GrafTech International Ltd (EAF) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to GrafTech's third quarter earnings 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. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today Thursday, November 3, 2005. I would now like to turn the call over to Keya Epps, Manager of Investor Relations. Please go ahead.

Thank you, Rob. Good morning, and welcome to GrafTech International's third quarter 2005 earnings call. Presenting today are GrafTech Chief Executive Officer, Craig Shular; and Graf Tech'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 302-778-8218 and she will be happy to fax a copy to you.

As a reminder, some of the matters discussed during this call my include forward-looking statements, as defined by the Private Securities and 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 we may discuss any non-GAAP information, you will find a reconciliation in our press release, which is posted on our website at www.graftech.com in the Investor Relations section. At this time, I'd like to turn the call over to Craig.

Thank you, Keya. Good morning. Thank you for joining GrafTech's conference call. Today we will take you through our third quarter highlights and then open it up to questions. In Q3, sales increased to $209 million, gross profit came in at 58 million, representing a 9% improvement year-over-year. Income before special items was 12 million, or $0.11per diluted share.

In our synthetic graphite segments, sales were $184 million. Year-over-year average graphite electrode prices per metric ton increased over 13% to $2,835 on 48,000 metric tons, 1,000 tons higher than planned. Higher graphite electrode prices, together with good cost containment and productivity projects, resulted in improved synthetic graphite gross profit.

Gross profit for the segment was 52 million, an 11% increase over prior year. Gross profit and gross profit margin percentage for the third quarter were the best for the segment in approximately four years, contributing to total Company improved performance. In our other segment, third quarter sales were up 8% to 25 million, as compared to 22 million in the same period in the prior year. Electronic thermal management sales came in at 5 million, a 70% increase over Q3 last year. We expect Q4 revenues for this product line to be $6 million for an annual total of about $20 million.

In the quarter we received our second approval for the use of our ETM products and solutions in the fast-growing LCD market. This is our first approval with a large LCD television producer. This is an exciting opportunity for us and we look forward to continued growth in this fast-growing LCD market, which is projected to grow from 5 million units this year to 47 million units by the end of '08. We are pleased with the progress in our ETM product line and we look forward to a strong fourth quarter.

Rounding out Q3 results SG&A and R&D expenses were 26 million versus 27 million last quarter, in line with our guidance. Interest expense in the third quarter was 13 million, in line with our guidance, and up over last year, primarily due to higher interest rates and higher average borrowings.

Now turning to outlook. The steel industry in most of our major markets experienced lower operating levels for the first nine months of the year. These lower steel operating levels resulted in reduced global steel inventories. During the third quarter of '05, U.S. steel inventories on hand dropped to their lowest levels in 18 months.

We expect a strong Q4 as a result of, one, these lower steel inventories, two, positive feedback from our customers regarding their Q4 order books, and, three, the fact that our customers have communicated their intention to take full delivery of their committed '05 requirements as global graphite electrode prices continue to rise.

Accordingly, we expect Q4 graphite electrode sales volume to be 57,000 metric tons, resulting in full year '05 graphite electrode sales volume of 200,000 metric tons. Q4 '05 average graphite electrode price is expected to be $2,890, resulting in a full-year average electro prices in the range of 28.50, based on currency exchanges as of the end of the third quarter.

Full year '05 EPS is expected to be in the range of $0.43 to $0.45, and free cash flow before antitrust and restructuring payments is expected to be a use of 10 million primarily due to planned increases in inventory. We are currently building our '06 graphite electrode order book, and although we are still early in the process overall graphite electrode market conditions are improving and the book building process is going well.

The global graphite electrode pricing environment continues to improve as demand for high quality, reliable graphite electrodes grow. In response to these market conditions and continued cost pressures, effective November 1, we increased our price for melter graphite electrodes to $4,250 per metric ton in the Americas, CIS, the Middle East, Africa, and Asia. In Europe, we increased our price for melter graphite electrodes to euro 3,200. These prices pertain to about 70% of our graphite electrode demand.

We have been informed that the Lemont, Illinois coker ceased producing green needle coke at the end of the third quarter, and has exited the premium needle coke business. Lemont's exit from the premium needle coke business is expected to result in approximately 70,000 to 80,000 tons of premium coke leaving the market in 2006.

Per our purchasing strategy, we have not purchased significant quantities from the Lemont coker in the past five years. We've secured about 65% of our total 2006 graphite electrode production cost. Although raw material and energy pricing pressures remain high, we have identified productivity initiatives which we expect will allow us to contain our '06 graphite electrode cost increases to 10% to 12%.

In terms of outlook for our Advantage technologies, we continue to exploit the megatrend of smaller and more demanding electronic applications. We recently executed a letter of intent to form a strategic partnership with iCurie. iCurie is a full-service provider of thermal heat management solutions for personal computers, consumer electronics, lighting, and display industries.

iCurie is a leader in next generation thermal management solutions built on their strong patents in thermal fluid nanotechnology. This strategic partnership is expected to create new opportunities for us in new market segments and contribute to the acceleration of our ETM sales growth.

