Yahoo Finance GrafTech International Ltd. (NYSE:EAF) Q1 2024 Earnings Call Transcript
GrafTech International Ltd. (NYSE:EAF) Q1 2024 Earnings Call Transcript April 26, 2024
GrafTech International Ltd. beats earnings expectations. Reported EPS is $-0.1, expectations were $-0.18. GrafTech International Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen and welcome to the GrafTech First Quarter 2024 Earnings Conference Call and Webcast Conference Call. All this time all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, April 26, 2024. I would now like to turn the conference over to Mike Dillon. Please go ahead.
Mike Dillon: Thank you, Constantine. Good morning, and welcome to GrafTech International's First Quarter 2024 Earnings Call. On with me today are Tim Flanagan, Chief Executive Officer; Jeremy Halford, Chief Operating Officer; and Catherine Delgado, Interim Chief Financial Officer. Tim will begin with opening comments, Jeremy will then discuss safety, the commercial environment, sales and operational matters. Catherine will review our quarterly results and other financial details, and Tim will close with comments on our outlook. We will then open the call to questions. As you are likely aware, GrafTech is currently involved in a proxy contest related to its upcoming Annual Meeting. The purpose of today's call is to discuss our earnings outlook and other business updates.
As such we will not be commenting on nor taking questions on the proxy contest during this call. If stockholders have questions on the proxy contest that you would like to discuss with management, please reach out to me after this call. Turning to the next slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, performance, trends and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures, and these slides include the relevant non-GAAP reconciliations.
You can find these slides in the Investor Relations section of our website at www.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: Good morning everyone. And thank you for joining this morning's call. In the first quarter, GrafTech delivered on our outlook and on the initiative discussed on our last earnings call. That said, we are not satisfied nor will we ever be satisfied with breakeven EBITDA performance and negative free cash flow. This is a pivotal time for GrafTech with many challenges still in front of us. Yet, we’re up to the challenge and remain excited about the path we are on and the opportunities lie ahead. We are confident that GrafTech can return to the position of generating great value for its shareholders. And on a personal note, I am honored and excited to have the opportunity to lead the company and the talented team.
As I move into this role on a permanent basis, let me highlight three of the key reasons I'm optimistic about the future of GrafTech. First, we’re confident about our ability to meet needs of our customers now and into the future. We continue to proactively engage with our customers, reinforcing the importance of our relationship with them and a shared view that this is a mutual partnership. In addition, we are investing in our customer value proposition to further differentiate GrafTech from our competitors. Our initiative to expand our product offerings by adding 800 millimeter supersized electrodes to our portfolio is proceeding well. We’re on track for the initial trials to occur in the third quarter of this year. In addition, we are expanding the breadth of our architect system, building upon our best-in-class technical service capabilities.
And with the majority of our original long-term agreements coming to an end, we are broadening our range of contract terms, which can be tailored to meet the needs of our customers. Lastly, on the commercial front. As it relates to the LTAs, we are pleased to have received the final award in a long-standing and our largest of our LTA arbitrations. In March, the Sole Arbitrator ruled in GrafTech's favor. Importantly, as we turn the page and move forward, we are focused on strengthening relationships with existing customers, while also fostering new ones with prospective customers. Secondly, we have taken the right actions to improve our cost structure, and we’re successfully executing these plans. We are safely and thoughtfully winding-down the production activities at St. Marys, and are on track to conclude the work by the end of the second quarter.
In addition, we have completed the activities related to the reduction in our overhead structure. And while actions that impact employees are never easy, these are the right steps for the long-term health of the company and for the collective benefit of our stakeholders. The steps we are taking to manage working capital levels are evident in the further reduction of inventory during the first quarter. Overall, we are on track to achieve the stated benefits from these initiatives, including the anticipated $25 million of annualized cost savings comprised of $15 million reduction in our fixed manufacturing costs and $10 million in lower administrative costs. Third, with our cost savings and optimization initiatives having been designed to preserve our ability to capitalize on long-term industry tailwinds, [actively] (ph) pursuing growth opportunities.
I already spoke to some of the actions we are taking to reinforce customer confidence in our graphite electrode business. As a result, we believe we are well-positioned to benefit as the global steel market inevitably rebounds. Longer-term, as decarbonization efforts drive a further shift to electric arc furnace steelmaking, this will be supportive of increased graphite electrode demand, and we are poised to capitalize on the anticipated growth. Beyond graphite electrodes, we remain proactive in pursuing opportunities in the battery anode space. We continue to engage with a number of third-parties on initiatives, which would leverage GrafTech's unique capabilities related to both needle coke and graphitization. Against this backdrop, we have not lost sight of where I started my comments.
We are still facing many challenges as the industry remains in a cyclical downturn. While there is much work to be done, we are confident in emerging from this period as a stronger GrafTech. Let me now turn it over to Jeremy to provide more color on the current state of the industry and our commercial performance.
