Good morning, ladies and gentlemen, and welcome to the GrafTech Third Quarter 2023 Earnings Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, November 3, 2023. I would now like to turn the conference over to Mr. Mike Dillon, Vice President, Investor Relations and Corporate Communications. Please go ahead, sir.

Thank you. Good morning and welcome to GrafTech International's third quarter 2023 earnings call. On with me today are Marcel Kessler, Chief Executive Officer; Jeremy Halford, Chief Operating Officer; and Tim Flanagan, Chief Financial Officer. Marcel will begin with opening comments. Jeremy will then discuss safety, the commercial environment, sales and operational matters. Tim will review our quarterly results and other financial details and will close with comments on our outlook. We will then open the call to questions. Turning to our next slide. As a reminder, some of the matters discussed in this call may include forward-looking statements regarding, among other things, performance, trends, and strategies. These statements are based on current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures, and these slides include the relevant non-GAAP reconciliations. You can find these slides in the Investor Relations section of our website at www.graftech.com. A replay of the call will also be available on our website. I'll now turn the call over to Marcel.

Good morning, everyone. Thank you for joining GrafTech's Third Quarter Earnings Call. I will begin by summarizing three key points we will discuss in more detail on our call today. First, the global steel industry remains constrained by geopolitical conflict and economic uncertainty, which has resulted in a persistently soft -- within a persistently soft commercial environment and weak demand and declining prices for graphite electrodes. As a result, our performance for the third quarter fell short of our expectations and our outlook has weakened. Second, GrafTech remains focused on managing through the near-term market disruptions while maintaining our positioning for long-term opportunities. We recognize steel industry performance and demand for graphite electrodes will be dependent on macro conditions. As such, we continue to prioritize those things that are within our control. These include proactively reducing our production volume to align with our near-term demand outlook, closely managing our operating costs, capital expenditures, and working capital levels, and making targeted investments to further improve our operational flexibility and support long-term growth. Our ability to execute these strategies is evident in the strong cash flow generated in the third quarter. Supported by these actions, we remain confident we have ample liquidity between cash on hand and borrowing availability to weather the market challenges. Third, we remain optimistic about the long-term outlook for our business and our ability to deliver shareholder value. We are taking actions that we believe will optimally position GrafTech to benefit from longer-term industry tailwinds in our graphite electrode business. At the same time, we continue to advance our efforts toward participation in the development of a Western EV battery supply chain. And you remain excited about this opportunity. Jeremy and Tim will expand on all these points during the call today. Before I turn the call over to them, I would like to address the recent announcement that I decided to resign from my role as CEO and President of GrafTech due to family health reasons effective later this month. During my first call after joining the company, I spoke to the reasons why I was attracted to GrafTech. A set of distinctive capabilities that provide confidence in our ability to deliver shareholder value over the long term. A business that is well positioned to participate in the long-term growth of the electrode market and with a promising foundation to pursue other avenues of growth. And a team with an impressive level of know-how, energy, and dedication. I feel that all these attributes are still in place today, and I continue to believe that GrafTech has some of the industry's best assets, operated by the best people and will get through this challenging period to remain an industry leader. We remain confident in the long-term direction of the company and the experienced management team that remains in place to execute our strategies. With that, let me turn the call over to Jeremy.

Thank you, Marcel, and good morning, everyone. As always, I'll start my comments with a brief update on our safety performance, which is a core value at GrafTech. We are pleased that our year-to-date recordable incident rate reflects a substantial improvement from the prior year level. As I noted at the beginning of the year, improvement in this area would be a key point of emphasis with our internal teams in 2023. And I would like to thank all of our team members for their ongoing efforts. We will remain highly diligent in this area and seek to further improve this metric as we continue working toward our ultimate goal of zero injuries. Let me now turn to the next slide for an overview of macro conditions and the commercial environment as context for our third quarter results and our outlook commentary. Steel industry production remains constrained by lower demand due to global economic uncertainty. Across the industry, there continue to be announcements of planned and unplanned outages at steel price. At the same time, steel exports from China in 2023 are on track to reach a seven-year high as China's domestic demand for steel has not been strong enough to absorb the year-to-date 2% increase in Chinese steel production. These trends are reflected in steel industry output levels outside of China that remain below the prior year with most regions showing production decline. Looking at the numbers, on a global basis, field production outside of China was approximately 201 million tons in the third quarter of 2023. This represented a 4% sequential decline from the second quarter. On a year-to-date basis, global steel production outside of China was down 2% year-over-year through the first nine months of 2023. Regarding global capacity utilization, the rate outside of China declined sequentially…

