GrafTech International Ltd (EAF) 2007 Q4 法說會逐字稿

Thank you for standing by everyone. Welcome to today's GrafTech Fourth Quarter and Year Ended 2007 Earnings Conference Call. Please be aware today's conference is being recorded.

Now at this time, for opening remarks and introductions, I would like to turn the call over to Kelly Powell, Manager of Investor Relations. Please go ahead.

Thank you, Micah. Good morning and welcome to GrafTech International's Fourth Quarter and 2007 Year End Conference Call.

On the call today is GrafTech Chief Executive Officer, Craig Shular and our Chief Financial Officer, Mark Widmar.

We issued our earnings release this morning. If you did not receive a copy, please contact Jen Raedake at (216)676-2281 and she will be happy to fax or email a copy to you.

As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language 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 Web site at www.graftech.com in the Investor Relations section.

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

Thank you Kelly. Good morning everyone and thank you for joining our conference call today. Today we'll take you through our fourth quarter and full year 2007 highlights and then we'll open it up for questions.

In '07, net sales increased 18% to over $1 billion while at the same time we were successful in reducing selling and admin expenses by 11% as a result of our ongoing productivity initiatives. Gross profit improved 36% to $331 million and gross margin expanded over four full percentage points to just under 33%.

Net income from continuing operations before specials increased more than 250% to $151 million or $1.35 per share. Operating cash flow more than doubled to $131 million and then on the debt side, net debt was reduced to $370 million. That's the lowest in our Company's history.

Finally, recapping the full year, structural improvements we've made to the business along with ongoing productivity initiatives are allowing us to leverage our top line growth into solid operating results. Year over year, our operating income more than doubled to $231 million and return on sales, ROS, improved a full eight percentage points to over 15%.

On this front in Q4, we closed our South African defined benefit pension plan and replaced it with a cost efficient defined contribution plan. This better positions us to be low cost and more competitive in the future.

Looking at the fourth quarter '07, net sales increased 14% to $269 million. Gross profit increased 17% to $81 million. Income before specials more than doubled to $44 million or $0.38 per share. Operating cash flow almost tripled to $55 million.

In our graphite electrode segment, sales were up 15% to $218 million while operating income for this segment increased 47% to $50 million. Volume for the quarter was 53,000 metric tons. Our graphite electrode segment benefited from higher electrode selling prices and successful productivity initiatives partially offset by rising raw material costs and of course the one time charge for the aforementioned South African pension.

In our advanced graphite materials segment, fourth quarter sales were $31 million as compared to $28 million a year ago in the same period. Operating income for this segment was $6 million. We continue to gain traction in this business and the quality of this business is improving. For the full year, operating income margin expanded over six full percentage points to nearly 18%.

Finally, turning to outlook, on February 15th, 2008 in our single largest call to date, we retired $125 million of our most expensive debt, our 10.25 senior notes. This leaves just $75 million of senior notes remaining from the original $550 million issue.

We're encouraged by underlying global demand for our products and based on steel industry forecasts, EAF steel production is expected to grow 2% to 3% in 2008. Our graphite electrode order book is over 90% built and we expect a solid year in 2008. We have secured firm pricing for approximately 70% of our key raw materials related to graphite electrode production including 100% of our needle coke requirements. We expect to deliver gross and operating margin expansion for the full year 2008. We expect cap-ex to come in the range of $70 million to $75 million as we continue to enhance our production platform, improve quality, increase efficiencies, and continue to lower cost. We are targeting expansion of operating income before specials of 25% to approximately $295 million. We expect cash from operations to improve approximately 25% to $165 million.

Finally, I'd like to make a few brief comments on our reporting segments as we go forward. We have realigned our operating segments in order to best serve our customers efficiently and cost effectively. As a result of the ongoing consolidation in steel, many of our customers now operate EAF steel furnaces as well as integrated steel furnaces and thus we are combining our graphite electrode business which services primarily EAF steel and our refractory business which services integrated steel into a new segment called "industrial materials." Previously, refractories was reported in our third segment and "other" segment.

We are also combing our advanced graphite material business with our natural graphite business into a new segment called "engineered solutions." This segment offers a host of tailored solutions to customers in the electronics, chemical, nuclear, and solar industries. These changes allow us to eliminate the "other" reporting segment, having only two segments go forward and perhaps more importantly, allows us to combine sales and marketing teams as well as admin functions with the net result being better service to our customers at a lower cost.

