Ferroglobe PLC (NASDAQ:GSM)
Q1 2020 Earnings Call
Jun 9, 2020, 9:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good morning, ladies and gentlemen, and welcome to Ferroglobe's First Quarter 2020 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 Beatriz Garcia-Cos, Ferroglobe's Chief Financial Officer. You may begin.
Beatriz Garcia-Cos Muntanola -- Chief Financial Officer
Good morning, everyone, and thank you for joining Ferroglobe's first quarter 2020 conference call. Joining me today are Marco Levi, our Chief Executive Officer; Gaurav Mehta, EPV [Phonetic] of Strategy and Investor Relations; and Jorge Lavin, Group Controller.
Before we get started with our prepared remarks, I'm going to read a brief statement. Please turn to Slide 1 at this time. Statements made by management during this conference call that are forward-looking 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 exhibit to those filings which are available on our website, www.ferroglobe.com.
In addition, this discussion includes reference to EBITDA, adjusted EBITDA, gross debt, net debt and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliation of these non-IFRS measures may be found in our most recent SEC filings.
Next slide, please. During today's call, we will first review the highlights for Q1 as well as our business and operating environment. I then will provide some additional details on our financial performance and key drivers behind our results.
I would now like to turn the call over to Marco Levi, our Chief Executive Officer. Next slide, please.
Marco Levi -- Chief Executive Officer
Thank you, Beatriz, and good morning, afternoon, evening, everyone. Before we get into some specifics for the quarter, I want to mention that priority one is the health and safety of our employees and we have taken significant measures during these unprecedented times to protect them and to ensure a secure work environment.
I am pleased with our crisis management team's execution, given the challenges across our organization from COVID-19 pandemic, and I am proud to report that the quick decisions of the team have resulted in healthy worksites across the group and enabled us to operate with minimal disruption.
After a challenging year in 2019, where our business was adversely affected by a severe industry downturn, 2020 started off unexpectedly with the COVID-19 pandemic, which has negatively impacted many industries and economies around the world. Despite the difficult environment, we have made significant progress in improving our business, both operationally and financially.
During the first quarter, we have expanded margins, improved working capital, increased the cash balance and reduced our net and the gross debt. The financial and operational improvements in Q1 were the result of management's continuous focus on cost management and rightsizing the Company to navigate and succeed in the current environment. There are still many uncertainties in our end markets and as a result of the COVID-19 pandemic. Our efforts will be ongoing as we seek to adapt to the lingering uncertainties created by the pandemic across our value chain.
In our previous conference call, we highlighted our new strategic plan, which was and is being evaluated and designed. With the help of a leading consulting firm, we are undergoing a deep and broad evaluation of our business with a fresh lens. The goal of the project is to conclude with a plan, which not only returns the Company to profitability but analyzes various parts of the business to evaluate how we can fundamentally change our Company, making it stronger, both operationally and financially.
The Q1 results illustrate the team's ability to swiftly implement changes across the various functions of the business. Given the competitive environment in which we operate, we feel there is much more we should be doing to drive value. I will be touching on some specific value drivers we are exploring in a few minutes.
At this time, I'll review our business and current operating environment. Moving ahead to Slide 5, please. First quarter sales were $311 million, down 17% from the prior-year quarter and down 30% from the year-ago period. The decline from last quarter was primarily attributable to lower volumes, which declined 15.6%, partially offset by average selling prices which were up 0.8%.
Although there was a continued weakness in demand across our business, the drop in volumes during Q1 was largely attributable to the operational changes we undertook going into the year as we decided to remain conservative on production in order to avoid any inventory build in the face of demand side uncertainties. Hence, the lower sales volumes are primarily due to the significantly smaller operating footprint. This was the first quarter where we saw a sequential increase in aggregate prices since the first quarter 2018.
The net loss for the first quarter was $52 million [Phonetic], compared to a net loss of $72 million [Phonetic] in the prior quarter. The decline in the net loss in Q1 was primarily due to lower input costs and the successful implementation of our cost-cutting initiative.
And lastly, our adjusted EBITDA was negative $17.6 million in the first quarter, which compares to negative $30.4 million in the prior quarter. Once again, this improvement was driven by lower input costs, positive results from our key technical metric initiatives and other cost-cutting initiatives at the plant and corporate office levels.
Overall, Q1 was marked by stabilization of pricing and continued volume declines offset by the significant effort on cost improvement. As a result, we saw improvement in our bottom line results despite lower sales. Further, we continued to deliver on improving our working capital position. We ended Q1 with working capital of $348 million, down from $474 million of working capital at the end of 2019. Of the $126 million improvement in working capital, $67 million was due to further reduction of inventory.
