GrafTech International Ltd (EAF) 2014 Q1 法說會逐字稿

Good afternoon. My name is Jasmine, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech first-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Kelly Taylor.

Thank you, Jasmine. Good afternoon, and welcome to GrafTech International's first-quarter conference call. On the call today is GrafTech's Chief Executive Officer, Joel Hawthorne, and Chief Financial Officer, Eric Asmussen.

We issued our earnings release this morning. If you didn't receive a copy, please contact Marie Noar at 216-676-2160, and she will be happy to fax or emile 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 that's posted on our website at www.GrafTech.com, in the Investor Relations section. In particular, on this call, we will be discussing, for the periods reported, the non-GAAP financial items of EBITDA and adjusted operating income.

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 Joel.

All right. Thank you, Kelly. Good afternoon, everyone, and thanks for joining GrafTech's call today.

Today, I want to walk you through our first-quarter highlights, give you an update on the rationalization initiatives, and give you some details of our recently completed refinancing initiative. I'll also provide a little outlook commentary, and then I'll open the call up for any questions.

Looking at Q1 results -- total Company sales were $281 million, up 11% over Q1 2013. EBITDA came in at $33 million, at the high end of our guidance range, due to the timing of shipments in our industrial materials segment. Operating cash flow for the quarter was $22 million, which included $9 million of rationalization and related cash costs.

We are proud of the whole GrafTech team, which has been working diligently to execute on our strategy. The actions that we have taken over the last year and a half to lower costs and realign our production platform have positioned us to succeed in a very competitive global market. Our first-quarter results demonstrate that we have the right plan in place, and we continue to drive value for all of our shareholders.

In our industrial materials segment, sales increased 5% to $219 million in the first quarter, mainly due to increased volumes. Adjusted operating income for the segment was $8 million, largely due to the lower graphite electrode selling prices, compared to the prior-year quarter.

As discussed previously, the global graphite electrode market remains challenging and has resulted in a weaker pricing outlook for 2014, compared to 2013. However, as indicated on our fourth-quarter call, prices appear to have stabilized, albeit at lower levels year-over-year, at approximately 8% to 10%.

Our order book, today, is currently about 90% firm and in final negotiations. The remaining 10% is mainly second-half or one quarter to one quarter negotiations that have not started at this point in time. We expect to run both our graphite electrode and needle coke facilities at no over 90% in 2014.

We have a planned five-year maintenance outage at Seadrift that will impact our 2Q results, compared to Q1. Also, in the first quarter was an insurance recovery of over $3 million that will not repeat itself in the second quarter.

Turning to our engineered solutions segment -- sales in the first quarter increased 38% to $62 million, compared to the prior-year period. The new product sales and fast-growing markets continue to drive strong revenue growth in our ES business.

As I discussed on our last call, we expect meaningful growth in the launch of our high temperature furnace system products for solar, LED, and consumer electronics markets. The launch of these new products represented approximately $10 million of new business in the first quarter and is still on target to achieve $30 million in 2014.

Adjusted operating income for the segment was $3 million, in line with our expectations for the first quarter, as startup costs associated with adding production capabilities for new products weighed in on profitability. For the second quarter, we expect operating income to be in the range of 8% to 12%, as our operating efficiency improves for those new products.

We continue to expect the average full-year segment operating income margin to be in the range of 10% to 15% as our product mix improves and startup costs wind down the second half of the year. I continue to expect ES revenue growth for the year to be in a range of 15% to 20%.

Turning to our rationalization plan -- as we have previously announced, we made the strategic decision to close two of our highest-cost graphite electrode production facilities and optimize their capacity. This allows us to significantly improve our cost structure and enhance our global competitiveness. These initiatives are substantially complete and are on track to achieve $50 million in savings this year.

The overall cost of these initiatives is expected to be slightly lower than originally anticipated. Down from the $100 million to $95 million, $25 million of which is expected to be in cash.

Additionally, we expect that we will see cash flow benefit from working capital [and] rationalization initiatives earlier than previously expected. We expect these initiatives, along with the completion of the wind-down agreement for third party supply of needle coke, to generate $150 million of working capital improvements. Approximately $90 million is expected in 2014 now, with the remaining $60 million in 2015.

