GrafTech International Management Discusses Q 2010 Results - Earnings Call Transcript

Oct.31.10 | About: Brookfield Asset (BAM)

GrafTech International, Ltd. (GTI) Q3 2010 Earnings Call October 28, 2010 11:00 AM ET

Executives

Kelly Taylor – Manager, IR

Craig Schular – CEO

Mark Widmar – CFO

Analysts

Ian Zacin – Oppenheimer

Brian Bitner – Oppenheimer

Luke Folta – Longbow Research

Zahid Siddique – Gabelli

Azad Abetti [ph] - GLG

Operator

My name is Ashley and I will be your conference operator for today. At this time I would like to welcome everyone to the GrafTech Third Quarter Earnings Call. (Operator Instructions)

I would now like to turn today’s conference over to Kelly Taylor. Ms. Taylor you may begin your conference.

Kelly Taylor

Thank you Ashley. Good morning and welcome to GrafTech International’s third quarter 2010 conference call. On the call today is GrafTech Chief Executive Officer, Craig Schular and our Chief Financial Officer, Mark Widmar.

We issued our earnings release this morning. If you did not receive a copy please contact Marie Nor at (216) 676-2160 and she will be happy to fax or email a copy to you.

As a reminder, some of the matter 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.

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

Craig Schular

Thank you Kelly. Good morning, everyone, and thank you for joining GrafTech’s conference call.

Today we’ll take you through our third quarter highlights and then open it up to questions.

Net sales were 255 million in the third quarter, a 55% improvement over the prior year. Gross profit improved 61% to 75 million or 29.4% of sales.

Operating income increased almost 90% to 47 million excluding 6 million in customary transaction expenses associated with the acquisitions of Seadrift and C/G. Excluding acquisition costs and the effect of intercompany loans, net income was 40 million or $0.33 per share, 2 ½ times greater than Q3 last year on the same basis.

Our third quarter results came in stronger than anticipated as electrode and refractory sales held up well in the quarter and our tax rate came in lower than expected. The lower tax rate benefited Q3 results by approximately $0.03 a share and the timing of shipments in our refractory business benefited the quarter by approximately $0.02 a share. We do not expect this $0.05 benefit to repeat in Q4.

Turning to our industrial materials segment, sales increased to 208 million in the third quarter, a 52% increase over Q3 last year. Excluding the impact of acquisition-related expenses, operating income for this segment was 40 million, a 17 million improvement year over year as a result of higher graph and electrode sales volume, offset in part by lower average graph and electrode selling prices and increased raw material costs.

In our Engineered Solution segment sales were 47 million in the third quarter, a 67% increase. Operating income grew to 6 million. Operating income margin in the quarter more than tripled to 13.3%. As anticipated, our Engineered Solution business began to recover in the third quarter enabled by solid demand in solar, oil and gas drilling, and electronics.

Now turning to our previously announced acquisitions, we have completed all work associated with the announced customary second request for additional information from the anti-trust division of the U.S. Department of Justice concerning the Seadrift and C/G acquisition. The work has gone very well. Feedback from the Department of Justice has been excellent and we expect to receive clearance and close before yearend. These acquisitions are components of our company growth strategy and will allow us to better serve our global steel customers. We are looking forward to welcoming the excellent Seadrift and C/G team members to team GrafTech.

Turning to outlook, based on IMF projections and other economic reports, global economies continue to recover, to varying degrees however, downside risk remain high. The global economic recovery continues to be fragile and slow.

According to the World Steel Association and other industry sources, global steel operates have fallen steadily since the second quarter of this year and are not anticipated to improve significantly in the near term. As a result, electric arch furnace steel operating rates are expected to ease in the fourth quarter.

Given the slowdown in Q4, we expect graph and electrode sales to be flat to down as compared with the third quarter. Our expectation is that operating income in the fourth quarter will decline slightly as compared to the third quarter.

In conclusion, excluding the impact of acquisitions and related costs, we are targeting full year operating income to be in the range of 175 million to 180 million and we reiterate our targeted operating and cash flow guidance of 100 to 110 million.

That concludes our prepared remarks and Ashley, can we open it up for Q&A please.

Operator

(Operator Instructions) Your first question comes from Ian Zacin from Oppenheimer.

Brian Bitner - Oppenheimer

Hi, thank you guys, it’s actually Brian in for Ian.

