Q2 2023 GrafTech International Ltd Earnings Call
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[music].
Good day, ladies and gentlemen, and welcome to the <unk> second quarter 2023 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 require immediate assistance. Please press star zero for the operator.
This call is being recorded on Friday August four 2023.
I would now like to turn the conference over to Mike Dillon. Please go ahead.
Thank you.
Good morning, and welcome to graphic International's second quarter 2023 earnings calls.
And with me today are Marcel Kessler, Chief Executive Officer, Jeremy Hallford, Chief operating Officer, and Tim Flanagan Chief Financial Officer.
Marcel will begin with opening comments, Jeremy will then discuss safety sales and operational matters, Tim will review, our quarterly results and other financial details Marcel will close with comments on our outlook. We will 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 graphic dot com.
A replay of the call will also be available on our website.
Now I'll turn the call over to Marcel.
Everyone. Thank.
For joining <unk> second quarter earnings call.
I will begin by highlighting four key points, we will get discussed on our call today.
Our performance for the second quarter was consistent with our expectations and represented a sequential improvement in key metrics.
Included quarter over quarter growth in sales volume and adjusted EBITDA as well as a sequential reduction in recognized costs on a per ton basis.
Second while we continue to see improvements in our business market indicators point towards further softness in steel production for the remainder of the year.
With the resulting impact on the demand for graphite electrodes.
Expectations for the second half of 2023 are more tempered how.
However, we remain optimistic about 2020 for recovering to improved levels of demand.
Third we continue to successfully execute our plans and strategies as we manage the business in response to the short term challenges in the environment.
Fourth we remain optimistic about the long term outlook for the business. We are taking actions that we believe will ultimately position <unk> to benefit from medium to longer term industry tailwind and deliver shareholder value.
Yes, Jeremy and Tim will provide more detail on our second quarter results, Let me turn to the second topic the current business environment.
Steel industry production remains constrained by local like global economic uncertainty at.
At the macro level, the global manufacturing PMI as reported in July has fallen to six months low and business and consumer confidence continues to be subdued.
This contributes to the steel industry output remaining below prior year levels with most regions showing production declines.
This in turn has resulted in ongoing softness for near term demand for our products.
As a result, we have lowered our volume expectations for the second half of 2023.
We now estimate our sales volume for the full year of 2023, and we will be in the range of 95 to 105000 metric tons as compared to our previous estimate of 100 to 115000 metric tons.
Sales of all of the Omega third quarter is expected to be broadly in line with sales volume for the second quarter of this year.
We remain optimistic for a recovery to improved levels of electrode demand and sales volume in 2024.
Based on the latest outlook from the World Steel Association Global steel demand outside of China is projected to increase 4% in 2024.
Year over year growth is expected in all key regions in which we participate.
This includes a projected 6% year over year increase in European Yoga Mat at 2% increase in North America, and a 3% increase in the middle East all of which should be by ice demand should drive demand recovery for graphite electrodes.
We recognize the industry performance will be dependent on macro conditions at.
As such we continue to focus on those things that are within our control to manage near term market uncertainties.
This includes proactively reducing our production volume to align with our near term demand outlook.
Mostly managing our operating costs capital expenditures and working capital levels.
And making targeted investments to further improve our competitive positioning and support long term growth.
We continue to be pleased with the execution of our plans and the progress to advance our business.
Let me briefly highlight several accomplishments since our last call.
Starting with our manufacturing operations.
Our facility in Monterrey, Mexico continues to ramp as expected.
We continue to make significant progress on our risk mitigation strategy relates to connecting things and initiatives to increase our operational flexibility.
As you will recall early in the second quarter, we received regulatory approval to restart production activities at that respect various facility in Pennsylvania.
Following this milestone BB.
Gas production operations at the plant with activity is expected to further ramp up in the coming months to increase our operational flexibility.
Turning to the commercial front during the second quarter, we announced the opening of any new sales office in Dubai, increasing our presence in this important region.
This supports our commercial strategy to operate with a global footprint as we expand our sales and technical service capabilities in key geographies.
In addition, we entered into new multiyear electrode sales agreements with certain customers in North America and Europe .
This reflects their confidence in <unk> ability to reliably deliver high performing product overtime.
We also continue to make progress on the sustainability front.
Recharge the United Nations Global compact and are excited to be participating in this important initiative alongside many other leading companies.
We look forward to building upon our ESG strategies for the benefit of the environment, our business and our stakeholders as we help shape, the better and more sustainable future.
To that end, we encourage you to read our latest sustainability report that we recently made available on our website.