Thanks, Jeremy. For the third quarter we had a net loss of $23 million, or $0.9 per share. Adjusted EBITDA was $1 million compared to $129 million in the third quarter of 2022. The decline reflected lower sales volume, higher year-over-year costs on a per-metric basis, the continued shift in the mix of our business toward non-LTA volumes and lower pricing. As Jeremy spoke to a number of these factors in his remarks, I'll expand my comments on costs. We provide a reconciliation of our cash cost per metric ton in the earnings documents posted on our website. However, let me provide some additional color. Reflecting the full year impact of raw material, energy, freight cost increases that occurred throughout 2022, we continue to sell higher priced inventory during the third quarter of 2023. In addition, during the quarter, our cash costs included approximately $18 million of fixed costs that otherwise would have been inventoryed if we were operating at normal production levels. This compared to approximately $10 million of such costs recognized in the second quarter. The sequential increase was driven by two factors. First, a modest quarter-over-quarter reduction in graphite electrode production. Second, and more significantly, was the impact of temporarily idling needle coke production at our Seadrift facility throughout the third quarter. As we previously noted, we have been taking a proactive measure to align our production with our current demand outlook. The temporary idling of production at Seadrift was consistent with this approach. These actions have provided meaningful benefit to our working capital levels and cash flows. Factoring all of this in, our cash COGS per metric ton were approximately $5,860 for the third quarter of 2023. This exceeded our projection for the third quarter, reflecting the impact of the previously discussed volume shortfall as underlying…

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. Good morning. Maybe I can just start with the electrode market outlook. So, it sounded like you had noted that there was continued price pressure and maybe some spot pricing data points around $3,000 a ton. Did I hear that correctly? And I guess what do you expect as far as how that evolves? I mean, is that mainly just weak seasonality and weakness in the China market that's causing that -- those declines? And do you see that maybe reversing and going back higher in early 2024, or how do you think about electrode pricing from here?

Yeah, so as we mentioned, Arun, Q3 non-LTA pricing was weaker than Q2 driven by the softer commercial environment. And we also noted that in the near term, as we reference from the World Steel Association statistics, we expect continued market weakness and with that, continued competitive pricing dynamics. With specific regard to the $3,000 Chinese pricing, that of course affects us much more in non-tariff protected regions than it does in the tariff protected regions that we referenced. And going beyond that, given that we're in the middle of our negotiation season with the customers, it's probably a little too soon to provide any more pricing guidance.

Okay. And what about needle coke then? So could you just provide us an update on where needle coke prices are and what do you expect on that side as well?

Yeah. So, looking at the import-export data, we've seen recent spot pricing for super premium needle coke in the range of about $1,700 a ton. There are some transactions below that, but that's generally a number that we're seeing. And this does reflect a little bit of further softening compared to what we indicated on the last call of around $1,800 for the higher end blend. But one of the things that I think is important to note is that, pricing here can be highly volatile, right? In the past we've seen -- in the past years, we've seen pricing as high as $3,000 last year and below $1,500 the year before that. And so, really we think the recent declines in needle coat pricing are indicative of recent softness in the electrode market, not being fully offset by the growth that's coming from the EV market. Longer term, as the EV demand materializes, I continue to expect the petroleum needle coke market to further tighten, leading to higher prices.

Yes, and that's a good segue to another question I had, which was, do you think that there's a greater sense of urgency now at GrafTech to pursue further opportunities for needle coke development and graphite development into the EV market, especially since China has placed some restrictions on their exports of graphite. Wouldn't that combined with the market softness that you're seeing in electrodes, really incentivize GrafTech to really make some more investments on that side and maybe accelerate your opportunities into delivering needle coke into EVs?

