GrafTech International's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Brookfield Asset (BAM)

GrafTech International Ltd (GTI) Q1 2013 Earnings Call April 25, 2013 11:00 AM ET

Executives

Kelly Taylor - Director, Investor Relations

Craig Shular - Chairman, President & CEO

Analysts

Martin Englert - Jefferies

Dave Katz - JPMorgan

Edward Marshall - Sidoti

Michael Gambardella - JPMorgan

Chris Haberlin - Davenport

Charles Bradford - Bradford Research

Sheldon Grodsky - Grodsky Associate

Chelsea Bolton - Goldman Sachs

Operator

Good morning. My name is Jody, 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.

Kelly Taylor

Thank you, Jody. 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 didn't receive a copy, please contact Marie Noar at 216-676-2160 and she’ll 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 would like to turn the call over to Craig.

Craig Shular

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 inline 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 segment with operating income margins in the range of 13% to 15% for the second half of the year. We entered 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 16th report, the estimate for 2013 global GDP growth has been reduced to 3.25%, a reduction from its 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 22nd, the World Steel Association, WSA reported a 3.6 decline ex-China in Q1 global steel production versus Q1 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 to 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 higher 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 emerge from this lower cycle stronger and position to exceed our prior peak performance as the industry recovers.

Jody, that’s the end of our prepared remarks, can you open it up for Q&A?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Martin Englert from Jefferies.

Martin Englert - Jefferies

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

Craig Shular

Yeah, 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 prices have dropped, so that’s the offset you see. As far as operating rates are, 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 I should highlight that in March that was up to about 72% or 73% operating rate. So over the course of this year, just based on our 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 will exit 80%, 81%, 82% operating rate in our electrode facilities in Q4.

Martin Englert - Jefferies

Okay. And just so I understand, 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 consumed volume expected to be fairly evenly consumed among the remaining quarters?

Craig Shular

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 carryover third party needle coke will be completely depleted. So it's one of the things that you will see in the second half of this year that will allow us to have a lower cost structure.

Martin Englert - Jefferies

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

Craig Shular

Yes, we continue to run Seadrift that 100% operate; that’s gone very, very well, the quality is superb and we are taking about 50% of Seadrift’s capabilities, so we are taking let's say Seadrift is about a 140,000 metric tons, we are taking about 70,000 tons of that as planned.

Martin Englert - Jefferies

Well, you will be taking that similar amount 50% in the back half of the year?

Craig Shular

Yeah, that’s pretty steady, so it will be similar. There is obviously some ups and downs, but big picture, yeah, we take about 50% of it’s requirements of it’s this production and 50% is sold outside.

Martin Englert - Jefferies

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

Craig Shular

We did and that’s normal phenomena; we have some 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 bit higher price; that also benefited a little bit Q1.

Martin Englert - Jefferies

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 second half of the year is softer just from a seasonal standpoint?

Craig Shular

Yeah, our customers’ order books remain short; that’s been typical the last few years, so I don't see a big change there. But they are ordering from us and the way they are placing their order with us and they are 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, and so the way they are placing their orders and their actual order book that we are building has bigger volumes in the second half.

Operator

Your next question comes from the line of Dave Katz from JPMorgan.

Dave Katz - JPMorgan

Hi Craig; I was hoping that you could talk a bit about the recent advancements in Graphene technology including use in batteries and detail how you are positioned to benefit from that.

Craig Shular

Yeah, in batteries, lithium ion batteries utilize a graphite powder inside the battery and so with our graphite material science that we have here in our world R&D center in Parma, our team’s done a lot of work on that particular part of the science and this falls within our Engineered Solutions business. So as you've seen us do in Engineered Solutions, we've 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; and so 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, etcetera is very, very important. So this placed to our sweet spot, graphite material science and I expect over the next few years you will see us with great success in that area and we will grow that area just as we've done advanced consumer electronics which need of course very sophisticated thermal management solutions that are all graphite.

Dave Katz - JPMorgan

And what about changes in advancement in Graphene technology.

Craig Shular

Yeah, Graphene is a very exciting area, obviously its fresh on the scene if you well, Nobel Peace Prizes are being awarded in this area. So 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. So Graphene has the ability to be very, very strong, very conductive with electricity. So if you look at capacitors or some of the latest futuristic developments in energy, Graphene has a tremendous role there.

So David is at the front end, its literally at the science end Nobel Peace Prize, but to me this is the importance of Engineered Solutions. If I took you back five to seven years ago, we were working on advanced thermal solutions for consumer electronics. Today that's a very nice business growing very, very nicely. Graphene will have a similar timeline. So if we look back probably 7 to 10 years from now, we will be having Graphene type products, they will be in the latest generation, new products coming out. It’s an area, you know those of us that are close to the 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.

Dave Katz - JPMorgan

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

Craig Shular

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

Operator

Your next question comes from the line of Edward Marshal from Sidoti.

