Ferroglobe PLC

Good morning, everyone, and thank you for joining Ferroglobes' second quarter 2021 earnings conference call. Joining me today are Marco Levy, our Chief Executive Officer, Benoit Olivier, Ferroglobes' Chief Operating Officer and Deputy Chief Executive Officer, Gurad Mehta, our Transformation Director and EVP of Strategy and Investor Relations, and Jorge Labin, Group Controller. Before we get started, with some prepared remarks, I'm going to read a brief statement. Please turn to slide two 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 Federal Globe's most recent SCC filings and exhibits to those filings, which are available on our web page. 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 known IFRS measures. Reconciliation of these known 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 the second quarter, as well as our business and operating environment. Then I will provide some additional details on our financial performance and key drivers behind our results. And finally, we will provide an update on the execution of our strategic plan. At this time, I would now like to turn the call over to Marco Levy, our Chief Executive Officer. Next slide, please.

Thank you, Beatrix, and welcome to our second quarter 2021 earnings call. We recognize that we are towards the end of summer and appreciate everyone carving out some time to participate on today's call. This quarter marks an important inflection point for Ferroglobe and its turnaround. Since my joining of the company, One of the top priorities has been the return to profitability. I am pleased to report that we have delivered a positive net profit during the second quarter, and our expectation is that we will continue to build on this momentum in the near future. Overall, we are beginning to see an acceleration of our financial performance. Our top line is benefiting from robust market conditions across all our key products, which are translating into higher demand and stronger pricing despite having the lingering impact of fixed-priced contracts, which are significantly below current spot levels. The rolling off of a portion of these lower-priced contracts during the back half of the year further supports the acceleration in our performance. On the demand side, we now expect this momentum to continue through the remainder of the year. Customers across the chemical, aluminum, and steel sectors are signaling strong demand into next year, and we remain in active discussions to meet their needs for the remainder of 2021, and are even engaged in discussions for 2022 with some larger customers. well ahead of the typical negotiation season. The cost side of the equation continues to present an area of challenge. On the one hand, we are successfully executing numerous initiatives underlining the strategic plan focused on driving down production and corporate overhead costs. On the other hand, we face some cost pressures which are limiting our full potential. During the quarter, we were challenged by significantly higher energy costs in Spain, inflationary pressures in certain raw materials, and idling costs in France. Furthermore, from a cash perspective, we had some one-time non-recurring outflows relating to the purchase of CO2 rights previously sold in 2020. and financing-related costs. We remain extremely focused on cost management and seek to drive margin expansion as we stabilize the cost side of the equation and put the non-recurring items behind us. With regards to the financing, I need to acknowledge the hard work and contributions of our employees, our board, our investors, and our advisors. This has been a long journey, and the aligning of the various components of the financing was certainly not an easy task. The successful closing of the financing, coupled with a strong market backdrop, sets the stage for an exciting back half of the year. We have several important initiatives tied to the strategic plan to complete, and the financing provides the resources and the flexibility to execute these initiatives. At the midpoint of the year, I am pleased that we remain on course to deliver the turnaround. We are systematically reconfiguring how we operate this business to ensure long-term competitiveness across the cycle and the recovery in value creation. This quarter's financial results further validate the plan and overall execution. And we remain confident in the ability to accelerate our performance in the second half of this pivotal year. Moving ahead to slide six, please. Second quarter sales, we have $418.5 million, top 15.8% from the per year quarter. predominantly driven by higher average realized selling prices. During the quarter, our