Operator: Hello everyone. Thank you for joining us and welcome to GrafTech's Q3 2026 earnings conference call and webcast. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Mike Dillon, Vice President of Investor Relations and Treasurer. Please go ahead.
Mike Dillon: Good morning, and welcome to GrafTech International's Q3 2026 earnings call. Thank you for joining us. Joining me on the call are Tim Flanagan, Chief Executive Officer, and Rory O'Donnell, Chief Financial Officer. Tim will begin with opening comments on our key strategic initiatives. Rory will then provide color on our quarterly results, outlook, and other financial matters. After closing comments by Tim, we will then open up the call to questions. Turning to our next slide. As a reminder, our comments today may include forward-looking statements regarding, among other things, performance, trends, and strategies.
Mike Dillon: 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.graftech.com. A replay of the call will also be available on our website. I will now turn the call over to Tim.
Tim Flanagan: Morning, everyone, and thank you for joining us today. The Q3 marked another important period for GrafTech as we continue to advance the commercial, operational, and strategic initiatives designed to improve our long-term profitability and strengthen our competitive position. We are particularly encouraged by the progress we are making on the pricing front, as higher priced customer commitments reinforce our confidence that we have reached an inflection point in our realized pricing. During the quarter, we also announced a significant step in our strategy to improve the efficiency and competitiveness of our manufacturing footprint through the planned closure of our Monterrey, Mexico, facility. These actions, together with our ongoing efforts to improve our cost structure, advocate for fair trade, and capitalize on emerging market opportunities, reflect our commitment to taking decisive steps to strengthen GrafTech's financial performance.
Tim Flanagan: We also remain confident in the longer-term fundamentals of our end markets, supported by improving steel industry conditions across many of our key regions, the continued transition towards electric arc furnace steel making, and the growing strategic importance of synthetic graphite. This morning, I would like to begin with an update on our strategic priorities, followed by our perspectives on the steel market and broader industry environment. I will then discuss safety before turning the call over to Rory for a review of our financial results. On the commercial front, our disciplined commercial approach is beginning to produce tangible results. During the Q3 and early in the Q4, we continued to secure customer commitments at higher price levels than those secured in earlier periods this year, reinforcing our expectation for meaningful improvement in realized pricing in 2027.
Tim Flanagan: Restoring graphite electrode pricing to more sustainable levels remains central to supporting continued investment in high-quality manufacturing capacity and ensuring reliable supply for our customers. As we've seen in prior industry cycles, changes in the balance between supply and demand can result in relatively rapid and significant movements in graphite electrode pricing. While the timing and magnitude of any recovery will depend on market conditions, we believe the combination of improving commercial momentum and actions to better address industry overcapacity create the potential for meaningful price recovery. To put our recent pricing progress in perspective, market pricing continued to decline early in 2026 before beginning to recover during the Q2 on the heels of the price increase we announced in March. Since then, we have seen sustained improvement in prices reflected in new customer commitments.
Tim Flanagan: However, because of our realized pricing reported to date in 2026 reflects commitments that were primarily entered into in prior periods, those improvements have not yet translated into our quarterly results. Our weighted average realized pricing was approximately $3,900 per metric ton in the Q3, essentially flat with the Q2. However, based on our current order book and the timing of shipments against these higher priced commitments, we expect a mid-single-digit percentage increase in realized pricing in the Q4. Looking ahead to 2027, we are seeing positive results in securing customer commitments at significantly higher prices than those reflected in our 2026 business. While a substantial portion of our anticipated 2027 volume remains to be committed, as is typical for this point in the year, these initial results reinforce our confidence in the pricing momentum we are building.
Tim Flanagan: Importantly, our objective is not simply to achieve near-term improvement in pricing, but to establish a more sustainable pricing environment. We believe our efforts to better align production capacity with underlying demand, together with the value customers place on reliable, high-quality supply, provide important support for that objective. We remain focused on securing commitments that appropriately reflect the value of our differentiated products, technical capabilities, and reliable supply, while maintaining discipline in how we allocate our available production capacity. We look forward to providing a more comprehensive update on our 2027 commercial position when we report our Q4 results early next year. Beyond our own commercial progress, we are also seeing positive industry developments. In China, graphite electrode prices have increased throughout the year, supported in part by higher raw material costs. At the same time, Chinese graphite electrode exports have declined approximately 10% year-over-year.
Tim Flanagan: Taken together, we view these developments as further indications that the prolonged period of low industry pricing is beginning to change. We are also seeing strengthening conditions in the petroleum needle coke market. Needle coke prices have steadily increased throughout the year, reflecting a combination of higher raw material costs and evolving supply and demand conditions. At the same time, interest in our own needle coke production capabilities is growing amongst potential customers serving various end markets. Historically, needle coke and graphite electrode pricing have been closely correlated with an average spread between the two of approximately $4,000 per metric ton over the past 20 years on an inflation-adjusted basis. Therefore, we believe the strengthening needle coke market provides another catalyst for higher electrode pricing, while our vertical integration positions GrafTech favorably as these market dynamics evolve. Second, with respect to our manufacturing footprint.
