GrafTech International Ltd (EAF) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GrafTech fourth quarter 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 star followed by the zero. As a reminder, this conference is being recorded today, Tuesday, March 15 of 2005. I would now like to turn the call over to Ms. Elise Garofalo., Director of IR. Please go ahead, ma'am.

Thanks, Mary. 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 and you need a copy, please call Julie Drexler [sp] at 302-778-8244 and we can fax or email 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 release. That same language applies to this call. Also, to the extent we discuss any nonGAAP information, you'll find reconciliations at the back of our press release.

This morning on the call we have Craig Shuler, Chief Executive Officer, John Wetula, President of our Natural Graphite line of business, and Corrado Gasperis our CFO. At this point I liked to hand the call over to Craig.

Thank you, Elise. Good morning everyone and thank you for joining GrafTech's conference call. Today we will take you through our fourth quarter and our full year 2004 highlights, then open it up to questions. In the fourth quarter, net income before special charges was 11 million, or $0.11 per share, as compared to net income of $0.06 per share in the '03 fourth quarter. Net sales increased 23 percent to $232 million, and gross profit came in at 57 million representing a 26 percent improvement year-over-year. The improvements were mainly due to our graphite electrode business where both sales volume and prices increased.

Graphite electrode sales volume was just under 60,000 metric tons or 13 percent higher than Q4 '03. In our other business segment sales were 26 million as compared to 17 million in 2003. Gross profit was also up about 27 percent primarily driven by increases in electronic thermal management and carbon refractory sales.

Next we'd like to turn to our '04 overall results and achievements. During the year we achieved strong year-over-year growth. Sales were up over 19 percent to approximately $850 million. Gross profit increased 25 percent to 210 million. EBITDA of 147 million, before special items, represented a 40 percent improvement over 2003 and a doubling over 2002. Our team has worked hard to improve EBITDA margins and over the last two years we have grown them from about 11.7 percent to over 17 percent.

Finally, net income of $0.43 per share, before special charges, was more than double 2003. During the year, our team set graphite electrode production records and achieved an annual graphite electrode sales volume of over 220,000 metric tons. Our team also had continued success commercializing advantage technologies. We grew our ETM sales from 2 million to 12 million in 2004.

We expanded our global ETM team and secured orders from industry leaders such as Del, Sony, Samsung and Panasonic in fast growing applications that range from plasma flat screen TVs, to cell phones, to lap top computers. We received the prestigious R&D 100 Award for the second consecutive year for our break through ETM products.

Turning to capital structure, our team also was successful in making significant improvements to our capital structure and putting several large legacy liabilities behind us. We completed a 225 million convertible debenture issue, securing a very attractive 1 5/8 coupon. We reduced our most expensive debt, our 10 1/4 senior notes, by $58 million. In the past two years we reduced these 10 1/4 notes by $115 million. We recently completed the refinancing of our revolving credit facility, securing 215 million in liquidity, reducing the interest rate spread by more than 110 basis points and obtaining less restrictive financial covenance. Our improved financial performance in '04 positioned us for this successful refinance. Our capital structure is now stable with no repayments due until 2010, and has liquidity to support the growth of our businesses.

Finally on the legacy liability front, over the past six years we have paid out more than 400 million to fund legacy anti-trust liabilities. Including more than 70 million to the European commission and the DOJ in anti-trust fines during 2004. We are now close to putting these legacy anti-trust liabilities behind us, with only 26 million remaining to be paid to the Department of Justice after the end of 2005. In 2004, we also funded 42 million of defined benefit pension obligations that were frozen in 2003. This achieved almost a 90 percent pension funding status for us in our U.S. pension plan.

This is up from a 50 to 60 percent level just a couple years ago. A year and a half ago we announced that we are terminating our U.S. Post Retirement Medical Plan effective 12/31/05. 2006 forward this will save us approximately 3 to $5 million per year. Also in 2004, we reduced expensive accounts receivable discounting by approximately $45 million. In total, our actions in this area in 2004 represent over 150 million of legacy liabilities that our team has put behind us.

Finally, closing out '04, we are pleased to announce that our team and our external auditors, Pricewaterhouse Coopers, have both completed the assessment of our internal controls as required by Sarbanes Oxley and concluded that GTI's controls are effective. Sarbanes Oxley, as you will recall, resulted in over $5 million of additional expenses for our company last year. Now turning to the 2005 outlook.

As we stated early last year, we modified the terms and conditions under which we sell graphite electrodes in order to build more flexibility to adjust pricing based on market conditions. After assessing graphite electrode supply demand balance, tightness in the supply of quality needle coke and rising production costs, including inflation and the continued weakness in the U.S. dollar, we initiated a base price adjustment in December.

We successfully executed a base price adjustment of approximately $440 per metric ton on all orders received prior to November 1, that were subject to our new terms and conditions. The base price adjustment we instituted should not be confused with a surcharge and is not tied to an index or a specific raw material input. The balance of the '05 melter electrode business has been booked in the $3,500 per ton plus change. As a result of the aforementioned, we expect melter electrode average revenue per metric ton to be up by approximately $600, or 24 percent higher than 2004.

In the nonmelter graphite electrode segment prices -- segment, prices vary significantly due to the variety of end markets an performance requirements across those end markets. We expect average revenue for metric ton in this segment to increase approximately $100 as compared to '04. Based on the actions and results to date, 2005 graphite electrode revenue per metric ton, including both melter and nonmelter segments, is expected to be between 2,900 and $3,000 per metric ton. Approximately 15 to 20 percent higher than 2004.

Graphite electrode sales volume is expected to be 210,000 metric tons for '05. We expect graphite electrode production costs to increase between 10 and 12 percent in '05 versus '04. Half of this increase is due to inflation in cost, especially petroleum coke, energy and freight. The balance is the result of the impact of the weak U.S. dollar on our production facilities outside the U.S. To date, we have secured firm price contracts for approximately 75 percent of our graphite electrode production costs. In 2005, we are targeting at least a 50 percent increase in ETM sales to achieve revenues of 18 to 20 million.

