GrafTech International Ltd.

Good morning, ladies and gentlemen, and welcome to the GraphTech second quarter 2024 earnings conference call-in webcast. At this time, all lines are in 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, July 26, 2024. I would like now to turn the conference over to Mike Dillon. Please, go ahead.

Thank you, Ace.

Good morning, and welcome to Graph Tech International's second quarter 2024 earnings call. On with me today are Tim Flanagan, Chief Executive Officer, Jeremy Halford, Chief Operating Officer, and Catherine Delgado, Interim Chief Financial Officer. Tim will begin with opening comments. Jeremy will then discuss safety, the commercial environment, sales, and operational matters. Catherine will review our quarterly results and other financial details, and Tim will close with comments on our outlook. We will then open the call to questions. 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 Tim.

Thanks, Mike, and good morning. And thank you for joining Graftech's second quarter earnings call. Let me start by saying that we operate in a cyclical industry and we find ourselves in a challenging part of the cycle. for our business and more broadly for our industry. Graphite electrode demand remains weak. Industry-wide capacity utilization rates remain low and consequently cost per ton are high. At the same time, pricing discipline in the inventory has been somewhat sacrificed to support volume. Against this backdrop, Graphtec and we believe most others in our industry are operating their electrode business at losses or low margins. We think these dynamics are well understood. We also believe it's well understood that these dynamics are not sustainable. We don't control all of these underlying forces, particularly the macro or the actions taken by others, but we do control our response and our actions. We are engaging with our customers with a relentless focus on meeting their needs. We are adding to our customer value proposition. We are investing in technical capabilities and offerings. We are aggressively cutting costs without compromising quality, safety, or the environment. We are managing our working capital and capital expenditure levels. We've reduced our production capacity. We are proactively managing production to balance supply and demand. And we are actively pursuing opportunities to diversify our business and support long-term growth. At the end of the day, we are focused on controlling the controllable. We set out a plan at the beginning of the year to do just that, and we're executing against that plan. I'm proud of our team's efforts and thank them for their continued dedication. All this said, we recognize that this won't translate into immediate recovery from a financial performance perspective. That wasn't our expectation, nor should it be yours. But they're the right actions to help us navigate the current challenges. Importantly, we participate in an industry that has many long-term and sustainable tailwinds. And it's very easy to lose sight of that when you're on the downside of a cycle. But cyclical downturns eventually come to an end, and the long-term growth opportunities in front of us are very real. During our comments today, we'll expand on all of these concepts and why we believe we're taking the right actions to manage the current environment and preserve our long-term flexibility. Let me begin with an update on some of our key initiatives starting in the commercial area. As I mentioned on our last call, we are instilling a renewed focus on a customer-first mantra, as meeting the needs of our customers must be central to everything we do. We continue to execute our customer engagement strategy, reinforcing the importance of our relationship with our customer and the investments we're making on our customer value proposition to further differentiate Graphtec from our competitors. For example, our initiative to expand our product offering by adding an 800 millimeter supersized electrode to our portfolio remains on track, with initial customer trials expected to occur later this quarter. We've expanded the breadth of our architect system as part of building upon our best in class technical service capabilities. We also continue to expand our first principles understanding of graphite electrodes, building on more than 135 year legacy of research and development of graphite and carbon based solutions. We've invested in our pin production capabilities and are the only graphite electrode producer with the capability to produce connecting pins on two different continents. In addition, we're building up our connecting pin inventory levels and we are on track to have 12 months of pin inventory on hand by the end of this year. All of these examples demonstrate the investments we are making to support our ability to meet the needs of our customers now and into the future. And as demonstrated by the feedback I'm receiving from our customers, including a number of interactions which have taken place in recent weeks, our investments in these areas are resonating. Our customer engagement efforts coupled with our compelling value proposition contributed to a 6% sequential improvement in our sales volume for the second quarter. Further, we continue to expect sales volume growth for the full year compared to 2023 as we continue to regain lost market share. But more importantly, our customer-centric mindset is all about the long term. It's about strengthening relationships with existing customers while fostering new relationships with prospective customers that are mutually beneficial for years to come. To that point, as we mentioned on our last call, We are pleased to have our longstanding and our largest LTA arbitration behind us, removing a substantial risk to our financial position. And more importantly, it allows us to focus our energy on the commercial relationship with this customer. Beyond commercial, let me highlight a few accomplishments across other areas of our business. In operations, our facilities continue to run well as they execute our production plans. And we are doing this safely, as our total reportable incident rate remains significantly low the prior year level. Ultimately, this is the most important thing we do, and I commend the team for their ongoing commitment to safety. Our initiatives to address key elements of our cost structure are also progressing well. During the second quarter, we safely and thoughtfully wound down the production activities at St. Mary's. In addition, we have completed the activities related to the reduction in our overhead structure. Overall, we are on track to achieve the projected $25 million of annualized cost savings from these initiatives. In addition, the other actions we have taken to reduce our variable costs and control overall spending levels are already paying off. We saw a further sequential decline in our cash costs on a per metric ton basis in the second quarter and have seen an 18% reduction in this metric in the first half of 2024 compared to the first half of 2023. And we remain on track to achieve a mid-teen percentage point decline in our full year cash costs on a per metric ton basis compared to 2023. In the EV space, we continue to progress our capabilities and to participate in the growing demand for petroleum needle coke and synthetic graphite for anodes for lithium ion batteries. During the second quarter, we received regulatory approval for the permit application we filed last year related to a potential expansion of Cedris production capacity. And at the same time, we're making investments within our R&D function, including pilot scale assets in our technical center. This will advance our capabilities as it relates to anode material. This remains a dynamic and exciting opportunity with our assets and expertise positioning as well to participate in this demand growth. In the area of sustainability, we continue to make good progress on our initiatives. Earlier this month, we published our latest sustainability report, encourage everyone to take a look at it. We continue to be good stewards in the communities in which we operate, both from an environmental perspective, but also having a positive impact through our community engagement efforts. In summary, in light of the challenging near-term industry dynamics, we set out a plan and we're executing against it. We believe these are right steps to position Graphtec to benefit as the global steel market rebounds. Longer term as decarbonization efforts further drive a shift to electric arc furnace steelmaking and higher graphite electrode demand, we are poised to capitalize on this anticipated growth. I'll expand later in our prepared remarks. Overall, we're proud of our recent accomplishments and remain confident in emerging from this period as a stronger Graphtec. Let me turn it over to Jeremy to provide more color on the current state of the industry and our commercial performance.

