Q1 2022 Ferroglobe PLC Earnings Call

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Good morning, ladies and gentlemen, and welcome to the front of the club's first quarter 'twenty to 'twenty two earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will be given at that time. As a reminder, this conference call is being recorded I would now like to turn the call over.

But you go out that far like life's transformation director and executive Vice President of corporate strategy Technology, and Investor Relations you may begin.

Good morning, everyone and thank you for joining <unk> first quarter 2022 conference call. Joining me today are Mark <unk>, Our Chief Executive Officer, Beatrice Garcia, our Chief Financial Officer.

Olivia <unk>, our chief operating officer, and Deputy CEO before we get started with some prepared remarks I'm going to read a brief statement. Please turn to slide two at this time.

Payments made by management. During this conference call that are forward looking are based on current expectations risk factors that could cause actual results to differ materially from these forward looking statements can be found in fair Globe's. Most recent SEC filings and the exhibits to those filings which are available on our webpage www dot <unk> dot com.

In addition, this discussion includes references to EBITDA adjusted EBITDA adjusted gross debt net debt and adjusted diluted earnings per share, which are non <unk> measures reconciliations of these non <unk> measures maybe found in our most recent SEC filings at this time I would now like to.

Turn the call over to Marco Levi our CEO .

Good morning, or good afternoon, everyone I'm really excited to present, our results, which set a new record in terms of our quarterly revenues adjusted EBITDA margins net profit and earnings per share since the formation of favorable.

Our organization has worked very well.

Over the past few years and reporting these stellar results.

Validation of the earnings potential of this business and we look forward to building on this positive trajectory.

The improvements in our go to market strategy, our quick reaction time to market changes the focus on continuous improvement amongst many other things all contributed to these results and the new framework Globe, we are creating.

The operating environment around us continues to evolve.

Whether it is changes in our customer needs and preferences coming out of the pandemic.

Sure our need to quickly find new suppliers in the wake of the terrible.

Ukraine War.

We are going through it very unique period.

Ironically enough.

He is in the midst of this drastic changes and uncertainties that fair globe is capitalizing on the full potential of its unique global asset footprint.

More so than ever before.

Our ability to service global customers locally has proven to be a great competitive advantage, particularly as customers put a premium on security of supply and seek short term supply chain.

This will only become more valuable over the coming years as suppliers and customers alright, thank strategies with their own ESG targets in mind.

In the face of an energy crisis, particularly in Europe , we have been able to leverage our operational flexibility scaling back production in Spain, and servicing customers from facilities in Norway and France.

Our diverse geographic footprint sets us apart from our competitors and is proving to be extremely valuable as we look at what's happening around us from an economic environmental and geopolitical standpoint.

One key element of our value creation plan has been footprint optimization.

The decision to right size the footprint and subsequently remaining disciplined and not restarting capacity to quickly. There's also been a key contributor to the eastern narrow let's.

Let's say.

We do see some positive signs to consider additional capacity restarts and are assessing these now in the area of silicon metal.

There are also positive developments regarding the French restructuring, which I'll come back to momentarily.

In addition to our operating assets, we're benefiting immensely from our vertical integration into critical raw materials.

<unk> provided a security of supply in areas like electrodes and has helped us mitigate inflationary pressures in other areas such as coal and courts.

During the first quarter.

Revenues increased 26% to $750 million.

And we achieved adjusted EBITDA of $241 million, an increase of 182% over the prior year quarter.

Adjusted EBITDA margin more than doubled to 34% in Q1.

And our earnings per share on a fully diluted basis was positive 80 cents a significant increase over 2007 cents per diluted share we delivered last quarter.

Overall, our business continues to perform well across the entire product portfolio and we expect this momentum to continue.

Moving ahead to slide five please.

Our silicon metal business.

The drastic change this quarter.

Is the materially lower fixed price contracts expired at the end of 2021, as we realized 100, an 8% increase in the average selling price in our shipments.

