GrafTech International Ltd (EAF) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the GrafTech Q2 conference call. At this time, all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference please press the star, followed by the zero. As a reminder, this conference is being recorded Thursday, August 4th of 2005.

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

Thank you, Stephanie.

Good morning, and welcome to GrafTech International’s second quarter 2005 earnings conference call. Presenting today are GrafTech’s Chief Executive Officer, Craig Shular, and joining us is GrafTech’s Chief Financial Officer, Corrado De Gasperis.

If you did not receive a copy of the press release this morning, please contact [Vanetta Harper] at 302-778-8281 and she will fax a copy to you.

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, the forward-looking statements contained in our press release, that same language applies to this call. Also, to the extent we discuss any non-GAAP information you will find reconciliations in our press release which is posted on our web site at www.graftech.com in the Investor Relations section of the web site.

At this time, I would like to turn the call over to Craig.

Thank you, Keya.

Good morning, everyone, and thank you for joining GrafTech’s conference call today. We will take you through our second quarter highlights, then open it up to questions.

In Q2 we grew our revenues in both business segments, resulting in sales increasing over 3% to $220 million. Gross profit came in at 57 million, representing a 5% improvement YOY. In our synthetics segment, GrafTech electrode sales volume was 48,200 metric tons. YOY average price per metric ton increased over 14% to $2,849.

Second quarter gross profit was 51 million, a 17% increase over the first quarter. Higher graphite electrode prices, together with good cost containment and productivity improvements resulted in this segment achieving a four-year high in gross profit and gross margin percent.

In the second quarter of ’05 our team received the prestigious R&D 100 Award for our Apollo brand graphite electrode, a newly commercialized breakthrough technology designed to significantly increase the EAF shop productivity. This electrode has increased strength and allows our customers to put more electric power through the electrode, which results in increased furnace productivity. We believe the EAF market is headed towards the larger and more powerful furnaces, and this is the segment Apollo has developed to target. This is our third consecutive year for receiving this Award. In the prior two years GrafTech received the award for new electronic thermal management products.

In our other business segment sales were up 8% to 27 million, the highest in four years. Electronic thermal management sales came in at 4.5 million, a 50% increase over Q2 last year. We expect to achieve [ETM] sales of $20 million this year, an increase of almost 70% over last year.

In the quarter, our team received our first approvals in the very important LCD flat paneled display segment. The LCD TV segment, when coupled with the plasma TV segment, where we already have business, is expected to grow from 8 million units or 4% of all TVs sold last year to 60 million units or approximately 30% of the global television market by the year 2008. In fact, many analysts point to about a 50% share of both these technologies in the global TV market by 2010. We are now well positioned to participate in the rapid growth in both these segments over the next few years.

Rounding out Q2 results, SG&A and R&D expenses were 27 million versus 28 million last quarter, and are expected to drop further to 25 million to 26 million in Q3.

Interest expense in the second quarter was 13 million as compared to 10 million in Q2 last year, up primarily due to higher market rates on GrafTech’s variable interest rate debt.

Now, turning to a market update and our outlook. The steel industry in most of our major markets experienced a significant slowdown during the second quarter. Several global steel producers announced reductions in operating levels. We believe these lower operating rates for steel producers will carry into the third quarter as our customers bring their steel inventories down to more normal levels towards the end of the quarter. In addition, the third quarter is seasonally slow in Europe as a result of the traditional holiday schedules. Accordingly, for the third quarter we expect graphite electrode sales volume to be about 47,000 metric tons.

As a result of the lower global steel production and operating levels we anticipate very little graphite electrode spot business in ’05. While we’ve seen some deferrals of some existing orders we have not experienced cancellations. In fact, our customers have indicated their intent to take full delivery of their committed ’05 requirements.

As steel inventories normalize we anticipate higher steel production rates in the fourth quarter as compared to the first three quarters. In fact, we expect to see graphite electrode sales of about 58,000 metric tons in the fourth quarter as customers take committed volumes under their ’05 contracts, as they did in the fourth quarter last year, primarily due to significantly higher graphite electrode prices next year and higher Q4 operating rates.

Resulting in full year 2005 graphite electrode sales volume of 200,000 metric tons, 5% lower than our initial ’05 guidance, with an average revenue per metric ton of $2,850. We expect full year ’05 EPS of $.43 to $.48, and free cash flow before antitrust and restructuring payments to be a use of $10 million, primarily due to planned increases in inventory.

Based on the current steel market we do not plan to expand our graphite electrode production capacity in the near future. We will continue to assess the market in a measured manner over time, and we’ll revisit our de-bottlenecking plans as appropriate. Accordingly, we expect ’05 CapEx to be about $45 million, at the low end of our guidance.

The petroleum needle coke market remains tight. We have been informed that the Lamont, Illinois coker will continue producing petroleum needle coke into the fourth quarter of ’05, perhaps into November. We expect the ultimate conversion of these assets to further exacerbate the existing tightness in the quality petroleum coke market.

Looking forward to ’06 we continue to work towards attaining firm pricing for the majority of our ’06 raw material requirements before the end of the third quarter, similar to our success in obtaining firm pricing for the majority of our ’05 raw material requirements in the second half of last year.

We have secured the majority of all of our 2006 petroleum needle coke requirements at a fixed price. Although needle coke prices will be higher next year as compared to ’05 our goal is to contain our overall 2006 graphite electrode production cost increases to levels comparable with the 10% to 12% increase expected for the full year 2005, through already identified productivity and cost reduction initiatives.

Our current 2006 market assessment is that graphite electrode prices are moving up across all geographies, including Asia and Europe, indicating that the heavy lifting done over the last couple of years is beginning to gain traction. As prices move north of $4,000 in the melter spot market, we remain committed to selling our product for a value allowing attractive returns on capital.

