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Edited Transcript of GSM earnings conference call or presentation 3-Dec-19 2:00pm GMT

Q3 2019 Ferroglobe PLC Earnings Call

LONDON Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Ferroglobe PLC earnings conference call or presentation Tuesday, December 3, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Beatriz García-Cos Muntañola

Ferroglobe PLC - CFO

* Francisco Javier López Madrid

Ferroglobe PLC - Executive Chairman

* Pedro Larrea Paguaga

Ferroglobe PLC - CEO & Director

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Conference Call Participants

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* Brett Levy

* Matthew Thomas Farwell

Imperial Capital, LLC, Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Ferroglobe's Third Quarter Earnings Call. (Operator Instructions) 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.

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Beatriz García-Cos Muntañola, Ferroglobe PLC - CFO [2]

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Good morning, everyone, and thank you for joining the Ferroglobe Third Quarter 2019 Conference Call. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to Slide 1 at this time.

The 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 exhibits to those filings, which are available on our web page, www.ferroglobe.com.

In addition, this discussion includes reference to EBITDA, adjusted EBITDA, gross debt, net debt and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliation of these non-IFRS measures may be found in our most recent SEC filings.

Next slide, please. We will first review the Q3 results and some detail of the breakdown across our core products. Next, we will update you on the corporate initiatives we are undertaking. And lastly, we will provide an update on the market outlook for the remainder of 2019.

I would like now to turn the call over to Javier López Madrid, Executive Chairman of Ferroglobe. Next slide, please.

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Francisco Javier López Madrid, Ferroglobe PLC - Executive Chairman [3]

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Thank you, Beatriz, and good morning to everyone. Today, we have with us Pedro Larrea, Chief Executive Officer; Beatriz García-Cos, Chief Financial Officer, Benoist Ollivier, Chief Operating Officer and Deputy CEO; and Gaurav Mehta, Executive Vice President, Strategy and Investor Relations.

Before we get started today, I would like to take a moment to comment on a few executive management changes which were recently announced. In October, we appointed Benoist Ollivier as Deputy CEO and Chief Operating Officer. As part of his role, Benoist oversees a number of important initiatives focused on our ongoing efforts to rightsize operations, generate cash and drive cost reduction. Benoist has been with Ferroglobe and his predecessors for over 25 years and has a wealth of operational, technical and managerial experience. His knowledge of the organization and our industry, combined with his proven track record for delivering results, supports the effective management and execution of our near-term plan to navigate the current downturn.

Additionally, we're thrilled to welcome Beatriz García-Cos to the executive management team of Ferroglobe. On October 29, Beatriz was appointed Chief Financial Officer. Beatriz has over 2 decades of experience as a senior finance professional in multinational companies, including having spent the past 7 years as a CFO of public companies in the metal and mining sector. She will lead Ferroglobe's finance strategy and oversee the company's financial operations. With the creation of a new deputy CEO and COO role and the appointment of a CEO -- CFO, we have strengthening the management team to successfully and expeditiously execute our strategy.

Our financial results clearly reflect a challenging operating environment. However, we have been doing what we need to do, one step at a time, to ensure we successfully navigate this downturn. The team has executed on a number of initiatives, both on the operational and the financial front. This includes complete divestitures, such as the sale of FerroAtlántica, and with it, our Spanish hydro assets. We have replaced our RCF with a new, more flexible North American ABL facility, and we have made production curtailments in parallel with cost-cutting initiatives. Although there have been some positive data points recently, we remain cautious and are continuing to adopt our platform until there are stronger signs of improvement in the trading environment.

Furthermore, following our lead, we're now seeing a number of recent capacity curtailments by other producers as the industry takes action necessary to support a recovery in prices. The entire organization is focused on completing the initiatives we have announced as well as generating new ideas to optimize our performance while reducing cost.

On the financial side, the repayment of our RCF was a critical step in removing financial constraints and further alleviating pressure on our capital structure. Notwithstanding our efforts thus far, the Board and management fully understand there is much more that we need to do to recover value for our stakeholders, and we are committed to the task. For now, I would like to thank our customers and suppliers for their support during this period, working with us to develop mutually beneficial solutions to weather the downturn. I am confident that the steps we're taking and the team we have in place will enable the company to drive improved results beginning in 2020.

