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Ferroglobe PLC (NASDAQ:GSM)
Q3 2020 Earnings Call
Nov 24, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen. Welcome to the Ferroglobe's third-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this conference call may be recorded. I would now like to turn the call over to Beatriz Garcia-Cos, Ferroglobe's chief financial officer.

You may begin.

Beatriz Garcia-Cos -- Chief Financial Officer

Thank you. Good morning, everyone, and thank you for joining Ferroglobe's third-quarter 2020 conference call. Joining me today are Marco Levi, our chief executive officer; Gaurav Mehta, EVP of strategy and investor relations; and Jorge Lavin, group controller. Before we get started with some prepared remarks, I'm going to read a brief statement.

Please turn to the Slide 1 at this time. Statements made by management during this conference call 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 Ferroglobe's most recent SEC filings and exhibits to those filings, which are available on our website, www.ferroglobe.com. In addition, this discussion includes reference to EBITDA, adjusted EBITDA, gross debt, net debt and adjusted diluted earnings per share, which are non-IFRS measures.

Reconciliation of these non-IFRS measures may be found in our most recent SEC filings. Next slide, please. During today's call, we will first review the highlights for Q3, as well as our business and operational environment. I then will provide some additional details on our financial performance and key drivers behind our results.

And finally, we will provide an update on the strategic plan. I would now like to turn the call over to Marco Levi, our chief executive officer. Next slide, please.

Marco Levi -- Chief Executive Officer

Thank you, Beatriz, and good morning, afternoon, evening to everyone. I hope that my voice reaches you loud and clear. Before we get into the specifics for the quarter, I want to express my gratitude to our global employee base, and thank them for the continued hard work and dedication during these trying times. The threat of COVID-19 continues to impact each of our employees, and we are taking every measure possible to ensure a safe work environment.

Given the resurgence in cases globally, we remain focused on the potential impact across different parts of the business and the potential impact locally, regionally and globally in the areas where we operate. Our ability to successfully navigate COVID-19 so far has been a result of the efforts and the execution of our crisis management team, who has been able to adapt the business and maneuvers in the wake of economic situation. Despite the unpredictable circumstances this quarter, we have marginally increased revenue, which is driven by higher volumes and commercial discipline, managed to achieve slight average pricing over the last quarter despite the broader pressures, which have adversely impacted the indices continued our cost reduction effort, which has enabled us to deliver positive EBITDA and maintain a sustainable level of cash. While we are not particularly thrilled with these results, they are a confirmation of the good actions we are taking.

These efforts will be ongoing as we continue to adapt the business to respond to lingering uncertainties across our value chain. Furthermore, we have started our transformation journey and have been pushing forward on all the various value creation levers and currently have dedicated teams across the organization, focus on this critical transformation. I will be discussing where we are in the transformation plan later in the presentation. Finally, I know that many of you on today's call will be anticipating an update with regards to our intended refinancing and upcoming unsecured bonds maturity.

At this time, we are limited in what we can share, but will highlight that the company continues to move in the right direction. We remain confident that we will be able to obtain the necessary incremental capital that will help us to execute our turnaround plan and provide the flexibility to continue to navigate this unprecedented time. A complete update will be provided to the market at the appropriate time. And at this stage, we kindly ask that these questions I reserved until the company is in a better position to respond.

At this time, I review our business and current operating environment. Moving ahead to Slide 5, please. This quarter sales were $263 million, up 5% from the prior quarter, driven by higher volumes, which increased 3.5%, while average selling prices remained flat. During the quarter, we experienced a slight rebound in demand, and more robust recovery has been delayed due to the pandemic.

The net loss for the third quarter was $46.8 million compared to a net loss of $40 million in the previous quarter. The quarterly net loss was driven by impairment charges at our Niagara facility in the United States, which impacted the results by $34.3 million. And lastly, our adjusted EBITDA was positive $22.2 million in the third quarter, flat versus the prior quarter. This was driven by a more disciplined commercial approach, continued benefit from key technical metric initiatives and other cost-cutting initiatives that were implemented at the plants and corporate office.

During the quarter, we also had the benefit of a reversal of some previously recorded accruals and liabilities. Beatriz will provide these details shortly. Overall, our Q3 results reflect the headwinds we anticipated going into the quarter. At an operating level, we are in a highly fluid situation, and need to constantly monitor demand and balance our production plans accordingly.

