Ferroglobe PLC (GSM) Q1 2022 Earnings Call Transcript

Ferroglobe PLC (GSM -0.40%)
Q1 2022 Earnings Call
May 11, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Ferroglobe's first quarter 2022 earnings call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Gaurav Mehta, Ferroglobe's transformation director and executive vice president of corporate strategy, technology, and investor relations. You may begin.

Gaurav Mehta -- Transformation Director and Executive Vice President of Corporate Strategy, Technology, and Investor relations

Good morning, everyone, and thank you for joining Ferroglobe's first quarter 2022 conference call. Joining us today are Marco Levi, our chief executive officer; Beatriz Garcia-Cos, our chief financial officer; and Benoist Ollivier, 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 2 at this time.

Statements 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 Ferroglobe's most recent SEC filings and the exhibits to those filings which are available on our web page, www.ferroglobe.com. In addition, the discussion today includes references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, and adjusted diluted earnings per share, which are all non-IFRS measures. Reconciliations of these non-IFRS measures may be found in our most recent SEC filings.

At this time, I would like to turn the call over to Marco Levi, our CEO.

Marco Levi -- Chief Executive Officer

Thank you, Gaurav. Good morning or good afternoon, everyone. I am 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 Ferroglobe. Our organization has worked very hard over the past few years and reporting these stellar results is the 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 among many other things, all contributed to these results and the new Ferroglobe 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 or our need to quickly find new suppliers in the wake of the terrible Russia-Ukraine war. We are going through a very unique period.

Ironically enough, it is in the midst of these drastic changes and uncertainties that Ferroglobe 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 the premium on security of supply and seek shorter supply chain. This will only become more valuable over the coming years as suppliers and customers rating strategies with their own ES&G 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 rightsize the footprint and subsequently remaining disciplined in not restarting capacity too quickly has also been a key contributor to this turnaround. That said, we do see some positive signs to consider additional capacity restarts and are assessing this 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 are benefiting immensely from our vertical integration into critical raw material. This has provided us security of supply in areas like electrodes and has helped us mitigate inflationary pressures in other areas such as coal and cohorts. During the first quarter, our revenues increased 26% to $750 million.

And we achieved adjusted EBITDA of $241 million, an increase of 182% over the prior quarter. Our adjusted EBITDA margin more than doubled to 34% in Q1. And our earnings per share on a fully diluted basis was positive $0.80, a significant increase over $0.27 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 5, please. Our Silicon Metal business had a drastic change this quarter as the materially lower fixed price contracts aspired at the end of 2021, as we realized a 108% increase in the average selling price in our shipments, excluding the joint ventures. The index in the U.S. was virtually flat in Q1 as a result of the pre-buying at the year end.

Hence, 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 are index-based and get reset quarterly based on an average price of the per year quarter index.

Hence, 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 given the energy pricing, a transportation strike in Spain this March, which has been leading to stand spillover volumes into Q2 and the delayed restart of the first furnace at Selma.

We continue to see steady demand on the chemical side with 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 curtailments. And 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 this year just yet. Overall, we saw a significant improvement in the contribution from Silicon Metal with quarterly adjusted EBITDA increasing to $150.4 million. There will be always some month-to-month fluctuations driven 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 our assessment around the restart of our 55,000 ton silicon facility in Polokwane, South Africa, a formal decision around the potential restart is targeted for September. Another exciting development is with our Silicon Metal powders project for batteries and other advanced applications. Given the positive responses from our customers, who have been testing our high purity silicon powders over the past year, we are scaling up production to meet growing demand for our products. We will be providing more details around this development shortly.

As our customers' needs continue to evolve, we feel this product and the perfect innovation behind it will be an important part of the Ferroglobe story in the future. Slide 6, please. The silicon based alloys product category also contributed handsomely 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 a 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 products.

We expect to recover some of this volume slippage over the coming quarters. More meaningful is the gap left by the conflict in Russia and Ukraine, given Russia's reliance on the export market. We see upward volume potential in the near term as a result of this. While pricing increased commercial for late February, there is an effect.