Excluding the joint ventures.

The index in the U S was way up to at least flat in Q1 as a result of the pre buying at the year end.

There hasn't been a lot of liquidity in new sales.

In Europe , the index pricing did come down right at the beginning of the year following an extremely robust Q4.

Since mid Q1, we have seen some recovery in the index into Q2.

Keep in mind that the majority of our contracts this year, our index based and get to reset quarterly based on an average price of the prior year quarter index and a rather flat Q1 at these attractive pricing levels is actually positive for us in Q2.

While our shipments during the quarter dropped I want to be very clear that this is not the result of demand destruction in any of our end markets.

The drop in volumes is actually attributable to the collective results of us starting the year with very low stocks after a strong Q4.

Our decision to curtail production in Spain grew even given the energy pricing.

That's per patient strike in Spain. This March which has been leading to some spillover of volumes into Q2.

And the delayed the restart of the first furnace at Sam.

We continue to see steady demand on the chemical side, we've many global customers considering plans for capacity additions.

At the moment the energy intensive aluminum sector is feeling the direct impact of higher energy prices, particularly in Europe . As a result, there have been some temporary code payments.

In photovoltaic is increasingly getting more focus these days many of our customers are thinking about their strategy, but we have not seen a big pickup in D. C. Here just yet overall, we saw a significant improvement in the contribution from silicon metal with quarterly adjusted EBITDA increase.

<unk> to $154 million.

That would be always some month to month fluctuations.

They're even by trade flows and demand side issues, but the fundamentals remain solid looking ahead, we see the supply demand tension holding supporting favorable pricing levels.

In light of the situation.

We have commenced at our assessment around the restart of our 55000 tonnes silicone facility in Polokwane, South Africa, a formal decision around a potential restart is targeted for September .

Another exciting development is with our silicon metal powders project for batteries and other advanced <unk>.

Locations.

Given the positive responses from customers, who have been testing our high purity silicone powders over the past year, we are scaling up production to meet growing demand for our products.

We would be providing more details surrounding these developments shortly.

As our customers' needs continue to evolve.

We feel this product and they perfect their innovation behind it will be an important part of the federal block story in the future.

Slide six please.

The silicon based alloys product category also contributed and suddenly during the quarter, we've adjusted EBITDA, increasing by 53% to $77 $4 million.

The slight drop in sales volumes was in Europe and is linked to lower production in Spain due to the energy related curtailments.

Production issue in South Africa, which has since been addressed.

And logistical issues in South Africa, limiting our ability to procure containers and more foundry probe.

We expect to recover some of this volume slippage over the coming quarters more meaningful is the gap left by the conflict between Russia, and Ukraine, even Russia is in reliance on the export market.

We see upward volume potential in the near term as a result of these wells.

Oil pricing increase.

Yes.

In late February there is a threat.

So we will see the full pricing benefit in Q2.

It is true that global steel demand was down in Q1. However.

The current situation in the region, coupled with the other logistical issues asset where.

He is supporting a mark to market tightness for ferrosilicon that builds on the strong momentum we saw at year end in this program.

We expect this part of the business to contribute more in the near term as a result of these factors at the moment the price appreciation is more than offsetting any cost pressures driving margin expansion.

Moving to slide seven please.

Turning now to manganese based alloys.

This part of our portfolio is also impacted by the war since the beginning of the war the prices of our manganese alloys have increased.

Similar to ferrous silicon the price lag in our context means we will realize these benefits in Q2.

In terms of volumes, our 75000 tonnes of shipments was in line with our expectations given the situation in Spain.

As a reminder, 97000 tons shipped the previous quarter was the result of some inventory build in catch up volumes at year end.

On the cost side, we have seen a direct impact of the inflationary pressures of manganese ore coke and other reductions.

Given the evolving situation in a real shot in Ukraine, we see some near term opportunities in this part of our portfolio.

Next slide please.

As we look at the year end there are a few key areas of focus 2022 would be the second year of the execution phase of our video creation plan.

