Ferroglobe PLC

Good morning, everyone, and thank you for joining Ferroglobe's second quarter 2023 conference call. Joining me today are Marco Levy, our chief executive officer, and Beatriz Garcia-Cos, our chief financial officer. Before we get started with prepared remarks, I'm going to read a brief statement. Please turn to slide number two. 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 exhibits to those filings, which are available on our webpage at ferroglobe.com. In addition, this discussion includes 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 like to turn the call over to Marco Levy, our Chief Executive Officer.

Thank you, Alex, and good day to everybody. Thanks for joining us on the call today. We appreciate your interest in Ferroglobe. I would like to briefly comment on our safety record improvements as our employees are our most valuable asset. Over the past 18 months, the rate of lost time injuries declined by 66% based on our rolling three-month data, approaching best-in-class industry standards. One of our top priorities is providing a safe work environment for our employees and we will continue to focus on providing the safest possible workplace. Our solid results in the second quarter reinforce our strong execution and ability to successfully navigate a challenging market. Sales increased 14% and adjusted EBITDA increased 136% to $106 million over the per year quarter. Our cash balance reached $363 million, the highest level in Ferroglobe's history. In addition, our net debt further declined to $37 million, also a record level for the company. Last month, we took a significant step in our deleveraging efforts by redeeming $150 million of our senior secured note. reducing our note balance to less than $150 million, highlighting our strong cash position and reinforcing our confidence in our long-term cash generation potential. To put our overall debt reduction accomplishments in perspective, since the first quarter of 2022, we reduced our gross debt from $520 million to $250 million. In addition to reducing our interest expense, this transaction enhances our flexibility as we continue to evaluate capital allocation priorities. As discussed before, our goal is to prudently deploy cash to enhance long-term shareholder value. Beatriz will provide more color on this in her remarks. Recently, the U.S. Department of Energy added silicon metal to its critical materials list. As the leading U.S. silicon metal producer, Ferroglobe is a significant beneficiary of this development. The Solar Energy Industry Association estimates that the U.S. solar manufacturing capacity will increase from 7 gigawatts in 2021 to more than 42 gigawatts over the next three, four years. As on-shoring efforts among all Western regions continue to build momentum, we expect to be a significant beneficiary as a critical part of the solar supply chain due to our global footprint and ability to produce high purity silicon metal. The Inflation Reduction Act and other legislative and financial initiatives throughout the supply chain are expected to benefit Ferroglobe for years to come. The electric vehicle market continues to represent a significant growth opportunity for Ferroglobe. We recently signed an agreement to license patents that strengthen our position in the EV battery market, reinforcing the company's position as an emerging leader in high-quality solutions for this market. This agreement allows us to advance Ferroglobe's proprietary technology and develop silicon products for the next generation of lithium-ion cells. As the silicon content in anodes increases, battery performance, charging time, and storage capacity will substantially improve our current technology. This will help Ferroglobe to produce low-carbon solutions and also accelerate the energy transitions. We are very excited about these developments as they reinforce the long-term growth opportunity for the company. In April, we restarted operations in France, which helped our volume and cost performance during the quarter. Operations in Spain remain limited due to less competitive energy prices. Our flexible global footprint enables us to move production during volatile energy periods to lower cost plants in other regions and still provide quality products to our European customers. Overall, our operation continues to perform well. We recently signed a competitive long-term power purchase agreement with a Spanish energy provider starting in January 2024, covering a portion of our required energy needs and utilizing 100% green energy. Importantly, this is our first power purchase agreement in Spain, and