GrafTech International Ltd (EAF) 2013 Q1 法說會逐字稿

Good morning. My name is Jodi, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech first quarter 2013 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Mrs. Kelly Taylor. Please go ahead.

Thank you, Jodi. Good morning and welcome to GrafTech International's first quarter 2013 conference call. On the call today is GrafTech's Chief Executive Officer, Craig Shular, and our Chief Financial Officer Lindon Robertson. We issued our earnings release this morning. If you did not receive a copy, please contact Marie [Knorr] at 216-676-2160, and she will be happy to fax or e-mail 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 are posted on our website at www.GrafTech.com in the investor relations section. For your reference a replay of the call will be available on our website.

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

Thank you, Kelly. Good morning, everyone, and thank you for joining our call today. Today we'll take you through our Q1 results, provide commentary on our 2013 outlook and then open it up to questions. Recapping Q1, total Company sales improved 5% to $254 million. EBITDA came in at $36 million, in line with our guidance. Net income was $4 million or $0.03 per share. Cash from ops was $18 million. Turning to our IM, Industrial Materials segment. Sales increased 8% to $209 million, operating income for the segment was $16 million. Higher cost third party needle coke carried into this year, will continue to negatively impact us in the second quarter. However, it is important to note that the second half of 2013 is anticipated to benefit from lower cost as this higher cost inventory is depleted and graphite electrode operating rates improve. As an update to our graphite electrode book building process, we currently have approximately 80% of our 2013 targeted book completed. This is up from the 60% level we highlighted in our last conference call at the end of February.

In our Engineered Solutions segment sales were $45 million in the first quarter. As expected, operating income was essentially breakeven. For the full year, we continue to target double-digit revenue growth for the Engineered Solutions segments with operating income margins in the range of 13% to 15% for the second half of the year. We enter the second quarter with demand ramping up nicely for thermal management solutions and advanced consumer electronics, which support our growth expectations for the year.

Turning to outlook, in the IMF's April 16 report, the estimate for 2013 global GDP growth has been reduced to 3.25%, a reduction from it's January's estimate of 3.5%. Advanced economies are anticipated to expand at a modest growth rate of 1.2% following a weak start in Q1. Recessionary conditions in Europe are forecasted to persist with economic activity projected to contract 0.3%. The IMF also reduced the growth rates for emerging and developing economies. On April 22, the World Steel Association, WSA, reported a 3.6% decline ex China in Q1 global steel production versus Q1 of last year. The WSA also reduced its total world steel demand growth forecast from 3.2% to 2.9%, largely driven by a weaker outlook and the soft Q1. As a result of the aforementioned economic and steel data, we are reducing our targeted EBITDA range for the full-year by approximately 5% to $165 million to $195 million.

Given the challenging operating environment, we are also reducing our targeted CapEx expenditures to $90 million to $110 million. In the second quarter of 2013 we are targeting EBITDA in the range of $30 million to $40 million. Seasonally stronger volumes compared to the first quarter in the IM segment and improved profitability in the Engineered Solutions segment are anticipated to be offset by the full flow through of lower 2013 pricing of graphite electrodes. In the second half of 2013, we expect improved profitability due to increased revenue in both business segments and lower-cost in the Industrial Materials segment as the carryover high cost coke inventory is depleted and, as we said, operating rates increase to fulfill customer graphite electrode orders. Lastly, the improvements made to strengthen our business model and the strategic initiatives to grow and diversify our company will enable GrafTech to emerge from this low cycle stronger and positioned to exceed our prior peak performance as the industry recovers.

Jodi, that's the end of our prepared remarks. Can you open it up for Q&A?

Yes, sir.

(Operator Instructions)

Martin Englert, Jefferies.

I wanted to see if you could provide more color on the volumes of electrodes year-on-year on Q1 and then what kind of utilization for your production -- how that looked?

Yes. Electrode volume was up year-over-year between Q1 last year and this quarter. So we have seen an improvement in volumes. Obviously graphite electrode process have dropped so that's the offset you see. As far as operating rates, as we discussed in the last call, we have been increasing the operating rates of our graphite electrode facilities to fill and take care of our order book. We ran, in Q1 at about a 65% operating rate, but I think that I should highlight that in March that was up to about a 72% or 73% operating rate. So, over the course of this year, just based on order book, we will be increasing the operating rate in our electrode facilities. And then I think as I said in the last call, probably the fourth quarter we will exit 80%, 81%, 82% operating rate in our electrode facilities in Q4.

