GrafTech International Ltd.

Good day, and thank you for saying bye. Welcome to the Graf Tech first quarter 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. Wendy Watson, you may begin.

Good morning, and welcome to Graf Tech International's first quarter 2021 conference call. On with me today is Dave Rentoul, Graf Tech's Chief Executive Officer, Quinn Coburn, Chief Financial Officer, and Jeremy Halford, Senior Vice President, Operations and Development. Dave will begin with a review of our safety performance, current industry conditions, and our demand and production levels. Jeremy will discuss operational matters and give an update on our ESG initiatives. Quinn will cover financial details, and Dave will close with final remarks. Turning to our first slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, results, 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.graphtext.com. A replay of the call will be available on our website. I'll now turn the call over to Dave.

Again, as we all do, we'll see. As shown on the slide today, our heart and core goal is to work with the VA and deal with the VA including our paid roles, such as reach to every team member. As a co-founder of the project, our overall is zero interest with everybody who may go home simply and again. Our continued ability and We also have included on this slide the graphic we use internally to

Dave, this is Wendy. Your sound is... There appears to be a problem with your sound. And so we need to go... Back over slide three.

Okay, I'll try this.

Is this better, Wendy?

That is much better, Dave. And if you want to go through slide three again, that would be great. Thank you so much.

Thank you, Wendy. And my apologies, everyone. Good morning, everyone, and thank you for joining our first quarter earnings call. I hope you, your families, and your colleagues are all well. We begin, as we always do, with safety. As shown on slide three, our first quarter total recordable injury rate is 0.58, indicating our continuous focus on the safety of each and every team member Health and safety excellence is a core value at Graphtec. Our ultimate goal is zero injuries with every employee going home safely every day. Our team continues to be diligent and thorough in our COVID-19 controls and protocols. We have also included on this slide the graphic we use internally to indicate our constant focus on E-Q, safety, environment, quality. SEQ is a core mission for the Graf Tech organization. I'm very proud of the Graf Tech team and personally thank each of you for your continued focus and vigilance. Safety, environment, quality. Now turning to slide four. We continue to see improvements. in both pricing and capacity utilization rates. Steel industry pricing continues to increase, with most types of steel at or near all-time highs. U.S. hot-roll coil values are currently at approximately $1,500 a ton, and hot-roll coil prices in both the U.S. and Europe were up about 35% over the course of the first quarter. The global steel manufacturing utilization rate outside of China was 73% in the first quarter of 2021, compared to 72% in the fourth quarter of 2020. The U.S. steel industry utilization rate improved to 77% in the first quarter from 72% in the fourth quarter of 2020. Global steel production outside of China was approximately 216 million tons in the first quarter of 2021, compared to approximately 210 million tons in the fourth quarter of 2020, according to the World Steel Association. In our last earnings call, I pointed out that we expected graphite electrode pricing to bottom out early in 2021, and the demand for graphite electrodes was beginning to rebound. Our commercial experience to date validates the recovery of graphite electrode demand and pricing and provides us with conviction on our outlook for the second half of 2021. Graphite electrode spot prices are increasing off those trough levels, and we will realize those increases in our second half 2021 results. As a reminder, our industry lags demand recovery in the steel industry due to our position in the steel producer supply chain. As the steel industry's capacity utilization improves, we first see increasing demand for graphite electrodes, which is then followed by higher pricing for our products. Each of these movements in the graphite electrode supply chain is at a lag to the steel producer's increasing demand. As we move through the dynamics of this lag, we remain confident that the improvement in our reported non-LTA pricing will be realized in the second half of 2021 and has us well positioned for continued improvement into 2022. Turning to slide five. As I mentioned, we are seeing increased demand for our products and our commercial team remains focused on providing superior services and solutions to our valued customers in this improving environment. Our estimates for graphite electrode sales volumes under our LTAs have not changed. Turning to slide six. We are pleased with the year over year improvement we saw in our first quarter sales volumes and productions, both up 9% over first quarter of 2020. We shipped 37,000 metric tons and we produced 36,000 metric tons of graphite electrodes. Breaking down our first quarter shipments, we sold 26,000 metric tons of graphite electrodes under our long-term agreements. At an average price, of approximately $9,500 per ton and 11,000 tons of non-LTA sales at an average price of approximately $4,200 per ton. Net sales in the first quarter were 304 million. As a reminder, the first quarter is generally the seasonal low of the year. Now, as we focus on responding to the improving market demand I would like to welcome Jeremy to the call, who will discuss various operating items and our ESG effort. Jeremy?