We believe we're very well positioned for another year of growth in this product line and we expect 2006 sales to be at least 50% higher than '05. Due to higher gasoline costs, we are seeing an increase in the interest in the commercialization of automobile fuel cell applications. Our graph cell expanded natural graphite is used in Ballard Power Systems' Mark 900 series fuel cell platform for all of their transportation applications.

Ballard fuel cells are utilized in 85% of all fuel cell vehicles on the road today. Their European bus program, in alliance in DaimlerChrysler, in 10 European cites has gone very well, and a status report was issued last week stating that they have had superb performance and reliability results, and have carried more than four million passengers. We are in 100% of those buses.

Service in Beijing in this bus program will begin in this quarter. In addition to our work with Ballard and its partners, Ford and Daimler-Chrysler, we have recently been selected by two large automotive manufacturers to begin work in their respective fuel cell programs in 2006.

Together, these four companies represent over 50% of the global automotive and light truck market. We believe fuel cell system products offer an exciting and significant growth opportunity for GrafTech in the future. That concludes our prepared remarks, and Rob, we can 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 Robert LaGaipa with CIBC World Markets. Please go ahead.

Hi, good morning.

Good morning, Bob, how are you doing?

I'm good. Yourself, Craig?

Excellent, thank you.

Good quarter. I just had a few questions. One, I just wanted to tackle the volumes that you're seeing, in terms of the sequential increase into the fourth quarter. We're sitting here now in November, about a third of the quarter is already over. Can you speak to how much volume you saw in October versus how much you're anticipating for the remainder of the quarter here?

Bob, we won't give you a month-by-month numbers, but the 57,000 we identified we feel very comfort with. Our customers are running well. As you know, the first three quarters of this year, steel was quite slow to work off excess steel inventories, and the communication with the customers, they've been very firm on their desire to take their full '05 committed contract quantities, mainly because graphite electrode prices are going up globally in every geography for '06.

Right, and as a follow-up to that, in terms of the order book thus far, you mentioned that it's going well for 2006, you're still early in the process. Can you maybe comment on this time last year, you know, the early part of November, how the order book has been shaping up versus last year? Are you ahead of last year? Are you behind? Are you somewhere in between? Have the customers come to you early given the price increases? Can you provide a little bit of color there?

I would say it is going better than last year. I think we have started as every year the market starts in the Americas. I think the Americas has gone better than last year. Europe is just starting up, and so as I said, it's very early in the process and we're going to have to let it finish. What we do see is across all geographies, including Asia, which, as you know, historically has been a low price area for graphite electrodes, we see prices rising in every geography in the '06 book.

When you say better in the Americas, is it better from the standpoint you have more customers signed up? Is it better from the standpoint the volumes are higher than last year?

All of the above.

Lastly, just on the cost side, obviously, in the third quarter not only year-over-year, but sequentially, you're looking at volumes roughly flat. The average pricing roughly flat also, maybe down just a tick. Obviously, the margin saw some significant improvement versus the second quarter. I was hoping maybe you can provide some color in terms of where you saw the cost improvement? You talked about productivity, efficiencies, cost reductions, et cetera, in the press release and also in your prepared remarks. I was curious if you can nail it down to two or three things that occurred during the quarter, that would be helpful?

Bob, it is primarily in our plant operations, and our process over the last few years of migrating our production to Advantage sites like Mexico, Brazil, South Africa, et cetera, and then growing those sites continues to give us productivity improvements. So every one of those sights has improved their cost structure, has improved their productivity, i.e., more metric tons per person, and every one of of those sites has improved their capability. I would look at this as a relentless march, '06, I think, we're going to see more of those improvements.

You saw one of them that we delineated in this press release, which was moving our U.S. machine shop from Tennessee down to the world's largest graphite electrode plant in Monterey. That's just part of this continuous process. Our facilities are making graphite electrodes faster, so cycle times are down. They're making them with less manpower, and they are making them as lower scrap levels. Our plants have never run better and the quality and consistency of our product has never been better.

Last one if I could and I promise this is the last one. In terms of the costs you've locked up for next year, you mentioned the 100% needle coke, 65% of your production costs for graphite electrodes. I was interested in, the 65%, I was hoping maybe you could break that down in terms of -- the needle coke, obviously, 100%. I think, if I recall correctly, you had something like 30% of the cost structure. In terms of the other components of that, the pitch coke, the direct energy costs, what type of cost increases, you know, are you seeing for next year that you're expecting to offset through the productivity improvements, including moving some of these facilities around?

As far as the 65%, your first question, needle coke, quality needle coke would be the largest item. We have our labor, of course, already lined up and fixed and then pitch and met coke, we have percentages of all of those already fixed. I won't give you the percentage increase in any of those buckets, obviously, for competitive reasons.

