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Operator
Good morning ladies and gentlemen and welcome to FerroGlobe's first quarter 2023 earnings call. At this time all participants are in 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 Anis Baradawalla, FerroGlobe's Vice President of Investor Relations and Corporate Strategy. You may begin.
Anis Baradawalla
Thank you. Good morning, everyone, and thank you for joining Ferroglobe's first quarter 2023 conference call. Joining me today are Marco Levy, a chief executive officer, and Beatrice Garcia-Coss, a chief financial officer. 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. 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 exhibit to those filings, which are available on our webpage, ferroglobe.com. In addition, these discussions include references to EBITDA, adjusted EBITDA, adjusted gross debt, net debt, and adjusted diluted earnings per share, among other non-IFRS measures. Reconciliation of non-IFRS measures may be found in our most recent SEC filings. At this time, I would now like to turn the call over To Marco Levi, our Chief Executive Officer.
Marco Levy
Thank you, Anish, and good morning or good afternoon, everyone. The first quarter has been very productive, and we have achieved significant milestones that demonstrate our commitment to deliver value to our shareholders. During the quarter, we continued to make progress in leveraging our balance sheet by paying down debt. We are focused on managing our operations and have successfully released working capital. On the operational front, we continue to start operations as we expand our capacity and are finalizing agreements to provide long-term renewable energy to our Spanish plants. Our company is at a pivotal moment in its history, ready to seize substantial growth opportunity as the largest western producer of silicon metal, a critical component of many industrial and consumer goods, and in particular, a key material supporting the green energy transition. The global trends toward renewable energy are driving strong growth in the solar and electric vehicle battery markets. The growth outside of China is being amplified by an increased focus toward onshore. These on-shoring trends are being enhanced by incentives such as the Inflation Reduction Act in U.S. and its equivalent in Europe, the Green Deal plan for net zero age, which are focused on local production and reducing reliance on China. As the Western market leading silicon metal producer, Ferroglobe is in a unique position to capitalize on these trends. providing an opportunity that will drive strong growth for years to come. As we review Q1 results, it is important to recognize the resilience and the adaptability of our business model. Our commitment to operational excellence, innovation, and cost efficiency has allowed us to maintain a positive and stable financial and operational performance during this challenging market environment. In Q1 2023, we have achieved an adjusted EBITDA of $45 million. Our free cash flow reached $117 million, underlining our ability to generate strong cash flow. At the close of the quarter, we maintain a robust cash position of $344 million, and net debt of $55 million. During this quarter, we made significant progress in strengthening our financial position by reducing our debt by $50 million. Given our strong cash flow and the excess of cash on our balance sheet, we are actively studying options to reduce our overall gross debt, optimize our capital structure, and will position the company to return value to shareholders. We will provide more detailed insights in the next few months. As you may recall, we previously made a commitment to release working capital. We have delivered on that commitment with a significant release of $131 million of working capital during the quarter, in addition to what we released in the fourth quarter. This is a direct result of the targeted actions that we have implemented, and we continue to focus on optimizing our working capital. Our positive adjusted EBITDA generation, combined with these improvements, positions us well to achieve our goal of turning net cash positive in the next couple of quarters. Now, I'm pleased to provide an update on the progress of our operations worldwide. In Europe, we have successfully resumed our French operations since April 1, 2023. These significant milestones will have a positive impact on our financial performance in the coming quarters, as we leverage our production capacity in France and capitalize on market opportunities with our best-in-class cost positions. We are in the final stages of finalizing long-term power purchase agreements in Spain, which will provide us with competitive energy prices. Securing these contracts is a critical step in our plan to restart and secure the long-term competitiveness of our Spanish facilities. I will provide further details on this in my upcoming corporate section. After restarting two furnaces at our Polokwane South African facility, we are ready to restart the third furnace. These three furnaces will provide 55,000 tons of additional capacity. This expansion demonstrates our ability to rapidly add capacity at very low capital intensity. It also significantly improves our geographic footprint by serving markets in Asia and in the Middle East and provides us with a considerable