Q4 2020 GrafTech International Ltd Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the cross check fourth quarter 2020 earnings conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question. Indeed answer session to ask a question. During this session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I would now like to turn the call over to Wendy Watson Vice President Investor Relations. Please go ahead.
Yeah.
Good morning, and welcome to our fourth quarter and full year 2020 conference call on with me today is Dave Rintoul graph Techs, Chief Executive Officer, and Quinn Coburn, our Chief Financial Officer, we are conducting the call from different locations. Today. So please bear with US if you experience minor delays or mixed.
Audio quality.
Turning to our first slide.
As a reminder, some of the matters discussed on this call may include forward looking statements regarding among other things results performance trends and strategies. These statements are based on current expectations and are subject to risks and uncertainties factors that could cause actual results to differ.
For materially from those indicated by forward looking statements are shown here.
The results we discuss today are based on our unaudited results for the year ended December 31st 2020.
We will also discuss certain non-GAAP financial measures and these slides include the relevant non-GAAP reconciliations you can find these slides in the Investor Relations section of our website at Www Dot graph Chegg Dot com a replay of the call will also be available on our website I'll now turn the.
Call over to Dave.
Thank you Wendy.
Good morning, everyone and thank you for joining our fourth quarter and year end 2020 call I Hope you your families and your colleagues are healthy and well.
We will begin as we always do with safety, our 'twenty 'twenty full year total recordable injury rate is 0.51, a 46% increase.
A decrease excuse me improvement from 2019.
Continuing our improvement trend over the last three years health and safety excellence is a core value of grass tech and demonstrates our keen focus on continuous improvement across our organization.
I'm very proud of the diligence and hard work by our global team and the safety area as well as their response to the challenges created by the pandemic over the past year.
Our plants have been diligent and thorough in their COVID-19 controls and associated items. Our team members continue to adhere to exacting protocols and we continued to proactively manage our response to the pandemic.
I want to personally thank the graph tech team for your efforts in 2020.
As we enter 2021, we must remain vigilant to reach our ultimate goal on every employee going home safely every day.
Health and safety are fundamental to our belief that a safe plant is an efficient plant.
And so our global team, we are proud of our culture of continuous improvement and the strong safety metrics, we reported in 2020.
That spirit of continuous improvement comes into other areas, including our 97% on time delivery performance in the fourth quarter.
Okay.
Our focus on efficiency and the highest level of customer service.
Moving to slide four.
As those of you who follow our company know health and safety is not the only place where we begin our conversation each quarter, but it is a cornerstone of our focus on ESG efforts globally.
Quintin I and our senior executives participate in our ESG steering Committee.
Hearing committee oversees our sustainability strategy, which compromises our comprises rather of employee health and safety community relations material sourcing and efficiency energy management greenhouse gas emissions and air quality water and wastewater management and waste managed.
Matt.
The strategy encompasses activities as varied as our community involvement and O treated in Monterrey, Mexico, our capture of energy generated our seadrift Coke facility to create additional sources of electricity for the area and our emission reduction efforts that include the installation of control technology on equipment.
On all of our sites.
Our goals are centered on improving our environmental footprint across our operations.
We are working hard to be good corporate citizens in the communities, where we operate and every day our business decisions and actions are guided by our code of conduct and ethics.
We look forward to continuing our ESG dialogue with you and publishing our second annual sustainability report later this year.
Now turning to slide five.
Late in 2020, we began seeing measured recovery in global steel markets, including improvement in steel pricing and capacity utilization rates.
Fourth quarter global steel production outside of China improved to 211 million tons from 191 million tons in the third quarter. According to the World Steel Association.
Global steel manufacturing utilization rates on the China improved in the fourth quarter to 72% from over just 60% in the third quarter.
Steel industry fundamentals continued to improve with pricing for most types of steel at or near all time highs.
You would say hot roll coil values are currently at approximately 11, 62, 11 day $80 per ton.
And we're up over 75% in the fourth quarter.
Black Sea billet prices were approximately $5 40 to $5 60 per metric ton and we're up over 30% in the fourth quarter.
