GrafTech International (EAF) Q3 2023 Earnings Call Transcript

GrafTech International (EAF -1.86%)
Q3 2023 Earnings Call
Nov 03, 2023, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen and welcome to the GrafTech third-quarter 2023 earnings conference call and webcast. [Operator instructions] This call is being recorded on Friday, November 3rd, 2023. I would now like to turn the conference over to Mr. Mike Dillon, vice president, investor relations, and corporate communications.

Please go ahead, sir.

Mike Dillon -- Vice President, Investor Relations

Thank you. Good morning and welcome to Graphic International's third-quarter 2023 earnings call. With me today our Marcel Kessler, chief executive officer; Jeremy Halford, chief operating officer; and Tim Flanagan, chief financial officer. Marcel will begin with opening comments.

Jeremy will then discuss safety, the commercial environment, sales, and operational matters. Tim will review our quarterly results and other financial details and we'll close with comments on our outlook. We will then open the call to questions. Turning to our next slide, as a reminder some of the matters discussed in this call may include forward-looking statements regarding among other things, performance, trends, 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 those indicated by forward-looking statements are shown here. We will also discuss certain non-GAAP financial measures and these slides include the relevant non-GAAP reconciliations. You can find these slides in the Investor Relations section of our website at www.graftech.com.

A replay of the call will also be available on our website and I'll turn the call over to Marcel.

Marcel Kessler -- Chief Executive Officer

Good morning, everyone. Thank you for joining GrafTech's third-quarter earnings call. I will begin by summarizing three key points. We will discuss in more detail on our call today.

First, the global steel industry remains constrained by geopolitical conflict and economic uncertainty, which has resulted in persistently soft -- within a persistently soft commercial environment and weak demand, and declining prices for graphite electrodes. As a result, our performance for the third quarter fell short of our expectations and our outlook has weakened. Second, GrafTech remains focused on managing through the near-term market disruptions while maintaining our positioning for long-term opportunities. We recognize steel industry performance and demand for graphite electrodes will be dependent on macro conditions.

As such, we continue to prioritize those things that are within our control. These include proactively reducing our production volume to align with our near-term demand outlook, closely managing our operating costs, capital expenditures, and working capital levels, and making targeted investments to further improve our operational flexibility and support long-term growth. Our ability to execute these strategies is evident in the strong cash flow generated in the third quarter. Supported by these actions, we remain confident we have ample liquidity between cash on hand and borrowing availability to weather the market challenges.

Third, we remain optimistic about the long-term outlook for our business and our ability to deliver shareholder value. We are taking actions that we believe will optimally position GrafTech to benefit from longer-term industry tailwinds in our graphite electrode business. At the same time, we continue to advance our efforts toward participation in the development of a Western EV battery supply chain and we remain excited about this opportunity. Jeremy and Tim will expand on all these points during the call today.

Before I turn the call over to them, I would like to address the recent announcement that I decided to resign from my role as CEO and president of GrafTech due to family health reasons effective later this month. During my first call after joining the company, I spoke to the reasons why I was attracted to GrafTech. A set of distinctive capabilities that provide confidence in our ability to deliver shareholder value over the long term. A business that is well-positioned to participate in the long-term growth of the electrode market and with a promising foundation to pursue other avenues of growth, and the team with an impressive level of know-how, energy, and dedication.

I feel that all these attributes are still in place today and I continue to believe that GrafTech has some of the industry's best assets operated by the best people and will get through this challenging period to remain an industry leader. We remain confident in the long-term direction of the company and the experienced management team that remains in place to execute our strategies. With that, let me turn the call over to Jeremy.

Jeremy Halford -- Chief Operating Officer

Thank you, Marcel, and good morning everyone. As always, I'll start my comments with a brief update on our safety performance, which is a core value at GrafTech. We are pleased that our year-to-date recordable incident rate reflects a substantial improvement from the prior year level. As I noted at the beginning of the year, improvement in this area would be a key point of emphasis with our internal teams in 2023 and I would like to thank all of our team members for their ongoing efforts.

We will remain highly diligent in this area and seek to further improve this metric as we continue working toward our ultimate goal of zero injuries. Let me now turn to the next slide for an overview of macro conditions and the commercial environment as context for our third-quarter results and our outlook commentary. Global steel production remains constrained by lower demand due to global economic uncertainty. Across the industry, there continue to be announcements of planned and unplanned outages at steel mills.

At the same time, steel exports from China in 2023 are on track to reach a seven-year high. As China's domestic demand for steel has not been strong enough to absorb a year to date, 2% increase in Chinese steel production. These trends are reflected in steel industry output levels outside of China that remained below the prior year with most regions showing production declines. Looking at the numbers on a global basis, steel production outside of China was approximately 201 million tonnes in the third quarter of 2023.