competitive advantage. As a testimony of these advantages and our reputation as a high-quality producer, we signed a new long-term contract to supply silicon metal to a leading Asian polysilicon producer. This further solidifies our position in the solar value chain and demonstrating our ability to forge strong partnership with key industry players. In line with our strategy of furthering our vertical integration, we recently signed an LOI to acquire a new quartz mine while also expanding our existing Cerabal quartz mine in Spain. Furthermore, Our board has approved additional growth topics to expand operations at Alden, our mining operation in Kentucky, to maintain our competitive advantage. These design-visive actions strengthen our leadership position in the silicon metal industry and enhance our global presence by managing complex vertical integration into quartz mining and strategic sourcing of essential raw materials. In the electric vehicle battery market, we see exceptional growth opportunity, driven by silicon metals' considerable advantages over graphite. The current are not standard. These benefits include an increase in battery capacity and enable significantly faster charging times, providing important improvements to EV technology. We are working with partners to innovate towards increasing the content of high-purity silicon metals in the anodes of batteries. While the current market environment presents short-term uncertainty, we are focused on things that we can control and drive long-term shareholder value. We are enthusiastic about the long-term prospects of our company and remain confident in our ability to navigate these challenges and deliver strong results for our valued investors. We are reiterating our 2023 adjusted EBITDA guidance, targeting a range of $270 million to $300 million. Next slide, please. Let's focus on silicon metal. Silicon metal revenue was $161 million in Q1, down from $184 million in Q4, a decline of 12%. Adjusted EBITDA for this segment was $31 million in Q1, down 65%, making $89 million in Q4. Our silicon metal business was down due to a challenging market environment impacting both price and volume. Volume declined 6.4% sequentially in Q1 to approximately 37,000 metric tons as a result of a shutdown in France due to our French energy agreement. We expect volumes to increase significantly in the second quarter, as we have secured long-term contracts with new customers in Asia and the Middle East, and are bringing our French operations back online. Our average realized price for silicon metal sales decreased by 6.5% compared to the previous quarter, driven by lower index pricing in the US and Europe. This price decline negatively impacted adjusted EBITDA by $17 million. Our total cost had a negative impact of $25 million to adjusted EBITDA versus the prior quarter. We continued to benefit from energy compensation agreements in France and CO2 compensation in the first quarter. However, compared to the previous quarter, we experienced less favorable impacts, negatively impacting our cost by $7 million compared to the prior quarter. Additionally, we incurred increasing idling cost of $17 million. The chemicals market are facing challenges driven by a weak microeconomic environment and oversupply in China with low-priced exports driving weak sales in silicone. As a result, our outlook is cautious. Next slide, please. Silicon-based alloys The revenue was $135 million in Q1, up 7% over the previous quarter. Adjusted EBITDA for Q1 was $22 million, down 41% from the previous quarter. Sales volumes increased 23% over the previous quarter, positively impacting adjusted EBITDA by $9 million. Average realized pricing was down 13% over the same period, and the result of low-cost exports from Brazil, China, Kazakhstan, and Azerbaijan, negatively impacting adjusted EBITDA by $18 million. Relative to the prior quarter, silicon alloys also received a lower benefit from the energy compensation agreements in France and CO2 compensation. This had a negative impact of $14 million, which was partially offset by favorable impacts due to year-end one-offs of $8 million, resulting in a net negative impact to cost of $6 million. Moving to slide seven, please. Turning now to manganese alloys. Manganese-based alloys revenue was $62 million in Q1, down 32% over the prior quarter. Adjusted EBITDA for Q1 was $2 million, down 90% from the prior quarter. Sales volumes were down over the prior quarter, negatively impacting adjusted EBITDA by $6 million, while average realized pricing was down 10% over the same period. This resulted in a negative impact to adjusted EBITDA of $3 million. The steel market continues to face challenges due to weak fundamentals in construction. While the current low spread between manganese alloy and ore is concerning, we expect demand to recover in the second quarter, which will help improve our margins. In Q1 2023, our costs were negatively impacted by $8 million due to various factors. In the fourth quarter, we recognized a gain from an adjustment to an earn-out provision that was not repeated in the first quarter. Costs were also negatively impacted by CO2 and the French energy compensation agreement relative to the four-year quarter. These were partially offset by improvements in raw material costs. I will now turn the call over to Beatriz, our CFO, to renew the financials.
