Q4 2019 Earnings Call
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Every time like you had the conference over to Meritas Bandy, Vice President Investor Relations.
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Alright. Thank you ma'am he could morning I welcome to Graftechs fourth quarter in your in 2019 conference call on the call with me today aircraft text, Chief Executive Officer, David rental and Chief Financial Officer, Quinn Coburn, turning to our first fine.
Never mind or some other matters discussing this call may include forward looking statements regarding among other things results performance and strategies. These statements are based on current expectations and our subject tourists and uncertainties factors that could cause actual results to defer materially from those indicated by forward looking statements are shown here.
Please note the results we discussed today are based on our on audited results for the year ended December 31st 2019, we will also discuss certain nongaap financial measures for which you will find reconciliations in these fights.
Besides are posted on our website at www Dot Graftech dot com and the investors section and for your reference to replay of the cold will also.
Our website now I'm pleased to turn the color for today.
Thank you murder thing good morning, everyone. Thank you for joining us today.
Graftech is a leading provider of highly engineer graphite electrodes services solutions and products to the growing electric arc furnace or steal market.
With low cost high quality, Neil co production and long term contracts in place Graftech continues to generate substantial free cash flow.
Deploy that cash for customer excuse me for shareholder returns and debt repayment.
Turning dislike for health and safety excellence is a core value or graftech in as a fundamental to everything we do.
I'm pleased to report that are 2019 toll recordable injury rate improved to 0.958, 39% improvement from the prior year.
I like to thank the team for all their hard work on safety.
As we enter 2020, we must remain vigilant to reach our ultimate goal of a zero harm that means every worker going home safely every day.
The improvements we've made in safety are also indicative of the work we're doing to drive continuous improvement across the company.
Continue an improvement continuous improvement work extends across the entire business.
No turning dislike five for more on 29 result, 2019 results.
I've Tech delivered favorable queue for 19 results, including quarterly net income of $175 million, which led to full year net income.
$745 million.
The company also generated for your easy but.
Of over 1 billion and free cash flow of over $740 million as we manage softer market conditions.
The world's still association reported 2019 global steel production, excluding China was down slightly compared to the prior year.
Graphite electrode inventories remain elevated for many customers, but were seen early evidence. The destockings is running his course.
We continue to expect graphite electro the inventory dish docking through the first half of the year.
We expect inventories the decline and conditions to improve as we move into the back half of Twentytwenty.
We believe steel manufacturing difficulties are short term trends that will work themselves out over time.
Longer term yeah, you have steelmakers continue to take market share from integrated producers as evidenced by the new electric arc furnace bills were seen in the United States.
And as a reminder, graftech continues to benefit from substance benefit from substantial vertical integration with low cost high quality petroleum needle cold and from our long term contracts.
Turning disliked six.
Graftech has sold about two thirds of our cumulative capacity via long term taker pay contracts.
These contracts provide profitability and visibility of earnings.
As you know certain of our customers have filed for bankruptcy and other customers are experiencing some financial difficulties.
With both developments, we expect to win to impact contractor sales volumes to a degree moving forward.
In response to this along with some variability permitted within certain L.T.A. provisions. We have adjusted are 2020 estimate shipments of volumes.
Now I'll turn it over to claim on slide seven for more detail on our quarterly financial results.
Okay. Thanks, Dave fourth quarter 2019 financial results remain solid despite some softening despite some of the softening market conditions that Dave spoke to earlier.
Fourthquarter net sales of 415 million, we're in line with a second sequential quarter, but down from a year ago, primarily due to lower volumes.
We continue to manage production to be more in line with recent sales volumes, while maintaining costs performance.
During the fourth quarter, we produced and sold 41000 metric tons.
Demand is expected to rebound somewhat in the second half of 2020 in line with a typical steel market cycle and those customers worker inventories.
Approximately 80% of our fourth quarter revenues were from customers with long term agreements.
Long term contract pricing was relatively stable and q. for non L.T.A. pricing was down compared to Q3 2019.
Based on bookings to date, we expect to see additional declines in the first quarter of 2020.
This quarter, we'd discontinued disclosure of a weighted average.
Realize pricing poor competitive reasons.
We will continue to provide the revenue footnote to our financial statements in our L.C.C. filings.
Turning to slide eight for financial results.
Fourthquarter 2019, net income totaled 175 million or 61 cents per diluted share.
Q for 2019 adjusted even.
235 million declined from the prior year period, due to lower sales volumes and higher raw materials costs, specifically, a third party petroleum needle called costs.
Fourth quarter 2019 free cash flow 200 million was roughly in line with the prior year.
As favorable working capital changes offset lower operational results.
As a reminder, Q1 tends to be a relatively low free cash flow quarter to timing of certain annual cash tax payments.
Turn into slide nine.
Graftech has a strong track record or free cash flow generation.
