GrafTech International Ltd (EAF) 2003 Q3 法說會逐字稿

Good morning and good afternoon ladies and gentlemen and welcome to the Graftech third quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's preparation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero. As a reminder this conference is being recorded today, Thursday October 23rd of 2003. I would now like to turn the conference over to Miss Elise A Garofalo, Director of Investor Relations. Please go ahead, maam.

Thank you very much. Good morning everyone and welcome to our conference call. At this time, each of you should have received a copy of our press release. If you haven't, please call Shirley Widdows at 302-778-8244 and we can quickly fax or e-mail you a copy. Before we get started this morning I'd like to remind all of you that both this release and this call contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Please note the cautionary language of our forward-looking statements contained in our news release, that same language applies to this call. Also, to the extent we discuss any non-GAAP information you will find reconciliations either at the back of our press release or on our website at www.graftech.com in the investor relations section. This morning on the call we have Craig Shular, Chief Executive Officer of Graftech, Scott Mason, President of Graftech Synthetic Graphite line of business, John Wetula, President of our AET Division and Corrado F. De Gasperis, our CFO. At this point I'd like to hand the call over to Craig.

Elise, thank you. Good morning, everyone and thank you for joining our conference call today. I'd like to briefly take you through some third-quarter highlights and then we'll open it up to questions. Net income was 6 million or 9 cents per share as compared to a net loss of 5 million or 8 cents per share loss in the third quarter of last year. Net income before other expense of 1 million was 7 million or 10 cents per share. This was higher than GTI's guidance mainly due to a lower than expected effective tax rate and lower interest as a result of benefits from interest rate risk management activities.

As previously advised, our team has been working to lower our effective tax rate as part of our cost savings program. This project has included such items as realignment of our legal entities to reduce our cash taxes and implementation of global production optimization model to assist us in production planning and cash profit maximization. We have previously communicated a goal of moving from our Q1 and Q2 '03 tax rate of 40% to a 35% tax rate beginning in Q1 '04. Our team has delivered on this target ahead of schedule and we should enjoy a 35% tax rate for '03. As a result of the improvement in the tax rate, we made a catch-up adjustment for Q1 and Q2 this quarter which contributed about 2 cents per share.

Moving on to sales, sales increased 15% to 173 million versus the same period last year. Our gross profit increased over 20%, to 41 million, as compared to the third quarter of 2002. The improvements were mainly due to our graphite electrode business where both sales volume and average prices increased. Graphite electrode sales volume was 49.8 thousand metric tons or 8% over the third quarter of last year. The average sales revenue per metric ton was $2,340 as compared to $2100 last year. We did experience lower sales of cathodes this quarter due to customer order patterns and in Q4 we expect cathode sales to return to normal levels.

Next I'd like to turn to two other critical objectives we set out for ourselves at the beginning of '03, commercialization of advantage technologies and deleveraging our company. Firstly on the commercialization of advantage technologies, over the course of the year we've announced several electronic thermal management product approvals and orders with industry leaders. This quarter we provided revenue forecast for the business which projected sales to increase from 500,000 in '02 to 2 million this year and grow to 8 million next year. A few other achievements in the quarter of note in our emerging businesses include one, we received a prestigious R&D 100 award for one of our electronic thermal management products.

This award recognizes new commercialized products that exhibit a step change in performance in the industries they serve. It is a global award given annually for the top 100 new products in all industries. We're delighted to receive this award and congrats to our R&D team on a fine performance. On the fuel cell front, we just announced the receipt of a 1.4 million government cash grant to advance our fuel-cell technology and support mass production of our fuel-cell products. On the deleveraging front, we recently executed a very successful equity issue raising 190 million of net proceeds, which were utilized to pay down debt. Net debt at the end of the third quarter was $699 million, in line with our prior guidance.

Pro forma with the equity issue, our net debt at the end of the quarter would have been $509 million. This would represent the lowest debt level in our company's history as a public company, and positions us well to execute on our business strategies going forward. Turning to outlook. For the fourth quarter earnings per share should come in the range of 7 to 9 cents, which would put us at the high end of our annual guidance. EBITDA for the year is expected to come in between 110 and 115 million. Fourth quarter graphite electrode sales volume is expected to be between 50 and 51 thousand metric tons. We expect positive cash flow from operations of up to 30 million before capital expenditures of about 10 million in the fourth quarter. This will be the first quarter in nearly two years that we are cash positive from ops after CapEx.