we expect to sign additional agreements in the coming months. This will help us reduce our exposure to energy price volatility in Spain. The global economy remains soft, impacting the end markets that we serve. Prices continued to decline in the second quarter due to weak demand impacting silicon metal, silicon alloys, and manganese alloys. We expect the market to remain challenging in the third quarter as higher inflation and interest rates are expected to continue impeding economic activity. Interestingly, in late July, the IMF raised Its global growth forecast for 2023 is likely to 3%, despite a shallower than expected recovery in China. The IMF maintains its 3% global growth estimate for 2024. This, combined with our internal views, provides optimism for 2024, as excess inventories should be depleted and the supply-demand balance for our products should improve. Despite these challenging market conditions, we are reiterating our 2023 EBITDA guidance of $270 to $300 million due to Ferroglobe's disciplined cost control and proactive energy agreements in 2023. Next slide, please. Let's start with silicon metal. Revenue was $195 million in Q2. up from $161 million in Q1, an increase of 22%. Adjusted EBITDA for this segment increased $31 million in Q1 to $82 million in Q2, up 165%. Our silicon metal business was up, primarily driven by restart in France, partially offset by lower prices due to a challenging market environment. Volume increased 37% quarter over quarter to approximately 50,000 metric tons. Our average realized price for silicon metal sales decreased by 11% compared to the previous quarter, driven by lower index pricing in the U.S. and Europe. This price decline negatively impacted adjusted EBITDA by $17 million. We continue to benefit from our energy agreement in France and indirect CO2, which together contributed roughly half of the cost benefit with lower material costs being the next larger contributor factor. As for the silicon metal outlook, we are starting to see initial signs of increased customer inquiries as the recent inventory of ERENG is almost fully corrected. At the same time, The price environment appears to have stabilized. Another positive sign for the silicon metal market is the reduced exports from China, which should bode well for the future prices. Next slide, please. Moving to silicon-based alloys, revenue was $133 million in Q2, essentially flat with the prior quarter. Adjusted EBITDA for Q2 was $32 million, up 45% from the previous quarter. Sales volumes remain flat over the previous quarter. Average realized pricing was down 2% over the same period, negatively impacting EBITDA by $3 million. Relative to the previous quarter, silicone alloys benefited from lower raw material cost, which was the largest contributor to cost improvement. These combined with higher CO2 compensations were the primary drivers of the cost impact. Demand outlook for silicon-based alloys remains soft due to the weakness of the European steel markets, with specialty ferro-silicon performing relatively better than standard. Our strategy to prioritize higher margin specialty and foundry products over commodity grades silicon alloys enabled us to achieve better pricing and margins, demonstrating the effectiveness of our execution. Moving to slide seven, we move to manganese-based alloys. Manganese-based alloys revenue was $78 million in Q2, up 27% over the per year quarter. Adjusted EBITDA for Q2 was $1 million, down $2 million in the prior quarter. Sales volumes were up 34% over the prior quarter, positively impacting adjusted EBITDA by $1 million, while average realized pricing was down 5% over the same period, which negatively impacted EBITDA by $3 million. The weakness in the European steel market continues to put pressure on the spreads between the alloy and ore, which are currently at historical lows. However, we do not believe that the current spreads are sustainable. Should this continue, we would expect a supply response. In Q2 2023, our costs in the manganese-based alloy segment were relatively flat compared to the per-year quarter. Before turning the call over to Beatriz, I want to emphasize that we are steadfast in our focus on driving future growth and enhancing shareholder value. Despite the current market softness, we are very well positioned to take advantage of the market upturn, which we believe will begin in the coming quarters. We are very bullish on Ferroglobe's role in the transition to green energy through solar and battery markets. which we believe provides a significant long-term growth opportunity for the company. Beatriz, please.

