Q3 2023 GrafTech International Ltd Earnings Call
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Good morning, ladies and gentlemen, and welcome to the grass Tech third 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.
Any time during this call you were quiet and needed assistance. Please press star zero for the operator.
It's being recorded on Friday November 3rd China, if anything.
I would now like to turn the conference over to Mr. Mike Gillen, Vice President Investor Relations and corporate Communications. Please go ahead Sir.
Thank you.
Good morning, and welcome to graphic International's third 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 the commercial environment sales in operational matters.
Tim will review, our quarterly results and other financial details.
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 the slides in the Investor Relations section of our website at Www <unk> com.
A replay of the call will also be available on our website.
I'll now turn the call over to myself.
Everyone. Thank you for joining <unk> third quarter earnings call.
I don't think end by summarizing three key points, we will discuss in more detail on our call today.
First the global steel industry remains constrained by geopolitical conflicts and economic uncertainty, which has resulted in persistently soft in a persistently soft commercial environment at week demand and declining prices for graphite electrodes.
As a result, our performance for the third.
Warner fell short of our expectations and our outlook has weakened.
Second.
<unk> remains focused on managing through the near term market disruptions, while maintaining our positioning for long term opportunities.
Recognize steel industry performance and demand for graphite electrodes will be dependent on macro foundations as.
As such we continue to prioritize those things that are within our control.
These include proactively reducing our production volume to align with our near term demand outlook closely managing our operating costs capital expenditures and working capital levels.
And making targeted investments to further improve our operational flexibility and support long term growth.
Our ability to execute these strategies is evident in the strong cash flow generated in the third quarter.
Supported by these actions we remain confident we have ample liquidity between cash on hand, and borrowing availability to weather the market challenges.
Third we remain optimistic about the long term outlook for our business and our ability to deliver shareholder value.
We are taking actions that we believe will optimally position <unk> to benefit from longer term industry tailwind and our graphite electrode business.
At the same time, we continue to advance our efforts to work participation in the development of a best in EV battery supply chain and we remain excited about this opportunity.
Jeremy and Tim will expand on all of these points during the call today.
Yeah.
Before I turn the call over to Dan I would like to address the recent announcement that I decided to resign from my role as CEO and president of graphic due to family health reasons effective later this month.
During my first call after joining the company I spoke to the reasons why I was attracted to graph tick.
A set of distinctive capabilities that provide confidence in our ability to deliver shareholder value over the long term.
A business that is well positioned to participate in the long term growth of the electronic market and with a promising foundation to pursue other avenues of growth.
And the team with an impressive level of Knowhow energy and dedication.
I feel that all of these attributes are still in place today and I continue to believe that grass Tech has some of the industry's best assets operated by the best people.
We'll get through this challenging period to remain an industry leader.
We remain confident in the long term direction of the company and experienced management team that remains in place to execute our strategies.
With that let me turn the call over to Jeremy.
Thank you Marcel and good morning, everyone.
As always I'll start my comments with a brief update on our safety performance, which is a core value at graphic.
We are pleased that our year to date recordable accident rate reflects a substantial improvement from the prior year level.
As I noted at the beginning of the year improving in this area would be a key point of emphasis with our internal teams in 2023, and I would like to thank all of our team members for their ongoing efforts.
We will remain highly diligent in this area and seek to further improve this metric as we continue working toward our ultimate goal of zero injuries.
Let me now turn to the next slide for an overview of macro conditions and the commercial environment as context for our third quarter results and our outlook commentary.
Okay.
The whole industry production remains constrained by lower demand due to global economic uncertainty.
The industries that are continued to be announcements of planned and unplanned outages at steel mills.
At the same time steel exports from China in 2023 are on track to reach a seven year high as China's domestic demand for steel has not been strong enough to absorb a year to date and 2% increase in Chinese steel production.
These trends are reflected in steel industry output levels outside of China that remained below the prior year with most regions showing production declines.
Looking at the numbers on a global basis steel production outside of China was approximately 201 million tons in the third quarter of 2023.
This represents a 4% sequential decline from the second quarter.
On a year to date basis global steel production outside of China was down 2% year over year through the first nine months of 2023.
Regarding global capacity utilization the rate outside of China declined sequentially to 65% for the third quarter.
On a regional basis, the economic performance and outlook for key regions continues to diverge.
In Europe, the ongoing slowdown in industrial production subdued market demand and high energy costs continue to weigh on steel production.
