaling $9 million related to [2023 totally an] estimated tax payments for 2034.

Last quarter we continue our quarterly dividend in the amount of $0.013 per share, which was paid on June 27.

We will be paying our third quarter dividend of $0.013 per share on September 27.

In an effort to continue enhancing our capital allocation policy, we have finalized the share buyback program, which was approved at the June AGM.

We have authorization to repurchase up to 37.8 million shares over a five-year period through both discretionary and nondiscretionary purchases.

Next slide, please.

We ended the second quarter with a cash balance of $144 million, down from $160 million in the first quarter.

This reduction in cash is driven by the inventory buildup as I have just discussed.

We continue to run the business on a net cash positive basis for the second quarter in a row.

Our gross debt really flat at $81 million.

We remain committed to maintain a conservative balance sheet.

However, we continuously explore opportunities to prudently add additional liquidity to enhance our financial flexibility.

At this time, I will turn the call back over to Marco.

Next slide, please.

Thank you, Beatriz.

Moving to the key takeaways on slide 15.

We had a strong second quarter, growing sales by 15% versus the first quarter and adjusted EBITDA going 124% with adjusted EBITDA margin expanding by 600 basis points to 13%.

Given the strong performance, we're increasing our adjusted EBITDA guidance range to $150 million to $170 million.

We were successful in our efforts to level the playing field in US ferrosilicon market, resulting in trade action against [predatory Russian] imports.

As a result, we have a significant opportunity to increase our market share starting in early 2025.

We continue to make significant progress with our Coreshell relationship, achieving excellent results in testing, validating their technology, and the use of silicon-rich materials in EV batteries.

As mentioned before, we have enhanced our capital return program by having the share repurchase program approved by the June AGM.

Operator, we are ready for questions.

Thank you.

(Operator Instructions)

Lucas Pipes, B. Riley Securities.

Good to see this solid results and the bump in guidance.

Marco, you mentioned in your prepared remarks the outlook for the second half of this year and you called out Q4 as the weakest period.

And if I heard you right, you cited drop -- pricing as one of the drivers for that and I wondered if you could maybe elaborate on that given how indexed pricing has moved over the last 9 months, 10 months or so.

I would have thought we would have passed the valley, so to speak in pricing, but would appreciate your thoughts on that and how lags mix, et cetera might impact pricing.

Thank you very much.

We have a good visibility on third quarter of course (technical difficulty) our business is content related.

We have indexed pricing.

This is why we have a good reading of Q3 and we expect to at least confirm the (technical difficulty) Q2 to Q3.

Q4 is impacted by what we see in the market.

Demand is weak in most of the segment. [Steel has killed] in India.

Steel production in the war base is down versus estimate when is not in negative territories in certain geographies like US, for example.

Aluminum is pretty stable in US, but weak -- extremely weak in Europe.

Chemicals are stable.

Solar is significantly down in Asia, mainly driven by the dramatic growth of policies comprise, but also by the new investigation of US authorities, which are definitely slowing down the export of solar supply chain elements to US.

So in this picture, we have already seen indexes weakening during the third quarter.

And as a consequence, we are extremely cautious on our outlook on quarter four, so weaker volume, weaker price in Q2.

That is helpful.

Thank you, Marco.

And you cited the excellent results in the Coreshell investment and technology.

Could you elaborate on those results what exactly was so positive?

Was this a surprise either in terms of the results or the timing?

I would appreciate your thoughts on that.

Thank you so much.

I would be even more positive when our batteries will start getting tested by the OEMs.

But in the meantime (technical difficulty) 80% or silicon metal have achieved almost 1,000 cycles of charging and discharging with a retention of 80% of their properties.

These are, in our case, unprecedented results that are justifying the move of Coreshell toward producing pilot quantities of batteries, these (inaudible) batteries that will be tested by the OEMs.

So of course, we need more and more testing.

We need the real testing by the OEM.s. But it looks like we are close to solve the old problem of being able to address the swelling of silicon metal in the battery.

That is really good to hear, Marco.

I really appreciate those comments.

Really quickly maybe for Beatriz as well.

You stockpiled for manganese ore on the back of the supply disruption, when would you expect your stockpiles there to normalize?

And as it relates to cash flow and working capital release, any comments as it relates to taking advantage of that buyback authorization?

Thank you, both.

Yeah, thank you, Lucas.

