GrafTech International Ltd (EAF) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the GrafTech First Quarter Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Keya Epps, Manager of Investor Relations. Please, go ahead.

Thank you, Rob. Good morning and welcome to GrafTech International's first quarter 2005 earnings conference call. If you did not receive a copy of the press release this morning, please contact Vanilla Harberg at area code 302-778-8218 and she will be happy to fax a copy to you.

This morning on the call, we have GrafTech Chief Executive Officer, Craig Shuler and Corrado De Gasperis, our CFO.

As a reminder, some of the matters discussed during this call may include 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 press release. That same language applies to this call.

Also, to the extent that we discuss any non-GAAP information, you'll find reconciliations in our press release on our website at www.graftech.com in the Investor Relations section.

At this time, I would like to turn the call over to Craig for his formal remarks, after which we will open the call up for questions and answers.

Thank you, Keya. Good morning, everyone and thank you for joining GrafTech's conference call. Today we will take you through our first quarter highlights and then open it up to questions.

In Q1, we grew our revenues across all lines of business, resulting in sales increasing over 7% to $211 million. Gross profit came in at 49 million, representing an 8% improvement year-over-year.

In our synthetic segment, graphite electrode sales volume was 47,300 metric tons, average price per metric ton increased over 13%, in line with our first quarter guidance. Our cost containment efforts are proving effective in this dynamic oil and energy market and expenses are tracking in line with our guidance of a 10 to 12% increase in 2005 versus '04.

In our other business segment, sales were up 13% to 26 million as compared to 23 million in the same period the prior year. Gross profit increased 20% year-over-year primarily as a result of increasing electronic thermal management sales. In the quarter, our team had continued success commercializing our advantage technologies, as we doubled ETM sales over the first quarter of 2004 to about $4.5 million, added two premier ultra-light laptop producers, Hewlett Packard and Toshiba to our customer portfolio, penetrated 2 new end markets, satellite and digital television broadcast communications, and finally, we continue to expand our global ETM team, hiring 15 new employees during the quarter to focus on sales, marketing, and R&D.

Rounding out our first quarter results, SG&A expenses were $26 million versus 21 million in the first quarter of 2004. The increase is primarily attributed to higher selling expense of 1 million, associated with higher net sales, 2 million of estimated variable comp in '05, and a negative impact of net changes on currency exchange rates of $1 million.

Q1 '05 interest expense was $12 million versus 7 million in Q1 '04. Recall interest expense in the first quarter last year was lower due to a one-time $3 million benefit associated with the $43 million reduction of our high cost 10.25 senior notes. Excluding this benefit, interest expense increased $2 million year-over-year due to higher interest rates. First quarter interest expense was flat in comparison to Q4 last year.

Net income before specials for the quarter was $6 million versus 8 million a year ago. As planned during the quarter, we had a net use of cash of approximately $18 million. Our primary uses of cash were one, scheduled interest payments of 21 million, and 22 million to achieve our objective of building adequate graphite electrode inventory buffers throughout the production chain in order to maintain the reliability and stability of our network, improve efficiencies, and reduce overtime and distribution cost.

Now, turning to what we're seeing in the market. We have noted instances of softening in steel production in selected market segments. In particular, US steel demand for the first 2 months of the quarter was slow with steel service center inventories outpacing shipment. US service center inventory levels corrected in March with March inventory-to-shipment ratios returning to normal levels.

Overall, we remain optimistic about 2005 steel production levels and we believe the underlying demand for steel will be strong leading into the second half of the year.

Looking at the graphite electrode competitive environment, our spot price for melter graphite electrodes is $4,000 per metric ton. We believe the market is in the spot price range of 3,650 to $4,000. Prices continue to vary by jurisdiction and segment. We believe the quality petroleum coke market remains tight. As we have said previously, we have secured all of our 2005 petroleum needle coke requirements. With the closure of the Unocal and Lamont Petroleum coke this year, we expect this coke tightness to be exacerbated by the end of the year and carry over into next year.

Most recently, it has been announced that Tokai Carbon is purchasing ERFTCARBON. We believe ERFT, which produces in Germany, has the capacity to produce about 20,000 metric tons of graphite electrodes and 10,000 metric tons of cathodes.

Turning to our business outlook for the second quarter, to date, the 2005 book is about 90% complete. Our production costs remain in line with our plan. Graphite electrode average revenue per metric ton is expected to be approximately $2,925. Graphite electrode sales volume for the second quarter is expected to be about 50,000 metric tons.

As a result of our continuing pricing efforts, these volumes will be lower than Q2 last year and in line with our guidance of 210,000 metric tons per year. Total SG&A and R&D costs are expected to be 27 to 28 million. And we expect interest expense to come in at approximately 12 to $13 million.