This represented a 4% sequential decline from the second quarter. On a year-to-date basis, global steel production outside of China was down 2% year over year through the first nine months of 2023. Regarding global capacity utilization, the rate outside of China declined sequentially to 65% for the third quarter. On a regional basis, the economic performance and outlook for key regions continues to diverge.

In Europe, the ongoing slowdown in industrial production, pursued market demand and high energy costs continue to weigh on steel production. Reflecting weak macro fundamentals the persistently low levels of economic growth within Europe are expected to continue for the foreseeable future. Two weeks ago, the World Steel Association issued their latest short-range outlook noting they expect a 5% decline in EU steel demand for 2023 as compared to their previous projection in April of demand being flat. World Steel also reduced their 2024 steel demand forecast for the EU by 4% compared to their April forecast.

In the U.S., although the region is showing more resilience, steel industry trends have softened of late. Utilization rates ticked down slightly in the third quarter to 76% and declined further in the first few weeks of the fourth quarter. In their recent outlook update, World Steel forecasts a 1% decline in year-over-year steel demand in the U.S. for 2023 compared to their previous forecast of 1% growth.

They also lowered their 2024 outlook by 3%. Overall, a significant amount of global economic uncertainty remains an overhang on steel industry demand in the near term. This in turn has resulted in ongoing softness for graphite electrode demands. Along with the soft demands.

Additional competitive dynamics are having a significant impact on pricing. Specifically, despite the current weak market environment, we continue to see a healthy level of electrode exports from certain countries including India and China. These are typically lower-priced electrodes and the prices have been declining further of late. For example, based on the latest reported statistics, export prices from China have fallen below $3,000 per metric ton on average.

These export dynamics are having a significant impact on pricing in non-tariff protected regions such as the Middle East that are typically an important element of our portfolio. In addition, there can be knock-on pricing effect in tariff protected countries such as within the EU as tier one producers increasingly compete in these regions to support volume. With that background, let's turn to the next slide for discussion on GrafTech's third-quarter performance. Our production volume for the third quarter was approximately 23,000 metric tons.

This resulted in a combined capacity utilization rate for our three primary electrode facilities of 47% for the third quarter, compared to 49% in the second quarter. Our manufacturing operations continue to run according to our strategy of proactively managing production volume to align with our evolving demand outlook. In the third quarter, sales volume was approximately 24,000 metric tons. This represented a modest decline compared to the second quarter and fell short of the outlook we provided on the last call, reflecting the market conditions I just spoke to.

Shipments for the third quarter included nearly 8000 metric tons sold under our LTAs at a weighted average realized price of $8,650 per metric ton. You have 16,500 metric tons of non-oil LTAs at a weighted average realized price of $5,400 per metric ton. Weighted average price for non-LTA sales was below the second-quarter level reflecting the soft commercial environment. Net sales in the third quarter of 2023 decreased 48% compared to the third quarter of 2022.

In addition to the lower sales volume and lower pricing, the ongoing shift in the mix of our business from LTA to non-LTA volumes contributed to the year-over-year decline. We expect the commercial environment and demand for graphite electrodes in the near term will remain weak. The decline in steel production and utilization rates outside of China have limited the ability of customers to significantly drive down their electrode inventory to typical levels. Given these dynamics, we anticipate our sales volume for the fourth quarter will decline modestly compared to the third quarter.

Against this backdrop, we have begun the negotiation process for 2024 electrode sales and are developing a range of commercial offerings that are intended to contribute to an increase in capacity utilization. Although it's too early to project the outcome of this commercial process, we believe we provide a compelling value proposition to our customers, including a strategically positioned manufacturing footprint that provides operational flexibility to reach key steelmaking regions. Being the only large-scale graphite electrode producer that is substantially vertically integrated into petroleum needle coke offering access to the architect firms, productivity system, and customer technical services at no incremental cost to the customer. The ability to produce connecting pins at three different locations on two continents and reflecting some of the targeted investments we've previously referenced.

We anticipate an expansion of our product offerings as we proceed through 2024. This includes adding 800-millimeter super-sized electrodes to our portfolio to serve a small but growing segment of the graphite electrode market. And in addition, we expect to bring to market the industry's first carbon-neutral graphite electrode offering. As always, our focus remains on producing the highest quality graphite electrodes and meeting the needs of our customers.

For these reasons, we continue to believe GrafTech will remain an industry-leading supplier of mission critical products to the electric arc furnace industry, the fastest growing segment of the global steel supply chain. Let me now turn it over to Tim to cover the rest of our financial details.

Tim Flanagan -- Chief Financial Officer, Vice President of Finance, and Treasurer

Thanks, Jeremy. For the third quarter, we had a net loss of $23 million or $0.09 per share. Adjusted EBITDA was $1 million, compared to $129 million in the third quarter of 2022. The decline reflected lower sales volume, higher year-over-year costs on a per metric ton basis.