Tim Flanagan: In the third quarter, we announced the planned closure of our graphite electrode manufacturing facility in Monterrey, Mexico. This represents an important step in our efforts to optimize our manufacturing network, improve operational efficiency, and better align production capacity with market demand. Over the past several years, the graphite electrode industry has faced persistent structural overcapacity, reflecting significant capacity additions in certain markets that have outpaced underlying demand growth. These conditions have contributed to a prolonged period of depressed pricing and have made it increasingly difficult to justify maintaining excess manufacturing capacity. We have taken meaningful actions over the past several years to improve our cost structure and operational efficiency. However, given the continued imbalance between industry supply and demand, we determined that further action was necessary.
Tim Flanagan: Following the phased wind down of Monterrey, customer requirements currently served by that facility will transition to our manufacturing operations in Calais, France, and Pamplona, Spain. The transition of connecting pin production capacity to Pamplona is also in process and on track. Upon the completion of this transition early in Q2 2027, our annual graphite electrode production capacity is expected to be approximately 127,000 metric tons. Importantly, we are confident this consolidation will enable us to serve our customers more efficiently through a more competitive manufacturing footprint while preserving the differentiated product capabilities and technical expertise that are central to GrafTech's value proposition. We expect the initiative to strengthen our cost structure, improve operating efficiency, and reduce future capital requirements. We are managing the transition carefully with a focus on safety, maintaining supply continuity, and meeting our customer commitments.
Tim Flanagan: I also want to reiterate our support for the employees impacted by this decision. The Monterrey team has made important contributions to GrafTech over many years, and we are committed to treating our colleagues with respect and supporting them throughout the transition. Taken together with our ongoing manufacturing productivity and cost reduction initiatives, this action represents another meaningful step towards establishing a more sustainable foundation for long-term profitability. Following the wind down of operations and permanent removal of graphite electrode production capabilities at Monterrey, we intend to pursue the sale of the property and have already begun preliminary activities in preparation for a potential transaction. Any proceeds from a future sale would provide additional opportunities to support our liquidity position and reduce our outstanding debt consistent with the requirements of our loan documents. Third, with respect to trade policy.
Tim Flanagan: We continue to advocate for fair trade and more balanced competitive conditions across the graphite electrode industry, including through our support of trade proceedings in key commercial jurisdictions. As we discussed last quarter, the US Department of Commerce has been investigating imports of large diameter graphite electrodes from China and India. Since our last call, Commerce has issued its preliminary antidumping determinations. While we were disappointed with the preliminary outcome as related to India, it is important to emphasize that the investigation is not yet complete. The information submitted by the Indian respondents remains subject to verification by Commerce, and the final determination is expected during Q1 2027. We will remain actively engaged throughout the remainder of this process and continue to support efforts to address unfair trade practices that undermine the competitiveness of domestic graphite electrode manufacturing.
Tim Flanagan: More broadly, we believe appropriate trade enforcement is an important component of establishing a healthier and more sustainable competitive environment, particularly as governments increasingly recognize the strategic importance of maintaining domestic and regional industrial capabilities. Finally, with respect to emerging opportunities, we continue to believe that the growing strategic importance of synthetic graphite presents attractive longer-term opportunities for GrafTech. As we've discussed previously, graphite electrodes are essential to electric arc furnace steelmaking, which we expect to benefit from the continued transition towards more sustainable methods of steel production. At the same time, demand for high-quality synthetic graphite, petroleum needle coke, is expanding into applications beyond traditional steelmaking, including battery materials, energy storage, and certain defense and industrial applications. These trends are reinforcing the importance of reliable, high-quality supply chains, particularly in North America and Europe.
Tim Flanagan: GrafTech's vertical integration into petroleum needle coke, extensive manufacturing capabilities, and expertise in graphite and carbon science provide a differentiated foundation from which to pursue these opportunities. An example of our progress in this area, which we're quite excited about, is a collaboration with Antora Energy that we announced in September. Antora develops thermal batteries designed to provide reliable energy supply for industrial applications such as AI data centers, and our collaboration is focused on leveraging our manufacturing capabilities at our St. Marys, Pennsylvania facility to support this technology. Although still in its early stages, this represents tangible progress in our efforts to leverage existing assets and technical capabilities to develop new revenue opportunities. We continue to engage with prospective customers and strategic partners, and policymakers to evaluate opportunities that leverage our existing capabilities and infrastructure.
