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GrafTech Expects Weaker Than Previously Anticipated Demand for Graphite Electrodes

04/30/2013 - As it reported its financial results for the first quarter, GrafTech International Ltd. said steel customer confidence remains low given the slow start to the year in steel production.

GrafTech International Ltd. announced financial results for the first quarter ended 31 March 2013.
2013 First Quarter Review
  • Net sales increased five% to US$254 million compared to net sales of US$241 million in the first quarter of 2012. The increase in revenue was primarily driven by higher graphite electrode volumes versus the first quarter of 2012, which had significant customer destocking.
  • EBITDA was US$36 million versus US$40 million in the same period last year.
  • Net income was US$4 million versus US$18 million in the first quarter of 2012.
  • Net cash provided by operations was US$18 million versus a net use of cash of US$15 million in the first quarter of 2012. The year-over-year increase in operating net cash was largely driven by lower working capital investments.
  • Net debt was US$555 million, or virtually flat as compared to net debt at year end 2012.
Craig Shular, chief executive officer of GrafTech, commented, "Supported by a solid balance sheet, GrafTech is well positioned as the industry's low cost and vertically integrated producer to confront this challenging environment. Our team is driven by continuous improvement, providing premier solutions and service to our customers and proactively managing costs within our control."
Industrial Materials Segment
The Industrial Materials segment's net sales for the first quarter of 2013 were US$209 million, as compared to US$193 million in the first quarter of 2012. Net sales in the current quarter increased primarily due to higher graphite electrode sales volume. The increase is compared to weak volumes in the first quarter of 2012, which had significant customer inventory destocking. Although graphite electrode volumes were higher in the first quarter of 2013, realized pricing for both graphite electrodes and needle coke was lower.
Operating income for the Industrial Materials segment was US$16 million in the first quarter of 2013, as compared toUS$25 million in the first quarter of 2012. The decline reflects lower realized graphite electrode and needle coke prices and higher graphite electrode costs related to the carryover of third party needle coke acquired in 2012.
Higher raw material costs carried into this year will continue to negatively impact our costs in the second quarter of 2013. However, it is important to note that the second half of 2013 is anticipated to benefit from lower costs as the third party higher cost needle coke inventory is depleted and graphite electrode operating rates improve.
Engineered Solutions Segment
Net sales for the Engineered Solutions segment were US$45 million in the first quarter of 2013 as compared to US$48 million in the first quarter of 2012. The US$3 million year-over-year decline in revenue was largely driven by lower sales of advanced graphite material products. As previously guided, operating income for the segment was essentially breakeven in the first quarter of 2013, compared to a net operating loss of US$1 million in the same period of 2012.
For the full year 2013, we continue to target double-digit revenue growth for the Engineered Solutions segment with operating income margins in the range of 13 to 15% in the second half of the year. We entered the second quarter with demand ramping for thermal management solutions in the advanced consumer electronics industry, which supports our growth expectations for the year.
Mr. Shular commented, “We continue to leverage GrafTech's core competency of providing innovative graphite material science solutions into diverse high-tech industries. New product innovations developed over the past three years are expected to drive nearly one third of Engineered Solutions revenue in 2013."
Outlook
Based on the International Monetary Fund's 16 April 2013 report, the estimate for global GDP growth has been reduced to 3.25% in 2013, a reduction from its January estimate of 3.5%. Advanced economies are anticipated to expand at a modest growth rate of 1.2% in 2013, following a weak start to the year. Recessionary conditions in Europe are forecasted to persist with economic activity projected to contract 0.3% in the region in 2013. The anticipated growth rate for emerging markets and developing economies was also reduced to 5.3% in 2013.
On 22 April 2013, the World Steel Association (WSA) cited that global steel production, excluding China, declined 3.6% in the first quarter of 2013 as compared to the same period in the prior year. On April 11, 2013, the WSA had also reduced its steel demand growth forecast from 3.2% to 2.9% in 2013, largely driven by a soft first quarter and a weaker outlook in the European Union. Steel customer confidence remains low given the slow start to the year in steel production.
As a result of the above economic and steel data, we are reducing our targeted EBITDA range for the full year 2013 by approximately five% to US$165 million to US$195 million to reflect weaker than previously anticipated demand for graphite electrodes. Given the challenging operating environment, we are also reducing our targeted capital expenditures to US$90 million to US$110 million.
In the second quarter of 2013, we are targeting EBITDA to be in the range of US$30 million to US$40 million. Seasonally stronger volumes, compared to the first quarter, in the Industrial Materials segment and improved profitability of the Engineered Solutions segment are anticipated to be offset by the full flow-through of lower 2013 pricing of graphite electrodes. In the second half of 2013, we expect improved profitability due to increased revenue in both business segments and lower costs in the Industrial Materials segment as the carryover of higher cost needle coke inventory is depleted and graphite electrode operating rates increase.
Mr. Shular concluded, "The structural improvements made to strengthen our business model and the strategic initiatives to grow and diversify our company will enable GrafTech to emerge from this cycle stronger and positioned to exceed our prior peak performance as the industry recovers."
In summary, the company’s expectations for 2013 are as follows:
  • EBITDA targeted in the range of US$165 million to US$195 million (previous guidance was US$175 million to US$205 million);
  • Overhead expense (selling and administrative, and research and development expenses) of approximately US$140 million;
  • Interest expense in the range of US$35 million to US$40 million;
  • Capital expenditures in the range of US$90 million to US$110 million (previous guidance was US$90 million to US$120 million);
  • Depreciation expense in the range of US$90 million to US$95 million;
  • An effective tax rate in the range of 33% to 36%; and
  • Cash flow from operations in the range of US$150 million to US$180 million.