8-K: GrafTech Reports Second Quarter 2024 Results, Showing Sequential Improvement

GrafTech International Ltd. announced its second quarter 2024 results, highlighting sequential improvements in sales volume and cost structure despite a challenging commercial environment.

Summary

• GrafTech's second quarter 2024 net sales were $137 million, a 26% decrease compared to the same period last year.
• The company reported a net loss of $15 million, or $0.06 per share, compared to a net loss of $8 million, or $0.03 per share, in the second quarter of 2023.
• Adjusted EBITDA was $14 million, down from $26 million in the second quarter of 2023, but included a $9 million benefit from a legal arbitration.
• Sales volume increased by 6% sequentially to 25.5 thousand metric tons, with capacity utilization reaching 60%.
• The weighted-average realized price for non-LTA volume was approximately $4,300 per MT, a 23% decrease year-over-year.
• The weighted-average realized price for LTA volume was approximately $8,300 per MT.
• Net cash used in operating activities was $37 million, and adjusted free cash flow was negative $44 million, including a $34 million interest payment.
• The company expects a mid-teen percentage point decline in full-year 2024 cash cost of goods sold per MT compared to 2023.
• Capital expenditures for the full year 2024 are expected to be in the range of $35 million to $40 million.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positive aspects like sequential improvements in sales volume and cost reductions, the overall financial results show a net loss and a significant decrease in sales compared to the previous year. The company is also facing ongoing challenges in the commercial environment.

Positives

• The company demonstrated a 6% sequential improvement in sales volume.
• There was an 18% reduction in cash costs per metric ton compared to the second quarter of 2023.
• Capacity utilization increased to 60%, indicating improved operational efficiency.
• The company received a $9 million benefit from a legal arbitration, positively impacting adjusted EBITDA.
• GrafTech is projecting a mid-teen percentage point decline in full-year 2024 cash cost of goods sold per MT compared to 2023.

Negatives

• Net sales decreased by 26% compared to the second quarter of 2023.
• The company reported a net loss of $15 million for the quarter.
• Adjusted EBITDA decreased to $14 million from $26 million in the same period last year.
• Net cash used in operating activities was $37 million, and adjusted free cash flow was negative $44 million.
• The weighted-average realized price for non-LTA volume decreased by 23% year-over-year.

Risks

• The company is facing persistent challenges in the commercial environment, impacting pricing and demand.
• The steel industry's production remains constrained by global economic uncertainty.
• There is a risk of continued weakness in demand for graphite electrodes in the near term.
• The company is exposed to fluctuations in foreign currency exchange rates.
• There are risks associated with the company's dependence on the global steel industry and the electric arc furnace steel industry in particular.
• The company is exposed to the cyclical nature of the business and the selling prices of its products.
• The company is dependent on the supply of raw materials, including decant oil and petroleum needle coke, and disruptions in supply chains for these materials.

Future Outlook

The company expects demand for graphite electrodes to remain weak in the near term due to persistent challenges in the commercial environment. Sales volume in the third quarter of 2024 is expected to be broadly in line with the second quarter of 2024, with a modest year-over-year improvement in sales volume for the full year. The company anticipates a mid-teen percentage point decline in full-year 2024 cash cost of goods sold per MT compared to 2023. Longer term, the company is confident that the steel industry's efforts to decarbonize will drive demand for graphite electrodes.

Management Comments

• We continue to successfully execute our stated initiatives, which drove sequential improvement in key metrics for the quarter.
• Our actions to aggressively address our cost structure led to a sequential improvement in cash costs on a per metric ton basis, as well as an 18% improvement compared to the second quarter of 2023.
• Our significant enhancement of our customer engagement efforts and focus on our customer value proposition contributed to a 6% sequential improvement in sales volume and supported our ability to increase capacity utilization.
• This company-wide emphasis on managing what is within our control is critical to our ability to navigate through the ongoing weakness in the commercial environment and preserve our ability to capitalize on long-term growth opportunities and deliver shareholder value.

Industry Context

The announcement reflects the ongoing challenges in the steel industry, which is facing constrained production due to global economic uncertainty. The company's focus on cost reduction and operational efficiency aligns with industry trends to navigate these challenges. The long-term outlook is positive due to the expected increase in electric arc furnace steelmaking, which will drive demand for graphite electrodes.

Comparison to Industry Standards

• GrafTech's performance is being impacted by the same global economic headwinds affecting other graphite electrode manufacturers, such as Showa Denko and Tokai Carbon.
• The 26% year-over-year decrease in net sales is significant, and likely reflects similar challenges faced by competitors in the current market.
• The 18% reduction in cash costs per metric ton is a positive sign, and is likely a key focus for all companies in the industry.
• The company's capacity utilization of 60% is a key metric to watch, as it indicates the efficiency of their operations compared to industry benchmarks.
• The company's vertical integration into petroleum needle coke via its Seadrift facility is a competitive advantage compared to competitors who rely on third-party suppliers.

Stakeholder Impact

• Shareholders will be concerned about the net loss and decrease in sales, but may be encouraged by the sequential improvements and cost reductions.
• Employees may be impacted by the cost reduction initiatives, but the company's focus on long-term growth may provide job security.
• Customers may benefit from the company's focus on customer value proposition and improved operational efficiency.
• Suppliers may be affected by the company's cost reduction efforts and changes in demand.

Next Steps

• The company will continue to focus on cost reduction and operational efficiency.
• GrafTech will continue to monitor the commercial environment and adjust its strategies accordingly.
• The company will participate in an earnings call on July 26, 2024, to discuss the results.

Key Dates

Keywords

graphite electrodes, electric arc furnace, steel industry, EBITDA, sales volume, capacity utilization, cost reduction, petroleum needle coke, financial results, LTA, non-LTA