Image source: The Motley Fool.
GrafTech International Ltd. (EAF -1.88%)
Q4Â 2019 Earnings Call
Feb 6, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the GrafTech Full-Year and Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Meredith Bandy, Vice President, Investor Relations. Thank you. Please go ahead.
Meredith H. Bandy -- Vice President, Investor Relations and Corporate Communications
All right, thank you, Lindsey. Good morning, and welcome to GrafTech's Fourth Quarter and Year End 2019 Conference Call. On the call with me today are: GrafTech's Chief Executive Officer, David Rintoul; and Chief Financial Officer, Quinn Coburn.
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 and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here.
Please note the results we discuss today are based on our unaudited results for the year ended December 31st, 2019. We will also discuss certain non-GAAP financial measures for which you will find reconciliations in these slides. The slides are posted on our website at www.graftech.com in the Investors Section. And for your reference, a replay of the call will also be available on our website.
Now, I'm pleased to turn the call over to Dave.
David J. Rintoul -- President and Chief Executive Officer
Thank you, Meredith, and good morning, everyone. Thank you for joining us today. GrafTech is a leading provider of highly engineered graphite electrode services, solutions and products to the growing Electric Arc Furnace, or EAF, steel market. With low-cost, high-quality needle coke production and long-term contracts in place, GrafTech continues to generate substantial free cash flow and to deploy that cash for customer -- excuse me -- for shareholder returns and debt repayment.
Turning to Slide 4, health and safety excellence is a core value of GrafTech and is a fundamental to everything we do. I'm pleased to report that our 2019 total recordable injury rate improved to 0.95, a 39% improvement from the prior year. I'd 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 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. This continuous improvement work extends across the entire business.
Now, turning to Slide 5, for more on 2019 results. GrafTech delivered favorable Q4 '19 results, including quarterly net income of $175 million, which led to full-year net income of $745 million. The company also generated full-year EBITDA of over $1 billion and free cash flow of over $740 million, as we manage softer market conditions.
The World Steel Association reported 2019 global steel production, excluding China, was down slightly, compared to prior year. Graphite electrode inventories remain elevated for many customers, but we're seeing early evidence that de-stocking is running its course. We continue to expect graphite electrode inventory de-stocking through the first-half of the year. We expect inventories to decline and conditions to improve, as we move into the back half of 2020.
We believe steel manufacturing difficulties are short-term trends that will work themselves out over time. Longer-term EAF steelmakers continue to take market share from integrated producers as evidenced by the new electric arc furnace builds were seen in the United States. And as a reminder, GrafTech continues to benefit from substantial vertical integration with low-cost, high-quality petroleum needle coke and from our long-term contracts.
Turning to Slide 6. GrafTech has sold about two-thirds of our cumulative capacity via long-term take-or-pay contracts. These contracts provide profitability and visibility of earnings. As you know, certain of our customers have filed for bankruptcies and other customers are experiencing some financial difficulties. With both developments, we expect to impact contracted sales volumes to a degree moving forward. In response to this, along with some variability permitted within certain LTA provisions, we have adjusted our 2020 estimate shipments of volumes.
Now, I'll turn it over to Quinn on Slide 7 for more detail on our quarterly financial results.
Quinn J. Coburn -- Vice President and Chief Financial Officer
Okay, thanks, Dave. Fourth Quarter 2019 financial results remained solid, despite some of the softening market conditions that Dave spoke to earlier.
Fourth quarter net sales of $415 million were in line with the sequential quarter, but down from a year ago, primarily due to lower volumes. We continued to manage production to be more in line with recent sales volumes, while maintaining cost performance. During the fourth quarter, we produced and sold 41,000 metric tons. Demand is expected to rebound somewhat in the second half of 2020, in line with a typical steel market cycle and as customers work through inventories. Approximately 80% of our fourth quarter revenues were from customers with long-term agreements. Long-term contract pricing was relatively stable.
In Q4, non-LTA 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 discontinued disclosure of weighted average realized pricing for competitive reasons. We will continue to provide the revenue footnote to our financial statements in our SEC filings.
Turning to Slide 8 for financial results. Fourth quarter 2019, net income totaled $175 million or $0.61 per diluted share. Q4 2019, adjusted EBITDA of $235 million declined from the prior year period, due to lower sales volumes and higher raw materials costs, specifically third-party petroleum needle coke costs. Fourth quarter 2019 free cash flow of $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 due to timing of certain annual cash tax payments.
Turning to Slide 9, GrafTech has a strong track record of free cash flow generation. In 2019, GrafTech generated nearly $750 million of free cash flow. In terms of uses of cash, approximately half our free cash flow or $360 million was returned to shareholders through dividends and share repurchases. We also repaid $350 million of debt during that time. Shareholder returns and debt repayment remained the key priority for uses of cash.