spk07
Thank you, Marco. Please turn to slide nine for a review of the income statement. As expected, our first quarter results experienced a decline relative to the fourth quarter, driven by price and volume declines across most of our product portfolio. Revenue for the first quarter was $401 million, down from $449 million in the prior quarter. The 11 percent decline from the prior quarter was a result of weaker prices across all three product lines and volume declines in silicon metal and manganese alloys. Silicon base alloys volume increased 23 percent over the prior quarter due to higher sales of standard grade products. During the first quarter, raw material and energy consumption for production declined to $255 million, down from $290 million in the prior quarter. As a percentage of sales, cost of sales remained flat at 64%, excluding the impact of our short-term power hedge in Spain. Other operating income in Q1 was $15 million, down from $78 million in Q4, driven by lower energy compensation in France versus the prior quarter. Operating profit for the first quarter was $44 million versus $30 million in the prior quarter. As a percentage of sales, operating profit was 11% in Q1, versus 7% in Q4. The $15 million increase in operating profit in the first quarter was driven primarily by the gains from short-term power hedging in Spain, partially offset by lower volumes and other operating income relative to the prior quarter. Net financial expenses in the first quarter declined to $11 million, down from $17 million in the fourth quarter. The decline is attributable to lower debt outstanding as we continue to execute on our deliberating strategy. Next slide, please. Slide 10. Our adjusted WDI in the first quarter was $45 million versus $130 million in the previous quarter. Adjusted WDI margins decreased to 11 percent in the first quarter, down from 29 percent in the fourth quarter. Volume declines in the first quarter negatively impact adjusted EBITDA by $30 million. The decline in volumes was partially driven by the shutdown at our French plants, where we optimized our power contract, as discussed in the prior call. These assets have since been turned on, and we expect improved volumes in the second quarter. Average selling price across our portfolio decline by 4.5%, resulting in a negative price impact of $38 million. Costs at a negative impact of $39 million may lead you to island costs, maintenance expenses, earn-out provisions, CO2, and energy compensation, partially offset by a favorable impact from raw materials and inventory revaluation. in the first quarter were as expected, even declining prices and weekend markets. As we stated in our last quarterly call, we believe the first quarter will represent the track and expect to see improvements in Q2, continuing through the second half of the year. Slide 11, please. Next slide. We ended the first quarter with a cash balance of $344 million. up from $323 million in the prior quarter, an increase of $21 million. This was driven by working capital release partially offset by the purchase of bonds in the upper market of $26 million and a $70 million partial repayment for Spanish government loan. Total adjusted gross debt declined to $400 million in the first quarter, down from $450 million in the prior quarter. Net debt declined to $55 million in Q1 versus $127 million in the prior quarter. This represents our lowest level of net debt in the company history and is a testament to our continued focus to reduce leverage. We aim to be net cash positive in the next couple of quarters. Next slide, please. During the first quarter, we generate operating cash flow of $135 million, up from $118 million in Q4. Free cash flow in the first quarter was $117 million, up from $104 million in the prior quarter. During the quarter, we had a working capital release of $131 million. Apex, in the first quarter, was $17 million versus $15 million in the fourth quarter. We continue to expect our base-level capex for 2023 to be around $75 million, with the potential to increase depending on additional spend for growth and ESG initiatives. Lastly, cash flow from financing activities in the first quarter was negative $96 million versus negative $18 million in the fourth quarter. The first quarter financing cash flows includes a coupon payment of $18 million and the debt repayment mentioned on the prior slide. At this time, I will turn the call back over to Marco. Next slide, please.
