GrafTech International Ltd (EAF) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's GrafTech Q4 and full-year 2008 results conference call. Please be aware today's conference is being recorded.

At this time I would like to turn the call over to Kelly Powell for opening remarks and introductions. Please go ahead.

Thank you, Holly. Good morning and welcome to GrafTech International's fourth-quarter and 2008 year-end conference call. On the call today is GrafTech's 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 Radke] at 216-676-2281, and she will be happy to fax or e-mail 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 website at www.GrafTech.com in the investor relations section.

At this time I would like to turn the call over to Craig.

Thank you, Kelly. Good morning to everyone and thank you for joining our call today. Today we will take you through our fourth-quarter and full-year '08 highlights and then we'll open it up for Q&A.

Net sales increased 19% to $1.2 billion. Operating income increased 46% to $329 million. Income from continuing operations before specials increased 69% to $246 million or $2.09 a share. Operating cash flow nearly doubled to just under $250 million.

Net debt was reduced to $78 million, the lowest in our Company's history and a $291 million improvement year-over-year.

Finally, recapping the full year, '08 represents a record year for our Company in sales, profits, and cash flow. During the year, we redeemed $180 million of our 10.25% Senior Notes and we also called our $225 million convertible debentures. This allowed us to complete the year with net debt, as I said, of $78 million.

Looking at the fourth quarter, net sales were $265 million, virtually flat with the same period last year. Gross profit increased 20% to $97 million, or a 36.8% of net sales.

In the fourth quarter, we recorded a $35 million non-cash impairment charge for our nonconsolidated affiliates, Seadrift. Seadrift is a strategic investment as the world's second-largest producer of petroleum needle coke, the key raw material in the manufacture of graphite electrodes.

Given the uncertain outlook for the steel market and the impact on electrodes and needle coke industries, we determined that the revised fair value of our investment in Seadrift is less than that previously reported carrying value. As a result, we wrote off a portion of our investment in Seadrift, including intangibles and other assets underlying our original equity investment.

Income before specials improved 40% to $59 million or $0.49 per share in the quarter. Operating cash flow increased to $79 million as a result of the Company's improving operating performance.

In our Industrial Materials segment, sales declined 5% to $219 million while operating income for this segment increased 16% to $59 million.

Operating income in the quarter benefited from higher graphite electrode selling prices, favorable currency movement, and in part was offset by lower graphite electrode sales volumes in the quarter.

Our Engineered Solutions segment fourth-quarter sales were $46 million as compared to $39 million in the same period in the prior year. Operating income for the segment nearly tripled to $11 million.

Our Engineered Solutions segment continued to gain traction during '08. Sales for this segment for the full year increased 26% to $182 million, while operating income more than tripled to $41 million in '08. For the full year, operating income margin expanded over 13 full percentage points to 22.7%.

Finally, turning to outlook, based on IM projections and other global economic forecasts, world growth is expected to decline significantly in '09. Both advanced and emerging economies will be affected. Weak endmarket demand is expected to persist, with a high degree of uncertainty surrounding forward-looking projections.

Accordingly, steel producers have significantly cut operating rates and continue to reduce inventory levels in an effort to match production rates with market demand. As a result, we expect reduced electric arc furnace steel production in '09.

In response to the current environment we have taken a number of actions to improve our cost structure and match our own production rates with market demand. These actions include reducing operating rates at our production facilities. We exited the fourth quarter with an op rate of approximately 45% for our graphite electrode manufacturing facilities. We will continue to align operating rates to meet customer demand and appropriately manage working capital.

Personnel reduction of 150 team members and contract workers in the fourth quarter was taken. We expect a further reduction of approximately 75 team members by the end of the first quarter. Again, aligning our cost as required.

Reduced pay for managerial team members were taken, including a 10% reduction for our officers of our Company. We implemented hiring freezes and suspended salary merit increases for the year. Incentive cash comp for the year will be paid 50% in GrafTech stock and 50% in cash for the Company's leadership team.

We also placed several facilities on shortened work weeks or furloughs, thus sharply reducing overtime hours worked. This resulted in a temporary employment reduction of approximately 55 full-time equivalent team members. So if you add all that up, we're probably down over 10% in headcount and worked hours.

We reduced planned expenditures of CapEx by $15 million year-over-year. I think last year we came in around $71 million; this year we will be about $55 million. We also reduced travel and other discretionary expenses some 20% to 25% year-over-year.

Given current global economic conditions, which continue to be extremely volatile and uncertain, our ability to project full-year guidance is limited. Therefore, we feel it's appropriate to make adjustments in our usual practice of providing annual guidance.