total volumes across all products were up 2.8%. We realized the benefit from the gradual ramp-up in silicon metal and silicon-based alloys, while manganese alloys volume was adversely impacted by higher production costs in Spain, where we had to manage our production levels. as well as being faced with some constraints in procuring manganese ore. We had strong improvement in our adjusted EBITDA. During Q2, our adjusted EBITDA was $34.1 million, which is an improvement of 54.5% from the previous quarter. During the quarter, we returned to profitability. The net profit for the quarter was $0.7 million, compared to a loss of $68.5 million in the prior quarter. Our operating cash flow increased 107% from $18.3 million in Q1 to $37.8 million in Q2. And despite some significant one-time cash payments, we returned to positive net cash flow of $21.6 million during the quarter. Q2 was marked by improvement in our top line, coupled with improved fixed cost absorption across our operating footprint. During the quarter, we experienced some increase in the cost of key inputs. However, the largest single jump has been energy prices in Europe, particularly in Spain, where the market price of energy has increased from approximately 50 euros from Megalotower to approximately 80 euros per megawatt hour in Q2. For the sake of clarity, these are references to the spot prices. Despite the increase in our top line and the restart of some previously noted capacity, our working capital marginally increased by $0.6 million quarter over quarter. The continued emphasis on operational efficiency and financial discipline is translating into improvement of working capital even as the business ramps up. The net debt increased by $23.7 million during the quarter as a result of the first tranche of the new senior secure debt financing being funded in Q2. We ended the quarter with net debt of $358 million. Please note that these are our quarter end figures and do not reflect the pro forma impact of the incremental $20 million of the senior secure financing tranche, which closed in July. And finally, our cash balance increased by $22.1 million, ending the quarter at $106 million. We are proud of these results, but feel there is significant room for improvement due to the added benefit of our previously announced capacity restarts and the gradual price increases we are anticipating. Furthermore, we have now passed the point of incurring significant one-off expenses tied to specific transactions. All in all, these factors should contribute to an acceleration of our financial results and a return to stronger margins. Next slide, please. turning first to silicon metal on slide seven. First Globes realized average selling price for silicon metal was $2,347 per metric ton in Q2, an improvement of 2.7% versus the previous quarter. The index, or spot pricing evolution in the US, increased by approximately 19% during the quarter, while the European spot index increased by 9% during the same period. At the end of Q2, we have approximately 65% of our silicon metal business contracted, excluding the JV volumes. Please keep in mind that many of these contracted volumes were at fixed prices, which were negotiated at the end of 2020 when the pricing environment was drastically different. and our average realized prices will not reflect the same pace of momentum reflected in the index until these contracts roll off at the end of the year. The volume trend chart on the top right, slide 7, shows a 9.9% increase in silicon metal shipments over the previous quarter and approximately 67,300 tons. This is partially attributable to some incremental volume following the restart of one firmness at the Sabon Spain facility and one firmness in Montrachet France during the quarter. EBITDA from our silicon business improved from $14.8 million in Q1 to $17.8 million in Q2. Pricing and volumes contributed favorably while significantly higher energy costs in Spain and higher inputs in the U.S., more than offset the improvement in our fixed-cost absorption. Overall, the supply-demand picture for silicon metal continues to be the best we have seen in years. On the chemical side, our customers continue to see strong demand for everyday consumer goods, as well as the benefit of new residential and non-residential construction supporting the demand for silicones. The demand has been surpassed our customers or earlier expectations for the year and has created a good tension in the marketplace going into next year. On the aluminum side, the pickup in activity is largely driven by the recovery in the refilling of the automotive supply chain in both North America and Europe. However, the recovery in