Ferroglobe PLC (GSM) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to Ferroglobe's First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later we’ll conduct the 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 Beatriz García-Cos, Ferroglobe's Chief Financial Officer. You may begin.
Beatriz García-Cos: Thank you. Good morning everyone, and thank you for joining Ferroglobe's first quarter 2021 earnings conference call. Joining me today are Marco Levi, our Chief Executive Officer; Benoist Ollivier, Ferroglobe's Chief Operating Officer and Deputy Chief Executive Officer; and Gaurav Mehta, our Transformation Director and EVP of Strategy and Investor Relations; and Jorge Lavin, Group Controller.
Marco Levi: Thank you, Beatriz. And welcome to our first quarter 2021 earnings call. It is a pleasure to present Ferroglobe's strong first quarter results particularly following the challenging year we faced in 2020. Despite the lingering threat of COVID, we are witnessing economic activity recovering at a tremendous pace globally, and we are certainly capturing the benefit of stronger demand across all our end markets. In part, we feel the overall pace of recovery has caught the industry by surprise and the tone of many of our customers going into the New Year was still one of caution and uncertainty. However, as we turn the corner and enter 2021, we have seen an acceleration in activity and firm signs of demand strength that is expected to continue at least through third quarter of this year. We are finally at an inflection point, which is underpinned by our solid supply-demand fundamentals across all products in our portfolio. While we are excited about the positive shift in the market backdrop, we have actually failed with the progress we have made at Ferroglobe on multiple fronts during the first quarter. The ongoing efforts to transform this business operationally and strengthen the business financially, positions us well to compete and capitalize on this market opportunity. We have been selectively restarting some previously idled capacity in line with our long-term plan, all while driving down costs by focusing on operational improvement.
Beatriz García-Cos: Thank you, Marco. Beginning with slide 11, I will touch on a few specific line items, on our income statement. Sales of $361 million, during Q1, were 30% higher than the $321 million of sales in the prior quarter. This increase in sales was driven by a 12% increase, in average realized prices, which more than offset the 2% decrease in shipments across our portfolio. During the quarter our cost of sales decreased by 8%, resulting in the doubling of our gross profit from 15% in Q4, to 31% in Q1. This is due to our continued cost efficiency efforts as well as the avoidance of some one-off cost, which adversely impacted the prior quarter. The decrease in other operating income by approximately $6.2 million is due to the accounting treatment relating to the CO2 emission rights. Although, production is marginally higher, quarter-over-quarter, we have not recognized any income in Europe during the quarter given that the 2021 allowance in Europe has not been granted yet. Operating expenses, totaling $36.8 million was higher than the previous quarterly, mainly because of the one-off impact in the United States during Q4. Reported to EBITDA of negative $18.9 million in Q1, when accounting for the onetime costs relating to the implementation of the strategic plan, the adjusted EBITDA was positive $22.1 million. Next slide please. Quarter-over-quarter, we did have a 302% increase in our adjusted EBITDA, from $5.7 million in Q4 to $22.1 million in Q1. The improvement in our average realized selling price had the single largest impact contributing $22.5 million. Continued efficiency program or KTM delivered the first results, reducing our viable costs, contributing $1 million. Additionally, the pickup in production across the platform drove fixed cost absorption, which is a factor having an adverse impact in Q4. The increase in head office expenses is attributable to a third-party consultant spend which decreased in Q1, as a result of some audit work and incremental legal expenses tied to specific transactions. During the quarter, we had an adverse impact stemming from the fair market adjustment related to our repurchase of CO2 rights, given an increase in the cost for these rights, slide 13 please. Turning now to slide 13, I will review our balance sheet in greater detail. Let me start by elaborating on the cash and restricted cash figure. As part of our refinancing process we repaid not only the ABL in the United States, but we also paid back letters of credit and other obligations with a specific lender as part of this transaction. The aggregated cash impact of this transaction was approximately $45 million. Hence, we had cash consumption during the quarter, despite the uptick in operating cash flow. Of the $84 million of cash on hand at quarter end, only $6 million is now restricted. This compared to the $28.8 million of cash which was previously restricted, under the prior ABL. The repayment of the ABL and cash consumed, impact our gross and net debt. Overall, our net leverage position improved during the quarter and is currently 3.79 times. Total assets were approximately $1.3 billion at the end of Q1, a slight decrease of $48 million over the prior balance, at year-end due to the net loss during the quarter. Next slide please. In aggregate, we turn to free cash flow of positive $9.1 million during Q1. The cash flow from operating activities during the quarter was $18.3 million. Reported EBITDA was negative $18.9 million. Cash flow from investing activities was negative $9.1 million attributable to approximately $2 million of capital expenditure, $7 million for the repurchase of CO2 rights. And lastly, cash flow from financing activities was negative $56.2 million for the quarter. In addition to the cash required to repay the ABL and ancillary obligations, we made our semiannual bond coupon payment. Next slide, please. Now turning to slide 15. We have reduced working capital by $5 million during the first quarter despite the increase in sales. When looking at the working capital evolution, please keep in mind that the target, which we have set for the year of $49 million is defined, measured as an average on rolling 12 months basis to account for cyclicality. In other words, we are targeting our average 2021 working capital to be $49 million lower than our baseline average for 2020. Slide 16, please. During the quarter both our gross debt decreased by $37 million to $419 million while net debt decreased by $10 million to $334 million. In the process of repaying the prior asset-based loan in the United States, we have to settle a few other obligations with the lender including letter of credit as well as retiring a credit card program. This led to the cash decline during the quarter. Next slide, please. As you will know from our announcement made on March 28th, the company entered into a Lock-up Agreement with members of an Ad Hoc Group of existing noteholders, representing in aggregate approximately 60% of the 2022 senior notes and Tyrus Capital, in relation to a capital raise and extension of maturity of the senior notes. Since our last update to investors, there has been material progress on the transaction. In particular, over 96% of our noteholders have now shown their support for the proposal by exceeding to the Lock-up Agreement and as a consequence, we have elected to implement the transaction by way of an exchange offer instead of an English law scheme of arrangement. This is expected to enable the transaction to be completely -- completed more quickly than would otherwise be the case and at a lower cost. The preparation of the long-form documents and satisfaction of the milestones and the Lock-up Agreement is proceeding in all material respects as expected. In particular, the group has entered into a note purchase agreement with members of the Ad Hoc Group relating to the issuance of an initial $40 million of the aggregate $60 million new senior secured notes. The conditions precedent to the note purchase agreement have been satisfying and the initial $40 million is in the process of being settled. We are still considering the appropriate form for the equity raise. You may recall that at the time of the March 28 announcement, we were considering conducting the new equity raise in the form of preemptive rights share offering available to all shareholders. We are still vetting the option and seek to finalize a structure soon. We are optimistic that the remainder of the transaction will complete within the timeline provided for in the Lock-Up Agreement and prior to the long stop date of September 28th, 2021. I look forward to reporting back to you as we hit additional milestones. At this time, I would like to turn the call back over to Marco, who will provide an update on the strategic plan.
