Ferroglobe - Q3 2024

Transcript

Speaker 1

Good morning, ladies and gentlemen, and welcome to Ferroglobe's third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to turn the call over to Alex Rotonen, Ferroglobe's Vice President of Investor Relations. You may begin.

Speaker 2

Thanks, Marvi. Good morning, everyone, and thank you for joining Ferroglobe's third quarter 2024 conference call. I want to apologize for the delay. Our operator had technical issues with their phone line, so we apologize. Joining me today are Marco Levi, our Chief Executive Officer, and Beatriz García-Cos, our Chief Financial Officer. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to slide 2 at this time. "Statements made by management during this conference call that are forward-looking are based on current expectations. Factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe's most recent SEC filings and the exhibits to those filings, which are available on our website at ferroglobe.com.

In addition, this discussion includes references to EBITDA, adjusted EBITDA, adjusted gross debt, adjusted net debt, and adjusted diluted earnings per share, among other non-IFRS measures. Reconciliation of non-IFRS measures may be found on our most recent SEC filings. Marco.

Speaker 0

Thank you, Alex. Thanks for joining us on the call today. We appreciate your interest in Ferroglobe. Q3 was another solid quarter. We reported Adjusted EBITDA of $60 million, up from $58 million in the prior quarter, driven by higher realized pricing, improved spreads in manganese alloys, and lower energy costs. On contracted volumes, prices usually lag indexes by two or three months, depending on the product. However, end market demand remained muted, and pricing continues to soften, which, as discussed last quarter, will put pressure on our fourth quarter results. Given our results to date and current outlook, we are reaffirming 2024 guidance of $150-$170 million. We expect to benefit from improved ferro-silicon volumes and prices in the U.S. as a result of the ferro-silicon trade cases we initiated earlier this year.

This favorable decision by the U.S. Department of Commerce resulted in duties on all ferro-silicon imports from Russia, Kazakhstan, Malaysia, and Brazil. More specifically, in June, the U.S. imposed anti-dumping and countervailing duties of 283% and 748%, respectively, on all ferro-silicon imports from Russia. For Brazil, Kazakhstan, and Malaysia, preliminary anti-dumping duties up to 22%, 6%, and 9%, respectively, were announced on November 1st. These actions will greatly reduce the imports of artificially low-priced ferro-silicon and level the playing field, benefiting local producers such as Ferroglobe. As a result of these new policies, we expect to see an improvement in the U.S. FeSi market in early 2025, as inventory in the channel is cleared and new orders are placed. Our flexible footprint provides resilience, enabling us to manage the short-term environment effectively and adjust production to match current demand.

Part of this adjustment includes curtailing production in France approximately one month early to maximize the rebate from our French energy agreement. As part of our continued effort to improve the company's performance, we recently started implementing a new S&OP process, so-called Sales and Operations Planning Process, which focuses on demand planning, optimizing raw material purchases, production, logistics, and sales. This will allow us to operate Ferroglobe in a more integrated way with lower costs and lower working capital, enhancing our financial performance and cash flow. We continue to move forward with our long-term brownfield expansion plans to increase our silicon metal capacity in the U.S. to capture the higher demand that we expect to materialize from solar and EV batteries in the coming years. This demand is forecasted by CRU to grow by nearly 140,000 tons to 365,000 tons by 2029.

In addition to increased capacity, the state-of-the-art furnace is expected to be the most efficient and cost-competitive in North America. The furnace will incorporate Ferroglobe's technological know-how and expertise accumulated over the decades as the leading silicon metal producer in the West. We are currently on track to file a permit application in the next few months. As a reminder, the approval process takes approximately 18 months, with construction taking an additional 24 months. We anticipate end markets improving in the second half of 2025, except the US ferrosilicon market, which is expected to improve starting in the first half as a result of the mentioned trade case. According to the World Steel Association, the global steel demand in 2025 is forecast to rebound by more than 3%, excluding China.