At this time, I would like to turn the call over to Pedro to discuss our operating results in more detail as well as providing insight into our end markets.

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [4]

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Thank you, Javier, and good morning, everyone. Q3 results are reflective of an overall industry slowdown, with revenues, EBITDA and net income at disappointing levels. One area where we have seen a positive trend is a drop in our input costs, which partially offset the top line decline.

As we review our financials, please note that our prior period financials have been restated to reflect the recent sale of FerroAtlántica and its associated Spanish hydro facilities. Overall volumes during the third quarter were down 3.8% relative to Q2. Our push to sell silicon metal and work down inventory during the quarter led to an increase in silicon shipments. However, silicon-based alloys and manganese-based alloy shipment volumes were down from the -- for the quarter. An important factor of the Q3 results was reduced pricing across most of our products.

On a quarter-over-quarter basis, silicon metal prices dropped 6.3%, silicon-based alloys dropped 5.2% and manganese alloys dropped 4%. Although this sales price decline is reflective of the overall market evolution, it includes selling prices in many of our markets that are above the index, but also some extra sales in less attractive markets at lower prices with the goal of inventory work down. The overall weaker volumes and pricing during the quarter yielded a 6.8% decline in our top line revenue versus the prior quarter.

The adjusted EBITDA in the quarter is negative $7.2 million compared to positive $5.5 million during the prior quarter. The adjustments included $174 million impairment charge during Q3, amongst the other items. Our EBITDA margin of negative 1.9% is a decrease of 312 basis points from the prior quarter. Given these negative developments, we are actively making changes to our commercial, operational and financial strategy, which we will discuss in a moment.

So turning to Slide 6, please. I would like to highlight that the numbers in these graphs have been restated to reflect the sale of FerroAtlántica and other noncore assets. Our consolidated sales have decreased 6.8% in Q3 to $382 million down from $409 million in Q2 2019.

Silicon metal revenues were higher during the quarter, driven by increased volumes, while silicon-based alloys and manganese-based alloys have declines in sales during the quarter due to lower volumes and lower pricing. This revenue weakness was only partially offset with cost improvements, resulting in negative adjusted EBITDA of $7.2 million during the quarter.

In historical terms, the softness in revenue remains accompanied by relatively high cost in some of our inputs, if we compare to where such costs, we're only a couple of years ago. Prices for manganese ore, coal, electric components, met and pet coke as well as power are coming down, but are still at relatively high levels. Furthermore, it is important to note that there is a lag factor for inputs such as manganese ore, where prices have declined significantly during Q3, but we will only capture the full benefit in the coming quarters.

Next slide, please. Adjusted EBITDA restated to exclude discontinued operations decreased to negative $7.2 million in Q3 versus positive $5 million in Q2. The biggest contributor to the decline during the quarter is lower pricing across all 3 product categories, which had an adverse impact of $14.7 million. There was a negative $1.7 million impact on the overall decline in volumes during the quarter. Partially offsetting the price and declines is a cost improvement of $10.9 million, which includes improved realized power pricing and operational efficiency improvements. We also realized the benefit of declining manganese ore prices, which yielded $5.5 million in cost savings quarter-over-quarter.

During the quarter, we took an inventory write-down of $5.1 million in order to value our finished goods at the lower of cost and net realizable value. This mostly relates to inventories of silicon metal and manganese alloys, and was driven by the falling selling prices of these products. Finally, mining and other items negatively impacted results by approximately $1.6 million.

Turning to Slide 8. On the next 3 slides, we will discuss pricing and volume trends, earnings contributions and market observations for each of our key products.

Turning first to silicon metal. Ferroglobe's realized average selling price for silicon metal declined by 6.3% to $2,175 per metric ton. The index pricing in the U.S. and Europe faced a steady decline in Q3 as the demand side of the equation has eroded faster than supply side cutbacks. As a result of the industry's recent actions, we have seen price stabilization at the beginning of Q4 and some index price recovery in certain markets like China and Europe in the past few weeks.