And it is also critical that we remain disciplined on the commercial side and avoid chasing volume that is not economically attractive. This discipline has yielded positive results for us during the quarter. With this backdrop, we are acting quickly on the operational and financial fronts to weather the storm and continue to work to preserve our cash position. This has been done in part through a number of actions, including the sales of CO2 credits, which were discussed previously as a subsequent event on our Q2 call.

Our working capital increased by $33 million, ended the quarter at $354 million. This was due to a reduction in account payables, as well as the FX impact on our European inventories that were a result of a stronger euro. During the quarter, gross debt decreased by 9 million to $442 million. The net debt balance improved by $3 million for a balance of $295 million as of September 30.

And finally, our cash balance decreased $5.8 million, ending the third quarter with $147 million of total cash, down from $153 million in the prior quarter. This includes our cash and cash equivalents, restricted cash and consolidation of the account receivable securitization program. Next slide, please. On the next three slides, we will discuss pricing and volume trends, earning contributions and market observations for each of our key products.

Turning first to silicon metal on Slide 6. Ferroglobe's realized average selling price for silicon metal was $2,248 per ton, up 1.5% from $2,215 in the prior quarter. The index prices in U.S. was flat, while European index decreased by 14% during quarter three.

The overall pricing environment was negatively impacted by rather limited sales opportunity. Furthermore, some of the spot business we saw was at extremely low levels, where we diligently walk away. During Q3, we had benefit from some price stability due to higher exposure to the chemical end market, which has fixed-price contracts. We have continued to see our customers buying patterns changing with small quantities and infrequent orders, which distort the index.

The volume trend chart on the top right of Slide 6 shows a 7% increase in silicon metal shipments over prior quarter to approximately 51,000 metric tons. During the quarter, we did see some change in activity patterns across our key markets for silicon. Aluminum-related demand showed some signs of recovery in both the U.S. and Europe, largely tied to a pickup in activity across the automotive industry.

This has been partially offset by a slowdown in chemical activity as the larger customers are purchasing silicon cautiously. Demand for silicon for the photovoltaic market continues to be the weak part of this end market. Silicon metal EBITDA improved from $11.8 million in quarter two to $14.2 million in quarter three, driven by pricing and volume improvement. On the pricing side, the main contributor was higher prices for chemical grade silicon in Europe.

The contribution coming from volume is attributable to increased sales volumes in Europe, particularly in the secondary aluminum market. The cost impact remained flat for the quarter as higher energy cost in Spain was offset by continued benefit of various key technical metric initiatives along with better fixed cost absorption. Given the fluidity of the situation, we will not be making any comment relating to our quarter four and 2021 order book at this time. Next slide, please.

Turning to silicon-based alloys on Slide 7. During the quarter, the average selling price remained rather flat, around $1,554 per ton. The U.S. and European price indices each declined by 14% during the quarter, with a sharp decline at the beginning of the quarter, partially offset by a rebound toward the end of the quarter.

Ferroglobe's average realized price for silicon-based alloys are positively impacted by its product mix. Specialty ferroalloys products account for approximately 60% in the quarter of the shipments during quarter three. Silicon-based alloy volumes increased 7.5% in quarter three to approximately 42,400 tons. The third quarter increase is primarily attributable to the recovery in foundry demand, both in the U.S.

and Europe, as automotive activity began to pick up. While the steel sector has continued to run at low utilization rates following significant curtailments for most of the year, there are some positive signs of restarts, which we'll continue to monitor. EBITDA from our silicon-based alloy segment dropped from $6 million in Q2 to negative $1.9 million in Q3. Increased cost had the largest impact on the quarter-over-quarter decline in EBITDA.

Our ferrosilicon production cost increased due to a planned curtailment in Europe, which had an impact of approximately $5 million. Furthermore, we had some technical difficulties relating to a production ramp-up at our Bridgeport facility in U.S. that adversely impacted the results by $2.8 million. We realized a $2.6 million improvement from volumes, which is attributable to product mix and our ability to be more selective in the commercial business.

To date, in quarter four, both the European and the U.S. index pricing is trending upward. This is attributable to stand production cuts in ferrosilicon across the industry, coupled with a pickup in steel demand. Next slide, please.

Turning now to manganese-based alloys. During the third quarter, average selling prices decreased by approximately 7.2% to $1,009 per metal ton, down from $1,088 per metric ton in the second quarter. The European index for ferromanganese declined by 14%, while the index for silicon manganese declined by 12% during the quarter. Volumes declined by 2.4% in the second quarter to approximately 54,000 tons due to continued slowdown across the steel sector.

