Phillip Murnane - CFO Javier Lopez Madrid - Executive Chairman Pedro Larrea - CEO

Ian Zaffino - Oppenheimer Martin Englert - Jefferies Vincent Anderson - Stifel Sarkis Sherbetchyan - B.Riley FBR

Good day, ladies and gentlemen, and welcome to the Ferroglobe's Second Quarter 2018 Earnings Investor Conference Call. 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 maybe recorded. I would now like to introduce your host for today's conference, Mr. Phillip Murnane, Chief Financial Officer. Sir, you may begin.

Good morning, and thank you for joining the Ferroglobe second quarter 2018 conference call. I'm going to read a brief statement and then hand the call over to Javier Lopez Madrid, Ferroglobe's Executive Chairman. Statements made by management during this conference call are forward-looking statements and 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 webpage, www.ferroglobe.com. In addition, this discussion includes references to EBITDA, adjusted EBITDA, and adjusted diluted earnings per share, which are non-IFRS measures. Reconciliations of these non-IFRS measures may be found in our most recent SEC filings. Slide 2, please. On the call today, we will review the Q2 results across our core products followed by some consolidated financial highlights. Lastly, we'll provide an update on the company's operating environment and highlight scenarios that have significant potential for long-term growth and value creation. At this time, I will turn the call over to Javier Lopez Madrid, Ferroglobe's Executive Chairman, to provide a few comments. Next slide, please.

Good morning, everyone and thank you for joining us on today's call. Concurrent with our second quarter earnings release announced the Board of Directors approval for our share repurchase program. This unanimous decision by Ferroglobe's Board follows lots of related vote at the recent generation holdings meeting whereby 99.9% of shareholders voted in favor of the share repurchase plan. The Board's decision to authorize the share repurchase program is based on our belief that Ferroglobe's recent share price level do not reflect the company's long-term intrinsic value and reflects strong repurchase opportunity for the company. Let me take a moment to touch on several reasons why we believe that this price levels may not reflect Ferroglobe's real value. One, the last time our shares traded around these level was in September 2016, a period when we were generating significantly lower EBITDA and we were dealing with significantly higher leverage. To put things into perspective, Ferroglobe generated approximately $176 million of adjusted EBITDA in the first half of 2018; this is nearly as much as what the company generated in all of 2017, and 2017 was itself a year in which we had more than doubled EBITDA over the previous one. Moreover, Ferroglobe's leverage which was above 5x at the end of Q2 2016 is currently well under 2x further highlighting the market improvement and our financial well-being in the last two years. Today, our end market across steel, aluminum and chemical sectors are all performing well with demand expected to remain strong; this is quite different from 2016. Number two; operationally our company has competitive advantage in it's ability to service customers globally. There is no overproducer in the world which offers a combination of science, geographic presence, and low cost of production; the resulting operational flexibility positioned on an unrivaled competitive position. This advantage is very important given the current lifecycle [ph] and noise relating to trade work and tariffs, a victory in the steel and aluminum sector. In particular, Ferroglobe is in a prime position to continue to serve two markets; the U.S. and Europe, given our production presence and capacities in both regions. Number three; shifting back to our recent performance. We're happy with our results through the first half of 2018. However, we're far from realizing the full potential of our platform. The manganese alloy business is one area where we expect significant upside. With the recent acquisition of Tier 1 manganese alloys facility, we have doubled our capacity in this product category. However, we generated slightly lower adjusted EBITDA compared to the previous quarter and less than a normalized return for the first half. Pedro and Phil will go into specific reason for this but I will just stress that we have a good quarter overall despite the manganese alloys part of the business contributing [indiscernible]. During the quarter, we deployed funds towards working capital on these plants and remain confident this portion of our business will be a stronger contributor going forward. Lastly, the Board considers longer term value creation drivers including organic growth, M&A, leveraging of our technology and divestitures of non-core assets. In particularly, we recently highlighted a very exciting milestone achieved during testing of photovoltaic cell made using our Ferro black silicon, we're pursuing similar projects lithium ion batteries and follow more broadly [ph]. While it's too early to determine the full potential of this, our success to-date gives us confidence that we can create value in these product areas and we tend to pursue the most promising of these projects forward. For all the foregoing reasons, [indiscernible] considered by the Board in approving the share buyback we collectively see Ferroglobe has the potential to generate a stronger EBITDA in the future and believe our share price will come to reflect this upside. As a result of a prudent usage of our capital to-date is to repurchase Ferroglobe's shares at current valuations, and while the Board supports the share repurchase program, we're equally committed to strike in an optimal balance in a broader capital allocation strategy including further deleveraging and consideration of order value enhancing opportunities as they arrive. In closing, I'd say we're extremely proud of the travels [ph] we have made to-date and look forward to delivering value to our stakeholders. With that, I'd like to turn the call over to Pedro Larrea, Ferroglobe's Chief Executive Officer.