Marco Levy
Thank you, Beatriz. Moving to the corporate update on slide 14. In 2022, we made the decision to limit production across our Spanish assets in response to the European energy crisis. Our flexible global footprint enabled us to move production during the volatile energy period to lower-cost plants in other regions and still provide quality products to our European customers. We are in the final stage of executing two long-term power contracts that will provide energy stability at our Spanish plants. enabling us to maintain consistent operations and to regulate production in these plans based on market dynamics. These power agreements represent energy that is produced from renewable energy sources. One agreement is set to start on July 1st, 2023, with the second one starting in January 2024. These agreements reinforce our commitment to ESG by sourcing power from 100% renewable energy sources. During the first quarter, we received approval from our board to expand our cerebral quartz mine in Spain, enabling the extraction of additional 300,000 tons per year of extremely high quality quartz. This critical mineral enables us to serve high-end markets in chemical, solar, and batteries. By completing this expansion, we are adding critical resources and optimizing maintenance costs. This combined with the expansion in Alden will ensure that we will continue to have access to high-quality raw materials, further reducing our reliance on third parties and dramatically improves our operating efficiencies. We announced our strategic plan last year to become the reference in silicon metal and ferroalloys by creating value for stakeholders through innovation. To successfully execute this strategy, we understand that workforce engagement is crucial. Over the past two months, we have held in-depth conversations with our top 400 leaders about our strategy and culture efforts. The sessions were very successful, resulting in excitement and commitment to achieve our aspirations. With this positive momentum of engagement, we are now well positioned to accelerate our strategy as one per globe.
spk00
Thank you. We will now begin the question and answer session.
Operator
To ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Please turn back when we compile the Q&A roster. We will now take the first question. It's from the line of Lucas Pipes from B Riley Securities. Please go ahead. Your line is open.
Marco
Thank you very much, operator. Good morning, good afternoon, everyone. Good job on the inventory side and on the full year outlook. And that's my first question. for the rest of the year, what would be roughly your expectation around cadence of EBITDA and any drivers that you could point to, be it on the volume or pricing side, or cost side for that matter, that would drive EBITDA towards, I think it's at 80 million run rate at the midpoint. Thank you very much for your additional color on that.
Marco Levy
Hey, Lucas. It's Marco. I will start answering your question. I think I touched on some of your questions during my pitch, but let me summarize. First of all, we confirm, we have reiterated our guidance of 207,300 million of EBITDA for the year. The second key factor is that the outlook that we have is positive. related to our sales volumes, as we have restarted our operations in France. We have a more solid outlook on what we can do with our Spanish assets due to the energy contracts. We have a pretty solid outlook on what we can do with our Polo Cuana operation in South Africa and hopefully it's going to run full in the second half of the year. These are things that are pretty much under our control. In terms of pricing, of course, we are in the trust. The key comment that I have to make is that our expectations that silicon metal price in the trough was better than in the previous troughs is visible, both in Europe and in the US. And for the alloys market on ferro-silicon, we will keep on leveraging on our 50% product mix. on ferro-silicon specialties and foundry and opportunistically continue to maintain our position on ferro-silicon standard. Manganese, due to the restart of steel operations in Europe, we see now a pickup in demand. Overall, there is Due to the slow economy, there is not a great visibility on demand for the coming quarters. Also because everybody in the supply chain is counting on lower material prices, lower energy costs, lower input costs. So everybody is quite cautious on managing his inventory. So this is the key picture that I can give to you.
Marco
That's very helpful. And a follow-up, what period would you expect to be the strongest based on your current outlook for the year?
Marco Levy
Well, for sure we expect Q1 to be the weakest. And I stop there.
Marco
Okay. Understood. I appreciate that. And then You mentioned the supply agreement with an Asian polysilicon customer, and I wondered to what extent additional offtake agreements could be in the works, and then what a typical structure looks like. Are these multi-year agreements? What is typically the size of those supply agreements? And what opportunity do you see in Europe and North America for additional agreements? Or in Asia, too. I would appreciate your perspective on that.
Marco Levy
Yeah, look, we are, as you remember, I restarted Poloquana only under the conditions that we had two, three-year contracts to cover the restart of this demand. and in the what we did with this contract we covered the restart of the first two furnaces one has restarted in november the second one was restarted in january this year and and now we we are planning to link the restart of the third four furnace to these additional contracts so that i i want to reiterate it that the We are talking about two, three years contracts.