Again, I want to thank our team, again, for their professionalism during this process and how efficiently and effectively they have conducted the rationalization related initiatives. It has been a smooth transition for our customers, communities, and the other stake holders in the regions.

On the financial front -- we recently completed a refinancing of our revolver. The new, five-year $470 million facility extends the maturity date from October, 2016 to April, 2019. This also provides additional financial flexibility -- increased revolver availability at reduced borrowing spreads.

The refinancing was completed efficiently, with strong support from our lender group, and represents an important step that will support our strategic and financial initiatives for growth and execute on our stated well defined strategy. We made a decision to reduce the facility to its current level, based on projected future requirements. And thought it was prudent to bring the level down, given our capital structure targets. Based on working capital initiatives of $150 million that I stated, the free cash flow generation, and our new revolver, we are well-positioned, going forward, to service debt requirements, invest, and grow the business.

Finally, let me turn the outlook into guidance. The IMF projection projects global GDP growth of 3.6%. This is a slight downward revision from its previous estimate, but an improvement, still, from 3% growth in 2013.

According to the World Steel Association, global steel consumption, excluding China, is expected to increase by 3.1% in 2014. While emerging economic growth rates have moderated, the forecast indicates positive growth in developing economies, including North America and the European Union, both regions which had negative growth in 2013. GrafTech's global steel customers remain cautiously optimistic, as trends indicate continued growth for the remainder of this year, albeit at a slower pace.

We reaffirm or full-year targeted EBITDA to be in a range of $150 million to $180 million. We expect second-quarter EBITDA to be in the range of $30 million to $40 million, as the benefits associated with rationalization initiatives begin, but are partially offset by the full flow-through of average lower 2014 graphite electrode pricing. Also impacting the quarter will be the planned five-year maintenance outage at Seadrift and nonrecurring benefits from 1Q.

We expect second-half EBITDA to be in the range of $90 million to $105 million, as the benefits of the rationalizations are fully realized. They'll be partially offset by average lower pricing, related to mix and the one-time nonrecurring events of the first half.

We are targeting cash flow from operations to be in the range of $150 million to $180 million in 2014, an increase over our previous guidance of $20 million. This increase is due to the faster cash flow flow-through from our working capital initiatives and reduced cash rationalization costs.

In conclusion, we continue to believe that GrafTech is positioned as one of the best carbon graphite material [science] companies in the world. We've built an [advantage-backwards], integrated low-cost business model in our industrial materials segment, which positions us well to capitalize on the trends when the market environment improves.

In engineered solution, the investments we've made are driving strong revenue growth and provides us with a solid platform for diversification against the steel cycles. Finally, I'm very pleased that we built a solid capital structure and will continue to leverage this as our business model and our strategic [advances] to drive long-term shareholder value.

This concludes my prepared remarks. And now, I'll open it up to see if there's any questions that I can answer.

(Operator Instructions)

Your first question comes from the line of Luke Folta from Jefferies.

Hey, Luke.

Hey, Luke.

I guess, first question -- I just want to, I guess, touch a bit more on the outlook for the year. Nice beat, relative to what you're expecting in 1Q. And 2Q looks a little better. So you said that was mostly due to timing of shipments?

Correct. So timing related to -- as we mentioned -- some of our refractory orders that are capital good buys by our customers. Sometimes, it wasn't clear when they would take it, and we've seen some of those go here in the first quarter. And that was the main contributor -- the timing of our customers in the industrial materials.

And again, in ES, we continue to see the revenue growth. And again, fast-developing markets in consumer electronics. And it depends on, again, how those end markets go, but we've seen some good program launches here in 1Q that will continue into 2Q.

Okay. So on the refractory orders, was that something that was scheduled in the second half, in your view, and that it got pulled forward to 1Q? Is that how to look at it?

Not for the major order. Again, the orders -- part of it was pulled, actually, from 2Q to 1Q. So not second-half to first-half, but one 1Q shipment, the customer wanted it. And we had it planned in 2Q.

I guess I'm just trying to explore -- you're doing quite a bit better in the first half than expected. But the second half, given that you reaffirmed the full-year guidance, the second half, implicitly, comes down. So I was trying to get a sense of what the moving parts are there.