The aluminum market is also expected to see better conditions in the second half as interest rates continue to decline and auto and construction industry should begin to grow. A Bloomberg analyst forecasts a 3.3% increase in the global aluminum demand in 2025. We're also excited to report that we agreed to supply silicon metal to a new large customer in the Middle East for their renewable energy initiative, highlighting our strong market position and success in expanding our solar supply chain presence. This is a significant opportunity for us to accelerate growth going forward. In September, we paid our quarterly dividend of $0.013 per share in the third quarter, and we also executed a small portion of our stock buyback program and established a 10b5 share repurchase plan. Our soon-to-be-issued third ESG report highlights our commitment and progress on multiple fronts.

We commit to a decarbonization plan to reduce our combined Scope 1 and Scope 2 carbon emissions by at least 26% by 2030, compared with the 2020 baseline. Also, we are shifting to clean, cost-effective biocarbon at our Sabón silicon plant to help achieve those carbon reduction goals. The new biocarbon production plant is expected to be operational by 2026 and funded with substantial assistance from the Spanish government. In addition, we have made significant progress in silicon metal traceability and compensating the entire value chain from raw material to final products. Next slide, please. Our third quarter revenue came in slightly lower than the second quarter due to lower volumes in all three segments. Despite the soft demand, we performed well, improving our adjusted EBITDA to $60 million. Operating cash flow in the third quarter was $11 million, an improvement of $9 million over the prior quarter.

Free cash flow was negative $10 million and an improvement of $10 million over the prior quarter. My CFO, Beatriz García-Cos, will come back to these numbers more in detail later. Next slide, please. Talking about silicon metal, revenue declined 5% in Q3 to $196 million, down from $204 million in the second quarter. Adjusted EBITDA increased by 17%, driven by a 5% improvement in realized pricing over the prior quarter. Our average price for silicon metal increased by 3% in Europe and 7% in the Americas compared to the second quarter. During the third quarter, index prices decreased approximately 15% in the US while remaining flat in Europe. The difference between the index and the realized price was the result of the three-month lag in price realization for contracted volumes. Overall, shipment volumes were down 9%, with all regions showing lower shipments.

European and U.S. shipments declined by 6% and 9%, respectively. The silicon metal outlook is mixed. Chemical and electronics markets are stable, and the aluminum sector remains weak in both Europe and in the U.S. in the short term. We believe the broad stimulus in the U.S. and China, combined with interest rate cuts, should begin to drive improved demand in the second half of 2025. Next slide, please. Let's move to silicon-based alloys. This segment had an adjusted EBITDA of $2 million in Q3, down from $10 million in the second quarter. This decline was primarily due to lower fixed cost absorption. Average realized prices were flat compared to the prior quarter in Europe and North America. The European ferro-silicon standard index is currently at a four-year low, reflecting lackluster demand and increased imports, mainly from Central Asia. These products have gained market share due to predatory pricing.

To preserve a level playing field, we continue to work on potential trade measures within the EU. Both U.S. and European shipments volumes were down 1% in the third quarter as industrial activity remains muted. In its latest World Steel Association report, U.S. steel production grew 0.2%, with the U.S. posting a 1.2% growth in September. We expect the European market to be stable in the near term, while the U.S. market is expected to benefit from Ferro-silicon trade case and a more robust economic outlook in 2025. Within the silicon alloy segment, the foundry continues to outperform. Next slide, please. Let's move to manganese alloys. Revenue decreased 9% to $90 million in Q3, driven by a 24% decrease in European shipments due to soft demand.

This was partially offset by a substantial 16% price increase in the third quarter, resulting in an Adjusted EBITDA of $28 million, up 100% over the previous quarter. After a significant run-up following the shutdown of South32 Gemco mine in late March, manganese ore prices have since dropped by approximately 60%. We continue to benefit in the third quarter as we sold our lower cost inventory at higher realized manganese alloy prices. The underlying demand is still weak and is expected to continue for the fourth quarter and the first half of 2025. However, we still anticipate spread to remain positive. Now, I would like to turn the call over to Beatriz García-Cos, our Chief Financial Officer, to review the financial results in more detail. Beatriz. Thank you, Marco. Before I go through our third quarter results, I will provide an update on the share repurchase program.

