Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Graftech first quarter Twentytwenty earnings conference call in webcast.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session.
To ask a question. During this time you will need to press Star then one on your telephone.
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Please be advised that today's conference is being recorded.
I would now like to hand, the conference or what's your speaker today Mr. Adam Dible. Please go ahead Sir.
Thank you Amy good morning, welcome to Graftech International's first quarter 2020 conference call.
On the called me today is Graftechs, Chief Executive Officer, Dave into <unk>, Chief Financial Officer Quinn Kober.
Now turning to our first slide.
As a reminder, some of the matters discussed on this call. Maybe 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 these indicated those indicated by forward looking statements are shown here.
We will also discuss certain non-GAAP financial measures for which you will find reconciliations in the slides.
The slides are posted on our website www dot graftech dot com and the Investor section.
For your reference a replay of the call also be available on our website.
No I'm pleased to turn the call over today.
Thank you Adam good morning, everyone and thank you for joining us today.
I hope this call find you your families and your colleagues well.
On that theme will begin as we always do with safety, which is more critical than ever in these times.
Health and safety excellence is a core value a graph Chuck.
Our first quarter total recordable injury rate has improved significantly to 0.5 for a more than 40% decrease from the prior year.
I would like to thank the team for their efforts associated with this achievement.
Over the last 18 months, we've made significant progress in improving our safety program.
This is fundamental to our belief that a safe plant provides the foundation to achieve success on the balance of the busy business metrics.
Now turning to slide four.
I would like to give you an update on where we stand within the context of Colby at 19, and the impact it has upon our business, but first I'd like to acknowledge and thank the healthcare workers and first responders, who have been the heroes working to help those directly affected by the virus.
Early on in this crisis, we established a covert 19 response team, which continues to me three to five times for a week and consists of a cross functional group of senior management.
Initial actions taken can consisted of bands on travel and in person meetings as well as working from home wherever possible.
We have developed a safe work playbook outlining exact protocols for safe operations in this new environment.
For those team members implants. This means actions such as taking temperatures were local privacy laws permit mandating the use of gloves by all plant employees additional cleaning using disinfectants and using good social distance practicing practices to name a few.
We have implemented daily check sheets to maintain focus and ensure compliance with new practices and procedures.
We have also developed returned to work protocols. So that when the time is right. We may have team members currently working from home safely return to the office.
Now turning to slide five.
I can't say enough about our team and the job they have done to keep our plants running safely and effectively throughout this crisis.
As a result of their hard work all of our facilities have managed to stay open and operating.
We did this by proactively working with eight different sets of government controls and guidelines given our global footprint.
As a result of our rapidly implemented protective measures to keep our employees and work environments safe I'm happy to report that over 99% of our employees have remained healthy.
Not only have our plants remain to operating we have met all of our customer requirements and she and achieved an on time delivery rate of 96% in the first quarter.
The team did all of this while still achieving safety performance that I discussed earlier.
Moving on to slide six.
Despite the steel industry being deemed an essential business in many countries a number of our customers have temporarily suspended or otherwise reduced operations.
As a result global steel production was down 1.4% in the first quarter and 4.1% if try as removed from those values.
We currently serve customers and over 300 locations and many have been adversely impacted in one way or another.
The pace of customer inventory de stocking was going as we expected until the pandemic outbreak.
The impact of the pandemic has slowed the pace of Destocking, which will now largely depend upon the timing of the economic recovery.
Our substantial vertical integration into needle coke to provide us competitive advantage has provided us a competitive advantage. Although we are not currently negotiating any third party needle coke purchases, we do monitor international trade data that suggests some thinly traded needle coke transactions took.
Place at just under $3000 during the first quarter.
We are planning our biannual turnaround at our seadrift plant in June to conduct regular maintenance projects. This outage will last approximately four weeks and we have sufficient needle coke the last us through that outage.
Now turning to slide seven.
As a result of covert 19, we have received over 20 force Ms. Your notices on our long term agreements.
Well there have been no additional bankruptcies within our customer base, we have had customers who had their operations to disrupt disrupted and are struggling to take volumes and perform on their contracts.