Finally during the second quarter, we completed a $450 million senior secured notes offering.
Tim will discuss further this offering and the related repayment of our term loan extended our debt maturity profile by about four years.
At the same time.
Main focused on maintaining sufficient liquidity to navigate the current environment via our working capital management and other initiatives.
This supports our financial flexibility as we take actions that he believes will optimally position <unk> to benefit from industry, <unk> and deliver shareholder value.
I will spend a few minute moments on those <unk> at the end of our prepared remarks, but first let me turn the call over to Jeremy.
Thank you Marcel and good morning, everyone.
Start my comments with a brief update on our safety performance, which is a core value at graph.
We are pleased that our year to date recordable incident rate for 2023 reflects substantial improvement from the prior year level and continues to place us among the top operators in the broader manufacturing lines.
We will remain highly diligent in this area and seek to further improve this metric as we continue working toward our ultimate goal zero injuries.
Let me now turn to the next slide for an update on steel industry trends in additional context for our second quarter results and our outlook commentary.
As Marcel indicated the overall performance of the steel industry has remained somewhat constrained.
During the second quarter, we saw further sequential improvement in certain market indicators. However, these metrics remained below year ago levels.
Global steel production outside of China in the second quarter was approximately $208 million.
This represented a 4% sequential improvement from the first quarter, but a 2% decline compared to the same period in the prior year.
On a year to date basis global steel production outside of China.
4% through the second quarter with most regions showing production declines.
Turning to the global capacity utilization outside of China for the second quarter. The rate was flat on a sequential basis at 66%.
We remain down by approximately 400 basis points compared to the second quarter of last year.
And looking at other market indicators, what will steel pricing declined during the second quarter alongside the steel demand.
With most market projections point to a continuation of subdued steel pricing and demand in the near term.
On a regional basis.
In Europe weak macro fundamentals have persistent including a soft construction markets and high inflation rates that continue to impact confidence.
Last week, the European Steel Association issued their latest 2023 outlook, knowing that they expect a 3% decline in steel demand for the full year.
This compares to the previous projection of a 1% decline.
In the U S utilization rates pick up in the second quarter, averaging 77%, although they remain below year ago levels.
The sequential increase reflects continued strength of the U S construction sector.
Overall, the significant global economic uncertainty continues to be an overhang on industry demand in the near term.
However, in the medium to longer term, we remain bullish on steel industry fundamentals for the reasons, we've previously indicated, thereby supporting future graphite electrode demand.
Turning to the next slide and graphics second quarter performance.
Our production volume was approximately 25000 metric tons, representing a 43% year over year decline, but up nearly 60% on a sequential basis compared to the first quarter.
This resulted in a combined capacity utilization rate for our three primary electrode facilities, just below 50% for the second quarter compared to 31% in the first quarter.
Subject to market conditions, we expect utilization rates at our manufacturing facilities to increase in the second half of 2023 compared to first half levels.
This reflects our continued focus on proactively managing production volume to align with our evolving demands.
Turning to sales our second quarter sales volume of approximately 26000 metric tons was in line with the outlook, we provided on the last call.
While representing a 38% year over year decline sales volume was up 56% on a sequential basis compared to the first quarter as we continue to recover from the impact of the Monterey suspension.
Shipments for the second quarter included 8000 metric tons sold under our <unk> at a weighted average realized price of $9 per metric ton.
And nearly 18000 metric tons of non LTE sales at a weighted average realized price of approximately $5600 per metric ton.
As anticipated the weighted average price for non LTA sales was below first quarter levels.
Net sales in the second quarter of 2023 decreased 49% compared to the second quarter of 2020.
In addition to the lower sales volume.
<unk> shifted the mix of our business from LTA and non LTA volume contributed to the year over year decline.
As we proceed through the third quarter of 2023, the softness in the commercial environment that we have discussed has tempered our expectations.
Specifically the year over year decline in global steel production.
Extreme steel utilization rates have limited the ability of our customers.
Can we drive down their electrode inventory to typical levels.
Further with our recently revised outlook from European Steel Association and considering the typical seasonal slowdowns in Europe , our near term outlook for European electric demand is cautious.
Given these dynamics, we anticipate our sales volume for the third quarter will be broadly in line with the second quarter.
For the fourth quarter, we expect a sequential increase in sales volume.
Factoring all of this and on a full year basis as Marcel mentioned in his remarks, we estimate sales volume will be in the range of 95 to 105000 metric tons for 2023.
Let me now turn it over to Tim to cover the rest of our financials.
