Ferroglobe PLC

Good morning, everyone, and thank you for joining Fairglobe's fourth quarter and full year 2021 conference call. Joining us today are Marco Levy, our Chief Executive Officer, Beatrice Garcia-Cost, our Chief Financial Officer, and Benoit Olivier, 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 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 those forward-looking statements can be found in Fairglobe's most recent SEC filings and the exhibits to those filings, which are available on our webpage, www.fairglobe.com. In addition, the discussion today includes references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, 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. Next slide, please. On today's call, we will first review the business highlights for the fourth quarter and full year. We will then also give you a perspective on our operating environment and provide an update on the status of our transformation plan. Then we'll provide you an update on our financial performance and key drivers behind our results. And finally, we're going to provide a trading update before opening the lineup for some Q&A. At this time, I would like to turn the call over to Marco Levy, our CEO.

Thank you, Gurav, and good morning, good afternoon, everyone. I am really excited to present our quarterly results, which demonstrate the acceleration in earnings potential that we have been anticipating and which caps off an important year for Ferroglobe. Overall, The acceleration in our performance in Q4 is supported by strong fundamentals across all three product categories, which will further fuel performance in 2022. Moreover, the tightness in the marketplace resulting from robust demand coupled with flat to declining supply has resulted in an unprecedented increase in the index pricing for our products. primarily silicon and ferro-silicon. During the quarter and the full year, we realized only a partial benefit from this run-up in prices, particularly in silicon metal, due to the fixed price nature of most of these contracts. However, with the contracts expiring at the end of 2021, we will have increased exposure towards index-based contracts, resulting in higher pricing, driving an increase in margins and revenues. In our silicon-based alloys portfolio, we realized the benefit much quicker, given the nature of these contracts and shorter lags. And in manganese alloys, the spread is holding at very healthy levels, with support from the steel industry, which is still recovering to pre-COVID levels of production. While the broader market provides an exciting backdrop, we remain focused on the areas which are in our control. This is primarily related to our value creation areas identified as part of our turnaround plan. 2021 market marked the first year of the execution phase of the plan. We have surpassed our targets and have a great deal of momentum continuing in 2022. In aggregate, 2021 marked an important year for Ferroglobe with several critical accomplishments. We refinanced our debt and raised our balance sheet by extending maturities. We successfully raised capital to navigate a turbulent time and to fund our turnaround plan. In addition, we started addressing gaps in the business, improved processes, and drove cost reductions. All of this was done with the goal of making the company more competitive with stronger results through the cycle. During the quarter, our realized average selling prices were 19% higher in our core product categories. Furthermore, our shipments increased 14% to just over 220,000 tons across our three core product categories. This resulted in top line growth of 33% to $570 million, which is our highest quarterly sales since 2018. And we also had a record setting adjusted EBITDA of $92.8 million, which is a 147% increase relative to Q3. Despite continued high energy costs in Spain and inflationary impact on kerosene materials, we improved EBITDA margins from 8.8% in Q3 to 16.3% in Q4. This was driven by a combination of top-line growth coupled with improved utilization of our asset base, reallocation of orders to optimize economics, stronger operational performance at the firmness level, and continued cost-cutting efforts. And finally, we returned to positive free cash flow during the quarter, generating $40 million. For the full year, our sales were just under $1.8 billion, we've adjusted EBITDA of $187 million. While full-year 2021 financials show a significant improvement over the previous year, we expect to see continued acceleration as our contracts average set at the beginning of the year, reflecting the benefit of higher pricing. And furthermore, we had a number of one-off non-recurring expenses which had a considerable adverse impact on our cash flow. With these factors behind us, we look forward to building on the momentum from Q4. Step by step, we continue to strengthen the company at the core and improve our overall competitiveness to best service our customers. The value of our unique product portfolio and platform is particularly exciting against the backdrop of emerging trends, such as the focus on shorter supply chains and customer behaviors influenced by ES&J. We are entering 2022 with a strong order book, a turnaround plan that is expected to drive further efficiency and cost improvements, and an integrated approach to operate the business. Overall, we are confident the Ferroglobe is well positioned to drive accelerated growth and improve margins in 2022. Moving ahead to slide six, please. During the quarter, index price for silicon