GRAFTECH-INTERNATIONAL Earningcall Transcript Of Q2 of 2024
operating officer; and Catherine Delgado, interim chief financial officer. Tim will begin with opening comments. Jeremy will then discuss safety, the commercial environment, sales, and operational matters. Catherine will review our quarterly results and other financial details, and Tim will close with comments on our outlook. We will then open the call to questions. Turning to our next slide. As a reminder, some of the matters discussed in this call may include forward-looking statements regarding among other things, 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 different materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures, and these slides include the relevant non gap reconciliations. You can find these slides in the investor relations section of our website at www.graftech.com. A replay of the call will also be available on our website. I'll now turn the call over to Tim. Tim Flanagan -- Chief Executive Officer Thanks Mike, and good morning, and thank you for joining GrafTech's second quarter earnings call. Let me start by saying that we operate in a cyclical industry, and we find ourselves in a challenging part of the cycle, for our business and more broadly for our industry. Graphite electrode demand remains weak, industrywide capacitation rates remain low, and consequently, costs per ton are high. At the same time, pricing discipline in the inventory has been somewhat sacrificed to support volume. Against this backdrop, GrafTech and we believe most others in our industry are operating their electro business at losses or low margins. We think these dynamics are well understood. We also believe it's well understood that these dynamics are not sustainable. We don't control all of these underlying forces, particularly the macro or the actions taken by others, but we do control our response and our actions. We are engaging with our customers with a relentless focus on meeting their needs. We are adding to our customer value proposition. We are investing in technical capabilities and offerings. We are aggressively cutting costs without compromising quality, safety, or the environment. We're managing our working capital and capital expenditure levels. We've reduced our production capacity. We are proactively managing production to balance supply and demand, and we are actively pursuing opportunities to diversify our business and support long term growth. At the end of the day, we are focused on controlling the controllable. We set out a plan at the beginning of the year to do just that, and we're executing against that plan. I'm proud of our team's efforts and thank them for their continued dedication. All this said we don't -- or we recognize that this won't translate into immediate recovery from a financial performance perspective. That wasn't our expectation nor should it be yours, but they're the right actions to help us navigate the current challenges. Importantly, we participate in an industry that has many long term and sustainable tailwinds, and it's very easy to lose sight of that when you're on the downside of a cycle. But cyclical downturns eventually come to an end, and the long-term growth opportunities in front of us are very real. During our comments today, we'll expand on all of these concepts and why we believe we're taking the right actions to manage the current environment and preserve our long-term flexibility. Let me begin with an update on some of our key initiatives starting in the commercial area. As I mentioned on our last call, we are instilling a renewed focus on a customer first mantra, as meeting the needs of our customers must be central to everything we do. We continue to execute our customer engagement strategy, reinforcing the importance of our relationship with our customer, and the investments we're making on our customer value proposition to further differentiate GrafTech from our competitors. For example, our initiative to expand our product offering by adding an 800 millimeter supersized electro door portfolio remains on track with initial customer trials expected to occur later this quarter. We've expanded the breadth of our architect system as part of building upon our best-in-class technical service capabilities. We also continue to expand our first principals understanding of graphite electrodes, building on more than 135-year legacy of research and development of graphite and carbon-based solutions. We invested in our pin-production capabilities and are the only graphite electrode producer with the capability to produce connecting pins on two different continents. In addition, we're building up our connecting pin inventory levels, and we are on track to have 12 months of pin inventory on hand by the end of this year. All of these examples demonstrate the investments we are making to support our ability to meet the needs of our customers now and into the future, and is demonstrated by the feedback I'm receiving from our customers including a number of interactions which have taken place in recent weeks, our investments in these areas are resonating. Our customer engagement efforts coupled with our compelling value proposition contributed to a 6% sequential improvement in our sales volume for the second quarter. Further, we continue to expect sales volume growth for the full year compared to 2023 as we continue to regain lost market share. But more importantly, our customer-centric mindset is all about the long term. It's about strengthening relationships with existing customers while fostering new relationships with prospective customers that are mutually beneficial for years to come. To that point, as we mentioned on our last call, we are pleased to have our long standing and our largest LTA arbitration behind us, removing a substantial risk to our financial position. And more importantly, it allows us to focus our energy on the commercial relationship with this customer. Beyond commercial, let me highlight a few accomplishments across other areas of our business. In operations, our facilities continue to run well as they execute our production plans. And we are doing this safely as our total reporting will incident rate remains significantly low the