Marco
Marco, really appreciate the caller. Continue. Best of luck to you and your team. Thank you.
Marco Levy
Thank you, Luke.
Operator
Thank you. Once again, as a reminder, it is star one and one if you wish to ask a question. And the next question comes from the line of Martin Englert from Seaport Research Partners. Please go ahead. Your line is open.
spk00
Hello. Good afternoon, everyone.
Martin
Hello, Martin.
Martin
So circling back on volumes on the near term, and I get the general expectation is for pickup coming out of the trough in one queue. Any goalposts when we think through the segments on 2Q relative to 1Q based on what you're seeing from customers today taking into account their inventory position, demand that they're seeing, what we can see on silicon metal, silicon-based alloys, and manganese?
Marco Levy
Yeah. Clearly, The key factor is France, right? And France is basically our key footprint for silicon metal production. And we have multi-year contracts to supply silicon metal. And we agreed with our customers to supply less in the first quarter. But now that we have the volume available, on supplying these contracts. The other key factor is the fact that as of July, we will have a better cost position for our assets in France, in Spain, sorry, and this will drive more production, I suppose, out of Sabon and our manganese plants in Invo and Monzon. And the point, as you know, Martin, we have pretty historical customers in the Western world, so we negotiate the supply based on our capabilities. The new factor is our expansion of sales in the Middle East and in Asia, which is related to the successful restart of Poloquane. These are the main factors.
Martin
Okay. When thinking about both the reduced production in France and output for silicon metal, in one queue and kind of aligning with customers, you get the sense that there was a fairly significant destock that happened through maybe the Euro footprint or maybe elsewhere, where they right-sizing inventories, you reduce production, just trying to better align with, you know, demand expectations.
Marco Levy
I mean, if we talk about I think that the stocking is over. So what we are facing in the supply chain is mainly related to lack of visibility of demand. And so everybody in the supply chain is watching, like we are doing, their working capital position. On the manganese alloys, I expect a hiccup of demand due to the restart of blast furnaces, steel blast furnaces in Europe in the first quarter. Of course, there is a bit of hiccup due to the fires to the two blast furnaces of acer or metal, but overall demand of manganese alloys is going up. Our view on ferro-silicon specialties and founder is rather stable. While on ferro-silicon standard, there are a lot of new dynamics, mainly aggressive, I would say, commercial policies from Brazil all over the world. Aggressive commercial policies from Kazakhstan and Azerbaijan in Europe. Aggressive commercial policy of ferro-silicon standard from China due to the slower than expected restart of steel industry in China. For the first time, we have seen significant volumes of Chinese ferro-silicon also in the United States. In a slow economy, there is price pressure also related to this new event. I must say that the recent data on steel production indicate that production now in China is ramping up significantly. Same in India. These are the only two countries in the world where we see a positive trend at this stage on steel production. Europe is catching up, but is still forcing to be rather flat versus the last year. And United States is to be seen until now has been stable on the levels of 2022.
Martin
Understood. Thank you for all the detail there. I want to touch on, within the silicon metal segment, costs per ton, I think, were about $3,500, which seems high, and you gave some explanation in the slide deck there. But if you could maybe provide a bit more detail or if you have some ranges At a group level on slide 10, you broke out a lot of the cost impact from lower energy and CO2 compensation, idling costs in France, annual maintenance, and those things. But I'm curious what that might have looked like for just the silicon metal segment. And maybe more importantly, if it's worth $3,500 or so there for one Q, How do we see a potential depletion there moving into the coming quarters?
Marco Levy
We usually don't give specific information about our cost position for our products also because they differ by by plant, and we're not accustomed to do specific indications on these values.
spk07
Martin, maybe I can put some color in Q1. So we expected from the – as we said in Q4, we expect to be on the top of the cycle from a pricing perspective as well, but on the cost side, we have been idling our assets in France and part of our assets in Spain, so the fixed cost or the lack of absorption of the fixed cost has been an important topic for us in Q1, right? It is going to be as we restart or resuming our operations in France, this will be diluted, so we expect a better cost position. going forward, yeah, in compare with Q1.
