Q3 2022 GrafTech International Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the <unk> third quarter 2022 earnings conference call and webcast.
At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
If at any time during this call you need assistance. Please press star zero for the operator.
Call is being recorded on Friday November 4th 2022, I would now like to turn the conference over to Mike Daley, Vice President Investor Relations and corporate Communications. Please go ahead.
Good morning, and welcome to graphic International's third quarter 2022 earnings calls.
And with me today are Marcel Kessler, Chief Executive Officer, Jeremy Alford, Chief operating Officer, and Tim Flanagan Chief Financial Officer.
Marcel will begin with comments related to our operations in Monterrey, Mexico, Jeremy will then discuss safety sales and operational matters.
Tim will review, our quarterly results and other financial details.
Marcel will then close with comments on our outlook.
We'll then open the call to questions.
Turning to our next slide.
As a reminder, some of the matters discussed in this call may include forward looking statements regarding among other things performance trends and strategies.
These statements are based on current expectations and are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from 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 these slides in the Investor Relations section of our website at Www Dot grass Tech Dot com.
A replay of the call will also be available on our website.
I'll now turn the call over to myself.
Good morning, everyone.
Thank you for joining <unk> third quarter earnings call.
Before we dive into grass teck's third quarter performance I would like to begin with a detailed discussion about our operations in Monterrey, Mexico.
First I want to thank the entire graphics team and in particular all of our employees in Monterrey for their efforts to address the situation and the continued focus on moving our business ahead.
I would also like to thank our customers for their ongoing support and understanding.
In a nutshell here is the update on the current status.
First.
Monterrey is manufacturing operations remain suspended and we are pursuing all possible avenues to get to the site to be opened.
At this point, we don't know when operations will resume however, we remain confident in our ability to ultimately resolve this situation.
Second Monterey is 30% of our total annual production capacity and currently the only site that produces the penny stocks utilized for all our electrodes.
We are working to restart our facility in <unk>, Pennsylvania, as well as pursuing other mitigation strategies to produce 100% of our Penn needs when fully implemented.
Third.
Monterrey Reopens, our business performance will be significantly impacted for the first two quarters of 2023 with a reduction in sales of all you are 50% or more before recovering in the back half of the year.
Fourth.
We expect to be able to meet our LTA commitments in 2023.
Fifth we have ample liquidity to see us through this challenge and sixth.
While the situation with Monterrey is very unfortunate we remain optimistic about the longer term outlook for grass Tech.
We have sustainable competitive advantages, including substantial vertical integration into petroleum needle coke longer term demand tailwind and the talented and experienced team we will emerge stronger from this short term challenge.
Let me provide more detail on each of these six points.
Our facility in Monterrey has been operating since 1959 has over 550 employees and represents approximately 60000 metric tons or 30% of our total annual electrode production capacity.
Martha race operations can produce a broad portfolio of products, including various sizes of graphite electrodes and pins.
As we have previously reported on September 15th inspectors from the environmental authorities for the state of the label. They all Mexico visited our facility in Monterrey.
At the conclusion of this visit the Inspector inspectors issued a temporary suspension notice.
Other than to allow for safe wind down of all operations. This suspension notice lots effective immediately.
In early October the obtained clarification that certain non production activities, including the movement of inventory we were permitted to continue.
Apart from these permitted activities operations has been halted since that time.
The findings of the inspect theres focus on procedural errors related to certain operating licenses and permits.
I believe that is important to point out that at no time during or after the inspection hazards been alleged by the relevant authorities that our operations exceeded any existing emission standards.
In the past several years, we have.
We invested over $10 million operating out of Monterrey sites to continuously improve our environmental performance.
Also you had previously initiated our voluntary participation in Mexico's federal clean industry certification program.
These efforts are part of our commitment to the community that we belief grass takes has demonstrated in its long history in this area.
We strongly disagree with the conclusion to spend all of their operations and we believe this measure is in no way commensurate with the findings of the state inspectors.
Further we do not believe a suspension notice should legally be apply to this situation.
While we are complying with the suspension notice we are vigorously defending our rights to resume operations.
And we are pursuing all available legal remedies as well as engaging in dialogue with the respective state and local authorities in Boston These matters.
As I mentioned in my introduction Monterey is currently the only site that produces the PE stocks needed for all of our electrodes.
Each electrode requires one pin to be utilized by our customers.