That's the end of our formal remarks. Let's open it up for question and Micah, if you could open up the line please.

Certainly sir, thank you. At this point if you would like to ask a question, you may do so by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And once again, to ask a question, that's *1.

We'll pause for just a moment.

And our first question will come from Brett Levy of Jefferies & Company.

Hey guys, congrats on yet another very strong quarter.

Good morning Brett. Thank you very much.

Good morning. One of the things that has started to come up as kind of a question that I keep getting on you guys is given that Steel Dynamics bought OmniSource and Nucor bought David Joseph's, is there a model where one of your customers shows interest in buying you, would that cause so much breakage with your other customers that that would be really problematic? Is it stuff that you even think about?

Brett, tough to speculate on the future, what may happen or not. Obviously our size of production of graphite electrodes far exceeds the largest individual consumer out there so obviously it's things we look at and study as we look at the global marketplace but very hard to speculate on anything like that and perhaps a bit remote given we are so much larger than the largest single consumer of graphite electrodes.

Alright, and the next one is just can you give -- I mean, it seems like needle coke is going to be a problem, foreseeably. Can you talk about any hope that capacity additions will start to relieve some of the stress there?

You're correct, Brett. Needle coke has been and we see it will probably continue to be tight. I think the producers of needle coke are not expecting to add major new capacity. I think all of them are getting some creep capacity which may help alleviate somewhat some of the tightness but we'll have to wait. Time will tell. Right now it is tight. We like our positioning being a very large buyer of this type product so I think it positions us well to leverage our volume, to secure our quantity, to get the right quality, and hopefully to get a favorable price because of our large volume.

And then lastly and then I'll get back in the queue, can you guys talk a little bit about what you have plans for with the additional free cash flow that you guys are going to be generating, taking out the remainder of the 10.25s, I don't know, any other expansion or debt reduction plans?

Obviously we have a track record here, a well earned track record of de-leveraging. Our first move here right out of the box was to call that $125 million of senior notes and we called them at the very earliest that we could to get the new step down in the call premium so I think one possible use of our cash flow going forward is to continue to de-lever.

Obviously another large area would be on the growth side and our Company is looking at a host of growth opportunities. They exist internally. In some cases they may exist externally so we are wide open looking at a host of growth opportunities to grow our Company, grow our competitive advantages and add more shareholder value.

Thanks very much.

Thanks, Brett.

We'll next pick a question from Robert LaGaipa of Oppenheimer.

Thank you, good morning.

Good morning, Bob. How are you today?

Pretty good. Yourself?

Great, thank you.

I have several questions as well. Maybe if we could just pick up on that last one. When you refer to external opportunities, does that include the carbide graphite facility that's for sale in addition to the Cedar facility?

Anything that we would talk about on a go forward basis would be speculation. I guess the takeaway should be given the improvement in our financials, given the improvement in our cash flow and our operating results, we believe we've positioned the Company to look at a host of opportunities globally. These exist around the world in all of our businesses, not just graphite electrodes. So you've mentioned a couple that may be out there. I think it's too early to speculate on any specific ones for our Company but your takeaway should be GrafTech is positioned to seize opportunities as we go forward.

Okay, terrific and then maybe if we could just talk about the potential volume in 2008. I didn't see it in the press release. Previously you've given it. What kind of volume should we be expecting? Similar to 2007?

Yes, we're getting away from annual volumes and individual quarters but maybe just to kind of kick off, we would expect volume this year to be similar to last year and we recognize that you gents are trying to put together some quarterlies and we're not going to give individual quarterly guidance but maybe just as you all know our business well, Q2 is usually a bit stronger quarter for us. Q4 is usually stronger. These are seasonal in nature and usually Q1 is a little bit weaker and then Q3 is a little bit weaker so usually out of the four quarters, Q2 is a stronger one. Q4 is a stronger, and then Q3 of course as I said is a little bit slower because of European slowdown. We don't expect that trend to change much so as you look at our quarterlies, the seasonal will probably look somewhat like you've seen in the past and annual volume would be similar to last year.

Okay, terrific and another question is just related to the needle coke price increases. Last time in the third quarter you mentioned obviously you secured the volume. What kind of price increases have you seen in needle coke and that remaining 30% of the raw materials that hasn't been locked up, what kind of variability can we expect there?

The coke prices have gone up significantly. We won't specify a price but obviously quality needle coke is tight and the raw material pressures have been formidable as they have been the last couple years. On the balance of our raw materials, we're very pleased to be sitting here at 70% done. All the key ones that we wanted to get done are done and fixed. We have the quantity. We have the quality and we fixed the price. The remaining 30% are primarily minor ones and one example would be natural gas. We've not hedged that for the full year. We don't really want to at this stage so we have some that are open but they're more open by design rather than our inability to go ahead and lock them up and this is no different than we've done the last couple years. Generally at this time we're about 70% fixed so it's just like we did last year and then we manage throughout the year. Obviously natural gas moves in different seasons. You've got a winter season, a summer season and we monitor that very closely and take hedges over the course of the year.

Two other quick questions for you. In one, the South African plant, now obviously there have been stories about power outages and so on and so forth, it's a fact, many of the metals companies down there. Your plant down there, your customers, has it been an impact thus far? Do you expect it to be an impact? Maybe if you could just provide some color there.

Yes, you're right. South African economy is tight on electric power and the government has been managing that and I think all of South African industry is going to feel that. It's already in Q1 been feeling that. At this stage, we don't see it to be material to ourselves. Obviously we are a buyer of electric power. Obviously our electric furnace customers use it there and obviously we export from that location so we have a large export business out of there so we're not just selling to the South African industry. But net, net, Bob, if you add all that up we're not anticipating at this stage, where the government has announced and put in some limitations on electric power, we're not anticipating a material impact and at this stage, everything that has been done there so far is fully incorporated in our guidance.

Last question before I pass the baton is just related to the capital expenditures. Obviously you're in a much better position from the balance sheet. You're generating a significant amount of cash flow. You're expecting that to be up over 25% in 2008. You mentioned this increase in capital expenditures. I was hoping maybe you could just expand on that. What specifically are you doing with that, that additional, that incremental capital and what type of benefit should we expect from that?

Bob, the incremental portion is primarily to improve efficiencies at our facilities, lower costs, and improve the quality of the graphite electrode we produce. We're trying to raise the bar on graphite electrode performance and quality so that's the primary increase in capital. There is a very minor component that will be a little bit of de-bottlenecking that we will get some additional capacity but it's not material. The main focus of this cap-ex increase is as you say, we can afford it now. We have some new technologies we've developed that are more efficient and lower cost and we believe at the end of the day when this is done, we'll have an even better quality graphite electrode for our customers.

Terrific, thanks very much. Good job.

Thanks Bob.

We'll next move to Luke Folta of Longbow Research.

Good morning.

Good morning. How are you today?

Not bad, yourself?

Excellent, thank you.

Great. I just had one question on your margin outlook for 2008. You said you're expecting higher margins. Is that essentially due to increase in the price or cost reductions? Can you maybe give some color on that?

Luke, it's all of the above. Graphite electrode prices of course have been going up and then our team has a very well earned track record on cost in the manufacturing sector and obviously in overhead. Last year as you saw, sales up 18% and overhead down 11% in the same year so it is all of the above -- operating costs, efficiencies at our plant, elimination, reduction of scrap and also some electrode price increases.

Also, you said that your order book is at 90% full for 2008?

Yes, sir. We are --

I'm sorry. Are those all firm pricing?

Yes sir. It's a bit over 90% in fact, very pleased the way the book has come together. We have a solid order book for '08. The volume and price in those is all set and fixed. Now we do not have "take or pay" contracts with our customers so if the economies have a major fallback and we had a major drop in the global economies, our customers can cancel orders or reduce orders. Our industry has never had fixed price -- I'm sorry -- or take or pay contracts but all the contracts are fixed in volume and price so if the economies and our customers run as is expected, the price is already set in all those. The price will not change and the volume commitment is already set in those, just like we did last year and the years before.

Thank you very much and good luck.

Thanks Luke, appreciate it.

We'll next take a question from Michael Gambardella of JPMorgan.

Hi Craig, congratulations on another good quarter.

Thanks Mike, how are you today?