Thank you, Tim, and good morning, everyone. Before I provide an industry update, I'll start by briefly expanding on Tim's comment about our safety performance. Safety is a core value at Graphtec. and with a year-to-date recordable incident rate that shows significant improvement over our solid performance in 2023, we are pleased with the ongoing momentum. Sending our employees home safely at the end of every day is our most important priority, and I would like to join Tim in commending all of our team members for their focus on this objective.

Let me now turn to the next slide to discuss the commercial environment.

As Tim indicated, We operate in a cyclical industry and currently find ourselves in a challenging part of the cycle, reflecting a constrained global steel industry. Earlier this week, the World Steel Association published their most recent steel production statistics. On a global basis, steel production outside of China was approximately 212 million tons in the second quarter of 2024, which was essentially flat for the prior year. The global steel capacity utilization rate outside of China also remained flat at 69%. Looking at some of our key commercial regions, for North America, steel production was down 5% in the second quarter on a year-over-year basis, neglecting a slight dip in what has been a relatively stable steel region. Steel output in the EU increased 3%, although it remains well below historical production and utilization rates for that region. These dynamics within the global steel industry have in turn resulted in persistent challenges in the commercial environment for graphite electrodes. Specifically, industry-wide demand for graphite electrodes has remained weak, with challenging pricing dynamics persisting in most regions. To expand on pricing, the graphite electrode industry continues to suffer from low-capacity utilization. Despite the weak demand environment, we continue to see a healthy level of electrode exports from certain countries, including India and China, into non-terra-protected regions such as the Middle East. These are typically lower-priced electrodes with prices declining further of late. As we've discussed in the past, With these export dynamics, we see a knock-on pricing effect in tariff-protected countries, such as those within the EU, as Tier 1 competitors have continued to lower prices in these regions to support volume. As we noted last quarter, we're also seeing this dynamic play out in the U.S., with prices softening further of late, all of which represent challenges we must manage in the near term.

With that background, let's turn to the next slide for more details on our results.

Production volume in the second quarter of 2024 was 27,000 metric tons, which resulted in our capacity utilization rate increasing to 60%. Our sales volume was nearly 26,000 metric tons, which was above our stated outlook for the quarter. Shipments for the second quarter of 2024 included 23,000 metric tons of non-LTA sales at a weighted average realized price of approximately $4,300 per metric ton. and approximately 3,000 metric tons sold under our LTAs at a weighted average realized price of approximately $8,300 per metric ton. Expanding on our weighted average price for non-LTA sales, this represented a 23% year-over-year decline and a sequential decline from the first quarter of approximately 2%. Net sales in the second quarter decreased 26% compared to the second quarter of 2023, driven by the lower pricing, along with the ongoing shift in the mix of our business from LTA to non-LTA volume. Looking ahead, for the reasons already mentioned, we expect that industry-wide demand for graphite electrodes in the near term will remain weak and pricing pressures will persist. In response, we remain selective in the commercial opportunities we're choosing to pursue, with a focus on competing responsibly. We expect our sales volume in the third quarter of 2024 to be broadly in line with sales volume in the second quarter of 2024. Further, we continue to expect a modest year-over-year improvement in sales for the full year. Longer term, as the global steel market rebounds and the shift to electric arc furnace steelmaking continues, this will lead to an improved commercial environment for the graphite electrode industry. Graph Tech remains well positioned to capitalize as the electrode demand recovers. Our customer value proposition remains intact and includes a strategically positioned manufacturing footprint that provides operational flexibility and reach to key steelmaking regions. Being the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke, best-in-class customer technical services and solutions that are offered to customers at no incremental cost, and a focus on continually expanding our commercial and product offerings, some of which Tim spoke to earlier. Overall, we believe we provide a compelling value proposition to our customers, and we will compete on more than just price. Let me now turn it over to Catherine to cover the rest of our financial details.