Recently, Ferroglobe announced extended production curtailments at plants in Europe and Canada, resulting in a run rate capacity reduction of 56,000 tons. Similarly, our producers have announced capacity curtailments as they respond to the declines in demand and to prices at loss-making levels. We view this trend favorably and see this dynamic as critical to stabilizing and eventually improving the pricing environment. We continue to have a decent order book for Q4 with fixed-price contracts and with floor limits in some of the indexing price contracts. These contracts allow us to realize average prices that do not decline as much of the underlying index.

The bar chart on the top right for Slide 8 shows an increase in silicon metal volumes. Despite continued demand slowdown across the aluminum, chemical and solar end market, Ferroglobe realized higher sales volumes due to a network of working down finished good inventory, in line with our previous announcement. Some of these volumes were sold at prices that brought our average realized price down during the quarter, but that has helped with our cash flow generation.

We saw a slight deterioration in our EBITDA from the silicon metal business quarter-over-quarter. The net impact of lower realized price outweighed the positive impact of lower input costs and cost improvements driven by technical performance. Additionally, we had a $2.3 million in inventory write-down at the end of the quarter.

Lastly, it is worth noting that we announced the formation of a domestic trade coalition in late October. Ferroglobe's U.S. subsidiary and Mississippi Silicon, the 2 domestic merchant producers in the U.S., agreed to form the coalition to address international trade regulatory issues related to unfair import competition, which affects both companies.

Next slide, please. Turning to silicon-based alloys. During the quarter, the average selling price decreased by 5.2% to $1,490 per metric ton, down from $1,572 per metric ton in the second quarter of 2019. In addition to the prior price decline, we also realized lower sales volume during the quarter. Sales volumes were approximately 69,000 metric tons in Q3, about 9,000 tons lower than the prior quarter. This decline is attributable to overall slowdown in the steel sector which impacted sales of both -- for our silicon and foundry, which is tied to the automotive end market. As you can see in the graph on the top left-hand side of the slide, the pricing has shown some recovery in both geographies in the current quarter -- the index pricing has shown some recovery in the current quarter. We recently announced extended outages, which lowered run rate production by 104,000 tons, and we'll continue to monitor developments in the steel industry and plans of capacity reductions by steel producers.

EBITDA for our silicon-based alloys business was adversely impacted by lower prices and volumes as well as higher costs. We also had a $0.5 million inventory write-down during the quarter. Collectively, these factors resulted in a drop in EBITDA contribution from this product category to $4.1 million in Q3, down from $11.4 million in the second quarter.

Next slide, please. Turning now to manganese-based alloys. EBITDA contribution from this business is down marginally at $1.7 million in Q3. It is important to note that the Q3 results include an inventory write-down of $2.4 million. Without this write-down, this part of the business would have shown some early signs of margin recovery. While we report our realized prices and corresponded -- corresponding index in U.S. dollar terms, the European index in Europe was rather flat during the quarter. Hence, the decline you see in the top left-hand corner of the slide is primarily due to foreign exchange movements.

Our realized average price increased by 4% during the quarter to $1,140 per ton. Volumes were down 5.6% during the quarter as a result of seasonality and some delays in shipments at quarter end. The recent trend line on the index pricing for manganese ore continues its positive trend. During the quarter, the Chinese index price for 44% grade ore declined from almost $6 per dmtu at the end of Q2 to little over $5 at the end of Q3. Current prices are well below $4 already.

Slide 11, please. Manganese's spread defines that the selling price for manganese ore -- alloys led the cost of manganese ore. It can be seen in the chart on the left side of the slide, these spreads have been volatile historically. Over the past several quarters, we have seen a gradual improvement in this spread, largely driven by the drop of manganese ore prices relatively -- relative to the alloys prices, which have declined marginally during this period. It is important to note that the spreads shown on this slide are illustrative, based on the spot prices for ferromanganese and silicomanganese and the spot pricing for ore. This does not detail the company's specific spread, but gives an indication of the trend line evolution in the spread spot prices. Most noticeable is a significant acceleration in the recovery of business spread in recent weeks. Given the lag factor, this dynamic should benefit us in future quarters.

I will now hand the call over to our CFO, Beatriz, to give you some financial highlights for the quarter. Slide 12, please.

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Beatriz García-Cos Muntañola, Ferroglobe PLC - CFO [5]

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Thank you, Pedro. Now turning to Slide 12. Working capital. Working capital increased here from $410 million in Q2 to $579 million in Q3, primarily resulting from the revised accounting treatment of the accounts receivable securitization program. Excluding the impact of this, working capital declined $13.4 million to $397 million. A release of inventory in the plants contribute to working capital improvement by $25 million. A decline in interest payables negatively impacted working capital by $90 million.

Now I will provide some comments on the securitization program. The recent downgrade in the company's rating triggered an amendment to the securitization program. This change affected risk profile of the program as a result of which it was classed as on balance sheet for IFRS purpose at the end of the quarter. The impact of this on the balance sheet is an increase of $182 million in working capital. As we speak, we are working on replacing the equivalent accounts receivable securitization facility will be aimed to increase the size of the loan and to return to a better risk profile, which will allow the company to take it off balance sheet again. The cash balance as of September 30 includes -- including restricted cash remained flat at $188 million.

Slide 13, please. To begin, let's review the debt position. There is a decrease in our gross debt and net debt by $110 million compared to Q2. The main drivers for the debt reduction are as follows: $58 million from lease pay down following the FerroAtlántica divestiture, $21 million of debt pay down in the form of letter of credit and the fair market adjustment of actual financial instruments by $10 million.

Moving now to the free cash flow evolution. The reported EBITDA for the quarter was negative $183.1 million. This includes our $174 million goodwill impairment charge, with $143 million allocated to Ferroglobe's U.S. operations and $30.8 million allocated to the Canadian operations. When adjusting for discontinued operations and other noncash items, the cash EBITDA from operations was negative $3.9 million. The changes in operating assets and liabilities is mainly working capital, inventories and payables contributing $7.3 million.

The change of $66.2 million in the account receivable securitization financial assets is a result of 3 factors: first, the rebalancing of the collateral, which resulted $25 million of debt reduction; second, the amendment of the securitization program in September, which excluded the eligibility of Canadian receivables. This accounts for $12 million that are now in the North American ABL facility, which was closed on October 11. And finally, as the facility terms were amended, the cash conversion from incremental accounts receivable during the quarter was adversely affected. This accounted for $22 million, which we expect to recover once the facility is replaced.

Including the impact of interest and income tax, the net cash used by operating activities totaled negative $82.3 million. Excluding the impact of the accounts receivable securitization, the net cash used by operations activity was negative $16.1 million. CapEx spend during the quarter was $6.3 million. When accounting for the $171 million from disposal of noncore assets, the free cash flow during the quarter was $82.5 million.

Slide 14. The ending cash balance at September 30 remained flat with the previous quarter at $188 million. First, I would like to highlight that cash provided by the core activities of Ferroglobe was positive by $3.4 million, with a negative contribution from EBITDA, but a positive impact from working capital. The sale of noncore assets generated the net proceeds of $171 million. The majority of this amount was used to repay debt, including the already explained effects of the accounts receivable securitization. During the quarter, we had $81.3 million of debt repayment mainly related to hydro lease tied to the sale of FerroAtlántica as well of some pay down of letter of credit. As explained on the prior slide, there was a negative net impact of $66.2 million from the accounts receivable securitization facility.

Next slide, please. Subsequent to the quarter end, on October 11, we announced the refinancing of our revolving credit facility with a new North American asset-based revolver. In affecting this refinancing, we used cash from our balance sheet to repay a portion of the revolving credit facility as well as a partial pay down of the accounts receivable securitization in the United States to free up the accounts receivable for the new ABL.

Net of these transactions, cash on hand dropped by approximately $97 million, leaving the pro forma September 30 cash balance at $91.3 million. This use of cash, however, is more than compensated by a reduction of the minimum cash requirement from $150 million in the old revolving credit facility to $22.5 million under the new ABL. As a result of this transaction, the total gross debt balance decreased by $63.8 million to $492.5 million on a pro forma basis at 30 of September. It is important to note that the refinancing marks a very important retention for the company. The new ABL has no leverage-based, no financial-based covenants and offers minimum liquidity requirements compared to the limitations imposed under the prior revolving credit facility. Furthermore, the ABL is fully prepayable, resulting in any penalty or incremental cost, which gives us the optionality to refinance it as required. So all in all, this refinancing has improved our available liquidity and has eliminated the linear risk of financial covenants during the current downturn.