And reflecting weak macro fundamentals the persistently low levels of economic growth within Europe are expected to continue for the foreseeable future.
Two weeks ago, the World Steel Association issued their latest short range outlook, noting they expect a 5% decline in reuse steel demand for 2023 as compared to their previous projection in April demand being flat.
World Steel also reduced their 2020 for steel demand forecast for the EU by 4% as compared to their April forecast.
In the U S. Although the region is showing more resilience steel industry trends have softened of late.
Realization rates ticked down slightly in the third quarter to 76% and declined further in the first few weeks of the fourth quarter.
And their recent outlook update world steel forecast, a 1% decline in year over year steel demand in the U S for 2023 compared to their previous forecast of 1% growth.
They also lowered their 2024 outlook by 3%.
Overall, a significant amount of global economic uncertainty remains an overhang on steel industry demand in the near term.
This in turn has resulted in ongoing softness for graphite electrode demands along.
With the soft demand additional competitive dynamics are having a significant impact on pricing.
Specifically, despite the current weak market environment, we continue to see a healthy level of electrode exports from certain countries, including India and China.
These are typically lower priced electrodes and their prices have been declining further of late.
For example, based on the latest reported statistics export prices from China have fallen below $3000 per metric ton on average.
These export dynamics are having a significant impact on pricing and non tariff protected regions such as the middle East that are typically an important element of our portfolio.
Yeah.
In addition, there can be knock on pricing effect in tariff protective countries such as within the EU at tier one producers increasingly compete in these regions to support volume.
With that background, let's turn to the next slide for a discussion on graphics third quarter performance.
Our production volume for the third quarter was approximately 23000 metric tons. This resulted in a combined capacity utilization rate for our three primary electric facilities of 47% for the third quarter compared to 49% in the second quarter.
Our manufacturing operations continue to run according to our strategy of proactively managing production volume to align with our evolving demand outlook.
In the third quarter sales volume was approximately 24000 metric tons.
This represented a modest decline compared to the second quarter and fell short of the outlook. We provided on the last call, reflecting the market conditions I just spoke to.
Shipments for the third quarter included nearly 8000 metric tons sold under our LTA is at a weighted average realized price of $8650 per metric ton.
We have 60 million and a half thousand metric tons of non LTA sales at weighted average realized price of $5400 per metric ton.
The weighted average price for non LTA sales was below the second quarter level, reflecting the soft commercial environment.
Net sales in the third quarter of 2023 decreased 48% compared to the third quarter of 2022.
In addition to the lower sales volume and lower pricing the ongoing shift in the mix of our business from LTE to non LTE volume contributed to the year over year decline.
We expect the commercial environment and demand for graphite electrodes in the near term we will remain weak.
The decline in steel production and utilization rates outside of China have limited the ability of customers to significantly drive down their electrode inventory to typical levels.
Given these dynamics, we anticipate our sales volume for the fourth quarter will decline modestly compared to the third quarter.
Against this backdrop, we have begun the negotiation process for 2024 electrode sales and are developing a range of commercial offerings that are intended to contribute to an increase in capacity utilization.
Although it's too early to project the outcome of this commercial process. We believe we provide a compelling value proposition to our customers.
<unk>, a strategically positioned manufacturing footprint that provides operational flexibility to reach key steelmaking regions.
Being the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke.
Offering access to the architect furnished productivity system and customer technical services at no incremental cost to the customer.
The ability to produce connecting <unk> at three different locations on two continents.
And reflecting some of the targeted investments. We've previously referenced we anticipate an expansion of our product offerings. As we proceed through 2024.
This includes adding 800 millimeter super size electrodes to our portfolio to serve a small but growing segment of the UHD graphite electrode market.
And in addition, we expect to bring to market the industry's first carbon neutral graphite electrode offering.
As always our focus remains on producing the highest quality graphite electrodes and meeting the needs of our customers.
For these reasons, we continue to believe grass Tech will remain an industry, leading supplier of mission critical products to the electric arc furnace industry. The fastest growing segment of the global steel supply chain.
Let me now turn it over to Tim to cover the rest of our financial details.
Thanks, Jeremy.
For the third quarter, we had a net loss of $23 million or.
<unk> <unk> per share.
Adjusted EBITDA was $1 million compared to $129 million in the third quarter of 2022.
