GrafTech International Ltd (EAF) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the GrafTech quarter two conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference please press the star followed by the 0 on your touchtone phone and as a reminder this conference is being recorded today, Thursday, July 29, 2004. I would now like to turn the conference over to Ms. Elise Garafalo. Please go ahead ma'am.

Thanks very much. Good morning everyone and welcome to our conference call. At this time each of you should have received a copy of our press release. If you haven't please call 302 778-8244 and we can quickly fax or e-mail you a copy. Before we get started I'd like to remind all of you that both this release and this call contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language of our forward-looking statements contained in our news release. That same language applies to this call. Also, to the extent we discuss any non-GAAP financial information you will find reconciliation's either in our press release or on our Web site at www.graftech.com. This morning on the call we have Craig Shular, CEO, Scott Mason, President of the Synthetic Graphite line of business, John Wetula, President of the Natural Graphite line of business and Corrado De Gasperis, our CFO. At this point I'd like to hand the call over to Craig.

Thank you, Elise. Today I will take you through our second quarter and year-to-date highlights, then open it up to questions. In the first quarter net income before special charges was 13 million or 13 cents per share, significantly improved over the prior year quarter which had net income of 3 million or 5 cents per share. Net sales increased 18 percent to 213 million year-over-year as all of our businesses delivered higher sales. In the graphite electrode business sales volume was 55,900 metric tons, 10 percent higher than last year and the average sales price increased to $2,507 per metric ton versus 2,347 in Q2 last year, up about 7 percent. We also saw favorable order patterns and product mix in both our advanced carbon and advanced graphite material businesses during the quarter. Gross profit increased to 54 million, up 26 percent versus the second quarter of last year. Gross profit benefited from several factors in the quarter; one, higher net sales; two, running all of our graphite electrode facilities at capacity including the Brazilian plant which had a production outage in the first quarter and finally net benefits from our cost management initiatives. During the quarter, however, we saw petroleum based raw material and energy costs continue to rise throughout the quarter. Currently we've locked in about 75 percent of our raw material costs for the balance of the year. Excluding other expense EBITDA was 38 million in the second quarter as compared to 29 million last year, a 31 percent year-over-year increase. Q2 EBITDA margin was 17.8 percent. Our team has worked hard to improve EBITDA margin over the past few years. We've grown it from 11.7 percent in '02 to 14 percent to 14.7 percent in 2003 and now the current levels at almost 18 percent. Second quarter interest expense was 10 million. This was about 1 million higher than the first quarter of '04 as LIBOR rose approximately 80 basis points during the quarter. Recall our 450 million of 10 1/4 senior notes are swapped to floating rate resulting in a Q2 interest rate of about 7.8 percent. We now expect '04 interest expense to be approximately $39 million.

Cash flow from operations was a positive 2 million for the '04 second quarter mainly due to a 29 million increase in working capital. The largest component of working capital was a $24 million increase in accounts receivable due to higher net sales. The $12 million refund from the EU antitrust fine was largely offset by 6 million of antitrust payments in the quarter, 1 million of restructuring payments and about 4 million from the discontinuation of accounts receivable factoring. Capital expenditures were 11 million in the quarter. As a result net debt was 620 at the end of the '04 second quarter as compared to 613 million at the end of the first quarter this year.

In South Africa we completed our mid-year bidding cycle. Average prices were increased by about $125 per metric ton and recall this is across all product sizes and grades. In the very important South African EAF steel melter market we realized graphite electrode price increases of about $150 to $200 per metric ton bringing the melter electrode prices in that market to the $2,600 to $2,700 per metric ton range. We also built into the South African contracts the ability to pass through raw material increases in the future and we plan to execute the same for the 2005 global order book.

Now I'd like to cover our ETM business, which had an excellent second quarter. We had record sales in our electronic thermal management products at 3 million for the quarter. This compares to less than half a million in the same period last year and is 50 percent higher than our total ETM sales for all of 2003. In addition, there were several highlights to note: one, we launched a breakthrough product, SpreaderShield 500 which exceeds the thermal conductivity of copper. This new product, which has a thermal conductivity that is 500 watts per Calvin [ph] meter competes with carbon, which is frequently used for the most demanding thermal management applications. Copper has a thermal conductivity of 370 watts per Calvin meter. Our product is 35 percent more conductive than copper, a breakthrough product for us. There are no cost effective substitutes that rival the conductivity of our new product.

We also announced several new product approvals in the quarter. Our advanced SpreaderShield product was approved in Samsung's next generation plasma display panel TVs. This new generation PDP will be launched for the Christmas season of '04 and is planned to be Samsung's premier product line for '05 and '06. Our SpreaderShield product was also approved in the new ultra light Toshiba and Sharpe laptops, which are currently being sold in Japan. Finally, we received the prestigious '04 R&D 100 Award. This award recognizes our SpreaderShield thermal management product. This award is in the latest generation Sony Vaio [ph] computer, which as we've talked before is the lightest laptop sold in the marketplace today. It weighs less than 2 lbs and has just become available in the US this month. This is the second year in a row our Company has received this award for an ETM product. This is a credit to our R&D team and we applaud them for this recognition.

Based on our product approvals and order book we now expect 2004 annual revenues for this business to be approximately $12 million, which is a 50 percent increase over our prior revenue guidance of $8 million. This business is beginning to gain traction as we've received approvals from several industry leaders including IBM, Intel, Hitachi, Cisco, Samsung, Nokia, NEC, Sharpe, Sony, Honeywell, etcetera. At these industry leaders our products are being used in applications which include laptops, servers, digital cameras, cell phones and plasma flat screen TVs to name a few. The end markets we are serving and targeting are large and have double digit annual growth rates. Finally, on the patent front we now have over 17 issued and pending patents covering this business. Obviously we are pleased with the progress in this business and we will continue to add resources to advance our market penetration and sales growth in the ETM industry.