Mainly, Luke, is on -- as I mentioned in the comments -- we feel good about the rationalization, the cost initiative is on track. As I mentioned, 90% of our book is firming up in negotiations.

In 1Q, you saw the benefit on price, of carry-over from the fourth quarter into 1Q. 2Q through the whole second half of the year, we'll begin to see the full impact of the new pricing. And plus, again, as we round the book out in the product mix. And product mix is both product itself, and, again, the geographic mix of where we're concluding the deals around the world.

Okay.

And the $3 million insurance recovery -- was that something that flowed through income?

Yes.

Is that an IM thing -- IM segment?

IM segment. Yes, exactly.

Okay.

And then also, can you give us a sense of what the volume trends have been so far, and the demand outlook? If you look at the World Steel production numbers, Europe seems to be bouncing back pretty nicely. Are you starting to see that in your order book?

And can you, maybe, just give us the volume numbers for the quarter? The year-over-year changes that will come in the Q, if you can.

Well, yes. It will come out in the Q. And in the Q, we'll disclose it's about 20%. In Q1, industrial materials -- which is all products -- is up, related to volume.

So as I mentioned, at the end of the year in the 1Q call, volumes, we feel pretty good about. And we're seeing that, when you look at our order book and you look at our shipment levels. The volumes are at decent levels, based on the market we're seeing.

The trend for the year is, again, 1Q was a solid quarter. 2Q, again, from a volume standpoint, will be a good quarter.

Second half, again, what we expect -- we don't expect any major pickup of the market from our volumes, which is built into our guidance. We expect the markets to continue at reasonable levels from 2Q into the second half.

We are encouraged -- when we look at our customers -- our customers are taking, again, decent levels compared to year-over-year. So, again, the thing we're gauging still, when we look to second-half, is going to be -- where do the customers end up?

And we're cautiously optimistic, like they are. There's some good indicators, some good signs, but there's still some things we're watching.

We always talk about nonresidential construction -- it's still mixed. The indicators are still there that it's going to improve. But the underlying economies are looking much better. The volumes -- I feel very good about our volumes, Luke, going into 2Q and the second half of the year.

Okay. Thanks, Joel.

And one last question. Maybe I'm crossing the line on this, but just looking through the proposal by the Save GrafTech folks.

There's some estimates in there that talk about what could happen, in terms of earnings generation from really changing up the strategy and going for market share focus. And one of them, I think, is something along the lines of increasing market share by 30,000 tons and that driving the $60 million in EBITDA growth. And I think there's a similar number -- 15,000 tons, I think, at Seadrift, and $24 million benefit there.

Can you comment -- I have some views on this. Can you comment on how realistic you think that is? Is that something that could be implemented? If you run through those volumes through the model on your end, is that the numbers you get, too, in terms of earnings impact?

I guess, Luke -- I appreciate the comment -- and again, it has been a very public and a lot of information about that. And again, I'll let it stick to the public and the information out there.

But I will say from our perspective and our strategy -- and Luke, you know of our approach to the market -- that we've been very price disciplined in our approach to the market. Now again, we believe you can differentiate. You can create values to customer. And we have a very good pricing discipline that we try to employ as part of our strategy.

With that, you also have to take into account -- into the market conditions of supply and demand and where you are. As part of our strategy. And we always try to do that and implement, again, a pricing discipline in light of where market conditions are with supply and demand.

And, I guess, while I refer to the details of what you mentioned -- obviously, there's a lot of information out there. And again, we've tried to be disciplined in our approach, in pricing and our market share. And that is part of our strategy as we continue to move forward.

Okay. Thanks a lot, guys.

Hey, Luke, thank you.

Our next question comes from the line of Edward Marshall with Sidoti & Company.

Hello, Ed. Hello, Ed?

Jasmine, we may have lost Ed.

Ed, you there?

Do you hear me?

Yes, I do now.

Okay. Did you just say that you think that volume -- you said volumes were up, roughly, about 20% in the quarter?

Yes. When you look at the revenues within the IM group -- referring to IM -- the revenues, if you break it down -- volumes, and carried them up over 20% in Q1, compared to Q1 last year.

Right. Okay.

