GrafTech International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

Key Takeaways

  • GrafTech delivered a sequential improvement in Q2 with higher sales volumes and adjusted EBITDA, along with a per-ton cost reduction that was in line with company expectations.
  • Due to ongoing steel demand softness, full-year 2023 sales volume guidance was lowered to 95,000–105,000 metric tons, with Q3 volumes expected to be broadly in line with Q2 and a modest uplift in Q4.
  • Cash COGS per metric ton in Q2 was approximately $5,250, down 7% sequentially; H2 costs are forecast to remain below H1 levels but above prior guidance as higher-priced inventory is worked through.
  • The company completed a $450 million senior secured notes issuance, repaid its term loan, extended debt maturities by about four years and ended Q2 with liquidity of $337 million.
  • GrafTech remains optimistic long term, citing electric-arc furnace steelmaking growth that could drive an incremental 200,000 metric tons of electrode demand outside China by 2030, and is advancing needle-coke capacity and EV battery anode opportunities.
AI Generated. May Contain Errors.
Earnings Conference Call
GrafTech International Q2 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the GrafTech Second Quarter 2023 Earnings Conference Call and Webcast. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, August 4, 2023. I would now like to turn the conference over to Mike Dillon.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to GrafTech International's 2nd quarter 2023 earnings call. On with me today are Marcel Kessler, Chief Executive Officer Jeremy Halford, Chief Operating Officer and Tim Flanagan, Chief Financial Officer. Marcel will begin with opening comments. Jeremy will then discuss safety, sales and operational matters.

Speaker 1

Tim will review our quarterly results and other financial details. Marcel will close with comments on our outlook. We will then open the call to questions. Turning to our next slide. As a reminder, some of the matters discussed in this call may include forward looking statements regarding, among other things, performance, Trends and strategies.

Speaker 1

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 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'll now turn the call over to Marcel.

Speaker 2

Good morning, everyone. Thank you for joining GrafTech's 2nd quarter earnings call. I will begin by highlighting 4 key points we will get discussed on our call today. First, our performance for the Q2 was consistent with our expectations and represented a sequential improvement in key metrics. This included quarter over quarter growth in sales volume and adjusted EBITDA as well as a sequential reduction in recognized costs on a per ton basis.

Speaker 2

2nd, while we continue to see improvement in our business, market indicators point towards further softness in steel production For the remainder of the year, with the resulting impact on the demand for graphite electrodes, our expectations for the second half of twenty twenty three are more tempered. However, we remain optimistic about 2024 recovering to improved levels of demand. 3rd, we continue to successfully execute our plans and strategies as we manage the business in response to the short term challenges in the environment. And 4th, we remain optimistic about the long term outlook for the business. We are taking actions that we believe will optimally position GrafTech to benefit from medium to longer term industry tailwinds and deliver shareholder value.

Speaker 2

As Jeremy and Tim will provide more detail on our second Drained by global economic uncertainty. At the macro level, the global manufacturing PMI as reported in July has fallen to a 6 month low and business and consumer confidence continues to be subdued. This contributes to steel industry output remaining below prior year levels with most regions showing production declines. This in turn has resulted in ongoing softness for near term demand for our products. As a result, we have lowered our volume expectations for the second half of twenty twenty three.

Speaker 2

We now estimate our sales volume For the full year of 2023, we will be in the range of 95,000 to 105,000 metric tons as compared to our previous estimate of 100,000 to 115,000 metric tons. Sales volume in the 3rd quarter is expected to be broadly in line with sales volume for the Q2 of this year. We remain optimistic for recovery to improve levels of Demand and Sales Volume in 2024. Based on the latest outlook from the Royal Steel Association, Global steel demand outside of China is projected to increase 4% in 2024. Year over year growth is expected in all key regions in which we participate.

Speaker 2

This includes a projected 6% year over year increase in European Yield demand, a 2% increase in North America and a 3% increase in the Middle East, all of which should revise demand should drive demand recovery for graphite electrodes. We recognize steel industry performance will be dependent on natural conditions. As such, we continue to focus on those things that are within our control to manage near term market uncertainties. This includes proactively reducing our production volume to align with our near term demand outlook, Closely managing our operating costs, capital expenditures and working capital levels and making targeted investments to further improve our competitive positioning and support long term growth. We continue to be pleased with the execution of our plans and the progress to advance our business.

Speaker 2

Let me briefly highlight several accomplishments since our last call, Starting with our manufacturing operations. Our facility in Monterrey, Mexico continues to run as expected. We continue to make significant progress on our risk mitigation strategies related to connecting pins and initiatives increase our operational flexibility. As you will recall, early in the Q2, we received the regulatory approval We began production operations at the plant with activities expected to further ramp up in the coming months to increase our operational flexibility. Turning to the commercial front.

