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Executives

Malcolm Appelbaum - Chief Financial Officer

Jeff Bradley - Chief Executive Officer/Chief Operating Officer

Analysts

Ian Zaffino - Oppenheimer & Company

Martin Engler - Jefferies & Company

Ian Corydon - B. Riley & Company

Richard Garchitorena - Credit Suisse

Phil Gibbs - KeyBanc Capital Markets

Globe Specialty Metals, Inc. (GSM) Q4 2012 Earnings Call August 21, 2012 9:00 AM ET

Operator

Good day, ladies and gentlemen. Welcome to the Globe Specialty Metals scheduled Fourth Quarter Fiscal 2012 Earnings Investor Call for August 21, 2012.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Malcolm Appelbaum, Chief Financial Officer and Mr. Jeff Bradley, Chief Executive Officer.

I would like to turn the call over to Mr. Appelbaum. Please begin.

Malcolm Appelbaum

Good morning. I am 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 exhibit to those filings. Jeff?

Jeff Bradley

Good morning. Thank you for joining us on the call this morning. I'm pleased to report that our fiscal 2012 was a record year for earnings.

Net income for the year was $54.6 million and EBITDA was $129.1 million. For the fourth quarter on a comparable basis net income increased 4%, and EBITDA was up 10% to $32.5 million versus Q3. These improvements coupled with our outlook for the future led our board of directors to approve a 25% increase in the annual dividend to $0.25 a share from $0.20 a share last year.

This is the third consecutive year of dividend increases since our IPO on NASDAQ in 2009. We continued in the quarter our unending focus on driving out cost from our business. This quarter we saw the positive impact of our many cost reduction initiatives. Costs were down from the last quarter in almost every one of our plants by an aggregate amount of more than $4 million and we also had a significant reduction in working capital as we focused on inventory turns and other such working capital metrics.

In the last quarter, on June 13th, we acquired a 51% interest in Quebec Silicon LP. The total net cash break was $34 million, which is approximately a third of the cost to build a new plant with much less risk and in much less time.

Although the plant and its operations require a certain improvements, this facility is one of the most modern silicon plants in the western world and the only silicon metal producer in Canada. With this acquisition, Globe is now the only merchant silicon producer in North America. We have identified numerous opportunities to improve the operation and we will implement them over the next six to nine months.

We selected one of our strongest and most experienced silicon production managers to assemble and lead a team of some of the best skilled operations people in the company to drive improvements at the plant. They each have specific areas of expertise, and are on the ground early on the first day working with the production people to implement overall operational improvement initiatives.

These changes should lead to improved efficiency at the furnaces, lower labor costs and increased output. In addition to this, we have already seen improvements in the performance of the furnaces with the addition of our specialty low ash Alden coal. Our Alden coal operation is now meeting expectations and contributes meaningfully to our costs and silicon operations.

Silicon sale for the balance of 2012 continue to be steady driven by demand from the chemicals, aluminum and solar markets we serve. The outlook for the steel industry, the end-market for our ferrosilicon is trending positively and strong demand from auto and energy sectors are fueling steel consumption in the U.S. Demand for our specialty alloys sold to foundries continues to grow as the U.S. automotive demand remained strong.

We remain optimistic about the markets for our silicon metal, silicon alloys, silica fume and specialty low ash coal. We are seeing early signs of increasing demand in many end markets as some of our customers request more supply than anticipated. We will continue to drive operating initiatives in order to improve productivity, lower our costs, and increase cash flow.

In closing, as always, we will continue to pursue accretive growth opportunities that will enhance shareholder value. Mal?

Malcolm Appelbaum

Thank you, Jeff. We have a few financial related slides, which you'll view automatically if you are listening to the call through our website. Just click on the maximize button on the bottom of the window to expand the slide to full screen, otherwise the slides are posted in the events and presentation section of our website www.glbsm.com.

EBITDA on a comparable basis for the fourth quarter increased 10% over the third quarter, primarily due to higher shipments and reduced cash production cost partially offset by an expected modest reduction in average selling prices.

