Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Globe Specialty Metals (NASDAQ:GSM)

Q1 2014 Earnings Call

November 05, 2013 9:00 am ET

Executives

Joseph D. Ragan - Chief Financial Officer and Principal Accounting Officer

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

Analysts

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Luke Folta - Jefferies LLC, Research Division

Tom Van Buskirk - Sidoti & Company, LLC

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Garrett S. Nelson - BB&T Capital Markets, Research Division

Jeffrey M. K. Bernstein - AH Lisanti Capital Growth, LLC

David Silverman

Operator

Good day, ladies and gentlemen, and welcome to the Globe Specialty Metals, Inc. First Quarter Fiscal 2014 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

I'd now like to turn the conference over to your host for today, Mr. Joe Ragan, Chief Financial Officer.

Sir, you may begin.

Joseph D. Ragan

Good morning, and thank you for joining the Globe Specialty Metals First Quarter of Fiscal Year 2014 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. Net sales in the first quarter of fiscal 2014 were $173 million. Shipments were 62,035 tons, and adjusted EBITDA was $21.4 million. Our continuing efforts to reduce costs led to a higher gross margin in the quarter. Gross margin increased from 12.6% in the June quarter to 13.5%. Cash flow and net cash levels in the quarter continued to improve. Continued focus on our working capital have resulted in inventories dropping to $90.5 million, the lowest level in more than 3 years, contributing to the 80% increase in net cash from the end of the June quarter and a $38.7 million of cash generated in the quarter.

Our silicon metal and silicon alloys facilities continue to operate well within the quarter. In fact, we continue to set new production records at a number of the plants. Additionally, the capital investments we have made in our production plants and raw material facilities, including Alden coal and the Alabama quartz operation, coupled with cost savings initiatives we have instituted, have resulted in more than $5 million in savings in fiscal '13, and we expect another $15 million of savings this year. The lockout at our Bécancour, Canada silicon metal facility continues. Discussions with the union are progressing, and we hope to find a resolution. We continue to operate in one of the 3 furnaces with the management employees.

In line with improvement worldwide in the macroeconomic environment, as well as our particular end markets, demand for our products continues to rise. In our silicon metal segment, the expectations from our customers is that silicon demand will continue to grow at a GDP-plus rate, and the [indiscernible] market continues to post positive sales, which positively impact aluminum alloys, which have 9% to 10% silicon, and solar installations continue to increase, driven by lower costs and expanding and developing solar consumer financing.

On the sales front. We have started negotiating with our silicon metal customers for 2014 business. The negotiations are moving forward, and so far, volumes are being booked at a marginally faster pace than in recent years. We expect our mix of contract, index and spot business to be similar to past levels in past years.

In our ferrosilicon business, we are experiencing higher prices in the current October to December quarter than our just-reported first fiscal quarter. As I stated on our last call, we will not be making any comments on this call relating to our ongoing trade actions in Canada and the U.S. And with the improvement we're seeing in the price environment, especially in the ferrosilicon market and potentially higher volumes, we anticipate a modest sequential improvement in earnings in the current fiscal second quarter.

Our business development group, headed by our Founder and Executive Chairman, Alan Kestenbaum, continues to see a high level of deal flow. They are actively pursuing accretive acquisitions that will drive shareholder value. Joe?

Joseph D. Ragan

Thanks, Jeff. We'll go to the first slide in the presentation for the 2014 financial highlights of the first quarter. During the first quarter, the company executed well in all areas of the business. Sales volumes, when excluding the impact of the Bécancour, Canada lockout, were up 4%. Gross margins, as a result of cost improvements, also improved on a sequential basis, and the overall results were slightly ahead of expectations. Adjusted EBITDA came in above expectations at $21.4 million for the first quarter. These results produced $0.08 diluted earnings per share for the quarter. We had a strong quarter in the area of cash management. Cash flow from operations increased to $38.7 million for the quarter, while net cash increased 80% from the end of fiscal year 2013 to end the quarter at $54.1 million. We continued to operate the plants well during the first quarter, realizing operating efficiencies, following the completion of the maintenance outages during the second half of fiscal year 2013.

On the next slide, on an adjusted basis, first quarter gross margins improved 90 basis points to 13.5% from the fourth quarter of fiscal 2013, and as I said earlier, adjusted earnings per share came in at $0.08 for the first quarter. Special items that occurred during the quarter included the adjustment for mark-to-market accounting for stock compensation of $12.1 million, which flowed through SG&A as a result of the increase in the share price. We have isolated the cost and lost EBITDA from the Canadian lockout, and have added back $2.6 million for Q1. These adjusted results produced EBITDA for the quarter of $21.4 million.

On a reported basis, results were lower compared to the last quarter of fiscal 2013 due to the mark-to-market accounting for stock compensation relating to the increase in share price. Without this expense, the results would have been higher by more than $8 million for the quarter. Our sales mix shifted sequentially from the last quarter of fiscal 2013, which put pressure on EBITDA for the first quarter. Excluding the impact of the Bécancour lockout, shipments were slightly higher for silicon metal when compared to the final quarter of fiscal 2013.

