GrafTech International Ltd.

Good morning, ladies and gentlemen, and welcome to the Graf Tech third quarter 2023 earnings conference call and webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, November 3rd, 2023. I would now like to turn the conference over to Mr. Mike Dillon. Vice President, Investor Relations, and Corporate Communications. Please go ahead, sir.

Thank you. Good morning, and welcome to Graphic International's third quarter 2023 earnings 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, the commercial environment, sales and operational matters, Tim will review our quarterly results and other financial details, and we'll 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. 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'll now turn the call over to Marcel.

Good morning, everyone. Thank you for joining Graftech's third quarter earnings call. I will begin by summarizing three key points We will discuss in more detail on our call today. First, the global steel industry remains constrained by geopolitical conflict and economic uncertainty, which has resulted in a persistently soft commercial environment and weak demand and declining prices for graphite electrodes. As a result, our performance for the third quarter fell short of our expectations and our outlook has weakened. Second, Graphtec remains focused on managing through the near-term market disruptions while maintaining our positioning for long-term opportunities. We recognize steel industry performance and demand for graphite electrodes will be dependent on macro conditions. As such, we continue to prioritize those things that are within our control. These include proactively reducing our production volume to align with our near-term demand outlook, closely managing our operating costs, capital expenditures, and working capital levels, and making targeted investments to further improve our operational flexibility and support long-term growth. Our ability to execute these strategies is evident in the strong cash flow generated in the third quarter. Supported by these actions, we remain confident we have ample liquidity between cash on hand and borrowing availability to weather the market challenges. Third, we remain optimistic about the long-term outlook for our business and our ability to deliver shareholder value. We are taking actions that we believe will optimally position Graf Tech to benefit from longer-term industry tailwinds in our graphite electrode business. At the same time, We continue to advance our efforts toward participation in the development of a Western EV battery supply chain, and we remain excited about this opportunity. Jeremy and Tim will expand on all these points during the call today. Before I turn the call over to them, I would like to address the recent announcement that I decided to resign from my role as CEO and President of Gravtech due to family health reasons effective later this month. During my first call after joining the company, I spoke to the reasons why I was attracted to Gravtech. A set of distinctive capabilities that provide confidence in our ability to deliver shareholder value over the long term. A business that is well positioned to participate in the long-term growth of the electrode market and with a promising foundation to pursue other avenues of growth. and a team with an impressive level of know-how, energy, and dedication. I feel that all these attributes are still in place today, and I continue to believe that Gravtech has some of the industry's best assets, operated by the best people, and will get through this challenging period to remain an industry leader. We remain confident in the long-term direction of the company and the experienced management team that remains in place to execute our strategies. With that, let me turn the call over to Jeremy.

Thank you, Marcel, and good morning, everyone. As always, I'll start my comments with a brief update on our safety performance, which is a core value at Draft Tech. We are pleased that our year-to-date recordable incident rate reflects a substantial improvement from the prior year level. As I noted at the beginning of the year, Improvement in this area would be a key point of emphasis with our internal teams in 2023, and I would like to thank all of our team members for their ongoing efforts. We will remain highly diligent in this area and seek to further improve this metric as we continue working toward our ultimate goal of zero injuries. Let me now turn to the next slide for an overview of macro conditions and the commercial environment as context for our third quarter results and our outlook commentary. Steel industry production remains constrained by lower demand due to global economic uncertainty. Across the industry, there continue to be announcements of planned and unplanned outages at steel mills. At the same time, steel exports from China in 2023 are on track to reach a seven-year high as China's domestic demand for steel has not been strong enough to absorb a year-to-date 2% increase in Chinese steel production. These trends are reflected in steel industry output levels outside of China that remained below the prior year with most regions showing production decline. Looking at the numbers, on a global basis, steel production outside of China was approximately 201 million tons in the third quarter of 2023. This represented a 4% sequential decline from the second quarter. On a year-to-date basis, global steel production outside of China was down 2% year over year through the first nine months of 2023. Regarding global capacity utilization, the rate outside of China declined sequentially to 65% for the third quarter. On a regional basis, the economic performance and outlook for key regions continues to diverge. In Europe, the ongoing slowdown in industrial production, subdued market demand, and high energy costs continue to weigh on steel production. And reflecting weak macro fundamentals, the persistently low levels of economic growth within Europe are expected to continue for the foreseeable future. Two weeks ago, the World Steel Association issued their latest short-range outlook, noting they expect a 5% decline in EU steel demand for 2023, as compared to their previous projection in April of demand being flat. World Steel also reduced their 2024 steel demand forecast for the EU, by 4% compared to their April forecast. In the US, although the region is showing more resilience, steel industry trends have softened a bit. Utilization rates ticked down slightly in the third quarter to 76% and declined further in the first few weeks of the fourth quarter. In their recent outlook update, World Steel forecast a 1% decline in year-over-year steel demand in the US for 2023, compared to their previous forecast of 1% growth. They also lowered their 2024 outlook by 3%. Overall, a significant amount of global economic uncertainty remains an overhang on steel industry demand in the near term. This, in turn, has resulted in ongoing softness for graphite electrode demands. Along with the soft demand, additional competitive dynamics are having a significant impact on pricing. Specifically, Despite the current weak market environment, we continue to see a healthy level of electrode exports from certain countries, including India and China. These are typically lower-priced electrodes, and their prices have been declining further of late. For example, based on the latest reported statistics, export prices from China have fallen below $3,000 per metric ton on average. These export dynamics are having a significant impact on pricing in non-terra-protected regions, such as the Middle East, that are typically an important element of our portfolio. In addition, there can be knock-on pricing effect in tariff-protected countries, such as within the EU, as Tier 1 producers increasingly compete in these regions to support volume.