Silicon metal shipments increased 17% in the fourth quarter for a total of 5,100 metric tons over the third quarter with approximately half of the increase coming from the timing of customer shipments and half from the newly purchased Quebec Silicon. Silicon based alloy shipments increased 2% in the quarter.

As expected, silicon metal average selling prices declined 5% or $0.07 per pound in the quarter, partially due to lower production costs for Alloy joint venture which sells material at cost to Dow Corning, and partially due to lower selling prices on our indexed contracts. Silicon based alloy pricing declined less than 1% in the quarter.

Cash cost of production per ton declined by 3% in the quarter as a result of efficiencies from Alden coal and the realization of our cost reduction initiatives. Reported EBITDA totaled $28.7 million in the quarter which was a $300,000 increase from the third quarter. Adding back the impact of transaction related expenses, EBITDA on a comparable basis was $32.5 million for increase of $3.1 million or 10% from the third quarter.

Sales from the fourth quarter increased 11% from the third quarter as shipments increased 10% or almost 6,000 metric tons and the average selling price declined 2%.

Our fourth quarter gross margin was 18.4%, compared to 19.6% in the third quarter. This 120-basis point decrease was almost entirely related to higher non-cash depreciation at Alden. Without this increase in depreciation, which includes one-time catch up at Alden, the gross margin percentage would have remained the same despite the decline in average selling prices.

SG&A expense of $18.5 million included $3.8 million of transaction related and due diligence expenses increased from the third quarter's $14 million including $1 million transaction related expenses. The net increase of $1.8 million in SG&A is partially due to higher variable compensation expense tied to the improved earnings.

Reported results were impacted by transactional related and due diligence expenses, including the write-off of prepaid expenses for the Iceland project, the write-off of deferred financing cost related to loans that were refinanced by our new holding company revolving credit facility and the consolidation of Dow Corning's 49% interest in our Alloy, West Virginia and Becancour Quebec plans which both provides material at cost to Dow Corning. The effects of these activities are shown on the third slide.

Turning to the next slide. Excluding the items detailed in the previous slides, our pro forma gross margin in the fourth quarter was 20.7% compared to 21.9% in the third quarter. Again, without the non-cash increase in depreciation the gross margin percent would have remained the same despite the drop in average selling prices.

Pro forma cost of goods sold per ton declined 3% in the fourth quarter as a result of the efficiency benefits from Alden coal and completion of maintenance and upgrade outages and our planned expense reductions. Pro forma EBITDA in the fourth quarter was $29.7 million compared to $27.3 million in the third quarter.

The next slide is a sales bridge showing increase in pro forma sales in the quarter $13.3 million. Lower pro forma average selling prices decreased sales by $3.8 million, which excludes the effect on average selling price of the joint venture that sells material to Dow Corning at cost and higher volumes increased sales by and $10.4 million.

In addition, we sold down certain raw materials at cost, which also increased sales and cash balances, but lowered the gross margin percentage in the quarter by 50 basis points.

The next slide is an EBITDA bridge showing the $2.3 million increase in pro forma EBITDA in the quarter. Decreased pricing lowered EBITDA by $3.8 million and higher volumes increased EBITDA by $2.7 million.

Improved efficiencies lowered production cost by $4.5 million and we had $600,000 of higher foreign exchange gains. These improvements were partially offset by the $1.8 million higher SG&A expense, which was partially related to higher variable compensation expense due to improved profitability.

The next slide shows cash flow for the period. Cash flow from operations in the fourth quarter was $56.2 million, $33.2 million higher than the third quarter. Excluding the Quebec Silicon acquisition, working capital decreased $29.8 million in the quarter mostly due to a reduction in accounts receivable and inventory.

Cash capital expenditures totaled $3.5 million in the quarter in addition to several capital leases, largely for equipment to expand coal production at Alden and planned maintenance outages from replacement equipment in Beverly, Ohio and Mendoza, Argentina. We expect working capital to remain relatively stable in our first fiscal quarter and second fiscal quarter.

