Q2 2022 GrafTech International Ltd Earnings Call
I believe that we are well positioned to participate in the growth of the graphite electrode market.
And have a promising foundation to potentially pursue other avenues of growth in the future.
During my first few weeks of grass Tech I've had the opportunity to get to know many of our associates and I'm very impressed by their level of Knowhow energy and dedication.
Turning to the second quarter. We are pleased to have delivered results in the period. Despite the challenges brought on by geopolitical conflicts and economic uncertainty.
Our ability to sustain key operating and financial metrics comparable to prior year levels is a testament to our operational execution and competitive advantages.
I would like to thank the entire graphics team for their hard work.
I will now turn the call over to Jeremy for an update on safety sales and operational performance.
Great. Thank you Marcel and good morning, everyone.
I'll start my comments with a brief update on health and safety excellence, which is a core value at graph tech as people are our most important asset.
We remain encouraged that our overall performance in this area continues to place us in the top quartile of operators and the broader manufacturing industry.
However, our year to date reportable incident rate through the end of the second quarter compares unfavorably to the past two years and we are not satisfied with this result.
Going forward, we will continue to emphasize that safety must be fundamental to everything we do.
And that key safety initiatives must be prioritized.
We will remain steadfast and working toward our ultimate goal of sending every employee home safely every day.
Turning to slide five let me provide a few data points on second quarter steel industry performance as context for our results.
Global steel production, excluding China declined 6% in the second quarter compared to the same period in 2021.
Commensurate with that lower production global capacity utilization rates also declined but remain in line with the industry average for the past several years.
We are increasingly seeing diverging steel industry trends in different geographic regions.
This includes softness in steel markets, such as Western Europe , reflecting among other things the economic and supply chain impact of the conflict between Ukraine and Russia.
Conversely, the U S steel market has shown more resilience as evidenced by utilization rates that remain elevated compared to the global industry.
Turning to our second quarter performance starting on slide six.
Our second quarter production volume increased 1% year over year to 44000 metric tons as our plants continue to operate at high levels of capacity utilization.
We sold 42000 metric tons of graphite electrodes in the quarter, representing a slight decline both year over year and sequentially, reflecting the volume impact of the Ukraine, Russia conflict.
Our second quarter electrode shipments were comprised of 24000 metric tons sold under our LTA.
At a weighted average realized price of $9600 per metric ton.
And 18000 metric tons of non LTA sales at a weighted average realized price of $6 per metric ton.
This non LTA pricing represented a 46% increase over the second quarter of 2021 and was in line with the first quarter of 2022 consistent with the expectations. We provided on our first quarter earnings call.
As we proceed through the remainder of the year, we expect our weighted average non LTA pricing for the second half to be comparable to the pricing realized in the first half of 2022.
Net sales in the second quarter were 364 million, representing an increase of 10% compared to the second quarter of 2021.
This reflected the higher non LTA pricing, partially offset by a mix and a mix shift from LTA to non LTA business as well as the decline in overall sales volume.
FX also had a slightly unfavorable impact on our year over year and sequential net sales performance during the second quarter.
This primarily reflects the strengthening U S dollar versus the euro and Japanese yen as a portion of our sales are denominated in these and other foreign currencies.
However, the FX topline headwind is more than offset on the bottom line by a benefit to Cogs related to euro denominated spending in our European operations.
Let me now turn it over to Tim to cover the rest of our financial details.
Thanks, Jeremy and good morning to everybody on the call that.
Net income totaled $115 million in the second quarter were <unk> 44.
44 of earnings per share on both a GAAP and adjusted basis.
Second quarter, adjusted EBITDA was $158 million, a decrease of 1% compared to the second quarter of 2021.
As higher year over year costs offset the increase in net sales.
Adjusted EBIT margin was 44% in the second quarter.
Let me take a minute to explain expand briefly on our costs.
Nearly all other industries, we continue to be impacted by global inflationary pressures, which is particularly acute in Europe , driven by higher energy prices.
Specific to our business the impacts are most significant for certain key raw materials energy and freight.