The manganese-based alloy's EBITDA increased during the quarter by -- to $13.1 million from $7.9 million in the previous quarter. Pricing had an adverse impact of $4.1 million on EBITDA due to the time lag in realized prices relative to the movement in the index pricing. Offsetting the pricing impact was an improvement in costs. Specifically, the production cost of ferromanganese contributed a positive impact of $1.2 million, along with an additional $0.9 million coming from the sale of CO2 credits.

And finally, there is a positive impact of $7.5 million resulting from a reversal of the previous accrual tied to a potential earn-out payment relating to the two manganese plants acquired in 2018. We realized further savings from technical improvements, which enable us to use different raw material grades at some plants. At this time, I turn the call over to Beatriz, who will review the financial highlights.

Beatriz Garcia-Cos -- Chief Financial Officer

Thank you, Marco. Beginning with Slide 10. Sales of $263 million during Q3 were 5% higher than the $250 million of sales in the prior quarter. This increase in sales was driven by a 3.5% increase in sales volumes as our average realized selling price across all products remain flat.

During the quarter, our cost of sales increased by 8%, resulting in a gross margin, excluding D&A, of 37%, down from 39% in the prior quarter. The cost of sales increase in Q3 was primarily attributable to higher energy cost, particularly in Spain, as well as the impact of lower fixed cost absorption, resulting from further cutbacks in production. Our staff cost increased 15% over the second quarter. However, please keep in mind that Q2 included the reversal of the 2019 compensation accrual, which totaled $6 million due to the cancellation of any bonus payments, as well as some severance expenses related to continued headcount reduction.

Other operating expense decreased by approximately $9 million as a result of realized cost reduction as part of our initiatives for 2020. Lower commercial expenses driven by drop in volumes and the removal of liabilities relating to an R&D project in France, for which we had received a government grant. The $1.2 million of order gains is attributable to the gain of CO2 emission rights sale. The Q3 operating loss before adjustment was $5.7 million, a decrease from $5.5 million in the prior quarter.

The difference between EBITDA and adjusted EBITDA relates to the impairment of fixed assets of $34.3 million, mentioned earlier. Slide 11, please. Adjusted EBITDA remains flat at $22 million for the quarter. As you can see, from the adjusted EBITDA bridge, there were some positive factors offset by some negative items.

The increased volumes, specifically in silicon and foundry products, contribute to a $3 million net benefit. Offsetting this is an adverse impact of $4 million, attributable to a mix pricing environment. Although chemical grade silicon and foundry products had a positive contribution from pricing, this was more than offset by the negative trend across manganese, alloys and ferrosilicon. There was a net cost improvement contributing $3 million during the quarter.

We realized a cost improvement in ferromanganese and the benefit of the CO2 credit sale by $1.2 million, offset by higher ferrosilicon production cost in the U.S. and Europe. Plant shutdown cost of $5.3 million related to the Cee Dumbria plant and $2.8 million due to the Bridgeport plant ramp up. Finally, there was a positive impact of $7.5 million resulting from a reversal of a previous accrual tied to a potential earn-out payment related to the two manganese plants acquired in 2018.

Given the current market environment, the potential liabilities relating to any future earn-out payment has decreased. Lastly, there was a negative impact of $2 million relating to several other items. As mentioned earlier, during the second quarter, it was decided that no bonuses were being paid for 2019. This result in a reversal of prior accrual in compensation expenses at head offices totaling $4 million.

Offsetting this was the elimination of a $5 million liability tied to the energy project in France. Next slide, please. Turning now to Slide 12. I will review our balance sheet in greater detail.

Overall, we saw a slight decline in our total cash balance, while improving both the gross and net debt. Cash and restricted cash decreased slightly to $147.4 million at the end of Q3, down from $153.2 million in the prior quarter. Gross debt increased by approximately $9.1 million in Q3 to $442 million. While net debt increased marginally relative to the prior quarter, ending at $295 million as of September 30.

Total assets were approximately to $1.43 billion, down from $1.48 billion in the prior quarter. This is mainly attributable to an impairment of our Niagara asset. Before we move on, one subsequent event to highlight. The securitization program for the European accounts receivable have been successfully refinanced on the first of October, with an additional release of cash of $90.7 million.