Craig Schular

Hi Brian, how’s it going?

Brian Bitner - Oppenheimer

Nice quarter.

Craig Schular

Thank you, sir.

Brian Bitner - Oppenheimer

I guess the question would be, as we get to this time of year, is there any updates you can gives us on the 2011 book building, any type of pricing outlook? What are you hearing from your customers there?

Craig Schular

On the book building front Brian, this year the book building has started off very slow. We have not seen customers rushing to build their 2011 book and I think a lot of that is the function of in part the slowdown in Q4 and especially the lack of line of sight they see into 2011. So there’s a lot of uncertainty and our customer base really isn’t rushing to build out their 2011 books. So it’s very early in the process, so I have very little really to give in the area of guidance or color over the 2011 book building, other than it’s just getting started, it’s orderly, but it’s at a slower point than it was let’s say in the more normal years.

Brian Bitner - Oppenheimer

So is this another year where you can see several of your customers go, revert to the kind of quarterly contracts rather than the annual contracts that you did a couple years ago?

Craig Schular

We would expect in 2010 that more customers will go for annual contracts. The dialogues that have started off, they have in general, all looked to annual contracts versus what we saw in ’09, where the majority went kind of quarter by quarter for a while. So I would expect the majority of our 2011 book once it gets put together will be underpinned by annual contracts.

Brian Bitner - Oppenheimer

Okay, that’s helpful. And as far as it relates to the third quarter, is there anyway – can you break out as far as the industrial materials business, the electrode business pricing versus volumes in that 52% revenue increase?

Craig Schular

It’s really not a point of guidance that we give between the businesses.

Brian Bitner - Oppenheimer

Okay and then the last would be on Seadrift more so than the C/G acquisition, as you’ve kind of, you were a minority holder for a while, as you kind of rap your arms even further around this acquisition, I mean, how creative could this be to ESP or margins?

Craig Schular

As we’ve gotten closer to both the acquisitions and recall, while we’re in the DoJ process we, you know, that is limited in nature, we are allowed to do some preplanning in areas like accounting, IT, HR, etc. That work has gone very well. I am very impressed by the two new teams that will be joining team GrafTech. We are inheriting two superb teams, so we’ve been very impressed with that interaction.

As far as integration or any additional color around what it will look like next year, we don’t have any further updates at this stage other than what we gave a quarter or two ago when we announced the acquisition.

Brian Bitner - Oppenheimer

Okay, well great quarter and thanks for taking my questions.

Craig Schular

Thanks you sir.

Operator

(Operator Instructions) Your next question comes from Luke Folta from Longbow Research.

Luke Folta – Longbow Research

Morning guys.

Craig Schular

Morning Luke, how you doing?

Luke Folta – Longbow Research

Not bad. A couple questions, first of all I appreciate the detail on the DoJ work that they’re doing. Can you give us a feel for – do they have a date which they have to make a decision?

Craig Schular

Working with the DoJ there is a rough schedule that’s always put together with the DoJ team. As I said, all of the work really has been completed. I’m very pleased with the way that’s gone; it’s been very, very detailed and exhaustive and it’s gone very, very well. And I would expect the DoJ will complete their final little bit of work here over the next few weeks and we’ll be able to close this guy at the end of the year.

Luke Folta – Longbow Research

Okay, but there’s not a strict date that you’re aware of that they have to.

Craig Schular

No, the way these normally go there’s not a fixed date. There are guidelines, so we all have different work requirements around different guidelines. But Luke, there’s not a fixed date that on this date this has to happen. But we’ve had many deliverables from both sides, from GrafTech’s side and from the government’s side, and I’m very pleased the way that works gone.

Luke Folta – Longbow Research

Okay. And secondly do have a first feel how you think Needle Coke negotiations might go for next year?

Craig Schular

That also is early is in process and so I can’t give much color around it. As we’ve done in the past, we like to line up our cost structure before we build out the large parts of the book. And so our lining out our cost structure, negotiating Needle Coke, all of those items are underway right now.

Luke Folta – Longbow Research

Can you give us kind of a broad directional feel for where it might be heading?

Craig Schular

I think it’s still early.

Luke Folta – Longbow Research

Okay.

Craig Schular

And I think really we should wait until when we release in February, I think we’ll have much more of the book activity behind us then, the raw materials picture will be behind us, and I think February will be a very good time to dialogue on that.