I don't know that we needed any more motivation to get into that room. This is something that we've been studying for quite a while, and we feel good about where we're at, right? The industry is currently in the very early stages of its development of the Western supply chain. And as part of that, we've been very active proactively testing our needle coke with third parties and potential customers to make sure that it meets the quality standards and specifications that are required. With regard to concerns about the China announcement, I think Tim captured a lot of that. It's too soon to know exactly what this is going to mean, but we do think at a minimum, it's a positive reinforcement of the importance of synthetic graphite for battery anode production. And more importantly, it reinforces the importance of building a robust Western supply chain rather than depending on China. And so, if this was not already apparent to OEMs and cell manufacturers before, it's certainly top of mind now.

Yes, and I would add to that a room. I think the EV opportunity is an exciting opportunity that we'll continue to explore and do the work we need to, as Jeremy has outlined. But we still have a strong conviction around the core business of graphite electrodes and what that market will look like. Obviously, conditions aren't great right now. It's a cyclical business, and we're in a bit of a down stroke as we sit here today. But we've seen pricing move very quickly. We've seen demand pick up very quickly. Any sort of material improvement in the macroeconomic environment, whether that's in Europe, Chinese steel production, the overall Chinese economy, can have a pretty sudden and swift movement for the core business, which again, short term we see some challenges outlook wise, but longer -- medium to longer term, we still have full conviction in the business that it's here today.

Right, and how much of your production do you think you could divert to the EV market? And, obviously, I would imagine that would also include maybe an expansion at Seadrift. Could you just address those issues as well? Thanks.

Yes, so one of the things that makes GrafTech an attractive partner in this space is that, we really do have almost dual-use assets. The same assets that we utilize to make needle coke for graphite electrode production, it can be used to make needle coke for anode production. Similarly, the graphitization assets that we use to make our electrodes can also be redeployed to make anode materials. And so, I don't have a real percentage to offer, Arun, more. I think it’s -- I think the relevant point is that our assets truly are dual use and we can select the most economically favorable [indiscernible] for the use of assets. Yes, so I was just going to add that with specific regard to your question about Seadrift, you'll recall that last quarter we discussed having filed a permit for the potential expansion of Seadrift. That permit is making its way through the process. I think we said last quarter that we anticipated about a 12-month turnaround time on that. So by the time this market really starts gaining steam here domestically, we expect to be fully permitted and able to make those investments if we make the decision to do so.

Thanks.

Thank you. Your next question comes from the line of Bill Peterson from JP Morgan. Please go ahead.

Yes. Hi. Good morning. Thanks for taking the questions. And Marcel, best wishes as you as you move ahead here. On utilization. So we saw it come down again quarter-on-quarter given the demand environment. I guess can you provide some color on the puts and takes here? Is Mexico running stronger than Europe and how does your utilization -- how do you see that comparing to the industry in this industry average? And just kind of related to the destocking environment, like where do inventories sit at your customer sites relative to norms, which I think is around two or three months.

Yes. So let me start with the customer inventory levels and then I'll come back around to talk about the utilization rates. The sequential decline in global steel production and the constrained industry utilization rates have really limited the ability of customers to significantly drive down their electrode inventory to typical levels. You know for perspective, it varies across the industry, but we generally estimate that customers maintain about three months of electrode inventory on average. And based on the recent channel checks, we believe it's currently averaging a little bit closer to four months, which is not significantly different from where it was a quarter ago. Although one of the things we're starting to see Bill is a divergence by region. In Europe, we've seen inventory levels decrease and are actually now below the average that I mentioned. This is really driven by customers continuing to work through the existing inventory, albeit at lower utilization rate. And many customers displaying continued reluctance to purchase of different additional electrodes due to ongoing economic uncertainty there. Conversely in the U.S. inventory levels are above the average and frankly, we think that some of this is partly attributable to some U.S. based steelmakers locking in larger commitments a year ago due to uncertainties related to our situation. Additionally, in the U.S. we are seeing tempered utilization rates which while above the global average are still below the recent history and that's preventing them from burning through some of these excess inventory that they have. With specific regard to the utilization rates, we do certainly try to utilize assets closest to where the demand is and that does drive utilization rates in North America higher than what we're seeing in Europe at 47%. Global utilization rates that does put us pretty much on par with what we're seeing out of the Tier 1 competitors in the rest of the world with the exception that we do think that their utilization rates in North America are currently running higher than ours for those same market dynamics that I just talked about.