Jeremy Halford: Thank you, Tim and good morning, everyone. Before I provide an industry update, I will start with a brief comment on our safety performance, which is a core value at GrafTech. We are pleased to have ongoing momentum with a first quarter recordable incident rate that showed further improvement over our solid performance in 2023. And I’d like to commend all of our team members for their efforts. While encouraged by this performance, we will not be satisfied until we achieve our ultimate goal of zero-injuries. Let me now turn to the next slide to discuss the commercial environment. As you know we operate in a cyclical industry and currently find ourselves in a challenging part of the cycle. The macro environment continues to be impacted by economic uncertainty and geopolitical conflict, which has contributed to the constrained global steel industry.
Looking at the numbers, using data published by the World Steel Association earlier this week. On a global basis, steel production outside of China was approximately 213 million tons in the first quarter of 2024. This represents a nearly 4% year-over-year increase with approximately [three-quarters] (ph) of the growth attributable to Turkey and India. As it relates to Turkey, with the first quarter 2023 production having been significantly impacted by the earthquake that occurred in February of last year. This year-over-year growth represents a recovery to historic first quarter norms. Commensurate with the global increase in steel production, the global steel capacity utilization rate outside of China ticked up slightly to 68%. Looking at some of our key commercial regions.
For North America, steel production was down 2% in the first quarter on a year-over-year basis, reflecting a slight reversal of recent trends in what has been a relatively stable steel market. Steel output in the EU declined 1% as the market remains relatively stagnant, reflecting a weak construction sector and high interest rates that continue to weigh on demand. Further, steel output in the EU remains well below historic production and utilization rates for that region. These dynamics within the global steel industry have, in turn resulted in persistent challenges in the commercial environment for graphite electrodes. Specifically, industry-wide demand for graphite electrodes has remained weak, with challenging pricing dynamics persisting in most regions.
To expand further, the graphite electrode industry continues to suffer from low-capacity utilization. While our competitors in the graphite electrode industry have also acknowledge near-term industry-wide headwinds, we were the first and thus far only industry participant to announce definitive actions to reduce capacity. Conversely, despite the weak demand environment, we continue to see a healthy level of electrodes export -- ported from certain countries, including India and China into non-tariff protected regions, such as the Middle East. These are typically lower priced electrodes with prices declined further of late. As we have spoken to in the past, these export dynamics, we see a knock-on pricing effect in tariff-protected countries, such as within the EU, as Tier 1 competitors have continued to lower prices in these regions to support volume.
We’re also seeing this dynamic play out in the US, with prices softening of weight, all of which represent challenges we must manage in the near term. With that background, let's turn to the next slide for more details on our results. Our production volume in the first quarter of 2024 was 26,000 metric tons. Our sales volume was 24,000 metric tons, a year-over-year increase of 43% and in-line with our stated outlook for the first quarter. As a reminder, sales volume for the first quarter of 2023 was significantly impacted by the temporary suspension of our operations in Monterrey, Mexico that occurred in late 2022. Shipments for the first quarter of 2024 included 20,000 metric tons of non-LDA sales at a weighted average realized price of approximately $4,400 per metric ton, and approximately 4,000 metric tons sold under our LTAs, at a weighted average realized price of $8,700 per metric ton.
Expanding on our weighted average price for non-LTA sales. This represented a 27% year-over-year decline and a sequential decline from the fourth quarter of 2023 of approximately 8%, reflecting the pricing dynamics I referenced earlier. Net sales in the first quarter of 2024 decreased 2% compared to the first quarter of 2023. The decline in pricing, along with the ongoing shift in the mix of our business from LTA to non-LTA volume, led to the slight year-over-year decline in net sales as these factors were mostly offset by the higher sales volume. Looking forward, for the reasons already mentioned, we expect that industry-wide demand for graphite electrodes in the near-term will remain weak and pricing pressures will persist in most regions.
In response, we remain selective in the commercial opportunities we're choosing to pursue with a focus on competing responsibly. We expect our sales volume in the second quarter of 2024 to be broadly in-line with the sales volume for the first quarter. Further, we continue to expect a modest year-over-year improvement in sales volume for the full year. Let me now turn it over to Catherine to cover the rest of our financial details.
Catherine Delgado: Thank you, Jeremy and good morning. For the first quarter of 2024 we had a net loss of $31 million or $0.12 per share. Adjusted EBITDA was essentially breakeven in the first quarter compared to adjusted EBITDA of $15 million in the first quarter of 2023. The decline reflected lower weighted average pricing and the continued shift in the mix of our business toward non-LTA volume. These factors were however, partially offset by year-over-year reduction in cash costs on a per metric ton basis, as well as with the benefit of higher sales volume. As Jeremy previously provided color on most of these drivers, let me expand on the topic of costs. As shown in the reconciliation provided in our earnings call materials posted on our website, our first quarter 2024 cash COGS per metric ton declined 18% on a year-over-year basis.
On a sequential basis, it declined 16% from the fourth quarter of 2023. Contributing to the sequential decline was a $5 million benefit or approximately $200 per metric ton, reflecting the portion of the lower cost to market inventory write-down recorded in the fourth quarter of 2023, which is now related to the inventory sold in the first quarter of this year. Beyond this, the majority of the sequential cost improvement reflected two key drivers. Let me provide some color on each one. First, as we mentioned in our fourth quarter call, we are addressing all elements of our cost structure. Our efforts related to variable costs are yielding benefits this quarter. Specifically, our technical team continues to work on engineering cost out of our manufacturing processes without compromising quality or performance.
