GrafTech International's CEO Discusses Q2 2012 Results - Earnings Call Transcript

GrafTech International Ltd. (GTI)

Q2 2012 Earnings Call

July 26, 2012 11:00 am ET


Kelly Taylor - Director, IR

Craig Shular - Chairman, President & CEO

Lindon Robertson - VP & CFO


Luke Folta - Jefferies

Ian Zaffino - Oppenheimer

Arun Viswanathan - Longbow Research

Tim Hayes - Davenport

Philip Gibbs - KeyBanc Capital

Charles Bradford - Bradford Research



Good morning. My name is Brooke and I will be your conference operator today. At this time, I would like to welcome everyone to the Graftech second quarter 2012 earnings call. All lines have been place 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 call over to your host, Kelly Taylor. Ma’am, you may begin.

Kelly Taylor

Thank you, Brooke. Good morning and welcome to Graftech International’s second quarter 2012 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 did not receive a copy, please contact [Marie Nor] at 216-676-2160 and she’ll 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 in the Investor Relations Section. For your reference, a replay of the call is available on our website.

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

Craig Shular

Thank you, Kelly. Good morning to everyone, and thank you for joining Graftech’s call today.

We will take you through our second quarter highlights and then open it to questions. In Q2, sales were $316 million, down 1% versus a year ago. EBITDA increased 11% to $67 million. Net debt came in it at $597 million, up largely the result of our 10 million share buyback and increased working capital.

During the second quarter, we repurchased 8.8 million shares and another 1.2 million in July at an average purchase price of $10.17. This completes our 10 million share buyback program that was announced in December of 2011. Upon completion, the Board of Directors approved a new share repurchase program for up to 10 million additional shares of common stock.

With the recently completed 10 million share buyback program coupled with the 2 million shares that were repurchased in the fourth quarter last year, we have now bought back 8.2% of our outstanding shares. This underscores our commitment to delivering long-term sustainable value for our shareholders.

Wrapping the second quarter highlights, as discussed in the last earnings call, our Seadrip production team has worked with scientists from our Engineered Solutions segment to develop a super-premium grade of needle coke. Seadrip has successfully commercialized this product and has begun sales to third parties.

This development demonstrates our continued commitment to leverage our core competencies in graphite material science to grow our company by commercializing new products and technologies. While we do not anticipate these sales will be material to 2012 results, we are encouraged by the market acceptance and believe it will prove strategically valuable to our business in the future.

Turning to the segments. Industrial Material sales were $260 million and operating income came in at $42 million, a $10 million increase over Q2 a year ago. The increase in operating income was largely due to higher year-over-year realized pricing of graphite electrodes and needle coke partially offset by lower volumes. Also adding to operating income that quarter was the carryover benefit of lower cost from inventory related to high Q4 2011 production rates and lower cost raw materials purchased last year.

It is important to note that the lower cost inventory has largely been utilized and we anticipate that the impact of 2012 raw material increases and higher fixed-cost absorption will be more fully reflected in the second half of the year.

In our Engineered Solutions segment, sales came in at $53 million and operating income was $5 million or 9% of sales. As expected our Engineered Solutions segment has returned to profitability this quarter as we continue to see solid demand in our advanced consumer electronics product line. We expect this segment will continue to grow in the second of the year and are targeting a double-digit operating income margin percentage in the fourth quarter of this year.

Turning to outlook. Based on IMF projections, the estimate for global GDP growth has been reduced to 3.5% for this year representing the second downward revision to growth estimates this year by the IMF. The IMF highlights in its July report that the global economic recovery has weakened considerably and continues to face significant downside risk. The European economies continue to struggle with massive debt and severe austerity programs, while growth out of emerging economies particularly China, Brazil and India has continued to slow.

Uncertainty in the global economies has impacted steel customer sentiment and production rates. Major markets such as the EU are down more than 5%. Since our Q1 earnings release, we've seen economic conditions in virtually every region we serve deteriorate further.

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