Okay. That's good color. It dovetails in the question on a competitive landscape. You've talked about competitors in China and India and some of the direct impacts, I guess Middle East and indirect Europe, but I guess drilling down to your core US and EU markets, hoping to get some further color specifically on the U.S. we're hearing at least one India based competitor looking to gain share in the U.S. market and then in Europe. I mean, are you seeing signs of China and India-based competitors there. I guess where do you see your differentiation here I guess as we -- how should we think about that vis-a-vis the suppliers coming from these regions?

Yes. No, that's a good question and again the market certainly is competitive. I think the first thing that we have to keep in mind both in the U.S. and Europe, you've got trade protections in place against the Chinese imports in both markets and then Indian imports into Europe. Albeit given the situation that occurred in Monterey probably opened the door for customers to potentially qualify new suppliers, Indian suppliers in particular. We still feel confident about what we deliver in terms of a total value proposition to our customers, not just lowest cost supply but high-quality electrodes. The ancillary services that we provide in terms of furnace monitoring and our CTS group. So all of those things I think we feel positioned us very well from a competitive standpoint in both of those markets. The rest of the world, certainly, it's a much more cost-oriented and price-oriented market than North America and Europe and that's the pressure that we're seeing now in the marketplace.

Okay. Yeah. Thanks for that color. And guess lastly on this challenging environment. You still saw -- we still saw a strong working capital unwind. How should we think about a similar release in the fourth quarter? And then guess maybe more importantly, could you talk about the puts and takes as we move into 2024, assuming maybe demand improves at least maybe more later in the year? I guess specifically under the working capital, how should we think about the cadence of payables and inventory days as shipments hopefully again improving again?

Yes. So as I think about Q4, right? We did make the comment that we expect to be free cash flow positive for the year. I think we expect some further releases of working capital in the fourth quarter. Jeremy and Tim have done a really good job of bringing inventories down. There's probably still some opportunities for that to come down further. As we noted also we're starting to Seadrift here later in the fourth quarter. So we're still working down existing needle coke inventories from where they are today. So still will be some release of working capital going forward. But I'd also comment that we're not taking them down to levels beyond what we think is necessary to fulfill customer demand for next year. So as we start to look out, we want to make sure that we have a manageable level of inventory on hand. Certainly, as production were to ramp up next year. You have some additional buying and procurement activities that go on and you also have a build of your receivables based. So there will be a little bit of use of working capital that I would foresee in 2024.

Okay. Thanks. Thanks again.

Thank you. Our next question comes from the line of Alex Hacking from Citi. Please go ahead.

Yeah. Hi. Good morning and thanks for the call. So not sure if you can answer this, but on the cost side, cash costs right now is in the high $5,000. As we look out to next year in the second half of the year, if we're back to a more normalized utilization rate of 70% or something. The best information that you have today like where would that cash cost be? Like I assume it's somewhere in the $4,000, but I don't know if it's high $4,000, low $4,000. Any color would be appreciated. Thank you.

Yeah. Thanks for the question, Alex. And I'll start by saying it's probably a little premature for us to be providing kind of detailed guidance or outlook on 2024, just given the fact that the commentary Jeremy provided around where we're at in the commercial negotiation process. That process, obviously, will inform our production capital and cost programs for the next fiscal year. So what I will say though directionally speaking is, we are a heavy fixed cost business. Any incremental improvement in our overall utilization rate of our plans will bring down our cost meaningfully, as well as if you think about the underlying raw material costs, energy, things like that. We've commented on. Those are continuing to moderate as we've expected and we'd expect significant improvement of those elements of our cost structure heading into next year will be through most of the inventory that's sitting on our balance sheet that's high priced, so we'll be in a much better cost position as we look out to next year. The other thing, the only other comment I would make just on the cost today sitting in that high five number that you quoted. Don't forget, in there, you've got about $375 of Seadrift cost that we're carrying that doesn't have any corresponding production associated with it. And so, as we restart Seadrift you naturally have those costs come out of the system.