We are actively pursuing multiple alternatives and mitigation strategies as it relates to internal production and external sourcing of feedstock.
These include accelerating a potential restart of hours, thanks, Moray East, Pennsylvania facility.
As many of you know our thanks, Mary Cypress previously a full scope electrode and pinion production facilities.
<unk> marries both rationalized at the time of lower demand in the electrical industry.
Over the last few years, we resumed operation of certain functions at sanction Harry's.
We are now actively pursuing approvals for operating permits to restart the facility for paint production.
With these permits and an incremental investment of about $8 million. Thanks, Moray east will be able to resume operations supplying 100% of the payments for grass Tech electrodes.
We expect that any Max mitigation activities, including this potential restart effect Mary's will take the first half of 2023 to be fully implemented.
However, until our Monterey operations are resumed.
Four hours, thanks Mary's facilities operational.
Or other mitigation activities are successfully implemented our ability to fulfill customer orders will be significantly impacted particularly as he gets into the next year.
The impact will be less significant for the fourth quarter as existing paying stock inventory is supporting our ability to fulfill most of the customer needs in the near term.
For next year, if Monterey remains suspended sales volume will be reduced by 50% or more in the first half of 2023 compared to the first half of 2022, but will recover after that.
We expect to be able to meet our LTA commitments throughout 2023.
As we move into the second half of 2023, assuming our mitigation activities related to pin production are fully implemented and depending on market conditions.
Anticipate that sales volume levels will recover.
With over $130 million in cash on hand as of today.
Ample liquidity to see us through all the reasonable scenarios.
Also there has been no impact on their ability to borrow under our existing facility on our borrowing costs on our borrowing needs.
While the Rd play disappointed with the current situation and the uncertainty that it has caused the beliefs that ultimately the reason and the rule of law will prevail and our Monterey facility will resume operations.
As I said at the start looking forward, we remain optimistic about the longer term outlook for our business.
Have a great team and sustainable competitive advantages.
We will be able to leverage these competitive advantages to capitalize on long term industry tailwind generated by the steel industry industry's efforts to decarbonize.
Idaho provider I don't provide further comments on our outlook at the end of our prepared remarks.
But let me first turn the call over to Jeremy now who will be followed by Tim as they provide commentary on our third quarter performance.
Yeah.
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.
While our overall performance in this area continues to place us in the top quartile of operators in the broader manufacturing industry, our year to date reportable incident rate does not meet our high standards.
We will continue to emphasize the need for further improvement in this area as safety must be fundamental to everything we do.
We remain steadfast and working toward our goal of zero injuries.
Let me now turn to slide five for an update on steel industry trends as context for our third quarter results.
During the third quarter, we saw further softening of key performance indicators for the steel industry.
In the third quarter of 2022 global steel production, excluding China was 198 million tons, representing a 9% decline compared to the same period in the prior year.
Global capacity utilization rates declined to 64% commensurate with a lower production.
These third quarter data points represent the lowest such production and utilization levels in the past eight quarters for the global steel industry.
We continue to see diverging steel industry trends in different geographic regions.
This includes weakness in Europe as macroeconomic conditions further deteriorate in large part due to the ongoing conflict between Ukraine and Russia.
Conversely, U S trends remained comparatively healthier and more stable.
Although utilization rates have softened somewhat in the most recent periods.
Turning to our third quarter performance starting on slide six.
Our third quarter production volume was approximately 38000 metric tons, representing a 5% year over year decline and a 14% sequential decline from the second quarter.
During the third quarter, we executed our planned annual maintenance work at our two European facilities, which drove the sequential decline.
The suspension of our Monterey operations had only a modest impact on our production volume for the third quarter.
We sold approximately 36000 metric tons of graphite electrodes in the quarter, which is an 18% decline from the third quarter of 2021.
Along with softening electrode demand driven by the current macroeconomic conditions the suspension of our Monterey operations contributed to the year over year decline in sales volume.
Specifically approximately 4000 metric tons of predominantly non LTA customer orders that were scheduled to ship from our Monterey location at the end of the third quarter were delayed to the to the facility suspension that began in September .
Third quarter shipments included 23000 metric tons sold under our LTA is at a weighted average realized price of $9400 per metric ton.
13000 metric tons of non LTA sales at a weighted average realized price of $6000 per metric ton.
