Ladies and gentlemen, thank you for standing by. And welcome to GrafTech's First Quarter 2020 Earnings Conference Call and Webcast. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Adam Dible. Please go ahead sir.

Thank you, Aimee. Good morning and welcome to GrafTech International’s first quarter 2020 conference call. On the call with me today is GrafTech's Chief Executive Officer, Dave Rintoul; and Chief Financial Officer, Quinn Coburn. Now, turning to our first slide. As a reminder, some of the matters discussed on this call may include forward-looking statements regarding, among other things, results, performance 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 these indicated – those indicated by forward-looking statements are shown here. We'll also discuss certain non-GAAP financial measures, for which you will find reconciliations in these slides. The slides are posted on our website at www.graftech.com in the Investors section. For your reference, a replay of the call will also be available on our website. Now, I'm pleased to turn the call over to Dave.

Thank you, Adam. Good morning everyone and thank you for joining us today. I hope this call finds you, your families and your colleagues well. On that theme we will begin as we always do with safety which is more critical than ever in these times. Health and safety excellence is a core value of GrafTech. Our first quarter total recordable injury rate has improved significantly to 0.54, a more than 40% decrease from the prior year. I would like to thank the team for their efforts associated with this achievement. Over the last 18 months, we have made significant progress in improving our safety program. This is fundamental to our believe that a safe plant provides us foundation to achieve success on the balance of the business metrics. Now turning to Slide 4. I would like to give you an update on where we stand within the context of COVID-19 and the impact it has upon our business, but first, I'd like to acknowledge and thank the Healthcare Workers and First Responders, who have been the heroes working to help those directly affected by the virus. Early on in this crisis, we established a COVID-19 response team, which continues to meet three to five times per week and consists of a cross functional group of Senior Management. Initial actions taken consisted of bans on travel and in-person meetings as well as working from home wherever possible. We have developed a safe work playbook, outlining exact protocols for safe operations in this new environment. For those team members and plans, this means actions such as taking temperatures where local privacy laws permit, mandating the use of gloves by all plant employees, additional cleaning using disinfectants and using good social distance practicing – practices to name a few. We have implemented…

Thanks, Dave. During the quarter, we produced 33,000 metric tons of GrafTech electrodes and our capacity utilization was 65%. We shipped 34,000 metric tons as electrode demand was impacted early in the quarter by customer destocking and later in the quarter due to steel operating rates. Shipments were also impacted by just over 1,000 metric tons from transportation delays as a direct result of COVID-19. Revenue decreased due to a lower – due to lower shipment volume and lower prices. Now turning to Slide 9. Net income was $122 million generating $0.45 of earnings per share. Adjusted EBITDA was $179 million driven primarily by the lower sales volume. Free cash flow totaled $125 million in the first quarter as we continue to generate strong cash flow. While the working capital impact on cash was neutral overall, we benefited from our ability to defer a first quarter tax payment of $50 million, until the end of the year in a foreign jurisdiction due to COVID-19 relief. Partially offsetting this benefit was our first required payment under our tax receivable agreement of $28 million. During the quarter, we also repurchased $30 million of our shares on the open market and paid dividends of $23 million. Now turning to Slide 10. We ended the quarter with a strong liquidity position. Our total liquidity is approximately 400 million consisting of $152 million of cash, then $147 million on our revolving credit facility. We also have plenty of runway with regards to our debt maturity profile. Our term loan is not due until February 2025 and we also made prepayments on our term loan in 2019 totaling $350 million leaving us with no required amortization payment until 2022. Now moving to Slide 11. In response to the current environment, we have taken decisive actions that…