SG&A was higher due to the onetime adjustment we've made in the fourth quarter of fiscal 2013 for $2 million, as well as higher external audit fees, the plant [ph] operated well in the first quarter when compared to the fourth quarter of fiscal 2013, producing an uplift of EBITDA during the quarter. We continued to see price pressure from the imports of ferrosilicon, especially from Russia and Venezuela, as well as silicon metal into the U.S. and corresponding pressure on selling prices. Net cash improved nearly $24 million during the quarter, as working capital initiatives converted assets to cash more quickly during the quarter.

Capital expenditures were as expected, as well as dividend and other outflows. As we look forward to the second quarter of fiscal 2014, we expect a modest improvement in earnings for the quarter, primarily related to higher volume and prices on silicon alloy.

We would now like to open the call to questions. Operator, you ready?

Question-and-Answer Session

Operator

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

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

It's a great presentation, actually. I just wanted to drill down that pricing mix -- the negative $3 million. Is that just a shift from -- to lower price just alloys or is that an apples-to-apples decline in selling prices?

Jeffrey K. Bradley

No. As we said, Ian, I think in the press release, we had aggressive pricing of the ferrosilicon imports, mainly from Russia and Venezuela, and we got the runoff of that material, silicon metal, again, the continued runoff of felt [ph] material in Canada from China, and there's somewhat of a lag effect here to get this material out of the system.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay. So it's just a matter of time before that reverses. And then Jeff, I wasn't exactly clear what you said on -- you said the mix -- so you expect the mix of contracts for calendar 2014 to be similar to what it was in 2013? Is that would you said?

Jeffrey K. Bradley

Yes, I said that the expected mix of the contract, coupled with the index business and the spot business, to be similar to past years, yes.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

What -- why wouldn't you want more spot, let's just say this year, with prices going up? And maybe you see like an increase in spot or something else like a further move away from fixed? Or is this just sort of a balance of contracts that you're trying to achieve?

Jeffrey K. Bradley

Again, we're not going to comment a whole lot, Ian, because we're negotiating right now with the customer base, but at the end of the day, our company has always liked to lock up as much as we can. We believe that visibility of earnings is important to our investors, and that's why we look to have pretty much the same mix as past years.

Ian A. Zaffino - Oppenheimer & Co. Inc., Research Division

Okay. And then what about your success on moving to different indexes? I know you've said in the past that some of the indexes have been understating what you could actually sell your metal for in the open market. What's going on there? How's that initiative going?

Jeffrey K. Bradley

Yes, again, right now, we're negotiating with all the customers, and I would prefer not to comment on that at this point.

Operator

Our next question comes the line of Luke Folta of Jefferies.

Luke Folta - Jefferies LLC, Research Division

You might not talk about this, but I wanted to understand since the Canadian case is final, as I understand it, is there anything you can see in terms of the success you've had there to -- since then or to date through the process in terms of [indiscernible] customers?

Jeffrey K. Bradley

Luke, I'd just say we're not going to comment.

Luke Folta - Jefferies LLC, Research Division

Okay. Secondly, on the $15 million in cost savings that you're expecting for this year, can you give us some sense how you get to that number? What are the big moving parts?

Jeffrey K. Bradley

Yes, the big moving parts are efficiencies at the plants and the raw materials.

Luke Folta - Jefferies LLC, Research Division

Okay. So where do you see the biggest change in raw materials? Is that just -- because I think you're -- most of your stuff is coming internally now. So is that cost improvement at Holden?

Jeffrey K. Bradley

It's also the efficiency of consuming the raw materials. We have things like electrodes. We buy some electrodes on the outside, we buy some coal on the outside and we buy some quartz on the outside.

Luke Folta - Jefferies LLC, Research Division

Okay. And then just lastly, on -- been trying to get our arms around what the situation is with Chinese antidumping duties on polysilicon. Have you seen any impact on that from your domestic customers in the solar space or could you just maybe fill us in on what the current expectations among those guys are on how that will impact things or not?

Jeffrey K. Bradley

Yes, again, this really ties to the comment that we would really rather not comment on any cases related to dumping.

Operator

Our next question comes from the line of Tom Van Buskirk of Sidoti & Company.

Tom Van Buskirk - Sidoti & Company, LLC

You've already answered or not answered, as the case may be, most of my questions, but let me just take a shot at one other thing. As far as -- and maybe you addressed this and I missed it, but in addressing the question of the mix and how it shifts from one quarter to the next, is there anything that we need to think about going forward that maybe changed from the past? And then the other question is just can you update us on planned outages and changes to CapEx plans?

Jeffrey K. Bradley

Yes. No, there's no -- there's actually no change in the comments I made on the mix. Again, we're negotiating right now so we won't know until the end of this year, but we expect levels to be the same as we've had in the past years. In terms of outages, in this current quarter, we do not have any outages planned, and we will update a quarter at a time as we go. We do have a couple of outages planned for the first half of next year, and as we get closer, I will share the comments on that.