Just so I understand, this do you have some carryover in needle coke that's going to be pressuring things in the first half -- pressure first quarter -- pressure in second quarter? And, outside of that, for third-party needle coke for '13 besides the carryover, is that incoming and consume volume expected to be fairly evenly consumed among the remaining quarters?

Yes it is. Obviously, our production is ramping. So it will move in consumption with those increases in operating rate. But I would say by the middle of this year, the higher cost very over third-party needle coke will be completely depleted. It is one of the things you will see in the second half of this year that will allow us to have a lower cost structure.

Can you provide any color for the Seadrift internal consumption and how that looked in the first quarter?

Yes, sir. We continue to run Seadrift at 100% operate. That has gone very, very well. The quality is superb. We are taking about 50% of Seadrift's capability so we are taking -- let's say Seadrift's about 140,000 metric tons. We're taking about 70,000 tons of that, as planned.

Will you be taking a similar amount, 50% in the back half of the year?

Yes. That's pretty steady. So it will be similar. There's obviously some ups and downs. But big picture, yes, we take about 50% of its requirements of its production, and 50% is sold outside.

Okay. And for the sales of electrodes in this quarter, did you have in the carryover pricing from '12 being sold?

We did, and that is a normal phenomenon. We have customers around the world that book Q1 to Q1, because that's their budget year. So we did have some carryover electrodes in Q1, which obviously had been higher-priced. So that also benefit a little bit Q1.

Okay. If I could one last quick question here. For the back half of the year, it sounds like you are anticipating some improvement in-demand from your customer base. Are they talking about improved order books? Do they have any kind of visibility out there? I guess, because typically it's a -- second half of the year is softer just from a seasonal standpoint.

Yes. Our customers' order books remain short. That has been typical the last few years. I don't see a big change there. But they are ordering from us, and the way they are placing their orders with us, and their planning of need has a bigger off take from us in the second half. They have run down electrode inventories I think quite low here in Q1. The way they are placing their orders, and their actual order book that we are building has a bigger volumes in the second half.

Okay. Excellent. Thank you for all of the commentary and color.

Dave Katz, JP Morgan.

I was hoping that you could talk about the recent advances in Graphene technology including use in batteries and detail how you are positioned to benefit from that?

Yes. In batteries, lithium ion batteries utilize a graphite powder inside the battery. And so, with our graphite material science that we have here and our world R&D Center in Parma, our team has done a lot of work on that particular part of the science. And this falls within our engineered solutions business. As you have seen us do in engineered solutions, we have attacked a lot of the emerging markets from smartphones, flat screen TVs, lithium ion batteries would be one area, LED lighting would be another area. That whole development of lithium ion batteries is very good for the graphite world. And developing graphite powder that can meet the requirements inside the battery, the charge, holding the charge, et cetera, is very, very important. This plays to our sweet spot, graphite material science, and I would expect over the next few years you will see us with great success in that area. And we will grow that area just as of we have done advanced consumer electronics which need of course very sophisticated thermal management solutions that are all graphite.

What about changes and advancements in Graphene Technology?

Yes. Graphene is a very exciting area. Obviously, it is fresh on the scene, if you will. Nobel Peace Prizes are being awarded in this area. This is at the front-end, but we would do a lot of work here on Graphene. Some of our scientists have published papers on Graphene. And, again, I look at that as something kind of medium to longer-term down the road. Graphene will be a very exciting capability product, product lines, and solutions within our portfolio. All of this work, again, resides in engineered solutions. Graphene has the ability to be very, very strong, very conductive with electricity. If you look at capacitors or some of the latest futuristic of elements in energy, Graphene has a tremendous role there. Dave, it is at the front end.

