Ferroglobe PLC (GSM) Q4 2018 Earnings Conference Call Transcript

GSM earnings call for the period ending December 31, 2018.

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Ferroglobe PLC  (NASDAQ:GSM)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Ferroglobe's Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call may be recorded. I would now like to turn the call over to Pedro Larrea's Ferroglobe's Chief Executive Officer, you may begin.

Pedro Larrea Paguaga -- Chief Executive Officer

Good morning and thank you for joining the Ferroglobe fourth quarter and full year 2018 conference call. As we stated in our earnings release Phil Murnane has taken a temporary medical leave of absence from his duties as Chief Financial Officer and we expect him to be on leave for the next few weeks. During Phil's absence Jose Maria Calvo-Sotelo, Deputy CFO and EVP Corporate Development is assuming the duties of the CFO. Joining me on today's call are Jose Maria Calvo-Sotelo and Brian Sikora, Ferroglobe's VP Global Corporate Controller. Before we get started with some prepared remarks, I'm going to read a brief statement. Please turn to and review Slide 1 at this time.

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 Ferroglobe's most recent SEC filings and the exhibits to those filings, which are available on our web page www.ferroglobe.com. In addition this discussion includes EBITDA, adjusted EBITDA and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliations of these non-IFRS measures to IFRS may be found in our most recent SEC filings.

Please turn to Slide 2. Today we will be presenting the Q4 and full year 2018 overview of results, then we will dig a bit further into the financial highlights and we will close with some comments on near-term outlook for our industry.

Turning to Slide 3, before we enter into the detailed analysis of results, I would like to highlight that Ferroglobe's fourth quarter results underscore the challenges we pointed out on the previous earnings call in terms of price erosion across our products and negative contribution from our manganese-based alloys business. On the one hand, the quarter was negatively impacted by continued headwinds in our core business and on the other hand, these market conditions accelerated the need to execute the cash generating commitments we set for the second half of 2018. Our cash generating initiatives were executed beyond our commitments in the second half of the year and delivered a significantly improved balance sheet at the end of the year. We will elaborate on all of these points on today's call.

So turning to Slide 4, in the fourth quarter, we had an increase in shipment volumes across all of our core products. However, the higher volumes were partially offset by some softening prices. Revenues for the quarter totaled $603.5 million, a 14.6% increase over the previous quarter. This impacted our adjusted EBITDA margin, which was lower by 323 basis points at 5.3% for the fourth quarter. Adjusted EBITDA was $32.1 million in the fourth quarter, which compares with $45 million in Q3. Ferroglobe posted a quarterly net loss of $15.2 million, which represents an $0.08 loss per share. Adjusted net loss for the quarter was $7.0 million.

The actions taken toward the end of the year, including capacity curtailments, cash generation initiatives and subsequent strengthening of our balance sheet with an amendment to our revolver credit facility in February 2019 are all intended to address the momentum shift experience at year-end and are all critical measures to ensure the Company's success in 2019.

Next slide; during the fourth quarter, we decreased our net debt by $82.1 million and decreased working capital by $84.1 million. We were able to redeploy the cash generated from various initiatives, including an increase to our AR securitization program, a reduction in raw materials and finished goods inventory levels and the divestiture of non-core assets. We first committed to these four initiatives during our Q2 presentation in August 2018. Despite noting that we are behind schedule on some of these initiatives during our Q3 earnings call, we ended the year delivering an excess of $40 million over and above the 95 million target. Cash generated through our initiatives in the second half totaled $135 million. Despite a sizable investment in two new facilities and other strategic investments Ferroglobe's free cash flow, including all cash flows from investing activities was nearly at breakeven for the year as a whole.