This non LTA pricing represented an increase of more than 30% compared to the third quarter of 2021 and was in line with the first half of 2022 consistent with the expectations. We provided on our most recent earnings call.
Net sales in the third quarter decreased 13% compared to the third quarter of 2021.
This reflected the lower sales volume and a shift in mix from LTA to non LTA business, partially offset by the higher non LTA pricing.
FX also had a slight unfavorable impact on our net sales performance during the quarter, reflecting the strengthened 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 was more than offset on the bottom line by a benefit to Cogs related to euro denominated spending in our European operations.
Yeah.
As we move through the fourth quarter, we expect our weighted average non LTA pricing to remain comparable to the year to date level of approximately $6000 per metric ton.
However, we anticipate a further sequential decline in our sales volume for the fourth quarter, reflecting softness in the graphite electrode demand due to current market dynamics, we have discussed.
In addition, the suspension of our Monterey operations will constrain our electrode and pin production capabilities impacting our ability to fulfill certain customer orders.
As referenced in our press release. This morning, we expect this constraint will have an impact on our fourth quarter sales volume in the range of 10 to 12000 metric tons.
Factoring all of this and we anticipate our total graphite electrode sales volume for the fourth quarter will be in the range of 25% to 28000 metric tons.
Let me now turn it over to Tim to cover the rest of our financial details. Thanks.
Thanks, Jeremy.
Net income totaled $93 million in the third quarter or 36 cents of earnings per share.
Adjusted EBITDA was $129 million, a decrease of 25% compared to the third quarter of 2021 reflects reflecting the lower sales volume and higher year over year costs.
Adjusted EBITDA margin was 42% in the third quarter of 2022.
Let me expand briefly on costs we.
We continue to be impacted by global inflationary pressures, most notably for certain raw materials energy and freight.
For the third quarter, we experienced a year over year increase of approximately 24% and recognize cogs per metric ton, excluding depreciation and amortization.
Although this represented a 5% sequential increase compared to the second quarter of 2022. This was below our previous estimate of a 7% increase.
As we look ahead, we expect sequential cost inflation to persist at a similar 5% rate in the fourth quarter on a cost per metric ton basis as higher priced inventory is sold during the quarter.
This also factors in the absorption of certain fixed costs related to our operations in Monterrey.
Yeah.
For 2023, if Monterey work remains suspended we anticipate further significant cost increases for at least the first half of the year.
Primarily reflecting cost to execute the previously discussed mitigation strategy related to producing pin stock as well as incremental absorption of certain fixed costs due to the anticipated decline in 2023 sales volume.
We continue to focus on prudently managing our operating and discretionary spending as we navigate the near term challenges in the operating environment.
Turning to cash flow.
In the third quarter, we generated $68 million of cash from operations and $52 million of adjusted free cash flow.
Both measures decreased compared to the third quarter of 2021, reflecting higher working capital and lower net income.
The year over year increase in cash used for working capital reflected a timing really cute related decline in accounts payable.
And an increase in inventory driven primarily by higher costs.
Turning to slide eight.
During the third quarter, we opted to retain our free cash flow and did not make a voluntary prepayment on our term loan.
This was done to support the financial flexibility as we contribute continue to navigate near term challenges, including the suspension of our Monterey operations.
Our gross debt to adjusted EBITDA ratio was one five times as of September 30, as compared to one six times at the end of 2021.
On a net debt basis, we ended the third quarter at a ratio of one three times.
During the quarter, our total liquidity increased to approximately $435 million.
Consisting of $109 million of cash on hand, and $326 million available under our revolving credit facility.
As of today, our total liquidity is further increase now is now over $450 million.
As Marcel previously indicated and as we look forward, we have ample liquidity between cash on hand, and availability under our existing credit facility to navigate this challenging situation.
Now turning to slide nine.
Maintaining a prudent and disciplined capital allocation strategy remains a long term priority.
This includes 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.
While we elected not to pay down our debt repurchase stock in the third quarter, a significant portion of our cash flow generation has been utilized for these purposes on a year to date basis.
In the first half of the year, we reduced our term loan balance by $110 million, and we repurchased $60 million of our common stock.
Combined these activities account for nearly three quarters of our free cash flow generation through the first nine months of the year.
In addition, we continue to expect our 2022 capital expenditures to be in the range of $70 million to $80 million, although the composition of our spend is somewhat change to reflect our current priorities.
This includes an acceleration of investments to support the restart St. Marys is Marcel previously discussed.