In June ’05 we increased our spot price per standard size melter graphite electrodes to $4,100 a metric ton in the Americas, CIS, Middle East, Africa, and Asia. In Europe the price is 3,100 Euro per metric ton. In South Africa, where historically the booking process begins in early June, we have achieved price increases of approximately 20% is the EAF melter market.

We look forward to the ’06 global sales order book building process, which we expect to begin in the latter part of the third quarter. We are entering the ’06 sales order building book process in our best positioning years. Prices for melter graphite electrodes are the highest in over 15 years. We’ve secured supply and firm pricing of our most critical raw material, petroleum coke. Our plan operations are running superbly, enabling our best and most consistent product quality ever. And, finally, we’ve identified productivity initiatives to help mitigate rising ’06 production costs.

Our industry has come a long way in the past couple of years, and it appears to be recognizing that pricing has been unreasonably low. The industry appears to be effectively assessing the value of graphite electrode product offerings; however, industry pricing and margins still fall short of providing sufficient returns on invested capital.

Finally, we see another strong year in ETM sales in ’06, and we expect ’06 sales to be at least $30 million. Our ETM products continue to provide solutions and outperform competing materials, and we continue to penetrate very high growth markets.

That concludes our prepared remarks. With that, we’d like to open up to q and a.

[OPERATOR INSTRUCTIONS.]

And the first question comes from [Bruce Klein] with Credit Suisse First Boston. Please go ahead.

Hi. Good morning. [It’s Bruce].

Good morning, Bruce.

How are you?

Good, thanks.

Anyway, it was a little quick for me. But anyway, I guess in terms of the overall steel market, it sounds like the fourth quarter you expect to see a bit of an upturn through a number of things that we’re all seeing. But have you seen that yet? The orders sort of, or the customers telling you that they are going to ramp back up a little bit in 4Q? Or is that something you’re just sensing from the sort of inventory numbers out there, or?

No, Bruce. We’re hearing it from our customers and pretty broad based, I think, the level of optimism is much higher here recently. Looking forward into Q4 I think the order books have started to pick-up at a number of our customers, especially here in the U.S. And so we have an awful lot of indications that Q4 the underlying steel demand should be good. And I really think it’s just a matter of working off this inventory which the steel industry has done, I think, a very good job globally to help work it down. And I think Q4 we will be back to decent and attractive operating levels in the steel industry.

Okay. And in terms of the ’06 graphite electrode cost per ton, thinking of up 10% to 12%, that’s consistent with what the ’05 was, right? It sounds like?

That’s right.

How much is reflected, how much does that figure sort of reflect the cost saving report activity? I mean how much of the, what kind of costs in the productivity numbers are you sort of looking for in ’06 to get to that 10% or 12% up?

Well, I think a couple percent of that, 2% to 3% of that probably will be some of our continued productivity improvements, but we’ve done a very good job here obviously in the face of oil, which the last two-and-a-half years is up 300%. And so I think we did a very good job containing it to the low end of our guidance of this year, so we’re going to be 9%, 10% this year. And I would look to next year per our guidance, 10% to 12%, and our team is going to see if they can’t improve upon that with productivity improvement.

Did I get that right? It sounds like the productivity portion of that was going to hopefully take that number down 2% or 3%?

That’s right.

Okay. So, the rest of that, I assume the rest of that rise is the coke?

It’s raw – it’s our broad base of raw materials. You know, if you look at our raw materials, what’s fixed right now, our coke is fixed, that’s 30% of the cost structure for next year. And then our labor is another 20%. And, Bruce, as you know, our labor is in very attractive locations. We don’t have any major labor contracts coming up. So, the way I would look at it right now, we’ve got 50% plus of our costs already fixed, and clean lines, line of site to it. Labor contracts, fixed price on coke, and I think in ’06 we will have very good cost containment, productivity improvements, as we achieved this year.

And the coke, how did it go, I mean in terms of the negotiations, you said you locked it in? You sort of – any sort of magnitude in terms of what sort of hike it was versus sort of ’05? I mean any color at all would be helpful.

It was a larger percentage increase than ’05. We won’t give guidance, of course, on the exact amount, obviously for competitive reasons, but it was a larger percent. And, obviously, the negotiations were very, very tough, you know, with what’s happened in the oil world. We brought to bear our large volume we purchased, and that, of course, has helped us tremendously in this process.

And, lastly, just in the – I think you noted your capacity on graphite electrode was going to stay static for awhile. Is that sort of a short-term comment, or you’ll see how the market goes and you’ll do [brownfield] if necessary, or are you committing to how long a timeframe pattern, is that more short-term?

Bruce, we’re right now at 230. You know, as we indicated previously, if we spent $5 million or $6 million we could get to 250 plus. Right now, we’re not going to do that based on our assessment of the market.

Obviously, this year has been a very frustrating year for us. We have a platform second to none. We’ve got the best quality. And we’ve given up a lot of volume this year to drag this industry up, to try to get to a fair price. So, we’ve been frustrated as hell this year, and our machine can get the 250, like we said, in a matter of months.

And so we’re pleased with the direction this industry is going in price. I don’t think it’s where it needs to be yet. But we’ll continue to assess the market. And right now for the foreseeable future, we’re going to stay at our 230.

And the market, any terms of market share or capacity changes in graphite electrode, anything that you know, that you’ve seen out there?

No.

Okay, I’ll pass it on. Thanks, guys.

Thanks, Bruce. Have a good day.

Thank you. The next question comes from Robert LaGaipa with CIBC World markets. Please go ahead.

Hi, good morning, everyone.

Good morning, Bob.