Operator

Our next question comes from the line of Phil Gibbs of KeyBanc Capital Markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

As far as -- your inventory reduction was fairly solid in the quarter. Anything that we should be expecting, going forward, as far as the absolute inventory levels continue to work that down? Or should we expect those to start stabilizing and moving up with better demand?

Jeffrey K. Bradley

I haven't put -- we haven't looked at our forecast yet for inventories for this quarter and going into next year, but I would not expect the inventories to increase.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. And how are you looking at the kind of the efficiency and momentum at Alden? And how should we be thinking about some of the expansions that you have been talking about probably closer to a year ago? And where are we at this point in time with expansion of potential output there?

Jeffrey K. Bradley

Well, let me just say for everybody that Alden is running very well. And as we talk about the improvements in our plants and the efficiency improvements, I can't emphasize enough how important the quality and the reactivity of this coal is. The Alden coal is working very well in all of our furnaces. Everything is very stable. So to sum everything up, Alden is going very, very well.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Anything more that you're doing on the external front as far as commercializing that product a bit more overseas? Or is that something that's more of a work in process at this point?

Jeffrey K. Bradley

We have not discussed who we actually sell to and where we ship the material to. We have said that we shipped in excess of 100,000 tons to third parties.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay, that's helpful, and I just have one more, Jeff, if you could help me with this here. I think our pricing assumption for silicon metal was a bit high in the quarter. Any sense you can give us on Dow's internal offtake on the JV agreement in the quarter in the silicon metal business?

Jeffrey K. Bradley

All I can tell you is that Dow Corning takes 49% of the output of the Bécancour plant, and 49% of the output of the Alloy plant. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Garrett Nelson of BB&T Capital Markets.

Garrett S. Nelson - BB&T Capital Markets, Research Division

You mentioned again that you're looking at accretive acquisitions. As you highlighted, the net cash increased by 80% during the quarter. The company's balance sheet's in good shape. Are you seeing a lot of opportunities out there? And if so, would it be another silicon or silicon alloys facility or would you consider other types of assets?

Joseph D. Ragan

We are seeing a lot of opportunities out there. I'm really not free to discuss what we're looking at, but it's going to be more of the same. Alan's got a reputation for finding assets that have a very low cost, assets that are accretive, mid-type [ph] assets, so it's going to more of the same.

Garrett S. Nelson - BB&T Capital Markets, Research Division

Okay. And then switching over to Bécancour, 6 months into the lockout now, are you content to operate the plant with the workforce you have in place there? Are you still seeking to reach a resolution with the union if you're content running the plant with the workforce you have? Are you making progress there on the productivity in the efficiency front?

Jeffrey K. Bradley

Yes, as I said, the furnace is running well. The management employees are doing a good job. And just to restate what I said, we hope to find a resolution.

Operator

Our next question comes from the line of Jeff Bernstein of AH Lisanti.

Jeffrey M. K. Bernstein - AH Lisanti Capital Growth, LLC

Just a clarification on the outages. You said plan for H1 next year, is that H1 of the calendar year or is that H1 of the next fiscal year?

Jeffrey K. Bradley

That is H1 of the calendar year.

Jeffrey M. K. Bernstein - AH Lisanti Capital Growth, LLC

Got you, okay. And then could you just give us an update. You touched briefly on solar and silicon. It sounds like polysilicon prices may be kind of bottoming, and there's anticipated to be a big improvement in demand out of China. Just give us an update on the general outlook for polysilicon.

Jeffrey K. Bradley

Yes, I mean, overall, everything that we're reading and seeing is that the forecast for installation this year will be higher than last year. Forecast for installations next year will be higher than this year. So we continue to be very optimistic about the solar market, Jeff.

Jeffrey M. K. Bernstein - AH Lisanti Capital Growth, LLC

And in terms of the plant, I know there have been some new plants planned, and I guess some are partially opened or one is partially open, one never opened, just give us the update there.

Jeffrey K. Bradley

Right. I think the 2 plants you're referring to are the Anwat plant and the Wacker plant, and I think -- I believe Wacker is still planning on opening that plant in Tennessee in 2015, and I believe, for now, Dow Corning has idled their plans to open that plant, and I don't believe they have given a date as to when they're going to open it.

Operator

Our next question comes from the line of David Silverman of Eagle Capital Partners.

David Silverman

I might have missed it, but of the $15 million in annualized savings you expect, what portion of that did you already achieve in this quarter?

Jeffrey K. Bradley

Dave, we actually did not give that number. We just gave the number for the entire year, and just to repeat, it relates to efficiencies at our plants and savings in the raw materials.

David Silverman

And do you expect that to actually increase EBITDA or will it offset other cost pressures you're seeing?

Jeffrey K. Bradley

It will be an impact of $15 million for the entire year.

Operator

And with no further questions in queue, I'd like to turn the conference back over to Mr. Jeff Bradley for any closing remarks.

Jeffrey K. Bradley

Thank you, everybody. We really appreciate your interest, and we look forward to hearing from you on the next call. Thanks again. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Globe Specialty Metals Management Discusses Q1 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts