GrafTech International Ltd (EAF) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the GrafTech International first 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, Tuesday, May 9th, 2006. I would now like to turn the conference over to Michael Carr, Director of Investor Relations. Please go ahead, sir.

Thank you, Scott. Good morning, and welcome to GrafTech International first quarter conference call. On the call today is GrafTech Chief Executive Officer, Craig Shular, and Chief Financial Officer, Mark Widmar. If you did not receive a copy of the press release, please contact Marie [Newar] at 216-676-2160, and she'll be happy to fax or e-mail a copy to you.

As a reminder, some of the matters discussed during the call may include forward-looking statements as defined in the Private Security Litigation Reform Act of 1995. Please note the cautionary language of our forward-looking statements contained in our press release. That same language applies to this call. Also to the extent that we may discuss any non-GAAP information, you will find reconciliations in our press release, which is posted on our website at graftech.com in the investor relations section. At this time, I would like to turn it over to Craig.

Thanks, Mike. Good morning, everyone, and thank you for joining GrafTech's conference call. Today we'll take you through our first quarter highlights, and then open in up to questions. In Q1, we recorded sales of $209 million. Gross profit came in at $56 million, representing a 15% improvement year-over-year. In our Synthetic segment, graphite electrode sales volume was a little over 42,000 metric tons, which was about 2,000 tons higher than planned, due to improving demand. Higher graphite electrode prices, together with good cost containment and productivity improvements, resulted in year-over-year higher Synthetic gross profit. Gross profit for the segment was $54 million, a 22% increase over the prior year. Graphite electrode gross profit also benefited from lower cost raw materials purchased in '05, and sold from inventory in the first quarter of this year.

In our other segment, first quarter sales were $20 million as compared to $26 million in the same period the prior year. The decrease was largely a result of a timing of carbon refractory product orders, which shifted due to customer scheduling needs, and will shift in the second quarter. In this quarter, our team had continued success commercializing advantage technologies on the electronic thermal management front. We entered into a cooperation of supply agreement with Tradex, a leading component supplier to the global cell phone market. This agreement is expected to accelerate the commercialization and technology development for AET in this very important cell phone market segment. We also expanded the scope of our relationship with Celsia Technologies, formerly iCurie. In addition to AET's commercialization of of Celsia's current technology, the 2 companies will begin working together jointly to develop next generation thermal solutions, including the combination and integration of AET's graphite material science and Celsia's microfluid thermal management technologies. Jointly developed products will be sold and marketed exclusively by AET in the electronic thermal management industry.

We also received several new approvals during the first quarter. These included applications in multimedia devices, flat panel LCD equipment, heat sinks, notebook computers. And they came from industry leaders, such as Gateway and Samsung. Rounding out the first quarter results, SG&A and R&D expenses were $31 million, versus $29 million in the first quarter last year. This increase was mainly attributed to 1, a $1 million noncash restricted stock expense, and the balance of the million was related to R&D expense to support ETM growth. And then finally, we had some additional transition and overlap costs of resources in our office consolidation program. Interest expense in the first quarter was $14 million, in line with our guidance, and up over last year, primarily due to higher interest rates and higher average borrowing.

Turning to outlook, we have noted firm demand in the steel industry and strength in EAF steel production. This is consistent with our full year estimate of approximately 3% annual EAF steel growth. The global electrode -- the global graphite electrode pricing environment continues to improve, as demand for high quality graphite electrodes grows. In response to these market conditions and continued cost pressures, especially from oil and energy-based materials, on April 18th this year we announced an increase in the current base price for standard sized graphite electrodes. This -- the geography involved was on a global basis, included the Americas, CIS, Middle East, Africa, Asia and Europe. The new price for standard sized electrodes is $5,950, or Euro 4875, per metric ton. The new price is effective immediately for all new orders. This increase will not materially impact this year. As you know, the majority of our book is put together. And we encourage you not to get ahead of the 2007 book building process. We operate in a very competitive global market, and we will have line of sight to our '07 book in the first quarter of next year.

I would like to take this time to welcome Mark Widmar to our team. He has, of course, joined us as our CFO. Mark joins us from the $6 billion NCR Corporation, where he served as their Corporate Controller. And prior to NCR, he worked at Dell and Allied Signal. Mark brings us some extensive financial and business skills, and we're delighted to have him on our senior management team.

