AK Steel Holding (AKS) Q4 2018 Earnings Conference Call Transcript

AK Steel Holding (AKS)
Q4 2018 Earnings Conference Call
Jan. 29, 2019 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to AK Steel's fourth-quarter and full-year 2018 financial results conference call. [Operator instructions] As a reminder, this conference call is being recorded. At this time, I'll turn the conference call over to Doug Mitterholzer, general manager of investor relations and assistant treasurer. Please go ahead, sir.

Doug Mitterholzer -- General Manager of Investor Relations and Assistant Treasurer

Thank you, Candice, and good morning, everyone. I also would like to welcome you to AK Steel's conference call to review our fourth-quarter and full-year 2018 financial and operating results. With us today are Roger Newport, our chief executive officer; Kirk Reich, president and chief operating officer; and Jaime Vasquez, our vice president of Finance and chief financial officer. In a moment, Roger will offer his comments on our business and overall market conditions.

Following Roger's remarks, Kirk will provide an update on our progress on some of the exciting projects and initiatives under way at AK Steel. Following Kirk's remarks, Jaime will review our fourth-quarter financial results, and together, we'll field your questions. Please note that during today's call, we will refer to presentation materials, which were posted on AK Steel's website this morning. If you've connected to this call via the webcast, you should see those slides on your screen.

For those of you who have dialed in, the presentation slides are available at our website, aksteel.com, under the Investors tab, where you can then click on Investor Presentations. We would encourage you to refer to that information during this call. However, it will also remain posted on our website subsequent to today's call. As noted on Slide 3 in the presentation, our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

Included among those forward-looking statements will be any comments concerning our expectations as to items such as future shipments, product mix, prices, costs, operating profit, EBITDA or liquidity. Please note that our actual results may differ materially from what is contained in the forward-looking statements provided during this call. Information concerning factors that could cause such material differences and results is contained in our earnings release issued last evening. Except as required by law, the company disclaims any obligation to update any forward-looking statements to reflect future developments or events.

To the extent that we refer to material information that includes non-GAAP financial measures, the reconciliation information required by Reg G is available on the company's website at www.aksteel.com. With that, here is Roger with his comments. Roger?

Roger Newport -- Chief Executive Officer

Thank you, Doug. Good morning, and thanks for joining us on our call. I am pleased with our fourth-quarter results, which demonstrate another step forward in executing our strategy. We generated net income of $33.5 million.

Excluding a pension settlement charge related to another successful de-risking transaction, we generated net income of $48 million or $0.16 per share for the quarter. For the full year of 2018, we generated net income of $200.5 million, excluding the pension settlement charge, our best year in a decade. Our adjusted EBITDA of $135.5 million for the fourth quarter and $563 million for the full year was again our best year in a decade. These results demonstrate that our strategy is indeed working well and that we are making good on the commitment to significantly improve the performance of our company.

In just a few moments, Jaime will provide further details and highlights concerning our Q4 and full-year results. Moving to Slide 6, throughout all that we do, the safety of our employees is our highest priority and a core foundation of operating our business. We continue to lead the industry in safety performance by a fairly wide margin in 2018. Turning to Slide 7, we're making great strides in our ongoing efforts to introduce new products in steel solutions into the marketplace.

Our Research and Innovation team is working collaboratively with numerous automotive OEM customers to incorporate our third-generation advanced high-strength steels, namely NEXMET 1000 and NEXMET 1200, into their current and future vehicle designs. These materials feature a unique combination of high strength and high formability, which is made possible through our prior investments made at our facility in Dearborn, Michigan. Our recently acquired Precision Partners subsidiary is delivering our new product introductions and further developments with our key automotive OEM customers, which Kirk will comment on shortly. And our AK Tube subsidiary posted their highest ever annual earnings in 2018, a tremendous accomplishment for which the entire AK Tube family deserves to be congratulated, but we're certainly not stopping here and additional actions will be taken in 2019 to further enhance our long-term performance.

One of these actions we announced yesterday afternoon involves the plant closure of our largely idled Ashland Works facility by the end of this year. This includes not only the hardened operations, which have been idle since late 2015, but also the single remaining coating line at Ashland Works that remained operational. We have carefully weighed the long-term operation of Ashland Works in the context of our strategy to focus on value-added, more innovative products, along with recent trade actions. To be clear, this administration's strong actions in addressing unfair global trade issues, including the Section 232 tariffs, has strengthened our industry.

However, global overcapacity, particularly from China, remains a systemic problem. This, along with recent U.S. announcements on new steelmaking capacity and the restart of existing mills, will create more competition in the commodity steels markets in the United States. Our strategic actions continue to focus on enhancing our competitive cost position in selling in the products that generate an adequate return.

Thus, in this environment, we ultimately concluded that a restart of the Ashland hardened operations would not enhance our earnings profile or provide an adequate return to our investors over the long term. It is also necessary to transition the Ashland coating line work to other existing units with excess capacity, namely at our Indiana, Ohio and Michigan facilities. This was a very difficult decision, particularly given the impact on our Ashland Works employees, their families in the local community. As the operations wind down later this year, we will encourage and assist our Ashland employees to take advantage of both the existing and upcoming job opportunities at our other facilities.

Since we idled our hardened operations three years ago, many of our Ashland employees accept their positions at other AK Steel locations. In the end, this action is necessary step to continue to improve our competitive cost position. We expect to realize at least $40 million of annual run rate savings by eliminating current idling expenses and lowering production costs through the increased utilization of our other coating facilities in the United States. Jaime will comment shortly on the near-term financial implications of our decision to close the mostly idled Ashland Works.

We have taken numerous actions over the last several years to increase our profitability, improve our competitive cost position, as shown on Slide 9. We made substantial investments in our operations, invested over $1 billion in acquisitions to grow our business, it enabled us to compete over the long run while also expanding in our downstream businesses. Our actions have also positioned us well to utilize our free cash flow to reinvest in our more cost-effective steelmaking and downstream operations. As we move into 2019, we plan to invest another $170 million to $190 million in these operations in addition to our maintenance spending.

Turning to Slide 10, I would now like to discuss what we're seeing in the markets that we serve. Our core automotive market just posted another very solid year, with North American light vehicle production is finishing right around 17 million units. The last five years are the highest ever achieved in the automotive industry. Another positive is vehicle inventories remain at good levels as automakers ended the fourth quarter with a 61-day supply of dealer inventory, which is down approximately four days from the 65 days at the end of the third quarter.

Although we're presently predicting a modest decline of approximately 1% in North American automotive build rates in 2019, we believe that this year will be another very strong year by historical standards. Likewise, we continue to see strength in the areas of residential and commercial construction. It is estimated that the new housing start finish the year at approximately 1.6 million units, which represents an increase of 4% from the prior year and the projections for 2019 represent further growth to approximately 1.29 billion units. In inventory, the steel distributors remain well balanced with seasonally adjusted inventories currently estimated at 2.4 months for carbon products and 2.9 months for stainless products.

In short, demand for our products remain solid overall and market conditions remain favorable. Now, I would like to turn the call over to Kirk to provide you an update on our customer contract negotiations, our steel operation, our downstream business progress and the exciting developments on the new products front. Kirk?

Kirk Reich -- Chief Operating Officer

Thanks, Roger. I'd like to touch on a few items, beginning with some of our strategic capital investments. We continue to make strategic capital investments at multiple facilities to improve our operational efficiencies and lower our costs. Slide 12 shows a few examples of these types of projects.

First, we plan to invest nearly $60 million at our Dearborn, Michigan facility this fall with upgrades to our blast furnace and steel shop. We'll also invest $6 million in our Rockport, Indiana facility to begin installation of a more modern, environmentally friendly and lower-cost pickling process. In Mansfield, Ohio, we will complete a $13 million investment in the steel casting area, which will allow us to expand the types of steel we can produce in that facility and further reduce our overall costs. Our Coshocton, Ohio stainless steel finishing facility, we will invest $11 million in a new state-of-the-art coil buildup line, which will reduce costs and improve throughput, while enhancing the quality of the products manufactured.

Of our 2019 capital budget, approximately one third of the money we planned to spend involve improvements, such as these, which align with our strategy to fundamentally transform our competitive cost position and grow our downstream operations. In addition to the major outage at our Dearborn blast furnace and steel shop scheduled for later in 2019, which I referenced a little while ago, we have pulled up some work in Dearborn due to an event in late December at one of our two steelmaking vessels. We have steel penetrate through the brick lining and shell and this resulted in us choosing the pull-forward, a vessel reline, which had previously been scheduled for the fall of 2019. Although there will be no disruption in shipments to contract customers, the repairs in vessel reline will impact our operations in the first quarter and will result in reduced spot market shipments by approximately 35,000 tons.

The work will be completed in early February, and we are taking the necessary steps to make up for these lost tons later in the year. Now turning to Slide 13, as an update on our downstream businesses, we realized increased EBITDA performance at Precision Partners, AK Tube and our joint venture Combined Metals in 2018. As Roger stated, our AK Tube team set a new annual record level for EBITDA in 2018. Precision Partners began to see meaningful improvement in November and December at one facility that had to address the underperforming portion of their business portfolio, which we previously discussed.

Also, at Precision Partners, we were awarded a record level of future business in 2018. As shown on Slide 14, a major OEM has contracted with us to supply a body side outer subassembly, consisting also of a single-piece, hot-stamped door ring. Likewise, Precision Partners was awarded a second single-piece, hot-stamped door ring on another vehicle platform by key tier one supplier. Taking together, the two awards represent approximately $50 million of annual stamping and assembly revenue, in addition to a large onetime tooling job.

This business will ramp up beginning in 2020, and they've already broken ground on a capital expansion to house this work adjacent to one of our existing facilities. This is the type of subassembly and major stamping job that only two other companies in North America have the technical capabilities to produce. Precision Partners has leveraged its hard-stamped tooling leadership in addition to their innovative hot-stamped process to strategically open the door to new opportunities with OEMs. It is these types of significant awards to produce differentiated products, along with our technical expertise that excites us about the significant growth opportunities at Precision Partners.

Moving forward into 2019, we expect to realize further improvements in EBITDA performance at AK Tube, Precision Partners and Combined Metals. This will be made possible through a variety of actions, which will include increased utilization rates, expansion into new markets and growth of our advanced high-strength steel products. Finally, I'd like to provide you with an update on our recent steel customer contract renewals. We have now concluded negotiations covering the majority of our carbon automotive contracts, and we were successful of securing higher prices.

This will result in both expanded margins and improved positioning with regards to adoption of new products. Likewise, we've wrapped up our specialty steel contracts and expect to generate higher overall margins in these segments as well. However, these gains in our contract book of business could be offset to some degree by our book of carbon spot or non-automotive carbon contract business. In total, approximately 30% of our shipments may see some price softening in 2019 depending upon the direction of future carbon spot market prices.

With that, I'll turn the call over to Jaime. Jaime?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Thank you, Kirk. Overall, we had a solid financial performance in 2018, generating our highest level of adjusted EBITDA in more than 10 years and meaningfully reducing debt and pension liabilities. For the fourth quarter, adjusted EBITDA was $135.5 million and essentially in line with our guidance. Net income was $33.5 million or $0.11 per diluted share and adjusting for the pension settlement charge, which I'll talk about in a few minutes, adjusted net income was $48 million or $0.16 per diluted share.

To review our results in more detail, let me begin with shipments and sales using Slide 17 as a backdrop. For the fourth quarter, flat-rolled steel shipments of 1.39 million tons, were up nearly 4% from the fourth quarter a year ago, although down to about 2.5% from the third quarter. Prior shipments into the distributor market drove the year-over-year increase, although sequential decline, primarily reflected the impact of lower seasonal demand and shipments to both the automotive and distributor markets. We do anticipate that in 2019, demand will be similar to 2018 across most of our markets, which I'll talk about in a few minutes.

Sales were $1.7 billion in the fourth quarter and $182 million or 12% higher than a year ago and about 3% lower in the previous quarter. Large year-over-year sales increase was driven by a stronger pricing environment, including carbon hot-rolled spot market pricing that was on average about $190 per ton higher in the fourth quarter than a year ago. Our fourth-quarter average flat-rolled selling price per ton of $1,106, was 8% higher than the fourth quarter a year ago due mostly to the change in spot market pricing for carbon hot-rolled coil. The flat-rolled average selling price decreased slightly from the previous quarter, reflecting the seasonal decline of spot market pricing that typically occurs every fourth quarter.

Turning to Slide 18, you can see the sequential decline or a change in our reported fourth-quarter adjusted EBITDA from the previous quarter. Pricing, volume and mix were negative $16 million impact in the fourth quarter compared to the third quarter, reflecting the decline in spot market pricing and shipments that were about 37,000 tons lower than the third quarter. The lower shipments were mostly due to the seasonal slowdown in automotive and distributor markets. Raw materials and energy costs were negative $12 million, reflecting several items, including higher natural gas costs as we transition from the summer to winter months.

Operations was a $5 million contributor to adjusted EBITDA compared to the third quarter, due mostly to the operating efficiencies gained after the successful restart of the Middletown temper mill that was replaced after a fire in May 2018 and while other was a $3 million negative impact and reflected the net of changes in several categories, including higher SG&A expense that was partially offset by other items, including insurance recoveries, lower reserve requirements for certain employee benefits that are reflected in the cost of goods sold line. I will now turn to the balance sheet and cash flow items, which we highlight on Slide 19. Working capital was a $25 million source of cash during the quarter and about $14 million source of cash for the full year. In the fourth quarter, lower accounts receivable and reduction in other current assets, which mostly reflected hedge settlements and increased trade payables were partially offset by higher inventory balances.

The increase in inventory was mostly due to increases in iron ore as we took additional deliveries and preparation for the winter months. And our capital investments in the fourth quarter totaled $51 million, which compares to $37 million in the third quarter. For the full year, capital investments were $152 million. We also made very good progress in further strengthening our balance sheet during the year.

And as I mentioned in the last quarter, we transferred about $280 million pension liabilities for doing an annuity transaction. And in total, we've now annuitized almost $500 million of projected benefit obligations over the past three years. And also, for the full year, we reduced our net debt position by $126 million. Let me conclude my remarks by providing you with our current outlook for 2019, which is highlighted on Slides 20 and 21.

As disclosed in our earnings release last evening, we are providing an annual guidance range for calendar year 2019, which better aligns with how we manage our business and parting from quarterly guidance. Over the past few years, we've changed our business model by reducing earnings volatility associated with the exposure to commodity markets. And as a result, more than 70% of our annual shipments are priced based on fixed base price contracts. Accordingly, this provides us with better insight into how our business should develop throughout the year.

For 2019, we currently expect adjusted EBITDA to be in the range of $515 million to $535 million, with about 50% expected to be generated in the first half of the year. Although our business tends to be seasonal, the first half, which is typically stronger than the second half, will be impacted by the timing of outages. Our guidance is based on the average carbon hot-rolled coil spot market price for the month of January to date of about $720 per ton, held constant for 2019, while spot market pricing will not directly influence our fixed base price contracts, will affect the pricing on about 30% of our expected shipments. As a result, we estimate that for every $10 change in carbon hot-rolled coil spot market price and primarily holding everything else constant, except for carbon scrap and surcharge, adjusted EBITDA would be impacted by approximately $5 million to $7 million on an annualized basis.