The decline reflected lower sales volume higher year over year costs on a per metric ton basis. The continued shift in the mix of our business towards non LTA volumes and lower pricing.
As Jeremy spoke to a number of these factors in his remarks ill expand Mike Bell expand my comments on costs, we provide.
A reconciliation of our cash cost per metric ton at an earnings and the earnings documents posted on our website.
However, let me provide some additional color.
Reflecting the full year impact of raw materials energy freight cost increases that occurred throughout 2022, we continue to sell higher priced inventory during the third quarter of 2023.
In addition, during the quarter, our cash costs included approximately $18 million of fixed costs that otherwise would've been inventories we are operating at normal production levels.
This compared to approximately $10 million of such costs recognized in the second quarter.
The sequential increase was driven by two factors.
A modest quarter over quarter reduction in graphite electrode production.
And second and more significantly was the impact of temporarily idling needle coke production at our seadrift facility throughout the third quarter.
As we've previously noted we have been taking a proactive measures to align our production with our current demand outlook.
Separate idling of production at Seadrift was a consistent was consistent with this approach.
These actions have provided meaningful benefit to our working capital levels and cash flows.
Factoring all of this in our cash cost per metric ton were approximately $5860 for the third quarter of 2023.
This exceeded our projection for the third quarter, reflecting the impact of the previously discussed volume shortfall is underlying cost coming from inventory were largely in line with our expectations.
Looking ahead, we expect our cash Cogs per metric ton in the fourth quarter of 2023 will be low will be below that.
Recognize level in the third quarter of this year.
But it will be above our previous expectations.
Market pricing of our key elements of our cost structure, including the Cana oil energy coal tar pitch and freight continue to moderate as expected.
However, the decline in our volume outlook has a two pronged effect on the cash cost per metric ton that will be recognized in the fourth quarter.
First with the lower sales volume statistics than at the time it takes to work through the higher priced inventory on our balance sheet.
Second with the corresponding decline in the production volumes, we will continue to recognize in the current period fixed costs that otherwise would be inventory is operating at normal production levels.
Specifically as it relates to the seadrift, we expect to restart the facility in the fourth quarter, which would result in a modest sequential reduction in the level of fixed costs being recognized on an accelerated basis.
Turning to cash flow.
For the third quarter, we generated $51 million of cash from operating activities and adjusted free cash flow of $43 million.
This cash flow performance was supported by our ongoing focus on managing our costs capital expenditures and working capital levels.
Most significantly this included a $50 million reduction in inventory during the quarter.
We continue to expect adjusted free cash flow to be positive for 2023 on a full year basis.
As we look further ahead from a cost and cash flow perspective, we expect market pricing to decline in the medium to longer term for certain key elements of our cost structure.
We will continue our current disciplined approach to managing costs and working capital.
These actions have resulted in a 12% reduction in our period costs for the first nine months of 2023 compared to the same period in the prior year.
In addition, since the end of 2022, we have reduced our working capital levels by $65 million as of the end of the third quarter.
Our decisions and actions in this area continue to be informed by three key and complementary effects objectives.
One our focus on preserving cash and maintaining sufficient liquidity as we navigate the current market uncertainties.
While doing so continuing to ensure that we remain well positioned from a working capital perspective to meet the evolving needs of our customers.
And third continuing to make targeted investments to support our ability to capitalize on our long term growth opportunities.
We are proud of the agility of our teams have displayed in balancing in the central priorities and believe these efforts have positioned us well to benefit as the markets recover.
I want to thank the entire graphic team for their continued efforts and commitment.
Moving to the next slide.
Our net debt to adjusted EBITDA ratio of six four times as of September 30, compared to one five times at the end of 2022, reflecting.
Reflecting a year over year decline in EBITDA for the first nine months of 2023.
As of September 30, our liquidity was $285 million, consisting of $173 million of cash on hand, and $112 million of availability under our revolving credit facility.
This reflects the financial covenant that limits, our borrowing availability under our revolver to certain circumstances.
However, more importantly, we do not anticipate the need to borrow against the revolver in 2023.
Further we remain confident we have ample liquidity between cash on hand, and borrowing availability to achieve the priorities I just spoke to.
Turning to the next slide let me now expand on the actions, we are taking and the investments, we're making to improve our strategic positioning for the long term.
Yeah.
De carbonization efforts are driving a transition in steel with electric arc furnace steelmaking continuing to increase its share of total steel production.
