GrafTech International Ltd (EAF) 2006 Q2 法說會逐字稿

Good morning or good afternoon, ladies and gentlemen, and welcome to GrafTech International Q2 earnings call. [OPERATOR INSTRUCTIONS]. As a reminder, this call is being recorded today, Thursday, August 3, 2006. I would now like to turn the conference over to your host, Mr. Mike Carr, Director of Financial Planning and Investor Relations. Please go ahead, sir.

Good morning, and welcome to GrafTech's second quarter conference call. On the call today is GrafTech Chief Executive Officer, Craig Shular, and Chief Financial Officer, Mark Widmar. We issued our second quarter earnings release this morning. If you did not receive a copy, please contact Marie [Knorr] 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 Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release, which is posted on our website at www.graftech.com in the Investor Relations section.

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

Good morning, everyone, and thank you for joining GrafTech's conference call. Today, we'll take you through our second quarter highlights and then open it up for questions.

In Q2, we recorded sales of $255 million and gross profit of $66 million, both representing a 16% improvement versus the second quarter last year. In our Synthetic segment, graphite electrode sales volume was 55,000 metric tons versus 48,000 metric tons in the second quarter of '05. Gross profit for the segment was $67 million, a 31% increase over the prior year. We continue to be successful in containing graphite electrode production costs below plan and now expect the full year annual increase to be in the 7% to 9% range, which is a full 3 percentage points lower than our original guidance.

In our other segment, second quarter sales were $25 million as compared to $27 million in the same period the prior year. Gross profit was a loss of $1 million. These results for the other segment include our carbon electrode business, from which, as previously announced, we will be exiting over the next few quarters. For the carbon electrode business, we recorded a $5 million non-cash charge comprised of a $1.2 million inventory adjustment and, as a result of the accelerated closure of this business, a $3.8 million reserve for the remaining inventory.

Our ETM product line continues to receive additional approvals for leading electronic applications. However, the lag between approval and realization of revenue is longer than planned. This, together with lower volume from one of our large ETM customers, which has experienced delays in his production ramp up, will result in lower than planned ETM sales in 2006. We now expect ETM sales to be in the range of $21 to $25 million.

On the R&D front, our team was awarded the prestigious R&D 100 award for the fourth consecutive year. This year's award is for our new product line, GRAFOAM. GRAFOAM is a unique carbon foam material that is produced in a wide range of densities with properties that are well suited for several industries. Its high strength and light weight make it ideal material for composite tooling in the aerospace industry. Also, its fire resistance and thermal properties make it an advantage solution for multi-layered panels ideal for defense and safety structures.

Turning to cash flow this quarter, we realized $45 million of positive free cash flow before antitrust and restructuring. This represents the strongest cash flow quarter we have achieved in five years and is due to improvement in our business as well as our cash conversion cycle. We finished the quarter with net debt of $695 million.

Finally, turning to the outlook for this year, we expect graphite electrode sales volume in Q3 of 53,000 to 54,000 metric tons and total year sales of about 210,000 metric tons. Global steel continues to run at high operating rates. EAF steel production rose 2.1% year to date June versus the same period last year. We continue to see favorable EAF steel production demand in Q3 and Q4 and expect to run our graphite production facilities at near full capacity for the balance of this year.

On the production cost front, we continue to see signs of escalation in costs from petroleum-based raw materials and expect to see significant raw material price increases in 2007. We plan to achieve higher graphite electrode pricing to offset these cost increases, to improve our cash flow next year and also to continue to reduce debt in '07.

This concludes our prepared remarks. Let's open it up for questions, please, Chris.

[OPERATOR INSTRUCTIONS]. Our first question is from Robert LaGaipa with CIBC World Markets. Please go ahead.

I just had a few questions. I guess, one, given your comments on the continued raw material pressures, especially the raw materials related to petroleum, the needle coke, can you maybe just talk about if you've entered into any negotiations with your suppliers at this point, what type of cost increases that you're looking for, what the availability of the needle coke is? And, can you maybe just discuss what the dynamics are within the market as you see it right now?

Surely. Bob, we've entered into discussions with all of our key suppliers with the objective being to secure '07 pricing as soon as we can and fix it for the entire year. However, at this stage, it is still very, very early in the game. Oil prices continue to be very volatile for them. We've had record oil prices here hit the last couple days. Natural gas has been up, etcetera. So, the supply chain for many of them is very, very volatile. So, so far, we have not fixed any '07 cost. We continue to work on it very, very hard with those suppliers. On the needle coke front, we see needle coke continue to be very, very tight, most of it driven by, number one, Lemont's exit earlier this year and, number two, continuing good strong demand for graphite electrodes. So, we believe '07 needle coke will be tight the entire year and that we will see good pressure on needle coke cost because of that tightness and because of their feed stock, oil and decant oil, rising so much in price year over year.

The second question is just related to the pricing front. Obviously, you were very aggressive several months ago in terms of raising your pricing. A competitor of yours didn't raise it nearly as much. Can you maybe just talk about-- I know at that point in time you had said that you hadn't received any orders with that new price level. Can you give us an update on have you entered in negotiations with customers, have you received that price from anyone and what you're expecting on a go-forward basis. Obviously, with these cost pressures that you're seeing, the pricing has to be able to offset that. Previously, I think as we all know, surcharge mechanism didn't work in the industry. Is it something that you reconsider? What are you seeing from a pricing standpoint?

Bob, you're absolutely right. We went out with what we feel was a very fair price increase, especially when matched up to the cost pressures that we're seeing for '07. You can call it aggressive, but, from our vantage point, very fair because we see very significant cost pressures all throughout '07. We see very tight needle coke market, and we see that EAF steel should run quite well next year with our customers being quite optimistic on the underlying demand. So, when you put all that together, we went out with-- we went out early, so the market could see it with what we feel was a fair price increase. We think at the end of the day, and as we look back on the cost increases, people are going to see that that is a very fair level for graphite electrode pricing because of cost, because of capital requirements and investments that have to be made in the business. On the booking front, Bob, the '07 booking is just starting up, so it's very early in the process. It's too early for me to comment on where pricing's going to come up. You're right on other competitors below us in pricing. So, I think it's probably premature to make a comment on that - where that's going to settle out. I think the customers are coming earlier this year than they've come any time in the past, and I think that's just indicative of the supply/demand equation on electrodes. So, I think we have all of the favorable items in the marketplace for price increases in graphite electrodes. Customers see it. They're coming earlier than ever to get their requirements. And, of course, very strong cost pressure. So, Bob, too early to really give you much color on '07 book building. It's just getting underway as we speak.

Well, how about from a spot perspective, then, Craig? If we think about the volumes that you've seen so far and the volumes that you're expecting for 2006-- Originally, you were looking in the second quarter for roughly 53,000 to 54,000 tons. You came in at 55,000. You left your annual target of 210,000 stable. What's the availability of spots tonnage in your book? You mentioned that for the back half of the year you're planning on running full out. Does that include any spot tonnage? Is anyone currently paying that higher rate, because that is effectively the spot rate at this point; correct?

That's right. We have two accounts that have paid [$5950]. They're small, and I don't want you to read that that means that's going to be indicative of the price for '07. I think it's way too early for that. So, there is a little bit of spot business. There is tightness in the graphite electrode industry. I think we're running full out. I think a number of the graphite electrode producers are at very, very high op levels. For sure, the GE industry is running at a much higher op level than steel. So, the dynamics are there for getting a fair price. And, as I said before, the cost pressures are there to justify it. But, right now, Bob, I'd say, again, it's too early to look forward into '07 book. It's just getting underway.

Last question, if I could, Craig, before I pass the baton. Just on the ETM side of things, obviously it's an area that you've targeted for significant growth. The market itself has been growing at a rapid rate. You'd mentioned one major customer, just because of delays, etcetera, calling back a little bit here in the near term, which affected the second quarter results. But, the comment for the rest of this year in terms of lower-- If we take the midpoint of the $21 to $25 relative to your previous forecast, obviously, it's about 23% lower. You'd mentioned in your commentary that the approval process actually translating into revenues taking a bit longer than what you originally expected. Can you just describe--? If the change of the margin in terms of your previous expectations versus your current expectations, what's changed in the last quarter to make that type of change in forecast?

