Ferroglobe PLC

NASDAQ:GSM

Earnings Call Analysis

Significant Q2 Growth and Future Caution

In the second quarter, Ferroglobe saw revenues rise by 15% to $451 million, driven by higher volumes and prices in silicon metal and manganese alloys. Adjusted EBITDA surged 124% to $58 million, expanding margins to 13%. Despite this growth, the company is cautious about the fourth quarter due to market uncertainties and plans to idle operations in France. This cautious outlook has led to a narrow adjusted EBITDA guidance range of $150-$170 million for the year. The company announced a quarterly dividend and a share buyback program, signaling confidence in long-term value creation.

Strong Q2 Performance Amid Price Volatility

Ferroglobe reported a solid second quarter with sales rising 15% to $451 million, a notable increase from $392 million in the previous quarter. This growth was mainly driven by higher sales volumes in silicon metal and manganese alloys along with increased prices across all segments. The company's adjusted EBITDA also surged, more than doubling to $58 million from $26 million in Q1, pushing the adjusted EBITDA margin up from 7% to 13%. This increase in earnings was attributed to effective cost management and higher fixed cost absorption resulting from increased production volumes.

Guidance Adjustment Reflects Optimistic Outlook

Ferroglobe's executives expressed confidence in their future performance, leading to an increase in adjusted EBITDA guidance. The new projected range is now between $150 million and $170 million, up from previous expectations. While the company anticipates solid performance driven by high index prices into Q3, there remains caution regarding the fourth quarter due to market uncertainties, particularly in the aluminum and steel sectors.

Cost Management and Operational Efficiency

The company effectively managed its raw material and energy costs, which decreased from 66% to 59% of sales. This improvement is a result of strategic cost management during a period of increased production volume. Additionally, financial expenses dropped by 31% following the redemption of senior secured notes, providing the company more room to maneuver financially. However, operating expenses were recorded to have increased by 64%, primarily due to adjustments in fair value for carbon credits.

Segment Performance Highlights

Revenue for silicon metal reached $204 million, reflecting a 22% increase primarily driven by a rise in both prices and shipments. Average selling prices for silicon metal grew by 2.8%, and volumes increased by 18.2%. Segment EBITDA for silicon metal also saw a significant uplift of 115%, reaching $35 million owing to strong pricing and volumes. Conversely, silicon-based alloys faced a dip, with revenues down 6% to $105 million, largely due to lowered shipments. The adjusted EBITDA in this segment fell by 29% to $10 million as a result of higher costs and reduced absorption rates in the U.S.

Manganese Alloys Fuel Growth

The manganese-based alloys segment displayed exceptional performance, with revenues soaring 48% to $98 million, bolstered by a 31% rise in shipments. This stimulated growth in adjusted EBITDA, which jumped over 150% from $6 million to $14 million. The company benefitted from strategic inventory accumulation before the market saw price increases driven by supply disruptions.

Navigating Future Challenges

Despite a robust second quarter, Ferroglobe acknowledges potential market pitfalls ahead. The demand is expected to remain soft in the latter half of the year with caution surrounding price drops in Q4 and impacts from inventory levels due to recent imports from lower-priced competitors. Their current strategy involves a focus on capturing market share in the U.S. following the implementation of substantial tariffs on Russian imports, leading to an expected increase in U.S. demand for domestically produced ferrosilicon from early 2025.

Capital Return Strategies

In line with enhancing shareholder value, Ferroglobe reiterated their commitment to returning capital through a $1.3 per share dividend, with a payment scheduled for September 27. The company also announced a share buyback program approved during the recent AGM, which allows for the repurchase of up to 37.8 million shares over five years, reflecting their proactive approach to capital allocation.

Innovations in EV Battery Technology

Ferroglobe is making notable strides in EV battery technology through its partnership with Coreshell, which has seen promising results in the development of silicon-based battery components. Enhanced testing outcomes, including substantial cycle retention rates, suggest potential advancements that could position Ferroglobe favorably in the growing EV market.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, good afternoon. [indiscernible] welcome to Ferroglobe's Second Quarter 2021 earnings call. [Operator Instructions] I would now like to turn the conference over to Alex Rotonen, Ferroglobe's Vice President of Investor Relations. You may begin.

