Ferroglobe PLC (GSM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Ferroglobe's investor call. [Operator Instructions] As a reminder, this conference call may be recorded. Before we get started, I am going to read a brief statement on behalf of the company. Statements made by management during this conference call that are forward-looking are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Ferroglobe's most recent SEC filings and the exhibits to those filings, which are available on our website, www.ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, gross debt, net debt, and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliations of these non-IFRS measures may be found in our most recent SEC filings. Please note, this conference call is not an offering of any securities and should not be [ constructed ] in any jurisdiction or for any purpose. I would now like to turn the call over to Javier López Madrid, Ferroglobe's Executive Chairman. You may begin.

Thank you. Good morning, and good evening, everyone, and thank you for joining us for this investor update call. As you will have seen from the information we published on Monday, we're in advanced discussion with the [ Ad Hoc ] group of our bondholders, which if successful could provide both time and capital to pursue our strategic plan. In the context of this discussion, it is important to note that they have not yet been finalized or recorded in any form of binding agreement. So while negotiations are continuing with a positive momentum, and we're hopeful that we will be able to announce the signing of a lock-up agreement shortly, you should be aware that the outcome of the discussion is not certain. You should also be aware that if we do enter into a lock-up agreement reflecting the transaction for discussion, it will be the first step in a transaction that will take a number of bonds to be fully [ interpreted ]. The strategic merits of the contemplated deal are described in [ bonder's ] publication, but I would like to take this opportunity to remind us of all the key points. First and foremost, through the ongoing support of our noteholders, we expect to eliminate any near-term refinancing risk related to our upcoming bond's maturity. Secondly, we expect to benefit from sufficient capital to pursue our strategic plan, which is for the detail in [ bonder's ] publication. And finally, we highlight that the anticipated new capital is expected to come from some combination of our noteholders, shareholders, and new investors. What I participate on today's call as Executive Chairman of Ferroglobe, I would like to take this opportunity to make a brief statement in my capacity as representative of Grupo Villar Mir, the majority shareholder of [indiscernible]. On behalf of GVM, I would like to reiterate our strong commitment to the company. GVM remains confident and supportive of management ability to execute the business plan that has been shared this week, and we're evaluating ways to participate in the proposed financing. Finally, as Chairman of the company, I would like to thank both our shareholders and noteholders for the confidence they continue to show in the ongoing efforts of our team and the recovery of Ferroglobe. We will use the rest of our discussion today to outline our belief of the key pillars of Ferroglobe's recovery on our vision of -- for a more optimistic future, while touching on our overall market environment, which remains challenging, not least of all in light of the ongoing COVID-19 pandemic. At this time, I will turn the call over to Marco Levi, Ferroglobe's Chief Executive Officer.

Thank you, Javier. Please allow me to spend a few minutes going through some highlights from our investor update. In connection with this financing discussions we have just referred to, an Ad Hoc Group of Noteholders represents approximately 70% of our unsecured noteholders were provided with confidential information regarding Ferroglobe. This information has been summarized in the presentation which accompanied at the press release issued on Monday, and which has also been posted on our corporate website. I will not be going through each slide contained in the presentation on today's call, but will touch on some of the broader themes underlining the data in the presentation. In order to set the stage, I begin by putting things into perspective, particularly as we come off of a highly irregular year due to the pandemic. Despite adding some new members on the senior management team in late 2019 and early 2020, and inheriting an ailing business we successfully navigated a challenging 2020, and we closed the year with a positive adjusted EBITDA. The team has been successful in addressing several immediate challenges by quickly reacting to an unforeseen and dynamic situation and battling down on all fronts in terms of costs. We partially offset the deterioration in volumes and prices through new cost-cutting initiatives. We have also emphasized commercial discipline, focusing on steady margin improvement. Collectively, the actions we have taken resulted in a gradual EBITDA recovery throughout 2020. At this point, we have not finalized the audit for Q4 and year-end 2020. So the figures shared in the presentation reflect our current expectation but are subject to change. Adjusted EBITDA for full year 2020 is expected to be positive $33 million, which compares with negative $37 million for full year 2019. When you look at the bridge on Slide 8, the part I draw your attention to, cost. The $512 million improvement is attributable to the slowdown in overall activity as well as a real focus on cost reduction and cost improvement across the board. During the year, we were successful in executing the first wave of initiatives at the plant and corporate levels. Given the cyclical nature of our business, we recognize important of -- sorry, the importance of rightsizing our operations to maximize the cost structure and to diligently eliminate excess costs. This is the theme we have been highlighting over the past several quarters, and it will be an important focus for us in going forward, particularly with the execution of the strategic plan. For the fourth quarter of 2020, our current expectation is adjusted EBITDA of $6 million, which compares to adjusted EBITDA of $22 million since the third quarter 2020. We have benefited from some volume pickup late in the quarter, but had an adverse impact from pricing across the portfolio. Furthermore, there was an adverse impact on costs, primarily attributable to the fact that we consume less energy than contracted in Europe due to unplanned production containments stemming from COVID. During the quarter, we had approximately $10 million on noncash charges. This is predominantly attributable