prior level. Ultimately, this is the most important thing we do, and I commend the team for their ongoing commitment to safety. Our initiatives to address key elements of our cost structure are also progressing well. During the second quarter, we safely and thoughtfully wound down the production activities at Saint Mary's. In addition, we have completed the activities related to the reduction in our overhead structure. Overall, we are on track to achieve the projected $25 million of annualized cost savings from these initiatives. In addition, the other actions we have taken to reduce our variable costs and control overall spending levels are already paying off. We saw a further sequential decline in our cash costs on a per metric ton basis in the second quarter and have seen an 18% reduction in this metric in the first half of 2024 compared to the first half of 2023. And we remain on track to achieve a mid-team percentage point decline in our full year cash costs on a per metric ton basis compared to 2023. In the EV space, we continue to progress our capabilities and to participate in the growing demand for petroleum needle coke and synthetic graphite for anodes for lithium ion batteries. During the second quarter, we received regulatory approval for the permit application we filed last year related to a potential expansion of [Inaudible] production capacity, and at the same time, we're making investments within our R&D function including pilot scale assets in our technical center. This will advance our capabilities as it relates to anode material. This remains a dynamic and exciting opportunity with our assets and expertise, positioning as well to participate in this demand growth. In the area of sustainability, we continue to make good progress on our initiatives. Earlier this month, we published our latest sustainability report, encourage everyone to take a look at it. We continue to be good stewards in the communities in which we operate both from an environmental perspective but also having a positive impact through our community engagement efforts. In summary, in light of the challenging near-term industry dynamics, we set out a plan and we're executing against it. We believe these are right steps to position GrafTech to benefit as a global steel market rebounds. Longer term as decarbonization efforts further drive a shift to electric arc furnace steel making and higher graphite electrode demand. We are poised to capitalize on this anticipated growth. I'll expand later in our prepared remarks. Overall, we're proud of our recent accomplishments and remain confident and emerging from this period as a stronger GrafTech. But let me turn it over to Jeremy to provide more color on the current state of the industry and our commercial performance. Jeremy Halford -- Chief Operating Officer Thank you Tim, and good morning, everyone. Before I provide an industry update, I'll start by briefly expanding on Tim's comment about our safety performance. Safety is a core value at GrafTech, and with a year-to-date recordable incident rate that shows significant improvement over our solid performance in 2023, we are pleased with the ongoing momentum. Sending our employees home safely at the end of every day is our most important priority. And I would like to join him in commending all of our team members for their focus on this objective. Let me now turn to the next slide to discuss the commercial environment. As Tim indicated, we operate in a cyclical industry and currently find ourselves in a challenging part of the cycle, reflecting a constrained global steel industry. Earlier this week, the World Steel Association published their most recent steel production statistics. On a global basis, steel production outside of China was approximately 212 million tons in the second quarter of 2024, which was essentially flat for the prior year. The global steel capacity utilization rate outside of China also remained flat at 69%. Looking at some of our key commercial regions. But for North America, steel production was down 5% in the second quarter on a year-over-year basis, neglecting a slight dip in what has been a relatively stable steel region. Steel output in the EU increased 3%, although it remains well below historical production and utilization rates for that region. These dynamics within the global steel industry have in turn resulted in persistent challenges in the commercial environment for graphite electrodes. Specifically, industrywide demand for graphite electrodes has remained weak, with challenging pricing dynamics persisting in most regions. To expand on pricing, the graphite electrode industry continues to suffer from low capacity utilization. Despite the weak demand environment, we continue to see a healthy level of electrode exports from certain countries, including India and China, into non-tariff protected regions such as the Middle East. These are typically lower priced electrodes with prices declining further of late. As we've discussed in the past, with these export dynamics, we see a knock on pricing effect in tariff protected countries such as those within the EU as Tier 1 competitors have continued to lower prices in these regions to support volume. As we noted last quarter, we're also seeing this dynamic play out in the U.S. with prices softening further of late, all of which represent challenges we must manage into term. With that background, let's turn to the next slide for more details on our results. Production volume in the second quarter of 2024 was 27,000 metric tons, which resulted in our capacity utilization rate increasing to 60%. Our sales volume was nearly 26,000 metric tons which was above our stated outlook for the quarter. Shipments for the second quarter of 2024 included 23,000 metric tons of non-LTA sales at a weighted average realized price of approximately $4,300 per metric ton and approximately 3000 metric tons sold under our LTAs at a weighted average realized price of approximately $8,300 per metric ton. Expanding on our weighted average price for non-LTA sales, this represented a 23% year-over-year decline and a sequential decline from the first quarter of approximately 2%. Net sales in the second quarter decreased 26% compared to the