This impact does not show up in our Q3 balance sheet. Next slide, please. We generated positive operating cash flow of $23 million in Q3, compared to $38 million in Q2. The quarter operating cash flow is driven by the $33 million of cash release with the CO2 emissions rights sold, and the $20 million reduction of accounts payable.

Cash flow from investing activities was negative $8.4 million, primarily attributable to higher payments for capex relative to the prior quarters. And lastly, cash flow from financing activities was negative $20 million for the quarter, down from $24.5 million in Q2. This is primarily due to the senior notes coupon payment and the ABL debt reduction of $7.8 million. In aggregate, we have a free cash flow of $14.3 million during Q2.

Next slide, please. Now, turning to Slide 14. During the third quarter, our working capital increased by $33 million. This is primarily attributable to a reduction in accounts payable.

Furthermore, there was a favorable impact of approximately $7 million on inventories resulting from FX as the euro strengthened. Turning to the chart on the right, our cash balance at the end of Q3 was $147 million compared to $153 million in the prior quarter. The Q3 balance includes unrestricted cash of $78 million, and noncurrent restricted cash and cash equivalents of $28.6 million. Next slide, please.

During the quarter, our gross debt decreased by $9 million to $442 million, while our net debt declined $3 million to $295 million. The gross debt decrease in Q3 is due to the $16.4 million semiannual bond coupon paid during the quarter, along with a $7.8 million reduction in the ABL balance. These reductions were partially offset by $8.2 million of bond interest accrual and an increase of $5 million of debt attributable to COVID-related loan warranted by the French government. For a full summary of our gross debt at September 30, please refer to Slide 21 in the appendix.

Next slide, please. On the financing side, there are a few highlights to share. We have been exploring options to tap into COVID-related financing plans, sponsored by local governments in the countries where we operate. During the quarter, we received a CAD 7 million loan from the Quebec government to support our Becancour facility during this difficult time, specifically to fund some capex projects at the plant.

This is an interest-free loan with a moratorium payments for three years. In regards to our prior accounts receivable securitization program in Europe, we closed on a new facility on October first. The new facility is slightly different than the prior securitization program and is structured as a factoring facility. This helps with improved advance rates and eliminate the SPV structure we previously had.

As a result, we were able to release $19.7 million of cash at closing, which was previously restricted within the SPV. Additionally, the overall cost of the new facility is significantly lower than the prior program. As lastly, with regards to the new capital raise, things are progressing. However, we will not be providing any additional comments beyond what Marco notes at the beginning of today's call.

With that, I turn it back over to Marco, who will provide an update on our strategic plans.

Marco Levi -- Chief Executive Officer

Thank you, Beatriz. Now, turning to Slide 18, please. Finally, I want to provide an update on our strategic plan. Since we introduced the plant in financial targets last quarter, we've been making significant strides and continue the strong momentum across the old value creation drivers.

One of the first and most critical steps has been around personnel and processes. In order to drive successful execution, we need to ensure that the proper backbone and foundation within the company are there. During the initial assessment phase, we had representatives from various layers in the organization involved in due diligence. But now we have formalized teams, reach, value, driver, beginning with a senior executive who has full ownership for their respective vertical.

As we began to dissect the value creation into smaller, specific and measurable action items, we have incorporated the appropriate people to execute. Today, there are over 80 teams spread across the world, working on various initiatives. We have also moved some people around where it was important to have fully dedicated resources. A lot of time and planning has gone into this process, but it is critical for execution and accountability to take this approach.

Beyond personnel, we have been focused on processes. This process has been across how we implement change, track savings, communicate throughout the organization and already the current way of doing things. The transformation plan goes beyond eating a certain set of targets. We are using this opportunity to fundamentally change and improve the way we operate in order to bolster the overall competitiveness of our plants and our ability to service our customers.

This is what will drive increased profitability in the future. We have a solid foundation in place we have started to execute. As expected, some work streams are progressing faster than others. All in, we remain confident in the ability to meet our financial targets through this transformation.

Let me give you one specific example of the work we have been doing. In the case of working capital, we have set a target of $70 million of cash release over the next three years. We have now mapped the inventory reduction opportunity on a plan-by-plan basis and allocated this responsibility to specific individuals. Concurrently, we are setting targets and introducing reporting tools and KPIs so that we can track and maintain a certain level of inventory and avoid buildup, which has been a problem historically.