The other guidance item I want to comment on is capital investments, which we expect to be in the range of $170 million to $190 million in 2019. This amount includes about $25 million to $30 million of growth-related investments at our downstream businesses. As you can see on Slide 19, there are other variables that could cause a change in our annual guidance. Not included in our guidance are charges associated with the plant closure of Ashland Works facility, as we announced last evening.

As shown on Slide 22, the $80 million charge is mostly associated with take-or-pay contracts and unemployment and employee benefit costs. Approximately $15 million of cash payments are expected to be incurred in 2019 and about $30 million in 2020, with the balance paid over several years beyond 2020. As we noted in our earnings release, the charge includes about $25 million associated with withdrawal from multiemployer pension plan. The exact amount won't be known until 2020 and is expected to be paid over several years.

There is also about $10 million of cash costs associated with Ashland Works facility, but it's not part of the charge but is included in our guidance for 2019. As Roger noted, we expect that the planned closure of the Ashland Works will result in annual savings in excess of $40 million once product is fully transitioned to our other coating lines. We are excited about the opportunities in 2019, so we made great progress on many fronts during the past year through the dedication and determination of the entire AK Steel organization. So at this time, it would be happy to take your questions. 

Questions and Answers:

Operator

Thank you, Mr. Vasquez. [Operator instructions] And our first question comes from Timna Tanners of Bank of America. Your line is now open.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Yes. Hey, good morning, everyone.

Kirk Reich -- Chief Operating Officer

Good morning.

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Morning.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

I was wondering and I thought it'd be a helpful review if you wouldn't mind if we could think about your bridge to 2019 EBITDA guidance in terms of what you did on Page 18, but looking at kind of a full year. So if I think about it conceptually, your time, as said, auto contracts resulted in margin expansion. So that would be additive year over year, and then the specialty business would have been more neutral sideways where you maintained margin. And then from there, I imagine that you're incorporating some of these additional costs, although not the pension issue -- sorry, not the Q1 charge.

So I'm just wondering if you could help us get to the 5% to 10% decline in EBITDA year over year. What are the other main buckets because, again, looking at just your sales and your profits, we would be up year over year? From what I understood, there is a 30% exposure to steel prices. And then what are the other major components?

Kirk Reich -- Chief Operating Officer

Yes. So I'll help you a little bit on part of it and I'll let Jaime jump in. So on the pricing side of it, you're correct in that the auto contract pricing is up and margins are up. Also, I said that the rest of our contract business, the specialty and electrical margins are up as well on that book of business.

And so all of those are good guys. They're against the headwind, which is, as we've said on our scripts, 30% of our business, which is earmarked right now according to our guidance at seven -- or at least pegged at $720 a ton hot-rolled price. That compares to $830 last year, so it's $110 delta. We've talked about cost increases that are going to hit us by way of raw materials and other things.

So that's on top of that $110 million or $110 a ton difference times the 1.8 million tons, which is 30% of our shipments, that is the number that's overwhelming the increase in the, I'll call it, the four million tons of contract business, that's auto and kind of all specialty. So that's the high-level math, Timna, between the big moving pieces that kind of get us to the numbers we stated. And Jaime, if you maybe fill in some of the other blanks, if there are any.

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. Just to put a little color behind it and I want to reiterate because I saw a couple of reports this morning. I think our sales team, overall, we did an excellent job in getting what we thought we would get on automotive contracts without a doubt. But offsetting that, as Kirk said, between our guidance and where the average spot market was in '18, you're talking roughly $110 decline on 1.8 million tons.

So you're well north of $200 million just as a headwind. And then, publicly, we've talked about -- people have told us that depending upon the blend, coal in the Appalachian region was anywhere from $20 to $30 higher. So we would take the midpoint of that iron ore because of the inflationary indices that we have. That's up a couple of dollars per ton.

Electrodes are up. So you blend that all together and you're probably north of $200 million of another headwind. And the fact that we're only down about 10% year over year on EBITDA just goes to show the strength that we got on the automotive contracts.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

OK. Super. And then, I guess, my second question would just be, can you give us any more color on the automotive -- the auto contracts. Sometimes in the past, you've given us percent increase or some other kind of quantitative guide on how you bear it in the negotiations?

Kirk Reich -- Chief Operating Officer

No.

Roger Newport -- Chief Executive Officer

No. The short answer to that is no. It's really we're very pleased with how the negotiations went and we don't disclose any of our specific customer contracts nor even give an average because each could have a little bit different starting point with the product mixes, etc. So we do not get into those details.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

OK. Fair enough. Thank you.

Kirk Reich -- Chief Operating Officer

Thank you.

Operator

And our next question comes from David Gagliano of BMO Capital Markets. Your line is now open.

David Gagliano -- BMO Capital Markets -- Analyst

Thank you for taking my questions. Just first on Ashland. I just want to clarify one thing, is the plan there to permanently close Ashland? Or you knock it down or claim, etc.? Is that the future plan?