to the earn-out provisions relating to our manganese assets in France and Norway. The noncash items also include the effect of year-end mark-to-market valuation of selected balance sheet items. In Q3, we also benefited from the removal of liabilities relating to an R&D project in France, for which we had received a government grant. The quarter-over-quarter impact of this benefit is offset in quarter 4 EBITDA bridge. For the purposes of today's call, I wanted to touch on the some highlights on the recent quarter. We will be providing much more detail and context around the key drivers for the fourth quarter during our regularly quarterly earnings call. Also, noteworthy as you go through the presentation is that you keep in mind that the refinancing of our prior accounts receivable securitization program was a subsequent event in our third quarter results as it closed in October 2020. The prior securitization program has an impact on the total and available cash to the company, as some cash was effectively trapped previously. Hence it is important to put the cash evolution numbers into context as we look at the movement from Q3 to Q4. As you see on Slide 10 of our presentation, the total cash at the end of Q3 was approximately $147 million. This includes approximately $41 million of cash that was in the SPV under the prior securitization, which was previously consolidated but not available to the company. So on a like-for-like basis, the $124 million of cash at year-end is up from Q3 balance. Overall, our cash balance remains above the minimum threshold we like to maintain, particularly with the looming impact of COVID-19. We have been tightly managing our cash through the pandemic. And one of the reasons we've been pushing some incremental financing is to provide the execution as there may be some lingering impact in 2021. Our pro forma net debt at year-end 2020 was approximately $391 million. As we think about the near term, our general expectation is that 2021 will be a transitional year, as illustrated by our projections. At the moment, we are seeing some positive trends emerging. On the demand side, the general state of the industrial economy is picking up, which is supporting a recovery in key end markets like aluminum, mainly automotive, and steel. And our sales into the chemical side of the business has also started to rebound after some unexpected slowdown in the back half of 2020. This overall pickup in demand has translated into some pricing improvement as well, evidenced by the recent uptick in index pricing across all our major products. Overall, given the contractual nature of our business, it will take time for the positive pricing environment to work into our profitability, when legacy contracts reprice and due to a lag effect on some index-based contracts. This highlights how dynamic the market currently is and how quickly the real sentiment can shift. While we expect to benefit from these trends on the volume side in 2021, our current expectation is that the energy realized pricing would be relatively flat from the product portfolio as a whole. This is due to factors such as new world private mix and specifically the mix by end market for silicon metal as well as the adverse impact of some favorable contracts expiring at the end of 2020 and renegotiated with different pricing terms. We do add index-based context in a portion of the order book subjected to spot business, which could provide upside should the pricing dynamic continue to improve. For the purposes of our business plan, we are being cautious and have made rather conservative pricing assumptions. We are [ adapt ] to our strategic turnaround plan. We're in the final planning stage across some value creation areas and have [ commanded ] the execution phase across other areas. 2021 will be the first year we realized some EBITDA contribution from initiatives underpinning the strategic plan. While we expect to realize some of that benefit beginning Q1 of 2021, there will be an acceleration of the uplift in EBITDA as we ramp up our execution throughout the year. The full year 2021, we are estimating $118 million of adjusted EBITDA. $55 million of this estimated amount is attributable to specific initiatives across transformation plan. You can now refer to the year-over-year bridge analysis on Slide 20 for some further commentary around the major drivers, including the impact of onetime costs relating to the contemplated financing and cost expected to execute the transformation plan. Given these one-off impacts, our cash flow from operation is expected to decrease year-over-year in 2021. Hence, we are seeking to add the additional buffer by a new capital rise. Our baseline liquidity before any new capital injection is expected to remain largely stable throughout 2021 at around $100 million. However, with the additional cushion achieved through a potential new money rise, if implemented, the expected annual cash balance would be approximately $180 million. On Slide 21, you can see the evolution in our expected liquidity on the quarterly basis for 2021. It has to be reemphasized that 2021 is a pivotal year for the company. We have to execute on all fronts. Hence, once we have the financing behind us, we can focus on execution of the turnaround plan and continue to improve the fundamental way of going to markets. Over the course of the projected period out to 2024, we expect a gradual recovery in volumes, but our overall volumes will remain below historical levels. This is due to the fact that we need to further adjusted the footprint. By cutting the least cost-competitive capacity, we are not only improving the overall economy for the company, but we also gain operational flexibility, which translates into commercial flexibility. Ultimately, we seek to break away from our traditional model focused on maximizing output and shift towards a model that focuses on margin. The core of this business is being transformed to ensure competitiveness through the cycle. And with the changes we seek to make, there will be a positive impact in the business across various functional areas. This comes not only from cost savings, but in simplifying the day-to-day operations to make better business decisions. On our previous call, we touched on the need to address some fundamental gaps. The gradual improvement in our business out to 2024 centers on rebuilding the foundation of the company so that we can improve efficiency, so that we can materially have lower cost structure. We establish customer relationships and regain some lost business, align production, and demand better to improve our competitiveness and be more selective on the commercial side, eliminate complexities within our business so that more time is spent servicing