That concludes our prepared remarks. With that, we will open it up for Q&A.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. [Operator Instructions]

Our first question comes from Brett Levy from Jefferies and Company. Please go ahead.

Can you guys talk a little bit about raw material costs from first quarter to second quarter? Needle coke, etcetera, I know that you got yourself sort of secured in terms of supplies. Just want to sort of get a better sense as to sort of costs in the second quarter?

Absolutely, Brett. Q1, of course, we still had some old lower-cost raw materials in the pipeline. Those have been worked off. So, we would expect raw material and cost in Q2 to be slightly higher than Q1 because of that, but entirely in line with our plan, and with our guidance of 10 to 12% year-over-year. That area looks like it's in good order.

Okay. Can you guys talk a little bit about China? I mean, obviously, the biggest source of additional mini-mill supplies coming on in China at this point. And, I think it's approximately 30 million of their 100 million tons are going to be mini-mills. Can you talk a little bit more about what you guys are doing to potentially accelerate your efforts to expand in that part of the world?

Absolutely, Brett. We agree. China is very exciting for EAF. A lot of new starts. In fact, most of the new starts this year and in our view the next couple of years are in China. And we see robust growth. What we've been doing is building a very strong sales force and technical service team in Asia. And over the last couple of years we have opened offices in Hong Kong, Shanghai, and Beijing to service the growth there. We have been impressed with the quality of the customers there, with the quality of their operations. And, generally, what they have done is invest in the absolute largest EAF furnaces that they can have constructed for them. They are world-class. And they require some of the best performing graphite electrodes. So, it fits very much into our sweet spot and it's a nice growth area for our company.

Can you talk at all about capital commitments in that part of the world?

To date, we have no production in the area. Obviously, we have looked at alternatives there. There are couple local producers of note. To date, we have not done anything there, but we continue to review our alternatives on that front.

Those were my major questions. Thanks.

Brett, thanks very much. Have a good day.

And our next question comes from Bruce Klein with Credit Suisse First Boston. Please go ahead.

Hi, good morning.

Good morning, Bruce. How are you doing?

Good. I was just wondering, back on the coke costs, what happens in '06? I guess, I mean is there any locked in now and where the sort of spot coke prices today versus a year ago? Maybe remind us again what percent of your costs represent needle coke?

Bruce, coke is probably a solid 30%, or so, of our total cost. And we're the largest buyer in the world of quality needle petroleum coke. And so have positioned ourselves over the last few years to secure coke.

We have, obviously, in preparation of this year negotiated very early last year, I think the earliest it has been done in the last 20 or 30 years, our coke requirements and fix the prices. We will continue to try to do that here, probably in the middle of this year or so, negotiate for '06, lock-in volume and lock-in price. And that process has gone very well for us. And so I don't expect any major hiccups for us on petroleum coke in 2006. I think, in fact, our team and our platform is well positioned for '06.

Where are spot roughly in broad terms?

Spot has gone up in the last two months -- two to three months. And I believe in recognition of the impact of this Lamont Coker shutdown, spot prices have gone up probably a good 20% in some cases, as people have scurried to try and meet their coke needs. So, it's come up significantly.

For us, next year I think is going to be a very manageable item as far as supply and as far as the cost of needle coke, I think, everyone else faces the similar kind of cost pressure. And, I think you will see that also bear on graphite electrodes as we move forward. Tightness in coke, I believe, will put some upward pressure on graphite electrode prices because coke will probably cost more for everybody.

I think we get the best price on the planet because we have such a large buy. And I think, again, as I said earlier, we will be well-positioned in '06 with coke. We will have the right quality, we'll have the right supply, and obviously as you know the last couple of years, we prepared our platform to supply an awful lot of graphite electrodes - high- quality graphite electrodes around the world.

I guess, on that, I recognize you are the biggest guys out there. Is there any of your competitors have any different sort of -- have they locked -- are you aware they have locked in their supply for '06 the way you have done?

No one I am aware of has been able to lock in for '06. And that's not been available in the market at the current time because, I believe, the producers want to get closer to the '06 year to see their own cost structure and their own availability. But, rest assured, we will look to lock-in early. And I believe our size and the leverage that brings will allow us to lock-in early at favorable prices and the position to enjoy '06, which we believe is going to be a good year.

Is there -- and lastly on the on the GE side, pricing-wise, is there -- I know contracts typically get set late in the year with potentially some adjustments mid-year. Is there any thought given where spot is today of adjusting more of it, mid-year this year, or is it -- there is going to be the bulk of it negotiated at the end of the year?

I think it's early to tell. And future moves on price, obviously, we don't communicate until they have been executed. But, again, as you have seen our moves in the last couple of years, given the pressure on raw materials from a cost standpoint, and a supply standpoint, we believe $4,000-plus is a fair price for graphite electrodes. And we see upward pressure on price because of both of those items.

Okay. I'll pass it on. Thanks guys.

Thanks Bruce.

And our next question comes from Robert Schenosky with Jefferies and Company. Please go ahead.

Hi. Actually this is Monica Ma for Bob. I was wondering can you update us on sort of your plans in terms of capacity expansion, sort of your thought process on getting to that 250,000 range. And then related to that, can you talk about what you see in terms of industry capacity relative to competitors and as it relates to quality? Is it really to understand that sort of Indian capacity seems to be improving a little bit. And I wondering if you are seeing that how that impacts you?

Absolutely, Monica. Thanks for the questions. On our own capacity front, we sit around 230,000 tons or so. And we have the ability, we believe, to bottleneck further and get to 250, 250-plus. It's going to require a little bit of capital.

And, over the course of this year, probably during mid-year/Q3, during Q3 we will assess the market and how we believe '06 still will run and we will make a determination if we spend that capital and take up capability to 250-plus.

As far as the industry capacity, we believe the Indian producers have added capacity over the last year, year-and-a-half, and we think if you add that up it's somewhere in the range of 20,000 to 30,000 metric tons. That's been expected for a while. They have been talking about that for a while. And I believe most of that's been digested already into the marketplace.

So, if you look forward, I would say, the key issues are, we don't see any new major step changes in capacity going forward. We think most of it's already out there in the marketplace. And, then if steel continues to run well and the second half is strong, the way we think it will be and '06 is another good year, I think we will be very well- positioned to capitalize on that.

And just a follow-up, as far as the quality you are seeing from the Indian producers, has there been a change in that or pretty much the same?

All the producers try very hard to improve their quality. The Indian producers have been working very hard on it for years. They have been improving their quality -- virtually every year their quality improves, as does ours and our other competitors. So, we haven't seen a step change in the quality from any of our competitors that's noticeable.

We aren't standing still, by any means. I think we make the best product we have made in years. I think our product today is even better than a product we had out in the marketplace as recently as 12 months ago. We see it in performance, we see it in productivity -- in our customer shops and we see it in compensation that we pay our customers if we have a defective product. It's literally at all-time lows. So, we don't stand still and we don't plan on, we put a lot of money in R&D, and we have -- I believe a great product. So, we expect the other competitors to continue to come up the quality chain. It motivates our team. And, we welcome it.

If I could ask one more question.

Please Monica.

Just - this is a bit longer term -- perspective. But I was just wondering, could you give us a little more color in terms of roughly speaking your game plan heading into the sort of the '06 pricing and what not?

How basically can manage and improve results for '06? Basically some could argue the peak of the cycle could be behind us in '05 argue will be coming in '06 or so. What sort of the rough game plan that you guys have in place? I know it is a little bit early, but...

Yes it is early, and it is a topic that usually we won't broadcast ahead of the execution. But, you have seen our moves the last couple years to increase graphite electrode prices in the face of strong increases on a raw material cost side and on the availability of some key raw materials. And I think you should look for us to continue to try and do that.

Well, we expect petroleum and coke to go up in '06 in cost. We see natural gas and other energy related raw materials we used continue to inflate. And, so we believe even $4,000 a metric ton is not a fair price for graphite electrodes given what is going on in the oil arena.

Okay. One last thing, as far as hedging your costs...

Please.

Are you still going to be looking for what percentage of cost can we look to be hedged for '06?

Like we did quite successfully for this year. In advance, we locked in about 75% of our cost. And I think you should look for us to do at least that. And of course my team will be trying to take that number up to 80% to 85%. Especially in today's market.

Oil for us has been so volatile. Natural gas, power, metallurgical coke. All of those items have been so volatile that you will see our team continue to work on that front. And we will have a starting point of 75% fixed, I believe, like we did this year. We will try, in fact, to improve upon that. The only constraint we have there is really getting the suppliers to lock-in with us.

So, I think you should plan on the raw material front a similar purchasing and fixing of our cost structure for '06 as we executed in '05.

Okay. Thank you very much.

Thanks, Monica. Have a good day.

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

Hi, good morning.

Hi Bob, how are you?

Good yourself?

I'm fine. Thanks.

Just had a few question for you just one in terms of the tonnage that was achieved in the quarter, obviously it's a little bit better than the 45,000 tons that was forecasted for the quarter. And was any of that spot tonnage that you saw? Was there additional couple of thousand tons just hit purely spot?

I just wanted to get a better sense for the outlook, because obviously, you need the 47,000 tons in the first quarter, anticipating 50,000 for the second quarter. That, obviously, infers or implies a fairly significant pick-up in the second half of the year.

I just wanted to get a better sense for what you are seeing in the marketplace, and also what it takes to get that additional tonnage in the second half?