With this trend of Eas share growth expected to continue we anticipate demand for graphite electrodes to experience accelerating growth over the longer term.
We estimate that planned eas capacity additions based on steel producer announcements along with production increases at existing <unk> plants.
Has the potential to bring an incremental 200000 metric tons of annual graphite electrode demand outside of China by 2030.
This would represent nearly a 30% increase to the level of global annual graphite electric demand in 2022 outside of China of approximately 680000 metric tons.
In addition, the demand for petroleum needle Coke the key raw material, we use to produce graphite electrodes is also expected to accelerate.
This is driven by its used to produce synthetic graphite for the anode portion of lithium ion batteries used in the growing electric vehicle market.
Based on analysts' estimates regarding 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 a compound annual growth rate of over 20% through 2030.
The growing demand for needle Coke should result in elevated pricing for this important precursor materials.
Given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing this trend should translate to higher market pricing for electrodes.
Reflecting our sustainable competitive advantages and the key elements of our customer value proposition, which Jeremy spoke to we are well positioned to capitalize on these favorable industry tailwind.
We also see potential long term value creation opportunity by participating in the anticipated growth of the EV battery market.
To that end, we continue to study participation via two potential avenues.
By leveraging our assets and technical know how in the area of petroleum needle Coke production given the expected demand growth for this key raw materials.
Second by leveraging our graph utilization resources and expertise to produce synthetic graphite materials for battery anodes.
While we have not yet made any firm commitments the pace of our activity in both areas continue to accelerate.
In addition, we remain encouraged by the external market developments in this space, which continue to evolve rapidly.
As an example last month, China the country that currently supplies nearly all of the anode material for the world announced occur about exports of synthetic graphite.
While it's too early to speculate on the ultimate impact. This measure will have we view this as another positive reinforcement of the importance. This key raw material for battery anode production.
Further this also reinforces the importance of the industry building, a robust supply chain outside of China as we move forward.
We are excited about the opportunity to participate in the development of a western EV battery supply chain as we possess key assets resources and Knowhow to support this industry.
We look forward to sharing more as we can.
In closing our optimism remains intact.
Our industry, leading provider of the consumable product that is mission critical for the growing electric arc furnace method of steelmaking.
We possess a distinct set of assets capabilities and competitive advantages.
Lastly, as a result of our disciplined capital allocation strategy, we have a strong balance sheet and ample liquidity to navigate the near term.
For these reasons, we are confident in our ability to deliver shareholder value moving forward.
This concludes our prepared remarks, we'll now open the call for questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone sign you'll hear Tom Clarke acknowledging your request and your question is will be pulled in the organ damage.
Should you wish to decline from the polling conference. Please press star followed by the firm by chance.
If you are using a speaker phone please lift your handset before.
Amit.
We have our first question coming from the line of Irene <unk>.
From RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
Maybe I can just.
Good morning, maybe you can just start with.
The electrode market outlook, so it sounded like.
You had noted that there was continued price pressure.
And.
And maybe some spot.
Pricing data points.
<unk> $3000 a ton.
I hear that correctly and I guess.
When do you expect as far as how that evolves I mean is that mainly just weak seasonality and weakness in the China market.
Causing that those declines and do you see that maybe.
Reversing and going back higher in <unk>.
Early 'twenty four or how do you think about electrode pricing from here.
Yes, so as we mentioned around the Q3 non LTA pricing was weaker in Q2, driven by the softer commercial environment. We also noted that in the near term as we referenced from the World Steel Association Statistics, we expect continued market weakness in with that continued competitive.
Pricing dynamics.
Now with regard to the $3000.
Chinese pricing that and of course, if access much more in non tariff protected reach incentive as AMC tariff protects regions that.
That will be referenced.
Beyond that we are.
Given that we're in the middle of our negotiation season with the customers, it's probably a little too soon to provide any more pricing guidance.
Okay, and what about needle coke and so.
Could you just provide us an update on where needle coke prices are in and what do you expect on that side as well.
Yes so.
Looking at the import export data.
We've seen recent spot pricing for Super premium needle coke in the range of about $2700 a ton.
There are some transactions below that.
Generally the number that we're seeing and this does reflect a little bit of further softening compared to what we indicated on the last call of around <unk> hundred dollars for the higher end brands.
One of the things that I think is important to note is that pricing here can be highly volatile right.