Bob, the biggest item is one account; it's Samsung. Samsung was scheduled to start up the third and largest production line in Q1 this year. They've had some trouble with that. Nothing to do with our product; it's production issues on the new very, very large third line. It is still going through problems as we speak. So, Q1 and Q2 they did not get it up and running as planned and as was in our production schedule for our shop. I think they're trying very hard to get it up in Q3. They're still working on it. So, that was the biggest change. I think the last report we had from them, and it's in the public-- it's in all of the releases-- they're optimistic that they can get it up in Q3. They were there the same thing in Q2. They thought they could get it back up - that it would be a near term solution. But, so far, they've still had production issues. So, that's the largest change.

The other is we've had a couple other accounts where we have full approval, all set to go, and the time from the approval and their own production schedules that they give us have slipped. So, the schedule they've given us-- they're a bit behind in starting up their line. So, if you add all that up, we view this as a near term item. We're still very excited about this business. We still have all the approvals. We still have the Samsung business. We still have that to come on the third line. We still have the two accounts that slipped on their own schedule to come online. So, we view this as a near term hiccup. It's an important hiccup for us. But we continue to grow the approval process, and I think our product and technology steel continues to bode very well in the small, high-powered electronic products that we continue to see more and more of them. So, flat screen plasma is going to be good. LCD-- all those LCD applications we believe are going to be good for us in the future. And, of course, the increasing functionality in cell phone, and 3G technology in cell phone we believe is going to be very good for our product line.

Craig, is it a specific product associated with that line that you're seeing the delays at Samsung and some of these other delays in terms of the approvals, or is it pretty much across the board?

Well, the specific product that they're working on is flat screen plasma TV. So, the third line start up for that product line for them is where the issue has been. They've announced it, and the market's been following their start up very, very closely. They thought they may have it early in the year solved, and that got delayed. They thought they'd happen in Q2, and that's been delayed. They're working through that process. I'm sure they'll get there. Then we will have and enjoy that third production line ramp up and that business to come.

Okay. Terrific. Thanks very much, Craig.

Thank you. Our next question is from Bruce Klein with Credit Suisse. Please go ahead.

You guys had a $5 million charge. Where in the income statement was that?

Bruce, could you just speak a little bit louder? You're not coming through quite that clear.

I'm turning his volume up also on the bridge, gentlemen.

You guys had a $5 million charge. Where was that on the income statement?

It was in our carbon electrode business that, of course, we're exiting. On the income statement, let me toss this over to Mark, and he'll give you the exact line where it sits.

It actually sits up in our product costs in our other segment. It's not broken out in the other line items that we may show below. It actually will show up in our gross margin for the other segment.

Okay. So it's in cost of goods sold in the other segment.

Right.

Okay. And what--? Craig, I'm wondering in terms of any graphite electrode capacity-- any new announcements of note?

Nothing new that we've seen. As I said earlier to the prior call, and of course listening to some of the other graphite electrode producers' conference calls, we believe everyone's running at very high production levels. The EAF industry's good, and op levels in the graphite electrode industry are very high.

And the spot prices for GE-- you mentioned, I think on the first quarter, the $5950. Is that--? I know spot's not your big business, but is that where it is? Has it drifted from there or gone up from there?

It's still very early to make any call on the '07 book, so I caution everyone. The market is just getting started. There's different prices out there, as Bob mentioned. One of the other competitors is significantly below us. So, I think time's going to have to tell. We've had two orders at $5950, and that just may be indicative of the supply/demand equation in graphite electrodes. There is some tightness out there. As we said, we believe that kind of level is a fair price for graphite electrodes.

You said one of the competitors is a fair bit below on the spot price.

No; they're a fair bit below on what they've announced for '07.

Okay.

I think that's why we really got to let the book come together. It's at the very front part. It's premature to make any calls or views on the '07 book.

Did that competitor announce something on contracts for '07?

Yes. On their intended pricing for '07 contracts, they're significantly below us. The market will determine where that price is. We're going forward. Costs continue to go up. We've got Middle East developments that, of course, don't speak well to oil and oil derivatives. Of course, we continue to have tight needle coke.

Okay. And then the antitrust payment is just the 16-- Was it $16.5 million left; that's it and then you're done?