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 CIS region, coupled with other logistical issues elsewhere, is supporting a market tightness for ferrosilicon that builds on the strong momentum we saw at year-end in this product. 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 pressure driving margin expansion. Moving to Slide 7, 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 ferrosilicon, the price lag in our contracts means we realize this benefit in Q2. In terms of volumes, our 75,000 tons of shipments was in line with our expectations given the situation in Spain. As a reminder, 97,000 tons shipped the previous quarter was the result of some inventory build and catch-up volumes at year end.

On the cost side, we have seen a direct impact of the inflationary pressures on manganese ore, coke, and other reductants. Given the evolving situation in Russia and 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 will be the second year of the execution phase of our value 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 of in-year EBITDA. This cost savings target is spread across footprint optimization, centralized procurement, continuous plan improvements and a benefit stemming from commercial excellence. On the point around footprint optimization, we recently announced an agreement with the French Works Council on March 30, relating 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 facility. Collectively, this agreement results in 195 potential job terminations and 35 employee transfers to other facilities. The project received validation from the French Labor Administration on May 4. I want to thank all the various government agencies for their deep involvement and 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 uplift 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. Overall, there is tremendous opportunity for improvement by focusing on the core or bolstering our capabilities and ensuring we have the right to support system in place to drive change. In order to create an edge and minimize value 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 this ES&G strategy. At the moment, we are still toward the beginning of this journey, but I am proud to announce that Ferroglobe will be publishing its first ES&G report during the first half of 2022. Needless to say, ES&G 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 new 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 excited 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 said, 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 Beatriz Garcia-Cos, our chief financial officer, to review the financial results in more detail.

Beatriz?

Beatriz Garcia-Cos -- Chief Financial Officer

Thank you, Marco. Please turn to the income statement on Slide 10. During the quarter, our top line grew by 26% to $750 million over the fourth quarter, primarily as a result of pricing in our Silicon and Silicon Alloy product categories. Given the continued strength in selling prices across our product portfolio, combined with some expected recovery in volumes that is further upside in top line growth into Q2.

During the quarter, we faced inflationary impact in key inputs. While we didn't encounter any operational disruptions, the sourcing from alternative suppliers for inputs previously purchased from Russia come at a higher cost. Despite these incremental costs, our margins in the first quarter improved due to a combination of higher pricing as well as improvement we have made to our overall business in optimizing our cost and improving the efficiency of our operations. Cost of sales as a percentage of sales was 48%, down from 65% in the prior quarter.

Our adjusted EBITDA margin hit a record 34%, more than doubling over the prior quarter. Our net profit had a significant jump, yielding earnings per share of $0.80 on a fully diluted basis. This is 196% increase over the $0.27 per share earned last quarter. Please note that with this regards to our Q4 figures, there have been some restatements, specifically relating to the accrual of interest for the Reindus loan for $6.1 million and an update on the earn-out provision of $7.3 million related to selected manganese assets.

Please refer to our 6-K filing for details around these statements. Next slide, please. The key driver for the quarter-over-quarter adjusted EBITDA growth is realized pricing, primarily the result of the resetted silicon prices. This more than offset some shipment issues we had during the quarter and the increase in our cost.

Specifically, on the cost side, the impact of higher raw material prices accounted for nearly half of the cost impact. Energy prices increased adversely impacted us by another $14.5 million, while we have some seasonal impact with winter tariffs in France. The main country of focus remains Spain. The impact of Spanish energy during Q1 was $4.1 million.

There have been some positive developments in the Spain with the government recently announcing plans to cut the price of natural gas, which ultimately impacts the market price of energy. The timing of 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 year. We continue to monitor this closely as we adjust our operational plans and the strategy as we get more clarity around this scheme. Slide 12, please.

