GrafTech International Ltd (EAF) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to GrafTech International 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, Tuesday, November 7, 2006. I would now like to turn the conference over to Mike Carr, Director of Investor Relations. Sir, please go ahead.

Thank you [Heidi]. Good morning, and welcome to GrafTech's third quarter conference call. On the call today is GrafTech Chief Executive Officer, Craig Shular, and our Chief Financial Officer, Mark Widmar. We issued our third quarter earnings release this morning. If you did not receive a copy, please contact [Jen Rettig] at 216/676-2281, 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 may 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.

Thanks Mike; good morning, everyone, and thank you for joining GrafTech's conference call. Today, we'll take you through our third quarter highlights and then open it up to questions.

In Q3, we recorded sales of $247 million, an increase of 18% and gross profit of $71 million, a 22% improvement over last year. In our Synthetic segment, graphite electrode sales volume was 55,000 metric tons versus 48,000 in the third quarter of 2005. Gross profit for the segment was $67 million, a 30% increase over the prior year.

In our other segment, third quarter sales were $19 million as compared to $25 million in the same period last year. Gross profit was $4 million versus $6 million last year.

During the third quarter, our ETM product line performed below our expectations due to lower volumes of one of our largest ETM customers, who has experienced production delays, some of which we have talked in the last couple of quarters about. Also the lag between approval and realization of revenue in other accounts is longer than planned. We expect ETM sales for 2006 to be approximately $16 million.

On the announced proposed divestiture of our Cathode business, we expect to complete the sale of our 70% ownership by year-end for $130 million to $140 million, subject to meeting customary conditions. The Cathode business September year-to-date revenue was approximately $90 million. Proceeds will be used primarily to de-lever and improve the balance sheet.

Turning to cash flow this quarter we realized $25 million of positive free cash flow before antitrust and restructuring charges. This is our second consecutive positive quarter, and for the 9 months, this is a $72 million improvement over the same period last year. We completed the quarter with net debt down to $669 million.

Turning to outlook, while some regions in steel are showing some cutbacks in production, overall global steel industry economic conditions continue to be favorable. EAF steel is on track to finish 2006 up about 3% versus last year. We believe that 2007 will also be a good year for steel and for GrafTech. We expect a solid finish to 2006 with fourth quarter graphite electro volume of about 57,000 metric tons and the full-year estimated volume at 210,000 metric tons as guided

We expect Q4 to be free cash flow positive, and anticipate full-year free cash flow of $50 million to $60 million. This represents the best annual free cash flow in over 7 years. This year's free cash flow performance together with the expected closing of the sale of our 70% interest in the Cathode business should allow us to complete the year with net debt below $525 million. This will position us very well as we enter 2007.

The graphite electrode annual order book is underway for next year, and we are currently booking orders at competitive market prices. Current price levels are higher than 2006, but still below what we believe is a fair price for the value of our graphite electrodes.

We have secured the 2007 volume requirements for all of our major raw materials, and continue to finalize pricing. In 2007, we expect to have gross profit expansion over '06 and to again be cash flow positive. We will provide 2007 guidance in our February conference call.

In January 2007, we will make our final DOJ anti-trust payment of $5.3 million. This will conclude this very large legacy item that we've had to deal with over the past 8 years. Thus, we will enter 2007 with our best balance sheet in years, with significantly lower debt; we should have lower interest expense, and the DOJ legacy cost will be behind us. As I said earlier, we expect gross profit expansion and to again be cash flow positive in 2007.

Heidi, with that let's open it up for questions.

[OPERATOR INSTRUCTIONS]. Brett Levy, Jefferies.

Hey guys, congrats on the strong quarter.

Thank you sir.

And the prospective asset sale here; can you give a rough sense as to what multiple or EBITDA comes out of the assets being sold, or will that be disclosed after you complete it?

Brett we'll disclose that after we get it done. As you know, there's very specific process in France for this type of a sale. They're customary processes, but they're particular to France, and as soon as that's complete, we'll give you full detail.