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 Tim.
As we have indicated the current environment for the steel industry remains in flux.
Global steel prices continue to retreat from recent highs and global steel production, excluding China has declined 5% year to date compared to 2021.
As Jeremy indicated we continue to see the routines steel industry trends in different geographical regions, but indicators for nearly all regions have softened since our last earnings call.
As a result, while we remain bullish on graphite electrode demand over the long term the outlook for 2023 is more cautious.
Our near term outlook is further challenged by the cost pressures that Tim spoke to which we expect to peak for our business during 2023.
In addition to the current suspension of our monetary operations the ongoing shift in mix from LTA non to non LTA business creates another near term headwind.
While these challenges are clearly significant via.
We remain confident in our ability to overcome the near term headwinds and are optimistic about the longer term outlook for our business.
We are pursuing all avenues and remain confident in our ability to achieve a resumption of our military operations.
And we are aggressively working to work multiple mitigation strategies at the same time.
Given that the Monterey suspension is at least in part a legal matter, we won't be able to provide much more information during the Q&A beyond what I laid out in my opening comments.
However, we hope to be able to provide more detail and clarity on the situation as soon as possible.
As we progress we will continue to align our operating and capital expenditures with the current environment.
We remain committed to maintaining a strong balance sheet and ample liquidity to see us through the near term challenges.
Longer term, we continue to expect the steel industry's efforts to Decarbonize will drive a continued shift to electric arc furnace steelmaking supporting long term demand growth for graphite electrodes.
The recent announcements of planned Eas capacity additions by steel producers globally, excluding China could result in an annual incremental graphite electrode demand of over 200000 metric tons by 2030.
The actions, we are taking to invest in our product and service capabilities will ultimately position us to benefit from demand growth.
Our vertical integration into petroleum needle Coke production through our seadrift facility is a critical differentiator from our competitors and found their foundational for our ability to deliver high quality graphite electrodes.
In closing.
But I forced first spoke to you a quarter ago I shared the reasons I was excited to join grass Tech it.
It's interesting leading physician at distinct set of capabilities and competitive advantages and the talented and dedicated team that is committed to serving our customers.
All of this is still in place today.
In fact, the resolve I have seen in our employees over the past couple of months makes me proud to be part of the grass Tech team.
And confidence 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 ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear my Sweet home farm technology ever class If you will.
Speaker phone please lift the handset before pressing any keys.
First question comes from David Gagliano of BMO capital markets. Please go ahead.
Hi, Thanks for taking my questions. So.
So I just had a few clarification questions first of all on the on the <unk> situation.
Every graphite electrodes needs a pen.
And the commentary was volumes were down 50%.
And if things don't change of Monterrey, So assuming that the it depends on being purchased.
From a third party is that correct.
So as I indicated in my prepared remarks, the impact for Q4, it will be modest because we do have quite a bit of existing inventory.
That we are actually exploring various mitigation strategies. So I talked about the restart of St. Marys. We are also looking at producing pins that modify our European facilities.
And we are looking to procure third party panes stock.
Okay. So what I'm sorry, thank you for that now so what needs to happen for volumes to only be down 50% in the first half.
Of those options.
Does that makes any sense.
Trying to figure out how much of that is already.
Yeah.
Capable of being produced versus how much do you have to actually figure out where youre going to get the pins for producers.
Jeff do you want to take that one sure.
Sure Yeah, Thanks, Marcella and thanks for the question David the substantial majority of depends that are required to to achieve what we're talking about are already in inventory in one form or another. So this is not something that we are going to be.
Dependent on third parties or some other.
Some other source for <unk>.
For achieving a level of achievement that that Marcel talked about we have a substantial amount of inventory we have kept a substantial amount of inventory all the way along of pins and 10 stock and we will be processing that through the the other facilities in order to achieve what Marcel was talking about.
Okay, and then just on the restart of St. Marys just for Penn production.
You know what.
There was commentary around well, there's a I have a few follow ups here first of all if for whatever reason St Marys doesn't restart permits or whatever and I don't know how much of an issue that is what would happen in the second half volumes of twenty-three. That's one of the questions and then the other question.
There was commentary that.
That volume should improve in the second half.
And is that on the assumption that St Marys restarts and that's why volume should improve in the second half of 'twenty three.
And then the third question regarding St. Marys at least from my seat is you know why not just restart everything what's the what's the difference in terms of capital costs and permitting.