The continued shift in the mix of our business toward non volumes and lower pricing. As Jeremy spoke to a number of these factors in his remarks, I'll expand my -- expand my comments on costs. We provide a reconciliation of our cash COGS for metric ton and earnings in the earnings documents posted on our website. However, let me provide some additional color reflecting the full-year impact of raw material energy freight cost increases that occurred throughout 2022, we continue to sell higher-priced inventory during the third quarter of 2023.

In addition, during the quarter, our cash costs included approximately $18 million of fixed costs that otherwise would have been inventory. We are operating at normal production levels this compared to approximately 10 million of such costs recognized in the second quarter. The sequential increase was driven by two factors. First, a modest quarter-over-quarter reduction in graphite electrode production.

Second and more significantly was the impact of temporarily idling production at our senior facility throughout the third quarter. As we previously noted, we have been taking a proactive measures to align our production with our current demand outlook. The temporary idling of production at Cedar was a -- was consistent with this approach. These actions have provided meaningful benefit to our working capital levels and cash flows.

Factoring all of this in, our cash COGS per metric ton were approximately $5,860 for the third quarter of 2023. This exceeded our projection for the third quarter, reflecting the impact of the previously discussed volume shortfall as underlying costs coming from inventory were largely in line with our expectations. Looking ahead, we expect our cash costs per metric ton in the fourth quarter of 2023 will be low -- will be below the recognized level in the third quarter of this year, what will be above our previous expectations. Market pricing for key elements or cost structure including pecan oil, energy, coal, tar pitch, and freight continue to moderate as expected.

However, the decline in our volume outlook has a two pronged effect on the cash for metric ton that will be recognized in the fourth quarter. First with the lower sales volume, this extends the time it takes to work through the higher priced inventory on our balance sheet. Second, with the corresponding decline in the production volume, we will continue to recognize in the current period fixed costs that otherwise would be inventory if operating in normal production levels. Specifically, as it relates to Seadrift, we expect to restart the facility in the fourth quarter, which would result in a modest sequential reduction in the level of fixed costs being recognized on an accelerated basis.

Turning to cash flow. For the third quarter, we generated $51 million of cash from operating activities and adjusted free cash flow of $43 million. This cash flow performance was supported by our ongoing focus of managing our costs, capital expenditures, and working capital levels. Most significantly, this included a $50 million reduction in inventory during the quarter.

We continue to expect adjusted free cash flow to be positive for 2023 on a full-year basis. As we look further ahead from a cost and cashflow perspective, we expect market pricing to decline in the medium to longer term for certain key elements of our cost structure. We will continue our current disciplined approach to managing costs and working capital. These actions have resulted in a 12% reduction in our period costs for the first nine months of 2023 compared to the same period in the prior year.

In addition, since the end of 2022, we have reduced our working capital levels by $65 million as of the end of the third quarter. Our decisions and actions in this area continue to be informed by three key and complementary objective objectives. One are focused on preserving cash and maintaining sufficient liquidity as we navigate the current market uncertainties. Two, while doing so continuing to ensure that we remain well-positioned from a working capital perspective to meet the evolving needs of our customers and third, continuing to make targeted investments to support our ability to capitalize on the long-term growth opportunities.

We are proud of the agility of our teams have displayed and balancing these essential priorities and believe these efforts have positioned as well to benefit as the markets recover. I want to thank the entire GrafTech team for their continued efforts and commitment. Moving to the next slide. Our net debt to adjusted EBITDA ratio is 6.4 times as of September 30th, compared to 1.5 times at the end of 2022, reflecting a year-over-year decline in EBITDA for the first nine months of 2023.

As of September 30th, our liquidity was $285 million consisting of $173 million of cash on hand and $112 million of availability under revolving credit facility. This reflects the financial covenant that limits our borrowing availability under our revolver in certain circumstances. However, more importantly, we do not anticipate the need to borrow against revolver in 2023. Further, we remain confident we have ample liquidity between cash on hand and borrowing availability to achieve the priorities I just spoke to.

Turning to the next slide, let me now expand on the actions we are taking in the investments we are making to improve our strategic positioning for the long term. Decarbonization efforts are driving a transition in steel with electric arc furnace steelmaking continuing to increase its share of total steel production. With this trend of share growth expected to continue, we anticipate demand for graphite electrons to experience accelerating growth over the longer term. We estimate that planned EAF capacity additions based on steel producer announcements along with production increases at existing EAF plants has the potential to bring in incremental 200,000 metric tons of annual graphite electrode demand outside of China by 2023.