Thank you, Quinn. Although the current conditions are difficult, we must remember that EAF steel manufacturing has several advantages over traditional steel making. Global warming is a critical issue facing steel companies going forward, and the EAF industry is among the largest recycling industries in the world. EAF production yields 75% less carbon emission than traditional blast furnace production and the long-term growth rate has been approximately 3% and there have been significant EAF capacity additions announced recently. Well, the near-term will be challenging. The long-term future is positive for the EAF industry as a whole. Turning to Slide 14, graphite electrodes are critical component of the EAF growth and our graphite electrodes are highly engineered and require extensive process knowledge to produce. The services and solutions that GrafTech provides will help to position both our customers and ourselves for a better future. Moving ahead to Slide 15, GrafTech is one of the largest electrode manufacturers in the world and we are the only producer that is substantially, vertically integrated into petroleum needle coke. We have taken decisive actions to manage through the COVID-19 crisis and have a strong liquidity position. We have a proven track record of cash generation and managing through downturns in the industry. While we cannot be certain, when the current difficult macroeconomic conditions will return to normal, we believe GrafTech is positioned well to weather this crisis. That concludes our prepared remarks. And will now open up the call for questions.

[Operator Instructions] Your first question today comes from the line of David Gagliano with BMO Capital Markets. Please proceed with your questions.

Okay, great. Thanks for taking my questions and thanks for the update in what's clearly a challenging time here. And then my questions are related to the current dynamics in the contract market. Obviously, we've seen the reduction in the 2020 contracted volumes, and then there's no indications now for 2021 and 2022 contracted volumes. I'm wondering if you can a bit more information regarding the remaining 100,000 to 115,000 tons that's sold under contract for 2020 or expected to be, in terms of also, how much of that is – incrementally is at risk of another reset lower? And also if you can comment on the expected pricing now tied to those contracts for 2020? That's my first question.

Okay, so I think there's a couple of things in there, Dave, and good morning, and thank you for your ongoing interest in GrafTech. Look, the current global macroeconomic state of affairs and the subsequent recovery will ultimately dictate the exact answer to your question. What we've done with this reduction is taken into account that we have these force majeure notifications and some others that are plant closures where people closed plants and didn't necessarily declare force majeure, but we know that they're closed. And trying to look through that and project the impact that those things will have on volume, along with some customers that we know that while they're certainly not bankrupt yet, we know there's a few that are in some financial distress. So to be fair, yes, we've taken an estimation of that we think one that is responsible, and to some extent, conservative. But the recovery of those and the contract is very specific, how those are handled, fortunately, the wording is quite constructive and very specific as to how that happens and how the contract gets extended into the out years to account for the period of time when force majeure in that example was put into place. In terms of the pricing, the pricing is really a factor of the mix, right? So that every one of those contracts allows for certain product mix. And in the first quarter, we saw some variation from that mix that created a lower number. As we go through the balance of the year, depending upon the operating – operations of various customers, that mix will probably change again and could up and could go down depending upon that mixture of customers. But the contract is very specific about what the pricing is. So it's not a matter of the mix that came within those contracts.

Okay, that’s helpful. The previous indications for 2020 contracts was an average price of $9,600 a ton, and then in 2021 and 2022 it’s $9,700 a ton. With the change today for 2020 what is that expectation for the average price, at least for 2020.

Yes, Dave, it’s Quinn. So in Q1 our average price was $9,450. I would expect it to be somewhere around there for the remainder of the year, $9,450 to $9,600. It won't be that much under $9,600. So the $9,450 for Q1 is probably a reasonable estimate.

Okay, thanks. I mean, that’s helpful. And then just the last question for me on the subject. Can you speak to how the contracts are structured with regards to over the life of the contract? And I know each one is different, but just in generalities, can you speak to how you would recoup the net present value of that contract over the life of the contract? Would it be extending volumes into the out years? Or is there some sort of upfront payments or something else?

Well, there are a couple of different ways for that to happen. But the primary one and the one that the contract really envisioned in terms of force majeure type events is that the contract essentially gets extended by whatever time frame that we've been in the force majeure condition. So the volume and the value of it gets recouped in that manner. There's also provisions within the contract that allow for a shorter time period for that to occur. But every condition and every customer's situation is going to be just a little bit different. So it's hard to give you a broad-based, yes, this is the way it will happen every time. So there is a mechanism that allows that recovery to happen at the beginning of the next year. There's another mechanism that allows in force majeure circumstances to extend the length of the contract by the length of whatever time the force majeure was taking place. So there are at least two different ways to handle that depending upon specific conditions.