At June 30th, we had $178 million of cash, an increase of $37.3 million from the prior quarter and only $140.7 million of debt, including $31.8 million used to finance the Quebec Silicon acquisition and $12.3 million from our two joint ventures with Dow Corning.

Income tax expense for the third quarter totaled $5.2 million for an effective rate of 34.5%. Excluding discrete items, we expect the effective tax rate to remain approximately 33%. Going forward SG&A, including the Quebec Silicon acquisition is expected to be in the range of $15 million to $15.5 million per quarter prior to transaction related and due diligence expenses.

We continue to pursue the business interruption insurance claim for the Bridgeport fire and received a modest advance payment from the carriers in our second quarter. We expect the final claim to be paid by the carriers by our second quarter of fiscal 2013.

We experienced unplanned storm related power outages at our Bridgeport, Alabama and Alloy, West Virginia plants in June and early July. These storms were very severe, but did not cause serious direct damage to the plants. These power outages initially caused the plant to cease production for several days and then it took a few weeks to the plant to resume full production. We expect the lost revenue and higher costs caused by these unplanned outages in June and July to reduce EBITDA in our first quarter by approximately $3 million.

We would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from Ian Zaffino of Oppenheimer & Company. Please proceed.

Ian Zaffino - Oppenheimer & Company

Great. Thank you very much. I know in the past, as there was a lot of uncertainty in Europe, I mean Europe continue to decline. You saw lot of supply being diverted away from Europe and into the U.S. market, which typically doesn't happen.

Have you started to see that reverse yet? And I know you talked about an increase in demand, but you're also seen some of that supply that was diverted into the U.S. go back into their traditional home of Europe as the European uncertainty seems to have kind of waned a little bit as the euro has stopped falling?

Jeff Bradley

Ian, this is Jeff. I can't point to a specific incident, but as you said all we can do is point to. We're seeing signs of demand improving and we saw signs in the chemical industry and the aluminum industry, so at the end of the day the positive thing to report is overall it looks like things are starting to improve a little bit.

Ian Zaffino - Oppenheimer & Company

Okay, and what about in your discussion with the customers, what's their confidence level today compared to even a month or two ago?

Jeff Bradley

Again, I can’t point to a specific incident but the only thing we can point to is the inflow of orders, and where the order book is now and it's positive, Ian.

Malcolm Appelbaum

Ian, we're also seeing that in Argentina with its shipments into steel mills Europe as well with the little bit more lead time visibility a little bit higher pricing, but it's still small incremental improvements.

Ian Zaffino - Oppenheimer & Company

Right, but in a positive direction?

Jeff Bradley

Yes.

Ian Zaffino - Oppenheimer & Company

Okay. All right. Thank you very much.

Operator

Thank you. The next question is from Martin Engler of Jefferies & Company. Please proceed.

Martin Engler - Jefferies & Company

Good morning everyone. Just wanted to see if there is any change to your time table and EBITDA guidance for both, Alden and Becancour there?

Jeff Bradley

No. There is no change. Alden is performing as expected. We were very pleased with the results both of how much coal we can get out of the ground, the progress we are making with third-party sales and as we indicated in our remarks with the cost reductions and efficiencies we’ve been able to achieve by using that Alden coal in our furnaces, so Alden is performing as expected and we’re very, very pleased and continue to get more and more coal out of the ground and actually reducing our cost of extracting that coal.

Quebec Silicon is operating initially as expected. As Jeff indicated, we need made some initial improvements very quickly at the facility and we continue to firm up those improvements and reduce cost there as well, so we’re very pleased with both of those acquisitions and expect them to perform according to plan.

Martin Engler - Jefferies & Company

Good, and you had noted that you're seeing maybe some incremental improvement with end-user demand, when you look into the second half of calendar '12 here, do you have any expectations as far as what the impact would be on volumes for the company?