Yes. What's left-- In fact, the Q3 payment's already gone out the door. If you ask me as of today, roughly what we have left is the Q4 payment, which is $5.5 million and then the very last payment of $5.5 million in January '07 and then that very ugly legacy is behind us. We would have settled off somewhere-- that approaches $500 million in liabilities-- would have all been put behind us and all paid.

Okay. I guess, based on the first quarter guidance versus the new '06 guidance, I've been trying to rack my brains running these sensitivities. Are you comfortable saying whether the net EBITDA guidance is higher or lower than it was in the first quarter?

No. I think our guidance is very much akin to where we were in the first quarter in total.

Okay. You think when you add out the--

Yes. There's some puts and takes. But, in total, I think we look very much like in total where we were at the Q1 call. So, I don't see any significant changes there from the Q1 guidance. There's some puts and takes. We had a good quarter this Q2 on cash flow. But, as we said, that's pretty much in our range. I think we increased the overall cash flow for the year from $10 to $10 to $20. So, I'd say net/net, we're very much in line with what we spoke of in Q1.

Even the EBITDA line.

Yes, sir. Across the lines.

And then the revolver availability? I don't know if it was in there.

We had $43 million drawn at the end of Q2 out of a $215 million facility, so lots of room in the revolver.

Okay. Thanks, guys.

Thank you. Our next question is with Andrew O'Connor with Wells Capital Management. Please go ahead.

Nice quarter. I wanted to know-- Can you hazard a guess; what would you expect year end '06 debt and cash to be?

Well, on the cash side, I think we'll come in between $10 and $20 million, as we said in the release; and on the debt side, it's probably-- it's under $700 million, $690. Maybe we can get it down a little bit below $690. But, it's in that kind of range.

Okay; thanks for that. And, then, if we look ahead to '07, what cost increase would you anticipate for '07 relative to '06? You've lowered your expectation for cost increase today for full year '06 from 10% to 12% to 7% to 9%. But do you have any sense for '07 versus '06? Thanks, again.

We're early in that cycle. We're in discussions with all of our key suppliers. We're trying to fix it early. So far, nothing is fixed for '07. What we can say is, as we've said here the last few months, is we would expect the '07 increases to be some of the largest increases our industry has faced. Needle coke-- Lemont exit-- and record oil prices-- all impact that needle coke price. So we think that's going to be high. Pitch and other oil derivative is going to be high. Natural gas-- we've all seen that move significantly and with a lot of volatility the last several months. And, of course, we're into the hurricane season here. So, I think all of our key raw materials, oil and energy-related, we're going to see significant increases. I would expect them to be percentage wise, larger than what we've seen in the last few years, just because of the underlying drivers to them. Again, that's why we went out with the kind of early pricing we did for graphite electrodes.

Thanks for that. Again, nice quarter.

Thank you. Our next question is from Gary [Madya] with Bank of New York.

Both my questions have already been answered. I've got a couple follow up. Mark, I just wanted to confirm, off of Bruce Klein's question, the $5 million is embedded in the cost of sales. So, is it fair to say, because it was non-cash, non-recurring, that the second quarter cost of sales were excluding non-cash, non-recurring items is typical - that it should be about $5 million lower?

Yes; right. From a cost of sales standpoint, you want to look at it-- it's a non-recurring, one-time item. If you wanted to adjust for that, the cost of sales would be lower, and the gross profit would be higher.

Okay; great. And, I just wanted to clarify. The issue that you're talking about in terms of needle coke for 2007 is strictly a price issue and not a supply issue. Is that correct, Craig?

No, Gary. It's both items. Lemont exit-- Lemont coker, which had run for 25-plus years, exited the business earlier this year. The last shipments out of Lemont, I believe, went probably in February. So, that has put real tightness into the quality needle coke market. So, one, it is a supply issue. Two--

A supply issue as it pertains particularly to [GrafTech]. I didn't mean supply throughout the industry. But, you're not concerned that you're going to have a difficult time accessing needle coke; it's just a question of how high the price is going to be in '07.

That's correct. Our look forward in '07, because we are a very large buyer-- we've been in this market for many, many years and very strong relationships-- we do not have a supply issue. Our issue is not availability of coke. We believe we will get adequate amount of coke to service our customers. It's price and cost pressure coming from needle coke.