It is literally at the science end, Nobel Peace Prize, but too me this is the importance of engineered solutions. If I took you back five, seven years ago, working on advanced thermal solutions for consumer electronics. Today, that is a very nice business growing very, very nicely. Graphene will have a similar timeline. If we look back probably 7, 10 years from now, we will be having Graphene type products. They will be in the latest generation new products coming out. It is an area -- those of us that are close with graphite, that only graphite can solve some of these issues with the customers. Graphite has unique properties, unique weight, unique thermal properties, and there is no other material that could solve some of these issues. So we are very excited about Graphene. We have Graphene scientists here. And as I said, some of our scientists have published papers.

Okay. And then, turning back to the first quarter, I think the press release stated there was bad debt recovery in there. Would you be able to quantify what impact that had on the first quarter results?

Yes. It was about a $1.2 million, $1.3 million in overhead. It was just a bad debt provision from last year that we were able to collect in its entirety. It is not a partial. We got it all. We just highlighted that because if you look -- obviously, we brought overhead down a lot for all of the normal blocking and tackling things that we do. And then Q1 was a little bit lower because of that one-off item.

Okay. Excellent. Thank you.

Edward Marshall, Sidoti.

A quick question on the technology, following up on what was just said, are you qualified for aerospace applications out of your engineered solutions. This is something we have discussed before I think.

Yes. We would have a number of solutions in aerospace. Everything in jet engines, we would have some applications there where there's very high-temperature, very severe environment. And so we would have some Graphite solutions in there. We have a broad range of qualifications that would go from aerospace to defense applications. And then of course you have seen us announce a number of exciting things with NASA on space including the Mars rover last year.

Sure. Is there any applications that you may be able, or have you look at the potential for the 787 and the lithium batteries applications? Is there any solutions that you could provide there to the overall mix? Or is that an opportunity going forward?

Down the road that may be an opportunity, yes. Down the road, we don't have anything in those batteries today, but down the road that may be another opportunity for us.

Okay. As we talk about order rates in engineering solutions, first, I don't know if you'd quantify the order rate that you saw. Maybe you can relate it to either the second half of 2012 or the first quarter of 2012 however you would like, but could you talk about how or quantify the demand ramping up nicely and that giving you confidence into the back half of the year?

Yes. For advanced consumer electronics and some other segments of ES, Q1 is traditionally a softer quarter. You all see many launches coming in the smartphone area, many of them getting announced. Those require us to ramp up over the course of the year. So we have been delighted with that business. And that business continues to grow nicely. There is a lot of world-class producers in that space. Obviously, we are in virtually all of their programs. We would expect engineered solutions to have another all-time record year on sales.

What we are seeing in engineered solutions is it is starting to get enough girth. $250 million plus in sales is now really starting to get some girth. It has started to absorb normal overhead. It can spread those costs. And then a lot of the startup cost on some of the CapEx we put into it is starting to be behind us. So I see the second half of this year, I expect engineered solutions to have its best six months it has ever had and then be very well positioned with the size, the girth, the start-up costs behind us for 2013.

And then, finally, on the industrial materials business, you said you are running at about 80% of your order book is full right now. Is there any spot to speak of, or would that be after the book is full?

Yes. Spot, I am not expecting a lot of spot business this year.

Sure.

You are right. It would generally come towards the latter part of the year. I think the only thing that may generate some spot is if there was a real pickup in nonresidential construction, the back half of this year, where maybe some of our customers may have underestimated their requirements. But, as you said, right now we have 80% of the book built. We have another 20% to go. As we all know, the market is a tough, tough market worldwide. But what I will say is, and I know you guys follow this closely, there are some data points starting to pick up. The US has some data points picking up, the ABI index. If you look at that, the last 10 months have been positive.

You've heard some of the key EAF producers here in the US release auto production has been picking up. Really, what we are all waiting for is some more pickup in nonresidential construction. I think as that starts to come, our customers' order books will really start to fill up nicely. Is that this year? Time will tell. I don't think anyone really knows. But the economic parts are starting put some pluses on the board that would indicate we are probably bottoming out in some economies, and in some economies we are going to start getting into nonresident construction.