Turning to outlook the steel industry continues to run at high operating rates and demand for graphite electrodes is strong. We have received higher production rates-- we have achieved higher production rates at our graphite electrode manufacturing facilities through the acceleration of our productivity initiatives and we now expect '04 graphite electrode sales volume to be about 10 percent higher than last year's level. On the cost front we continue to direct our efforts towards offsetting the escalation in energy and raw material input costs. Rising interest rates will increase our interest expense outlook to approximately 39 million for the full year. The higher raw material costs and higher interest expense will put pressure on our second half results. Accordingly we expect our results to be at the lower end of our annual earnings guidance range of 55 to 65 cents per share. For the '04 third quarter we expect EPS to be between 12 and 15 cents and graphite electrode sales volume is projected to be approximately 54,000 metric tons. One last point before we open it up to questions, in June the FASB issued a proposal that would address the issue of when the shares associated with a contingent convertible debt instrument should be included in the EPS calculation.

In January we issued a 225 million contingent and convertible debt due in 2011. It was priced at a very favorable 1 5/8 interest rate. This debt has a GTI share price conversion trigger of $20.73. In other words, GTI share price much reach $20.73 for twenty of thirty consecutive days in order to convert at that $20.73 level. Our 225 million convertible would convert into approximately 13.6 million shares. If this proposal gets implemented the shares underlying the convertible debt would be considered dilutive immediately and we would estimate it would reduce the Company's 2004 earnings per share by approximately 4 to 5 cents. With that we would like to open up to questions.

Thank you, sir. Ladies and gentlemen, at this time we will being the question and answer session. If you have a question please press the star followed by the one on your pushbutton phone. If you would like to decline from the polling process press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order that they are received. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment please for our first question. Our first question comes from Bruce Kline [ph] with Credit Suisse First Boston. Please go ahead with your question.

Hi, guys. Good morning.

Good morning, Bruce. How are you doing?

Pretty good. I missed the very beginning but if we turn to the marketplace in graphite electrodes what's going on in terms of new capacity. Is there anything you can announce out there? And secondly I guess on contracts in '05 I think you mentioned that you're trying to get some clauses in there regarding pass throughs of raw materials. I'm wondering-- it sounds like-- I don't think. I'm not sure if that's been done before and then any sense of whether you think your competitors are heading in that direction? And thirdly, do you start the negotiations earlier because of the strong spot market this year or it's the same kind of year-end time?

OK. Appreciate it, Bruce. Firstly, on the GE capacity, we're not aware of any major capacity increases out there. The two Indian producers as we've talked before on the last few conference calls have talked about trying to bring another 15,000 to 20,000 metric tons to the marketplace. That may or may not happen over the next twelve to eighteen months, remains to be seen. So on the graphite electrodes front it remains very tight out there and steel demand, as I said in the conference call, remains very strong.

Could there-- I mean is it sold out? I mean could there be bottlenecks on the mainland side or--?

Potentially depending on how they run in '05. It is tight today and I think if you talk to the mini-mill side they'll tell you that they do not have excess inventories of graphite electrodes anywhere in the pipeline and some of them are very tight. Our shipments are tight. You see it in our inventories. We, of course, had a nice bump up in Q2 shipments and you see our inventories remain very, very lean and we believe that's the case at all the GE competitors around the world.

OK.

On your question on '05 in the pass through on contracts, we're not aware that our industry has done this on any broad basis. We executed this in the mid-year South African bid cycle and we plan to do this also globally as we build the '05 book. Time will tell what the rest of the industry does. Obviously the industry has felt the same cost increases we've seen and we've seen the steel industry also execute these kinds of pass throughs so time will tell what the rest of the competitors do but as I said we're very committed to make this happen and execute this on the '05 book.

Do you start earlier than normal or no?

The customers are coming in about a month earlier so we've had-- I'd say our first one has come in about 30 days ahead of what we would normally see. How many more will come in? I guess our expectation is we're going to see earlier this year than last year. The customers that have come thus far would be the earliest that we've seen in the last 5, 7, 8 years and again, it's due to the tightness we believe in the marketplace.

And lastly, just working capital? I didn't know if you had many comments. I know it was use of cash, mostly receivables. I'm wondering what the trend is, if the second have is going to be up or down as a source of use.

Yeah, the use-- so you're absolutely right it was all AR, i.e. a good use. Our accounts receivable are very clean, very, very current so we don't have an issue there and the balance of the year we may see a little bit more of that but we look forward to start collecting now those higher ARs over the course of the year and we should see that turn into some positive cash flow for us over the course of the balance of the year.

OK. I'll pass it on. Thanks, guys.

Bruce, thanks very much. Have a good day.

Thank you. Our next question comes from Bob Shenosky [ph] with Jeffries and Company. Please go ahead with your question.

Thank you and good morning.

Good morning, Bob.

Craig, update us on potential capacity for GrafTech next year.

Absolutely, as we've talked before on these calls we've been targeting to finish up this year at about a 230,000 metric ton run rate and our '05 target by the end of '05 would be at 250,000 metric tons. Obviously you've seen us here in this announcement talk about being ahead of that schedule as we've advanced our productivity improvement program and so we feel very comfortable we would exit this year at a 230 type level and our team is driving towards that 250 level by the end of next year. These are work process improvements, technology improvements at our plant and our team has demonstrated over the last couple years a very good track record here so we feel good about that.

Okay great. Thanks.

Thanks, Bob.

In terms of the remaining 25 percent raw materials that are not locked in for the balance of the year can you discuss what those are?

Sure can. There are a couple key buckets. One is power. Around the world we buy like everybody from the regional power company. A lot of those power companies don't have the ability to fix the contracts for anything but a month or two, maybe three maximum so we're open on the power to some extent. The other one would be natural gas. We still have some open positions on natural gas. But just about everything else that's petroleum based, coke, pitch, etcetera, we've got fixed here for the balance of the year. So it would be power and natural gas would be the two buckets that still have openings.

Okay, great. And then on the contracts as they relate to South Africa and what you plan to implement in terms of pass throughs for next year, can you be more specific on how you plan to execute those pass throughs in terms of what would be related and how you would set it up? Would it be an index and what type of lag that may have?