Craig, I just wanted to circle back to the volume issue. You know, specifically in the fourth quarter I know you’ve mentioned a number of things that give you confidence or increased optimism that you’ll see that increase, but we’re talking about a 22% increase from third to fourth quarter. I mean the last several years, specifically last year, you know, there was an element of a pre-buy. You know, you only saw about a 7% increase, so, is there any inventory on the ground currently? I mean what has to happen or what’s built into the forecast to get to that 22% sequential increase off the third quarter?

Last year, last Q4 we did 60,000 tons, so obviously, you know, 57,000, 58,000 tons is well within our capability. What’s in that forecast is primarily the orders we have in the book, number one; and number two, very strong words from our customers and commitments that take the full volume.

I think the customer base has seen the overall global price of graphite electrodes go up significantly here, and in fact our customers have come and reaffirmed their strong desire to take their fully committed order for ’05. So, when we add all that up, that’s where we get to that kind of Q4. I think, also, we may have a little bit of pickup in steel op levels in Q4 for the reasons we talked earlier.

And is that more weighted towards, I mean you mentioned that North America, specifically, and how the order book has picked up. I mean is that specifically weighted more towards North America? Is it more towards Europe? Is it fairly evenly distributed? I mean how should we think about it regionally?

And, also, are you seeing any competitive pressures there? You know, I’m aware of at least one competitor that recently obviously increased their capacity by about 20,000 tons, and that’s primarily directed towards the export market. Are you seeing any pressure there?

Well, firstly, as far as where we see the improvement, we see the biggest improvement coming in the North American market and South America. Europe less so. Europe continues to lag a little bit. Asia still looks good to us. China, of course, has been doing very, very well.

As far as the competitive pressures, we have not noted any significant change whatsoever in the competitive arena or more pressure. Some of the new capacity coming onstream that’s been talked about, out of India, of course it has different quality characteristics. Some of it’s been on furnaces throughout the U.S., and it’s been on for a few weeks and it’s not on any more. There’s been a number of cases where, you know, these U.S. furnaces, as you well know, are large, very demanding, high productivity shops, and you’ve got to deliver the best electrodes on the plant to stay on those furnaces. And so we haven’t seen any additional competitive pressure out there at all.

Okay, and the last two questions. One, just going back to the raw material. You mentioned the large increases that you’re seeing in the needle coke side. You know, are you already in negotiations on the [pitch] coke side?

And, also, you know, with regards to this recent price increase, which is obviously a positive, you know, it gets you up over that $4,000 limit, are you – has that already been built-in in terms of another additional surcharge? I mean is that what you’re thinking on a go-forward basis, once you lock-up these costs increases, then using that surcharge mechanism to move the pricing even further? I mean what’s the thought there?

Firstly, on the raw materials and pitch and the other one, we have in-process all of our key raw materials in negotiation. And our goal is to have 75% plus all locked up and fixed, very similar to the success we had last year for this year.

And I think as you see, this year so far, our cost containment productivity initiatives have all been at the low end of our guidance, and like I said, we may even beat our guidance this year. So, all of that is underway in the raw material front. Very successful last year, and in fact, the first time I think it was done in our industry that early that we achieved last year. You’ll see us do the same thing this year on all the other raw materials.

On the pricing front, I think there’s going to be, continued strong upward pressure on graphite electrodes. We have, as we’ve indicated, tightness in the quality of petroleum needle coke market. We believe that tightness is going to become much more apparent at the end of Q1, Q2 next year, as the Lamont Facility goes down. And right now, one of the competitors has their price fixed at $4,100 out to the end of October 31st. And if you ask me, ‘is $4,100 the last price that I expect to see in this book building process?’ No, I expect continued upward pressure. Raw material costs are going to push it and the availability of quality coke is going to push it.

Terrific. And the last question, obviously you’re doing a very good job in terms of the cost containment, productivity initiatives. You know, can you maybe provide us with a little bit more color as to, you know, what’s going on in that regard? Is it anything that you can kind of put your finger on? Is it something that’s a little bit more broad based? You know, if you could just maybe help walk us through what changes you’ve seen from last quarter to this quarter, and the changes that you’re expecting going forward to get to the low end of the cost guidance, and possibly even better?

Well, one of the biggest areas is the improvement of the cycle time in the manufacturer of graphite electrodes. We’re making graphite electrodes faster than we ever have in the past, so we’re cutting days off the production timeline of a graphite electrode. And the longer you’re in the furnace, of course, there’s more costs, it ties up more assets, et cetera.

So, one of the biggest buckets would be the improvement in cycle time. The second bucket is we have worked very hard to really maximize our global buy. We have six, as you know, very well positioned plants, but we packaged up all of their global buys on many of their raw materials and miscellaneous supplies, and really tried to leverage that up and get the best price.

And then the third bucket would be just on productivity improvements in the plant. We’ve done some automation, we’ve been able to cut headcount in some cases, and in other cases we’ve been able to save power because of productivity improvement.

So, those would be the three main buckets. If you ask – you know, I’m delighted with the success this year on the cost front, but our teams really gain some confidence in what can be done in ’06. So, I think you’re going to see us even improve upon the success of ’05 on the cost containment and productivity improvement.

Terrific, thanks very much. I’ll get back in queue.

Thanks, Bob.

Thank you. The next question comes from Michael Gambardella with JP Morgan. Please go ahead.

Yes, good morning.

Morning, Mike.

A couple of questions. One thing that kind of confuses me on your comments is that in the numbers, you’re giving guidance for third quarter average price realizations on the graphite electrode business. Average prices to be flat, with the second quarter. And you’ve just mentioned that you’ve renegotiated all of your South African business in the second quarter. And I believe the South African business is somewhere around 8% to 10% of your total sales, in that ballpark. So, how could you have up prices in South Africa by 20% and there’s no impact on the average prices in the third quarter?

