GrafTech International Ltd (EAF) 2002 Q1 法說會逐字稿

Good morning and thank you for standing by. Welcome to the GrafTech international conference call. Following the presentation instructions will be given for the question and answer session. If you need assistance, press the * and the 0. [inaudible] This is being recorded. I would like to [inaudible]. Go ahead.

[Static on line and very inaudible] Good morning and welcome to the conference call. Each of you should have received a copy of our press release. If you haven't, call Michelle [inaudible[] She can quickly fax or e-mail you a copy. Both the release and conference call contain forward-looking statement as defined in the act of 1995. Please note the language about forward-looking statements contained in our news release and quarterly report. [inaudible] That same language applies to this conference call. Today on the call, [inaudible] Scott Mason, executive vice president of the AET division, [inaudible].

Thank you very much. [inaudible] Welcome to our conference call. I will be briefer than normal since we did report results in a flash release last week on May 1st. [inaudible]reported last week. [inaudible] GrafTech International was approved yesterday at our annual meeting. The stock ticker symbol for the company is GTI. We confirm the loss for the first quarter at 2 cents per share. Our reported loss is 6 cents per share for the quarter. There are three components that make up the conference of 2 cents versus 6 [inaudible] amounts, we had a benefit of $5 million, which was a tax benefit, which pertains to the completion of moving our debt offshore and the completion of our restructuring, including our head office here in Delaware. [inaudible] this is an acceleration of some of the facts we talked about before in our cost-saving program of 10-12 million cash savings per year. The second element nonrecurring was when we completed our bond in early February. We took an extraordinary charge on bank fees, as we adjusted the balance sheet amount. That was $2 million. And we had been able to close and mothball[phonetic] our Italian plant two months early. We got it completed in March. I am pleased with that. In light of the higher volume demand on the business, that makes up most of the restructuring charge of $6 million. That is the explanation between the 2 cents and the 6 cents per share. With regard to our financing, we did close and receive $144 million on Monday. We issued senior notes, which was a tack-on at 104.5 percent, which gives us a yield to maturity of 9 and a half percent. We are very pleased with the demand we saw in the marketplace for this bond. It helps us with regard to pushing out for another two years bank debt repayment that is now to 2007. Half of the proceeds were used to pay down our revolver. Our revolver is essentially at 0. [inaudible] We did downsize our revolver from 250 million to 200 million euro. We don't believe that we needed that amount of debt capacity. As a result of that downsizing, the banks were prepared [inaudible] in an amendment to request to change the covenant coverage from total debt to EBITDA. That gives us more room with regard to that covenant. Our cost-savings plan is going ahead on target of $7 million for the first quarter. I am pleased with that. The target for this year is 45 million. The target for the end of '03 is 80 million. Half of the 45 is from our GPS graphite business. First quarter we had positive savings in GPS, despite the acceleration of the closure of our Italian plant and also spending additional maintenance money to prepare our other facilities for higher production, which has already started in March and in this quarter. If it wasn't for that, the savings would have been 4 million alone, from GPS. With respect to GPS, our volume was quite low, 38,000 and 500 tons. It picked up in March. We had kept our production level at that low rate in order not to increase inventories. We are rapidly getting our other plants prepared for higher production and higher sales. We expect that now that we are down to 6 plants, we believe that we are going to run our plants at a very high operating level throughout the rest of the year, more like a 95 percent level. And we are taking steps, as well, to have the capability by the fourth quarter and be able to produce 50,000 tons of which we think we can sell. With respect to the revenue per metric ton, first quarter 2083 was where we thought it would come with the decline in prices, primarily in the United States, Mexico and Canada. The whole industry saw from last year into this year. The currency impact was significant in the first quarter. Since about 40 percent of our sales are invoiced in euro, we do get a lower dollar revenue per ton with the euro. Our [inaudible] translation rate was around 86 to 87. That is improved during the second quarter to over 90. That would be good for our average revenue per ton. With respect to gross margin, it was not a surprise for us to be at 22 percent gross margin with such low volume. Also, this excess cost of a couple million dollars in order to get prepared for the balance of the year. We believe our gross margin will improve from the first quarter, going into the second quarter. With regard to the AET, sales are lower than last year. This decline came from our core industrial businesses, our emerging businesses are doing well. I think the whole industry is suffering from very low demand in the semi-conductor and automotive markets. Again, we are getting a little more confident for the balance of the year, as our order book is improving in this area for us. As it is, also in graphite electrodes, we have 85 percent of this year's business already booked. Gross margin, therefore, was affected by this reduction in core sales. I am very pleased with our rate of new product development commercialization. Very important for us strategically to assign commercial agreements with IBM, Hitachi and [inaudible]. Our patent applications continue to grow over last year with 11 new patent applications filed during the first quarter. I am pleased with the continuation of declining costs below gross margin. Our SGNA[phonetic] at $18 million, 14 percent lower than a year ago. We did have a charge - excuse me, a credit of 3 million in this quarter pertaining to a currency exchange game on euro-denominated debt, which was taken in other income. Essentially, that gain is, as we said, is offset by the additional cost above gross margin in the GPS division that I referred to earlier. Interest expense, 13 million for the quarter, 6 million lower than the first quarter of [inaudible] last year. And, as I mentioned during the last conference call, with this legal and tax restructuring, that will give us these tax cash savings of 10 or 11 million dollars per year. Another advantage is our effective [inaudible] reporting profits and it will be about 35 percent. That is what we were able to use during this quarter. Let me see, net debt. Net debt for the end of the quarter was $663 million. We knew it would increase to about this 11 because we took about $13 million cash charge associated with fees paid to the investment bankers and the bond in early February. [inaudible] We also took $6 million charge on restructuring. We accelerated expenditures that affected our working capital in order to be prepared for this higher volume in graphite electrodes, which we saw in Italy and other sites. Typically, the first quarter is a very seasonal quarter, with regard to accounts payable, where they typically go up from the end of the year. With respect to debt, we continue with our target of bringing our debt down to $500 million by the end of 2004. We believe that we can get back to last year's levels if we complete most of our asset sales during this year. On that front, we have a number of nonstrategic assets we are selling. I am pleased to say that we are moving along quite well. I am confident that we will probably have at least one asset or maybe two, sold this year. We are not aggressively pushing the timing on these, as it is important for us to get the very best price as we negotiate the sale of these assets. With regard to the outlook for the company, it is certainly very encouraging on the demand side. We are seeing our steel customers primarily here in NAPTA[phonetic] with a higher operating level in the first quarter from last year. Many of them are quite [inaudible] with their production for the year and have been able to improve their prices. I think that is reflected now in higher graphite electric demand. I feel good about our cost position. Our cost in the first quarter continue to be record costs, just like the fourth quarter of last year, despite the low operating level of 38,500 tons of production. We came in with lower cost per ton than we had in previous quarters. I feel optimistic this trend will continue and that we will meet our target of 15 50 this year and continue to drive that down to our goal of 1400 by the end of 2003. I think you realize that we have over $100 of depreciation included in these numbers. Overhead is going in the right direction. Scott can comment on some of the good things going on in the AET division, which we believe will be good for shareholders and Craig will comment on the outlook of his business and then take questions.