So volume's up 20%. The book is 90% firm. I'm just curious to get your sense as to why pricing was going to be down 8% for 2014. It just seems like the demand side seems a little bit stronger, as we move into 2014, than when pricing was set. So maybe, you can just help me parse those two things together.

Absolutely Ed. Actually, you back up into the negotiation season last year -- which was, again, the September, October time period -- the market had already moved down. And so what you began, you began at that level where the market was.

And I mentioned this in our last call, that when you look at where we were from the fourth quarter on pricing coming into the year, the movement just from fourth quarter into 1Q was going to be around 5%. The total year -- that 8% to 10% that I mentioned -- is a full impact of the prior bookings in early 2013, where again, price is down -- you go year-over-year, 1Q to 1Q -- significantly down in the quarter. And again, probably around 18%, 19% in the quarter.

So what you're seeing is the impact of that, and the average of what that 8% is. So where you started the bid season -- and this is where I said it's encouraging to us -- that pricing is flat in the bottom, is where you started it. It didn't move significantly. You're at that bottom point.

Now, why are you at the bottom point? To your other point, volumes were pretty decent for us in the back half of the year. And I said, coming into this year, that's why we felt good about the book and the underlying volume -- is even at that current level, volumes will continue to be at a decent pace.

So it wasn't so much -- is this is where you started in the bid season, at the level. The price didn't move significantly from where it started -- as I mentioned -- 5% end of the year, coming into this year.

Where do you see spot pricing starting to develop now, as you're starting to fill out the book then?

Yes. Again, from a spot basis, I think we're going to review -- and we'll look at it as we move into the second half of the year -- where spot market would be. Again, most of our business right now that we're booking is on the obligations that we negotiated here through February, March, April.

But I'd say we'll begin looking at the spot market, especially in the second half of the year, and see if -- again, supply/demand -- if the conditions warrant, if there should be any movement on the spot market. And we will make that assessment, here, as we round out the book and get into late 2Q, early 3Q.

So to further extrapolate that then, do you think that pricing could go up without further revisions to capacity in the industry? I understand we're at the bottom of the steel cycle, but with constant pressure on pricing over the last two years, the fact that the book is filled out 90%, that you're still seeing some -- as we at least progress into the first half of this year -- we've sees some pricing degradation, do you think that pricing is going to have to wait for further rationalization? Or do you think that this is just the nature of the cycle and where we are?

No. I think Ed, obviously, the rationalization that we have done -- the industry has done -- my view, it hasn't taken into account where you're looking to the future bookings and the supply/demand equation. Because remember, when the order books were put together, even now, those rationalizations were in process and not fully implemented and fully realized.

I think we'll get a better feel when we move into, obviously, the second half through 2Q into 3Q. As we begin to look to 2015, where demand is, and how, obviously, we see our order book, our utilization rates, and what price can do.

And I've said before, I think the big question is -- clearly, pricing is flat and bottom in my opinion -- is will it be a U or V recovery in that book bill for 2015? And the factors that will determine that are some of the things you mentioned, right? The supply/demand, the rationalization, where does demand go from the EAF customers? That will determine where pricing goes moving forward.

Right.

Now, to be clear, the $17.4 million, the $25 million of full-year expense -- the rationalization related to depreciation. First, is that -- assuming that's accelerated depreciation, due to the -- is that right? Just as you close those operations?

Correct.

And that's excluded from the $150 million to $180 million?

Correct. Correct, Ed.

Okay.

And then finally, again, on the discussion surrounded the proxy -- I just wanted to be clear. Is there any cost related to you -- I'm sure there are -- but are there costs related to GrafTech with the proxy fight? And how long do you see that lasting?

Well, I will just comment. Of course, there's costs associated with that proxy contest because we said, we try to resolve this because of the distraction and the costs, so there are costs associated with it.

Our annual meeting is May 15. So, obviously, May 15 is when the determination will be made on that contest.

I see. Could you -- I guess, you won't quantify the cost at this point. And will it be meaningful to, say, 2Q results?

And then, secondly, in the event that this carries forward past the May 15 deadline -- which sounds like it may -- will they go along at the same level? I'm just curious.

Well, two things. Again, we didn't call out the costs because our team has done a great job managing the costs, along with all of our other SG&A costs in Q1 and into Q2.