We are generally the largest buyer of most of those materials, and we try to use that purchasing leverage to get the best prices. What I can point you to is the total, and we guided to 10% to 12% increase in costs for this year, '05, and we were delighted to come in at the low end, 10%. We are guiding for '06, 10% to 12% up, and our team's mission will be to want to achieve that and then drive that to the extent possible with productivity improvements and efficiencies to the low end of the range.

Great. Thanks very much, Craig.

Thanks, Bob, have a good day.

You too.

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 today?

Pretty good. How are you? I missed part of the call, but the '06 contracts for commercial contracts, how much is set already? Remind me. These get set November, December, January?

Yes. These start up in, oh, September, October, a little bit and then November, December, January and will be wrapped up, generally, by the end of January, first part of February.

How much has been set already of the contract --?

Bruce, we won't give guidance on the percentage that's done. It's still in process, so there's some competitive aspects to this. But what can we tell you is that the Americas, as every year, is the first part that comes to the contract process, and that has gone well. We're pleased with that progress.

We have seen graphite electrode prices increase for '06 in every geography. We are very early in the process. So we're just going to have to wait really until we finish up that book. So far it's gone well.

Okay. And the raw petroleum, I think you mentioned you said 65% is secured, and I guess that gives you -- that's reflected in your 10% higher TE, cost per ton for '06?

We have 100% of our quality needle coke fixed, and when you add up that and our other raw materials and inputs that are fixed we're 65% fixed already. In fact, that number continues to grow, and it may be 67% here very shortly. That number continues to grow and get higher, and total guidance for all of those cost increases for '06, Bruce, is 10% to 12%.

Okay, I mixed it up. 65% of your raw materials, you're saying?

That's right. We have 65%. That number will go up literally every week, every 10 days. That number will go up.

On this spot price hike announcement did you lead or did someone else lead, and did someone -- did they follow? I'm trying to see if you're out there alone?

Bruce, let me back up a little bit. As you know, over the last three years we've led virtually every one of the increases. The last two increases and this one in particular, this $150 increase was led by one of our competitors. So last two increases by the competition.

This very last one was 150, and we moved up, I think, a few weeks after the competition moved and we moved up to the same 150. So for us, you know, pleased to see the overall market moving up. Pleased to see that other competitors are also being proactive and initiating increases in response to cost pressures.

Okay. And was there -- has there been any capacity announcements of late?

No, none -- no new capacity announcements that we're aware of at all.

Thank you, guys.

Thank you, Bruce. Have a good day.

Our next question is from Brett Levy with Jefferies & Co. Please go ahead.

Thanks, guys. Good quarter.

Good morning, Brett. Thank you very much.

Can you guys talk a little bit about what your consumption is of natural gas and what portion of that, I mean, I gather you're not going to say completely what portion you have hedged, but what is your annual consumption of natural gas?

Bruce, let me keep it in percentages. Consumption and what not, there is a competitive aspect to it. If you're in our industry it can tell you an awful lot if I gave you BTUs. Natural gas, for us, as a percentage of total cost for our graphite electrode is about 6%. I'm not minimizing the importance of natural gas. Don't get me wrong. It's very important to us, and we manage it very, very tightly. But it's one of the our smaller input costs, 6%.

If we look at what's happened to the global natural gas prices, North America, of course, has been under real pressure, a lot of it driven by the storms and the interruption. In North America, of course, we produce in Monterey, Mexico.

So if you look at our other plants, we really have not had much pressure on natural gas or at least not near as much as we've seen in North America. Mexico -- the Mexican federal government did something several weeks ago because they are one of the purveyors, the large purveyors of natural gas down there, and they put in a program to cap how fast people's natural gas could rise.

We're part of that program. It's helped mute some of this. Natural gas, all the increases you've seen so far and everything that's gone on in response to the storm is fully built into our guidance of 10% to 12% increase next year.

All right. And then it seems like needle coke is consistently getting tougher and tougher to acquire. Is there any plan to establish a long-term supply agreement, or even, potentially, move into that business yourselves to assure that that's not something that's a threat to your business model?

Brett, you're absolutely right. This is the most critical raw material. It's tight, and Lemont makes it get tighter. We have been in long-term agreements. The largest producer is Conoco Phillips and we've had a long, multi-decade relationship there.

I believe we are their largest account, and we have been in a multi-year contract relationship with them. So we agree with you. We have done our best to secure not only quantities under long-term arrangements, but also negotiate the price very early in the game.

As we did last year and now this year, this year is the earliest we've been able to secure needle coke prices for the upcoming year in our history. As far as back integrating into this, it's something we always look at, and we look at opportunities as they surface, but currently there are no plans for that.

Last question is, as you guys look at this, the Ballard business and the fuel cell business and that sort of thing, obviously, the outlook for that business has changed, Ballard's stock prices, obviously, a fraction of what it was. Can you talk longer term about why that might reverse itself and just some of the megatrends there? What makes you so enthused about this business because you haven't talked about it for a couple of quarters?