Our cash balance improved by $60 million, ending the quarter with $176 million. This lowers our net debt to $342 million at quarter end. Despite the strong growth during the quarter, we maintained a flat level of working capital to sales, thanks to the discipline and financial controls we introduced in operating our business over the past year. Following the increase in account receivables, we have expanded our factoring facilities, which will help accelerate our cash generation going forward.

Our working capital also includes some one-offs like settlement of some mobile payables and the cash payment for CO2 to address our 2021 deficit. With improvement in our financial performance, we'll continue to bolster liquidity and enhance our overall credit profile. Next slide, please. Q1 represented the second consecutive quarter of positive operating cash flow with $66 million up $44 million over Q4, driven by a strong quarter.

Increases in accounts receivables and inventories yielded a working capital increase. During the quarter, the actual cash impact of our capex spend was $9.1 million, and the net impact of cash flow from financing activities was $2.6 million. As we highlighted on our prior calls, we were expecting a slower ramp-up in free cash flow generation versus EBITDA growth in Q1, given items such as the double coupon payment paid during the quarter, CO2 credit purchase an increase in working capital. We now expect an acceleration in cash flow generating generation going forward.Slide 14, please.

Looking at the year ahead, our priorities for the cash we expect to generate target two key areas. The key priority is to reduce the quantum of our debt. Through the past few years, our debt balance has increased, and we are committed to reducing the debt significantly. The logical place for us to start are the 9% super senior notes, which we can pay back at par through 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 and for general corporate purpose. We have been working on this over the past few months and are targeting to close a transaction by the end of Q2 with the goal of deleveraging, we are currently evaluating options for our capital structure, which offer a cost of debt in line with our current credit profile, sufficient flexibility to operate our business, and also enables debt prepayment in a cost-effective way. We will be providing an update on these once we have decided our path on our path forward. After several years of having a scale back on capex spending, the other priority is to increase our capex spend to $75 million, which we deemed to be a good level going forward.

All in all, a lot of exciting prospects on the region as our financial results continue to improve. At this time, I will ask the operator to please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question today comes from the line of Martin Englert from Seaport Research. Your line is open. 

Martin Englert -- Seaport Research Partners -- Analyst

Good afternoon, everyone.

Marco Levi -- Chief Executive Officer

Hello, Martin.

Martin Englert -- Seaport Research Partners -- Analyst

So last quarter, you noted an estimated EBITDA for January around $74 million. Can you just talk a little bit about how things progress through the balance of the quarter here to kind of bridge to the $241 million quarterly results?

Marco Levi -- Chief Executive Officer

Yes, Martin. Basically, what happened is volumes going up in February and March versus January. January is always not a full month. And then there has been the usual price creep, positive creep, mainly due to the alloys pricing dynamics.

Martin Englert -- Seaport Research Partners -- Analyst

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

Marco Levi -- Chief Executive Officer

No. I would say no, no. It's mainly not too much spot is normal creep because, as you know, the price of alloys get adjusted either monthly or be monthly or on a quarterly basis. So you have -- it's natural to have when the price goes up, it's natural to have some positive price creep.

Martin Englert -- Seaport Research Partners -- Analyst

Kind of coming back to the commentary in the release and the prepared remarks, you spoke about the financial momentum continuing. You gave some color on the segments. I think on silicon based alloys, you talked about margin expansion and maybe there was margin expansion anticipated on Silicon Metal. But is there any more detail that you can provide as we think about 2Q here, maybe across the business segments where we're seeing margin expansion versus steady in contraction?

Marco Levi -- Chief Executive Officer

Well, I mentioned -- I gave a few items during reading my script. But in a nutshell, the way we see it in Q2 is pricing stronger than cost increase across our -- all across our main product line.

Martin Englert -- Seaport Research Partners -- Analyst

Top rate on the...

Marco Levi -- Chief Executive Officer

This margin expansion.

Martin Englert -- Seaport Research Partners -- Analyst

OK. Margin expansion across all the business segments.

Marco Levi -- Chief Executive Officer

Yes.