This would represent nearly a 30% increase to the level of global annual graphite electrode demand in 2022 Outside of China of approximately 680,000 metric tons. In addition, the demand for petroleum needle coke, the key raw material we use to produce graphite electrodes is also expected to accelerate. This is driven by its use to produce synthetic graphite for the anode portion of lithium-ion batteries used in the growing electric vehicle market. Based on analyst estimates regarding projected growth in electric vehicle sales and battery pack sizes.

We estimate this could result in global demand for use in EV applications increasing at a compound annual growth rate of over 20% through 2030. The growing demand for needle coke should result in elevated pricing for this important precursor material. Given the high historical correlation between petroleum needle coke pricing and graphite electrode pricing, this trend should translate to higher market pricing for electrons. Reflecting our sustainable competitive advantages and the key elements of our customer value proposition which Jeremy spoke to, we are well-positioned to capitalize on these favorable industry tailwinds.

We also see potential long-term value creation opportunity by participating in the anticipated growth of the EV battery market. To that end, we continue to study participation via two potential avenues. First, by leveraging our assets and technical know-how in the area of petroleum needle production given the expected demand growth for this key raw material. Second, by leveraging our graphic design resources and expertise to produce synthetic graphite material for battery anodes.

Well, we have not yet made any firm commitments, the pace of our activity in both areas continue to accelerate. In addition, we remain encouraged by the external market developments in the space which continue to evolve rapidly. As an example, last month, China, the country that currently supplies nearly all the anode material for the world announced a curb on exports of synthetic graphite. Well, it's too early to speculate on the ultimate impact this measure will have.

We view this as another positive reinforcement of the importance of this key raw material for battery anode production. Further, this also reinforces the importance of the industry building a robust supply chain outside of China as we move forward. We are excited about the opportunity to participate in the development of a Western EV battery supply chain as we possess key assets, resources and know how to support this industry. We look forward to sharing more as we can enclosing our optimism remains intact.

We are an industry-leading provider of the consumable product that is mission critical for the growing electric arc furnace method of steelmaking. We possess a distinct set of assets, capabilities, and competitive advantages. Lastly, as a result of our disciplined capital allocation strategy, we have a strong balance sheet and ample liquidity to navigate the near term. For these reasons, we are confident in our ability to deliver shareholder value moving forward.

This concludes our prepared remarks. We'll now open the call for questions.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] We have our first question coming from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks for taking my question. Maybe I can just tell -- good morning. Maybe I can just start with the electrode market outlook.

So it sounded like you had noted that there was continued price pressure and maybe some spot pricing data points around $3,000 a ton. Do I hear that correctly And I guess what do you expect as far as how that evolves? I mean is that mainly just weak seasonality and weakness in the China market that's causing that those declines And do you see that maybe reversing and going back higher and early 24 or how do you think about electrode pricing from here?

Marcel Kessler -- Chief Executive Officer

Yeah. So as we mentioned, Arun, the Q3 non-LTA pricing was weaker than Q2 driven by the softer commercial environment. And we also noted that in the near term as we referenced from the World Steel Association statistics, you know we expect continued market weakness. And with that continued competitive pricing dynamics.

With specific regard to the $3,000 Chinese pricing, that of course affects us much more in non-tariff protected regions than it does in the protected regions that we referenced. You know, beyond that we're, you know, given that we're in the middle of our negotiation season with the customers, it's probably a little too soon to provide any more pricing guidance.

Arun Viswanathan -- RBC Capital Markets -- Analyst

OK. And what about needle coke then, So could you just provide us an update on where needle coke prices are and -- and what do you expect on that side as well?

Marcel Kessler -- Chief Executive Officer

Yeah. So you know, looking at the import-export data, you know we've seen recent spot pricing for super premium needle coke in the range of about $1,700 a tonne. There are some transactions below that, but that's generally the number that we're seeing and this does reflect a little bit of further softening compared to what we indicated on the last call of around $1,800 for the higher-end blends. But you know, one of the things that I think is important to note is that, you know, pricing here can be highly volatile, right? You know in the past we've seen over the past year even we've seen pricing as high as $3,000 last year and below $1,500 a year before that.

And so you know, really we think the recent declines in needle coke pricing are indicative of recent softness in the electrode market not being fully offset by the growth that's coming from the EV market. Longer term, as the EV demand materializes, you know, I continue to expect the petroleum needle coke market to further tighten leading to higher prices.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Yeah. And that's a good segue to another question I had was, which was do you think that there's a greater sense of urgency now at GrafTech to pursue further opportunities for needle coke development and graphite development into the EV market, especially since China has placed some restrictions on their exports of -- of graphite? Wouldn't that -- that combined with the market softness that you're seeing in electrodes really incentivize graph tech to really make some more investments on that side and maybe accelerate your -- your opportunities into delivering needle coke into EVs?