Thanks, Dave, and good morning, everyone. In the first quarter, we maintained our strong delivery performance record, shipping 37,000 metric tons to our customers with excellent on-time performance of 95%. This level of execution helps to further strengthen our customer relationships and differentiates Graphtec from our competitors. We're continuing to prioritize operational initiatives that are focused on improving efficiencies in our manufacturing facilities, and we're staffing appropriately to meet increasing demand for our graphite electrodes. So then turning to slide seven. Our ESG efforts fit seamlessly with our focus on safety, environment, and quality, as Dave described. Our ESG steering committee, comprised of several members of our executive team, including me, Dave, and Quinn, oversees our sustainability strategy. During the first quarter, we undertook several initiatives related to our ESG strategy. We launched the process for our second annual sustainability report, which we plan to publish later this year, and are currently undergoing a rigorous materiality assessment, which will help us to continue to refine and further improve our ESG efforts. Additionally, we continue to strive to be good corporate citizens, supporting our communities and organizations wherever possible. During the quarter, We work with a local community organization in the area of our operations in Monterey, Mexico, to distribute grocery packages and cloth face masks to local families. Additionally, our Pamplona, Spain facility was ISO 14001 certified in the first quarter, and we continue to upgrade our manufacturing facilities to improve our environmental footprint. We look forward to continuing our ESG dialogue and sharing our progress with you. Now let me turn it over to Quinn, who will discuss our first quarter financial results on slide eight.

Thanks, Jeremy. We were very pleased with our first quarter results. We earned 37 cents of EPS, 155 million of adjusted EBITDA, and generated 108 million of free cash flow in the first quarter. We continue to achieve strong free cash flow conversion with 70% of first quarter's adjusted EBITDA converted to free cash flow. Turning to slide nine, We continued to strengthen our capital structure in the first quarter. We reduced our debt by an additional $150 million and entered into an amendment to our credit facility to reprice our term loan interest rate. In connection with this debt reduction and credit facility repricing, Moody's upgraded our corporate credit rating to BA3, and Standard & Poor's raised the issue level rating on our debt to BB. As a result of these transactions and upgrades, we successfully reduced our interest rate by 100 basis points annually. These actions support our continued commitment to ensure balance sheet strength and flexibility. At the end of the first quarter, our total liquidity was approximately 342 million, consisting of 96 million of cash and 246 million available under our revolving credit facility. Now turning to slide 10, the strong earnings and cash flow we delivered in the first quarter reinforces our expectation that 2021 will be another year of significant cash flow generation. Consistent with our actions in the first quarter, we plan to use the majority of that cash flow to further reduce debt. Our focus on the balance sheet and maintaining a strong capital structure provides us with significant financial, operational, and strategic flexibility, which is particularly important as we position the company to capitalize on improvements in the market. We are maintaining our full year 2021 capital expenditure outlook of $55 to $65 million. We will use these funds to support our high-quality, low-cost, global operating assets and to target high return operational improvements. In late February, we provided an outlook on our first half 2021 earnings per share and adjusted EBITDA. Based on strength of our first quarter result and adjusted EBITDA expectations have improved on a year-over-year basis to a mid single-digit decline compared to the first half of 2020. This compares to our prior estimate for a high single-digit decline. Please note that these estimates do not include any possible change in control charges that could be triggered if and when the ownership of our largest shareholder, Brookfield, actually falls below 30%. Brookfield currently owns approximately 37% of our shares. These charges could include a one-time cash charge to the company of $65 to $75 million related to our long-term incentive plan, as we have previously disclosed in our SEC filing, and a one-time non-cash charge to the company of approximately $15 million related to the acceleration of certain previously granted equity awards. Now I'll hand it back to Dave on slide 11.

