GrafTech Investor Presentation. June 2015

Transcription

1 GrafTech Investor Presentation June 2015

2 2 Important Disclosures Forward-Looking Statements This presentation and related discussions may contain forward-looking statements about such matters as: the proposed tender offer and merger, the conditions to consummation thereof, the terms thereof and related matters; a proposed issuance of convertible preferred stock, the conditions to consummation of such potential issuance, the terms of any such potential issuance and stock, the use of proceeds and related matters; the effects of such proposed issuance, tender offer and merger under our equity award and benefit plans and agreements or our credit agreement, senior notes or senior subordinated notes; our outlook for 2015; future or targeted operational and financial performance; growth prospects and rates; the markets we serve; future or targeted profitability, cash flow, liquidity, sales, costs and expenses, tax rates, working capital, inventory levels, debt levels, capital expenditures, EBITDA, cost savings and business opportunities and positioning; strategic plans; cost, inventory and supply-chain management; rationalization and related activities; the impact of rationalization, product line changes, cost competitiveness and liquidity initiatives; expected or targeted changes in production capacity or levels, operating rates or efficiency in our operations or our competitors' or customers' operations; future prices and demand for our products; product quality; diversification, new products and product improvements and their impact on our business; the integration or impact of acquired businesses; investments, acquisitions, asset sales or divestitures that we may make in the future; possible financing or refinancing (including factoring and supply-chain financing) activities; our customers' operations, order patterns and demand for their products; the impact of customer bankruptcies; our position in markets we serve; regional and global economic and industry market conditions, including our expectations concerning their impact on us and our customers and suppliers; conditions and changes in the global financial and credit markets; legal proceedings and antitrust investigations; our liquidity and capital resources, including our obligations under our senior subordinated notes that mature in November 2015 ; tax rates and the effects of jurisdictional mix; the impact of accounting changes; and currency exchange and interest rates and changes therein. We have no duty to update these statements. Our expectations and targets are not predictions of actual performance and historically our performance has deviated, often significantly, from our expectations and targets. Actual future events, circumstances, performance and trends could differ materially, positively or negatively, due to various factors, including: failure to satisfy the conditions contained in the definitive agreements relating to the proposed issuance, tender offer and merger to consummation thereof, including due to material adverse changes affecting the Company or its prospects or failure to obtain regulatory approvals; litigation in relation to such transactions; events of default occurring or repurchase obligations arising under our credit agreement, senior notes or senior subordinated notes related to the proposed tender offer and merger, or otherwise (including by reason of cross default provisions thereunder); downgrades in the ratings of our senior notes and the requirement to repurchase the senior notes that could arise as a result thereof; restrictions on the conduct of our business in the ordinary course due to provisions under such definitive agreements; failure to achieve cost savings, EBITDA or other estimates; actual outcome of uncertainties associated with assumptions and estimates used when applying critical accounting policies and preparing financial statements; failure to successfully develop and commercialize new or improved products; adverse changes in cost, inventory or supply-chain management; limitations or delays on capital expenditures; business interruptions, including those caused by weather, natural disaster or other causes; delays or changes in, or non-consummation of, proposed or planned asset sales, divestitures, investments or acquisitions; failure to successfully integrate or achieve expected synergies, performance or returns expected from any completed investments or acquisitions; inability to protect our intellectual property rights or infringement of intellectual property rights of others; changes in market prices of our securities; changes in our ability to obtain new or refinance existing financing on acceptable terms, or at all; adverse changes in labor relations; adverse developments in legal proceedings or antitrust or other investigations; non-realization of anticipated benefits from, or variances in the cost or timing of, organizational changes, rationalizations and restructurings; loss of market share or sales due to rationalization, product-line changes or pricing activities; negative developments relating to health, safety or environmental compliance, remediation or liabilities; downturns, production reductions or suspensions or other changes in steel, electronics and other markets we or our customers serve; customer or supplier bankruptcy or insolvency events; political unrest which adversely impacts us or our customers' businesses; declines in demand; intensified competition and price or margin decreases; graphite-electrode and needlecoke manufacturing capacity increases; fluctuating market prices for our products, including adverse differences between actual graphite-electrode prices and spot or announced prices; consolidation of steel producers; mismatches between manufacturing capacity and demand; significant changes in our provision for income taxes and effective income-tax rate; changes in the availability or cost of key inputs, including petroleum-based coke or energy; changes in interest or currency-exchange rates; inflation or deflation; failure to satisfy conditions to government grants; continuing uncertainty over fiscal or monetary policies or conditions in the U.S., Europe, China or elsewhere; changes in fiscal and monetary policy; a protracted regional or global financial or economic crisis; and other risks and uncertainties, including those detailed in our SEC filings, as well as future decisions by us. This news release does not constitute an offer or solicitation as to any securities. References to street or analyst earnings estimates mean those published by First Call.

3 3 Company Overview Company Facts GrafTech International Ltd. Sales (2014) $1,085M Employees (2014) 2,397 Incorporation Delaware NYSE ticker GTI Product Offerings Graphite electrodes Needle coke Refractory bricks Industrial Materials Segment Information Engineered Solutions Sales (2014) $840M (77% of total) Sales (2014) $245M (23% of total) Key Market Electric Arc Furnace steel production Product Offerings Flexible graphite for thermal mgmt. Graphite blocks & machined parts High-temp furnaces Composites Graphite powders Key Markets Advanced Electronics Industrial Alternative Energy Aerospace & Defense % Revenue by region Graphite electrodes Advanced materials Needle coke plant Sales offices GrafTech is a global leader in carbon and graphite material sciences

4 4 Competitive Landscape Industrial Materials Segment Graphite Electrode Capacity Engineered Solutions Segment Company Est. Capacity (1,000 metric tons) (1) Company 2014 Revenue ($ millions) 195 (Engineered Solutions Segment) $245 Fangda Carbon Tech Co. Ltd. (China) 200 SGL Carbon AG (Germany) 170 Showa Denko (Japan) 157 Sinosteel Corporation (China) 120 Tokai Carbon (Japan) 100 GIL (India) 98 HEG (India) 80 Nippon Carbon (Japan) 32 SEC (Japan) 27 Other Chinese producers 626 Other 109 Worldwide Total ~1,900 Sources: 2015 estimates derived from published information including press releases, websites and public-company filings (1) Estimated capacity after announced closures (2) Includes Graphite Electrodes, Refractories and Needle Coke Total Market for Industrial Materials ~$5 billion (2) SGL Carbon AG (Graphite Specialties Segment) $459 Mersen (Advanced Materials & Technologies Segment) $372 Toyo Tanso (Total Company) $322 Tokai Carbon (Fine Carbon Segment) $136 Nippon * Panasonic * Poco * Kureha * Ibiden * SEC * Others * Worldwide Total ~$2,400 * Generally compete with a subset that is not separately disclosed Total Market for Engineered Solutions ~$2.4 billion GrafTech is a global leader in carbon and graphite material sciences

5 5 GrafTech Update 1 2 Industry Update Business Update 3 4 Convertible Preferred Investment Tender Offer

6 6 Global Sector PMI Global Sector PMI: detailed sectors 15-Apr 15-Mar Global Sector PMI: broad sectors 15-Apr 15-Mar Beverages Telecommunication Services Insurance Media Tourism & Recreation Real Estate Commercial & Professional Services Software & Services Healthcare Services Banks Telecommunication Services Consumer Services Healthcare Industrials Financials Consumer Goods Source: Markit Technology Basic Materials Pharmaceuticals & Biotechnology Machinery & Equipment Transportation Food Household & Personal Use Products Other Financials General Industries Chemicals Automobiles & Auto Parts Forestry & Paper Products Construction Materials Technology Equipment Basic Materials has been the bottom ranked broad sector for 12 of the past 14 months Metals & mining sector Continues to fall third successive monthly drop in output Has been ranked in the bottom three for the past nine months Metals & Mining Source: Markit

7 7 Total Monthly Steel Production Trends 160 Total Monthly Steel Production Trends Monthly Global Production 6-month rolling average Monthly Production (excl. China) Source: World Steel Association, May 2015 Excluding China, production has been trending down for two years

8 8 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 8 Total Steel Capacity Utilization 90% Source: World Steel Association 2010 Avg. 78.1% 2011 Avg. 79.8% 2012 Avg. 76.9% 80% 2013 Avg. 74.2% 2014 Avg. 73.3% 2009 Avg. 71.3% YTD Avg. 71.8% 70% 60% Capacity utilization is almost back down to 2009 levels driven by capacity expansions

9 9 Steel Production - EAF 1800 (MT millions) Total Steel 500 (MT millions) EAF Steel China 4.2% CAGR China 13% CAGR ROW 1.3% CAGR ROW 2.6% CAGR Source: World Steel Association EAF Growth Outside of China has Been Stronger than BOF Production

10 10 EAF Production (MT millions) EAF Production and EAF Share of World Steel Production (excl. China) 38% 38% 40% 41% 43% 43% 44% 45% 45% 46% 46% 45% 45% Source: World Steel Association However, EAF Growth has Slowed Recently

11 11 Steel Production by Country Country Q Q YtY (%) 2014 March 2015 March YtY (%) % EAF 2014 Total World % China % Japan % United States % India % S. Korea % Russia % Germany % Turkey % Brazil % Ukraine % Italy % Taiwan % Mexico % France % Iran % Spain % ROW % Source: World Steel Association Numerous data points suggests that EAF s are down significantly more than BOFs in 2015 Example: Turkey s blast furnace production was up 5.3% despite total production being down 8.8% 10 of the top steelmaking countries in the world are down an average of 10% March 2015 to March These 10 countries produced 41% of their steel in EAF s in Source: World Steel Association

12 12 Steel Production Economics BOF vs EAF BOF Key Raw Material Input ~ 50% of Cost EAF Key Raw Material Input ~ 65% of Cost Iron Ore Coal Scrap Iron ore fines cfr China ($dmt) Low-vol coal fob Australia ($/mt) (Heavy Melt #1 scrap ($/gross ton) Only 25% reduction to 2014 ~ 60% reduction ~ 60% reduction Now ~45% reduction EAF Production has Been Negatively Impacted by the Recent Disparity in the Cost of Inputs for EAF Production Compared to BOF Production

13 13 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Chinese Steel Exports Impact on GE Demand China Monthly Net Exports China Annual Exports 10 (MT millions) Net Exports 6 M Rolling Avg. 120 (MT millions) Imports Exports Net Exports Source: China Steel Association Some EAF Production is Being Displaced by China Steel Exports Which Are at Record Levels

14 14 Industry Update Summary Steel Industry and EAF Challenges Overall capacity has expanded faster than production o Utilization rates are at lower end of five year range o Excess Melt Capacity has increased Integrated production costs have decreased more than EAF costs over past year o Iron ore prices have dropped more than scrap prices o Global met coal prices are lowest in many years Significant excess integrated capacity in China is driving record net exports o Displacing some EAF production Potential Electrode Industry Catalysts Iron-ore and scrap price imbalance is correcting o Significant scrap price reduction in 2015 YTD o Materially lowers costs of EAF production Growth in scrap supply globally will continue Continued growth of non-residential construction Projected growth of EAF will resume at historical rate of 1-2% o Developing economies will continue to shift steel production to EAF Positive Signs Steel Industry and EAF Global economy generally continues to improve US non-residential construction, Architectural Billing Index, housing starts, auto production, appliance shipments and job creation are positive indicators Recent costs improvements for integrated production vs. EAF are beginning to rebalance China export surge should slow based on trade cases EAF strongly positioned for continued steady growth: o However, timing to recovery is biggest question Near-Term Opportunities for GrafTech Lower oil prices o GrafTech uses approximately one million barrels of decant oil annually (net of by-product sales) Improved pricing - every 1% increase in electrode price would increase operating income by ~$6 million Potential higher production rate in 2016 (after right-sizing of inventory levels) will reduce unit costs Potential growth and improved profitability of Engineered Solutions Steel Industry / EAF Currently Facing Headwinds; But Positive Signs for Future

15 15 GrafTech Update 1 2 Industry Update Business Update 3 4 Convertible Preferred Investment Tender Offer