[Alex Rotonen, executive]

Good morning, everyone, and thank you for joining Ferroglobe's Second Quarter 2024 conference call. Joining me today are Marco Levi, our Chief Executive Officer; and Beatriz GarcÃa-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 exhibit to those filings, which are available on our web page 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. Reconciliations of non-IFRS measures may be found in our most recent SEC filings.



Before I turn the call over to Marco Levi, our Chief Executive Officer, I want to announce that we'll be participating in Seaport Research Partners Annual Summer Investor Conference on August 20 and 21. We hope to see you there. Marco?

[Marco Levi, executive]

Thank you, Alex, and good morning, good day, and good evening to everyone. Thanks for joining us on the call today. We appreciate your interest in Ferroglobe.



Before we begin with our quarterly earnings update, I want to inform you with deep regret that Juan-Miguel Villar Mir, founder and former Chairman of FerroAtlántica, our legacy company passed away last month. I would like to express our deepest condolences to his family.



In Q2, we continued to execute well, driving strong financial performance with increased volumes, revenues and adjusted EBITDA. As we discussed in our first quarter call in May of this year, the U.S. International Trade Commission recognized that the imports of ferrosilicon from Russia, Kazakhstan, Malaysia and Brazil, which represented approximately 70% of all imports in 2023 are engineering our U.S. operations. The substantial government subsidies are received in these countries and the low selling prices of these imports have adversely impacted the U.S. ferrosilicon market, hurting local producers and their ability to compete. The ITC's final decision will be made in October.



On June 24, the U.S. Department of Commerce announced preliminary anti-dumping and countervailing duties of 283% and 748% respectively, on all Russian imports of ferrosilicon. As a result, all importers of Russian ferrosilicon are required to post cash deposits or bonds to cover these duties.



Russia represents approximately 35% of all ferrosilicon imports into the U.S. in 2023. This is a significant victory for our industry, allowing us to compete on a level playing field. The investigations of the remaining three countries Kazakhstan, Malaysia and Brazil [indiscernible].



The International Trade Commission were announced by eliminated terminations for countervailing duties expected in August and anti-dumping duties in October. We believe these decisions will have a positive impact on our business in 2025 as inventory in the channel is depleted.



As you recall, during the first quarter, we signed an MOU with Coreshell to further develop batteries for EVs using silicon [ rechanneled ]. We are very excited about this relationship as it enables us to take part in the evolution of EV batteries. In testing, Coreshell has achieved a high cycle lifetime using an 80% Ferroglobe-silicon content anode in a Coreshell battery. This improvement in battery performance is an important milestone. The benefit to consumers is that the silicon rechanneled significantly reduces the cost of batteries, speeds up the charging time to just 10 minutes and increases the range up to 40%.



The next step is to produce a commercial size battery that OEMs can begin testing. Coreshell has closed its financial round targeting the development of their pilot plant that we produce larger [ 60 unpair cells ] for the OEM testings. This project is on track with commissioning scheduled to begin in Q4 of this year and testing at OEMs expected [indiscernible] 2025. We'll keep you informed as we continue to achieve new milestones.



In addition to developing silicon rechannels with Coreshell, we are working approximately with 70 EV battery companies to also develop other silicon-based technologies such as silicon carbon composites and silicon monoxide anodes for batteries. These technologies while less efficient than [indiscernible] batteries are either in use or expected to enter the market in 2020.



While [indiscernible] prices in general have been strong during the first half of the year, they have been even more by supply constraints than a fundamental improvement in demand. Strong index prices in the second quarter should drive solid results in Q3. However, we are still cautious about the fourth quarter, given the uncertainty in the market, especially as it relates to the aluminum, foundry and steel sectors. We continue to enhance our capital return policy in addition to paying a quarterly dividend of 1.3% -- $0.03 per share, our share buyback program was approved in June. We are narrowing adjusted EBITDA guidance range from $130 million to $170 million to $150 million to $170 million. The strong second quarter combined with [ higher index ] prices should positively impact the third quarter, which gives us more confidence for the second half of the year.