We will continue to develop break through ETM products and solutions that enable our customers to be leaders in designing smaller, lighter, and more powerful electronic devices. We are excited about the opportunities in this business and will continue to invest in people and technologies to grow this business. Based on our 2005 guidance, we expect net income before other income and expense to be about 55 million to 65 million in 2005, or 25 to 50 percent higher than last year.

We expect 2005 free cash flow, before anti-trust and restructuring payments, to be approximately 25 million or an 82 million increase as compared to a cash use of 57 million in 2004. This improvement includes an expected improvement of 60 to 70 million in cash flow from operations. As you read in our press release, we are transitioning our guidance to cash base measures consistent with how we run our business, incent our employees, and build long term value.

On a quarterly basis, we will review and discuss in detail key business and cash flow drivers including market conditions, strategic and operational initiatives and other relevant factors expected to affect our business. In addition, because we do not believe that short term guidance is conducive to creating long term value, we will no longer provide quarterly EPS guidance.

Turning to Q1 '05, we expect the first quarter of '05 to be our weakest quarter of the year. In addition to it being a seasonally slow quarter, rising graphite electrode prices last year resulted in customers taking all tons available under their 2004 annual contracts in the fourth quarter. Finally, our recent pricing actions have contributed to our lower Q1 volume. We expect graphite electrode sales volume to be about 45,000 tons in Q1. With that, we would like to open it up to questions, please.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press the star, followed by the one on your push button 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 pulled in the order they are received. If you are on speaker phone, please lift the handset before pressing the numbers. One moment, please, for the first question. Our first question comes from Michael Gambardella with JP Morgan. Please, go ahead.

Yes, good morning, Craig.

Good morning, Mick. How are you today?

Okay. Good morning. I have a couple questions. First on the cost front, can you give us an indication of the needle coke cost that you hadn't secured back in November, you know, how much did that go up over the first 90 percent of the prices that you locked in?

The -- Mike, the needle coke price has continued to go up virtually every couple of weeks, starting with Q3 when the announcement on the Lamont coker closure came out. And at that point in time, coke prices, depending on the grade, were roughly in the range of 500 to $550 a metric ton. And from that period to today, we've had -- we've seen in the markets, spot prices for petroleum coke rise to $750 a metric ton plus, so there's been a significant increase from that point in time.

I mean, what is your outlook for '06 on neo-coke? Do you expect just a significant increase over the average cost that you had in '05?

It's early to tell. This negotiation will usually begin in the middle of this year to the third quarter. But I would expect, if we continue to see the strong oil price and for sure I believe we're going to continue to see the tightness in the quality coke market that we would be anticipating higher petroleum coke prices on '06 than '05. It's early to tell what percentage, but the direction we believe is upward and that will put a greater pressure upward on graphite electrode prices.

And on the -- the 25 percent of your cost for '05 that you haven't locked in yet, what are those costs?

Mike, those are in the area of three or four buckets. It's natural gas, power, freight and metallurgical coke. Now each one of those we have some hedges in place and some fixing for the year. Natural price I would say probably about 75 to 80 percent is open right now. And a lot of that we stayed at the spot rate, which has been bouncing around 6. A lot of that's because the forward curve was so steep and so expense that thus far that's been the right thing to do and we've gotten a better price.

A bit of our power is floating freight. We've done a lot of work securing and fixing freight costs, but we still have some carriers that are allowed, if there is a spike in oil, to pass on some surcharges on whether it be bunker fuel or diesel. And then metallurgical coke, as I'm sure you know in the steel industry, has gone short.

We have all the requirement we need, but as far as fixing the price, the metallurgical coke industry has been very reluctant to give annual prices and we've probably only fixed out for, oh, about nine months of this year, so we've probably got about one-quarter, the last quarter of this year would be open to price; not supply, just price.

And how much metallurgical coke do you use?

Our annual spend's probably about $20 million.

But, in terms of volume?

It's -- metallurgic coke is, I believe, around $40 a ton. So, it's running right around $40 a ton. So, we use quite a bit of it. It's gone up. As you know, it's one of our raw materials that's almost almost doubled in price. As you've seen in many of the other, you know, coking, coal, et cetera. Most are 86 to 100 percent up.

And then last question, just on your volume guidance was down quite a bit from where you thought you would have been, and it seems like, you know, with the new 250,000 ton capacity, that you're running about 84 percent of capacity.

Could you talk a little bit about that in terms of, you know, you must have lost some share based on the price initiative that you had started in December? And -- and why are you not seeing others following your price initiative in December?

Okay. Good. Let me address those, Mike. The first one on our capacity. Right now we can comfortably produce something north of 230,000 tons a year. And you'll recall our target was to exit '05 somewhere around the 250,000 ton range. So right now our capacity sits somewhere around 230 to, call it 240. Last year we sold 222,000 metric tons. We have not given any guidance for '05, so we haven't set any expectations or numbers out there, of course.

But this year, it looks like we will do about 210 and all of that movement, from 222 down to 210 is 100 percent due to our pricing actions. Holding firm on price, trying to bring the price up in , in -- for our product and get a fair price for our product. And I think as you've seen, we initiated I think five increases, last year, in price. Plus a BPA, trying to keep up with raw material increases and, like we said, get to a fair price of our product. And so we were willing to give up volume. We held very firm on that.

As far as the others, you know, it's hard to, you know, speak to their strategy, but obviously, you know, we have initiated most of the price increases in this industry. Over the course of last year, we had some following and movement in the price upwards. In December, of course, we went out with a $4,000 price increase, and for whatever reason, the competition has not moved to that kind of level. I think the last price published by the competition was in January 14 or 15. They were back at 3,650 a metric ton. I really can't speak to why they -- why they stay back at 3,650 a metric ton when we're at 4,000, given all of the petroleum based cost pressures and energy pressures that we have in our industry.

Now, did you get the $0.20 per pound price increase in just the U.S. or have you gotten it elsewhere?

That's, Mike, you're referring to the BPA and that's 440 a metric ton or U.S. pricing, $0.20 of course.