Tim Flanagan: While these opportunities remain at various stages of development, we believe they offer an attractive potential to diversify our business over time and create additional value from our assets. In summary, we are making progress on several important fronts. Pricing momentum is building, and we are taking decisive steps to improve our manufacturing footprint and cost structure, and we continue to position GrafTech to benefit from longer-term growth opportunities. We believe these actions will strengthen our competitive position and enhance our ability to generate improved earnings and cash flow as industry conditions recover. With that, let me turn to the broader steel market environment. Turning to slide 5. Let me spend a few minutes discussing the broader steel market, as steel industry fundamentals remain the primary driver of long-term graphite electrode demand.
Tim Flanagan: Overall, we continue to see improving trends across several of our key regions, supporting our expectation for modest growth in graphite electrode demand during 2026. Through the first 2 months of the Q3, global steel production excluding China totaled approximately 142 million metric tons, an increase of approximately 2% compared to the corresponding period last year. In the United States, steel production continues to benefit from favorable trade policies and resilient domestic demand, with steel capacity utilization reaching 80% for the second consecutive quarter. While the pace of improvement varies by region, we're also encouraged by recent policy developments in Europe that we believe will support a more favorable environment for regional steel producers over time. Taken together, these trends reinforce our view that the steel industry fundamentals outside of China are gradually improving, providing a constructive foundation for graphite electrode demand. Turning to slide 6.
Tim Flanagan: Beyond the improving conditions we are seeing today, several potential catalysts could support additional growth in steel demand over the coming years. These include infrastructure investment, higher defense spending, investments associated with the energy transition, and growing demand related to artificial intelligence and data center infrastructure. We also see opportunities for additional demand growth as construction activity recovers, investment in steel-intensive manufacturing increases, and geopolitical tensions ease. While the timing and magnitude of these individual catalysts will vary, we believe their combined impact provides a favorable backdrop for steel demand growth over the medium term. Importantly, this perspective is supported by the World Steel Association's latest short range outlook, published earlier this month. The World Steel Association is projecting finished steel demand growth outside of China of approximately 1.5% in 2026, accelerating to 4% in 2027.
Tim Flanagan: We view this anticipated acceleration as an encouraging indicator of improving industry fundamentals with positive implications for graphite electrode demand. Specifically in Europe, which remains one of our most important commercial regions, we see important developments aimed at strengthening the competitiveness of regional steel production. As we discussed last quarter, the implementation of the European Union's Carbon Border Adjustment Mechanism, together with increased trade protections for steel, has the potential to improve the competitive position of European steelmakers. More broadly, we believe these catalysts will drive increased regional steel production over time and support our view that graphite electrode demand outside of China will increase at a compound annual growth rate of approximately 3% in the coming years.
Tim Flanagan: While the pace of improvement will depend on broader economic and market conditions, we believe that these demand drivers, combined with other strategic actions we are taking to improve our commercial performance and cost structure, position GrafTech to benefit as industry conditions strengthen. Before turning the call over to Rory, I would like to briefly discuss an area that will always remain our highest priority, which is safety. I have always believed that no business objective is ever more important than ensuring our people return home safely at the end of every shift, and I am proud of the continued focus our employees have demonstrated across our global operations. Through the first nine months of 2026, our total recordable incident rate was 0.47.
Tim Flanagan: While this is above our full year 2025 performance, it remains substantially below the levels we experienced several years ago, reflecting the meaningful progress we have made in strengthening our safety culture. We recognize that maintaining a strong safety performance requires constant attention and a commitment to continuous improvement. Safety must remain embedded in every aspect of how we operate rather simply than a metric being reported each quarter. On behalf of our leadership team, I would like to thank all of our employees for their dedication to operating safely while delivering for our customers every day. Their commitment is the foundation of everything we accomplish as a team. With that, I will turn the call over to Rory to review our Q3 results and our outlook in greater detail.
Rory O'Donnell: Thank you, Tim, and good morning, everyone. I will begin with our Q3 operating and financial performance before discussing our liquidity position and financial outlook. Our Q3 results reflected continued execution against our operating priorities, including disciplined production management and ongoing cost improvements. While financial performance continued to reflect lower realized graphite electrode pricing associated with customer commitments established before our recent pricing action. Starting with our operations, production volume was approximately 27,000 metric tons during the quarter, an increase of 2% compared to the prior year quarter, but a sequential decline of 19% from Q2 2026. The sequential decline in production primarily reflected planned summer maintenance shutdowns at our European manufacturing facilities. Our capacity utilization rate for the quarter was 64%, compared to 63% in the Q3 of last year and 74% in Q2 2026.
Rory O'Donnell: Through the first nine months of 2026, production volume exceeded sales volume by approximately 2,000 metric tons. We continue to expect production and sales volumes to be balanced on a full year basis, consistent with our previous outlook. Turning to sales, we delivered approximately 29,000 metric tons during the quarter, essentially flat compared to the prior year period and in line with our expectations. Importantly, year-to-date sales volume increased approximately 7% compared to the first nine months of 2025, keeping us on track to achieve our full year expectation for sales volume growth between 5% and 10%. Net sales for the quarter were $140 million, a decline of approximately 3% compared to the Q3 of last year, primarily reflecting lower weighted average realized graphite electrode pricing.