Thanks, Jeremy.
For the second quarter, we had a net loss of $8 million or <unk> <unk> per share.
Adjusted EBITDA was $26 million, a decrease from $158 million in the second quarter of 2022.
The decline primarily reflected the lower sales volume higher year over year cost on a per metric ton basis, and the continued shift in the mix of our business towards non LTA volumes.
Adjusted EBITDA margin was 14% in the second quarter.
Expanding on costs.
As reflected in the reconciliation we provided in the earnings documents posted to our website cash cogs per metric ton excludes depreciation and amortization as well as cost of goods associated with byproduct sales and other noncash factors.
Reflecting the full year impact of raw materials energy and freight cost increases that occurred throughout 2022.
We continue to sell higher price inventory during the second quarter of 2023.
In addition, during the quarter, our cash costs included approximately $10 million of fixed costs that otherwise would've been inventory if we're operating at normal production levels.
Factoring all of this for the second quarter of 2023, our cash Cogs per metric ton were approximately $5250 in line with our expectations.
This represented a 7% sequential decrease compared to our high watermark of $5600 in the first quarter of 2023.
Looking ahead, we continue to expect our cash Cogs per metric ton in the second half of 2023 will be below the level recognized in the first half of the year, but will be above our previous expectations I'll provide some more color on that here in a moment.
As we have anticipated we're starting to see relief from some of the inflationary pressures for certain key elements of our cost structure.
<unk> decant oil energy coal tar pitch and freight.
However, given where we're at in the fiscal year and with our current inventory levels. This won't have a meaningful impact on our costs in the second half of 2023.
Furthermore, the decline in our volume outlook has a two pronged effect on the cash Cogs per metric ton that will be recognized in the second half of this year.
First with the lower sales volume. This extends the time it takes to work through higher priced inventory on our balance sheet.
Secondly, with the corresponding decline in production volume, we will continue to recognize fixed costs that otherwise would be inventory that we are operating at normal production levels.
As a result, we remain focused on managing our controllable costs and working to bring down our inventory levels.
As we look ahead, we continue to expect market pricing to decline further in the medium to longer term for certain key elements of our cost structure.
For these reasons and with the anticipated increase in their capacity utilization our sales volume levels improve in 2024, we remain optimistic that our cost per metric ton will improve as we move beyond the current year.
Now turning to cash flow.
In the second quarter, we used $9 million of cash in operating activities, while adjusted free cash flow was essentially breakeven for the quarter.
Our second quarter adjusted free cash flow included the benefit of approximately $24 million related to the settlement of interest rate swaps.
The majority of this benefit was a result of terminating our interest rate swaps in connection with the repayment of our $434 million term loan balance at the end of the quarter, which I'll speak more about in a moment.
We anticipated the second quarter would represent the low watermark for cash flow in 2023 and that continues to be our expectation.
With our focus on managing our costs capital expenditures and working capital levels, we continue to expect.
Adjusted free cash flow to be positive for 2023.
Moving to the next slide.
During the second quarter, we completed a private offering of $450 million senior secured notes due December 2028, which coincides with the maturity of our existing $500 million senior secured notes.
As the net proceeds of this offering were used to repay the term loan that was due in the first quarter of 2025. This effectively extended our debt maturity profile by nearly four years.
Our gross debt to adjusted EBITDA ratio was three eight times as of June 30, compared to one seven times at the end of 2022.
Reflecting the decline in EBITDA for the first two quarters of 2023 on a year over year basis.
On a net debt basis, we ended the quarter at a ratio of three three times.
As of June 30, our liquidity was $337 million, consisting of $132 million of cash and $205 million available under our revolving credit facility.
This reflects the financial covenant that limits borrowing availability under our revolver in certain circumstances.
However, we do not anticipate the need to borrow against our revolver in 2023.
Further we remain confident we have ample liquidity between the cash on hand, and our borrowing availability to navigate the current market conditions and to continue to make targeted investments.
For the full year, we will continue to expect our capital expenditures will be in the range of $55 million to $60 million.
I'll now turn it back to Marcel for some closing comments.
Thank you Tim.
Let me reiterate that we remain confident in our ability to overcome near term headwinds.
We're successfully executing our plans to navigate the current environment and our.
We're encouraged by the progress our teams continue to make.
We remain optimistic about the long term outlook for our business and are taking actions that we believe will optimally position <unk> to benefit from sustainable industry Tailgates.
Specifically decarbonization efforts are driving a transition in steel with electric arc furnace steelmaking continuing to increase share of total steel production.
In 2022.