Turning to outlook for the second quarter, we currently have 210,000 metric tons of electrodes in our '06 book. The book looks good. In Q2 we expect GE sales of 53,000 to 54,000 metric tons. Our production costs remain in line with our plan and our guidance of 10 to 12% up. The previously announced restructuring plans are proceeding well, and on schedule.

Summarizing, EAF steel looks like it's performing well. Well within the 3% up guidance we gave. Our cost programs are on target. Our restructuring programs are on target. And 210 in the book right now. AET as we guided to 30 million, looks good. We continue to get good solid approvals from very large companies in some very attractive segments. And you should look forward to us continuing to grow relationships like we announced with Tradex and Celsia to help us grow that business faster and penetrate some new markets. With that, we would like to open it up for Q&A. Scott? Scott, if you could open us up, we'll take questions.

[OPERATOR INSTRUCTIONS] Robert LaGaipa, CIBC World Markets.

Craig, can you just -- I guess one of the questions that's probably on top of all of our minds, is the pricing strategy. Now, the increase that you've just implemented recently, the April 18th increase, the 5,950 global, the Euro 4,875. Now that's approximately 30% higher than what SGL had increased prices recently by. Can you just walk us through what the pricing strategy is for the rest of this year, into 2007. And I mean, I guess what most of us are concerned about, in light of this price increase, is kind of deja vu with late in '04. And I recognize it's early in the year, and there's room for adjustments as the year progresses. But if we look back to '04 to '05, you lost market share as a result of the aggressive pricing action. And given that 75% of your costs have been locked up for this year, are you anticipating that much of a cost increase to justify a price increase of that magnitude?

Well, Bob, thank you very much. You're right, we've gone out very firm in our pricing. And subsequent, another competitor came out below ours. And so the marketplace will term determine the price. Supply-demand economics would determine it. So I won't comment on that gap. What I will say is, '07 costs, we have no '07 costs fixed yet. However, when you look at the oil markets and the related energy markets, we are expecting some significant cost pressure in '07. We're trying to get ahead of that. Graphite electrode market remains tight. Good quality needle coke remains very tight. And so when we add all that up, we believe a very fair price for graphite electrodes is the price we announced.

Okay. What was the average electrode pricing in the quarter? [inaudible]

As you know, and as we mentioned in our last couple conference calls, we no longer give pricing guidance, per se. We will give business conditions, as we did in this release and the prior release. But we will not give individual market or individual quarter pricing.

What about the actual? I understand you're not interested in giving guidance. But what was the actual in the quarter?

Well, again as I said and as we mentioned in prior calls, we were going to stay away from that. And when we are trying to execute price increases, we just don't think that's appropriate. We've got some different prices out there by geography, and what we're trying to do is bring up the global price. This industry, I think warrants the increase, and cost pressures, especially looking to '07 and $70 oil, is causing us to take a look at it early, and get ahead of the curve.

Let me ask you a couple other questions then, before I pass the baton. 1, just with regard to the gross margin in the quarter. Obviously it was much higher than, at least what we forecasted. And you had mentioned that a portion - I'm not sure how much, and I was hoping you could provide some color here - is you had mentioned the raw materials that were purchased in '05, that were used in the first quarter of '06, which benefited your gross margin. Can you just give us some indication of what the magnitude was of that benefit? And have you now run through all of your '05 raw material costs -- or raw materials inventory, that we should expect some pressure, at least from the price increases that were announced for '06, that you're not going to see that type of benefit moving forward?

Yes, Bob, you're right. The '05 carryover inventory has all washed through. We did get some benefit to that. We won't quantify that today. Obviously, prices of our raw materials went up significantly in '05, many of them energy related. And kind of relates to your prior question on price, why does price need to go up. But, so I don't expect to see that on a go forward basis, that type of a benefit. But as we guided, we would expect margin expansion throughout this year versus prior year.