Building on last year's success, we have identified a new pipeline of initiatives, which are expected to deliver an additional $65 million Eaton of E Mirror EBITDA.

These cost savings targets his spread across footprint optimization centralized procurement continuous plant improvements and the benefit stemming from commercial excellence.

On the point around footprint optimization, we recently announced an agreement with the French works Council on March 30 <unk>.

Waiting to the process, which started one year ago.

The scope of the project was amended back in November to reflect the continuation of operations at the link level facility.

Collectively this agreement that results in 195 potential job terminations and 35 employees transferred to other facilities.

The project received validation from the French Labor administration on May four.

I want to thank.

While the various government agencies for their deep involvement in productive discussions over the past year.

In arriving at this structure.

Overall, we are well ahead of schedule in delivering the $180 million of EBITDA lift from cost cutting and commercial excellence, which was initially targeted by the end of 2024.

This year, we will also focus on looking beyond the financial targets. Although there is tremendous opportunity for improvement by focusing on the core bolstering our capabilities and ensuring we have the rights of spar system in place to drive change in order to create an edge and minimized right.

New leakage, we have plans across our functions aimed at driving higher productivity enhancing our operational efficiency, improving our customer experience and driving sustainable results.

Another area, where we have been spending a lot of time around these ESG strategy.

At the moment, we are still towards the beginning of this journey.

But I am proud to announce that the third global we publishing its first ESG report during the first half of 2022.

Needless to say U S. LNG is a critical pillar for all our stakeholders and we are invested in ensuring that this becomes a part of our company's culture.

In due course, we will be releasing details around the key areas of focus and the targets we are setting.

Overall.

I Hope this call leaves you exit cited as we are about where we are going.

Since I joined in January 2020, we have been driving change throughout the organization, which has supported our financial trajectory.

That's eight we continuously broaden the scope of our plan and execute on our new initiatives to unlock additional value.

I would now like to turn the call over to batteries.

<unk>, our Chief Financial Officer to review the financial results in more detail.

Thank you thank you Michael.

Let's turn to the income the same then on slide 10.

During the quarter our top line.

36% to $715 million over the fourth quarter, primarily as a result of pricing in our silicon and silicon alloy categories, even they continue strength in selling prices across our credit portfolio.

Combined retail respectively.

Williams.

What that upside in <unk> during the quarter, we faced inflationary impact in key inputs why we didn't encounter any operational disruptions the sourcing from alternative suppliers for inputs previously per case transaction call.

At the highest cost.

Despite these incremental costs our margins in the first quarter infill due to a combination of higher pricing as well as improvement we have made to our business.

He might have on cost and improving the efficiency of that lateral patients cost of St. As a precedent that you've seen less 48% down from 65% depending on the payer flood that.

Our adjusted EBITDA margin hit a record of 34% more than doubling over the prior quarter.

Net profit had a significant gap yielding earnings per share of 8% on a fully diluted basis.

This is 196% increase over the 37% this year and last quarter.

Please note that <unk> two I'd like to for a few years there have been some restatements specifically relating to the accrual of interest for the remainder loan for six months 1 million and an update on the end after the <unk> of 7.8 million relate into selected manganese.

Please refer to our 8-K.

Filings for these days around the space statements.

Next slide please.

The key drivers for the quantity of their client that adjusted EBITDA growth is realized pricing primarily the result of the recipient silicon prices. These more than offset some simpler cases, we had during the quarter and being Casey network cost.

Typically on the cost side, the impact of higher metal prices accounted for nearly half of the cost impact.

Energy prices increase admittedly impact us, but you know that $14 five millions.

Right, let's have some seasonal impact we said winter tariffs in France.

Main continual focus remains in Spain, the impact of the Spanish and Nicky during Q1, plus $4 1 million.

They have been completed development in this pain with the government recently announcing plans to cut the price of natural gas.