<unk> accounted for approximately half of global steel production outside of China, which increased from 44% in 2015.
With this trend of EES share growth is expected to continue the anticipate demand for graphite electrodes, we experience accelerating growth.
We are currently tracking more than 200 announcements of planned <unk> capacity additions by steel producers around the world.
We estimate that these additions along with production increases at existing Es plants could result in incremental annual graphite electrode demand outside of China of 200000 metric tons by 2030.
This compares to global annual graphite electrode demand in 2022 outside of China of approximately 680000 metric tons.
On a regional basis.
<unk> these industry announcements this could translate into incremental graphite electrode demand as follows 60.
65000 metric tons in Europe .
75000 metric tons in North America, and over 55000 metric tons in the Middle East and Africa.
In addition, the demand for petroleum needle Coke the key raw material used to produce graphite electrodes is also expected to accelerate.
This is driven by its used to produce synthetic graphite anode portion of lithium ion batteries used in the rapidly growing electric vehicle market.
Based on analyst estimates regarding the projected growth in electric vehicle sales and battery pack sizes. We estimate this could result in global needle coke demand for use in EV applications, increasing at the compounds compound annual growth rate of over 20% through 2030.
The view of the growing demand for needle Coke is another positive long term trend.
As higher demand should result in elevated pricing.
Given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing this trend should translate to higher market pricing for electrodes.
We are well positioned to capitalize on these favorable industry tailwind.
We operate <unk>, the highest capacity electrode manufacturing facilities in the world.
With these facilities and the recent restart of St. Marys, the have strategic flexibility and a global footprint that gives us proximity to large yes, you were making regions.
Further through our seadrift production facility remain the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke.
The sustainable competitive advantages are critical differentiators, and foundational where our ability to serve all the electrical customers.
As we discussed on the last call. We also see long term value creation opportunities beyond our existing electric business <unk>.
Specifically, we continue to study the ways in which we can participate in the anticipated growth of the EV battery market via two potential avenues.
First by leveraging our assets and technical Knowhow in the area of petroleum needle Coke production given the expected demand growth for this key raw material.
To that end, we have recently filed a permit application to significantly expand the production capacity at seadrift.
Second by leveraging our grasp of decision resources and the expertise to produce synthetic graphite material for battery anodes.
While we have not yet made any firm commitments continued to test our needle coke and graduate mutation capabilities with several third parties parties and we are confident in our ability to meet the specifications and quality record required for battery applications.
We are excited about the possibility of participating in the growth of the EV battery market and look forward to sharing more as we can.
In closing we are effectively executing our plans to manage the current environment.
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.
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One moment. Please for your first question.
Okay.
The first question comes from TSMC.
BMO capital markets. Please go ahead.
Hi, Thank you for taking my questions, maybe starting off with the spot pricing environment. I think you mentioned you expect spot prices to decline sequentially can you provide more color on the magnitude of decline you're expecting.
Yes. Thank you for your question <unk>.
So as we have noted second quarter price.
Our non LTA site <unk> below our first quarter levels as well as anticipated given the soft and get softer environment.
As Tim noted I think there is some expectation that we may see further declines in the second half of the year.
I understand the desire for more clarity on pricing expectations further into 2023 and beyond.
However, and I know what I've said this before for competitive reasons.
We're going to refrain from providing our expectations on near term pricing and in fact have limited visibility on pricing further out.
Understood maybe done on the cost side previously you expected the full year 2000 to the cost to be up about 20% year over year I'm, assuming that is moving higher now or how should we think about it.
Yes, Youre absolutely right. So we said that we.
We expected a 17% to 20% increase I think we guided to the high end of that range last quarter on a year over year basis.
So we'll end up somewhere north of that high end and but we fully expect to be still below kind of what we average for the first half of the year. So first half of the year averaged about $5400 on a cash cogs basis. So it will be somewhere above that 20% increase level in 5400 to give you some parameters.
Perfect. Thank you so much.
Thank you.
The next question comes from Arun.
This one.
RBC capital markets. Please go ahead.
Thanks for taking my question just wanted to clarify a couple of things so.
Did you say that the Q3.
Sales volume would be similar to Q2.
And then Dennis director will be higher.
Okay.
Yes.
Great.
Thanks for that so.
Given that then.
You've done about $40 million of EBIDTA and.
And in the first half the.
Second half I guess.
You will have similar volume in Q3, but maybe slightly higher volume in Q4 would.
Would you get some more fixed cost leverage on that and so maybe.
Maybe your EBITDA is a little bit.
Slightly better sequentially in Q3, there is some.