From our perspective, right now, it will conclude May 15. We do not see anything that would take us beyond May 15 at this point in time. And again, all those costs have been factored into our guidance that I've provided.

I see. Thank you.

Thanks, Ed.

Our next question comes from the line of Brett Levy with Jefferies.

Long time, no speak.

How is it going?

Not bad at all. Not bad at all.

I think the challenge that has been held out there, I think, by Luke and others for this industry is the entrant of new foreign competition. And this has historically been a business where you guys have had -- you and some of your European competitors -- have had a quality advantage, a service advantage, a location advantage. And that has given you some degree of price protection. And that there's been a bit of an improvement in the foreign product and some inroads made.

Can you just give a little bit of an update on the quality dynamic, the supply-side dynamic -- what you guys have done to battle? Because it seems like you've done a good job, especially with the recent guidance, in battling that competitive dynamic. But just talk a little bit about where they are, where you are, how you differentiate yourself -- as an update.

Yes. Appreciate that, Brett.

Obviously, the market over the years has had no new entrants into it. It had people who have been there and have expanded, as you referred to, both in India -- there's some expansions -- obviously, Japanese expanding here in the US. Those decisions were made at the top of the cycle.

So what you are seeing the industry fight through, from a supply/demand balance as we came off the cycle of 2008 peak down to the 2009-2010, the cycle is in the recovery of that. And so supply/demand is out of balance. So the market is trying to work through that new supply that has come on in some cases in the last year, and with where the demand is.

How we try to differentiate in that -- and always have -- is, obviously, through our product quality that you mentioned and the innovation we try to bring to the market. We still believe that you can differentiate in the shop. You differentiate, obviously, not only through product quality, but also through the service that you provide to the customer.

The gap of that between the top tier guys has always been pretty relatively close, right? There's the Japanese, the Germans -- we've always been relatively close in that the quality and what we deliver. And we fight over differentiating for different strategies at each account.

The tier behind that, the gap has, obviously, gotten closer over the years. But there still is a gap, obviously, overall.

One key thing we believe we've done, going forward, to keep differentiating us is the backward integration into the needle coke. That provides us an advantage, obviously, not only to the cost structure through the cycle, but also the key raw material now, we can work and develop that raw material as it goes into the electrode. And we have done that.

At our Seadrift facility, we've talked about this before, we have, obviously, developed super premium cokes. We're testing those into the market place and trying to create that advantage on quality through the raw material. So again, we'll continue to do that with our R&D group through the key raw material. Develop it so it has a quality advantage in the marketplace.

So, again, I think we've positioned well, Brett. And you're right, the market always adjusts to supply/demand entrants at various times. And we always have to position ourselves to differentiate ourselves in the market.

Again, last thing I'll say on that is, obviously, we've talked before about China. China again -- the quality is still not there. Again, the access to raw materials -- there's obviously been attempts themselves to add capacity in China.

From what we see, the quality of the raw material is still not to the standards that we would want to see in a high quality electrode. There has been added capacity, but again, a lot of that capacity has been more for the domestic market as it has grown, than it has for the imports. So we'll continue to watch it.

I guess the key take-away for me is, we always got to work to differentiate ourselves through our R&D, innovation -- which we work to do -- and the service we provide to the marketplace with our technical service support. So Brett, does that give you a good overview?

That does.

And then the other part is, you guys have talked about your strategic growth initiatives. And I just wanted to get a sense -- I mean, you've got the ability to de-lever rather significantly here, given your cash flow dynamics. Can you talk a little bit about the priority of de-levering versus some of your growth initiatives?

And without saying exactly -- you know, I'm going to go buy this company or build a new plant or something like that -- can you talk in a little bit more detail about the growth initiatives might be?

Absolutely, Brad. In fact, again, I made it very clear, our focus right now is to generate cash, out of the balance sheet and from operations, and de-lever us and get us to a three times EBITDA multiple, right? Which we will see by the end of this year, as we get there.

So clearly, our focus short-term, through 2014, is manage the balance sheet. We want to get it back to below three times EBITDA. And that will be our focus in 2014. And that's why we talked a lot about our initiative of the working capital and bringing this to the right level that we see.