However, given the weak demand, we are still cautious about the fourth quarter. And combined with the idling of French operations, we anticipate having the lowest adjusted EBITDA of the year in the fourth quarter.



Next slide, please. Our second quarter performance was strong with total sales increasing by 15% from the prior quarter to $451 million and adjusted EBITDA reaching $58 million, up from $26 million driven by strong pricing and sales volumes.



Operating cash flow and free cash flow were $2 million and negative $20 million, respectively, due to inventory build as we have started France and made a calculated decision to purchase incremental tons of manganese ore in anticipation of price increases. Beatriz will discuss this in more details as he reviews the financial results.



Next slide, please. Silicon Metal revenue in the second quarter was $204 million, up 22% from the prior quarter. This increase was a result of higher prices and higher volumes. Average realized prices increased 2.8%, where shipments increased 18.2% to almost 63,000 tons, driven primarily by strong sales to the chemical sector in Europe.

The volume shipped in the second quarter was the highest level in the past 2 years.



Index prices in Europe, which were down slightly in the second quarter were negatively impacted by lower product Chinese exports and weaken the market, particularly in the aluminum sector, which was affected by high energy prices in Europe. Prices in North America were strong in the second quarter and benefited from supply constraints such as the Baltimore bridge accident. In addition, high tariffs make Chinese silicon metal imports a nonfactor in the U.S. market.



Silicon metal adjusted EBITDA was $35 million, an increase of 115% over the prior quarter driven by strong volumes, higher prices and lower costs. Given weak demand in end markets and easing supply constraints, we're expecting these prices to soften into the third and fourth quarters. We have a typical 3-month lag in pricing, we expect the third quarter results to be relatively stable, but weaker in the fourth quarter. In addition, we expect France to be idling towards the end of the year, which will also impact fourth quarter results.



Next slide, please. Silicon based alloys. The revenue in the second quarter was $105 million, down 6% from the prior quarter. This revenue decline was a result of lower shipments, which were down 8% from the prior quarter, partially offset by a 2.4% increase in prices. Index prices in North America were up versus the first quarter, while Europe was relatively flat during the second quarter.



Adjusted EBITDA was $10 million in the second quarter, down 29% from the first quarter. This decrease was the result of a higher cost due to the idling of French operation in the first quarter and lower absorption cost in the U.S.



Weak shipments were primarily driven by a 19% decline in North America, which has negatively impacted by high inventories due to Russia selling subsidiaries low price [indiscernible] in the U.S. Excessive Russian shipments have led to a high level of inventory in the channel, which we expect will be depleted over the next couple of quarters. This will negatively impact demand until inventory levels normalize. However, -- as a result of the tariffs recently imposed on U.S. imports of [indiscernible] we anticipate increasing demand beginning in the first quarter of 2025 as imports from the affected countries will be [indiscernible].



This is expected to give Ferroglobe an opportunity to expand its market share in the region. Given the current economic uncertainty, we expect European and new demand to remain soft for the second half of the year.



To the next slide, please. Turning now to Manganese based alloys. Manganese based alloys revenue in the second quarter was $98 million, up 48% from the prior quarter. This revenue increase was a result of higher shipments of [ 81,000 ] tonnes, up 31% from the prior quarter [indiscernible] increased 13%.



We capitalized on South32-high-grade manganese ore mild shutdown, which was damaged by Cyclone Megan in late March by building higher inventory levels of manganese ore before the resulting shortage drove market prices higher. This enabled us to ship the highest volume of manganese alloys in the past 8 quarters. Manganese alloy index price increased during the second quarter, driven by a shortage of high-grade manganese ore caused by this shutdown.



Adjusted EBITDA was $14 million, up from $6 million in the first quarter. This represents an increase of over 150%. Price and to a less extent volume [indiscernible] increase in EBITDA, partially offset by higher costs. European end markets continue to be weak, and we expect our volume to normalize in the second half. It is important to note that nearly all our end market for manganese alloys is in Europe.