Turning to Slide 6, adjusted EBITDA during the quarter was $32.1 million, a 28.7% drop relative to the prior quarter. The decline in quarterly EBITDA in the second half of the year is largely attributable to the deterioration in the pricing environment for our products. We also experienced some cost inflation throughout the year. Despite record adjusted EBITDA of $253.1 million in 2018, the year was bifurcated in terms of our performance and actions. The first half of the year benefited from a stronger operating environment and we were focused on growth, specifically the integration of the new manganese alloy facilities. The back of the year saw a gradual deterioration in market conditions and required us to react and strengthen our balance sheet.

Next slide please. In the fourth quarter revenues, increased across all of our product categories compared to the prior quarter. Revenues for the silicon metal business were up 5.6%, silicon-based alloys were up 2.2% and our manganese alloys business was up 43.7% from the prior quarter. Despite weaker realized pricing during the quarter, total revenue was up 14.6% quarter-over-quarter. For the full year 2018, our revenues of $2.3 billion were up 30.6% over full-year 2017.

So turning to Slide 8, during the fourth quarter, we benefited from cost reductions of $6.1 million. This consisted primarily of $3.3 million from the cost improvement in manganese ore. This improvement is a combination of lower unit costs for ore and a mix change in our manganese ore blends to optimize unit cost and logistics. Furthermore, we realized a strong contribution from our energy division amounting to $9.1 million. Overall weaker pricing during the quarter more than offset these gains, negatively impacting EBITDA by approximately $28.1 million. The mining division negatively impacted the quarter by $3.9 million. A number of other factors had a negative -- a net positive impact on the quarter of $2.9 million, these include positive contributions of a total of $8.6 million from insurance claims collected and the sale of excess inventory of CO2 emission rights. Offsetting these were a negative $2.7 million charge tied to audit fees and other factors. Other operating income in Q4 on top of the already described $8.6 million contains $14 million that correspond to the grant of three CO2 emission rights in France and that have an exactly offsetting cost entry in cost of sales, rendering a zero net impact on our Q4 accounts.

Next slide please. Turning first to silicon metal on Slide 9, in the US they index price for silicon metal was in a tight band for nearly 10 weeks before a recent decline in late January, and the European index for silicon metal has now been in a tight range for nearly 13 weeks going back to late November 2018. Ferroglobe's realized average selling price for silicon metal in the fourth quarter declined by almost 7.9% to $2,429 per metric ton as compared to $2,636 per metric ton in the third quarter. As a reminder, Ferroglobe's realized prices include the volumes associated with our joint ventures, which carry much lower realized prices of around $2,355 per ton in Q4 versus $2,949 per ton for third-party sales in North America.

The chart on the top right of the slide shows an increase in volumes over the prior quarter. Of the approximately 12,000 additional tons shipped in Q4 over Q3, a significant proportion or spillover volumes, which did not ship on time in Q3. In addition to higher volumes, silicon metal EBITDA during the quarter also benefited from lower costs, which were driven by technical improvements at the plant level. Going forward, we will need to pay close attention to our production costs in Spain as power rates have increased for the first half of 2019.

Turning to Slide 10, turning to silicon based alloys, the EBITDA contribution from these products declined primarily due to price softening during the quarter. While Ferroglobe's realized average price remained above both the US and European indices, the average price for the quarter decreased by approximately 4.6% to $1,719 per metric ton. Continued pressure on pricing can be seen in the drop in the index through the beginning of the first quarter of 2019. Sales volume improved in Q4 as quarterly shipments totaled 81,197 metric tons, a 14.3% increase over the prior quarter. While steel demand globally has held near historic levels, there has been increased ferrosilicon supply which is weighing on prices, particularly in Europe. The foundry business, representing a third of this segment, performed well both in terms of volumes and margins and capped off a strong 2018.

Next slide please. 2018 proved to be a disappointing year for manganese-based alloys, which contributed negative results for the fourth quarter and was neutral for the full year. Our average realized price for manganese based alloys decreased 4.4% to $1,158 per ton. In aggregate our EBITDA contribution from this business was negative $8.6 million, which is the same as what it delivered in Q3. The negative impacts of pricing, volumes and costs were offset by more favorable manganese ore unit cost. During the quarter, we saw a significant increase in manganese alloy shipments.