Thank you, Javier and good morning, everyone. Next slide, please. In Q2, Ferroglobe performed as expected confirming the positive fundamentals of the business. We posted a quarterly net profit of $66 million, and an adjusted net profit of $25.7 million in Q2 compared to $33.3 million in the previous quarter. Reported EBITDA in the quarter was $130.9 million, on an adjusted basis, EBITDA in Q2 was $86.3 million, down 3.7% from $89.6 million during the prior quarter. Overall, the differences between the reported and adjusted figures derived from the bargained purchase price gain that has been recorded relating to the manganese alloys plant required earlier this year. In Q2 we achieved topline growth of 4% over the prior quarter, however, higher input cost resulted in adjusted EBITDA margin of 14.8%, a decline of 120 basis points. Next slide, please. So on Slide 6 is the first half of 2018. We have seen a steep change in our financial performance that brings the company back to more normal operating environment. During the first half of 2018, we generated a $175.9 million of adjusted EBITDA reflecting a 135% increase over the same period last year. The adjusted EBITDA generated in the first half of 2018 amounts to 25% of the company's total adjusted EBITDA in 2017, once again highlighting the return of our business to a more stable state. While the year-over-year trend is certainly positive, we believe the full potential of the business is not reflected in this comparison, the continued cost pressures along with line slagging [ph] manganese alloys performance impacted our results in the first half of the year, particularly in Q2. Once these pressures start we tend to benefit meaningfully including through additional contributions from the manganese alloys business. Overall, Ferroglobe's year-over-year performance clearly illustrates a positive dynamic around growth in the underlying business, in turn supported by end user growth. Next slide, please. Our portfolio related sales grew by 4% in Q2 over the prior quarter continuing the steady increases in our top line we have seen in the past two years. For the quarter, we have strongest revenue growth in our manganese alloys business due to the addition of the two acquired plants. Ferro silicon's sales were flat quarter-over-quarter while silicon metal revenues showed a slight decline due to lower overall activity in the industry which we believe was the result of inventory builds at some of our customers in anticipation of [indiscernible]. The ability of our product contribution to change this quarter reinforces the value of our diversified product portfolio. Year-to-date, we have significantly increased volumes and we have significantly improved our average realized selling prices across the portfolio compared to 2017. The high utilization rates and strong demand provides a good dynamic to support this trend line for the business. Next slide, please. Adjusted EBITDA declined 3.7% over the previous quarter with stronger volumes and broadly stable prices in Q2 being offset by an increase in raw materials costs and restore their maintenance. Overall, reportedly adjusted EBITDA was positively impacted by incremental volumes in manganese alloys and silicon-based alloys. In the aggregate these factors contributed an incremental $3 million in adjusted EBITDA quarter-over-quarter. Average selling prices across our core products were marginally lower in those two product categories while realized silicon metal prices were flat. In the aggregate, the realized price evolution across all products consulted in a negative adjusted EBITDA impact of $4 million during the quarter. The biggest contributor to the recent quarter-over-quarter adjusted EBITDA was cost pressures having an aggregate negative impact of $8.9 million. Our industry is paced with ongoing inflationary cost pressures across our products resulting in an adverse impact of approximately $7.5 million quarter-over-quarter. Manganese ore prices, energy prices and electrode cost increases all contributed to this impact. Additionally, several facilities were faced with technical issues and inflections [ph] during the quarter resulting $4 million of additional spends. On the positive side, our overhead costs for the headquarters obviously were reduced by $2.5 million. Foreign exchange volatility driven by a strengthening U.S. dollar had an adverse impact of $1.8 billion. A $6.2 million improvement in the other category include the negative impact of $4 million in the energy business which is still at exceptionally high EBITDA levels of $5.6 million in Q2. It also includes positive contributions from non-core products and from mining. Next slide, please. On the next slide we will be