With that background, let's turn to the next slide for discussion on Graf-Tex third quarter performance. Our production volume for the third quarter was approximately 23,000 metric tons.

This resulted in a combined capacity utilization rate for our three primary electrode facilities of 47% for the third quarter compared to 49% in the second quarter. Our manufacturing operations continue to run according to our strategy of proactively managing production volume to align with our evolving demand outlook. In the third quarter, sales volume was approximately 24,000 metric tons. This represented a modest decline compared to the second quarter and fell short of the outlook we provided on the last call, reflecting the market conditions I just spoke to. Shipments for the third quarter included nearly 8,000 metric tons sold under our LTAs at a weighted average realized price of $8,650 per metric ton. and 16,500 metric tons of non-LTA sales at a weighted average realized price of $5,400 per metric ton. The weighted average price for non-LTA sales was below the second quarter level, reflecting the soft commercial environment. Net sales in the third quarter of 2023 decreased 48% compared to the third quarter of 2022. In addition to the lower sales volume and lower pricing, The ongoing shift in the mix of our business from LTA to non-LTA volumes contributed to the year-over-year decline. We expect the commercial environment and demand for graphite electrodes in the near term will remain weak. The decline in steel production and utilization rates outside of China have limited the ability of customers to significantly drive down their electrode inventory to typical levels. Given these dynamics, we anticipate our sales volume for the fourth quarter will decline modestly compared to the third quarter. To get this backdrop, we have begun the negotiation process for 2024 electrode sales and are developing a range of commercial offerings that are intended to contribute to an increase in capacity utilization. Although it's too early to project the outcome of this commercial process, we believe we provide a compelling value proposition to our customers. including a strategically positioned manufacturing footprint that provides operational flexibility to reach key steelmaking regions, being the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coat, offering access to the architect furnace productivity system and customer technical services at no incremental cost to the customer, the ability to produce connecting pins at three different locations on two continents, and Reflecting some of the targeted investments we've previously referenced, we anticipate an expansion of our product offerings as we proceed through 2024. This includes adding 800-millimeter supersized electrodes to our portfolio to serve a small but growing segment of the UHP graphite electrode market. And in addition, we expect to bring to market the industry's first carbon-neutral graphite electrode offering. As always, our focus remains on producing the highest quality graphite electrodes and meeting the needs of our customers. For these reasons, we continue to believe Graphtec will remain an industry-leading supplier of mission-critical products to the electric arc furnace industry, the fastest-growing segment of the global steel supply chain. Let me now turn it over to Tim to cover the rest of our financial details.