Speaker 2

During the Q2, we announced the opening of a new sales office in Dubai, Increasing our presence in this important region. This supports our commercial strategy to operate with a global footprint as we expand our sales and technical service capabilities in key geographies. In addition, we entered into new multi electrode sales agreements with certain customers in North America and Europe. This reflects their confidence in GrafTech's ability to reliably deliver high performing products over time. We also continue to make progress on the sustainability front.

Speaker 2

We joined the United Nations Global Compact and are excited We look forward to building upon our EST To that end, we encourage you to read our latest sustainability report that we recently made available on our website. Finally, during the Q2, we completed the $450,000,000 senior secured notes offering. As Tim will discuss further, this offering and the related repayment of our term loan extended our debt maturity profile by about 4 years. At the same time, we remain focused on maintaining sufficient liquidity to navigate the current environment via our working capital management and other This supports our financial flexibility as we take actions that we believe will optimally position GrafTech to benefit from industry tailwinds and deliver shareholder value. I will spend a few minute moments on those tailwinds at the end of our prepared remarks.

Speaker 2

But first, let me turn the call over to Jerry.

Speaker 3

Thank you, Marcel, and good morning, everyone. I'll start my comments with a brief update on our safety performance, which is a core value at GrafTech. We are pleased that our year to date recordable incident rate For 2023, reflects substantial improvement from the prior year level and continues to place us among the top operators in the broader manufacturing industry. We will remain highly diligent in this area and seek to further improve this metric as we continue working toward our ultimate goal of 0 injuries. Let me now turn to the next slide for an update on steel industry trends as additional context for our Q2 results and our outlook commentary.

Speaker 3

As Marcel indicated, the overall performance of the steel industry has remained somewhat constrained. During the Q2, we saw further sequential improvement in certain market indicators. However, these metrics remain below year ago levels. Global steel production outside of China in the 2nd quarter was approximately 208,000,000 tons. This represented a 4% sequential improvement from the Q1, but a 2% decline compared to the same period in the prior year.

Speaker 3

On a year to date basis, global steel production outside of China was down 4% through the 2nd quarter with most regions showing production Turning to global capacity utilization outside of China. For the Q2, the rate was flat on a sequential basis at 60 6%, but remained down by approximately 400 basis points compared to the Q2 of last year. And looking at other market indicators, global steel pricing declined during the Q2 alongside steel demand, with most market projections pointing to a continuation of subdued steel pricing and demand in the near term. On a regional basis, in Europe, weak macro fundamentals have persisted, including a soft construction market and high inflation rate That continued impacts my confidence. Lastly, the European Steel Association issued their latest 2023 outlook, noting that they expect a 3% decline in new steel demand for the full year.

Speaker 3

This compares to their previous projection of a 1% decline. In the U. S, utilization rates picked up in the 2nd quarter, averaging 77%, although they remain below year ago levels. The sequential increase reflects continued strength in the U. S.

Speaker 3

Construction sector. Overall, this significant global economic uncertainty continues to be an overhang on industry demand in the near term. However, in the medium or longer term, we remain bullish on steel industry fundamentals for the reasons we've previously indicated, thereby supporting future graphite electrode demand. Turning to the next slide in GrafTech's second quarter performance. Our production volume was approximately 25,000 metric tons, representing a 43% year over year decline, but up nearly 60% on a sequential basis compared to the Q1.

Speaker 3

This resulted in a combined capacity utilization rate for our 3 primary Subject to market conditions, we expect utilization rates at our manufacturing facilities to increase in the second half of twenty twenty three compared to first half level. This reflects our continued focus on proactively managing production volume to align with our evolving demand outlook. Turning to sales. Our 2nd quarter sales volume of approximately 26,000 metric tons was in line with the outlook we provided on the last call. While representing a 38% year over year decline, sales volume was up 56% on a sequential basis compared to the Q1 as we continue to recover from the impact of the Monterey suspension.

Speaker 3

Shipments for the Q2 included 8,000 metric tons sold under our at a weighted average realized price of approximately $5,600 per metric ton. As anticipated, Net sales in the Q2 of 2023 decreased 49% compared to the Q2 of 2022. In addition to the lower sales volume, the ongoing shift in the mix of our business from LTA to non LTA volume contributed to the year over year decline.

Speaker 2

As we proceed through the

Speaker 3

Q3 of 2023, the softness in the commercial environment that we have discussed has tempered our expectations. Specifically, the year over year decline in global steel production and the constrained steel utilization rates have limited the ability of our customers to significantly drive down their electrode inventory to difficult levels. Further, with the recently revised outlook from the European Steel Association and considering the difficult seasonal slowdowns in Europe, Our near term outlook for European electric demand is cautious. Given these dynamics, we anticipate our sales volume for the Q3 will be broadly in line with the second For the Q4, we expect a sequential increase in sales volume. Factoring all of this in, on a full year basis, as Marcel mentioned in his remarks, we estimate sales volume will be in the range of 95,000 to 105,000 metric tons for 2023.