demonstrating a volume trend, earning contributions and market observations for each of our key product families. Turning first to silicon metal on Slide 9, despite some pricing declines in the U.S. and in European indices, Ferroglobe maintained a flat realized average selling price for silicon metal reflecting a well-managed commercial strategy and a good mix of fixed and index price contracts. Our average selling price increased by 0.4% to $2,773 per metric ton. Prices across North America, Europe and China remained well above 2017 levels, during the same period at attractive levels following the trade case moving underpinning the robustness in end-market demand. In Europe, the decline in the index pricing is largely attributable to seasonal lower activity. U.S. pricing has remained at above $1.3 per pound, significantly higher than expectations after the negative outcome of the U.S. [indiscernible]. Overall, the fundamentals of the silicon metal industry remained robust. The silicon, solar and aluminum industries are all -- reflect this [ph] in their respective sectors. The bar chart on the top right hand side of Slide 9 shows the first quarter-over-quarter decline in volumes over the past year, this is primarily attributable to lower sales activity as customers build up stocks in advance over the trade gains outcomes. The cost increases we faced in silicon metal production continue to be largely attributable to electrodes and energy. We've also faced in some extraordinary maintenance related costs in Selma, Polokwane and Montricher facilities which adversely impacted silicon metal EBITDA by $3 million during the quarter. Furthermore, we continue to monitor the economics of the silicon metal business relatively -- relative to Ferrosilicon to evaluate if any further capacity conversions should be implemented [ph]. Next slide, please. Turning to silicon based alloys, overall EBITDA contributions from this area declined due to slightly lower pricing and increased costs. During the quarter, the average selling price decreased by 2.4% to $1,908 per metric ton. Despite this drop, the pricing of Ferrosilicon which accounts for the majority of our silicon based dollar sales remains near historically high levels. Sales volume continues and trying to look steady quarter-over-quarter increases reaching 78,214 metric tons in Q2. We believe the relevant demand drivers will continue to support Ferrosilicon prices at these levels. Globally, the steel market has been robust despite the recent trade war type actions. In particular, Ferroglobe is in a prime position to continue to share two protected markets; the United States implemented Section 232, and Europe enacted safeguard measures fostering local steel production and increasing demand for our products. Additionally, the ongoing environmental crackdown in China has resulted in Ferrosilicon production capacity curtails [ph]. Similar to silicon metal, the silicon-based alloys business was faced with increased costs in the second quarter. Some of these was due to annual overhaul such as our Bridgeport facility. While we also faced higher energy costs in Europe, I would like to stress that around one-thirds of our silicon-based alloys business is in foundry products, these are tailor-made non-commercial products with much weighted stability in prices and where we are making significant progress with 10% growth year-over-year. Next slide, please. So turning to manganese-based alloys. Q2 represented the first full quarter we've recently acquired manganese alloys facilities in France and Norway. As a result, we saw significant increase in sales volumes during the quarter. Despite this increase in volumes, the quarter EBITDA contributions from this product failed to $6.6 million, down 45% from $12.0 million at previous quarter. The manganese missioners [ph] has been under pressure as the prices of these alloys in Europe have dropped in recent months while manganese ore prices remained high, all having an adverse impact in our spreads. The average selling price for manganese alloys decreased during the second quarter by 5.2% to $1,304 per metric ton. Product margins also were affected by increasing manganese ore prices and higher energy costs in Spain. Equipment in manganese ore prices would benefit us in late 2018 and early 2019, and energy prices in Spain should eventually return to more normalized levels. And as we have mentioned for silicon-based alloys, Ferroglobe is in a prime position to continue to serve super-effected [ph] markets where contracted measures are fostering local steel production and increasing demand for our products. With that, I would now like to turn the call back to Phil who will review the financials in some more detail.