We expect '09 to be very challenging for both of our businesses. We anticipate the first-half '09 profits will be weaker, with second-half earnings potentially improving as we expect customers will have largely completed destocking initiatives.

First quarter earnings are expected to be essentially breakeven. However, a first-quarter loss is possible. A marginal improvement in second-quarter earnings is expected. And in full-year '09 we are targeting capital expenditures of approximately $55 million; depreciation expense of approximately $35 million; and an effective tax rate that will be in the range of 32% to 35%.

With that, Holly, let's open it up for questions.

(Operator Instructions) Ian Zaffino, Oppenheimer.

Question would really be as far as raw material pricing versus electrode pricing, what your thoughts are there and how we should think about that. Thanks.

As we've done in prior years, we are lined up going ahead and locking in our raw material requirements and prices. So we have probably got somewhere around 60%, maybe a bit more of our raw material requirements for '09 locked in.

This is lined up with the book building process. As we talked in our last call, kind of the middle of last year the book building process kind of just stopped with, of course, the global economic deterioration.

So the restart of that book building, if you will, really hasn't started up yet. We have had virtually no new orders of any kind of size.

But talking to our customers, we expect that to probably get started kind of end of March and then roll right through April, May, and June.

So in anticipation of that, we have been working with our key raw material suppliers. Coke, we've got coke pretty much locked up on prices; and some of our other key raw materials. If you add all that up, we're probably 60%-plus that we have locked up.

So we understand well and know our cost structure ahead of this book building process that, as we said, is really just going to get started. I don't expect much even in February.

We have had nothing in January, nothing in February. March, I think a little bit will start. Then really April, May, and June it will get underway; and then we will build the rest of the book for '09.

Okay. The remaining 40% you need to lock in, do you think they will be at higher, lower, or identical prices to what you have locked in so far?

Well, let me compare it not so much to the prices we have locked in so far, but maybe last year. In general, I think the balance of the 40% will probably come in lower, lower cost than last year.

Okay, but the 60% is at higher?

Well, in the case of coke it is at higher. Most of the other ones -- there's a couple exceptions. But most of the other ones are lower than '08 cost.

But coke, as we have talked in the past, there's many alternatives for the needle coke producers besides making needle coke. Their facilities can make many different kinds of coke. So they are seeking price increases and they appear to be getting them across the board.

So needle coke as we said before we expect to be up. It is up. It is definitely going to be out. Spot market is up, contract market is up.

But on the balance of the items, the majority of those we are expecting and have seen so far lower cost than last year.

How does the prices that you are looking at getting or that you have already locked in compare to the coke cost versus last year? And how much of your book have you locked in, so far?

Well, Ian, it is not a guidance we will give at this time. Let's say we have locked in a very small portion of the book; and it is really the activity that took place kind of the middle of last year.

Since then there has really been no orders really requested from the customer base as they have been in this massive destocking exercise, reducing their operating rates, and then of course using up and reducing their inventory accordingly.

Pleased with the prices we got middle of last year. I think those got off to a great start. But a couple observations. It is a small quantity relative to total book.

And as I said also, it is just going to start getting started back up. Some customers are just starting to have dialog, saying, okay, we are planning on making a bid. Or, can you come meet us? So they are just starting to really initiate that process again.

I think one or two may come in March. Not a lot. I think the majority will come in April, May, and June. So we will get to really start to see some pricing, I think, in kind of the second half of Q2.

As I see the inventory in the supply chain of our customers and their low operating rates right now, it appears at this time that probably Q3 and Q4 they have got to start using new electrodes. I would say a lot of them, Q1 for sure they are living off of inventory. And then another significant portion of them have enough inventory even into Q2.

So I would say second half we are going to see our customer base really start to require new electrodes and start to utilize newly ordered electrodes. We're really going to have to let that process take place before we can really give some indication on what the book looks like or what pricing looks like.

Okay. Then one final question. The pricing that you are looking at -- or initially, I know it's very, very far out and it's very unclear -- but versus '08, how do you view pricing?

I view pricing of graphite electrodes up versus '08 and driven in large part because the key raw material that is 45%-plus of the cost structure is going up. So that is going up more than the others are coming down. The other miscellaneous ones, they are coming down, but not near enough to offset the increase in the big 45% guy, needle coke.

Okay. But let me try to reconcile that. Because you said that 40% of your needle coke cost will be lower than '08. So that would indicate higher margins for '09 versus '08. (multiple speakers) lower volume, but as far as the percentage of the --?

Let me just clarify. Why do you say 40% of our needle coke will be lower priced?

I thought that is what you indicated.