Okay. And just a couple of, I think, quickies here. The volume forecast-- we've done first half '06 about 97,000 metric tons. We've got 54,000 identified for-- if we take the high end of your range for third quarter. So, that kind of leaves about 58,000 and change for the fourth quarter. Is it fair to say that's probably a bit aggressive in that perhaps there's a better chance that you come in slightly under 210,000?

No. I think we feel comfortable with the 210,000. The underlying customer base is running well. Our facilities are running very, very well. I think that's very indicative from the cost performance of those facilities. So, we see the underlying demand good in our book for 210,000, and we see our plants ready and able to supply the 210,000.

Okay. And then, just finally, I know last year-- first part of this year when the book was announced, the weakness in the marketplace seemed to be really focused or centered in Europe. Can you give us a sense of what you're seeing or feeling over in that region right now in terms of supply and demand? I think there was some speculation last year that some incremental capacity from India kind of put the market out of kilter and was part of the reason why the '06 book was a little bit weaker than expected in that region. Can you just update us?

Gary, on Europe, Europe has started to pick up. If we look at EAF production year over year, let's say the first half of this year versus the first half last year, western Europe would be up about 1.3%, and eastern Europe would be a little bit higher than that, probably about 1.7% in EAF steel production. So, Europe has started to turn and pick up. So, I would say in the EAF world, we have good numbers around the world. Asia, of course, are the larger year over year increases. China EAF is doing very well and continues to grow and is a very key target of ours. So, Europe has started to pick up. Last year was sluggish to flat, and now we have some growth in EAF steel in Europe.

Okay. That speaks primarily, I think, to the demand side of the equation. Are you getting a sense that there's potential for incremental capacity or production over there, or do you estimate that the lack of premium needle coke is going to perhaps tighten that up a little bit?

Gary, we would view it as a tight market - one, needle coke, and, two, most of the suppliers are already running at very high op levels. So, pick up in underlying demand from the steel industry and then GE production being already at high levels and already tight needle coke. So, we don't see a lot of excess electrodes out there in the system.

Okay. That's all I have. Great quarter, guys.

Thank you. Our next question is from Justin [Bergner] with [Dibelli] & Company. Please go ahead.

In regards to the lowering of, I guess, cost guidance from 10% to 12% to 7% and 9%, is that simply a matter of the restructuring initiatives, or are there other factors at play helping to lower that range as well?

It is a little bit of the restructuring. Our head count so far year to date this year is down 214 people, so it's a little bit of the restructuring. We're starting to get a little bit of that, as we said. But, it's primarily just running the plants very well, and it's the continuous and relentless attention to overall cost performance and plant operations. So, the plants are running well. We've been through a lot of restructuring the last several years, and some of that is starting to come together. We have five plants that have all increased significantly in size, so our average plant size has gone up. The global footprint sits on four continents. So, Justin, I think it is primarily just our five plants running very, very well-- high efficiencies, high op levels. They're larger than they've ever been. And then a little bit-- 214 people off the payroll as we start to get some of the productivity improvements.

Okay. I guess if your initial guidance was 10% to 12%, what would have had to have happened to have caused your operations to run less effectively and have had you to fall in that 10% to 12% range?

Well, remember, when we start out the year, we don't have all the costs fixed; we only have about 75% of the costs. So, there's a cost element that's still open. And, we also have continuing programs at every facility to improve productivity and cut costs. So, as those deliver throughout the year, we get ourselves in a position to update the guidance and come in better. So, that's what we've seen here. Here we sit in July, and those plants have run well and high op levels. Some of that heavy lifting that's been done over the last couple of years starts to pay off. And then, as I said, another 214 people come off the payroll, and we still make more electrodes than we've ever made. So, it's a combination of those items, Justin, that allow us to reduce our cost estimate.

So, would it be safe to say if these are kind of ongoing productivity initiatives that if we had some cost increase in our model for 2007, then we could lop off 2% from that increase, based upon the cost increase expectations in '06 and the productivity initiatives continuing going forward?

Justin, I think it's premature to do that and early. What I'd like to do is get to the end of the year and give that '07 guidance after we've completed the other productivity projects we have on board and after we have a raw material book put together, and we can actually see how much those costs are going up. I think your takeaway can be that the GrafTech team is relentless on this productivity front. We continue to cut costs. We continue to run the facilities well. The facilities have all grown in size and in productivity. And, tons per man-- tons per man hour continue to go up at GrafTech, and we will be relentless on that. We'll continue that program into '07 and '08.