As I was mentioning in the call, so we have indicated that in Q2 so we have been seeing already the impact of lower manganese ore price and higher prices in Q2 and as you said, we -- purchase manganese ore in Q2, and we expect to see that release of these and of course, we expect prices to hold in Q3 and therefore, (technical difficulty) impact in working capital in Q3 but will be offset maybe with older business.

We expect a release of working capital overall with (inaudible) in Q4, Lucas.

Any thoughts on the buyback authorization?

Well, we said on the call.

First, the AGM approved the share buyback program at the end of June, so we didn't have a lot of time to react on that because the closing period just started.

And I think what is more relevant for us is when you -- what you hear Marco talking about the outlook on the second part of the year and the market conditions.

We want to take a conservative approach and preserve our cash and our liquidity.

So for the time -- for the time being, we're going to be -- we want to be prudent in the use of our cash and liquidity.

I appreciate that.

Thank you so much for all of your comments and continued best of luck.

Keep up the good work.

(Operator Instructions)

Martin Englert, Seaport Research Partners.

Circling back on silicon metal and price weakness, how much of the work you price weakness is associated with the weaker Asia market and may be more favorably priced product being exported there from South Africa.

So more of a negative mix shift, implicating prices at the segment level.

Martin, let me talk about (inaudible) like in most of the businesses, China has built our capacity and with the current crisis that they're going through, they are exporting everything that they can.

We see that in silicon metal, imports from China into Europe in the second quarter, which have significantly increased.

Prices are extremely low.

And this will have an impact on the overall index.

It is true that due to the quality that they export, they tend to supply mainly metallurgical silicon for aluminum, but they are definitely moving their product outside of China and I have seen -- we have seen the same (inaudible) we need to test with imports in US from Angola where Chinese have relocated apparently some of their old furnaces and silicon metal is as part of out of Angola to US.

The other part of your question is around the solar demand.

Our sales of silicon metal to Asia for solar have been rather stable in second quarter.

We foresee a slowdown in the second half of the year, which is related to this US investigation that basically blocks the export of solar supply chain elements to the US.

So even the major players are concerned about being forced to pay duties in case they continue to do business.

Honestly, we believe that their situation is not sustainable for the US.

And I can add other comments but at the moment, the offtake of silicon metal in Asia for solar has gone down.

Thank you for all the detail there.

That's helpful.

I wanted to circle back on the ferrosilicon trade case, and it seems like there was maybe some pre-buying ahead of that and elevated channel inventories.

So you're expecting muted or depressed volumes in US ferrosilicon throughout the balance of the year, but then you expect an uptick into 2025.

Is that correct?

Now well, I think I also made this comment in the previous quarter.

Massive quantities of silicon have been delivered to US in the last few months from [Russia] and we estimate an amount of 120,000 tons of ferrosilicon.

That corresponds to one year's supply of [fraction] ferrosilicon to the US.

On top of it, we have seen, like everywhere else, massive increase of export outside of additional capacity of ferrosilicon out of Kazakhstan and to combine this situation in US, we have seen increased export out of Brazil, some minor suppliers of Brazil of ferrosilicon as Malaysia.

So the situation combined with the -- we estimate -- the estimated drop of production of steel in the US about 3.3% below last year, year to date, as environment.

So pricing has gone out based on the announcement of the authorities, but you don't speak too much liquidity yet.

I can share with you a general comment that we perceive the need of securing supply of ferrosilicon next year in the American market because we are getting contacted by several steel (technical difficulty) have to secure volumes for next year.

Are you aware of any alternative key sources that if these countries are bought out of the US market due to the trade case that consumers in the US may source from alternatively to fill the holes?

Or are they going to be largely fully reliant on US production?

No, no.

First of all, they are quite significant freight capacity (inaudible) US.

We are local players and we have capacity.

Of course, we can support demand also outside of our most competitive assets in US and South Africa if needed.

For sure then you have the Brazil -- some of the Brazilians who can supply more and some of the Asian, who can supply more.

So I don't think the US is going to suffer lack of ferrosilicon.

Remember also that we -- our power plant in Selma is down as we speak, and we could be able to sell to ferrosilicon production in a quarter.

I appreciate all the detail and congratulations on the results.

Thank you.

We have no further questions at this time.

I will now hand back to Marco Levi for closing remarks.

Thank you, and thank you again for your participation.

We look forward to hearing from you on the next call in November.

Have a great day.