Martin
Do you think when you're calling out the fixed cost impact on 1Q, do you think that was the majority there of what was kind of elevating it on a per unit basis?
spk07
Yeah, I think this is the right assessment, Martin.
Martin
Okay, understood. Thanks for that caller. If I could, one more. Working capital, I think, was 36% of sales this quarter, down somewhat from 39% previously. Any specific ranges? I know the intent is to kind of continue to work back towards the targets, but any specific ranges when we think about 2Q?
Marco Levy
Our objective is to get to run silicon metal and ferro-silicon in the 21-22% and the manganese alloys in the 25-36% of working capital. Of course, Q1 had a revenue that was extremely low with extremely low volumes. So we We did our best and I think we achieved a working capital release that was above my previous indication. We indicated in the last call between $80 and $100 million target release in first quarter. And we will keep on adapting our working capital performance to get to the optimal levels that I have mentioned. Of course, due to the extreme volatility that we have been facing since Q3 of last year, we have to take every week or every day and adjust our performance.
Martin
Thank you for that, but no specific release range.
Marco Levy
kind of continue to work back to what we are balancing in Q2 we are balancing what I say between higher volumes and as a consequence the need to have the raw materials with the right level of inventories that we need to have to manage our customer portfolio
Martin
Okay. And I could just get you to repeat. You mentioned 21% to 22% for silicon, ferro-silicon. And what was the manganese alloys? You wanted to get back to about what percent? Okay. Excellent. All right. Thanks for all that. Nice job navigating a difficult market. Thank you. Thank you.
Operator
Thank you, Martin. Thank you.
Martin
we will now take the next question it's from the line of greg bennett stockholder please go ahead good morning thank you for the call i was curious uh the i understand the expansion of this uh mine in spain you've mentioned that you're going to acquire an additional mine where is that located Is that for reserves for the future, or is that something that will produce cash flow once you acquire it?
Marco Levy
Thank you for the question. I don't hide. We purposely don't disclose the location of the mine at this stage. We will once the negotiation is closed, but clearly our strategy is to reinforce our back integration. We feel that in order to be competitive and win the growth in silicon metal, we need to have the best possible back integration on quartz and related quartz quality. So we are, we'll be moving toward two directions. One, expand the capacity of our CeraVal mine in Spain, which is a fantastic mine in terms of quality. The quality of quartz is outstanding there. And then signing this LOI that will hopefully drive to a positive closure of the negotiation and will allow us to count on further reserves of high-quality quartz.
Martin
Okay, thank you. Final question, the refinancing with your cash balance right now, is that invested with rates where they are, short-term rates? Are you able to invest your cash balance at these high rates we're getting right now for U.S. treasuries, for instance?
spk07
We hold some money market deposits, of course, at good rates. This is what basically in the U.S. and as well a part of it in the European side.
Martin
So right now your net interest expense, excuse me, on the cash balance would be the spread would only be somewhere in the neighborhood of 4%.
spk07
Well, it's still negative. Yeah. It's still negative. Let me put it like this, the spread.
Martin
So the need to refinance your call your bonds in July, it's not pressing as much as long as we have an inverted yield curve, I guess.
spk07
Well, this is what we are reiterating. So we are generating a strong cash flows, right? We are watching very closely the debt market and the opportunities that we have at the moment. We reiterate our intention to reduce our gross debt. And we'll be announcing something in the next month around the refinancing, if this answers your question. Yeah.
Martin
Okay. Thanks for such a great job. Appreciate everything you guys are doing.
spk07
Thank you so much.
Operator
Thank you. That was the last question we have time for. I would like to hand back over to the speakers for final remarks.
Marco Levy
Thank you. That concludes our first quarter 2023 earnings call. As we move forward, we remain focused on executing our strategic plan and optimizing our operations. We are positioning the company to capitalize on significant opportunities in the solar energy and battery markets that we expect to drive strong growth in the coming years. Thank you again for your participation. We look forward to hearing from you on the next call. Have a great day.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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