Okay, got it. I appreciate it. Thanks for the info.

Okay.

Your next question comes from the line of Arun Viswanathan with RBC Capital Market. Your line is open.

Great, thank you. Good morning. Thanks for taking my questions.

Good morning.

I guess, I wanted to ask about needle coke. We've seen a dramatic shift in the oil markets. And how does that affect decant oil? How does that affect needle coke pricing? And then how does that affect your own strategy on needle coke sourcing? I'm just curious if Seadrift is less attractive now in this environment, maybe we can start there. Thanks.

Well, I will start by saying that the benefit of having Seadrift still has not changed in so much as our cost structure is well below what takes place in the marketplace, even with some of the numbers that I shared on the call earlier. We're still in a much better place than that, with our internal cost to produce needle coke. In terms of what goes on in the oil market in recent weeks, yes, that has an impact on the price of decant oil and lowers the cost of that. I'll remind everybody that we are hedged as well. But net-net takeaway is, developments in oil and needle coking pricing at this does not change the benefit for us of having Seadrift. It's a valuable part of the family and provides us with not only a cost-effective product compared to the market, but it allows us to do some things on the quality front to provide better electrodes at the end of the day.

And then I guess regarding the health of your customers. I guess, have you seen any shifts in purchasing patterns? I'm just curious if there been increased adoption of lower quality electrodes. I don't know if it’s – if you have any visibility on that, but that was one of the concerns that we had that maybe some customers would be switching to smaller diameter electrodes in a tougher environment. Is it – have you observed any of that?

So, so technically, the technology part of electric arc furnace is at the current conducting arms that hold the electrode or designed for a specific diameter. So it's not very practical for somebody to say, oh, I've been using 700-millimeter electrodes. I think I'm going to change tomorrow and I'm going to use 400-millimeter electrodes. Life technically doesn't work that way on the furnace. In terms of behavior patterns overall, look, the COVID-19 thing has turned the entire world on its head. And so any conclusions we would draw about what's taken place in the last several weeks are not valid in terms of a longer-term pattern. People are trying to do their best at their steel plants to keep their doors open, and some have been able to do that with more success than others. And others that – case in point, the terrible situation that evolved in Italy, folks had no choice but to deal with it and then shut down. So there's a real – the scheme or rather the range of reactions to this crisis is quite broad, depending upon what country people are in and their specific circumstances. So it would be unwise and inappropriate for me to generalize that – those conditions.

And then I just wanted to, I guess, ask beyond COVID. When you think about the business versus a couple of years ago, needle coke pricing has come down, electrode pricing has come down. There was a potential for the industry to move more towards LTAs. I guess, is it fair to assume that, that is less possible now just given the reduction in needle coke and your competitors kind of not willing to sign contracts at these low levels? How are you thinking about your business as it evolves beyond COVID?

Sure, I think the fact of the matter is, at this point in time, most of our customers are just trying to deal with what's going to happen tomorrow relative to their COVID-19 response. The – most of the contracts we have in play are there until the end of 2022. I think that's good news for us because it will allow some period of time of recovery post this crisis for the world to get back to whatever the new normal is going to be, but certainly, much closer to way the life was in 2018 and through the first part of our 2019 – 2019 as opposed to 2020. And people including ourselves, will be assessing that as we get into the latter part of 2021 and into 2022 and whether the conditions remain appropriate. I think as I said before in the past, these are a type of hedging that people do on all kinds of commodities in the steel business, whether it's natural gas, electricity or in our case, graphite electrodes. We will certainly be the one that's positioned to continue to be able to offer that service and that contract configuration to customers. I suspect it will still be of interest to some and maybe not others. And – but we will be positioned to be able to continue to provide that service. And the macroeconomic recovery in the market will dictate the reception to that mode of contractual business when we get closer to 2022.