We were very successful in that program, Mike, and we took the approach that we really had to treat everybody the same. I mean, no one likes price increases, so we treated everybody the same and we executed that virtually 100 percent across the board, everywhere where the contract allowed that.

So that would be U.S., Mexico, western hemisphere, Europe, and Asia. So we had success in virtually every geography, wherever the contract allowed that to take place.

Okay. Very good. Thank you.

Thank you, Mike.

thank you. Our next question comes from Bret Levy with Jefferies and Company. Please go ahead.

Can you give a little bit of an update, obviously you guys are spending some money to bring some more capacity online, and also, can you give an update on what you're hearing kind of around the world about additional capacity coming on away from you guys?

Thanks, Brett. How are you today?

Very well, thank you.

Yeah, we had some opportunities as we've talked the last couple years to de-bottleneck some of our plants. In some cases with a bit of CapEx, in other cases just with process know how, improving the cycle time that we make graphite electrodes. And having six well positioned graphite electrode plants around the world on four continents, you know, the best platform in the industry, we feel one of our competitive advantages is to go ahead and exercise that and execute on those process technology improvements and de-bottlenecking.

So, as you've seen over the last couple of years, we've taken that capability from 180,000 metric tons to 230 and, and as I said earlier, we're probably north of that maybe closer to 240 and our stated goal has been to try and exit '05 closer to the 250 range. So I think you'll see us continue to, you know, where we have very attractive de-bottleneck productivity opportunities we'll continue to do that.

And your second question, on what about others? From what we see, we believe our two Indian competitors are doing the same kinds of things in their plants. We believe they're trying to de-bottleneck. They're not building new plants. No one's done that for 30 years. But they're de-bottlenecking their plants and as we've said on prior calls we think they're attempting to get another 15, between the two of them 15 or 20,000-tons out of those -- the plants they have in India. Brett, finally, to your question, obviously we've worked very hard to get a fair price for our product and we've been willing to sacrifice volume to try and execute on that.

And as you see prices up 15 to 20 percent, and I think if you compare that to where some of the competitors are, you'll see that absolutely we've gotten a higher pricing and sacrificed volume if we had to.

All right. And then, can you talk to what CapEx is going to be for '05, kind of the in the current mode and what the major projects will be?

Yeah, Brett. It will be around 45 to 50 million. The majority of that will be regular working budget to keep the plants running well and productive. There's probably 3, 4 million in there for AET type capital, as we continue to grow that business. As, as you know that's gone very well for us. So probably, you know, 10, 12 percent of that number is pointed toward AET/ETM et cetera. And then there's probably about another 5 to 6 million that I would put in the bucket of kind of de-bottleneck/productivity improvements in our plants.

Where, very attractively, we can de-bottleneck or automate a function or put in some new process technology and really get a much better capability out of it. I think if you talk to the trade, our quality over the last five years has ramped up and improved nicely and we're probably producing the best most stable electrode we have in the last ten years.

All right. Then the last question is a longer-term type question. There's been less and less emphasis in your -- in your press releases and your conference calls on, you know, the Ballard arrangements, car batteries, that sort of thing. Given where the price of fuel is right now, has there been any increased initiative in that direction or, you know -- just can you give a little bit of an update there?

I sure can, Brett. Brett, our view of Ballard and the opportunities in fuel cells have never been better. And the only reason you may see us talk a little bit less of it, because it's probably out there six to ten years, we've tried not to oversell and get people ahead of it. But obviously, I think you've seen Ballard make some great advances.

As you know they're our 100 percent exclusive supply arrangement we have with then, where they buy our flow field material out to 2016, and so you've seen their bus program in Europe, in Beijing and Singapore. Very, very successful, tremendous performance results. That's 100 percent our product and I think more recently you see the U.S. government, Japanese government, as you said in some cases in response to oil prices and availability, really start to get on the fuel cell program.

So we think what you're going to see over the next three to five years is much more attention and awareness in this area. We've added people and we have a dedicated team, a strong, strong relationship with Ballard, who, as you know, has probably 85 percent of the fuel cell cars that are out on the road today.

All of those are our product so we see nothing but upside there. And tightness in oil and oil prices really get those programs going and the government grant money flowing to support it.

All right, and last question. On the working capital front, can you give a little bit of guidance for, you know, first quarter or all of '05? Obviously your raw material costs are moving upward. Can you give some sense as to where you see your investment in working capital this year?

Yeah, Brett, for all of '05 it's probably going to take about 25 to 30 million in working capital. Higher prices for our product in receivables and of course our costs have gone up 10 percent to 12 percent. So 25 to $30 million increase.

Thanks much, guys.

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

Thank you. Our next question comes from James Caldwell with WPG. Please go ahead.

Hello.

Yes, sir.

This is Jerry Farber (sp). I guess what I'm trying to reconcile is, you know, you mentioned before it's hard to account for the competitors and that not following with your price increase. Presumably over time, your demand and, you know, capac -- capacity, supply demand situation is related to steel demand. And, you know, all the data we're seeing is for extremely strong trends in steel output and the like. Are there some geographic pockets or classes of product that might account for the industry being not as tight?

You know, again, the industry being your carbon product, being the raw products not being in total, and quite a supply, demand position or , you know, it just -- it seems a little strange that price increases are not being sustained in the part of competitors with such a tight and high demand market. Can you help us understand why that would be?

Jerry, we share your observation. The melter EAF electrode segment, our number one segment which is 70 percent of our volume, remains very tight. And I think you hear it from us and you hear it from the competition on their calls, you hear it from the steel industry. So, you're absolutely right. The melter electrode market is tight. It's been tight now for a year and a half.

And there are no geographic pockets that are upsetting, you know, this global balance. Electrodes move around the world. So, it remains tight, and we share with you, you know, how do we understand, given all the cost increases and this is a petroleum based product with energy, why -- why we haven't gotten to a more fair level for our product.

So right now there's no accounting for the lack of price follow-through on the part of your competitors. It doesn't sound like there's any material increase in capacity by your competitors or by yourself, vis a vis the demand situation out there.