Mike, you’re correct. South Africa’s total sales are about 8% to 10%, but remember South Africa is not 100% the EAF melter market. There’s a large non-melter segment in South Africa, mining, titanium dioxide, et cetera.

And so in the EAF melter segment, up 20% plus. I think a very good result for our team there. But the other parts of the segment aren’t up that much. And remember, you know, the second half of the year you’re talking about 4%, so it’s a relatively small amount. And then you throw in the Euro movement, which has been on a weakening trend, and we decided to stick with the 2,850.

I mean still, I mean getting the non-melter part of the business must have gone up in price, too, I would think, right?

It’s been going up, absolutely. And some of it will come up throughout the quarter, some of the non-melter is not all middle of the year the way steel is now. Now, remember, steel is that way down in South Africa, it’s just a historic pattern they’ve had for 20 years. Not all of the non-melter falls in that way. Some of the non-melter is annual contracts, January to December, so you have that nuking affect there.

It just seems weird that it would be still flat even though you’ve negotiated all of the South African business?

Yeah, could there be some up side on there? Absolutely could be. The Euro I think is going to, you know, affect where our price finally comes out because that’s been moving quite a bit the last six months.

And then just in terms of your perspective on global, you know, capacity? Your sense is there’s no new capacity or?

Well, you know, the Indians, you know, we’ve talked about the increases in the Indian capacity. I think that’s well out there in the marketplace. You know, the prior questioner asked ‘have we seen any pressure from that?’ And we really haven’t. I think coke availability is one issue. I think coke is completely sold out. You can’t find coke right now, quality coke. I think that’s an issue. And then I also think the other issue is the differential in quality between the new capacity that has come onstream. Some of that has come on trial throughout the U.S. Some of that is already off the trial and out of the shop.

Because I mean I recently checked into the Indian capacity and talked to the, one of the producers, and he was saying that there are 20,000 ton increase of capacity just started three weeks ago, and that they won’t be, you know, finished actually producing the product for a few weeks, so they haven’t shipped anything of that 20,000 into the market yet. And he said, one of their competitors in India has done the same thing, expanded capacity by another 20,000, and he’s about three weeks behind him in getting to the market. So that none of the 40,000 tons, or about l4% of global supply has hit the market yet.

Well, these are the ones we’ve talked a bit about before. But, again, I would point to coke availability and the quality differential in those electrodes.

Well, I mean they’re, I mean again this is just one of the producers is saying that there’s plenty of coke availability now that one of the cokers that didn’t go down is being extended, and they have plenty of coke. But I guess the point is I thought this product was kind of in the market the way you were talking. And they’re saying, no, you know, none of it has hit the market, and they basically export everything of the incremental capacity.

Not in the market per se, Mike, but in the books. But factored into the ’05 book.

Yes, submitted in their bids, right?

But I mean they’re just, they said they won’t be shipping for another three weeks, and then their competitor, which is another 20,000, is like three or four weeks behind them.

Right, but remember the books got put together the end of last year, so we know they’ve bid some of that business in the book. It’s already been taken by account and put into their book. So, you know, it’s been absorbed in the bidding process. Now, how much of that they were able to sell question mark?

But we’ve seen them in the book building process six months ago and nine months ago, already out there seeking higher volumes for the second half of the year as this capability came onstream. So, when we say, ‘gee, we think it’s already been, you know, a fair amount of it’s already been digested,’ they bid it in their book in anticipation, right? Because they’re not looking to try and find 20,000 plus of spot business at this juncture, right? It’s just not out there.

Yeah, but I mean you don’t rev it up to capacity when you’re first started, so there’d be a continued ramp-up in incremental supply I would think in the market? And that’s like 4% of global supply I thought?

Yes, could be. I mean when we brought new facilities on, or de-bottlenecks, I mean it comes relatively quickly, right? And when we’ve brought them on, you know, the book that we’re building we factor that into the book. As you know, 95% of the industry gets booked the prior year, so if you’ve got additional capacity coming out in the second half of the upcoming year, well, you build your book around that.

And, Mike, we saw them in the book building process for this year, you know, nine months ago already shopping those larger tons for the second half. So, how much of that’s already been built-in is a good question. We’ve seen them [anticipate], I mean obviously they’ve known it’s coming. And, obviously, they’ve tried to get coke for it. But when we say, gee, we think a lot of that’s already been put into the books, it’s based on what we saw during the ’05 book building process.

Okay. And then could you comment on your guidance on cash flow, going from 10 million, you know, source of funds to a 25 million use in the back half of the year? What’s going on there?

It’s just the other way around, I think the guidance was at 25 source, and now it’s at 10 used. And it’s primarily the inventory builds that you’re seeing in our numbers now, and the anticipation of the inventory needs for the fourth quarter really ’06, really in the outlook, in the stronger demand outlook. And to a lesser extent from the coke.

So, Mike, we’re going to be a little bit higher on graphite electrode inventory, and we’re going to be a little bit higher on coke, both positions which we think are very prudent in the face of the increases in coke and, more importantly, in the availability of coke.

So, although there’s assumed piece that obviously is consistent with the earnings revision. I could substantiate all of it with the use of cash revenue for it.

Okay, even though the fourth quarter is going to be a huge shipping quarter?

Yes.

Yes.

Okay.

Even still, yes.

All right. And in terms of debt reduction, any thoughts there?

Well, really, I mean I think there is sort of this, there’s a softness, a sort of persistent softness that we saw in the field operating levels, sort of an online, deferred by about six months here. You know, Q2 and Q3. I think we’re going to have a very strong Q4 EBITDA, very strong. And I think the free cash flow in ’06 is going to be strong. So, it’s probably, there probably won’t be any neutral de-leveraging in ’05, you know, consistent with the current guidance.

And the needle coke, you said the majority of the volumes and the price are locked in for ’06. Is that…

That’s correct.