Ultimately impacted the market price of energy the timing and final cut prices have not yet been finalized, but we think it can have a positive impact for us in the second half of the yet they continue to monitor this closely as we adjust our operational plans and the strategy as we get more.

Around this is keene.

Slide 12 please.

Our cash balance improved by $60 million, ending the quarter with $176 million.

<unk> net debt to $342 million and collected and.

Despite this total growth during the quarter, we maintain a flat level of working capital to sales.

As to the discipline and financial controls, we introduce in operating our business over the past year.

Following the decrease in accounts receivables.

Expand our factoring facility, which will help accelerate our cash generation going forward.

<unk> capital also include some one offs like settlement of some of the new payables and a cash payment for <unk> to address electric <unk>.

With improvement in our <unk>.

Actual performance, we continue to have lots of liquidity and enhance our OLED okay fine.

Next slide please.

Q1 represented the second consecutive quarter of positive operating cash flow was $66 million.

<unk> up $44 million, although Q4, driven by a strong quarter increases in accounts receivable was in inventory.

Net working capital increase during the quarter the actual cash impact of our Capex has been less $9 1 million.

And the net impact of cash flow from financing activities less $2 6 million on it.

As we highlighted on our play of course, we were expecting and nowhere.

Slower ramp.

That's in free cash flow, we generate agent versus EBITDA growth in Q1.

Given items such as the double coupon payment paid during the quarter senior integrated bouquets and increase in working capital that we now expect an acceleration in cash flow generating intimidation going slowly.

Slide 14 please.

Looking at the year ahead, our priorities for the cash we expect to generate at again a target two key areas.

Keeping that you're already is to reduce the quantum of our debt.

So in the past few years, our debt balance has increased and we are committed to reducing the debt significantly.

The logical place for us this time, the nine person Super Senior notes, which we can take back at time until October 2022, when it comes to the capital structure more broadly our first objective is to add an asset based loan to fund working capital inflow candidate for getting it on our corporate purpose.

We have been working on this over the past few months and are targeting to close that transaction by the end of Q2, we said Golar deleveraging. We are currently evaluating options for our capital. It took them we feel that our cost of debt in line with our correctly.

Sufficient flexibility to operate our business and also enables debt prepayments in that cost effectively.

We will be providing an update on these ones we have decide I'll, let pass or not pass slowly after several years of having a scaled back on capex is pending.

<unk> is to increase our capex spend to $75 million, which we deem to be a good level going forward.

Only known a lot of exciting prospects on the update on our financial results continue to improve at this time I will ask the operator to please open the line for questions.

Thank Keith to ask a question you in its press star one on your palisade tutorial question press the pound Husky piece some by while we compile the Q&A roster, while its weight star one if you would like to ask a question.

Your first question today comes from the line of Martin Englert from Seaport Research. Please go ahead. Your line is open.

Good afternoon, everyone.

Hello Martin.

So last quarter you noted an estimated EBIT tell for January were almost $74 million can you just talk a little bit about how things progressed through the balance of the quarter year to kind of bridge to the 241 million quarterly results.

Yes Martin.

<unk>.

What happened is.

Volume growing up in February and March versus January January as always.

Not a full month.

And then there is there has been the usual.

Price creep positive creep, mainly due to the alloys pricing dynamics.

So is it fair to say that you participate in maybe a bit more on the alloy side in the spot market to capture some of those high prices.

No I would say no is not too much sport to ease our normal creep up because as you know the the price of alloys get adjusted either monthly or bimonthly or on a quarterly basis. So you have is natural to have when the price goes up is not direct with some positive <unk>.

Ice cream.

Okay. Thanks for that all kind.

Kind of coming back to the commentary in the release in the prepared remarks, you spoke about the financial momentum continuing.

Gave some color on the segments.

On Silicon based alloys, you talked about margin expansion and.

There was margin expansion anticipated on silicon metal, but is there any more detail that you can provide as we think about <unk> here, maybe across the business segments, where we're seeing margin expansion versus study in contraction.