Edward Marshall - Sidoti

So a quick question on the technology following up from what was just said. Are you qualified for aerospace applications out of your Engineered Solutions and this is something we've discussed before I think.

Craig Shular

Yeah, we would have a number of solutions in aerospace; everything in jet engines. We would have some applications there where there is very high temperature, very severe environment, and so we would have graphite solutions in there. So we have a broad range of qualifications that would go from aerospace to defense applications, and then of course you've seen us announce a number of exciting things with NASA on space including the Mars Rover last year.

Edward Marshall - Sidoti

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

Craig Shular

Down the road, that maybe an opportunity, yes, down the road. We don’t have anything in those batteries today, but down the road that maybe an other opportunity for us.

Edward Marshall - Sidoti

As we talk about order rates in Engineered Solutions, first I don't know if you’d quantify kind of the order rate that you saw or maybe you can relate it to either the second half of 2012 or the first quarter of 2012 however you like, but could you kind of talk about how or quantify the demand ramping up nicely and then giving you confidence since the back half for the year?

Craig Shular

Yeah. For advanced consumer electronics, and some other segments of the ES, Q1 is traditionally a softer quarter, and you all see many launches coming in the smartphone area, many of them getting announced. So 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, and obviously we are in virtually all of their programs.

So we would expect Engineered Solutions to have another all time record year-on-sales. What we are seeing in Engineered Solutions is it's starting to get enough girth and so 250 million plus in sales is an, it's really, now it's started to get some girth, it started to absorb the normal overhead, it can spread those costs and then a lot of the startup cost on some of the CapEx that we put in it 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's ever had and then be very well position with the size, the girth, the start-up cost behind us for 2014.

Edward Marshall - Sidoti

And then finally I guess on the industrial material business, you say 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, let’s say a 100%?

Craig Shular

Yes, spot I am not expecting a lot of spot business this year, and you are right it would generally come towards latter part of the year, and I think the only that may generate some spot is if there was a real pick up in non-residential construction at the back half of this year, where may be some of our customers underestimated the requirements, but as you said right now we have 80% of the book build, we got another 20 to go as we all know the markets are 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. US has some data points picking up the [ABI] index, if you look at that for 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 and really what we are all waiting for is some more pick up in non-residential construction. So I think as that starts to come, our customers order book will really start to fill up nicely. Is that this year? Time will tell, I don't think anything really knows. But the economic data points are starting to put some plusses on the board that would indicate we are probably bottoming out some economies and in some economies we are going start getting into non-res construction.

Edward Marshall - Sidoti

It sounds like your comments are slightly more cautiously optimistic then they were in 4Q, would you say this first half for this year is really your trough?

Craig Shular

Yeah, could be and I think you are right, we are little bit more cautious here, obviously Q1 steel production numbers have come in lower than I think World Steel Association obviously expected. I think even a lot of our customers is expected. So the first quarter got off to a slow start, and so we are cautiously optimistic, that’s why we lowered our guidance a little bit just based on that. But the books continues to come together nice, another 20% to go so there is always risk on that. But I’d say this years just looks pretty much the way we’ve guided majority of it is put together for us and now our teams is working very hard on cost, and you see us cutting overhead, you see us cutting cost and so that fortunately we've got a team that's got a great track record in that area. So we are going to continue to do that very hard the balance of the year. When you see non-residential construction start to pick up, I think we are going to be so well-positioned to really take advantage of that and really put some points on the board.

Operator

Your next question comes from the line of Michael Gambardella from JPMorgan.

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 increased export activity of Japanese-based graphite electrode production coming out of Japan?

Craig Shular

Yeah, on the currency front, let me give kind of inside GrafTech first and then kind of outside your question, the global competition, on the inside currency force really wasn't a factor. We had some negative on the sales line, but we had some positive on the cost side, net-net currency wasn't 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 a 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’s material, I feel like I said our books 80% put together, but they do -- you are right Mike they do have a little bit advantage with that slide in the yen.

Michael Gambardella - JPMorgan

Thanks a lot, Craig.

Craig Shular

Thank you. Have a good day.

Operator

Your next question comes from the line of Chris Haberlin from Davenport.

Chris Haberlin - Davenport

I just wanted to see if you could update us on your pricing expectations. I think on Q4 call you had guided a needle coke prices down 8% to 10% and graphite electrode down 8% to 12%, are you still looking at those ranges or are those bind out some given weaker demand environment?

Craig Shular

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

Chris Haberlin - Davenport

And then, you mentioned that your operating rates in Q1 were 65%, how does that compare to industry-wide and where you are seeing industry-wide operating rates?

Craig Shular

Yeah, I don't get to see our competitors obviously and some of them don't 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 these bids, they are very global, very competitive. I think they are seeing the same thing we are. And so I would think most of them are down into the lower end of the operating range. So 60% to 65% to 70% something like that, I think they all would be somewhere in there. And 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 up in the second half based on our orders we have from customers and I would see Q4 probably 80%, 81%, 82% up level.