That -- that's correct. Melter electrodes remain tight. Costs are going up, and we will continue to monitor the situation and, as I said, we increase price five times last year plus a base price adjustment as we make every effort to get a fair price for the product and a fair return. Our customers want high performing electrodes at the technology CapEx so...

And, and just following up, in the first quarter, you said there is - a) there's a tough compare, vis a vis last year. Is there's also seasonality that would allow the customer base to shift up from one supplier to another and is that -- does that, does that seasonality change in subsequent quarters where the customers would not have that latitude?

Jerry, that's spot on. Q1 historically is the slower quarter of the year. It's usually our lowest quarter. And so Q1 we did see some slowness in the market and of course, customers have a chance to use some of the graphite electrode inventory. There is some of that shifting as you talk. But Q2 onward, historically, and what we see in our book, is much stronger.

So the -- is a good part of the decline forecast on an annual basis, which is, I guess, about 12,000 tons or there about?

That's right. That's right. About 12, 15,000 tons.

Is the bulk of that -- is the bulk of that occurring as you put your forecast together in the Q1 shortfall, or are you building in some declines in subsequent quarters?

The majority of it's in the first quarter. We've also prudently trimmed a little bit from the subsequent quarter, but most of it is in Q1.

Okay. But...okay, so you're just doing that just to be prudent, as you say. But there's no indication of full year outlook loosening up in terms of the capacity/demand situation.

That's right, you're correct.

So, it is possible that subsequent to Q1 we -- it's possible given current conditions, we might see the higher run rates that number of people were thinking about given supply demand because, as you know, a lot of analysts' forecasts were in the 230 to 250 range on a full year basis, or you thinking that run rate is now unrealistic in subsequent quarters?

Yeah. I think the analysts were around 225, 230.

Um-humm.

We would stick firmly with our 210 and we would guide you to that 210.

No, I understand that at 210, but I'm just wondering, again, is it possible that we could see higher run rates because of things so skewed in terms of the, you know, the decline in the first quarter, as you eluded to.

Well, it's possible. Recall the lower volume is 100 percent due to our stance and firmness on price.

Yeah.

Not the quality of our product, ability to deliver, et cetera. All of that is superb.

Right. Okay, thank you.

Thank you, Jerry.

our next question comes from Robert LaGaipa with CIBC World Markets. Please go ahead.

Thank you.

Morning, Bob. How are you today?

Good, and your self, Craig

Great, thanks.

I just had a number of questions for you. I guess one, just getting back to the, the volume issue -- the volume decline from the 222 to the 210.

Can you give us some sense of, you know, just -- I know someone had mentioned just from a demand perspective, geographically, where you might be seeing weakness and you mentioned that , you know, the demand out there is, is very strong certainly for steel production globally, but, can you talk about where you're meeting the most resistance, on a geographic basis, relative to these price announcements?

The one at -- the one we referred to earlier at 3650 is a global price, So I would say it is an all geographies in general, okay? So let's start with that premise.

Um-humm.

That's number one. If I look at the more difficult environments, you know, one would, of course, be western Europe, where steel growth and the economies there have been lagging what we've seen, of course, in the Americas and Asia. So, if, you know, kind of a subcategory would be Europe remains still, you know, the two to three type growth. Germany, high unemployment, 11 percent unemployment. So I would say Europe is the more difficult of the group. But globally, we have quite a difference, as we said earlier.

Right. The other question is, you had mentioned that, you know, the cost. I mean, you know, obviously, from a variable cost perspective, I mean, you're seeing 5 percent lower volumes, but you're seeing the cost jump 10 to 12 percent obviously the pricing's up, you know, quite a bit. But, you know, where I'm trying to get, you know, some sense of reconciliation is, just relative to these -- these base price adjustments, the $440 a ton. And you mention that that applies to the contract that are subject to that adjustment.

Can you give us some color relative to, you know, the percentage of the contracts that are subject to that adjustment versus those that aren't. You know, because if you had contracts for example that, you know, were signed maybe, you know, in their -- late part of summer, early part of summer that may have not been subject to those adjustments, obviously that would -- that would account for the difference there. Can you maybe just, you know, provide some color on that?

Let me give you first some annual and then maybe a little more detail. Sure. You know, if we look on a year-over- year basis in '03 the average graphite electrode price was about $2,500 a metric ton. And you'll recall we have 70 percent melter and 30 percent nonmelter. And we spoke about the melter, the 70 percent going up $600 a metric ton and the nonmelter going up about $100 a metric ton. And so if you weight those for the 70/30, that's about a $450 increase, add it on to your 2500, you get to the middle of our guidance, 2950. That's the year over year.

If I give you some color on the BPA, the BPA we applied very evenly to all customers whose orders were received prior to November 1. And we really had no exceptions there. And we tried to treat every customer equally, fairly, no one likes a price increase, obviously. We don't like them. We fight like hell. Our customers fight like hell, you know, as they should. But given the cost pressure, et cetera, we executed and we're very pleased with it -- the way it went.

But were 100 percent of those contracts that you signed subject to that adjustment or is it a number lower than that?

The only ones that wouldn't have been, Bob, where -- would be some cases where maybe we had a couple multi-year contracts and those were still on, and the language in those contracts didn't provide for that. And then, you know, we've got some other contracts that go Q1 to Q1. It's just a feat -- we've talked about this before on calls. It's just a feature of some customers purchasing factors -- they're Q1 to Q1 rather than a calendar year. So only in those kinds of exceptions. Other than that all the other customers where our terms and conditions provided for this, we executed.

But how much of that would represent -- or how much of that would account for the volume? So, in other words, if it's 220,000 tons in 2004, 210,000 in 2005, I mean, do those types of contracts represent 10 percent of the volume, 20 percent of the volume? I'm just trying to get a better sense for that.

That's a hard one to tell. I mean, remember, we had five price increases last year, we had a BPA, and then we've got, you know, some of the highest prices, you know, out there. So all of the above contributed to that 12 to 15,000 tons we talked about earlier. I think it's hard to color it, which one of those actions. I think standing firm on all those price increases and on the BPA. All of those added up is what resulted in our lower volume.