We expect continued steel industry strength to positively impact the graphite electrode market later in 2021.
As you know our industry lags demand recovery in the steel industry due to our position on the steel producers supply chain.
On the steel industry's capacity utilization improves we first see increasing demand for graphite electrodes, which is then followed by higher pricing for our products.
Each of these movements in the graphite electrodes supply chain is that a lag to the steel producers increasing demand.
In the fourth quarter, our average price from LTA sales of graphite electrodes was approximately $9600 per metric ton.
And our average price for non LTA sales was approximately $4900 per metric ton.
Turning to slide six.
Our commercial team worked hard throughout 2020 to service, our customers and to develop mutually beneficial solutions to challenges they faced during the year, including volume commitments.
Going forward, we remain focused on providing superior services and solutions to our valued customers.
The estimates we announced last November for expected graphite electrode sales volumes under our LTA is have not changed in 2021, we estimate our LTA sales volume will be in the range of 98000 to 108000 metric tons.
'twenty 'twenty two will be in the range of 95000 to 105000 metric tons and for the years 'twenty 'twenty three to 'twenty 'twenty four we estimate LTA sales volumes of 35000 to 45000 metric tons.
I'll now turn the call over to Quinn on Slide 11 on slide seven excuse me to discuss our fourth quarter and full year 2020 financial results Quinn.
Okay. Thanks, Dave were.
We're pleased with our fourth quarter 2020 financial results and the steady sequential improvement we are seeing across our key metrics fourth quarter 2020, net sales were $338 million.
A sequential improvement of 18% from third quarter in.
In the fourth quarter production and sales volumes of graphite electrodes improved sequentially to 36000 metric tons of graphite electrodes produced and 37000 metric tons of graphite electrodes shipped.
Fourth quarter L. P. H shipments were 31000 metric tons and the full year LTA shipments were 113000 metric tons.
Our non LTA sales in the fourth quarter consisted of 6000 metric tons of electrodes, bringing.
Bringing our full year non LTA sales to 22000 metric tons.
Now turning to slide eight.
Despite the challenges of 2020, we were able to deliver solid results for the year with $1 62 of full year EPS.
659 million of adjusted EBITDA and $528 million of free cash flow.
Sequential improvements continued in the fourth quarter of 2020.
With net income of $125 million up 33% from the third quarter and earnings per diluted share of 47 cents up 34% over third quarter EPS.
Fourth quarter, adjusted EBITDA of $176 million and fourth quarter free cash flow of $142 million were both up 15% from the third quarter.
As you will see on slide nine we use the majority of our 2020 free cash flow to repay debt.
As I mentioned previously <unk> continued its strong track record of free cash flow generation in 2020.
With $528 million of free cash flow.
Our 2020 capital allocation included 400 million of debt repayment.
$31 million of dividend payments and $30 million for share repurchases.
Now moving to slide 10.
We significantly strengthened our capital structure in 2020 pursuant to our commitment to reduce debt and maintain balance sheet flexibility.
Over the course of the year, we reduced our debt by $400 million.
In December we issued a 500 million, 4.625% senior secured notes due in 2028.
We used the proceeds to repay a portion of our term loans.
These transactions effectively extended the maturity of $500 million of our long term debt by approximately four years further enhancing our financial flexibility.
At the end of 2020, our total liquidity was approximately $392 million.
<unk> of $145 million of cash and $246 million available under the revolving credit facility.
Now on to slide 11.
In 2020, we anticipate another year of significant cash flow generation.
We expect to use the majority of that cash flow to further reduce debt our focus on the balance sheet and maintaining a strong capital structure provides us with significant financial operational and strategic flexibility.
We also plan to invest in our business both through maintaining our high quality low cost global operating assets and.
And targeting high return operational improvements.
We look to deploy cash into projects designed to reduce operating costs increase productivity and develop products that our customers value.
We expect full year 2021 capital expenditures in the range of $55 million to $65 million.
Now I'll turn it back to Dave on Slide 12.