Good, good, good. I have a question about the structure of your graphite electrode pricing. Have you seriously considered or tried to change the structure from an annual to say, a quarterly pricing structure?

Thus far, our industry, and this is probably 20, 25 years of history, has had an annual pricing program. Obviously it's something we always look at especially with severe raw material pressures. Obviously our customers have a much more frequent pricing throughout the year. They open up their books a couple months forward so it's something we study. I guess the challenge is there are 20, 25 years that this industry has been done on annual contracts but it's something that we study. It has some positive attributes to it, especially when raw materials are going up as much as they have the last couple years.

Because I was just thinking in the early part of the 20 year history, the industry was basically price fixing and then after that, you saw the industry, yourselves and the rest of the players, really go into poor financial condition and now that's turned where your financial condition is much better and the other players' financial condition is improved. So I was thinking maybe you could go to maybe more of a quarterly to try to capture a little bit more of the upside.

Excellent point and definitely something we've looked at very, very hard in our industry and the challenges there too we talked about. We agree with you. There would be some real merits especially given where raw materials and the rapid increase in raw materials have been in the last couple years and our customers price that way so obviously something we've studied and future things on pricing, etcetera, we really can't talk about but we see the merits of it absolutely.

And last thing, could you just give us some color on how the pricing season went in terms of when you finished pricing and can you give us any idea of the percent increases?

We've stopped giving really price information or details by geography but the color I can give you is I think the pricing started kind of Q3 last year and there are some customers that start up early in Q3. It really gets rolling in Q4 and then we've got a number of customers and orders that really aren't finished up until January and February so that's kind of the timeline of it. I think it was very orderly. Customers obviously had seen our raw material increases and accepted increases on graphite electrodes and then net, net like I said, we're very pleased the way the book came together. We've built a solid order book and we're 90% plus already fixed. We're at a very good point.

Last thing on the pricing, does any one of the players, yourself or any of the other players, try to go for a really big number? I mean, your customers are looking at iron ore prices up 65%, potentially coal prices up over 100%, scrap prices for your direct customers up significantly around the world. It seems like far bigger increases than the graphite electrodes which as everyone knows is a relatively small component of the cost structure. I was just wondering, did you guys or anyone else try to go for a really big number this year?

I think you've seen the activity the last couple years and we've obviously on many occasions been out front on price increases and trying to get a fair price for our product and get ahead of these large raw material increases, so I can't really say that in this season anyone did anything different than a year before. Having said that, we also monitor very closely the sharp increase in iron ore and the others and so we're very aware of some of the large increases that are being sought there in markets that are tight also.

Okay, thanks Craig.

Thanks Mike.

We'll next move to Merrill Lynch's Asad Abedi.

Good morning guys, Asad Abedi from Merrill Lynch. A couple of questions for you -- the one, the kind of operational improvements that you did at your plants, what kind of activities did you pursue and how much further do you think you can go? And the second is on improving your electric quality. What do you have in mind and what do you think you can achieve?

Asad, thank you for the question. In the plant side, we've done a lot of things to try and eliminate waste. We continue to work in that area. We've done a lot of things to improve productivity, a lot of things to reduce scrap rates. We're running some of the lowest scrap rates we've ever run. We've done a lot of things to improve cycle time, process our products faster through the constraint. We've spent a lot of time on that. And so it's a host of items. It's not one particular or two particular items that we've worked on. We've worked on a host of items. Overhead speaks for itself, down 11%. We've gotten very efficient there. A number of activities we've done the last couple years have gotten us to this place including consolidating our overhead, moving the headquarters. Getting everybody under one roof in Parma has been very supportive and helpful on that front. And so it's a host of those kinds of activities.

On the quality front, we believe that today we're making the best electrode we've ever made in our history and obviously we have a strong R&D team and we continue to seek ways to get a better product, a better performing product, and a more consistent product that we sell around the world for our customers. Many of our customers are global customers. They have 30, 40 locations and they want the same great electrode in every location so a lot of the work we've done is on consistency and so I think there's room to go there. I'll never say that we're near that wall. I think that's not productive so Asad, I think we still have a lot of room to go on quality. We've made some great strides the last couple years. The team has got momentum on the quality front and you'll see us continue to put money into it. We can afford to do that now and we see all of this as just adding to our competitive advantage -- best global network, position on the right continents to service these large global steel accounts that keep getting larger and then really trying to grow the quality gap between ourself and some of the other competitors.