Rory O'Donnell: Our weighted average realized price was approximately $3,900 per metric ton, down approximately 7% compared to the prior year quarter, and has been essentially flat through the first three quarters of 2026. As Tim discussed, our reported pricing continues to reflect customer commitments established before the more recent improvements in market pricing. We expect the benefit of these higher price commitments to begin flowing through our reported results in the Q4 with a significant increase in realized pricings anticipated in 2027 compared to 2026. To put the financial opportunity into perspective, each $100 improvement in our weighted average realized price would equate to approximately $12 million of incremental annual cash flow, thereby further supporting our liquidity position. Combined with these actions we are taking to optimize our manufacturing footprint and improve our cost structure, we believe this pricing momentum positions us to deliver stronger financial performance going forward.
Rory O'Donnell: Turning to slide 9. We continue to make progress on our cost improvement initiatives while managing the impact of ongoing inflationary pressures across several key input categories. During the Q3, cash COGS per metric ton declined approximately 4% compared to the prior year quarter. While this metric can fluctuate from quarter to quarter due to production schedules, inventory timing, and the recognition of manufacturing costs, our underlying cost structure remains materially improved from the levels we experienced several years ago. Our teams remain focused on identifying and executing opportunities to improve manufacturing productivity, enhance operating discipline, optimize procurement effectiveness, and improve energy efficiency. To highlight two key areas of focus. First, with respect to decant oil, a key raw material in our needle coke operations, we continue to manage cost pressures through supplier diversification and enhancements in our blending capabilities.
Rory O'Donnell: In addition, sales of oil-related byproducts from our needle coke manufacturing process provide a natural hedge that partially offsets increases in decant oil costs. Further, our domestic feedstock sourcing and established supplier relationships provide an advantage in managing raw material availability, particularly given the ongoing supply chain disruptions and uncertainty affecting producers in Asia. In Europe, fixed-price energy contracts covering a significant portion of our 2026 requirements have helped insulate us from recent market volatility. As we look to 2027, we anticipate higher energy costs as portions of that contractual coverage reset, and we are incorporating those expectations into our operating plans while continuing to pursue energy efficiency improvements. Despite these external headwinds, we continue to expect a low single-digit percentage decline in cash cost of goods sold per metric ton for the full year of 2026 compared to 2025.
Rory O'Donnell: Looking beyond 2026, the planned consolidation of our manufacturing footprint through the closure of our highest cost facility, Monterrey, is expected to provide meaningful financial benefits. As previously announced, we anticipate annual cash cost savings of approximately $20 to $25 million, with the full benefit expected in 2028, as well as a reduction in annual capital expenditure requirements of approximately $5 million beginning in 2027. We also expect a one-time release of approximately $20 to $25 million of working capital, with the majority anticipated to occur in 2028. These benefits will be partially offset by approximately $20 to $25 million of one-time cash costs associated with the closure, the majority of which is expected to be incurred by the end of 2027.
Rory O'Donnell: As we have emphasized previously, our objective is not simply to reduce costs in the near term, but to establish a more efficient and competitive manufacturing network that can deliver greater operating leverage as market conditions improve. Importantly, we remain committed to achieving these improvements while maintaining the product quality, reliability, and safety standards that our customers and employees expect. With that, let me turn to our Q3 earnings and cash flow performance. Turning to slide 10, we reported a net loss of $47 million, $1.76 per share, compared to a net loss of $28 million, $1.10 per share in the prior year quarter. Included in our Q3 results were approximately $14 million of restructuring and other exit charges associated with the planned closure of our Monterrey manufacturing facility, the majority of which were non-cash.
Rory O'Donnell: Adjusted EBITDA was $9 million during the quarter, compared to $13 million in the prior year period, with the decline primarily reflecting lower weighted average realized graphite electrode pricing, partially offset by lower cash cost of goods sold per metric ton. Turning to cash flow, net cash used in operating activities was $8 million during the Q3, while adjusted free cash flow was -$16 million. This represented a significant improvement from the Q2, when net cash used in operating activities was $69 million and adjusted free cash flow was -$75 million. Our Q3 cash flow reflected an increase in inventory levels that was consistent with our expectations. We continue to anticipate a reduction in working capital, including inventory, during the Q4.
Rory O'Donnell: As we have discussed previously, our cash requirements are influenced by the seasonal nature of our working capital needs, as well as the timing of our semi-annual interest payments on our second lien notes, which occurs in Q2 and Q4. We continue to expect Q2 to represent our highest quarterly cash requirement for 2026, with cash usage during the H2 of the year significantly lower than during the H1. For the full year, we continue to expect a modest increase in working capital, and we are maintaining our expectation for approximately $35 million of capital expenditures. Turning to the next slide, let me review our liquidity position and debt maturity profile. We remain focused on preserving liquidity and managing our balance sheet prudently as we execute on our strategic initiatives.