second quarter of 2023, driven by the lower pricing, along with the ongoing shift in the mix of our business from LTA to non-LTA volume. Looking ahead, for the reasons already mentioned, we expect that industrywide demand for graphite electrodes in the near term will remain weak and pricing pressures will persist. In response, we remain selective in the commercial opportunities we're choosing to pursue with a focus on competing responsibly. We expect our sales volume in the third quarter of 2024 to be broadly in line with sales volume in the second quarter of 2024. Further, we continue to expect a modest year-over-year improvement in sales for the full year. Longer term, as the global steel market rebounds and the shift to electric arc furnace steel making continues, this will lead to an improved commercial environment for the graphite electrode industry. GrafTech remains well positioned to capitalize as the electrode demand recovers. Our customer value proposition remains intact and includes a strategically positioned manufacturing footprint that provides operational flexibility and reach the key steel making regions. Being the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, best in class customer technical services and solutions that are offered to customers at no incremental cost, and to focus on continually expanding our commercial and product offerings, some of which Tim spoke to earlier. Overall, we believe we provide a compelling value proposition to our customers, and we will compete on more than just price. But we now turn it over to Catherine to cover the rest of our financial details. Catherine Delgado -- Interim Chief Financial Officer Thank you, Jeremy. For the second quarter of 2024, we had a net loss of $15 million or $0.06 per share. Adjusted EBITDA was $14 million in the second quarter, compared to adjusted EBITDA of $26 million in the second quarter of 2023. This decline reflected lower weighted average pricing and the continued shift in the mix of our business toward non-LTA volume. These factors were partially offset by an 18% year-over-year reduction in cash cost on a per metric ton basis. In addition, second quarter results included a $9 million benefit related to the final award in a long-standing LT arbitration. And as this represented a reimbursement of legal fees and other related expense, it was recorded as a reduction in selling and administrative expenses. Now let me expand on the topic of our cash cost of goods sold. As shown in the reconciliation provided in our earnings call materials posted on our website, our second quarter 2024 cash costs per metric ton were approximately $4,300 which was in line with our expectations for the quarter. Contributing to the 18% decline on a year-over-year basis was a benefit of 6 million in the second quarter or approximately $230 per metric ton, reflecting the portion of the lower of cost or market inventory write down recorded in prior periods that was related to the inventory sold in this quarter. However, the majority of the year-over-year cost improvement reflected two key drivers, and let me provide some color on each one. First, as part of addressing key elements of our cost structure, our efforts related to variable costs are already yielding benefits, specifically, our technical and operational teams continue to work on engineering cost out of our manufacturing processes without compromising quality and performance. Additionally, we are aggressively working with our existing supplier base and qualifying new suppliers as we enhance our procurement practices related to certain key input costs. Second, we had a year-over-year reduction in the level of fixed costs being recognized on an accelerated basis due to low production levels, and as a reminder, these are costs recognized in the current period that would otherwise have been inventoried if we were operating at normal production levels. In the second quarter of this year, as utilization rates at our graphite electrode and seadrift facilities increased, we recognize approximately $1 million of such costs, compared to approximately $10 million in the second quarter of 2023. And lastly, the cost savings related to aiding our Saint Mary's facilities are beginning to flow through in the second quarter. Reflecting the progress we're making on our cost structure, we continue to anticipate a mid percentage point decline in our cash costs per metric ton for 2024, compared to the full year cash cos per metric ton for 2023 of just over $5,500. For the first six months of the year, our cash cost per metric to was approximately $4,500, which is an 18% decline compared to the first half of 2023. Therefore, as the math would imply, we expect to see a sequential increase in our cash cost per metric ton for the second half of 2024 as compared to the first half of 2024. Among other factors, this expectation reflects first, the benefit from the utilization of the previously recorded lower of cost to market inventory write down being more heavily weighted toward the first half of 2024. Second, seasonally higher energy costs for our European facilities in the second half of 2024. And third, the impact of upcoming plant production declines on fixed cost absorption. And specific to the plants production declines, this relates to normal shutdowns at our European electrode facilities and our plant turnaround activities at our seadrift needle coke facility which take place every 18 months to three years. This planned maintenance events are scheduled to take place later in the third quarter. So, however, despite the quarter to quarter lengthiness in cost recognition, the key point is that with the actions we're taking, our overall cost structure is moving in the right direction for 2024, and we would anticipate cost to decline further as we look ahead to 2025. Now turning to cash flow. For the second quarter of 2024, cash used in operating activities was $37 million and adjusted free cash flow with a cash usage of $44 million. As a reminder, our semi annual interest payments of $34 million are made in the second and in the fourth quarter of the year. As it relates to working capital, inventory levels increased slightly during the second quarter. And however, this