What we've set up rather than a very formal specific index because many of our markets are very diverse, our production facilities are in diverse locations. So we've kept it general and it would be any material, raw material increases that we face so we've kept it open.

Any sense of a lag though? Would it be a quarter lag? Would it be shorter than that?

I think it would probably be shorter than that. Obviously we may have one or two months of inventory so I would think the maximum lag we would really want is probably something like one or two months because we keep very tight inventories at the plant so our costs would literally go up probably within 30 days so I don't anticipate a big lag on an execution of a program like that.

Okay and if I could just one last quick one?

Sure.

We understand the potential for higher steel contract prices into next year. That's probably the first time since '94 we've seen it. Spot prices for your product are extremely high. One would think that an aggressive move in prices for you next year would be feasible and I recognize the sensitivity of the contracts but is it reasonable to assume that we could see anything even close to where spot prices are today going into some of the contracts for next year?

Well, let me put it this way, you know you're absolutely right. Spot around the world in most of the markets is just below $3,000 a metric ton right now. Mechanically, physically I don't see any barriers to that kind of price being in contracts. There is no physical barrier. It's the market will determine it so obviously it's up to the market. The book will get built here in Q4 in January and the market will determine the price but spot now, that's just shy of $3,000 a metric ton in most markets. There are no barriers to executing that.

Great and just a final clarification that that price would not include any surcharges that may exist at some point during next year on a pass through?

No, those-- surcharges if our industry executes those would be in addition to that and they would be reflective of raw material increases after the book was put together.

OK. Excellent. Thank you, Craig.

Thank you, Bob.

Thank you. Our next question comes from Bob Legaba with CIBC World Market. Please go ahead with your question.

Thank you. Good afternoon.

Morning, Bob. How's it going?

Pretty good. Yourself, Craig?

Excellent. Thank you.

I just wanted to follow up on the volume increase expected and explain the de-bottlenecking process. I mean how much of that is built in to the 54,000, if any, for the third quarter and what are your expectations there for the rest of the year?

The 54,000-- I'm reading into your question a little bit. The 54,000 has no production capability that we do not have today built into it.

OK.

So I would look at the 54 as very low risk. It's just something very unexpected in the global marketplace happening so it's not dependent on us having some additional breakthrough productivity increase in the plants. The 54,000 is in hand.

Okay and then given your range for the year that would imply obviously a pick up for the fourth quarter. I thought you were actually targeting an additional 10,000 tons. Is that just a function of being conservative for the rest of the year?

Yeah, we're just trying to be on the prudent side. That's for sure. Obviously 230,000 tons is where we expect to exit the year and we believe we're ahead of that program and so yeah, we're a bit on the conservative side there.

Okay terrific and two more questions if I could. One, just related to the interest rate swaps, now when were those agreements actually entered into and when do they expire and what is the strategy there going forward?

Yeah, good question. Let me toss that over to Corrado.

Yeah, the existing swaps cover all of our senior notes and they're perfectly matched to the notes meaning that they run through 2012 and so we entered to them at the latter part of '02 after we had done the senior note execution, the earlier part of '02. We've had at least two occasions, I think three actually where just because of favorable market conditions we were able to reset those bringing in excess of $40 some million and currently as Craig mentioned earlier they bring our effective interest rate to about 7.8 percent today and that's obviously reflective of a pretty significant LIBOR move during this quarter. We do also have caps on the entirety of those positions that cap us at a LIBOR of 550 so we would never be in a position that we would pay more than a percentage point over the existing senior note rate so that the downside risk has really been mitigated but even today the positive carry on on the existing swaps is over 250 basis points.

Okay terrific. And one last question if I could just related to the new product, the new spreader product, what's the market potential of that and how much of that is actually built in to the $12 million for the year?

Bob, the SpreaderShield 500 just to give you more color is an absolutely superb product. Those in the EPM industry know that copper has always been kind of the top of the food chain if you will. It's very expensive. It's very heavy but for thermal conductivity no one has ever beat copper. You'd have to go to something like gold to try and beat it or maybe silver beats it a little bit so this is a real breakthrough. In the 12 million we have very little of this product in the 12 million so we are just launching this product. It's just been commercialized and I think you'll see this product become more of our portfolio in the '05 season and in the '06 season.

Because if I remember correctly you were targeting a market size for these ETM products of approximately $300 million and it assumed obviously a large increase year-over-year and in growth. Does this expand that market size or what would you estimate that market size is currently?

The sweet spot of the market we're going after you're right, is the 300 million. I'm not ready to expand that 300. I think there's plenty of rich targets for us in it. I think what this product does is going to help us with penetration rates because when you can go into an account and beat copper with a lighter product, a great cost structure, a flexible product from a design standpoint really you have eliminated all of the issues that may be on the table. Why not look hard at our product, invest the R&D work, the design work. And so I think you're going to see it in faster penetration rates in '05 and '06 and then obviously more higher end that we're going to substitute, that we're going to knock out of the game.

Great. Thanks very much.

Thanks, Bob. Have a good day.

You too.

Thank you. Our next question comes from Michael M. Bardello [ph] with JP Morgan. Please go ahead with your question.

Yes, good morning. Hi, Craig.

Morning, Mike. How's it going?

Good. I've got a couple of questions. One, on your earnings outlook that you gave for '04, now if you take your guidance for the third quarter and your guidance for the full year and what you've done in the first half you're basically implying about a 20 cent number for EPS in the fourth quarter or a pretty significant ramp up and I know you have more volumes coming in in the fourth quarter but what I wanted to ask you about was on pricing. I mean are you getting a lot of spot sales coming into the fourth quarter?

Good question. You're absolutely right. We're in that 20 cents kind of number for the math. Volume is up. Q4 cost saves continue to come in. ETM as we know will be 7 million or so in the second half so ETM will be higher and on the volume side obviously our book is absolutely full and cost side we feel very comfortable with. ETM, the order book is there so we don't see-- you know most of the costs fixed. We don't see a lot of exposure to that, Mike.

Well what about on the spot pricing in the fourth quarter?