During the quarter, we purchased approximately 117,000 shares at an average price of $4.22. The modest approach with our buyback program is a result of the current uncertainty in our end markets. As we begin to see signs of improvement and better visibility, we plan to become more proactive. Our first priority is ensuring that we maintain a strong balance sheet to make sure that Ferroglobe is well positioned to withstand the down cycle that we are currently experiencing, and also have the ability to invest in growth markets such as solar and electric vehicles as these opportunities materialize. In addition to our discretionary buyback program, we set up our 10B5 program, allowing purchases during a closed window if certain criteria are met. As a reminder, we need $120-$150 million of cash to operate our day-to-day business.

In 2025, our EUR 35 million SEPI loan in Spain is due in two payments, with the first half due in Q1 and the remainder in Q2. Please turn now to slide 10 for a review of the income statement. Sales decreased 4% in the third quarter to $434 million. During Q3, we saw lower volumes across all three segments, with stronger silicon metal and manganese alloys prices, partially offsetting weak demand. Raw materials and energy consumption for production remained flat, with Q2 at 59% of sales, primarily driven by higher energy compensation in France. Staff cost increased $5 million in the third quarter to $72 million, primarily due to profit-sharing arrangements in Europe. Adjusted EBITDA in the third quarter was $60 million versus $58 million in the prior quarter. During the quarter, we earned approximately $20 million from our 2024 French energy agreement, which increased our EBITDA by the same amount.

Due to early hiring of our French operations, we now expect to benefit from the energy agreement by approximately $60 million for the year, compared to our prior estimate of approximately $40 million. Next slide, please. Our adjusted EBITDA was $60 million in the third quarter, up 5% from Q2, driven primarily by stronger realized prices. Silicon metal prices increased 5% from the prior quarter, and manganese alloys were up 16%, while silicon-based alloys were flat. Stronger third-quarter sales prices benefit from higher index prices in the second quarter due to a two to three-month lag between indexes and realized prices. Volume negatively impacted our adjusted EBITDA by $8 million, driven by soft demand across our three segments, with volumes declining by 10%, 3%, and 21% in silicon metal, silicon-based alloys, and manganese alloys, respectively.

Head office and non-core business negatively impacted adjusted EBITDA by $5 million as a result of lower volumes at our mining operations. Slide 12, please. During the third quarter, our free cash flow was negative $10 million, impacted by use of cash by working capital of $21 million. This was partially offset by $11 million partial collection of the French energy rebate. We expect to collect another $20 million in the fourth quarter and the remaining $30 million in early 2025. Capex outflows in the third quarter were $21 million versus $22 million in the prior quarter. We paid $2.4 million or a 1.3 cent per share dividend on September 27, and are scheduled to pay our fourth-quarter dividend of 1.3 cents per share on December the 27th. Next slide, please.

We ended the third quarter with a cash balance of $121 million, down from $145 million at the end of the second quarter. Our positive net cash position declined from $64 million to $32 million in the third quarter, while our adjusted gross debt remained moderate, ending at $89 million as of September 30. Next slide, please. And at this time, I'll turn the call back over to Marco. Okay. Thank you, Beatriz. Moving to the key takeaways on slide 15. We had another strong quarter. We have an adjusted EBITDA of $60 million as our realized manganese alloy and silicon metal prices improved over the second quarter. The favorable U.S. ferro-silicon anti-dumping decision is final regarding Russia and preliminary for Brazil, Kazakhstan, and Malaysia. We expect this successful trade action to provide Ferroglobe with a strong tailwind in the U.S. in 2025 and beyond.