Martin Englert -- Seaport Research Partners -- Analyst

OK. And then anything on the cost side of things when we think about like the cost per ton across the business segment, I mean there is a notable step down in good cost management quarter over quarter here, but how we think about that in 2Q versus 1Q?

Marco Levi -- Chief Executive Officer

Well, the way we see it at this stage, there is the most substantial cost increase on Silicon Metal between 4% and 5%. We see a slight reduction, about 2% points in Silicon Alloys and a rather flat cost picture for manganese.

Martin Englert -- Seaport Research Partners -- Analyst

That's helpful. And if I could one last one here, and you touched on this, reviewing the financials and capital allocation, but thoughts around when you may be able to explore a potential refinancing of the debt looking beyond the super seniors, given the lagging nature of the ratings agencies when that window might open for you?

Beatriz Garcia-Cos -- Chief Financial Officer

Yes, Martin. This is Beatriz speaking. We are working at the moment on that. So as soon as we have news, we'll be commenting on that.

Martin Englert -- Seaport Research Partners -- Analyst

Great. All right. Thank you for all the detail, and congratulations on navigating a fairly challenging market.

Beatriz Garcia-Cos -- Chief Financial Officer

Thank you, Martin. 

Martin Englert -- Seaport Research Partners -- Analyst

Thank you. 

Operator

Thank you. Your next question comes from the line of Brian DiRubbio. Please go ahead. Your line is open.

Brian DiRubbio -- Robert W. Baird and Company

Good afternoon, Marco and Beatriz. Just a couple of questions for you. Just with the change in the contracts this year that you're experiencing, which is helping with results 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?

Marco Levi -- Chief Executive Officer

Well, the -- if you talk about -- what we are referring to is Silicon Metal. This comment was to the contracts of Silicon Metal. And we moved from -- excluding joint ventures, from contracts which we're covering about 70% of our traded volume in Silicon Metal with fixed yearly price to less than 10% of our volume on fixed yearly price. So basically, we have moved all our contracts to index.

Brian DiRubbio -- Robert W. Baird and Company

And are those contracts though still expiring at the end of this year? Or are those index-based pricing contracts for multiple years?

Marco Levi -- Chief Executive Officer

We have variable duration of our contracts in Silicon Metal. There are contracts which have a longer tenure, three years, two years, one year, a different quarter.

Brian DiRubbio -- Robert W. Baird and Company

And just trying to think about how your customers are viewing security supply. Is that going to be able -- are you going to be able to get more customers to engage into longer-term contracts, even if they're index based?

Marco Levi -- Chief Executive Officer

Yes. This is what we are looking for. And the supply security really popped up last year in all the discussions, but is still pretty valid due to all the complexity that we -- everybody has been living in supply chain. So there is a natural trend to cover supply security with more local supply.

And for the geographies that we cover, of course, having our asset footprint spread properly is an advantage, having like I said, our back integration in cohorts and partial back integration in coal are definitely an advantage for us in satisfying this customer demand of supply security.

Brian DiRubbio -- Robert W. Baird and Company

And then Beatriz, given -- I mean, the results are strong this quarter, with the company's business over the long term is volatile. How are you thinking about the optimal capital structure? Is there a certain amount of gross debt that you that you'd like to hold? Is it mid-cycle leverage target? I just love to get a sense of how you're thinking about the future capital structure of the company?

Beatriz Garcia-Cos -- Chief Financial Officer

Let me put it like this. So I think today, we have recognized that the cost of debt does what reflect the credit profile of the company. So what we are doing at the moment is we have the window to refinance our supersite first step for us to start is to refinance our super senior that goes without the cost in till October 2022. And then as we said, we plan to use our cash generation to cover two objectives.

Number one is to continue to further reduce down debt; and number two, to continue to invest in our assets with $75 million of capex in 2022. And we expect this level of capex to continue going forward.

Brian DiRubbio -- Robert W. Baird and Company

So if you're looking to reduce debt, what's the option of debt do you think that you should be holding on the balance sheet?