auto manufacturing is negatively impacted by the semiconductor chip shortage. We expect the demand on the aluminum side will continue to grow as the industry seeks to meet the backlog of demand. Sales into the photovoltaic market, which was predominantly in North America, is also showing some positive signs for the first time in years. With the emphasis on renewable energy and the need to secure value chain domestically, The new administration is focused on ensuring the viability of this sector domestically. We will continue to monitor the developments that are hopeful of a recovering sales going into this end market in the coming years, which would further extend the demand search. In addition to strong demand, bottlenecks in raw material sourcing and logistics have created additional barriers globally limiting supply and further supporting the higher price environment. Given this backdrop, we feel good about the overall supply-demand trends for the remainder of the year. As previously noted, we restarted one furnace at Sabon in Q1 and another furnace in Mauritius in May. At the moment, we have not made any firm plans for additional capacity restarts and continue to assess the situation. A combination of our index-based contracts, which get reset quarterly, as well as the free negotiated volumes, particularly with the capacity restarts, provide an attractive opportunity to capitalize on the broader trends. And lastly, an update on our trade case. At this time, the Silicon Meta trade cases against Bosnia and Herzegovina, Iceland, Malaysia, and Kazakhstan have all concluded. Overall, we deemed the final determinations to be a successful outcome to ensure an even playing field. Both on the U.S. Department of Commerce and the International Trade Commission sides, we achieved pretty much the best results we could. Even in the case of Malaysia, while we would have liked a higher final margin, we did obtain a significant increase from the preliminary rate to the final rate. While trade cases are not a core pillar of our competitive strategy, the results from this trade action will enforce the importance of taking action to assure that all global market participants compete on even terms, which is critical to protect our workforce and assets. Next slide, please. Turning to Silicon Valley on slide eight, During the quarter, the average selling price increased by 9.9% to $1,830 per metric ton, up from $1,665 per metric ton in the first quarter. During the quarter, we realized a 5.9% increase in sales volumes. Sales volumes of silicon-based alloys were approximately 65,200 metric tons in Q2, about 4,200 tons higher than the clear quarter. Our silicon-based alloys are going into steel market, which has shown strong demand in the first half of the year. What started off as a recovery in demand to pre-COVID levels for steel has now accelerated due to the various infrastructure programs and construction built globally, supporting continued strength in this end market. Most of the quarterly improvement in this part of our private portfolio is driven by the Ferro-Silicon business, which had a strong pickup in volume as well as pricing during the quarter. Foundry is also benefiting from the strength of the auto market. EBITDA for our Silicon-based alloys business was positively impacted by prices and volumes, but not set by higher costs. resulting in adjusted EBITDA of $12.8 million in Q2, up from $10.1 million in Q1. During the quarter, there was an adverse impact of approximately $7 million from higher energy costs in Spain, as well as some material inflation. Additionally, with the idling of sun capacity in France, in line with our ongoing restructuring plan, we had lower fixed cost absorption, which negatively impacted the results by $1.6 million. Next slide, please. Turning now to manganese-based alloys, during the quarter, the average selling price increased by 20.5% to $1,414 per metric ton. However, the quarter was adversely impacted by lower shipments, which were down 5.9% relatively to the previous quarter. The decrease in volumes during the quarter was primarily due to management of our operating times of the Spanish plants, given the high energy costs. Furthermore, our previously stated plans to restart Moirana were also delayed with production commencing only in July. Despite these challenges, EBITDA, from this business was up over 50%, contributing $15.7 million in Q2, plus $10 million in the first quarter. The increase in pricing more than offset the cost pressure from energy and air over cost, as the spread remained above historical high. I would now like to turn the call to Beatrice to review the financial results in more detail.