was an intentional build in advance of the seasonal production declines which I just spoke to. As we move through the back half of 2024 we remain focused on reducing our overall inventory levels as part of or initiative. We continue to expect the net impact of -- working will be neutral to our full year cash flow performance. And lastly on cash flow, we continue to anticipate our full year 2024 capital expenditures will be in the range of $35 million to $40 million. Moving to the next slide. We ended the second quarter with a liquidity position of $232 million consisting of $121 million of cash and $111 million available under our revolving credit facility. This reflects the financial covenant that limits worrying availability and [Inaudible] in certain circumstances. More importantly, we do not anticipate the need to borrow against the revolver in 2024. Further, let me add that we have no debt maturities until the end of 2028. Now let me turn the call back over to Tim for some final comments on our outlook. Tim Flanagan -- Chief Executive Officer Thanks, Catherine. To summarize our comments on the quarter and year to date results, while we're not satisfied with this level of performance, GrafTech continues to deliver on our stated outlook and initiatives to control the controllable. We are pleased with the team's execution and remain confident in our ability to manage the near-term headwinds. And further, there are many reasons for optimism about the longer term prospects for our company as we look ahead. While we remain cautious on the near-term steel industry trends as we've mentioned, cyclical downturns eventually come to an end. World Steel Association's most recent short term forecast on global steel demand calls for low- to mid- single-digit percentage increases in 2025 for nearly all of our key regions including the EU, the Americas, the Middle East, and in Africa. Longer term, as I noted earlier, decarbonization efforts are driving a transition in the approach to steel making with electric arc furnaces continuing to increase the share of total steel production. Based on updated production statistics published last last month by the World Steel Association, The EAF method of steel making accounted for 50% of global steel production outside of China in 2023, an increase from 44% in 2015, with market share growth in nearly every region. And this trend of EAF share growth is expected to continue. They're tracking approximately 200 announced projects from steel manufacturers regarding plans for new EAF facilities or expansion of existing facilities. Outside of China, these projects are expected to result in over 170 million metric tons per year of new EAF steel production capacity coming online by the end of the decade, with much of this growth concentrated in our key commercial regions. This in turn is expected to drive incremental demand for graphite electrodes. In fact, 170 million metric tons of EAF steel capacity, even at conservative assumptions around utilization rates, could translate into about 200,000 metric tons per year of incremental demand for graphite electrodes. That would be more than 25% of the total manufacturing capacity that currently exists outside of China. All in, this would drive graphite electrode demand increasing at a compound annual growth rate of 3% to 4% through the end of the decade. Importantly, about 80% of that growth would take place in regions where we already have a strong presence. As the strategic actions we are taking to reduce costs have been designed to preserve our competitive advantage that we have spoken to, we view GrafTech as being well positioned to capitalize on long term industry tailwinds. Further, anticipated demand for growth in petroleum needle coke will also present a tailwind for our business given our substantial vertical integration. We expect this demand for high quality needle coke to be driven by two factors. First, the demand for graphite electrodes from the ongoing shift to EAF steel making I just spoke to, and second and more importantly, the demand for synthetic graphite anode material for use in electrical vehicle batteries where needle coke is a key precursor material. Growing demand for needle coke should result in elevated needle coke pricing, and given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing, this trend should translate to higher market pricing for graphite electrodes. This again reinforces the key competitive advantage that our substantial vertical integration into needle coke affords us as it relates to our graphite electrode business. Beyond graphite electrodes, we continue to evaluate ways to leverage our assets and technical know-how to directly participate in the demand growth for anode material for the EV market. There's a strong desire by Western OEMs and supported by Western governments to establish EV battery supply chains that are independent of the current reliance on China. Our unique manufacturing footprint would allow us to participate in the establishment of the supply chains in two potential ways. First, as a supplier of petroleum needle coke, given that we are only one of two Western manufacturers of these key material. And second, as one of the largest Western operators of gravitation capacity, we could leverage these assets to convert needle coke into synthetic graphite. We continue to hold dialogue with leading participants in the space and remain excited about the opportunity and the development of the supply chain and our associated prospects. In closing, this is a pivotal time for GrafTech with many challenges still in front of us. Yet, we're up to the challenge and we continue to believe GrafTech will successfully manage through the near term uncertainty and remain an industry leading supplier of mission critical products to the EAF industry. Longer term, we possess a distinct set of assets, capabilities, and competitive advantages to capitalize on growth opportunities. For these reasons, we are confident we can return GrafTech to the position of generating great value for its stockholders. This concludes our prepared remarks, we will now open up the call for questions. Operator Questions & Answers: |
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