Okay. And last few questions. 1, just with regard to the volume expectation moving forward. If I recall, last quarter you had had mentioned the first half of '06 was probably going to be similar to the first half of '05. And you were a little bit better on volume in the first quarter here, 42.4 thousand metric tons. The guidance for second quarter would imply something equivalent to last year. So it seems like the second quarter came at the expense -- or the first quarter came somewhat at the expense of the second quarter. And in light of the 210,000 that you're targeting for the year, at the lower end your 210 to 215,000 metric ton forecast, can you just give us some color as to what you're seeing in the marketplace, just again, to get to the 53 to 54 for the quarter. And then subsequently, the 210 for the year. I mean, what has to happen for to you get to the 210? What has to happen for it to be better, worse? Can you just provide some color there? That would be helpful.

Sure, Bob. Well, we have 210 in the book today. So if the steel industry continues to run the way it is, the 210 looks very, very firm. As far as the first quarter versus the second quarter, first quarter did, as we said, come in better than expected. You recall in Q4 last year, we had a inventory overhang of graphite electrodes. Because of the price increases in electrodes, the customers took their full '05 allotment. But it appears most of that has washed through the trade. And I think in part, that's why we did 42 plus. Demand is good. EAF shops are running well. They're getting price increases. So we've been pleased with the EAF market in the first quarter. And right now, what we see in the second quarter also looks good. And so I think all of that is very much within the guidance and the outlook that we gave, that we felt EAF steel would be up about 3% this year, versus last year. You recall, '05 was about flat versus '04 in EAF. So, EAF is having -- is off to a great start this year. The 210 looks good. The 210 is in the book. And they continue to run like this, we will have a 210. Now, upside, is there some upside? There is if they have an outstanding banner year. But I think right now from our vantage point, we should all plan on the 210 type number.

And how much of the book is contract? I mean, because I recall last time around, you had mentioned you weren't quite to the, call it 90% of the book, under these contracts. I mean you're at 90% of the book now, and you're leaving some upside for the spot tonnage that is a potential out there? How should we characterize the book, the 210, versus that 90% threshold that you usually have had in the past?

Well, the 210 is in the book. So it's not 90% of the 210. The 210 is fully in the book. The way to look at spot, yes, there may be some spot. Of course, we're trying to execute some significant price increases, which sometimes has an impact on the spot business. So how hard steel runs the back half of this year, will impact how much spot, if any, we get.

No question. And last question, if I could, Craig, before I pass it along. Is just with regard to the SG&A and the R&D costs. Now, what are you expecting on a go forward basis? I mean, given the first quarter was higher than anticipated, to get to your 112 would anticipate -- would imply, obviously, a decrease in the cost as the year progresses. I mean, what is going to cause those -- the decrease in those costs? I mean you're anticipating R&D to come back down to the $2 million level? What's going to happen on the SG&A cost side as the year progresses to get to your $112 million number?

Bob, with the consolidation work we've been doing on our head offices, we would expect the SG&A go forward to come down a bit. R&D, I don't look for that to come down. We're not trying shrink R&D. We're investing in R&D and ETM. So go forward, I think SG&A, you can look for us trying to drive that down lower, as we have brought everybody under 1 roof here in Ohio.

Is that going to be an immediate impact to second quarter? Or is it something that is going to be phased in, do you think, as the year progresses?

It will be over time.

Okay. Terrific. Thanks very much, Craig.

Brett Levy, Jefferies & Co.

Can you guys talk in rough terms what the estimated headquarters move will cost initially? And then what's the timetable to realize how much in the way of benefits?

The headquarter move is absolutely 100% completed. So we have done all that heavy lifting. We began that in very end of the year, and it has been finished up here in the first quarter. So we have no one in Delaware anymore. We've moved people out of Tennessee, and people out of Switzerland. So that is all done. The cost is behind us. That little extra cost and overlap cost you saw in Q1 was the -- kind of the dual roles in running in a couple different locations, and training, et cetera. So Brett, that's all behind us. And as I said previously, we would expect SG&A to, over time, start to come down.

And any sense as to magnitude?

Well, I think as we get deeper into the year and maybe towards Q4, we may give some guidance go forward. But right now, I would stick to the 112 guidance we have given. And as Bob had mentioned on the prior question, that infers that the next few quarters we will see some slide down on those numbers.

Okay. I mean, could we get a sense as to head count or -- I'm just trying to build a model.

