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Globe Specialty Metals (NASDAQ:GSM)

Q4 2013 Earnings Call

August 21, 2013 9:00 am ET

Executives

Joseph D. Ragan - Chief Financial Officer

Jeffrey K. Bradley - Chief Executive Officer and Chief Operating Officer

Analysts

Tom Narayan - Oppenheimer & Co. Inc., Research Division

Martin Englert - Jefferies LLC, Research Division

Ian Corydon - B. Riley Caris, Research Division

Tom Van Buskirk - Sidoti & Company, LLC

Luke Folta - Jefferies LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Globe Specialty Metals Inc. Fourth Quarter and Fiscal 2013 Earnings Call. [Operator Instructions] As a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to your host, Mr. Joe Ragan, CFO. Please go ahead.

Joseph D. Ragan

Good morning, and thank you for joining the Globe Specialty Metals fourth quarter and full year results for fiscal year 2013 conference call. I'm going to read a brief statement and then hand it over to our CEO, Jeff Bradley.

Statements made by management during this conference call that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Globe's most recent SEC filings and the exhibits to those filings.

Now for Jeff Bradley, Globe Specialty Metals' CEO.

Jeffrey K. Bradley

Good morning, everyone. Thank you for joining us on the call this morning. First, I want to say I'm pleased to introduce our new CFO, Joe Ragan. Joe has already been with the company now for 3 months and adding significant value. We're really pleased to have him on board and as a member of the management team.

We finished out our fiscal 2013 with net sales of $757.6 million, more than $52 million above last year's level, and shipments of 266,135 tons were up 14% from last year. Adjusted EBITDA for the year was $99.1 million versus $141 million in fiscal 2012.

For the fourth quarter, net sales were $181.1 million as compared to fourth quarter fiscal 2012 level of $191.7 million. Adjusted EBITDA for the fourth quarter was $23.8 million as compared to $14 million in Q3.

Our silicon metal facility performed much better than last quarter, as we saw higher operating efficiencies and lower production costs. We attribute this improvement to the completion of our maintenance outages last quarter, improvement on [ph] and the realized benefits from them.

As we said on the last call, many of the costs related to higher production cost of silicon metal in the previous quarter would be corrected, and we are pleased that the operations are largely back on track.

We also continue our focus on balance sheet management, including optimization of working capital and cash build. We will continue to drive out costs wherever we can. While communications with the union representing the workers at our Bécancour, Canada silicon metal facility continue, the lockout at the plant remains in place. We continue to operate 1 of the 3 furnaces with the management employees.

On the sales front, our silicon alloy business has been negatively impacted by low-priced ferrosilicon imports coming into the U.S., primarily from Russia and Venezuela. We have taken action in the form of filing a trade petition to address this unfair trade flow.

End markets for our products continue to show improvement. In our silicon metal segment, silicones continue to grow at GDP-plus rates, along with the growing consumer economy in homebuilding and continued growth in autos, which use large amounts of silicon metal in their aluminum alloys.

Also, the solar market continues to grow strongly, driven by reductions and the continued growth in advanced consumer financing. We're also starting to see a more positive trend in the spot price of silicon metal as reported by the indexes as a result of the imposition of interim duties on imports of Chinese silicon into Canada as of July 22, 2013. We will not be making any further comments on this call concerning our pending trade actions in Canada and the United States.

Our fume business continues to improve. We're seeing higher prices in the export and spot markets and demand from the oilfield, refractory and the concrete markets in North America remained strong. The company is pleased to announce it's closed on a new replacement $300 million revolving credit facility this month, which gives us additional liquidity and flexibility with far fewer restrictions.

We've also approved the next quarterly dividend and have increased the annual dividend rate from $0.25 to $0.275 per share. And finally, we continue to actively pursue potential accretive acquisitions and work on cost savings initiatives to drive shareholder value.

Joe?

Joseph D. Ragan

Thanks, Jeff. The fourth quarter represented a strong recovery from Q3 during fiscal year 2013. While sales were down by 8% on a sequential basis, net income increased to $9.7 million from a net loss of $40.1 million in Q3, producing $0.09 earnings per share in Q4 versus zero in Q3.

Adjusted EBITDA increased 70% sequentially in Q4 to $23.8 million compared to $14 million in the third quarter. Results were improved primarily due to completion of major silicon metal-related maintenance initiated during Q3.