For the second quarter, we experienced year over year increase of approximately 21% and recognize cogs per metric ton, excluding depreciation and amortization.
This represented a 7% sequential increase compared to the first quarter of 2022.
We expect sequential cost inflation to persist at a similar rate in the third quarter.
That being said, we continue to focus prudently on managing our operating and discretionary spending as we navigate the current inflationary environment.
Turning to cash flow.
The second quarter, we generated $60 million of cash from operations and $48 million of adjusted free cash flow.
Both measures decreased compared to the second quarter of 2021, reflecting higher working capital.
This higher working capital was driven by an increase in inventory, reflecting both the cost impact I just spoke to as well as higher quantities as production volume outpaced sales in the first half of 2022.
Inventory builds occurred during the second quarter in advance of planned third quarter outages at our European electrode facilities, and our seadrift needle Coke production facility.
Also in anticipation of upcoming outages at certain oil refineries that supply decant oil.
Additionally, early in the second quarter in response to market disruptions related to the conflict in Ukraine.
On hand quantities for certain raw materials that are essential to our manufacturing process, where increased above our typical stage safety stock levels.
These actions were taken proactively to enable us to meet the electrodes supply needs of our customers. Despite the current uncertainties in the global supply chain.
As we move beyond the outage windows in the third quarter and our as our visibility into supply chain continues to increase we anticipate beginning to unwind the inventory build as we proceed through the back half of 2022.
Turning to slide eight.
We further strengthened our balance sheet with a $40 million reduction in our term loan during the second quarter, resulting in a total debt pay down of $110 million on a year to date basis.
Our debt to adjusted EBITDA ratio was one four times as of June 30th.
Compared to one six times at the end of 2021.
During the second quarter, we executed an amendment to our revolving credit facility, which increased our borrowing capacity by $80 million for new total capacity of $330 million.
We ended the quarter with total liquidity of approximately $382 million, consisting of $56 million of cash and $326 million available under the revolver.
Now on to slide nine.
Maintaining a prudent and disciplined capital allocation strategy remains a priority.
This includes a continued focus on reducing debt to further strengthen our balance sheet and support our strategic flexibility. While also returning capital to our stockholders and investing in our business.
During the second quarter, we repurchased $30 million of our common stock, resulting in a total of $60 million repurchase through the first half of 2022.
We ended the quarter with $99 million remaining available under our stock repurchase program.
In addition, we continue to expect our 2022 capital expenditures to be in the range of $70 million to $80 million.
As the industry moves towards more Eas based deal production, we will continue to invest in our high quality low cost global operating assets to meet the growing demand that this shift will create over the long term.
We will remain prudent in managing our capex spend prioritizing those projects with the highest return on investment.
Now, let me turn it back to Marcel for his perspective on the outlook.
Thank you Dan.
That's the case for most manufacturing based sectors at this point in time, you're operating environment for the steel industry remains volatile.
Global steel prices have retreated from recent highs and global steel production, excluding China declined 6% both in the second quarter and year to date compared to the same periods in 2021.
As Jeremy indicated we continue to see diverging steel industry trends in different geographical regions.
<unk> spending in certain markets, such as western Europe by the other markets such as the United States has been more resilient.
<unk> the near term outlook is becoming more challenging with higher raw material energy and logistics costs as well as the impact of the ongoing conflict between Russia and Ukraine.
At the same time, the shift mix from LTA to non LTA business continues.
To get ahead of these near term challenges.
Continued to strengthen our commercial capabilities proof.
Prudently manage operating and capital expenditures and we will continue to focus on reducing our long term debt.
We will also continue to invest in our product and service capabilities to be optimally positioned to participate in the longer term demand growth for graphite electrodes.
We remain confident that the steel industry is accelerating efforts to decarbonize will lead to further growth in the electric arc furnace steelmaking driving demand for graphite electrodes.
To that point.
Now I'll commence with plan, yes capacity additions by steel producers across the industry could result in annual incremental electric demand.
Tom's globally, excluding China by 2030.
As a leader in the graphite electrode industry does supports our positive long term outlook for our business.
We also anticipate that demand for petroleum needle Coke a key raw material used.