Thank you, Pedro. If we can move to Slide 13, please. As you've already heard, sales volumes are up 13.6% to over 271,000 tons in the quarter, and revenues are up to approximately $583 million. Recorded total growth in our manganese alloys business volume due to the addition of the two acquired plant and Ferrosilicon sales at flat of silicon metal revenues sales slightly declined. Adjusted EBITDA of $86.3 million compares favorably with prior quarter and represents 14.6% EBITDA margin, which compared from the current quarter is still well above the same period in 2017. Moving to Slide 14. Overall, working capital increased to $407 million. This quarterly increase actually is $35 million in total working capital build and the two acquired manganese alloys plants. The growth in working capital in both, the quarter and the first half has a cost running impact on both net debt and free cash flow. We've been announcing initiatives to return this working capital during the second half which I will discuss in more detail. Although net capital increased in the period our balance sheet metrics remains strong, and we will continue to focus on deleveraging, we are committed to this target for leverage to be announced in Q1 [ph]. We move to the next slide. As announced previously, the working capital increase in the second quarter includes a $35 million in working capital, the possible [ph] use of working capital of $90 million in the acquired manganese plants. The Q2 impact was primarily driven by normalization of payment terms on manganese ore. Additionally, you see working capital increase in the second quarter for an increase in finished goods inventories across various products. I will also highlight that the increased new AI securitization program has started to capture additional sales volumes. Q3 should see a further increase as the securitization program has been extended by an additional $50 million. Next slide, please. As I noted on the previous slide, the working capital increase in the second quarter for the manganese included pre-cap [ph] increase in working capital requirements to a total of $90 million, primarily driven by normalization of working capital. On Slide 16, going into more detail on the acquisition of the two manganese plants. A $9 million working capital balance at the end of June includes approximately $98 million of inventories of which $43 million belongs to raw materials, and $55 million to finished products inventories. These inventory levels represent 155 days outstanding versus an average of 64 days outstanding for the rest of the company. Even allowing for additional logistics complexity normalized working capital in these assets should stand at $60 million in due course. Accordingly, we expect a $20 million reduction in inventory levels by year end. During Q2, we recognized volume purchase gain for the acquisition of $46 million representing the fair value of net assets from the acquisition less consideration of non-cash and consideration. Fair value for property assets recognized were based on an independent valuation with an immaterial change from recorded book value, cost of working capital and other assets where books pronounced any adjustments. Fair value is a continued consideration for the year net losses was based on an OTV calculation including historic spreads in their frequency, the year-end percentages and system rates [ph]. No gain or loss is recognized in Q1 2018 and the purchase accounting is actually completed. We move to the next slide. As highlighted previously, working capital investments from new plant announcements [ph]. As you can see, this has driven an increase in our overall growth and net gains. We move to the next slide. Looking in more detail on our cash generation; profit for the six months period was $102 million. Adjustments for non-cash items including the bar in purchase gain approximate adjusted to these non-cash items was approximately $178 million. This cash was then invested in operating assets and liabilities, a $158 million, contributing working capital investments in a period of six months. Interest payments of $20 million, income tax payments of $24 million, and payments due to investments of $52 million resulting in a free cash flow from the first half of $77 million. As highlighted in few lines, the working capital increase during the period includes the newly acquired plants as I've noted. The scale establishment would not call or we would turn a normalized period. Regarding the interest payments of $20 million, we are actually considering refinancing the company's 9.38% 2022 Senior Notes, and we expect any new debt to reduce interest expense. And finally, in respect to payments due to investments of $52 million, we would expect recurrent CapEx going forward to be below H1 2018 levels. Given the outflows required during H1 2018, we have implemented various cash generating initiatives including a planned increase from the A/R securitization program which provides additional liquidity of $35 million. As previously highlighted, we will reduce manganese ore inventory levels with a target reduction of $20 million, we are planning on increasing the rotation of finished product inventories in key products and adapting production capacity to commercial commitments which we expect in between $20 million. And finally, we expect to complete non-core assets divestitures during the remainder of the year of about $20 million. We expect to be cash flow positive in the second half of 2018 and we are actively committed to targeting positive free cash flows for the full year. Next slide, please. With a strong Q2 and [indiscernible] 2018 we continue to be committed to conservative capital structure, and we will focus on continued deleveraging on the company's balance sheet. We will continue to balance this commitment with returning value to shareholders and consideration of other investment opportunities. Now, I'd like to turn back to Pedro who will comment on end-market dynamics and an update on growth drivers.