And restarting UHD graphite electrode production same areas as well.
So let me tackle the first two and then we'll get back to the third question I'm.
So with regards to the second half we feel confident that a combination of our mitigation strategies will be in place that will read throughs will lead to production and sales of all of your recovery. So it will be the restart of St Marys and for the starting of pen production, that's right up our Europe .
And facilities and or the securing of sufficient third party pins.
So it is not solely dependent on a on a on the St Marys restart and Dana I would also like to reiterate our confidence that we think we both believe that Monterrey will reopen.
Okay.
Okay, and then regarding restarting all the St Marys.
So with regards to restarting all of St. Marys, that's clearly something we're in basically investigating.
It will require a different set of permits that would likely take longer.
<unk> will also require additional incremental spending but I think we are clearly on track to go there as well, but they probably won't be able to see that come to implementation before 2024.
Okay. Okay, and then just switching gears to the costs.
I have no idea of what a pin costs in the in the in the public domain or in the whatever domain pins are traded.
But my question is just generally speaking we got to 5%.
The per unit cost increase for the fourth quarter of 2022 quarter over quarter.
And in the first half of 2023.
Monterey stay shut.
And given all the fixed cost absorption and things like that what's a reasonable range for expectations. There for unit cost increases in the first half of 2023 State for example versus <unk> 2022.
Yes.
So just on the cost side right.
We continue to work through the mitigating strategies that Marcel said and obviously, we will have to continue to work through the economics of each of those because they do vary by by strategy.
So I'm not going to provide any more guidance at this point in time on what we think the 2023 costs look like.
I think the other thing is taken into consideration is is that fixed cost absorption rates, so with sales volume down.
Fixed costs at our existing operations.
Being spread over that volume that'll have an impact as well beyond the 5% that we're talking about kind of on a normalized inflationary run rate.
But we've looked like.
But I think just talking about costs for a second more broadly.
No.
Seeing inflation into the fourth quarter.
Certain areas, we'll probably see some inflation into 2023, but on the flip side, we are starting to see some moderation in some of the key areas of our business whether it's the.
The underlying Brent price for Decant oil I think we're starting to see favorability on freight rates. The routes that are important to us are starting to show some some downward trends, which we would expect to continue.
As well as longer term pitch pricing in some of the raw materials, we've talked about in the past.
Okay.
Okay, I'll turn it over to somebody else. Thanks.
Thank you next question comes from Arun Viswanathan RBC capital markets. Please go ahead.
Great. Thanks for taking my question I guess, the first set of questions is just around some of the market developments. So.
Yes.
You know it you know spot prices now kind of hovered around the $6000 per ton range.
Whereas needle Coke and I guess, how do you see the spot price evolving from here.
Steel prices have also kind of continued to modestly.
Modestly move lower or.
You know consistently moved lower so.
Yeah, how should we think about kind of the price evolution in the electrode and needle coke markets from here. Thanks.
Yes.
Thanks Arun.
We've really seen needle coke prices really be pretty resilient, we have seen if tracking the import statistics we've seen.
[noise] continued.
Continued transaction somewhere in the high two thousands I think we put a high end of the range around 2900 last time. We spoke we are still in that range, maybe a very small amount of moderation, but still you know in that 27 $2800 a ton.
And as we as we look forward you know as you know we.
We expect to see continued acceleration for demand in needle Coke driven by you know on the one hand more graphite electrode demand from the.
Growth in EAA steelmaking, but.
As we've talked about a couple of times rapid growth of needle coke demand for use in the electric vehicle industry, where graphite for key material used in lithium ion battery anodes.
Okay.
So it sounds like you know needle Coke should continue to move modestly higher because of strong demand.
Okay.
And then again, so how does that translate to the electrode side I mean should we kind of just keep in mind that three to one rule of thumb or is that.
Unlikely, though that drugs would would be as resilient because maybe there is some extra supply or how should we think about how electrode prices should trend.
Yeah.
Thank you.
As you look forward I think those rules of thumb, probably hold true via longer term and as needle coke prices.
Trend upwards, we would see an upward demand or upward push on an electric pricing as well I think in the short term I think you have a bit of a dislocation because of call. It the global uncertainty that's in the markets right now, particularly in Europe , where those rules of thumb don't always hold true in the very near term. So you may have a little bit of short term.