On the spot side as we've always guided you know we try to say let's not let that be considered a significant portion but obviously our spot sales in Q2 volume-wise are bigger than Q1 and what I would expect to see is each quarter this year the spot tons will be higher than the prior quarter and so will there be higher prices in Q4? Probably and some of it will absolutely be that spot impact. Some will be the South African impact.

When you negotiate your big annual contacts starting at the beginning of the calendar year and you fix a price do you also fix a volume level?

Yes, generally the contract commits a volume for the year and a price so the typical one would be 4,000 metric tons size and grade and price.

So in a pretty hot market like we have right now can you assume that a lot of your customers or some of your customers are going to be running through their volume allocations under the contract price in the fourth quarter and triggering some more spot pricing?

Yes, Michael, we will have that. We had that last year. We saw it last year and I would expect probably this year see even more of that than we did last year.

OK.

And hence we would expect Q4 more spot tons and obviously higher prices. As you know the spot prices are strong and are we doing deals at those 2,900 levels? Absolutely, we're doing spot deals at those levels.

Okay second question on the ETM guidance of 12 million for the year in sales?

Yes.

Are those-- how are you coming up with that 12 million? Are those orders that you have in hand?

They are orders we have in the book and they are orders that we know we will get based on product approval and where we are with the customer and his production schedule for his new generation rollout so they're sales we feel very comfortable in.

So you could exceed that number?

We could get some more but remember as we said in this business generally you get product approval. Then you wait for the new design model to be launched. You get a production schedule for the customer so there could be some upside to that but I think we've tried to be very prudent in this business and manage expectations so I think we should think about the 12 million for now for this year.

In the past you've mentioned about the possibility of applications outside the electronics industry. Anything new there?

We continue to work on them. There are none we are ready to announce yet. We've been working hard lately on additional cell phones, additional laptops, additional plasma screen and even some LCD applications. We've been working hard on all of those so because we see that so sweet as a market segment and our product is so compelling in its performance that's where we've put most of our calories.

Now say on the plasma flat screen your customer there is Samsung. Now that Samsung is in buying this material for their plasma flat screen TVs have you had discussions with any of the other plasma TV manufacturers of the world since then?

We have been to every one of the top flat screen plasma producers in the world which obviously would be LG Electronics, Pioneer/NEC, Fujitsu/Hitachi and Matsushita [ph] so we're with all of the top five dialogues, trials, working on programs with them to try and get in their next model generation.

I mean what would be the earliest you could see some product coming out of those guys?

Next year.

OK. All right. Thanks a lot, Craig.

Mike, thanks very much. Have a good day.

You too.

Thank you. Our next question comes from David Mitchell [ph] from William Blair [ph]. Please go ahead with your question.

Yeah, good morning, guys.

Morning, David. How's it going?

Good, good. A couple of questions for you. You talked about the pass throughs and that would be great if you could achieve that. I'm curious what kind of earnings you could be putting up this year if you had that kind of capability in 2004? What would you say-- what kind of costs would you have been able to pass through and therefore what would the earnings be if you had that?

I would say that from what we've seen on the raw material in the petroleum side it's probably somewhere $9 million to $13 million is the kind of impact that's had on us and that's what if we would have been in a pass through situation we would have passed through something that looked like that.

OK. All right my next question is in talking about next year and specifically relating that to South Africa where you said you got 2,600 to 2,700 I guess I'm a little surprised. That seems a little low relative to where the spot market is today and I'm kind of wondering why you weren't able to achieve a higher price in South Africa given where the spot market is today?

Well spot as we said is just shy of 3,000 but if you go back in the year remember the price increase before this one that took it 2,900 plus, the price was about 2,750 was the price increase out there. So when a lot of this book started to get put together remember they started earlier rather than later, we were probably around that 2,750 level. So could have been higher perhaps but we're pleased. We're pleased with what got executed there. It's moved up nicely and we have a very good share there and we've been pleased with the outcome.

Do you think it's conceivable that you could have $2,900 kind of pricing for next year?

I think it all depends on the market. Spot is closer to $3,000 a metric ton now than 2,900 and it's going to depend on the market. The market will determine that, of course. Electrodes are tight. Steel is running very well. It's poised well and we're just going to have to see how the market puts together their books in the Q4 and into January.

Well you-- just so I understand the math I mean if you'd had $2,900 this quarter you would have made 22 million bucks more, right? If you had 2,900 versus the--

Well you have another you know think of the price right now is around in our book you know you saw this quarter 2,507 and it would be another 400 bucks plus of--

Right times roughly 55 is 22 million bucks.

Right.

OK. Thank you.

David, thanks very much. Have a good day.

Thank you. Our next question comes from David Winger [ph] with Jeffries and Company. Please go ahead with your question.

Yes, could you give me the capital expenditure outlook for '04 in entirety?

Yeah, cap ex should come in around 45 million or so for this year.

OK. Thank you.

Thank you, David.

Thank you. Our next question comes from Brendar Diggins [ph] with Gardner, Lewis Management [ph]. Please go ahead.

Boy, you butchered that. Hey, Craig, how are you?

I'm good Brendar, how're you doing?

Doing really well.

Otherwise I wouldn't know who he's talking about.

Yeah, I was wondering at first if he was talking about somebody else. Hey question for you, as you start to collect your receivables in the back half of the year should I expect to see your debt number come down accordingly?

Yeah, that's our plan and we're looking at probably you know 40 million by the end of the year of cash flow over the second half.

Good, excellent. Thanks a lot.

Thank you, Brendar. Have a good day.

You too.

Thank you. Our next question comes from Calis Sore [ph] with Solventis [ph]. Please go ahead with your question.

Yes, hello gentlemen. I have a couple of questions regarding this into three parts. My first question is actually what drives you further volume growth? Are there special regions that you achieve the volume growth? The second is on pricing basically. Actually prices compared to the second quarter are pretty much stable while at the same time you said spot prices are rising. Actually what type of strategy are you actually running? Are you running a volume strategy before the prices or what is your aim actually if your fixed price is especially also in the contract business. And the second question is on costs. Basically you mentioned that several cost items have gone up. Are there special areas that you especially see costs are rising? Could you be more precise in which regions you're facing those cost rises. And also on the cost topic you mentioned that you're actually closing down the Italian [ph] plant or that you booked a restructuring charge there, a heavy restructuring charge and the question is are you closing completely down that plant or are you actually still continuing to run that plant on a lower level?