Thank you, Phil. So if we turn to Slide 22; to provide further perspective on the back half of the year, we're having towards the breakdown of our order book across our products. In silicon metal, we had approximately 84% of our order book contracted for the second half as of the close of Q2. The fixed price contract in North America and Europe are above the current index price. From index contract as pure reflecting the positive evolution of the indexes during the first half of the year, so we expect overall index contracts to remain at stable price levels in the coming months. And we feel the overall supply demand tension in the market, as well as increasing input cost provide good reason to expect prices to remain broadly stable around these levels. In silicon-based alloys, we had approximately 87% of the order book contracted for the second half as of the close of Q2. Not only have we lost in fixed price contracts as various acute levels, we have also optimized our production capabilities to maximize the margins in this business. Increased demand in our markets and plant closures in China are both factors that helped the overall tightness in this market. Lastly, in regard to manganese-based alloys we are expecting improvement in this business as the alloys prices have not increased in line with the ore prices in past quarters. Going forward, we expect to spread between the alloys price and ore cost to get back to historical levels, hence the order book for this product categories weighted more towards book business at the index and small volumes going into the end of the year. The sentiment tied into our commercial strategy which is to remain disciplined during periods of sound fundamentals. Should these dynamics change in the future, we maintain the flexibility to use our global production platform to our advantage and can take advantage to optimize our performance accordingly. We believe current price levels in over-crowd markets and specifically in silicon metal and in manganese alloys are resulting in net margins for most producers worldwide. So we see no reason for suppliers to reduce our offered prices and risk negative profitability. Next slide. It is important to note that the medium and long-term outlook for our markets. Ferroglobe's products are sold into our diversified product group of end-markets which are not generally correlated to one another. Given the overall health of the global economy, our core end-markets have all performed well and remained slob [ph]. A recent wave of earnings updates and outlooks by many of our major customers across these verticals reinforces our confidence that demand in the next 18 months should remain healthy. We do not think the evolving trade wars and tariffs which has targeted the steel and aluminum sectors in particular will impact the aggregate demand for steel or aluminum globally. What changes the location of where the aluminum or steel is sourced? We believe that the production of these products in our geographical markets, both America and Europe will remain strong and hence will lead for Ferroglobe's products. Another factor potentially impacting our markets is the Chinese environmental regulatory shutdowns and financial reforms which has impacted the steel, aluminum and chemical industries, as well as the production of metal Ferrosilicon manganese alloys resulting in lower Chinese export trends. With regard to chemicals and silicones, we perceived favorable sentiments among our customers who recently released earnings and expressed view of their end markets going into the back half of the year. The tightness in these markets continues and the incremental supply will probably both catch up to meet demand until 2019. Turning to polysilicon, the outlook beyond 2018 remains positive as the overall growth in this end-market will continue as the rest of the world, ex-China, continues to see an increase in demand for solar panels. Next slide, please. The images on the left side of Page 14 show the construction of our net new joint venture facility in Puertollano, Spain as of two days ago. We remained on-track to complete construction in the coming months. Further, there have been no changes to the budget we initially presented related to the construction costs. On August 14, we issued a press release detailing an important milestone in our continued development of solar grade silicon capacity. Over the past few months, our material was successfully tested by one of the global leaders in the portable-type [ph] industry after it manufactures over 130,000 solar wafers 100% unblended solar-grade silicon produced by us. The results obtained and certified by a well know independent German testing institution confirmed that our solar-grade product compares favorably with chemically-produced polysilicon but it's manufactured using a process that is orders of magnitude less energy intensive and entails much lower environmental impact. These are exciting validations of our proprietary processes and products, not only for ourselves but for our potential customers with whom we are working with. Indeed, we are now commencing discussions with such potential off-takers. Next slide, please. The long-term growth of this business will come in-part from the various projects we are currently developing. We are investing in R&D of products across several verticals by leveraging our silicon metal and manganese alloys expertise. This improves in addition to production of solar-grade silicon photovoltaic [ph] industry, high value powders for industrial use, and the development of next-generation lithium-ion batteries that include our products in both, the cathodes and the anodes. These projects are currently at different stages of development, as we did certain milestones we will consider collaboration with strategic partners to have finance the growth and then accelerate our time-to-market and our commercial scale. Our industry has always been characterized by innovation, and we feel it is critical for our long-term growth to stay ahead of the curve. Developing these types of projects also helps us shift our mix away from commodity grade products which we expect will ultimately group [indiscernible]. Overall, we anticipate that the combination of these efforts should add 15% to 20% to Ferroglobe's topline results in the near to medium-term. In closing, the second quarter confirms a solid first half of 2018 and continues to support a positive evolution of our business. The general sentiment we have shared is one of confidence in our ability to leverage our unique platform and capabilities to maximize the potential in the second half of the year. While demand from our end-market customers remains solid, we need to counter cost pressures to maximize our margins and stay attentive to pricing trends in our product markets in order to act flexibly in the deployment of our production capacity. We standby our decisions in terms of combating furnaces and making investments in the manganese alloy side of the business. These strategic moves are important to the long-term success of the company as they provide increased flexibility. By focusing on continued improvement and operational excellence, we commit to improving our balance sheet further by year end. Furthermore, by staying in the shipment with our commercial strategy and strategic brand we will return value to shareholders. At this time, I would like to open the line to any questions.