Thanks Gwen.
<unk> Tech is one of the largest producers of ultra high powered graphite electrodes in the world operating three of the largest global facilities graphite electrodes are mission critical component to the ear you have steel industry and there is no substitute for our product our customers are the lowest cost producers of steel and for some of the law.
Larger recyclers in the world producing steel with 25% of the carbon emissions of traditional integrated steel producers, we have a sustainable and long term competitive advantage from our low cost structure and vertical integration into a key raw material petroleum needle coke.
Our graphite electrodes are highly engineered and require extensive process knowledge to manufacturer.
The services and solutions that graph Tech provides how position both our customers and us for a better future.
Our balance sheet commitment and proven track record of high quality earnings and significant cash flow generation gives us the strength to manage through the industry cycles.
With commitment of our people and our significant competitive advantages. We continue to strongly believe grass tech is well positioned today and over the long term.
That concludes our prepared remarks, and we'll now open the call for questions.
Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad low.
Pause for just a moment to compile the Q&A roster.
And your first question comes from Iran.
Jonathan with RBC capital markets. Your line is open.
Great. Thanks for taking my question good morning, and congratulations on the performance in 'twenty.
I guess first question is could.
Could you just provide an update maybe.
On a spot pricing and.
Electrodes and needle Coke, obviously theres been a nice improvement as you referenced and in steel pricing and utilization rates have you started to see that flow through on the needle coke and electrodes side.
Sure Arun Thanks for your question on your interest in the company.
So as I referenced earlier, there is a lag, but we believe that as we've transferred through the into the first quarter.
Was pricing is bottoming out and volumes have started to pick up so were.
That's why we're optimistic about 2021, we think has those.
And balloon so those prices filter through the year remembering that you know today, we're negotiating orders that are for late delivery in late Q2 on into Q3, we'll start to see the impact of improved improve.
Improved pricing on needle Coke.
Think we're starting to see that.
Similar trend and that was an expectation that as we go through the year on needle Coke pricing will increase also.
Okay, and thanks for that and I guess, a couple of more so.
I guess in the past you had referenced a.
Months of inventory.
Still in the industry on the electrode side, how would you size the the.
Lori position now with your customers I think in the past you'd you'd referenced something in the six month range as debt is that still where you see things now or has that kind of also shortened with the improvement in this in the in the steel utilization rates.
Sure you know one of the reasons you have the lag is because people work down inventory is there.
Before they start placing new orders, obviously as they see shifts to be sure that the market is.
Continuing on that trend. So we are seeing the debt inventory has been worked down.
Significantly and approaching as we.
The stock at this time approach from what we would call a normal amount of inventory and I think we said on the last call that we expected that would be completed by.
Both the end of this quarter.
I think that still is our trajectory I think the inventory.
Build that had taken place Suez has been worked worked down nicely.
Okay, Great and then I.
I guess just looking ahead then.
You've laid out the LTA volumes that you expect for the next couple of years.
What do you expect as far as.
Maybe some of the merchant and spot volumes, how did those evolve through the year.
Do you see a scenario where maybe in 'twenty two you'd get back to kind of your 18 levels of of.
Spot volume sales or how does the how does the spot book evolve for you guys.
So we're optimistic about the spot order book to be sure.
I don't think today that we would be brave enough to be trying to predict what 2022 is going to bring.
But we're certainly optimistic as we go through this current year.
And.
C a.
The sizable increase in the amount of spot business that we do in.
On 2021 compared to what we did in 2000 Twenty's zone.
I think we're.
I'm cautiously optimistic about the.
On the future of course on assuming the continued on.
A rebound that we're seeing in the steel industry remains.
Going forward in.
At this point in time, you know, we don't see any reason to believe anything different.
Okay and then just lastly from me when you think about.
The uses of cash I guess in 'twenty one.
Deleveraging was obviously a focus on 'twenty.
But maybe you are in a slightly better position to return capital to shareholders in 'twenty, one I guess.
Is that is that the case and.