Speaker 3

Let me now turn it over to Tim to cover the rest of our financial details.

Speaker 4

Thanks, Jeremy. For the Q2, we had a net loss of $8,000,000 or $0.03 per share. Adjusted EBITDA was $26,000,000 a decrease from $158,000,000 in the Q2 of 2022. The decline primarily reflected the lower sales volume, higher year over year costs on a per metric ton basis and the continued shift in the mix of our business towards non LTA Adjusted EBITDA margin was 14% in the 2nd quarter. Expanding on costs.

Speaker 4

As reflected in the reconciliation we provided in the earnings documents posted to our website, cash COGS per metric ton excludes depreciation and amortization as well as cost of goods associated with byproduct sales and other non cash factors. Reflecting the full year impact of raw material, Energy and freight cost increases that occurred throughout 2022. We continue to sell higher priced inventory during the Q2 of 2023. In addition, during the quarter, our cash costs included approximately $10,000,000 of fixed costs that otherwise would have been inventory if we were operating at normal production Factors. Factoring all of this in for the Q2 of 2023, our cash COGS per metric ton were approximately $5,250 in line with our expectations.

Speaker 4

This represented a 7% sequential decrease compared to our high watermark of $5,600 in the Q1 of 2023. Looking ahead, we continue to expect our cash COGS per metric ton in the second half of twenty twenty three will be below the level recognized in the first half of the year, but will be above our previous expectations. I'll provide some more color on that here in a moment. As we've anticipated, we're starting to relief from some of the inflationary pressures for certain key elements of our cost structure, including pecan oil, energy, coal tar pitch and freight. However, given where we're at in the fiscal year and with our current inventory levels, this won't have a meaningful impact on our costs in the second half of twenty twenty three.

Speaker 4

Furthermore, the decline in our volume outlook has a 2 pronged effect on the cash COGS per metric ton that will be recognized in the second half of this year. First, with the lower sales volume, this extends the time it takes to work through higher priced inventory on our balance sheet. Secondly, with the corresponding decline in production volume, we will continue to recognize fixed costs that otherwise would be inventory that we are operating at normal production levels. As a result, we remain focused on managing our controllable costs and working to bring down our inventory levels. As we look ahead, we continue to expect market pricing to decline further in the medium to longer term for certain key elements of our cost structure.

Speaker 4

For these reasons and with the anticipated increase in our capacity utilization as sales volume levels improve in 2024, We remain optimistic that our cost per metric ton will improve as we move beyond the current year. Now turning to cash flow. In the Q2, we used $9,000,000 of cash in operating activities, while adjusted free cash flow was essentially breakeven for the quarter. Our Q2 adjusted free cash flow included the benefit of approximately $24,000,000 related to the settlement of interest rate swaps. The majority of this benefit was a result of terminating our interest rate swaps in connection with the repayment of our $434,000,000 term loan balance at the end of the quarter, which I'll speak more about in a moment.

Speaker 4

We anticipated the Q2 would represent the low watermark for cash flow in 2023 That continues to be our expectation. With our focus on managing our costs, capital expenditures and working capital levels, we continue to expect The maturity of our existing $500,000,000 senior secured notes. As the net proceeds of this offering were used to repay the term loan that was due in the Q1 of 2025, This effectively extended our debt maturity profile by nearly 4 years. Our gross debt to adjusted EBITDA ratio was 3.8 times as of June 30th compared to 1.7 times at the end of 2022, reflecting decline in EBITDA for the 1st 2 quarters of 2023 on a year over year basis. On a net debt basis, we ended the quarter at a ratio of 3.3 times.

Speaker 4

As of June 30, our liquidity was 337 dollars consisting of $132,000,000 of cash $205,000,000 available under our revolving credit facility. This reflects the financial covenant that limits borrowing availability under our revolver in certain circumstances. However, we do not anticipate the need to borrow against our revolver in 20 Further, we remain confident we have ample liquidity between the cash on hand and the borrowing availability to navigate the current parking conditions and to continue to make targeted investments. For the full year, we'll continue to expect our capital expenditures will be in the range of $55,000,000 to $60,000,000 I'll now turn it back to Marcel for some closing comments.

Speaker 2

Thank you, Tim. Let me reiterate that we remain confident in our ability to We remain optimistic about the long term outlook for our business and are taking actions that we believe will optimally position GrafTech With Electric Art Furnace Steelmaking continuing to increase share of total steel production. In 2022, EAFs accounted for approximately half of global steel production outside of China, which increased from 44% in 2015. With this trend of EEF share growth expected to continue, we anticipate demand for graphite electrodes to experience accelerating growth. We are currently tracking more than 200 announcements of planned EAF capacity additions by steel producers around the world.

