Q1 2021 GrafTech International Ltd Earnings Call
Good day, and thank you for saying by welcome to the grass Tech first quarter 2021.
Carl.
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After the Speakers' presentation there'll be a question answer session.
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Good morning, and welcome to grasp check International's first quarter 2021 conference call.
On with me today is Dave rental graph techs, Chief Executive Officer.
And Coburn, Chief financial Officer and <unk>.
Jeremy Housebreak senior Vice President operations and development.
Dave will begin with a review of our safety performance current industry conditions, and our demand and production levels share.
And he will discuss operational matters and give an update on our ESG initiatives Quinn.
Quinn will cover financial details and Dave will close a final remark.
Turning to our first slide.
As a reminder.
Some of the matters discussed on this call may include forward looking statements regarding among.
Among other things results performance trends and strategy.
These statements are based on current expectations and are subject to risks and uncertainties.
Sectors that could cause actual results to differ materially from those indicated by forward looking statements are shown here we.
And we'll also discuss certain non-GAAP financial measures and these slides include the relevant non-GAAP reconciliation.
You can find these slides and the Investor Relations section of our website at Www Dot brand and tech stack on them.
A replay of the call and it'll be available on our website.
I'll now turn the call over to Dave.
Yeah.
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Yes.
Thank you.
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Sure.
And what are you.
And we hope to simply.
Alright.
Joel.
And.
Total sales.
On this slide and graphics and.
And those internally.
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Thank you.
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Sure.
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Yes.
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Yeah.
Yes.
Okay.
This is Wendy your sound is there appears to be a problem with your sound.
And so I, we need and should go back.
Back over slide three.
Okay.
Okay.
Right.
Okay I'll try this is this better wendy's.
And that is much better gave and if you want to go through slide three again that would be great. Thank you so much.
Thank you Wendy and my apologies to everyone.
Good morning, everyone and thank you for your for joining our first quarter earnings call I Hope you your families and your colleagues are all well.
We begin as we always do with safety.
As shown on slide three our first quarter total recordable injury rate is 0.58 and.
Indicating our continued focus on the safety of each and every team member.
Health and safety excellence is a core value and grass tech.
Our ultimate goal is zero injuries with every employee going home safely every day.
Our team continues to be diligent and thorough and our COVID-19 controls and protocols.
We have also included on this slide the graphic we use internally to indicate our constant focus on S and Q.
Safety and environment quality.
And <unk> was a core mission for the graph Tech organization.
I'm very proud of the grass tech team and personally thank each of you for your continued focus and vigilance.
<unk> environment quality.
Now turning to slide four.
We continued to see improvement and both pricing and capacity utilization rates and the global steel markets during the first quarter.
Steel industry pricing continues to increase with most types of steel at or near all time highs.
U S Hot rolled coil values are currently at approximately $500, a ton and hot rolled coil prices and both the U S and Europe, we're up about 35% over the course of the first quarter.
Our global steel manufacturer and utilization rate outside of the China was 73% and the first quarter of 2020, 'twenty 2021.
Compared to 72% and the fourth quarter of 'twenty 'twenty.
The U S steel industry utilization rate improved to 77% and the first quarter from 72% and the fourth quarter of 2020.
Global steel production outside of China was approximately 216 million tonnes and the first quarter of 2021 compared.
Compared to approximately 210 million tonnes and the fourth quarter of 2020, According to the World Steel Association.
And our last earnings call I pointed out.
And we expected graphite electrode pricing to bottom out early in 2021.
And the demand for graphite electrodes was beginning to rebound.
Our commercial experience to date validates the recovery of graphite electrode demand.
And pricing and provides us with conviction on our outlook for the second half of 2021.
Graphite electrode spot prices are increasing.
And those trough levels, and we will realize those increases and our second half 2021 results.
As a reminder on.
Our industry and lagging demand recovery and the steel industry due to our position and the steel producers supply chain.
And as the steel industry's capacity utilization improves.