Thanks, Jeremy. For the third quarter, we had a net loss of $23 million, or $0.09 per share. Adjusted EBITDA was $1 million compared to $129 million in the third quarter of 2022. The decline reflected lower sales volume, higher year-over-year costs on a per-measure basis, the continued shift in the mix of our business towards non-LTA volumes, and lower pricing. As Jeremy spoke to a number of these factors in his remarks, I'll expand my comments on costs. We provide a reconciliation of our cash cost per metric ton in the earnings documents posted on our website. However, let me provide some additional color. Reflecting the full year impact of raw material, energy, freight cost increases that occurred throughout 2022, we continue to sell higher priced inventory during the third quarter of 2023. In addition, during the quarter, our cash costs included approximately $18 million of fixed costs that otherwise would have been inventoried if we were operating at normal production levels. This compared to approximately 10 million of such costs recognized in the second quarter. The sequential increase was driven by two factors. First, a modest quarter over quarter reduction in graphite electrode production. Second, and more significantly, was the impact of temporarily idling needle coat production at our seizure facility throughout the third quarter. As we previously noted, we have been taking proactive measures to align our production with our current demand outlook. The temporary idling of production at Cedric was consistent with this approach. These actions have provided meaningful benefit to our working capital levels and cash flows. Factoring all of this in, our cash clogs per metric ton were approximately $5,860 for the third quarter of 2023. This exceeded our projection for the third quarter, reflecting the impact of the previously discussed volume shortfall, as underlying costs coming from inventory were largely in line with our expectations. Looking ahead, we expect our cash costs per metric ton in the fourth quarter of 2023 will be below the recognized level in the third quarter of this year, but will be above our previous expectations. Market pricing for our key elements are cost structure, including decanoil, energy, coal tar pitch and freight continue to moderate as expected. However, the decline in our volume outlook has a two-pronged effect on the cash clocks for metric ton that will be recognized in the fourth quarter. First, with the lower sales volume, this extends the time it takes to work through the higher priced inventory on our balance sheet. Second, with the corresponding decline in the production volume, we will continue to recognize in the current period fixed costs that otherwise would be inventory if operating at normal production levels. Specifically, as it relates to C-DRIFT, we expect to restart the facility in the fourth quarter, which would result in a modest sequential reduction in the level of fixed costs being recognized on an accelerated basis. Turning to cash flow. For the third quarter, we generated $51 million of cash from operating activities and adjusted free cash flow of $43 million. This cash flow performance was supported by our ongoing focus of managing our costs, capital expenditures, and working capital levels. Most significantly, this included a $50 million reduction in inventory during the quarter. We continue to expect adjusted free cash flow to be positive for 2023 on a full-year basis. As we look further ahead, from a cost and cash flow perspective, we expect market pricing to decline in the medium to longer term for certain key elements of our cost structure. We will continue our current disciplined approach to managing costs and working capital. These actions have resulted in a 12% reduction in our period costs for the first nine months of 2023 compared to the same period in the prior year. In addition, since the end of 2022, we have reduced our working capital levels by $65 million as of the end of the third quarter. Our decisions and actions in this area continue to be informed by three key and complementary objectives. One, our focus on preserving cash and maintaining sufficient liquidity as we navigate the current market uncertainties. Two, while doing so, continuing to ensure that we remain well-positioned from a working capital perspective to meet the evolving needs of our customers. And third, continuing to make targeted investments to support our ability to capitalize on the long-term growth opportunities. We are proud of the agility of our teams that have displayed in balancing these essential priorities and believe these efforts have positioned us well to benefit as the markets recover. I want to thank the entire GraphTech team for their continued efforts and commitment. Moving to the next slide. Our net set to adjusted EBITDA ratio was 6.4 times as of September 30th, compared to 1.5 times at the end of 2022, reflecting a year-over-year decline in EBITDA for the first nine months of 2023. As of September 30th, our liquidity was $285 million, consisting of $173 million of cash on hand and $112 million of availability under a revolving credit facility. This reflects the financial covenant that limits our borrowing availability under our revolver in certain circumstances. However, more importantly, we do not anticipate the need to borrow against revolver in 2023. Further, we remain confident we have ample liquidity between cash on hand and borrowing availability to achieve the priorities I just spoke to. Turning to the next slide, let me now expand on the actions we are taking and the investments we are making to improve our strategic positioning for the long term. Decarbonization efforts are driving a transition in steel, with electric arc furnace steelmaking continuing to increase its share of total steel production. With this trend of EIF share growth expected to continue, we anticipate demand for graphite electrodes to experience accelerating growth over the longer term. We estimate that planned EIF capacity additions based on steel producer announcements, along with production increases at existing EIF plants, has the potential to bring an incremental 200,000 metric tons of annual graphite electrode demand outside of China by 2030. This would represent nearly a 30% increase to the level of global annual graphite electrode demand in 2022 outside of China of approximately 680,000 metric tons. In addition, the demand for petroleum needle coat, 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 the anode portion of lithium ion batteries used in the growing electric vehicle market. Based on analyst estimates regarding projected growth in electric vehicle sales and battery pack sizes, we estimate this could result in global needle coat demand for use in EV applications increasing at a compound angel growth rate of over 20% through 2030. The growing demand for needle coat should result in elevated pricing for this important precursor material. Given the high historical correlation between petroleum needle coat pricing and graphite electrode pricing, this trend should translate to higher market pricing for electrodes. Reflecting our sustainable competitive advantages and the key elements of our customer value proposition, which Jeremy spoke to, we are well positioned to capitalize on these favorable industry tailwinds. We also see potential long-term value creation opportunity by participating in the anticipated growth of the EV battery market. To that end, we continue to study participation via two potential avenues. First, by leveraging our assets and technical know-how in the area of petroleum needle coat production, given the expected demand growth for this DRAM material. Second, by leveraging our graphitization resources and expertise to produce synthetic graphite material for battery NOs. While we have not yet made any firm commitments, the pace of our activity in both areas continue to accelerate. In addition, we remain encouraged by the external market developments in the space, which continue to evolve rapidly. As an example, last month, China, the country that currently supplies nearly all the anode material for the world, announced a curve on exports of synthetic graphite. While it's too early to speculate on the ultimate impact this measure will have, we view this as another positive reinforcement of the importance this key raw material for battery anode production. Further, this also reinforces the importance of the industry building a robust supply chain outside of China as we move forward. We are excited about the opportunity to participate in the development of a Western EV battery supply chain as we possess key assets, resources, and know-how to support this industry. We look forward to sharing more as we can. In closing, our optimism remains intact. We are an industry-leading provider of the consumable product that is mission-critical for the growing electric arc furnace method of steelmaking. We possess a distinct set of assets, capabilities, and competitive advantages. Lastly, as a result of our disciplined capital allocation strategy, we have a strong balance sheet and ample liquidity that navigate the near term. For these reasons, we are confident in our ability to deliver shareholder value moving forward. This concludes our prepared remarks. We'll now open the call for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star, followed by the number two. If you are using a speakerphone, please lift your handset before pressing any key. We have our first question coming from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. Maybe I can just start. Good morning. Maybe I can just start with the electrode market outlook. It sounded like you had noted that there was continued price pressure and maybe some spot pricing data points around $3,000 a ton. Did I hear that correctly? And I guess, what do you expect as far as how that evolves? I mean, is that mainly just weak seasonality and weakness in the China market that's causing those declines? And do you see that maybe reversing and going back higher in early 24? Or how do you think about electrode pricing from here?