2019, crap generated nearly three quarters of a billion dollars for free cash flow.
In terms of use of cash approximately half our free cash flow or 360 million was returned to shareholders dividends and sharing purchases.
He also repaid 350 million of debt during that time.
Shareholder returns and debt repayment remain the key priority for uses of cash.
Turning the page 10.
Since our I.P.O., we have reduced by 18% and repurchased about 11% of our shares outstanding as of your and.
Given our strong free cash flow generation, we've you share repurchases as a highly a creative use of cash.
In 2020, we expect to continue to focus on shareholder returns and debt repayment.
We plan to use about 50% to 60% of our cash for debt repayment with the balance earmarked for shareholder returns.
Now turn into slide 11.
And 2020, we expect a capital expenditures to be in the 60 to 70 million dollar range in line with 2018 and 2019.
Allowing us to maintain our high quality low cost asset base.
Capital expenditures are focused on high return quick payback project to reduce operating costs increase productivity and develop products that our customers value.
In addition, we will continue to invest in health safety and environmental performance.
Shareholder returns are expected to include primarily our regular quarterly dividend and share a purchases.
Our regular quarterly dividend remains unchanged.
We also have approximately 79 million of our previously announced 100 million open market share repurchase program remaining.
We completed 11 million of the open market share purchases in 2019.
And have repurchased further 10 million so far this year.
The timing of future Shera purchases will depend on share price trading volumes and other market conditions.
We continue to manage our debt levels to align with the visibility that we have to our free cash flow.
We we paid 225 million of debt in the fourth quarter of 2019, and anticipate making further debt repayments in the years to come.
Well now turn it back to Dave on Slide 12.
Thanks, Quinn the long term outlet for your your steelmaking growth remains strong and we believe graftech as well positioned to benefit from that growth.
Electric arc furnaces make up about 30% of global steel production and that share is expected to continue to grow over time.
Electric arc furnaces or advantage relative to integrated mel's due to their flexible cost structure lower capital intensity and better environmental performance.
In addition, graftechs vertical integration into petroleum needle Coke offers a competitive advantage as needle coke demand from electrodes and electric vehicle batteries continue to support long run Neil cold pricing.
With low cost vertical integrated production and a commercial strategy focused on long term value when quality, we expect to continue to generate meaningful cash flow free cash flow and are committed to deploying that cash for shareholder returns and balance sheet improvement.
This concludes our prepare remarks, we will now open the call for questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please press start followed by the number one on your telephone keypad well pause for just a moment compiled the q. and a roster.
[noise]. Our first question comes from David Gagliano with a B.M.O. capital markets. Your line is no how often.
Okay, great. Thanks for taking my questions instead of a few on the.
Current market conditions on the the change in the contract position <unk> <unk>.
<unk> what are the plans for the displaced you know 12000 times for 2020.
So we have the commercial department working hard on a spot opportunities that we think will be available to us.
Okay. So the <unk>, okay. So somewhat related I guess <unk> can you give us the sense as to what your expectations are for full year 2020 sales volumes.
Sure David It's Quinn.
As we indicated last quarter, our our utilization has been down over the past couple of quarters.
And we would continue to expect that utilization to be down in the first half of next year.
As we indicated in our prepared remarks, we do expect a recovery in the second half of the next year.
And one thing I would note as we've noted previously Q1 does tend to be our weakest quarter of the year. So we would anticipate that again this year.
Okay, and then I'll I'll, just a tiny try one more on on the pricing I I understand competitive reasons.
But obviously, it's a little challenging without any kind of visibility on on where the market is other than you know random data points out of China and other places can you give us a sense as to where it's just a range or something that's hilarious you spot prices.
Currently for your market.
Sure, let me speak to that for a second.
Yeah. So as you noted we did stop giving up prices for competitive reasons.
As you know, it's not a practice in our industry, none of our competitors give the pricing.
We'll still published a sales volumes each quarter and we'll also publish you know the other revenue disclosures that we've published in the past.
We mentioned that 80% of our revenue this quarter was from long term agreements, we had about 4% from byproduct on other revenue and the rest was spot in a short term agreements. So that's the information you know that we've typically typically given in our footnotes and will continue to get that information going forward.
With that information you should be able to get a reasonable idea of of where we were.
Okay, what what was the contract price that flowed through.
Sure the contract price was $9900, but was the average price for the year and it was similar for Q. for.
Okay, Great. That's helpful. And then just one last question for me I apologize just the.
Obviously the change in 2020, the the reduction in the contractor positions can can you give us a sense as to how much is left in terms of exposure for the remaining contract book for 2020 2021 2022 at this point.
I think the graph Fung page five I believe it was <unk> gave an indication.
Excuse me page six.
Gave an indication of our estimate for this year and the.
Following two years that are left in the the L.T.A.S too.