We are managing our production to match the current demand and are proactively controlling expenditures. As a result of lower interest rates and positive forecasts for steel and aluminum, we anticipate better market conditions in the second half of 2025. We continue executing our capital return policy through ongoing dividends and share repurchases. Operator, thank you. We are ready for questions. Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Again, press star one to join the queue. Your first question comes from the line of Lucas Pipes with B. Riley Securities. Please go ahead. Thank you very much, Operator. Good day, everyone. Marco, my first question is on the U.S. expansion that you had mentioned in the prepared remarks. Could you provide a bit more color as to the cost, the capacity? I think you mentioned a timeline in regards to permitting, but if you could reiterate some of those comments, that would be helpful. Thank you very much. Yes, Lucas, thanks for the question. We confirmed that our expansion will take place brownfield, as we firmly believe that the expansion brownfield is going to be definitely very, very competitive. Our estimate is that the Capex required is between 30%-50% lower than a greenfield.

We are excited about it because we have technology available that allows us to believe that our investment is going to be extremely cost competitive due to the size of the furnace or the furnaces that we're going to put at our location. We have not decided yet about the location, but as we are applying for permits, at least at two of our locations in the U.S., and we are in the middle of the work to apply for these permits. All this work, on average, lasts about 18 months, and then it takes us about two years to build the brownfield capacity based on our requirements. We have not decided yet either about the location or the capacity addition that we're going to put in place, but the expectation is that we are going to start up new capacity latest at the beginning of 2028.

That is very helpful, and Marco, just to go back on the capacity figure for this, any ballpark that you could point to as kind of output for one firm would be helpful to get a bit better understanding. Yeah. I mean, what we have in mind is minimum 60,000 tons, but it could be bigger depending on the technology that we choose. And in terms of a capital cost per ton of capacity, is there a rule of thumb to think of for this specific development? I can give you a market indication: $200 million. Okay. Thank you for this. Turning a little bit more to the near-term outlook, some movement on working capital expected in Q4, if I heard it right.

But I wondered if you could maybe just put everything together for Q4 between kind of market conditions, pricing, working capital, where would you expect to end the year from a free cash flow perspective? Thank you very much. Yeah. Beatriz, we'll answer this question. Hi, Lucas. Thank you for the question. I think on Q2, we already announced a release of working capital. We confirmed the release of the working capital in Q4. The size of this release could be, I'm talking overall working capital, around $15 million, $1.5. This is what we expect at the moment. Okay. And the operational market outlook for Q4, how would that factor into expectations? Yeah. So as you know, we are idling our plants in France for Q4, right? So we have been building working capital in Q2 and in Q3, right? Sorry, in Q3.

We're going to be releasing it in Q4 2024 as we need to sell from our inventories, right? And of course, the benefit of that is the RN benefit on the energy, where we were expecting initially to get EUR 14 million. You remember at the beginning of the year, this is what we said. Now we are seeing that as a result of this early idling of our plants in France, we're going to be going up to EUR 60 million for the year. Okay. Marco, Beatriz, thank you so much for all the color and to you and the team. Continued best of luck. Thank you. Your next question comes from the line of Martin Englert with Seaport Research. Hello. Good day, everyone. Hello, Martin.

Within the silicon-based alloy segment, there was slight movement in volumes, so they were essentially flat quarter on quarter, year on year, but the fixed cost absorption was cited as an issue. Margins were fairly compressed. Can you provide more detail on that? Is there some dynamic with differing volumes and fixed cost trends across your regional footprint that prompted this, or was there something else behind it? I can start addressing this question, and then Beatriz, feel free to add comments. The market in Europe for the bulk of ferro-silicon, which goes to steel, I'm excluding considerations on foundry now, is defined by, like I say, the very flat demand at low level, and in Europe, the further price erosion is driven by increased, continuously increased imports, not only from Kazakhstan that I always mention, but also from Egypt, for example, or Iran.

So there are massive imports of ferro-silicon standards in Europe that, combined with a weak demand, drive price erosion. And indeed, in my speech, I mentioned that the price level in this quarter has already reached the lowest level that we have seen in the last four years. So definitely margin compression. In the U.S., there is a different dynamic. I would say the market is rather, steel market is rather flat in the U.S. But there are steel inventories, like we mentioned in the last quarter, of imported materials, including Russia, that prevent the price to recover and our sales to develop. So being in these two situations in the U.S. and Europe, we have reduced our production, and from there, our cost of absorption has gone up. I don't know, Beatriz, if there is anything else that you can add.