Adding to this pressure the spot price for graphite electrodes has been declining in recent periods and pricing pressure has been exasperated by the covert 19 crisis.
We've now reached a point, where our spot price, which averaged approximately $6500 per ton and the first quarter is below what is in the long term agreements.
Well most customers understand the situation and value of the long term contracts for the security of supply and price certainty. Some have recently chosen not to perform on their contractual obligations.
In light of these challenges we are now estimating that our twentytwenty long term agreements shipments will be in the range of 100 to 115000 metric tons.
This is down from our previous quarter estimate of 130000 tons. However, we expect some of this decrease will in fact be deferrals, which will be recovered in future years.
We will continue to work with our valued customers for viable solutions to these issues, but we will make every we will take every measure to ensure that both graftech and our customers honor these contracts.
Now I'll turn it over to quit on slide eight for more details on our first quarter results.
Thanks, Dave during the quarter, we produced 33000 metric tons of graphite electrodes and our capacity utilization was 65%.
We ship 34000 metric tons of electronic demand was impacted early in the quarter by customer Destocking and later in the quarter due to steal operating rates.
Shipments were also impacted by just over 1000 metric tons from transportation delays as a direct result of Cowen 19.
Revenue decreased due to a lower due to lower shipment volume and lower prices.
Now turning to slide nine.
Net income was 122 million generating 45 cents earnings per share.
The EBITDA was 179 million driven primarily by the lower sales volume.
Free cash flow totaled 125 million in the first quarter as we continue to generate strong cash flow.
While the working capital impact on cash was neutral overall, we benefited from our ability to defer it first quarter tax payment of 50 million until the end of the year in a foreign jurisdiction due to coven 19 really.
Partially offsetting this benefit was our first required payment under our tax receivable agreement of 28 million.
During the quarter, we also repurchased $30 million of our shares on the open market.
And paid dividends of 23 million.
Now turning to slide 10.
We ended the quarter with a strong liquidity position.
Our total liquidity is approximately 400 million consisting of 152 million of cash.
47 million on our revolving credit facility.
We also have plenty of runway with regards to our debt maturity profile.
Our term loan is not due until February 2025, and we also made prepayments on our term loan in 2019 totaling 350 million, leaving us with no required amortization payment until 2022.
Now moving to slide 11.
In response to the current environment, we have taken decisive actions that began with eliminating discretionary spending.
We have decreased our capital expenditure plan by 50% to approximately 30 to 35 million, which represents a maintenance level of capital expenditures.
We have right sized our workforce by removing substantially off contractors and temporary workers and reducing our full time workforce.
And all we are reducing our head count at our electric plans by 15% compared to 2019.
You are also reducing our fixed cost by 15% at our electrode plans.
We are managing our inventory levels to mess demand and expect the total inventory to be down by year's end.
Now looking ahead on page 12.
We also are taking proactive steps this quarter to increase our financial flexibility in the face of unprecedented uncertainty and unexpected period of economic disruption.
We have reduced our quarterly dividends to one cents per share and we are adjusting our capital allocation to focus on liquidity and balance sheet flexibility.
In Q1, we returned over 50 million to shareholders in the form of open market share repurchases and dividends.
During the remainder of the year, we will use the majority of our incremental free cash flow to pay down debt.
We expect the or to revisit the dividend level when market conditions.
Crew.
Ill now turn it back to do on slide 13.
Thank you Quinn.
Although the current conditions are difficult, we must remember that E. F steel manufacturing has several advantages over traditional steelmaking.
Global warming is a critical issue facing still companies going forward and the E. F industry is among the largest recycling industries in the world.
You have production yields 75% less carbon emission than traditional blast furnace production.
And the long term growth rate has been approximately 3% and there have been significant enough capacity additions announced recently.
Well there near term will be challenging the long term future is positive for the ETF industry as a whole.
Turning to slide 14.
Graphite electrodes are critical component of the a of growth and our graphite electrodes are highly engineered and require extensive process knowledge to produce.
The services and solutions. The Graftech provides will help position, both our customers and ourselves for a better future.