Yeah, so as we mentioned, Arun, the Q3 non-LTA pricing was weaker than Q2, driven by the softer commercial environment. And we also noted that in the near term, as we referenced from the World Steel Association statistics, We expect continued market weakness, and with that, continued competitive pricing dynamics. With specific regard to the $3,000 Chinese pricing, that, of course, affects us much more in non-terra-protected regions than it does in the terra-protected regions that we referenced. Beyond that, given that we're in the middle of our negotiation season with the customers, it's probably a little too soon to provide any more pricing guidance.

Okay, and what about needle coke then? So could you just provide us an update on where needle coke prices are and what do you expect on that side as well?

Yeah, so looking at the import-export data, we've seen recent spot pricing for super premium needle coke in the range of about $1,700 a ton. There are some transactions below that, but that's generally a number that we're seeing. And this does reflect a little bit of further softening compared to what we indicated on the last call of around $1,800 for the higher end blend. But one of the things that I think is important to note is that pricing here can be highly volatile. In the past year even, we've seen pricing as high as $3,000 last year and below $1,500 the year before that. Really, we think the recent declines in needlecoat pricing are indicative of recent softness in the electrode market not being fully offset by the growth that's coming from the EV market. Longer term, as the EV demand materializes, I continue to expect the petroleum needlecoat market to further tighten, leading to higher prices.