Chris Haberlin - Davenport

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

Craig Shular

Well, I think a couple of things. I think we've talked over the last couple of years that you know the competitors, the Chinese competitors have been losing an awful lot of money in China because of their cost structure, their poor quality and the last year was absolutely terrible financial performance for them. Some of them losing hundreds of millions of dollar. And so what I see is, you know obviously that can’t go on forever and so there maybe some consolidation in that industry, because some of them just -- they just don’t have a balance sheet. So I see that as probably one item that maybe on the landscape.

Another item I just see as steel demand picks up, as this globally as non-residential construction starts to pick up, that is very, very beneficial for the operation of our EAF customers. So I kind of see those through the big -- the big one everyone I think is watching in our world is non-residential construction. Here in the U.S. 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, non-res construction just isn’t there yet and it's that way in many economies. Obviously, the EU, same thing. So as non-res comes back, we will see a pick up in volumes that will help our operates, I think it will start to soak up some of the excess capacity in electrodes. And then lastly as I said before, you may see some consolidation in that China producers, just so many of them are losing money.

Chris Haberlin - Davenport

Thanks. That’s very helpful. And then just last one from me. Are you seeing customers in 2013 just given lower prices, do you think that customers are looking at restocking inventories this year? I know they went through a destocking phase last year. Are they restocking or customers were living kind of hand to mouth right now?

Craig Shular

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

Operator

Your next question comes from the line of Charles Bradford from Bradford Research.

Charles Bradford - Bradford Research

Couple of things have obviously happened this morning which I don't know if words gotten out yet, but U.S. dealer has announced they are going to lock out their employees like (inaudible)?

Craig Shular

Right.

Charles Bradford - Bradford Research

So the question is, do you know of any or who do you think would benefit from that, the parent name that comes to my mind is the [Fasco]?

Craig Shular

Yeah, I hate, pick one of my customers obviously, we service all the EAF shops in North America. So I will take it may be big picture. I think this will help the EAF guys obviously. So may be some of the EAF guys here in the U.S. will have a chance to run a little bit higher op level because of the lake area issue.

Charles Bradford - Bradford Research

The Fasco besides being integrated does have the EAF.

Craig Shular

Correct.

Charles Bradford - Bradford Research

Another question on the usage, ThyssenKrupp was building a stainless steel melt shop in Alabama and it's now part of the new company’s name I keep forgetting, the spin-off with Outokumpu they own, do you know if that melt shop is running much yet?

Craig Shular

Outokumpu, no, I don't think they are running much at all. Obviously stainless steel is in the difficult area, pricing down, volumes down. So I would say stainless is even behind carbon steel and recovery.

Charles Bradford - Bradford Research

And then looking outside the U.S., it looked like at least according to the USA data electric furnace production last year was up 3 million tons which is essentially nothing when it comes to the total, but there are some estimates in their data which could throw the whole thing. For example they have a pretty good number for India being 67.5% of the total being EAF, do you know how accurate that number maybe?

Craig Shular

Well, I can speak the India from our advantage point, so our Indian customers have been running at a better level than a lot of other parts of the world, so 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. And so 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 businesses out there. So for us the Indian EAF business has been improving a bit.

Charles Bradford - Bradford Research

I guess I will just have to wait for the rest of the markets to turn around, thank you.

Craig Shular

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

Charles Bradford - Bradford Research

And you have some mini mills talking about how bad flat-rolled steel is and some of the integrated saying, oh, broad operating rates are very high in flat-rolled. We will have to see how it works out, but thank you very much.

Operator

Your next question comes from the line of Sheldon Grodsky from Grodsky Associates.

Sheldon Grodsky - Grodsky Associate

I'm kind of new to your company, but then looking at the industry I read some details about there seems to be a lot of worldwide capacity coming onstream, is this a threat or is this just a normal expansion as far as you can see.

Craig Shular

Yeah, its capacity coming on, its not a huge amount of capacity coming on when you look at the total production landscape. But what it is, is some capacity coming on at a very weak point of the cycle. And so that's what's really exacerbated things. So you've got some capacity coming on in India, you've got some coming on here in the US, and that's coming on at a time when our customers and steel demand and demand for electrodes is very low. So that's what's really aggravating the thing. You also have some capacity coming on in China, that's 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 in the last few years especially last year just a brutal year for them and we may see some fallout there, maybe some of the players are going to drop away, there maybe some consolidation. So Sheldon big picture, yes on capacity is a huge in quantity not really, but it’s coming at a very low point in our normal steel cycle.

Operator

(Operator Instructions) your next question comes from the line of Chelsea Bolton from Goldman Sachs.

Chelsea Bolton - Goldman Sachs

Actually all our questions have been answered, thank you so much.

Craig Shular

Jody any other calls.

Operator

(Operator Instructions)

Craig Shular

Jody I think we can wrap it up then and everyone I appreciate you participating in our call. Look forward to talking to you next quarter. Thank you all very much. Have a good day.

Operator

Thank you. That does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!