GrafTech International Ltd (EAF) 2007 Q1 法說會逐字稿

Good morning. Welcome to today's GrafTech International first quarter earnings conference call. Please be aware today's conference is being recorded. At this time I would like to turn the call over to Kelly Powell, Manager of Investor Relations for opening remarks and introductions. Ms. Powell?

Thank you, Tamika. Good morning, and welcome to GrafTech International's first quarter conference call. On the call today is GrafTech's Chief Executive Officer, Craig Schular, and our Chief Financial Officer, Mark Widmar. We issued our earnings release this morning. If you did not receive a copy, please contact [Jen Radeke] at 216-676-2281, and she will be happy to fax or email a copy to you.

As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also, to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release, which is posted on our website at www.graftech.com, in the Investor Relations section.

At this time, I'd like to turn the call over to Craig.

Thank you, Kelly. Good morning, everyone, and thank you for joining GrafTech's conference call. Today we'll take you through our first quarter highlights and then open it up to questions.

Sales increased 31% to just under $230 million. Income before specials was 52 million, or $30 million higher than Q1 '06. Gross profit increased 54% to $76 million, while gross margin improved five full percentage points to 33.4%. Net cash from operations improved 51 million, to $18 million. Earnings per share from continuing operations before special items more than tripled to $0.27 per share. Net debt continues to improve. We completed the quarter with net debt at 497, a reduction of $12 million.

Finally, recapping overall Q1 results, we are beginning to see the flow-through to results of several of the initiatives we undertook the last couple of years. These include repositioning our production platform, quality improvements in our products, higher product pricing, the impact of several productivity projects, relentless attention to cost, overhead reduction initiatives, and finally, tax planning efforts.

Turning to our graphite electrode segment, net sales increased 40% to $180 million. Sales volume was 50,000 metric tons for the quarter, a 19% increase year-over-year. Operating income for the segment was $48 million, an increase of 35 million over prior year.

We experienced solid demand in the first quarter as our customers ran at good operating rates, allowing for strong first-quarter electrode shipments. Our graphite electrode segment benefited from a number of factors including higher sales volume, higher selling prices, successful productivity initiatives, and the benefit of lower cost raw materials purchased last year and sold from inventory in the first quarter of this year. As discussed previously, we experienced significant increases in petroleum-based raw materials in 2007, which will be more fully reflected in future quarters.

In the advanced graphite materials segment, first quarter sales were 27 million, as compared to 25 million in the same period last year. Operating income for this segment was 3 million versus 2 million a year ago.

Turning to cash flow, we continue to improve on this front. We generated a $51 million improvement year-over-year in operating cash flow, enabling us to complete the quarter with net debt below 500 million.

We recently announced a third call of our senior notes, our most expensive debt at 10.25, for an additional 50 million to be retired later this month. This brings our total year-to-date senior note redemptions to 185 million. Following this third call, the amount outstanding will be reduced to $250 million. Recall that after peak approximately four years ago, the outstanding notes totaled $550 million.

Selling and admin expenses declined 2 million to 25 million in the first quarter. The decrease is a result of realized benefits again from previously announced productivity initiatives.

Finally, turning to outlook. We are encouraged by underlying demand for our products, and we continue to expect a solid year for global EAF steel. As a result, we are raising our full year '07 guidance. We expect graphite electrode volume for the year to be approximately 210,000 metric tons. We anticipate the second quarter graphite electrode volume sales to be 52,000 metric tons.

On a full company basis for the full year, we expect sales now to increase 12% to 14%, up from our previous guidance of 10% to 12%. And we currently expect graphite electrode sales to increase 18% year-over-year. As a result, we target income before special items to improve 40% year-over-year to $185 million to $195 million, and cash flow from operations to be between $90 million and $95 million.

We've also revised our effective tax rate before special items to be approximately 28% to 30% due to a number of tax planning initiatives, improved profitability, and a favorable mix of income in lower tax rate jurisdictions.

With that, let's open it up for Q&A, Tomika.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Michael Gambardella with JPMorgan.

Hey, Craig, good morning. Congratulations on all the success you've had recently.

Mike, thank you very much. I think we're just beginning to get some traction.

Good. I have a question on your comment that you just made about the lower cost material that filtered into the first quarter, and what kind of impact did that have on first quarter? Because you mentioned that you'd see higher priced material flowing through in the second and I guess the rest of the year?

That was probably a benefit of $4 million to $5 million in Q1.