Jeff Bradley

Well, no. As you know for the most part we are sold out. We still had some capacity available for the fourth quarter and the end of the year and it's just a matter of taking these increases and putting them into the order book.

Martin Engler - Jefferies & Company

Okay. One last question. Looking into the contracts for 2013, do you expect any meaningful shift between what you'd be doing as contract versus spot business when you head into next year?

Jeff Bradley

It's too early right now. We’re in August and we typically start talking to negotiating with the customer base, specifically in silicon metal, September, October, November and one into the end of the year.

Martin Engler - Jefferies & Company

Okay. Thank you very much.

Operator

Thank you. The next question is from Ian Corydon of B. Riley & Company. Please proceed.

Ian Corydon - B. Riley & Company

Thank you. It looks like on the silicon alloy side at least commodity ferrosilicon silicon prices declined through the June quarter. Can you talk about what we can expect for pricing for your silicon alloy book in the September quarter versus the June quarter?

Malcolm Appelbaum

We don't expect, at least sitting here today with the index prices where they are to see a meaningful decline. As we mentioned, silicon based alloys quarter-over-quarter into our Q4 decreased by only 1%, so as you know we do a lot of specialty grade where we can command a premium, so there may be a decrease but it will not be a substantial decrease like the very minimal decrease we saw in the fourth quarter.

Ian Corydon - B. Riley & Company

That's great. Then on Alden, it sounds like you are making good progress there. I think the first, or one of the hurdles you set was to get to 100,000 tons of external sales. When do you expect to hit that on a run rate basis?

Jeff Bradley

Where they are currently and we would look to increase that going forward from two initiatives one as you know, Ian, getting more coal out of the ground and we have been successful at doing that by opening up that mine that had been closed long ago by the seller, because they didn't have the right capital equipment and we've brought in the equipment from CAD, although it's the underground mining, but it took longer than expected to arrive, we reopened the mine and are getting good production out of it and the second are sales initiatives and we are traveling in the world selling test quantities of coal to other silicon producers and they are testing our coal and we have to imagine they're achieving the same results that we are as we reported to you today the significant improvement in efficiency from using the coal.

Ian Corydon - B. Riley & Company

Great. Then if you can comment on prices for Alden coal, that would be helpful?

Jeff Bradley

We talked about the alternatives, particularly coal from Columbia, the only other significant source to low ash coal, plant in the U.S. being in the range of 300 plus dollars a ton. We believe based on the quality of the Alden coal and the results we have achieved with it that we should command similar pricing.

We won’t disclose exactly the sales price to the third parties, but we are looking for significant increases over the $170 a ton that we had talked about that the seller had been selling us Alden coal for in the past.

Ian Corydon - B. Riley & Company

Okay. Refresh my memory. Do you still have contracts that are priced at those lower levels or have those run off?

Malcolm Appelbaum

For the Alden coal those have run off.

Ian Corydon - B. Riley & Company

Okay. Thank you.

Operator

(Operator Instructions). The next question is from Richard Garchitorena of Credit Suisse. Please proceed.

Richard Garchitorena - Credit Suisse

Thanks. Good morning.

Jeff Bradley

Good morning, Richard.

Richard Garchitorena - Credit Suisse

First question, just on Quebec Silicon. Did you include one-month or one-and-a-half month of production in Q4?

Jeff Bradley

Half-a-month, Richard, approximately.

Richard Garchitorena - Credit Suisse

Okay. Great, so the drop in the realized in the quarter was I guess a mix of spot declining as well as the lower priced legacy contracts from Quebec Silicon?

Jeff Bradley

Yes. That had an effect, but not a significant effect because it was only half-a-month. It was the reduced indexes, and therefore our index based contracts were down. It was a bit of spot and then it was a good news of lower production cost their alloy joint venture which lowered our sales price to Dow Corning because we sell to them as you know at fully loaded cost.

Richard Garchitorena - Credit Suisse

Okay. I guess going forward, we should see a bit of an impact from the lower price tons from Quebec Silicon?