At this time, I would like to hand the call over to Pedro to review the near-term strategic plan. I would also remind the audience that there are some supplemental slides on our financial in the appendix.

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [6]

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Thank you, Beatriz. So if we turn to Slide 17 now, please. Today, we are faced with an ongoing uncertain operating environment across our main products. While there are some early positive data points emerging across our various products, we are assuming a delayed recovery and are adapting our cost structure and our production portfolio on this basis. Over the past 12 months, we have introduced a number of initiatives impacting our operational, financial and corporate areas.

On the operational side, there has been a significant push to rightsize the production footprint to address the decline in demand. By curtailing our idling plants, we reap a number of direct and indirect benefits. Our goal is to adapt our production platform to the reality of decreased demand. Furthermore, by scaling back production, we are able to drive plant-level cost savings as well as focus on working capital release, primarily through the reduction of inventories.

On the financial side, we continue to evaluate opportunities to further improve our liquidity. However, this is always underpinned by the premise that any new capital needs to provide financial and operational flexibility.

And finally, on the broader corporate sides -- side, our emphasis is continued cost reduction such as re-evaluating headcount and screening various corporate-level expenses. Additionally, we continue to evaluate our portfolio of assets to determine ways to streamline and potentially monetize these businesses, as we did in the case of FerroAtlántica. We have considerable asset value approach or a vertically integrated business and are constantly looking at opportunities to extract value and improve our capital structure. We'll develop these points in the following pages.

So next slide, please. Our operational action plan is focused on 3 primary areas: one, focused at plant-level economics; two, releasing working capital; and three, making adjustments to our production and operational profile.

Over the past few quarters, we have repeatedly discussed our key technical metrics, or KTM program. The goal of the KTM initiative is to continuously monitor and benchmark key metrics across our facility to drive improved operational efficiency, while decreasing costs and improve competitiveness. The initial KTM plan has yielded successful results, and we are now launching a second phase. With an operating culture centered on continuous improvement, each facility privately and constantly looks to improve its cost structure. We recognize that the competitive environment across our product category -- categories is dynamic, and we have to evolve to remain competitive.

Shifting now to working capital release. As the demand for our product has declined, we have made the necessary changes to ensure our working capital follows this trend. Last quarter, we announced our decision to shutdown the Polokwane facility in South Africa in order to control inventories and reported our plans to destock in the later part of the year. After further review, we have developed a comprehensive plan for each plant to achieve inventory work down. This includes improvement of raw materials and spare part management and optimization of finished goods stocks. At the moment, we are targeting inventory reductions of at least $75 million over the next 2 quarters. As a reminder, we were able to raise $89 million of cash from inventories released in Q4 of 2018, so we feel confident in our ability to reach our target.

Working down inventory levels is aided by our ability to adapt production to reduce demand from end customers. The planned curtailments we are making have been viewed as a necessary step by the industry given current pricing levels, and that has led to other producers to follow with similar actions. It is critical that the industry brings supply levels down to support the producers' cost of structures and the recent activity of our peers is viewed positively by Ferroglobe. We certainly will continue to take action as necessary and feel our peers are of similar mindset.

So next slide, on the topic of capacity curtailments. The graphs on this slide show the run rate production capacity evolution across our key product categories. Recently, we announced a series of extended outages. In silicon metal, we have now curtailed cumulative 56,000 tons in Canada and Europe expressed on a run rate basis. In silicon-based alloys, we reduced production by 88,000 tons in the U.S. and Europe. And in manganese-based alloys, we are curtailing production by 125,000 tons at our Mo I Rana facility in Norway. Downsizing our operational platform has a number of benefits that underpins our targets for cash release from inventory work down.

So turning to Slide 20, we provide an update on our cost savings achieved through the first half across the 3 cost-cutting areas. For the year, we were expecting to realize $10 million of savings through reduction of corporate overhead costs. During the first 9 months of the year, we have achieved $7.4 million of this target. The improvements in overhead costs are primarily attributable to a reduction in personnel costs, reduced use of third-party consultants and adviser as more work has been handled in-house, particularly related to operational and legal matters.