Seasonal benefits as well in the energy costs are a little bit lower.
How should we think about EBITDA maybe in Q3.
Yeah. So.
As we think about starting with the fixed cost leverage and we anticipate we'll continue to have.
Some fixed costs that are expense directly to the P&L that otherwise would be inventory in the third quarter and this is again, reflecting our intention of managing production levels in line with our overall commercial demand in our sales volume expectations.
Layering on top of that as well is while we've released some inventory during the first half of the year.
We anticipate releasing more inventory and using as much of what we have on hand to support the sales forecast in the back half of the year.
As well so.
We would expect the plant is still not to be running at.
At at what we would consider normal or target levels.
It'd be running harder than they have in the first half of the year as we commented, but we will still have some some fixed cost leverage challenges in the back half of the year as well.
Right. Thanks for that and then given that your <unk>.
<unk> two about.
<unk> 95 to 105.
Of sales volumes 100000 sales volume.
That implies kind of a 50% utilization of your overall capacity.
Is that right and what is it going to take to really get.
You know back to a more normal environment is it.
I guess, a number of factors, including better Europe .
You know, maybe some better industrial backdrop.
I ask because there's some conflicting factors out there on the one hand, we have a pretty robust automotive market. There are some re shoring and infrastructure projects that seem to be supporting them.
Better steel utilization and again you cited the mid Seventy's steel utilization rate.
For U S 77, so why our electrode utilization rates. So low I guess is the overall question.
Yeah. So so from a volume perspective, right, yes, what will it take to get back to more normalized volumes and I think it would be start by reflecting on 2023, Theres really two factors impacting sales volume and 23 first of all you've got the Monterey situation, which is kind of unique to us and then you've got the overall kind of math.
ROE environment, that's weighing on kind of each of the regions of the world differently right you see a more robust U S market still not performing at the same level. It was a year ago, but youre seeing some some strong performance as you know.
And automotive.
Construction is continuing to be strong and then I think theres, a pretty optimistic outlook for.
Infrastructure spending more broadly with the $2 billion plus dollars of spending that's anticipated on that front.
Conversely, I think if you look at macro environments in other regions of the World I think it's a little bit more challenged Jeremy mentioned the European Steel Association is kind of a revised outlook for the year being down.
To a 3% reduction in the current year versus what they previously thought was a 1% reduction so.
The combination of those things I think you really have to go region by region to understand the dynamics and how that's affecting <unk>.
Electric demand.
I think as we have.
Move through Monterrey, largely this year with the strong operation of the plant thus far continuing to work on the pin mitigation strategy and rebuilding our pin inventory.
And the fact that we fully expect to be engaged with our customers and the <unk>.
Commercial negotiation process here in the second half of the year. We think we are taking that challenge off the table as we head into 2024, so really the determination of where things and how things returned to more normalized levels as the macro environment of.
Each of those regions and how you see recovery.
I think again World Steel Association European Steel Association are all predicting recoveries of different orders of magnitudes in each of the regions of the world, which gives us a pretty optimistic outlook that 'twenty four from an overall demand perspective for electrodes will be better than this year.
Okay. Thanks for that but again just to just to understand this further.
So.
Would you would you say that there have been some capacity additions and those are being absorbed.
I'm still not fallen why the electrode and putting aside monterey.
You know your second half.
It would still imply kind of a much lower utilization rate versus global steel utilization rates.
You know so.
I'm just not following exactly why the electrode utilization rates are so low.
Even in you know potentially 24.
Yeah, I think the other factor that's going to weigh on that on utilization rates.
Our inventory levels first and foremost what we're carrying and again, we're actively working down the inventory that we built over the last 18 months, but then also on this at the same time and we talked about this in the last call as well customer inventories right. So to the extent that the Monterey situation caused people to pull.
For some buying of electrodes that we're not seeing at these utilization rates work out yet that's going to impact our utilization of our plants into demand more.
More broadly for graphite electrodes.
Okay. That's helpful and just one last one then.
You know as you look out into the future here.
It appears that you've kind of gone through a.
A pretty challenging time and youre coming out on the other side of it Monterrey is back up and running.
Going through some commercial renegotiations would you kind of characterize that first half.
2023, as a potential bottom and if so then.
You'll you'll you'll slowly see utilization and volumes improve and fixed cost leverage improve.
And then thus profitability also as you look out into <unk> in the 'twenty four and 'twenty five.
How youre looking at the World.
And is that also allowing you to.
Maybe redirect some of your attention.
To the EV markets in some of your initiatives there.