Can you give, I know in previous calls you've given guidance in terms of what you think is going on from a pricing perspective in Europe, Asia, and the Americas. Can you give us a little bit more color on that?

Well, it's still early; the book building process is underway; I guess the color we can give at this stage is the process is orderly. We've obviously engaged the market at prevailing prices; the prices are up. And viewing our raw material prices that we see right now in the market, which we're finalizing, we would expect margin expansion for next year.

Across all geographies?

Yes, we expect prices to be higher across all geographies, absolutely.

All right, and of the new capacity coming on in Asia, approximately what percent of that is EAF?

EAF right now in China is about 50% of all new starts. Today, the majority of it is still integrated, which is very common in an economic developing country like China. So we would expect near term, the next let's call it 3 to 5 years, we'll probably still see some integrated expansion, but as the local infrastructure gets developed, as it starts to generate scrap on its own, as an auto industry develops and we start to get a scrap source in China, we think we'll see some very attractive EAF growth in China.

So today Brett, it's a relatively small percent; China is only 13% or 14% EAF today, but we would expect over time, it will move to 25% or 30% as we've seen in many countries that have gone through a similar cycle as recent as South Korea.

All right, and then I know you guys have not put out 2007 CapEx guidance; can you talk about whether or not you're contemplating any major projects, and where you see maintenance CapEx for the Company being, kind of pro forma for this divestiture.

Yes, we'll give that type of guidance in February, but we don't see anything significant out of the ordinary at this point Brett.

All right; I'll get back in the queue, thanks.

Thank you; Bob LaGaipa, CIBC World Markets.

Hi, good morning Craig; a few questions; I guess one to circle back to the book building process, which you mentioned was orderly at least at this point. I mean, I was struck by a comment you made in here, and I was hoping you could qualify it in the press release, that you mentioned you had begun booking orders at the prevailing market prices. Now, what exactly does that mean? Does that mean that you are holding off on booking orders up until this point, and now you're booking at the prevailing market prices? Or, maybe if you could provide some color there.

The color would be this Bob; we went out with some price increases earlier in the year; we held at those prices. We've booked orders at some of those prices, but the market did not move up as much as we would have liked and so we've engaged at the prevailing market price that's out there. And so we're building a very orderly book, and I think at the end of it we'll see that it's a good solid book.

And the fact that you did book some orders at those higher levels, I mean are customer that had booked at those prior levels, given the fact that the pricing is now prevailing market pricing, obviously prevailing market pricing is much different than the prices you were looking at earlier in the year, are those customers now coming back to you and saying, "Look, we booked at these levels; the prevailing market price is this level; can we renegotiate the contract?" Or are they demanding that you renegotiate the contract at these lower levels?

We don't expect any of that type of activity. We haven't seen any of that; we don't expect any. As you know, electrodes are tight; the raw material supply chain for quality, needle coke is very tight and I think those customers that booked earlier wanted to be assured of their supply. So I don't expect any of that type of activity that you mentioned.

Okay, and secondly, with regard to volumes, you mentioned that the pricing has been orderly, etc. I mean, if we think about North America for example, it's our understanding that the North American book has largely been completed. Are the volumes that you've booked in North America higher or lower than what you booked last year?

We'll give that guidance in February, but I would say for North America, for South America, for the Western Hemisphere a lot of that has been put together already, and we're pleased with the volume.

Okay; another question just on the margin expectation, now I know the book is still being built in terms of the electrodes. You mentioned that you locked up the volumes for raw materials; could you give us some sense of what type of increases that you're seeing around the raw materials, the needle coke, the pitch coke, etc., and what gives you confidence that with the book still being built on electrodes that you will see gross margin expansion moving in for next year?

Bob as you said we have locked up the volume of all the critical raw materials. On the price front, what we're, we have indication on all the prices; we're one of the biggest buyers in most of these raw material segments, so we have good indication of where the price is right now for these raw materials. What we're going through right now is trying to improve upon that. So obviously, if I thought the price was going to run away from us, we would have fixed immediately, but we are negotiating trying to improve on that pricing of those raw materials.