Thanks, Quinn. I will wrap up with some comments on our favorable positioning in the market. Graphtec is one of the largest producers of ultra-high power graphite electrodes in the world, operating three of the largest global facilities. Graphtec electrodes are a mission-critical component to the EAF steel industry, and there is no substitute for our product. Our customers are the lowest-cost producers of steel and are some of the largest recyclers in the world, producing steel with 25% of the carbon emissions of traditional integrated steel producers. We expect the EAF steel industry growth to continue to outpace the global GDP over the long term, positioning our products for solid long-term growth. We are pleased to see that the recovery and strength of the steel industry is beginning to have a positive impact upon our business. And as we highlighted earlier, we expect to begin to benefit from those favorable trends in the second half of this year. We have a sustainable and long-term competitive advantage from our low cost structure and vertical integration into our key raw material, petroleum needle coat. Our graphite electrodes are highly engineered and require extensive process knowledge to manufacture. These services and solutions that Graf Tech provides help position both our customers and our company for a better future. Our balance sheet commitment and proven track record of high quality earnings and significant cash flow generation give us the strength to successfully manage through industry cycles. With the commitment of our people, and our significant competitive advantages, we continue to strongly believe graph tech is well positioned today and over the long term. This concludes our prepared remarks, so we'll now open the call up for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. We have our first question from the line of Kurt Woodworth.

Yeah. Hey, good morning, everyone. Hey, Kurt. Good morning, Kurt. You know, Dave, I wonder if you could – I know you're always reluctant to talk about sort of spot price dynamics between Needle Coke and UHP, but it seems like, you know, our channel checks relative to the 4,200 you booked this quarter – for non LTA is now moving significantly above that, um, you know, closer to 6,000 or even higher. Um, and we understand the needle coat market tightening a little bit as well with some of the EV pull. So, you know, just any color you can kind of give on, on how you see supply demand. Um, you know, if you can give any kind of reference points on pricing, that would be appreciated.

Sure. We can do that. Um, so I think, um, just to kind of set the stage a little bit. On the last earnings call, you'll recall, Kurt, that I referenced that we thought that pricing would bottom out somewhere in the first quarter and that we were seeing the beginnings of a demand pickup. And that... projection turned out to be correct. And having said that, please remember that the lags that I spoke to, so steel starts to see more demand. They start making more tons. Once they start making more tons, they begin to chew into their electrode inventory. And remember, we went We went into the COVID pandemic with a high electrode inventory that we spoke about almost a year and a half ago. I also commented in an earnings call that we expected by the end of Q1 that because of the improved demand that electrode inventory would begin to normalize. It has done that. And we exited Q1 with the graphite electrode in our customer base normalized. So that meant at that point in time, that people were now in balance and needing to purchase electrodes consistent with their production cycles. So as that occurs, our demand improved, and we acknowledge that. And as in any market product, shortly after demand begins to pick up, you start to see price falling at some point. All of this has happened quite as we expected. And remember that when you buy an electrode in early Q2, it's not going to get delivered until early Q3. It's a three-month process thereabouts to make an electrode. So the fact that we bottomed out in Q1 or during Q1 on pricing is reflected about what you're going to see in our performance in the second quarter with, as we acknowledged, the second half being better with pricing, the realized pricing that hits the P&L beginning to see the increase in the third and then subsequently fourth quarters. So with that in mind, that explains why we're talking about Q2 and obviously provides an indication that as to why we're still talking about mid-single-digit EBITDA changes from the first half of last year when we provided that guidance back earlier in the first quarter. So, with respect to, you know, exact numbers, obviously we had, you now know that we had $4,200 in the first quarter, which was the guidance we also provided at that time. I think from what I've described, you should be able to think about what the second quarter is going to bring, and their improvement in the third and fourth quarter. In terms of needle coke, yeah, we see that because there's an improvement in the overall electrode and steel world, that there will be positive influences there and expected to have, you know, commensurate impacts on the pricing of needle coke. I think we've spoken in the past of numbers in the $1,300 to $1,800 range in the last earnings call. And I would suggest that, you know, we would anticipate that we'll start to see things more in the top end of that range and we have procured the needle coke we need for this year and you know we'll soon be thinking about 2022 as we expect that the market for our products will continue to improve and I think we're going to have a good second half as well as into 2022. Hopefully that assists you and provides some insight, Kirk.

Yeah, no, that's helpful. And then I guess with respect to the non-LPA book, when we look across a lot of your competitors, they seem to be running at relatively high utilization rates. So it does seem like the market is definitely getting tight. Can you provide any sort of guidance on how we should think about spot volume progression or the cadence of that volume trend over the back half of the year? Thank you.