And we first see increasing demand for graphite electrodes, which is and followed by higher pricing for our products.
Each of these movements and a graphite electrodes supply chain is that a lag to the steel producers increasing demand.
As we move through the dynamics of this line we remain confident.
But the improvement and our reported non LTA pricing will be realized and the second half of 2021.
And has us well positioned for continued improvement into 2022.
Turning to slide five.
As I mentioned, we are seeing increased demand for our products and our commercial team remains focused on providing superior services and solutions to our valued customers and this improving environment.
Our estimates for graphite electrodes sales volumes under our L. P A's have not changed.
Turning to slide six.
We are pleased with the year over year improvement, we saw and our first quarter sales volumes and productions.
Both up 9% over first quarter of 2020.
We shipped 37000 metric tons, and we produced 36000 metric tons of graphite electrodes.
Breaking down our first quarter shipments, we sold 26000 metric tons of graphite electrodes under our long term agreements and.
And on average price of approximately $9500 per ton.
And 11000 tons on.
Non LTA sales at an average price of approximately $4200 per ton.
Net sales and the first quarter were $300 million as a reminder, the first quarter is generally the seasonal low of the year.
Now as we focus on responding to the improving market demand I would like to welcome Jeremy just to call, who will discuss various operating items and our ESG effort Jeremy.
Thanks, Dave and good morning, everyone.
And the first quarter, we maintained our strong delivery performance record shipping 37000 metric tons to our customers with excellent on time performance of 95%.
This level of execution and helps to further strengthen our customer relationships and differentiates <unk> from our competitors.
We're continuing to prioritize operational initiatives that are focused on improving efficiencies and our manufacturing facilities and were staffing appropriately to meet increasing demand for our graphite electrodes.
So then turning to slide seven.
Our ESG efforts fit seamlessly with our focus on safety environment and quality as Dave described our ESG steering committee comprised of several members of our executive team, including me, David Quinn oversees our sustainability strategy.
During the first quarter, we undertook several initiatives related to our ESG strategy, we launched the process for our second annual sustainability report, which we can't play and to publish later this year and are currently undergoing a rigorous materiality assessment, which will help us to continue to refine and further improve our ESG efforts.
Additionally, we continue to strive to be good corporate citizens supporting our communities and organizations wherever possible.
During the quarter, we worked with the local community organization and the area of our operations and Monterrey, Mexico to distribute grocery packages and cloth face masks to local families.
Additionally, our cash flow and our Spain facility was ISO 14001 certified and the first quarter and we continue to upgrade our manufacturing facilities to improve our environmental footprint.
We look forward to continuing our ESG dialogue and sharing our progress with you.
Now, let me turn it over to Quinn, who will discuss our first quarter financial results on slide eight.
Thanks, Jeremy.
We're very pleased with our first quarter results. We earned 37 cents of EPS 155 million of adjusted EBITDA and.
And generated 108 million net free cash flow from the first quarter.
We continue to achieve strong free cash flow conversion with 70% of first quarter's adjusted EBITDA converted to free cash flow.
Turning to slide nine we.
We continued to strengthen our capital structure and the first quarter.
We reduced our debt by an additional $150 million.
And entered into an amendment to our credit facility to reprice, our term loan interest rate.
In connection with this debt reduction and credit facility repricing, Moody's upgraded our corporate credit rating to be <unk> three.
And standard and Poor's raised the issue level rating.
On our debt to double B.
As a result of these transactions and upgrades, we successfully reduced our interest rate by 100 basis points annually.
These actions support our continued commitment to ensure balance sheet strength and flexibility.
At the end of the first quarter, our total liquidity.
It was approximately $342 million, consisting of 96 million of cash and 246 billion available under our revolving credit facility.
Now turning to slide 10.
The strong earnings and cash flow, we delivered and the first quarter reinforces our expectation that 2021 will be another year of significant cash flow generation.
Consistent with our actions and the first quarter, we plan to use the majority of that cash flow to further reduce debt.