So high level, the volume has been secured; we've got a good indication on the pricing and that's why we can say we will have margin expansion, and what we're just trying to do now is maximize the leverage of our large buy and get the best price, a fair best price for these raw materials.

And as your, with regard to your comments of looking for the margin expansion, is that based on the existing pricing that you're seeing, or does that anticipate some better pricing based on your negotiations?

No, that's from what we're seeing in the prevailing market price today.

Okay terrific, and last question if I could; just on terms of the debt loads moving into next year, obviously, they're going to be in much better shape; you also have the 10.25 are potentially callable in February. Can you just discuss what your plans are with regard to that call date?

Well, obviously as you said, February 15 next year we have a window to call those 10.25s; they're our most expensive debt, and so we are reviewing all financial alternatives around that. Obviously, you pay down the revolver first and we are evaluating what is best for our Company in cash flow and to de-lever us.

So the good news is the timing of this in-flow from the proceeds is matched up very nicely around the call date, and I think high level, we're looking forward to a much lower debt level and lower interest expense next year.

Terrific, thanks very much Craig.

Bruce Klein, Credit Suisse.

Hi good morning; again, just on the, on a GE contract pricing; prevailing market pricing is not -- again, I'm still trying to understand whether you're talking about kind of what you were getting sort of earlier in the year on spot, or where spot is today, or where the other guys are on spot, or how do we think about that?

Well, I think the best way is it's still fluid, the book is being built and we will give our '07 guidance in February, so I think it's premature Bruce, really to give you any guidance there. The price is up in every region around the world, and as I said high level, we expect margin expansion year-over-year.

I guess one of your key competitors I saw did raise GE spot prices I guess about a month ago.

That's right.

And I'm wondering if you all booked sort of the bulk of what you've booked so far prior to or after that, or with that number --?

You're correct; one of the competitors did raise, and they raised some double-digit percent, 12% plus, which I think is positive and reflective of just the raw material cost pressure that the industry is facing. But again, I'll have to ask you to wait until February, and let's get the full book put together and we'll give you guidance at that time.

Okay; can you share Craig maybe how much of the '07 book; is it less than half, more than half that you've kind of booked already today? Do you share that or not?

I won't give you a percentage but on the geographies, most of the Western Hemisphere has come together now. So the book is working now in Europe and Asia; Western Hemisphere, as I said, price increase across the board; orderly process, and we're pleased thus far with the book we've built.

Okay and then back to the market in general, I mean you still characterize it as tight, and is that right?

Yes, I think it is very tight on quality needle coke, and I think we see continued growth in EAF through new starts; China '07 we think is going to be another good year for steel. As we said at the outset, they're going through a little slowdown here in production; we view that s near term. So I see '07 is going to be another tight year for graphite electrodes, and also tight on the raw material side, namely coke.

Does it surprise you that your current spot price isn't where everyone else was giving it tight, and is there any way to square that thinking with what the other guys might be doing?

Well, I think there's room for it to go up, and as was said earlier, one of the other competitors did raise 12% plus, so I think there's room for it to go up, and we'll just have to see how this market evolves over the course of next year.

You said competitor and that 12% hike; are you talking about what their spot price was, or what they articulated for '07?

What they said was their price increase. They issued a price increase that I think was up about 12% or so.

Okay, and I didn't -- you mentioned a 50% China number; I didn't know what you were --.

That's the number of EAF new starts around the world; about half of them are in China.

Oh, all right, I've got you.

So the question was what's happening with EAF in China; it is starting to pick up. It's still a very small percentage of total China steel, 13% or 14%, but that is very normal in the front end of a growth cycle that a country goes through. We saw that in South Korea; South Korea started out with single-digit EAF, and now it's 40%, 45%, so I think we'll see the same over time in China. So we're very bullish on the Asian front for graphite electrodes.

Right, and lastly just the Cathode business, how are you booking that? The 70% was fully [inaudible] in your financials? I don't recall, the 70% Cathode business that you have now; how was it, how does it show on your financials?