Yeah, and that's a good segue to another question I had, which was, Do you think that there's a greater sense of urgency now at Graphtec to pursue further opportunities for needle coke development and graphite development into the EV market, especially since China has placed some restrictions on their exports of graphite? Wouldn't that combine with the market softness that you're seeing in electrodes really incentivize graph tech to really make some more investments on that side and maybe accelerate your opportunities into delivering needle coke into EVs?

You know, I don't know that we needed any more motivation to get into that room. This is something that we've been studying for quite a while, and we feel good about where we're at, right? The industry is currently in the very early stages of its development of the Western supply chain, And as part of that, we've been very active, proactively testing our needle coke with third parties and potential customers to make sure that it meets the quality standards and specifications that are required. With regard to concerns about the China announcement, I think Tim captured a lot of that. It's too soon to know exactly what this is going to mean, but we do think at a minimum, It's a positive reinforcement of the importance of synthetic graphite for battery inlet production. More importantly, it reinforces the importance of building a robust Western supply chain rather than depending on China. If this was not already apparent to OEMs and cell manufacturers before, it's certainly top of mind now.

I would add to that a room. I think the EV opportunity is an exciting opportunity that we'll continue to explore and do the work we need to, as Jeremy has outlined. But we still have a strong conviction around the core business of graphite electrodes and what that market will look like. Obviously, conditions aren't great right now. It's a cyclical business, and we're in a bit of a downstroke as we sit here today. But we've seen pricing move very quickly. We've seen demand pick up very quickly. any sort of material improvement in the macroeconomic environment, whether that's in Europe, Chinese steel production, the overall Chinese economy, can have a pretty sudden and swift movement for the core business, which, again, short-term, we see some challenges outlook-wise, but medium to longer term, we still have full conviction in the business as it sits here today.

Right. And how much of your production do you think you could – you know, divert to the EV market. And, you know, obviously, I would imagine that would also include, you know, maybe an expansion at C-Drift. Could you just address those issues as well? Thanks.

Yeah, so, you know, one of the things that makes GraphTech an attractive partner in this space is that we really do have almost dual-use assets. the same assets that we utilize to make needle coke for graphite electrode production can be used to make needle coke for anode production. Similarly, the graphitization assets that we use to make our electrodes can also be redeployed to make anode materials. And so I don't have a real percentage to offer a room more. I think the relevant point is that our assets truly are dual use and we can select the most economically favorable for the use of those assets. I was just going to add that with specific regard to your question about C-Drift, you'll recall that last quarter we discussed having filed a permit for the potential expansion of C-Drift That permit is making its way through the process. I think we said last quarter that we anticipated about a 12-month turnaround time on that. So by the time this market really starts gaining steam here domestically, we expect to be fully permitted and able to make those investments if we make the decision to do so.

Thanks.

Thank you. Your next question comes from the line of Bill Peterson from J.P. Morgan. Please go ahead.

Yeah. Hi. Good morning. Thanks for taking the questions. And, Marcela, best wishes as you move ahead here. On utilization, so we saw it come down again quarter on quarter, you know, given the demand environment. I guess, can you provide some color on the puts and takes here? Is Mexico running stronger than Europe? And how does your utilization, how do you see that comparing to the industry average? And just kind of related to the stocking environment, where do inventories sit at your customer sites relative to norms, which I think is around two or three months?