Speaker 2

We estimate that these additions, along with production increases at existing EF plants, could result in incremental annual graphite electrode demand Outside of China of 200,000 metric tons by 2,030. This compares to global annual graphite electrode demand in 2022 outside of China of approximately 680,000 metric tons. On a regional basis, Reflecting these industry announcements, this could translate into incremental graphite electrode demand as follows: 65,000 metric tons in Europe, 25,000 metric tons in North America and over 55,000 metric tons in the Middle East and Africa. 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 use to produce synthetic graphite for Anode portion of lithium ion batteries used in the rapidly growing electric vehicle market.

Speaker 2

Based on analyst estimates regarding the projected growth in electric vehicle sales and battery pack sizes, We estimate this could result in global needle coke demand for use in EV applications increasing at the Compound annual growth rate of over 20% through 2,030. We view the growing demand for needle coke as another positive long term trend as higher demand should result in elevated pricing. Given the high historical correlation between petroleum needle coke pricing And graphite electrode pricing, this trend should translate to higher market pricing for electrodes. We are well positioned to capitalize on these favorable industry tailwinds. We operate 3 of the highest capacity electrode manufacturing facilities in the world.

Speaker 2

With these facilities and the recent restart of Saint Mary's, we have strategic flexibility and a global footprint that gives us proximity to large EDF steelmaking regions. Further, through our CJS production facility, We remain the only large scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke. These sustainable competitive advantages are critical differentiators and foundational for our ability to serve our electrode customers. As we discussed on the last call, we also see long term value creation opportunities beyond our existing electrode business. Specifically, we continue to study the ways in which we can participate in the anticipated growth of the EV battery market via 2 potential avenues.

Speaker 2

1st, by leveraging our assets and technical know how in the area of petroleum needle coke production, Given the expected demand growth for this core key raw material, to that end, we have recently filed a permit application to While we have not yet made any firm commitments, We continue to test our needle coke and graphitization capabilities with several third parties, And we are confident in our ability to meet the specifications and quality required for battery applications. We are excited about the possibility of participating in the growth of the EV battery market and look forward to sharing more as we can. In closing, we are effectively executing our plans to manage the current environment, and I want to thank the entire GrafTech team for their Our long term thesis remains intact. We are an industry leading provider of a We possess a distinct set of 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.

Speaker 2

For these reasons, I remain confident in our ability to deliver shareholder value. That concludes our prepared remarks. We will now open the call for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer One moment please for your first question. The first question comes from Katya Santsik of BMO Capital Markets. Please go ahead.

Speaker 5

Hi. Thank you for taking my questions. Maybe starting off with the spot pricing environment. I think you mentioned you expect spot prices to Can you provide more color on the magnitude of the client you're expecting?

Speaker 2

Yes. Thank you for your question, Katya. So as we have noted, the 2nd quarter price for our non LTA site is Below our Q1 levels as was anticipated given the softer environment. And as Tim notes, I think there's some expectation that we may see further Clients in the second half of the year. And I fully understand the desire for more clarity on pricing expectations further into 2023 and beyond.

Speaker 2

However, and I know I've said this before, right, for competitive reasons, we are going to refrain from providing our expectations On near term pricing and we in fact have limited visibility on pricing further out.

Speaker 5

Understood. Maybe then on the cost side, previously you expected the full year 'twenty three costs to be up about 20% year over year. I'm assuming that is moving higher now or how should we think about it?

Speaker 4

Yes, you're absolutely right. So we said that We expected a 17% to 20% increase. I think we guided to the high end of that range last quarter on a year over year basis. So we'll end up somewhere north of that high end and but we fully expect to be still below kind of what we average the first half of the year. So first half of the year average is about $5,400 on a cash COGS basis.

Speaker 4

So we'll be somewhere above that 20% increase level and 5,400 give you some parameters.

Speaker 5

Perfect. Thank you so much.

Operator

Thank you. The next question comes from Arun Viswanathan of RBC Capital Markets. Please go ahead.

Speaker 6

Thanks for taking my question. Just wanted to clarify a couple of things. So Did you say that the Q3 sales volume would be similar to Q2 And then before would

Speaker 2

be higher? Yes. Okay.

Speaker 6

Great. Thanks for that. So given that then, you've done about $40,000,000 of EBITDA In the first half, the second half, I guess, you will have similar volume in Q3, but maybe Slightly higher volume in Q4. Would you get some more fixed cost leverage on that? And so, maybe your EBITDA is a little bit Slightly better sequentially in Q3.