Cal, appreciate the questions. Let me knock the four questions off here one by one. On the volume growth we're seeing that in the Americas and in Asia and we've seen it pretty much in both those regions board based across all of our customer base and steady and we see customers in both those regions with very strong order books for the balance of the year. We've also started to see Europe pick up a little bit and in Q2 Europe steel production and our customer's needs picked up which was encouraging. You'll recall Europe has been lagging for us. And as far as the productivity improvements we've articulated this a number of times but we look for those to continue right up to a 230 type run rate by the end of the year. On prices you're right. Prices are up slightly in Q2 but I'd say the main reason they're not up more is the Euro exchange rate. The Euro was firmer in Q1. I think it was probably closer to a 124-125 rate and, of course, in Q2 I think the average for the quarter was more like 120 and so I think if you factor that in you'd see that 2,507 was probably closer to a 2,525 price so it's all currency. None of it is lowering the prices. Prices are going up.

On the cost front most of the pain we have felt has been petroleum based products and they've been things like pitch, coke. They've been to some extent some of the other raw materials like metallurgical coke etcetera that we get from the blast furnaces that have been tight and so we believe all the producers fact that. We all buy from the global marketplace and we felt that in Q1. We've locked up, of course, a lot of those prices for the balance of the year but we would look for those cost pressures to be there probably into '05 as all of the global economies seem to be performing very well. Lastly on the Italian plant you're right. We're closing that plant. We do a few miscellaneous things there so you shouldn't misread that we're opening up that plant or we're changing that profile. That's absolutely not happening. We've announced there publicly, locally to the unions we're closing that plant and, in fact, the majority of our folks have already been moved on to other jobs through out placement or they've taken a severance package so we're down to a case where probably there's only 15 percent of even the available employee base even left. They've all moved on to other jobs and other careers. And so that plant is closing and again we do some miscellaneous work there. It's minor in scale. It's to help out where it makes sense to do that work there but I would say over the next year or so you'll see a completely cease operations. What we've tried to do is migrate that high cost capacity to our other advantage locations and obviously as you've seen us bring up our capability and tonnage from 180 two years ago to 220, now to 230 by the end of the year you see we've been successful in that. Our six plants will have a record-- well each quarter virtually they've had record production but they'll have a record production this year historically.

Yeah, thank you very much. Actually on the volumes you actually could use are you achieving-- you mentioned you have a high capacity utilization to consider. Are you actually achieving market share gain? You've gained market share with your strategy right now or is it actually just the market running there?

No, we believe we're absolutely gaining market share. When you just look at our tonnage increase over the last couple years, 180 to a 230 capability and selling it all out literally immediately upon manufacturing we believe we're gaining market share. When we look at what we believe is the increase in the global graphite electrode market based on what the steel production op levels have increased to we believe we've gained share.

Could you mention to what extent? Is that possible?

Yeah, we would say probably share has moved over that time frame over the last three years probably from something that looked like a 19 to 20 percent up to something that's probably 23 percent, perhaps even higher right now so we've been very pleased with that program.

Thank you.

Thank you, sir.

Thank you. Our next question comes from Greg McCosco [ph] with Lord, Abbott [ph]. Please go ahead with your question.

Yes, thank you very much. Could you talk just a little more about the contract situation? Did I hear you say that you've already begun talking with North American manufacturers, customer?

Yes, Greg, that's correct. The couple of the North American manufacturers, US producers in this case, who are generally always the first to come year after year, they have come in about 30 days earlier than what they normally did. Last year they came in earlier. This year is even earlier so they're a month ahead of schedule and what they tell us is it's just based on what they see in the graphite electrode market. It's tight. They're running hard. They're book is full and they want to be sure they secure '05 requirements.

And they haven't walked out of the room when you started to talk about raw materials surcharges or increases?

They are very aware of the spot prices. They've seen all of the announcements and publications on spot price so no, they're fluent on where the market is today.

But including additional raw materials, raw material surcharges have been a part of those discussions?

They are a part of those discussions, absolutely.

Okay and is that both up and down? I would assume that if raw materials fall the price would fall as well?

Well, as I said we have not fixed a benchmark there so we don't expect to slide against a benchmark because we've not set it that way. The way it's set is if we have a material increase in raw materials we have the ability to pass that through and that's the way we're going to execute. Remember we go ahead and buy a lot of our raw materials up front, commit to it and I would say you know looking forward to '05 it looks like the raw material prices are going to be higher rather than lower and so we have built in the ability to raise those prices and pass that through. We have specifically not built in some kind of formula where every quarter we go back and forth and calculate and it's up 2 or it's down 2. We didn't want to execute that kind of a sliding scale.

With regards to the thermal management what kind of price reductions are we seeing on the new contracts or what is built in with regard to that increased penetration?

I would say on the ETM front most of what we have seen because it's a unique product and obviously now substituting now copper we have not seen material price reductions. Now having said that obviously a key feature of the electronics industry is you get in and they produce a million units, you have a certain price. And then next year they're going to produce 7 million units, you have another price. So I'd say our prices so far, the reductions we've seen have been volume driven. They haven't been the case that you sold me a thousand last year and now next year you're going to sell me another thousand. Okay where's my 15 percent price reduction? They have been volume related and so far that's the way we've been running that business and the volumes-- well, if you just look at PDP, cell phones, the volume growth has been spectacular. It's 18-20 percent plus and so our price reductions have been linked to and affected by volume increases, good news for us.

With regard to your expectation of 39 million interest for the year, does that assume the 40 million cash flow is applied to the debt throughout the second half of the year?

I would say to that point it does not specifically calculate into the 39 million. Recall we have a revolver completely undrawn, $200 million revolver undrawn. So our only way to reduce total debt is to go and bring those bonds back out of the market so that is not assumed in that 39 million.

And the use of that cash flow then?