Bob, in Q1 there was only a nominal amount of spot. It was, in fact, very little spot in Q1, and I would expect in the second half of this year, we will see steel run quite well. I expect to see more spot than we did in the first half.

And, remember, in the first quarter, we had an awful lot of steel producers, especially in the US and Europe, take early maintenance or extended maintenance outages. I think some of the US numbers have just come out and the out levels were about 88% versus 91%, 92% a year ago. So, there's definitely a slowdown. So, we saw very little spot orders in Q1.

And to your point on the back half yes, we expect the back half to pick up. We believe we positioned very well, from raw material side, inventory side, production platform, very efficient and lean, to service that. And, like I said, going into '06, I think the platform will be very, very well positioned. We believe graphite electrodes remain tight. We're one of the few that have room in the platform.

And, from what we see from the other producers, they are very, very tight. And so going into the back half, if the back half strong the way we see it, I think it will bode well for us. I think we will be very well-positioned for '06.

And, just in terms of the guidance I recognized that 2005 guidance for the full year hasn't changed at all. If you look to the line items that you provided, was missing from the press release was the 50 to $0.60. Was that EPS expectation still be the valid expectation for 2005?

Bob, yes, it is.

Okay. Two other questions if I might. One, on the ETM business the 4.5 million. Obviously, up quite substantially from last year. I mean if you annualize that, we get to Loren the 18 million to 20 million, are you anticipating a gradual pick-up as the year progresses to get to the upper end of the approximately and higher than that the ETM business.

Bob, the ETM business continues to go very well. And you see it in our hiring and in those hiring's as we had indicated earlier, many times we have take some very seasoned veterans in the electronics industry. So, we're pleased with the progress there and we're pleased with the big names coming in the book. And we're pleased with some of the new market segments that we've been successful in.

So, you are right. We're off to a great start. I would stick with the guidance we've given and over the course of the year if we have other major updates to that, then we come out very clearly like we did last year when we upsize it. But right now we would like to stay exactly with the guidance we've given.

How about just in terms of those two additional segments that you are successful in at least getting some product approvals as far in the radio satellite and also the power amplifiers? Now, does that change the size of the addressable market? I know you have talked about in the past kind of $300 million-plus, in terms of the addressable market for this product. Right? With these additional two segments, does that change the addressable market or is it still the same?

No it is starting to cause it creep up because these are completely new spaces, and some of them are quite interesting. Both of these have very difficult, aggressive performance environments, not only in thermal requirements, but in the case of some of the satellite and the remote wireless, these are base stations around the world that are in very adverse locations -- high-temperature, cold, and we were delighted to get into this segment.

Because, here you have our product performing in a base station that might be in the middle of Australia, very, very hot temperatures during the day, down to almost desert conditions in the evening, and a real breakthrough for us.

So, obviously, the names we gave you are a couple of the producers in that space, but there are several others in that satellite space there are several others that we will be working on. So, Bob, these will start to increase the addressable markets that we've been looking at.

Terrific. Sure. Last question if I could, this one is for Corrado, just in terms of the new Corrado facility. I was just interested in what the changes were there. Either in the flexibility, or the change in the interest rate. Also related to the debt side of things and also in the interest rate swaps, I noticed that you changed, or exchanged, some of the swaps, entered into new ones. I was curious as to if that changed the swap rate.

So, in other words, I know the previous swaps were kind of Libor plus 579 basis points. And there is any new ones are difference in that.

Thanks. Let me start with that one. The lease interesting swaps it did not change the spread. But we did improve or I would say enhance the interest rate a little bit in the sense that we are setting LIBOR in advance on the 150 rather than in arrears.

So, that sort of slows of the progression on interest expense a little bit to an extent for an increasing rate environment. And, the other piece of it Bob, was that we diversified the credit a little bit with a different counter party so that our potential of future collateral requirements have been reduced significantly. So, a good move for us in terms of risk management. But, in terms of just overall position, it is pretty much the same.

Okay.

From a spread standpoint it's almost identical.

Terrific, and on the credit agreement?

On the credit agreement two major enhancements. I guess three obviously we were opportunistic to expand the facility through 2010, which would have otherwise expired next year. So we extended all that posture very nicely to complement the rest of capital structure in its long nature.

And then we reduced interest rates by over a 100 basis points. And we have a grid, so to the extent our credit profile improves, it could even get better than that. And then our covenants, which were reasonably flexible to begin with, we made even more flexible and extended them to the entire life of the facility.

So, this facility does not have a covenant structure that ratchets up and gets tighter. It's flexible and stays that way for life. So, those are major enhancements and we're pleased with the retaining all the liquidity the 215 million of the revolver and we also were pre-approved for incremental capacity which today, obviously, we have no intention to use. But it is there. And I think a good acknowledgement of our collateral acquisition that the banks gave us in advance.

Sure. Thanks. I will get back in queue.

Thanks Bob.