On a reported basis, gross margins increased sequentially 4.3% to 11.8% in the quarter. SG&A was reported lower in the quarter due to mark-to-market accounting of stock compensation.

Overall, we produced $9.7 million of net income in the fourth quarter versus a loss of $40.1 million in the third quarter.

Special items that occurred during the quarter included, as I mentioned a moment ago, the adjustment for mark-to-market accounting for stock compensation of $6.6 million, which flowed through SG&A. We have isolated the cost and lost EBITDA from the Canadian lockout and have added back $1.4 million for Q4. These adjusted results produced EBITDA for the quarter of $23.8 million versus $14 million in the third quarter.

On an adjusted basis, fourth quarter EBITDA margins improved 600 basis points to 13.1% from the third quarter. The improvement was driven by increased gross margins and a reduction of SG&A expense. This increased adjusted earnings per share to $0.09 from zero in the third quarter.

Shipments were down 7% in Q4 when compared to Q3 of FY 2013, as we continue to see pressure from imports of ferrosilicon, especially from Russia and Venezuela, into the U.S. and an upsurge in Chinese silicon imports into Canada in advance of the July 22 date on which interim duties on the Chinese imports were put in place.

We did see a slight increase in the price variance during the quarter, as well as an improvement in SG&A. Operations improved significantly during the quarter, as silicon metal maintenance outages were concluded and all then resumed normal operations.

Net cash improved nearly $20 million during the quarter, as working capital initiatives converted assets to cash quickly during the quarter. Capital expenditures were as expected, and the greater EBITDA contribution drove net cash to a higher ending balance at June 30.

As we look forward to the first quarter of fiscal year 2014, we expect continued improved performance with some offsetting impact of volume and sales mix.

We'd now like to open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ian Zaffino of Oppenheimer.

Tom Narayan - Oppenheimer & Co. Inc., Research Division

It's actually Tom Narayan for Ian. I know you said you maybe can't comment too much on the, I guess, trade disputes with Canada and the U.S. But maybe to ask it on a different way, could you comment at all on the potential impact on alloy pricing with -- maybe based on precedent on the Commerce Department's investigation in Venezuela and Russia on the alloy side of dumping?

Jeffrey K. Bradley

Tom, this is Jeff. As I said, we are not going to comment at all on anything to do with the cases in the United States or Canada.

Tom Narayan - Oppenheimer & Co. Inc., Research Division

Okay. And then, on the cost side, I guess, I see why the SG&A was so much lower. I mean, how should we look at that, kind of, perspectively in 2014? The SG&A number and also maybe on the COGS side? It seems like costs were a lot lower this quarter.

Joseph D. Ragan

Yes, that's a good question, Tom. I am looking at SG&A as a -- from a normalized perspective, looking at Q3 of fiscal year 2013 slightly less than that number on a run rate basis for 2014.

Tom Narayan - Oppenheimer & Co. Inc., Research Division

Okay. And then, on interest expense, on the impact that the lower borrowing rate would have, is that something that you could talk to? Or if you want, we can do that off-line. But perspectively, how that would look like?

Joseph D. Ragan

Yes. And so, slightly less, 25 basis points. It's not a huge number of less. But I'm looking at a cost savings from an interest perspective of about $200,000 to $300,000 a year.

Operator

Our next question comes from Martin Englert of Jefferies.

Martin Englert - Jefferies LLC, Research Division

I know you kind of touched on this before. But just to be clear, the adjusted SG&A for the quarter, could you just walk through that and what that was after adjusting for the charges there?

Joseph D. Ragan

Sure. We had, as you saw, $6.6 million of the mark-to-market stock compensation that went favorably in the quarter. There was a -- there were a couple million of favorable adjustments on some reserves we had taken previously. So that takes our run rate slightly less than $13 million a quarter when you adjust for those, Martin.

Martin Englert - Jefferies LLC, Research Division

And when you look at the overall cost structure now that we saw this quarter, gross margins, EBITDA margins, I understand you kind of guided to some puts and takes there in the upcoming quarter based on mix and volume. But in general, assuming that the lockout would persist, would you say this is fairly representative of the overall cost structure as a run rate for the coming quarters there?

Jeffrey K. Bradley

Martin, we're not going to forecast run rate going forward. As I said in my comments, we've gotten the operational issues behind us. The operations are running well. I made a comment about our markets improving overall. I would tell you that we're optimistic.