Okay. And then just one more last one, could you comment on electric vehicle uptake, I guess, of needle coke? Has there been any reduction, I guess, in needle coke demand globally because of maybe some slowdown in the electrical vehicle market? Thanks.

Well, look, I don’t think that we have the statistics over the last several weeks, what's happened in response to COVID-19 on the battery market per se. I do know this much is that as we were monitoring the situation through the first quarter, there was no question that there was some of the needle coke that was being used in the battery business that – in the last crisis that we had, the last global crisis that was anything close to this, that wasn't the case. So that is a market that didn't exist in the past. Certainly, with the decline in the automotive sector, as part of the COVID situation, I would have believe that cars aren't being manufactured, there would be some near-term – short-term impact on that, but do believe that that's a COVID specific reflection of that change. So one would expect that as the economy recover then that demand would resume and pick up.

Okay. Thanks a lot. Good luck. I appreciate it.

Thank you.

Your next question comes from the line of Alex Hacking with Citi. Your line is open.

Hi, good morning. Dave and Quinn, hope you guys are doing okay. My first question would be around the contracted volume. Thanks for the updated guidance for the year. I guess, is there any way you can give us color on kind of the cadence of that through the year? My assumption would be that 2Q would be weaker than 3Q and 4Q? But kind of any color around that would be helpful. Thank you.

Yes, certainly, I think you are directionally correct because you know as we are sitting here, we're in the month of May already, April saw a lot of the force majeure. We see a lot of it coming off now, and would expect that we'll start to resume shipments to some of those plants through this month and next month. But there's no question that there's the initial hit of the crisis, the COVID-19 impact that will cause the second quarter to be impacted by that. And we're optimistic that the third and the fourth quarter will see some degree of recovery from that, although, again, the economic condition and the demand for steel is ultimately going to drive this. And we're not going to pretend that our crystal ball is probably any better than yours with respect to steel demand. But our numbers that we gave in reducing reflected our best estimate that there would be some lingering impact throughout the year because I don't expect that come anytime soon in this month, like there's a – somebody's going to flick a switch and steel demand will suddenly return exactly to where it was back in January. I think you're all aware that if you just look at the United States as an example, it's not too long ago at the beginning of the year that utilization rates were at 81% and last week they were at 51%. So obviously that has to have an impact not only in the second quarter, but as we move through the third and fourth quarter to some extent.

Okay, thanks. That’s helpful. And then a follow-up. I guess coming back a little bit to the needle coke question, but a bit more broad. And I'm not sure if you could answer this, but how do you see the global ex-China cost curve right now? I mean, you mentioned in your prepared remarks, I think, that you've seen some electrode transactions around $3,000 a ton. I mean if that really is where prices are would – do you – I guess do you think everyone's underwater or you think the cost curve is reset to make that kind of a breakeven price? Thank you.

So, look, we need to be very clear and transparent like we were trying to be in my prepared remarks. We obtained that information just like anybody else get through looking at trade statistics. And we saw a couple of – and then we did say it was very thinly traded. We saw a couple of instances where transactions took place at numbers just below that – or below that $3,000 value. So because we’re not buying needle coke and because of our – the inventory situation, our own ability in the market conditions that we've referenced here before, we don't expect to be purchasing needle coke this year and venders know that. So it’s not like we’re getting first hand information. We're using the trade statistics to inform us. So I want to be very clear about that so there's no misunderstanding. And where that brings the other few folks that do make needle coke, I cannot speak to their cost curves. It wouldn't be fair and it wouldn’t be appropriate for me to do that. I just know where ours are, and we think we know we're in good shape relative to those kind of values. And we'll continue to focus on running the business cost effectively, not just at the electrode plants, but also at our Seadrift facility.