The majority, is that like 55% or is that like 95%?

That’s more like 85% plus.

Okay. All right, I’ll pass it along to the next one.

Thanks, Mike.

Thanks, Mike.

thank you. The next question comes from [Nick Bloncek] with RCB Investment Management. Please go ahead.

It’s Jeff [Frensek]. How are you guys?

Good morning, Jeff. How are you doing?

Okay. I guess I’m going to ask you to say what you’ve said three or four times, but I just want to make sure I understand it. Could you – you’ve proven no better at forecasting demand from customers in your industry than, frankly, anyone else has. And you’ve been consistently I think missed it for the past year or so.

And I guess one more time, could you go through exactly what you’re seeing that leads you to believe you’re going to have that strong of a fourth quarter? Secondly, I’m not quite sure, if you could just comment on the, your inventory situation one more time, internally as well as at your customers, and how that your inventory build jives with I guess you should have some flux given you haven’t held anything in spot over, you know, basically this year? And, again, looking out to ’06 what could one expect as far as a working capital source?

Jeff, in the first one, Q4, the reason we think Q4 is going to be strong is because the orders we already have in our books and confirmations from the customers behind those orders is that they intend, in fact, demand, and have been demanding of us, don’t shortchange me on my ’05 order. And the reason they’ve been doing that is twofold. Number one is they see the ’06 price going up significantly. So, the conversation with the customers is ‘don’t you shortchange what you’ve already committed to me in ’05. I’m going to take it before the end of the year,’ and they’ve confirmed it, okay?

The second one is we see that Q4 the op levels will be higher. I think we’ve all seen a slew of global announcements, it’s been quite [depressive], of slowdowns from the steel industry to try and correct its inventory overhang problem they’ve had. And I think we’ve all tracked the movement of it. The movement has been directionally I think very good. And I think you even see the steel customers, and we see and talk to them, their books are starting to look a little bit better. Q4 I think most of them are pointing to even increases in price. Some are increases in scrap prices in Q4. So, we believe the underlying demand still remains good, and in Q4 the steel op levels will start to pick back up. So, that’s how we get to that kind of fourth quarter.

Next year, obviously, prices are up. The prices are up globally. In fact, the last two price increases that have been led were not by us. We had a European competitor lead a large price increase, and we had major Japanese from one of the first times in a long time lead two price increases already this year. And the ones by the Japanese were I think a total of almost 18, 19% together. So, I think the steel industry views that the graphite electrode price is absolutely going to be much higher globally in ’06, and, therefore, are going to take their Q4 requirements, they’re going to take their full allotment under their ’05.

As far as the inventory, graphite electrode inventories at the customers, we don’t see a lot of large inventories. Now, they’ve kept them very thin. They’ve taken very little in Q3, or I’m sorry, in Q2. You see it in the numbers. So, they don’t have big bubbles in their inventory. They’ve got an annual contract that I think as we discussed, most of it will be all taken and demanded in Q4.

In terms of our inventories though, Jeff, I think as we’ve said, we’ve built, you know, we’ve used about 30 million so far this year. We strongly believe it’s prudent, not only given the demand outlook, but also just, you know, our cost increases that are occurring. So, we’re moving toward on that. We’ll build more. You know, not excessively, but we’ll build to what we see the demand is. We have a lot of ability to regulate it to demand. We’re choosing not to in the current period because of the intermediate outlook. And I think to answer your question, specifically, those inventories, the source should be 30 million in ’06, and really that depends on where we end up, ’05. But as I would see it today, you would think it would be maybe at least 30 million in ’06.

And just how do you differentiate between in just true industry demand and, you know, people just wanting to buy cheaper, you know, take their orders at cheaper prices in the fourth quarter, knowing they’re going to be paying more in ’06?

Well, that’s always, you know, globally that’s a major challenge. And, as you said, between all of the analysts and everyone that watches steel, virtually no one has gotten either the upturn right or the downturn right. It’s a challenging item.

But we are in all of the shops. We see the inventory of graphite electrodes they have in the warehouse. They don’t have a bubble out there today in the warehouse by any means. Q4, I think they’re going to take the full allotment which they’re allowed to do legally under their contracts. So, I think given the price increase legally they’re going to take their full allotment, and they’ve been very firm with us to that affect.

And we see the million tons of graphite electrode demand growing. We see the startups that we identified coming online. The majority of them, more than half are in China. They’re big furnaces. They require very powerful electrodes. We see that equating to a 20,000 to 30,000 ton increase in demand, and we do think the capacity has been factored in on a macro basis.

So, I think the elasticity that you talk about does occur, right? From period to period, but in the longer term we still see electrodes to electric steel as tight. So, we’re being prudent with our capacity, I think, because the larger goal is there’s not a position for return on investment, period. We’re not making money yet. We’re fed up with it, we’re frustrated by it, and it’s led to the actions that we took in 2005. We don’t like giving up business, but we’re moving towards the goal, and I think we need to continue to do that.

Thank you very much.

Thanks, Jeff. Have a good day.

Thank you. The next question comes from [Andrew O’Connor] with Wells Capital. Please go ahead.

Andre O’Connor(ph): Good morning, guys.

Good morning, Andrew.

Andre O’Connor(ph): Any possibility that your full year ’05 CapEx will come in less than 45 million? How hard is this number? You know, what I’m thinking is, you know, your new guidance is for free cash flow burn of 10 million versus the prior guidance of a source of 25 million. So, again, any flexibility in the CapEx for the back half of ’05?

Yes, it could come in lower. You know, 2 million. It could be lower. I would say you’re not going to be higher than 45, but you could be down 2 million on that.

Andre O’Connor(ph): Okay, not much.

Not that much, no. But it will be higher.