And our next question comes from Michael Gambardella with JP Morgan. Please go ahead.

Yes, good morning, Craig

Good morning, Mike. How are you doing?

Fine. Hi Corrado.

Good morning, Mike.

Couple of questions. Kind of a follow-up question to the shipments that you are expecting because from the actual shipments in the first quarter and your outlook for the second quarter and then for the full year, I mean, to hit your full year number you have to grow your second half shipments by 16% over the first half.

And I look back on the last 3 years as the call was going on the quarters and it looks like you have done kind of 5%, 7%, 9% growth second half versus first half. What gives you the confidence you can get to that 16% second half growth in shipments?

Couple of things, Mike. One, as I said, we're looking for a stronger second half from steel than the first half, especially given the first quarter. And then secondly, if you look back at our Q3, Q4 last year, I agree that the quarter-over-quarter percentages are smaller. But, obviously, Q3, Q4 last year we ran at higher rates than what you're mentioning to get to the 210.

So, the platform of course we can do it without a doubt and as recently as Q3 and Q4 last year, our sales volumes were in excess of those numbers that we would need to make the 210. So, obviously, the risk is steel performance for the second half we acknowledge that but our view is it will come in strong. And we also view we will probably have some more spot business. We will have the coke. We're not sure that everyone else will have a similar capability to take care of spot or the raw materials required. And I think we may even see some benefit from that.

All right. I know you have the capability to do it, but you never had a second half growth rate of shipments at this level, at 16% last year it was 9% but I'm just questioning, are you assuming in the back half of the year that you are going to either have to grow market share or you are anticipating that you may get some production problems at other producers.

I think it is more on the market share. And those customers that are required to come to the market and who has tons available to service them. I believe most of the other producers are pretty much sold out.

And so those accounts that remain and need to come to the market for the second half, one -- those that are spot that are going to run harder than planned and require more. I think will bring volume our way.

And then looking out into '06, when you started the call you mentioned the restart of ERFT, the producer in Germany.

That's not a restart. ERFT is a company that went through a bankruptcy and then was picked up by a bank and then by a private equities fund that has run it for a while. And now purchased by Tokai, so ERFT is been running full out the last four years. So no change in the towns in the market, change in the owner.

So, the old owner ERFT -- one competitor if you will has gone away. The assets were always there running and the assets will continue to run. And they've been picked up by Tokai, an existing player.

Okay. So there is no incremental tonnage.

No net change. In fact if we cast the landscape for you Com rady (ph) has come back those tons are already out in the market.

Right.

And again Com rady like ERFT there was a competitor gone away, and existing player picked them up just like ERFT. So those tons are in the market. We believe most of the Indian tons are already accounted for in the market. And, so, when we look forward into '06 and we see another strong steel year and China still doing well, we see -- not see a lot of news tons of graphite electrodes coming to market. We obviously as you know have availability in our platform.

We also see the coke market exacerbated. Let's recall Lamont is still running today so Lamont has not shut down. And so we have not seen that impact, yet. And remember there's a pipeline. So, the pipeline will empty out. So, we may not see that impact as Lamont going away which, by the way, as we said was extremely high quality coke

Right.

We may not see that until the end of the year, and into 2006. And so graphite electrode tons and volumes available should be exactly what we see about today, so no change there. Coke, probably shorter, especially quality coke we believe is shorter than what you see right today because Lamont is still running full out as we speak.

Okay. And then last question. Just in terms of the EPS guidance that you had given in the 50 to 60. I mean, it looks like from the numbers that you gave in terms of your outlook for the second quarter, all the different assumptions, the EPS on the second quarter would come in around 10, $0.11. I mean are we been counting on this big volume up-tick and I guess some more spot sales to get you up to the 50 to $0.60?

That's right. We are expecting a better, stronger second half.

Okay. All right. Thanks Craig.

Thanks Mike. Have a good day.

Our next question comes from George Capri (ph) with RBC. Please, go ahead.

Thank you. Most of my questions have been answered. But two very quick things. First have you seen any movement as far as your competitors' relative to their pricing?

George, we haven't. Right now the competition prices sit down below ours. And, I believe one of our competitors has his price fixed out until mid-year. And so I believe it is in early June they are due to make an adjustment in price. And, so I think that is a good time to revisit that.

Okay. And then secondly, could you just give me your -- I see your aggregate debt total. Where are you in terms of your revolver in terms of revolving?

The revolver drawn was 24 million at March 31st. You can pick that up in the cash flow statement. We were undrawn at year-end. But, we also have 60 million of cash on the balance sheet.

Right. Okay. And you are at a similar level currently?

Yes. We wouldn't update it for anything past the press release, George.

Okay. Very good. Thank you.

Thanks George. Have a good day.

Our next question comes from our Mitch Golden with RH Capital. Please, go ahead sir.