Okay. We can follow-up off line on that issue, but, just one last question just in terms of the ETM business, the 18 to 20 million, up from the 12 million. Can you give us a sense for, you know, where that additional revenue is coming from? Or, you know, maybe you can provide some parameters there. Is that the result of 75 percent of the approvals you've had signed over the last three years? Is it, you know, 25 percent of the approvals that would lead to additional upside, you know, as we -- as we move out further? Can you provide some color there as well?

Well, lot of that growth has been in the laptop arena. You've seen us announce a number of laptop approvals. Especially in the ultra light segment. And you've seen many of the electronic companies come out with their own ultralight. Del, Sony, Panasonic. And we've been picking up virtually every one of those. So we've announced those.

And this volume you see here is securing the order, and usually a full year of that order and 100 percent share. So, I won't give you the percentage that we still have in the pipeline. I think that's really for our team and that's a competitive arena for us. But what I will say is, as you've seen us announce those approvals, our team has delivered with orders and usually because of the advantaged technology, 100 percent share on those orders.

All right. Okay. Thanks you very much, Craig.

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

You, too.

Thank you. Our next question comes from Jeff Bronchek (sp) with RCB Investment Management. Please go ahead. Go ahead.

Hi, guys. Hopefully, this will be the last question on this matter. So, if I understand correctly, there's been whining that you're not raising praces -- prices fast enough, and now that you do raise prices fast, or getting there, clearly, that was an effect on volume as your -- looks like according to SGL, they're -- they're always a half step behind. So that's one factor behind the volume, is that correct?

That's ab -- that's absolutely right. And we went into this process over the course of last year with the increases knowing that we would be willing and planning on losing some volume.

And secondly, could you make a guesstimate, obviously, if I were a customer, I would be, you know, take, buying every single possible ton I could, knowing that this industry is just seems to be a half step behind what they can achieve in pricing, ergo I'd want to put as much graphite sitting around at my factory in '04 rather than pay a price in '05. Is that -- how much would you estimate customers just, you know, took a much as they humanly can or -- and that contributed to a shortfall in buying profile?

Yeah, that's -- that's part of it. Especially in the first quarter. We saw our customers, you know, absolutely calculate every ton they were due under annual contracts in '04 and of course, you know, we adhere to those and they want a delivery in '04, so. We saw that. I think probably our competitors had the same reaction from their customers because of the price increase. And I think every, every steel shop out there tried get as much graphite as they could in Q4. So, that's definitely part of the lower Q1. But the majority, I would say, is the firm stance on, on pricing.

I'm going ask two quick questions.

Please, Jeff.

So maintenance CapEx, however you cut it, if you're this company, runs 40 to $43 million as currently configured. Is that correct? I mean, I call it de-bottlenecking, I mean, you're going to do that every year. You're spending 40 to 43 million. 10 million above depreci -- that, that's the run rate?

That's right. You know, if you put our productivity improvements, de-bottlenecking and some AET into that category, yeah, you're probably right. Those are probably good numbers.

And, this company has spent a lot of time on, you know, with your predecessor, on working capital and supply chain management and has had really restructuring after restructuring over the past four years to become a class a company and how it runs its operations. Would you say that you are, you know, this is just a difficult environment, given the price increases, or are you just disappointed with the working capital and operations performance of the Company and how it operated in the past year?

No. I think on the operations side, we are pleased at what our team delivered, record production. And just as a milestone, we produced more out of the six graphite electrode plants last year than we did out of our ten old graphite electrode plants before the restructuring. So a tremendous accomplishment. A tremendous transformation, getting out of U.S., Canadian, German plants that were high cost, had all the attendant pension and medical issues with them.

So, we're pleased the way the production platform ran. Very pleased. We've got some stellar teams in -- in, you know, from Mexico to Brazil to South Africa, et cetera. Our disappointment would be that we don't think we're getting a fair price for our product, given raw material input, given energy cost, given the demand of our customers to have a superior product that can run and produce high levels of steel, very productively, so it requires some technology, it requires a very stable and high quality production platform. And so our disappointment would be more -- we don't believe we're getting a fair price for our product.

And given that you talked about compensation of the Company run on a cash basis, would it be fair to say that bonuses for 2004 would be minimal?

Bonuses for 2004 were zero because we weren't pleased with where we came out on cash. We have a very, very focused team on cash. One of the reasons we're moving away from EPS just to a cash focus, with a company like ours, with the debt and in a very competitive industry, we want everyone in our company focused on cash. So there is a zero cash bonus for '04.

Okay, now here's the long question. So, this industry had a problem with pricing. People went to jail. Things collapsed. This industry operates on, again, sorry I've never really worked for a living, I work on Wall Street, but -- pricing a commodity based business on an annual basis, I mean is this vestages of a 1920s type mentality?

Go through for us, if you would, exactly what efforts were taken over a year to break this annual pricing and move toward whether it's, you know, volume and not price, whether it's quarterly based, whether it's, you know, putting in the ability to pass at raw materials. You know, where do we stand on that? And what percentage of your annual volume is tied to a, quote, new contract versus old contract? Because I see that as a problem.

Jeff, back in the first quarter of last year, we were very clear in our conference calls, and we articulated that we were reviewing all of our graphite electrode sales contracts and we were going to embark and move in the direction of building more flexibility into those contracts so that we could price them based on market conditions, supply/demand, raw material, costs, et cetera, et cetera, for the very reason you pointed out, that to go ahead and fix a price for a year in an industry that's got an awful lot of energy based input cost and also an industry that you can't yourself fix all of your costs really wasn't good business.

And so we are very clear with the market, very clear on conference calls, that we were doing this. We explained all of the reasons above on why. And so we went through and we built globally, our contracts, to allow for this kind of activity. What the activity does, it allows us to reprice the contract based on supply/demand, based on market conditions, based on our input cost. It's not tied -- it's not a surcharge. It's not tied to a specific raw material index. But to give us that flexibility, like a lot of other industries have, and like the steel industry, for instance.