That's great. Thanks a lot.

Thanks Asad.

We'll next take a question from Private Investor, [James McKean].

Hi Craig.

Morning James, how are you today?

Very good. I wanted to congratulate you on some great work over the last few years.

Thank you sir.

Turned it into a real lean, mean company there.

Thank you sir. We've put together a great team here.

Yes, very great. A couple years ago, analysts were asking about capacity constraints and your capacity at the time was about 230 tons, 230,000. Are we still at that level?

James, right now we're around 215 or so, so we have 215 current and then we also have obviously a host of de-bottlenecking opportunities that we've talked about and those de-bottlenecking opportunities are 30,000 to 40,000 tons is available at low cost to expand and what we've said, we'll continue to assess the market and when the market is there and the timing is right, we'll look to add capacity. But right now we sit at 215 and we're happy to be at 215 right now.

Okay, that sounds great. Does the shortage of coal in China increase their demand for electric arc furnaces? I would imagine so.

Coal has so many other applications and not a direct impact on EAF. Obviously coal prices moving up rapidly like many commodity prices so on the energy side it's getting dragged along like all energies but as far as a direct or strong correlation to EAF, it's not really that strong at all.

And India, do you see a lot of, is their production level as you expected a few years ago, 20,000, 30,000 ton increases per year, something like that?

The Indian producers are both producing more than that so they've come up over the last few years on the graphite electrode side but what we've seen of course is Indian steel coming up nicely, Russia, Latin America, China steels all come up and so demand for electrodes has come up nicely and absorbed any of the increases in capacity so electrodes remain quite tight right now.

Great, sounds great, great job to you and your team.

Thanks James. Have a great day.

Thank you.

Next we'll go to [Gary Madea] of Bank of New York.

Thanks guys. All my questions have been answered. Thank you.

Thanks Gary, have a great day.

We'll move on to Scott Martini of Cobalt Capital.

Hey guys, it's Sam.

Hey Sam, how are you today?

I'm good Craig, thanks. Just a couple of questions -- first following up on Mike's question on pricing, two questions. First, can you talk just qualitatively about where you saw SGL on the market in terms of their pricing strategy relative to your own and the discount perhaps that they were pricing at, if any or were you seeing a more rational approach to their pricing strategy this year?

Sam, all I can really comment on the competitor's actions is that net, net and I can look at our own book, is that pricing came up across the board in all geographies.

And so would you characterize this year as more rational than say, two years ago? Are we continuing to move towards a more reasonable pricing strategy away from you?

I can only comment on our book but I would say our book came together very orderly and here we sit with 90% plus booked and very pleased the way our book came together and I think we have a very solid book for '08.

Craig, just another question on that topic. In terms of the premium melter electrode versus the ladle applications, did you see any pricing -- did one of those categories have a more dramatic price increase than the other or is pricing kind of moving up equally in both segments?

I can't give you specific color on the two segments perhaps other than to say that both went up. There are raw material pressures on both those segments and both segments have gone up year over year.

Okay, and can you just -- there have been a lot of materials inflation and you had given some numbers in the past about the cost of Brownfield expansion on a per ton basis. Can you just roughly give what you think on a per thousand ton Brownfield expansion, what capital costs would be at this point?

Sam, what we see is roughly to have kind of a 30,000 ton plant, in that kind of range, 30,000, 35,000 ton plant, you're probably going to need about $250 million of capital, Brownfield.

Okay, and that would take what do you think? Permitting is up and running, three years?

At least two I would say and it could stretch into that third year and you said Brownfield but I think I interpret yours as, meaning Greenfield.

That's it, Greenfield.

That's what I thought you meant. I just wanted to -- you had said Brown but I think you really mean Greenfield so Greenfield, about $250 million. You'll get about 30,000 tons. Maybe you could get 35,000 if you're good and it'll take a couple years. It might even get into year three depending on permits and approvals, etcetera and then that's before the --

We've had Brownfield opportunities in the past, maybe a year, 18 months ago, say 30,000 tons, maybe 50 million. Is that still a good number?

That's still a good number Sam and we have that opportunity which I think is a real asset inside our plant gates and I guess lastly, just on your Greenfield example, the 250 is the construction of course, cost and then you've got working capital on top of that.