This is one example of the work being done across all the verticals to enhance decision-making, improving operating efficiency and cost reduction, all with the aim of improving the quality of our collaboration with customers. As we continue to get further down into the plan, we will provide periodic updates and benchmark of our saving relative to the target. I'm more convinced than ever that this transformation plan would be a success. And the success of the plan is critical to drive the value recovery we are expecting.

There is a lot of work ahead of us, but we are striking a balance in running our business more efficiently and more profitable each day, while pushing forward on the broader transformation. We certainly look forward to updating you on our progress and expect that it would be evident in our future financials. This concludes our review of our third-quarter results. At this time, I will ask the operator to please open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Nick Jarmoszuk with Stifel. Your line is now open.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Good morning. Good afternoon. A question for you on the CO2 credits. Was there an associated expense with them, or was it a 100% margin sale?

Marco Levi -- Chief Executive Officer

Beatriz?

Beatriz Garcia-Cos -- Chief Financial Officer

Nick, Beatriz speaking. Let me guide you through the answer. So the cash amount was $33 million. And we have a margin.

So that is the impact on the P&L that you see that is $1.2 million. You can see that on the caption of the P&L called other gain and loss.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

So if I understand correctly, previously, you paid about $30 million for them and then you booked that roughly $2 million? Or was it $1.2 million? You booked some gain, but you did pay roughly $30 million for them. Is that the right way to think about it?

Beatriz Garcia-Cos -- Chief Financial Officer

Yes. So the margin is 1.2. No, 2 million. Yes.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. So you received roughly 33, and you paid close to 32 for them?

Beatriz Garcia-Cos -- Chief Financial Officer

Correct. Correct.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. All right. Question for you on capex. The LTM figure looks like it's about $25 million.

Previously, you stated capex is 70 to 75 million. Are the facilities being fully maintained? Is there going to be a massive capex catch up figure going forward? Any comment there?

Marco Levi -- Chief Executive Officer

I can take this one. Benoist you want to go to details. Benoist, you're welcome. OK.

If Benoist is not online -- yes.

Beatriz Garcia-Cos -- Chief Financial Officer

Can I make a correction on my previous answer to Nick, just a clarification, because, Nick, the margin issued that is $1.2 million, but you need to bear in mind is that with these rights, you are granted with this right, right? So this is something that you get granted from the government. So we did not pay. Let me put it like this. Yes.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. So in terms of -- how should we think about the -- back to the CO2 credits, the impact to EBITDA? Did it have a benefit of the 1.2? Or did it have a benefit of the 33?

Beatriz Garcia-Cos -- Chief Financial Officer

Well, one thing is the cash impact that, as you said, this is 33 million. And the other one is the impact on your P&L, that is the difference between the value at which you reduced the CO2 in your balance sheet and the value at which you disposed or the fair market value of the CO2 rights. Sorry, Marco.

Marco Levi -- Chief Executive Officer

No. Moving to your capex question, like we already said, this year we have been focused on spending capex to maintain our unit operating without having any kind of EH&S problem. So we are not investing in expanding capacity or particularly new devices. We are in line with our plan and maybe catching up a little bit, spending a little bit more in Q3 versus the previous quarters.

But we are in a ballpark of $25 million spending on capex this year.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. And then last one. Can you just provide any commentary on the contracting environment, what you're seeing from your buyers?

Marco Levi -- Chief Executive Officer

Well, yes, this is a contracting season. All I can say is that everybody tries to be reasonably optimistic and contemplate sort of new recovery considering the fact that in our segments, Q2 and Q3 have been pretty much flat considering the bottom of the demand and customers are rather at, I would say, cautiously optimistic about seeing a U-curve during 2021. This is the key comment that we can provide.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. Right. Thank you.

Operator

Thank you. And this does conclude today's question-and-answer session. I'm not showing any questions at this time. I would now like to turn the call back over to Marco Levi for any closing remarks.

Marco Levi -- Chief Executive Officer

Thank you. That concludes our third-quarter 2020 earnings call. As I mentioned at the beginning of the call, this quarter's performance is a good confirmation of the actions we are taking. However, we have more work to do to return the company to profitability, as well as with regards to execution of our new strategic plan.

Thanks again for your participation today, and please stay safe. Have a great day.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Beatriz Garcia-Cos -- Chief Financial Officer

Marco Levi -- Chief Executive Officer

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

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