Kirk Reich -- Chief Operating Officer

The plan or the intent is to permanently close the facility. What we do with it after its closure will depend on offers or anything else we choose to do with it at that point, but, yes, that's correct, David. And we'd wind it down during the course of this year by transferring the funds that are still produced there on our galvanized line to other galvanized lines in our -- within our company.

David Gagliano -- BMO Capital Markets -- Analyst

OK. And you mentioned offer, so I was kind of wondering, is this facility now -- I'm assuming, it's for sale, is that reasonable?

Roger Newport -- Chief Executive Officer

I would -- This is Roger. I would comment that Ashland hardened has been idled for a few years. So there has been opportunities. We've looked at all the different alternatives, as you can imagine as a company, looking at what's the best way can we generate returns out of that.

We ultimately concluded we could not generate adequate returns to our investors on the hot end. And then, as we saw what's happening on the marketplace, in general, determined that we have a lot of opportunities to lower cost to increase the utilization of our other facilities by moving products out of there. So, as Kirk said, the facilities are being permanently shut down, but the assets will still be sitting there for a while.

David Gagliano -- BMO Capital Markets -- Analyst

OK. And then just my follow-up question. In terms of the 2019 guidance, first of all, it's a two-part question, embedded in the EBITDA expectations, what is the expectation for the downstream businesses, in general, or Precision Partners, in particular? It's first part. And then the other part, with the price reopeners on 30% of the business, is that purely spot based? Is there anything different in the 30% of the business in terms of how it will price relative to, say, for example, as spot market?

Kirk Reich -- Chief Operating Officer

Yes. I'll do the 30% and let Jaime fill on with downstream EBITDA. The 30% piece is, as it's always been, David, it's kind of a blend of -- there is monthly and quarterly kind of movements depending on which contract it is. So, yes, that will still be there with the same lag factor that we've seen in the past.

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

And with respect to the downstream businesses, I think, speaking to both AK Tube and Precision as combined, revenues will probably be in that $575 million range. At the expected EBITDA, I'd say combined would be in that $70 million to $80 million range. We do expect some significant improvement in Precision Partners. As Kirk mentioned, we saw a pretty significant turnaround in November and December upon troubled facility, and we expect that to gain momentum as we go throughout 2019.

David Gagliano -- BMO Capital Markets -- Analyst

OK. And what was that EBITDA contribution in 2018 for the two downstream businesses in total?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

In total, they were probably close to $60 million, $65 million.

David Gagliano -- BMO Capital Markets -- Analyst

All right. Thanks.

Kirk Reich -- Chief Operating Officer

Thank you.

Operator

And our next question comes from Curt Woodworth of Credit Suisse. Your line is now open.

Curt Woodworth -- Credit Suisse -- Analyst

Yes. Hi, good morning.

Kirk Reich -- Chief Operating Officer

Morning.

Curt Woodworth -- Credit Suisse -- Analyst

So when Ashland is fully shutdown, what's the level of excess rolling capacity you would have there, or just in general for the company relative to your hot metal base? And how would you look at optimizing that?

Roger Newport -- Chief Executive Officer

I'd comment it. When you look at the operations side, if you remember, our Ashland produced around 2.5 million tons a year. So those slabs used to be run up at our Middletown hot mill. So that would be kind of ballpark, I'd say, at least capacity would be available at our Middletown hot mill while we would have some extra capacity up at our Dearborn facility.

And as we have in the past, we utilize our Butler melt shop for, I'll say, flex times in the spot market and carbon spot market where it make sense, where we can produce upwards as much as half a million tons or so -- the slabs, I'm sorry, carbon slabs up at Butler to help supplement for the carbon spot market. And again, the nice thing with Butler is makes electrical, stainless and carbon, so we can flex times around to how we run that operation, that's our flex times. And if we produce the slabs -- carbon slabs up at Butler then we would kind of run those typically down at Middletown hot mill.

Curt Woodworth -- Credit Suisse -- Analyst

So what is the amount of slab you need to process at this point to maximize your rolling mill capacity?

Kirk Reich -- Chief Operating Officer

Yes. Well, we just stand at 2.5...

Curt Woodworth -- Credit Suisse -- Analyst

OK. OK. All right. 2.5.

Kirk Reich -- Chief Operating Officer

It really doesn't -- it doesn't change, Curt, from what has been in the last three years, right? I mean, it's -- I put it into permanent, but it's the same math we've been doing for the last three years. We've got plenty of hot-rolling capacity available.

Curt Woodworth -- Credit Suisse -- Analyst

Understood. OK. And then with respect to the pension, the annuitization of $280 million, it looks like the pension liability didn't change that much. I think maybe went up a little bit sequentially.

Can you just address sort of your plans for pension funding the next couple of years? I know you gave guidance on '19, but what is the funding requirement for 2020? And do you plan to do more annuitizations this year?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

On the contributions right now for 2019 and 2020, they're right around $45 million. So '19 is as pretty much set in stone 2020, there could be some minor tweaks to it. In terms of the annuitization, the team is always looking to further annuitize. The markets have been, I would say, pretty receptive to it.

So it's something we're constantly looking at.

Roger Newport -- Chief Executive Officer

And part of our strategy is de-risking the balance sheet. And the biggest risk we had actually in 2018 was not a good financial performance for the pension assets and that's the risk we have. We know the liability side because our pension plans are locked and frozen. The risk we have is on the asset side.