Right, if you were to say -- the Brownfield opportunity, would that be Monterey?

We have some of that in all of our locations. Monterey is one of them that has that opportunity. Where we finally do it I think will be driven by the market and where do we think those electrodes are really needed? Do we do it in Monterey? Do we do it in one of the other plants will probably be driven by market demand. Where is that demand growing and where is that closest to our customer?

And what do you think the electrode industry capacity is now? I know it's hard to know. Do you think it's $1.2 million?

Yes, it's around a million, maybe a bit over $1 million. I think people talk 1 million, $1.1 million, $1.2 million. It's somewhere in that neighborhood. It's a good number

But I mean if I'm looking at this right, you could spend $50 million at $1,000.00 EBIT a ton. To bring on 30,000 tons you spend 50 to make 30. It's pretty good.

It's a huge opportunity and that's why we've kind of laid it out there over the last couple years so our investors realize we have this and we have the capability to grow at a very efficient capital cost and obviously with the balance sheet we have today, we've got the wherewithal to do it very easily.

Right. Two cleanup questions for Mark. Mark, obviously you could call it $80 million in the 10.25s left, is there something preventing us from just putting a revolver in place and calling the rest of this and getting Libor plus 150 debt that we could just have reasonable access to? Is the credit market that bad for a sub-one times levered company?

No, there is really no constraint from that standpoint other than we've been trying to be as efficient and prudent as possible with the time limits of taking those out and trying to use working capital leverage opportunities that we have as well as cash flow generations and that's been the primary focus but we could use the revolver if we needed to but the other thing too is the revolver will, 2010, does have a life on it and what I want to do is stay out of that with any material amount because sooner or later we're going to have to do some refinancing on that.

Right, but could we replace the -- the current revolver is undrawn?

Yes it is.

Right, I'm assuming we could -- would we be wrong to assume that we've got a new revolver in place by the end of the year that's giving us pretty good flexibility, reflecting our new credit status?

Yes, but you've got to remember the credit markets are pretty tough right now. Our spread that we have on our revolver is pretty competitive right now.

What is it, Libor plus 2.25?

We're at 150 right now.

150, and cash tax rate for '08 is still decent, 20%?

It should be right around that.

Thanks guys.

Thank you. Have a great day.

You too.

We'll next move on to Scott Kirk of C-Cap.

Gentlemen, thank you for your time. I just wanted a little more color on two points you made earlier. One is on the margin guidance. Margins, it looks like they may have come down slightly sequentially and I just wanted to get a sense of the improvement, how you see it playing out and if you can give us any additional color on one time things that might cause it to be weaker or stronger in the short term versus for the year.

I think if you look at the margin sequentially and again one of the things that we did call out was the impact of the South Africa pension termination. Once you adjust for that I think the sequential margins were relatively in line.

Could you give me what your adjusted margin that you're referring to on the gross and operating level?

If you look at it on the script, we call it out on an adjusted basis as 32% so we reported 30% and if you look at the press releases, it actually is at 32%.

Okay, and on the operating line?

Op margin for the quarter was right around 23%. Again, that would be op margin including the special items such as the pension termination and the other income and expense items that we normally exclude from our operating results.

Okay, and so when we look at your guidance for them both to be up in '08, is there any kind of way you can help us calibrate how much upside possibility there is or I guess we can back into it slightly from operating income guidance, but on the gross margin I'm just wondering how much, what's the potential there?

I think the best way to look at is start from the op margin. We've given you an indication of the op margin or op income before specials. We've given you an indication around the volume, the revenue growth.

And that's around 25% at the high end of revenue guidance. Is that about right?

It should be in that range, yes.

Okay.

And then as Craig has already mentioned, around our overhead structure, we're going to continue to be as efficient as possible there so I wouldn't expect any material change other than kind of normal inflationary growth that we'd normal expect in your SG&A structure.

Okay, and so on the gross margin line, is there a long term -- should we think of that as having the ability to continue to move up or how should we view that? It was a very good year this year obviously.

Scott, obviously the goal is to grow that. The guidance is as we've put out there and our team has earned a great track record on a number of these metrics and the target will be to continue to improve the quality of our business, the efficiency of our production facilities and then stay very, very lean and low cost on the overhead cost.