Speaker 6

There's some seasonal benefits as well and energy costs are a little bit lower. So how should we think about EBITDA maybe in Q3?

Speaker 4

Yes. So as we think about starting with the fixed cost leverage and We anticipate we'll continue to have some fixed costs that are expensed directly to the P and L that otherwise would be inventoried in the Q3. And this is again reflecting our intention of managing production levels in line with our overall commercial demand And our sales volume expectations. Kind of layering on top of that as well is, while we've released some inventory during the first half of the year, We anticipate releasing more inventory and using as much of what we have on hand to support the sales forecast in the back half of the year as well. So We would expect the plant still not to be running at what we would consider normal or target levels.

Speaker 4

They'll be running harder than they have in the first half of the year as we commented, but we'll still have some fixed cost leverage challenges in the back half of the year as well.

Speaker 6

Right. Thanks for that. And then given that you're guiding to about That 95,000,000 to 105,000,000 of sales volumes, 100,000 of sales volume, That implies kind of a 50% utilization of your overall capacity. Is that right? And what is it going to take to really get back to a more normal environment?

Speaker 6

Is it, I guess a number of factors including a better Europe, maybe some better industrial backdrop. I ask because there are some conflicting factors out there. On the one hand, we have a pretty robust Automotive market, there's some reshoring and infrastructure projects that seem to be supporting better steel utilization. And again, you cited the mid-seventy percent s fuel utilization rate, for U. S.

Speaker 6

77. So why are electrode utilization rates so low, I guess, is the overall question. Yes. So from

Speaker 4

a volume perspective, right, you asked what will it take to get back More normalized volumes and I think if you start by reflecting on 2023, there's really two factors impacting sales volume in 2023. First of all, you've got the Monterrey situation, which is kind of unique to us. And then you've got the overall kind of macro environment that's weighing on Kind of each of the regions of the world differently, right? You see a more robust U. S.

Speaker 4

Market, still not performing at the same level it was a year ago, But you're seeing some strong performance as you noted in automotive construction is Continuing to be strong and then I think there's a pretty optimistic outlook for infrastructure spending more broadly with the $2,000,000,000 plus of Spending that's anticipated on that front. Conversely, I think if you look at macro environments in other regions of the world, I think it's a little bit more challenged. Jeremy mentioned the European Steel Association's kind of revised outlook for the year being down to a 3% reduction in current year versus what they previously thought was a 1% reduction. So the combination of those things, I think you really have to go region by region to understand the dynamics how that's affecting electrode demand. I think as we have moved through Monterrey largely This year with the strong operation of the plant thus far, continuing to work on the pin mitigation strategy and rebuilding our pin inventory, And the fact that we fully expect to be engaged with our customers in the commercial negotiation process here in the second half of the year.

Speaker 4

We think we're taking that challenge off the table as we head into 2024. So really the determination of where things and how things to more normalized levels is the macro environment of each of those regions and how you see recovery. I think again, World Steel Association, the European Steel Association are all predicting recoveries of different orders of magnitudes In each of the regions of the world, which give us a pretty optimistic outlook that 2024 from an overall demand perspective for electrodes will be better than this year.

Speaker 6

Okay. Thanks for that. But again, just to understand this further. So Would you say that there have been some capacity additions and those are being absorbed? I'm just I'm still not following why the Electrode, I mean, and putting aside Monterrey, your second half Would still imply kind of a much lower utilization rate versus global steel utilization rates.

Speaker 6

So I'm just not following exactly why the electrode utilization rates are so low, even in potentially 2024?

Speaker 4

Yes. I think the other factor that's going to weigh on that on utilization rates is our inventory levels first Foremost and what we're carrying and again we're actively working down the inventory that we've built over the last 18 months. But then also on the same time and we talked about this in the last call as well, customer inventories, right? So to the extent that The Monterey situation caused people to pull forward some buying of electrodes that we're not seeing at these utilization rates work out yet. That's going to impact our utilization of our plants and the demand more broadly for graphite electrodes.

Speaker 6

Okay. That's helpful. And just one last one then. As you look out into the future here, It appears that you've kind of gone through a pretty challenging time and you're coming out on the other side of it. Monterrey is back up and running.

Speaker 6

You're going through some commercial renegotiations. Would you kind of characterize that first half Of 2023 as a potential bottom? And if so, then you'll slowly see You know, utilization and volumes improved and fixed cost leverage improved, and then thus profitability also as you look out In the 2024 and 2025, is that how you're looking at the world? And is that also allowing you to Maybe redirect some of your attention to the EV markets and some of your initiatives there?