You said maybe the only comment to add, Martin, is, as I was mentioning to Lucas, the energy benefit has been benefiting silicon and manganese business, right? But not so much the silicon-based alloys business because we have only a small plant in France, Piercy, that produces the ferro-silicon products in part in Lausanne. So the positive benefit of the energy has not been impacting the cost as on the other two businesses, and therefore this impact on the fixed cost, lack of fixed cost absorption. Margin compression, like you're saying. That's the margin compression, yeah. Are you able to provide a little bit more color on the volumes? They're largely flat-ish. It seems, correct me if I'm wrong, but the activity in both the E.U. and U.S., from a demand perspective, is largely flat-ish, but you noted production is lower.

For ferro-silicon, are you able to share what the change in production was quarter on quarter within the U.S. or North American footprint versus the Europe footprint? For these details, Martin, we need to go back to our numbers and give you the right production rate. I don't have them with me now. Okay. That's fine. We can circle back on that. I do appreciate the color. Pivoting to the U.S. ferro-silicon import tariffs that we've seen, do you feel that the tariff levels are sufficient to properly protect the U.S. market, and are they kind of aligned with where you expected they might shake out? And then, in addition to that, if you can just play out your expectations for how this is going to impact the market from a price volume perspective if we look forward into first half 2025.

We need to clarify the topic here because if we talk about imports from Russia, everything has been already decided, and the total fees are far beyond our expectations, right? So a 1,000% fee was totally unexpected, but this is real. And if you look at the volumes in 2023 sold by Russia to the U.S., are about, looking at imports, 70,000 tons, so about 30%-35% of the consumption of the steel industry in the U.S. So this is a fact. It's there, and these volumes will have to be supplied by somebody else: local producers and other producers. When we talk about Kazakhstan, Malaysia, and Brazil, there are some predetermined conclusions, but they are not final. So I am not like the famous blogger in the U.S. who pretends to know the decisions of the authorities.

I wait for the authorities to tell us what are the final decisions about the inquiries of Kazakhstan, Malaysia, and Brazil. What I can tell you is that these three countries in 2023 accounted for another 70,000 tons of ferro-silicon supplied to the U.S. And for sure, there will be measures taken toward these three countries. We have to understand the size and still understand the impact. Another information I can confirm is that we have acquired two new contracts on ferro-silicon standard in the U.S. for 2025, contracts which are significant, but I assume that also the purchasers are waiting for the confirmation of the duties on these three countries to make their decisions on 2025. For the two new contracts, maybe combined, is there a range of volume that you would anticipate annually gaining from these? Well, like I said, I don't want to refer to specific contracts.

Like I said, there are significant volumes. We are talking about thousands of tons. But lacking the final decision of the authorities, which is due in November, the customers are waiting for finalizing the negotiations for 2025. So I don't have a defined growth number for our sales of ferro-silicon in 2025 yet. Okay. Understood. Given your comment just a few seconds ago about not wanting to provide the detail, which I understand on the contracts, but can you provide anything else? You noted it was a Middle Eastern new silicon contract. Is that correct? Yeah. This is related to silicon metal and the startup of one silicon production, large silicon polysilicon production unit in the Middle East. We are being invited to the table, and we have got part of the business, and this goes to the fact that our volumes of silicon metal are completely traceable.

And this has been given us the opportunity to win some additional new business in the Middle East, totally related to solar. For the Middle Eastern project, can you remind me of the polysilicon capacity at that plant? 100,000 tons, as far as I know, which will ramp up during 2025. Okay. Okay. Excellent. I appreciate all the detail. Thank you very much and good luck. Thank you. Thank you, Martin. There are no further questions at this time. I will now turn the conference back over to Marco Levi for closing remarks. Thank you, Marvi, and thank you for pronouncing my last name correctly. Appreciated. Combined with the benefit of phasing import duties into the U.S., we expect better overall market conditions to materialize in the second half of 2025 as the full effect of interest rate cuts and destocking begins stimulating demand next year.

Thank you again for your participation. We look forward to hearing from you on the next call. Have a great day. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.