Following a finished goods inventory build at the end of Q3 due to certain specific logistics and commercial difficulties, volumes lost at the end of Q3 were recovered in Q4. For this reason, our average volume sales for Q3 and Q4 is probably a better indicator for quarterly manganese sales during the second half of 2018. Since mid-December, we have seen some improvements in the fundamentals of manganese alloys. Ore market prices have steadily declined approximately 10% since December 2018. Alloys prices mainly silicomanganese have had a slight improvement in the same period with modest gains at the end of 2018 and according to the indices stability since. Should this strength continue, the combination of slightly higher prices and decreasing ore costs could yield a turnaround for our manganese business in 2019. However, given the time it takes from ore purchases to alloy processing, any realization of a lower cost or higher pricing could take several months to be reflected in our P&L.

Turning to Slide 12, as an additional disclosure, we have included a detailed reconciliation of EBITDA including both our core products that we have reviewed on previews slides and other contributors. Other minor products such as silica fume, grades (ph) and fines continued to contribute very positively all through 2018, increasing by 70% the contribution obtained in 2017 and offsetting the decline in the mining business. 2018 was a good year for our energy division, which had s stellar fourth quarter, contributing $11.4 million due to increased volumes and prices, generating record profits for this business. Corporate overhead and other costs remained relatively flat in Q4 and were reduced by $13.4 million in the year as a whole, with room for further improvement in 2019.

Moving on to Slide 13, despite the poor performance during the second half of the year, 2018 was a good year for the Company. Year-over-year, our sales grew by 30.6% as volumes increase across all products. Pricing for silicon metal and silicon-based alloys also improved considerably. The significant disappointment has been the manganese alloys business, which was the lag at the entire year and did not contribute to EBITDA. EBITDA for the Company was a record $253.1 million, up 37.1% over the prior year. The year was clearly marked by a number of successes, as well as challenges. Overall, we were able to leverage our diversified production capabilities and footprint to navigate through a very volatile year. Despite two weaker-than-expected quarters in the second half, the entire organization focused on ensuring that our second half 2018 objectives, which emphasize cash flow generation were successfully achieved.

Next slide please. Ferroglobe's consolidated adjusted EBITDA during full year 2018 primarily benefited from higher volumes, positively contributing approximately $39 million; higher average pricing, contributing $166 million and a significant contribution of approximately $25.4 million from the energy division. During the year, the business was challenged by cost pressures adversely impacting EBITDA by $171.2 million, including not only high manganese ore prices, negatively impacting us by $23.3 million, but also other cost factors such as energy, electrodes, coal or met coke, which in total contributed negatively $147.9 million.

If we now turn to our Slide 16, it shows the detail of many of the figures we have already been reviewing. I would note that the financial results presented for the fourth quarter and for full year 2018 are unaudited and maybe subsequently adjusted for items including impairment of long-lived assets such as the assets associated with our solar-grade silicon project. Any subsequent changes if required will be reflected in our audited Annual Report on Form 20-F. As I mentioned before, sales volumes were up 25.8% to approximately 322,000 metric tons in the quarter, while revenues totaled $603.5 million. Adjusted EBITDA of $32.1 million is down from the prior quarter with a 5.3% EBITDA margin. Full year 2018 experienced 31% growth in revenues and 37% growth in adjusted EBITDA with adjusted EBITDA margins improving from 10.6% to 11.1%.

Moving to Slide 17 and turning to review a bit more in detail our balance sheet. We are glad to have significantly improved our net debt, our liquidity and our working capital. Ferroglobe's working capital improved by $84.1 million in the fourth quarter, primarily as a result of our emphasis on lowering raw materials and finished goods inventories across the portfolio. Despite our efforts in the back half of the year, working capital for the year increased by approximately $79.4 million compared to year-end 2017. The significant portion of this increase can be attributed to the absorption of two new facilities, which were acquired back in February 2018. The growth in working capital over the year has had a corresponding impact on net debt and free cash flow.