Yes, no problem. Total head count, we finished last year -- and this whole bucket of head count is, of course, all of the productivity improvements. As you know, we announced 9 projects in 5 countries. But last year we ended at about 3,860 team members, and we will finish out this year at about 3,000. And with those 3,000 we will make more graphite electrodes and more cathode blocks than we've ever made in our history. So it's that kind of magnitude, I think we guided to $22 million in savings, from all of those productivity projects, and within those is head office consolidation.

Got it. Obviously China is adding a lot of new capacity over the next couple of years. Can you guys talk about sort of what on the demand side you guys anticipate, in terms of overall global growth from a planning standpoint? And then what are you hearing about on the the capacity front? Obviously, you guys have got your own projects. But sort of away from you, what are you hearing on the global capacity front? There's 2 parts, demand and capacity.

Perfect. On the steel side, yes, China continues to do very well. We've developed a very nice customer base there. Our customers there continue to build and add the largest furnaces on the planet, which demand the best electrodes. So we're very bullish on China. The country, of course, has done a very good job of managing the growth, and the expansion of the the economy, thus far. And so we see China contributing an awful lot to EAF growth. And in total, we would see EAF growth over the next few years to be in the 3 to 4% type range. Which would mean for electrodes, high quality demand electrodes are probably in a 2%, maybe 2 to 3% growth over the next few years.

Per year?

Per year.

Got it. And then on the new capacity side, sort of what new projects, what expansions are you hearing about away from yourselves?

Well, right now, in overview fashion, it appears that the quality graphite electrode industry is constrained by quality needle coke. They can't get enough of the key raw material. Most of that driven by the [Lemont] closure we've talked about before. We, of course, have some unutilized capacity. We think maybe the Indian producers have some unutilized capacity. A lot of the rest of the industry of high quality electrodes, we believe is running almost full out. We would believe that global GE production rates are probably 93% plus, so it's running at a high op level. As far as new capacity coming on, I don't know of a lot of brand new in addition to what the Indians have put on, some of which is underutilized, I believe, because of lack of coke. So we don't see any major new graphite electrode capacity construction projects out there. I'm sure there's a few talked about, but we don't see any going into the ground.

Got it. And then last question is you guys have said at this point, you don't have anything locked in for either energy or needle coke costs for 2007. Is it your inclination to go that way, given the run ups that we've seen?

If we -- twofold. We always like to fix costs earlier than later. However, when you look that far out into '07, it's very difficult to get fixed prices on a lot of our raw materials, and so we are working on that. We're working with suppliers. But obviously, it's a long lead time for our suppliers to be able to do that. And of course, oil has been very volatile the last several quarters. And so if we saw the right window, the right price and the availability to do that, Brett, yes our inclination would be to do that. I think you've seen in the past, usually in Q3 prior to the upcoming year, we've driven to have something like 70, 75% fixed. So you'll see us continue to drive towards that effort. But here we are, Q2, it's very early to get suppliers to try and fix right now. And hence, on the questions on the price increase, we believe cost increases are going to be very sizable for '07. Needle coke is going to be extremely tight for '07. And hence we need to get in front of that with graphite electrode price increases.

All right. Thanks very much, guys.

Michael Gambardella, JPMorgan.

I've got a couple questions. 1, just to follow-up on the pricing decision to send out the letter to all your customers for the, I think it's $2.70 a pound. And then have SGL follow-up with $2.07 a pound. I mean, I just don't understand the timing of that on your part, in the sense that, aren't you kind of signaling to all your vendors and suppliers that you're going for this big price increase. Therefore, they feel more comfortable in jacking up your costs next year?

Well, on the cost side from our suppliers, a number of our suppliers, we have benchmark prices like pitch. There's a global price on pitch. There's a global price on natural gas. There's regional prices on power. So I think in a lot of those, we have alternatives. And they're posted prices many times. Many times they're commodity prices. In the case of needle coke, needle coke is extremely tight. And let's face it it, with Lemont out of the picture, '07 coke prices are going to go up. I think they're going to go up significantly. And so we've got alternatives on coke. We're one of the largest buyers in the world of the raw material. We believe we get very fair pricing because of the volume buy. We negotiate well. We have long-term relationships with the suppliers. So I think we can mute a lot of that impact that you're inferring, as a possible risk from the supplier side. I think for us, Mike, for us it's more important to get fair graphite electrode pricing, that quite frankly, as we look back over the last several years, hasn't been the case. If you matched us up with consumer price index, you matched us up with scrap prices, fuel prices, you matched us up with the input prices, it's just not kept pace.

