Q3 2020 GrafTech International Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Graftech third quarter 2020 earnings conference call and webcast. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad if you.
You require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your speaker today when do you Watson. Please go ahead.
Good morning, and welcome to Graftech International's third quarter 2020 conference call on the call with me today is Dave Rentoul, Graftechs, Chief Executive Officer, and Quinn Coburn, our Chief Financial Officer.
Turning to our first slide.
As a reminder, some of the matters discussed on this call may include forward looking statements regarding among other things results performance trends and strategies. These statements are based on current expectation and are subject to risks and uncertainties factors that could cause actual results to differ materially.
From those indicated by forward looking statements are shown here.
We will also discuss certain non-GAAP financial measures and these slides include the relevant non-GAAP reconciliations.
You can find me slide the best in the Investor Relations section of our website at Www Dot Graftech Dot com a replay of the call will also be available on our website I'll now turn the call over to Dave.
Thank you Wendy good morning, everyone and thank you for joining our third quarter call.
Okay. You your families in your colleagues are healthy and well.
We will begin as we always do with safety.
Which has become even more important during the pandemic.
[laughter] Watson health or safety is a core value of Graftech and a key priority.
Our year to date total recordable injury rate at the end of Q3 was 0.57.
[laughter] 40 per cent decrease.
From 29 team.
Thank you.
The the Graftech team for your continued diligence and hard work in this area.
However, the only correct number zero with every employee going home safely every day.
Health and safety is fundamental to our belief.
Save plan is a foundation for the excess success on the balance of our business metrics.
Turning to slide four.
We continue to proactively manage through the cold mid 19 pandemic.
Our executive led Cold at 19 response team continues to me three times per week.
To monitor developments and make response of changes to our safe work playbook to facilitate team member and customer safety.
Our plans have been diligently throughout the call that 19, pandemic and therell and their controls and associated audits. Our team members continue to adhere to exacting protocols and cleaning PPV, social distancing and other measures designed for safe operation of our.
Facilities.
Regular team member communication and education is critical and ongoing.
These challenging times and during these challenging times. We are also focused on providing the highest level of service to our customers and maintaining an on time delivery rate of 98% in the third quarter.
Turning to slide five.
We're very pleased to have launched our inaugural sustainability report in September [laughter].
We are committed to advancing our years Ci efforts and continue to monitor progress on our environmental initiatives.
As we focus globally on being good environmental stewards, we're mindful that electric arc furnace steel production yields 75% less carbon emission than traditional blast furnace production.
Uh huh.
The steel industry overall is a leader in recycling and more steals being recycled every year in North America, and paper aluminum plastic and glass combined.
We are proud of our inaugural sustainability report and are fully committed to these efforts across our organization.
We expect to issue our sustainable earnings reports sustainability report on an annual basis.
Moving to slide six.
We are seeing measured improvement from the second quarter and the global steel industry with regions recovering at different rates.
Third quarter global steel production outside of China improved 197 million tons from 167 million tons in the second quarter. According to the World Steel Association.
China is expect to achieve a new high for steel production estimated at just over 1 billion tons in 2020.
Global steel manufacturing utilization rates outside of China also improved in the third quarter to just over 60% from approximately 57% in the second quarter.
In the U.S. utilize duration rate now stands at just over 70%.
Steel prices have also been increasing in the third quarter.
USA hot rolled coil values at approximately $700 per tonne.
North European Hot roll coil at 513 euros per metric ton or 593 to $600 U.S. dollars per metric ton.
And black Sea billet pricing at $412 per metric ton all of these up over the second quarter.
[noise] well demand is improving in the steel industry, we expect customer graphite electrode de stocking efforts to continue for the remainder of 2020.
We expect measured improvement and graphite electrode demand as the electric arc furnace steel industry recovers.
Due to a favorable mix in the third quarter, our average price for non LTAC sales of graphite electrodes in the third quarter improved slightly to $5700 per metric ton.
However, as anticipated we believe the general spot price, how graphite electrodes continued to trend lower during the quarter.
Turning to slide seven.