Marco Levi: Thank you, Beatriz. Now turning to slide 19. At this time, I would like to take a few minutes to provide an update on our strategic plan. Given that we are now running full speed ahead on the execution of initiatives across all value creation areas. We intend to provide a quarterly update on our progress from both the quantitative and a qualitative basis hitting on some key highlights. To start, let me reiterate our targets for the year. We are expecting to realize $55 million of incremental EBITDA benefit in 2021 as well as $49 million of working capital improvement, which Beatriz highlighted. On the EBITDA side, we captured $4.75 million of benefit through specific initiatives tied to turnaround plan, which accounts for 9% of our annual target. It is worth noting that the $4.75 million is actual impact, which flows into our P&L. Also please keep in mind that the savings are not expected to be captured in a linear fashion as several larger initiatives are weighted towards the back half of the year. With the way these initiatives are collectively progressing, we remain confident in delivering our target. With regards to footprint optimization, we formally engaged with the European Work Council on March 29 to commence the restructuring in Spain and France. In Spain, the negotiation period officially started on April 8. On May 13, 2021, the consultation period ended without an agreement between the parties and FerroAtlántica del Cinca, which communicate its decision regarding the collective dismissal to the legal representation of the worker and the labor authority. So, FerroAtlántica del Cinca will communicate its decision. In France, the project implies a consultation period of four months. The procedure started officially on April 13, and Ferroglobe management is working since then to encourage social dialogue and transparency. Another area that we have significant progress is our continuous plan efficiency. While this work stream builds on our previous KTM program, we are revamping our processes for implementation and are investing in training our workforce on how to execute these types of projects most effectively. The aspect is provided by the consulting firm we are leveraging is also under tremendous value in improving our benchmarking and measurement capabilities as we are clearly starting to see a cultural shift and excitement growing around this program. Centralized procurement was a big undertaking because we have to reorganize the department in terms of personnel and train people to function under new organization. I commend the team's effort on quickly establishing this platform. In first quarter, we launched several RFPs and started to see the benefit of operating in this manner. As the organization gets used to working under the new formation, we see the opportunity to broaden the scope of this work strain to capture savings. On commercial excellence, there are 12 distinct subcategories we are progressing on. During the quarter, there has been a tremendous effort on reviewing and reallocating resources to better serve our customers. Through the development of improved account planning and customer coverage, we seek to develop a partnership with our key customers while enhancing and optimizing the overall order book. Over time, our goal is to focus on value-added products and having a strong partnership with our customers is critical to achieve this. And lastly, on working capital improvement, most of the efforts today has been centered on inventory management. We are creating targets based on KPIs in an effort to improve the overall efficiency throughout the cycle. Over time, we will move to other areas such as accounts payable and accounts receivable, but the initial way of working down both raw material and finished good inventory base on newly identified targets, is proving to be a significant improvement. Based on the way the target is measured, we have seen significant improvement in Q1. Let's say, the rolling average is intended to account for seasonality. So this trend line may fluctuate from quarter-to-quarter. Overall, we remain confident in delivering on the working capital target as well. Beyond the numbers, we are focused on fundamentally changing the DNA of this company in terms of unifying the global workforce by creating a culture centered on excellence and training our workforce at all levels to operate in a different manner. This journey is just starting, but we are saved with the overall level of engagement and results so far. I certainly look forward to keeping our stakeholders updated on this journey over the coming quarters. At this time, I will ask the operator to please open the line for questions.
Operator: Thank you. Thank you. Our first question comes from the line of Brian DiRubbio with Baird. Your line is now open. And pardon me Brian, your line is now open. Thank you. I would now turn the call back over to Marco…
Marco Levi: Thank you.
Operator: …Levi for closing remarks.
Marco Levi: Thank you. That concludes our first quarter earnings call. As I mentioned at the beginning of the call, the stats are aligned in terms of all parts of the company showing strong prospects for the year. Now it is up to us to execute on all fronts. The existing order book, the addition of new capacity and the ongoing improvements in how we operate the company will all support our ability to capitalize on this opportunity. The progress on the financing side is also critical to our success. Now that we have mitigated some risks, the path forward provides us comfort that we can continue to execute on our plan. Things are shaping up nicely, and we look forward to keep you updated on our progress. Thank you again for your participation. Have a great day.
Operator: Ladies and gentlemen, you may now disconnect.