Dislocation, but I think over the long term.
Where trends in needle coke pricing will drive electrode pricing.
Higher.
Okay and then.
Maybe you can just help us understand or get your perspective on contracting.
You know.
Unfortunately, the Monterrey facilities is not running full out so your volumes are going to be down in the first half.
And so maybe that limits the you know kind of commercial opportunities.
That you can put forth to your customers is that true and are you kind of now operating more of that.
You know kind of a shorter time frame, maybe one to three months of visibility or are you thinking about you.
You know setting up for the next couple of periods Oh.
Order book is there is there are other options in front of you.
Yes. Thanks.
It's an important question of room and one of the things that I want to make clear is that you know.
While we need to consider the near term supply constraints related to the Monterrey situation. None of this changes our commercial strategy. We continue to believe that we are unique in the market and our ability to offer a variety of different contracting terms to our customers.
It's supported by <unk>.
Our vertical integration and that's a key differentiator our ability to provide that certainty to our customers and while in the very near term, we're dealing with the Monterey situation, we have absolute confidence in our ability to resolve this.
Current environment, we're in and it's not changing our commercial strategy at all.
Okay and then.
Lastly, just there are some you know you've called.
That weakness in Europe now for a couple of quarters and it sounds like it has continued to.
Main weak and potentially even worse than in Q3 and Q4.
What is it going to take for that market to improve and is that you know.
One of the main things.
You guys are watching them or some other regions more important and and I'm. Just curious if yes. This does continue what.
How do you think about your own footprint, just given that you do have a lot of production over there and.
You know are there options to again startups and some of your other facilities a little bit quicker are shifting production there.
What's your outlook for Europe , and when this kind of it starts to improve.
So with regards to the outlook in Europe , and how that will be resolved I think much hinges on the conflict in Ukraine.
Create so much uncertainty for the European economy overall and for energy prices in Western Europe . In particular, I think that's the key resolution point whoopi any easing or a resolution of the conflict in Ukraine, and obviously, we are not able to make any predictions around that.
With regards to our operating footprint I think in the short term, we're obviously dependent on our European manufacturing sites.
Until we have been able to restart St. Marys first for <unk> production and then in the medium term hopefully for electrical production as well now we do take some solace in the fact that our electrodes factories in Europe are some of the most efficient and especially energy efficient one out there.
Thanks.
Thanks Sarah.
Thank you. Your next question comes from Alex Hacking Citi Research. Please go ahead.
Hi, good morning. Thanks.
Thanks for all the color on Monterey that was quite helpful.
Let me ask Dave's cough question, maybe a slightly different way.
Roughly what percentage of your overall cost structure today is fixed versus variable.
Yeah, Thanks, Alex Yeah. So.
Consider that roughly a third.
Do you think about it in broad strokes is the way I would I would think about that now obviously, we do have the opportunity over extended periods of time to adjust that fixed cost structure right.
But that's the way I would think about it kind of from a broad brush perspective.
Okay. Thanks, that's very helpful.
On the on the Seadrift needle Coke side like if my math is correct and you are selling you know 50%.
Electrodes in theory, you would have access needle Coke do you plan to sell that into the marketplace.
It's something that we're considering yes.
Short answer, but you can't give you any any specific estimates around that at this point.
Okay sure.
And then just another one on seadrift, if I may.
If I remember correctly.
The decon oil hedges kind of rollout around around the end of this year I think.
What's the.
Is that correct and what's the incremental cost impact is moved.
The move to spot pricing next year. Thanks.
Yes, so the <unk>.
Hedges did.
The hedge effect stopped.
And the midpoint of this current year and we'll see the P&L effect rolled through the first two quarters of next year.
Probably looking at somewhere about $100, a ton give or take on the hedge benefit that will be.
We will be gone after the second quarter of next year.
Okay. Thanks, a couple more I apologize for pepper you with questions.
On the electric market, you know if youre down to 50% that's 80000 ton annual rate of electrodes. That's gone from his market right and its 800000.
Tonnage market ex China, if my memory is correct.
I mean are your customers.
Expressing concern about their ability to source electrodes and in this scenario the electric market potentially.
Potentially tightening up because of this thank you.
So it's an excellent question now given the weakness, especially in Europe , but also more broadly around the world with the in the steel markets that we've spoken to I think the we don't really see any short term tightness.
In addition, given the slowdown that we have seen in the industry at the inventories at many of our customers are actually up significantly.
