GrafTech International's CEO Discusses Q3 2011 Results - Earnings Call Transcript

GrafTech International Ltd. ( GTI)

Q3 2011 Earnings Call

October 27, 2011 11:00 AM ET

Executives

Kelly Taylor – IR

Craig Shular – CEO

Lindon Roberton – CFO

Analysts

Luke Folta – Jefferies & Company

Michael Gambardella – JP Morgan

Mark Parr – Keybanc Capital

Daniel Whalen – Auriga

Wayne Cooperman – Cobalt Capital

Tim Haze – Davenport & Company

Chitra Sundaram – Cardinal Capital

Saeed Sedick – Gabelli & Company

Charles Bradford – Bradford Research

Operator

Good morning. My name is Apra and I will be your conference operator today. At this time I would like to welcome everyone to the GrafTech Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Ms. Kelly Taylor, you may begin your conference.

Kelly Taylor

Thank you, Apra. Good morning and welcome to GrafTech International third quarter 2011 conference call. On the call today is GrafTech’s Chief Executive Officer, Craig Shular and our Chief Financial Officer, Lindon Roberton.

We issued our earnings release this morning. If you do 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 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 is posted on our website at www.graftech.com in the Investor Relation section.

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 GrafTech’s call today. Today we will take you to our third quarter highlights and then open it up to questions.

In Q3 sales improved to $36 million up 35% year-over-year driven by increased volumes in GrafTech electrode and graphite electrode and needle coke businesses. EBITDA was $78 million an increase of more than 45%. Net income increased 55% to 40 million or $0.28 per share. Operating cash flow increased to $47 million. Net debt was $365 million at the end of Q3, 10 million lower than Q2.

Turning to segment performance in our industrial material segments year-over-year sales increased 45% to $302 million in the third quarter. The sales increase was primarily as a result of higher graphite electrode sales volume and adjustment of needle coke sales from Seadrift.

Operating income for the segment increased 52% to $54 million due to favorable mixed cost absorption associated with higher graphite electrode volumes and the contribution of Seadrift operating income. Improvement in operating income was offset in part by expected increases in raw material cost. Graphite electrode Q3 operating rates came in at approximately 85% up from 80% in Q2. We expect this rate will continue to increase over the course of the year with fourth quarter electrode operation rates over 90%.

In our engineer solution segment, we have sales of $43 million and operating income of 3 million. This segment witnessed revenue and operating income in quarter due to weaker demand in the solar and oil and gas industries.

Turning to outlook, the International Monetary Fund, IMF has again reduced 2011 estimate for global GDP growth to 4% from 4.3% in their June 2011 estimate. This is slower than expected recovery in advanced economic and the continuation of financial market volatility. The IMF also reduced its 2012 global GDP growth forecast to 4%, down from 4.5% in their June 2011 estimate.

Overall the recovery progressing slower than anticipated and uncertainty in globally financial markets is further weighing on the recovery. While downside risk remained the outlook discussed for future recovery is expected to continue. In the fourth quarter, we project graphite electrode sales volume to increase slightly over the third quarter as customers fulfill their annual contract requirements.

It is important to note however, that our customers visibility to fourth quarter demand has been reduced due to uncertainty in the global economic environment. In light of the increased business risk we are targeting full year EBITDA to be in the range of 275 million to 285 million.

Recapping 2011, we are on track to achieve all time record sales and the second fast EBITDA performance in our company’s history. We completed three excellent acquisitions that has significantly improved our business model. We have integrated the Seadrift, St. Mary’s and Micron Research teams and operations and have been very pleased with the constitution they’ve made to our company.

The targeted synergies and EBITDA contribution from these acquisition is on track to meet our original guidance of $90 million. We recently concluded the refinancing of our revolving credit facility. The new five year 570 million revolver represents 310 million increase over the prior facility and extends the maturity date to October, 2016 with improvements in rates, terms and conditions.

We have successfully increased our borrowing capacity at very favorably rates which provides us with improved financial flexibility and positions us very well for future internal and external growth opportunities. We are very well positioned to siege the opportunities and confront the challenges of 2012.

Turning to 2012, the latest forecast issued by the World Steel Association about 15 days ago has come in cautiously optimistic for 2012. They project more than a 5% increase in steel consumption in 2012. Consistent with macroeconomic projections the association anticipates that the recovery in steel demand will be slower in advanced economies as compared to emerging economies that are today witnessing better growth.

Based on WSA and other steel forecasts, we expect solid growth in 2012 in steel production. This would represent a record steel production level in response to global steel demand for next year. We are now in the process of building our 2012 electrode book and as usual, we will provide additional commentary in our Q4 earnings release.

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