[Operator Instructions] Our first question comes from Ian Zaffino with Oppenheimer.

I may have missed this but can you maybe touch on what the inventory levels you're seeing and your customers are for silicon metal? How much were they actually buying ahead of the trade cases, and where are we sort of in their work done with that inventory before I guess you could start realizing like normalized sell-through to those customers? Thanks.

We don't have loyal transparency I must say in inventories at our customers so it is not obvious I'd say what is the exact numbers of inventories at our customers. What I would say is that we have failed during Q2 some slowdown in consumption from some of those customers and our hypothesis is that they have been accumulating some inventories in Q1; that should have been -- I would say depleted during Q2. Also it is important to note that significant customers in North America where I felt because of industrial incidence in their facilities and those are back up. So we see that -- but again, our customers are running pretty much at full capacity and that -- again, inventories should be more or less today at normal levels.

And also, I know you've been a big believer in the recent price decline and silicon metal being driven by availability of Hydro in China. When does this kind of period end and then we'll start to see maybe -- supply coming out of China is coming down and prices in China is going up and kind of the rest of the world than going up as well? What's sort of the timing of that? What should we expect? Thanks.

Again, I would say two things. One is yes, there is typically a bit of a seasonal dip in prices in China this time of the year. It has two sources, one is as you say lower power of prices in some regions of China; the other is actually lower activity in China because of holidays or vacations, and of course, those two factors are seasonal. What is important to stress is that such seasonality this year has happened at prices that are $300 to $400 per ton and higher than a year ago, so that again disclosed a very healthy trend. The other point I have been stressing in the past few weeks is actually our cost inflation in China, the way we see an evolution of the silicon industry in China is one with much higher cost, which provides in our view a good support for prices going forward. So our view of evolution of prices in China and in the rest of the world is again, but there is a [indiscernible] support at more or less current levels of silicon metal and then upside absolute as those seasonal events fade away.

Our next question comes from Martin Englert with Jefferies.

You have seen a number of sequential cost pressures in 2Q about $9 million quarter-on-quarter, how do you view that incrementally going into 3Q?

As you see part of those cost increments are exceptional and have to do with -- again, with exceptional or extraordinary maintenance in some of our facilities for a number of around $4 million on KR [ph] extraordinary costs in Q2. If we look at an overall raw materials costs and the rest of the cost components, right now we see stable trend in costs and eventually some of the factors that have increased cost in Q2 like energy in Spain, as we were saying eventually should be going down. However, we are all I think aware of the volatility in many factors and mainly in commodities, so coal, manganese ore and energy worldwide are -- again, we think are stable at current levels but they are volatile. Electrodes costs which has been a source of lot of debate in the past few quarters are again stabilizing, we need to also underline that we started our electrode production facility in China that is providing some hedge to those increased cost in electrodes and we are there to invest in it, we can extend and expand the reason why we believe that the electrode situation worldwide is actually positive for us at Ferroglobe but as I was saying, we do have something we have hedged with the production in our Bay [ph] facility.

