Graftech (EAF): Q3 Results & Takeaways

Graftech (EAF) Q3 Results & Thoughts:

Highly anticipated quarter where the focal points were: 1. How does EAF preserve liquidity to get through the down cycle, and will they have to issue equity? 2. How are 2025 volume and pricing negotiations going?

Liquidity – Unsure who negotiated on Graftech's behalf, but the announcement of a new $175m first lien term loan, a $100m delayed draw term loan, and a one-year extension to existing debt – extending the maturity to 2029 with no change to rates (which are currently well below market rate) were much better than anyone could have anticipated. The new first-lien term loans will bear an interest rate of SOFR + 6% (10.60% today). How such good terms for a company staring down the barrel of a liquidity issue occurred is not for me to ask, but congratulations to the EAF management. This should provide them with a runway to avoid equity dilution. As is customary, EAF management disclosed financial projections: Adjusted EBITDA is forecast to be $0 million in FY 2024, ($28 million) - $31 million in FY 2025, $131 million in FY 2026, $274 million in FY 2027, and $346 million in FY 2028. Unlevered Adjusted Free Cash Flow is forecast to be ($51 million) in FY 2024, ($81 million) - ($33 million) in FY 2025, $18 million in FY 2026, $126 million in FY 2027, and $183 million in FY 2028. All in all, shareholders should receive the terms and outcome well. I was fully anticipating an equity dilution.

2025 Volumes & Price – Management's guiding 2025 volumes of +LDD stemming from new product offerings and a slight rebound in EAF steel utilization rates. This is light relative to my expectations; however, recent commentary out of Europe suggests the economy is still struggling (I was expecting volumes +20%). Even worse than volumes was the current pricing environment. $4,300/mt in Q2 was terrible, and a sequential 4% decline to $4,100/mt was surprising, as management's tone in Q2 suggested that pricing was stabilizing. $4,100 is not a sustainable price for any producer, which is why we are seeing Electrode Manufacturing facilities idle/close. A Graftech competitor announced a 20% price increase; however, management stated they aren't doing a sweeping 20% price increase but are being selective based on geography. If pricing recovers only modestly (5%-10%), 2025 sales estimates of $607m will likely need to come. Graftech's management often stated that prices take the elevator down and the escalator up. Expecting a sudden move higher in pricing sounds like an unlikely scenario, higher, but to what extent is the question? I believe the stock wasn't up dramatically after the financing announcement because of the outlook and current environment.

The one part of the story that "bothers" me is the continued discussion about EAF steel production coming online through the decade's end and what that means for graphite electrode manufacturers. The story is always "ex-China"; however, China is the story today, with the amount of Electrode dumping into regions Graftech supplies. If the new EAF steel capacity comes online, yet China's economy is still weak, I don't believe it matters. Chinese Electrode manufacturers need to shut down, or China needs to increase EAF Steel Capacity while idling BOF. To have a view on the stock/business moving forward, I believe you need to have a view of China's economy.

Seadrift Expansion – With the recent HEG stake and the new administration entering the picture, I view the DOE loan to expand Seadrift capacity as less likely than it was months ago.

Final Note – Graftech's high-priced LTA's rolloff at the end of 2024 presents another headwind to revenue/EPS.