Andre O’Connor(ph): Okay. And then, secondly, related to your estimate of ’06 sales for ETM products and solutions of at least 30 million, what does this incorporate about LCD flat panel displays?

Well, you know, right now very little. The 30 million is what we have line of sight to. You’ve seen a lot of approvals, and I think as we have some LCD wins those will be added to that.

Andre O’Connor(ph): You know, is there any reason to believe that these wins will come about in ’06, Craig?

That is our goal, absolutely that’s our goal. This new generation is coming up, that’s what we’ve been approved on, and our goal, like in the plasma, with these two competing technologies, LCD and plasma, is to really absolutely have the majority share of all the thermal management requirements in flat screen TV. It’s a huge sector. It’s growing very nicely. And we’ve got the product that works.

Our product has done a tremendous job on better brightness, longevity of the screen. It’s lightweight, of course, and you hang these on the wall, so that’s very attractive. And it’s a cost effective solution. And so as the disruptive technology we’ve been very successful at getting the approvals and getting model changes, as you might imagine, our technology requires really a redesign of the back of that stack. And a lot of time that redesign takes cost out of the back of that flat screen TV.

So, we’ve been delighted the way the sales are going. There’s a lot of new models coming out next year, whether they’re laptops or cell phones, or flat screen. And we look forward to participating in those.

Andre O’Connor(ph): Thanks so much. That’s all we have.

Thanks, Andrew.

Thank you. The next question comes from [Jim McAllen], Private Investor. Please go ahead.

Hi, guys.

Morning, Jim.

I understand there’s a C change in the steel industry of China, the government is trying to get away from the small polluting mills and go into some more high quality, larger mills. And I see that only as a benefit to a company like GrafTech, is that correct?

Jim, you’re spot on. That’s a big benefit to us. A lot of those small mills have very old small EAF furnaces. And they use very low quality small diameter electrodes, mainly made by local Chinese producers. All of the new startups, the last five years plus, are large furnaces, in some cases the largest in the world. They use some of the highest electric power, and they use imported electrodes, like GrafTech’s. So, shutting down all those small guys is just a tremendous benefit for us.

Right now, all of the EAF steel in China is only about 14% of total Chinese steel. And so it’s got a long way to grow. U.S. is over 50%, and the U.S. went through this same transition the last 30, 35 years. And we looked to China to make a similar kind of transition. And we’ll see that 14% of total steel start to grow over the next five to seven years.

That sounds great. I guess my question then becomes can you properly service them, or do you eventually have to partner up or build a plant over there?

Well, that’s a good question. We’ve been looking very hard on the best way long term to service that market. Thus far we’ve established a number of offices, you know, we have three offices now throughout China, technical service people on the ground, an excellent team. And our volumes are growing nicely. We’ve been getting a lot of those new startups with our technical service and our performance of our electrodes. And, obviously, if we found the right partnership we would absolutely try to put that together.

Okay, sounds good.

Thanks, Jim.

Good luck, as always.

Thank you.

Thank you. The next question comes from [Richard Kuser] with WPG. Please go ahead.

Yeah, hey. How you guys doing?

Hi, Richard. How are you doing?

Terrific. A quick question. Pricing happened when, October? Is repricing happening in October?

That’s right. You know, the steel industry drives that every year. I mean they all kind of, you know, come en masse. And so we expect it in the third quarter. Last year they came earlier, and probably 20 of them all came at the same week last year. This year I would expect sometime towards the end of the third quarter, in discussions with them so far, it looks like when they’re going to come.

Terrific. What are we looking for at the new contract prices? Should it be near spot? And if it’s near spot, you know, from a cash flow point of view, given all of the changes in the input prices, what should we be looking for as a cash flow number for next year?

Well, Richard, as far as the opening bids on the ’06 book, I would say absolutely it should be the $4,100. It’s going to be right at the spot type of number, for sure.

Yes.

Going forward, we haven’t given any guidance in ’06 as far as cash flow. Our book will be put together probably by the end of January next year, and then February in our conference call we’ll layout all of those details having put together the book.

Great. Thank you, guys, very much.

Thanks, Richard. Have a good day.

Thank you. The next question comes from [Trinie Bafon], Principal. Please go ahead.

Hello. Go ahead, please. Stephanie, maybe we lost that caller.

Thank you. The next question is a follow-up from Michael Gambardella. Please go ahead.

Yes, can you hear me?

Yeah, Mike, very good.

On the South African business, again. On the melter part of the business did you achieve the $4,000 that you’ve had out in the spot market in the average price realizations on that contract?

The pricing is closer to 3,700, 3,750. It looks more like the 3,100 Euro price, the spot price in Europe. It is not the spot price in the Americas. It looks exactly like the spot price 3,100 Euro or call it 3,700, 3,750.

And that was 20% up from last year?

That’s right.

And, again, even with that there’s no move on the third quarter prices?

Well, not that we’re guiding to. You know, as we said, Mike, could there be up side? Yes. As we said, this is a slice of that business down there, and of course, we have the Euro movement. So, is there possible up side? Yeah, absolutely. Let’s see where the Euro comes, and, you know, we thought it more prudent to guide to the 2,850.

And just on the guidance that you gave for all the inputs, for the third quarter and the full year, and maybe I should just go offline with you on this. Because we’re putting it in, you know, even if we give you the most optimistic end of your guidance on each of the individual items, we’re still coming up kind of at the low end of the range of EPS.

You know, I guess on that one, I’ve got to let you guys run your own model. Our guidance is $.43 to $.48 has the 200,000 tons in it. The pricing we talked about. I would say some of the pluses and minuses are on SG&A where we’ve been having some improvement, and on the cost side where, of course, we’ve been tracking at the low end of our guidance and having some pretty good success. And maybe there’s even some room there.

Okay, all right. Thanks a lot, Craig.