And so lot of work was done on that, and that was executed as we said on December 1, for all orders received before November 1. And as we said earlier, that's - we're very pleased with the way that's gone.

And we did it in all the geographies and we treated all the customers equally. We think more flexibility in the pricing would be better for our industry, our costs are moving. We have oil sitting at 55 bucks now. And, so, you're right, we have been trying to change the pricing dynamics in this industry.

Okay. And so, again, what percentage of your volume now for '05 do you think is on a more flexible contract?

Let's -- I'm not going to give you a number, but I'm going to point you to the, at least the area. Recall we have two segments. And so the melter segment electrode would be the segment that is very tight as we know it. So that's 70 percent of our volume. And in that 70 percent, the majority of that business would be structured that way.

And on, again, on the flexibility concept on their idea of the ninth inning is where you want to be, and 2003-04 were on the first inning, where are you? Is this the first step and you're in the third inning of this process and every year you're going to pound away at it, or...?

Well, again, it will depend on supply demand in the industry and the other factors that we said go into this. This is obviously the first time it's been done in our industry in, you know, decades. And let's see where, where we go from here. You know, one thing we can say is, and we produce graphite electrodes all around the world, is you know biggest platform, broadest platform of anybody.

So we know graphite electrode costs wherever you want to put them. And none of our competitors are seeing any different raw material input costs than us. If anything, because of our large buy, we're advantaged. So, we -- you got to believe that the entire industry feels, petroleum, energy, natural gas and that these pressures -- these cost pressures are on everybody.

Thank you, guys.

Thanks, Jeff. Have a good day.

Thank you. Our next question comes from Bob Schenosky with Jefferies and Company.

Thank you, good morning.

Morning, Bob. How are you today?

Good. Craig, can you give us a sense of the number attached related to CapEx that you employed to go from 210 in capacity now up to where you'll be at the end of this year at 250?

Bob, that's probably, you know, if I take the slice of our capital, that's probably something that's around 10 to 12 million.

Okay, great. And, you know, couple years ago you were adamant about getting capacity up and de-bottlenecking obviously made sense. But can you talk about what the plans are now, if you're going to operate at 210 this year, what the plans would be for those 40,000 tons of additional capacity available?

Those will depend on market conditions, one. Two, we'll build some inventory. We've been running the last two years, as you all know, hand to mouth and that's resulted in us missing some spa orders last year and the year before. Obviously with today's prices you don't want to miss any of those orders. So we're going to build some inventory. Building that inventory will also allow us to be a little bit more efficient on the supply chain so that we don't have to move produce around so much and we've got it in place. So, we'll use a little bit of that excess capacity for that. And then, Bob, it'ill be on the go forward basis. We'll view market conditions and supply/demand and we'll determine where best to place that, that volume. Obviously, we've talked a lot about other segments and we've done a lot of work in other segments, in that nonmelter segment, which is very attractive for us. Allows us to fill up plants.

Many times those nonmelter segments are very close to our facilities because of the spread of our facilities. And so time will tell how we exercise that additional capacity. Obviously, we would not be putting in place if we didn't expect that the right time and market conditions to utilize all of it.

So the bulk of it is nonmelter?

No, no. It can make both.

Okay, so...

It's flexible. ...You're going to drop down some inventory this year. Is that already built into your cash flow assumptions? Yes, building some inventory is already built in there. We're going to build up some inventory because the last two years we've run so tight.

Okay.

And you want to have inventory today to take care of those spot requirements. And I'll tell you, there's a few spot requirements just because things are so tight.

Right. And just one final question, then. My understanding is one of the Indian producers is unable to get needle coke that you're actually processing for a competitor. Are you concerned at all about any availability of coke as you get into '06 if you decide to deploy some of this additional capacity?

We feel very comfortable with our petroleum coke position. We've secured all of our requirements for '05. And being the largest buyer in the world, we feel comfortable that in '06 we will get the coke that we require.

Okay. Thank you.

Thank you, Bob. Have a good day.

Our next question comes from Andrew O'Connor with Wells Fargo. Please, go ahead.

Craig, good morning, everyone.

Good morning, Andrew. How are you today?

Craig, you know, you've already kind of spoken around this, but what needs to take place or come about externally and internally for GrafTech to earn $0.60 this year, $0.60 a share in '05 versus $0.50 in terms of, or sensitivity to the sales volume you projected, cost of production and other factors?

Andrew, the range we've given, that 50 to 60 fits right down the center of the guidance we've given on sales increase, cost increase, so, we're very comfortable with that range. I know that may not be exactly and as precise as you'd like, but that 50 to 60 embodies the guidance we've given in our press release on the detailed sales numbers, cost increase, et cetera.

One thing I will say is, we see steel continuing to run strong in '05 and, of course, that's probably for every one in the graphite electrode industry, the number one item. And, so, the risk in the plan would be steel does not run strong. We will feel that in the plant, obviously. Or if steel has absolutely outstanding better than expected, what all the analysts are expecting type year, then of course we have the capacity, as we said, to go ahead and move those electrodes at the prevailing price.

All right. Fair enough. Thanks.

Andrew, thank you very much.

Our next question comes from Jeff Cross with Cross Capital Company. Please, go ahead.

Yeah. Thank you. I wanted to ask a couple questions about the 45,000 metric tons volume. Now, that's a sales volume, not a production volume?

Yes, Jeff, that's a sales volume.

Okay. So any inventory billed would be production in excess of 45?

Absolutely.

Okay. Let me also ask this. Is that sales, is that all contract sales? So you've factored in no estimate of what you might, might sell in to spot?

Well, you know, we're pretty deep into the quarter.

Right.

So I would look at the 45,000 as a good strong number.

Okay. So basically it kind of includes just approximately spot sales up until a couple days ago?

Yeah. Obviously we've had some of that with things being tight. We get those literally every week or two. They pop up around the world, sometimes in a little bit of an emergency situation. And we're, you know, delighted to fill them. It's a great service to customers and not letting a customer shut down.