metal in the United States and Europe exhibited significant increases. with reference prices in the U.S. increasing by approximately 160%, ending the year just above $10,000 per ton. And in Europe, pricing peaked at 8,100 euro into a quarter and ended the year close to 6,100 euros, representing a 53% increase over the quarter. A combination of continued and market strength particularly in chemicals, coupled with expectations of meaningful capacity curtailments in China during the final months of the year, served as a catalyst for the price intention. Beyond the cutbacks, there are other factors, such as financial and environmental reforms, increasing raw material and energy costs, logistical issues, and higher labor costs, which are feeding into higher production costs for Chinese silicon. As the floor price within China increases, it will have a positive effect on European and U.S. indexes. Ferroglobes realize average selling price for silicon metal increased by 19%, to $2,944 per metric ton. Excluding the volumes sold to the joint venture, the average realized price has improved by 23% during the quarter. To reiterate, our high weighting toward fixed price contracts limited the upside throughout 2021. Overall shipment volumes increased by 3% to approximately 63,700 tons. Shipments during the quarter were constrained due to some operational issues and temporary production loss, such as our Beverly, Ohio facility, where there was a crane that collapsed, stopping production at two furnaces for a few weeks, as well as further containment in Spain to address rising energy costs. At the end of November, we announced the temporary idling of one furnace at our Sabon facility which has annual capacity of approximately 13,500 tons. EBITDA from the silicon metal business improved over 200% to 32.5 million. The ability to sell greater volumes at market prices had the greatest impact in the quarter over quarter improvement. The total cost impact was negative 9.1 million during the quarter. Increases in energy costs had an adverse net impact of $9.9 million on the silicon business. In Spain alone, the impact was negative $7.7 million. We have provided additional details around the cost drivers, both positive and negative, in our press release and presentation slides for everyone's reference. Looking ahead in 2022, there is a lot to be excited about. We recently restarted one of the two furnaces at our Selma facility in Alabama and have the temporary idle capacity in Spain, which can be restarted rather quickly. With strong end market support, we believe prices will remain at a healthy level through 2022. We see the chemical side of the business remaining strong, as end markets such as consumer goods and medical applications continue to drive demand. There have been some signs of caution in the aluminum sector as a result of increasing operating costs due to energy pricing in Europe. Furthermore, the auto end market continues to be impacted by lingering shortage of semiconductor chips, which in turn impacts the demand for silicon-containing aluminum alloys. This may reverse in the second half of the year. And finally, we continue to see increasing signs of recovery in the solar sector, which offers an attractive market for stronger growth, specifically with the renewed focus on energy generation in the Western world. At the moment, approximately 70% of our forecasted non-JV volumes have been contracted. Of this portion, approximately 85% of the volume is subject to index-based pricing. The remaining 15% of the committed business is at fixed pricing. Beyond the contracted volumes, there is approximately 15% of our overall volumes where we have commitment, but the pricing has not been set on all these volumes. And finally, the remaining 15% is spot business. As a reminder, our joint venture volumes are priced using a cost-plus formula. Overall, customers seem to have procured their material needs for the better part of the first half of 2022. And we will soon enter into discussions for Q3 deliveries for the freely negotiated part of our book. Also worth noting, is that we have entered into key multi-year contracts, which provide the company protection and flexibility in the future. Overall, we view this to be a very important and favorable development for the company. Turning to silicon-based alloys on slide seven. The index price of ferro-silicon had a strong run in Q4, as the market remained very tight. driven by continued steel production recovery in Europe and North America and low inventory levels throughout the value chain. In the United States, index pricing for 75% silicon contained ferro-silicon increased approximately 60%, while the price in Europe increased approximately 40%. During the quarter, the average selling price of our silicon-based alloys portfolio, which consists of ferro-silicon, foundry products, and calcium silicon, increased by 39% to $2,770 per ton. On a relative basis, the realized increase for ferro-silicon was even higher. This is partially attributable to a weighting of our iron margin specialty grade, as well as a portion of our content being reset with one month lag. During the quarter, sales volumes increased by 8%. Sales volumes of silicon-based alloys were 61,000 metric tons in Q4, about 4,200 tons higher than the prior quarter. We saw steady demand from our customers in the US and Europe. Furthermore, Our foundry sales also improved slightly on the back of gradual recovery across the global automotive and market. Our silicon-based alloys business saw a significant