We also plan to generate an additional 10 million of net cash proceeds from asset sales in the fourth quarter. Recall we upsized our asset sale program for the year from 25 million to 30 million, as a result we're pleased to report that our year-end net debt is expected to be below $500 million. On the graphite electrode market front we continue to see tightness in the supply demand balance, and therefore are continuing to run our facilities at capacity to meet demand. As you know, we are in the middle of the '04 book building process and therefore are limited in the comments we will make. However, we believe the pricing in electrode industry remains very firm, and we are committed to executing our price increases for '04. With that, we'd like to open up to questions.

Thank you, sir. Ladies and gentlemen at this time we will begin the question-and-answer session. If you have a question, please press the star, followed by the 1 on your push-button phone. If you would like to decline from the polling process press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for the first question. And our first question comes from Bruce Klein with Credit Suisse First Boston. Please go ahead.

Hi, good morning.

Good morning, Bruce, how are you today?

Pretty good. A couple questions. Just on the GE prices. If you can just review for us where you're kind of at in the spot market and what's been announced in each region and then I think the third quarter subsequently was down a little bit, I don't know if that was currency related. And then Mexico, how that's performing and ramping up.

Perfect. On the spot market, Bruce, in the Americas, in the U.S., spot price is around $2600 a metric ton. In the European region it's about 2400 euro, 24.50 euro a metric ton and out in Asia it's about $2500 a metric ton. And as we said, we see the market tight and pricing firm, and we are in the middle of that book building process. It is going well so far.

How's the competitors?

Are they all on board with these same kind of levels, and how's their response been during this contract season so far. The competition in their public announcements have announced similar types of pricing levels, and I think from our view of the marketplace, the competition appears to also be very committed to executing price increases. The market remains tight and supply/demand balance we think is very tight.

And how about Carbide Graphite, are they active out there.

They've put some trial material out in the marketplace, relatively small quantities, they're getting some approvals, they appear to have started up their machine. And they appear to be gaining some approvals in some locations. They had a recent press release where they indicated that pricing was about $2600 a metric ton for them. If you convert the U.S. dollar price that they had in their press release earlier this week, it would be right around 2600. So we see them in the marketplace, they are small right now, very small right now in the marketplace, but our take would be with their cost structure, they also are seeking price increases right around the existing levels.

Okay. And the third quarter.

The third quarter absolutely no drop in price, so the little bit of movement you see there is 100% mix and currency. Price is firm out there.

And what was the currency impact on your company in the quarter? I know you're not a U.S.-based company to much anymore in terms of the G side, so what did it mean to you guys.

Quarter over quarter, not real significant because the euro was pretty steady quarter over quarter. Some of the other currencies had some movements. So I think in the difference in price, I think our total book was only five, six, seven dollars difference per metric ton, so almost nothing. I would attribute most of that to mix and so just to recap, price is firm out there, no slippage in price whatsoever, and anything you see in between Q2 and Q3 would primarily be mix and maybe a little bit of currency in there.

And, Craig, when you say quarter over quarter, you mean 3 Q over 3 Q the prior year or, no you mean 3 Q over 2 Q.

I mean this third quarter over last quarter. There's just a slight swing in the price. Year-over-year, last year we lost $2100.

So you mean third quarter over second quarter, okay.

That's right.

And then in Mexico.

Mexico continues to run well. We have achieved an analyzed run rate above the 60,000 metric tons we had been targeting and we've been running closer to a 62,000 metric ton run rate. So that process has gone extremely well. Our Mexican team has done a superb job bringing that project in on time and under budget and I got to give them a few compliments on the quality, the quality out of that plant has never been better.

Are you selling it where it's most economic to sell it.

That's right. You'll see most of that product go into North America, core set products going all throughout Mexico, U.S. and Canada would be the majority of their sales and then we're exporting some down to Central America.

Okay. I'll pass it on. Thanks guys.

Thanks Bruce.

Thank you. Our next question comes from Bob Schenosky with CIBC World Markets. Please go ahead.

Good morning. This is Jim Giannakouros calling on behalf of Bob. How are you doing.

Hey, Jim, how are you today.

Doing okay. I know you said you didn't want to comment too much on how contract negotiations are, but, has there been any push back from the mills due to their significant increases and other input costs, or just scrap and energy, can you speak to that at all.

You know, I can. Obviously, no customers like price increases, that goes without being said. We have some outstanding customers in our mix. And they have had some energy increases, like all of us, and they have had of course in many mills they felt some scrap increases. So we're sympathetic to that but in the electrode side, I mean as we all know, our industry's come from a very depressed condition in the last two years, and I think our customers, although no customer likes an increase, they understand that, and I would say at this stage the book building for '04 is going quite well.