Rory O'Donnell: We ended Q3 with approximately $242 million of total liquidity, consisting of $134 million of cash and approximately $108 million of available borrowing capacity under our revolving credit facility. Importantly, we have substantially no debt maturities until December of 2029, providing us with the time to execute our operational and commercial initiatives and benefit from improving market conditions. Taken together, our liquidity position and debt maturity profile provide financial flexibility as we manage through the current industry environment and implement the actions necessary to strengthen our long-term profitability.
Rory O'Donnell: As we look ahead, we remain focused on preserving liquidity, managing capital expenditures and working capital carefully, and pursuing opportunities to strengthen our balance sheet over time. In my closing remarks, I would like to thank our employees around the world for their continued dedication and hard work. Their commitment is essential as we execute our strategic priorities and position GrafTech for improved financial performance. With that, I will turn the call back to Tim for his closing remarks.
Tim Flanagan: Thank you, Rory. Before we open the call for questions, I would like to close with a few thoughts on why we remain confident in GrafTech's future. First, we are making meaningful progress on the priorities within our control. Our commercial initiatives are gaining traction. We are securing customer commitments at significantly higher prices, and we are taking decisive actions to improve our manufacturing footprint and cost structure. While we recognize that our financial performance has not yet reflected the full benefit of these actions, we believe the progress we are making today is establishing a stronger foundation for improved profitability and cash flow. Second, we remain encouraged by the longer-term fundamentals of our industry. The continued transition toward electric arc furnace steelmaking, together with improving steel industry conditions outside of China, supports our expectation for growth in graphite electrode demand over time.
Tim Flanagan: Third, GrafTech possesses a set of differentiated capabilities that we believe will be increasingly valuable as market conditions evolve. These include our global manufacturing network, substantial vertical integration into petroleum needle coke, advanced manufacturing technology, and our ability to provide high-quality products and technical solutions to our customers around the world. We are also leveraging these capabilities to pursue opportunities in adjacent markets, providing additional avenues for long-term growth.
Tim Flanagan: Finally, we recognize the importance of strengthening our financial position. We remain committed to disciplined capital allocation, preserving liquidity, and ultimately reducing leverage as our operating performance improves. We recognize that there is more work ahead, but believe the combination of the pricing improvements we are securing, a more efficient cost structure, and our differentiated competitive position creates a compelling opportunity for GrafTech. Our focus remains on executing our strategy and delivering sustainable value for our shareholders. With that, we would be happy to take your questions.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Bennett Moore with JPMorgan. Your line is open. Please go ahead. Just a reminder that if you are asking a question, to unmute your device. Thank you.
Tim Flanagan: Yeah, maybe we go to the next one.
Rory O'Donnell: Good morning. Tim Flanagan here.
Tim Flanagan: There you go. Hey, Bennett.
Bennett Moore: Can you guys hear me?
Tim Flanagan: Morning.
Rory O'Donnell: Yeah, we can hear you now.
Bennett Moore: Okay. Sorry about that. Thanks for taking my questions. First, it is really encouraging to hear there is strong price momentum headed into 2027. First, could you just talk about how the dialogue has been with customers on that front? Then second, is it your expectation that these increases will be margin accretive given the cost inflation, I guess, on the EU energy side and maybe lagged decant oil costs?
Tim Flanagan: Yeah, absolutely. Thanks for the question. So maybe let us talk a little bit about the evolution over the course of this year from a pricing perspective. As we entered 2026, we saw declining spot prices that were contracting in the Q1, which led to the initial price increase that we announced at the end of the Q1. We gave some guidance, or at least some directional indications in the Q2 call that if you extrapolated what we are seeing in the marketplace as a result of that over the full volume, it would be roughly a 15% uplift. That is what is starting to take hold and will drive the mid-single digit increase that we mentioned heading into the Q4. Then early September, announced another price increase of 30%. That really is where the negotiations start with every customer.
Tim Flanagan: Each customer is a bespoke or unique negotiation, but that is the starting point. I think at this point right now, we are really pleased with the progress we are making in those discussions. We still have quite a bit of volume yet to book, but I think we are right on track where we have been in prior years at this point in time. Now, four to six weeks into the heart of the negotiation season. I would expect as we work through the end of the year, we would end the year and get into the Q1. The call in February for the Q4 was roughly 60% to 65% of our order book confirmed. So, making good progress.
Tim Flanagan: I think if I add some color to the customer conversations, I think they understand and appreciate that graphite electrode pricing has been on a downward slope for quite some time, and that necessarily is not sustainable in the long run. I think there is absolutely a recognition of the importance of the graphite electrode industry to the health of the steel industry, and I think when you start to talk about utilization rates at 80% plus in the United States, there certainly is a need to have a stable supply base.