Thank you, Jeremy. For the second quarter of 2024, we had a net loss of $15 million for $0.06 per share. Adjusted EBITDA was $14 million in the second quarter compared to adjusted EBITDA of $26 million in the second quarter of 2023. This decline reflected lower weighted average pricing and a continued shift in the mix of our business toward non-LCA volume. These factors were partially offset by an 18% year-over-year reduction in cash costs on a per metric ton basis. In addition, second quarter results included a $9 million benefit related to the final award in a long-standing LTA arbitration. And as this represented a reimbursement of legal fees and other related expenses, it was recorded as a reduction in selling and administrative expenses. Now, let me expand on the topic of our cash cost of goods sold. As shown in the reconciliation provided in our earnings call materials posted on our website, our second quarter 2024 cash costs per metric ton were approximately $4,300, which was in line with our expectations for the quarter. Contributing to the 18% decline on a year-over-year basis was a benefit of $6 million in the second quarter or approximately $230 per metric ton, reflecting the portion of the lower-up cost of market inventory write-down recorded in prior periods that was related to the inventory sold in this quarter. However, the majority of the year-over-year cost improvement reflected two key drivers, and let me provide some color on each one. First, As part of addressing key elements of our cost structure, our efforts related to variable costs are already yielding benefits. Specifically, our technical and operational teams continue to work on engineering costs out of our manufacturing processes without compromising quality and performance. Additionally, we are aggressively working with our existing supplier base and qualifying new suppliers as we enhance our procurement practices related to certain key input costs. Second, we had a year-over-year reduction in the level of fixed costs being recognized on an accelerated basis due to low production levels. And as a reminder, these are costs recognized in the current period that would otherwise have been inventoried if we were operating at normal production levels. In the second quarter of this year, as utilization rates at our graphite electrode and seed drift facilities increased, we recognized approximately $1 million of such costs compared to approximately 10 million in the second quarter of 2023. And lastly, the cost savings related to idling our St. Mary's facilities are beginning to flow through in the second quarter. Reflecting the progress we're making on our cost structure, we continue to anticipate a mid-teen percentage point decline in our cash costs per metric ton for 2024 compared to the full year cash costs per metric ton for 2023 of just over $5,500. The first six months of the year, our cash costs per metric ton was approximately $4,500, which is an 18% decline compared to the first half of 2023. Therefore, as the math would imply, we expect to see a sequential increase in our cash cogs per metric ton for the second half of 2024 as compared to the first half of 2024. Among other factors, this expectation reflects first, the benefit from the utilization of the previously recorded lower of cost or market inventory write down being more heavily weighted toward the first half of 2024. Second, seasonally higher energy costs for our European facilities in the second half of 2024. And third, the impact of upcoming plant production declines on fixed cost absorption. And specific to the plant production declines, this relates to normal shutdowns at our European electrode facilities and our plant turnaround activities at our Seadrift needle coke facility. which take place every 18 months to three years. These planned shed maintenance events are scheduled to take place later in the third quarter. So, however, despite the quarter-to-quarter lumpiness in cost recognition, the key point is that with the actions we're taking, our overall cost structure is moving in the right direction for 2024. and we would anticipate costs to decline further as we look ahead to 2025. Now, turning to cash flow. For the second quarter of 2024, cash used in operating activities was $37 million and adjusted free cash flow with a cash usage of $44 million. As a reminder, our semi-annual interest payments of $34 million are made in the second and in the fourth quarter of the year. As it relates to working capital, inventory levels increased slightly during the second quarter. And however, this was an intentional build in advance of the seasonal production declines, which I just spoke to. As we move through the back half of 2024, we remain focused on reducing our overall inventory levels as part of our initiatives. We continue to expect the net impact of working will be neutral to our full-year cash flow performance. And lastly, on cash flow, we continue to anticipate our full-year 2024 capital expenditures will be in the range of $35 to $40 million. Moving to the next slide. We ended the second quarter with a liquidity position of $232 million, consisting of $121 million of cash and $111 million available under a revolving credit facility. This reflects the financial covenants that limits borrowing availability under a revolver in certain circumstances. More importantly, we do not anticipate the need to borrow against the revolver in 2024. Further, let me add that we have no debt maturities until the end of 2028. Now, let me turn the call back over to Tim for some final comments on our outlook.