Maybe you can just lay out to you know kind of how you're seeing priorities for cash use at this point.
Yeah, Glenn I'll leave that.
Yep.
So as we noted on our comments Arun I mean first and foremost I think we will focus on making the appropriate investments in our business maintain our high quality assets continue to invest in high return projects.
Thing that would be improve our operations and have a high return and as I mentioned.
We plan on Capex of 55 to 65 million so that would be the first priority.
Second priority just from a philosophical standpoint is we do have an emphasis on a strong balance sheet as we have had for the last couple of years.
I think it's appropriate and in our best interest and in the shareholders' best interest to operate from a position of balance sheet strength.
So we think that gives us financial operational flexibility and is very appropriate for the industry that we're in.
So in 2021.
We will continue to focus on balance sheet strength that would be our number one priority our number one priority for cash will be too.
<unk> on our.
Reducing our debt level.
And as you note.
We've returned cash to shareholders in the past, we continue with our dividend and we have 59 million remaining on our open market share repurchase program. So of course that will continue to be an option.
But as we mentioned our first priority will be balance sheet strength and debt reduction.
Great. Thanks.
Again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad Youre on.
Next question comes from David Gagliano of BMO capital markets. Your line is open.
Alright, great. Thanks for taking my questions I think Arun had hit a lot of them, but I just wanted to follow up on the.
On the capital allocation policy.
Drill down a bit further on the philosophy there.
Last comment because.
Obviously substantial progress in reducing debt levels and what was obviously.
A challenging year.
And one could argue that the balance sheet.
We will be under Levered.
Substantially even especially if we continue to direct the vast majority of the cash.
Coming to debt reduction so is there an optimal level of.
Capital structure for example, net debt to EBITDA, even though on a normalized basis or even on an outright basis.
Comfort level of net debt, whereby you would actually start directing more of that cash to the shareholders as well as the debt.
Debt reduction initiatives.
Yeah sure David Thanks for that.
So the way I would characterize it is we do quite a quite a bit of discussion at the management level at the board level on an ongoing basis as you know as we've discussed before.
And.
With regards to the target debt level, we have been fairly consistent we have been very consistent in communicating and managing to a leverage level of no more than two to two five times currently we're at two two times.
And as I said, it's that target is our maximum range.
And we're comfortable operating below that level as well.
Just as a note for most of 2018 to 2019, we operated at a level of around one seven to one eight so again, we're comfortable operating below that level. Thanks.
The key.
You know decisions with regards to exactly how much debt, we hold will depend on what the future brings in terms of long term contracts.
And also what the business conditions are like on the future but as.
As we've mentioned our key priority will be to maintain that flexibility through the cycle. So we have the financial operational and strategic flexibility that we that.
We believe is in the best interest for the company on the shareholders drop rate.
With.
Okay, and understandable I think though if one did the you know the basic math on.
Kind of a run rate.
On cash generation.
And applied that to the out years.
If graph that shifted to a sort of a even a 50 50.
On capital allocation approach similar to one the one in 2019.
You would be.
Effectively below one five times leverage on a normalized EBITDA of 500 million. So I think that's right. So I'm curious if you know is that normalized EBITDA assumption too high or is there something else that we should be thinking about here.
No Dave I think it's just a I think you're spot on I think we could drop down below again, the two times and be comfortable with that and as I noted we continue on an ongoing basis to discuss at the management and board levels, and we'll continue to assess and when when the.
The right time is to shift to return more cash to shareholders. They wont make that shift at the appropriate time.
Absolutely.
Okay. That's perfect. Thanks, and then just one last one from me short term.
Can you just give us a little more color on your.
Given that we're five weeks into the first quarter and on your volume expectations for the first quarter.
That's it from me.
So thanks David.
I think as we are.
Came out of the fourth quarter.
Which was a good quarter for us we saw some.
He'll late.
L T a improvement as people were trying to clean up some obligations, which we were appreciative of love.
And as we move into the new year.
We start the cycle again.
Again, I think we will see an increase in AR.
Some of the spot business and some we have a few L. Tas.