So, net-net orderly [ph] seeing stability in some of the variable cost here and then the maintenance items likely roll-off quarter-on-quarter. Have you considered or are you planning to ideal any facilities due to the continued deterioration at silicon metals and alloy prices when we look at the back half of the year?

Well, I would -- we see continued deterioration of silicon metal prices, so I would say those -- that prices are in the past few weeks have stabilized. I thought we're saying we believe that there is a fully ground, we don't see any reasons why suppliers worldwide would be willing to go into that with profitability, so we see a good support for silicon metal prices worldwide; so that would be my first comment. And second is that -- well, of course we will never be running a facility at losses, so if we see prices going down we have proven in the past that we will in the future be very active in eyeing capacity if we go to negative territory. What we are seriously considering and we are looking at that is switching additional capacity from one product to another, depending on the relative profitability of the different products, and that is one advantage we thought as a company that none of our competitors has got.

Any eminent plans on the furnace changeovers or what -- or maybe how much capacity could possibly changeover from one alloy to another?

Yes, we're now looking at -- in the -- I would say starting September switching one additional furnace in Europe from silicon metal to ferrosilicon; it's one net we would be actually switching back a silicon metal furnace for over silicon to silicon metal but then switching two furnaces from ferrosilicon to silicon metal cheers [ph] for better logistics. So net-net, it would be one additional furnace on ferrosilicon versus silicon metal in Europe. In North America, not yet but we are again closely monitoring demand evolution and price evolution and we would be considering switching one of our facilities, mainly -- maybe Selma, there are two furnaces from silicon metal to ferrosilicon, that is something we have in the drawing board we are analyzing and depending on the evolution, we could do that [ph].

Our next question comes from Vincent Anderson with Stifel.

My first question is on capital allocation over the next 9 to 12 months. The working capital releases in cash generation is encouraging, but when you look at your opportunity to refinance your debt in 1Q '19, how do you plan to balance that with the cash needs of the share repurchase program, whatever additional dividends you expect you maybe able to declare -- can you just kind of what -- lay out how you expect to approach those three buckets over the next -- call it 9 to 12 months?

I'll allow Phil to talk about the refinancing. What I would say is that when we look at second half of this year we see very strong free cash flow generation and we are confident that with that free cash flow generation we can undertake all that we are announcing, so about the share repurchase, the dividends, and still maybe even with all of that we able to slightly reduce our net debt in 2018 as we told [ph]. So our view today is aiming to have positive free cash flow in 2018 as a whole and that allowing us to undertake, again the different commitments of returning value to shareholders. And with regards to where we are with the refinancing and what is the impact on cash notes, Phil?

For the refinancing, we're actively starting the conversations now. I think given the same position of the company, we have lots of options available to us and we'll continue to come back as we proceed with those discussions. We really do expect that any new -- and the type is going to reduce down our interest expense. Further on cash generation over-Hedged 2 [ph], I think we committed to you around $95 million of the silicon initiatives and we're already making progress on the initiatives. So beyond what we do every day, I think there is more being done in Hedge 2 [ph]. And then I think also, if we look forward to next year, then a lot of what's happened in -- during the first half of this year, it is not going to continue on a normal basis. I'd expect normalized CapEx to come down and should be in the range of $70 million to $80 million per year, you will see those impacts we're talking about on interest costs flowing through and you will see -- you won't see the build of working capital as we move forward. So very confident when you add all these things together, we're going to deliver positive cash flow in the second half of the year. We will absolutely be targeting positive free cash flow for the full year and we have committed to those targets we've set on deleveraging for the company and we try to balance that out with returning values to shareholders and looking at those other investment opportunities.

So turning over to manganese alloys; you know, the steel markets have been strong and traditionally there has been decent raw material pass-through from the ore side, historically as you've mentioned. So just what is driving this connect that we continue to see -- is there new capacity that we haven't noticed, is there a volume focused integrated producers such as what we have in Eastern Europe just being kind of a bad actor? What do you attribute this disconnect to?