Thanks, Catherine. To summarize our comments on the quarter and year-to-date results, while we're not satisfied with this level of performance, Graphic Tech continues to deliver on our stated outlook and initiatives to control the controllable. We are pleased with the team's execution and remain confident in our ability to manage the near-term headwinds. And further, there are many reasons for optimism about the longer-term prospects for our company as we look ahead. While we remain cautious on the near-term steel industry trends, as we've mentioned, cyclical downturns eventually come to an end. The World Steel Association's most recent short-term forecast on global steel demand calls for low to mid-single digit percentage increases in 2025 for nearly all of our key regions, including the EU, the Americas, the Middle East, and in Africa. Longer term, as I noted earlier, decarbonization efforts are driving a transition in the approach to steelmaking, with electric arc furnaces continuing to increase the share of total steel production. Based on updated production statistics published last month by the World Steel Association, the EAF method of steelmaking accounted for 50% of global steel production outside of China in 2023. an increase from 44% in 2015, with market share growth in nearly every region. And this trend of EAF share growth is expected to continue. We're tracking approximately 200 announced projects from steel manufacturers regarding plans for new EAF facilities or expansion of existing facilities. Outside of China, these projects are expected to result in over 170 million metric tons per year of new EAF steel production capacity coming online, by the end of the decade, with much of this growth concentrated in our key commercial regions. This in turn is expected to drive incremental demand for graphite electrodes. In fact, 170 million metric tons of EAF steel capacity, even at conservative assumptions around utilization rates, could translate into about 200,000 metric tons per year of incremental demand for graphite electrodes. That would be more than 25% of the total manufacturing capacity that currently exists outside of China. All in, this would drive graphite electrode demand increasing at a compound annual growth rate of 3 to 4 percent through the end of the decade. Importantly, about 80 percent of that growth would take place in regions where we already have a strong presence. As the strategic actions we are taking to reduce costs have been designed to preserve our competitive advantage that we have spoken to, we view graph tech as being well-positioned to capitalize on long-term industry tailwinds. Further, anticipated demand for growth in petroleum needle coke will also present a tailwind for our business given our substantial vertical integration. We expect this demand for high-quality needle coke to be driven by two factors. First, the demand for graphite electrodes from the ongoing shift to EAF steelmaking I just spoke to. And second, and more importantly, the demand for synthetic graphite anode material for use in electrical vehicle batteries where needle coke is a key precursor material. Growing demand for needle coke should result in elevated needle coke pricing, and given the high historical correlation between petroleum and needle coke pricing and graphite electrode pricing, this trend should translate to higher market pricing for graphite electrodes. This again reinforces the key competitive advantage that our substantial vertical integration into needle coke affords us as it relates to our graphite electrode business. Beyond graphite electrodes, we continue to evaluate ways to leverage our assets and technical know-how to directly participate in the demand growth for anode material for the EV market. There's a strong desire by Western OEMs and supported by Western governments to establish EV battery supply chains that are independent of the current reliance on China. Our unique manufacturing footprint would allow us to participate in the establishment of these supply chains in two potential ways. First, as a supplier of petroleum needle coke, given that we are only one of two Western manufacturers of this key material, and second, as one of the largest Western operators of graphitization capacity, we could leverage these assets to convert needle coke into synthetic graphite. We continue to hold dialogue with leading participants in the space and remain excited about the opportunity and the development of this supply chain and our associated prospects. In closing, this is a pivotal time for graph tech, with many challenges still in front of us. Yet we're up to the challenge, and we continue to believe Grafitech will successfully manage through the near-term uncertainty and remain an industry-leading supplier of mission-critical products to the EAF industry. Longer term, we possess a distinct set of assets, capabilities, and competitive advantages to capitalize on growth opportunities. For these reasons, we are confident we can return Grafitech to the position of generating great value for its stockholders. This concludes our prepared remarks.

We'll now open up the call for questions. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star sign followed by the number one in your touch phone. You will hear a prompt that your hand has been raised. Should you reach a decline from the polling process, please press the star sign followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question.

Our first question is from Bill Peterson from JP Morgan.

Go ahead.

Yeah, hi. Good morning, team. You know, nice job on the continued efforts on the cost side. Although you mentioned before the guidance does apply a step up in cost to the back half of the year, you discussed the downtime. I believe you also may have seasonal energy impacts in Europe. I guess first, on these outages, how long are these outages planned to be? And then taking into account the shutdowns and maybe potential energy impacts, how should we think about the cash cause at an absolute level in the third quarter and then the fourth quarter? Should we assume higher in the third quarter than declining in the fourth quarter? How should we think about the cost from here?

Yeah, thanks. We'll split that up. I'll start talking about the shutdowns, and then Catherine can talk a little bit about the financial impact. So the shutdowns are typically two to three weeks. We do it on a little bit of a rolling basis through the plants in order to make sure that we have some amount of staff on site so that we can respond to any customer demands. that may change over the course of the shutdown. And so, you know, I would generally anticipate that for Europe, you know, think two to three weeks for most of the operating action there. In C-drift, it will be, you know, something similar, focused primarily on the calcination portion of the plant. And so, you know, again, think of, you know, roughly three weeks for that as well. But let me hand it over to Catherine to talk about the financial question.

Thank you, Jeremy. Yes, Bill. So, you know, we have maintained our full-year cost reduction estimate of a mid-teen percentage point decrease, you know, from the level of 2023, which was $5,500. So, as I indicated earlier, for the second half of this year, we expect a little bit of a sequential decrease. uptake versus where we landed for the first half. Now, and I mentioned that earlier, seasonally higher energy costs for our European facilities in the second half of 2024 will be a factor. And, you know, the benefit from the utilization of the previously recorded lower-up cost-to-market inventory write-down was certainly more heavily weighted toward the first half of 2024 than it will be for the second half. And then lastly, as we spoke about with Jeremy, we have the impact of the planned maintenance shutdown on the absorption of our fixed costs. But, you know, overall, I think the key points to keep here in mind is that on a four-year basis, our overall cost structure is moving in the right direction, reflecting the actions we're taking. And, you know, we would anticipate further after in 2025 that our costs would continue coming down.