Ferroglobe's net leverage at the end of 2018 was 1.7 times, continuing the steady decline we have witnessed over the year. All our leverage ratios and our liquidity are now in better shape than ever before in the short history of our Company, allowing us to face the near future with renewed confidence. Most important to us is the reversal in free cash flow generation during the quarter. Despite negative free cash flow during the first nine months of 2018, we diligently turned around -- turned things around in the fourth quarter, delivering $79 million of positive cash flow. Although net debt decreased significantly during Q4, the various decisions we made during the year to deliver cash flow back to shareholders and to investments geared toward longer-term value creation left the Company with higher net debt at the end of 2018 relative to the end of 2017.

Turning to Slide 18, our working capital reduction of $84 million in the fourth quarter was largely due to a decrease in finished goods inventory, primarily in silicon metal and manganese alloys. We are satisfied with where we ended the year, particularly given the requirements of the two facilities we acquired in 2018 for working capital funding. We believe there is further room for improvement to working capital by mid-year 2019.

Moving to slide 19 by achieving our cash generation targets, we significantly improved the net debt of the Company, lowering it by $82 million in the fourth quarter, while gross debt remained relatively flat at $645 million. With the net leverage level of 1.7 times and a successful amendment to our revolving credit facility, we have strengthened the balance sheet considerably.

Next slide please. On the left hand side, there is some additional detail around our cash flow into in 2018. Our profit adjusted for non-cash items was approximately $253.1 million. Three contributing factors consumed cash so that the net cash generated by operating activities ended at $76.3 million. First, significant working capital investment through the year; second, interest payments of $43 million; and third, income taxes paid of $36.4 million. Payments for property, plant and equipment totaled $108.2 million and this resulted in negative free cash flow for full year 2018 totaling $32 million. Considering the investment we made in the new manganese alloy facilities and the divestiture of non-core assets, our net free cash flow, including all cash flows from investing activities was negative $11.6 million.

During our Q2 2018 results presentation, we committed to several cash generating initiatives. We targeted an increase in our AR securitization program by $35 million, but we were able to achieve $37 million. We targeted $20 million reduction in manganese ore inventories and we were able to achieve $25 million. And the area where we had the most success is the working down of finished goods inventories where we achieved a $53 million reduction versus our target of $20 million. With respect to the divestiture of non-core assets, while we met our monetary target of $20 million by year-end, there are a few pending transactions we are pursuing. This varying amount and are at different points in the sales process. We remain keen to close on these transactions in the first half of 2019.

Slide 21 please. We have recently amended some terms in our revolving credit facility in order to provide Ferroglobe additional flexibility to face evolving market conditions. This amendment resulted in a few changes to our covenants. First, we have downsized the RCF by $50 million to $200 million. Second, the net total leverage ratio covenant under our RCF has been suspended effective March 31, 2019 through March 31, 2020. Third, we have replaced this covenant during the interim period with a net secured leverage ratio of 2.75 times. Lastly, there is a minimum cash liquidity requirement to maintain the greater of $150 million of cash or equivalent amount drawn under the RCF.

For further details on these amendments, please refer to the credit agreement filed on Form 6-K with the SEC today. Despite the added flexibility, we continue to be committed to deleveraging our balance sheet, not only in terms of ratios with the medium term target below 1.5 times, but also in terms of an absolute net debt figure, which we aspire to get down to $200 million. While we continue to strengthen our balance sheet, we will concurrently -- we will be currently evaluating options to refinance our senior note in order to reduce our financing cost. Within this commitment to deleveraging, we continue to implement cash generating initiatives and in the first half of 2019, we are targeting cash generation of $60 million from further asset divestitures and from working capital release. We also reviewing our CapEx commitments to ensure that costs are focused on addressing the safety, environmental and maintenance needs of our facilities.