our customers instead of on administrative tasks, make investments to make our plans more competitive. In the business plan, we have provided our expectation for aggregate volume each year. The gradual recovery is quite modest in our opinion, particularly when you compare to our past shipment levels. On the pricing side, we have many challenges in making long-term prediction. Where available, we are referencing the forward pricing for a cut of third parties like CRU. And in other cases, we are taking our best deal given our expectations for supply and demand. Furthermore, you have to keep in mind that there is an adjustment factor to these numbers in order to account for our portfolio mix within each family of products, specific grade requirements for customers and future plans to increase our emphasis on specialized products, among other things. Slide 14 summarizes the longer-term projections for volumes and pricing. On the cost side of the equation, there is no doubt that we have a tremendous opportunity, and this is the crux of the strategic plan, through initiatives like continuous plant efficiency and we have a robust pipeline of projects, which we have validated with our consultants and remain confident in our ability to deliver significant savings. We now have the centralized procurement organization in place and are training our people to think and work in a different way. Step changes like this will also drive value. And we have introduced new disciplines and policies throughout the company to ensure trackability and accountability of spend. On Slide 15, we highlight our expectation for cost reduction over the next few years, taking operating costs down from 98% of sales in 2020 to a target of 75% in 2024. This will be achieved through the collective efforts across all key value creation areas we have discussed on the prior quarterly earnings calls. At the moment, we are expecting $180 million of EBITDA uplift from the various initiatives between now and 2024. Over the past few months, our team working alongside the team of consultants and industry experts have been validating many of the initiatives and targets through a bottom-up approach on an asset-by-asset level. This will lead to some incremental pockets of value, which are reflected in the updated target level. Approximately $40 million is expected to come from footprint optimization; $60 million is expected to come from continuous plant efficiency; $25 million is expected to come from SG&A cost reduction; and $50 million is expected to come from centralized procurement; and $40 million is expected to be driven by our commercial strategy. Additionally, we still target $70 million of cash release from working capital improvement. $49 million of this target is expected to be realized this year, in 2021. While meeting the target is important, we need to ensure sustainability of working capital levels on a relative basis. We have introduced a vigorous plan around this and will track working capital as a percentage of sales to maintain this discipline. You can see this on Slide 16, with the [indiscernible] being under 20% beginning of 2022. And the underlining business recovers and will get the benefit of the turnaround plan, the company will return to profitability and will generate cash flow. Over the past few quarters, we have scaled back on spending and we managed cash, focusing on the critical areas of environment, healthy, safety, and our routine maintenance. The smaller operation footprint has supported our ability to scale back on spend. However, we recognize the current level is more sustainable. As our cash flow situation improves, we plan on prioritizing projects requiring incremental spend and expect to ramp up our CapEx back to a run rate of $75 million per year. Furthermore, we feel the projected cash profile support the operation of the company and allows us to satisfy all our obligations. Slide 19 summarizes the path to cash generation and our projections for net debt. This business has demonstrated the ability to generate significant cash flow in the past. And we have developed a robust plan for getting the business to a point where we generate cash through the cycle. Our target is to achieve a net cash flow conversion of approximately 60% once we complete 2 turnarounds. With the capital required to execute the strategic plan received in 2021, cash flow generation is expected to remain constrained, and we are seeking to raise incremental capital as part of the proposed financing. As noted earlier, we expect to realize $59 million of EBITDA uplift from our turnaround plan this year. However, when you take the full year run rate benefit coupled with additional initiative earmark 2022, the cumulative cash flow profile of the company improves drastically. Hence, we remain confident in the decision to take the necessary steps now, and the expected financial benefit in 2022 more than offsets the cost of the incremental capital. Once we begin realizing the benefit of the actions we are taking, the improvement in cash generation beginning 2022 more than offsets the cost of the incremental capital. Hence, we feel the proposed financing is attractive and necessary for the future of the company. And before we move on, it is worth mentioning that we have settled on some new terms with the Spanish government relating to the Reindus loan, and our agreement with the government, Reindus loan repayment will only begin in 2023 with annual amortization of approximately $6 million per annum. Overall, we are extremely excited about the path ahead for Ferroglobe and the ability to create value. We have diligently rolled out a new strategic plan and are setting the foundation for execution. With this proposed financing, if successfully closed, we will be in a position to begin executing the business plan. There is tremendous value to be unlocked within this company, and we believe the Ad Hoc Group of Noteholders recognizes the potential of this business to generate cash and is willing to provide incremental capital on that basis. We are further encouraged that our largest shareholder, Grupo Villar Mir, continue to remain supportive and is discussing the potential involvement in the injection of incremental equity. We certainly look forward to continuing our dialogue with the various financing parties and moving towards a lock-up agreement. We would continue to update the public if further progress is made and meet other milestones in this process. I want to thank you very much for your attendance on today's call. We will be briefly analyzing a date for our fourth quarter and full year 2020 earnings call shortly and look forward to speaking with you then.

This concludes today's investor call. You may now disconnect. Thank you.