A few years ago a graphite electrode was about 4% of the cost to make a ton of EAF steel. Today, I believe it's closer to 2 or 2.5%. So it just hasn't kept pace. So we believe now is the the right time. Get out there, get ahead of this, get the pricing out there in the market, work on execution, and try and get ahead of what we believe are going to be very high raw material input costs.

Additionally, Mike, I'll tell you the other item. The steel producers, I believe, looking at graphite electrode markets, some of the tightness that the coke situation, have come to us earlier than any year in the past, seeking pricing and starting to discuss contracts for '07. So I do not want to get into contract discussions at the old price, the '06 price, when we know '07 costs are going to go up so much. So in the face of those kinds of inquiries from steel customers on '06, '06 pricing, '06 book, could you give me some bookings for '07. We've gotten ahead of that. Otherwise, I think Mike, we'll fall into a trap where prices go out, and they're at today's type of level, and we get '07 costs come in. And they are large increases. So some of this is driven by steel customers. We've been approached by a number of steel customers for '07 pricing, '07 indications. And so we've given that here.

I mean, with your biggest competitor, SGL, coming out with a price after yours 23% below yours, it doesn't matter how early the steel guys come in, because if you're going to hold the line, you're not going to get any orders for a while.

Well, hard to meet -- hard for me to speak to another competitor's pricing strategy, and I'm sure difficult for you, too, why somebody would be so much lower in today's environment. So I can't really speak to why they took that action after our increase. And obviously, cost pressures are there for '07. We buy a lot of the same raw materials, and obviously, we face the same supply-demand economics, and the market for electrodes is very tight. And after all, what are we talking about, 10, 20,000 tons of graphite electrodes? Small number in the total context of global supply.

No, I'm just saying that with such a wide variance in terms of what you're offering on price, and what SGL is offering on price, I would assume what could happen is that the vast majority of the orders that come in early go to these other competitors. And then you have to kind of be willing to hold the line. And at the end of the day, you could be redirecting a lot of your graphite electrodes around the world. And logistically that could wind up costing you more.

Yes, the market is just going to have to determine this graphite electrode price.

Okay.

Your point is well taken, Mike, and we agree with you. There is a gap in the pricing as we sit today. But I believe the supply-demand economics at the end of the day in the graphite electrode industry will tell us where it comes out. There's a lot of competitors in this industry, and needle coke is very, very tight. And I'll tell you, graphite electrodes are getting quite tight right now.

Then another question, just what kind of caught my eye was on the balance sheet. The net debt has jumped $44 million in the quarter to I think what looks like an all time high in terms of net debt at $742 million. And I mean, the net debt in the Company continues to go up over the last several years. And we have been hearing about working capital reductions, and it's just not happening.

Well, I think we've guided to a use of working capital, and we had a use of working capital also here in the first quarter, primarily accounts receivable and inventory, right on plan. In fact, our net debt for our internal plan came spot on. The use of -- the increase in working capital spot on with our internal plan. We guided that end of the year debt this year would be about $700 million. We believe we're still on target for that. As far as an all time high, I can tell you back when I joined the Company, I believe we were just under $900 million. And so there has been a debt reduction if we go back over the the last several years. So the investment has been made in working capital. Price is up. We have gone heavier on inventory. You know some of the reasons. Some of that was because of the tightness in needle coke. And so Mike, yes, our net debt is up 733. But it's right on what we had planned, and we had guided to a use of working capital in this quarter.

Okay. And just last question on the -- on capacity, because we're hearing noise that some of the Indians could be getting needle coke to ramp up their capacity. Have you heard anything on that?