So moving on to Section III in the next few slides, we will be giving some forward-looking commentary about possible developments in our industry that are based on analysis of third-party experts and publications. I would like to underline that current market conditions in our industry as in many others are dominated by uncertainty due to major macroeconomic developments such as trade wars, Brexit China economic slowdown and others. Additionally, supply demand and prices have proven to move very rapidly in relatively short periods of time and often contrary to expert analysis.

So turning now to Slide 23 over the past few weeks, we have paid close attention to the sentiment shared by customers and industry analysts across our end markets as they provided their outlook for 2019. One commonality in many of these presentations was a change in tone on how these experts are approaching 2019. Heading into the new year, many institutions, such as the World Bank and International Monetary Fund we're projecting GDP growth across most regions. However, some of our customers appear to be signaling greater degree of caution.

It is difficult to pinpoint some industries are concerned with the outcome of the global trade war, they are speculating an economic slowdown in China or if they are truly seeing a slowdown in demand from their products, but we are beginning to see some buying habits change. For example, let's look at the chemical industry, producers in this industry have publicly noted that silicon's supply globally will be short through to 2020 as no new capacity is forecasted to come on line until then. With GDP-driven growth, we were expecting the aggregate demand for these end market to hold at a minimum of 2018 levels going into the new year. However, we have seen a slowdown in orders from the chemical producers in both North America and Europe. This is one example of developing trend across all of our end markets that we are currently experiencing. Analysts and experts forecast stable or growing demand and potentially supply shortage in some of our markets, but producers are taking a cautious stance. This is unquestionably posing uncertainties in the very short term, but according to experts, it could trigger a rapid price recovery once demand starts to get back to its normalized levels.

Slide 24, please. In addition to the trend just described quite for the chemical sector, near-term silicon demand may be affected by activity in the aluminum sector. Aluminum demand globally is still projected to grow in 2019 as indicated by many industry leaders. However, we cannot ignore the impact of the aluminum scrap supply and its potential effect on silicon demand in North America. Likewise, we continue to monitor the auto industry and the evolving emission standards, particularly in Europe, which seem to be impacting the outlook of the automakers in the region.

The pricing erosion we experience at year end 2018 has continued into Q1 in North America, while Europe and China index prices have remained stable now for almost three months. Ferroglobe and other producers have taken action by curtailing production. Most analysts believe the tightness in the market leaves some room for upside in pricing. Should demand grow as projected for instance by CRU and other experts that could be a shortage of product in the market at some point during the year.

Our silicon-based alloys business is performing well and we expect this trend to continue. Stable steel demand predicted by experts provides a good backdrop for ferrosilicon prices, which have already shown some pricing correction in the second half of 2018. Lastly in manganese alloys, we are seeing some initial signs of improvement in market-based spreads, which we had been expecting for sometime. On our side, we have focused on improving production cost through a better choice of manganese ore mix, helped by our diversified portfolio of plans and our sintering facilities. We are also focused on increasing our sales of higher margin refined products.

Slide 25; this slide provides a visual for the evolution in the manganese spread referred to on the previous slide. The manganese spread is defined as the selling price for manganese alloys, less the cost of manganese ore. As can be seen in the chart on the left side of the slide, these spreads calculated with market index prices have been volatile historically. However sharp drops in spreads have generally reverted quickly. Throughout 2018, this business was pressured with a sharp decline in spread, particularly during an extended period when manganese ore prices stayed unusually high.

The dynamic we experienced in 2018 lasted longer than expected and prompted us to curtail capacity. This trend started reversing since the later part of the fourth quarter with modest gains in manganese alloys index prices at the end of 2018, and a sharp decline in ore index prices during January 2019. Most experts predict growth further widening of spreads in the coming months. Should this trend continue, we could see the positive impact in our manganese alloys business in 2019 as early as Q2.

