Ferroglobe PLC
Q3 2020 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Good morning, ladies and gentlemen. Welcome to the Ferroglobe's Third Quarter 2020 Earnings Conference Call . As a reminder, this conference call may be recorded. I would now like to turn the call over to Beatriz García-Cos, Ferroglobe's Chief Financial Officer. You may begin.

[Beatriz García-Cos:]

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 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 Web site, www.ferroglobe.com.

[Marco Levi:]

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 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, focused on this critical transformation. I will be discussing where we are in the transformation plan later in the presentation.

[Beatriz García-Cos:]

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 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 US and Europe, plant shutdown cost of $5.3 million related to the plant and $2.8 million due to the Bridgeport plant ramp up.

[Marco Levi:]

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, drivers, 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. To date 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. These processes span across how we implement change, track savings, communicate throughout the organization and review 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 on 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.

[Operator:]

Our first question comes from the line of Nick Jarmoszuk with Stifel.

[Nick Jarmoszuk:]

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

[Beatriz García-Cos:]

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 gains and loss.

[Nick Jarmoszuk:]

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 that. Is that the right way to think about it?

[Beatriz García-Cos:]

So, the margin is $1.2 million, no $2 million.

[Nick Jarmoszuk:]

So, you received roughly $33 million and you paid close to $32 million for them?

[Beatriz García-Cos:]

Correct.

[Nick Jarmoszuk:]

Question for you on CapEx, the LTM figure looks like it's about $25 million. Previously you stated CapEx is $70 million 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:]

I can take this one. Beatriz, you want to go to details. Beatriz, you're welcome. Okay. If Beatriz is not online, I -- yes.

[Beatriz García-Cos:]

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. So, this is something that you get granted from the government, so we did not pay. Let me put it like this.

[Nick Jarmoszuk:]

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 million or did it have a benefit of the $33 million?

[Beatriz García-Cos:]

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.

[Marco Levi:]

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, expanding 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:]

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

[Marco Levi:]

Well, 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, I would say, cautiously optimistic about seeing a U-curve during 2021. This is the key comment that we can provide.

[Operator:]

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:]

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:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.