Luke Folta – Longbow Research

Okay. And then just lastly, in the past you’ve given capacity utilization rates for the quarter for your electrode business, also the year-over-year change in electrode pricing, can you please provide those for the quarter?

Craig Schular

Yeah. On the op rates, if you recall just to refresh everyone, last year in ’09 we kind of averaged around a 40% op rate. We exited in Q4 of last year around 51%. And then this year they’ve steadily come up; Q1 was 66% operate, Q2 was 76%, and in Q3 with the slowdown that we discussed earlier on the call coming in Q4, we’re down around 72%, 73% op rate.

Luke Folta – Longbow Research

And any color on the year over your change in electrode price?

Craig Schular

When you get the queue you’ll see our usual analysis in there, but as we said I think the last couple calls, we would expect somewhere in a high single digits slippage year-over-year.

Luke Folta – Longbow Research

All right, great. Thanks a lot.

Craig Schular

Thank you sir. Luke have a good day.

Luke Folta – Longbow Research

You too.

Operator

Your next question comes from Zahid Siddique from Gabelli.

Zahid Siddique - Gabelli

Hi good morning. Most of my questions have been answered, but I’ll take the opportunity to ask a couple. What is the capacity utilization within the steel industry, how has that been trending?

Craig Schular

That steel utilization kind of peaked worldwide and in the U.S. in Q2. And so if you look back, I think the peak worldwide back in Q2 in April was about 82% utilization. And then it has pretty much slid since that and we exited Q3, I would think in steel utilization worldwide, total steel, around 74%. And what we’re getting from the marketplace and I’m sure you’ve heard on a number of steel customers own conference calls that Q4 looks like it going to be softer, so we would expect that to trend down some further in Q4.

Zahid Siddique - Gabelli

Okay. And you mentioned something about February, is that when you will disclose all the details about your negotiations?

Craig Schular

February is when we give our Q4 release. And so towards the end of February we’ll release Q4 and we’ll give next year’s guidance and historically what we’ve done, if we’ve got an annual electrode book build out versus quarterly, we’ve done our best to try to give annual guidance.

Last year we gave quarterly guidance because a lot of the customers ordered quarter by quarter. So our goal would be to give annual guidance and we’ll have to wait until we get there, but from what I see now, it looks like the majority of the customers are booking annually. So if we’ve got the book pretty much put together, line of sight on annual contracts we would tend to try to give annual guidance if possible.

Zahid Siddique - Gabelli

And in what month do you actually start the book building process? Have you just started in October?

Craig Schular

Yes sir, it’s just starting. Now, on a more normal year, let’s go back to before the ’09 crash, which was all quarterly contracts for much of the year. We would start building – some customers would come in in June and July. But this year, I think a function of the uncertainty in the marketplace and the lack of sight out there that many of the global steel producers have, I think they’ve gone slower on their own raw material book building and it’s not just electrodes. I think they’ve done a lot the same thing on metallics and a number of their other raw materials and it’s driven by really lack of line of sight and uncertainty in the economic picture.

Zahid Siddique - Gabelli

Okay and last question is on the industrial business. Your revenue was up I believe roughly 50%, 52% in Q3, what’s the breakdown of that volume price mix, etc?

Craig Schular

It’s not a detailed guidance we give, but if you wait until we publish the Q we refine some of that in the final Q and you can see some of that year-over-year movement, some of that in our Q.

Zahid Siddique - Gabelli

Okay and that’s where you said the pricing was about a slippage of high single digits.

Craig Schular

Yes.

Zahid Siddique - Gabelli

Okay thank you so much.

Craig Schular

Thank you sir. Have a good a day.

Operator

And you next question comes from Ian Zacin from Oppenheimer.

Brian Bitner - Oppenheimer

Hey guys, it’s Brian again.

Craig Schular

Hey Brain.

Brian Bitner - Oppenheimer

Just trying to get to your operating income $175 to $180 million, if you’re going to have a lower fourth quarter than third quarter, how do we get to this?

Craig Schular

The way I would look at op income is if you take our first nine months op income you’ve got about $123 million and then recall the acquisition expenses, year-to-date, first nine months are about $12 million, so you have to add those back, so add that back so you get to about $135 million clean.