16 16 GrafTech s Strategy Industrial Materials Carbon & Graphite Material Science Shared Technology Engineered Solutions Industrial Materials o Differentiated Low-Cost Strategy Engineered Solutions o Commercialize Advanced Technologies Create Long-Term, Sustainable Stockholder Value Financial Discipline o Strong Balance Sheet and Liquidity GrafTech Has a Clear Strategy Focused on Creating Long-term Stockholder Value

17 17 GrafTech s Strategy - Industrial Materials Segment GrafTech s Strategy Differentiated Low Cost Electrode Industry Current Situation Industry Results Past Two Years Low Cost Capacity Utilization, Productivity, Integration Over-Capacity ~70% Capacity Utilization Differentiation Quality, Service, Reliability Stagnant Demand Industry Volumes Roughly Flat Value Pricing Based on Value Severe Price Competition ~25% Price Declines GrafTech has the Right Strategy for the Challenging Industry Environment

18 18 Low Cost IM: Differentiated Low Cost Strategy Capacity Utilization Low Cost 100% 90% 80% 70% Capacity Utilization Integration Productivity 60% 50% E Capacity Utilization Without Inventory Reduction 1.10 Manufacturing Costs 75 Productivity E E Index of Manufacturing Costs where 2012 = 1.0 Kg per labor hour Low Cost Through Capacity Utilization, Productivity and Integration

19 19 Differentiation IM: Differentiated Low Cost Strategy Reliability Quality Differentiate Service Quality Constant improvement through Best Practices Innovation Developed Super Premium Needle Coke at Seadrift Facility Developed technology that reduces electrode breakage Developed technology that reduces electrode stub loss Quality Measurement System ISO 9001 Certifications Reliability Service 4 large production facilities & backward integration Inventory and warehousing on 4 continents Greater than 99% on-time delivery Performance credits less than 0.3% of sales Production sizes of mm Short delivery lead-times Global Sales and Technical Service Groups Global Support Group ArchiTech Furnace Productivity System EAF Benchmarking / Best Practice Audits EAF Training Programs and Technology Seminars Differentiation Through Quality, Service and Reliability

20 GrafTech s Strategy Engineered Solutions Segment Innovation Engineered Solutions Product Leadership Leverages carbon and graphite product and process technology leadership for new product development Execution Core Competency Graphite Material Science Collaboration Exploits technological capabilities for developing products with thermal, electrical and strength requirements in high-growth markets Enhance Quality and Commercialize New Products for High Growth Markets Customer Intimacy - Speed of New Product Development Diversifies revenue base and enables future value creation Commercialize Advanced Technologies for High Growth Markets 20

21 Execution Commercialize Products for High Growth Markets Advanced Electronics Technologies Advanced Graphite Materials Advanced Composite Materials Advanced Materials Flexible Graphite Advanced Graphite & Insulation Carbon Composites Powders Electronic Thermal Management (Smartphones, Tablets, Displays) High Temp Furnaces (LED, Silicon, SiC, Industrial) Diamond Drill Bit Molds Rail Wheel Molds Rocket Nozzles Heat Shields Hydraulic Fracturing Additives Lithium Ion Batteries Electric Vehicles Revenue from New Products* was more than 40% in 2013 & more than 30% in *Products launched in the past 3 years as a % of total Engineered Solutions revenue

22 22 Multi-Year Transformation Implemented in Last 18 Months Industrial Materials Engineered Solutions Company-wide Rightsizing Phase 1: Announced October 2013 Graphite electrode plant production rationalization SG&A reductions $75 Million in annual savings Phase 2: Announced July 2014 Advanced graphite materials product line rationalization SG&A reductions $18 Million in annual savings Phase 3: Announced Sept 2014 Streamlined business model with greater accountability & cost efficiency SG&A reductions $30 Million in annual savings More than $120M of cost savings, $100M of cash savings, in aggressive actions launched & completed in the past year and a half

23 23 GrafTech Update 1 2 Industry Update Business Update 3 4 Convertible Preferred Investment Tender Offer