Yeah, so let me start with the customer inventory levels, and then I'll come back around to talk about the utilization rates. You know, the The sequential decline in global steel production and the constrained industry utilization rates have really limited the ability of customers to significantly drive down their electrode inventory to typical levels. For perspective, it varies across the industry, but we generally estimate that customers maintain about three months of electrode inventory on average. Based on the recent channel checks, we believe it's currently averaging a little bit closer to four months, which is not significantly different from where it was a quarter ago, although one of the things we're starting to see, Bill, is a divergence by region. In Europe, we've seen inventory levels decrease and are actually now below the average that I mentioned. This is really driven by customers continuing to work through the existing inventory, albeit at lower utilization rates, and many customers displaying a continued reluctance to purchase additional electrodes due to ongoing economic uncertainty there. Conversely, in the U.S., inventory levels are above the average, and frankly, we think that some of this is partly attributable to some U.S.-based steelmakers locking in larger commitments a year ago due to uncertainties related to our situation. Additionally, in the U.S., we are seeing tempered utilization rates, which, while above the global average, are still below the recent history, and that's preventing them from burning through some of these assets. excess inventory that they have. With specific regard to the utilization rates, we do certainly try to utilize assets closest to where the demand is, and that does drive utilization rates in North America higher than what we're seeing in Europe. At 47% global utilization rates, that does put us pretty much on par with what we're seeing out of the tier one competitors in the rest of the world, with the exception that we do think that their utilization rates in North America are currently running higher than ours for those same market dynamics that I just talked about.

Okay, that's good, Paul. It dovetails in the question on the competitive landscape. You talked about competitors in China and India and some of the direct impacts, I guess, Middle East and indirect Europe, but I guess drilling down to your core U.S. and EU markets, hoping to get some further color, specifically on the U.S., we're hearing at least one India-based competitor looking to gain share in the U.S. market. And then in Europe, I mean, are you seeing signs of China and India-based competitors there? You know, I guess, like, where do you see your differentiation here? I guess how should we, you know, how should we think about that vis-a-vis the suppliers coming from these regions?

Yeah, no, that's a good question. And again, the market certainly is competitive. I think the first thing that we have to keep in mind, both in the US and Europe, you've got trade protections in place against the Chinese imports in both markets and then Indian imports into Europe. You know, albeit given the situation that occurred in Monterey probably opened the door for customers to potentially qualify new suppliers, Indian suppliers in particular, we still feel confident about what we deliver in terms of a total value proposition to our customers, not just lowest cost supply, but high quality electrodes, the ancillary services that we provide in terms of furnace monitoring in our CPS group. So all of those things think we feel position us very well from a competitive standpoint in both of those markets. You know, the rest of the world, certainly it's a much more cost-oriented and price-oriented market than North America and Europe. And that's the pressure that we're seeing now in the marketplace.

Okay. Yeah, thanks for that, Collar. And then I guess lastly on this challenging environment, we still saw a strong working capital unwind How should we think about a similar release in the fourth quarter? And then I guess maybe more importantly, you know, can you talk about the puts and takes as we move into 2024? You know, assuming maybe demand improves at least maybe, well, later in the year, I guess specifically, you know, under the working capital, how should we think about the cadence of payables and inventory days as shipments hopefully begin improving again?

Yeah, so as I think about Q4, right, we did make the comment that we expect to be free cash flow positive for the year. I think we expect some further releases of working capital in the fourth quarter. Jeremy and team have done a really good job of bringing inventory down. There's probably still some opportunities for that to come down further. As we noted also, we're restarting C-DRIP here later in the fourth quarter, so we're still working down existing needle coke inventories. from where they are today. Still will be some release of working capital going forward, but I'd also comment that we're not taking them down to the levels beyond what we think is necessary to fulfill customer demand for next year. As we start to look out, we want to make sure that we have a manageable level of inventory on hand. Certainly, as production ramp up next year, you have some additional buying and procurement activities that go on, and you also have a build of your receivables base. So there will be a little bit of use of working capital that I would foresee in 2024.

Okay, thanks.

Thanks again.

Thank you. Our next question comes from the line of Alex Hacking from Citi. Please go ahead.

Yeah, hi. Morning, and thanks for the call. So, not sure if you can answer this, but on the cost side, you know, cash costs right now is in the high 5,000s. As we look out to next year, you know, in the second half of the year, if we're back to a more normalized utilization rate, you know, 70% or something, with the best information that you have today, like, where would that cash cost be? Like, I assume it's somewhere in the 4,000s, but I don't know if it's High $4,000, low $4,000, any color would be appreciated. Thank you.