It would right now and for assumption purposes is put on the balance sheet and calculated in the net debt and to apply against our cap ex expenditures so that we can keep that revolver probably fully undrawn and continue to look at the right way to reduce our debt.

But those are-- in other words those are the at present uses for that cash flow?

That's right.

OK. Thanks very much.

Greg, thank you very much. Have a good day.

Thank you. Our next question comes from Myra Lee [ph] with Seligman [ph]. Please go ahead with your question.

Yes, hi. I just had a question in regards to 54,000 metric tons for Q3 and then 58,000 is what you're doing for volume in Q4. What percentage of your customers are finishing up their volume and then will be open to the spot market?

Good question, Myra. Much appreciated. Just building on some of our prior dialogue that's a very small percentage. It's going to be larger than last year but I think for everyone's planning purposes we should consider that to be a small percentage. Do we expect Q4 price to be higher? Yes, because of that attribute of the spot coming in and some of our contracts running out and our customers needing more but let's think of that as a small number. I think that's the right guidance for us to give you to be prudent at this juncture.

OK. Thanks.

Thank you. Our next question comes from Michael Christodulu [ph] with Enwood Capital [ph]. Please go ahead with your question.

Yes, Craig, good morning.

Good morning, Mike. How are you doing?

Fine, sir. Seven quick questions on the ETM business. First of all any SpreaderShield business built into these wins that you've announced this quarter, the IBM, the Intel, Hitachi and others?

There's some SpreaderShield business into some of those laptops and it would be SpreaderShield business where we either already have the order or we have the product approval and we are looking at a design change that we know will begin production this year.

OK. And how much SpreaderShield revenue would you say is in the 12 million '04 estimate that you have?

Michael, for competitive reasons we don't like to segment this ETM business so I'd rather us just to look at it as 12 million in sales and not segment it for you between SpreaderShield, cell phones etcetera mainly for market competitive reasons.

Fair enough. When do you think you'll give us '05 ETM revenue estimates as you've been doing over the last few quarters?

That will come year-end.

Year-end. OK.

Year-end we'll give guidance for electrodes and ETM for all of '05.

And what would you say the Company's current revenue capacity is for ETMs and SpreaderShield?

We have plenty of room to grow that 12 million. You should not think of that 12 million as being constrained. I don't feel any constraints there over the next year or two.

Could it be 50, 60, 70 million?

Could be.

OK. And what portion of your cap ex, the 45 million mentioned for the year, is going toward ETM?

A relatively small portion because of the capability we already have in that business, the question you just mentioned.

Is this out in your Ohio facility?

Yes, sir. Yes, sir. It's very close to our R&D center so it's right next to our technology team and it's all in Ohio.

Is there a point when you think you'll need to break out or want to break out this business from a P&L point of view?

It may when it becomes significant and warrants from an accounting FASB standpoint to be broken out but we'll probably wait 'til that juncture.

Right and last question not to get you too far out on a limb but five years ago the Company was taking steps to isolate this business and some of your other leading technologies in an IPO. Is that something the Board would ever think about resurrecting?

Michael, it's always something we would look at if we felt truly that was the best way to maximize shareholder value.

Very good, gentlemen. Thank you.

Okay, Michael, thank you. Have a good day.

Thank you. Our next question comes from Robert Winter [ph] with Zeisiger Capital Group. Please go ahead with your question.

Good morning, guys.

Hey, Bob. How're you doing?

I'm doing well. A number of questions. First of all to follow up on the South Africa issue and pricing overall, I hear your response about reading the market and trying to get the best price. On the other hand your response sort of indicates that you got within 5 percent of the contract of the spot market at the time you were negotiating the contract but 5 percent being below it and in this pricing environment it amazes me that you can't enter into-- run into the contracts not only getting to the spot but getting above the spot given what's going on in the market and given how much money not only the customers are making out there, your customers, but how they are continuing to raise prices. And I guess I'm wondering or worrying that is there a residual impact psychologically within the Company and/or the marketplace that is still hanging over pricing in this market back from the price fixing days?

Bobby, I can speak to GTI very specifically and clearly. There is no residual hangover in our enterprise as far as executing price increases and I would point to just our actions on the several price increases that we have lead over the last couple years so we've been very firm on the need for the price increases. They've been very justified obviously from the cost standpoint so from our vantage point and our Company absolutely no hangover. I think for '05 the industry is going to determine. I think the industry has faced higher costs. I think the entire industry sees steel running very well, very firm and I think the entire graphite electrode industry sees it. It being tight repeatedly we get calls where a competitor has had trouble getting the product where it needed to be and we've had to respond so I think as I said earlier time will tell. The marketplace will tell. Obviously we're going into the '05 book building in a very good position with a very good underlying steel demand and with a tight electrode market and with a spot that's just under 3,000 and let's see if our industry can't execute.

But Craig, if I can follow up on that. First of all is there any reason why you can't execute another spot price increase prior to going into the contract and is there really a limit right now or should there be on a price that you're willing to go into contract negotiations given the fact that your customer base is basically enjoying prices that are really unprecedented in the last several decades for the industry and profitability associated with that and you know is there any reason why you can't go into contract pricing and ask for 3,200 a metric ton? And the reason I propose that is it worried me a little bit in you guys comments that you are proud and you should be in the sense that you've gained market share in the last couple of years but you guys are by far the lowest cost producer in the global industry. Nobody is even close and what I'm concerned about is that you're growing volume and growing market share at a time when you're in a cyclical industry here in electrodes. By my calculations you know-- you know the sensitivity of the market better than I do. Every 10,000 to 20,000 tons of incremental capacity in a market like this can have a psychological impact on pricing. If you add 20,000 tons at 2,600 a ton realization with 25 percent gross profit margin versus if you don't add that and you could increase prices by $200 a ton you should increase prices rather than add capacity or add market share. And I'm concerned that you guys are growing volume and growing market share at a time when maybe you ought to be a little bit more focused on raising the price out there even more aggressively than admittedly you already are.