Martin Englert - Jefferies LLC, Research Division

Okay. And I think last quarter, you gave some guidance there for silicon metal shipments and silicon-based alloy shipments of about 110,000 and 120,000, respectively, x JV, for the calendar year. Is there any change to that?

Jeffrey K. Bradley

Again, we're not going to comment on putting a number out there. The other thing I'd just like to make -- or would like to mention on the call is that we're getting close to pricing season. So we're really not going to comment much on forward pricing or tonnages.

Operator

Our next question comes from Ian Corydon of B. Riley & Co.

Ian Corydon - B. Riley Caris, Research Division

Just a follow-up on the operating costs. Would you say that, across your plants, you're operating about where you want them to be at this point? Or are there more cost improvements potentially to come in the coming quarters?

Jeffrey K. Bradley

Ian, the plants are running well. We had some hiccups in the third quarter. As I've said, we've gotten through them. We're pleased where the plants are operating now. I will tell you that we continue to look for opportunities to drive out costs. We have a number of cost savings initiatives that we feel really good about for this year. So we always look to drive improvement at all of our plants.

Ian Corydon - B. Riley Caris, Research Division

Got it. And at Bécancour, the -- I think it's $0.7 million per month of EBITDA impact from the lockout costs. Is that all in gross margin or is some of that in SG&A as well?

Joseph D. Ragan

That is pretty much gross margin that we're looking at. So you -- I think you've captured it right at $2.1 million a quarter.

Ian Corydon - B. Riley Caris, Research Division

Okay. And at Alden, I believe we curtailed production last quarter. It sounds like that's back online. Can you just talk about maybe a little bit about what the run rate of production is at Alden at this point?

Jeffrey K. Bradley

Yes, Alden is back online. We talked last quarter about some high inventories of coal. And, yes, Alden is back online and running at historic rates.

Ian Corydon - B. Riley Caris, Research Division

Great. And last question is, do you have a forecast for capital expenditures for fiscal '14?

Jeffrey K. Bradley

Yes, Ian, it looks like this year we're going to be somewhere in the neighborhood of $40 million to $40 million plus.

Operator

[Operator Instructions] Our next question comes from Tom Van Buskirk of Sidoti & Company.

Tom Van Buskirk - Sidoti & Company, LLC

A couple of questions. On the lockout, anything else that you can add in terms of color on how that's going in terms of the time you expect it to take and so forth? Any movement or expectations as far as concessions you expect to get?

Jeffrey K. Bradley

No, Tom, I'm really not going to comment anymore than we have in the past. We continue to work with the union and look forward to a good outcome eventually.

Tom Van Buskirk - Sidoti & Company, LLC

Okay. And then, on the alloy business, this isn't directly a question about dumping. But the sales mix within the alloy business, I know it bounces around a little bit from quarter-to-quarter. But how significant is ferrosilicon in the mix typically versus other products?

Jeffrey K. Bradley

Tom, again, I'm just not able to comment.

Tom Van Buskirk - Sidoti & Company, LLC

Okay. And then, on the last thing, I know I can look it up and I will eventually, but could you maybe characterize the changes in covenants in the revolver in terms of the fewer restrictions on movements you want to make going forward?

Joseph D. Ragan

Sure. The biggest change, Tom, is that we've gone from a gross debt covenant to a net debt covenant. That unlocked about $100 million of additional liquidity. But there was an elimination. We'll send out the credit agreement, but there was an elimination of many of the covenants -- specific covenants. So we only just have the 2 that we disclosed, which is net debt leverage and interest coverage.

Operator

[Operator Instructions] Our next question comes from Luke Folta of Jefferies.

Luke Folta - Jefferies LLC, Research Division

So most of my questions have been answered. I just have one. You had talked about some reserves that has been reversed that contributed to some of the costs this quarter. I didn't -- can you just review that? I didn't get what that was all about.

Joseph D. Ragan

Sure. That -- they -- we took some reserves for bad debt and ended up collecting everything. So that was done over the fiscal year 2013.

Operator

And with no further questions at this time, I would like to turn the conference back over to Mr. Jeff Bradley for any closing remarks.

Jeffrey K. Bradley

Okay. Thank you, everybody. We really appreciate your interest, and we look forward to speaking to you again on the next call. Thank you.

Operator

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

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