Yes, so I think thats exactly how we see the situation how we see the situation involving two I think the first half is clearly the bottom.
As far as we can see today.
Primarily driven by the fact that Monterrey as being the key driver of the low performance in the second half and while there may be some lingering effects lingering effect here, where the second half of this year. This will be completely worked through by by 2024, yes.
Or is estimates we completely agree with them.
And what about the EV side could you elaborate on some of the initiatives there and maybe provide an update on what youre working on.
So as I mentioned in my prepared remarks, I E. The have not made any any firm commitments that we can speak to in terms of agreements with potential customers or.
Or significant investments to expand capacity.
However, we continue to work with several third parties in two ways right one.
Is your testing.
The needle coke at Seadrift for us as.
Battery anode material and we are very confident that well produce at seadrift is very well suited for this application.
And to that end that also add.
The prepared remarks that you have just filed an application to expand the capacity Youll seadrift here going forward.
Secondly, we are working with third parties to use our <unk> assets that we currently exclusively used for electrical production too.
The ties that material for battery materials and in that case as well will be a very big.
Courage by the findings even that the functionality that the capability and the quality of that Pat Powderly 10 produced in our grasp utilization furnaces.
Very well suited for battery applications. So we are progressing on both fronts and there are going to be very happy to share more about this SDK.
Thanks.
Thank you. The next question comes from Bill Peterson of Jpmorgan. Please go ahead.
Yes, hi, good morning, and thanks for taking my questions.
<unk> volumes increased quarter on quarter with flat pricing, but with based on your annual volume and revenue guidance. It would imply a step down in both in the back half of the year is that a fair assumption and if so how should we think about the LTA in the cadence for the back half of the year.
Yes, so we haven't changed the guidance for the full year I think youre right. When you kind of do the math the.
The math would suggest a slightly lower price and thats really going to be driven by mix of LTA customers right not all contracts are the same.
Lot of these contracts are those that have been extended over time.
We've worked with customers to.
Blend and extend those contracts out so.
I think we will fall well within the ranges that we provided on the LTA side.
Okay. Thanks for that and I guess looking at capital allocation can you provide some additional color on our rationale for the on the dividend suspension.
I guess I understand the improvement use of cash.
Assuming that we're at the bottom free cash generation should improve into next year I'm trying to get a feel for the rationale and maybe what would you need to see to have been reinstated as we look at it.
Yes, so I think the suspension of the one <unk> per share dividend.
It is consistent with our current capital allocation priorities right thats, although one and focusing on maintaining sufficient liquidity to navigate the short term headwinds and also making targeted investments to position our business for long term growth.
Regarding the possibility of David that being reinstated in the future as you know Dave.
Dividend declarations are always at the discretion of the board. So I will refrain from speculating at what point that might happen.
Okay. Thanks for the color.
Following the progress and good luck.
Thank you for your questions.
Thank you. The next question comes from Curt Woodworth.
Credit Suisse. Please go ahead.
Yeah. Thanks, good morning.
With respect to the <unk>.
Cause under absorption in some of the stuff you mentioned in terms of the inventory.
You know how should we think about what your cost structure should look like on a normalized basis. So if you were to assume more normalized utilization.
It kind of runs on the spot.
Coal tar.
Pricing decant oil pricing and can you give us a sense of what that could look like today.
Yeah, I mean so.
And thanks for the question Kurt.
I think if you look back a couple of years historically, we've been in that $3600 a ton on a cash cogs basis.
I think.
Just given the fact that so much of our cost structure is market driven we should be able to drive back towards that as you see kind of normalization of the coal tar markets. The decant oil markets and certainly we've seen improvement as I mentioned in our prepared remarks, a number of those areas we're seeing.
Some beneficial.
<unk> price movements that are helping us and will continue to help us as we move into 2024.
Other elements of the cost structure in particular labor.
Inflation in those costs tends to be stickier. So you won't work all of that out so well.
The aspirational to get back to that $3600 level.
We're likely not to get not going to get there anytime anytime sooner without investment. So we will see a significant reduction in cost as we head into next year as fixed costs get better the.
The leverage gets better with the return of volume.
We're seeing that again the benefit on some of the variable stuff and we will continue to work diligently to manage our period or fixed cost as we have done. So this year and continue to keep our plants as efficient and cost effective as possible. So we.
We will see good movement heading into next year, but we may not get all the way back to that $3600 level.
Okay and then.
Kind of consistent with Ryan's question.
Looking at your <unk>.
Sales volumes utilization. It does it does seem much more higher rate of decline versus what we're seeing in the global steel production data. So I think.