Now I would like to turn the call over to Beatriz GarcÃa-Cos, our Chief Financial Officer, to review the financial results in more detail.

[Beatriz García-Cos Muntañola, executive]

Thank you, Marco. Please turn to Slide 10 for a review of the income statement.



Sales increased 5% in the second quarter to $451 million, up from $392 million in the prior quarter. During the second quarter, we saw increased volumes in silicon metal and manganese alloys and higher selling prices across all 3 segments.



Raw material and energy consumption for production remained broadly flat and decreased as a percentage of sales from 66% to 59% in the second quarter, primarily due to effective cost management and higher fixed cost absorption as a result of increased volumes.



Other operating expenses for the quarter increased by 64% to $86 million, partially driven by a $19 million increase due to the fair value adjustment of the free carbon credit. This is fully offset by an increase in other income.



Staff costs decreased by $3 million in the second quarter to $67 million due to the profit-sharing arrangement in Europe during the first quarter. Adjusted EBITDA in the second quarter more than doubled to $58 million from $26 million in the prior quarter.



During the quarter, we earned approximately $8 million from our 2024 French Energy Agreement in line with the first quarter. As a reminder, cash from this benefit is expected in early 2025.



Net financial expenses for the quarter declined 31% to $5 million due to the full redemption of the senior secured notes in February. Going forward, we expect [ internet ] expenses to normalize below these levels.



Next slide, please. Our adjusted EBITDA margin increased from 7% in the first quarter to 13% in the second quarter, primarily due to increased pricing and volumes, which impacts EBITDA by $80 million and $11 million, respectively, relative to the first quarter. The higher cost was driven by the mark-to-market earnout provision in the manganese business, partially offset by higher fixed cost absorption in France and Spain.



Overall, average selling prices increased by 2.5%, positively impacting adjusted EBITDA by $80 million, $10 million of which was from manganese-based alloys. Total volume increased by 50% with an $11 million positive impact on adjusted EBITDA compared to the prior quarter. Thanks to [ inflation ] from metal sales to the chemical sector in Europe.



Head office and noncore business contributed approximately $5 million to increase EBITDA, driven by lower G&A costs.



Slide 12, please. During the second quarter, we consumed free cash flow of $20 million, primarily due to the need to build up inventories from the end of Q1, during which the French plants were idled and higher manganese ore prices following South32 mines shutdown.



Working capital was a use of $30 million driven by a $37 million inventory build as we restart operations in plants. In addition, after the South32 mine disruption, we purchased incremental inventory of manganese. This inventory increase was partially offset by [indiscernible] $6 million and an increase of $70 million in [indiscernible].



CapEx outflows in the first quarter were $22 million versus $8 million in the prior quarter. In addition, we paid cash taxes totaling EUR 9 million related to 2023 totaled an estimated tax payment for 2024. Last quarter, we continued our quarterly dividend in the amount of $1.3 per share, which was paid on June 27, and we will be paying our third quarter dividend of $1.3 per share for September 27.



In the net cost to continue enhancing our capital allocation policy, we have finalized the share buyback program, which was approved at the June AGM. We have authorization to repurchased up to 37.8 million shares over a 5-year period through both discretionary and non-discretionary purchases.



Next slide, please. We ended the second quarter with a cash balance of $144 million, down to $160 million in the first quarter. This reduction in cash is driven by the inventory buildup, as I have just discussed. We continue to run the business on a net cash positive basis for the second quarter in a row. Our gross debt remained flat at $81 million.



We remain committed to maintain -- in a conservative balance sheet. However, we continuously explore opportunities to prudently add additional liquidity to enhance our financial flexibility.



At this time, I will turn the call back over to Marco.



Next slide, please.

[Marco Levi, executive]

Thank you, Beatriz.