So which gives them quite a bit of phosphorus so.
I don't think that the.
As is.
It's unlikely to be a shortness in the market in the first half of 2023.
Jeremy if I could add to that.
No I think you hit the key points right.
We see a reasonable amount of inventory being held by our customers given the softness that that <unk> been experiencing and that that will bridge through any tightness that we would be creating in the near term.
Okay. Thanks, and then.
All of these answers very helpful. I appreciate that and then.
Just final one I think the answer here is no but.
Are there any covenants on any of your debt tied to EBITDA or anything like that thank you.
Yes, it's just.
Just going back and kind of reiterating what Marcel said in the opening commentary no impact on our ability to borrow as it exists today our cost of borrowing.
So we're in good shape from a liquidity perspective at this point in time.
But there's no there's no covenants or anything like that right just to be clear.
I mean, we have customary covenants and we've laid those out in the 10-Q.
We have a springing covenant on our revolver that isn't isn't in jeopardy at this point in time.
Okay. Thanks, So I will turn it over thank you very much.
Yeah.
Okay.
Thank you next question comes from Curt Woodworth Credit Suisse. Please go ahead.
Thanks.
Good morning, everyone.
You know with respect to the Monterrey process I realize maybe Europe , there's limitations.
You can say.
But just in terms of like the legal.
<unk> for issues like this or a timeline and the ups things too.
Sort out this issue is there any more color you can say and is it is it the type of thing where depending on the outcome of the case.
You would just have to resolve an issue pay a fine and restart or.
If you could just walk through maybe some of the more.
Procedural dynamics, just to help us understand a little bit around timing.
How we should think about it.
I don't think we are able to provide a lot more detailed on the legal path, but I think it's important pointing out that I think our priority focus here is to resolve this through discussions with the Mexican authorities and regulators.
Jointly developed by the agreed upon plan for reopening, which will hopefully be really it will hopefully be able food I think in the near term right I think any legal path that we're pursuing in parallel.
It will likely take longer I think that's all I can say that the.
Priority is active engagement with the authorities and they are doing that there are ongoing active conversation. So on a regular basis to make sure that we can agree on a plan to reopen.
Yeah.
Okay understood and then with respect to your energy position.
I think my understanding of that was about 15% of Cogs.
Last year with most of that I think two thirds power.
And I believe you enter into fixed price annual tower.
Contracts, so you're relatively hedged for the year can you give us any sense of.
Have you entered into for power price agreements for next year.
Are you going to be more exposed to spot and just given where the energy curves are today can you provide any color on what the potential of year on year impact on your energy.
Cost of goods sold would be for next year.
Thanks Kurt.
Your recap of what we've said in the past is spot on in terms of about 15% of our total cost and two thirds of that power.
Versus natural gas.
So we do move into next year and I think we've previously commented that we were less fixed as we head into next year, then that previously so where we sit today.
We're about 50% fixed on our power needs and our Pamplona and Kelly facility and about 25% fixed on our natural gas needs heading into next year and we continue to work through opportunities to further lock in some of those power prices and I think more broadly as we look at that European power market.
We saw prices peak back in August .
Have come down significantly here over the last call. It 60 days or so and we're probably sitting around $120 a megawatt hour now so it's an improvement from where we were certainly there is still a long way to go in Europe with respect to power prices, but.
Ian managers continue to work with our vendors and third parties to try to lock up as much of that as we can.
And can you can you guys give us any perspective on dollar you know magnitude of dollar cost to increase given the spot prices today.
Just to help us calibrate our models.
I guess, what I would offer without getting into specifics of projecting out next year's cost I mean, what we've locked in is at a rate commensurate with what we have this year.
Okay Alright.
Alright, great. Thanks very much.
Thank you Kurt.
Thank you. The next question comes from Matt <unk>.
He also from Jefferies. Please go ahead.
Yes. Good morning, Thanks for taking my call just thinking about cash flow for 2023, obviously, we've all got to do some work on our models for 2023 EBITDA.
Given some of the moving parts on the cost side, but just thinking about capital spending you talked about being able to potentially flex that.
Wanted to see what you thought you could bring capex down to in 2023.
And along those lines are there costs associated with restarting.
Monterey if you've got the go ahead.
In the first half of 'twenty three the restart Monterey.
Is there a cost to take that out of some sort of cold idle or how do we think about bringing that facility back online from a capital perspective.