Hi guys. Just a question on inventories, and I know the company's inventories are fairly flat year-on-year. But, given you noted some softness on the steel side, I was just wondering if you have any insight into some of the inventories of your customers that are out in the field?

We saw steel inventories start to come down pretty nicely in March, and we believe that's continued into this month. Obviously, the slowdown and some of the extended maintenance has helped that.

So, we see steel inventories pretty much all headed the right direction. So, they're beginning to tighten up, and I think we'll see op levels in the second quarter start to pick up if that's finished - if that working op is finished.

Just another question, and somewhat related to the earlier questions about the volume needing to pick up in the second half of the year. Can you give a sense how much overhead absorption are -- what the potential margin is since you guys have, say, 230,000 tons of capacity there, clearly running below that currently?

If you are able to achieve those volume increases what does that mean if there was an incremental margins?

Mitch, we don't give that kind of fixed cost or cost per ton or absorption type guidance. So, I apologize for that, but that's not a guidance we give, mainly for competitive reasons.

Just one more quick question. You know, one of your competitors reported their quarter yesterday, I'm wondering, if you look at their margins-- and I know they don't report gross margins for some of their segments, but, it appears that they may be running at higher margins than Graftech is. Do you have a sense for your relative cost position versus some of your competitors in the industry?

Firstly, our takeaway wasn't that they're running at higher margins. Our portfolio plants where they are located, you know, Mexico, South Africa, Brazil, Russia The size of our plants, as you know, we have the largest plants in the industry. We have the number one largest, the number two largest, and then our average size plant is significantly larger than any of our competitors.

So, we believe, you add all those up, we've got an excellent cost structure, and we believe it's better than the competition. And we've continued to grow that platform and de-bottleneck it, reduce costs, reduce headcount, et cetera. And so, we're more than willing to put that cost structure up against anybody in our industry.

Obviously, the points on volume, we have run at lower volumes here, lower sales volume, in an effort to try and get a fair graphite electrode price, and obviously, we'll continue that approach. It goes without saying our cost structure is much better if we ran this platform at 230 or 250.

Thank you.

Thanks Mitch.

And our next question comes from Greg Weiss with WPG. Please go ahead.

Hi guys. Most of my questions have already been answered, but I'm just curious, I haven't seen it myself, do you know how much Tokai paid for that facility you mentioned earlier?

Greg, it hasn't been announced, so we don't know. I think I can leave it said here just for our shareholders, we -- myself and our team have looked at every opportunity that has come to market. We've looked at all the firms that have gone bankrupt and the assets have been put on the market. We've analyzed them. And in each of the cases, we determined it that they did not add value to our platform, either because of their cost structure or where they sat or their size or other issues.

So, we don't know what was paid, and time will tell on the impact of that in the overall marketplace.

Got it. And one more quick question. Today, in tons, what is the size of the electrode market? How much quality needle coke is out there today, and how much is this Lamont facility, the size of it?

The total graphite electrode market worldwide is about 1 million tons, Greg. If you go to the quality section of it, it's probably around 600,000 metric tons or so. And right now, if you added up the available coke and the size of the available -- or the required quality graphite electrodes, you'd see it's very tight. It is almost one for one right now.

And now you take Lamont out of the picture, and Lamont runs 50,000 to 80,000-plus any given year. And so, that's the potential additional tightness coming into the marketplace; one just on tons, and the second one is quality. Lamont had some of the highest quality coke, and generally for a coker to come up the quality curve takes years. And so for that coke to be replicated, we believe, it's going to take a while.

So, I think you've got an availability issue on tons, and you definitely have a quality issue on substituting different coke for that.

Got it. Okay.

Thanks Greg.

Thanks very much.

[Operator instructions] And our next question comes from Greg Bennett with Smith Barney. Please go ahead.

Hi, Craig.

Hi, Greg. How are you doing?

Fine. Thank you. Just to clarify, you currently don't have source anything from this Lamont facility, is that correct?

That's correct. We haven't purchased from Lamont for years. It wasn't part of our coke strategy, and so we have no legacy purchases there for quite some time. They made a great coke, don't get me wrong, but it wasn't part of our purchasing strategy to buy any coke there or to rely significantly on that coker.

When you mentioned 50 to 80 tons comes -- of high quality coke comes from Lamont, what does that translate -- you mentioned the 600,000 tons quality graphite electrodes?

Right. It's 50 -- it's a 80,000 metric tons of quality coke out of Lamont, and its virtually, Greg, one for one.

It's one for one. So, that means there is 50,000 to 80,000 tons of quality graphite electrodes?

That's right. You know there's 50,000 tons plus-plus that need to be made up.

Who source this from Lamont though?

Our competitors.

Like the -- did the Germans source from there?