Marcel Kessler -- Chief Executive Officer

I don't know that we needed any -- any more motivation to get into that arena. This is something that we've been studying for quite a while and you know, we feel we feel good about where we're at, right? The -- the industry is currently in the very early stages of its development of the western supply chain. And as part of that, you know, we've been very active proactively testing our needle coke with third parties and potential customers to make sure that it meets the quality standards and specifications that are required. We, you know, with regards to concerns about the China announcements, you know, I think Tim captured a lot of that, that you know, it's too soon to know exactly what this is going to mean.

But we do think at a minimum it's a positive reinforcement of the importance of synthetic graphite for battery anode production. And more importantly, it reinforces the importance of building a robust Western supply chain rather than depending on China. And so you know, if if this was not already apparent to OEMs and cell manufacturers before, it's certainly top of mind now.

Tim Flanagan -- Chief Financial Officer, Vice President of Finance, and Treasurer

Yeah, and I would add to that Arun, you know, I think the EV opportunity is an exciting opportunity that will continue to explore and do the work we need to as Jeremy is outlined. But we still have a strong conviction around the core business of graphite electrodes and what that market will look like. Obviously, conditions aren't great right now. It's a cyclical business and we're in a bit of a downstroke as we sit here today.

But we've seen, you know, pricing move very quickly. We've seen demand pick up very quickly, any sort of material improvement in the macroeconomic environment, whether that's in Europe, Chinese steel production, the overall Chinese economy can have a pretty sudden and swift movement for the core business, which again short term we see some challenges outlook wise. But longer, medium to longer term. You know, we still have full conviction in the business as it sits here today.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Right, and how much of your production do you think you could, you know, divert to the EV market And you know, obviously, I would imagine that would also include, you know, maybe an expansion at Seadrift. Could you just address those issues as well? Thanks.

Marcel Kessler -- Chief Executive Officer

Yeah. So you know one of the things that makes graph tech an attractive partner in this, you know in this space is that we really do have almost dual use assets. The same assets that we utilize to make needle coke for graphite electrode production can be used to make needle coke for anode production. Similarly, the graph of assets that we use to make our electrodes can also be redeployed to make -- to make anode materials.

And so I don't have a real percentage to offer Arun more. I think it's -- I think the relevant point is that our assets truly are dual use and we can -- we can select the most economically favorable for the use of those assets.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thank you.

Marcel Kessler -- Chief Executive Officer

Yeah, yeah, sorry. I was just going to add that with specific regards to your question about about Seadrift. You'll recall that last quarter we discussed having filed a permit for the potential expansion of Seadrift. That permit is making its way through the process.

I think we said last quarter that we anticipated about a 12-month turnaround time on that. So by the time this market really starts gaining steam here domestically, we expect to be fully permitted and able to make those investments if we -- if we make the decision to do so.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

Thank you. Your next question comes from the line of Bill Peterson from J.P. Morgan. Please go ahead.

Bill Peterson -- JPMorgan Chase and Company -- Analyst

Yeah. Hi. Good morning. Thanks for taking the questions and Marcel best wishes as you as you move ahead here on utilization.

So we saw it come down again quarter on quarter given the demand environment. I guess can you provide some color on the puts and takes here? Is Mexico running stronger than Europe and how does your utilization -- how do you see that comparing to the industry in this industry average? And just kind of related to the destocking environment, like where do inventories sit at your customer side relative to norms, which I think is around two or three months.

Marcel Kessler -- Chief Executive Officer

Yeah. So let me -- let me start with the customer inventory levels and then I'll come back around to talk about the utilization rates. Yeah, you know the -- the sequential decline in global steel production and the constrained industry utilization rates have really limited the ability of customers to significantly drive down their electrode inventory to typical levels. You know for perspective it varies across the industry, but we generally estimate that customers maintain about three months of electrode inventory on average.

And based on the recent channel checks, we believe it's currently averaging a little bit closer to four months, which is not significantly different from where it was a quarter ago. Although one of the things we're starting to see feel is a divergence by region. In Europe, we've seen inventory levels decrease and are actually now below the average that I mentioned. And this is really driven by customers continuing to work through the existing inventory, albeit at lower utilization rate.

And many customers displaying continued reluctance to purchase of different additional electrodes due to ongoing economic uncertainty there. Conversely in the U.S. inventory levels are above the average and frankly, we think that some of this is partly attributable to some U.S.-based steelmakers locking in larger commitments a year ago due to uncertainties related to our situation. Additionally, in the U.S.

we are seeing tempered utilization rates which while above the global average are still below the recent history and that's -- that's preventing them from burning through some of these excess excess inventory that they have with specific regard to the utilization rates, we do certainly try to utilize assets closest to where the demand is and that does drive utilization rates in North America higher than what we're seeing in Europe at 47%. Global utilization rates that does put us pretty much on par with what we're seeing out of the tier-one competitors in the rest of the world with the exception that we do think that their utilization rates in North America are currently running higher than ours for those same market dynamics that I just talked about.