During the quarter, we reduced both our gross debt and net debt. Gross debt declined in Q1 to $442 million, down $39 million from the prior quarter. The net debt was reduced by $59 million with a balance of $299 million as of March 31, 2020.
In Q1, we also improved our cash balance, ending the quarter with $144 million of total cash, up from $123 million in the prior quarter. This includes our cash and cash equivalents, restricted cash and consolidation of the accounts receivable securitization program.
Next slide, please. On the next three slides, we will discuss pricing and volume trends, earning contributions and market observations for each of our key products. Turning first to silicon metal on Slide 6. Ferroglobe's realized average selling price for silicon metal was $2,212 per metric tons, up 2.2% from $2,164 in the prior quarter. The index price in U.S. was up 2%, while the European index increased 13% during first quarter.
Despite weaker overall demand in the U.S. and Europe, prices trended positively due to the action taken by the industry to curtail capacity in an effort to bring supply in line with weakening demand. Actions by several producers, particularly toward 2019 year-end in Europe, resulted in steady price increases during Q1.
The volume trends chart on the top right of Slide 6, shows a decline in silicon metal shipments of 16% over the previous quarter. The decline in volume was the result of capacity curtailment across our production footprint as well as end-market demand slowdown. Aluminum-related demand, which is largely tied to auto sales, had been weak in -- both in the U.S. and in Europe. This has been partially offset by strength in chemical sector demand.
Demand for silicon going toward the photovoltaic market continues to suffer as a result of lower solar production at current photovoltaic price levels. Silicon metal EBITDA improved from the loss of $2.6 million in quarter four to positive $3.5 million in quarter one, driven primarily by cost improvements and volume, somewhat offset by price. The change in the product mix drove $2.1 million positive impact from volumes as we focused on chemical sales.
The biggest contributor to our improved silicon metal performance was a $6.3 million improvement in cost, which was driven by KTM-related initiatives, raw materials mix and lower input costs. As a reminder, there is a lag in how the index pricing gets reflected in some of our contracts. The increase in the index prices during Q1 positively impacts a portion of our contracted volumes in Q2.
Next slide, please. Turning to silicon-based alloys on Slide 7. During the quarter, the average selling price increased by 3.5% to $1,474 per metric ton, up from $1,424 per metric ton in the prior quarter. The increase in our silicon-based alloys business is primarily due to the strength in ferrosilicon pricing in the U.S. and Europe. Despite pressures from lower steel activity, the industry benefited from positive supply/demand tension during the quarter, which has resulted in the upward pricing trend seen across both indexes on the top left hand of the slide. Ferroglobe's average realized price for silicon-based alloys benefited from our higher-margin specialty ferroalloys products, which accounted for approximately 50% of the shipments during the first quarter.
Silicon-based alloys volume declined 6% in Q1 to approximately 61,000 metric tons, a deceleration over the prior two quarters. The first quarter decline is attributable to weaker steel and foundry demand in both U.S. and Europe, driven primarily by weaknesses in the global automotive end-market. EBITDA from our silicon-based alloys segment improved from $600,000 in quarter four to $2.3 million in Q1, driven by volume, cost and pricing improvement.
Cost improvements contributed $700,000, which was a result of shifting production to our lower cost plants. We realized a $900,000 improvement from volumes, which is attributable to product mix improvement in Europe. At the moment, index pricing is down slightly in Q2 as a result of lower demand. However, continued production cuts across the industry should help maintain some stability.
Next slide, please. Turning now to manganese-based alloys. During the first quarter, the average selling price decreased by approximately 8% to $973 per metric ton, down from $1,054 per metric ton in the fourth quarter of 2019. This decline in our realized price for the quarter is the result of a lag relatively to the index and lower sales into North America, where prices have recently been higher.
Volumes declined 23% in the first quarter to approximately 74,000 metric tons, due to capacity curtailment at year-end as well as lower sales in the U.S. Manganese-based alloys' EBITDA was essentially flat at negative $2.5 million in Q1. Lower cost of manganese ore provided a benefit, offset by pricing and costs. A decline in manganese ore prices provided an $8 million benefit to EBITDA, partially offset by $2 million in finished good writedowns. Index pricing for manganese-based alloys increased by approximately 15% in the first quarter, which we expect to have a positive impact in Q2.
Next slide. And finally, referring to Slide 9, I'll elaborate on my earlier comments relating to a new strategic plan, which is currently being developed. Since joining the Company, I have spent a lot of time with management at various levels to get a better feel for the organization and how we conduct business. These meetings are enforced by initial view that there is a significant room for process improvement throughout the organization, which will drive efficiency and enhance the economics of the business from both the revenue and cost sides.