Okay, thanks for that. Spot pricing fell another $100 per ton, so I guess less pronounced decline this quarter. However, on your commentary, it sounds like the competitive dynamics are still challenging. Pricing remains challenging. So I guess, how does the spot pricing decline compared to the latest needle coke prices you've been seeing? And I guess, what are your directional pricing expectations, both for your product as well as needle coke from here?

Yeah. Thanks, Bill, and good morning. Appreciate the questions. You know, from a pricing perspective, and I think we said it a couple times in our prepared remarks, right, the competitive market, and it continues to be a competitive market given the overall dynamics around supply and demand. And therefore, you're seeing that reflected in the spot pricing or the non-LTA pricing that we reported this quarter. I think those pressures are going to continue and they're going to persist. But one thing I think you have to keep in mind, and we start to lose a little bit of visibility around pricing this time of year as the order book is largely locked in place and there's less volume being transacted, broadly speaking. But right now, I think our view is that challenging pricing is going to persist. And we'll have a better read on that as we get into the negotiations with customers here in the third and fourth quarter. On the needle coke market, I would say we're still trading sideways compared to where we were in the second quarter, you know, somewhere in around that $1,100 to $1,300 range, depending on the grade of coke in the market. So the needle coke side is stabilized in many respects. but would hope to see that start to trend in the right direction as you start to see demand picked up with, you know, maybe some better demand numbers out of the steel industry heading into 2025. Great.

Thanks for that. And just a bit of housekeeping. So adding back to $9 million to SG&A, but I guess taking into account other actions you've been taking, belt tightening and other maybe productivity initiatives, can you level set us on how we should think about SG&A for the third quarter and then trajectory thereon?

I mean, SD&E will remain at the run rate that you've seen, you know, if you look at the first half of the year, excluding that $9 million benefit. I think we're seeing the impact of our rationalization activities, and this has started to show in our underlying cost for the second quarter in SD&E, and we would expect that run rate to continue over the rest of the year.

Okay, thanks. I'll pass on.

Our second question is from Alex Hacking from Cedar Research. Please go ahead.

Hi. Just to quickly follow up on the pricing outlook. Based on your comments, it sounds like the realized spot price would be weaker in the second half of the year than the first half of the year. Is that a fair assumption? Or am I reading it too negatively?

Yeah, I mean, I think we continue to see challenges in the pricing. You know, also what's going to play into that is mix, right? And where we're delivering tons on a relative basis, right? Because that average, that price, you know, the $4,300 plus that we reported is an average over all of the regions that we ship to. So, you know, I wouldn't sit here and say that we think there's a real rosy outlook for pricing as we look into the back half of the year. But, you know, mix will play into it as well.

Okay, thanks. And then I guess Bloomberg and some other media have reported that the company is working with advisors considering various different options to improve liquidity. Could you maybe comment on that, if you're able to, kind of what's under consideration and what will be the timeline? Thank you.

Yeah, thanks for that, Alex. You know, and maybe let me start by just reiterating the comments that Catherine made on the liquidity front. You know, we ended the quarter with $121 million of cash and a little more than $111 million of availability on the revolver. So, you know, $230 plus million of total liquidity here at the end of the second quarter. And again, don't feel or don't see a need or a use of the revolver and feel good about the cash position for the foreseeable future. But, you know, I guess more specifically to your question, right, I think we've tried to be proactive. You know, since I joined the company in November of 21, I think we've tried to be proactive with our capital structure around refinancing the revolver, refinancing the term loan. And we continue to have conversations with advisors in various fronts, you know, around our capital structures and trying to be proactive. And I think that's a prudent move for any company and organization regardless if you're in the downside of a cycle or the upside of a cycle. I think we're always looking at our existing capital structure. Beyond that, I'm not going to comment on market speculation or rumors that are coming out of the media.

Okay, thanks. I'll leave it there and jump back in the queue. Thanks, Alex. Our next question is from Andrew Jones from UBS.

Please go ahead.

I just have a bigger picture question on the structure of the industry. I mean, if we've clearly seen this significant downside in pricing, I don't think it's, you know, it's maybe too much pushback on your comments about the demand growth that will come from greater EAF penetration in Europe and the US and probably elsewhere. But On the supply side, this overcapacity issue clearly persists. What, in your view, can be done to change that in your core markets? I mean, is there any prospect of any sort of import protection coming at any point in the near future or any discussion about it, or are any of your competitors talking about or likely to be taking out capacity soon? Or what, in your view, can be done by the industry to actually help to sort of correct the course of the ship? Because it's a pretty ugly price chart when you look at that on Bloomberg. Thanks.