As a general update, the move from London to Madrid is progressing on schedule. Most of the executive management team has now moved, with the remaining few expected to do so over the next month or 2. We have also made hires for key roles where the previous incumbent is not moving to Madrid. In addition to the new hires, there is a thorough transition plan for each role which continues to be executed. Overall, the move to Madrid has been successful, and we are seeing the advantage of having the majority of the management team under the same roof through improved costs and efficiency, enhanced communication and more agile decision-making. Once again, this is important as we execute on our various initiatives.

The next bucket is the KTM initiatives. The key technical metrics program is focused on achieving performance improvements through increased productivity and efficiencies, including changes to raw materials mix and focus on byproduct recycling and change to electrode technology. To date, we have achieved $13.4 million of the $15 million target for the year. But naturally, we have been focused on reducing fixed cost at the plant level. During the first 9 months of the year, we achieved savings of $14.3 million, which compares to our full year 2019 target of $15 million. Overall, we are on track to achieve the $40 million cost savings targeted for 2019. On a run rate basis, our target savings remains $75 million.

Next slide, please. Due to the continued negative results and under the working assumption of a prolonged downturn, it has been critical for the company to improve its liquidity position and its financial flexibility. We have already delivered in a number of significant initiatives. First, the divestiture of FerroAtlántica in August that was already extensively explained in the Q2 results presentation. Also, as a subsequent event, after the closing of Q3 results on October 11, we announced a successful replacement of the existing RCF with a loan backed by our North American inventories and accounts receivable. Beatriz has already explained the details and advantages of the new facility. All in all, this refinancing has improved our available liquidity and has eliminated the lingering risks of financial covenants during the current downturn.

We continue to evaluate a number of alternatives aimed at further strengthening our balance sheet and liquidity. We have unencumbered assets and incremental debt capacity, which can help facilitate our goals. Finally, with regards to our maturity ladder, the company does not have any near-term maturities with the largest single tranche of debt of 2022 notes maturing in over 24 months. While we prudently evaluate options to optimize value, no formal decisions have been made at this time.

I would now like to turn it over to Javier, who will review the near-term outlook.

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Francisco Javier López Madrid, Ferroglobe PLC - Executive Chairman [7]

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Thank you, Pedro. The slower activity in many of our end markets in 2019 has certainly been the driver of this cyclical downturn in our financial result as the end customer demand has declined much faster than the industry originally anticipated. While each of our end markets are impacted by different factors, there are commonalities tied to fears of a global economic slowdown, which has led many of our customers to cut back their production, and hence, purchase fewer of our products.

This -- the ongoing trade war developments have added another layer of uncertainty to the demand picture. Given the fact that the broader global economic remains relatively healthy, coupled with the destocking we believe to have taken place this year and the recent wave of capacity cutbacks, there is a possibility of market squeeze, which could favorable -- could be favorable for our products, mainly silicon metal, but we are not conducting our operations under that assumption.

The aluminum sector continues to be challenged by the trade war, and demand for aluminium for the automobile industry has declined significantly this year. Offsetting this has been a slightly better demand dynamics for aluminum going into end market such as packaging and transport. Overall, the global deficit in aluminium, along with the loan -- low inventory levels, should provide some stability to end market demand as we enter 2020. The greatest drop in volume in the past few quarters has been in the chemical market at levels which far outpace GDP decline. While customers are cautiously purchasing going into 2020, we see tightness in this end market as destocking could have already taken place, and the demand is projected to remain at GDP-plus level globally.

And finally, the picture for the photovoltaic industry has not changed much. However, as new PV installation hits an all-time high in 2019, we think there is probably a work down of solar cell inventories, which will need to be replenished. Hence, we're expecting some recovery in this end market in 2020. The steel industry which impacts our manganese-based alloys and ferrosilicon business has been under pressure in 2019, and we expect these headwinds to continue.

In the U.S., we see some potential risk over supply pressuring prices, but the demand picture should be fairly stable. It is true that there is some risk of year-over-year slowdown in demand, but we have to remind ourselves that we are coming off of record-setting years.