Moving ahead. This slide 15, Graftech is one of the largest electrode manufacturers in the world and we are the only producer that is substantially vertically integrated into petroleum needle Coke.
We have taken decisive actions to manage through the co vid 19 crisis and have a strong liquidity position.
We have a proven track record of cash generation and managing through downturns in the industry.
While we cannot be certain when the current difficult macroeconomic conditions will return to normal we believe graftech is positioned well to whether this crisis.
That concludes our prepared remarks, and we'll now open up the call for questions.
Hi, This time she would like to ask a question. Please press Star then one on a telephone.
Your first question today comes from the line, it's David Gagliano with BMO capital markets. Please.
Please proceed with your question.
Okay, great. Thanks for taking my questions and thanks for the update and.
Well, it's clearly.
She is challenging time here.
And then.
My questions are related to the current dynamics in the contract market.
Obviously, we've seen the reduction in 2020 contracted volumes and then there is no indications now for 21 and 2022 contracted volumes.
I'm wondering if you can give us a bit more information regarding the remaining.
Hundreds are under for 2000 tons. That's that's sold under contract for 2020 are expected to be.
In terms of also you know how much of that is.
Incrementally that risk of another reset lower and also if you can comment on.
The expected pricing now tied to those those contracts for 2020, that's that's my first question.
Okay. So I think there's a there's a couple of things in there Dave and good morning month and thank you for your ongoing interest in Graftech.
Well the.
Current global macroeconomic state of affairs, and the and the subsequent recovery will ultimately dictate a though the exact answer to your question.
Well, we've done it with this reduction is taken into account that we have these fortunately as youre notifications.
And some others that are plant closures.
Where people close plants and didnt necessarily declare force mature, but we know that their closed.
And trying to look through that and project.
The impact that those things will have on volume along with some customers that we know that while there are certainly not bankrupt yet we know there's a few that are suffering some financial distress so to be fair, yes, we've taken.
An estimation of that we think one that is responsible.
And to some extent conservative.
But the recovery of those in the contract is very specific how those are handled.
Fortunately the wording is quite constructive in very specific as to how that happens and how the contract gets extended.
Into the out years to account for the period of time when force Majeure isn't that example, I was put into place in terms of the pricing.
The pricing is really a factor of as the mix right. So that every one of those contracts allows for certain product mix and in the first quarter. We saw some variation from the from that mix that created a lower number as we go through the balance of the year depending upon the.
Operating operations of various customers that mix will probably change again it could go up it could go down depending upon that and mixture of customers, but the contract is very specific about what the pricing as so it's not a matter of anybody.
Changing price, it's more a matter of the mix that came within those contracts.
Okay. That's helpful. The previous.
Indications for 2020.
Contracts was an average.
Price of $9600 a ton and then in 2021 in 2022 is $9700 time with the change today for 2020, what is that expectation for the average price at least for 2020.
Yes, Dave it's Glenn So in Q1, our average price was 90 450, I would expect that to be somewhere around there for the remainder of the year 90, 450 to 96 on it it won't be that much under Ninesix hundred. So the 90 450 for Q1 is probably a reasonable estimate.
Okay. Thanks, I mean, that's that's helpful. And then and then just the last question for me on that subject can you can you speak too.
You know how the contracts are structured with regards to.
Over the life of the contract.
And I know each one is different but just in generalities can you speak to how you would reach recoup the.
The net present value that contract over the life of the contract would it be extending volumes into the out years, where there's some sort of.
Upfront payments or or or or something else.
Well there are a.
Couple of different ways for that to happen, but the primary one and the one that the contract.
Really envisioned in terms of Oh.
Force Majeure type events.
Is that the contract essentially.
Gets extended by whatever timeframe.
That we've been in the force majeure condition, so the the volume and the value of it gets recouped.
In that manner.
There was also provisions within the contract that that allow for a shorter time period for that owed to occur.
Every week every condition in every customers situation is going to be just a little bit different. So it's hard to give you a a broad based yeah. This is the way it'll happen every time. So there there is a mechanism that allows that recovery to happen.