Yeah. Thanks, maybe I'll take the first half of that which was your question about bringing Monterrey back from.
Cold idle too.
Fully restarted then I'll hand, it over to Tim to talk about the balance of it.
The quick answer is that.
No there shouldnt be there shouldnt be a disproportionate amount of costs associated with bringing it out of bringing it out of its current idle mode.
We have <unk>.
Assets that were.
Behaving the way that we expected them to and.
We would look to restart some exactly as they were and so there is no extended warm up period or anything like that as you might see in other.
Large capital asset businesses. So so I wouldn't anticipate any substantial cost increases associated with that.
Yes, maybe I would just add more broadly on capital right.
This year, we're going to spend $70 million to $80 million and we've talked about kind of what makes up that in the past.
I think on a normal run rate basis, our sustaining capital or maintenance capital is probably in that $50 million to $60 million range and certainly we have the ability.
Kind of within that number right two to flex that down further to the extent that we need to.
To do that but I think it's important and we will continue to make investments in kind of our key projects as we move forward.
Jeremy just talked about St. Marys in particular, we've got some projects in Pamplona that will significantly reduce our natural gas consumption and lower our overall cost input as we move forward and note. Both of those projects are ongoing now and will continue into next year. So it's a balance of what we need to spend money on just to keep the plants running.
In an efficient and safe manner, as well as those that generate a big ROI and balance of cash as well.
Thanks, that's helpful and then I guess.
Just just big picture on the capital allocation.
Going forward.
Did highlight that debt reduction will remain a priority and clearly given the volatility we're going to see in earnings over the coming 12 months that that makes a lot of sense I would think.
Share buybacks, maybe are on the on the shelf for at least the time being but on the debt reduction side.
You know at times, you your bonds have traded into the mid seventies.
I'm wondering if that might be an avenue to pursue debt reduction.
Buying back bonds at a discount is that something you would consider.
Yes, I mean, I think when we broadly think about capital allocation. We look at what is best for the organization and more broadly our shareholders at large and certainly if there is an opportunity to take that out at a discount.
Look at that but you weigh the cost benefit of pulling forward nearer term maturities so yeah.
I think.
What is important is that commitment we have to.
Our shareholders and stockholders for a disciplined approach.
You said, if we're going to continue to focus on the balance sheet I think frankly the work we've done over the last two years gives us the confidence to maneuver and work our way through the challenges that we're facing right now.
And that's why we've done what we've done in the past so.
Right now I don't think Theres any plans to change that strategy.
A longer term basis.
And did you guys have.
Maybe just a big picture target for what you are saying that reduction is a priority.
You know steel in general is a volatile industry.
To participate in like how do you think about the right amount of debt for this enterprise over the long run.
Yeah, I mean again I think we've been pretty consistent in the past when we've said our leverage target is no more than two five times two to two and half times.
And right now our current leverage is one five times on a gross basis or one three times on a net basis. So we feel like we're in a good spot, we kind of stick with that target.
Longer term, we think that allows us to kind of work through any cycles.
The steel industry has and positions us well with a strong balance sheet.
Going forward.
Great.
Maybe just one more quick one on the cash flow front for 2023 again lots of moving parts I understand it's hard to pin things down, but as we think about volumes coming up meaningfully.
The business not necessarily operating under its normal course.
Any working capital implications.
From that from from from these disruptions.
One way or the other either positively or negatively impacting cash flow anything that jumps out at you.
Yeah.
I don't want to comment on 2023 at this point in time I think we've given some kind of directional indicators is the way we think 'twenty three is shaping up.
Absent the restart of Monterrey.
But certainly we think in the first half of the year when volumes are down and then they pick up in the back half of the year that'll have an impact on working capital we look out to the fourth quarter right. We've talked about the volume decrease that we're expecting in the fourth quarter. So we're going to be carrying some additional inventory in the back half or in the fourth quarter.
So I would say working capital is relatively flat flat as.
As we head through fourth quarter.
Alright, thanks for your time.
Okay.
Thank you Matt.
Thank you. This concludes our question and answer session I will now turn the call back over to Mr. Kessler for closing comments.
Thank you operator.
I would like to thank everyone on this call for your interest in grass Tech and they look forward to speaking with you next quarter.
Have a great weekend everyone.
Ladies and gentlemen, this concludes your call for today.
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