Okay. And can you discuss volume potential for '04 in your most-significant markets for the AET segment.

For AET the guidance we've given to date has been on electronic thermal management. And the profile we've given there, Jim, is it was a half a million in sales last year, this year we'll do a little bit over 2 million, and next year we'll be 8 million. And so that's probably the best guidance I can give you right now. That's what we've delivered so far into the public arena.

Okay. And any potential impact on you from the pending merger of Alcan and Pechiney.

Yeah. We're delighted with that merger, because obviously Pechiney's been our partner and Pechiney usually comes in around number 5 in the aluminum production ranks and Alcan, of course, was a number three type player. Together they've become the clear number 2 in aluminum production. So we're delighted that our partner now in the cathode business is the second largest producer in the world of cathodes and in fact I think on a sales basis they might even be number one. So we couldn't be more pleased with that combination.

Okay. Thanks. That's all I have.

Thanks, Jim.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star, followed by the one at this time. As a reminder, if you're using speaker equipment you will need to lift the handset before pressing the number. One moment, please, for the next question. And the next question is from Brad Levy with Royal Bank of Canada. Please go ahead.

Hey, guys, another good quarter. Let's see, and pardon the background noise, I'm in an airport. I wanted to ask you a little bit about competitive restarts, or capacity creep from potentially any other competitor plants given that the pricing dynamic is what it is right now.

Thanks, Brad, thanks for your comments and question. Right now on the capacity front coming into the market, the only one we've seen so far is CG, and as we said earlier, the amounts have been trial quantities, seeking approval. So they've not been significant amounts. On Konrady, there is no start-up, no even efforts underway to try and start that up so we've seen nothing there. And then as far as capacity creep, obviously there's probably some out there but I can tell you at this stage and thus far this year, we've not seen anything significant at all on that front. And so I think probably CG is the one we should look at as the increase, and time will tell how they do on their re-entry and restart-up.

All right. And then some guidance for '04, just as it relates to currency.

Well, on '04 we have not given any guidance, other than the EPS guidance we put out there, 60 to 75 cents. On currency, we've done a lot on currency risk management and a lot in the structure of our portfolio. We don't try to project currencies. But as you've seen this year, we've done a pretty good job on that front. And so I don't think you'll see us try to project currencies at all. movements in currencies as we go forward.

Thanks guys.

Thanks, Brad, have a good day.

Thank you. Our next question comes from Mark Filom with Healy Capital Management, please go ahead.

Thank you. A couple questions. Can you bring us up to date on your cost-cutting initiatives and whether they're on target.

Yes, Mark. Thanks for the question. On the cost-cutting we said we would get 16 million this year and right now year-to-date we stand at about 13 million. And our plan, as we've usually done in Q4, we will give you a table breaking down the components of that. And so we are right on target to to get our 16 million.

Secondly, the profitability in broad terms of the electronic thermal management products.

Yeah. The ETM products are really strong value-add products. They are displacing some incumbent products in technology with a much superior capability to remove and dissipate heat. And so they are high margin products. They would be the highest margins in our portfolio. And just from a competitive basis we may hold back on giving some of that out, but leave it said, they're going into the computer industry, into servers, into DVDs, into flat-screen TVs and they're high value. They represent a step change in most of the applications in performance. They are lightweight and they are, for us, performing extremely well in the industries they serve. So you should look at these as high-margin products and you see our standard margins 23, 24%, these would be a multiple of that.

Okay. And then, lastly, just an update, or if there is any, on the lawsuit.

Yes. Mark, on the lawsuit, no nothing new on the third-party lawsuit to report. But having said that, as we have commented I think a number of times this year, we have absolutely increased our proactiveness on that front, and we have been very proactive with the judge and the court, and we are trying our best within the professional context, of course, to push that court to go ahead and make a decision. I don't have a time-table, but I would say we are moving down a course of action that we believe we're speaking about months rather than years. And so that's about all I can give you at this stage. Our team is actively engaged on that front right now.

Thank you very much.

Thanks, Mark.

Thank you. Our next question comes from Chris Polecky with Shocko Capital. Please go ahead.

Yeah, hi. I was just wondering if you guys could talk a little bit about how the thermal management product markets are going to develop, maybe any milestones we should be looking for or what particular partners or areas you're most aggressive about attempting to penetrate right now.