And then how did you get SG&A down so much in the quarter?

Well, last year I think we talked about a number of initiatives and some repositioning of the platform, and so we've -- it's a combination of taking out some people. Obviously, selling the cathode business made us a simpler business, and so that also has led to some productivity improvements. But most of those actions were taken over the course of last year with the people coming off either at the end of the year or the first part of Q1.

So, that number in the first quarter, I think the 22, is sustainable?

Yeah. That looks pretty good to us.

Okay, great. All right, thanks a lot.

(OPERATOR INSTRUCTIONS) We'll go next to Brett Levy with Jefferies & Co.

Hey, Craig, excellent quarter. Can you talk a little bit about the situation with needle coke? Exactly where has pricing gone, because I've heard it really has gone up almost double or more here? When is that going to start filtering in? And can you just sort of talk about the supply-and-demand situation in that product? It looks as if at some point there should be a way of increasing the amount of availability, but it doesn't seem to be happening.

The needle coke front, Brett, we feel very good about our position on needle coke. We're probably the largest buyer in the world of needle coke, and so as we've talked on prior calls, we believe we're very well positioned. We've secured supply. We have a strong track record of securing supply.

Because of our large buy, we also believe we get the best price out there in the marketplace, and we have leverage on that purchase. Needle coke has gone up a significant amount in large part driven by the increases we've seen in oil, and so we'll start to see some of that flowing through in our numbers the balance of this year. But having said that, as you see, we've executed on a number of productivity initiatives, cost reductions, overhead reductions to offset some of that, and as you see in Q1, we've been able to achieve margin expansion, and we expect margin expansion for the full year. And so we've been able to digest those significant increases. But, again, we feel good about our needle coke position. It is tight, as you said, and there's not a lot of new needle coke out there, but being the big buyer, I think we're well positioned in today's marketplace.

All right. Would you backward integrate in any way now that you've got some free cash flow? And then I guess a different question. You've now got that down to a very manageable level and you've got a reasonably low call price coming up soon. Are you thinking about refinancing the 10.25s?

Your two questions, first on the refinancing, obviously we could refinance everything very, very easily right now. You're absolutely spot on on that. What we're balancing, of course, is our Company's been improving quarter by quarter. The debt's been coming down, cash flow up, cost down, and so as we look forward, the only thing delaying us on a refinancing is the improvement in traction we're starting to get.

So, we'd like to do this refinancing when it's best for us and when we can get the best package and best deal. And, as I said, we're improving quarter by quarter here, and when we think we can get that best deal, we'll pull the trigger on a refinancing and obviously we can lower our interest expense. Those 10.25s are expensive. They were done a long time ago when we were in a much weaker financial position.

So, a refinancing will come, it will come at an opportune time, we believe, for ourselves, and I look forward to quarter-to-quarter improvements to just better position us when we do go to market. I think we'll be very well positioned.

On the needle coke, I don't see a lot of new capacity coming. As far as back-integrating and looking at those alternatives, obviously, we will look at any alternative out there that we think will improve our production platform and our competitiveness. So, we're completely open to looking at anything that will help advance our competitiveness, lower our cost structure, and improve our product and platform as we deliver to customers.

All right. I've got a few more questions, but I'm going to get back in queue.

Perfect. Thanks, Brett.

Moving on, we'll take our next question from Robert Legaipa with CIBC World Markets.

Hi, good morning. So, very good quarter, and I guess what I'm interested in most is the forward outlook. What I mean by that is the increased cost that you're expecting in the future on the petroleum-based products, where exactly are you seeing that? Are you seeing that in natural gas? Are you seeing that on the pitch coke side? I mean, if we look at the increase in the income guidance, it would imply, if my numbers are correct, that somewhat lower results moving forward and purely as a result of the increased [inventory] costs?

That's what it is. We worked off some of the lower cost inventories from last year, so the higher cost inventories of raw materials will start to flow through. I think we'll see perhaps a little bit higher pricing go forward. Because, as you will recall, a number of our customers in graphite electrodes book Q1 to Q1. We have some customers that's just their budget cycle. So, generally, prices are a little bit lower in Q1 because their contracts go Q1 prior year to Q1 this year. So, pricing will probably be up a bit, and then costs will be up a bit, also, because of the higher flow-through of raw materials.

But having said that, you've seen us hit on a number of productivity items, cost reduction overhead, and we're going to offset some of that. In total year we will have margin expansion.