Salary.
Batteries sort of growing.
Petroleum needle Coke is another positive long term trend for our business as higher demand will result in continued related pricing for needle coke.
Our vertical integration into petroleum needle Coke production by our Seadrift facility is foundational for our ability to reliably deliver high quality.
Si electrodes.
With sustainable competitive advantages and a strong and committed team we are confident in our ability to deliver shareholder value over the long term.
That concludes our prepared remarks, we will now open the call for questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by the number too.
One moment. Please for your first question.
Your first question comes from David Gagliano of BMO. Please go ahead.
Hi, Thanks for taking my questions.
Just wanted to ask a few.
Operational type of questions first just a clarification on the near term.
First of all on the pricing I believe the commentary with comparable pricing in the spot market second half versus first half.
I think historically or reasons historically.
The commentary was there is about a six to nine months.
Lead time, obviously, it's Bob there's lead times associated with it in the commentary was expectations for prices to continue to improve in the second half so.
I believe so now the comment being flat is that because.
More recent contracts or volume being signed or being time at lower prices can you just give us a little more color on the pricing dynamic that youre seeing right now in the spot market.
Yeah sure. Thanks, David I appreciate the question.
Really a lot of this comes down to some macro factors you know just given that the world economy has been pretty dynamic and there's a variety of market forces at work in different regions.
And most notably what's going on in the Ukraine, Russia.
Situation and the impact that's having on energy prices.
No.
We're seeing we're seeing things that are diverging regionally and it's important to recognize that the anticipated pricing that we're talking about here is a global average.
As we discussed in the in the remarks were seeing some continued resilience in certain regions and softness in others and essentially what's happening.
Does that this softness is manifesting itself in a variety of different ways, including announcements by steelmakers, particularly those in Europe that they're avoiding operations during certain peak power times or they're extending their planned summer outages due to high power costs and.
And so these reduced operating rates are having the impact of increasing electrode inventory at certain customers, particularly in Europe , and consequently, reducing demand in the short term ultimately applying some downward pressure on pricing in certain regions that is beyond what we had anticipated earlier. So this is really limit.
Some of the price escalation that we were previously anticipating it's also worth noting that FX is playing a role here.
As you know we report in USD.
And we've seen a pretty dramatic run up in the value relative to the euro and the Japanese yen.
And so given that some of our sales are contracted in euro and yen price increases that we anticipated on those sales in local currency don't necessarily report in don't translate into reported price increases on a USD basis.
But having said that I think it's important to note that that this is a short term impact over the medium term and long term, we remain very bullish on our core markets and we believe that the value proposition of the Eas.
Process to help Decarbonize the steelmaking industry is is.
Is undeniable and that's being borne out in the various new eas projects that have been announced globally for the coming years.
As Marcel noted.
We're monitoring over 150, new Eas projects.
The time period through 2030 that will generate 200000 tons of incremental electrode demand during that timeframe.
And these new these new furnaces are going to require the latest and greatest in electrode technology, and we believe that our value proposition to support these high efficiency Eas through our product technology.
Sure.
And our ability to promise a stability of supply through our vertical integration through seadrift is really going to be shifting a lot of these market dynamics in our favor.
Okay. That's helpful. Thank you for that answer and just a follow up on the commentary obviously Tom.
We are cautious on the near term historically.
Congrats on it has been a leader a point.
Terms of meaningfully reducing volumes in a week.
Weaker demand environment.
Considering the situation now.
Can you speak more specifically to second half and third quarter and second half volume expectations.
How low will graph.
Take it.
Volumes in the second half of this year.
Thanks, Dave I appreciate it.
Yes, we talk about the second half of the year certainly.
I think.
We look at our contracted sales.
We provided the guidance for the full year on the LTA volume and obviously, we have to deliver against those volumes in.
The order book is otherwise pretty full in the back half of the year on the non LTA side as well I guess the question always becomes and we've talked to or alluded to in some of our commentary about the efforts to replace the impacted tons because of the conflict.
In the Ukraine.
Those have to come out in a profitable manner. So as we look at the end of the year certainly the escalating costs in Europe .
