GRAFTECH-INTERNATIONAL Earningcall Transcript Of Q2 of 2024


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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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