Yeah, thanks for the question, Alex. And I'll start by saying it's probably a little premature for us to be providing kind of detailed guidance or outlook on 2024. Just given the fact that the commentary Jeremy provided around where we're at in the commercial negotiation process, that process obviously will inform our production capital and cost programs for the next fiscal year or so. What I will say though, directionally speaking, is we are a heavy fixed cost business. Any incremental improvement in our overall utilization rate of our plants will bring down our costs meaningfully, as well as if you think about the underlying raw material costs, energy, things like that, we've commented on, those are continuing to moderate as we've expected and would expect significant improvement of those elements of our cost structure heading into next year. We'll be through most of the inventory that's sitting on our balance sheet that's high priced, so we'll be in a much better cost position as we look out to next year. The other thing, the only other comment I would make just on the cost today sitting in that high five numbers I quoted, don't forget in there you've got about $375 of seed drift cost that we're carrying that doesn't have any corresponding production associated with it. as we restart Cedric, you naturally have those costs come out of the system as well.

Okay, thanks. Makes sense. And then, just to clarify, I guess, on earlier comments, it sounds like you're hoping for a higher utilization rate in the first half of next year compared to where we've been in the second half of this year. Is that fair?

Yeah, again, without getting into specific kind of guidance, right, just given where we're at from the commercial side, what I can say is we are entering this year's negotiation season with the opportunity to lock in significant volumes with our customers. We didn't have that opportunity because of monitoring a year ago, but we're in that position today. meaningfully reduced kind of the operational risk associated with Monterey during the current year and Jeremy commented on our ability to produce pins at multiple locations now. So we feel really good about the position we're starting from on top of the fact, again, broadening our commercial offerings to our customers. We think we present a compelling value proposition beyond just quality electrodes. So all of those things would lead us to be in a much stronger commercial position with the backdrop of the current macro environment.

Okay, thanks. And I guess just one final question, if I may. This is probably a dumb question, but I think in your prepared comments you talked about a carbon-neutral offering. I guess how does that work in a product that's effectively made of carbon? Thanks.

Yeah, so fair enough. That's a good question, Alex. You know, when we say carbon-neutral, right, we're really talking about CO2 equivalents, right? There's carbon in trees and everything else that we want more of. But the carbon-neutral electrode was really born out of a trend towards more environmentally responsible steelmaking. And our ability to do this is really facilitated by some of the investments that we've made over the past few years to limit our scope one, two, and three emissions. These are investments that we've made in assets and systems to reduce our on-site generation of CO2 and sourcing portions of our power from carbon-free sources now. So we've been able to significantly drive down our product carbon footprint, and for any CO2-equivalent emissions that we can't eliminate, we'll buy offsets for. And so this gives us an opportunity to lead the market in the introduction of a product like this. The product will, of course, be priced at a premium, and as a result, won't be for everybody. But we do think that this is another step towards differentiating ourselves from some of our more price-focused competitors that we talked about.

Okay, thanks. Makes sense. Thanks for the call. Thanks.

Thank you. Our next question comes from the line of Sophia Danziger from RBC Capital Markets. Please go ahead.

Morning.

Morning. Thanks for taking my question. The first one I wanted to follow up on, on an earlier question that was asked by Bill here. Regarding the non-tariff-protective regions flooding the market, you know, recognizing cheaper exports and how they've impacted pricing power, you spoke a little bit about the differentiation of your product, and I think that's a big part of the value proposition you've spoken about in the past. Maybe you can help us walk through a little further how we could think about that differentiation today. Is it not being valued the same by the market given some of the pricing pressure we're seeing here now and slowdown of LTAs potentially on a go forward?

Certainly, you know, I would start by saying not all customers are created equal, right? And people have different concerns. And frankly, certain mills run differently than other mills in terms of the stresses and strains they put on the product. So certain markets are able to take lower quality electrodes versus what are otherwise favored both in North America and in Europe in many respects. But customers ultimately will make a decision around consumption rates versus ultimately the price that they have to pay for an electrode and what's being delivered. I would say in those markets today where they're running at lower than kind of prime prices, Utilization rates, they're not necessarily compensating for the higher quality, the lower consumption rates, and what we think is the value proposition of our product. But those markets where that is valued, we certainly are getting that premium.