At the beginning of the next year there is another mechanism that.
Allows in force majeure circumstances to extend the length of the contract by the length of whatever time the force mature.
What's taking place. So there are caught the at least two different ways to to handle that depending upon specific conditions.
Okay got it appreciate it thanks for the EPA.
Okay.
Your next question comes from the line of I Rune. This one of them with RBC capital markets. Your line is open.
Great. Thanks, good morning.
Thanks.
Morning.
I guess I wanted to ask about needle coke, we've seen that dramatic shift and the oil markets and.
How does that affect decaf oil how does that affect needle coke pricing and then how does that affect your own strategy.
So sourcing I'm, just curious if seadrift Ms less attractive now in this environment.
And maybe we just start there thanks.
Well I'll start by saying that.
The benefit of having seadrift.
Still has not changed in so much as our cost structure.
Is well below what takes place.
In the marketplace, even with some of the numbers that I shared on the call earlier.
We're in a more of them still in a much better place that with our internal cost to produce needle coke in terms of what goes on in the oil market in recent weeks.
Yes that has an impact on the price of Decatherm oil and lowers the cost of that I'll remind everybody that we are hedged as well but.
But net net takeaway is.
Developments in oil and needle coking pricing at this point.
Does not change.
The benefit for us of having seadrift.
It's a valuable part of the family and provides us with not only a cost effective product compared to the market, but it allows us to do some things on the quality front to provide better electrodes at the end of the day.
And then I guess regarding the help of your customers I guess have you seen any shifts and purchasing patterns I'm. Just curious if there has been you know.
Increased adoption of lower quality it electrodes.
I don't know.
If you have any visibility on that but that was one of the concerns that we had that maybe some customers would be switching to smaller diameter.
Electrodes.
In the tougher environment, if you observe any of that thanks.
So so technically and all the technology part of electric arc furnaces at the current conducting arms that holding electrode our design for our specific diameter. So it's not.
Very practical for somebody to sale I've been using 700 millimeter electrodes I think I'm going to change tomorrow I'm going to use 400 millimeter electrons life life technically doesn't work that way on the furnace.
In terms of behavior patterns overall look the covert 19 thing has turned the entire world on its head and so any conclusions we would draw but whats taken place in the last.
All several weeks are not valid in terms of a longer term pattern people are.
Trying to do their best at their steel plants to keep their doors open and somewhat been able to do that with more success than others and others that case in point.
The terrible situation at evolved in Italy.
No choice, but to deal with it and shut down so.
There is a real.
The scheme or rather the range of reactions to this crisis, there is quite broad depending upon what country people are in and their specific circumstances. So.
It would be unwise and brand appropriate for me to generalize.
That those conditions.
And then I just wanted to I guess ask 'em beyond Nicole good.
When you when you think about the business.
Versus a couple of years ago, Neocart pricing has come down electrode pricing has come down.
There was a potential for the industry to move more towards LTAC.
I I guess is it fair to assume that that is less possible now just given the reduction in needle Coke and.
You know your competitors kind of not willing to sign contracts at these low levels.
Are you thinking about your business as it evolves beyond kind of it.
Sure.
I think the the fact of the matter is at this point in time.
Most of our customers are just trying to deal with what's going to happen tomorrow relative to their covert 19 response.
The most of the contracts we haven't play are there until the end to Twentytwenty too I think thats good news for us because it will allow.
Some period of time of recovery posted this crisis for the world to get back to.
Whatever the new normal is going to be but certainly much closer to weigh life was.
In 2018 and through the first part of our 29 10 2019 as opposed to 2020 and people, including ourselves will be assessing that as we get into the latter part of a 21 and into 22 and whether the conditions remain.
Appropriate I think as I've said for in the past.
These are type of hedging that people do on all kinds of commodities in the steel business, whether its natural gas electricity on our or in our case graphite electrodes.
We will certainly be the one this position to continue to be able to offer that service and that.
Contract configuration to customers I suspect it'll still be of interest to summon maybe not others and and but we will be positioned to be able to continue to provide that service and the macroeconomic.