Bill Peterson -- JPMorgan Chase and Company -- Analyst

OK. That's good color. It dovetails in the question on a competitive landscape. You've talked about competitors in China and India and some of the direct impacts, guess Middle East and indirect Europe, but I guess drilling down to your core US and EU markets, hoping to get some further color specifically on the U.S.

We're hearing at least one India based competitor looking to gain share in the U.S. market and then in Europe. I mean are you seeing signs of China and India-based competitors there, You know, guess where do you see your differentiation here I guess as we -- how should we think about that vis a vis the -- the suppliers coming from these regions?

Marcel Kessler -- Chief Executive Officer

Yeah. No, that's a good question and again the market certainly is competitive. I think the first thing that we have to keep in mind both in the U.S. and Europe, you've got trade protections in place against the Chinese imports in both markets and then Indian imports into Europe.

You know, albeit given the -- the situation that occurred in Monterey probably opened the door for customers to potentially qualify new suppliers, Indian suppliers in particular. We still feel confident about what we deliver in terms of a total value proposition to our customers, not just lowest cost supply but high-quality electrodes. The ancillary services that we provide in terms of furnace monitoring and our CTS group. So all of those things I think we -- we feel positioned us very well from a competitive standpoint in both of those markets.

You know the rest of the world, certainly, it's a much more cost-oriented and price-oriented market than North America in Europe and that's the pressure that we're seeing now in the marketplace.

Bill Peterson -- JPMorgan Chase and Company -- Analyst

OK. Yeah. Thanks for that color. And guess lastly on this challenging environment.

You still saw we still saw a strong working capital unwind. How should we think about a similar release in the fourth quarter? And then guess maybe more importantly, could you talk about the puts and takes as we move into 2024, assuming maybe demand improves at least maybe later in the year? I guess specifically under the working capital, how should we think about the cadence of payables and inventory days as shipments hopefully again improving again?

Marcel Kessler -- Chief Executive Officer

Yeah. So I think about Q4, right? We did make the comment that we expect to be free cash flow positive for the year. You know, I think we expect some further releases of working capital in the fourth quarter. Jeremy and Tim have done a really good job of bringing inventories down.

There's probably still some opportunities for that to come down further. As we noted also, you know, we're starting to see drift, you know here later in the fourth quarter. So we're still working down existing needle coke inventories from where they are today. So still will be some release of working capital going forward.

But I'd also comment that we're not taking them down to levels beyond what we think is necessary to fulfill customer demand for next year. So as we start to look out, you know, we want to make sure that we have a manageable level of inventory on hand. Certainly, as production, you know, we're to ramp up next year. You know, you have some additional buying and procurement activities that go on and you also have a build of your receivables based.

So there will be a little bit of use of working capital that I would foresee in 2024.

Bill Peterson -- JPMorgan Chase and Company -- Analyst

OK. Thanks. Thanks again.

Operator

Thank you. Our next question comes from the line of Alex Hacking from Citi. Please go ahead.

Alex Hacking -- Citi -- Analyst

Yeah. Hi. Good morning and thanks for the call. So not sure if you can answer this, but on -- on the cost side, you know, cash costs right now is in the high 5000.

As we look out to next year in the second half of the year, we're back to a more normalized utilization rate, you know 70% or something. The best information that you have today like where would that cash cost be? Like I assume it's somewhere in the 4000, but I don't know if it's high 4000, low 4000, Any color would be appreciated. Thank you.

Marcel Kessler -- Chief Executive Officer

Yeah. Thanks for the question, Alex. And I'll start by saying it's probably a little premature for us to be providing kind of detailed guidance or outlook on 2024 just given the fact that the commentary Jeremy provided around where we're at and the commercial negotiation process. That process obviously will inform our production capital and cost programs for the next fiscal year.

So what I will say though directionally speaking is you know we are a heavy fixed cost business. Any incremental improvement in our overall utilization rate of our plans will bring down our cost meaningfully as well as if you think about the underlying raw material costs, energy, things like that. We've commented on. Those are continuing to moderate as we've expected and we'd expect significant improvement of those elements of our cost structure heading into next year will be through most of the inventory that's sitting on our balance sheet.

That's high price, so we'll be in a much better cost position as we look out to next year. The other thing, the only other comment I would make just on the cost today sitting in that high five number that you quoted, you don't forget in there, you've got about $375 of trip cost that we're carrying that doesn't have any corresponding production associated with. And so as we restart, you naturally have those costs come out of the system.