I'm sure that's a possibility. I know for sure they put a lot of investment in the ground, and I'm sure they've got maximum efforts to get quality needle coke. But I would say right now, it still is very tight. Could they be using some low grade coke? Yes, they could. It will make an inferior electrode. And the large furnaces and the demanding customers, it will perform in a weak fashion. We -- right now for us to try to find an extra 500 metric tons of coke out of our 200,000 ton annual buy, we couldn't find 500 metric tons right now, Mike. It's that tight. And recall that the Lemont coker's last shipments went out the door in February or January of this year. So that coke is still working through the pipelines. So we still haven't seen really what the coke picture looks like or the electrode picture looks like ex-Lemont. And as I said earlier, I think we'll see that in Q4.

Okay. Very last question, I promise.

Please. No problem.

You have heard that before on this call.

No trouble.

Have you had any response from your customers on the the price increase announcement?

Well, it's early. And if I had to recap, will our customers pay $6,000 a metric ton for graphite electrodes? Absolutely. They just want to pay a fair price. The electrode now is only about 2.5% of their cost structure. And for -- they will pay a fair price for a high quality graphite electrode. They're doing great, as you know very well. And frankly, all their other input costs have gone up, driven by inflation, and their own inputs. And graphite electrodes has lagged. And lagged dramatically. Any way you want to cut it, inflation, CPI, input costs, a good 60% of a graphite electrode is driven by oil and energy costs. We're selling a stick of oil, basically. And with a long supply chain, 3, 4, months to make, a lot of working capital demand, and so feedback from the customer -- will they pay $6,000? Absolutely. All they want to do is pay a fair price. And they realize coke is tight, and they realize quality electrodes are tight.

Okay, thanks, Craig.

Bob Schenosky, Jefferies & Co.

I'll try not to ask too many here. Just want to get a couple of them in. The first one is, can you just walk us through how the antitrust payments, as well as the restructuring payments will look over the next 3 quarters?

Sure can. Antitrust, we've already made a couple this year. This full year was going to be about $21 million. And then next year Q1, the final remaining one of $5 million to the DOJ. So for the DOJ, $21 million this year, $5 million next year. The $21 million I believe, we've only got about 10 or 12 left of that for this year. So that will go out over the next -- it's spread over the quarters, the balance of this year. And then the final $5 million in Q1 '07.

Okay. And then restructuring?

On the restructuring front. Let me give it to you by the 3 categories, cash, expense and then, savings, of course.

Okay.

On the cash side, we guided to about $19 million. 17 of that will be this year, and about 2 will be next year. And on expense, $19 million, 10 of that was expensed in '05, 7 will go in '06, and '07 will be a final 2 million. And then of course, on the savings, we guided to about $21 million of annual reoccurring savings, and that's broken down $5 million -- about 5 million this year '06, and the balance of 16, 17 million in '07.

Okay, so the cash expenses, should we look at it so it will be effectively even across the final 3 quarters?

Yes, I think for planning purposes, that's probably pretty good.

Okay. And a macro question. You talked about 3% growth on the graphite electrode demand relative to minis. Can you be a bit more specific? A lot of the restarts in Russia are integrated. New capacity coming up, Brazil, China the same. Even some new additions in India, they're talking integrated. So are there any big projects that you see specifically which will add to the 3% growth rate you're talking about?

Well, yes, you're absolutely right. On the integrated side, there's been a lot of expansion, and a lot of growth planned. And so we see a lot of that all happening. But independent of that, EAF has number of new projects out there. And this year and next year are a couple of the largest 2 year, back to back 2 years, for EAF new starts. About 50% of them are in China. We know those customers. We're in those shops, and those projects are all going forward. Some of them start up later this year. And that's where a lot of this new EAF growth is going to be. So when you look at, why do we think EAF over the next few years is going to grow 2, 3%? Part of it is new, very large EAF starts coming onboard.

The other part is, looking at China, they are trying to get out of a lot of smaller integrated and smaller EAF furnaces. And they've set out here in Q1 a number of regulations that will result in the closure of a lot of the small EAF shops. Now, remember, Bob, in those small EAF shops, they're served by local graphite electrode producers. Small diameter, poor performing electrodes, don't really require a large diameter powerful electrode like we make. Those guys we believe, per the government's statements, they're going to be driven out of business. They're inefficient. They usually pollute the local community. And those going out, being picked up by the larger EAF shops, of course is a big bonus for us. And that's a big part of what we see in EAF growth. We just had the EAF conference here of course, last week, was hosted here in Cleveland. And we had customers in probably from over 20 countries. And I'll tell you, the outlook and the new construction going on in the EAF industry is impressive. So we're bullish on future growth in EAF.