It was consolidated into our results and obviously, we booked minority interest against that, so if you look at the P&L you'll see minority interest there, and you'll also see it on the balance sheet, we have minority interest liability.

Okay, I'll get back to you. Thanks guys.

Andrew O'Connor, Wells Capital Management.

Good morning Craig, nice quarter.

Thanks Andrew.

Wanted to know, what would the margin expansion you envision for '07 Craig come from? Would it be mostly from the top line or from the cost line? And if you can't quantify it, can you speak to it qualitatively? Thanks.

Thanks Andrew; obviously price is going to be up as we said so there'll be some due to price increases. And then our team, as you saw this year we've done very well in the cost containment front, and I think we've done better than our original guidance on cost, and we've now got it down to a 7% to 9% year-over-year increase for this year.

So Andrew, the other portion would be on good cost management, good productivity improvement, projects in our locations.

So related to that, what specific cost reductions or initiatives should we look for for GrafTech to benefit from or realize in '07 relative to '06?

Yes, earlier in the year, we announced $20 million, $22 million in productivity improvement projects, and those have gone very well for us. Most of the heavy lifting for those is this year, and those have gone well for us; those are tracking well. And we said about 25% of that cost savings would come this year, but the majority would be next year. So your takeaway should be those are on target; we'll see some of that next year, and obviously, I'll have another list of those next year that we'll continue to work on. It's an evergreen process to improve productivity and get costs out.

Okay, and you're suggesting that 75% of the benefit has yet to hit the bottom line; that'll come in '07?

That's right, so I think you'll see it in many forms; in spend obviously you'll see some in headcount, and some of that will articulate and talk about in the February call.

Thanks very much.

Gary Madya, Bank of New York.

Good morning, thank you; hey Craig can you flush out a little bit the $7 million of variable incentive pay that way put into SG&A? give us a sense as to what form that took and to whom those expenses were, that comp was paid to?

Yes Gary, we have a cash bonus in our Company that goes to every man and woman in the Company. We've got a program, and there's cash flow targets set up; everybody in the Company, every employee participates in it, and obviously, we you've see over the year, and our cash flow has improved quite significantly, and we've started to trigger some of those bonus targets. And so that is all going into a pool that would be paid to everyone in the Company if we're successful in closing out those targets.

If you pull that away, I think what you'd see is the core SG&A is flat year-over-year. And so we've held that flat so we've offset all inflation SG&A and the increase you see is primarily due to the triggering of the cash targets, achieving some of those bonus requirements, and then those payments would go out to all the employees.

Okay, so how should we think about that going forward, if the Company continues to at the very least maintain status quo in terms of free cash generation, is this a one-time thing due to the improvement that we've seen kind of year-to-date? Or is it something that as we kind of look into 2007, should we kind of permanently adjust our thoughts about what the SG&A line should look like?

Well, 2007 we expect to be cash flow positive as we said, and there will be targets set for each of our business teams, and if they achieve those targets Gary, they will trigger a cash bonus. So I think you should look that if we're successful in growing and accelerating our cash flow here, we will have cash bonus payments in the future, which is the way we really want to drive our team.

Right, I understand it's kind of a [inaudible] problem.

Yes absolutely, and just to clarify that our language is clear in the release, Q3 was a catch-up on that number, right? Q1 we were still negative; Q2 we went positive; Q3 positive; and obviously we've guided her that Q4 will be positive, so in the Q3 number you're speaking of, there was a catch-up in that for the balance of the year.

All right, so that was a bit inflated.

Yes.

Okay good, getting to the Cathode divestiture, I know you're not going to talk about EBITDA or any sort of operating margins, but when we kind of back into what you guys are forecasting for net debt below 525 kind of versus the current 669 and we take a look at what your estimate is for free cash, we pick the mid-point, that kind of backs into a number like a net proceed number of somewhere around $90 million which would imply we look at evaluation of like 135, right in the middle again of what you've put out in public, a tax r ate of 35% which seems a bit high. Could you give us a sense as to potentially kind of what the tax impact might be on the Cathode and whether or not I'm thinking about this correctly?