We're looking at those on an order by order basis to make sure that they are.
<unk>, but as long as we can continue to sell tons is profitable we will ship as many tons as we can in the back half of the year.
And we will from an operational standpoint, we'll continue to match our production.
To that sales demand right and make sure that we have sufficient.
Graphite electrode inventories on hand at the end of the year as we head into the first quarter of next year as well.
Okay. So when you put all that together.
What's reasonable.
I look back the last.
Whatever it is that the 2018 Q specifically volumes.
We are below obviously, there are some challenging times, there, but went down to 32000 tons in 2020.
39000 last year.
The reason will be within those two zones for <unk> 32 to 39 somewhere in that band.
No I would think we would expect certainly as we look to the back half of the year to be more in line with where we've been not going down to the level that you quoted in 2018 or what we saw.
Even last year.
Okay. That's helpful. Thank you and then just one last one from me.
Just on the longer term.
We're getting closer obviously.
Four months by months away from the end of the from the from the from the meaningful wind down and the market doesn't sound great.
What's the updated thoughts on extending the LTA is in.
Or is there actually any negotiations happening along those lines for 'twenty, three 'twenty four and beyond.
Thank you for that question, David It's Marcelo here so.
First of all it's important to point out that that Grasberg has been providing graphite electrodes for a very long time.
For entering into any LTV.
I think we are fully prepared to handle this change now.
Now we continue to believe that there is a role that multi year agreements will play in our portfolio.
And they can be a win win for our customers and for us providing our customers that are hedging mechanism and surety of supply by locking in a portion of our cash flow.
I think as we move forward here, we will look to offer our customers that variety of contract terms tailored to their needs.
Specifically to your question. So we have had discussions with some customers already.
We would expect to have some new multiyear agreements in place by the end of this year and into next year now in general we would expect those new agreements to be based on the current market conditions at the time that they are entered into it.
Entered into although we may consider a variety of pricing structures.
With their needs.
Both us and our customers.
However, it is important to note that while we will continue to offer a multi year agreement as an important part of our commercialization strategy and value proposition.
We would not anticipate that they will make up the majority of our portfolio moving forward.
Okay. That's helpful. Thanks very much.
Thanks, Dave.
Your next question comes from Curt Woodworth of Credit Suisse. Please go ahead.
Yes. Thank you good morning.
Good morning, Kurt.
So with respect to the third quarter, it seems like volume metrically youre guiding roughly flattish.
I think basically the same non LTA.
So from a cost perspective can you talk through how you see cost progression in the quarter you talked about youre going to have an outage in Europe , an outage at Seadrift and then you've got the buy in more third party Coke.
And then you have deflationary pressures on top of that and I would tend to assume that the <unk>.
Merchant Coke price would be going up sequentially as well.
So can you walk through some of those moving pieces just to help us get a little bit better.
Gains on the third quarter. Thank you.
Yes.
Kurt I think theres about six questions or points in there.
But I will try to make sure I hit them all.
So as it relates to the outages certainly these are planned activities.
We take down our European operations annually.
And this coincides with a lot of holiday periods.
For our folks over in Europe , and we do a lot of maintenance and repair work during that time.
And then also of Seadrift, we do a biannual turnaround.
Major maintenance activities down in seadrift, so in our prepared remarks I commented on the inventory build that we had.
And that was done twofold, one to make sure we had the graphite electrode inventory to ship to our customers throughout the third quarter did not have any disruption in supply certainly, but then also making sure that we have sufficient needle coke on hand as we.
Continue.
To produce in the back half of the third quarter. If you will so a lot of that is already in our results in our cash flows if you will.
We will continue to work that down through the back half of the year.
On the cost side, yes.
Yes, certainly.
Yes.
Inflationary forces are have impacted us and will continue to impact us I think we're looking at.
Sequential.
Cost increase of roughly 7% in line with where we were Q1 to Q2, it's really driven on a couple key areas first of all European power prices right.
<unk>.
Overall energy is a relatively small piece of our overall portfolio of cost and we're we're largely fixed in Europe for.
For energy, where it probably 80% fixed on the power side.