Terrific. And I guess, you know, with regard to the volumes from the Q1 to Q1 type contract, what type of volumes are we talking about there that are going to re-price as of the second quarter?

Well, it's a guidance we don't give. It's customer-specific. It changes a little bit each year. It depends on which customer is in the book, how much share you have with them. It's not a material amount, if you will, but there is a portion, call it 10%, 15% type customers that go Q1 to Q1.

The second question related is the fact that the [inaudible] costs are up so much, and if you look at the oil pricing it's still up at a fairly high level. I guess my question is, when you look at contract season moving into the late summer, early fall, have you seen any customers come to you early to try to negotiate pricing for even next year, or has any of that taken place?

There has been no pricing for '08 yet. It's not our intention to do any pricing at this stage. No customers have come yet, either, but I would expect because the supply/demand equation in electrodes is very tight right now. But in a dialogue with some of the customers, they're indicating they're going to come early, and so perhaps later in the second quarter we may see some come. But just driven by tightness in electrode market, it is very tight, and as we've talked before, we're running at a very high op level at our facilities.

The last question, if I could, just in regards to the cost savings and initiatives that you put in place last year. I think you had mentioned that 25% of that was going to occur in '06, with the remaining 75% in '07. Have we seen the whole 75% here in the first quarter, and that's just expected to continue, or are we going to see further savings as we move throughout the year?

We did a good job completing our productivity initiatives. There was only one in the U.S. that carried over into the first quarter, that was just completed at the end of the first quarter. All the other imitatives that we've laid out in the past conference calls were completed on time and on target. And so I think we identified around $20 million, $22 million in savings to you, and we saw about 25% of that last year. All of it we will see this year, of course. New would be the remaining 75% you're speaking to, but also the carry-over from prior year. So, I think in the first quarter and go forward, you're seeing a significant portion of that full 22 million or so.

And that one that was completed at the end of the quarter, how significant was that?

Well, it was one of our smaller ones. It was a machine shop we had in the U.S., iu Tennessee. We were machining some electrodes here. It was only 35, 40 people, very professional team that stayed right with us to the end. So, compliments to that group of team members, and we moved that down to Mexico. So, that's all centralized in our very large, as you know, the world's largest graphite electrode plant down in Mexico, low cost, efficient, all under one roof, and we serve all of North America out of that facility very efficiently.

Great. Thanks very much. Good quarter.

We'll go next to Gary Madea with Bank of New York.

Thank you. Just a quick follow-up question, guys, to Brett's question on the refi. I'm sure you noticed over the past couple of days, one of your -- well, the primary competitor, SGL, just placed a $200 million euro convert deal over in Europe, and I know that has been kind of a desire of yours to perhaps offset some of your cash tax obligations over in that part of the business model for you folks. And obviously the deal they did was well received, it was about 12 times over subscribed. Any comment or thoughts about being receptive or thoughts about the transaction and whether or not something like that would make sense for GrafTech? Thanks.

Yes, we did see that transaction. I really can't comment on the transaction, but, yes, we're aware of it. We're looking at all refinancing alternatives, and so we have many, many alternatives that have opened up to the Company that were not, quite frankly, available to us the last eight years. In fact, this quarter, Q2 will be the first quarter in over eight years we've not had an antitrust payment. So, we're just really at the front-end of this traction. This is really the first quarter that the cash we generate is going to be used all on benefiting our Company, growing our Company, improving our productivity and competitiveness, improving our products.

So, as we look forward, Gary, we see a host of refinancing alternatives for us. Literally, everything is open to us, and as we go forward the pricing thereof, because we're improving each quarter, gets even more attractive to us.

So, I don't want to limit us to look at this business. We're looking at all of them. Obviously, we had gone through a period where we struggled to get people to join our finance agreements. That's no longer the issue. We can put together a world-class group and literally do any kind of refinancing, and I think we're going to see some attractive rates because of our financial improvement.

Okay, very good. Thanks, guys.

(OPERATOR INSTRUCTIONS) We'll go next to John Evans with Wells Capital.

Morning, John.

Mr. Evans, your line is open if you do have a question.

Can you just talk a little bit about R&D expense? It was down year-over-year, and this 2.1, do you think you can continue that kind of throughout the year, or does it go up? And then can you also talk a little bit about depreciation? It was down year-over-year, and kind of the outlook for depreciation and amortization?

Yeah, the R&D, I think, will probably come in around 9 or 10. I don't see a major change year-over-year on R&D, and so it will probably be around 9 or 10 for the year. On depreciation, we've got guidance out there on our depreciation. We've guided to 35 million, and I don't see any real material swings in that.