Jeff Bradley

That's true. Not a dramatic impact, but there will be a small impact. Yes.

Richard Garchitorena - Credit Suisse

Okay. Great. Then on Alden. Can you tell us how much EBITDA Alden generated during the quarter?

Malcolm Appelbaum

We don't break out Alden. Ultimately, we may very well do that. Break it out as a separate segment as it gets larger and larger. We can tell you that it was nicely positive and that we are on our plan for it, but we are not breaking it out at this moment.

Richard Garchitorena - Credit Suisse

Okay. In terms of how positive income statement is, is that through the revenue line or is it revenue and costs or?

Malcolm Appelbaum

Today, as you know we are using most of the Alden coal ourselves and selling a small amount, we talked about this 100,000 ton run rate to third-parties. That third-party sale does flow through revenue and cost of sales. The rest of it that we use ourselves is flowing just through cost of goods sold as an input in our production process.

Richard Garchitorena - Credit Suisse

Okay. Great. Then a last question. Just back to the Becancour impact. The cost savings that you saw this quarter most of that you said is spread out among all the plants, so should we expect to see more cost savings going forward as more of the tonnage comes from Becancour?

Jeff Bradley

Yes. Richard, we continue to drive cost savings throughout the company. I can't specifically tell you what they are going to be this quarter, but as I always say to the people here, we are not taking our foot off the gas, and yes we still have upside to drive cost out of the Becancour plant and we've identified initiatives around the company to drive additional cost out.

Richard Garchitorena - Credit Suisse

Great. Thank you.

Operator

Your next question is from Phil Gibbs of KeyBanc Capital Markets. Please proceed.

Phil Gibbs - KeyBanc Capital Markets

Good morning, Jeff and Mal. How are you?

Jeff Bradley

Good morning.

Phil Gibbs - KeyBanc Capital Markets

Good quarter, guys. Question on the solar market. Just update on what you are seeing there?

Jeff Bradley

I mean, overall I think we touched on, on the last call, when you look out at the solar market in and by itself the outlook is very good. As we look back over the past couple of years whether it's two, three, four, five years, you look back at the estimates and all those estimates have been weak and when we look at the estimates going forward, the estimates are that there will be more installed solar power this year than last year and more next year than this year, and the number continues to grow, so we're very optimistic about solar.

The price of poly, I don't know exactly where it is today, but the price of poly is low versus where it's been. Year ago at this time, it was probably $50. Today, we hear numbers close to $20, but we need to be clear. Low priced poly is good for Globe. Why? Because low priced poly means solar is less expensive and you can't make poly without silicon metal, so we like low cost poly because it's just going to drive the solar market even more.

Phil Gibbs - KeyBanc Capital Markets

Okay. I had been looking at the 10-Q, and I just found something with regards to your Iceland JV. Just had a question regarding the contract terms and the maximum penalty that you may be forced to pay for opting out of the plant construction?

Malcolm Appelbaum

No. As you know, we're not pursuing the Iceland venture and we wrote off the prepaid expenses that relate to it this quarter in Q4. That was about $1.3 million pre-tax, and the penalty did not reach the phase of development where there are penalties due to any of the contractors or the power suppliers, or power transmission or any of the other vendors, so we're able to work on the project in a way that our risk was really minimal and the extent of it was these prepaid expenses that we wrote off.

Phil Gibbs - KeyBanc Capital Markets

Okay, so from going forward is there a breakup fee, or is everything pretty much settled at this point?

Malcolm Appelbaum

This should be it.

Phil Gibbs - KeyBanc Capital Markets

Okay. Thanks a lot, guys.

Operator

I am showing no further questions in the queue. I would like to turn the conference back to Mr. Jeff Bradley, CEO for any further remarks?

Jeff Bradley

I would just like to again thank everybody for joining us on this call and we look forward to talking to you in a couple more months. Thank you very much. Bye.

Operator

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

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