24 24 GrafTech Balance Sheet Total Debt Debt / EBITDA ($ millions) x 4.4x 5.0x 3.6x 2.3x Q Proforma* Q Proforma* *Pro-forma for issuance of $150 million convertible preferred shares Convertible Preferred Significantly Reduces Debt / EBITDA

25 25 Material Terms of Convertible Preferred Stock Transaction Material Terms of Convertible Preferred Stock Transaction Amount US$150 million, representing ~18% of the common stock on a fully converted, post-transaction basis ($135 million and ~16% if no stockholder approval) Use of Proceeds Proceeds to be used (with cash or draw on the Company s revolver) to repay the Company s subordinated notes Dividends Conversion Preemptive Rights Change of Control (35%) Put Right Put Right at Year 7 Company Call Right Governance Rights Transfer Restrictions 7.0% coupon, payable quarterly in arrears in cash Participates in dividends on common stock on an as-converted basis Conversion into common stock permitted at any time $5.00 per share conversion price, subject to customary anti-dilution adjustments Preemptive rights with respect to equity and equity-linked offerings to protect percentage ownership (subject to customary exceptions) Put right at Fair Value calculated in accordance with Black-Scholes formula; however, premium is limited to: o In-the-money-value, if that change of control occurs during go-shop o 25% of Fair Value, if Brookfield initiates a change of control during the first 2 years Put right to the Company for a 6-month period beginning at the end of Year 7 at a price equal to principal plus accrued and unpaid dividends After Year 4, the Company can redeem all or a portion of the Convertible Preferreds at a price equal to principal plus accrued and unpaid dividends, provided: o Daily VWAP of the common stock is at least 175% of the conversion price for at least 40 trading days during a period of 60 consecutive trading days After Year 7, the Company can redeem all or a portion of the Convertible Preferreds at a price equal to principal plus accrued and unpaid dividends Company gives 30-days notice so Convertible Preferreds can convert into common stock, if desired Directors: 2 Directors (if Brookfield holds 75% of Convertible Preferreds, including common stock from conversion); 1 Director (if 25-75% of Convertible Preferreds, including common stock from conversion); 1 Observer (if <25%) o At least 1 Brookfield Director on each committee, subject to NYSE requirements Director-designation rights are transferrable on sale of Convertible Preferreds to controlled affiliates of Brookfield Asset Management and transferees approved by the Company s Board Convertible Preferreds generally votes together with common stock Transfers to identified competitors/suppliers not permitted No transfer restrictions on common stock issued on conversion of Convertible Preferreds Registration Rights Customary demand, piggyback and shelf registration rights

26 26 GrafTech Update 1 2 Industry Update Business Update 3 4 Convertible Preferred Investment Tender Offer

27 Tender Offer Purpose of Tender Offer The Board views the Offer as an opportunity for the Company s stockholders to choose immediate liquidity at a premium for some or all of their Shares and to avoid the risks inherent in the current operating environment or to participate in the Company as a stockholder following the closing of the Offer with the benefit of Brookfield s sponsorship going forward to the extent the conditions to the Merger, particularly the Merger Condition, are not satisfied. The Offer will provide stockholders with the opportunity to accept a price for their Shares that is likely to be higher than what may be available in the open market at this time and for the foreseeable future, particularly in light of the Company s recent results of operations, financial condition and guidance and historical multiples Potential Outcomes of Tender Offer Minimum Condition is not met Brookfield would not own at least 30% (including Convertible Preferred) upon closing of the tender offer Would mean that less than ~15% of currently outstanding shares are tendered Would result in the tender offer not being completed GrafTech remains a listed public company Minimum Condition is met, but Merger Condition is not met Brookfield would own 30% - 80% (including Convertible Preferred) upon closing of the tender offer Would mean that ~15% - 75% of currently outstanding shares are tendered GrafTech remains a listed public company Merger Condition is met Merger Condition: Brookfield would own at least 80% (including Convertible Preferred) upon closing of the tender offer Would require that ~75% of currently outstanding shares are tendered Merger would be required to be completed and GrafTech would become a private company Any shares not tendered would be purchased at $ Minimum Condition and Merger Condition are defined in the Merger Agreement