Turning to Page 10. Since our IPO, we have reduced debt by 18% and repurchased about 11% of our shares outstanding as of year-end. Given our strong free cash flow generation, we view share repurchases as a highly accretive 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 turning to Slide 11. In 2020, we expect capital expenditures to be in the $60 million to $70 million 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 projects to reduce operating cost, 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 dividends and share repurchases. 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 repurchases in 2019, and have repurchased a further $10 million so far this year. The timing of future share repurchases will depend on share price, trading volumes and other market conditions. We continued to manage our debt levels to align with the visibility that we have to our free cash flow. We repaid $225 million of debt in the fourth quarter of 2019 and anticipate making further debt repayments in the years to come.
I'll now turn it back to Dave on Slide 12.
David J. Rintoul -- President and Chief Executive Officer
Thanks, Quinn. The long-term outlook for EAF steelmaking growth remains strong, and we believe GrafTech is well positioned to benefit from that growth. Electric arc furnaces make up above 30% of global steel production and that share is expected to continue to grow over time. Electric arc furnaces are advantaged relative to integrated mills due to their flexible cost structure, lower capital intensity and better environmental performance.
In addition, GrafTech's 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 needle coke pricing. With low-cost vertical integrated production and a commercial strategy focused on long-term value and 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 prepared remarks. We will now open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from David Gagliano with BMO Capital Markets. Your line is now open.
David Gagliano -- BMO Capital Markets -- Analyst
Okay, great. Thanks for taking my questions. I just have a few on the current market conditions and the change in the contract position. First question is what are the plans for the displaced 12,000 tons for 2020?
David J. Rintoul -- President and Chief Executive Officer
So we have the commercial department working hard on spot opportunities that we think will be available to us.
David Gagliano -- BMO Capital Markets -- Analyst
Okay, so the plan -- OK. So somewhat related, I guess, can you give a sense as to what your expectations are for full-year 2020 sales volumes?
Quinn J. Coburn -- Vice President and Chief Financial Officer
Sure, David. It's Quinn. Yes. As we indicated last quarter, 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 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.
David Gagliano -- BMO Capital Markets -- Analyst
Okay. And then I'll just try one more. On the pricing, I understand competitive reasons. But obviously, it's a little challenging without any kind of visibility on where the market is other than random data points out of China and other places. Can you give us a sense as to where just a range or something as to where you see spot prices currently for your markets?
Quinn J. Coburn -- Vice President and Chief Financial Officer
Sure. Let me speak to that for a second. Yes. So as you noted, we did stop giving 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 publish the sales volumes each quarter and we'll also publish the other revenue disclosures that we published in the past. We mentioned that 80% of our revenue this quarter was from long-term agreements. We had about 4% from by-products and other revenue and the rest was spot and short-term agreements. So that's the information that we typically give in our footnotes and we'll continue to give that information going forward. With that information, you should be able to get a reasonable idea of where we were.
David Gagliano -- BMO Capital Markets -- Analyst
Okay. What was the contract price that flow through?
David J. Rintoul -- President and Chief Executive Officer
Sure. The contract price was $9,900 that was the average price for the year and it was similar for Q4.
David Gagliano -- BMO Capital Markets -- Analyst
Okay. Great. That's helpful. And then, just one last question from me, I apologize. Just obviously, the change in 2020, the reduction in the contracted positions. Can you give us a sense as to how much is left in terms of exposure for the remaining contract book for 2020, 2021 and 2022 at this point?
David J. Rintoul -- President and Chief Executive Officer
I think the graph on Page 5, I believe it was, it gave an indication, excuse me, Page 6 gave an indication of our estimate for this year and the following two years that are left in the LTAs, Dave.
David Gagliano -- BMO Capital Markets -- Analyst
Understood. Well, I guess, I'm assuming you're referring to the estimated to take or pay shipments with the bar chart that says 130, 125 and 117?
David J. Rintoul -- President and Chief Executive Officer
That's correct.
David Gagliano -- BMO Capital Markets -- Analyst
Okay. What I'm wondering is, how much of those volumes do you -- would you say are at risk of being renegotiated like we just saw?
David J. Rintoul -- President and Chief Executive Officer
Well, so look, we've estimated and that's what that chart indicates where we believe we are at and we will continue to monitor the situation going forward. But at this point in time, that's our best estimate of where this year and the next two years will bring us.
David Gagliano -- BMO Capital Markets -- Analyst
Okay. I'll turn it over. Thanks.
David J. Rintoul -- President and Chief Executive Officer
Okay. Thank you.
Operator
Our next question comes from Alex Hacking with Citi. Your line is now open.