jump in EBITDA during the quarter, positively impacted by prices and, to a lesser extent, volumes. Some details underlining the negative 2.5 millions of net impact can be found in our release and accompanying slides. When we discuss silicon basaloids from the perspective of expected volumes for 2022, approximately 65% is ascribed to ferro-silicon, 30% to foundry, and 5% to calcium silicon. For ferro-silicon, approximately 65% of our expected volumes for 2022 are now contracted. Approximately 90% of these volumes are subject to index prices, with the remaining 10% at fixed prices. On the total expected volumes, approximately 25% has been committed, and the remaining 10% is subject to spot sales. Once again, with the visibility we currently have, we feel good about volumes and pricing through the first half of the year. Next slide, please. Turning now to manganese-based alloys. During the quarter, the average selling price increased by 9% on a blended basis to $1,720 per ton, up from $1,574 per metric ton in the third quarter of 2021. The ferromanganese business had a 6% increase in realized prices, which realized while realized silicon manganese pricing was 13% higher. Shipments during the fourth quarter were up 27%, an increase of approximately 20,500 tons over the previous quarter. Of the 97,000 tons sold, there was an even split between ferromanganese and silicon manganese. As you recall, the company was building inventory of manganese alloys in Q3 in anticipation for this demand pickup, as steel producers delayed some shipments during the summer months. During the quarter, we temporarily curtailed some capacity in Spain due to the high energy costs and reallocated those sales to our facilities in Norway and France. The EBITDA contribution from our manganese-based alloys segment was 28.6 million in Q4 versus positive 22.5 million in the third quarter. Volumes and pricing positively impacted the quarterly results by 6.5 million and 12.7 million, respectively. On the cost side, there was an adverse net impact for the quarter of 13 million. The manganese portfolio continues to benefit from favorable spread, and we expect this continue into the first half of 2022. Approximately 60% of our expected 2022 volumes are contracted. Next slide, please. The turnaround plan has been a critical driver to our success in 2021. It was the cornerstone of the refinancing process we underwent in 2021, and it has engaged various stakeholders' confidence in our ability to turn around the company. Furthermore, the plan was designed to generate the cost savings which gave us the means to navigate a difficult stretch, and the financial targets are sized to derive this company through the cycle. Our target for the first year of the execution of the plan was $55 million of in-year contribution from cost savings and commercial excellence and $49 million of working capital benefit. We ended 2021 capturing $58 million EBITDA, benefit from cost savings and commercial excellence, and $70 million of working capital improvement, significantly outperforming our target. On a go-forward basis, we look to build on this momentum and will continue to feed the pipeline with new initiatives. Our goal is to have a run rate of $140 million by the end of 2022. I am really proud of our organization to drive change at all levels in reaching these targets. We are knocking down walls and rebuilding the business from the ground up to the aim of optimizing to maximizing the platform. There is a lot of work left to be done, but our first year results certainly motivates us to keep going. 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.

Thank you, Marco. I will begin by reviewing the income statement in slide 11. Sales of approximately $570 million during Q4 were 33% higher than the $429 million of sales on the prior quarter. We ended 2021 with sales of approximately $1.8 billion, up 55% over the prior year. The improvement in our top line was the result of an increase in both our shipments and average realized across the portfolio. During the quarter, our cost of sales as a percentage of sales was 65% down from 69% the prior quarter. The lingering impact of higher energy costs, particularly in Spain, and inflationary headwinds in our raw materials were offset by a combination of top-line growth and our cost-cutting efforts at the facility and corporate levels. For the full year, we had a cost of sales as a percentage of sales of 67%. Operating income increased by 26% during the quarter. The approximately $8 million increase is attributable to a mark-to-market adjustment of the fair value of our CO2 credits. There is an offsetting decrease of approximately $8 million in our operating expense line related as well to the back-to-market adjustment to the CO2 accrual. Staff costs increased by 43% in Q4. Please keep in mind that in Q3 we had a partial release of the accrual related to ongoing asset restructuring in Europe. The Q4 figure reflects the accrual and adjustment of the bonus and then the long-term incentive plan. Operating profit in Q4 was $64.9 million, up 446% from the $11.3 million realized in Q3. During the full year 2021, our operating profit was $40.4 million compared to an operating loss of $184.4 million during the full year 2020. The net financial expenses was $12.4 million during the fourth quarter, reverting back to more normalized levels. When you compare it quarter over quarter, keep in mind that the Q3 expense had the accounting impact of the refinancing, which yield a significantly higher number. The net profit