Thanks, Chris. The first milestone I think we've put out there for ourselves is 8 million or more for next year, so that's the first one you should keep an eye on. And of course we'll do our best to blow right through that target. We've targeted a $300 million market out there, which is a subset of the 1.7, $1.8 billion thermal management market. And it's that 300 million market where we think we've really got an advantage product. And so the first milestone we'll give you out there is that 8 million in sales, and ancillary to that you've seen our product win probably the number one R&D award, that was the top 100 new products in the world, all industries go into that competition. You've seen us get some government grant money for fuel cells, you may see us get something in the future that may help us on the ETM, electronic thermal management front. So as we go into next year we'll set some more milestones we'll put them out in the public. We'll probably do that in the first quarter like we did the first quarter of this year. And we're excited about that business.

Are there one or two particularly large design wins or companies you need to penetrate that might have a significant share of that $300 million market, or is it spread amongst a number of different applications that sort of aggregate small pieces to get the 300 million.

Chris, it's spread across a number of customers and industries. Sony, IBM, Intel, Hitachi, to name a few are very important. We have product approvals in sales going in there. Our mission is to grow it. Obviously, we're working on all the major computer manufacturers, and I hope over the course of next year, to add a couple other very big names to that list. Obviously, you know, if I look at that list, Dell is not on that list, Cray is not on that list yet. And obviously we would have teams working on those. And maybe you'll see some more product approvals hopefully next year and hopefully us to be able to update on that 8 million.

Thank you.

Thanks, Chris.

Thank you. Our next question comes from Dave Mitchell with William Blair and Company. Please go ahead.

Morning, guys.

Good morning Dave, how are you today?

Good, good. Just a couple questions. I'm a little curious on the interest expense. Saying the $9 million level is going to be about the same in the fourth quarter, is that correct.

That's right, Dave. This is Corrado. What happened. There's a couple factors in the quarter on interest where we benefited from. One obviously was the deleveraging activity that we announced at the end of June and then subsequently we did some more deleveraging in the third quarter with the bond exchanges. So just a lower average debt. But just as relevant is that we had accelerated some interest benefit, probably more than normal related to our interest rate management activities. That would be our interest rate swaps. We're currently enjoying about about a 325, 330 basis point reduction in our bonds on a recurring ongoing basis. What happened in the third quarter was that to the extent we exchanged 35 million of bonds at the early part of the quarter, some of the unusual swap gains that we had reported at the beginning of the year, I think you recall about $30 million of cash gains, is getting amortized over a longer period of time. Some of that amortization was accelerated. So there's probably a couple million dollars that benefited the quarter, which I would call a higher than normal, higher than average, and that wouldn't recur, but now because of the equity offering obviously we'll have a sustainable lower number and that's what sort of harmonizes Q3 to Q4 and beyond.

Okay, I guess I understand that part. The next question is, just on CG. I mean everybody seems to be all - CG coming back into the market oh, boy, oh, boy look out, look out. Can you just king of quantify for us the whole market and how minimal CG coming back is to the whole market.

Absolutely, Dave, and you raise a good point. You know, the total market is 950,000 metric tons and CG, remember what's coming back is only one of the two plants that CG did have. So there's St. Mary's plant that's attempting to come back, and so it's only a portion of CG. And we believe the portion that's coming back has a total capacity, if it's run full out, is perhaps in the neighborhood of 17,000 metric tons. So your observation's absolutely correct. It's a very small quantity coming to this global market and as we said, they're at the front end of their trials and attempting to come back into the market.

Okay. Then finally on the ETM side. The guidance you've given us, the 8 million. Is that sort of a number that you sort of feel that you have in hand for next year as opposed to what you're trying to continue to get.

It's a number that we feel comfortable with. I think what we've tried very hard to do as a team is really under promise and over deliver. So it's a number we're comfortable with. And it's based on approvals we have in hand, it's based on sales orders we have on hand, and it's based on some additional business that we are going after that we feel pretty darn comfortable we're going to get because the power of the technology and the performance of the product line.

Okay. Thanks a lot, guys.

Thanks, Dave, have a good day.

Thank you. And there are no further questions at this time, please continue.

Folks, thank you very much for your questions, much appreciate your time this morning, and we'll pick it up at the end of the fourth quarter and we'll give you a recap of the year. And we again thank you for all your support. Have a good day.

Thank you, sir. Ladies and gentlemen, this concludes the Graftech third quarter earnings conference call. If you would like to listen to a replay of today's conference call, please dial 800-405-2236 or 303-590-3000 with pass code 553503. Once again if you would like to listen to a replay of today's conference call please dial 800-405-2236 or 303-590-3000 with pass code 553503. You may now disconnect and thank you for using AT&T Teleconferencing.