One, in response to the higher gas prices, what we have seen is a number of the automotive companies get very, very serious in their programs. They all have programs, but what we've seen is their commitment to the program increase. We've seen the money they put in their programs increase and we've seen their interface with us.

We mentioned that we signed up two very large automotive producers and perhaps sometime in the future we'll be allowed to identify who they are. But part of that, just that activity is some of the increase we see.

Now, the auto companies, I think, in response to diminishing oil supplies, $60 a barrel oil prices are putting more money into these programs. The cost to produce a fuel cell stack in a fuel cell automobile has been dropping every year. That's got us encouraged. A lot of people are working on it. Governments have gotten involved. The U.S. government has identified billions of dollars. The Japanese government has really put 10 to 15 times that amount into fuel cell technology in supporting their auto industry to try to commercialize.

The state of Ohio, as we mentioned in our release, has given us a $2 million-$3 million to support our commercialization efforts. So when we look at all these initiatives, the money being put into it with the backdrop that oil is diminishing in supply, oil prices have been very, very high, we see a horizon, and I think if you talk to the analysts in that area, that looks like in seven to 10 years we will be going to commercial showrooms and purchasing fuel cell-powered vehicles.

All right. Thanks very much, guys. Good quarter.

Our next question is from Michael Gambardella with JPMorgan. Please go ahead.

Yes, good morning and good quarter.

Thank you, Mike. How are you today?

Pretty good, and yourself?.

Excellent, thank you.

Good. Couple questions, that are still left, I guess. One is you mentioned in someone's question earlier that you were, in terms of North American order book, you were doing better both in pricing and volumes. Does that mean you're ahead of where you were in volumes on the order book last year?

I would say, Mike, yes, we are ahead on volume. I'd say that we are bidding into a market, a steel market that is better than when the book got put together last year. You recall we were coming off a very strong year, '04, and then into '05, of course, we had that very sizable build-up of steel inventories.

So we were coming into a year where a lot of the customers were slowing down. We had a global slowdown, as we all saw in steel. I think we're bidding into a much more optimistic and positive customer base. Their order books look good for Q4. Their plans for '06 look good. So I'd say, yes, price up and right now volume looks like it will improved also. Thus far in the Americas we're pleased with the progress.

My understanding is on North America, maybe what the difference is, is that one of the bill gorillas, in terms of one of your biggest customers, came in extremely early this year, and that they filled their orders early, at a relatively low price, and that you guys and maybe SGL backed away and let some other guys fill the orders even before the hurricanes hit and pushed up natural gas for some of the U.S. producers who may be kind of disappointed they did that.

In any event, maybe you're looking at, you know, some of the smaller customers or medium-sized customers that may not have as much, kind of, purchasing power now, and that bodes pretty well for the rest of the order book and pricing in North America. Can you comment on that?

Yes, I can speak, of course, just for ourselves. Our team has been very diligent on executing these price increases. I think the scenario you described is quite accurate. Our team has been firm on the price increase. Our team has been very well controlled and disciplined in executing that, and as a result of that, if someone came and tried to demand a very low off market rate, we do not bite on that.

So we have built the book with blue chip names across the board, the who's who of the steel industry, our relationship with the trade could not be better. I think, you know, if we go back a year ago, some folks questioned, gee, with GrafTech leading the price increases for the last few years, have you hurt some of your relationship and I can tell you absolutely not and that's very evident in the building of the '06 book.

Our quality and service is superb and we have built the book with the blue chip names across the board in it.

It looks like from your recent announcements on the price hikes that your North American and your European prices are higher than I had assumed, but what really looks to be quite a bit higher than what we were assuming was the rest of the world.

I mean, usually the prices outside of the Americas and Europe are quite a bit lower, but in the release you're basically saying they're at the 4,250, which is right with the Americas.

Well, you know, if you look at the numbers and you look at that euro conversion to dollars, you see the European price --

No, excluding the European price. I'm talking about outside of Europe and outside of the Americas, basically Asia.

Asia, we have seen good price movement upward. As I said at the outset, every geography we see for '06 will be an increase in price. Asia prices have come up, nicely. Europe is the lower price right now, as you see in our numbers. It's about 10% below.

I think it's about $400 below, and Europe, as you recall last year, was one of the those areas where we were not pleased with the book building and the volume. Europe is underway as we speak, so as I said, we're still early in the process and we can't give you a lot of detail in the total book, but you're right. Asian prices have come up, North American prices have come up, and probably European are the ones right now that are about 10% below.

And can you give us any kind of, you know, range or indication of what non-melter prices are like?

Well, non-melter prices, that 30%, literally vary from $1,800, $1,700, up to probably 23, 24. So that's a real mixed bag, and that's why giving any guidance of our total average price really needs to wait until we're in the February time period. We have the book put together. Some of that business is very, very attractive, as we've said in the past. It uses different raw materials. Some of it runs through our factories very, very well, but that can result in the total book and the mix being a lower average price, and so you've got to let us finish the book, really, before we can give you good color on that.