Sounds like your comments are slightly more cautiously optimistic than they were in 4Q. Would you say the first half of this year is your trough as you kind of --

Yes, it could be. And I think you are right there, we are a little bit more cautious here. Obviously Q1 steel production numbers have come in lower I think World Steel Association obviously expected I think even than a lot of our customers expected. The first quarter got off to a slow start. And so, yes, we are cautiously optimistic. That is why we lowered our guidance a little bit just based on that. But the book continues to come together nice. Another 20% to go so there is always risk on that.

I would say, this year to us looks pretty much the way we have guided. The majority of it is put together for us. And now our team is just working very hard on costs, and you see us cutting overhead. You see us cutting costs. And so that -- fortunately, we have got a team that has got a great track record in that area, and so we are going to continue to do that very hard the balance of the year. When you see nonresidential construction start to pick up, I think we're going to be so well-positioned to really take advantage of that and really puts some point on the board.

I agree. Thanks for the color, guys.

Michael Gambardella, JPMorgan.

I have got a question on currency. The Yen has depreciated quite a bit against the dollar recently. Are you seeing any increase export activity of Japanese-based graphite electrode production coming out of Japan?

Yes. On the currency front let me get kind of inside GrafTech first and kind of outside your question, the global competition. On the inside, currency for us really was not a factor. We had some negative on the sales line, but we had some positive on the cost side. Net-net currency was not a factor for us in Q1. If we look outside and look on the competitive landscape, yes, our Japanese competitors, obviously with the Yen around 100, have some improvement in their cost structure. So it is a factor. We do see some of them a little bit more aggressive, because they have gotten that benefit from the currency. I don't think it is material. Like I said, our book is 80% put together. But they do -- you are right, Mike, they do have a little bit of advantage with that slide in the Yen.

Okay. Thanks a lot, Craig.

Chris Haberlin, Davenport.

I just wanted to see if you could update us on your pricing expectations like on the Q4 call you had guided the needle coke prices down 8% to 10% and graphite electrode down to 8% to 12%. Are you still looking at those ranges our are those combined out some due to the weaker demand environment?

I don't think the range are too far off. I think on GE we may be a towards the upper end of that range, but I think we will still be in that range. Needle Coke, we could be, I know we said 8% to 10%. Gee, that could be 11%, could be 12%. That book has come together nicely, too. I'd say on both of those think about the upper end of the range as we have gone from kind of the 60% to the 80% of the book put together.

And then you mentioned that your operating rates in Q1 were 65%. How does that compare to industry-wide are where you're seeing industry-wide operating rates?

Yes. I don't get to see our competitors, obviously, and some of them do not report this number. But I think from what I see all of our competitors, because this is very much a global market. We are in all of these bids, very global, very competitive. I think they are seeing the same thing we are. I would think most of them are down in the lower end of the operating rate range so 60%, 65%, 70%-ish, something like that. I think they all would be somewhere in there. So I don't see a big disconnect between us and what the competition is doing. And then, as I said earlier, we see our book volumes picking us the second half based on our orders we have of customers. And I would see Q4 probably 80%, 81%, 82% [up level].

And then just maybe from a high level thinking about the industry given the market's over supplied right now. There's additional capacity having online. Operating rates are relatively low. What is it going to take for the electrode producers to get pricing power back?

Well, I think a couple of things. I think we have talked over the last couple of years that the competitors, the Chinese competitors, have been losing an awful lot of money in China because of their cost structure, their poor quality. And then last year was absolutely a terrible financial performance for them, some of them losing hundreds of millions of dollars. What I see is, obviously, that can't go on forever. There may be some consolidation in that industry, because some of them just don't have a balance sheet. I see that as probably one item that may be on the landscape. Another item I just see as steel demand picks up. As this globally nonresidential construction starts to pick up, that is very, very beneficial for the operation of our EAF customers. I kind of see those two.

The big one that I think everyone is watching and our world is nonresidential construction. Here in the US, autos has come back. You see housing has come back quite nicely. But the big one, 30%, 40% plus for a lot of our customers just isn't there yet. And it is that way in many economies, obviously, the EU same thing. As non res comes back, we will see a pickup in volumes that will help are operates. I think it will start to soak up some of the excess capacity in electrodes. Lastly, as a said before, you may see some consolidation in that China producers. So many of them are losing money.