Beatriz Garcia-Cos -- Chief Financial Officer

Well, that's something that we are working at the moment. So we are not able to put a figure out there. But for sure, as soon as we work on that, we'll be communicating on that. But basically, as I said this to the as much as we can.

Brian DiRubbio -- Robert W. Baird and Company

Understood. Appreciate the color. Thank you.

Operator

Thank you. Your next question comes from the line of Neill Morgan from BlueBay. Please go ahead. Your line is open.

Neill Morgan -- BlueBay Asset Management -- Analyst

Thanks very much. And congratulations for the very strong quarter and appreciate the comments on margin expansion into Q2. Do you have -- I appreciate there's a lot going on in the market, not least Ukraine, Russia, energy prices, etc. Are you able to -- does your visibility extend into H2 currently? Or are you really just able to see things quarter by quarter.

Perhaps I start there?

Marco Levi -- Chief Executive Officer

Well, I can tell you what we see right now. We see our chemical business, which is Silicon Metal related being pretty strong. And like I said, customers are planning for increased production, always related to Silicon Metal, we see the aluminum market slowing down due to tremendous pressure related to energy cost -- when you move to the steel business, there are quite different dynamics because, of course, the war has an impact. The overall global production is down, but there are geographies where the production is holding due to the gap of the output in Eastern Europe.

So overall, we don't see at this stage any drastic change in the demand profile.

Neill Morgan -- BlueBay Asset Management -- Analyst

OK. Thank you. That's very helpful. And then just 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, and that mainly relates to the alloys, both silicon based alloys and manganese based alloys rather than the Silicon Metal business? Is that the right takeaway?

Marco Levi -- Chief Executive Officer

It is the right takeaway. I mean, the Ukraine historically has been extremely 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 has a big impact on that. Russia is the biggest quarter of ferrosilicon and depending on the matters taken by the various countries and the possibilities to pay material for sure, there is an impact overall on ferrosilicon demand related to the war.

Neill Morgan -- BlueBay Asset Management -- Analyst

OK. Thank you. And my last question and perhaps just maybe trying to think about Brian's question about the capital structure, but in a slightly different way. Would -- is it an objective or 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 cash, RCF, and working capital facilities, and equity as to get rid of any leverage in the earnings of the company?

Beatriz Garcia-Cos -- Chief Financial Officer

Yes. Thank you for the question, Neill. I think our primary objective, as we mentioned for this year in 2022 is with the cash that we're going to be generating increasingly from is to accomplish two objectives. One is to deleverage as much as we can the company.

We are working on that at the moment and second, to invest in our capex program. What we are doing is, I think we already commented on that. We increased our factoring or working capital facilities, mainly on what we call factoring. We increased our facility for an additional $30 million, and this is bringing liquidity into the business.

And the second thing that we are doing is to work with an ABL program in the U.S. that will add working capital flexibility into our business and other corporate proposed users.

Neill Morgan -- BlueBay Asset Management -- Analyst

Just a follow-up on the ABL in the U.S., what kind of size or what kind of range of size would the company think -- or is the company looking for?

Beatriz Garcia-Cos -- Chief Financial Officer

We are working at the moment on that. So let me revert as soon as we have something close. But we have ability our borrowing base is at least of $100 million, and then we can we will decide what is the size of our -- the size of the ABL that we were.

Neill Morgan -- BlueBay Asset Management -- Analyst

OK. Thanks very much. Appreciate the answers.

Operator

Thank you. There are currently no further questions. I will hand the call back to Marco for closing remarks.

Marco Levi -- Chief Executive Officer

Thank you. That concludes our first quarter earnings call. Once again, we are super excited about the quarterly results we have reported today 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.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Gaurav Mehta -- Transformation Director and Executive Vice President of Corporate Strategy, Technology, and Investor relations

Marco Levi -- Chief Executive Officer

Beatriz Garcia-Cos -- Chief Financial Officer

Martin Englert -- Seaport Research Partners -- Analyst

Brian DiRubbio -- Robert W. Baird and Company

Neill Morgan -- BlueBay Asset Management -- Analyst

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