We have made progress. [inaudible] is going on very well. In fact, we have tested first generation prototypes and [inaudible] and have proven out the technology feasibility. In a portable application, we have had PM[phonetic] FUEL[phonetic] cell stacks running with flow fuel plates and the performance has been very good. Testing is going good there. Our development program target now is focused more on component optimizing now that the technology feasibility has been demonstrated. In the automotive area, we continue to work on developing new products in both [inaudible] plates for the applications. That will evolve as necessary for that industry. Things are going well there. In the electronic thermal management business, in Q1, we had a number of noteworthy approvals, both by IBM and Intel. The use of our material for their chip testing process, this validates the robustness of this product line, both the cycle ability of the product and the efficiency of it. We are excited to receive that approval and even more exciting is companies like Hitachi have improved our commercial applications in their next-generation products. For Hitachi, it was a DVD camera. I am also proud to announce that about a year ago we had said our target was 12-18 months to have our first thermal component to be approved in a new device. We achieved that in our first quarter. Nortel approved a heat spreader for a new server application. We shipped several hundred of them in the first quarter and will start wrapping up shipping throughout the year. This really validates that our heat and thermal spreader business, the viability of the technology and the value that we bring in thermal dissipation, we are excited about that. I look forward to more opportunities this year to prove that out. And we have many active programs going on at this point. We completed the installation and start-up of our new prototyping facility that we were working on and finished that one month early. It is up and running. Our new manufacturing facility for heat sinks[phonetic] will be up at the end of May. Craig.