Tim Flanagan: So I think a lot of the conversation is oriented around that. But I think there is also a recognition, too, to your second part of your question, that there are rising costs and there are some headwinds globally on the petroleum needle coke front, in particular, the raw material input that we use decant oil as well as energy pricing.
Tim Flanagan: I am confident in saying at this point in time that the price increase and the momentum we are building, next year will be margin accretive, will more than offset any sort of price increases or, sorry, cost increases that we will experience, as I think we have done a pretty good job over the last couple of years in reducing our costs, and I think we can do quite a bit to combat the inflationary pressures that we are seeing.
Bennett Moore: No, that is great color. I appreciate it. My second question I want to ask about the rationale behind why Monterrey was specifically chosen, and I think the location makes it appear as if it is counterintuitive, but presumably, there were some aspects related to efficiencies and prior investments at other facilities. Maybe if you could just help unpack that.
Tim Flanagan: Yeah. No, it is a good question. I think, if you take a step back, our first and foremost, and I think we had alluded to this in a number of calls previously, with the oversupplied market conditions, we felt that we needed to evaluate what our portfolio looked like. I think everyone on the call can appreciate that running industrial assets at 60% utilization is not a recipe for long-term success. Really, our first objective was to bring that supply and demand oversupply back into balance to the extent that we could.
Tim Flanagan: We looked at all of our facilities and really went through an evaluation process of saying, "How do we continue to serve our customers?" By serving our customers, maintaining the product mix that we have today, our capabilities around supersized electrodes to standard sizes, as well as some of the more unique products that we offer to the market that differentiate us, ALX, extra long lengths, the low oxidation, items like that. Secondarily, we wanted obviously to improve our cost profile, which Rory spoke to in terms of bringing down our fixed costs. We were able to reduce the overall cost profile on a variable cost basis for a number of reasons. Monterrey is the highest cost facility that we had in our portfolio, partially driven by the fact it is also the smallest set of assets in our portfolio.
Tim Flanagan: Lastly, it is how we manage the risk of transition, right? How we can ensure that we can do this seamlessly and not disrupt, ultimately, our customers' business. I think one thing that is important, you raised the point of the proximity to the US market and that we only serve the US market partially out of Monterrey. We have historically brought in quite a bit of material from our European facilities.
Tim Flanagan: From our perspective, this is not really a change in the way we have otherwise had to operate. St. Marys gives us a lot of flexibility to stockpile inventory, allow us to manage deliveries and shipments to customers, so it has been a pretty efficient supply chain for us over time. At the end of the day, we view it as it is the same needle coke going through the same production process under the same quality standards, with the same expectations of product performance. So it does not really affect how we think we will deliver to our customers at the end of the day.
Rory O'Donnell: Hey, Bennett, just a couple more things to add on the cost front. Do not overlook the efforts that we have made in the past few years around investment in equipment and process innovation around our petroleum needle coke production facility. I think we have got a proven track record that we are able to battle changes in underlying crude indices and other commodity costs with our capabilities around blending. I mentioned it in my prepared remarks. With those investments we have been making, it is possible for us to continue to improve our premium needle coke quality with a diversified set of oils. We have got many refineries that supply us. They are not all the same quality, but we have got the science behind the blending and the ability to cushion some of the blow of some of the volatile markets. Please keep that in mind.
Rory O'Donnell: On the energy front, remember, we have a pretty robust hedging strategy in Europe. Some hedging contracts are up to 2 years, so we are going to enjoy some protection against some of the volatility going into 2027 in some of our operations in Europe. But it is kudos to the team, the management team around identifying these risks and properly mitigating them, whether it is through process innovation, supplier relations, equipment investment, or contractual commitments. Just want to add that to Tim's cost comments.
Bennett Moore: No, that's great color and much appreciated. Maybe just sticking with that thread, if I can squeeze in one last one, is with the Antora deal, is there any opportunity here to help absorb stranded fixed cost at St. Marys?
Rory O'Donnell: Of course. That's one of the benefits that we see. We're not going to guide to individual asset costs or any of the terms of the agreement. We're still working through it with our partner, but we're pleased where it's going, and that, of course, is what Tim was mentioning around prudent use of our idled assets. That's exactly one of the objectives. I think I'll leave it at that, but-
Bennett Moore: Thanks so much.
Rory O'Donnell: You go soon with the next one. Thanks.
Bennett Moore: All right. Thank you very much.
Rory O'Donnell: Thanks, Bennett.
Operator: Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun, your line is open. Please go ahead.
Arun Viswanathan: Great. Good morning. Thanks for taking my questions. I think you mentioned turning the corner on some pricing initiatives, so maybe you can just elaborate on what you are seeing there. Maybe if you could link that to your outlook on pet needle coke as well. It sounds like you have done some work there, but is there more of an outlook on what you see there, especially given the recent oil price inflation? Thanks.