Our commercial team has been working hard in the current environment to serve our customers and to develop mutually beneficial solutions for customers, who have struggled to take the volumes, we have committed to under our ltacs.
We have made substantial progress in negotiating LTV modifications with several of our customers providing them near term relief in exchange for additional contractual commitments going forward.
We expect to continue finalize you more these mutually beneficial negotiations in the coming months.
For the full year Twentytwenty, we anticipate the LTAC sales volumes will be above the midpoint of our expected range of 100 to 115000 metric tons.
Given the good progress we are making in the LTAC negotiations with our customers, we estimate that our graphite electrode LTAC sales volumes and Twentytwenty one.
Well be in the range of 98 to 108000 metric tons.
And Twentytwenty two we will be in the range of 95000 to 105000 metric tons.
And for the year is 2020 trees through Twentytwenty, four we estimate LTAC sales volumes.
35 to 45000 metric tons.
This effort represents the partnership to craft a cast with our customer base.
Now I'll turn it over to quit on slide eight to discuss our third quarter financial results.
Okay. Thanks, Dave third quarter 2020, net sales were 287 million a sequential improvement of just over 2% from the second quarter and down 32% from the third quarter of 2019.
During the quarter, we produced 32000 metric tons of graphite electrodes in line with the last two quarters.
Our capacity utilization was 67%.
We shipped 33000 metric tons in the third quarter for a total of 98000 metric tons year to date.
Our LTAC accounted for 27000 metric tons of third quarter deliveries, bringing our year to date LTL deliveries to 82000 metric tons.
Now turning to slide nine.
Third quarter 2020, net income was $94 million or 35 cents per diluted share year to date earnings per diluted share or one dollar and 15 cents.
Third quarter, adjusted EBITDA was 153 million.
And third quarter free cash flow was 123 million.
Year to date free cash flow is 386 million as you'll see on slide 10, we have used the majority of our 2020 free cash flow to repay debt.
As we noted earlier in the year, we will make a foreign jurisdiction tax payment of approximately approximately 50 million in the fourth quarter.
This payment was deferred from the first quarter to the COVID-19 related relief.
Now to slide 10.
During the third quarter, we continued to execute on our financial commitment to reduce debt and maintain our balance sheet flexibility.
We reduced our debt by approximately 150 million in the third quarter and an additional 60 million in October, bringing our 2020 debt reduction through October to 313 million.
We continue to be disciplined with our capital expenditures consistent with managing the business through the conditions created by the pandemic expecting full year spend of approximately 35 million a near 50% reduction year on year.
We're also closely managing our working capital, including aligning inventory levels with customer demand and controlling our costs.
At the end of the third quarter. Our total liquidity was approximately 406 million consisting of 159 million of cash and 247 million available under our revolving credit facility.
[noise], our strong liquidity position and continued debt reduction provides us with significant financial flexibility.
We expect to continue to use the majority of free cash flow to further reduce debt and maintain balance sheet liquidity.
Now I'll hand, it back to Dave on Slide 11.
Thanks Quinn.
Inherent manufacturing flexibility of electric arc furnace steel producing facilities with the ability to idle and restart operations quickly and cost effectively as a significant advantage over traditional integrated steelmaking.
This advantage was evident over the past several months as the steel industry addressed and demick related challenges and this flexibility will help drive growth for the year, you industry, including the need for high quality graphite electrodes over the long term.
Graftech is one of the largest electrode manufacturers in the world operating three of the largest global facilities.
Graphite electrodes are mission critical component to the F. industry. The electrodes that we manufacture highly engineered and require extensive process knowledge to produce.
The services and solutions. The Graftech provides help position, both our customers and ourselves for a better future.
We have a sustainable and long term competitive advantage from our low cost structure and vertical integration into our key raw material petroleum needle coke.
And our global footprint provides us flexibility should any operating environments become challenged due to a second wave of the pandemic.
Our balance sheet and proven track record of cash flow generation gives us the strength to manage through industry cycles.
With commitment to our people and our significant competitive advantages. We continue to strongly believe graftech is well positioned today and over the long term.