I really -- because we don't deal with Lamont, I really can't give you much color on who or what percentage they have, because, frankly, we just haven't purchased from that coker in a long time.

And there's no new Coke facility coming on, Craig?

No. Looks a lot like graphite electrodes. There's nothing new out there.

So, isn't there going to be a shortage next year?

Well, that's what we've been trying to highlight and identify that it's going to be tight. Time will tell where does steel run, does steel run hard, can some of the other cokers de-bottleneck and make up some capacity, you know, a big question mark? And what do the other producers have that they can substitute?

Have you ever thought about getting in the coke business?

Greg, we -- in maximizing value, we look at both ends of the supply chain. So, we've looked very hard at the coke end of it. We're possessing quite a bit of knowledge and technology in the arena of petroleum coke. So, yes, we do look at it, we have studied it. We know these cokers quite well from a technical standpoint, and in some cases from having looked at them for purchase.

Okay. The second question is, last year you had your -- you fixed your contract in the summer, and then you changed your pricing to variable pricing starting in January were you allowed for you to have cost increases to pass through to your customers.

Right.

This year you are fixing, at least, it sounds to me like you won't have a problem sourcing coke, and that you are also trying to fix the price of coke, and it will probably be a higher price going into 2006?

That's right. That's our general sense, and again, we want to fix it early because our view on oil and the Middle East is that probably the chances are there will be more pressure on the upside rather than some good news on the downside.

Craig, what happens if we're wrong and oil is back at $30 a barrel next year and you fixed your price at a high price?

Well, Greg, its always something we balance. But, recall the supply/demand side of the petroleum coke market. Our sense is petroleum coke is going to be short -- it's going to be tight. And, so, throw that on top of, yes, oil could move and some of the inputs that go into petroleum coke could move, but if net-net that market is tight, I don't know that there's a lot of room on the downside for petroleum needle -- high quality petroleum needle coke.

So, in other words, you could see oil move down 15%, and because of the supply/demand economics on quality coke, it may not -- it may go the other direction.

Okay. Do you think that this year you will have your 2006 costs -- I think, you said it was approximately 70% that you could fix?

We will be targeting to do at least 75% ahead of time.

Before you even enter into a negotiation?

Well, that's a tight on timing. In the negotiations, the steel market will come when they come. You can refuse to bid on them, but you won't get any business obviously. So, that's one alternative.

But, the effort will be to secure as much as we can on raw materials in advance in '05 for '06, and if possible, to do that ahead of building our book for '06 on graphite electrodes.

Okay. So, is this year -- I guess what I'm trying to get at is, are you going to approach your pricing this year different than last year?

Really don't want to broadcast any strategies on our pricing other than -- you've seen our actions the last couple years, and our efforts have been to get a fair price for graphite electrodes and offset rising raw materials. And, I think you'll see us continue in that direction. Individual tactics may vary, but I think you'll see us in the same direction.

So, the net sense for pricing in this industry sounds to me will be in mid- June when the Germans post -- I guess, they mentioned in their call that they actually post their pricing?

I think you're right. That's probably the next data point that's out there.

Wanted people to look at.

That's right.

Thank you, Craig.

Thanks Greg. Have a good day.

Our next question comes from Jeff Koch with Koch (ph) Capital Management. Please go ahead.

Could you remind me for the fourth quarter what the ETM product sales were? I couldn't find it in my notes.

It was just maybe a little over 4 million.

Do you know -- have you got a sense yet from your customers if there is any seasonality in this business?

Jeff, we haven't seen an awful lot, and in part because we're adding so many new accounts in new market segments, we haven't seen a lot. If you had to look to one that I think might emerge, we may not see it this year, but obviously, at year-end when you look at the Christmas season and new models coming out, you may see something where Q4 is a little bit higher because of those factors.

But, as I said, in our numbers, I don't think it's going to be real apparent to you, because we continue to add so many new accounts and new segments that it's going to distort that. But, going forward down a couple of years, we may see that towards the end of the year is a bigger quarter for us, because of new models and because of the Christmas season.

I kind of suspected it might be. Now, about manufacturing capacity for these, do you have any capacity constraints at this time, or under reasonably foreseeable volumes this year, or are we in good shape for that?

Jeff, we are in good shape for this year and into next year we're in excellent shape.

Okay. You've taken care of my questions. I appreciate it.

Thanks, Jeff. Have a good day.

You too.

And our next question comes from Robert Richards of Graham Capital Management. Please go ahead.

Yes. Good morning. I have got couple of follow-up questions, guys. First off, Craig, you've characterized the needle coke market this year as being tight already, and you're indicating through now - through this conference call as well as ones before that, basically, about north of 10% or close to of the quote - unquote - "high quality needle coke" which translates into high quality electric market is going away with no replacement.

That's right.