Speaker 2

Yes. So I think that's exactly how we see the situation evolving too. I think the first half It's clearly the bottom as far as we can see today, primarily driven by the fact that Monterrey has been the key driver Of the low performance in the second half, right. And while there may be some lingering effect here For the second half of this year, this will be completely worked through by 2024, yes. So in your assessment, we would completely agree with that.

Speaker 6

And what about the EV side? Could you elaborate on some of the initiatives there and maybe provide an update on what you're working on? Thanks.

Speaker 2

So as I mentioned in my prepared remarks, right, we have not made any firm commitments that we can speak to in terms of Agreements with potential customers or significant investment to expand capacity. However, we continue We work with several third parties in 2 ways, right? 1 is we are testing the needle called at Seadrift For use as a battery anode material. And we are very confident that what we can produce at Seadrift It's very well suited for this application. And to that end, also as per my prepared remarks, we have just filed An application to expand the capacity of Seadrift here going forward.

Speaker 2

Secondly, we are working with third parties To use our graphitization assets that we currently exclusively use for electro production to graphitize that material For battery materials. And in that case as well, we are very encouraged by the findings given that the functionality, The capability and the quality of the powder we can produce in our graphitization furnaces is very well suited for battery applications. So we are progressing on both fronts and we are going to be very happy to share more about this as we can.

Speaker 3

Thanks.

Operator

Thank you. The next question comes from Bill Peterson of JPMorgan. Please go ahead.

Speaker 7

Yes. Hi. Good morning and thanks for taking my questions. The LK volumes increased quarter on quarter with flat pricing, but Based on your annual volume and revenue guidance, it would imply a step down in both in the back half

Speaker 3

of the year. Is that

Speaker 7

a fair assumption? And if so, how should we think about the LTA and the cadence for the back half of the year?

Speaker 4

Yes. So we haven't changed The guidance for the full year, I think you're right when you kind of do the math, the math would suggest a slightly lower price. And that's really going to be driven by mix of LTA customers, right? Not all contracts are the same. A lot of these contracts are those that have been extended over time And we work with customers to blend and extend those contracts out.

Speaker 4

So I We'll fall well within the ranges that we provided on the LTA side.

Speaker 7

Okay. Thanks for that. And I guess looking at capital allocation, can you provide some additional color or rationale for the on the dividend suspension? I guess, I understand the improvement in use of cash, but assuming that we're at the bottom and free cash flow generation should improve into next year, I'm trying to get a feel for the rationale. And Maybe what would you need to see to have this reinstated as we look ahead?

Speaker 2

Yes. So I think the suspension of the $0.01 per share dividend It's consistent with our current capital allocation priorities, right? That's on the one hand, focusing on maintaining sufficient liquidity to navigate The short term headwinds and also making targeted investments to position our business for long term growth. Regarding the possibility of the dividend being reinstated in the future, as you know, dividend declarations are always at the discretion of the Board. So I will refrain from Speculating at what point that might happen.

Speaker 7

Okay. Thanks for the color and we'll look forward to following the progress we get back.

Speaker 2

Thank you for your

Operator

question. Thank you. The next question comes from Curt Woodworth of Credit Suisse, please go ahead.

Speaker 8

Yes, thanks. Good morning. With respect To the fixed cost under absorption and some of the stuff you mentioned in terms of the inventory, how should we think about what your cost structure Should look like on a normalized basis. So if you were to assume more normalized utilization and kind of run some of the spot Coal tar pricing, decan oil pricing, and can you give us a sense of what that could look like today?

Speaker 4

Yes, I mean, so and thanks for the question, Kurt. I think if you look back a couple of years, historically, we've been in that $3,600 a ton on a cash COGS basis. I think just given the fact that so much of our Cost structure is market driven. We should be able to drive back towards that as you see kind of normalization of the coal tar markets, the decan oil markets and certainly, we've seen improvement as I mentioned in our prepared remarks. A number of those areas we're seeing some beneficial in commodity price movements that are helping us and will continue to help us as we move into 2024.

Speaker 4

Other elements of the cost structure, in In particular, labor inflation in those costs tends to be stickier, so you won't work all of that out. So while We'll be aspirational to get back to that $3,600 level. We're likely not to get not going to get there anytime Sooner without investment. So, we'll see a significant reduction in costs as we head into next year as fixed costs Get better. The leverage gets better with the return of volume.

Speaker 4

We're seeing again the benefit on some of the variable stuff And we'll continue to work diligently to manage our period or fixed costs as we've done so this year and continue to keep our plants As efficient and cost effective as possible. So, we'll see good movement heading into next year, but we may not get all the way back to that $3,600 level.

Speaker 8

Okay. And then kind of consistent with Arun's question, just looking at your Sales volumes utilization, it does seem much more higher rate of decline versus what we're seeing in the global steel production data. So I think One of the questions people have is with respect to Monterrey and just all the gyrations in the industry and arguably there's probably more import pressure From China and India in this type of market as well. Can you comment at all on your market share? Do you feel like you've lost share?