Let me respond to your two questions. The first one there is no constraint to another increase before the bid season gets off and rolling. The market will determine that so there is no physical constraint there. You asked could prices go up again. Yes, they could. The market will determine. I hear your argument, Bobby. It's loud and clear and obviously we need to do our damndest to maximize price and get a fair price out of the market. I agree with you everything you've said on price. The productivity improvements we've had at our plants and the de-bottlenecking we believe has allowed us to take some volume and work in some segments that maybe we weren't prevalent in and enjoy those segments where otherwise we wouldn't have. In the melter market we've spent an awful lot of time on price increases and obviously we will do our best to execute the highest price that the market can achieve in the '05 book.

Well, I've got a follow-up question on electronic thermal management but don't get me wrong, you guys have done an incredible job of rebuilding this Company over the last couple of years from death's door. But I'm you know-- in case you ever forget it's cyclical business and you've got to make hay when the sun shines and the steel industry won't be enjoying these times forever and they're raising prices substantially and they always push back on their suppliers but you guys seem to be in a dominant position and the market is tight and it seems to me there shouldn't be a-- there hasn't been a limit on how far the steel producers would raise their prices to their customers so it doesn't seem to me there should be a strong limit on how far you guys should raise your prices to them.

We hear you loud and clear and I believe we're very much aligned.

On electronic thermal management a broader question for you which is the last couple years you guys have really executed well here in establishing and growing this business but I've also heard you sort of talk about this $300 million market and I know there's other segments even beyond that and that it grows at a rate of I think it's 15 to 20 or perhaps 20 percent higher per year. Is it still a $300 million market? Has it grown in the last two years? Is it now a $350 million to $400 million market? You know because that metric of 300 million has sort of stayed the same for the last two years and yet the metric that you've also talked about is that this is a fast growing market.

You're right, Bobby. We've been talking about that 300 million market now probably for about 18 months and so is it a bit bigger? Yes, we believe it's growing a good 15 to 20 percent. I think if you just look at the cell phone numbers the cell phone numbers year-over-year are up almost 19 percent and so yeah, you're right. It's 300 million plus. I guess the question we had before are we going to expand that circle to something beyond that and what we see right now is to focus our efforts on that same 300. Maybe it's 350 today because the targets are so right and our offering is so compelling to the customer.

Well I guess my point view is that I don't think two years ago looking out a year or two from now or even currently that anybody would have predicted for instance even the plasma screen TV market the size that it is and so I guess I would think that that pie even without what you're doing is already growing.

Agreed.

One last question for you on that, your annualized rate in the second quarter is obviously 12 million in terms of now what is your full-year forecast. Is there some seasonality to delivery production at order wins here in terms of your full-year forecast or is it admittedly still and properly a pretty conservative forecast at this point?

The seasonality there maybe a little dip in Q3. Q4 obviously jumping up Christmas season so there may be a little dip end of summer, you know summer holidays, nothing significant. But you know as I said I would look to the 12 million. 12 million is our guidance and we'll refresh that at the end of the year and also give '05.

OK. Thank you.

Bobby, thank you very much. Have a good day.

Thank you. Our next question comes from J.D. Padgett [ph] with Founders Asset Management [ph]. Please go ahead with your question.

Yeah, I had a couple ones. On SG&A what was the rationale for that tracking up sequentially?

Let me-- J.D., thanks for the question. Let me pass that over to Corrado.

Yeah, we've been-- I mean primarily we've been putting quite a bit of effort into our infrastructure. We've talked quite a bit about some of our work process and systems work. We made a decision about six months ago to accelerate some of those efforts and so we're seeing not only a little bit higher administrative costs that are specifically contained to these programs but we are also accelerating. In fact, just in Q2 we went live in the US, France and Switzerland and are now about 70 percent through the countries with only three more to go to get global so we're excited about that and we're investing if you will in the infrastructure and that's the primary reason.

And what do you expect will be the pattern of that over the next multiple quarters? Will some of the cost savings programs keep a lid on that here or drive that down or do you expect still some subtle increases there?

Cost savings program would be intended to mitigate that and we would suggest that it wouldn't be until sort of mid '05 when the full program is done that we'd start to see meaningful reductions.

Okay so maybe stays about the same level or grows slightly through mid '05?

Right.

Okay and the other question just on gross margin, the performance there pretty strong in the June quarter. Just kind of looking forward to the September quarter it seems like there were some factors that you called out that helped the mix last quarter that may not recur in the September quarter plus it looks like you expect that the volume on the electrode side is going to be down slightly which I would suspect would hurt utilization a little bit. Is it right to think that gross margins step down or can we still build on those?

I don't think you're going to see any material step down at all.

Okay, what's the offset? Is it the cost reduction plans then?

That's right. That's right. It's that and continued driving productivity improvements at our sites.

Okay so even though mix will be maybe less rich an utilization might not be as high the cost reduction programs will offset that?

Absolutely.

Keep gross margins solid?

That's right, J.D.

OK. Thanks.

You have a good day.

You too.

Thank you. Our next question comes from Mark Ligazinsky [ph] with Bank Austria [ph]. Please go ahead with your question.

Hi. Hello everybody. I've got two questions regarding the gain of market share and graphite electrodes. The first one is would you say that you have won more market share in the US or in Europe and the second question is did you observe any shift of major customers from competitors to you?

Mark, thanks for your question. On the first one on market share I'll keep it broader than a specific country. I would say our gains have been in Asia and in the Americas and in regards to any major shift in customers, no major shift in customers whatsoever. Ever year I think all of the producers depending on-- especially those executing price increases face the switch of a couple customers and those get executed and the market really tests the price but absolutely no major shifts in customers around the world.

All right. Thank you.

Thank you, Mark.

Thank you. Our next question comes from Robert Jackapraro [ph] with Merrill Lynch. Please go ahead with your question.

Thank you. First, a clarification. Good morning everybody.

Good morning, Robert.

The 9 to 13 million impact, Craig, was that a first-half impact or what you would see over the full year?

No, that was the full year, Robert.