65% fixed on the gas side.
If you look at the volatility of the gas market in Europe right now the Dutch ETF has swung from.
110 euros, a megawatt hour to where it's sitting today at $200 a megawatt hour over the last four months, so even with with having as much that we have hedged those wild swings are going to have an impact on our results.
You mentioned raw materials and certainly.
So if we think about pitch, which is again a key key element in the manufacturing of an electrode.
The conflict in Ukraine disrupted the European pitch market in the latter part of Q1 and into Q2.
And while we've stabilized that supply chain in la.
Blocked in the supply that we need that pitch pricing and associated logistics with it have certainly gone up.
Decant oil.
Trades off of Brent and our spread over rent in those markets have continued to increase.
So despite our hedges.
We're still seeing some some cost inflation on the <unk> side.
I guess, just commenting that we can't hedge 100%.
Of your need in and we can't hedge that that spread over Brent.
Straight to that.
And then last point on cost logistics right.
I think logistics pricing remains elevated or continues to elevate for certain routes and in particular that affects us is in North America to Europe and vice versa.
And reliability of logistics remains at an all time low so those are maybe a little bit of color on some of the cost headwinds that we're facing but we continue to work to mitigate that the best we can.
And I think your last <unk>.
Comment or question was around third party needle coke.
And I think on the needle coke side.
If we look at the import statistics that we often reference on these calls again I'll just remind that they are a month or so dated and they are just a reference point, but youre trading at a range of 26 to $2900 a ton, which is up call. It $300 a ton on the high end. So we continue to see increased.
The needle coke through the first half of the year as anticipated and expected.
<unk> be seeing a little bit of plateauing here in the near term.
But that's kind of what we're seeing from our needle Coke perspective at this point in time.
Great Super helpful and then.
Your comments on petroleum Coke and kind of the interplay in the lithium ion battery I mean, there is a lot of debate I think around the ultimate mix of.
Both the natural or synthetic wrap by component in the anode and then even within that synthetic pizza combination between petroleum coke or.
Coal tar pitch Coke. So I just wanted to see do you have a view on kind of the composition and the evolution of that market.
Would you have any interest long term in terms of.
Getting into the merchant.
The market.
So you saw the deal that PSX announced with them.
Onyx extra.
Right.
Yeah, so happy to happy to comment on that.
As we think about the lithium ion battery space. It's clear that this is going to be a huge driver of needle coke consumption.
As I think as I think youre aware.
Regardless of the battery chemistry, when we talk about the cathode whether it would be a lithium iron phosphate our nickel manganese cobalt or whatever in every case, the anode is graphite and so and so within that.
As we see the EV.
Option continuing to increase.
That's going to drive an increase in the amount of lithium ion batteries that are sold and the other thing that we're seeing is a continued growth in the mega.
Megawatt hours at the batteries that are going into these evs.
And so when we put all of that together really what it's telling US is that between now and 2030, we expect about a 23% compound annual growth rate in the amount of synthetic graphite and consequently needle coke that's being consumed in that market. So it will be a meaningful driver of.
Of the underlying economics, and the needle Coke world.
Whether or not we.
We ultimately choose to participate in in that space is something that we're exploring currently.
In kind of more to come on that but to your point Curt the.
This is clearly a driver of.
Needle coke in needle coke consumption and when we think that that is going to continue to be supportive of our value proposition as we go forward and and our competitors needs to increasingly are increasingly.
Increasingly rely on.
Pardon me rely exclusively on third party sources, if that needle coke, whereas we will be able to offer our customers are electric customers surety of supply given the given our vertical integration.
Alright, Thank you very much.
Sure.
Your next question comes from Erin This Wanna Chan of RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
Just picking up that last line of questioning and I guess a kind.
Kind of touching.
Touching on something you said earlier as far as utilization rates. So.
What is the capacity that graph tech has.
To potentially dial back its own utilization rates, where are you guys running I guess.
Across your different facilities.
Question your system.
And just curious if you've made some conscious decisions to reduce rates in Europe .
And then also.
Just given the reduction in steel utilization rates that you referenced and then.