Brian Bitner - Oppenheimer

Got you.

Craig Schular

And the balance I think if we just drew a map in the range we gave for the full year $175 to $180 million, that would imply a Q4 kind of $39 to $43, $44 million.

Brian Bitner - Oppenheimer

That clears is up, thanks again.

Craig Schular

My pleasure, any time, welcome the question, thank you sir.

Operator

(Operator Instructions) And your next question comes from Luke Folta from Longbow Research.

Luke Folta – Longbow Research

Hi guys.

Craig Schular

Hey Luke.

Luke Folta – Longbow Research

Another question, you talked about the refractor business a bit, can you give us a sense of how big that business is, if I were to say something in the $50 to $70 million annual revenue run range, is that, am I in the ball park there?

Craig Schular

It’s a point of guidance we don’t give Luke. What I can tell you it’s a global business, we’re one of the players in that segment of the refractories, and we line really in blast furnaces the most difficult sector within the blast furnace, the most challenging from a temperature and abrasion issue and it would be the hearth wall. So it’s a global business, we’re a major player there, we’ve got a unique technology, and what’s come up that we highlighted in Q3 is those orders tend to be lumpy and when they come they’re large and we have one that shipped in Q3 that if anything, one or two that shipped earlier than maybe what we thought and so they all fell in Q3 and that was the extra benefit in Q3 we got, that you won’t see in Q4.

Luke Folta – Longbow Research

Typically do, how do margins compare in the refractor business versus electrodes.

Craig Schular

Again it’s not a point of guidance, but it’s a good business. It’s a premier technology, it’s a technology we developed at GrafTech and commercialized, and we have a different offering. And our refractories have a tremendous performance history of long lasting, greater productivity for the steel manufacturing, so we have a great value equation, and like I said it global, big business in China, North America, Europe, etc. and the orders tend to be lumpy, you literally build all of the blocks for a furnace and in some cases we even assemble it at our facility for a review and inspection by the customer, then it all ships at once. And that’s what you had in Q3.

Luke Folta – Longbow Research

Okay and just last question. You guys had put out a press release with some stock pricing information May, as we think about the 2011 contracts, once you have a better sense of what your Neal Coke costs are going to be and your book starts to build, should we see another stock analysis for 2011, that should help guide us on ’11’s pricing?

Craig Schular

I don’t know where prices are going to go the marketplace will determine that, so I really can’t say where that is and as far as color on the book and next year that will be at the end of February.

Luke Folta – Longbow Research

Okay, thanks a lot.

Craig Schular

Thanks Luke. Have a good day.

Luke Folta – Longbow Research

Your next question comes from Azad Abetti [ph] from GLG.

Azad Abetti [ph] - GLG

Good morning guys.

Craig Schular

Good morning Azad. How are you today?

Azad Abetti [ph] - GLG

Not too bad, yourself?

Craig Schular

Excellent, thank you.

Azad Abetti [ph] - GLG

I want to understand what the developments were in Q3 that surprised you positively relative to your guidance of Q2? Because as I saw it steel volumes did decline in Q3 versus Q2, yet you posted very strong results. Did you take market share?

Craig Schular

No, what I would say is it’s the two items we highlighted, the refractory orders that shipped in Q3, the tax rate was a benefit, that came in lower than expected, and then I would say in general our graph and electrode business held up a little bit better in the quarter than we expected. Q3 is generally a softer quarter with the European slow down and so we obviously saw the European slowdown, that all took place with big holiday schedules, that happens every year, but in general in a lot of the other regions the graph and electrode sales held up better than what we expected, but as you’ve all heard from the steel customers releases thus far Q4 is slowing down. And that’s in the numbers, it’s in the utilization rates and it’s in our customer interfaces, they’re telling us and we’re seeing it. So that’s why Q3 was better and that’s why Q4 will be a bit softer.

Azad Abetti [ph] - GLG

All right thank you.

Craig Schular

Thank you Azad. Have a good day.

Operator

And there are no further questions at this time, do you have any closing remarks?

Craig Schular

Ashley, thank you very much. Everyone thank you for joining our call and look forward to talking to you at the end of February when we report Q4 and then hopefully our position to give annual guidance. If we’re not, depending how the book comes together and customers put their orders in we would give our quarterly guidance we did this year. Thank you all very much. Have a good day. Bye now.

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