That concludes our prepared remarks, we will now open up the call for questions.
At this time as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound or hash key.
Your first question comes from Curt Woodworth from Credit Suisse. Your line is open.
Yes, hi, good morning.
Good morning, Kurt.
Dave when we look at the new updated LTV, you know guidance. It seems like if I add up all the tons and includes the 2023 year you are really not too far off from your.
Baseline level that the company initially established yet you have had.
Clearly some of those tons permanently go out so I'm just wondering is that a function of.
Part of the LTA renegotiation process, where you actually add additional tons on the contracts on the back end to help preserve.
It's kind of it's an a b argument that you have been trying to pursue.
Thanks. Thanks for your question Kurt Yeah, I mean, it's in an effort to find a place with some of the kind of customers that are having some challenging times to come up with a a win win arrangement, where we provide some assistance in the near term and.
In exchange for that we get consideration.
And some of the the out years. So we think we're accomplishing that and I think over the last.
Several weeks Weve closed a number of these.
[noise] arrangements with people and I can see a few more are more to come but I think it does that it preserves.
What the customers are looking for in terms of some of the near term challenges today and it helps us preserve the value for our shareholders.
And some of the you know out.
Outcomes, you just talked about would that be it credo.
Accretive to your Lpa book or it is something that just simply pushing.
Maybe a 2021 LTAC at the 2023.
I think it's I think it's a creative Quinn yeah.
Yes, one other thing to keep in mind. Kurt is previously you know we had a few contracts or fixed share contracts that could vary in volume and previously we had indicated that that was.
Could be up or down 5000 tonnes per year, and then our previous disclosures.
In our previous disclosures, we had stated those in the mid point in this disclosure. We then looked picking a little more conservative view and put those at the low end of what those could be so that's.
10000 tons, so taking that into account you can see that we're actually overall once adjusted for that a little bit higher than the previous numbers.
Okay, Yeah, that's that's what I thought.
And then with respect to the comment that the.
The spot price trended down in the quarter, yet you were able to obtain higher.
Higher non lpa value.
Given the spot where you see it today can you can you give any guidance on kind of what what range of pricing you're seeing in the market and.
And given where needle coke has come down too would you say that the spot sales would be profitable at this point.
Sure.
You know that's a difficult question I'm sure as you know at this point in time and that.
You know weve been careful about.
[noise] disclosing what we thought in the past careful disclosing what we saw in spot pricing was because early in our expenses as a publicly traded company found that that worked against us relative to our competitors is using that data, but I also recognize your challenges and your colleagues challenges.
And viewing the company, so well do our best year to try and provide as much color around that subject as possible. So.
So.
Having said that one of the things that has happened is.
Absolutely.
Spot pricing has lowered.
Today from what it was in Q2 and Q3 has been a downward trend.
To be clear.
However, at the same time, the disparity or the distribution standard deviation you will pricing around the world has grown so there's there's somewhat of a disconnect from region to region to region about what those numbers were so a funky.
View, an average price today.
Of where we thought it would be.
It would not be candidly wouldn't be terribly useful for you because it would be a different price in the U.S. and a different price and you want a different price in the middle East and yet another one again.
In Japan, and Korea et cetera, if the distribution of the change.
Disparity from region to region has grown as the prices come down.
Now the best way that I think we can help you think about that is that.
If you look at the information is publicly available and that is the export import numbers on.
You know Paul you'd find that that number recently you know it has it ranges well, but its anywhere from.
A few trades not many but a few as lowest 13 huh.
And more more into both the 1800 level. So I think in the past we've given a lot of information about how to take those kind of numbers and translate back into.
Cost structures, and so Oh graphite electrodes, so my or our council would be given that for the reasons. I've stated previously that we're not going to come right out and tell you what we think.
Prices are on graphite electrodes I think you can use that needle coke number and.
And think about that in context of the incremental cost that people are facing now on Oh electrodes and knowing that that's probably pretty close to the to the bottom range of wont be practicable I hope that's helpful.
Yes, very thank you no.
No I understand there's a lot of regional variation so that's fair and.