Yes, let me readjust your numbers because I think you're not looking at it maybe as well as you should. If we start with the net debt at the end of Q3, the 669, and then of course, we guided that we would be positive in Q4 and we gave the annual guidance, which if you subtract that, you'd get probably that Q4 would be 20 to 31 million positive, and that's going to get you to a net debt of 648 to 638, depending on where that comes in. And I think that would leave you, if you backed into it, and net proceed somewhere around 113 to 115 million, to maybe 123 million, so we have some good tax assets, and of course I think you're going to find when we finish this deal that it's been done very efficiently.

Okay, all right, so I wasn't factoring in the anticipated free cash.

That's right, you were missing that piece. So we expect to be 525 net debt of below, and obviously, if you look back on our recent history, this is one of the best balance sheets we're going to have in 7 or 8 years, and we're going to be positioned I think very well going into '07; '07 is going to be a better year for us. There will be margin expansion, and interest expense is going to be down; 15 million of the DOF we don't have to pay. Obviously, you're going to see our team just attack costs; we've already talked about success on the productivity projects we identified earlier this year. Those will come through, and so we're feeling pretty good about '07.

Okay, and one final question; I saw that you reduced the bank revolver by about 14. I think I know what the number is but what was your bank debt again at the end of the quarter?

The bank debt at the end of the quarter was about $30 million outstanding.

Okay, I guess based upon the earlier comments, I mean obviously, the tentative quarters are the most expensive debt but contractually, the bank is supposed to be paid first. Will the Company perhaps be looking for some flexibility from the banks in order to affect the transaction that would have the more positive impact on the income statement in terms of interest expense?

Well, I don't think we need to ask for any more flexibility from our banks. We have very good flexibility with the revolver; it's a $215 million revolver, and it only has a 30 draw on it; I mean, obviously our own cash flow in Q4 is going to eliminate most of that. So I would say most of those net proceeds of this Cathode sale are going to go and look at the 10.25s and give us some nice interest expense reduction in next year.

I understand, okay guys thanks a lot; I appreciate it.

John Lansfield, Royal Capital.

Question, and a couple of other callers have touched on this, but can you give some sense for the profitability of the Cathode business that you're divesting? I mean, the minority interest, the relatively small portion de minimis expense or income you're recognizing from that quarter to quarter would suggest that that's sort of a break-even business. Are we thinking of that right?

Yes John, I think you are looking at that correctly. This has not been a business that's contributed very much to us for the last 3 years in fact. And as you said, you can see a minority interest on the balance sheet, and so you can kind of back into it.

So you're looking at it correctly. If we're successful in closing this, we'll give, of course, a recap of all of that, but you're looking at it the right way. It's a business that hasn't contributed a lot to use the last few years; we have an opportunity to do some significant de-leveraging at this stage, and we have also an opportunity to do it very tax efficiently, so I think it's a very good deal for us, and obviously, ultimately it's lined up very nice with our call date on the 10.25s. So we're very pleased with this deal.

Is it fair to say that the margin improvement in '07 is -- obviously getting rid of a break-even business enhances the synthetic graphite segment margins -- is it fair to say that those are improving the guidance that those will improve is not solely based on just the loss of this break-even business?

That is absolutely correct; in fact, I think we can even say that stronger. The majority of the improvement for '07 will be from the continuing businesses; it won't be because we sold the Cathode. It's going to be because of the improvement in the graphite electrode business and our other businesses. So it's good, strong continuation of margin expansion in our continuing businesses.

Okay; the $4.1 million in "Other Expense" during the quarter, what did that relate to?

The $4.1 million in "Other Expense" primarily related to gains and losses, currency gains and losses on the inter-Company loans that we have; there's a number of other items that are in there, but that's the primary contributor.

Okay, and I guess, just circling back to the ETM business, obviously this is just, this relates in some pat to issue at one particular customer. Can you talk more broadly about when that might work out, what you expect that business to do, and really what we might expect just topically from that next year?