Tim Flanagan: Yeah, Arun, thanks. On the pricing front, again, I think good progress is being made by the team across the board. I think we'll start to see the realization of the initial price increase that we announced back in March in Q4, and that will have a higher ASP reported out in the fourth quarter. Then you'll see a step change that will be meaningfully higher as we head into 2027, as we continue to work through the negotiations. But very pleased thus far with the team's effort and all the work that's been done throughout the year to get us here. I don't know if there's much more I can say at this point on the price front. With respect to needle coke, I think needle coke has been similar to electrode prices, pretty stagnant for a number of years.
Tim Flanagan: We probably entered the year somewhere in the $1,000 to $1,200 range, depending on grade. We've seen that steadily increase over the course of the year. Really, that's a factor of two things. One, obviously higher oil prices are going to drive the byproducts for oil and that. So that's certainly driving up the price of needle coke to some extent, but also supply and demand. I think we're seeing greater demand in the market across a couple end markets and end users, which certainly helps drive up the price of needle coke. So if I had to say where I think the market is today, we're probably in that $1,700 to $2,000 a ton range, again, which I think provides support for higher electrode prices going into 2027.
Tim Flanagan: I probably would expect that number to continue to creep up as we head into Q1 and Q2 of next year. Again, it's been a little while since we've had this conversation, but again, when you start to see needle coke prices in that range, Seadrift really becomes a cost benefit to us and a strategic asset beyond the benefits we get from having surety of supply and the ability to control the quality of the product we put into our electrodes. So we're really pleased with how that market's evolving as well.
Arun Viswanathan: Thanks for that. I guess wanted to get your thoughts on supply-demand for electrodes globally. Congrats on your own decisive actions here to close Monterrey, but you noted the 60% utilization. I imagine the industry is also not running full, maybe above that 60%. But where do you think industry utilization rates are, and do you expect other actions? I know you yourself may not be able to take anything else, but I guess maybe just get your thoughts on that. As a related question, now that you've exited some extra, or you will be exiting some electrode finishing capacity, conversion capacity, will you still be able to potentially use some of your needle coke and divert it to the EV side, the battery materials market, or is that unlikely? Maybe you can offer your thoughts on both industry supply, demand, and then potential forays into the EV industry. Thanks.
Tim Flanagan: Thanks, Arun. I will try to capture both of those. So just to clarify, on a year-to-date basis, we are at about 68% utilization, so a little better than the 60% that I threw out there before, but just as an example. I think if you look across the industry right now, if I had to take an estimate of where I think it is at collectively, we are probably sitting at about 65% globally outside of China.
Tim Flanagan: If you take the 51,000 tons of capacity reduction, that would put you probably closer to 70% or just over 70%. So certainly a meaningful move in terms of balancing out supply and demand, but I think there is still opportunity for that to tighten up, and some of it will happen organically as electrode demand continues to grow at call it 3% a year over the next 5 years or so or as we project out.
Tim Flanagan: I think there is still opportunity for some supply reduction in the market. Which plants and which competitors in that, I think we have done our part. I will not speculate as to what it is, but I think at the end of the day this is a cost game and fixed cost leverage game in many respects. So I think the bigger the plant, the more cost competitive they tend to be. With respect to Seadrift and how we view Seadrift as an asset, certainly by reducing our electrode capacity, that gives us a little bit more capacity, our excess capacity out of Seadrift, and certainly allows us to continue to explore how we partner and supply needle coke into I will say broadly, other synthetic graphite applications, whether that is for EVs, energy storage, industrial defense applications, whatever.
Tim Flanagan: We continue to work in the background, as we have been saying for the last couple of years, and Antora is the first example of all of this work by our development and technical teams to come to market and allow us to use some stranded assets. We have a number of other initiatives and activities going on that will allow us to use the needle coke at Seadrift and pretty excited about where that will land longer term.
Arun Viswanathan: Thanks.
Tim Flanagan: Thanks, Rory.
Operator: Your next question comes from the line of Abe Landa with Bank of America. Abe, your line is open. Please go ahead.
Abe Landa: Good morning. Thank you for taking my questions. Maybe just some housekeeping items. The cost to achieve the Monterrey closure, the $20 million to $25 million, what is cash versus non-cash, and how do you split that up between COGS and SG&A?
Tim Flanagan: That is a cash cost of $20 million to $25 million. I would split it predominantly as cost of goods sold. The primary categories of that cost are general closure cost is about half and people cost is the other half, so you could probably think about that mostly as COGS. We will be isolating that to report it separately for you as we go forward.
Abe Landa: Sorry. Maybe the $20 to $25 million of cost saves, I guess, how would you split the cost saves between COGS and SG&A?
Tim Flanagan: Oh, I see.
Abe Landa: No, I think I misspoke over here.
Tim Flanagan: That cost savings will be primarily cost of goods sold.
Abe Landa: Okay.
Tim Flanagan: We're lowering our overall. Go ahead.
Abe Landa: Is there no long-term liability cleanup costs that are kind of associated with closing the Monterrey?