So, if I think about that 45,000 as -- and probably spot sales opportunities in the first quarter, are the weakest?

That's right.

Typically.

Well that's right because remember, Q4, everybody took every ton they could off of their '04 contracts.

Right.

So, yeah. Spot Q1 would generally be a lighter spot month and then as you go through and people run harder and ramp up, you tend to see more of it.

So if I -- if, if I -- I thought of that as, as -- the 45,000 is probably pretty close, but what I'm getting at is, if it changes, it's only going to go up? It might be 45,400, if you ever carried it out to that many decimal places, but it's not likely to be less than 45,000.

We feel comfortable with the 45,000.

Okay. But basically you, you ... Okay, you factored in all the spot sales so far but you haven't guessed that there'll be two more in the next two weeks?

That, that's right. That obviously that happened. But we, we feel very comfortable with the 45 and, like wise, on the annual the 210 and we would point you directly to that 210 for the year.

Okay. Okay. And that just -- that's just basically -- the 210 is kind of interpreted how -- I'll say how deep you expect the spot market to be. If it's less deep, you might be a little low and, and if it's a lot deeper, in other words, if there's more uptake through the spot market, it could be higher.

That's right. That's a good way to look at it.

Okay. Okay. Well, let's see. I think you've taken care of me.

Jeff, thank you very much for your questions.

Thank you.

Our next question comes from Greg Macosko with Lord Abbett. Please, go ahead.

Yes, thank you.

Morning, Greg.

Morning. Could you talk about the book? Your 75 percent book. I assume that's the 158,000 that you have contracted for. How does that relate to the melter versus nonmelter?

No. The book just to clarify, the book is probably about 85 percent together. Similar to the last year, maybe a little bit lower than last year. And that 85 percent would be pretty equal across melter and nonmelter. So we're 85 percent, maybe it's 88 percent, full for the year and -- on the 210 and that would be equal across segments. No real difference between the segments.

Okay. And the -- and with regard to the expectation on the 210,000, what production expectation you expect for the year?

As I said, we'll build a little bit of inventory. We may produce something close to 220, to a little bit over 220. You know, as we said, our machine now can produce that very comfortably. Last year that was, you know, push everything you could, there's extra cost to do that, so the de-bottlenecking and the fine work our production team has done lets us produce 220 very, very comfortably. So, you'll see probably 220, 225 we'll produce this year.

And with regard to the earlier question on needle coke, if you -- if for some reason had to produce 230 or 235, would you have the availability of needle coke? Could you get it? Forget about the price for now. But is, is -- do you have contracts to get that much needle coke?

Greg, we feel comfortable that if we had to produce and sell 230, that we could do that and we would be comfortable with our coke to make that happen.

And could you tell me what is your estimate as to when Chicago needle coke operation is -- will, in fact, shut down?

Yes, Greg. Good question. Let me give the latest update that we all have in the public arena around that. You know, I think we highlighted this back in Q3, once it was announced and it was a major development, and we tried to lay that out and give it to everybody so they could understand it. And, that transaction has been done.

The coker has been sold. Now there's been announcement of the actual kind of final date that it's going run to. It looks like it's going to shut down and then convert over to fuel coke which do not make electrodes. It looks like it's going to be about the middle of the year. So, that deal has happened as expected. Has been signed and concluded and we've all got kind of our final notice from the coker management that that finishes up the middle of the year.

And do you have an under -- an idea as to how much melter electrodes at this point are being supplied by India and/or China?

On China, very few. Most of what China does goes into the nonmelter segment, okay? So, let's hold that. So think of China as the vast majority are going into nonmelter segment. The Indians have, as we've said over the last couple years, come up the quality curve and I'm going to guess that the majority of their electrodes go to melt their applications today. We don't have precise figures, but I'm going to say the majority of their electrodes go to the melter application. They're great competitors. We have a lot of respect for them. They run a great business and they're in the melter segment today.

On the highest end furnaces, some of the big furnaces in the U.S., of course, they would be trying to penetrate that. To date they've had some success, in other cases, no success. But I'm sure that part of their target, it's a segment that they're trying to get into and they're already in it in many, many places around the world.

Do they produce 26-inch electrodes?

They've been coming up in size. They make 24, absolutely and they've been working on larger diameter. And, not only 26, but they've been making some 28-inch. And I'd say they're up to about a 28-inch diameter. They've been doing that now for a year, year and a half.

Okay. And then where do they source their -- their high quality coke?

We don't know for sure, but I'm going to suspect because there's only, you know, four or five of these coke sources around the world, that they go to the same, same ones we do. Conoco, Unical, Seadrift and the Japanese, and then a -- there's a little bit out of -- out of Europe. So I'm, I'm going to -- because it's so tight, I'm sure they've knocked on every one of those doors like everybody else has.

Thank you.

Thank you, Greg.

Our next question comes from Michael Jurinsky (sp) [inaudible] Asset Management. Please go ahead.

Thank you. Just wanted to just kind of dig in a little more on these volumes issues. 'Cause last year the steel industry had no problems passing through their cost increases in the form of surcharges. And then now here in the first quarter of 2005, I know of at least two instances of steel companies accelerating outages so that to try to, you know, not put a lot of steel out there because demand never picked up like they expected and there's still a lot of inventory out there in the channels.

You know, if I put two and two together here, is it possible that your customers, by not, you know, seeing the volume there, and your competitors by not raising prices, is it possible that they're seeing a slowdown in the industry, that you have not picked up on yet?

I don't believe so. Yeah, we call on the same shops and, as you know, we have one of the largest sales and customer tech service teams in the industry. So we have a very good global coverage. What we watch, and I, you know, something I can point you towards, is the steel service center inventories.

And if you see those inventories that are plotted every couple weeks, you'll see that, you know, kind of the last couple months of last year and the first month and a half of this year, the inventories ramped up significantly. And they have turned the last set of numbers that came out, they turned dramatically, down. And I mean dramatically. So there was a slowdown.