Right. Lower average, obviously, than the melter price, but not compared to the average of last year for the total realization of the Company?

That's right. The non-melter segment is coming up. Every segment we've seen increases, and that non-melter segment will be higher than it was in '05.

Okay. And then just give us a status again of where you are with kind of finalizing these payments on the anti-dumping case back in '96?

Yes. The antitrust case we paid out --

The antitrust.

Yes, the antitrust, if you add up the legal fees and everything, probably close to $400 million already. The good news is at the end of this year we will have only 26 million left to go. It's on a two-year payment schedule with the DOJ here in the U.S., so very, very manageable for us. Our team has come through and satisfied and paid off every single claim, government, customer, et cetera, to put that legacy behind us.

Okay. Very good. Thank you very much.

Thanks, Mike. Have a good day.

You too.

Thank you, and our next question comes from Bob Schenosky with Jefferies & Co. Please go ahead.

Good morning.

Good morning, Bob, how are you today?

Good, good. Just two quick ones for you, since everything's been already asked. But, first, in terms of '06, what percent of the natural gas is hedged at this point and what percent of the electrical contracts do you have in place?

Let's do the electrical first. The electrical is a grid price that we negotiate in each of the countries where we operate. We are generally the largest consumer in the communities that we live and operate in those countries, and our team is in process of doing that. So if I look at electric by itself, that's probably 6% of our total cost of graphite electrode, 6% to 7%, and let's say, you know, 10% of that is probably already done at this stage.

On natural gas, again, that's about 6% of the total cost of a graphite electrode and let's say somewhere around 5% of that is already done. We have been -- let's say, trying to be very prudent here. As you know, natural gas has spiked and went up, and went up over $14 and we've been monitoring that very closely. We've been trying to be very prudent and reactive to that and lock up a lot of our natural gas at the $14, $13.

It's been coming off: . It's now 11, 11.50 now. We stay very close to the Gulf Coast and what's going on down there. We see a lot of that coming back. We see a lot of the pipelines coming back. So we would expect, you know, some more softness in those natural gas prices.

Remember, our big user is Mexico, and Mexico we've got the federal government with the cap in there. Right now the way that cap works, we're only paying about 21% of the increase above $7.25 on natural gas. So that's even been muted.

Then, as I said earlier, if you look at our other countries, Russia, South Africa, the gas prices have not moved near as much. In fact, they're very, very affordable. So natural gas, as I said, we're not trying to minimize it. It's very important to us. But it is only 6% of our cost structure and most of the geographies we operate in have not seen this huge increase.

Okay. Fair enough. The second question I had was related to ETM. In the 30 million target that you have for next year, can you discuss any starts for major platforms, including customers such as, you had mentioned Dell previously, or any of the LCD customers, and then a sense of any magnitude there as well built into that 30 million estimate?

Right now the large LCD television manufacturer we just secured asked us not to announce the name. I think their logic and strategy was they're coming up on their new season, and asked us not to do that. We may be able to do that in February.

What I will say is what we have now is we have both the plasma technology, applications and success there, and now the LCD technology. So both of the new emerging technologies for television and 100% of the flat screen, between those two technologies, we have superb products and we have penetrated very large names. Looking forward, we think they will be about 50% of the television market, flat screen will be in about 2010.

So the names we've given so far, Bob, as you know, has been Dell, Sony, Samsung, literally the who's who across the board. These recent wins, I'm going to probably have to wait until February. I might be released in February to identify who they are. Where we're in, we're in 100% of the segment that we have with them, and so just a superb technology. We're delighted with it, and we're excited about the megatrend we see in flat screen TVs.

That's fair, Craig. What I'm trying to get to, let's say out of all the TV technology that you have, what rough percentage of that 30 million would be that business?

Out of TVs I would say that -- this is a tough one. Today, I would say that it is -- of our 20 million, it is less than 50%. Less than 40% of our 20 million.

Okay. And then for next year, how substantial do you anticipate Dell becoming?

Dell, I think, as they release more ultra lights we will grow. We have 100% in their new ultra light laptop, and we are working, of course, on Dell's entrance into some of that LCD market. Dell has announced that they will try to expand into some of that LCD market and televisions, et cetera, and there is some very good cross-selling. We've showed this as we've gotten into a Sony or Samsung where we get into one division, maybe it's flat screen TV, and then six months later we announce we have their cell phone. So we're in the Dell ultra light laptop, and, obviously, we're working to get into anything that Dell is successful in on the flat screen TV.

Right, but I mean for '06 is Dell a million bucks worth of business out of that 30?

We won't give you that guidance by any particular customer. There's some competitive issues here. We have a lot of competitors trying to penetrate these attractive markets. Dell is somebody we worked on for over 18 months, and we just announced it this year.

So Dell is it still a relatively small player for us. Very attractive player. We like their style. We like their aggressiveness, and we like their attention to cost because we think our product plays into everything they're trying to do in low-cost platform, high-volume manufacturing. That's what our product really -- that's the sweet spot of our product. So today they're very small for us. That's all upside for us, Bob.