Beyond that, obviously, as we do that, we always look for growth initiatives. Again, like we've shown in the past, if the right opportunity comes for both the technology, that makes sense to us, or improves our cost position and our core product, we will always look at that. And again, depending on where it is, the timing of it, we'll gauge that and determine the next step.

But I want to make it clear, here, in 2014, our focus, really, is generating the cash, taking use of that cash, and making sure I get the balance sheet to where it is. So then we can act on some of those growth things like we've done in the past.

Sounds good. Thanks very much, Joel.

No problem, Brett. Good talking to you.

Good talking to you, too.

Our next line comes from the line of Dave Katz of JPMorgan.

Howdy. Hope you all are doing well.

I was curious. If you look back in the past, the Company had indicated on engineered solutions business that margins on a sustainable basis could be 10% or above that. The Company hasn't hit that yet.

I understand that the first quarter, historically, is typically weaker due to the product cycle. But looking beyond that on a more sustainable basis, if and when do you expect to get to that 14% margin level?

Sure. Thanks, Dave.

As I said in my comments, Q1 came in, as we expected, relative to 4Q, based on the seasonality and some of the new products that we knew were launched in Q1. As we walk to Q2, I said that, look, we see the improvement of 8% to 12% in the ES operating margin.

I'll give you a little color on that. About 1% to 2% of that will be -- some of those product startup costs we saw in Q1 will work their way off, as we move forward. The other -- call it -- 2%, 3%, moving in 2Q, will be, obviously, improved mix and increased revenues, as the initiatives I mentioned that were launched in Q1 -- especially in the consumer electronics space -- we see more volume in 2Q.

The second half, our target -- and based on what we see right now -- is we will achieve in that 10% to 15% range, in the second half of the year. And again, for the whole year, we still feel that average will be 10% to 15% as we go.

It has been frustrating. And I know, I ran the business for three years. But again, I see the assets that we put in are starting to run, starting to develop the product. The prices are accepted by the market. We'll start to see the synergies in the operations in the second half of the year.

So again, we're still feel good on ES. As you know, we've driven the sales from $120 million to the forecast this year is around $300 million. On an absolute dollar basis, the operating income is improving. It's just getting the quality of earnings we expect out of the business, which, again, is us managing the cost side and the new product introductions.

And in 2015, do you expect both the revenue and the margin in that business to grow?

Well, what we've said, as far as beyond 2014 is, we expect ES to get to $500 million. Is what we've said publicly. As far as 2015 itself -- too early for us to tell.

But again, from a trajectory -- where we want to go with ES, and what we've talked about -- the objective is, and we see the investments we're making, will start pointing us towards that $500 million revenue number. And we said that, again, that should be at a 10% to 15%. And we expect, maybe, at the higher end of that range longer term, as all of the bugs are worked out.

Okay. Thank you.

All right, Dave. No problem. Thanks.

Our next question comes from the line of Charles Bradford with Bradford Research.

Good afternoon.

Hey, Chuck.

How are you doing?

A couple of things. The data on electric furnace output that we track, which is 58 countries, showed a 5.2% increase for the first quarter of just the EAF output. Which is better than the World Steel Association had for the countries that they cover, which was 2.5%. Do you think this represents, maybe, a final turn-up in the construction markets?

Again, I'll give you my view on it, Chuck. Again, our numbers for EAF in 1Q year-over-year are -- again, outside of China -- are, again, 2.5% to 3%. That's what we saw with our numbers.

Again, I don't know if it represents a turn in construction yet. Again, in talking to our customers, what we're seeing is, I think, they're still cautiously optimistic of the construction turn -- rebar, structural products.

We've seen the utilization rates of our customer still be at the lower level in that space. So again, we see still good opportunity, when it does turn, that their utilizations rate will go up.

But again, I think it is too early, Chuck, from what we see, if there's been an impact of it. Clearly it's at a lower level -- as you know -- from where it can be, when nonresidential construction finally does kick in.

On another issue, with the political issues between Ukraine and Russia -- those, generally, have been pretty large sources of scrap supplies to places like Turkey, which is a big EAF producer. Have you seen any signs of the Turks having difficulty getting raw materials that might affect their EAF output?

You're absolutely right on the supply chain, but we have not seen any impact in the Middle East or Turkey, from our perspective, of who we service and the volume levels there or their operating rates. So we've seen no impact from our perspective.

