Q2 2020 GrafTech International Ltd Earnings Call
After the presentation, we will open the call for questions.
Hi, if you have the question. Please press star one on your telephone keypad again pound followed by one. Please note that this call is being recorded today Thursday August six 2020.
Our o'clock eastern daylight time, I would now like turn the meeting over to your host for todays call Graftech International Chief Executive Officer, Dave rental you may begin.
Yes, good afternoon, and welcome to Graftech International second quarter Twentytwenty Conference call.
On the call with me today is Quinn Colburn, Chief Financial Officer, and Wendy Watson, who is our new Vice President Investor Relations.
Wendy is a seasoned investor relations professional and we're excited to welcome her to the Graftech team.
I'll now hand, the call over to Wendy.
Thank you, Dave it's a pleasure to be here and I'm looking forward to working with Graftechs investment community.
Before we begin today's call I want to remind you that 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 expectation and are subject to risks and uncertainties.
Factors that could cause actual results could differ materially from 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 slide.
These slides are posted on our website at www Dot Graftech dot com in the Investor section for your reference a replay of the call well also be available on our website now I am pleased to turn the call over to Dave.
Thank you Wendy and good afternoon, everyone and thank you for joining us today.
I Hope this call finds you your families and your colleagues healthy.
Well begin as we always do with safety, which has become even more important during the pandemic.
Health and safety excellence is a core value across Chuck.
Our total recordable injury rate for the first half of 2020 improves significantly to 0.4% to 856% decrease from 29 team.
We're especially pleased to let's say is as it was achieved in addition to the actions taken in response to covert 19.
This year the team has been particularly focused on safety tax tasks involving actions such as the interface between people and mobile machines.
Pre tax planning and hands off practices just to name a few.
We're extremely pleased with our safety results for the quarter and committed to a culture of continuous improvement.
As part of this continuous improvement, we will expand our leading safety indicators to enhance awareness going forward to safety awareness going forward.
I want to take a moment to thank the team for their continued diligence and a hard work in this area. However, the only correct number here is zero.
Oh since safety is a is fundamental.
To our belief that a save plan provides a foundation to achieve success on the balance of the business metrics.
Turning to slide four.
We are proactively managing through the covert 19 pandemic.
Our executive like Cobas 19 response team continues to meet three times per week to assess the situation at all of our locations.
Travel by team member remit team members remains heavily restricted.
We have temperature checks a place for personnel entering our facilities personal protective equipment is being utilized including mandatory glove used for 100% of our workforce operating facilities.
Hi, guys.
Yes.
Okay, turning to slide five.
The actions that we have taken around our coated 19 protocols have enabled our plans to continue operating safely and effectively.
Our organization has quickly adapted to the new normal working environment.
Our European plans, where the first to adapt and implement new practices as a pandemic K your prior to North America.
Our north American plants are currently dealing with the recent surge in Covidien 19 infections, and both the United States and Mexico.
I'm pleased to be able to say that 99% of our employees remain co bid 19 free to date.
Our plants have remained operating through the covert 19 pandemic and are running at levels to meet our customers' requirements.
During these challenging times, we're increasing our efforts to provide the highest level of service to our customers and have achieved an on time delivery rate of 98% in the second quarter.
Our seadrift facility recently completed its regularly scheduled maintenance outage.
This plan by annual outage last of five weeks our team safely completed the turnaround on time and on budget with a facility backend operations at the end of July.
Moving to slide six.
It goes without saying the co bid 19 has significantly impacted the steel industry and steel demand.
The World Steel Association recently reported that global steel production outside of China was down 25% in the second quarter from the same period in 2019.
Utilization rates have also falls.
Sampling United States, the utilization rate declined from approximately 80% in Q1 and currently stands at 59%.
Steel prices have generally decreased and are more volatile since the pie dam pandemic began.
Customer destocking efforts have been reduced as operating rates have impacted electro consumption.
We continue to expect Hello, graphite electrode demand to remain soft for the remainder of 2020.
Turning to slide seven.
As we said on our last call we are experiencing the impacts associated with challenges currently facing the steel industry.
We have received approximately 35 force majeure claims.
Some of our customers are struggling to take the volumes they've committed to under our LTL days.
Additionally, we've had a few customers fail to perform on their contracts.
We are working hard with our customers to develop mutually beneficial solutions.
Well expect to take appropriate measures to ensure the obligations under our contracts are fulfilled we have been able to modify some of our contracts to provide relief in the near term, while securing additional volumes by extending the contract.
We continue to anticipate that our Twentytwenty LTAC sales will begin the range of 100 to 115000 metric tons.
Now I'll turn it over to Quint on slide eight for more detail on our second quarter financial results.
Okay.
During the quarter, we produced 33000 metric tons of graphite electrodes, which is in line with the last quarter, our capacity utilization was 65%.
We said 31000 metric tons of elect our demand was impacted by lower steel operating rates and the impact of coven 19.
Our healthy is accounted for 26000 metric tons of these deliveries and brings our year to date LTAC deliveries to 55000 metric tons.
We sold 5000 metric tons of electrodes in the spot market in Q2.