Well, you're right; that customer has had a number of production issues; they've been out in the public domain and I mean, they've been very clear about their issues and production line startup. John, I think it's probably going to take into next year for them to solve those and work those out. Obviously, I think they've lost some market position through the process, so I think it's going to take a little while for them to sort that out.

Okay, that's all, thanks.

Mike Gambardella, JP Morgan.

Do you, you must feel fairly confident to say year-over-year, '07 should be an up year for earnings per share, right?

Well, we've talked about margin expansion, and I don't want to reach into the February call until we've got everything together, but we expect margin expansion year-over-year driven by price improvement, good cost containment of our continuing businesses.

But the price situation, even though I mean it's obvious it should be up year-over-year. I'm kind of thinking that from your comments today on the call and in the release that you're disappointed on the pricing front how that's panning out.

I believe the price could have been much higher for this year. When you look at the raw material situation on supply of quality needle coke, 1; 2, when you look at the pressure on petroleum-based raw materials, the strong upward pressure; and then 3, you just look at the demand for graphite electrodes, I think the price could have been much higher. And if you look at some of the other raw materials in the supply chain for steel, you see much larger in creases and I guess the case I would put to you Mike, is I don't think they're as tight as what graphite electrodes are today. So yes, I think the price, fair value of the price could have been much higher.

So, I mean I understand things that are within your control like conversion costs, you've done some good work on, but some of these big-ticket items like price, which seems to be lower than you expected, I'm just a little concerned; do we have a situation where, because you came out and the other guys came out very early with pricing, you kind of signaled to the, some of the big cost input guys like needle coke, that you would be getting very high pricing, and maybe you're not getting as high a pricing and that your needle coke is still pretty high. I guess you're getting kind of squeezed on the margins compared to where you thought you would be a few months ago.

Yes, well let me comment on that one. Mike, you know a lot of those raw materials, natural gas, power costs, I don't think the graphite electrode price in any way, shape, or form has any impact on those.

On the case of needle coke, I mean obviously we all saw the significant tightness coming. We had the Lamont coker go out; everyone has been talking about that for a long time. We had a major rise I oil prices, and so I really don't think that where electrode graphite prices are really affects that global oil price or decant oil or a lot of the feed stock into needle coke. And so, I hear your point, but in the grand scheme of things, electrode prices, no impact on global natural gas, power rates around the world, or oil prices around the world.

But I guess what's concerning me a little bit here is just that this is like the third or fourth year in a row where as this exercise of the pricing dance goes on between the producers and the consumers, it seems like it's coming out to be disappointing again.

Well, I think a lot has been left on the table. The price obviously has come up a lot over the last few years. And I think Mike, maybe one of the things we've got to recall is this is an industry that had a terrible time getting prices up. And it's getting better; a comment was made that we recently had another competitor raise the price 12%. I think that the execution is getting better in the industry; I think money has been left on the table for this very valuable graphite electrode is tight, that has very strong pressure on the raw material front.

But there has been improvement and as we said, we expect margin improvement again in '07, and I think if steel runs well in '07 we will have an even tighter graphite electrode market next year.

But I mean, the steel business has done extremely well the last 3 or 4 years now, and the companies are after all making record profits and your earnings have been relatively flat. From your perspective, what's wrong here in terms of getting the pricing?

Well, part of it, steel obviously, if you look at the drivers of steel, you've seen some very significant consolidation in the steel industry. And it's driven a lot of the fundamentals in where steel is, and steel has gotten very good at executing in their various steel markets and the various steel segments.

I think the electrode business has been improving each of the years. We've led a lot of that, and I think it's better in '06 than it was in the prior several years. I think '07 is going to be a better year than the prior several years, but I think it's still underachieving. Our expectations for the business are much higher, much higher, and I think it's there; it's absolutely there when you look at the supply/demand equation, and I guess that's the disappointing point for us, but let's be clear; our expectations for this business are much higher. We believe the supply/demand economics are there; we believe our platform can deliver that, and the cost structure we have got to also will allow us to deliver to that.