Got it. And another point here in Tim's prepared remarks, you know, a focus on understanding. So for the third quarter, and just to clarify, for the entire third quarter, C-drift was idled. Is it still idled, you know, today on the point of this call? I think an earlier comment noted hopefully restarting it in the back of the fourth quarter here, just recognizing in the start of November. So I want to think about some of that. I know, you know, slide 10 here and many slides in the past focused on thinking about the EV tailwind uplift and sort of thinking about the go-forward landscape. Was that not something you considered using the CGF needle coat production this past quarter to help offset some sales pressure in the electrodes?

Yeah, so let me start by talking about – so CGF was – was down for the entire third quarter. As we sit here today, it is not restarted yet, but we're in the process of preparing Cedric to restart here in the fourth quarter. I'm going to let Jerry talk a little bit about kind of where we're at and what our thinking was on the Cedric Beetle Coke into that market.

Yeah, Sophia, I think the key point on that is that if we were – a year and a half to two years down the road, exactly what you said would have been the path that we would have gone down. Unfortunately, the battery and the value chain in the West is still undeveloped. It's still in the very early stages of that development. And so the things that we've been doing with needle coke have been focused primarily on proactively testing that needle coke with third parties and potential customers. and making sure that we're able to participate in that industry or that value stream as it develops. But in the Western world, it's still a little bit premature for that to have happened, which is really what led to the decision to idle Cedris for a period of time, just given the supply-demand economics.

Understood. Just last one for me here. Can you help us understand what else you can do near term to think about some of the cash preservation and the free cash we saw this quarter? We've mentioned C-GIST idling. We've mentioned some of the revolver availability. You know, past those two levers, what else can we be considering and thinking about near term here if the demand environment continues to stay weak?

Yeah, so, I mean, I think... Again, to my comments around 2024 and looking out forward, it's a little premature for us to sit here and say what we will or can or have to do in response to that. I think we really do need to let the commercial season kind of work through its process. And that, again, will inform the way we approach next year. What we can do in the near term is remain kind of the rigorous focus that we've had over the last 12 months on cost whether it's period costs, SG&A, you know, our capital spending, you know, how we manage our working capital levels. I talked a little bit about the release of some additional working capital as we go through the fourth quarter. So all of those things will continue to happen. And I think just organizationally, without having the backdrop of the LTAs behind us, right, we are a much more cost-focused and oriented business going forward. So, you know, we'll let the commercial exercise play out, and that'll inform how we approach 2024 from

Great.

Thanks for taking my questions.

Thank you.

Our next question comes from the line of Abe Landa from Bank of America. Please go ahead.

Good morning. Thank you for taking some of my questions. A little bit more on these negotiations. Kind of on this, the LTA or that, or even your ESA negotiations for next year. I know you can't really comment on pricing, but can you maybe just talk about from a volume perspective, are you kind of seeing customers entering into LTAs or ESAs in the U.S. and Europe kind of at a normal cadence like you've seen in the past, or is there something maybe different this time around?

Yeah, so maybe just to be sure we're saying the same thing. Typically when we talk about LTAs or ESAs, we're talking about multi-year agreements. The negotiation process that Tim and I have both referenced is really a semi-annual or annual negotiation that takes place this time every year. So assuming you're talking about the negotiations that are taking place right now, the process is playing out largely the way that we expect it to. I would say that the timing is maybe a little bit later a little bit later in the year than it has been in years past, in part because of some of that economic uncertainty that I talked about in the prepared remarks, as everybody's still trying to get a read on where the market's headed in total. By and large, the process is playing out the way that we expect it to. The timing is delayed a small amount. But nothing unexpected and nothing extraordinary.

And, Abe, I would just add on the LTA front. We talked a little bit about this in prior calls. These continue to be an offering that we think we're uniquely positioned, given the vertical integration with C-DRIP, to offer to our customers. And they are one of the many kind of commercial offerings that we offer and options that we provide. I will say that, you know, from our standpoint, given what we view as a somewhat depressed market or the bottom of the cycle, if you will, you know, we're not overly aggressively pursuing these or locking in pricing at these levels. So, you know, Jeremy's commentary about the commercial process and what's going on right now for 2024 is spot on. But these, again, remain as options that we have, you know, in our toolkit, if you will.

That's helpful, Carlos. Thank you.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Flanagan for any closing remarks.

Thank you, Laura. I'd like to thank everyone on this call for your interesting graph deck. We look forward to speaking with you again next quarter. Have a good day.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.