Moving to the key takeaways on Slide 15. We had a strong second quarter, growing sales by 15% versus the first quarter and adjusted EBITDA growing 124% with adjusted EBITDA margin expanding by 600 basis points to 13%. Given the strong performance, we are increasing our adjusted EBITDA guidance range to $150 million to $170 million.



We were successful in our efforts to level the playing field in the U.S. ferrosilicon market, resulting in trade action against predatory [ conversion ] imports. As a result, we have a significant opportunity to increase our market share starting in early 2025.



We continue to make significant progress with our Coreshell relationship, achieving excellent results in testing, validating their technology and the use of silicon-rich materials in EV batteries. As mentioned before, we have announced our capital return program by having the share repurchase program approved by the June AGM.



We are ready for questions. Thank you.

[Operator]

Thank you, sir. [Operator Instructions] We are now going to proceed with our first question. The questions come from the line of Lucas Pipes from B. Riley Securities.

[Lucas Pipes, analyst]

Good morning, good afternoon, everyone. Good to see the solid results and the bump in guidance. Marco, you mentioned in your prepared remarks the outlook for the second half of this year. And you called out kind of Q4 is the weakest period. And if I heard you right, you cited pricing as one of the drivers for that. And I wondered if you could maybe elaborate on that, kind of given how index pricing has moved over the last 9 months, 10 months or so. I would have thought we would have passed the valley, so to speak, in pricing, but I would appreciate your thoughts on that and how lags, mix, etc., might impact pricing?

[Marco Levi, executive]

Well, we have a good visibility on third quarter, of course, as a bunch of our businesses [indiscernible] related with index pricing. This is why we have a green in the Q3 and [indiscernible] to confirm [indiscernible]. Q4 is impacted by what we see in the market. Demand is weakening in most of the segments. Steel India steel production in the world base is down [indiscernible] estimate where it's not in negative territories in certain geographies like U.S., for example.



Aluminum is pretty stable in U.S. but weak -- extremely weak in Europe. Chemicals are stable. Solar is a significant [ slowdown ] in Asia, mainly driven by the dramatic growth of polysilicon price but also by the new investigation of U.S. authorities, which are definitely slowing down the [indiscernible] of solar supply chain elements to U.S.



So having this picture, we have already seen indexes weakening during the third quarter. And as a consequence, we are extremely cautious on our outlook on quarter 4. So weaker volume, weaker pricing in Q4.

[Lucas Pipes, analyst]

And you cited the exit results in the Coreshell investment and technology. Could you elaborate on those results? What exactly was so positive? What is the surprise either in terms of the results or the timing? Would appreciate your thoughts on that.

[Marco Levi, executive]

Well, I would be very even more positive when our batteries will start getting tested by the OEMs. But in the meantime, [indiscernible] we contain 80% of our silicon metal have achieved almost 1,000 cycles of charging and discharging with a retention of 80% of their properties. These are, in our case, unprecedented results that are justifying the move of Coreshell toward producing pilot quantities of batteries the [ 60 amp ] per batteries that will be tested by the OEMs.



So of course, we need more and more testing. We need the real testing by the OEMs. But it looks like we are close to solve the old problem of being able to address the swelling of silicon metal in the battery.

[Lucas Pipes, analyst]

Really quickly, maybe for Beatriz as well. You stockpile for manganese ore on the back of the supply disruption. When would you expect your stock cost there to normalize? And as it relates to kind of cash flow and working capital release, any comments as it relates to taking advantage of that buyback optimization?

[Beatriz García-Cos Muntañola, executive]

No, as I was mentioning in the call, so we have been taking advantage in Q2. So we have been seeing already the impact of lower manganese ore higher prices in Q2. And as you said, we take -- we bought some -- we purchased manganese ore in Q2, and we expect to see the release of this. And of course, we expect pricing to hold in Q3 and therefore, going to be a positive impacting in working capital in Q3 but could be offset maybe with all the business, where we expect the release of working capital overall could be more in Q4 Lucas.

[Lucas Pipes, analyst]

Any thoughts on the buyback authorization?