If so would you be able to redirect some of that.
Needle coke volume potentially into the EV market and potentially start that process I'm sure you're early on in that in that exploration, but just wanted to get your thoughts on that thanks.
Okay, Yeah, so a great.
Great question and say Ah Thanks Helene.
So starting with a discussion about our utilization rates in our factories in Europe .
Where our factories in general as a as we've said historically, we've got a boat to about 200000 tons of capacity that we could reasonably expect to have operating at at 90% of capacity.
And so that would say.
Roughly 45000 tons in the quarter and Theres, a little bit of seasonality to that but.
Given that we're gonna take things down for a couple of weeks in.
In the third quarter. So that would tell you that we were continuing to run our factories are pretty hard right now.
In order to ensure that we protect our customers.
As we go forward, we're continuously monitoring the.
<unk>.
The underlying economics of running those factories and <unk>.
Comparing comparing those economics to our ability to command price on the selling side and we'll make we'll make prudent decisions as as this progresses and where we're selling incremental tonnes.
And so.
Fortunately I if we go back in time, a little bit we've really dialed up a lot of our focus on ESG initiatives and in particular, the environmental side of things.
And so we do have some things that we were doing to improve the energy efficiency of our facilities.
Round, the globe, but I'm talking specifically about Europe , right now and some of those investments that we were making primarily for environmental purposes. Now now come in we're now generate a pretty substantial economic return given the price of gas and where its going and so as we think about.
How we how we run our factories and how we are how we prioritize our business.
We expect that as we look into the into the medium term, we will start seeing some benefit from investments that were initially made more for environmental reasons will now be generating pretty strong financial results for us as well.
Coming back around then too.
Your question about.
Our ability to produce more needle coke in seadrift, and our ability to potentially get into the lithium ion battery.
<unk>.
I think we've said before that kind of the headline capacity at seadrift is about 140000 metric tons.
And given that our internal consumption is meaningfully higher than that we do we do by third party Coke from a variety of places and so that does give us.
Some strategic flexibility, if we were to decide to get into that space to use some of our internal capacity to to test that market, while continuing to utilize third party sources for some of our internal usage as we as we carry that forward. So.
I hope I touched on all on all points of your question, but.
Happy to go deeper somewhere if you'd like.
Great No that was very helpful.
And then I guess I also wanted to obviously get your your thoughts on on.
The markets in electrodes in needle coke as well so.
You noted that there has been some pullback.
You know in steel utilization rates, causing some inventory build on the electrode side and you know.
Some some impact on pricing.
How long do you think that will last I mean do you think we're kind of in the early stages of that just given what's going on with demand and.
The macro side and I guess has it impacted needle coke as well could you just comment on <unk>.
Where prices are and needle coke in the spot market and if you see.
That also kind of in the early stages of that.
Inventory built.
Well, it's Marcel here, maybe one comment then I will pass it back to Jeremy for the statistics on the needle Coke I think.
Just reinforcing our earlier comments drive you're currently and operating environment.
Very volatile.
And while we remain optimistic about the long term fundamentals of our business. This near term uncertainty in the broader market.
The reason why we will refrain from providing more specifics on our 2020 through outlook at this time.
But Jeremy is there anything you want to add more specifically on the question for needle Coke pricing.
Yeah. So.
I think what we've seen I think Tim referenced that we've seen about a $300 run up in our third party needle coke prices based on the the import export statistics that we monitor and so.
So despite the.
The.
The softening of the market in in certain regions of the world.
We think that our needle coke pricing is.
It is elevated compared to where it has historically been but we think that as we look at the you know the various factors that are going to affect it we think that there's at least support for the current levels and and likely.
No room to grow even from where from where they're at right now and so essentially what you know what.
The way I would characterize it is that any demand.
Demand slowdown that we're seeing on the graphite electrode side is being more than made up for on the lithium ion battery side and so and.
So.
Our anticipation is that we'll continue to see strength in needle coke pricing.
Great. Thanks, and then I.
I guess the last question I had was just on and the needle Coke market have you seen.
Other electronic manufacturers.
Using pitch needle coke.