It's difficult to tell. I would say that there is a strong evidence of correlation historically; so we are confident that this will return to normal. I would say that our alloy prices for long time have been discounting, ore prices going down and that is why I think they have not been reacting more than what we would have expected. Again, there is some signals in China of silicon-manganese futures going up, I think again -- we are very confident that we will see either alloy prices going up and most surely, in the medium term ore prices going down. The ore market is a well-supplied market and we are confident that it will return to more normal levels.

Just hoping to get an update on the KTM initiative; have any efficiency factors been identified and kind of their impact being quantified as to what kind of timeline we could see an impact? What plans that would be rolling out to or at least maybe not planned specifically but product segment -- anything along those lines?

Yes, we are monitoring -- I think that the main improvements and we will size that, we are -- the analytics of sizing that is not always specific, it implies a number of variables, but we are certainly seeing an improvement in energy efficiency across the group and I'm talking mostly in silicon metal, so we certainly have seen a very good impact of sharing best practices across the group instead of just normal technical performance of the furnaces. And we are seeing that happening, so there is a more or less average I think of 400 kilowatt hours per ton improvement in furnace performance overall in the group. So that is significant and we have to run the analytics to make sure what is the economic impact. I think the other area where we have done a lot of work and is being very interesting is electrodes -- and as I was saying in the context of increased electrode costs across the world, we have been very flexible in changing from one technology of electrodes into others, and we have benefited from the expertise we have again, in different technologies and that has proven to be very effective in furnace performance and in economic performance.

[Operator Instructions] Our next question comes from Sarkis Sherbetchyan with B.Riley FBR.

Phil, you mentioned the returning CapEx for the back half of this year below the one-half levels; and I think you gave a run rate number between $70 million and $80 million per year. Can you maybe line up the expectations of CapEx for the back half of this year and how you get to call it $70 million and $80 million on a forward basis?

Just to clarify, I thought you said $70 million to $80 million was on a normalized basis. I think if we go to the second half to see it, clearly we have the sole project which [indiscernible], and we have some confirmed spend there that committed the -- the CapEx there is $13 million.

And I think we have generally said that this year total of the solar project in the year is somewhere around $60 million of -- it wouldn't be surprising that our full-on CapEx in the year is $50 million to $60 million above a normalized level.

And then I think either in the prepared remarks or the slide I saw, the non-core asset divestitures figure of about $20 million. Can you maybe remind us what those pieces relate to? Would it be the Hydro facility that was on sale earlier or would this be some other non-core assets?

We are looking at three tangible alternatives, one is on the closed and which is spending collection [ph] and that has to do with timber farms [ph] in South Africa, a part of that has already been realized in the first half of the year. The remaining is somewhere around $10 million I believe in the second half of the year. The rest is -- one is Hydro assets that are not subject to regulatory approval, the effective size of that is around 20 megawatts, I say effective because the rest of [indiscernible] is Hydro assets with confections [ph] that expire next year, so basically no value. And we think we could get in the range of €20 million to €25 million for that and hopefully, we'd be closing that in the second half of this year. The third alternative we are exploring is maybe a minority stake in our mining operations in South Africa and that is something we are persuading, still don't [indiscernible]. So when we talk about $20 million, I think we maybe being conservative but we want to be conservative when we talk about cash management and balance sheet management. And we think we could -- we believe in the above the $20 million we are talking about in the presentation.

I think you mentioned some evaluation of plants which were from the earlier questions, and I also believe some of the extra maintenance or planned overhaul cost we saw, perhaps may not be recurring. So I guess in that context if you were to do a switch over in a go-forward quarter period, would there be some incremental -- maybe couple of million dollars of extra expenses associated with that or at this point you don't really expect some of those extra expenses; can you maybe help us understand that?

I would say that the plans that are now launched specific and that I talked about in Europe, those are I would say within the normal CapEx on cost trend, so those will -- should not be showing as exceptional. If we do anything in North America, that could have some additional cost during the year that would show as extraordinary cost. So you're right in that. And I don't have a pricing for that because again, that is still in a very preliminary stage of evaluation.

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

Well, that concludes our Q2 earnings call. Thanks again everybody for your participation. We look forward to hearing from you on the next call. And have a great day everybody. Thank you, everyone.

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