And then just last question with respect to the U.S. market, there's eight to 9 million tons of new electric car capacity coming online. The next call. It 12 months.
Can you talk at all about.
Do you think that is going to move the needle at all with respect to price have you been able to.
When any business with that new capacity. Thank you.
Yes, sure obviously you know it's funny.
The fundamentals of supply and demand so that it'll it'll certainly help the demand situation.
Well, what I would say is that.
Just his arm our market.
Lags as steel production comes off at also flags on the other side, so as we're seeing strength.
In the steel market and ill Testament to that as you know $700 a ton hot rolled coil pricing and rebar has been pretty steady at about 600 Bucks. So there's a lot of.
Pause.
Positive signs in the certainly in the U.S. steel market in recent earnings releases by.
Some of the mills in the country and.
Add to that sentiment. So we're optimistic that it will help and obviously more.
Facilities come online will be helpful.
Recognizing that the increased to just over 70% of utilization is good.
But we also have to be realistic and understand it before the coldest came along all the American steel industry was running in the 80 ish percent utilization so the new facilities when Evan will inevitably help.
And while I think we're on the way to show good progress and optimistic about it we're still not yet obviously back to pre coven and the United States and I think maybe home certainly Europe's a little further behind that but generally speaking no matter, whether you look at that are black sheep below price.
He is or even Asian hot roll prices all of the steel related key metrics are moving in the right direction. So.
We are optimistic about what that will bring to.
The demand side of the equation, which will ultimately trickle through into the graphite electrode industry.
Great. Thanks, very much everyone.
Okay.
Your next question comes from Erinn fitness Swanson from RBC capital markets. Your line is open.
Great. Thanks, Good morning, I guess good morning off just wanted.
Good morning, just wanted to get back to some of those near term fundamentals you were discussing so maybe you could just help us square.
The kind of.
Differing dynamics here on the one end you do have a it seems like some some improvement in steel markets.
You know yet you know needle coke and maybe electrodes.
You know you reference spot pricing and electrodes going the other way so.
Why is that the case I guess, maybe you can just tie in some comments on supply and inventory on a on both the needle coke and electrodes. Thanks.
Sure well first of all recognize that.
Our industry will always lag whatever's transacting in the steel industry. So we'll we'll sees a decline a little later and we'll see the increase a little later, so I don't think you should come as a surprise at all that.
Well the steel industry in the third quarter began to see an uptick.
Did it hasn't quite made its way.
Into our world yet I wouldn't have expected EPS would have just yet.
As long as it continued will eventually see it make it in into our world.
In addition to that and you're quite right. We entered into the pandemic or you think about my comments back in our earnings release at the beginning of the year at that point, we were talking about de stocking taking you know.
All through two.
End of the third quarter of this year and that was before the pandemic.
Took place so.
As we think about that now that that de stocking is starting to happen again, because it's the inventories picking up but we had almost certainly how we had a period of time.
Were.
Not much of anything what's happening happening.
Relative to Destocking because of the pandemic. So as I said in my comments earlier, we expect that Destocking to continue through the balance of this year. So you combine the fact that there was always a natural lag in our industry combined with some of the de stocking that had to finish.
And that's why you see a situation where I'm still talking about a decline in graphite electrode pricing, so we'll need to get into.
Into the new year, assuming that.
The steel market continues to move in a positive direction and then there.
Recent developments and then a covert world don't disrupt that we hope it doesn't.
Well, we're not going to we're not saying our crystal ball is any better than anybody else's on EPS, and we're not going to try and predict that.
But assuming that the market continues on its trend you know once we get into than in the year I think we'll start to see some of that pull from the demand side help out and I would on your inventory question. I mean, I think of answers are from graphite electrode perspective on a needle coke approach.
Spectrums there will be.
Needle coke in the World just like there was graphite electrodes because the.
The pandemic interrupted everything so there'll be some periods of time.
Be some needle coke overhang and then on top of all of this of course is that Fortunately.
China has recovered strongly making on looks like they're going to make over 1 billion tons of steel this year.