Okay, great. Thanks, Craig.

Thank you, Bob, have a good day.

Our next question comes from David Siegel [PH] from Axiom Capital. Please go ahead.

Good morning. I have an interest in talking to you about the iCurie contract that you announced today, or the joint agreement. I'm trying to tie it in with your contracts with Dell and Sony. What did does it mean to the Company? How do you monetize what this could be for you?

I'll tell you what attracted our two companies together. iCurie is very focused on trying to capture and participate in the megatrend of very high-powered electronics getting very, very small. So their technology manages thermal requirements in very powerful pieces of electronics that have to be lightweight, like ultra lights, like aerospace application. The background of the iCurie team is blue chip. A number of them came out of NASA. They've had NASA aerospace applications, so they're at the forefront of some of the most sophisticated thermal management products.

Together, we both have a similar vision, that there is a huge megatrend taking place, whether it's flat screen TV's, ultra lights, or cell phones, where these appliances are being asked to do more and more. The chip sets are getting larger, and the appliance itself has to be lighter and smaller.

iCurie has some very solid technology in these nano-sized product like flat heat pipes that, perhaps, together with our technology offers us penetration into automobile industry, aerospace, a host of market segments that together the two of us -- together we can attack that maybe separately we couldn't. I think this will work out to be a very positive relationship for both companies.

How long will that really take for you to get going selling these products?

I would expect that we would see some sales revenue -- I'm not going to give you any guidance yet, but I would expect we'll see some sales revenue in '06. Remember, there is a production cycle on a lot of these products, so you get in, you get approved, but you may be in the next generation, and many times that approval process is 12 to 18 months. But I would say that we will have some sales in '06. I believe they will be relatively small, but our target will be to get these new products in the next generation coming out. So approvals in '06, market recognition in '06, and then '07 we're in the new generation and, if we're successful, perhaps we have 100% share in that new generation.

Great. Thank you very much.

Thank you, David.

Our next question is from Andrew O'Connor. Please go ahead.

Good morning, Craig. Good quarter, guys.

Thank you, Andrew, how are you today?

Great, thanks. Wanted to know, with the Lemont, Illinois closure, how is the market making up for this loss of needle coke, Craig, the 70,000 to 80,000 tons?

As we were not a buyer from Lemont, we're not close to that part of it, but obviously 70,000, 80,000 tons coming out of a global quality needle coke market, that's probably around 700,000 is significant. Let's say 10%, thereabouts, of the coke market has shrunk. I think coke was tight in '04 and '05, and I think it will be even tighter in '06.

So there's been no adjustment yet. It would just seem to be an opportunity for somebody else. That's all.

Perhaps. In some cases I think some competitors will struggle to get quality needle coke. They may have to try and substitute lower-quality needle coke, which will mean poor performing electrodes, which will cause difficulties in steel shops, and open up more opportunities for us.

Okay. Thanks for that. Secondly, one of the your priorities in '06 is to reduce the variability and risks to your cost structure. I was wondering, can you quantify this goal for next year, for 2006?

We're at 65% of the graphite electrode costs are already fixed. That number goes up every seven to 10 days, and our goal will be to get into year-end, into January, February and trying to have at least 75%-plus fixed so that surprises and variability are off the table.

We did a very good job of that in '05 and you saw in our guidance. We guided 10% to 12% up and came in at the low end, 10. Our team is getting very good at that. We get better quarter after quarter and I would expect to show continued improvements in that in '06.

Okay. That's all we have. Thanks very much.

Thank you, Andrew. Have a good day.

Our next question comes from Brett Levy with Jefferies & Co. Please go ahead.

One just macro follow-up question. If you look at China, a lot of the forecasts have got them adding 100 million tons of capacity between now and 2010. You have other parts of Asia adding a lot of capacity. Can you guys talk about about what percentage EAF or graphite electrode users you see out of that additional capacity, and, although no new capacity has been announced, what do you think is done to address that? Just speak for your own Company, and then sort of where you think some of the additional supply is going to come in to address what seems to be a huge growth in demand in the next five years?

Let me speak to China first. China, we have built a superb team there. We have offices in Hong Kong, Beijing, and Shanghai now. They've all been opened in the last two and a half, three years. We are very bullish on China EAF. In fact, 50% of all new EAF starts that we see in '06 and '07 are in China. They are the largest furnaces and latest technology, so they demand the largest and best performing electrodes. So they play right into our sweet spot.

So we see EAF continuing to grow in China. Brett, you're right. A lot of new capacity for steel's come in China. Today, most of it is integrated and only about 14%, 15% of China steel is EAF, so the upside and possibilities are huge. We see those growing as China puts in infrastructure and automobile industry, all of which are underway, and China starts to develop and generate it's own scrap for those EAF furnaces.

So on the China front we could not be more pleased with our progress or the trend there. On new GE capacity, as you know, our team has demonstrated tremendous capability the last three years to de-bottleneck and get more out of our plants, and, I think, in '04 every one of our plants set a new production record.