That's helpful. Is there any way you could sort of parse out pricing improvements driving margin from the operational improvements that you're talking about?

That's guidance we don't give. It's more detailed guidance than what we provide.

Okay, and then on the seasonality that you spoke to, I'm just curious, the -- and I know you're moving away from quarterly guidance but if you could just help me understand this nuance in that the street is expecting the revenue and earnings to be up slightly in March when historically they've been down so is there anything that's impacting the seasonality in the first quarter this year that would enable that?

No, we would expect the seasonality impact between quarters that you've seen the last couple years. It will probably look the same. Q2 is generally a little bit stronger. You're coming out of the winter months. You've got more construction and our customers have a larger demand. Q3 is a little bit slower usually because you've got European holiday period and a lot of our customers do turnarounds during that period. And then Q4 is usually a stronger quarter so the two stronger ones are usually Q2, Q4 and the two slower ones are Q1 and Q3.

I'm sorry. I'm referring specifically to the fourth quarter to the first quarter here so from December to March. Historically I've seen that down and this year folks are looking for it to be up.

Maybe one impact that's playing into that is we've been getting much more linearity in our operations across the quarters and so the differentiation between a stronger Q2 and a stronger Q4 versus the other two slower quarters is much lower today. We're running our plants much more consistent. We've worked hard with our customers to get a better planning and a more consistent off take and it's mainly to drive better cost and quality. So we have less overhead, we can plan better and so we're getting much more linear. If you went back a few years, you had a much bigger Q4 and then Q1 would slow down. I think year over year, if you went back to Q4 '06 I think we did about 58,000 tons and then you see of course this Q4 we did about 53,000 tons. So we don't have as much of a spike in Q4 or Q2 that we had historically and it's allowing us to -- it's been an effort we've undertaken, a very focused effort working with our customers to run our machine much more consistent, linear sales and like I said, it's reduced cost and improved quality.

Okay, so revenues which have historically been down about 10% from December to March last year were down only abut 3% and this year, there is an expectation out there that they're flattish. That may be the result of the process you just discussed.

That's right, that's right.

Okay, thank you so much and great quarter.

Thank you sir, appreciate your comments.

We'll next move on to Michael Christodolou with Inwood.

Michael, how are you today?

Hi, can you hear me?

Yes sir.

Good morning. A couple of questions -- of the $285 million of inventory on the books at the end of the year, how much would you say is finished goods that may ship in the first half of '08 and might we at all expect to see some gross margin blimp up due to lower cost inventory sold at the higher prices over the 2008 book?

I'm not going to get into too much detail around the components of the inventory. You'll be able to see that when we file the K so that information will be disclosed in there but clearly the same as we had last year. There is some positive carryover effect. We do have an inventory position of raw material or WIP and finished good at the end of the year that will be a 2007 needle coke cost so when we flow that into 2008, we will see some benefit. I would say that benefit and the profile of that between Q1 and Q2 should be similar to what we saw in 2007.

Very good, and in terms of cash uses, you mentioned of course debt repurchase and growth. You did put that buyback in place a month or so ago and I don't believe you've had any activity on that. Would you call that a distant third or does it just depend on the timing of other opportunities to either repurchase debt or some of these growth initiatives?

I think it's obviously in the forefront of our thought process and we'll continue to evaluate it in line with the other opportunities that we have for cash but it's also out there partly to help us manage through the dilutive impact of options exercised and so as we receive proceeds against the options exercised, we'll be looking at those, utilizing some of those proceeds on the share repurchase program.

Michael, did that answer all of your questions?

I think we lost him.

I think we may have actually lost him. We will move on to Robert LaGaipa of Oppenheimer.

Perfect.

Thanks. I just had a couple of quick follow up questions. Number one, with regard to capacity expansions, obviously you've mentioned the ability to increase capacity by 30,000, 40,000 tons at a minimal capital cost. You mentioned the Greenfield cost, etcetera for any capacity expansion. I guess my question is related to the ability to do that in light of the needle coke constraints. Obviously needle coke is still in very tight supply. There has been some de-bottlenecking but probably not as much as what was lost with that [Lamont] facility or maybe at this point, maybe it's gotten it to break even but probably not more. Sitting right here today looking out over the course of the next year or so, is there enough needle coke available to even pursue the capacity expansions at this point?