Thanks. That is very helpful. Last one for me. Are you seeing customers in 2013, just given lower prices, do you think the customers are looking at restocking inventories this year? I know they went through a de-stocking phase last year. Are they restocking, or are customers more living hand to mouth right now?

I think they are hand to mouth is what I see. They have tried to skinny down. Last year was a very, very tough year for our customers. They have tried to skinny down their balance sheet as best as they can so squeeze down working capital, all the inventories. And I see them all pretty much still in that same mode. They have tried to get very, very light on inventories kind of hand to mouth as you say. That would be my typical customer is what I see out there today.

Okay. Thanks very much. I appreciate it.

Charles Bradford, Bradford Research.

A couple of things have obviously happened this morning, which, I don't know if word has gotten out yet, but US Steel has announced they are going to lock lockout their employees at Lake Erie.

Right.

The question is, do you know of anybody -- who do you think would benefit from that? The parent name that comes to my mind is Devasco.

Yes, I hate to pick one of my customers. Obviously we service all the EAF shops in North America. I will take it maybe big picture. I think this will help the EAF guys, obviously. So maybe some of the EAF guys here in the US will have a chance to run a little bit higher opt level because of the Lake Erie issue.

Devasco besides being integrated does have an EAF.

Correct. Correct.

Another question on usage. ThyssenKrupp was building a stainless steel melt shop in Alabama. It's now part of the new company whose name I keep forgetting, the spinoff, Outokumpu. Do you know if that melt shop is running much yet?

Outokumpu? No. I don't think they are running much at all. Obviously, stainless steel is in a difficult area, pricing down, volumes down. I would say stainless is even behind carbon been steel in recovery.

And then looking outside the US, it looked like, at least according to WSA data, electric furnace production last year was up 3 million tons, which is essentially nothing when it comes to the total.

Correct.

There are some estimates in their data that could throw the whole thing. For example, they have a pretty good number for India of being 67.5% of the total being EAF. Do you know how accurate that number may be?

Well, I can speak to India from our vantage point. So our Indian customers have been running at a better level than a lot of other parts of the world. They have been picking up some production. The EAF guys there are quite nimble. They go up against some of those large, integrated state owned, steel companies in India. I find the EAF Indian shops versus those large state owned shops can maneuver very quickly. They are very efficient and usually are very good at capturing any business that is out there. For us, the India EAF business has been improving a bit.

I guess we will just have to wait for the rest of the markets to turn around.

Yes. I think, like you, everyone is watching non res construction and some of the big items to turn and for the EU to find the bottom. When we get to the bottoming process in the EU and they start to turn, I think our EAF customers will do much, much better.

You have some [mini mills] talking about how bad flat roll steel is and some of the integrates saying, oh, but our operating rate is very high in flat roll. We will have too see how it works out. Thank you very much.

Sheldon Grodsky, Grodsky Associates.

I am new to your Company, but in looking at the industry, I read some details about their seems to be a lot of worldwide capacity coming on-stream. Is this a threat, or is it just normal expenses as far as you can see?

Yes. It is capacity coming on. It is not a huge amount of capacity coming on when you look at the total production landscape. What it is, is some capacity coming on at a very weak point in the cycle. That is what has really exacerbated things. You have got some coming on in India and have some coming on here in the US. It is coming on at a time when are customers and steel demand and demand for electrodes is very low. So that is what is very aggravating the thing. You also have some capacity coming on in China. That is less disruptive.

China is already in excess capacity, and, as I said earlier, most of the Chinese electrode producers are losing a lot of money the last few years, especially last year, just a brutal year for them. We may see some fall out there. Maybe some of the players are going to drop away. There may be some consolidation. Sheldon, big picture, yes, on capacity. Is it huge in quantity? Not really, but it is coming at a very low point in our normal steel cycle.

Thank you.

(Operator Instructions)

Chelsea Bolton, Goldman Sachs.

Actually all of our questions have been answered. Thanks so much.

Jodi, any other calls?

(Operator Instructions)

Jodi, I think we can wrap it up then. Everyone, I appreciate your participating in our call. I look forward to talking to you next quarter. Thank you all very much. Have a good day.

Thank you. That concludes today's call. You may now disconnect.