So as far as the ability to get more electrodes out, as that demand grows, I feel very comfortable that our machine is ready and willing to deliver that, and it will deliver it from the low-cost platform in the industry.

All right. Thanks much, guys.

Thanks, Brett. Have a good day.

Our next question is a follow-up from Michael Gambardella with JPMorgan. Please go ahead.

Yes. Hi, again, Craig. You have these two kind of different business segments in your Company. You have the electrode/cathode business and then you have the fuel cell and the ETM and some of the other businesses that would be considered, you know, much higher growth businesses, like fuel cell and ETM, clearly, more growth-oriented businesses.

Several years ago you had discussed the opportunity, or potential, to either sell off or spin off the growth part of your business to kind of extract the value that's, you know, probably being somewhat depressed by the rest of the business.

Now that you have the ETM business really getting off the ground here in the last couple of years, high fuel prices causing the fuel cell business to, you know, restart again, any chance that you'd be rethinking about, you know, releasing some of the value of the growth part of the business by selling it or spinning it out to shareholders?

Mike, we've kept all of our ETM and all of our fuel cell and all of those high-growth technologies that you talked about in a separate, stand-alone, subsidiary, Advanced Energy Technologies, AET. And we've done that by design, it's been part of our strategy. We are always looking at opportunities to maximize that value. Right now we are starting to gain some pretty nice traction in ETM. It is still very small business. Looking at our shareholder base, I would say we have very little to your point, very little value assigned to this attractive ETM business.

When you see the shareholders we have, we have primarily the value -type shareholders versus any of the large growth-type shareholders that might be attracted to AET. It's something we look out. We always evaluate. Our mind is open to it.

We've been approached on occasion, but currently we believe best value right now is to continue to grow this and get this business north of $100 million and participate in these megatrends. The iCurie is the first strategic partner. I think as we've gained a reputation in this thermal management industry, you'll see more and more of these types of opportunities come to us.

We are now a very known quantity in that industry, and two years ago, you know, we were knocking on all the doors and, literally, now we are approached all the time with opportunities, whether they be customers that have problems that need a solution, or they're another industry participant that wants to do something together with us.

So we've had a dramatic change in that type of contact in the last 24 months. So Mike, excellent point. It's something we look at all the time, and like I said, by strategy we have kept all this business in a stand-alone subsidiary.

Have you been approached by potential buyers of the business looking for your interest to sell it?

We have. We've been approached a few times over the last two years as we've gained a name in the industry.

Okay.

And we've turned all those down.

Okay. Great. Thanks, Craig.

Thank you, Mike.

Our next question is a follow-up from Robert LaGaipa with CIBC World Markets. Please go ahead.

Hi, good morning, again. Just two quick follow-ups, Craig. One, on the fuel cell business, obviously, you said in a point earlier you hadn't talked about it in quite sometime and given the higher energy costs it could be more attractive moving forward. I was just interested in an update. How large is that business from a sales perspective, and is it profitable, breakeven, loss, where does it stand currently?

Bob, it's a very small business, it's approximately a couple million dollars a year, so it is at very much the front end. The sales right now are primarily into Ballard, which are into Ford and DaimlerBenz vehicles primarily. We have sales to four, five, or six others where our product goes into some of the Japanese automobiles and some of the other automobile companies. The latest move here of us joining with two other major automobile manufacturers, I think, is important for us.

This is the first time that we're going into other automobile companies, outside of the Ballard, Ford, DaimlerBenz relationship, which we've been in now for 10 years. This is our first step outside. I think, again, it's a recognition of the technology and skill we have and we're excited to enter some of those other programs. And big picture, that puts us in 50% of all global automobiles and trucks. So it's very small today, Bob. I think the break will come here, if and when, fuel cell vehicles get commercialized and they're in the showroom.

But is it profitable?

Yes, it is a profitable business. We do not lose on this. This is a technology business.

Right, and the last question, my second follow-up was, just related to the move, which includes yourself moving to Parma, Ohio?

That's correct.

Good luck with the move, number one. Number two, you mentioned the annualized cost savings from the Clarksville move from Monterey, Mexico. I was just interested, given that this one occurs earlier in the year, toward the end of the first quarter, have you targeted an annualized cost savings from the move to Parma?

We have internally. Not one that we will give out in piecemeal, but it is built into our overall Company guidance. Our team's looking forward to the move to Cleveland. The state of Ohio has been very receptive. They've been very good to us in cash grants to support our fuel cell business, and they've been very supportive on this relocation. So we're delighted.

We own our -- the land and the building. We have a very fine facility there, so we will moving out of leased facilities here in Delaware into Company-owned facilities, and it will bring under one roof our business teams, or R&D teams and our financial teams. So I think there will be additional synergies even around that.

Terrific. Thanks again, Craig.

Thank you, Bob.

[OPERATOR INSTRUCTIONS] Our next question comes from Greg Bennett with Smith Barney. Please go ahead.