I'm sure the steel folks worked off some inventory. Some of them took extended outages. I'm talking globally now, not just the U.S. we have to recall, took out some extended outages over the Christmas holidays. We saw that in Europe, we saw it -- some of that in the U.S. And then you even saw a couple announced that were slowing down some, some older facilities, some of that -- in some cases integrated because of concerns over piling up inventory. But I would say right now what we see, we still see strong field demand, we see service center inventories in the U.S. have come down dramatically. They're at very comfortable levels right now. That wasn't the case two, three months ago. And we still see strong demand in Asia and China.

Okay. Thank you.

Thank you, Mike.

Our next question comes from Yale Fergain (sp) with Royal Capital. Please, go ahead.

Morning, Craig, this is John Lansfield for Yale, how are you?

John, how are you today?

Very well, thanks. Say, question. Just trying to clarify, like everyone else, this 210,000 ton volume number. You said that you booked 85 to 88 percent of your -- of your contracts. Is what you were saying there that you've booked contracts for 180 or 185,000 tons? And the 20 to 25,000 ton Delta to the 210 is what you're assuming will be spot?

You're partially correct. Let me walk back. Start with the 210 volume, 80, 85 percent of that is booked. That would bring you up to the, a roughly what ? A 180, 185 number? And the balance is not spot. The ba... you know, there's a little bit of it in there, but the balance is business that comes up over the course of the year.

Because not everybody comes in to your book right now. Some come up in the middle of the year, that's just their buying practices, or they have a contract in place, or they buy throughout the year. Not every steel producer goes and tries to get all of their requirements at one time. Some are -- that's just their purchasing strategy is every quarter or every six months.

Okay. And can you give -- could you give some sense in 2004 what portion of your volume was done on spot? There's obviously a lot of -- a lot of room here for -- it would seem to us for tonnage to be sold at $4,000 a ton, or higher. You know, there's -- there's, there's your excess capacity and then there's whatever portion of the 25,000 tons, say, that we just talked about, that might be spot.

The last year, probably five to seven percent was spot. We missed some spot orders because we just couldn't get the tons out of the plant. So you might see five to seven percent and we, you know we may see more of that this year. In the 210, we've tried to factor in what we believe will be all of the contracts and that element of spot. So, again, we'll guide you to that 210.

Biggest determinant will be how steel runs. And like we said, if we -- if steel slows, we will feel that immediately like the other graphite electrode producers and if it run extremely well, well then there will be some upside on that 210. We have that capacity and the capability to deliver above that 210 like you said, at the prevailing prices.

Great. Thanks, Craig.

Thank you. Thanks, John.

Our last question comes from Brandon Elliott (sp) with Freese Associates. Please go ahead.

Good afternoon, gentlemen.

How are you today?

Good. I hate to keep pounding on this spot and this volume question, but the -- in the 210 -- I mean, I guess maybe stepping back first, the spot demand. It sounds like, given what customers took at the end of the year on the old contracts, that you -- spot demand has not been that good here in the first quarter?

It's been relatively light, that's right.

Okay, and how does the competitive pricing, you know, compare versus your 4,000 level currently?

The competitive pricing right now varies, I would say, around 36, 3650 to $4,000.

Okay. And I think you guys already said, just to clarify, you think from a raw materials standpoint you've got capa -- you have the ability to produce beyond that 210 if you had to.

Brendon, that's correct. Absolutely correct.

Okay. And, and the portion spot, I didn't hear if you gave a number that you have kind of budgeted in and that was in that 210? How much of that would be spot?

Brenden, we usually do five to seven percent in a year in spot.

Okay, so, so around that 10 to 15,000 ton category of spot sales?

That's right. And that's factored in, as you said, to the 210.

Okay. What about variable cost? I mean, assuming that for some reason, maybe the steel market stays strong or little stronger than people think, and you're able to, you know, do 215, 220 plus. What, what's the variable, you know, cost component of that additional -- how profitable is that additional tonnage?

Well, obviously that's very attractive for us. You know, to run the platform fuller is extremely attractive and very efficient for us. So, if steel did have a banner year, obviously we would be very well prepared with inventory, and a team capable, and raw material input to go ahead and deliver on it. So it, it is attractive to us. Very attractive. And typically, from a seasonality standpoint, when would be -- when's the potential for spot to either pick up or for us to get a better visibility on how the spot can shake out for the year? Is there any seasonal component to that? Well, yeah. I would say maybe a little bit more in the back half of the year. You know, traditionally, you know, again, if steel runs very hard you'll probably see more in the back half than the first half. Some of that's a combination of Q1. Some of that's a combination of, you know, the big offtake in the Q4 the year before. So, that would be our typical, but I would plan on that five to seven. I think that five to seven percent for planning purposes is good, and obviously, you know, we'll keep everyone posted as we go forward and we, of course, watch the steel numbers and steel inventory numbers very very closely.

How much, how much -- just one last. How much of the customer or how much of your volume do you think you lost or had customers come back and cancel on you due to the, to the rapid price increases?

I'd say that's a good 15,000 tons that we stood firm on. And --

Do you think that those customers were able to replace that -- replace that tonnage else where on the market or did they just say, forget it, we're not planning on that kind of volume then, if we have to deal with , you know, spot purchases of electrodes later, then that's going to affect our pricing?

I think by and large they went to our competition and then there may be a sliver of them, we're not planning on it, but there may be a sliver of that that they haven't secured everything they need yet. But I would say they went and -- went to the competition, who was at a lower price and in some cases, as we discussed, a maybe a much lower price.

Great. Thanks, guys.

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

Thank you. I'm going to turn it back over to management for any closing statements you may have.

Mary, thank you very much. Everyone, thank you for your time today. We look forward to talking to you in another couple months on our Q1 results. Thank you, have a good day.

Ladies and gentlemen, that concludes the GrafTech fourth quarter conference call. If you would like to listen to a replay, you may dial in at 303-590-3000 or 1-800-405-2236. Followed by the pass code of 11021508 and followed by the pound sign. Once again that number is 303-590-3000 or 1-800-405-2236 followed by the pass code of 11021508 and followed by the pound sign. Thank you for participating in today's conference. You may now disconnect.