Right, but I mean your industry is actually more consolidated than steel; the 2 UNSGL are about 40% of the world market; you've both experienced a surge in raw material costs, iron ore and scrap for the steel guys, and needle coke and some other energy-related things for you guys, but why is it that they seem to pass it along and you guys have problems?

Well, I disagree with that. I think we've all passed it along in a similar fashion.

Well, in terms of profitability expansion you haven't passed it along as they have.

Well, I think that if you look at segment to segment, we're not all in the same business and there's are several businesses that maybe the competitor that you're talking about is in that we aren't, but I think if you look business to business on the electrode side, the performance has been very comparable.

I just don't see it on the bottom line.

Yes, when you look at total Company, there are some differences, absolutely.

So I mean, are you saying that for the graphite electrode part of your total Company, you feel like you've achieved kind of comparable performance to what the steel companies have achieved on their bottom line?

No, not the steel companies, absolutely not Mike. That's the case we're making; it's underachieved we think. We think a lot of money has been left on the table.

That's what I'm saying is why do you think that's so? I mean, what going on in the industry that's holding you back?

Well, we're not the only one in the marketplace right? There's other producers in the marketplace, so you're arguing our case. It should be much better; we agree with you, we absolutely agree with you that the supply/demand equation says it should be much better, and that it's out there to be had. And so we agree with you on that front. Why I think; there's many participants in the marketplace. This industry has a legacy history to it that is improving and, but I think still has a ways to go.

Okay, so you're basically saying that your competitors and the price discount, even though the supply/demand equation is tight?

Yes, I don't think too many people will argue that the supply/demand is pretty tight. And the op levels are high in electrodes; I think it's higher than many of the raw material streams into steel. And so I think the opportunities are much better to get a higher price and a fair price for electrodes just given the supply and demand balance.

And the reason you just can't let these other guys, these crazy guys who are price discounting, book their business and then book yours at a much higher is because of the logistics involved with maybe mismatching your customers, some of your customers with your plants?

Well, that's part of it, and I think you end up with kind of the bottom of the barrel if you will. I think you also end up with global steel accounts that we want to grow with, and there's relationships and there's proximity to the plant, and here we sit on 4 continents, who is better to serve these global steel producers. So I think there's a longer term relationship here that's important.

And as we said, the industry is improving; there's been good improvement. But I think it's underachieved what's available out there and I think you're arguing the same case we are.

Yes, I agree, all right thanks Craig.

Michael Christodolou, Inwood Capital.

Good morning; couple of question on graphite electrodes. First, could you recap for us the percentage that the electrode would cost at the prevailing market prices that you're booking? What percentage of that is an EAF manufacturer's cost of goods?

Michael, it's probably down to something it looks like about 2%. And so it's a very small percentage of his total cost structure.

And how are you helping -- this is a qualitative question -- how do you help that customer realize the full value you bring to bear? I mean, clearly there's quality issues, some of the startup guys in India and China have had imperfection in their sticks. I guess there are some horror stories out there about using a B-grade product. Are there any benchmarking data from independent sources that you're able to show? Just help us kind of walk through that education process.

Well, you're right, the quality electrode is very important and the biggest impact it has on the steel producers in the area of productivity, any defaults in the electrodes or breakage stops his steel-making operation and affects his productivity immensely, and obviously, at today's high steel prices it very costly to him. So we spent a lot of time value selling with our customers, and laying out and demonstrating the performance of our electrodes versus the competition and the impact on productivity.

I'm not aware of any independent studies out there Michael. Obviously, internally we keep a very sophisticated database by furnace, by customer of our electrode performance, and we also get many times feedback and data on competitors' products because they're in the same shop.

Okay; what are you seeing in terms of specific consumption trends? Clearly some of the older EAF mills can get more efficient, but I would imagine a lot of the new stuff that's coming on in China is just so young it's nowhere near being at a point where it can reduce consumption of your products.