We know that they've also advanced than they're construction of.
Play.
Plants in our industry and so time will tell some of that balancing now it comes from the supply a slight side I don't think thats, it's still a little bit opaque at this point in time and the pandemic EPS complicated views on that but I think generally speaking the demand from steel will pull the demand for BRAF quite a lot.
Tones out because we get into the new year, and we'll find ourselves.
In a bit better place.
Okay. Thanks for that.
So just just to be clear I guess, when you started the year, you're expecting maybe three quarters to work through the inventory.
Maybe with co bid.
You know, maybe that length, and a little bit and you're now starting to see some some de stocking I guess the other question I had also it was just when you think of the what's transpired here and your own production levels. When you started out I think you had 180000 ton.
Tons of capacity you went through a de bottlenecking project and got your capacity close to 200.
So you know it gets your Ltacs are spoken for for the next couple of years around 100000 ton range.
Well, how do you think about all the other capacity that is within Graftechs control. I mean is that a is it best to just leave it idle for now or is there.
You know permanent shutdowns that could be contemplated.
And if you could offer any thoughts on the industry as well from a supply demand standpoint, if you see any for you know closings are coming.
As well thanks.
So I think it's a good question. The one thing I just want to correct a little bit in the first part of your statement.
We talked about de stocking taking until the third quarter not three quarters long so at that point in time or what a bad in January.
On through to the end of June so not not nine months underlying profit six months on lengths, because we said it would be.
Pretty much.
Complete once we got to the third quarter. So I don't want to imply that you think currently we still have another nine months ago.
So relative to capacity I think that.
That's a good question and down somewhat a little early yet to address in so much as you have to see what the expansion plans in the United States and the belief and the knowledge that look the environmental factors in the world are such that the electric.
Mark furnace industry inevitably will grow.
Integrated steel production will inevitably decline.
So is that increase takes place.
There's a there's a place for the graphite electrode industry.
Industry and long term growth in it so well one has to do as we when the time comes in we truly exit the pandemic one has to assess that that forward growth curve and as you think about.
You know carbon.
Mission situation in Europe, and the fact that carbon credits mess that trading system is alive and well and it will influence people on their decisions about how they are going to make steel and that same methodology and that same thought process.
This is.
He is not unique could use them along we've been here the Chinese now talking about having.
Having some kind of thoughts around developing policy on this similar front. So all of these things tell us that the electric arc furnace steelmaking world.
We'll expand and grow so once we exit the pandemic I think that's the time when we can triangulate and determine okay. What is the graphite electrode capacity and how does that shape up against the growth pattern electric arc furnaces, and what decisions would be.
Approach.
Appropriate at that point in time, I think it's just a bit too early yet.
Jump to that conclusion.
Thanks, and then lastly, if I could just on the.
The cash side when you again when you contemplate these beads <unk> dynamics.
You know how.
How do you feel that the priorities of cash use will will be you know from here I know de leveraging is still important.
But but yeah, maybe you can just reiterate how you're thinking about using that cash yeah. Given these dynamics. Thanks.
Yeah, thanks or in its Quinn first.
First thing I would say is as we said before this is a topic that we review on an ongoing basis with management and the board of directors.
And as you noted a rune.
In our comments and in the earnings release, we indicated that.
In the near term, we expect to continue to use the majority of our cash flow to reduce debt.
No we always want to be in a position of balance sheet strength and think that's a very good for the shareholder.
So that will be our plan now obviously, we will continue to evaluate all the options as you well know we have 59 million available on our share repurchase program.
We will continue to examine that that would continue to be an option.
But as noted in the near term the priority will be a debt reduction.
Thanks.
Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Alex Hacking from Citi. Your line is open.
Yeah, good morning, and thanks for the time so.
Hi, So I apologize my phone cut out a little bit earlier did you say that needle coke spotty, because I know you don't buy it but you estimated was around $1800 a ton.
Well, we said if you look in the.
Export import data that's publicly available if you do the research you will find that.
There are few trades the words lows 13, most of them were in the $1800 range.