No, all the needle coke that we are ordering now, all the newly booked needle coke will be higher priced. The needle coke producers are seeking higher prices and they're getting them.

Versus '08?

So needle coke is about, call it, roughly 40%, 45% of the cost structure of a graphite electrode. So for that portion which is, call it, rounded 45% of the cost structure, that is going to be higher cost in '09 than in '08.

The balance of the raw materials in general, most of those have come off. Natural gas is down nicely. In some case electric power is down nicely, some countries. So some of the other raw materials are coming down nicely and will be lower across in '09 than in '08.

Okay, great. Thank you very much.

Chuck Murphy, Sidoti.

Morning, guys. Just --

Chuck, did we lose you? Hello?

Hello.

Sorry, I think we lost you. You went mute for a second. Go ahead, Chuck.

Okay, so I thought you said as well that you had locked in 60% of your needle coke requirements. Was that correct?

Chuck, we have locked in 60% and maybe a bit more of our total raw material costs.

Total, okay. I got you.

Okay? And we have done that size not different than other years; maybe later than other years, just because the book building process has been so delayed.

But we like to lock that in and we will do 60%, 70% of our cost structure, lock it in before we actually get into the big book building. What I am saying is that larger part of the book building is going to probably begin in April, May, and June.

I got you. Okay, that helps.

I apologize if I wasn't clear. I appreciate the clarifying question.

No problem. Then I was kind of wondering, for the contracts that haven't been renewed for 2009, I mean for those customers are you just seeing zero sales right now until there is a contract in place?

Yes, what we are seeing is kind of this. I think the way to look at Q1 '09, virtually all of our business in Q1 '09 is from two buckets. It is those customers that book Q1 to Q1 contracts, so they are finishing up the last quarter of their contract that was taken well over a year ago.

And then we have a few customers, not a lot, a small percentage of a couple very large key customers that maybe a future of their electrodes slid from December into the first quarter.

So really first quarter is all, let's call it, old booked electrodes from more than a year ago. So our customers are living off of those and then inventory.

I think one thing we have seen and I'd say a lot of our customers have seen, obviously the steel industry went through some tremendous consolidation over a relatively quick period. I think the downturn, like all of us, required and drove us to look hard at inventories.

I think a lot of our customers see -- wait a minute, we have made so many acquisitions, we have got a lot of different raw materials, maybe more than what we thought. And I think that is an aspect of it also.

I think they understand very well what they have today; and then, of course, their op rates are so low. I think when you look at not only the US, but I think if you add it up worldwide, op levels are somewhere between 40% and 50% here in Q1 in global EAF.

So obviously, what six months ago was two months of inventory, today might be four or five months of inventory.

Okay, so part of your customer base is essentially down 100%?

That's right. We definitely have customers, Chuck, that are just living off of inventory.

Okay.

It's been in extended, as I said, because their op levels are so low. Now when I look at the large picture of our customer base, as I said earlier, I see that the majority of them in Q3 and Q4 will have to start to use newly ordered electrodes.

From the dialog with them, I see most of the ones are starting to gear up here; and probably April, May we are going to see a lot of activity. Some of it might be in June, also. But kind of in the second quarter, they are really going to gear up and secure the second-half electrodes. And those will be the newly acquired.

Got you. Now for customers who are on the March-to-March contracts, what are shipments to them looking like these days?

The Q1 to Q1, they are taking those electrodes. Some have asked, because of lower op rates, can we push them out? In general, we have been very resistant pushing out booked electrodes. The obvious reason is we bought those raw materials maybe three, four months ago. We have already paid for them and I have already made their electrodes per their requirement and per their contract.

We really need them to take those electrodes and then of course pay for the accounts receivable. We all have to manage our supply chain and our cash flow. So the vast majority of our customers are taking all their contracted electrodes when their contract said they would.

Okay. Final question, any sign of any of your competitors getting more aggressive on pricing?

While, Chuck I'd just say I think it is too early to tell. There has been so little activity and so it is literally since the middle of last year on the new order front been very quiet. There's been a few little orders, but these are small and these are almost tweaks in our customer's requirements rather than, oh, let me get my '09 requirements.

We have had virtually no activity where customers have come and say, okay, I'm ready to book my '09 requirements. Here we go; do the bid process; finish the bid process; communicate the results. That just hasn't been happening.

Okay, all right. I will hand it over to somebody else. Thanks.

Charles Bradford, Bradford Research.

Could you talk a bit about what is happening in the Engineered Solutions? Most of us focus on the electrodes, as well we should. But you've had quite a bit of success. What are you looking at over the near term?

Chuck, thank you very much for the question. Yes, our Engineered Solution business has been gaining traction. I am pleased with the traction it is gaining.