Well.

I meant I gave few items during my reading my script, but in a nutshell.

The way, we see it in Q2 years.

<unk>.

Pricing.

Stronger than cost increase.

It grows our may all across our main product lines.

Okay. So it's fair to.

It's operated under Dana expansion margin expansion.

Okay margin expansion across all business segments yet.

And then.

Anything on the cost side of things when we think about like the cost per ton across the business segments. I mean, there was a notable step down as good cost management quarter over quarter here, how we think about that <unk> versus <unk>.

Well the the way we see it at this stage there is the most substantial cost increases on on silicon on silicon metal.

Between four and 5%.

Let's see.

Slide the reduction about 2% points in silicon alloys, and Theyre rather flat.

Cost picture for manganese alloys.

Thanks, that's helpful and.

If I could one last one here.

You touched on this.

Reviewing the financials of capital allocation, but thoughts around for what you may be able to explore a potential refinancing of the debt looking beyond the super seniors.

Given the lagging.

The lagging nature of the ratings agencies when that window quite open for Ya.

Yeah. Martin. This is <unk> speaking are we are working at the moment on on that to lessen as we have engineers.

We'll be commenting on off on that.

Okay.

Thank you for all the detail and congratulations on navigating a fairly challenging market.

Thank you Martin.

<unk>.

Thank you.

Your next question comes from the line of Brian <unk>. Please go ahead. Your line is open.

Good afternoon more computers are just a couple of questions for you just with the change in the contracts. This year that you are experiencing which is helping with results from.

From fixed price to index space, how many of those contracts expire at the end of the year and how many of those contracts are on multiyear agreements.

Well the.

If you talk about.

What we're referring to is silicon metal is comment was on the.

To the contracts on silicon metal.

And we moved from <unk>.

Excluding joint ventures from.

Contracts, which were covering.

70% of our traded volume in silicon metal with fix yearly price.

Two less than 10% of our volume on fixed yearly price. So basically we are moving all of our content to index.

And are those contracts, though still expiring at the end of this year or are those index based pricing contracts for multiple years.

We have variable duration of our contracts in the silicon metal.

There are contracts, which have a longer tenure.

Three years two years, one year different cultures.

Okay.

And just a.

Just trying to think about how your customers are.

Our viewing security supply is that.

Being able to you would be able to get more customers to engage into longer term contracts, even if they are index based.

Yes. This is what.

This is what we were looking for.

And the supply security.

Really bumped up last year and all the discussions, but these still pretty valid due to whole the complexity that we have variability has been leaving in supply chain.

You know there isn't not dwell trend to cover supply security we've more local.

Supply.

And for.

For the geographies that we cover of course everything.

Our asset footprint displayed properly.

<unk> is an advantage, having got like I say, though.

Back integration in courts, and partial back integration and coal are definitely an advantage for us satisfying this customer demand of supply security.

Okay, and then Beatrice.

Given I mean, the results are strong this quarter with the Companys business over the long term is you know are volatile.

How are you thinking about the optimal capital structure is there a certain amount of gross debt that you're that you'd like to hold is it you know mid cycle, you know leverage target I, just would love to get a sense of how you're thinking about the future capital.

Structure of the company.

Yeah. Thank you Ryan let me, let me put it like this until I think today, we are recognized at them.

Cost of debt, that's not reflected in the financing company. So what we are doing in at the moment as we have the window to refinance unless supersede the SST.

Is that for last two southeast to refinance our Super Senior debt goes we felt that most teams in October 2022.

And then as we said we plan to use our kashi termination to call them two objectives.

That one needs to continue to fund that did you lose any downturn and number two.

To continue to invest in our assets and with $75 million of Capex in 2022, and we expect this level of Capex to continue going forward.

So if you're if you're looking to reduce our debt what what's the optimum amount of debt do you think that you should be holding on the balance sheet.

Well, that's something that we're working at the moment.