In Europe, the recent wave of capacity curtailment by steel producers have been more drastic and is largely driven by retrenchment in the auto industry. Our sale into this market has been stable in 2019 to date, and we continue to monitor developments. The curtailments we have made should certainly help us manage our sales book and keep inventory levels low despite potential slowdown in steel demand.

Slide 24. As we continue to negotiate contracts in the silicon metal business for next year, all the trends and factors discussed today come into play. There was a slowdown at start of the contracting season due to the demand side slowdown, productivity has picked up in recent weeks. As a matter of fact, we have won some business in the U.S. and Europe at levels which reinforces some of the points just discussed around the tightness in the market. We are not expecting a V-shaped recovery, but the fundamental supply and demand dynamics certainly support a gradual recovery in silicon prices in 2020.

Our commercial and operational strategies will certainly support the strength, and we will be very careful in restarting capacity. The decision to curtail silicon capacity was intentional given market uncertainties. We have emphasized the urgency of an industry-wide return to profitability. In light of the risk of a saturated market, our priority is to sail at sustainable margins rather than to focus on volumes. On the other hand, we will head into 2020 with an order book which is less committed overall than prior years as it would be not in our best interest to sign deals with customers at a time where the market is showing signs of some improvements.

Shifting to silicon-based alloys portion of our business, the pace of contracting is consistent with prior years, with some very significant orders already booked. Our focus on optimizing the specialty sales is bearing fruit. With manganese alloys, we start to benefit from the continued decline in ore prices. Furthermore, we expect some stabilization in alloy prices as the stocking slows, which helps our spread. Once again, with our curtailed volumes, we do not foresee any issues selling our alloys and may even restart one furnace, depending on the evolution of the spread. The key to our commercial strategy in 2020 is to sell less, but to ensure a healthy margin. Shrinking our footprint helps facilitate a number of key objectives and make the business more manageable in this operating environment.

Turning back -- turning to Slide 25. In closing, the third quarter highlights continued downturn in our business and disappointing financial result in 2019. Despite some positive signs of recovery, we're operating under the assumption that the headwinds challenging our business on the demand and pricing sides will continue into the beginning of 2020. As such, our strategy has centered on ways to combat the cash losses in our business by driving initiatives geared at cash flow generation and financial flexibility.

The more drastic actions we are taking to curtail capacity and temporarily shrinking our operational footprint will help accelerate our efforts and increase our rate of success in hitting our targets. This strategy might limit our upside, should there maybe -- should there be a market to squeeze, but we want to remain prudent to ensure that the business remains cash neutral during this stretch. We do not see 2020 shaping up to a better year than we expected -- we're not -- sorry, we do see 2020 shaping up to a better year than we expected just a few months ago, but the recovering won't happen overnight. While we welcome a faster recovery, we have developed and we are operating under a plan that prepares for a few more difficult quarters. Recent history has highlighted the volatility in the business, both on the downside as well as on the upside. For more than a year now, we've been faced with downward pressures, which have materially impacted our businesses. We have systematically done what was needed to combat the evolving market environment and plan on continuing to do so as necessary.

Updating our plan is only half of the story, the other half is the execution. I am confident that the management changes we have made will be effective in ensuring that we're putting our best foot forward to execute the near-term strategy. We have been in this position before and have been able to navigate through these difficult times, I don't see this time being any different.

Once again, thank you for your participation on today's call. And at this time, I would ask the operator to open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matt Farwell with Imperial Capital.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [2]

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I was wondering if you could give a little bit of more color on the potential to released cash from refinancing the AR facility that was mentioned in one of the slides, what amount of cash could be released in that to add to the balance sheet? And that was my first question.

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [3]

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Yes. Thank you, Matt. This is Pedro. If there is any comment that Beatriz would like to add, I'll allow her. But we mentioned that during the last weeks of Q3, the changes in the AR securitization program we are under right now drove $22 million of invoices that were not translated into cash. It is approximately that amount that we would be expecting to recover when we replace the AR securitization, the current facility, with the new one.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [4]

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Okay. Great. And then one other question. When you talked about $125 million of lean capacity, would you be able to clarify any plans to utilize that capacity in the short term? Is there -- would you pursue some sort of exchange or refinancing?