And naturally, the key to our pension annuitization, we've done roughly $500 million over the last few years. So as Jaime said, we chipped away at it, but the biggest risk and as you correctly note on our balance sheet what changed on liability side is -- what happened is you did not have the anticipated 7% return on those assets. So anything that you did not get as return, eventually, you have to fund or earn it back in future earnings.

Curt Woodworth -- Credit Suisse -- Analyst

OK. And just one final question. The volume outlook, you talked about auto being down 1% and some displacement of spot sales in 1Q. But your total volume guidance for the year is up, I think, like 4% year on year.

So should we infer that, that the contract outcome process for this year with auto and appliance that you took market share and that gives you conviction to grow 4% and a down 1% auto market?

Kirk Reich -- Chief Operating Officer

I'd say we've at least hold our own there, Curt, in a down market and kind of gotten on or continued to be awarded business on the right platforms with improved product mix in addition to that. So those are all good guys that are related to that. And then you don't have a couple of the headwinds that we had in 2018 with some of the upset conditions we had at Middletown that will now allow us to produce a bit more tons next year -- this year, 2019.

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

And just, what we're alluding to there is just a little challenge on the mix this year. As we said, automotive was going to be down in terms of total builds. And we will be selling more into kind of the spot market through the distributor market, so that would be a little bit of a mix impact.

Operator

And our next question comes from Seth Rosenfeld of Jefferies. Your line is now open.

Seth Rosenfeld -- Jefferies -- Analyst

Good morning. I have two questions. First on Ashland, and secondly, on Precision Partners, please. With regards to Ashland, can you just confirm how much coated material you're expecting to transition away from the Ashland lines to other coating facilities? What are the current utilization rates of those other lines? And where would they move after taking from Ashland material? And then secondly, on Precision Partners, obviously, the commentary on new order window is very positive.

Are you already baking into your forecasting something to elevated operating costs during that ramp-up period? What would you expect, I think, post that ramp-up for earnings contribution for Precision?

Kirk Reich -- Chief Operating Officer

Yes. So Ashland is currently loaded with 330,000 tons. And we'll be transitioning all that product to our other facilities. I don't know the exact utilization rate of each of the others, but they're 90% plus four and that allows us to kind of now flip that script to be fully utilized on virtually all of our coating lines or nearing that level, which allows us to certainly improve our operational costs.

We'll still have some additional headroom. We can still take on some new business. It probably gets us in a very good spot from that standpoint. And with regards to Precision Partners, yes, as we go through this year, there will be investments and will be increasing our training costs and those kind of things, as you would expect, to get ready for that new facility to -- or that expanded facility to be able to produce those products ramping up in 2020.

And so that is built into the plan and then that will obviously improve our EBITDA overall as we ramp that business up.

Seth Rosenfeld -- Jefferies -- Analyst

Would you expect those costs Precision Partners to conclude in 2019 or that be a lingering element in 2020 as well?

Kirk Reich -- Chief Operating Officer

May carry over to the first little bit of 2020, but the vast majority of it should be this year.

Roger Newport -- Chief Executive Officer

And most of it will be capital, but there is some expense flowing through the P&L.

Seth Rosenfeld -- Jefferies -- Analyst

Great. Thank you very much.

Operator

And our next question comes from Arjun Chandar of JPMorgan. Your line is now open.

Arjun Chandar -- J.P. Morgan -- Analyst

Good morning. Thank you. I just wanted to get some clarification. In your press release, you mentioned $650 million maintenance investment in number of the facilities in 2019.

That's an OPEX, not a CAPEX number, correct?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

True.

Roger Newport -- Chief Executive Officer

Yes.

Kirk Reich -- Chief Operating Officer

Yes.

Arjun Chandar -- J.P. Morgan -- Analyst

OK. And just on your guidance in your 720 HRC assumption driving the EBITDA forecast for 2019, does that bake in any premium to spot? Or is that purely a spot number -- an average spot number for hot-rolled coil in January?

Kirk Reich -- Chief Operating Officer

Yes, purely an average spot.

Arjun Chandar -- J.P. Morgan -- Analyst

Thank you.

Operator

And our next question comes from Nick Jarmoszuk of Stifel. Your line is now open.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Hi, good morning. Thanks for taking the questions. First one with the 2019 5% notes, can you discuss how you guys are thinking about addressing those?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. On the 5% notes, we have a variety of options that we still are considering. I mean, obviously, you can issue another convert, and we do have the benefit of being able to just take it out with existing liquidity. So we'll continue to watch as we go through the course of the year.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. And then second one with natural gas prices in the first quarter. Do you have any hedges in place?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. We have a very robust and, I would say, very systematic hedging program across most of the commodities that we can hedge and that includes natural gas that we're pretty well covered for the first quarter.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. So if we could think about how -- like, if there is a spike with the upcoming cold weather, what would be the highest price that you'd say?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. I wouldn't disclose that. But typically, what we do is use a variety of options and forwards. And the front month, we might be anywhere from 85% to 90%-plus hedged.