Okay; great. And one question on the restructuring initiatives. Are the costs associated with undertaking the restructuring initiatives in line with the initial plan?

Yes; they are. The restructuring issues all are in line and currently, in total, all on target. A couple are a little bit ahead; a couple are behind a few weeks. But, in total, our restructuring projects look very, very much in line.

Okay. Thanks. Looks like a good quarter.

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

It's actually Jeff Largi. Just one question. In years past, you guys used to speak about the South African contracts that would have been wrapped up around this time of year. I see you guys left it out. I think you were trying to move away from talking specifically about pricing. But, I just wanted to know if you could give some color on, one, if those contracts did get wrapped up and, two, what your level of satisfaction was with that pricing?

Jeff, good question. You're spot on. One, as you've said, we've gotten away of talking about pricing a specific region. But, two, and a very important two-- in South Africa some of the global steel comp consolidation, of course, has impacted that market. Mittal picked up Iscor there, which is by far the largest steel producer. So, Iscor was absorbed by Mittal. They had some additional globalization there. [High Phelps] was picked up by SeverStal, the Russian producer. So, due to that globalization, the midyear contract program in South Africa really is going away because the buy of those South African entities now is rolled up in the annual buys of those large globalized customers. I think we really don't have anything to add on South African pricing. They're rolled up into the global buy and the global demand for those larger accounts. I think we won't see that South African buy annual midyear; it's going to move to the global buy of the Mittals, the SeverStals, etcetera of the world.

Those guys typically buy on the calendar year?

That's right. Absolutely; they buy on a calendar year, twelve months - fixed contract.

Okay. And have you guys had any--? Is there any concern or what have you on the Arcelor-Mittal merger and what that might do to their possible purchasing power?

Well, I think it's the old double-edged sword. They're much larger-- much, much larger. Their buy is very, very large, so obviously they get more purchasing leverage from that. That's a very, very clear aspect of this consolidation. But the other side of it is their electrode buy is so large that, really, there is no one producer that can take care of them. Recall that a number of our competitors are single-plant locations. Their annual buy looks more like two or three plants. So, they've gotten so large that the top few graphite electrodes producers-- they'd probably have to have us all on their book to meet their annual requirements. So, that's the other side of that double-edged sword. Yes; the purchasing power is up. But they're so large-- they need the large global electrode producers to service them. We believe because we're on the four continents and, of course, when you look at Mittal-Arcelor, they're everywhere we are - South America, North America, Europe, eastern Europe, etcetera. So, our footprints match up very, very nicely. So, I think we will be a part of their buy probably for many, many years. We look forward to servicing that large account. I think it's a good combination of two very fine companies.

Okay; great. Thanks.

Thank you. Our next question is from [Srina Vassen]; [Ramia]. Please go ahead.

My questions have been partly answered; just a couple of follow ups. We've seen about 40,000 tons annualized capacity being stabilized in India in the last quarter. Does that concern you as you get into pricing and volumes for '07?

Yes. The Indian producers have been bringing capacity on. For the last couple years, they've been ramping up. I think that-- Everyone's been aware of that. They've been announcing that for the last 18 months or 2 years. So, that program, I think, has gone very well for them. So, absolutely; I think some of those tons-- well, a lot of those tons are already in the market; and some more of those tons will probably come to the '07 book-building process. So, I don't think it's a major concern. I think the Indian producers face the same kind of raw material cost increases we have. And, I think what's coming on can be absorbed in the market. There's a lot of new EAF starts, especially in Asia. So, I don't think it's a major concern for us. It's obviously an item we all watch. But I wouldn't say it's a major concern, sir.

And to what most of that incremental capacity that they've been talking of has actually come in only in the last quarter in terms of them having stabilized their production?

Well, I think it's been coming over the last couple years from the two Indian producers. They've been announcing more of it coming. I think one of them has worked on stabilizing the process, and more will come. But I think we've seen a lot of that come over the last couple years. I don't necessarily see just a straight 40,000 coming out all at once. I think it's been coming out for the last couple years as they've been in a ramp up process.