Yeah, thanks for that. And I'll try to touch on all the points. And maybe let's start with how we view market recovery both in the shorter term and then into the medium and longer term. And it's really driven kind of by four things. One certainly is an improvement in demand, in particular in the EU. You know, I think if you look at EU steel production levels are probably down 20% from the peak back in 2021. So any sort of meaningful uptick in EU demand will help. especially us given our geographical footprint, but I would say just the Western electrode industry more broadly. And two, I think the continued growth of EAFs. We talked about the 170 million tons of new capacity coming online over the balance of the decade. Some of that is front-end loaded, and we'll start to see new mills come online in the geographies in which we have a significant presence here over the next couple years. That continued growth and the move to some of the new products we're offering will help on the demand front as well. You mentioned supply reduction. Supply reduction and supply rationalization is an important piece and really could be the thing that is a catalyst for near-term reaction or impetus for pricing to change. We started back in the first quarter in February when we announced the idling of St. Mary's and the rationalization of our footprint, and we took down 24,000 tons of production. We felt that that was the right step for us at the time. We've since seen one of our competitors take about 24,000 tons out of their footprint or announced the potential to take 24,000 tons out of their footprint. I mean, I think those are the moves that are needed when you find yourself in a market that's oversupplied in the West as it is today. But I think there's room for more people to engage in kind of that rationalization as we go forward. You know, China, I think, is the fourth big piece, and China certainly is the entity that weighs on pricing the most. And I think China really is probably driven by two things. One, their domestic markets in terms of construction, their EV market, overall steel production. Right now, 30% of construction is 30% of China's overall GDP, and it's underperforming. So that's certainly weighing on their overall economy, which obviously impacts steel production, which then impacts graphite electrode consumption domestically. Sure. And then their announced transition from EAF steel production. Right now, China produces about 10% of its steel via EAFs. And that was announced or they reconfirmed or reiterated their commitment to move to a 15% target. Now, we've heard this in the past and it hasn't come to fruition, but any sort of genuine effort to move the Chinese steel market from 10% to 15% will have a meaningful impact on not only EF-produced steel, but graphite electrode consumption, right? You're talking 50 million tons of steel at that 5%, which is probably more than 80,000 tons of graphite electrode demand that would come along with it. So all of those things combined, I think, help move the market. Some of them are shorter term in nature, and some of them are kind of more structural returns to where the market historically has been, which would be around a $6,000 average price over the last 20 years or so. And this is really all absent some of the electric vehicle and needle coke demand elements that we've talked about on numerous occasions, right? You know, we still firmly believe that we're going to see a Western supply chain for electric vehicles set up. The demand for needle coke is going to increase exponentially here over the balance of the decade and being vertically integrated and having sea drift as a strategic asset for the company will position us very well. And all of that, I think, is why we still have long term conviction on where the business can go, where the market's heading, and now it's just a matter of us continuing to execute in the short term.

Yeah, that makes sense. And on the policy side, do you see any proposals or any measures that have been tabled, either in the EU or on the US side, that would potentially restrict imports from markets like China?

Yeah, so just to level set, right, if you look at the landscape as it exists today, in the U.S., there are trade restrictions on Chinese imports ranging from 25% to 150%. The EU has restrictions on both Chinese electrodes and Indian electrodes. Chinese, I think, 23% to 75%, and then the Indians are a little bit smaller at 7% to 15%, depending on the size and the grade. Um, so I, there are trade restrictions in place and we think they do have an impact and they, they work as they exist today. Um, you know, I think everybody's always looking, uh, much like we see our customers on the seal side, trying to protect their markets. Um, you know, I think we're no different in terms of looking for opportunities to strengthen our domestic position and support our businesses and the geographies that we operate in. So beyond that, I can't really comment on status and where that, that stands, but, um, certainly something that, uh, everybody's always looking at.

And just finally, any risks that you see around the fact that, I guess in the EU, there's been some move from some right-wing populist parties making progress in various countries. Obviously, in the US, I guess a Trump presidency looks a bit more likely. I mean, could we see rollback on some of the proposed sort of decarbonization initiatives and subsidies for EVs and things like that that you see as a material risk to the electrode market in the medium term, if that EEF penetration might slow down, for example, in Europe?

Yeah, I've made it a habit of not trying to predict political outcomes my entire career, so I'm not going to start now, certainly. But, yeah, I mean, I think the impact on policy and regulation is something we keep an eye on. Again, I think we believe that the decarbonization story and the electrification of the auto fleets, both in Europe and the U.S., is a real story, and those trends will continue. I'm sure we will continue to see twists and turns along the way as how it all comes to market. But just, you know, the chart continues to go up and to the right. It may not be an exactly straight line, but we still see this as the path we're heading to longer term. And I think all of that is constructive for our business.

Agreed. Yeah. Okay. Thank you very much.

Our next question is from Abe Landa from Bank of America. Please go ahead.

Good morning. Thanks for letting me ask some questions. Maybe just to start off, just to further press on liquidity. You kind of reiterated that you expect it to remain adequate for this year. But I guess, what do you think about maybe planning to obtain it, maybe some additional liquidity for 2025? Is that something you would look to prior to the annual selling season in the fall? Or would you kind of wait until you see some more visibility there?

Yeah, thanks for that, Abe. I mean, again, reiterating where we sit today from a liquidity position, we feel good about our liquidity. If you look at the first half of the year, we used $54 million of cash, so let's call it on average $27 million a quarter. So we feel good about where our cash position otherwise is right now. We continue to look at our crystal ball going into the future and try to see what 25 and beyond looks like. But again, I think we feel good about where we sit. Obviously, that'll continue to be informed by conversations with customers and economic indicators and steel indicators that we continue to monitor. But otherwise, you know, we're good with where we sit today.

Okay, and then...