There were three years, a drop off and I think we've given some some guidance on that so.
I think the we see steady.
The improvement I think quarter over quarter for the year.
And our.
Our optimistic about where wendel, where the quarter or excuse me, where the year will take us usually the first quarter is a bit of an adjustment excuse me as people are trying to sort out where they're going to be so I think.
I don't think Q1 will have oh.
We won't have an increase from where we are where we left off on the fourth quarter, but will grow from there I think quarter over quarter in the second third and fourth quarter.
That's great. Thank you very much.
Your next question comes from Alex Hacking with Citi. Your line is open.
Yeah, Good morning, Dave and Quinn Thanks.
Thanks for taking my question most of them were already asked but I do have a couple firstly you talked about the priority being reinvesting in the business Capex.
It remains relatively relatively low.
And obviously you have excess.
The capacity in our current operations in St Marys or their capital projects that you could see yourself doing at some point in the future that would you know raised capex materially above.
Above 100 million or something like that or.
Or is this kind of capex level, what really we would be looking at for the for the foreseeable future.
Alex I think this is a sustainable level of Capex.
With the best vision, we have today on the market that were <unk>.
Servicing it.
We certainly I can tell you we don't have any visions of anything that would take us to a number that's over 100 as you suggest but.
But we do remain flexible in terms of if there was an opportunity that came up.
So.
That's the way we view it in terms of the ongoing business I think that's a sustainable value but.
Yeah.
We will remain flexible to opportunities that.
Might come along in the future that we're not aware of is that time of this call Quinn anything debt.
No that's absolutely right I think.
In 2018, 2019, we operated sort of at the call it $55 million to $65 million of level of Capex and we view that as a good level of capex for us as we demonstrated this year, we can reduce as needed. But this is a good level allows us to again reinvest continue to keep our.
Assets in very good shape and continue to maintain our low cost position in the marketplace.
Thanks, So much and then the second question and I'm asking this question.
At least 12 months too early but.
Philosophically.
Do you see yourselves wanting to sign long term contracts again.
As we approach the end of.
You know in 2022, when the original five year contracts, we're gonna start rolling off.
Do you see yourself wanting to get into the business of long term contracts again and do you see your customers wanting to do it.
Or is it just simply a matter of price and in fact, some price for customers would do it at some price you would do it in.
I have to say if those two price ranges overlap.
Yeah sure Alex look I think one of the things that we're particularly proud of and I think that.
Provides graph take a leg up because we do offer.
On a variety of ways in which to do business with us and because of our vertical integration. We are the only one that's capable of providing.
The longer term contracts.
In a sustainable way zone, we can we expect to continue as we move forward to offer our customers.
On the opportunity to do longer term arrangements.
All in shorter term, one year or two year type agreements and assume what we call short term and then even spot so I think.
And we have some interesting ideas that we've worked on with a few customers around.
Some degree of index scene, if you will so.
These are all things that we think we bring to the table that R. R.
On.
Good for our customer base in terms of the LTA, specifically, we will continue to provide that availability and I think we'll have more insight into that as we get into <unk>.
2022 of course, but I think that's an instrument that still has a valid place.
And I referenced this before that it's a little it's a little bit like hedging and people hedging their natural gas and electricity and those kinds of things all the time. So we will certainly be offering that tool to our customers and as you said, it's a matter of what price it will be at that point in time on the market. So I think these new tools that others can't offer.
We can provide an advantage to our customers.
Okay. Thanks, so much and congrats on all the success last year.
Particularly on the safety side on generating cash and improving the balance sheet. Thanks.
Thanks Alan.
And there are no further questions queued up at this time I will turn the call back over to David Rintoul for closing remarks.
Thank you Denise.
I'd like to take this opportunity to wish everyone on this call health and safety in the coming months. Thank.
Thank you for your interest in graph Tech and we look forward to speaking with you on the next quarter take care and have a good day. Thank you.
This concludes today's conference call you may now disconnect.
Okay.
Yeah.
Yeah.
On.
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