Next slide, protecting our balance sheet is one of our priorities. We have continued the trend of improving our net leverage ratio, but we still have a lot of work ahead to meet our target level of $200 million of net debt, lowering the debt burden also directly impacts our cash interest expense. We intend to de-lever the balance sheet in 2019 by focusing on some new cash generating initiatives. In the first half of 2019, we will prioritize on additional working capital release. At the moment, we are targeting $20 million from this measure.

Additionally, we are focused on rightsizing our platform. Part of this initiative is divesting our non-core assets, which we are targeting to generate an additional net proceeds of $40 million by mid-year 2019. On top of this $40 million, as you may recall, we tried to sell our larger set of Spanish hydro assets with a total installed capacity of 167 megawatts in 2017, but faced regulatory obstacles from local government authorities. We have been exploring a number of alternatives, which may help facilitate a monetization of these assets, while complying with all legal requirements. This situation is evolving and we will provide updates as necessary.

In addition to the sale of non-core assets, we have to take a fresh look at our platform and analyze our core asset base. To-date, we have not made any decision to sell core assets, but we'll review this option during the first half of the year. The goal would be to streamline the business and move toward value-added products by leveraging our technology.

Lastly, in terms of rightsizing the platform, we will be taking action more quickly to address changes in market conditions by leveraging our production footprint. This means curtailing production, idling plants or reopening facilities as market conditions dictate. The windows to capitalize on opportunities are often tight and we have to position the Company to remain nimble and flexible where possible.

Another pillar consists of cost reduction and improve competitiveness. We will be evaluating ways to consolidate offices and streamlining functions at every level of the Company. In addition to personnel, we seek to strike value from improving performance and productivity down to the furnace level. This entails improving power efficiencies, improving raw material mix and conforming processes across our platform in an effort to cut cost and increase productivity.

Lastly, we will manage our discretionary spending. Our current budget for 2019 CapEx is limited to maintenance environmental and safety-related items, which should total $60 million to $70 million. We are temporarily suspending other projects, such as our solar-grade silicon pilot plant in Puertollano and several R&D initiatives until we bring that down further.

Slide 27; in summary, I'll quickly recap some of the key themes from today's presentation before opening up the line for questions. During the fourth quarter, we delivered on our commitment for cash generation. We strengthened the balance sheet and we streamlined operating platform. So Ferroglobe's balance sheet remains solid. Not only has our net debt position improved significantly, we also have a strong liquidity position and added flexibility following the amendment to the RCF and our cost cutting and cash generation initiatives will further strengthen our balance sheet.

Regarding our earnings, the past two quarters have been challenging and we expect some of those headwinds to continue in the near term, given the sentiment of uncertainty and caution across the industry. We are confident that our competitive position, the diversification of our assets, markets and products and our continuous operational improvements will allow us to be eventually improve our financial performance and revert our profitability.

Also as we survey the fundamentals of our business and end markets, according to analysts and experts, the medium-term outlook remains strong. Based on these surveys, demand should remain -- should resume growth especially in sectors such as solar, silicones or aluminum. And this -- with changes in production strategy, which we and some of our peers have made should help balance supply and demand beyond the next few months, setting the basis for a recovery in prices and volumes.

Our business has significant value as we have seen in the recent past and we are committed to recovering this value for our shareholders. Our global platform and solid asset base provide the flexibility and optionality to navigate these times. We look forward to updating you on the various initiatives highlighted on today's call. Thank you for your time and participation this morning. And at this time, I would ask the operator to open the line up for questions.


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Questions and Answers:

Operator

(Operator instructions) Our first question comes from the line of Vincent Anderson of Stifel. Your line is now open.

Vincent Anderson -- Stifel -- Analyst

Yeah, thank you for taking my question. Just first and foremost, are you able to address in anyway the financial health of Grupo Villar Mir right now? And are you aware of any plans by Grupo Villar Mir to improve its transparency for the benefit of the shareholders of its publicly traded subsidiaries?