Thank you, Marco. Beginning with slide 11, I will touch on a few specific line items on our income statement. Sales of $480 million during Q2 were 15.8% higher than the $361 million of sales in the prior quarter. This increase in sales was driven by an 11% increase in average realized prices and 2.8% increase in shipments across our portfolio. During the quarter, our gross margin improved to 36%, up from 31% the prior quarter. This is due to top-line growth as well as continued cost-efficiency efforts. The increase in over-operating income by approximately $35 million is due to the accounting treatment relating to the CO2 emission rates. This represents the current view of the 2021 free allocated allowance of CO2 rights in Europe. This is partially offset in other operating expenses, resulting in a minimal impact on our P&L. With regards to staff costs, Q2 marks a return to a more normalized level, as we had some one-off provisions relating to the restructuring in Europe. Operating expenses, totaling $93.2 million, was higher than the previous quarter, mainly because of the recognition of the 2021 CO2 emissions rights, the increase in activity, and a reclassification to conform group presentation. We had reported a VTR of $31.9 million in Q2, a significant improvement versus the negative $18.9 million in Q1. When accounting for the one-time cost related to the implementation of the strategic plan, the adjusted EBITDA was positive $34.1 million. And lastly, it is worth reiterating our return to positive net profit of $0.7 million during the quarter. Next slide, please. Quarter over quarter, we did have a 55% increase in our adjusted EBITDA. from $22.1 million in Q1 to $34.1 million in Q2. The improvement in our average realized selling price had the single largest impact, contributing $36.4 million. Additionally, strong demand resulted in increased volumes, which contributed an additional $2.7 million. Partially offsetting these factors was the adverse impact on cost, by $27.2 million. Approximately half of this impact is attributable to the higher energy rates in Spain, which impact the quarter by $40 million. Additionally, we have been impacted by the raw material inflation on select inputs. The biggest contributors are manganese ore and coke in Spain, France, and Norway, which accounts for $7.1 million. as well as lower fixed cost absorption in France, which impact the results by $1.6 million. In addition to this, we also had a different mix of products in silica fume and by-products, representing a decrease of approximately $2 million when compared to the previous quarter, and the impact of an accrual of sales, which adversely impact the quarter by approximately $1 million. Slide 13, please. Turning now to slide 13, I will review our balance sheet in greater detail. At the end of the quarter, our cash and restricted cash balance was $106 million, up from $84 million in Q1. Total available cash increased from $78 million in Q1 to $100 million in Q2. Total assets were approximately $1.4 billion at the end of Q2, an increase of $107 million over the prior balance at the end, due to the allowance of CO2 rights and the capitalization of deferred financing fees. The gross debt at quarter end was $464 million, up from $418 million during the quarter, We raised $40 million of the $60 million of new super senior secure financing. Additionally, we had the impact of the interest accrual under the prior senior notes. Please note that the additional financings, which closed in July, are not reflected in these Q2 balances. Debt debt increased to $358 million, up from $334 million in Q1. Despite an increase in our overall activity, our working capital remains flat quarter over quarter. Overall, we continue to manage our working capital as part of the broader strategic plan. We have introduced new tracking tools for inventories of raw materials and finished goods with the goal of optimizing these levels through the cycle. As such, we are defining key metrics relating to working capital on the basis of tracking it as a percentage of sales. Next slide, please. During the second quarter, we had a significant increase in our operating cash flow, which improved from $18.3 million in Q1 to $37.8 million. Unlike the prior quarters, the increase in operating cash flow is primarily driven by the improvement in reported EBITDA. while the cash impact from working capital remains relatively flat. Cash flow from investing activities was negative $43.5 million and is primarily attributable to the CO2 rights. And finally, cash from financing activities contributes $27 million. While we raised $40 million, there was $11 million in debt issue and cost, and $2.3 million ascribed for the interest payment relating to the reinduced loan. Overall, this quarter marked a return to positive debt cash flow, totaling $21.6 million. Next slide. On July 30th, we announced the occurrence of the transaction effective date under the lockup agreement dated March 27th, which marks the completion of the financing process. As part of the transaction, 98.588% of the prior 9.38% senior notes holders exchanged into the new 9.38% senior secured notes. The new notes push out the maturity from 2022 to 2025, mitigating the risk of any material near-term maturities. Since we did not get 100% participation in the exchange, there is a small extra amount of approximately $5 million of the notes, which will need to be repaid in March 2022. Additionally, we received $40 million in aggregate proceeds from the issuance of ordinary shares. Following the equity issuance, our share count is now approximately 187 million shares. And finally, we close on fund the remaining $20 million of the $60 million of new super senior notes. Overall, we feel this is a good outcome for the company. The ongoing support by existing investors as well as new investors certainly reinforces the broader confidence in our turnaround plan and execution. And with the new financing now in place, we have the resources to complete a few critical initiatives of the plan, as well as maintain flexibility to run our operations. Once again, we thank all the parties involved for their hard work and contribution in what was a complex transaction. At this time, I would like to turn the call back over to Marco, who will provide an update on the strategic plan.