Do you see that leading the pricing pressure for you or shift in market shares?

Well, obviously, it's a worry card. But in the large global market and the strong EAF market, I think a lot of that can be absorbed.

Okay. Just a bit on needle coke. If you just forget the '07 numbers and look forward maybe two or three years, do you think as an industry you're going to have a serious problem getting the needle coke quantity as such?

Well, I think the less additional capacity is added by the major coke producers in your horizon, out three to five years, yes; I think the supply equation for needle coke will become much more tight. If EAF still continues to run very hard and grow as it has the last couple years and as it looks like it's going to do in '07, I think it will become a big issue. Right now, the existing producers have been going through de-bottlenecking exercises. Some of them have been doing that for years. So, there's only so much more they can get out. I think three to five years out, it will be perhaps a bigger issue than it is today, unless one of them can add some additional capacity.

You don't see that happening right now.

No. I see '07-- I think the major producers that have a large buy of quality needle coke will be able to get their coke. I think it will be on the pricing front we'll see significant pressure. So, I think '07 is okay. But, out three to five years, it could be very, very real. An aside to that, of course, is sometimes the Gulf storms affect some of the production. Sometimes there's an unplanned outage at those facilities. Then other times they have to do their annual turnaround maintenance, which at some of those cokers is very extensive. It comes up every three to five years. So, those issues, I think, down the road will become much more important to us because things are so tight today. So, any interruption at those facilities today will ripple through the marketplace.

Thanks so much. Good luck.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is a follow-up question from Bruce Klein with Credit Suisse. Please go ahead.

I was just wondering on the needle coke side what gives you the comfort that we won't have a supply-- I recognize you're one of the biggest or the biggest-- but, other than that, is there any reason you believe that you're in a better position from a supply standpoint or you won't have a supply problem?

What gives us comfort is, one, our large buy; but, also, we have a very strong partnership with one of the largest producers, Conoco. Of course, as I said, we are already in the discussions for '07. Conoco and our other suppliers where we are large-- we already have been talking volume. We don't have a concern over volume for '07. It's price that's going to be our big pressure point for '07.

What percent, roughly, does Conoco supply for needle coke?

Conoco is 50%, a tight number for us, plus/plus. So, Conoco-- of our quality needle coke, Conoco could be as high as 70%.

Okay. You don't have a formal agreement. You have a relationship with them; there's no contractual arrangement. Right?

Yes. We have a contractual arrangement also that also supports our supply and our working together and cross functional teams between both companies. We have an evergreen facility that assures us of supply and also the interactions between our two companies. So, we have a very strong multiyear agreement. Right now, it's evergreen. It continues and renews automatically each year. So, on the supply side, Bruce, we feel comfortable. As I said, it's pricing pressure because of supply and demand in needle coke and oil prices.

Do you know if your other competitors also have similar supply--?

I do not. None of them have talked much about it. They may. I do not know. But, as I said earlier, I think for '07 the larger graphite electrodes producers will probably be able to get their supply. It's just the price pressure that our industry will face, and pitch is no different. Pitch and other oil-based produce, I think, will face the same kind of pressure. Again, not to belabor it, but that's why we have been seeking a higher price and what we consider a fair price, given all those dynamics.

Okay. Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question is from Greg [Vinnet] with Smith Barney. Please go ahead.

In previous conference calls, you alluded with the Lemont facility closing down that there might actually be shortages of this quality needle coke. You don't have a shortage, but have you heard about other producers getting needle coke?

A couple of the small or medium-sized producers on their conference calls have talked about being coke constrained. I think, as I said, the larger producers, no; but the small or medium-sized I think have felt the pinch on trying to get available quality needle coke. They've talked about it on their conference calls.

Okay. Is your plan for the contracts for next year to lock in all your prices first and then negotiate?

No. We went out early for a couple reasons. One, customers came to us early. They came to us earlier than they've ever come to us in 15 years. So, they came to us and said, gee, we'd like to start '07 discussions. So, we felt very important to get our price out there while-- because of that initiative from our customers. Then, two, because of everything we've talked about here this morning, we saw very significant raw material price pressures. So, again, that's why we went out early on the price. So, our strategy is not to fill up our book and then get our cost. Ideally, we would like it the other way around. We'd like to know where our cost structure is for '07 and get a lot of that secured and in place and then start to open up our book. That is absolutely our first choice. If we can get that out of this industry, that's where we think it should be. That's the way the steel industry would work. The steel industry would go ahead and get their scrap lined up, etcetera, and then they would open up their book.