Our focus on the balance sheet and maintaining a strong capital structure provides us with significant financial operational and strategic flexibility.
It is particularly important as we position the company to capitalize on improvements and the market.
We are maintaining our full year 2021 capital expenditure outlook of $55 million to $65 million.
We will use these funds to support our high quality low cost global operating assets and to target high return and operational improvements.
In late February we provided an outlook on our first half 2021 earnings per share and adjusted EBITDA.
Based on the strength of our first quarter results, our first half 2021 earnings per share.
And adjusted EBITDA expectations.
Have improved on a year over year basis to a mid single digit decline.
<unk> to the first half of 2020.
This compares to our prior estimate for a high single digit decline.
Please note that these estimates do not include any possible change in control charges that could be triggered if and when the ownership of our largest shareholder Brookfield actually falls below 30%.
Brookfield currently owns approximately 37% of our shares.
These charges could include a one time cash charge to the company of $65 million to $75 million related to our long term incentive plan as we have previously disclosed in our SEC filings and.
And a onetime noncash charge to the company of approximately 15 million related to the acceleration of certain previously granted equity awards.
Now I'll hand, it back to Dave on Slide 11.
Thanks Quinn.
I will wrap up with some comments on our favorable positioning and the market.
Grass Tech is one of the largest producers of all.
Ultra power Ultra high power graphite electrodes and the world operating three of the largest global facilities scrap tech electrodes or a mission critical component to the E. R. You have steel industry and there is no substitute for our product.
Our customers are the lowest cost producers of steel and are some of the largest recycles in the world from.
<unk> steel with 25% of the carbon emissions of traditional integrated steel producers.
We expect the here and you have steel industry growth to continue to outpace global GDP over the long term positioning our products for solid long term growth.
We are pleased to see that the recovery and strength of the steel industry is beginning to have a positive impact upon our business and as we highlighted earlier, we expect to begin to benefit from those favorable trends and the second half of this year.
We have a sustainable and long term competitive advantage from our low cost structure and vertical integration into our key raw materials petroleum needle coke.
Our graphite electrodes are highly engineered and require extensive process knowledge to manufacture.
These services and solutions that graph Tech provides help position, both our customers and our company for a better future.
Our balance sheet commandment and proven track record of high quality earnings and significant cash flow generation give us the strength to successfully manage through industry cycles.
With the commitment of our people and our significant competitive advantages. We continue to strongly believe grass tech is well positioned today and over the long term.
This concludes our prepared remarks, so we'll now open the call up for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Draw your question press the pound key please standby, while we compile the Q&A roster.
We have our first question from the line of Curt Woodworth.
Yeah, Hey, good morning, everyone.
Hey, Kurt good morning, Kurt.
And Dave I Wonder if you could.
And I know, you're always reluctant to talk about sort of spot price dynamics between needle coke and and U H b, but it seems like you know are our channel checks relative to the 4200 you booked this quarter for non LTA is now moving significantly above that you know closer to 6000 or even higher.
And we understand the needle coke market is tightening a little bit as well with some on the E. V. Poles. So you know just any color you can kind of give on on how you see supply demand. You know if you can give any kind of reference points on pricing that would be appreciated.
Sure we can do that.
So I think.
Just to kind of set the <unk>.
Stage and a little bit on the last earnings call.
Youll recall Kurt.
And I referenced that we thought then.
Pricing would a.
Bottom out and no.
Somewhere and the first quarter and that we were seeing and all the beginnings of a demand pick up.
And.
Projection turned out to be correct.
And having said that.
Please remember that.
The lags that I spoke to show.
Still starting to see more demand and they start making more tonnes.
Once they start making more tons.
They begin to chew into their electrode inventory and remember we when we went into the COVID-19 pandemic with a high electrode inventory that we spoke about and almost a year and a half ago.
And also commented and the and the earnings call that we expected by the end of Q1 that.
Because of the improved demanded electrode inventory will begin to normalize it has done that.