Additionally, we are aggressively working with our existing supplier base and qualifying new suppliers, as we enhance our procurement practices related to certain key input costs. We’re pleased to see these benefits beginning to flow through our variable costs. Second, we had a quarter-over-quarter reduction in the level of fixed costs being recognized on an accelerated basis due to low production levels. As a reminder, these are costs recognized in the current period that would have been inventoried if we were operating at normal production levels. In the first quarter, as utilization rates at both our graphite electrode and [indiscernible] facilities increased sequentially. We recognized approximately $6 million of such costs compared to approximately $10 million in the fourth quarter of 2023.
Then while not materially benefiting the first quarter cash cost performance, our initiatives to reduce fixed costs are on track to generate cost savings, as we proceed through the year. reflecting the progress we are making on our cost structure as it relates to the full year, we now anticipate a mid-teen percentage point decline in our cash COGS per metric ton for 2024 compared to the full year cash COGS per metric ton for 2023. This compares to our original guidance provided on the fourth quarter call of a year-over-year low teen percentage point decline. Turning now to cash flow. For the first quarter of 2024, cash from operating activities was essentially breakeven as the net loss was offset by, among other factors, a further reduction in working capital, most notably inventory.
Reflecting our first quarter capital expenditures adjusted cash flow was negative $11 million. We continue to anticipate our full year 2024 capital expenditures will be in the range of $35 million to $40 million. Now moving to the next slide. We ended the first quarter with a liquidity position of $275 million, consisting of $165 million of cash and $110 million available under our revolving credit facility. This reflects the financial covenants that limit borrowing availability under our revolver in certain circumstances. More importantly, we do not anticipate the need to borrow against the revolver in 2024. And further, we know that we have no debt maturities until the end of 2028. Let me turn the call back over to Tim for some final comments on our outlook.
Tim Flanagan: Thanks Catherine. Let me reiterate my earlier comment that there are many reasons for optimism about the long-term prospects for our company. As we look to the near term, we recognize that a significant amount of global economic uncertainty remains, as an overhead on steel demand, and therefore graphite electrode demand. While it's prudent to remain cautious on near-term industry trends, we can't lose sight of the fact that all cyclical downturns eventually come to an end. Earlier this month, the World Steel Association published their updated short-term forecast on global steel demand. The forecast calls for low to mid-single-digit percentage increases in steel demand in both 2024 and 2025, for nearly all of our key regions, including the EU, the US and Middle East.
As I mentioned earlier, we are well-positioned to benefit as the global steel market recovers. We believe we provide a compelling value proposition to our customers and we can compete on more than just price. Our value proposition includes strategically positioned manufacturing footprint that provides operational flexibility and reach to key steelmaking regions. Being the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, best-in-class customer technical services and solutions and a focus on continually expanding our commercial and product offerings. Longer term, as I noted earlier, decarbonization efforts are driving a transition in steel with electric arc furnaces continuing to increase share of total steel production.
The ongoing transition towards EAF steelmaking, is expected to drive demand growth for graphite electrodes over the longer term. Overall, considering planned EAF capacity additions based on steel producer announcements, along with production increases at existing EAF plants, we estimate that this will translate to global graphite electrode demand outside of China growing at a 3% to 4% CAGR over the next five years. As the strategic actions we are taking to reduce costs have been designed to preserve our ability to capitalize on long-term industry tailwinds, we view GrafTech as being well positioned to benefit from this trend. Further, anticipated demand growth for petroleum needle coke, the key raw material we use to produce graphite electrodes will also present a tailwind for our business given our substantial vertical integration.
To expand on this point, needle coke demand is expected to accelerate driven by its use to produce synthetic graphite for the anode portion of lithium-ion batteries using the electric vehicle market. Growing demand for needle coke should result in elevated needle coke pricing. And given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing, this trend should translate to higher market pricing for electrodes. Additionally, we continue to see potential long-term value creation opportunities by directly participating in the development of Western supply chain for the EV battery market. With our needle coke and graphitization capabilities, we possess key assets, resources and know-how that uniquely position GrafTech to participate in this industry.
We remain excited about the development of the supply chain and our associated prospects. In closing, we’re working through the challenges we face but have many reasons for optimism as we look ahead. We continue to believe GrafTech will successfully manage through the near-term challenges and remain an industry-leading supplier of mission-critical products to the EAF industry. Longer-term, we possess a distinct set of assets, capabilities and competitive advantages to capitalize on growth opportunities. As we think about the company's key stakeholders, we’re instilling a renewed focus on a customer-first mantra, as meeting the needs of our customers must be central to everything we do. At the same time, we must ensure the safety and professional growth of our more than 1,200 employees, our most valuable asset.
We must act responsible as stewards in our local communities, protecting our environment and investing in community programs. If we do right by our customers, our employees and the communities in which we operate, we are confident we can deliver long-term value for our shareholders. This concludes our prepared remarks. We'll now open up the call for questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Curt Woodworth from UBS. Please go ahead.
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