Okay. So that I mean am I correct that that represents a fairly substantial decline from where.
Well, we would sort of three months ago, when they were more in the.
You know 2000 to 2500 range.
Yeah, I mean, if you want to classify yes, I mean I think your.
The range you provided just renewed for a few months back because I think it might be more like four or five months back but.
You're you're in the right John.
Okay. Thanks, just just checking I'm I'm, a little surprised just given how the steel market from a stronger but.
That's extremely helpful. Thank you and then but don't but don't forget don't don't forget Alex <unk> everything in our world lags. The steel guys. So what you're seeing now if you think back to where the steel guys were like in March April may when things were really bad everybody was going on there.
Were declared force majeure et cetera, et cetera. So all is though our industry and as Neil Cole guys and all and the neocons, even like further because they like us a little bit.
Okay.
Point taken thank you.
And then I guess.
Yes, you know you talked a little bit before about Chinese supply.
I mean, how do you assess competition.
From China at the moment, I mean, I think in the past.
You'd spoken about you know, maybe two or three Chinese manufacturers of electrodes, we could sort of pretty you know west and quality you know you HP quality electrodes.
And potentially export those like it has your view there changed at all I guess you know just a broad question here how do you assess you know try.
Hi, Steve graphite electrode capabilities at the moment. Thanks.
Sure. Thanks, Alex.
Actually spent.
Spent a quite a bit our effort in the last.
Number of months trying to a certain that for ourselves for obviously for our own business purposes, and we still believe that there are a small.
Small and there is a handful of larger suppliers that are making their way into.
The U.H.P. space and.
Developing.
[music].
I would say a tier two level type electrodes not.
Not quite up to the standards of ourselves on the Japanese but respectable on them in that way.
There's a lot of smaller.
Operations that aren't there and you have to understand pain Chinese steel industry, a little bit under.
I understand why.
They don't have the same need because there.
For the most part a lot of their all electric arc furnaces as you know are brand new.
Most of the March our fed with.
Hot metal.
Or many of them.
Probably should qualify that and say many.
With a launder system.
And.
Many are fed with scrap through a conveyor preheat conveyor system.
Those are apt that application is much less.
Let us demanding.
And I'll call it the traditional fixed bucket charge.
Like.
Most of the operations in this country would be so.
So many of those smaller operations.
May not have the the.
The need.
To be able to service their they'll be able to service their own domestic.
Applications. So while we believe the Chinese will are continuing to grow and we want to be careful to be respectful of that and.
Be transparent about that and.
They're growing in advance of their electric arc furnace a trajectory.
Trajectory and we still believe that the objective that the Chinese government said, having 20%.
Here you have furnace production by 2025 is still alive and well.
That would mean, if you think about the billion a ton number I talked about earlier that there would be 200000 tons.
Hi hearing of steel production in China by 2025 to 200 million 200 million sorry. Thanks Grant 200 million. So when you think about that in the context of the United States, where we have you know 70, arguably 70 80 million tons of here.
Yeah capacity on China will have almost three times the off production in five years that we currently have in this country. Its a mix a management change.
So they will need.
Big.
Graphite electrode industry to be able to service that and they are in fact working on building that.
Oh.
As we once again as we exit the pandemic.
And we get some clear vision on where the economy is going to be in supply and demand will know more about.
Maybe what's been happening in China during the pandemic around.
Some of these facilities, we do know that there's many of them as we said that our small or smaller.
And most likely geared towards domestic supply.
That's what we know at this point I would be.
Be careful in saying that it isn't opaque area of the world to try and dig exacting information out.
That's what we we believe in what we think we know at this point and we will continue to work on that.
Oh.
Trying to get it clear and clear for our own purposes as well.
Thanks, that's very helpful. Thanks.
Thanks again for the question.
Okay.
Second is further questions at this time I turn the call back over to taper into.
Thank you very much we appreciate everybodys.
Focus and attention to our call today, Thank you for joining us.
I'd like to take this opportunity to wish everyone on the call health and safety in the coming months. Once again. Thank you for joining us and we look forward to speaking with you in the next quarter take care and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].