Understood I I, well I guess I'm, assuming you're referring to the asked me to take her pay shipments with the bar charts that says 131, 25 and 117.
Oh correct.
Okay, what I'm wondering is.
Much of the how much of those lines you would you say or.
At risk of.
B renegotiated like we just saw.
Well so look we we've estimated.
And that's what the chart indicates.
Where we believe we are at and.
You know, we will continue to monitor the situation going forward, but at this point in time, that's our best estimate.
Where are the this year in the preceding the next two years will bring us.
Okay alternate over thanks.
Okay. Thank you.
Hi next question comes from I like talking with city airline is now open.
Yeah, Yeah, good morning, and thanks for the time I get following up on days question, you know as I sure kind of spot volumes reset into 2020.
<unk> <unk> <unk>, where do you where do you watch the mate <unk>, it's it's going to be in the first quarter.
<unk>, we're in the middle of five now so I imagine you have a pretty good time for that.
Well I think as good as quick reference you know, we saw decline and 2019 and spot price seen that acquainted roughly 25%.
We do expect to see a further decline.
In Q1.
And do do still have optimism that as the inventories rebalance themselves.
Through the first half of the year, we'll see a recovery in the second half of the year and I guess at this point that's about as far as.
We can go.
So I guess can you give us any help quantifying button in the first quarter so that.
We we can effectively model what what revenues are going to be like Oh, you just don't want to discuss further.
Well I think as Quinn referenced we recognize front competitive reasons, what we should and perhaps should not.
Disclose at this point in time, and I think with that in mind you know the guys. We we've provided here in this call about as close as far as we're going to go Alex.
Okay Fair enough I guess another question, but I don't know you might have hot three the but as we think about your third party needle Coke and 20.
Twentytwenty versus 2019.
How how should we think about the cadence a year on year.
Yeah sure as as we discussed before a third party needle coke costs running through a cost of goods sold increased sequentially each quarter throughout the year 2019 in the fourth quarter here, we had another increase about $4 million.
That should be the last time, we see an increase there's a as we've discussed before there's a bit of a delay a couple of quarters.
For the cost to roll for cost of goods sold by the queue for would be that would've been the last of kind of increase going into 2020, we would expect to see some decrease in that.
Q1, I would estimate the decrease to be about 4 million similar to the increase in Q4, so that was hard to turn down a little bit throughout 2020.
And and would you expect it to sequentially decline from one Q. went to cheer cue.
The second huh.
It will sequentially decline, a small amount Alex small amounts yep, okay, just a small my heart.
Okay, I'll turn it over to someone else. Thank you. Thanks for the time appreciate it thanks outdoors. Thank you.
Hi next question comes from I ruined this one of them with I.B.C. capital markets. Your line is now open.
Great. Thanks, good morning.
Thoughts first off I guess on on cue for the even dot level that you achieved again <unk> wasn't you know terribly.
Yeah, just given what we've seen on spot pricing I guess could you just break that out I guess, the but that that you were able to achieve maybe from your long term contracts versus other sales.
Sure, we really don't break down even from but you know by long term contracts versus spot. We did indicate though the revenue 80% of the revenue came from long term contracts and we gave the price of the long term contracts around 9900, and then about 16% of the revenue came from spot in short term.
Tracks, and then 4% from other revenue and byproduct.
So that's the revenue breaks down some of the you know historical information, we've given at or around I.D.O.. You can build up kind of of course have a ton of.
Electrodes with with Seadrift needle Coke versus third party nidoco, but specifically given that breakdown, we we haven't provided.
Okay, and then [noise]. So on that on that last point, then are you still seeing kind of like three to four or so range.
Electrode pricing versus needle coke or.
Is that kind of the the the level, we should think about.
You're talking about the spread over a needle coke correct.
Yeah again in the same in the same way, we we are not giving spock pricing I think we would veer away from giving you know what current spreads are or what our expectations for the spread over needle coke.
And then.
Yeah go ahead, sorry, David.
I was just going to say in the spirit of being transparent on that.
I I I would imagine that you know it's common knowledge to all of the folks on this call that you know markets Oh or fluctuate significantly given the also the situation in the steel industry and that hasn't flown through effective at the end of.
The day too.
Needle coke as well and therefore, given that there's not a just like there's not a a market.
Posted or published electrode price. The same holds true of needle cool. So we know quite well what our cost structure is.
And given our current needle coke inventories.
I think as well as our competitors I would suggest that.
The needle cold market is significantly opaque at this point in time.
Okay.
[noise].
And I guess.
So so a couple of more questions. So on the cash flow side, maybe you could help us understand.
Guess, what level of free what level of cash flow do you expect to generate from the long term contracts.
I mean that you could share with us.
I guess, what the what I would direct you to have ruined his we've given the you know the volumes and pricing for the long term contracts. So you can get the revenue.