Okay. Now, I don't - I haven't listen to everything, but I don't recall Nucor or anybody else there using these, talking about fearful that they're going to be able to run their steel plants next year, and yet you are indicating a 10% drop in the global supply of graphite electrodes.

And, I think the question is, is that really correct, are we missing something, or are your customers missing something? Because, again, factually, they can actually run their plants without electrodes, and yet you're indicating that from an already tight market there's going to be a 10% drop in supply, because you're indicating that the needle coke will disappear with no replacement.

If that is, in fact, the case, I guess, I am confused as to why customers in that area - potential customers are not already talking to you and/or others about it and are not making fast attempts to try and figure out what they're going to do next year?

Bobby, I think, customers are starting to come up the learning curve. And I know a lot of dialogue I've had with individual customers. We have helped bring them up the learning curve. And I think a lot of them are familiar with Lamont now, in fact, maybe for the first time in 20 years they realize what Lamont is, what it means, etcetera. So, I think they are coming up their learning curve.

I think if you listen to some of the other conference calls of the graphite electrode producers or what they publish I think almost everyone of them has started to mention tight needle coke issues and they are speaking about today. And so our point is, we believe it's tight today and Lamont is still running. And Lamont will go down some time this year; there'll be a little pipeline there of course a few months, and then I think that 50,000 tons plus is that question, where is that going to get made up and if it does get made up, is it of good quality?

Or is it made up of something that really doesn't make a great graphite electrode that in some of the high-powered furnaces that we are familiar within the US really isn't that productive. So, we believe it's a real issue. We don't have any knowledge of any new needle coke capacity coming on-stream, these obviously are major projects. We don't have any news of de-bottlenecking or coke coming out.

And, so I think in the graphite electrode industry, it's well-recognized. I think increasingly selling the steel customers -- they are coming up the curve.

Well, I have a follow-up question, but you realize the implication what you are saying is either there is maybe change right now, but tremendous ignorance on the part of your steel customers as to a important supply element of theirs that actually would potentially cause them to shut down their plant.

Or, the implication is that there is needle coke out there that maybe your emphasis here, discussion that it's high quality and for - you need a high-quality needle coke to high- quality electrode is not quite that rigid and that maybe you can get away with actually not using high-quality needle coke, that you can get away with using some lesser-quality needle coke to satisfy that.

Yes. Some furnaces, obviously, I believe could do that. They won't be as productive. Furnaces of the world-class producers like a Nucor you mentioned, and others, of course buy the best quality electrodes they can get, because they put maximum power through to get maximum productivity out of their furnace. And so those furnaces have always purchased the best electrodes on the marketplace. And, so, an inferior coke, we believe, into those furnaces will impact productivity.

Second question on pricing, I believe you guys should be approaching your discussions in South Africa, because those prices are usually done mid-year?

Yes. Some of those will come up in the middle of the year.

You know, though, we're basically right on top of that. You guys have, basically announced the base price adjustment in the post to contract period in December, but we've - which the implication of that seemed to be that that was a sea change by you in the pricing element or behavior in the industry by you.

But, we've seen nothing since then in terms of that. If you do nothing between now and the South African contract and/or the ones later this year, isn't that just mean it's just an annual contract price adjustment, there has really been no change?

Well, as you mentioned, we did the very first base price adjustment in our industry. Looking forward, I think it's too early for us to say additional pricing actions on that front. And what we will do or won't do, obviously, in any pricing moves, we'll look at the market. We'll look at the raw material situation from cost and supply standpoint and then make a decision.

I think, as you've seen, we have led a number of price increases, been very, very firm on them. It's impacted our volume in cases. And I think you should look forward that we'll continue to try and get a fair price for graphite electrodes.

Is it fair to say though that you've characterized that as a different form of pricing mechanism that can be reactive to changes in your cost structure, changes into other things in the marketplace, correct?

Well, that's right. It has given some flexibility there. Not unlike what our customers have and very much akin to what our customers have done on a number of occasions over the last two years.

Okay. But we're what -- we are approaching 6 months since you introduced it, you've made no adjustments to it. If you characterize it like your customers do, they tend to adjust these things on a monthly basis, correct?

Well, that's right. But, as I said, we won't broadcast in advance any moves there, or on price. We execute, and then we go ahead and inform the marketplace.

But, will you announce it after you've done it, or is it just something we will learn after the fact when you report earnings?

Generally what we have done is, after the fact when we report earnings.

Okay. Thank you.

Thank you, Bobby. Have a good day.

At this time, we have no further questions in queue. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Rob, thank you very much. Ladies and gentlemen, thank you for joining our Q1 conference call, and we look forward to talking to you after the second quarter. Have a good day.

This does conclude the Graftech Q1 Conference Call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 or 1-800-405-2236, using passcode 11028412#.

Thank you again for your participation on today's conference, and you may now disconnect.