Recovery in the market will dictate.
The reception to that most of 'em contractual business.
When we get closer to 2022.
Okay, and then just one more last one could you comment on.
Electric vehicle uptake I guess.
Needle coke.
You know it has there been any reduction in I guess and needle coke demand globally because of a maybe some.
Slowdown in the electrical vehicle market. Thanks.
Well look.
I don't think.
I think that we have the statistics over the last several weeks what's happened in response to covert 19 on.
The battery market per Se I do know this much is that.
You know as we were monitoring the situation through the first quarter.
There was no question that there were some of the needle coke that was being.
Used in.
The battery business that when the last a crisis that we had the last global global crisis, and there was anything close to this that wasn't the case.
So that is a market that didn't exist in the past certainly with the decline in the automotive sector as part of the coal vid situation I would have to believe that.
Cars are being manufactured there'd be some near term short term impact on that but do believe that that's a co vivid.
Specific reflection of that change so one would expect that as the economy recovered than that demand would resume and pick up.
Okay. Thanks, a lot good luck with future.
Thank you.
Your next question comes from the line of Alex Hacking with Citi. Your line is open.
Hi, Good morning, Dave and quite hope you guys are doing okay.
My first question would be around the pick the contracted volume. Thanks for the updated guidance for the year I guess is there any way you can give us color on kind of the cadence of that through the yeah My assumption.
Would be that QQ would be weaker than threeq and Fourq you.
But you kind of and any color around that would be helpful. Thank you.
Yes, certainly I think you're right Directionally correct because.
You know a rise we are sitting here we're in the month of May already.
April so a lot of the force majeure, we see a lot of a coming off now and would expect it will start to resume shipments to some of those plants through this month and next month, but there's no question that.
Yeah, there's the initial head of the crisis, the covert 19 impact.
That will cause the second quarter.
To.
Be impacted by that and we're optimistic that the third and fourth quarter, we'll see some degree of recovered from that although the gig again, the economic condition than the demand for steel is ultimately going to drive this.
And we're not going to pretend that our crystal ball is.
Probably any better than yours with respect to steel demand, but our numbers that we gave and reducing reflected our best estimate that there would be some lingering.
Impact throughout the year, because I don't I don't expect that.
Come anytime.
Soon in this month like Theres, a suddenly because somebody's going to flick a switch in steel demand will suddenly return exactly to where it was back in <unk> in January I think you're all aware that.
If you just look at the United States as an example.
It's not too long ago to began the year that utilization rates are at 81%.
And last week, they were 51%. So obviously that has to have an impact.
Not only in the second quarter, but.
As we move through the third and fourth quarter to some extent.
Okay. Thanks, that's helpful and then.
A follow up.
I guess coming back a little bit to the to the needle Coke question, but a bit more broad and I'm not sure. If you can answer this but how do you see the global ex China Kaska right now I mean, you mentioned in your prepared remarks, I think that.
You've seen some neat some you know electro transactions around 3000 to Todd.
I mean, if that really is where prices are.
You know do you I guess, how do you think everyone's underwater or you think the Costco has reset to make that kind of.
A breakeven price thank you.
So look we need to be a.
Very clear and transparent like we were trying to be in my prepared remarks.
We obtained that information just like anybody else could through looking at trade statistics and we saw a couple of and then we did say was a very thinly traded we saw a couple of instance, where transactions took place at numbers just below that or below that 3000 value. So.
Because we're not buying needle coke and because of our the inventory situation our own ability in the in the market conditions that we've referenced here before we don't expect to be purchasing needle coke.
This year and vendors know that so it's not like we're getting first hand information we're using that.
The trade statistics to inform us so I want to be very clear about that so there is no misunderstanding.
And where that brings.
The other few folks to do make needle coke I can cause I cannot speak to their cost curves it wouldn't be fair and it wouldn't be appropriate for me to do that I, just know where ours are and.
We think we know we're in good shape relative to those kind of values and we'll continue to focus on running the business cost effectively not just at the electoral plants, but also at our seadrift facility.
And Alex this is Glenn just to clarify one.