Pedro Larrea Paguaga -- Chief Executive Officer

Well, as you know the Vincent I'm afraid I'm not in a position to comment on GVM's intentions or situation. That of course is a matter for GVM and you need to address the question of what they intend to do really directly to them.

Vincent Anderson -- Stifel -- Analyst

Okay, thank you. With regards to the manganese alloy shipments in 4Q '18, can you just talked about predominantly where those volumes went? Did they go into trader channels? Did they make it all the way to the end user? Do you feel that in your efforts to reduce that working capital could there have been any kind of impact on market pricing in the near-term?

Pedro Larrea Paguaga -- Chief Executive Officer

Well I think as I mentioned during the this call and also partly in Q3 call, there were some delays in Q3 shipments. So, really when you look at Q3 plus Q4, in average, that really gives you a better view of what is the normalized level of manganese alloys volumes for the second half of the year. So, really the main driver of increased volumes in Q4 compared to Q3 is the spillover from Q3 to Q4.

Vincent Anderson -- Stifel -- Analyst

Understood. So they all had buyers lined up.

Pedro Larrea Paguaga -- Chief Executive Officer

Most of it. There is some, some volumes that always go to traders. We have also been having shipments to North America, for instance, that are at good price, but carry significant logistic costs. So of course, we are trying to increase our market share and our position in the market that sometimes carry in the beginning additional costs, which have had some impact on the profitability of that business, but that is, I would say business as usual.

Vincent Anderson -- Stifel -- Analyst

That's helpful. Thank you. And just one more from me. Has there been any progress in your discussions with New York State with regards to the power supply agreement for your Niagara Falls plant?

Pedro Larrea Paguaga -- Chief Executive Officer

Not really. I mean. The only -- what we have been doing is a negotiation mostly, which was successful in terms of the fixed costs. The fixed cost we would have had to face for the Niagara facility, while it was idled and we had got a waiver on those costs. That is the only specific I would say positive news we have there.

Vincent Anderson -- Stifel -- Analyst

Okay. Are you still working on negotiating a renewal of your prior power supply agreement?

Pedro Larrea Paguaga -- Chief Executive Officer

We are always negotiating with our suppliers and with the authorities wherever it is required, in Niagara and in other places around the world.

Vincent Anderson -- Stifel -- Analyst

Okay, thank you very much.

Operator

And our next question comes from the line of Martin Englert of Jefferies, your line is now open.

Hi, good day, everyone.

Pedro Larrea Paguaga -- Chief Executive Officer

Hi, Martin.

Operator

I wanted to see if you could maybe touch on the fixed price contracts for silicon metal both respectively within the US as well as the European market and how that maybe compared to more recent spot price trends?

Pedro Larrea Paguaga -- Chief Executive Officer

That's actually a -- that's a good question. I don't have the numbers with me right now but I wouldn't say that in general of fixed price contract that we have been closing both in North America and in Europe are not below of where you see index prices today. So if any, we do have some fixed price contracts that are above current index prices. What I think I have also been mentioning in the past is that this year we do have -- and of course, we are now talking about silicon metal I presume but most of -- one ship we have, seen this year and also in the past couple of years, is a greater proportion of indexed price contracts. So, that I think it's more the trend today and also shorter-term contracts, which means that even if we got some relatively good priced contracts if index continued to go down, then that would reflect in following quarters.

Operator

Thanks, that's helpful. And I want to see -- can you touch on the gross margin trends? So I know some things and you called it out on the call are baked into that on the gross profit line item and then there were some stuff below the gross profit. So I wanted to get a sense of what the gross margins -- what's the expectation as far as like a run rate here near term? If things wouldn't change too much, would we still see something in the 20 percents here?