28 28 Material Terms of Tender Offer Transaction Material Terms of Tender Offer Transaction Tender Offer US$5.05 per share for up to 100% of the outstanding common stock Minimum Tender Condition Go-Shop Tender Offer Period Other Conditions Standstill Governance Rights Termination Fee Merger Brookfield s aggregate ownership must equal at least 30% of the outstanding common stock (including the Convertible Preferred ownership on an as-converted basis) 35-day go-shop period plus additional 15-day go-shop extension to continue discussions/negotiations with any party reasonable likely to deliver a superior proposal After the go-shop period, no-shop restrictions apply Open for an initial period ending 10-business days after expiration of the go-shop Extensions: o If the Minimum Tender Condition is satisfied, the tender period must be extended for successive 10-business day periods until the earlier of (i) satisfaction of all Other Conditions (see below) and (ii) drop-dead date of 150 days after execution of the Merger Agreement o If the Minimum Tender Condition is not satisfied, the tender period could be so-extended at Brookfield s option Customary closing conditions, including (i) regulatory approvals, (ii) no change in common stock (e.g., split/redemption/issuance), (iii) no tender offer or business combination and (iv) no Company MAE Brookfield subject to a standstill after consummation of the tender offer and continuing for so long as Brookfield (i) has a director on the Board or (ii) holds more than 35% of the common stock (as-converted basis), plus a 6-month tail period Standstill restrictions fall away in connection with change of control transaction or proxy fight During standstill period, Brookfield is prohibited from, among other things, purchasing shares (subject to exception if its ownership would not exceed 45%), making a hostile takeover bid and launching a proxy fight If Brookfield owns at least 35% of the outstanding common stock (as-converted basis), Brookfield is entitled to directornomination rights proportionate to its ownership stake (taking into account Directors designated through Convertible Preferreds) and is required to vote all of its shares for the Company s entire slate of Directors Additional shares purchased through standstill exception must be voted in proportion to vote of other stockholders or in accordance with recommendation of non-brookfield directors Termination Fees: o US$20 million in the event of termination for (i) Board recommendation change, (ii) superior proposal after expiration of go-shop or (iii) drop-date or breach by the Company plus definitive agreement for alternative transaction within 12 months o US$7.5 million in the event of termination for superior proposal before expiration of go-shop A merger will be completed if Brookfield owns 80% of the outstanding common stock (as-converted basis) following completion of the tender offer

29 Transaction Timeline April 29, 2015 Announced two letters of intent with Brookfield for $150 million Convertible Preferred investment and Tender Offer for up to 100% of the Company s outstanding common stock May 4, 2015 Entered into definitive Investment Agreement in respect of Convertible Preferred investment May 17, 2015 Entered into definitive Agreement and Plan of Merger in respect of Tender Offer for up to 100% of the Company s outstanding common stock; Minimum Tender Condition of 30% Brookfield ownership (on an as-converted basis) May 17, 2015 Go-Shop period commenced May 26, 2015 Tender Offer period commenced June 21, 2015 Initial Go-Shop period expires after 35 days on June 21, 2015, but can be extended for an additional 15 days to July 6, 2015 if the Company has received a proposal that is reasonably expected to lead to a Superior Proposal July 7, 2015 Initial Tender Offer period expires - Tender Offer must be extended to July 21, 2015 if Go-Shop is extended to July 6, If the Minimum Tender Condition is satisfied, Tender Offer must be extended for successive 10-business-day periods until all other conditions are satisfied or, if earlier, the drop-dead date occurs - If the Minimum Tender Condition is not satisfied, Tender Offer could be extended at Brookfield s option Closings Closing of Convertible Preferred investment and Tender Offer to occur after all conditions are satisfied, principally regulatory approvals (no substantive issues expected) and, in the case of the Tender Offer, Minimum Tender Condition - Closings of Convertible Preferred and Tender Offer are not cross-conditional - Closing of Convertible Preferred anticipated in advance of closing of Tender Offer October 1, 2015 Drop-dead date for Convertible Preferred closing October 14, 2015 Drop-dead date for Tender Offer closing (will be automatically extended for 60 days if only condition not satisfied is foreign antitrust) 29 Note: Capitalized terms represent defined terms within the Merger Agreement