Okay. And then can you just refresh us from the standpoint of, do you have any electrodes that you can actually sell on the spot market? And if you do, can you talk a little bit about maybe the pricing that you're seeing in the spot market?

Well, we have perhaps another 5,000 tons. As we've said before, our capacity right now is about 215. All the plants have to run well full out to get that 215, so a tension . The spot market right now is about 59.50. We do not give pricing guidance, so I won't speak to price, but I will tell you the posted spot price is 59.50. If you ask me do I have 59.50s in the book? Yes, but we have, John, to answer your question, perhaps another maximum 5,000 tons, if we run -- everything runs very well the balance of the year that would be

Okay.

So, in other words, not a lot. We are running full out and I believe the overall supply/demand equation for electrodes is that kind of tightness.

And, lastly, can you just comment, the euro has been so strong here in the first quarter. Obviously, your competitor is euro-based. What kind of effect is that having on the market, and do you get any sense that they could potentially push prices more?

Well, yeah, I can't comment on price, but on the euro, yes. The euro has appreciated significantly. Our sales in the euro zone are denominated in euro. All the competitors are denominated in euro in that zone, so there is some benefit on the sales side. We've highlighted some of that in the prior quarters. Also, on the cost side, we were confronted with euro costs, so we have to battle that, and that's why the relentless attention on the cost side and productivity initiatives.

And one last question relative to this inventory that you sold at a lower cost, you don't have any more of that in there, is that correct?

Well, the majority of it is flowing through in the Q1. There will be some that will carry over. It's not all zeroed out. It goes across a number of our raw materials, but the majority of it went through in Q1, and then the balance of the year we will see the higher priced petroleum-based products start to flow through. But, again, as I keep reminding everyone, the total year guidance is that despite that, we will still achieve margin expansion for the full year.

Okay, thanks so much.

(OPERATOR INSTRUCTIONS) We'll go next to Michael Christodolou from Inwood.

Good morning. A couple of questions where I suspect maybe the answers maybe semantical, so I appreciate your indulgence. So, the additional 2,000 tons of volume that you had here in the first quarter, did those end up getting -- can you say that those end up being just spot demand you were able to respond to, or was that from existing customers that had a fixed price with some kind of potential volume add-on that was established back in last September, October, November?

Michael, that was by and large from existing customers running harder. EAF steel ran well in Q1, and so it's customers taking more out of their annual contract for Q1 and running quite well. We see global steel running quite well and -- in the quarter, and our outlook and our customers' outlook, when I look at the total world, there's always a few soft spots and a couple of them are here in the U.S. But when I look at total global steel, it looks like it's poised to run quite well the balance of this year.

And so they were running harder at the price that they established seven months ago now?

That's correct, Michael.

Okay. And then the additional 3,000 of tonnage that you expect for the balance of the year, is that just because you see steel running harder, or is that 3,000 tons officially spoken for, and would that be people that came in at spot or people invoking it under an existing agreement?

It's a mix thereof. It's a combination of both of those, and to the extent that steel continues to run well like it did in Q1, we may see a little bit more spot.

Okay. So, that could be some of this spot prices with a five handle on it?

That could be possible. That could be possible.

Okay. And then with respect to spot, I guess I saw where SGL came out and, again, they raised their spot here recently, back on April 2, and I don't know if there's anything you could comment on that, or is there any significance of their April 2 timing in terms of raising prices effective immediately across Europe, America and Asia?

Yes, we did see that, Michael, but there's really not much I can say about it. It's really too early to comment on it.

When you're quoting a spot, would that be for regular -- that would be for extra size or regular size?

That's regular size. That 59.50 is our posted spot for regular size, and then the larger size, or super size, would have a higher price than that.

Could you care to quantify that?

It's a posted price. It's about 10%, 11% higher than that 59.50.

Okay. All right. Very good. thank you very much.

Michael, thank you so much.

And there are no further questions at this time. I will turn the conference back over to Mr. Shular for any additional or closing remarks.

Tomika, thank you very much. Everyone, thank you very much for your support on this call. Again, we are very pleased with the quarter and, as we said, we believe we're beginning to gain some traction on some of the initiatives the last couple of years, and we look forward to talking to you in the second quarter on Q2 results. Have a good day.

And that does conclude today's conference call. We thank you all for your participation and you may now disconnect.