Thanks, Mike. Have a great day.

Thank you.

Thank you. The next question come from [Jeff Spector] with [John Levin and Company]. Please go ahead.

Yes, hi, guys.

Good morning, Jeff. How are you doing?

It’s actually [Russ Dewaukoff]. I guess what we have difficulty understanding and maybe you could help us is sort of go through the mindset of a mini mill operator, and sort of understand their purchasing behavior? Because if I were running a mini mill, and I know that prices will be substantially higher next year, why would I want to buying everything for my quarter this quarter, next quarter, the previous quarter, you know, you guys I guess that’s how you model that? And yet that behavior is clearly not what is happening in reality. So, I’m just wondering sort of for the, for next quarter, why you guys are so bullish?

Well, for this reason. The steel producers have an annual contract, and so they’ve got a committed annual volume. Like, you know, let’s say 4,000 metric tons committed. They have to take that before 12/31 this year or it’s a dead contract, so they only take 3,000 by the end of the year, that’s all they’re going to get.

Obviously, as they manage their business, their working capital, there the customer and that’s just been the industry practice for 30 years, not necessarily our first choice. But the industry practices annual contract, and then they get to take it as they order against that contract. I would much prefer that we had quarterly contracts in this industry and they had to take at the end of each quarter or they gave up that volume and that price. But that’s not been the last 20 years in this industry.

I think, Russ, I think that is actually what underlying is happening. You know, we had guided at the beginning of the year that about 90% of our book was filled, and the rest, you know, either some additional business or spot. And our perception, our market’s feel is that all of that 200,000 or 90% will be taken, and that our competition is shipping everything that was committed, as well. We put ourselves in, you know, sort of this somewhat frustrating position in transition here to higher pricing to bear that sort of differential, you know, that 10,000 or so tons that didn’t materialize because of our stand, which we think is the longer term thing.

So, I think fundamentally you’ve got it right, is they’re taking what they ordered. If they want more starting tomorrow, take that 4,100, that was true from our perspective in March, right? So, it’s the spot business at the new price that they’re not, is not materializing because of these lower operating levels as they work through the higher inventory. The business the booked, you know, from September to January, they’re taking it all.

That’s helpful, guys. Thank you.

Thanks, Russ. You have a good day.

Thank you. Your next question comes from Trini Bafon, Principal. Please go ahead.

Yeah, hi, guys. Good morning. Sorry I lost you last time.

Good morning. No problem. How are you today?

Good, very good. Your realization relative to your list price, the discount is roughly 30%. Could you give a sense of what this has been in the past, and do you see this discount coming down in the near future, or maybe one year down the line?

Well, there’s really no discount. What you have to do is go back to last year in Q3, Q4 when the ’05 book got put together. And that was the prevailing spot market back at that time. As we come forward, there’s been a number of price increases, several we led. And more recently, two or three very important ones that the competition led. And so the price has moved up that amount. It’s not that there’s been a discount.

And there was a prior question, gee, as we go into the book building process for this year will you be looking towards spot to be making your offers? Yes, so this year we’ll be at the 4,100 type level as we start to build the book. And then if there’s continued pressure on pricing we would look for that 4,100 to grow.

So, the 4,100 remaining at these levels, would you see long-term contracts going closer to 4,100? If so, how close?

That would be, I think if you based that on last year’s history, yes. If this year works out like last year you would have a spot that looked like 4,100 and an annual contract at 4,100 for that 70% of our business which is the EAF melter.

That would imply in a price realization increase of almost 40%?

Well, remember, 70% of our book is EAF melter. There’s another 30% that is not going to EAF steel melting furnaces, and that has a variety of prices. It’s a much cheaper electrode, and it goes into everything from smelting to [lado electrode].

Okay, so this 70%, what would be the average realization as opposed to the 2,850?

Say it – I missed the last part of your question, sir?

The 70%, where you see a list price of 4,100, is the average realization here closer to 2,850? And is it possible that you could see this going up 40% if we assume that long-term contract prices will be closer to spot prices?

Well, no, our realization in this hotter market, spot market, or in the EAF melter market is much higher. It’s more like $3,400. So, the $3,400, you know, they go $3,400, $3,500, $3,600, those kinds of numbers. Those are going to 4,100.

Okay, so that’s about 20%?

Yeah, I’d say 20% is the kind of increase right now where we stand, and as I said, one of the competitors fixed that price October 31st. I think we have a lot of pressure on price upward because of raw material costs and because of availability of coke.

And so I think there was a question, well, is that the price for the rest of the year? Absolutely not. I think we’re going to hear a lot more about availability of quality needle coke. We’re going to hear a lot more about some of the competition having higher price or cost increases than we do because of their, the size of their buy versus our large buy.

Great, that sounds good. A couple of quick questions, if I may?

Yes.

The incremental capacity that’s been coming from India, which you say has been contracted, has there been price undercutting there? I mean are they selling at lower prices relative to what you have been selling?

Generally, the Indian electrodes have been a lower priced electrode. Where that goes in the future, I don’t know. But historically, yes, they’ve been lower priced, 5%, 8%, it depends on the application.

Okay. And could you, last question, could you give a sense of the needle coke market, the one year down the line, are you seeing capacities coming up there? I would believe the supply of needle coke will be pretty much close to what the demand is right now. So, are you seeing capacities going forward after 2006, coming up there?

We don’t…

Netting [down], that it happens?

No, we don’t see any new capacity coming onstream. Obviously, I think the remaining producers will try and do some de-bottlenecking, but we haven’t seen any initiatives to bring on new capacity. Obviously, that takes a couple of years to build.

And what we see is Lamont, 80,000 metric tons going out of the market, and going out of a market that’s already tight. You know, here we are the largest buyer, and we struggled to get 1,000 tons extra of coke right now. And so that’s why we’re pointing towards this as a key issue next year, and I think we’ll have additional pressure on graphite electrode prices.