And then the month behind that, we might be around 80%. So we're pretty well-protected.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

OK. And then last question just on the pension funding. I just want to confirm all of that goes through the statement of cash flows, correct?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Right. It's cash flow.

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

All right. Thank you.

Operator

And our next question comes from Phil Gibbs of KeyBanc Capital Markets. Your line is now open.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Hey, good morning. Just curious what were the planned outage costs in the fourth quarter and how should we think about the cadence on the $75-roughish million plan for 2019?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

The fourth-quarter outage costs were probably around $13 million to $15 million.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

And then in terms of the cadence of the $75 million, I know that Kirk talked a little bit about pulling some forward and then load some of the very end. So it sounds like heavy in Q1, heavy in Q4 and kind of late in the middle?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. It will be more -- it'll be nice split between Q1 and Q2, maybe not too much of a difference in the pull-forward on the Dearborn reline and then the fourth quarter will be really the bulk of it.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

Of the $75 million, you're saying?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

OK. So pretty heavy than in the fourth quarter. And then I just wanted to be clear on Ashland. I know a lot of questions asked, but in your $525 million of EBITDA midpoint in the guidance, in terms of Ashland, what headwinds are you baking into that number because I know you'd been caring about $5 million a quarter from Ashland?

Roger Newport -- Chief Executive Officer

Well, in regards to Ashland, as we indicated, our guidance doesn't include any of the one-time charges. So there are some ongoing costs while ongoing costs that we talk about that are roughly $10 million on an ongoing basis for -- not ongoing, but for 2019. And then that would decline quite a bit in 2020. And we've also included our depreciation estimates in there because that's accelerated as that will finish operating at the end of this year.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

So you've included the accelerated depreciation in about $10 million of ongoing?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes, that's included.

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

OK. Thanks, gentlemen. Appreciate it.

Kirk Reich -- Chief Operating Officer

Thank you.

Operator

And our next question comes from David Lipschitz of Macquarie. Your line is now open.

David Lipschitz -- Macquarie -- Analyst

Yes. Good morning. Just quickly then on the Ashland, the $40 million savings. So is there any of that this year or that start more next year?

Kirk Reich -- Chief Operating Officer

So David, there might be a little bit this year. The majority of this year is going to be spent moving all the parts to our other facilities, getting qualified and kind of finishing all of that. And so they will be running parts at both places a bit. And so the vast majority of the year is going to be spent doing that.

The savings really come from lower cost assets being more fully utilized and transportation/logistic advantages that we unlock as part of that. And so we'd expect those to kind of be full in effect in 2020, but '19 is really going to be a transition year where you may get a little bit of that, but the vast majority, you'll be tied up in all that transition.

David Lipschitz -- Macquarie -- Analyst

OK. Thank you.

Operator

And our next question comes from Derek Hernandez of Seaport Global Securities. Your line is now open.

Derek Hernandez -- Seaport Global Securities -- Analyst

Hello, and good morning, everybody. I want to ask if debt reduction is still your central priority for capital allocation in 2019? And is the one to two times levered range still your target there?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. Our priority is debt reduction. I mean, we're still more levered than we'd like to be. So any free cash flow, just like we did in 2018, we're going to apply free cash flow to debt reduction.

Right now, leverage has improved on a trailing 12-month basis, we're about 3.5 times. We got to drive that down lower ideally. We would like to be at two times levered position to give you more flexibility to do things strategically.

Derek Hernandez -- Seaport Global Securities -- Analyst

And then you mentioned not all annual contracts are complete. Do you mind elaborating a little bit on which sectors you still have annual contracts to complete?

Kirk Reich -- Chief Operating Officer

Yes. So what I meant by that is, is really in the specialty and electrical, especially stainless and electrical side, those are done. But what we're referencing is in the auto sector, those all roll off at different times. And so there is allotment of those that expire at the end of the first quarter.

There are some that expire at the end of the third quarter. And so those continue to kind of evolve that way. And so therefore, we're not done with all of our negotiations. And some of them will actually expire at the end of the first quarter, that's what we meant by that.

Derek Hernandez -- Seaport Global Securities -- Analyst

Excellent. Thank you very much.

Operator

And our next question comes from Matthew Fields of Bank of America. Your line is now open.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, thanks very much. So just on the previous comment about not done with all the auto negotiations. If we get to next quarter and you've completed another round of auto negotiations, is it conceivable that guidance could change without a change in spot prices?

Kirk Reich -- Chief Operating Officer

I don't think that's the case, Matthew. We've got -- we're far enough along we have it within a fairly tight band of where that will finish, and so I think we're good with that.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. Great. And one more question. It's my understanding going through your indenture is that the 2021s are the only notes that you have left without any provisions for junior lean capacity.

So is it my understanding correct that you could issue up to at least $500 million of second lien notes to take out those 2021s?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Matt, it's Jaime. It's an interesting question. I'm not sure of the genesis of that question, but before I answer that directly, let me make a few comments because we've heard things in the market, we've had investor calls, we've had analyst ask us directly about breaching covenants, potentially breaching covenants. I even saw something this morning that talked about the ruling out any near-term concerns about liquidity.

