Ferroglobe PLC: Q3 2018 Financial Summary
Business Context and Reporting Period
This Form 6-K, filed on November 26, 2018, reports the unaudited financial results for Ferroglobe PLC for the third quarter ended September 30, 2018. Ferroglobe is a leading global producer of silicon metal and silicon- and manganese-based specialty alloys. The reporting period covers the three and nine months ended September 30, 2018.
Key Financial Metrics
| Metric | Q3 2018 | Q2 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|---|
| Revenue | $526.8 million | $583.0 million | $451.6 million | $1,670.5 million | $1,273.5 million |
| Net (Loss) Profit | $(2.9) million | $66.0 million | $(5.0) million | $98.7 million | $(12.1) million |
| Adjusted Net Income | $0.1 million | $25.7 million | $9.2 million | $59.1 million | $10.5 million |
| Adjusted EBITDA | $45.0 million | $86.3 million | $56.1 million | $220.9 million | $130.9 million |
| Adjusted EBITDA Margin | 8.5% | 14.8% | 12.4% | 13.2% | 10.3% |
| Diluted EPS (Reported) | $(0.01) | $0.39 | $(0.02) | $0.60 | $(0.04) |
| Net Debt | $510.9 million | $475.3 million | N/A | N/A | N/A |
| Liquidity | ~$250 million | N/A | N/A | N/A | N/A |
| Operating Cash Flow | $(7.9) million | $(4.6) million | $(52.7) million | $(32.9) million | $(20.2) million |
Material Changes vs. Prior Periods
- Quarter-over-Quarter (Q3 vs. Q2 2018): Revenue declined 9.6% due to lower volumes and selling prices. Adjusted EBITDA fell 47.9% to $45.0 million, driven by a 5-7% decrease in average selling prices across all product lines and a seasonal slowdown in Europe. The company reported a net loss of $2.9 million compared to a net profit of $66.0 million in Q2.
- Year-over-Year (Q3 2018 vs. Q3 2017): Revenue increased 16.7% and Adjusted EBITDA decreased 19.7% (from $56.1m to $45.0m). The decline in EBITDA was attributed to higher input costs (raw materials and energy) and deteriorating market conditions for manganese-based alloys.
- Year-to-Date (9M 2018 vs. 9M 2017): Revenue grew 31.2% and Adjusted EBITDA surged 68.8% to $220.9 million. This strong YTD performance was aided by the acquisition of manganese-based alloy plants in February 2018 and a $44.6 million bargain purchase gain included in operating profit.
- Balance Sheet: Net debt increased to $510.9 million from $475.3 million in Q2, primarily due to a $36.0 million increase in working capital driven by elevated inventory levels.
Guidance, Outlook, and Management Commentary
- Market Conditions: Management noted deteriorating market conditions in Q3, with average selling prices dropping 5-7% quarter-over-quarter. Manganese-based alloy prices have significantly deteriorated despite high ore prices.
- Operational Response: Ferroglobe is curtailing production in silicon metal and manganese-based alloys to optimize its portfolio, focusing on the most cost-effective plants. The company is also drawing down inventories to improve free cash flow.
- Outlook: Management stated that free cash flow targets for the second half of 2018 have become a "stretch" goal. The company expects financial results to remain challenged in the near term due to a volatile environment.
- Capital Structure: Leverage remains below 2.0x. The company has approximately $250 million in liquidity with no material debt maturities until 2022. They are evaluating the refinancing of $350 million in Senior Notes but will act when market timing is right.
- Dividends: No interim dividend was declared for Q3 2018 due to financial performance and a focus on deleveraging.
- Legal Contingency: The Executive Chairman, Javier López Madrid, had a sentence confirmed by the Spanish Supreme Court regarding misuse of corporate credit cards. He has applied for a suspension of the sentence in exchange for a fine of €7,120. The Board continues to support him.
Investor Verification Checklist
- Inventory Levels: Verify the extent of the $36.0 million working capital increase and the timeline for inventory drawdown, as this directly impacts cash flow.
- Manganese Alloy Margins: Monitor the spread between manganese alloy selling prices and ore costs, as management noted a significant deterioration in this segment.
- Production Curtailments: Confirm the impact of planned capacity cuts (e.g., Selma, Mendoza, and specific furnaces in Spain and France) on Q4 and 2019 cost structures.
- Debt Refinancing: Track the status of the $350 million Senior Notes refinancing and interest rate environment impacts.
- Legal Proceedings: Monitor the final resolution of the legal case involving the Executive Chairman to assess any potential reputational or governance risks.