Thank you, Marco. Please turn to slide nine for a review of the income statement. Our second quarter results improved over the first quarter due to an overall increase in volume and cost efficiencies, partially offset by weaker pricing. Revenue for the second quarter was $456 million, up from $401 million in the prior quarter. The 14% increase from the prior quarter was due to stronger volumes, driven by the resumption of operations in France after idling in the first quarter as a result of our energy agreement. The volume increase related to our French operations was primarily in silicon metal and manganese alloys, which increased 37% and 34% respectively. Our volume gains were partially offset by lower prices. During the second quarter, raw material and energy consumption costs improved to $229 million versus $255 million in the prior quarter. The lower raw material and energy consumption for production costs were driven by cost benefits from our energy agreement. Cost of sales as a percentage of revenue improved to 55%, down from 58% in the prior quarter. Excluding the accounting impact from the short-term PP&A in Spain, cost of sales declined to 50%, down from 64% in the first quarter. Operating profit in the second quarter was $63 million versus $44 million in the prior quarter. As a percentage of sales, operating profit was 40%, 14% in Q2, up from 11% in Q1. The $19 million increase in operating profits at the second quarter was driven primarily by higher volumes and cost efficiencies. Debt financial expenses in the second quarter declined to $1 million, down from $11 million in the prior quarter. The decline was attributable to lower debt outstanding as we continue to execute our deliberating strategy. In addition, we extend the maturity of one of our government loans, resulting in a one-time two-up of accrued interest during the quarter. Next slide, please. Our adjusted EBITDA in the second quarter was $106 million versus $45 million in the previous quarter. Adjusted EBITDA margins increased to 23% in the second quarter, up from 11% in the first quarter. Silicone metals and manganese volumes increased in the second quarter as we resumed production in France. The volume increase positively impacted adjusted EBITDA by $34 million. The average selling price across our portfolio declined by 6.7%, resulting in a negative price impact to adjusted EBITDA of $23 million. Declining prices in the second quarter were impacted by soft demand. Improved costs positively impact adjusted EBITDA by $50 million. mainly due to our energy agreement, CO2 compensation, and declining raw material prices. Slide 11, please. We end the second quarter with a record cash balance of $363 million, up from $344 million in the prior quarter, an increase of $19 million. Total adjusted gross debt was $400 million, flat from the prior quarter. During Q2, we repurchased $2 million of our senior secured notes in the open market, which was offset by accrued interest. Debt declined to $37 million in the second quarter, another record level. As a result, debt as a percentage of equity improved to 4% in the second quarter, down from 8% in the prior quarter, and 30% in the year-ago quarter. This dramatic improvement over the past year highlights our progress in reducing our leverage and strengthening our balances. Furthermore, in July, we redeemed $150 million of our 9.375 senior secured notes due in 2025, effectively reducing the outstanding note balance by and lowering our annual interest expenses by approximately $14 million. Overall, in less than 18 months, we have reduced gross debt by $270 million, down from roughly $520 million, approaching our objective of having approximately $200 million of gross debt. For the next step in our capital structure, We are currently evaluating the most effective capital allocation policy to maximize shareholder value. As you are probably aware, before we can return any capital to shareholders, we must remove the covenant restriction in our senior secure note, debt agreement, which prevents dividends and share buybacks. Given the strength of our balance sheet and the alternatives at our disposal, we believe Such restrictions will be removed in the coming months. Next slide, please. During the second quarter, we generate operating cash flow of $24 million versus $135 million in the prior quarter, primarily due to a $75 million tax payment made during the quarter. The high tax payment was the result of record earnings in 2022. Free cash flow in the second quarter was positive $1 million versus $117 million in the prior quarter. During the quarter, we had a working capital release of $79 million. We had a total $66 million of non-cash items related to the accounting impact of the short-term PPA in Spain and the energy agreement. We plan to build inventory in the coming months as we prepare for the first quarter idling in France. We expect that this will increase our overall working capital in the next quarter. CAPEX outflows in the second quarter were $23 million versus $17 million in the first quarter. We continue to project our base level CAPEX for 2023 to be around $75 million, with the potential to increase depending on additional spending for growth and ESG initiatives. Lastly, cash flow from financing activities in the second quarter was $19 million versus negative $96 million in the first quarter, impacted by bond prepurchases, early repayments, and bond interest payments. Next slide, please. At this time, I'll turn the call back over to Marco.