Bob, you are absolutely correct. Needle coke is tight. There is some coming via creep capacity. We've never struggled to get all the needle coke we need and I think the thing that's on our side and one of the advantages of being a large buyer, I believe the largest buyer in the world of high quality needle coke, is the leverage that brings and so I think if we looked at adding some additional capacity when the market is ready for that, we'll be able to get that coke. We're just a big buyer. We're a great partner with our suppliers and that gives you a lot of leverage and we've been with our suppliers for decades and so I think as you look out there, we'll be able to get the coke we need.

Terrific, and I guess this is a related question, the follow up to that. If we look at your mix between the melter versus the non-melter, the typical 70/30 that we've seen over the course of the last several years, what was that mix in 2007 and do you expect a similar mix in 2008 and how does the needle coke, I don't know if it should affect that but obviously you can mix different things in and so on and so forth and adjust the quantities but has that mix changed at all and do you expect it to change?

No Bob, that mix hasn't changed in any material fashion over the last few years or as we go forward here into '08. We see that mix pretty much the same.

Terrific, thanks again.

Thanks Bob, have a good day.

We'll move to Justin Bergner of Gabelli and Company.

Good morning Craig. Good morning Mark.

Good morning Justin, how are you today?

Good, thanks. When you talk about your forecast for EAF steel production growth of 2% to 3%, are you talking about the entire world or the subset of the world that you address?

No, that's global. That's what we see globally, all geographies. We see it growing 2% to 3% and that's based on a number of sources that are out there, steel industry analysts and steel industry databanks that are out there that do these kinds of things and globally I think most of them are in that range, 2% to 3%.

Do you see the number being lower, the same, or higher in Europe and North America?

Where we see the biggest growth has kind of been in the classic BRIC countries, so Eastern Europe, Russia, South America, Brazil, China, India, very good growth, a lot of new furnaces going in that we're prepared and currently servicing. Some of them were very good at doing the startup to those furnaces and partnering with the customers. So that's where we see the biggest growth but having said that, there are some new furnaces going in the U.S. There are some new ones going into Europe but the biggest growth would be primarily in those BRIC regions.

Okay. To follow up on that question of market growth, what sort of trend are you seeing in terms of the increase in the productivity of the electrodes in '07 versus '06? You typically filed that number in your 10-K in terms of how many electrodes are needed per ton of steel and the trend over time. What are you seeing for '07 now that you look back on the year?

That improvement continues. That's an ongoing process and it continues usually to improve a little bit each year. What we have seen when you step back and look at the data is the rate of improvement is slowing and so if you went back 15 years ago, the rate of improvement was much greater than what you've seen the last few years here. So improvement continues but the rate of year over year improvement has dropped off significantly and is relatively minor today.

When you say relatively minor, are you kind of talking 1% to 2% as opposed to 2% to 3%? Can you kind of --?

It's in that kind of range. 1% to 2% is kind of the annual improvement we see and if I took you back 15 years ago, you might see 5% improvement in some years and so it's really started to level off and what you get is there is a theoretical limit that it can get to and it's just based on the chemistry of graphite and so as we go forward, we'll get closer and close to that and that's what it's bumping up to now is some of that theoretical limit so I would expect each year as we go forward we're going to see that to continue to improve but the rate has slowed down significantly.

Okay thanks, good quarter.

Thanks very much Justin.

We'll now move back to Michael Christodolou of Inwood Capital.

Hi Craig, just a few follow ups. On your capacity of 215,000 tons, earlier you mentioned de-bottlenecking with 30,000 to 40,000 but I thought de-bottlenecking was to do a little tweaking that would maybe get you another 5,000 to 10,000 right now and then the Brownfield is another 25,000 to 30,000 if you ever pulled those plans out of your side drawer. Is that, am I looking at that right?

No, what we call de-bottlenecking is the 30,000 to 40,000 tons we get. These are in the existing graphite electrode facilities. They're very well delineated projects. We know what they are and so that's the 30,000 to 40,000. Did we lose Michael again? I heard him click there.

I think we may have.

We did.

We have, and that was the final question in the queue, sir.

Very good. Well, thank you very much for joining our call and we look forward to talking to you next quarter. Have a great day.

That does conclude this conference call. Thank you all for joining us and have a wonderful day.