Thank you.

Yes. Thanks, Chuck.

Our next question comes from the line of Frank Duplak from Prudential.

Hey, Frank.

How are you doing?

I just had a couple of questions. A couple on the new revolver, if you guys could answer them. Are there financial covenants -- maintenance covenants -- on that revolver?

There are. They're the typical leverage ratio and interest coverage. The leverage ratio is 3 to 1 on a debt-to-EBITDA. And the interest coverage, 2.5 to 1.

Is that different than what the prior covenants were?

They're a little looser. The prior covenants were 2.25 to 1. And then, 3 to 1 on the interest coverage.

Okay.

And then, has the availability changed? I know you guys weren't using the whole -- or didn't have the whole $570 million available. So was your liquidity impacted at all by the smaller size? Or that was just capacity you were never would be able to use anyhow?

I think you've caught it with the latter. The 2.25 was a limiting factor on the utilization, so the decrease of size from $570 million to $470 million really has no impact. It's the leverage ratio that allows us more utilization and better liquidity.

So what was the availability as of the end of the quarter?

The end of the quarter was $206 million. And if we factor in, with the new facility, what it would be on an implied basis, it would be $332 million.

Okay.

And then I noticed you guys -- it looks like you paid off the supply chain financing. Is that still available to you, or is that not a source you're going to use going forward?

We absolutely have supply chain financing as a source that we use when and as needed.

Okay.

And then, just last thing -- can you just talk a little bit about the timing of the Seadrift plant closure? How long that's going to take? How long it might be off? And what the cost might be?

Sure, Frank. From a timing perspective, here in 2Q as I mentioned, we'll take this five-year maintenance outage. It will take about -- I will call it -- half the quarter. So -- call it -- roughly 45 days is what we're planning to do to the major maintenance and refurbishment of the facility.

Haven't disclosed what that cost impact will be. But, clearly, it will have an impact on the operations, as you won't be operating for half the quarter.

And again, that was built into our guidance that we gave for 2Q. We factored in -- when we said we'd be in the range of $30 million to $40 million, we factored in that impact into 2Q.

So that cost has not been excluded from EBITDA. That EBITDA guidance is inclusive of that maintenance outage expense?

You got it. Yes.

Thanks for your help. Appreciate it.

No problem.

(Operator Instructions)

Our next question comes from the line of Tyler Kenyon from KeyBanc Capital.

Hi. Good afternoon.

Hello, Tyler.

Hello, Tyler.

Just how should we think about inventories, as we progress through the rest of the year? I think, inventories were a little bit higher to start the year than, I think, we were projecting -- at least here in the first quarter. And would expect those to come down as we progress through the year, naturally, as you purge some higher-cost needle coke.

But can you just give us some thoughts there, as to how you're thinking inventories will look as we progress through the year? Thanks.

Yes. No problem, Tyler. Again, when you look at Q1, overall inventories -- it looks like they didn't change a whole lot in Q1.

Behind it, I'll tell you, we're starting to see the IM inventories decrease. Obviously, ES inventories pretty much offset that, as they built with their higher revenues that they generate and the inventory to service that. So we're beginning to see the impact behind the scene on the inventory number.

We would expect, as you go into 2Q, obviously again, not much significant changes. As, again, we're still adjusting the rationalization and moving the inventory and where we are.

But then, in Q3, Q4, is where you'll see the impact of the inventory. And again, if you had to split it, you'll start to see in Q3. And then the majority -- or a good chunk of it -- will come in Q4, on the inventory reduction.

Okay, thanks.

And then, just on the -- I guess, one housekeeping item here -- where, exactly, did the insurance recovery flow through in the industrial material segment? Is that above the line, or was that below the line item?

Primarily in COGS above.

Yes. In the operating income -- COGS.

Great. Thank you.

No problem, Tyler.

There are no further audio questions at this time. I will now turn the call back over to Joel Hawthorne for closing remarks.

Thank you, Jasmine. Again, I want to thank all of you for joining the call today.

On behalf of the 3,000 men and women of GrafTech, thank you for your interest -- your participation on our call. And Eric and I look forward to talking with you at the end of the second quarter. Have a great day.

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