The decision to work with an outside firm was based on the need to put a formal structure and time frame around the process to arrive at an actionable plan. The illustration on Slide 9 highlights the key value creation levers we are currently exploring as part of this project. Starting on the left hand of the slide, we are conducting a deep study centered on commercial excellence and believe there are several improvements that can be made to improve our top line. This includes the way we go-to-market, how we manage and develop customer relationships and the pricing models employed to highlight a few specific areas.
The second area of focus centers on optimization of costs and capital management. Ferroglobe currently has a broad physical asset footprint, which provides a number of competitive advantages, but also adds complexity in managing the business. We have to take a hard look at the competitive environment and assess potential risks in order to identify where Ferroglobe can remain most competitive.
Along these lines is the need to continue our initiatives centered on continuous plant-level improvement. The key technical metrics program has produced positive results for us and we have seen a step change in productivity and cost improvement at specific plants as a result of the program. At the moment, we are doing a systematic analysis on a plant-by-plant basis to identify the next areas of such initiatives.
SG&A and overhead costs have been an area of focus we have discussed on prior calls. As we get deeper into this project, we have stronger conviction that there is further optimization yet to be implemented beyond cost-cutting at corporate headquarters. To date, we are focused on homogenizing the plants from a technical perspective, but there appears to be room to standardize the organization at the current level.
Another area we are studying is procurement. By centralizing the purchasing, we see an opportunity to cut costs, improve logistics and have greater control and visibility on our spending. This in part ties in with our continued -- our effort on improving working capital. While we have made progress reducing working capital recently, there is an additional room to enhance our working capital and cash conversion cycle. As part of this lever, we seek to introduce new processes and have greater accountability to ensure this is being measured, managed and optimized throughout the organization.
And lastly, we recognize that changing the way we conduct our business day-to-day needs to be well thought out and managed. That's why we have to study the existing organization from a personnel and process standpoint, and potentially recreate parts of the organizational structure to drive and support the final set of initiatives from this project.
For me, this project is critical to the future success of Ferroglobe. It is something which I personally called for when joining the Company and it has been one of my top priorities since joining. Clearly, the financial results of the past few years has fallen short of our expectations and are far from the full potential of this business. By taking the time to methodically dissect and analyze our business, we are learning a lot and realizing it's time to make some changes. I look forward to reporting back to you in due course with our final conclusions and strategic action plan.
At this time, I will turn the call over to Beatriz to review the financial results in more detail.
Beatriz Garcia-Cos Muntanola -- Chief Financial Officer
Thank you, Marco. Beginning with Slide 11, sales of $311 million during Q1 were 17% lower than the $377 million of sales in the prior quarter. This decrease in sales was driven by a 15.6% decline in sales volumes, partially offset by 0.8% increase [Phonetic] in the average selling prices.
During the quarter, our cost of sales declined by 23%, resulting in a gross margin, excluding D&A, of 22%. This was an improvement of 5.4% over the prior quarter, where our comparable gross margin was 16%. The cost of sales improvement in Q1 was primarily attributable to improvements in raw material product mix and lower input prices, including raw materials.
Other operating expenses decreased approximately $19 million to $40 million in Q1, a decline of 32%. The decline in other operating expenses was driven by lower volumes in Q1 as well as a number of one-off items, which impacted Q4 such as penalties relating to significant energy contracting funds as we temporarily shut down some plants there.
The Q1 operating loss before adjustments was $48.2 million, an improvement from $78.1 million in the prior quarter, driven by lower cost of sales, the staff costs and other operating expenses, partially offset by lower operating income.
Adjusted EBITDA was negative $17.6 million, an improvement from negative $30.4 million in Q4. Adjusted EBITDA margin improved by 2.4% to minus 6% in Q1. The Slide 12, please. The sequential improvement in adjusted EBITDA quarter-over-quarter is attributable to a few key factors. Cost improvement contributed $13 million of the improvement, while atypical and other items contributed $3.7 million, followed by a positive contribution from volume of $2.9 million.
The cost improvement impact is primarily attributed to our raw material mix, coupled with a decrease in pricing of key inputs, including energy. The benefit of the raw material mix is the result of the KTM program and the technical adjustments we have been making at the furnace level, which enable us to use different grades of raw materials without compromising the quality of the end product.
The $3.7 million impact from atypical is due to the fact that we had some expenses in Q4 relating to plant shutdowns and pension valuations. Partially offsetting this is a negative movement in the contribution of several byproducts, including silica fume and fines. The $2.9 million of positive impact from volumes is due to the reallocation of production away from higher cost facilities.