Thanks for that color on your lower costs or market of the inventories. Do you have a dollar amount? I know you kind of did it on a per ton basis, but do you have a dollar amount in 2Q in the first half? And maybe what do you expect that impact in 3Q in the second half of the year?

Yes, yes. Thank you for the question. As we indicated in our remarks, the second quarter impact of the utilization of the lower cost-to-market reserves was about $230 benefit to our cash cog. And, you know, it was somewhat in the $200 range in the first quarter of this year. So as we move now into the second half of the year, we would expect roughly about half of that benefit only on a per metric ton basis. So call it about, you know, $100 per metric ton. That would be the expectation for the second half of the year.

And if we were to kind of reverse out in the second quarter, that 230, you kind of get a 4,550, give or take. And you kind of alluded to some potential improvements into 2025. I mean, I guess, what is your ability to kind of improve from that, call it 4,550 per metric ton level? Like what additional actions can we take beyond kind of the go forward rate?

You know, the biggest component over time on the cost is really our fixed cost absorption and ultimately, you know, volume levels increasing across, you know, our manufacturing sites, you know, higher production levels. Our variable cost, you know, we're making really very good progress on it this year. And if we expected to stick, you know, this would remain into 25 as well. So overall, we'd say the most important parameters going forward will be the production level in terms of helping our fixed cost absorption.

And Abe, I would just add to that. I mean, we've talked about this on past calls and, you know, despite the challenges we're facing right now, we continue to invest in our business, right? And part of those investments are projects that help improve our overall cost position. And one of the projects in particular that we've talked about, and it's not only it's a good ESG story because it's reducing natural gas consumption, but it certainly helps our cost position in Pamplona as well. We will continue to make those sort of investments in our plants and think that this is a little bit of a roadmap for us to continue to drive costs out of our system. Yes, there's a capital cost to it, but those are the things that we have to do to continue to be competitive and also position us for the long-term and our views around the long-term positioning of the company.

Thank you. And then maybe just my last question. You had a competitor maybe last quarter was indicating that they expected the prices of at needle coke to increase in the second half of this year? Is that, I know it's early in the quarter, but is that something you're seeing or do you share that view and kind of on a related, like what's the capacity that Seadrift is running at today? That's it for me.

Yeah, so I think on the broader needle coke market, as I stated before, I think it's relatively flat at this point in time, but Again, that is somewhat, I'll call it stale data because it's typically about a month old when we see it. But, you know, I do think we'll start to see maybe as early in the back half of 24, but certainly as we get into 25, that you'll start to see more of a pull on needle coke demand. not only from higher utilization rates, because we continue to expect volumes to go up from our perspective, but also on the EV side, right, as supply chains start to get organized and more work is being done to align to kind of some of the 2027 kind of key milestones that the OEMs and others have. So, you know, again, crystal ball aside, you know, we expect needle coat prices to continue to go up from this point as they've been trading sideways for a quarter or two now. And then seed drift utilization, you know, we're probably running commensurate with where the electrode plants are, right? We're matching, you know, seed drift production with what our demands or internal needs are right now.

Thank you very much. We have Kirk Ludkey from Imperial Coppola. Please go ahead.

Hello, Tim, Jeremy, Catherine, Mike, thank you for the call. Appreciate it. With respect to the shift toward EAF, I'm curious, you know, I know it's, you've got forecasts through the end of the decade, but I'm curious, you know, can you quantify how much will come online in the very near term, say, you know, second half of this year and 2025?

Yeah, I mean, I don't have exact numbers year by year. I think we could probably get those to you offline in terms of what we're tracking. But certainly, I think there's a number of projects here domestically in the US that we know are coming online. A few mills anticipate to ramp up here and strike their first arc in the back half of 24 and would see fairly good production levels in 2025. But we can get that to you offline.

OK. And anything in China, you mentioned the shift from 10% to 15%. Is there anything happening at the plant level that might suggest that this time it's different?

Yeah, I mean, other than the Chinese government saying that... This time they're serious and it's going to happen. You know, I think it's too early from that announcement really to see a change in operating levels and rates. I think, you know, we haven't seen a significant uptick in operating rates here, you know, over the last month or two. But, you know, I think, you know, time will tell. But ultimately, you know, I think if China wants to continue to, you know, be a more active engage in kind of the world economy, right? The decarbonization efforts need to be real and they need to act upon those. So hopefully this time around we'll see better action. So I'll couch it as cautious optimism at this point in time.

Got it. Thank you. I appreciate it. And I know you're not providing guidance, but directionally it seems as though spot pricing sequentially is weaker You've got the downtime scheduled for the third quarter. It seems as though sequentially earnings will be down between the second and the third quarter, then maybe rebound in the fourth. Is that directionally accurate?

Yeah, I mean, I think you captured kind of at least what we've said around pricing direction as well as, you know, Catherine's discussion around the lumpiness of our costs. So, Yeah, without providing guidance, I think you're fair.

Got it. And with respect to the energy costs, is that just the seasonality of energy or do you have contracts that are rolling off that we should try to think through?

Yeah, I would describe it as seasonality, right? I mean, different markets have different incentives at various times. You know, the summer season is a high energy use season in certain jurisdictions, so it's not unusual to see higher prices as we go into the third quarter.

Got it. Thank you. And then last question, you have access to all the cash. There's no limitations on you moving cash around to service debt?