Absolutely.
Last year, even though we've seen pricing as high as $3000 last year.
Below $500 the year before that and so.
Really we think the recent declines in needle Coke pricing are indicative of recent softness in the electrode market not being fully offset by the growth that's coming from the EV market.
Longer term as the EV demand materializes.
<unk> expect the petroleum needle coke market to further tighten leading to higher prices.
Yes, that's a good segue to.
Another question I had was.
Do you think that there's a greater sense of urgency now at graph tech to pursue further opportunities.
For needle Coke development, and graphite development into the EV market, especially since China has placed some restrictions on their exports of.
Of graphite.
Wouldn't that that combined with the market softness that youre seeing in electrodes.
Incentivize graph tech to really make some more investments on that side and maybe accelerate your your opportunities.
And to delivering needle coke into Evs.
I don't know that we needed to be.
More motivation to take it into that Arun. This is something that we've been studying for quite a while and that we.
We feel what we feel good about.
We're at rate fee. The industry is currently in the very early stages of its development of a western supply chain.
And as part of that.
We've been very active proactively testing, our needle coke with third parties and potential customers to make sure that it meets our quality standards and specifications that are required.
With regard to our concerns about the China announcements I think Tim captured a lot of that.
That.
It's too soon to know exactly what this is going to mean, but we do think at a minimum.
It's a positive reinforcement of the importance of synthetic graphite for battery anode production.
And more importantly, it reinforces the importance of building a robust western supply chain, rather than depending on China and so.
If this was not already apparent to Oems and cell manufacturers before it's certainly top of mind now yes.
And I would add to that a room.
I think the opportunity is an exciting opportunity that will continue to explore in and do the work we need to as Jeremy has outlined.
But we still have a strong conviction around the core business of graphite electrodes and what that market will look like obviously conditions aren't great right now its a cyclical business and we are in a bit of a downstroke as we sit here today.
We've seen pricing move very quickly we've seen demand pick up very quickly any sort of material improvement in the macroeconomic environment, whether that's in Europe Chinese steel production. The overall Chinese economy can have a pretty sudden and swift movement for the core business, which again short term that we see some challenges.
Outlook wise, but longer term medium to longer term, we still have full conviction in the business as it sits here today.
Right and how much of your production do you think you could.
Divert to the EV market and.
Obviously I would imagine that would also.
Include.
Maybe an expansion at seadrift could you just address those issues as well thanks.
Yes.
One of the things that makes scrap tech an attractive partner in this.
And this space is that we really do have almost dual use assets. The same assets that we utilize to make needle coke for graphite electrode production can be used to make.
Needle coke for annual production.
Similarly, the <unk> assets that we used to make our electrodes can also be redeployed to make to make anode materials and silhouette.
Don't have a real percentage to offer.
Our room more I think it's I think the relevant point is that.
Our assets truly are dual use and we can we can select the most.
Economically favorable outlook for the use of those assets.
Thank you.
Yes, so I actually can add that with specific regard to your question about.
Seadrift, you'll recall that last quarter, we discussed having filed the permit for it.
Potential expansion of seadrift and that permit is making its way through the process I think we said.
Last quarter that we anticipated for the 12 months turnaround time on that so by the time this market really starts.
Gaining steam here domestically, we expect to be fully permitted and able to make those investments. If we if we make the decision to do so.
Thanks.
Sure.
Thank you. Your next question comes from the line of Bill Peterson from Jpmorgan. Please go ahead.
Yes, hi, good morning, Thanks for taking the questions Marcella best wishes as well.
As you move ahead here.
On utilization so we've got to come down again quarter on quarter, given the demand environment. I guess can you provide some color on the puts and takes here.
Mexico running stronger than Europe.
How does your utilization how do you see that comparing to the industry in this industry average and just kind of related to the destocking environment like where do inventories.
As your customers next year relative to norms.
Which I think is around two or three months.
Yes, So let me let me start with the customer.
Tori levels, and then I'll come back around to talk about the utilization rates.
The.
<unk> will decline in global steel production and constrained industry utilization rates have really limited the ability of customers to significantly drive down their electrode inventory to typical levels.
For perspective, it varies across the industry, but we generally estimate that customers maintain about three months of electrode inventory on average.
Based on the recent channel checks. We believe it is currently averaging a little bit closer to four months, which is not significantly different from where it was a quarter ago. Although one of the things we're starting to see bill is a divergence by region.