One of the questions people have is with respect to Monterrey, and just all the gyrations in the industry and arguably.
Are there more import pressure.
From China, and India in this type of market as well can you can you comment at all on your market share do you feel like you've lost share.
Do you feel like your contract position or your relationships are generally still in <unk>.
Tact in terms of thinking about 2020 for recovery that you should benefit the industry recycles higher.
Yeah, So a couple of thoughts.
I think we can comment directly on market shares.
Enough transparency around that.
In regards to the impact of Monterrey, A&P I think we've talked about that in some detail on the last two calls right.
The during that suspension in late 2022 right.
The ability to negotiate volumes, especially for the first half of 2003, and maybe even to some extent in the second half right. So that was diverse possible time perfect suspensions of that is really the key driver of impact and underperformance at the disconnect between what you're highlighting here.
<unk> utilization rates versus the electrical plant utilization rates I think it's the indirect impact of Monterey at the loss of that negotiation window. During the most critical negotiation time in late 2022.
Okay.
And then just check.
Please go ahead.
Okay understood and then.
Just with expansion at Seadrift.
You know I think in the past.
The capex for kind of a replication of that asset.
Can't remember exactly but.
Six 700 million I think there was some potential to maybe do a more subscale investments right.
No.
Can you comment on how that would actually work just given you know given your capital structure.
Is it that type of thing, where you would try to get a JV investment and then you would get.
Our fee to operate the facility or how would that look like.
So yes, yes comment in the past.
At least <unk> of the seadrift will be very expensive and right now that's not what the around they're taking here.
Essentially finding a permit.
Perfect application for an expansion of the existing facility.
And we believe that this is the most capital efficient way to add capacity in the western World.
We are one of the only two western providers of needle Coke.
Sure.
<unk> facilities that shops is set up in such a way that is a relatively modest capital investment we can get the significant increase in capacity to be a bit more specifics.
Seadrift currently has a nameplate capacity of 101000 140000 metric tons.
Needle coke.
With the anticipated.
Spansion Lee with increase that by approximately 40%, which is a combination of what we called health side than creep needle Coke and I don't want to go into a technical rabbit hole, but typically calcined needle Coke is what we and others use for the manufacturing of graphite electrodes and.
Battery materials, Austin or battery material manufacturing is often done with green needle coke, but not in all cases, so while the actual production increase will be would depend on the blend of how much of that would actually be green needle closer versus Cal side or how much of that production would go into battery materials.
Versus.
There are select coats, but it's important to point out that we're not talking about.
Multi hundred million dollar ret mutation of the seadrift asset here.
Expansion of existing facility with a relatively modest position.
Okay. Thank you.
Yes.
Thank you. The next question comes from Alex Hacking of Citi. Please go ahead.
Yeah. Good morning could you maybe just.
Discuss.
The way you think.
Needle coke prices are in the market right now I mean, I understand you guys aren't really in the market buying but if you have some sense that would be helpful.
Thanks.
Yes sure.
Excuse me thanks.
It's been a rather biomarker volatile commodity for us.
Last few years, but right now we're seeing it in the range of about $800 for Super premium needle Coke, maybe a couple of hundred dollars below that for the more normal premium grades so somewhere in that range.
The low on the historical trends that we've seen a year ago, we were looking at things.
Approaching $3 a tonne.
The year before that it was down.
$500 a ton.
We've trended lower lately, but anticipate.
Some strengthening of that as the EV market picks up.
The slack from the softness in the electric market.
Okay. Thanks, that's helpful.
And then I guess kind of circling around on the questions.
It's been asked a couple of times, but I'll, maybe ask in a slightly different way.
If you look at your implied utilization rate in the second half of the year, it's 50% to 60%.
I think you know as it was originally frame Monterey was really going to be a first half issue and your ability to contract.
I mean do you think the entire electrode industry right now is running at 50% to 60% utilization rate like that seems.
That seems a little low I guess it seems like your utilization rate is running lower than what some of the others are running out.
Yeah, Alex I would I would point to are not going into specifics of our competitors in the market, but they have said publicly on their recent.
Recent calls that in.
Various regions are running at or below 50% capacity utilization as well. So I think the whole electrode industry as a whole is running at a fairly low utilization rate right now.
Okay. That's.
That's helpful. Thanks.
And then I guess, just one more if I if I may I don't want to assume any question but.
Could you maybe discuss the impact of.
Tariffs on the U S market.
And then how you see that.
Is that something that you see.
Benefiting <unk>.