Why would you not do that, Craig?

Well, some of it's driven by our customers. Our customer demand--

Let them go down the street.

-- industry practices. The customers, like so many industries, drive a lot of it. Right now, some of the customers are coming looking to secure their '07. So, it's a trade off between trying to get maximum price, understanding your cost and still get an important part of the market share that you should have.

I guess, Craig, what I have a hard time understanding over the last year or so is if it's a tight market, which is what you're saying, and the customers want to come and negotiate with you, and the major competitor of yours priced below the market, why would you not let him fill up his own book at whatever price he wants, but we're going to wait until we've locked in our costs. We will give you the supply; we just don't know what the price is.

I think we are set up-- very hard to try and test some of that this year. We've come out early with the price, and I think we got the question, do you have anything in your '07 book, and we said no. We don't. I think we're down that path right now. I think at the end of the day the market's going to decide the price. It's very early in the '07 book building process. We're just going to have to wait and see how that comes together.

In other words, you've quoted prices for next year.

Absolutely. $5950.

But you're not sure you're costs are going to be-- you don't know what your costs are going to be for next year.

Well, it's early. We've got some ranges and some ideas and indications because we've all seen how much oil has moved. So, we've seen some of the drivers of our cost structure and what they've moved. But, we have nothing fixed for next year.

[inaudible] profitable.

Pardon me?

At $5950, you feel like you can be profitable.

$5950 we feel is a very fair price for graphite electrodes. And, given where costs are going, we believe gives a fair return.

Okay. Now, in a previous conference call-- I think it was the last one-- you had indicated that it looked like you wouldn't be operating at capacity for this year. Now the second quarter you're indicating-- on these results you're looking like you're operating at capacity. The industry is up or near capacity. Is that correct?

Yes; that's right. We will run-- Remember, Q3 always there's some maintenance things we do at our plants. There's the European holiday season, etcetera. So, Q3 and Q4, we will run all of our facilities at virtual capacity.

So, the delta, the difference between three months ago and now at capacity, those would be all at spot prices; wouldn't they?

No, because, remember, Greg, our book is already put together for the entire year. That was put together at the end of last year.

Okay. There wasn't any excess in your book.

That's right. That all got put together, and that was about 210,000.

Okay. I see. Final question. South African contract which came off which we were talking about earlier-- those mills, and it's a small percentage, I realize, but those mills are now controlled by one of your larger customers. What are you selling to South Africa? Are you selling that under the old contract, or is there a different deal for supplying those mills at maybe a higher price? Maybe you can't comment.

It's rolled in. They've been acquired-- two of the steel producers-- the largest, Iscor, by Mittal, of course. So, it's by far the largest in that market. They've been rolled into the global bid process and the global contracts already of those accounts.

[inaudible].

I'm sorry?

They had contracted for a certain amount last year for this year.

Yes. So, those have already rolled in. Those are at the prices that were put into this year's book, and they're in the 210,000 volume.

But, aren't they buying additional over and above what they contracted for?

No. Those acquisitions were known at that time, and the consolidation of the global books were put together for this bid season. So, if we look at it high level, South Africa used to be separate standalone steel companies. Just historically that market used to be middle year of the bid. That's just the way it was. As that steel industry has been consolidated by the global players, like SeverStal and Mittal, they've gone to an annual contract; and they've been rolled into the annual bid. So, for instance, Mittal bids globally their book. They don't bid country by country. SeverStal, the same thing. So, they've been rolled up into that. So, we don't have a South African six-month phenomena really much at all today.

Okay. Thank you.

Gentlemen, at this time, I show no further audio questions.

Everyone, thank you for your questions and joining our call. We look forward to talking to you at the end of Q3. Have a good day.

Thank you, gentlemen. This concludes GrafTech International Q2 earnings conference call. Once again, ladies and gentlemen, we wish to thank you for your participation. You may now disconnect.