During the quarter, pricing had an adverse impact of $8.3 million and this is primarily attributable to our manganese business, where the lag results in lower average realized prices during the quarter as expected on top of lower volumes.
Next slide, please. Turning now on to Slide 13, I will review our balance sheet in greater detail, where we made improvements to our debt, available cash and working capital. With a challenging market environment, these improvements are critical for our business. Cash and restricted cash improved to $144.5 million at the end of Q1, up from $123.2 million in the prior quarter.
Gross debt decreased by approximately $38 million in Q1 to $443 million, while net debt decreased by $55 million over the quarter ending at $299 million as of March 31.
Total assets were approximately $1.5 billion, down from $1.7 billion in the prior quarter. Ferroglobe's working capital improved by $126 million in the first quarter, primarily as a result of lower inventory and accounts receivables.
Next slide, please. We generated a strong operating cash flow in Q1, driven by improvements in working capital, primarily accounts receivable and inventory, which contribute a total of $155 million to our cash flow generation for the quarter. The cash flow from operating activities in Q1 was $89.6 million, an increase of $50 million from $39.2 million in Q4. Cash flow from investing activities was negative $4.4 million. Payments for maintenance capex were contained at the level of $4.6 million.
And lastly, cash flow from financing activities was negative $64 million for the quarter. This is primarily due to the net impact of loan repayments of $45 million in our semi-annual coupon on the outstanding senior notes. In aggregate, we had a free cash flow of $85 million during Q1.
Next slide, please. Now turning into Slide 15. We reduced working capital by $126 million during the first quarter. This reduction was primarily driven by a $67 million work down in inventory and a decrease in accounts receivable of $91 million, partially offset by a $32 million decrease in accounts payable.
As Marco noted in his opening remarks, we have chosen to take a conservative operational view. We wanted a smaller operating platform in order to avoid a build in inventory, given the many uncertainties in our end-market demand. This approach has enabled us to continue our work down of inventory far exceeding our initial target.
Turning into the chart on the right. Our cash balance at the end of Q1 was $144 million, compared to $123 million in the prior quarter. The Q1 balance includes cash and cash equivalents of $116.3 million and non-current restricted cash and cash equivalents of $28.2 million. Cash and cash equivalents includes the cash balance of the accounts receivable securitization program of $38.7 million.
Next slide, please. During the quarter, both our gross debt and net decreased. The decrease in our gross debt is attributable to a $20 million reduction in our North American ABL balance, the elimination of the cross-currency swap reducing debt by $9.6 million, and the decrease in accrued coupon interest. For a full summary of our gross debt at March 31, please refer to Slide 22 in the appendix.
Next slide, please. Lastly, with uncertainty created by COVID-19 pandemic, there is a limited visibility as to its eventual impact on our business. We feel it's prudent for the Company to explore all financing options to bolster its cash position further, and we are looking at a few alternatives. Governments around the world have designed different schemes to assist companies during this unprecedented time. We are currently exploring a few of these options in the countries where we operate and where we think there's a good chance to secure funding at attractive rate and on favorable terms.
While we are further along in some jurisdictions relative to others, we are not in a position to comment on the specifics at this time. Additionally, we are exploring more traditional means of financing. As we have highlighted in the past, we have secured lien capacity under our existing indebtedness and significant asset value which remains unencumbered.
Overall, we remain confident in our ability to secure additional funding, which will augment the cash which we expect to generate from the business. While there is uncertainty in our business, stemming from COVID-19, we continuously conduct the scenario testing and feel our current cash should be sufficient to carry us to the recovery we anticipate.
With that, I will ask the operator to open the line for questions.
Questions and Answers:
Thank you. [Operator Instructions] Okay. Ladies and gentlemen, it's my pleasure to turn the call back to Marco Levi for his final remarks.
Marco Levi -- Chief Executive Officer
Thank you, Carmen. That concludes our first quarter 2020 earnings call. As I mentioned at the beginning of the call, this quarter's performance is certainly trending in the right direction. However, we have much more work to do to return to profitability.
I am confident that the actions we are currently undertaking, along with the new initiatives which are being developed as part of our strategic plan, will help us get there and ensure a strong and more competitive Ferroglobe. The work we are doing evaluating all parts of our organization is interesting and available, and we look forward to updating you on our new strategic plan when we conclude our work.
Thanks again for your participation. We look forward to hearing from you on the next call. Have a great day.
[Operator Closing Remarks]
Duration: 34 minutes
Beatriz Garcia-Cos Muntanola -- Chief Financial Officer
Marco Levi -- Chief Executive Officer