Second, and I apologize if I might have missed this and I realize that you're talking about putting in surcharge mechanisms or cost recovery mechanisms but since your customers are coming to you earlier have you been able to entice your major supplier of petroleum coke earlier into your conversations about what their pricing expectations would be for 2005?

Absolutely, we've already begun that process and we would expect no later than sometime within the fourth quarter to understand our petroleum coke cost and have those all locked up.

And availability isn't an issue with them?

We remain the world's largest buyer and that gives us a good leverage in the global marketplace and we don't see any major constraints with availability.

And understanding it's early on in ETM but I think in past conversations you have plenty of spare capacity to grow into that business and the question revolves around what do you see sort of the capital requirements of that business as far as working capital? Would you see better working capital terms than the core business at this point in your expectations and as far as just implications for general cash flow?

Absolutely, on the cap ex as we said earlier we don't expect any significant cap ex in this business in the next year or two. We're in good shape and there's something you should know about this industry this is not the cap ex intensive. This is technology intensive and so unlike the graphite electrode business this is not 40 million of cap ex in this business. Incrementally these are to significantly expand capacity is more like a 10 million expenditure so it's a much for efficient cap ex play than graphite electrodes. On the working capital turn it has a much quicker turn than graphite electrodes. Graphite electrode takes a month and a half to make. These products we make in hours and so the turn is much quicker. The electronics industry moves very quickly. The payment cycles are very good so working capital turn is a completely different picture than graphite electrodes, much, much quicker. And I think you had one other question there?

Yeah, I was curious of your outlook for 13 million and I know it's-- is there any way you can give color as to the breadth of either product categories or sort of the amount of engineering approvals you've gotten? You are "x" percentage the way through that in attaining 13 million? Is there any way you can kind of give us a little more color on just how this business is really broadening out by either customer or product?

Robert, the guidance is just 12 million just to keep clear. It's 12 million.

I'm sorry.

We have avoided giving any of the segmentations in this business and it's purely market intelligence reasons. Cell phones, laptops, PDPs, digital cameras, all important to us, all very large industries growing very nicely so I think you should look at the 12 million as penetrating all of those segments and us with major initiatives in each one of those segments. We're trying to get more cell phone folks and we're, of course, trying to get some more PDP folks. Laptops you've seen them start to come in pretty nicely, Sony, Toshiba etcetera and we're working with all the other major laptop folks. So I would look at it as a broad based penetration effort. Our efforts are very broad based in each one of those segments. We have people in each one of those segments on the ground with the R&D design teams in those customers and that 300 million plus that we talked about our course is broad based and that's the way you should look at our effort.

And just one more quick question, a couple months ago the EU had found one of your competitors dumping. Are there any other than just market dynamics, any potential positive implications for you, either recovery of injury or something like that like sometimes happens in the United States?

Yeah, the EU has been looking at that. I believe it's just the two Indian graphite electrode producers right now. They have been doing an investigation. There is no money that would flow back to our Company or any other companies. The EU the way they work they would if they find that there was wrongdoing they would go ahead and put duties on there, a percentage duty, and usually it's multi-year. So the way I think you should look at this if the EU executes on this the cost of those Indian producers of doing business in Europe would go up.

Thank you very much.

Thank you, Robert.

Thank you. Our next question comes from Tom O'Shay [ph] with Golden Tree [ph]. Please go ahead with your question.

Yes, on your capital structure now what are you paying on your bank revolver, on your bank term loan?

Thomas, let me pass that one over to Corrado for you.

It's a LIBOR based variable rate of about 350 basis points above LIBOR. You know though that the facility is undrawn today.

What about on the term loan?

We don't have any term loan remaining. The only other debt that we have would be our 225 million convertible with an interest rate of 1 5/8 most likely maturing 2011 and then our senior notes with 150 million maturing 2012 with a coupon 10 1/4 but swapped currently to 7.8 percent.

Okay even though it's undrawn the LIBOR 350 in this bank market seems high. Have you thought about going back to the banks? I assume it's not call protected.

No, we would I think in the normal course you know the facility doesn't expire until '06 but in the normal course of just normal capital structure planning we would probably look to reestablish or extend that facility and the consideration could be nearer term with a good market. We're aware of that.

Okay, so it's something you're going to look at what in the next few months or--?

It's something that we're always looking at and certainly something happening in the next six months would not be unreasonable.

Okay great. Thanks.

Thanks, Thomas.

Bye.

Thank you. Our next question comes from Joe Lemanowitz [ph] from Prudential. Please go ahead with your question.

Thanks. Just a quick question, if you guys were to unwind the swap in the cap what would be the financial impact?

Currently it would probably be something like $18 million to $20 million. We wouldn't have any intention certainly to do that in the near term.

Okay, thank you.

Thank you. Ladies and gentlemen, if there are any additional questions please press the star followed by the one at this time. As a reminder if you are using speaker equipment you will need to lift the handset before pressing the numbers. Our next question is a follow-up from Calis Sore. Please go ahead with your follow-up.

Yes, again on the market of graphite electrodes what exactly is your assumption for '05? Will it be a growing market for graphite electrodes?

Cal, thanks for the question. Yes, South African market steel is performing very well and not unlike we see in many of the other geographies and so we see growth in the South African market and it's probably in the 4 percent type range. EAF is doing well there as are some of the other smelting titanium dioxide businesses.

So it's just the South African market?

No, I only mention that because I thought that was your point in question but no, next year's growth we would look at 4 percent plus in the overall marketplace.

Okay, thank you.

Steel continues to run like this. Steel continues to have the kinds of successes they have on getting more production out of their facilities. We look for, as I believe most of the analysts, to a record year next year in steel.

Thank you, gentlemen. There are no further questions at this time. Please continue.

All right. Thank you very much everyone for participating in the call and we look forward to talking to you on our Q3 results. Have a good day.

Ladies and gentlemen, this concludes the GrafTech quarter two conference call. If you would like to listen to a replay of today's conference call, please dial 303 590-3000 or 1 800 405-2236 followed by the pass code 11001796. Once again those numbers were 303 590-3000 or 1 800 405-2236 followed by the pass code 11001796. You may now disconnect and thank you for using AT&T Teleconferencing.