In Europe, we've seen inventory levels decreased and are actually now below the average that I mentioned and this is really driven by customers continuing to work through the existing inventory, albeit at lower utilization rates and many customers displaying continued reluctance to purchase a difficult additional electrodes due to ongoing economic.
Certainty there.
Conversely in the U S inventory levels are above the average.
Frankly, we think that some of this is partly attributable to some U S based steelmakers locking in larger commitments a year ago due to uncertainties related to our situation.
Additionally.
In the U S. We are seeing a temporary utilization rates, which while above the global average are still below the recent history and that is preventing them from burning through some of the success.
<unk> inventory that they have.
With specific regard to the utilization rates.
We can certainly try to.
Utilize assets.
Closest to where the demand is and that does drive utilization rates in North America higher than.
What we're seeing in Europe at.
At 47%.
Global utilization rates.
Does it put us pretty much on par with what we're seeing is with tier one competitors.
In the rest of the world with the exception that.
We do think that their utilization rates in North America are currently running higher than ours for those same market dynamics that I just talked about.
Okay. That's good color it dovetails on the question on the competitive landscape, you've talked about competitors in China, and India and some of the direct impacts I guess middle East and indirect Europe, but I guess drilling down to your core U S and EU markets, hoping to get some further color specifically.
We're hearing of at least one NDA based competitor looking to gain share in the U S market.
And then Europe I mean are you seeing signs of China, and India based competitors there.
I guess, where do you see your differentiation here I guess.
How should we think about that DCP the suppliers coming from these regions.
Yes, no that's a.
Good question and again the market certainly is competitive I think the first thing that we have to keep in mind, both in the U S and Europe, you've got trade protections in place against the Chinese imports.
In both markets and then Indian imports into.
Europe.
Albeit given the situation that occurred in the Monterey, probably opened the door for our customers to potentially qualify new suppliers Indian suppliers in particular, we still feel confident about what we deliver in terms of the total value proposition to our customers not just lowest cost supply, but high quality electrodes.
The ancillary services that we provide in terms of furnace monitoring in our Cts group. So all of those things I think we feel position us very well from a competitive standpoint point in both of those markets.
Rest of World certainly, it's a much more cost oriented and price oriented market.
North America, and Europe and.
And that's the pressure that we're seeing out in the marketplace.
Okay, Yes.
So that color and then I guess lastly on this challenging environment.
Are you still thought we still saw strong working capital unwind.
How should we think about a similar release in the fourth quarter and then I guess, maybe more importantly can you talk about the puts and takes as we move into 2024.
Assuming maybe demand improves we may.
Maybe for later in the year.
I guess specifically.
The working capital how should we think about the cadence of payables and inventory days.
As shipments hopefully again improving again.
Yes, so as I think about Q4 right. We did make the comment that we expect to be free cash flow positive for the year I think we expect some further releases of working capital in the fourth quarter, Jeremy and team have done a really good job of bringing inventory down there's probably still some opportunities for that to come down further as we noted also.
We're starting to Ctrip.
Here later in the fourth quarter, So we're still working down existing needle coke inventories.
Where they are today, so there will be some release of working capital going forward, but I'd also comment that we're not taking them down to the levels beyond what we think is necessary to fulfill customer demand for next year. So as we start to look out.
Want to make sure that we have a manageable level of inventory on hand, certainly is as production.
We're in a ramp up next year.
You have some additional buying and procurement activities that go on and you also have a buildup of receivables base. So there will be a little bit of use of working capital that I look forward into 2024.
Okay. Thanks, Thanks again.
Okay.
Thank you.
Our next question comes from the line of Alex Hacking from Citi. Please go ahead.
Yes.
Okay.
Yes, hi, good morning, and thanks for the call. So I'm not sure. If you can answer this but on the cost side.
Cash cost right now is in the high five thousands.
But as we look out to next year in the second half of the year from a back to a more normalized utilization rate.
70% or something.
The best information that you have today like where would that cash cost be like I assume its somewhere in the 4000, but I don't know if its high for thousands low four thousands any color would be appreciated. Thank you.
Yes, thanks for the question Alex.
I'll start by saying, it's probably a little premature for us to be providing kind of detailed guidance or outlook on 2024.
Just given the fact the commentary Jeremy provided around where we're at the commercial negotiation process that process, obviously will inform our production capital and some cost programs for for the next fiscal year. So.