We'll add entertainment to towards that figure it out that that's matured as soon as we work on that and we'll be communicating on that side.

<unk>.

I'd say the head to the assay that's my test weekend.

Understood I appreciate the color. Thank you.

Thank you.

Thank you.

Your next question comes from the line of Neil Malkin from Bluebay. Please go ahead. Your line is open.

Thanks, very much and congratulations for the very strong quarter and I appreciate the comments on margin expansion.

Into Q2.

Do you have I appreciate there's a lot going on in the market not least she crane, Russia energy prices et cetera.

Are you able to.

Does your visibility extend into H two.

Currently or you really just have to see things quarter by quarter.

But progress is still the plan.

Thank you and thank you for the question well.

I can tell you what.

Well, what we what we see right now we see.

Our chemical business.

We choose silicon metal related being pretty pretty strong.

I see.

Customers are planning for an increase in production.

Always related to silicon metal that we see the aluminum.

Market is slowing down due to tremendous pressure related to energy cost.

When you move to two the steel business.

They are quite different dynamics because.

Of course, the war has as an impact.

The overall global production is down but there are geographies, where the production is he is all being due to the to the gap of the output.

In eastern Europe . So.

Overall the Wii.

We don't see at this stage.

Any.

Drastic change in the demand profile.

Okay. Thank you.

That's very helpful.

And then just do you know when you were talking about impacts on demand for your products from customers as a result of Russia, Ukraine did I get the right takeaway in the that's mainly relates to the alloys place silicon based alloys and manganese based alloys.

Rather than the silicon metal business is that the right takeaway.

It is the right takeaway.

I mean the.

Ukraine historically.

Has been there.

So we made a large producer of manganese alloys, probably the biggest producer in Europe , and I think number three producer in the world So of course.

The war.

As a big impact on that.

Russia is our biggest quarter.

Oh ferrosilicon.

And depending on the measures taken by the various countries.

And the possibilities to be material for sure there is an impact.

Overall on federal Silicon demand.

Related to the war.

Okay. Thank you my last question, perhaps just maybe trying to think about Brian's question about the capital structure, but in a slightly different way.

Would you is it an objective or a a desire of the company to actually not have any.

Leverage on the business, but actually to have debt facilities, which are purely there for working capital funding, but actually just fund the structure through you know cash also you have some working capital facilities.

And equity.

Is it to get rid of any any any any any leverage you can see earnings of the company.

Yeah. Thank you. Thank you for the question and then as I think our primarily objective here.

Mention four Bcf.

In 2022, and with the cash that Lee Glen Ivy generating increasingly income from Q2.

To accomplish two objectives, one is to Delever, that's as much as we can be the company. We are working on that at the moment.

Second to invest in our Capex program.

What we are doing it I think we already.

<unk> done that we increase in Atlanta, and factoring our working capital facility mainly.

We call it.

Factory.

We increased our facility for an additional $30 million in D C and bringing <unk> into the business and the second thing that we're doing is to work in recent AVN program, maybe the U S that will add to and looking at the dollar flexibility each of our business and other corporate <unk> and yourselves.

Yeah, just to follow up on the a B L.

The U S what kind of size or what kind of range of size would the company think ooh. He is the company looking forward.

We are working at the moment.

That's still on maybe that they are so desperate pathway something show.

Something close, but they will have I believe our borrowing base.

<unk> at least.

<unk> hundred millions and then we can decide let me some sense of how what are the size of the avian that we win yep Yep.

Okay. Thanks, very much I appreciate the answer thank you.

Thank you. Thank you.

Thank you.

There are currently no further questions I will hand, the call back to Mark Kaye for closing remarks.

Thank you that concludes our first quarter earnings call once again.

Super excited about the quarterly results, we reported today and.

And with the prospects for the company, we look forward to building on this momentum and continue to work relentlessly to deliver stronger results and create value for our stakeholders. Thanks again for your participation have a great day.

Yes.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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Yes.

Thanks.

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