Question, you referred to graphite electrodes are our prepared remarks around transactions below 3000 related to needle coke.
Oh, Okay. Thank you. Thank you to clarify that I misunderstood. So thank you that's that's helpful.
And then I guess, just one final one if I may.
How should we think about working capital for the rest of year.
Obviously, you talked about selling inventory and going to generate some cash there is there anyway, you can quantify that thanks.
Yes, sure. So we do expect inventories come down over the course of the year it'll be a bit of a slow process for to come down given the volumes are lower certainly our purchases are lower and we will manage our production generally to match the sales volumes, so while I won't.
Come down drastically in the near term will come down overtime and then you saw in the first quarter, we had quite a nice benefit.
Cash flow from accounts receivable, that's natural if sales or to be lower there'd be some additional benefit from that and sales are the same than that that will probably be about the same so well what summarize it is some meaningful positive benefit due to lower inventories regardless of.
Levels of volumes over the rest of over the remainder of the year.
And that total.
As you might imagine just to be clear that's total inventories from needle Coke all the way through electrodes, we may decide to hold inventories in different places, but the total as a whole.
Would come down.
Hi, Thanks, guys, if they say.
Your next question comes from the line of Curt Woodworth of Credit Suisse. Your line is open.
Thanks, Good morning did and Quinn.
Good morning, Kurt.
So it's some.
We're not going to be sourcing Burton Coke then is it safe to say that you're sort of effective capacity. This year would this be.
I think it's roughly 135, Katy you source out of secret.
[noise] well be less than that this year because we're taking this is every second year, we take a a turnaround hi. This is the this year. He is a turnaround year. So we'll have that operation out of service for for a month, so it will be lower than.
In that value.
Last year, we indicated that our production at Seadrift was roughly 125000 metric tons. So the lower than that in this year occurred because of the one month turnaround.
Okay. So I believe it's roughly a one to one for Coca Cola <unk> ratio, so thats below 125, but you're still going to do potentially.
120 of LTAC that would assume.
Your spot.
That's great Yeah, Yeah, yeah. Good good question, Kurt So we did in anticipation of the outage build up our needle coke inventory to some extent so we have enough inventory to cover us through the outage and then going forward.
We don't anticipate any meaningful purchases of third party needle coke through the remainder of the year.
Okay, and I mean, given the fact that I mean, the spot market is then as he said no query.
You know reports a spot pricing.
Well below five 6000, right now I mean.
Is the is the philosophy is just too.
You know kind of Baseload facilities as best you can I mean can you talk about how to optimize your footprint.
Right now I notice you know the fixed cost reductions that the business is really fortunate that you don't have a great lot of fixed cost ratio, but.
Just in terms of how you're running the business on a lower utilization rate can comment on that and if there would be any unit cost pressure.
Just something at basis going forward.
Sure look.
Therein lies one of the big benefits of the LTAC of course.
But on that on the in the spot area.
We will conduct ourselves in a manner to be competitive.
In the markets that we consider.
Our our traditional home markets I think we can weather the storm as well as anybody can.
Now doesn't.
Doesn't prohibit people from perhaps doing irrational things and that doesn't mean that we're going to follow somebody down an irrational path, but but for the most part to answer your question, we expect to be competitive.
We're going to maintain.
Our presence in the market and service to customers that we've been doing business with for years and years.
And it May mean at the end of the day and I think this is your point that when you look at a margins the spot businesses may not.
The as attractive as it was a one year or so ago five and we're in this for the long haul and we will.
The in the place and available for our customers are no question about that.
Great. Thank you.
And at this time ill turn the call back to the presenters for any closing remarks.
Well. Thank you in conclusion, Graftech is well positioned to be resilient through these challenging microeconomic macroeconomic conditions and we're committed to providing our customers with a reliable service through the difficult days that lay ahead.
I'd like to take this opportunity to wish everyone. On this call continued health and safety in the coming months again. Thank you for your interest in Graftech and we look forward to speaking with you next quarter.
This concludes today's conference call. Thank you for your participation.
You may now disconnect.
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