Alex Hacking -- Citi -- Analyst
Yes. Hi. Good morning, and thanks for the time. I guess, following up on Dave's question, as your kind of spot volumes reset into 2020, where do you estimate average spot price is going to be in the first quarter, right? We're in the middle of Feb now, so I imagine you have a pretty good sense of that.
David J. Rintoul -- President and Chief Executive Officer
Well, I think as Quinn referenced, we saw decline in 2019 in spot pricing that equated to roughly 25%. We do expect to see a further decline in Q1, and 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.
Alex Hacking -- Citi -- Analyst
So, I mean, I guess, can you give us any help quantifying that in the first quarter, so that we can effectively model what revenues are going to be or you just don't want to discuss further?
David J. Rintoul -- President and Chief Executive Officer
Well, I think as Quinn referenced, we recognize from competitive reasons what we should and perhaps should not disclose at this point in time and I think with that in mind, the guidance we've provided here in this call is, as far as we're going to go, Alex.
Alex Hacking -- Citi -- Analyst
Okay. Fair enough. I guess another question and, I don't know, you might not answer either. But as we think about your third-party needle coke in 2020 versus 2019, how should we think about the cadence year-on-year?
Quinn J. Coburn -- Vice President and Chief Financial Officer
Yes. Sure. As we've discussed before, our third-party needle coke costs running through 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 is a, as we've discussed before, there's a bit of a delay a couple of quarters for the cost to roll through cost of goods sold, but the Q4 would be -- would have been the last 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 will start to trend down a little bit throughout 2020.
Alex Hacking -- Citi -- Analyst
And what do you expect it to sequentially decline from 1Q into 2Q and into the second half?
Quinn J. Coburn -- Vice President and Chief Financial Officer
It will sequentially decline, a small amount, Alex, small amounts. Yes.
Alex Hacking -- Citi -- Analyst
Okay, just a small amount. All right. Okay. I'll turn it over to someone else. Thank you. Thanks for the time. I appreciate it.
Quinn J. Coburn -- Vice President and Chief Financial Officer
Thanks, Alex.
David J. Rintoul -- President and Chief Executive Officer
No worries. Thank you.
Operator
Our next question comes from Arun Viswanathan with RBC Capital Markets. Your line is now open.
Arun Viswanathan -- RBC Capital Markets -- Analyst
Great. Thanks. Good morning.
David J. Rintoul -- President and Chief Executive Officer
Good morning, Arun.
Arun Viswanathan -- RBC Capital Markets -- Analyst
I just want to get your thoughts. First off, I guess on Q4, the EBITDA level that you achieved again wasn't terribly down, just given what we've seen on spot pricing. I guess, could you just break that out, I guess, the EBITDA that you were able to achieve maybe from your long-term contracts versus other sales.
Quinn J. Coburn -- Vice President and Chief Financial Officer
Sure. We really don't break down EBITDA from -- by long-term contracts versus spot. We did indicate that the revenue, 80% of the revenue came from long-term contracts and we gave the price of the long-term contracts around $9,900. And then about 16% of the revenue came from spot and short-term contracts, and then 4% from other revenue and byproduct. So that's the revenue break down. Some of the historical information, we've given at around IPO, you can build up kind of the cost of a ton of electrodes with Seadrift needle coke versus third-party needle coke. But specifically, given that break down, we haven't provided.
Arun Viswanathan -- RBC Capital Markets -- Analyst
Okay. And then so on that last point then, are you still seeing kind of like a three to four or so range electrode pricing versus needle coke or is that kind of the level we should think about?
Quinn J. Coburn -- Vice President and Chief Financial Officer
You're talking about the spread over needle coke?
Arun Viswanathan -- RBC Capital Markets -- Analyst
Correct.
Quinn J. Coburn -- Vice President and Chief Financial Officer
Yes. Again, in the same way, we are not giving spot pricing, I think we would bear away from giving what current spreads are or what our expectations for the spread over needle coke.
Arun Viswanathan -- RBC Capital Markets -- Analyst
And then -- yes, go ahead. Sorry, David.
David J. Rintoul -- President and Chief Executive Officer
I was just going to say, the spirit of being transparent on that, I would imagine that it's common knowledge to all of the folks on this call that markets are -- fluctuate significantly given also the situation in the steel industry and that has a flow-through effect at the end of the day to needle coke as well. And therefore, given that there is not a, just like there is not a market posted or published electrode price, the same holds true of needle coke. 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 coke market is significantly opaque at this point in time.
Arun Viswanathan -- RBC Capital Markets -- Analyst
Okay. And I guess -- so a couple of more questions. So on the cash flow side, maybe you could help us understand, I guess, what level of free -- what level of cash flow do you expect to generate from the long-term contracts? Is that something that you could share with us?