Okay. Thanks. Makes sense. And then just to clarify, I guess on earlier comments, it sounds like you're hoping for a higher utilization rate in the first half of next year compared to where we've been in the second half of this -- in the second half of this year. Is that fair?

Yeah. Again, without getting into specific kind of guidance, right, just given where we're at in the commercial side. What I can say is we're entering this year's negotiation season with the opportunity to lock in significant volumes with our customers. We didn't have that opportunity because of Monterrey a year ago, but we're in that position today. We've meaningfully reduced kind of the operational risk associated with Monterrey during the current year and Jeremy commented on our ability to produce pins at multiple locations now. So we feel really good about the position we're starting from on top of the fact, again broadening our commercial offerings to our customers. We think we present a compelling value proposition beyond just quality electrodes. So all of those things would lead us to be in a much stronger commercial position with the backdrop of the current macro environment.

Okay. Thanks. And I guess just one final question if I may. This is probably a dumb question, but I think in your prepared comments you talked about a carbon-neutral offering. I guess how does that work in a product that's effectively made of carbon? Thanks.

Yeah. So fair enough. That's a good question. A good question, Alex. The -- when we say carbon neutral, right, we're really talking about CO2 equivalence, right? It's -- there's carbon in trees and everything else that we want more of. But the carbon neutral electrode was really born out of a trend toward more environmentally responsible steelmaking. And our ability to do this is really facilitated by some of the investments that we've made over the past few years to limit our Scope 1, 2, and 3 emissions. These are investments that we've made in assets and systems to reduce our onsite generation of CO2 and sourcing portions of our power from carbon-free sources now. And so, we've been able to significantly drive down our carbon footprint and for any CO2 equivalent emissions that we can't eliminate we'll buy offsets for. And so, this gives us an opportunity to lead the market in the introduction of a product like this. The product will of course be priced at a premium and as a result won't be for everybody. But we do think that this is another step toward differentiating ourselves from some of our more price-focused competitors that we talked about.

Okay. Thanks. Makes sense. Thanks for the call.

Thanks.

Thank you. Our next question comes from the line of Sophia Danziger from RBC Capital Markets. Please go ahead.

Good morning.

Good morning. Thanks for taking my question. The first one, I wanted to follow up on an earlier question that was asked by Bill here regarding the non-tech protected regions, flooding the market recognizing cheaper exports and how they've impacted pricing power. You spoke a little bit about the differentiation of your product and I think that's a big part of the value proposition you've spoken about in the past. Maybe you can help us walk through a little further how we should think about that differentiation today. Is it not being valued the same by the market given some of the pricing pressure we're seeing here now and slowdown of LTEs potentially on a go forward?

Certainly. I would start by saying not all customers are created equal, right, and people have different concerns and, frankly certain mills run differently than other mills in terms of the stresses and strains they put on the product. So certain markets are able to take lower quality electrodes versus what are otherwise favored both in North America and Europe in many respects. But customers ultimately will make a decision around consumption rates versus ultimately the price that they have to pay for an electrode in -- what's being delivered. I would say in those markets today where they're running at lower than kind of prime utilization rates. They're not necessarily compensating for the higher quality, the lower consumption rate, and what we think is the value proposition of our product. But those markets where that is value, we certainly are getting that premium.

Got it. And another point here in Tim's prepared remarks a focus on understanding so for the third quarter and just to clarify for the entire third quarter Seadrift was idled. Is it still idled today on the point of this call? I think an earlier comment noted hopefully restarting it in the back of the fourth quarter here, just recognizing in the start of November. So I want to think about some of that? I know slide 10 here and many slides in the past focused on thinking about the EV tailwind uplift and part of thinking about the go-forward landscape. Was that not something you considered to using the Seadrift needle coke production this past quarter to help offset some sales pressure in the electrodes?