And Alex, this is Quinn. Just to clarify one thing. In your question, you referred to graphite electrodes, but our prepared remarks around transactions below $3,000 related to needle coke.

Okay, thank you. Thank you for clarifying that. I misunderstood. So, thank you. That’s helpful. And then I guess just one final if I may. How should we think about working capital for the rest of the year? Obviously, you talked about selling inventory and going to generate some cash there. Is there any way you can quantify that? Thanks.

Yes, sure. So we do expect inventories to come down over the course of the year. It will be a bit of a slow process for it to come down given that volumes are lower. But certainly, our purchases are lower and we will manage our production generally to match the sales volumes. So while it won’t come down drastically in the near term, it will come down over time. And then you saw, in the first quarter, we had quite a nice benefit of cash flow from accounts receivable that’s natural if sales are to be low, there would be some additional benefit from that. If sales are the same then that will probably be about the same. So the way I would summarize it is, some meaningful positive benefit due to lower inventories regardless of levels of volumes over the rest of – over the remainder of the year.

And that's total – as you might imagine, just to be clear, that's total inventories from needle coke all the way through electrodes. We may decide to hold inventories in different places, but the total as a whole would come down.

All right, thanks guys and stay safe.

Your next question comes from the line of Curt Woodworth of Credit Suisse. Your line is open.

Thanks. Good morning Dave and Quinn.

Good morning, Curt.

So, if you’re not going to be sourcing merchant coke, then is it safe to say that your sort of effective capacity this year would just be I think it’s roughly 135 kts source out of Seadrift?

Well, it would be less than that this year because we’re taking – this is every second year, we take a turnaround. And this is the – this year is a turnaround year. So we'll have that operation out of service for a month. So it will be lower than that value.

Last year, we indicated that our production at Seadrift was roughly 125,000 metric tons. That would be lower than that this year, Curt, because of the one month turnaround.

Okay. So I believe it’s roughly a one to one sort of coke to electrode ratio. So if it's below 125, you're still going to do potentially 120 of LTA that would assume zero spot. Is that right?

Yes, yes, good question, Curt. So, we did in anticipation of the outage, build up our needle coke inventory to some extent. So we have enough inventory to cover us through the outage. And then going forward, we don't anticipate any meaningful purchases of third-party needle coke through the remainder of the year.

Okay. And I mean, given the fact that – I mean the spot market has been – as you said, and there’s clearly reports of spot pricing well below $5,000, $6,000 right now. I mean, is the philosophy just to kind of baseload your facilities as best you can? I mean, can you talk about how to optimize your footprint right now? I noticed the fixed cost reductions. And the business is fairly fortunate that you don't have a very – lot of fixed cost ratio. But just in terms of how you're running the business on a lower utilization, can you comment on that? And that there would be any unit cost pressure just on the unit basis going forward?

Sure. Look, therein lies one of the big benefits of the LTAs, of course. But on the – in the spot area, we'll conduct ourselves in a manner to be competitive in the markets that we consider our traditional home markets. I think we can weather the storm as well as anybody, now doesn’t prohibit people from perhaps doing irrational things, and that doesn't mean that we're going to follow somebody down an irrational path. But for the most part, to answer your question, we expect to be competitive. We're going to maintain our presence in the market and service the customers that we've been doing business with for years and years. And it may mean at the end of the day, and I think this is your point that when you look at margins that the spot businesses may not be as attractive as it was a year or so ago, but we're in this for the long haul, and we will be in the place and available for our customers. No question about that.

Great, thank you.

And at this time, I will turn the call back to the presenters for any closing remarks.

Well, thank you. In conclusion, GrafTech is well positioned to be resilient through these challenging macroeconomic conditions, and we are committed to providing our customers with a reliable service through the difficult days that lay ahead. I'd like to take this opportunity to wish everyone on this call continued health and safety in the coming months. Again, thank you for your interest in GrafTech, and we look forward to speaking with you next quarter.

And this concludes today’s conference call. Thank you for your participation. You may now disconnect.