And we exited Q1 with the graphite electrode and our customer base normalized so that meant at that point and time that people were now and balance and using there.
And needing to purchase electrodes consistent with their production cycles.
So as that occurs our demand improved and we acknowledge that.
And as in any.
Market.
Product.
Shortly after demand begins to pick up you start to see price fall line at some point.
All of this has happened.
Quite as we expected.
And remember that when you buy and electrode.
And in early Q2, it's not going to get delivered until early Q3, it's a three months process thereabouts can make and electrical.
So the fact that we bottomed out in Q1 from during Q1 on pricing.
And is reflected on <unk>.
And so once you're going to see and.
Our performance and the second quarter with as we acknowledged the second half being better with pricing.
And the realized pricing that hits the P&L beginning to see the increase and the third and then subsequently fourth quarters.
So.
With that in mind and explains why we're talking about Q2, and obviously provides an indication as to why we're still talking about mid single digit EBITDA changes from the first half of last year, when we provided that guidance.
On <unk>.
Earlier on the first quarter.
So with respect to <unk>.
Exact numbers, obviously, we had you know and although we have $4200.
And the first quarter, which was the guidance. We also provided at that time I think from what I've described you should be able to think about what the second quarter has got a brain and then from there and improvement and the third and fourth quarter.
Hum.
In terms of needle coke.
Yeah, we see that because there's an improvement in.
Hum.
Overall electrodes and steel world and there will be.
Positive influences there.
And we expect it to have <unk>.
And measure it impacts on.
On the.
On the pricing.
Needle Coke and I think we spoke in the past too.
And the 13 to 1800 dollar range and our last earnings call.
And I would suggest that.
You know, we would anticipate that we'll start to see.
See things more on the top end of that range and.
And we have procured the needle coke we need.
From this year and.
And we will soon be thinking about.
2022, as we expected the.
And the market for our products will continue to improve and I think we're going to have a good.
Second half as well as into 2020 two.
Hopefully that S issue and provide some insight Kirk.
Yeah no debt.
That's helpful.
And then I guess with respect to the non L. P. E book, you know when we look across a lot of it your competitors there and they seem to be running at relatively high utilization rates.
So it does seem like market is definitely getting tight and can you provide any sort of guidance on you know.
How should we should think about spot volume progression or the cadence of that.
Volume trend over the back half of the year. Thank you.
Sure you know all of the market.
And obviously grab tech has the advantage of.
And the sizeable part of its order book are secured.
Secured through the LTA process.
And therefore.
We're not.
Selling as many spot tons as most of our competitors, but I think your.
And your view as reasonable although I will tell you that there you know.
We know and some of our competitors are still working hard.
And Phil there.
Some of the specific plants and and you know it would be inappropriate for me to name those plants, but.
You know on a go so far as to say that.
There.
Competing hard.
Phil some of those plants.
And our numbers that are not and their genre that you suggested and the first part of your call.
No.
Yeah, So that's probably where I should.
Stop it.
And.
I don't get myself in trouble and our general counsel.
Okay, and they're working hard and they are starting to fill their plants blood.
Based upon there and.
Actions and they're not quite there yet I think we're we're in a much better place.
And that's allowing us to behave.
And I and a way that it's a little more beneficial to our shareholders.
Understood. Thank you.
Your next question comes from the line of.
Arun Viswanathan.
Okay.
Great. Thanks for taking my question good morning.
Yeah, I guess, just going back to the last set of questions. So first off it looks like.
And it looks like your average price was around 80 to 100 and that was made up of the day 4200 on spot and.
You know I think I don't know I think you said 9500 on on contracts and maybe just reiterate what you said on the L. T A's and average price and then.
And so you do see that trending up I guess, what's the cadence we should expect there I mean.
You know theres been a lot of cost pressure and the market that we're seeing does that have any impact on pricing or is it mainly supply demand driven.
And do you have any escalators within your contracts to deal with some of that inflation that's true.
That's my first question I guess.