Obviously, this started out as a much smaller business and we have developed a number of new products here. We have been successful in commercializing them. So they have finished '08 obviously with sales up almost 30%; over $180 million in sales. I remember this business when it was an $80 million business.

So it is gaining nice traction on the sales top line. And then also because it is tailored solutions and because those solutions go into a number of emerging markets like solar, some high-tech markets, and they are tailored, they command some pretty good economics. So I am pleased with the developments there.

'07, '08, very nice growth; and then obviously year-over-year as we said in the earlier part of the conference call, double-digit margin expansion. So the margin expansion has been great.

Looking into '09, I expect that ES will also be impacted by this global severe recession we are all seeing.

But some of its markets may still be, let's say, decent. They are all going to be down compared to last year, but I think some are going to be decent. Lower sales but still attractive. It's going to be primarily some of those solar, emerging markets, alternative energy type markets. Those should have a decent year.

It is pretty clear that the new administration is really pushing a lot of these areas, especially the solar, the fuel cells, and what have you. Do you see anything in the new stimulus legislation that is particularly helpful to you?

I think in general you are absolutely right. There is a lot of emphasis on some of those markets that we participate in. So I am encouraged.

But having said that, I expect ES year-over-year is going to be down in sales and down in income just because of the severity of the global recession. It has hit so many industries.

And then it is all exacerbated by the banking and financial industry. I mean, we have a lot of customers in these good industries, but they just can't get the financing. Or in some cases, maybe we don't like their balance sheet that much; they are relatively new, thinly capitalized, and they can't get the LC. And I really, really want them on LC business.

So net-net, ES should be down in '09 versus '08, but I think some of the segments should do decent because of some of the stimulus packages and the growth in those areas, Chuck.

Understood, thank you.

Yvonne Varano, Jefferies.

Thanks. I know you said a very small quantity of your business is actually locked in on the pricing sign. Can you put a percentage on that?

And then if that was locked in, say, a quarter or plus ago, that would come up for renegotiation -- what, mid-year '09?

Yvonne, what is locked in now is that small quantity when the book building business for graphite electrodes kind of started the middle of last year. So the volume is small. As I said earlier, the pricing is good, but the volume is small.

So I am hesitant to really say too much about it. We really don't guide to what that percentage is. That is not part of our guidance.

Pleased with the pricing. Small volume. We really have to let this book building start up in Q2 to really have a line of sight to what the '09 book is going to look like.

Okay, but I would guess that this small portion comes up for renegotiation at midyear or so again. Right?

No, Yvonne, those are annual contracts. So those were customers -- which often happens with critical graphite electrode supply -- they go ahead and kind of in the middle to third quarter of the upcoming year, they go ahead and book for '09. So those contracts run January to December '09.

So what was booked in the middle of last year is for January through December '09. They do not come up in the middle of '09. They are 12-month annual contracts for '09.

Okay. Then just on the cost side, you have taken a lot of steps here. Anything that you can help quantify in terms of the savings from a dollar perspective?

You're right, Yvonne. We have been very proactive. Obviously, if you go back in the history of our team, we have a well-earned track record in this area. As you know, if you go back a number of years, we are a large turnaround, and we have had tremendous experience in very difficult environment in our turnaround.

So we are very proactive. Everyone participates. As you saw, the officers have gladly taken a 10% cut. That came directly from the management team. This was not anyone asking or telling us to do this. This came from my team.

So the officers have taken a 10% cut; and then as you go through a couple different grade levels of management, there is an 8% cut, there is a 6% cut. And then some of our less compensated team members, there is no change to their income.

So one, we are very proactive. Two, we have a lot of experience in this area. We have a well-earned track record.

It is not an item, though, Yvonne, that I will price out for you and say okay, gee, Craig, if I add up your numbers come you are down about 8%, 9%, 10% of your workforce. What is that value? It is not buckets we work on and that we will articulate.

But what I will point you to is our accomplishments on items that you see clearly on the P&L, like overhead. I think if you look at overhead and you look at our overhead over the last five, seven, eight years you will see very tight control on things like overhead and those expenditures.

So we are proactive and we will do aggressive actions, usually well ahead of the curve on the cost front.

Okay. Then I know you said you are expecting essentially a breakeven, but maybe a loss. I guess what would need to change in what you are seeing now to get to a loss? Would it be fewer volumes?

I guess the reason we are saying breakeven or could be -- could be -- a loss is it's that volatile out there.

I have got customers, and I think many of you have listened to their earnings calls the last three, four weeks, they just don't know their book well. Their book is variable.