Alex Hacking -- Citi -- Analyst

OK. Thanks. Makes sense. And then just to clarify, I guess on earlier comments, it sounds like you're hoping for a higher utilization rate in the first half of next year compared to where we've been in the second half of this -- in the second half of this year.

Is that -- is that fair?

Marcel Kessler -- Chief Executive Officer

Yeah. Again, without getting into specific kind of guidance, right, just given where we're at in the commercial side, what I can say is we're entering this year's negotiation season with the opportunity to lock in significant volumes with our customers. We didn't have that opportunity because of monitoring a year ago, but we're in that position today. We've meaningfully reduced kind of the operational risk associated with Monterrey during the current year and Jeremy commented on our ability to produce pins at multiple locations now.

So we feel really good about the position we're starting from on top of the fact, again broadening our commercial offerings to our customers. We think we present a compelling value proposition beyond just quality electrodes. So all of those things would lead us to be in a much stronger commercial position with the backdrop of the current macro environment.

Alex Hacking -- Citi -- Analyst

OK. Thanks. And I guess just one final question if I may. This is probably a dumb question, but I think in your prepared comments you talked about a carbon-neutral offering.

I guess how does that work in a product that's effectively made of carbon? Thanks.

Marcel Kessler -- Chief Executive Officer

Yeah. So fair enough. That's a good question. A good question, Alex.

The -- you know, when we say carbon neutral, right, we're really talking about CO2 equivalence, right? It's you know, there's carbon and trees and everything else that we want more of. But you know, the carbon neutral electrode was really born out of a trend toward more environmentally responsible steelmaking. And our ability to do this is really facilitated by some of the investments that we've made over the past few years to limit our scope one, two, and three emissions. You know these are investments that we've made in assets and systems to reduce our onsite generation of CO2 and sourcing portions of our power from carbon-free sources now.

And so we've been able to significantly drive down our carbon footprint and for any CO2 equivalent emissions that we can't eliminate, you know, we'll buy offsets for. And so this gives us an opportunity to -- to lead the market in the introduction of a product like this. The product will of course be priced at a premium and as a result won't be for everybody. But we do think that this is another step toward differentiating ourselves from some of our more price-focused competitors that that we talked about.

Alex Hacking -- Citi -- Analyst

OK. Thanks. Makes sense. Thanks for the color.

Marcel Kessler -- Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Sophia Danziger from RBC Capital Markets. Please go ahead.

Marcel Kessler -- Chief Executive Officer

Good morning.

Sophia Danziger -- RBC Capital Markets -- Analyst

Morning. Thanks for taking my question. The first one, I wanted to follow up on -- on an earlier question that was asked by Bill here regarding the non-tech protected regions, flooding the market recognizing cheaper exports and how they've -- they've impacted pricing power. You spoke a little bit about the differentiation of your product and I think that's a big part of the value proposition you've spoken about in the past.

Maybe you can help us walk through a little further we should think about that differentiation today. Is it -- is it not being valued the same by the market given some of the pricing pressure we're seeing here now and slowdown of lights potentially on a go forward?

Marcel Kessler -- Chief Executive Officer

Certainly. I would -- I would start by saying not all customers are created equal, right, and people have different concerns and, frankly certain mills run differently than other mills in terms of the -- the stresses and strains they put on the product. So certain markets are able to take lower quality electrodes versus what are otherwise favored both in North America and Europe in many respects. But you know, customers ultimately will make a decision around consumption rates versus ultimately the price that they have to pay for an electrode in.

You know what's -- what's being delivered, I would say in those markets today where they're running at lower than kind of prime utilization rates. You know, they're not necessarily, you know, compensating for the -- the higher quality, the lower consumption rate, and what we think is the value proposition of our product. But those markets where that is value, we certainly are getting that premium.

Sophia Danziger -- RBC Capital Markets -- Analyst

Got it. And another point here in Tim's prepared remarks, you know, a focus on understanding so for the third quarter and just to clarify for the entire third quarter Seadrift was idled. Is it still idled? You know today on the point of this call, I think an earlier comment noted hopefully restarting it in the back of the fourth quarter here, just recognizing in the start of November. So I want to think about some of that I know slide ten here and many slides in the past focused on thinking about the EV tailwind uplift and part of thinking about the go-forward landscape.

Was that not something you considered to using the needle coke production this past quarter to help offset some sales pressure in the electrodes?

Tim Flanagan -- Chief Financial Officer, Vice President of Finance, and Treasurer

Yeah. So -- so let me start by talking about -- so Cedar was -- was down for the entire third quarter as we sit here today. It is not restarted yet, but we're in the process of preparing to restart here in the fourth quarter. I'm going to let Jeremy talk a little bit about kind of where we're at and what our thinking was on the needle poke into that market.