I will talk about two key industries, steel and aluminum. Gill says production has picked up in the Americas. The levels have picked up from 70 percent type range to over 85 percent here in the first quarter. On the aluminum front, there is several new projects we have been able to get majority share in many of them. The replacement business has gone strong in that industry. We expect aluminum to do well well into 2003. Looking at our business, the Q2 volume for EE[phonetic] should be between 17 and 20 in Q2. Our cap business which services the [inaudible] sold out this year and sold out into the end of Q1, 2003. On the cost front, our team continues to deliver impressive cost savings and productivity improvements. In conclusion, the production platform we have to date, we are pleased with the advantage we have built there and will continue to drive productivity improvements and cost savings on that advantage platform.

Thank you, Scott and Craig. We would love to take questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question press * followed by 1 on your phone. If you would like to be pulled from the process, press the * and a 2. Your questions will be pulled in the order they are received. [inaudible]. One moment please.

Scott Morrison. Thanks. Good morning. This is -- Gil or Craig, talk about the volume increase in the electric business. I was wondering if you could talk about the outlook for prices and what is locked in [inaudible] or say more visibility on how that will track over the next three or four quarters?

Thank you. I will pass to Craig.

I appreciate the question. You are right. Things are tightening up in the steel industry and the graphite electrode industry. This is an area we review continuously. Sometime this year, the opportunity may exist for some improvements in graphite electrode pricing. We monitor it continuously. The market will determine the right time to do that.

How much is sort of locked in at this point? Can you walk through the next quarter or two?

Next quarter, over 95 percent is booked, so q2 looks strong and very firm. Balance of the year, we probably have something north of 85 percent booked. The orders are firming up nicely, especially in the Americas and so, your question on how much can price be changed. You are right. A lot is booked. We have started to see tightness in the electrode industry. There is no inventory in the pipeline. So, things have been tight. We missed a few shipments in Q1.

Part of the strategy is for us to move to fewer, but larger plants and then to be able to run these plants at a good operating level. That helps us very much in driving our costs down. Then, as Craig says, supply demand condition of the industry dictates the climate for pricing. That is looking more favorable now than a quarter ago. So, you know, with that, you know, we think we will be able to produce the volume to meet the demand and get excellent costs. We see how the rest of the industry operates, that really will determine the climate for the pricing.

What is booked now for the balance of the year? That is all price protected?

[inaudible] it was really important for us to lock into a cash required to run this company and to get that business and get the best cost performance from our facilities. A lot of the contracts are annual contracts to negotiate them. It is important, also, for key customers and strategic customers to have a good share under the contracts.

I understand. I was trying to get a sense of when the pricing cycle may turn up. It sounds like the first half of '03 is the opportunity to get better pricing.

Yeah, we wouldn't disagree with that.

Thank you. Next question is Andrew [inaudible]. Go ahead.

Yes. That was my previous question. How comfortable are you with 1400 dollars per ton cash operating cost?

The cash operating cost is more like 1300. We have depreciation included in that number. As far as comfort is concerned, I will turn it over to the guy who got it delivered.

We are ahead of that target. We should be at 1500 run rate at the end of the year. The 1400 dollar total cost rate for the end of 2003, we feel comfortable with. Any other questions?

No. Thank you.

Ladies and gentlemen, is there additional questions? Press the * and 1 at this time. If you are using speaker equipment, left the handset before pressing the number. One moment, please. It comes from Dennis [inaudible] go ahead.

Yes. Just a quick question on what is going on in the competitive front. If you can give an update on CG and SGL[phonetic] and what they are doing in terms of their capacity and if you are seeing them much in the market.

CG filed chapter 11 last year. A Wall Street Investment firm announced they are in due diligence to acquire the company and that due diligence period will be up in the middle of May. Craig will comment on how they are in the market place. With SGL, it is encouraging to see they are also rationalizing their capacity and bringing it down and again, I will let Craig talk about specifics.

CG is struggling through bankruptcy and they are under due diligence by a buy-out firm. They have been struggling in the market and they have been doing the usual things a firm in their condition does chasing volume and chasing whatever price they can get it. As far as SGL[phonetic], they did a rationization at one facility and took out graphite electrode [inaudible] and removed some capacity permanent from graphite electrodes.

Thanks. Just as clarification, [inaudible] Italian operation, your total capacity will be 50,000 per quarter. Is that right?

We should be there. We are making low cost [inaudible] and South African plant. Those two plants will be the largest in the world. They will be probably double the size or more than double the size of the average size of O-R-U competitor plants. Thanks.

At this time, we have no further questions. Please continue with any further statements you have. Thank you. If there are follow-up questions don't hesitate to call me at any time. Thanks very much.

Ladies and gentlemen, this concludes the GrafTech International conference call.