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [5]

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The $125 million is a description of what the bond indenture allows us in terms of groom for additional capacity. And we are confident that we have an asset base that allows us to raise additional capacity -- I'm sorry, additional capital within that capacity. We are examining different options for that.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [6]

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Okay. And then final question for me. Would you be able to just give us some more color from a macro perspective on capacity curtailments that you're seeing from your competitors? We know that Ferroglobe has taken one for the team, essentially, by shutting down a significant amount of capacity. What else are you seeing out there? And then -- and what is the problem? I know one of your slides has indicated that take-or-pay contracts are perhaps sustaining capacity above economic levels. So could you just give us some more market color, please, on that front?

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [7]

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So first, in terms of what we have observed, and I'll focus specifically on the silicon metal market. Public data shows that -- and I think this is the main factor in the supply-demand dynamics in this market, shows that Chinese exports of silicon metal this year, on an annualized basis, are somewhere around 120,000 tons below last year. That is the main factor in terms of the supply-demand dynamics. The second point is we also have some observation of reduced capacity utilization in Brazil in the past 2 or 3 months. We are not certain about what is the level of that reduced capacity utilization, but there is some capacity utilization. Third is, there's been public announcements of Rusal reducing silicon metal production. Also Elkem as of reducing also capacity utilization. And then some other minor players, we know that the Iceland plant, PCC, is having difficulties in operating that we cannot confirm, but it looks like they are not hitting the market as they would have expected. And also Bosnia is showing the capacity or -- sorry, production curtailments as well. The second part of the question, sorry, it slipped my mind.

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Matthew Thomas Farwell, Imperial Capital, LLC, Research Division - MD [8]

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That was it. I was just asking about market color. And -- yes, about -- regarding the take-or-pay arrangements in...

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [9]

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Yes, yes, sorry about that. Yes, right. Yes. So we have made that point in the past in terms of the ability of certain of our competitors to cut back capacity like in the middle of the year because you would have some commitments in terms of take-or-pay, power, labor, et cetera. We think that the fact that we are now seeing some of our competitors cutting back capacity may be meaning that some of those restrictions have been lifted or they have reached the point in which they have the option either to renew those commitments or not renew, and they are now having more ability to cut back capacity.

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Operator [10]

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(Operator Instructions) Our next question comes from Brett Levy with AD Securities.

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Brett Levy, [11]

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Under the new agreement, are you allowed to repurchase any of your bonds at discounted levels?

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [12]

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We are -- in terms of the bonds, we are contemplating different options going forward. We still have more than 24 months until maturity. We will be looking at different options. We have made no decisions, but we're allowed.

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Francisco Javier López Madrid, Ferroglobe PLC - Executive Chairman [13]

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But we're allowed.

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Brett Levy, [14]

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Got it. And then in terms of your cost-cutting plans, I know at one point, you guys put out a target of $75 million and that sort of thing. Is there a dollar amount, sort of, from this point going forward that you have as a cost-cutting target, say, between now and the end of 2020, given what you've achieved? Kind of give me a year-to-date or period-to-date cost-cutting effort update? And then how much is left to go on the target?

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Pedro Larrea Paguaga, Ferroglobe PLC - CEO & Director [15]

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So we announced $75 million run rate savings, and by run rate means that, that is the savings that we would be having actually in 2020 compared to 2018. In 2019, we announced that we would be having savings of $40 million in the year as a whole compared to 2018. And so far -- and that -- all of this is detailed in Slide 20. So far, we have achieved $35 million year-to-date, which, of course, places us on track to achieve the $40 million for this year. So far, we have not announced any additional targets above those $75 million that you referred to, and that would be fully captured, fully in 2020.

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Brett Levy, [16]

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My other questions have been asked.

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Operator [17]

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And I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

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Francisco Javier López Madrid, Ferroglobe PLC - Executive Chairman [18]

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Okay. Thank you. That concludes our third quarter earnings call. Thanks again for your participation, and we look forward to hearing from you on our next call. Have a great day.

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Operator [19]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.