Tim Flanagan: So-
Abe Landa: Will that be taken account when it's?
Tim Flanagan: That's included in the first $20 million. Yeah, there's a lot of $20 to $25 million floating around. So that first $20 to $25 million was the cash cost expected from the closure, which would incorporate all the site closure costs and other decision-based costs. The $20 to $25 million of cost savings going forward would be COGS savings.
Abe Landa: Okay.
Tim Flanagan: If that clarifies it.
Abe Landa: Yes, it does. You kind of mentioned that you thought realized prices were to be up mid-single digits quarter-on-quarter in Q4. I guess if we were to just to look at those open contracts where you are able to actually enable cost increases or price increases, what was the percent change on those volumes on a quarter-versus-quarter basis or expected change?
Tim Flanagan: Yeah. I will go back to kind of the analysis or the indicators that we shared previously. Because the first price increase we announced was a range of $600 to $1,200, so it was not ratable across each region. Again, negotiated on a customer-by-customer basis. But if you take what we achieved in those on a regional basis and apply our existing mix, it was about 15% for the new contracts that we had. Again, just to remind you or the new commitments that we made during 2026 after the price increase announcement. Just again, to remind you that when we made the price increase announcement, about 80% of our volume was already committed. So it is a relatively small subset of customer commitments that were at that higher price point.
Abe Landa: Okay. That is essentially what you are saying, is that is flowing through into Q4 and that is why we are getting to the mid-single digits.
Tim Flanagan: Yeah. If you think about the way, Q1 would have been all negotiated in 2025. Q2 would have been almost entirely negotiated in 2025, maybe some small volumes in 2026, but probably before the price increase. Q3 and Q4, that percentage of when it was contracted pre or post price increase tends to go up. The Q4 is going to have the biggest portion, and that is why we are seeing the price increase now trickle through our results.
Abe Landa: Given your recent price increase, I think it was 30% in September-ish timeframe, that is going to then flow through one Q combined with the commitments you typically get from the North American markets. That will all essentially kind of flow through to the better higher price increases starting in 2027. Am I kind of thinking about the various parts correctly?
Tim Flanagan: Yeah. That will be a step change as we get into 2027. All of the 2027 volume is being negotiated post this new price increase announcement. So you will see a step change as we get into Q1 deliveries. Again, typically, it is more of that 60% to 65% that we have committed in the start of the new year is going to be heavier weighted towards North American or US customers, just the way those markets tend to contract versus the rest. But there is a lot of European and other region commitment in there as well.
Abe Landa: Maybe just touching on, in the US, the antidumping and countervailing duties that were, at least the preliminary was provided since your last call, it seems like, especially in India, it was kind of lower versus your expectations. Maybe if those are reaffirmed, how do you expect US graphite electrode import volumes to be impacted, and maybe the impact on pricing within the US?
Tim Flanagan: So a little disappointed in the outcome. But again, I don't think the previously communicated numbers were our expectations. That's what the filed cases were, and the preliminary assessment coming out of the ITC. But again, I think as we made in our prepared remarks, the investigation's not complete. The information will be subject to verification, as it always is as Commerce works through its process. And I think we're confident that Commerce will do a complete and thorough investigation before they announce their final ruling in Q1 of next year. In terms of market, I think certainly we saw the Indian competitors have call it 10% to 15% of the US market a few years ago. And with all of the turmoil and trade talk over the last year or year and a half, I think that maybe has pulled back some.
Tim Flanagan: But how that plays out going forward, prices are still going up absent the announced increase or tariff levels as high as what the preliminary rulings would have otherwise suggested. So, I think we like our position both in the US and Europe globally and our market position. Again, I think it all comes down to value proposition for those customers that value something other than just the absolute lowest price.
Abe Landa: And then my last question. You said earlier that pet needle coke prices are being driven by graphite electrode demand, but then also other markets. Can you just describe what's going on in those other markets and maybe any other aspects from supply and demand perspective on pet needle coke?
Tim Flanagan: Yeah. So I think there's a few things, right? Obviously, needle coke demand, I think all of the disruption in the oil markets to date in terms of oil coming out of the Middle East and getting to petroleum needle coke producers globally certainly will have an impact as well as I think as you start to think about the demand and the impact that the diesel markets are having. As the refineries produce more diesel, they're producing less decant oil. Less decant oil means less petroleum needle coke in the market. So all of those things can weigh on the supply and demand balance from a price pushing up, but also graphite electrode demand pulling petroleum needle coke prices up as well. So, it's kind of a push and pull on that front.
Abe Landa: Okay. That makes sense. That's all for me. Thank you.
Tim Flanagan: Thanks, Vic.
Operator: There are no further questions at this time. I will now turn the call back to Tim Flanagan, CEO and President, for closing remarks.
Tim Flanagan: Thank you, Kenneth. I would like to thank everyone on this call for joining us this morning. We look forward to speaking with you again next quarter. Have a great day.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