Sure. Out in the market, obviously, Graphtec has the advantage of a sizable part of its order book secured through the LTA process. Therefore, we're not selling as many spot tons as most of our competitors. But I think your view is reasonable, although I will tell you that we know that some of our competitors are still working hard to fill some of the specific plants. And it would be inappropriate for me to name those plants, but I'll go so far as to say that they're competing hard to fill some of those plants at numbers that are not in the genre that you suggested in the first part of your call. Yeah, so that's probably where I should stop it so I don't get myself in trouble with our general counsel. So, yeah, they're working hard. They are starting to fill their plants, but based upon their actions, they're not quite there yet. I think we're in a much better place that's allowing us to behave, you know, in a way that's a little more beneficial to our shareholders.

Understood. Thank you.

Your next question comes from the line of Arun Viswanathan.

Great. Thanks for taking my question. Good morning. Good morning, Arun. Yeah, I guess just going back to the last set of questions. So first off, it looks like, you know, it looks like your average price was around $8,200, and that was made up of the $4,200 on spot. I think you said $9,500 on contracts, so maybe just reiterate what you said on the LTAs as an average price. So you do see that trending up. I guess, what's the cadence we should expect there? I mean, there's been a lot of cost pressure in the market that we're seeing. Does that have any impact on pricing, or is it mainly supply-demand driven pricing? And do you have any escalators within your contracts to deal with some of that inflation? That's my first question, I guess.

So let me begin by asking Quinn to validate the pricing and numbers that were in the release.

Sure, thanks, Dave. Sure, Arun. Just to reiterate, the LTA price we realized in the first quarter was 9,500, and the non-LTA price we realized in the first quarter was 4,200. And 26,000 tons were sold under LTA, and 11,000 tons were sold under non-LTA. And then if you do the averages of that, then that's approximately 7,900 tons. per metric ton as a weighted average price of those two, of the LTA and the non-LTA. And then maybe while I'm giving some color, I can give some color on your cost question. As you mentioned, there are some pressures on cost. We had a decrease in cost in our Q1 results relative to our Q4 results. It's about a $400 decrease relative to Q4 and about a $300 decrease relative to the full year. The pressures that we're seeing on cost would be great cost. That's kind of a pressure we see globally. We have two plants in Europe. The euro is a little bit stronger. It's about 7% stronger than Europe. 2019, early 2020. So with two of our three plants in Europe, we feel some pressure there. But generally speaking, Arun, what I would say going forward is that I would expect Q2 costs to be similar to Q1. In the back half of the year, we might have a little more pressure with the rising third-party needlecoke. We'll try to manage that, and we will manage that very proactively. So generally speaking, I would see Q2 being similar, probably the back half being similar with maybe a little bit of pressure upwards from third-party needlecook.

Great. Thanks for that. And then if you can also just reiterate your priorities on cash use from here. Obviously, you've done some deleveraging. Is there any interest or potential for reinstating a larger dividend, or would you opt for buybacks as you go through the year? Thanks.

Yeah, thanks, Arun. Yeah, as we noted on our last conference call and also in our remarks, we will continue to focus and prioritize the majority of our cash flow this year for debt reduction. As I've mentioned before, absolutely, we monitor our capital allocation strategy very closely. We discuss with management every quarter. We discuss with the board of directors every quarter, and we'll continue to monitor that for future investments in terms of shifting out a little bit more towards returning capital to shareholders. But for this year, we've indicated that the majority of our cash flow will be to reduce debt.

Thanks. Your next question comes from a line of David Galagina.

Thanks for taking my question. I just wanted to ask a little bit about the – Just the change of control provision you mentioned with Brookfield. I think you said below 30%, and there are payments made by Graf Tech to Brookfield. Is that correct?

No. You got the first part of it correct. The change of control language kicks in when Brookfield moves below 30%. And there is a LTIP plan that covers a few of the employees or a number of the employees that were in place at the time that Brookfield purchased Graphtec as a retention mechanism. Those payments get made directly to those employees, not to Brookfield.

I'm sorry, those payments get made directly to, I'm still confused, they get made to the graph tech management?

Yes, they get paid to members of graph tech management that were in place at the time of the bio back in 2015.

Okay, that's what I thought. And so then related to that question, Are there any other triggers or anything else that we should think about, or do those payments just automatically happen right when it goes below that 30% threshold?