If you go back to the time of the I.P.O., we indicated that.
The cost of an electrode using seadrift needle Coke if you want to think about you know the long term contracts using seadrift needle coat.
That's a cost an electrode using c., the needle coke, but around $2800.
The is not going to be a lot different today than it was back then and so you can kind of use that to model. The even from the long term agreements and then you can from there.
Mhm model the cash flow for the long term agreements. Okay. Yeah. That's helpful. And then I guess the other question I had was just you know thinking about the market here.
No you reference kind of D. stocking lasting for a little while is it mainly just driven to you know what what's driving that d. stocking is it kind of you know what you said before as far as 19, you know being a year of.
Or 18 being a year of image rebuilding unwinding some of that in 19, you know or has the actual growth of the market kind of decelerated yeah in your view.
Well certainly as as you remember from previous.
I think quoting me I currently there was inventory bill during the 18 period, when electrodes were difficult to come by and it did create some degree of.
Extra buying in addition to that as we've referenced if you look at the particularly in some regions of the World Europe.
South America or or parts of the world that have from a steel perspective.
19 wasn't particularly good year for them. So the outcome of that is obviously, they're not make me steel, they're not but I'm not using electrodes and consequently, you know that <unk> ads too.
The situation, where <unk> build oelkers. So when you add both of those up you have a higher level of inventory than would normally be in a place and we've begun we have begun to see the reversal of that and that the inventory.
Is beginning to be consumed but as I've said earlier, we do we do expect it to continue on for.
The first half of this year before and not for that.
You know D. stalking has in fact taken place.
Right and just two more click when so so I guess last quarter. Also you mentioned you know bankruptcy amongst some of your customers are very few in number and then you also mentioned potential renegotiation of long term contracts.
You know this quarter <unk> you further mentioned the bankruptcy are you still seeing you know potential renegotiation of any of your long-term contract terms. So I need perhaps just politely modify your choice of words renegotiation I don't believe.
Is the exact word we used what we said last quarter and we remain steadfast with.
<unk> is if a the customers have difficulties we are willing to discuss how we can assist them in getting through those periods. We've had some discussions with a few customers on that front expect that they'll those kind of discussions will be.
On ongoing part of 2020.
So they're not that's not a full born renegotiation per se is it's an agreement in some cases, where.
You know contracts could be extended the best one that's one solution we've given folks so it's really depends on the customer as to how we.
Help them out in that respect our goal of course is to ensure that our shareholders Oh are allowed to.
At the end of the day received the value for those agreements that we're negotiated a few years ago. When I think it's important also to point out that all of those agreements you know on the net net bases. If you look from inception, you know customers are still on a net net basis in a disk.
Current market changes, there's still on pause it place. So those contracts are doing exactly what they intend to do for both parties.
Alright, that's helpful. And then just going back to the needle coke price in cost there's been some volatility there but would you would you consider maybe some of the you know more capital intensive Alas integrated players within the industry to be nearing cash costs.
Reduction at these levels of of needles pricing.
Well look.
You know, our we don't as a rule comment on you know the wellbeing of our competitors I would suggest that your observation would be correct in so much as they're in a more difficult spots and we are given that we have.
By and large control of our own raw material base and bad in a situation in a in a in the current market environment is certainly a very large benefit to graftech.
And then just lastly, I know, it's early but any any impact potentially that you could expect.
From growing a virus I mean could there be a positive impact if some of the nonintegrated lower quality Electra manufacturers in China or not running at full rates or could it be negative because of a weakening on the steel industry <unk>, how do you guys kind of thinking about that.
So so look let me begin by saying that it's unfortunate that this is a virus has a reared its head in China, and we feel bad for the people impacted by that both in China and abroad.
Your observations I would suggest while it's early yet.
Hmm could turn out to be predict of some things that we are aware of developing such as a shortage of containers were we are aware of situations, where you know understandably.
Folks are hesitant to send their containers over to that part of the world for for obvious reasons. So it's possible well wait and see in observe that and we have ensured that all of our customers are well.
Aware of the fact that as we did in 17 and 18, when our customers had difficulties graftech will stand by our customers ensure in the event that they should have some difficulties in in for the reasons, you're suggesting that we will be there too.
Assist and provide them electrodes to make sure that their operations are not impacted.
Okay. Thanks, I'll turn it over.
That's complete their question answer session I will now have to call back over to Mr. In 12 for closing right.
Thank you Lindsay in conclusion, Graftech is a leading provider of highly engineer graphite electroservices solutions and products to the growing yeah Yep steel market.
Company benefits from substantial vertical integration and profitable long term contracts, we have a proven track record of generating cash and returning cash to shareholders.
Again, thank you for your interesting Graftech and we look forward to speaking with you next quarter.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may know disconnect.
Hmm.
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