So let me begin by asking quintile and all that.
L a date.
And all the pricing and our numbers that more and though and the release.
Sure. Thanks, Dave.
Sure Arun.
Just to reiterate the L. T. A price we realized from the first quarter was 9500.
And the non LTA price, we realized and the first quarter was 4200.
And our 26000 tons were sold under LTA and 11000 tons were sold under non LTA.
And then if you do the average of that and that's approximately 7900 per metric ton.
Weighted average price of those two of the LTA and non LTA.
And then maybe well on.
Well I'm well on.
Given some color I can I can give some color on your cost question.
As you mentioned there are some pressures on cost we had.
A decrease in cost and our Q1 results relative to our Q4 results.
It's about a 400 dollar decrease.
The Q4 and about a $300 decrease relative to the full year.
And the pressures that we're seeing on cost would be freight costs, that's kind of.
Pressure, we see globally.
We have two plants in Europe and the.
The euro is a little bit stronger, it's about 7% stronger than two.
2019 early 2020, so with our two two of our three plants in Europe, we felt some pressure there.
But generally speaking a.
Arun, what I would say going forward.
So I would expect Q2 costs to be similar to Q1.
And the back half of the year, we might have a little more pressure with the rise in third party needle Coke.
Tried to manage that and we will manage that.
Very proactively so generally speaking I would say Q2 being similar probably the back half and similar with maybe a little bit of pressure upwards from from third party needle Coke.
Great. Thanks for that and then maybe you can also just reiterate your priorities on cash use from here you know, obviously, you've done some deleveraging and.
You know is there any interest or potential for reinstating a larger dividend or.
Or would you.
Opt for for buybacks as you go through the year.
And.
Yeah. Thanks Arun.
Yes, we as we noted on our last conference call and also on our remarks today, we will continue to focus and prioritize the majority of our cash flow this year for debt reduction.
And.
<unk> mentioned before absolutely we monitor our capital allocation.
<unk> very closely we discuss with the management every quarter, we discuss with the board of directors every quarter.
And we will continue to monitor that.
For the future.
In terms of shifting that a little bit more towards Ah.
Return on capital to shareholders, but for this year, we've indicated that the majority of our cash flow will be to reduce debt.
Thanks.
Your next question comes from the line of David Kelly do you.
Thanks for taking my question and I, just wanted to ask a little bit about the.
Just the.
The change of control provision you mentioned with Brookfield I think he said below 30%.
And there are payments made by <unk>.
Graph tech to Brookfield is that correct.
No.
And you've got the first part of it correct.
And control change of control language ticked.
Kicks in and when.
Phil.
Moving to below 30%.
And there is a L tip.
Plan that covers.
A few of the employees are a number of the employees that were in place at the time that.
Brookfield.
On purchase.
<unk> Tec as a retention mechanism goes payments get made directly to those employees and not to Brookfield.
I'm sorry. This is payments get made directly to I'm still confused and they get paid to the grass Tech management, yes.
Yes, they get paid they get they get paid.
Members of graft Tech management.
And that were in place at the time on the.
Of the bile backing twice 2015.
That's what I thought and then and then so then related to that question.
Is there are there any other triggers or anything else that we should think about or do those payments just automatically happen right. When it goes below that 30% threshold.
More or less.
There was a slight.
And a 30 day delay, but for all intents and purposes and sits on media.
Now are there any differences.
David to be you know and the spirit of full transparency. We also commented and and it was and Quinn's comments during the prepared remarks. There is also some.
Restricted some stock and some options that gets accelerated.
On to the tune of Wow, and net worth of the world just over $15 million.
But that's okay and are there any payments debt that's a non cash.
Items.
Okay understood and then just the last part of it are there any retention requirements are or are those people who receive those payments and.
And for you to take the money and leave on day one.
Theoretically.
Hum there are and there are no retention requirements. The intent of those payments was two.
Season through two to this point, but I would share with you that cross check has a solid and <unk>.
Cash and planning.