Okay, but one would think in China, that that's likely to be lower priced, correct?

Lower priced why? For the graphite electrodes?

Yes.

I think that's up to supply-demand in the graphite electrode industry. Not necessarily, that's for sure. Same producers, and remember, China is building the largest. EAF furnaces on the planet. They absolutely demand the best electrodes. And our typical customer in China is getting the latest Danieli furnace. If there's a new generation out in the last 12 months, that's the one they want to put in the ground, and that requires the best electrodes.

Okay. Cash flow question. Given the negative use in the first quarter of 41, your CapEx number versus depreciation, can you give us a sense how you're going to -- what are the the key factors in driving this to a positive 10 by the end of the year? Is it predominantly going to be working capital? Are there asset sales in that assumption as well? Or how do you put that together?

In the -- there's definitely going to be some top line growth, as we said. Electrode sales are going to be larger in the second half than the first. So there is some top line growth. Working capital reductions are going to be part of it. Some will come out of inventory. Some will come out of AR.

Any idea how big that shift will be?

Well, I have got to point you to our annual guidance. And we said we would be up 10 million before anti-trust and restructuring. And we also have asset sales that we've targeted of about 17, 18 million, that we targeted that would offset the cash cost of those restructuring programs.

So you do not have that included in the 10 million figure?

No, that is not included.

So it's just income and working capital?

That's right.

Okay. And then just one final comment, Craig. Don't take it the wrong way, please.

No, no. Not at all.

But given the transparency in pricing at the steel mill level, we all know it exists. I'm a bit disappointed, as I suspect investors are as well, in the lack of commentary, even as related to historical pricing. I think it would still be helpful, even if it was directional, even if you couldn't give us the exact figures.

I understand. Appreciate the feedback. What we've tried to do is guide to total Company sales, and the percentage up, and stay away from individual markets, individual dialogues on graphite electrode prices. Big picture, we think those kinds of dialogues, although I completely understand are helpful and informative. But when you're trying to execute global graphite electrode prices, which has been a struggle in this business for many, many years, when we weigh that, we believe it's not productive to talk about individual markets, prices, et cetera, and look forward, announce our price increases. And then go ahead and execute and build a book.

I do appreciate the comments, but at the same time, there is an obvious level of transparency at the mill level. I mean, when we're getting faxes from mills to tell us what prices are, then I think all the competitors also know. And I'll leave it at that.

Perfect. Much appreciate the input, Bob.

Gary Madya, Bank of New York.

Most of my questions have already been answered. So I just have a couple follow-ups. Speaking of the asset sales, status of those, timing, can you give us a better sense as to what is going on there?

The team has done a good job, and I think they're tracking well, and we said we would complete those this year. And I would say in the first quarter we moved closer to that objective. And we expect to complete them before the end of the year.

Okay. So it's a higher probability?

Yes.

Okay. All right. Speaking of the average graphite electrode price per ton, I know that you -- I mean, that's been a heavy topic on today's call. I'm going to try to get at it this way. Is it fair to say that the -- in '05, the graphite electrode business represented about, oh say 75% of the net graphite revenue for the entire year. Is it fair to say in the first quarter of '06, that that percentage is still in the approximate range of 75, perhaps low 70s?

Gary, I'm going to take you back to our real objective here. Our objective is to get graphite electrode prices up. We think it's in the best interest of our cash flow, and in our shareholder's best interest. So I'm really going to have to point to you the annual guidance we've given, and keep you to that, and not rifle shot off certain segments.

Okay.

Okay.

Fair enough. The working capital, excluding DOJ and restructuring, I estimate you used about $35 million in normal working cap. Is it fair to say that you expect that going forward, through the remaining 3 quarters of 2006, that the working capital net through the next 3 quarters will most likely be a source, in that you probably expect to end the year with a small net use of working cap?