So, does it mean that volumes, graphite electrode globally would actually cool off in 2007 despite an increase, a presumed increase in demand?

Gee, that’s a tough one. I think what might vary is the quality. I mean if producers can’t get, if graphite electrode producers can’t get good quality coke, they may have to reach down and try and use a much lower grade coke, which of course won’t perform on the larger demanding furnaces. So, I think you’re going to get that kind of situation, where we may see quality issues in the marketplace, lower performing electrodes, electrodes that really don’t give the efficiency or productivity that the steel producers look for.

Given that you’re running at close to 100% utilization, does this availability factor determine your expansion plan?

No, remember, we have the capability of 230, and right now we’re only going to do about 200,000 metric tons, so we have room. We have room and we have a very capable production team with the best quality we’ve ever had in our history.

Thank you.

Thank you, sir. Have a great day.

Than you. The next question comes from [John Lancefield] with Royal Capital. Please go ahead.

Hi, guys. Good morning.

Good morning, John. How are you doing?

Good, thanks. Say, a quick question. If the strategy here has been to hold the line on pricing and give up volume which you’re continuing to see over the back half of this year, can you sort of explain what’s happened in terms of the lowered full year price per ton guidance? Is this a mix shift, is it price concessions, how do we go from 2,900 to 3,000, down to 2,850?

John, it’s mainly two items. One, it’s mainly two items. One, it’s very little spot business because of the operating rates in the steel industry. Two, it’s a weakening Euro. You know, all of our European sales are denominated in Euro. And those would be the two main reasons. Is there a little plus or minus in mix? Yeah, perhaps. But really not significant. No spot business, weakening Euro have been the two items.

Right, the 2,900 to 3,000 obviously the up end of the range, you know, getting to that 210 primarily was spot business at the 4,000 level, that didn’t materialize for obvious reasons. So, we’re closer to the 2,900. Then you factor the currency, is really the differential to take you from 29 to 2,850. Not all of it, but the majority of it, substantially all.

Okay. And this sort of follows up on one of the questions of earlier, but why would you not assume that you might see more spot business in Q4 given what could be a fairly sizable YOY EAF electrode pricing to your customers?

Well, remember if we – I think, John, because they can either get spot at 4,100 or they can get an annual contract at 4,100, right? So, I don’t think there’s going to be many that are going to come and take a lot of spot, unless they’ve made a mistake in their ordering, or their planning process.

Or if somebody else lets them down.

Or they have a quality issue, or somebody is on the furnace and they run into a quality issue, which happens. And we get a call, and it says, ‘gee, come on over, help.’

Or they anticipate that 4,100 is a starting point for negotiations and the full year contract could be higher than that for next year?

Well, that’s right, you could get some of that. And some of our customers do take those kinds of views, and do have that kind of purchasing strategy. So, there definitely can be that element of it.

Okay. And a follow-up, if I might. Could you give some detail as to the delay in the Lamont shutdown, given that it’s been pushed out here over several months, what gives you confidence that November is actually the time you’d see that come out?

Well, John, we’re just going off of what the folks on the ground there are telling us. And the latest is it could run into November. We’ve had it right, and it’s going down. Don’t plan on it, it’s being converted. I mean so that’s stamped and feedback has not changed one bit, but the timing of the conversion has slipped here a little bit, and the latest we have is it could run into November. There’s a bit of a pipeline of product. And that’s why we say, ‘gee, this will probably show-up end of Q1, Q2, when people start to, you know, try and replace that 80,000 tons of Lamont.’

Thanks, guys.

Thank you, sir.

Thank you. Have a great day.

Thank you. The next question comes from [Skip Teneman] with [JDC Investment Advisors]. Please go ahead.

Thank you. Could you go through what your borrowings were outstanding against your revolver, and your availability?

We had about 30 million drawn on the revolver, and so it’s a 215 million facility with only about 7 additional million used for letters of credit. So, substantially all of the remainder is available. We don’t see any liquidity issues and that’s consistent with our decision to build inventory for the second half of the year.

And would you finance on that liquidity build with further borrowings under the revolver?

Yeah, it could. Yes, it was negative. We’re looking relatively flat, you know, as we played out, and it would just be the inventory there.

Okay, thank you.

Thanks. Have a great day.

Thank you.

[OPERATOR INSTRUCTIONS.]

We do have an additional question from [Rob Hayes] with Wellington Management. Please go ahead.

Hi, good morning, guys.

Good morning, Rob. How are you doing?

Good. Most of the questions here have been beaten to death. But the C drift coker was recently sold, as I understand it. Do you have any comment on potential availability coming out of that facility?

Rob, what we see is no increase in the tons. We haven’t bought from that coker for, you know, many, many years. And we think it’s been running full out the last couple of years, and will continue to run full out. And we aren’t anticipating at least from what we’ve been informed so far from those folks, any significant increase in their capacity.

The buyers, I understand it, was at least somewhat affiliated with the graphite electrode market, is that right?

Yes, I believe there’s a relationship with the old T&G operation.

Yeah, which is interesting.

Yeah. Okay, thanks.

Thank you. Rob, have a good day.

Thank you. And I show no additional questions. Please continue with any concluding remarks.

Thank you, Stephanie.

Again, thanks for joining our Q2 call, and we look forward to talking to you next quarter. Have a good day.

Thank you, sir.

Ladies and gentlemen, this does conclude the GrafTech Q2 conference call. If you would like to listen to a replay please dial 1-800-405-2236 or 303-590-3000 with pass code 11034223. Once again, your dial-in numbers are 1-800-405-2236 or 303-590-3000 with pass code 11034223. We thank you for you participation today, you may now disconnect.