Program and there is no worries about whatever people elect to do.
Okay I appreciate the clarity thanks.
Your next question comes from the line of Alex hacking.
Yeah. Good morning, I, just wanted to follow up on on the volume side I mean.
So that's me Dave I just wanted to clarify.
That you that you said that you believe customer inventory was now fully normalized if it did I hear that correctly.
Yes.
Okay. Thanks, and then.
In terms of you know not talk about this year, but more sort of structurally.
I mean, what do you think is a normalized sales volume.
For Kraft I can and just for context, you know back in 2018 at the beginning of 'twenty and 19.
Selling about 45000 tonnes a quarter, but.
But subsequent to that it turned out that customers had overstocked right would suggest that.
And but maybe too high to think about as sort of a normalized shipment number.
So any comments that you would have around that would be helpful. Thanks.
Sure, Alex and Neil Thanks for your question and and and.
Interest and our firm.
So you're in a way asking me to try them on.
Obviously to predict the future and to some extent provide guidance switch.
On won't provide direct guidance, but what I, what I would point out to you.
Is it.
You know during this same period.
Theres been.
Growth of the electric arc furnace industry globally.
And if you think just specifically to the United States.
S T I was going to bring their furnace on line.
A number of months.
I believe that yeah on North Star Blue scope will as well and I think if you look at the numbers over the next.
12.
Maximum 18 months Theres about 14 million tons of additional capacity coming on line just in the United States.
And then in addition to that and also some of the areas that had been lagging and on South America seems to be particularly Brazil, despite the COVID-19 difficulties coming along nicely.
So and how our previous numbers and you talked about.
Do not.
Certainly do not frighten me.
And.
And.
And I think it.
There's.
No reason that we can't get back to those.
Those kind of values going forward now the exact timing of that and it all depends upon obviously still recovery still being strong as it is etc, but I'm.
I'm not I'm not.
On a frightened by any prospects to get give back to the values that we were at.
Okay. Thanks.
Uh huh.
Look I think we're going on I think you know.
Things are in our favor Hector.
The steel guys are and they are.
Are showing a $1500 a ton on margins that they never dreamed up and there while the streams. So why shouldn't some of that trickle down to the graphite electrode Boris.
[laughter] I hope so.
And then thanks for the color.
And and then.
Just one other question I don't know how much you can comment on this but are you seeing any.
You know with with the market coming back are you seeing any pressure from electrodes coming out of China and any of your markets.
Or as you know because there was a period of time, where.
You know exports out of China was starting to emerge when prices were.
Hi, let me once a day.
Are you seeing any of that.
Any color there would also be appreciated thanks.
Well sure I mean, the the Chinese to.
The Chinese were in the market and before.
And admittedly a lot of that presence was and.
And all our label electrodes.
They have and made some progress and the.
You H P space there.
And the quality is still there is not for the most part.
And as good as ours.
But.
And while I think Gibson and natural.
And.
Evolution for them and so I wouldn't you know they are they are a factor that we need to be cognizant, though.
And also remain optimistic because we.
We still believe quite and I think this I think the facts support us.
Is it.
With the commitment of the Chinese government to the environment that theyre going to grow their electric arc furnace industry and easily get and all $200 200 million tons by 2025.
And the evidence is there they are on that trajectory.
And we're encouraged by some of their recent moves, including you know, allowing scrap imports.
That along with their environment and most tells us that they are on that trajectory if not more.
And that trajectory is going to require graphite electrodes.
I think.
And there will be some moderating effect by the domestic improvements within China.
But as I said, we are we have to be cognizant of China has been a competitor and we will continue to do so.
Great. Thanks, a lot.
This concludes our question and answer session I will now hand, the call back over to Mr. Mcmullen for closing comments.
Well. Thank you very much everyone I'd like to take this opportunity to wish everyone on this call health and safety and the coming months. Thank you for your interest and grass Tech and we look forward to speaking with you next quarter.
Thank you and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Good day.
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