Yes, our objective is to get net debt down to about $700 million. So taking that from where we are today, we will pull some cash out of working capital, sales will be up in the back half. As we say, we've got 210 in the book already. And 210 firm. So that looks pretty good. As we said, the underlying industries we serve, steel and aluminum, are running well. So yes, we would expect to pull working capital numbers down over the course of the year, in a staged fashion, such that's we'll finish the year with about $700 million of net debt.

Okay, very well. And just 2 quick questions. On the cash flow statement, I noticed an entry that said, basically a source of cash from short-term borrowings of about $15.7 million. Is that part of the credit facility?

Yes, it is.

Okay. That is part of the credit facility. And just a fixed income question here. At the end of March, what was the value of the intercompany loans in support of the senior note guarantee? I know it was about $323 million at the end of '05. Do have you that?

Okay. Let's see if we've got that handy. If not, we can give that to you, Gary, off line, from a credit bank standpoint.

Very well. Thanks, guys, that's all I have.

[OPERATOR INSTRUCTIONS] Michael Tappinger, WestLB.

Just 2 questions. One is, how much of your cost base is gas and oil? And the second question is in terms of the Lemont needle coke closure, have you seen any efforts in the market to compensate for that?

On the coke side, I'm sure a number of the coke producers are trying to de-bottleneck their plants. I believe some of them are working on it. However, I believe that's going to take some time. It may involve some equipment, some CapEx. But given the tightness in the market, I would expect them trying to get more throughput through their factories. On the cost save, let's just see if I understand your question. I think you said how much was related to energy?

Yes. You are saying basically that you expect significant cost pressure coming from gas and oil. I'm just wondering how much that is?

Oh, how much the cost pressure will be?

Sorry, I mean how much of the -- of your energy costs are gas and oil related?

Well, if we take a total cost of a graphite electrode, 60% plus is oil and energy related products. Things like needle coke, natural gas, electric power, bunker fuel, fuel on all the transportation. If you add all that up, you're going to get to a good 60% or so related to energy based products. And that's the heart of the cost pressure for graphite electrodes.

Okay. Thank you.

Ross Levin, Arbiter Partners.

On the advanced energy technology front, could you go into a little more detail about this cooperative supply agreement with Tradex? And it also notes -- the release also notes that you received several new approvals for the use of the ETM solutions. What exactly does that mean in terms of the certainty that there will be -- that the ETM solutions will be employed in the products that are listed? And do you guys have any idea what the sort of scale and speed of uptake would be?

Okay. Good. Tradex, just to give you some background on Tradex. Trade sells about $90 million. It a company headquartered in Sweden. They were founded back in the mid 60s. They have a very, very strong position in the cell phone market. A large share with Ericsson, Nokia, et cetera. They've got manufacturing facilities around the world, Sweden, China, South Korea, Brazil. So a very, very, well established company with an excellent entre into the cell phone arena. And so that's our main interest with Tradex. We've developed a number of cell phone products, and with Tradex, we will work together to grow our market share in the cell phone arena. So we're excited about the Tradex folks. Tradex, just as a matter of background, after we did our deal, Tradex was acquired by a company called Brady Corp. Brady Corp is a New York stock exchange traded company, And Brady Corp is an $800 million company. So Brady Corp also brings some additional electronic and thermal management skills to the table. SoTradex will help us advance our technology, penetrate cell phones faster than what we could do alone.

As far as the orders, the orders that we talked about on the conference call are all product approvals. And in some cases, those will start up the back half of this year. In other cases, we're going to have to wait for the manufacturing segment of those approvals to be modified, so it can use our product, and it might not be into '07. So those approvals aren't going to change our $30 million guidance. Some of those are in that $30 million, because we have production schedules for those customers that start up in Q3 and Q4.

Thanks.

At this time there are no further questions. I would like to turn the call back over to Mr. Shular for any closing comments.

Scott, thank you very much. Everyone, thank you for joining our call, and we all look forward to talking to you in the next quarter. Thank you. Have a good day.

Ladies and gentlemen, this concludes the GrafTech International first quarter earnings conference call. If you would like to listen to a replay of today's conference, you can do so by dialing either 303-590-3000 or 800-405-2236, with the access code 11058564, pound. We thank you again for your participation. You may now disconnect.