Speaker 8

Do you feel like your contract position or your relationships are generally still intact in terms of thinking about 2024 recovery that you should benefit as the industry recycles higher?

Speaker 2

Yes. So a couple of thoughts. I don't think we can comment directly on market shares. Obviously, we have enough transparency around that. With regards To the impact of Monterrey, I think we've talked about that in some detail on the last two calls, right.

Speaker 2

During that suspension in late 2022, right, we lost the ability to negotiate volumes, Especially for the first half of twenty twenty three and maybe even to some extent in the second half, right? So that was the worst possible time for that That is really the key driver of the impact and underperformance and the disconnect between what you're highlighting here, The steel utilization rates versus the electro plant utilization rates. I think it's the indirect impact of Monterrey, the loss of that negotiation window During the most critical negotiation time in late 2022. Okay. Do

Speaker 9

you want to add anything?

Speaker 2

Please go ahead.

Speaker 8

Okay, understood. And then just with expansion at Seadrift, I think in the past, there's The CapEx for kind of a replication of that asset, I can't remember exactly, but $600,000,000 $700,000,000 I think there was some So maybe do a more subscale investment, but can you comment on how that would actually work just given your capital structure Today, is it the type of thing where you would try to get a JV investment and then you would get a fee to operate the facility or How would that look like?

Speaker 2

So yes, we have commented in the past, right, that a replication of a CGRIP It will be a very expensive endeavor, right? And that's not what we're undertaking here. We are essentially filing a permit Perfect application for an expansion of the existing facility. And we believe that this is the most capital efficient way To add capacity in the Western world, right? So as you know, we are one of the only 2 Western providers of needle coke.

Speaker 2

And our Seadrill facility is set up in such a way that with a relatively modest capital investment, We can get a significant increase in capacity. So to be a bit more specific, CGR currently has a nameplate capacity of 100,000 140,000 metric tons of needle coke. With the anticipated expansion, We would increase that by approximately 40%, which is a combination of what we call Health Science and Green Needle POKE. I don't want to go into a technical rabbit hole, but typically calcined needle coke is what we and others use for the manufacturing of graphite electrodes. And battery materials often or battery material manufacturing is often done with Green Needle Coke, but not in all cases.

Speaker 2

So what the actual production increase will be would depend on the blend of how much of that would actually be green needlecoarser versus Calcite or how much of that production would go to battery materials versus electrodes. It's important to point out that we are not talking about a multi $100,000,000 replication of the Seadrift asset here, About an expansion of the existing facility with a relatively modest additional capital.

Speaker 8

Okay. Thank you.

Operator

Thank you. The next question comes from Alex Hacking of Citi. Please go ahead.

Speaker 5

Yes, good morning. Could you maybe Discuss where you think needle coke prices are in

Speaker 10

the market right now? I mean, I understand you guys aren't Really in the market buying, but if

Speaker 5

you have some sense that will be helpful. Thanks.

Speaker 3

Yes, sure. Thanks, Alex. It's been a rather volatile commodity for us over the last few years. But right now, we're seeing it in the range of about $1800 for super premium needle coke, maybe a couple of $100 below that for the more normal premium grades. So Somewhere in that range.

Speaker 3

It's pretty low on the historical trends that we've seen. A year ago, we were looking at things Approaching $3,000 a tonne. The year before that, it was down in the below $1500 a tonne. And We've trended lower lately, but we anticipate some strengthening of that as the EV market picks up The slacks from this office in the electric market.

Speaker 10

Okay, thanks. That's helpful. And then I guess kind of circling around on a question that's been asked a couple of times, but I'll maybe ask in a slightly different way. If you look at your implied utilization rate in the second half of the year, it's 50% to 60%. I think As it was originally framed, Monterrey was really going to be a first half issue and your ability to contract.

Speaker 10

I mean, do you think the entire electrode industry right now is running at 50% to 60% utilization rate. Like that seems a little low. It seems like your utilization rate is running lower than what some of the others are running at.

Speaker 4

Yes, Alex. I would point to not Going into specifics of our competitors in the market, but they've said publicly on their recent calls that in Various regions are running at or below 50% capacity utilization as well. So I think the whole electrode industry as a whole is running at a fairly low utilization rate right now.

Speaker 10

Okay. That's helpful. Thanks. And then I

Speaker 5

guess just one more if

Speaker 10

I may. I don't want to ask too many questions. But

Speaker 5

Could you maybe discuss the impact of tariffs on the U. S. Market? And then how you

Speaker 10

see that? Has is that something that

Speaker 5

you see benefiting GrafTech? Thanks.