As we expect the spot prices declined in the second quarter, our average realized price for non LTAC sale was $5500 per metric ton.
Given the current market environment, we expect that spot prices will likely continue to decline in the third quarter.
Now turning to slide nine.
Net income was 93 million generating 35 cents of earnings per share adjusted EBITDA was 151 million.
Free cash flow totaled 138 million in the second quarter as we continue to generate strong cash flow.
Turning to slide 10.
During the second quarter, we successfully executed on our financial commitments to address the coven 19 pandemic.
We eliminated discretionary spending and reduced our capital expenditures forecast.
Chris.
While continuing to execute on our strategic initiatives.
We right sized our workforce at our electrode class to match, our current production levels and achieve our target of reducing fixed costs at our electrode plans by 15%.
Turning to slide 11, we again ended the quarter of a strong liquidity position. Our total liquidity was approximately 435 million consisting of 188 million of cash and 247 million on our revolving credit facility.
We achieved this liquidity, while reducing our debt levels by 103 million in the quarter.
This provides us with significant financial flexibility as our term loan is not due until 2025 and RMS amortization payment is not due until mid 2022.
We will continue to use the majority of our free cash flow in 2020 to reduce our debt and maintain balance sheet liquidity.
Now I'll hand, it back to days on slide 12.
Thanks Glenn.
Well, the global economy, including a steel industry is facing significant challenges in the wake of the current pandemic. We remain confident about the long term strengths of the electric arc furnace and graphite electrode industries.
He asked industry has several advantages over traditional steelmaking.
For example facilities more flexible to operate and during this recent downturn, we're able to be idled and restart it quickly and cost effectively.
Additionally, environmental considerations will continue to become an increasingly critical issue facing industrial companies and DCF production yields, 75% less carbon emissions and traditional blast furnace type operations.
These economic operational and environmental advantages put the finished tree in a strong position to whether this downturn in a short Ron and do achieve continued solid growth over the long term.
Turning to slide 13.
As the ETF industry continues to grow the use of graphite electrodes will continue to grow as well graphite electrodes are mission critical component to the ETF industry.
Look towards that we manufacture our highly engineered and require extensive process knowledge to produce.
Services and solutions. The Graftech provides will help both position our customers and us for a better future.
Moving ahead to slide 14.
Craft tick is one of the largest electrode manufacturers in a world we've taken decisive actions to manage through the coal vid 19 pandemic.
Our global footprint provides us flexibility should any operating environments become challenge to to further outbreaks.
We have a strong balance sheet and our proven track record cash flow generation and managing through industry cycles.
Well, we cannot be certain when the current difficult macroeconomic conditions will return to normal we believe graftech is very well positioned to weather the challenges challenges of the current environment.
That concludes our prepared remarks, and we'll now open the call up for questions.
Thank you Sir at this time, we will take question if he would like to ask a question. Please press the pound followed by the number one on your telephone keypad.
Again that is pound one.
Please note due to the number of questioners. We please ask that you limit your question to one before rejoining the queue.
Please hold while we compile the roster.
Our first question.
Comes from David.
God Liana with BMO capital markets.
Your line is open.
Okay. Thank you for taking my questions.
Ill try and just keep to one question I'm going to try and.
Turning it into a two part question possible.
In terms of the near term Im wondering spot prices are falling.
And there were obviously spots hills and second quarter.
My first question is.
First part of my questions or what.
What spot price would you no longer sell into the spot market and are you continue to sell into the third into the spot market in third quarter.
And then I I also have a longer term second part of the question.
As a fourth quarter results.
The numbers for long term contracts for 21 in 2022 or 125 117000 Tonsils Ford.
Average price was 9700 Bucks a metric ton what are those figures as of now.
My question. Thank you.
Okay. So in terms of your question on spot.
There's no question that we will be selling spot business and the third quarter absolutely.
We.
I intend to.
Maintain our presence in the marketplace as appropriate we have.
Many good customers that we intend to maintain that relationship with and will be.
Competitive.
As a means by which to ensure that our relationship.
Remains both solid and positive as we move into the future.
Yes, David on the second question those are the contracted numbers that you referenced for 2021 and 2022.
We haven't actually given any guidance beyond that those contracted numbers, we haven't tried to assess at this point.
A number of tons that we will actually realized in 2021 in 2022 of course for doing that internally. We just haven't we're not prepared at this point.
Hi, good estimate to give publicly as we've talked before some of the tons that we did not.
Realized this year should come back in future years, and some of the tons in future years will.
Potentially be pushed out so.
We're monitoring.
Working that as we indicated in our release here you too.
Work with customers.
In a proactive and mutually beneficial way to ensure these volumes are filled on the contracts, but exactly how that will roll out over the next couple of years, we have publicly.
Given any information on that yet I think the last part of that answers. The most important part more working very hard.
With a number of our LT customers.
That have.
Experienced difficulty as a result of this pandemic.
And as any good business partner and we're we're trying to find ways.
Ways in which.
Both parties can find a acceptable path into the future.
Assisting our partnering while at the same time, ensuring that were being good stewards.