Quinn J. Coburn -- Vice President and Chief Financial Officer
I guess, what I would direct you to, Arun, is we've given the, you know, the volumes and pricing for the long-term contract, so you can get to revenue. If you go back to the time of the IPO, we indicated that the cost of an electrode using Seadrift needle coke, if you want to think about the long-term contracts using Seadrift needle coke -- that the cost of an electrode using Seadrift needle coke was around $2,800. That 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 EBITDA from the long-term agreements, and then you can -- from there, model the cash flow for the long-term agreements.
Arun Viswanathan -- RBC Capital Markets -- Analyst
Okay. Yes, that's helpful. And then, I guess, the other question I had was just thinking about the market here, you've referenced kind of de-stocking lasting for a little while. Is it mainly just driven to -- what's driving that de-stocking? Is it kind of what you said before as far as 2019 being a year of -- or '18 being a year of inventory building, unwinding some of that in '19? Or has the actual growth of the market kind of decelerated in your view?
David J. Rintoul -- President and Chief Executive Officer
Well, certainly as you remember from previous -- and I think, quoting me accurately, there was inventory build 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 parts of the world that have from a steel perspective, '19 wasn't a particularly good year for them. So, the outcome of that is obviously, if they're not making steel, they're not buying -- not using electrodes, and consequently that adds to the situation where inventory build occurs. So when you add both of those up you have a higher level of inventory than would normally be in place. And we've begin -- 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 expect that to continue on for the first half of this year before enough of that de-stocking has, in fact, taken place.
Arun Viswanathan -- RBC Capital Markets -- Analyst
Great. And just two more quick ones. So I guess last quarter also you've mentioned bankruptcy among some of your customers are a very few number. And then you also mentioned potential renegotiation of the long-term contracts. This quarter, you further mentioned the bankruptcy. Are you still seeing potential renegotiation of any of your long-term contract terms?
David J. Rintoul -- President and Chief Executive Officer
So I need to 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, is -- if 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 an ongoing part of 2020.
So they're not -- it is not a full borne renegotiation, per se. It's an agreement in some cases, where contracts could be extended, that's one solution we've given folks. So it 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 are allowed to, at the end of the day receive the value for those agreements that were negotiated a few years ago.
And I think it's important also to point out that all of those agreements on a net-net basis, if you look from inception, customers are still on a net-net basis in a -- despite current market changes, they're still on a positive place. So those contracts are doing exactly what they intended to do for both parties.
Arun Viswanathan -- RBC Capital Markets -- Analyst
All right, that's helpful. And then just going back to the needle coke price and cost, there's been some volatility there. But would you consider maybe some of the more capital intensive, less integrated players within the industry to be nearing cash cost of production at these levels of needle coke pricing?
David J. Rintoul -- President and Chief Executive Officer
Well, look, our -- we don't -- as a rule comment on the well-being of our competitors, I would suggest that your observation would be correct insomuch as they're in a more difficult spot than we are, given that we have, by and large, a control of our own raw material base. And that, in the situation, in the current market environment, is certainly a very large benefit to GrafTech.
Arun Viswanathan -- RBC Capital Markets -- Analyst
And then, just lastly, I know it's early, but any impact potentially that you could expect or we should expect from Coronavirus? I mean, could there be a positive impact if some of the non-integrated, lower-quality electrode manufacturers in China are not running full rates? Or could it be negative, because of a weakening on the steel industry? How are you guys kind of thinking about that?
David J. Rintoul -- President and Chief Executive Officer
So, look, let me begin by saying that it's unfortunate that this virus has 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 could turn out to be predictive of some things that we are aware developing such as shortage of containers, where we are aware of situations where understandably folks are hesitant to send their containers over to that part of the world for obvious reasons.
So it's possible. We'll wait and see, and 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 and for the reasons you're suggesting, that we will be there to assist and provide them electrodes to make sure that their operations are not impacted.
Arun Viswanathan -- RBC Capital Markets -- Analyst
Okay. Thanks. I'll turn it over.
Operator
This concludes our question-and-answer session. I will now hand the call back over to Mr. Rintoul for closing remarks.
David J. Rintoul -- President and Chief Executive Officer
Thank you, Lindsey. In conclusion, GrafTech is a leading provider of highly engineered graphite electrode services, solutions and products to the growing EAF steel market. The 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 interest in GrafTech. And we look forward to speaking with you next quarter.
Operator
[Operator Closing Remarks]
Duration: 33 minutes
Call participants:
Meredith H. Bandy -- Vice President, Investor Relations and Corporate Communications
David J. Rintoul -- President and Chief Executive Officer
Quinn J. Coburn -- Vice President and Chief Financial Officer
David Gagliano -- BMO Capital Markets -- Analyst
Alex Hacking -- Citi -- Analyst
Arun Viswanathan -- RBC Capital Markets -- Analyst