Thanks.
Yes, so both the U S market as well as the European Union to have tariffs in place against imports in the case of the U S. It's covering Chinese imports in case of the European Union and its both Chinese imports.
Getting imports out of their various levels of tariffs depending on the size of the electrode centre provider.
But they are quite significant and I think they have been quite effective in limiting the import volumes from east region. So both are quite important for graphic.
Have you I mean have you seen a I don't track that data Unfortunately, but have we seen it kind of a material decline in Chinese imports since the tariff was put in place.
Yeah, I think Chinese imports into the U S are irrelevant relatively lower material on an overall basis I don't know what they look like.
Higher to 2017 timeframe when those tariffs were put in place, but there is not much Chinese supply find its way into the U S market as a result of these tariffs and that really has to be.
No change in recent years on that.
Okay, sorry, I was mistaken for some reason I thought there been a change in the tariff structure I'll discuss them.
With you off line alright, thanks for the question.
Thanks.
Okay.
Thank you. Our last question comes from Abe Landa of Bank of America. Please go ahead.
Good morning, Thanks for taking my question.
John .
Maybe update on.
Monterey and just.
Maybe.
I know I know, maybe not operate as efficiently as it could be given the lower volumes, but where you are right now kind of all the post all the noise that we saw the fourth quarter of last year.
I just want to verify that.
Everything is finalized in terms of like government approvals there as well.
Yes. Thanks.
Yes, the Monterey site is running regular production in the same way that it was prior to the suspension.
As always we continue to operate within their required emission levels.
In addition to focusing on compliance with the required emission levels. We're also significantly increasing the frequency of our interactions with the regulatory agencies as well as our neighbors in the surrounding community where we are.
We've been in.
Economic pillar to that community for over 60 years.
I'm happy to say plant is running the way that we need for it to continue to comply with all of them.
Legislative requirements.
And.
I guess following up on some other people questions as well.
It could be a little early on.
More.
Longer term LTA type of contracts I know, that's typically more fourth quarter ish timeframe, but yes.
Do you have any early indications.
How those discussions are going would go.
And I imagine others Semgroup.
Some of your customers got graphite electrodes from other different sources are there maybe early discussions have kind of returning back to.
Just given that.
Monterrey is back up and running et cetera kind of recapture so I'm not sure.
As we have highlighted on this call as well on the previous call that you have entered into several let me call electrode service agreements, which are multiyear agreements typically three to five years out with several customers in both the United States and in Europe .
Now they are quite different in their structure from delta items, obviously very different in terms of pricing you're right. They are more closely tied to the current spot pricing at a premium given the the long term nature of it so the structure essentially the premium over current spot price typically include some some inflation.
<unk> for us.
Now they are not yet material in terms of overall volume or 'twenty three we don't expect it will be material.
In 2024, but we do actually in light of the challenges you've had with Monterrey, right and take great comfort that as our customers continue to be.
Relying on an offset that as a reliable supplier of high quality electrical through these.
These multiyear service agreements are esa's as we call them.
And then I would just add to that as we look out to 'twenty four is probably premature to start talking about specific volumes just given the fact that the bulk of those negotiations start here at the end of the third quarter and into the fourth quarter.
But from our standpoint, where we sit today.
The fact that as Jeremy commented Monterey is running well we've rebuilt our pin stock inventory, we continue to execute on the plans at St Marys.
<unk>.
Get that plant up and operational as well.
We fully expect to be engaged in that process as we have been in past years absent. The 2022 cycles. So we feel pretty good heading into that negotiation window.
I think at the end of the day customers have and will continue to appreciate our value proposition.
We're the only company.
Tier one company in fact.
One of the only electric producers in the World that makes 10 at multiple sites. We've got two so we can provide it.
And a surety of supply now that nobody else can.
Have industry, leading customer service approach through the our technical service representatives as well as our architect product.
And.
And we're present in their regions.
Not only in operating but also a commercial presence in several regions. So we expect that supports our support our commercial efforts as we head into that negotiation.
And should we expect during the next call should we expect more color around that and kind of like an orderly looking through kind of how those negotiations are going and then to 24.
Yes, I think we'll have a better sense.
At that time, and it will be one one quarter closer to 24 and understanding of the macro environment as well.
Thank you.
Thank you.
This concludes our question and answer session.
Now hand, the call back over to Mr. Kessler for closing remarks.
Thank you operator.
Thank everyone on this call for your interest in <unk> and we look forward to speaking with you next quarter have a good weekend.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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Okay.
Okay.
Thank you.
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Yes.
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