[Beatriz García-Cos Muntañola, executive]

Well, maybe what we said on the call. First, the AGM approved the share buyback program at the end of June. So we didn't have a lot of time to react on that, right, because the closing period had just started. And I think what is more relevant for us is when you hear Marco talking about the outlook of the second part of the year and the market conditions, we want to take a conservative approach and preserve our cash and our liquidity. So for the time being, we're going to be -- we want to be prudent in the use of our cash and liquidity.

[Operator]

[Operator Instructions] The questions come from the line of Martin Englert from Seaport Research Partners.

[Martin Englert, analyst]

Circling back on silicon metal and price weakness, how much of the 4Q price weakness is associated with the weaker Asia market and maybe more favorably priced product being exported there from South Africa? So more of a negative mix shift implicating prices at the segment level.

[Marco Levi, executive]

Let me talk about facts. Like in most of the businesses, China has built over capacity. And with the current crisis that they are going through, they are exporting everything that they can. We see that in silicon metal imports from China into Europe in the second quarter, which have significantly increased. Prices are extremely low, and this have an impact on the overall index. It is true that due to the quality that they export, they tend to supply mainly metallurgical silicon for aluminum, but they are definitely moving their products outside of China.



And I have seen -- we have seen the same something that we need to test with imports in U.S. from Angola, where Chinese have relocated apparently some of their old furnaces and silicon metal is exported out of Angola to U.S.



The other part of your question is around solar demand. Our sales of silicon metal to Asia for solar have been rather stable in second quarter. We foresee a slowdown in the second half of the year, which is related to this U.S. investigation. That basically blocks the export of solar supply chain elements to the U.S. So even the major players are concerned about being forced to pay duties in case they continue to do business. Honestly, we believe that this situation is not sustainable for the U.S., and I can add other comments. But at the moment, the offtake of silicon metal in Asia for solar has gone down.

[Martin Englert, analyst]

I wanted to circle back on the ferrosilicon trade case. And it seems like there was maybe some prebuying ahead of that and elevated channel inventories. So you're expecting muted or depressed volumes in U.S. ferrosilicon throughout the balance of the year, but then you expect an uptick into 2025. Is that correct?

[Marco Levi, executive]

Well, I think I also made this comment in the previous quarter, massive quantities of ferrosilicon have been delivered to U.S. in the last few months from Russia. And we estimate an amount of 120,000 tons of ferrosilicon that corresponds to 1 year supply of Russian ferrosilicon to the U.S. On top of it, we have seen like anywhere else, massive increases of export outside of additional capacity of ferrosilicon out of Kazakhstan. And to combine this situation in U.S., where we have seen increased exports out of Brazil, some minor suppliers of Brazil of ferrosilicon plus Malaysia.



So the situation combined with the estimated drop of production of steel in U.S., about 3.3% below last year year-to-date has stretched the environment. So pricing has gone up based on the announcement of the authorities, but we don't see too much liquidity yet. I can share with you a general comment that we perceive the need of securing supply of ferrosilicon next year in the American market because we are getting contacted by several steel [indiscernible] who want to secure volumes for next year.

[Martin Englert, analyst]

Are you aware of any alternative key sources that if these countries are bought out of the U.S. market due to the trade case that consumers in the U.S. may source from alternatively to kind of fill the hole? Or are they going to be largely fully reliant on U.S. production?

[Marco Levi, executive]

No, no. The -- first of all, there is a quite significant free capacity now in the U.S., we have 2 local players and we have capacity. Of course, we can support demand also outside of our most competitive assets in U.S. and South Africa, if needed. For sure, then you have the Brazil, some of the Brazilians who can supply more and some of the agents who can supply more. So I don't think the U.S. is going to suffer a lack of ferrosilicon. Remember also that we -- our plant in Selma is down as we speak, and we could be [indiscernible] sell one, two ferrosilicon production in the quarter.

[Operator]

We have no further questions on this call. I will now hand back to Marco Levi for closing remarks.

[Marco Levi, executive]

Thank you, and thank you again for your participation. We look forward to hearing from you on the next call in November. Have a great day.

[Operator]

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you, and have a great day.