What I will say, though directionally speaking is.
We are a heavy fixed cost business any incremental improvement in our overall utilization rate of our plans will bring down our costs meaningfully.
As well as if you think about.
The underlying raw material costs energy things like that we would comment on those are continuing to moderate as we've expected.
We would expect significant improvement of those elements of our cost structure heading into next year will.
We'll be through most of the inventory thats sitting on our balance sheet. That's high priced so we'll be in a much better cost position as we look out into next year.
The other thing the only other comment I'd make just on the cost today sitting in that high 5% number that you quoted.
For it in there you've got about $375 of seadrift cost that we're carrying that doesn't have any corresponding production associated with it. So as we restart Cedric is actually half those costs come out of the system as well.
Okay. Thanks makes sense.
And then just to clarify I guess in earlier comments it sounds like you're hoping.
For a higher utilization rate in the first half of next year compared to where we've been in the second half of this and this.
Second half of this year is that is that fair.
Yes, again without getting into specific kind of guidance right, just given where we're at for the commercial side what.
What I can say is we're entering this year's negotiation season with the opportunity to lock in significant volumes with our customers. We didn't have that opportunity because of modern rate a year ago, but we're in that position today.
We've meaningfully reduced kind of the operational risk associated with moderate during the current year and Jeremy commented in our ability to produce tens of multiple locations now so we feel really good about the position we're starting from on top of the fact to get broadening our to our commercial offerings to our customers. We think we presented.
Selling value proposition beyond just quality electrodes. So all of those things would lead us to be in a much stronger commercial position with the backdrop of the current macro environment.
Okay. Thanks, and I guess, just one final question.
Question. If I may this is probably a dumb question, but I think in your prepared comments you talked about a carbon neutral offering.
I guess, how does that work in a product thats effectively made of carbon.
Yes.
Fair enough. It's a good question good question Alex.
When we say carbon neutral rate, we're really talking about cotwo equivalents rates.
Carbon in trees, and everything else that we werent Laura.
The carbon neutral electro was really born out of a trend towards more environmentally responsible steelmaking and our ability to do this really facilitated by some of the investments that we've made over the past few years to limit our scope one two and three emissions.
These are investments that we've made in assets and systems to reduce our onsite generation of Cotwo.
Sourcing portions of our power from carbon free sources now.
So Pat so we've been able to significantly drive down our product carbon footprint.
For any cotwo equivalent emissions that we cannot eliminate.
We'll buy offsets floor.
And so this gives us an opportunity to lead the market in the.
Introduction of a product like this.
The product will of course be priced at a premium and as our results won't be for everybody, but we do think that this is another step towards differentiating ourselves from some of our more.
Price focused competitors that that every time.
Okay. Thanks makes sense, thanks for the call.
Thanks.
Thank you.
Next question comes from the line of Cynthia Danziger.
RBC capital markets. Please go ahead good morning.
Sure.
Good morning, Thanks for taking my question.
First of all I wanted to follow up on on an earlier question.
That was asked SaaS by Bell here.
Regarding the non cat protective region flooding the market recognizing cheaper ports and how they've impacted pricing power you spoke a little bit about the differentiation of your product and I think that's a big part of the value proposition you've spoken about in the past maybe you can help us walk through a little further we have to think about that differentiation. Today is it is it not being valued.
The same by the market.
Given some of the pricing pressure, we're seeing here now and slowdown of Lp's potentially on a go forward.
Yes, certainly.
I would start by saying not all customers are created equal right and people have different.
Different concerns and frankly, certain mills run differently than other mills in terms of the stresses and strains they've put on the product so certain.
Markets are able to take lower quality electrodes.
Versus what are otherwise favored both in North America and Europe in many respects.
But customers ultimately will make a decision around consumption rates versus ultimately the <unk>.
They have to pay for an electrode.
What's <unk>.
Delivered I would say in those markets today, where they're running at lower than kind of prime utilization.
Utilization rates, they are not necessarily compensating for the higher quality at a lower consumption rates and what we think is the value proposition of our product, but those markets where that has value. We certainly are getting that premium.
Got it and another point here.
In Tim's prepared remarks focus on understanding so for the third quarter and just to clarify for the entire third quarter seadrift with idle.
Is it still idle today on the point of this call I think an earlier comment noted hopefully be starting in the back of the fourth quarter here. The second and the start of November. So I wanted to think about some of that.