was positive $65.1 million in Q4 compared to a net loss of $97.6 million in Q3. For the full year, we had a net loss of $103 million, which compares to a net loss of $250 million in 2020. Next slide, please. Quarter over quarter, we had a significant increase of 147% in our adjusted EBITDA to $92.8 million. with the adjusted EBITDA margin nearly doubling to 16%. As Marco discussed earlier, we had positive contributions from both shipment and realized pricing, which combined contributed $97.7 million. On the cost side, energy had an adverse impact of $26 million. The impact of energy in Spain alone was $25.9 million in Q4. partially offset by improvements in North America and South Africa. The impact of CO2 accrual was another $5.5 million, with silicon metal and manganese alloys having an adverse impact, which is partially offset by a positive impact from silicon-based alloys. General increase in raw material had an impact of $4.1 million, while the annual accounting impact from pension plans in France has a positive contribution of $3.9 million. Staff costs at our corporate offices increased by $10.5 million. Approximately $8 million of this is attributable to the staff cost increase described on the prior slide. Additionally, there is approximately $2 million of accrual for OBIT-related costs. Next slide, please. Slide 13. For the full year, adjusted EBITDA improved from $32.5 million in 2020 to $186.6 million in 2021. The most significant factor that impact this swing was the 28.8% increase in average selling price across core products. were adversely impacted by higher energy prices of $111.2 million, $19.6 million of which is tied to Spain. Additionally, higher raw material prices impacted by $53.3 million, higher fixed costs in materials and logistics, which had an adverse impact of $19.9 million, and higher costs due to increased production of byproducts and out-of-spec materials. resulting in a cost of $15.3 million. We have an extremely focused on our corporate expenses, focusing on both discretionary and non-discretionary spend. Approximately $8 million of these is tied to bonus, accruals, and incremental $2 million is related to audit costs. During 2020, we had a number of non-recurring items, including the release of several accruals and provisions. Collectively, this impacts the year-over-year adjusted dividend by $21 million. Next slide, please. Turning now on slide 14, I will review our balance sheet in greater detail. Total cash increased by approximately $21 million to $117 million as of December 31, 2021. Our unrestricted cash balance was approximately $114 million, up from $89 million in the prior quarter. Total assets were approximately $1.5 million at the end of 2021, which was $105 million higher than the prior quarter, mainly because of our quarterly profit. Adjusted gross debt increased marginally, with a year-end balance of approximately $508 million, while our net debt balance decreased to $391 million. Please note that these figures are year-end balance and do not include the recently announced SEPI loan in Spain. While our relative leverage ratios continue to improve, we are focused on deliberating the balance sheet as cash generation from the business begins to accelerate. Ferroblox working capital increased by approximately $69 million during the fourth quarter. This is primarily attributable to an increase in account receivables in line with our top line growth. Next slide, please. While we have provided all the quarterly details for 2021 on this slide, let me first bring your attention to the Q4 2021 figures. Our cash flow from operating activities returned to positive territory, contributing $21.7 million. So in the quarter, despite an increase in working capital. Cash flow from investing activities was negative $7.5 million, which is attributable to a planned increase in capex expense. And lastly, cash flow from financing activities was positive $7.4 million for the quarter. The increase in overall activity enabled us to send more invoices into the account receivable factory facility in Europe. Free cash flow for the quarter was $14.2 million. For the full year 2021, our cash from operations was negative $1.3 million, primarily due to the investment in working capital of $171 million. The negative $24 million of cash flow from investing activities relates to capital expenditures incurred in our plans. And finally, cash flow from financing activities was $10.5 million for the year. Despite the comprehensive financing completed in 2021, the cash impact reflects on the interest costs and fees associated with the debt and equity financing. Free cash flow for the year was negative $25.2 million. Next slide. On February 16th, we announced that the Spanish Fund for Supporting Strategic Companies has approved a 34.5 million euros loan. These loans are part of the SEPI fund intended to provide assistance to non-financial companies operating in strategically important sectors within Spain in the wake of the pandemic. The loans are funded using a dual-transit structure and are expected to be funded around the end of Q1. 17.25 million matures in February 2025 and 17.25 matures in June 2025. 16.9 million euros of the loan covers a fixed interest rate of 2% per annum. Interest on the remaining 17.6 million euros is calculated as IVOR plus a spread of 2.5% the first year, 3.5% in the second and third years, and 5% in the fourth year, plus an additional 1% payable if the result before taxes of the beneficiaries is positive. At this time, I turn the call back to Marco.