No, that's correct. Got it. I appreciate it. Thank you. Thank you.

And our last one will be Arun Viswanathan from RBC Capital Markets. Please go ahead.

Great. Thanks for taking my questions. I hope you guys are well. So I just wanted to understand, you know, kind of the path forward here. So it looks like, you know, if you remove that gain, maybe $9 million or so, you know, you would be at like a $5 million run rate of EBITDA in this quarter. Do you see kind of a path to, you know, maybe the $25 to $50 million level? And the reason I'm asking is because you are going to be, you know, I guess volumes could be increasing, which could help lower your production costs. Then you do have, you know, continued roll-off of the LTAs. So just wondering, you know, if we kind of assume kind of a normal $4,500 or so, $4,000 or so on the cash cost per ton level. What kind of volumes can you get to, and what does that really mean for EBITDA? Maybe you can just help us, give us some break points on that journey. Thanks.

Yeah. So, again, we don't provide a lot of guidance, and I'm not going to sit here and start speculating about next year. Other than, you know, I think we're laying the groundwork with our customers in all the work that we've been doing, and we've been saying this ever since Q4 of 2022, that we're confident that we'll continue to claw back our market share. And yeah, maybe we went down in the elevator and we're climbing back up on the stairs, but we will continue to drive forward and get market share back as we head into 2025. So while we expect modest increases in volume this year, I would think it's fair to continue to expect increases in volume as we head into 2025. And Catherine commented on the cost side where, you know, The moral of the story is the cost trend is going in the right direction from 23 to 24, and we expect that to continue from where we sit today heading into 25. So a lot of the things that we can control and that we can drive are progressing as we would expect and as we've been saying they would. You know, the question that remains, you know, the uncertainty and the question that I can't answer for you today is, is what does pricing look like next year? And we won't know that until we start engaging more fulsomely with our customers here in the late third quarter and early fourth quarter as we get into contract negotiations. So hopefully that helps at least give you a little bit of direction as the way we see 25. And I think that trend just continues because some of the bigger drivers around EAF and steel demand, as well as needle coke demands, really start to come into play as we get more into 26 and beyond. So hopefully that gives you a little more visibility or at least a sense of how we're viewing kind of the recovery and kind of the growth curve for the business as we look out here over the midterm.

Thanks for that, Tim. Maybe I can just ask a follow-up in a slightly different way. So would you say, would you agree that the market has bottomed? I know it has on a, maybe it has on a volume front. But again, with your LTAs rolling off, I know pricing won't necessarily, you know, also it's probably not bottomed per se on an average realization basis. But would you say that prices have bottomed, you know, from a, you know, overall spot basis?

Yeah, Arun, much like not speculating on political outcomes, I think I'm going to refrain from calling a bottom. That usually doesn't work well for most folks. But I mean, again, I think, you know, you're seeing some stability. I would certainly think that now that we are, you know, six months, almost six months removed from our announcement of reducing capacity in St. Mary's. Again, I mentioned one of our competitors come out and they've taken action around their production capacity. I stated before, I don't think that all of the Western producers operating at losses or kind of thin or single digit margins is a sustainable business. And certainly, you know, if we think about how essential we are to the production of steel in EAFs, right, it's not really sustainable for our customers either, right? So at some point in time, you have to see some better pricing support across the industry. And again, whether that's, you know, through higher demand, more, supply rationalization or just better overall demand and economic conditions, you know, we do see things returning back to more normalized conditions as we move through into 25 and beyond.

Okay, thanks. And then just lastly, you know, you spoke last time about some improved commercial actions that you're taking, some, you know, initiatives to win back some share. And maybe, you know, you noted this time laying the groundwork with a lot of customers. So where are you on that journey? Have you actually gotten any customers back? And do you feel like that's also kind of, you know, bottomed and heading higher as far as your, you know, kind of share gain recovery?

Yeah, I mean, I would absolutely agree. I don't know how I call it, customer bottom, but I would say that, you know, we continue, myself, Jeremy, Inigo Perez, our head of sales, continue to engage with our customers on an in-person basis, you know, and we've been doing so throughout this year and we'll continue to do so because I think it's important that we continue to articulate to them not only the value proposition that we think we offer that we've talked about on this call, but also to make sure that the products that we're delivering to them meet their specification and needs and that we're thinking about ways to help them improve their business and their cost competitiveness. You know, and really the technical services we provide them, all the value add that we think we can provide that is truly a differentiator from our competition. I think that is paying dividends. And I think most importantly, and maybe somewhat different than than in the past, is really articulating to them that these are partnerships, these are long term relationships, and that's what we want. We don't want customers who buy from us one quarter and we don't see them again for a couple of years. Right. We want customers that are concerned about our business because we're concerned about their business and that we're willing to invest in those partnerships for the long-term health of both companies. So that is resonating. I think that message is being well received, and we'll continue to see that dividends being paid as we look out into 2025 and beyond.

Thanks a lot. Thanks, Varun.

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

Thank you, Ace. I'd like to thank everyone on this call for your interest in graph tech. We look forward to speaking with you again next quarter. Have a great day.

Thank you, ladies and gentlemen. This concludes our conference call. You may now disconnect.