To make ultra high performance electrodes.
Just curious if there's any observations you have had you know maybe potentially with capacity in China or elsewhere.
Has there been any innovation too.
Uh huh.
Uhm fees from pitch needle Coke and is that also causing extra supply in the market.
Yeah. So so another great question I appreciate that the as we look at.
Our competitors and what they're doing obviously, we were not inside their factories. So we don't know for sure what they're what they're doing with Fitch pitch based in needle Coke.
We ourselves have looked at this.
In the past.
As you know thinking about Pitch-faced needle coke.
And have.
I have concluded that it was not suitable for us and our applications.
Primarily given some yeah.
Some.
Chemistry issues within it and what it would do to our processing times that would drive a significant amount of inefficiency in our manufacturing process to be able to make a UHT electrode using our process. It could certainly be done, but we don't think that it could be done in an.
In as efficient a manner as we were able to accomplish with petroleum based needle coke.
Perfect. Thanks, a lot I'll turn it over.
Your next question comes from Alex Hacking of Citi Research. Please go ahead.
Yes, hi, good morning.
Two or three follow up questions. If that's okay.
So on the I guess the cost side the production side.
Are there meaningful cost differential opening up between your production facilities in Europe .
And.
Monterey.
Is there a point, where it sort of makes sense to shift your operating footprint a little bit you know move volumes more towards North America.
Even consider reopening St Marys.
Florida cost differentials does not not that great.
Yes.
Thanks, Alex I appreciate that question and I'll take the first part and then Jeremy tackle the operating portfolio.
Yes, certainly there are cost differentials between all of our sites right in terms of the regions we operate.
North American energy prices are substantially lower than what we see in Europe , right now and even on a historic basis, North American natural gas is much cheaper than European natural gas and you have labor differences differentials as well.
At the end of the day.
If you look at all of those there's not a wide disparity in terms of our cost structure.
On average, but but certainly I would say right now.
The European power pricing does.
A unique challenge to those operations Jeremy.
Jim I don't know if you want to talk about kind of the overall network.
Yeah. So.
So Alex.
As you would probably have anticipated given this this difference that's opened up that Tim was talking about and some of the differences in our.
Steel utilization rates in North America versus Europe .
We have substantially all of our lean and continuous improvement team.
We have all of those resources focused on Debottlenecking everywhere, we can in North America, and Monterrey, obviously being a key driver of that so so you're absolutely right that.
To the extent that we can continue to open up incremental capacity.
In Monterey.
That's what we have our resources focused on doing right now.
As we are.
In response to your question on St Marys.
As you know we've we've increased.
The amount of activity in the St Marys facility with the installation of the new pin machining line.
<unk> complements the graph it is Asian activities that were already taking place there.
I would point out that I'm actually quite pleased with the St. Mary's team and their performance on commissioning and ramping up that equipment and they have demonstrated the ability to run that equipment asset that path to design great.
So as we go forward St. Mary's you know it is a location with a plentiful access to reasonably priced energy and that's a factor that we need to consider as we think about this but.
At the moment it remains just a.
One more one more.
Arrow in our strategic quiver, if I could put it that way.
Moving to nothing to announce in terms of anything beyond that but but obviously.
Something that we continue to keep in mind as we are as we explore what we're going to do with the manufacturing footprint.
Okay. Thanks, and then I just wanted to follow up on your answer to Dave's question earlier on the LTA. So.
I think what you said was you know you are in discussion on LTA with certain customers.
B lower volume going forward.
With these <unk> be similar.
Multiyear fixed price structure.
As the old ones were.
I mean, I guess in terms of pricing I'm not sure what you can say probably not much but.
I guess from my perspective, I'm not sure how attractive it would be to be fixing.
Fixing current spot prices for multiple years.
Given the.
The volatility on the cost side, so I guess any any more color on the LTA process. Thanks.
Yeah. Thanks, Thanks for that and I will add to the comments from Marcel provided earlier.
Certainly, yes, we do expect it to be a lower overall percentage of our portfolio.
Yes.