More or less. There's a slight 30-day delay, but for all intents and purposes, it's immediate. Are there any? David, to be in the spirit of full transparency, we also commented in and it was in Quinn's comments during the prepared remarks, there's also some restrictive, some stock and some options that gets accelerated to the tune of net worth of just over $15 million. But that's not a cash payment. That's a non-cash item.

Okay, understood. And then just the last part of this, are there any retention requirements or are those people that receive those payments free to take the money and leave on day one, theoretically?

There are no retention requirements. The intent of those payments was to see them through to this point, but I would share with you that Graf Tech has a solid succession planning program and there is no worries about whatever people elect to do.

Okay. Appreciate the clarity. Thanks.

Your next question comes from the line of Alex Hacking.

Good morning. I just wanted to follow up on the volume side. I mean, firstly, Dave, I just wanted to clarify that that you said that you believe customer inventory was now fully normalized. Did I hear that correctly? Yes. Okay, thanks. And then in terms of, you know, not talking about this year, but more sort of structurally, I mean, what do you think is a normalized sales volume for Graftec? And just for context, you know, back in 2018 and the beginning of 2019, You're selling about 45,000 tons a quarter. But subsequent to that, it turned out that customers had overstocked, right, which suggests that that number may be too high to think about as sort of a normalized shipment number. So any comments that you would have around that would be helpful. Thanks.

Sure, Alex. And, you know, thanks for your question and interest in our firm. So you're in a way asking me to try and, you know, obviously to predict the future and to some extent provide guidance, which I won't provide direct guidance. But what I would point out to you is that, you know, during this same period, there's been, you know, growth of the electric arc furnace industry globally. And if you think just specifically to The United States, you know, SDI is going to bring their furnace online in a number of months. I believe that, you know, North Star Blue Scope will as well. And I think if you look at the numbers over the next 12 to maximum 18 months, there's about 14 million tons of additional capacity coming online just in the United States. Then in addition to that, you know, some of the areas that had been lagging, you know, South America seems to be, particularly Brazil, despite the COVID difficulties, coming along nicely. So, you know, our previous numbers that you talked about do not, certainly do not frighten me. And I think that... you know, there's no reason that we can't get back to those kind of values going forward. Now, you know, the exact timing of that, you know, depends upon obviously still recovery, still being strong as it is, et cetera. But I'm not frightened by any prospects to get back to the values that we were at.

Okay, thanks.

Look, I think things are in our favor. Heck, the steel guys are selling $1,500 a ton of margins that they never dreamed of in their wildest dreams. So why shouldn't some of that trickle down to the graphite electrode boys?

I hope so. And then thanks for the call, Eric. And then just one other question. I don't know how much you can comment on this, but are you seeing any, you know, with the market coming back, are you seeing any pressure from electrodes coming out of China in any of your markets? Or is, you know, because there was a period of time where, you know, exports out of China was starting to emerge when, you know, prices were a lot higher than they were today. Are you seeing any of that? and any color that would also be appreciated. Thanks.

Well, sure. I mean, the, the Chinese, um, the Chinese were in the market before, uh, and admittedly, a lot of that presence was in, um, you know, uh, ladle electrodes. Um, you know, they have made some progress in the, um, UHP space. The quality still is not for the most part, uh, as good as ours. But, you know, I think it's a natural evolution for them. So I wouldn't, you know, they are a factor that we need to be cognizant of. I also remain optimistic because we still believe quite, and I think the facts support us, is that with the commitment of the Chinese government to the environment, that they're going to grow their electric arc furnace industry and easily get, you know, 200 million tons by 2025. And the evidence is there. They're on that trajectory. And, you know, we're encouraged by some of their recent moves, including, you know, allowing scrap imports. That, along with their environmental moves, tells us that They're on that trajectory, if not more. And that trajectory is going to require graphite electrodes. So I think there will be some moderating effect by the domestic improvements within China. But as I said, we have to be cognizant of China as being a competitor, and we will continue to do so.

Great. Thanks a lot.

This concludes our question and answer session. I will now hand the call back over to Mr. Ratul for closing comments.

Well, thank you very much, everyone. I'd like to take this opportunity to wish everyone on this call health and safety in the coming months. Thank you for your interest in graph tech, and we look forward to speaking with you next quarter. Thank you and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.