Slide 10 here and many funds in the past focus on thinking about the EV tailwind uplift.
And thinking about the go forward landscape was that not something you consider using the seadrift needle coke production.
Past quarter to help offset some sales pressure in the electrodes.
Yes.
Let me start by talking about so ctrip was.
Was down for the entire third quarter as we sit here today. It is not restarted yet, but we're in the process of preparing ctrip to restart here in the fourth quarter.
I'll, let Jeremy talk a little bit about kind of where we're at and what our thinking was on the seadrift needle coke into that market.
Yes.
I think the key point on that in fact.
If we were.
Year, and a half to two years down the road to exactly what you said would have been.
Path that we would have gone down.
Unfortunately, the battery anode.
Value chain in the West is still undeveloped it's still in the very early stages of that development.
The things that we've been doing with needle Coke has been focused primarily on proactively testing that needle coke with third parties and potential customers.
And making sure that.
That we are able to participate in that industry or that value stream as it develops but in the western world It's still.
It's still a little bit premature for for that to happen, which is really what led to the decision to.
Ctrip for a period of time and just giving in the.
As supply demand economics.
Understood and just last one for me here.
Can you help us understand what else.
Ken given your term to think about some of the cash preservation and free cash we saw this quarter.
Mentioned C. Just idle and we've mentioned some of the revolver availability.
Those two levers what else Ken can we be considering them and think about near term here.
The demand environment continues to stay weak.
Yes, so I mean.
I think.
Again to my comments around 2024, and looking out forward rate, it's a little premature for us to sit here and say, what we will or cancer have to do in response to that I think we really need to let the commercial season.
Kind of work through its process and that will get will inform the way. We approach next year, what we can do in the near term has remained kind of the rigorous focus that we've had over the last 12 months on cost whether its period costs SG&A.
Our capital spending how we manage our working capital levels I talked a little bit about the release of some additional working capital as we go through the fourth quarter. So all of those things will continue to happen and I think just organizationally without having the backdrop of the LTA is behind US right. We are a much more cost focused and oriented business going forward. So.
We will let the commercial exercise play out and that will inform how we approach 2024.
Our fiscal year perspective.
Great. Thanks for taking my question.
Thank you.
Our next question comes from the line of Abe Landa from Bank of America. Please go ahead.
Good morning, Thank you for taking my questions.
A little bit more on these.
Negotiations.
Kind of on this LTE are that even.
Even your Esa negotiations for next year.
And I know you can't really call out pricing, but can you maybe just talk about from a volume perspective.
Are you kind of seeing customers entering into LTE data and U S and Europe.
At a normal cadence like you've seen in the past or is there something that would be different this time around.
Yes so.
Maybe just to be sure we're saying the same thing typically when we talk about <unk>, we're talking about multi year agreements.
The negotiation process that.
Tim and I have both referenced is really.
Semiannual or annual negotiation that takes.
Takes place this time every year.
So assuming you are talking about.
The negotiations that are taking place right now.
The processes.
Largely the way that.
That we expect it to I would say that the timing is maybe a little bit later.
Later in the year than it has been in years past in part because of some of that economic uncertainty that I talked about.
Paired remarks as everybody's.
<unk> still trying to get a read on where the where the market's headed and telecom, but by and large the process is playing out the way that that we would expect it to the timing is delayed.
A small amount but.
But there's nothing nothing unexpected and nothing extraordinary.
<unk> I would just add on the LTE front, and we talked a little bit about this in prior calls these continue to be an offering that we think we're uniquely positioned given the vertical integration with ctrip to offer to our customers right and they are one of the many kind of commercial offerings that we offer.
And the other options that we provide I will say that from our standpoint, given what we view as a somewhat depressed market or bottom of the cycle. If you will.
Not overly aggressively pursuing these are locking in pricing it at these levels. So.
Jeremy is commentary about the commercial processes and what's going on right now for 2024 is spot on.
But again remain adoptions that we have.
In our toolkit, if you will.
Alright Thats helpful color. Thank you.
Thanks, Ed.
Thank you Dan.
No further questions at this time I'd now like to turn the call back over to Mr. Flanagan for any closing remarks.
Thank you Laura I'd like to thank everyone on this call for your interest in <unk>. We look forward to speaking with you again next quarter have a good day.
Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask Victor. Please disconnect your lines have a lovely day.
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