Speaker 2

Yes. So both the U. S. Market as well as the European Union do have tariffs in place Against imports. In the case of the U.

Speaker 2

S, it's covering Chinese imports. In case of the European Union, it's both Chinese as well as Indian imports. There are various levels of tariffs depending on the size of the electrodes and the provider, but they are quite Significant. And I think they have been quite effective in limiting the import volumes from these regions. So both are quite important for GrafTech.

Speaker 10

Have you I mean, have you seen a I don't track the data unfortunately, but have we seen a kind of a material decline And Chinese imports since the tariff was put in place?

Speaker 4

Yes. I think Chinese imports into the U. S. Are Relatively lower immaterial on an overall basis. I don't know what they looked like prior to 2017 timeframe when those tariffs were put in place.

Speaker 2

Yes. But there is not much Chinese supply finding its way into the U. S. Market as a result of these tariffs. And there really has been No change in recent years on that.

Speaker 10

Okay. Sorry, I was mistaken. For some reason, I thought there have been a change in the tariff structure. I'll discuss that With you offline. All right.

Speaker 10

Thanks for the question.

Speaker 4

Thanks.

Operator

Thank you. Our last question comes from Abe Landa of Bank of America. Please go ahead.

Speaker 9

Good morning. Thanks for taking my question. Just on I kind of want to maybe update on Monterey and just I know maybe not operated as efficiently as it could be given like the lower volumes, but where you are right now, kind of all the All the noise that we saw in the Q4 of last year, I just want to verify that everything is finalized in terms of like government approvals there as well.

Speaker 3

Yes, thanks. So, yes, the Monterey site is running regular production in the same way that it was prior to the suspension. As always, we continue to operate within the required emission levels. And in addition to focusing on compliance with the We're also significantly increasing the frequency of our interactions with the regulatory agencies As well as our neighbors in the surrounding community where we've been an economic pillar of that community for over 60 years. And so I'm happy to say Plant is running the way that we need for it to and continue to comply with all of the legislative requirements.

Speaker 9

And I guess following up on some other people questions as well. It could be a little early just on more longer term LTA type of contracts. I know that's typically more 4th quarter ish timeframe, but Do you have any early indications of how those discussions are going would I imagine others some of your customers got graphite electrodes from other different sources. Are there maybe early discussions of kind of returning back to Just given that Monterrey is back up and running, etcetera, kind of recapturing some of that share?

Speaker 2

So as we have highlighted on this Call as well on the previous call. We have entered into several what we call electro service agreements, which are multiyear agreements, typically of 3 to 5 years out with several customers in both the United States and in Europe. Now they are quite different in Their structure from Galti Island obviously very different in terms of pricing, right? They are more closely tied to the current spot pricing. Now we do get a premium given The long term nature of it, so that the structure essentially is a premium over current spot price and typically includes some inflation protections for us.

Speaker 2

Now they are not yet material in terms of overall volume for 'twenty three. We don't expect they will be material in 24. But we do actually in light of the challenges we've had with Monterrey, we take great comfort that our customers Continue to be relying on offset as a reliable supplier of high quality electrode to these multiyear service agreements or ESAs That's me,

Speaker 4

Calvin. And I would just add to that as we look out to 2024, it's probably premature to start talking about specific volumes Just given the fact that the bulk of those negotiations start here at the end of Q3 and into Q4. But from our standpoint, where we sit today, The fact that as Jeremy commented, Monterrey is running well. We've rebuilt our pin stock inventory. We continue to execute on the plants at St.

Speaker 4

Mary's To get that plant up and operational as well, we fully expect to be engaged in that process As we have been in past years, absent the 2022 cycle. So we feel pretty good heading into that negotiation window.

Speaker 3

I think at the end of the day customers have and will continue to appreciate our value proposition, right? We're the only company, the only Tier 1 company and in fact, one of the only electrode producers world that makes pins at multiple sites. We've got to so we can provide an assurity of supply now that nobody else can. We have industry leading customer service both through the our technical service representatives as well as our architect product And we're present in their regions. We have not only an operating, but also a commercial presence in several regions.

Speaker 3

So we expect that to support our commercial efforts as we head into that negotiation.

Speaker 9

And should we expect during the next call, should we expect more color around that and kind of like an early look into Kind of how those negotiations are going into 2024?

Speaker 4

Yes. I think we'll have a better sense at that time and We'll be 1 quarter closer to 24 and an understanding of the macro environment as well.

Speaker 9

Thank you.

Operator

Thank you. This concludes our question and answer session. I will now hand the call back over to Mr. Kessler for closing remarks.

Speaker 2

Thank you, operator. I would like to thank everyone on this call for your interest in GrafTech, And we look forward to speaking with you next quarter. Have a good weekend.

Operator

Ladies and gentlemen, this

Powered by Quartr