Good morning, Craig.

Good morning. How are you today?

Fine. Thank you. Getting back to the needle coke issue, were you able to secure more volume, more tons of needle coke before the new year?

Greg, we have secured 100% of our requirements. I won't give you the number. I guess the direction I could give you is that being the largest buyer out there and a very high quality buyer of this product, the trend, our trend of buying needle coke over the last five years is that it has been increasing. So we have been increasing our buy. Next year you're going to have to just wait until we put our book together and I come out in February with the full guidance on tons and what not.

For your capacity right now, currently, is about what, 230 --?

That's right, 230,000 metric tons.

And, I think, in previous calls you said for a small -- well, a small capital investment of five or 10 million you can add an additional 10 to 20 million tons?

That's right. In fact, our team continues to have breakthroughs on that front. So we can get another 20 out of that machine, and I tell you, we continue to impress ourselves. If the market requires it, I don't believe our team -- our production team will be constrained on that front.

Mexico continues to deliver more tons, and as I go around the horn at our plants, each one of the plants has been having some significant breakthroughs, shorter cycle times. We're making electrodes faster than we ever have, and scrap rates are some of the best we've seen in 20 years.

Craig, how many -- in the U.S. market, how many tons of the high-quality electrodes are produced that might be subject to shortages due to the closing of the facility -- the Lemont facility, or everybody is focusing on natural gas, which sounds to me isn't an issue for you, but may be an issue for some of the your competitors in the U.S. market?

Lamont was 70,000 to 80 ,000 metric tons of coke.

Was that all in the U.S. market, though?

That's a hard one to tell. We didn't buy from there. That went to our competitors, and I would say the majority of that was probably in North America, and then some of that would have gotten sent to South America and, perhaps, some to Europe. But the majority was probably in the North American arena, and that will have to be substituted. That was some of the finest coke available in the marketplace. They made very, very good coke. So it's a one for one, 70,000, 80,000 tons that will have to be replaced.

I guess what I'm, and you alluded to this in a previous call, is that some of the steel companies were coming around to figuring out this may be a problem for them for 2006, that they won't -- that they won't have that supply available. I'm wondering, are you finding that when you're out there talking to your steel companies?

Yes, Greg, I think our steel companies and, some, due to our education with them and just being a good supplier we've educated them very well on the situation in coke in Lemont. I would say that the majority of the steel producers in the U.S. are very much aware of Lemont going out of this business.

How quickly -- I'm sure they -- how quickly do you think that inventory would be absorbed? Will it be absorbed by the end of the this year?

I would say, typically, looking at Lemont there's probably 90 days in the pipeline, something like that, 90, maybe 110 days in the pipeline, and so with the closure at the end of Q3, you'll probably start to see the impact of that in Q1 of next year.

It seems to me that it's almost a given that you're going to get a substantial increase in volume based on the closure of that facility.

Well, I would not necessarily jump to that conclusion, because graphite electrodes is a global market. These electrodes move all around the world. It's a very, very competitive market. Electrodes come into the U.S., literally, from Europe, from Asia, from Russia, from China, and so, Greg, I wouldn't draw that analogy. I think it's too early because this is such a competitive arena, and electrodes move all around the world.

Okay. On your contract, a year ago you broke new ground with putting in the surcharge, or the ability to have a surcharge, at least I think that was last year. Are your negotiations now with these contracts, are you continuing with that, the ability to have a surcharge? There was a question about the legality of it, I think, a year ago and people challenging it, that kind of thing. What's happening now?

Let me give you an update. Greg, you're right. We put in a surcharge, legal, no legal issues at all. Very legal. And, in fact, we're a very big supporter of putting a surcharge in on graphite electrodes just like our steel customers have done, and they did a year ago and they continue to put a surcharge in on energy costs, natural gas, et cetera. There's one right now on, I think, virtually every steel contract in America.

So we were a strong proponent of a surcharge for graphite electrodes. We led that, we led that initiative. We stuck our neck out on it. We pushed very hard for that. We executed it. But, unfortunately, we did not get a following in the graphite electrode industry, and so we did not get other competitors that followed and executed, or put surcharges in, to our disappointment, because it's just mirroring what our customer base does. Almost to the same exact logic we're buying gas, we're all buying energy-based products.

So no one else followed, and building the '06 book, because no one has followed that and there was no support from the competitive arena, our '06 book has been -- the vast majority is built on fixed price contracts.

Okay. Thank you.

Thank you. Thanks, Greg. Have a good day.

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

Rob, thank you very much. Everyone thank you for joining our Q3 conference call and we look forward to talking to you in Q1 to recap 2005. Thank you for your support.

Ladies and gentlemen, this does conclude the GrafTech third quarter earnings conference. If you would like to listen to a replay of today's conference, you may dial 303-590-3000, or 1-800-405-2236 and use the pass code 11041196 to access the conference. Thank you again for your participation on today's conference, and you may now disconnect.