Our shareholders.
Well being.
Okay. That's helpful. Thank you and then just the last.
One of those question I asked the is there or is there a level I'm sure. There is zero level, where spot prices is too low to.
You know to sell in to maintain relationships and if so what is that level.
Well look.
At this point.
The the evolution of the spot market our focus is on.
Servicing the customers that.
We are good partnership with an end business has been in business with for many years, because we've been around for a long time, when we expect to continue to do that.
So I don't think is prudent for me on this call to.
Put out.
Such a value.
So I'll leave that go with that.
Our next question from Aaron This wonderful.
With RBC. Please ask your question your line is open.
Sorry about that I was having trouble mute line.
Thanks for all the details.
I guess first question.
What we're starting to think about this industry you reference a lot of difficulties.
Summers are going through some financial difficulties I.
I guess.
Maybe you can just discuss the contracting environment there looks like you are.
Thank you renegotiating, some contracts and securing more volumes for out years.
How are those discussions going.
I guess, how are you able to kind of give us any kind of thoughts on where those those contracts are kind of ending up or they materially lower than your prior contracts are they closer to spot.
How do we think about the future here.
So I think the importantly, remember is that there's no one size fits all solution every one of the customers that has come to us has their own unique set of circumstances that is driving the components that.
Our important to them so.
The complication.
But we're working through it is this is not a cookie cutter exercise.
Every one of them is is unique and I think that speaks to.
Our efforts and being a good partner that we in fact our.
Receptive to ensuring that solutions that we come up with.
Work for both both parties in like I said, it's not just cookie cutter.
In terms of so therefore theres no specific Ted.
Hi may able to give you because each one of them is a bit different but I did say something in answering a previous question that I think is important.
As we strive to solve and work through issues in the near term for our customers.
We also.
Take very seriously our fiduciary responsibility to our shareholders. So.
We we try to.
Corecard to.
Come up with win win solutions, where.
The.
Our responsibilities as shareholders are not forgotten, while we're trying to.
Navigate.
Near term solutions for.
Our customers.
Okay, and then maybe two areas more so first on the cost side.
Presumably you've seen some.
Relief in certain raw materials, and maybe you can just discuss that and again are there other cost actions that you are taking.
Both temporarily and structurally and if you could speak to those.
How should we think about the cost that you guys are taking out that are structural.
Would those be a benefit to earnings and 21.
Sure.
So as we noted in our comments, we were able to reduce our fixed manufacturing costs for our electrodes by 15%.
Which we were very pleased with.
And those are production costs in the quarter and so the benefits of those reduce costs when go to inventory in the current quarter and would roll through the CNL in future quarters. So that will accrue and then you're right on the raw materials side third party needle Coke has softened overtime.
And with a lower volumes, we've used less third party newco and so weve how does it have a benefit there in terms of the average cost of coke in our electrode and that should also continued to improve somewhat over time. So got those two factors working in our favor going forward.
And then just lastly on.
I guess, how you're thinking about the capital structure.
Yeah, you did have an event in the quarter, maybe you can just discuss.
That that sale down by your majority shareholder to the owners of that.
Consortium and then.
And then also maybe what does that imply I guess going forward from a capital return standpoint, and or your preference for deleveraging. How are you thinking about using free cash flow.
Sure. So first on the distribution from Brookfield, obviously.
Doesn't impact us directly to access the increase the public float, which we think as low as a long term positive.
The increase in enhancing the liquidity in our star.
It did result in the public float increasing from approximately 25%, 35% and Conversely.
Brookfields consortium control position reduced from 75% to 6%.
So in general.
Increase in liquidity, we think is positive for shareholders over the long term, but other than that.
We we really.
Growth that level in line with visibility that we have to our cash flows and specifically to the long term agreements that we have.
We've set a leverage ratio target that would be something not to exceed.
Two to two and a half times.
At the end of the quarter here in net leverage ratio was 1.9, so were slightly below that range and we're comfortable being below that range, we wouldn't want to exceed that range.
And as we've indicated before we planned to be prudent in our balance sheet management, we plan to ensure financial strength and flexibility I think thats, even more important during this uncertain uncertain period of time with a pandemic and the uncertainty around the length of it and the overall impact on the.
Joining me on the steel industry. So we absolutely plan to prioritize balance sheet flexibility and ensure financial strength and therefore will continue to use the majority of our cash flow to pay down debt over the rest of the here as we note in our press release we.
We do.
On an ongoing basis discuss.
Capital structure with our board of directors, and we will continue to examine opportunities to repurchase stock.
But as we've indicated the priority will be.
You know balance sheet strength.
That is all the time, we have for questions today, I will turn it back to the speakers for concluding remarks.
Thanks.
Okay. Thank you operator.
In conclusion graph tick is well positioned to be resilient through these current macroeconomic conditions.
And we're committed to providing our customers with reliable service through any challenges that lie ahead.
I'd like to take this opportunity 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. Thank you.
Thank you all this does conclude today's conference and thank you for participating you may now disconnect and have a great. Thanks.
[laughter].
The moderator has ended the conference Goodbye. Thank you for.