Marcel commented on the fact that we've operated without LTA is in the past right and these are these are a good option for both us strategically as well as our customers as they have certainty of supply and I think over the last couple of years, you've seen enough supply disruptions that companies are looking for a little bit more of that certainty but.
We don't haven't gone to our head necessarily where we feel compelled that we have to load 50% of our order book or 80% of our order book with fixed price long term agreements right. We can be strategic about it enter into those partnerships with those customers that I think there is a mutual value perceived out of those.
Those long term relationships and that's the way we're approaching it and that's certainly the approach in the customers that we're having the discussions with currently how they're viewing it as well so.
We look at these as a mutual benefit to both.
But again don't feel compelled us to lock in at any price.
I think as we look going forward.
I think there is a variety of pricing structures that could be introduced under these agreements whereby.
They may not.
They may not look and feel like the original kind of Gen. One if you want to call them that LTA is that were signed five years ago or so.
Okay. Thanks makes sense.
And then just one final question, which was something that Im an investor asked me in kind of interesting question I wasn't quite sure of the answer.
I mean, obviously youre not making.
Needle coke from from pitch, but for those that are.
The coal price.
<unk> relative you know some kind of.
<unk> cost support.
For.
For that needle coke for the pitch needle coke or it's not really relevant because it's because it's a byproduct.
<unk>.
Yeah, So Alex I would be speculating if I tried to answer that so it's probably better if I don't.
I apologize, but I don't know the answer to that and I don't want to mislead you or somebody else.
Yes, no worries.
I appreciate the candor alright. Thanks, Thanks, a lot for the question.
Thanks.
We have a follow up question from Curt Woodworth of Credit Suisse. Please go ahead.
Yes. Thanks.
One of the questions that I had is that my understanding is a lot of these new.
Electric arc.
Under construction are up.
Planning stage are going to utilize and I think you kind of spoke to this.
The larger size.
More higher type product a lot in the 32 inch diameter. So I'm just wondering if you could kind of speak to.
The ability and the 32 inch size and.
All of the growth is coming and that's kind of one particular product or the very large size diameter.
How like how are you positioned for that and then can you speak to how tight that market is today.
Okay.
Yes perfect.
Thanks Kurt.
As we see a lot of these high efficiency furnaces coming on.
Absolutely right that's.
Many of them are going with larger and larger graphite electrodes. The 32 inch market is still in fact.
Reasonably start in fact quite small in.
Mostly focus just on a couple of a couple of applications here in the U S. As we project out.
Five six or seven years, we will see the 32 inch become a.
A more of a standard.
Currently.
What we're seeing is that you know the 30 inch or 750 millimeter, depending on which side of the ocean. You're on is is is really the.
The standard for Super size electrodes, because we're seeing a lot of $750 even seven hundreds are.
What we're seeing on a lot of the new furnaces and as we think about those those larger electrodes, that's really where a lot of our value proposition comes into place as we think about the.
700, and 750 is that the market is really demanding of us right now.
It's where we like that space, because that's where we have installation from some of the more cost oriented competitors and gives us an ability to sell our product on a value proposition basis, where those customers value.
Not just that not just our product technology, but our technical service as well as the surety of supply that we give them in are in those sizes and so.
You're exactly right that as we're seeing more conversions of mills going from the integrated.
Steelmaking route to electric arc furnace.
The size of the electrodes is continuing to grow.
The $800 or 32 inch that you're talking about is still a relatively small part of that market, but but will grow as we progressed through the.
The balance of this decade.
And.
We like our position on Super size electrodes.
Right now as we think about the 700 and 750 millimeter electrodes, that's really where our where our primary focus is given that that's the heart of the market and we'll be ready for them.
You know to spend more time on the eight hundreds or 32 inch as that as that becomes a bigger part of the market.
Alright, Thank you very much.
Thanks Kurt.
There are no other questions from the phone lines I would like to turn the conference back to Marcel Kessler for closing remarks.
Thank you operator.
I would like to thank everyone on this call for your interest in graph stack that needs to be.
Look forward to speaking with you next quarter have a.
Great day.
Yeah.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you for participating and ask that you. Please disconnect your lines.
Yeah.