Pedro Larrea Paguaga -- Chief Executive Officer

Well, as I was saying, I think the right now. For Q1, if you look at trends or prices, and I would say mostly in silicon metal and for silicon index prices both in silicon metal and for silicon have continued to go down. Not a lot in the case of silicon metal, but they have during Q4 I mean and partly also depending on regions at the beginning of Q1. So one would expect with this trend that the selling prices for those two categories of products could actually be lower in Q1 than they have been in Q4. And in terms of volumes, the name of the game I would say today is uncertainty and caution. So, it is clear that a lot of our customers in our view are retrenching and being very cautious in terms of that our order commitments.

Operator

Okay and then just circling back on the gross margins was around like mid 20's I believe for the quarter. Would something like that kind of continue to persist, assuming no notable changes in market dynamics with demand and price levels?

Pedro Larrea Paguaga -- Chief Executive Officer

Well, you know we don't provide those specific guidance with those kind of numbers. But as I was saying, we do see in the market in terms of both prices and demand or apparent demand some erosion. So that that could, that could translate into our into our margins, of course.

Operator

Okay. I appreciate all the color there. Thank you and good luck.

Pedro Larrea Paguaga -- Chief Executive Officer

Thank you, Martin.

Operator

And our next question comes from the line of Sarkis Sherbetchyan of B. Riley FBR. Your line is now open.

Thanks for taking my question here. What's the optimum working capital level and most importantly inventory given the backdrop of the business environment that you described.

Pedro Larrea Paguaga -- Chief Executive Officer

Well, as I was saying, we are still of aiming for further reduction of around $20 million of working capital during the first half of 2019. So, with still think there is some room for improvement, but not really a few points (ph). When you look at the newly acquired assets, at the end of the year we landed at $67 million all of working capital and we had been insisting that that kind of level between $60 million and $70 million is the, I would say, normalized run rate working capital for those facilities.

When you look at the rest of our platform. Working capital has been slightly up in 2018. At the end of 2018 compared to 2017, but that is mainly because we have shifted production from North America with very favorable logistics to South Africa with less favorable logistics and there is just a natural working capital increase that. So all in all, I would say we are today close to normalized working capital levels. At current activity level, we should be seeing some decrease in working capital during 2019. But it is not going to be all terribly significant.

Operator

Understood. And I think you mentioned about $40 million of additional non-core asset sales that you've outlined. Can you maybe talk about what those assets are specifically and if there is any anticipated regulatory hurdles that you need to overcome to monetize those?

Pedro Larrea Paguaga -- Chief Executive Officer

Well, the second part, the answer is no. So, the first part of the of the question, the answer. Of course is Yes, I can provide more detail. So we have always been talking about to 2 specific assets which is hydro facilities in France of around 15 megawatts and we have always been saying that is just as a rule of thumb around $15 million.

Then we have timber funds in South Africa, which we should be also near to closing that would deliver $10 million to $15 million as well. And then the rest is small little things here and there, we are looking at alternatives for our Polish assets and some other smaller things.

All of those again do not require. I take it back in the case of South Africa they have to go through competition antitrust authorities as a rule, always, but we don't foresee any obstacles. There do not have any regulatory hurdles to go through. They just do have administrative hurdles in France, in South Africa and those sometimes are lengthier than we would like to. So we don't think we will be able to close in Q1, but we are certainly aiming to close in Q2.

Operator

Great, that's helpful. I'll take the rest offline. Thank you.

Pedro Larrea Paguaga -- Chief Executive Officer

Thank you Sarkis.

Operator

And I'm not showing any further questions at this time, I would now like to turn the call back to Pedro Larrea for closing remarks.

Pedro Larrea Paguaga -- Chief Executive Officer

Well, thanks all. Thank you everybody. I guess this concludes our Q4 and full year 2018 Earnings Call. Thanks again for your participation and have a great day

Operator

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

Duration: 47 minutes

Call participants:

Pedro Larrea Paguaga -- Chief Executive Officer

Vincent Anderson -- Stifel -- Analyst

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