Yes, the new furnaces are very, very productive. A lot of the old furnaces over the last 5 to 7 years have started to come out of production. They've been replaced by larger ones, so if I stood back and looked at specific consumption trends, I think over the last 15 years, you would have seen a pretty significant drop, and in the last 5 years of so, it's started to level off because we're getting very close to kind of the theoretical basket, the number of the furnaces. And so we would expect that specific consumption improvements for the next several years will probably be in the 1% to 2% a year type range, so it's started to level off.

Okay; what percentage -- let me phrase it this way -- is your book through November 7, '06 further along as a percentage than it was November 7, '05?

No, I'd say it was about comparable, where we would expect it to be at this stage. It's primarily the Western Hemisphere is finished up.

I guess then to the last question, or a question you had answered, clearly to some degree you don't want to play a really Draconian poker game because you do have some financial leverage and you have some fixed costs, so I kind of understand that. And I understand that you don't want to tell us what you're going to do and what percentage you'll be booked at until February. I guess I'd like to explore a little further, can you talk about what you didn't do, i.e. you didn't tell the customers, "Hey, we're only going to book 30% of our book versus -- and I'm making up this number now -- 60%, 70%, 80%", you didn't do that and I don't know if you've told customers, "Hey, we're going to leave 20% open on the back end as opposed to 15% that we normally let ride in the spot market." I'm just curious if you could again elaborate on the poker game techniques, and this is a public forum, so maybe you have a chance to send some customers a message.

Well, driven by raw material price increases, petroleum-based products, etc. pressure, we saw price increases earlier in the year. The market came up but not up to those levels as we talked earlier. So we engaged the market at its prevailing prices. And thus far, we've built an orderly book; the Western Hemisphere is primarily completed; and thus far, we're pleased with that process, and we expect margin expansion year-over-year.

Fair enough; what capacity utilization would you be at in the fourth quarter if you make 57,000 tons?

Virtually full out.

Okay.

And the entire industry is running I think at a very high op level. We are virtually full out in the fourth quarter. To the points earlier addressed, I think you go to a number of raw materials that are in this steel stream, and not a lot of them are at 100% right now. That's what we're talking about in supply/demand balance, and right now you can't find 500 metric tons of quality needle coke. And P.S., the shipments are in 2,000 ton increments; that's how tight the key raw material is. So when we talk about underachieving price, that's what we're talking about.

Just 2 quick last questions; you've had some plans to potentially add some capacity. Can you tell us where that is, and to the degree that you don't add capacity, how that helps your negotiating strategy?

Yes, we haven't significantly changed our capacity at all. Obviously, we've been very clear that we have the capability to go up probably another 30,000 to 40,000 metric tons, very efficiently, very low cost, and at the right time we will do that, and we will do that at our low-cost facilities and grow that when the market is ready for that.

But you've back-burnered that the last 2 or 3 quarters, right?

That's right; we're trying, obviously with the supply/demand and what we've been trying to do on price, that's what we've done. We reevaluate this all the time, but leave it said that we have 30,000, 40,000 tons very efficiently, low cost that we could go ahead, de-bottleneck, and execute at our facilities and put out the best quality product on the planet.

My last question, and I think I know the answer, but if you could just reaffirm for the record, this ETM customer who's had the production challenges, that is unrelated to their selection of your thermal management product; is that correct?

That's correct; it has nothing to do with our product at all. It's their own production issues, and it has nothing to do with our electronic thermal management product.

And so another customer, or another supplier is not getting that business?

That is correct.

Okay great, thanks for everything and good luck with the poker game.

Michael thanks so much.

At this time, we have no further questions. I would now like to turn the call back to management for closing remarks.

Heidi, thank you very much; everyone else, thank you very much for your support and we look forward to talking to you in February where we'll recap the year and give you our '07 guidance. Thanks very much; have a good day.

Thank you; ladies and gentlemen this concludes the GrafTech International Third Quarter Earnings Conference Call. Thank you for your participation; you may now disconnect.