And the team here has done a lot to improve the financial position of this company. This is now a company with more than $900 million liquidity available to it. And we have no meaningful financial covenants. And the only meaningful financial covenant is if liquidity goes below $150 million.

So financially, we're in a really, really good position. And Matt, that's not directed at you. That's a comment I wanted to make in general because there has been noise out there. But in response to your question, Matt, yes, you are correct.

Our 2021 unsecured notes, if we refinance those, that would remove any really junior lean restructuring that we would have. We do have a basket under the other unsecured notes that would allow up to about $500 million of junior lean issuance.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. Thanks very much.

Operator

And our next question comes from Sean Wondrack of Deutsche Bank. Your line is now open.

Sean Wondrack -- Deutsche Bank -- Analyst

Roger, Jaime and Curt, Good morning. When we think about your operating cash flow because, I think, this is sort of getting mixed in the conversation. It looks like your operating cash flow before changes in working capital on a consolidated basis was about $350 million last year. We think about the new EBITDA guidance this year, would you sort of expect a commensurate decline in operating cash flow? So I think it's roughly $38 million relative to how you performed in 2018 or do you think you could see a weaker operating cash flow there?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

I wouldn't say probably too much weaker. I mean, if we -- one of the big items in that line item is just really how the hedges perform. We had very good protection last year. But, as you know, on our hedging program, you kind of average into this.

I mean, if costs are continuing to move out, you're averaging into a higher-cost scenario. So I'd say, that's 501 caveat on the operating cash flow. And then the costs associated with Ashland planned wind out will be the other item.

Operator

And our final question comes from the line of Brian Lalli of Barclays. Your line is now open.

Brian Lalli -- Barclays -- Analyst

Maybe first, if I could, just following up, excuse me, on maybe Matt's question and just maybe to come out of it a different way. Jaime, would you mind maybe walking through in addition to the 2019s, which you did discuss what your plans would be for the 2021 notes? Again, that's a question we get a lot from investors. And I think why people are looking at other avenues of liquidity. And then I'll have a follow-up.

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. The 2021 notes, we continue to evaluate the markets. Obviously, going back a couple of months, the markets, I would say, for our level of paper turned very negatively. We've got plenty of time.

I mean, what is 34 months to go. So assuming just like kind of that January of 2016 time period, it takes a couple of months sometimes for the markets to recorrect themselves that we've got plenty of time to refinance those.

Brian Lalli -- Barclays -- Analyst

Got it. And then, I guess, my follow-up and that's a good segue. It looks like in your slides, you did in addition to your revolver reduction, it seems like you're out in the market buying back some of your longer-dated 25s and 27s. If you wouldn't mind, any details around that pricing? And I guess, how you think about the repurchasing of those debt securities in the open market relative to your liquidity? I guess, is that a sign that you guys feel really good about your liquidity and sort of your path forward?

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Yes. I think it's -- you hit it right there. I mean, the bonds, I think they've traded recently as low as in the kind of the mid-70s. The yield on that is probably 11% or close to 12%.

Just for us, it seems like a ridiculous price. But when we seem trading at those levels from time to time, we'll be in the market. We've done this in the past and probably continue to do that. But yes, we think they're under-priced there.

And liquidity, we're very comfortable with.

Brian Lalli -- Barclays -- Analyst

Got it. Very helpful, Jaime. Thanks a lot.

Operator

And this concludes our question-and-answer session. I would now ask Mr. Newport for his closing comments.

Roger Newport -- Chief Executive Officer

Appreciate your questions and comments. And we'd like to leave you with the following thoughts. We made great strides in the past few years, as we execute on our strategic objectives to build a stronger foundation for our company. Slide 24 illustrates our actions to date.

We are not done. We have more work to do, and we remain focused on enhancing shareholder value. We remain very optimistic about the future. And we currently believe that many of the factors that impact the steel market remain fundamentally good overall.

We continue to take action that will drive results and increase returns for our investors. As shown on Slide 25, we're focused on the three pillars of our corporate strategy, which are: one, commercializing our innovative new products and services; two, transforming our operations to significantly improve our competitive position; and three, driving future growth, both organically and through acquisitions into new markets and downstream businesses. We're confident that these actions will create long-term value for our shareholders. Thank you for joining us today.

We appreciate your continued interest in AK Steel, and we look forward to updating you on our progress in April.

Operator

[Operator signoff]

Duration: 54 minutes

Call Participants:

Doug Mitterholzer -- General Manager of Investor Relations and Assistant Treasurer

Roger Newport -- Chief Executive Officer

Kirk Reich -- Chief Operating Officer

Jaime Vasquez -- Vice President of Finance and Chief Financial Officer

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

David Gagliano -- BMO Capital Markets -- Analyst

Curt Woodworth -- Credit Suisse -- Analyst

Seth Rosenfeld -- Jefferies -- Analyst

Arjun Chandar -- J.P. Morgan -- Analyst

Nick Jarmoszuk -- Stifel Financial Corp. -- Analyst

Phil Gibbs -- KeyBanc Capital Markets -- Analyst

David Lipschitz -- Macquarie -- Analyst

Derek Hernandez -- Seaport Global Securities -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Sean Wondrack -- Deutsche Bank -- Analyst

Brian Lalli -- Barclays -- Analyst

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