Yeah. So let me start by talking about -- so Seadrift was down for the entire third quarter as we sit here today. It is not restarted yet, but we're in the process of preparing Seadrift to restart here in the fourth quarter. I'm going to let Jeremy talk a little bit about kind of where we're at and what our thinking was on the needle poke into that market.

Yes. Sophia, I think the key point on that is that, if we were a year and a half or two years down the road, exactly what you said would have been the path that we would have gone down. And unfortunately, the battery anode value chain in the west is still undeveloped. It's still in the very early stages of that development. And so, the things that we've been doing with needle coke have been focused primarily on proactively testing that needle coke with third parties and potential customers and making sure that that we're able to participate in that industry or that value stream as it develops. But in the Western world, it's still a little bit premature for that to happened, which is really what led to the decision to the idle Seadrift for a period of time just given the supply demand economics.

Understood. Just last one for me here, can you help us understand what else you can do near term to think about some of the cash preservation and the free cash we saw this quarter. We've mentioned Seadrift idling. We've mentioned some of the revolver availability. You know past those two levers, what else can we be considering and thinking about near term here, if the demand environment continues to stay weak?

Yeah. So I mean I think again to my comments around 2024 and looking out forward, right? It's a little premature for us to sit here and say what we will or can't or have to do in response to that. I think we really need to let the commercial season kind of work through its process and that will again will inform the way we approach next year. What we can do in the near term is remain kind of the rigorous focus that we've had over the last 12 months on cost, whether it's period costs, SG&A, our capital spending, how we manage our working capital levels. I talked a little bit about the release of some additional working capital as we go through the fourth quarter. So all of those things will continue to happen. And I think just organizationally without having the backdrop of the LTAs behind us, right, we are a much more cost focused and oriented business going forward. So, we'll let the commercial exercise play out, and that'll inform how we approach 2024 from a fiscal year perspective.

Great. Thanks for taking my questions.

Thank you.

Our next question comes from the line of Abe Landa from Bank of America. Please go ahead.

Good morning. Thank you for taking my questions. Maybe a little bit more on these negotiations kind of on this, the LTA that even your ESA negotiations for next year. I know you can't really comment on pricing, but can you maybe just talk about from a volume perspective, are you kind of seeing customers entering into LTA stays in the U.S. and Europe kind of at a normal cadence like you've seen in the past? Or is there something maybe different this time around?

Yeah. So maybe just to be sure we're saying the same thing. Typically when we talk about LTAs or ESAs, we're talking about multi-year agreements, and the negotiation process that that Tim and I have both referenced is really a semi-annual or annual negotiation that takes place this time every year. The -- so assuming you're talking about the negotiations that are taking place right now, the process is playing out largely the way that we expect it to. I would say that the timing is maybe a little bit later, a little bit later in the year than it has been in years past, in part because of some of that economic uncertainty that I talked about in the prepared remarks. As everybody is still taking to get a read on where the market's headed in total. But by and large, the process is playing out the way that that we expect it to. The timing is delayed a small amount, but nothing unexpected and nothing extraordinary.

And Abe, I would just add on the LTA front, we talked a little bit about this in prior calls, right? These continue to be an offering that we think we're uniquely positioned given the vertical integration with Seadrift to offer to our customers, right? And they are one of the many kind of commercial offerings that we offer and on options that we provide. I will say that from our standpoint given what we view as a somewhat depressed market or the bottom of the cycle, if you will, we're not overly aggressively pursuing these or locking in pricing at these levels. So, Jeremy's commentary about the commercial process and what's going on right now for 2024 is spot on. These again remain as options that we have in our toolkit, if you will.

That's helpful color. Thank you.

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Flanagan for any closing remarks.

Thank you, Laura. I'd like to thank everyone on this call for your interest in graph tech. We look forward to speaking with you again next quarter. Have a good day.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.