Ferroglobe PLC: Q2 2019 Financial Summary
Business Context and Reporting Period
This Form 6-K, filed on September 3, 2019, reports the unaudited financial results for Ferroglobe PLC for the quarter ended June 30, 2019. Ferroglobe is a leading global producer of silicon metal and specialty alloys. The reporting period reflects a challenging cyclical downturn characterized by declining end-market demand and pricing pressure across the automotive, solar, and chemical sectors.
Key Financial Metrics
| Metric | Q2 2019 | Q1 2019 | Q2 2018 |
|---|---|---|---|
| Sales Revenue | $409.5 million | $447.4 million | $577.9 million |
| Net Loss | $(43.7) million | $(28.6) million | $66.0 million (Profit) |
| Adjusted Net Loss (Parent) | $(22.2) million | $(21.9) million | $25.6 million (Profit) |
| Reported EBITDA | $(7.1) million | $3.3 million | $127.6 million |
| Adjusted EBITDA | $5.0 million | $3.3 million | $83.0 million |
| Adjusted EBITDA Margin | 1.2% | 0.7% | 14.4% |
| Diluted EPS (Reported) | $(0.24) | $(0.16) | $0.39 |
| Diluted EPS (Adjusted) | $(0.13) | $(0.13) | $0.14 |
| Net Debt (as of June 30, 2019) | $478.3 million | $419.7 million | N/A |
| Cash and Equivalents | $187.7 million | $216.6 million | N/A |
| Operating Cash Flow | $(37.4) million | $8.7 million | $(4.6) million |
Material Changes vs. Prior Periods
- Revenue Decline: Sales decreased 8.5% quarter-over-quarter (QoQ) and 29.1% year-over-year (YoY). This was driven by a 6.0% drop in shipment volumes and a 3.2% decrease in average selling prices.
- Profitability Deterioration: The company reported a net loss of $43.7 million, a significant widening from the $28.6 million loss in Q1 2019 and a reversal from the $66.0 million profit in Q2 2018. Adjusted EBITDA improved slightly to $5.0 million from $3.3 million in Q1, but remains drastically lower than the $83.0 million recorded in Q2 2018.
- Product Mix Impact: Silicon metal shipments fell 13.1% QoQ with prices down 1.6%. Silicon-based alloy shipments dropped 3.1% with prices down 5.8%. Manganese-based alloys saw a 4.0% volume decline but a 1.4% price increase.
- Cost Structure: Cost of sales decreased to $292.4 million (71.4% of sales) from $329.4 million (73.6% of sales) in Q1, aided by lower manganese ore costs and power price savings. However, other operating expenses rose to $62.9 million due to contract termination costs.
- Liquidity and Debt: Net debt increased by $58.6 million to $478.3 million, primarily due to a $59.3 million increase in working capital driven by inventory buildup. Operating cash flow turned negative at $(37.4) million.
Guidance, Outlook, and Strategic Initiatives
- Divestiture of FerroAtlántica: On August 30, 2019, the company closed the sale of its 100% interest in FerroAtlántica, S.A.U. for gross proceeds of €156.4 million (approx. $173 million). After mandatory debt repayments, net cash proceeds are estimated at approximately $112 million. Pro forma net debt is expected to reduce to approximately $308 million.
- Refinancing: The company is actively refinancing its Revolving Credit Facility (RCF), targeting a closing around the end of Q3 2019. The new facility aims to eliminate leverage-based covenants and improve financial flexibility.
- Production Adjustments: To address the demand slowdown and optimize working capital, Ferroglobe idled its silicon metal facility in Polokwane, South Africa, and restarted one furnace in Sabón, Spain. This reduces annual production capacity by 39,000 tons.
- Cost Reductions: The company is implementing a $75 million "run-rate" cost-cutting plan. Initiatives include moving headquarters from London to Madrid (expected Q4 2019), reducing personnel costs, and optimizing raw material mixes. $16.4 million in savings were achieved in H1 2019.
- Outlook: Management expects headwinds from declining demand and pricing to linger in the second half of 2019. While index prices are stabilizing, the company anticipates continued erosion in North America. Fixed-price contracts are expected to soften the impact of lower index prices.
Investor Verification Checklist
- Refinancing Terms: Verify the final terms and closing date of the RCF refinancing, specifically regarding the removal of leverage covenants.
- Divestiture Proceeds: Confirm the final net cash proceeds from the FerroAtlántica sale and the exact pro forma net debt reduction.
- Working Capital Management: Monitor the trajectory of inventory levels and working capital, which increased significantly in Q2 and contributed to negative operating cash flow.
- Production Cuts: Assess the impact of the 39,000-ton capacity reduction on future revenue and the ability to ramp up production if demand recovers.
- Cost Savings Realization: Track the progress of the $75 million cost-cutting initiative, particularly the headquarters relocation and staff reductions.