Marcel Kessler -- Chief Executive Officer

Yeah. Sophia, I think the key point on that is that if we were a year and a half or two years down the road, exactly what you said would have been the path that we would have gone down. You know and unfortunately, the battery anode value chain in the west is still undeveloped. It's still in the very early stages of that development.

And so the things that we've been doing with needle coke have been focused primarily on proactively testing that needle coke with third parties and potential customers and you know and making sure that that we're able to participate in that industry or that value stream as it develops. But in the Western world, it's still, you know, it's still a little bit premature for -- for that to have happened, which is really what led to the decision to the idle drift for a period of time just given the supply demand economics.

Sophia Danziger -- RBC Capital Markets -- Analyst

Understood. Just last one for me here, can you help us understand what else you can do Near term to think about some of the cash preservation and the free cash we saw this quarter. We've mentioned drift idling. We've mentioned some of the revolver availability.

You know past those two levers, what else can -- can we be considering and thinking about near term here, if the demand environment continues to stay weak?

Marcel Kessler -- Chief Executive Officer

Yeah. So I mean I think again to my comments around 2024 and looking out forward, right, It's a little premature for us to sit here and say what we will or can't or have to do in response to that. I think we really need to let the commercial season, you know kind of work through its process and that will again will inform the way we approach next year. What we can do in the near term is remain, you know, kind of the rigorous focus that we've had over the last 12 months on cost, whether it's period costs to you know, our capital spending, how we manage our working capital levels.

I talked a little bit about the release of some additional working capital as we go through the fourth quarter. So all of those things will continue to happen. And I think just organizationally without having the backdrop of the lies behind us, right, we are a much more cost focused and oriented business going forward. So you know, we'll let the commercial exercise play out, and that'll inform how we approach 2024 fiscal year perspective.

Sophia Danziger -- RBC Capital Markets -- Analyst

Great. Thanks for taking my questions.

Marcel Kessler -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Abe Landa from Bank of America. Please go ahead.

Abe Landa -- Bank of America Merrill Lynch -- Analyst

Good morning. Thank you for taking my questions. Maybe a little bit more on these negotiations kind of on this, the LTA that even your Isa negotiations for next year. I know you can't really comment on pricing, but can you maybe just talk about from a volume perspective, are you kind of seeing customers entering into LTA stays in the U.S.

and Europe kind of at a normal cadence like you've seen in the past? Or is there something maybe different this time around?

Marcel Kessler -- Chief Executive Officer

Yeah. So maybe maybe just to be sure we're -- we're saying the same thing. You know, typically when we talk about LTAs or ESAs, we're talking about multi-year agreements, and the negotiation process that that team and I have both referenced is really a semiannual or annual negotiation that takes place this time every year. The -- so assuming you're talking about the negotiations that are taking place right now, the process is -- is playing out largely the way that we expect it to.

I would say that the timing is maybe a little bit later, a little bit later in the year than it has been in years past, in part because of some of that economic uncertainty that I talked about in the -- in the prepared remarks. As everybody's, you know, still taking -- still trying to get a read on where the -- where the market's headed in total. But you know, by and large the process is playing out the way that that we expect it to. The timing is delayed a small amount, but you know, but nothing, nothing unexpected and nothing extraordinary.

Tim Flanagan -- Chief Financial Officer, Vice President of Finance, and Treasurer

And Abe, I would just add on the LTA front, we talked a little bit about this in prior calls, right? These continue to be an offering that we think we're uniquely positioned given the vertical integration with CE driven to offer to our customers. Right and you know they are one of the many kind of commercial offerings that we offer and on options that we provide. I will say that you know from our standpoint given what we view as a somewhat depressed market or the bottom of the cycle, if you will, you know, we're not overly aggressively pursuing these or locking in pricing at these levels. So you know, Jeremy's commentary about the commercial process and what's going on right now for 2024 is spot on.

These again remain as options that we have in our toolkit, if you will.

Abe Landa -- Bank of America Merrill Lynch -- Analyst

That's helpful color. Thank you.

Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Flanagan for any closing remarks.

Tim Flanagan -- Chief Financial Officer, Vice President of Finance, and Treasurer

Thank you, Laura. I'd like to thank everyone on this call for your interest in graph tech. We look forward to speaking with you again next quarter. Have a good day.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Mike Dillon -- Vice President, Investor Relations

Marcel Kessler -- Chief Executive Officer

Jeremy Halford -- Chief Operating Officer

Tim Flanagan -- Chief Financial Officer, Vice President of Finance, and Treasurer

Arun Viswanathan -- RBC Capital Markets -- Analyst

Bill Peterson -- JPMorgan Chase and Company -- Analyst

Alex Hacking -- Citi -- Analyst

Sophia Danziger -- RBC Capital Markets -- Analyst

Abe Landa -- Bank of America Merrill Lynch -- Analyst

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