I've got customers -- and I'm not talking globally here. I know a lot of you focus a lot on the US, but this is global customers, that they run for a week and they don't run next week. Or they run for three days and then next week they run one day.

It is mainly around the variability. The environment right now is that variable.

Then lastly, could you just maybe contrast your domestic customers versus the international in where you think they are on the destocking?

I see across the board they have taken very aggressive action. I wouldn't make a distinction between domestic customers and international overseas customers.

Obviously, there's a lot of global steel producers. So when you see the big global guys institute something, it is worldwide. So I don't see a big distinction.

If I took you to China, yes, I would say they lag on destocking versus, say, US, European, South American customers. They lag. There may be a less well-oiled machine on destocking.

If I took you to kind of Russia, I think Russia -- there's some tough balance sheets in Russia. We watch it very closely.

LC business, et cetera, I think some of them have been quite aggressive because they have been driven by their banks and the lack of financing.

So if you ask me one that is a little bit soft on destocking or really getting an immediate jump on slowing down production, it would be mainly in China. China tends to run production longer in general -- not every customer -- but in general than maybe some of our other customers in other geographies.

Terrific. Thanks very much.

Bob Richard, Longbow Research.

Good morning, guys. Great quarter, thanks.

Thank you, sir.

Last quarter, Craig, you discussed perhaps high double digit guidance for needle coke cost increases, from '08 to '09. Are you able to maybe provide any further color on that?

The only color I can give is -- yes, we have seen high double digit increases in needle coke. As I said, those producers have alternative uses for those assets and many are doing that. They're making different types of coke and they are not making needle coke.

Needle coke is kind of top of the food chain if you will. It is harder to make. It is higher cost to make, and they have moved on to some other things. So they are getting double-digit increases right now.

Okay, so moving on to pricing, would you say your leverage maybe in '09 versus '08 is comparable, less, or more for pricing negotiations in '09 versus '08? Taking into consideration how many electrodes are out in the channels and who is making what these days.

Well, Bob, I guess in general, I think anytime you've got the kind of severe global recession we have right now, that, yes, the sellers' leverage is less. I think that is a general statement.

If you are trying to sell something, I don't care what material it is today. In this global environment, it is harder. Now, point one, general discussion.

Point two, in our case because of where the book building is, we have really got to let it start up; and time will tell. I think at the end of Q2, we will have a much better view. I would expect by the end of Q2, most of our steel customers have booked the balance of their '09 requirements.

That helps. And congratulations on your balance sheet improvement. Any thoughts on -- I see you are cutting back your CapEx. I would presume you're just going to play that very conservative here for a least for the medium term.

Yes, Bob, you are correct. Like I said earlier, we have a very well-earned track record here. We are very prudent financially, and I think you will see us continue that path.

If we see the opportunity to delever our $78 million we will even do some of that, if that avails itself in '09.

So yes, I think you can plan on us being very conservative and prudent on the balance sheet side. We are very pleased with the progress the team made here over the last few years.

Just one quick housekeeping question. Seadrift accretion, where is that on your income statement?

Bob, it's Mark. You actually will see it --o it's included on the P&L. It is the line item that shows the equity. It's actually --

Oh, equity in earnings?

Yes, equity in earnings and writedown of the investment. So the writedown is included in that as well as the earnings associated with -- actually, we booked five months of activity for Seadrift. We are on a one-month lag. So it has five months of the operating results as well as the impairment that we discussed.

You would expect maybe sequential degradation from those? We could squeeze the math out and get a monthly performance, if you will. We should probably expect declining performance there, right, year-over-year?

Well, we're not really providing any guidance from Seadrift at this point in time.

Okay, thanks. That helps, and great quarter.

Mike Marburg, Ramsey.

Just wanted to follow up quickly on two items. One that is on Seadrift, it was partially addressed, but you had spoken before about giving us a little bit more color as to that business. Is there anything else you can tell us about future operations?

I think, Mike, we have the same issue with Seadrift as we do with our own business at this point in time. There is just really very little clarity at this point in time. So as we learn more about just the general demand for EAF production, which will require obviously demand for electrodes and then subsequently needle coke, we will be able to give a little bit more color.

But at this point in time, '09, there is a lot of uncertainty at this point in time.

Would it be fair to assume that if you're experiencing double-digit price increases from your providers that Seadrift will have that same dynamic?

Really, we're not going to comment on that at this point in time. But obviously, it's a very dynamic market and there's obviously a strategic value of that supply chain that is dependent upon the sole source of having needle coke in order to produce graphite electrodes. So it is a pretty strong value proposition from that standpoint.

Okay. Then in terms of (inaudible) just the cost on a dollar basis, SG&A costs, are you able to --? I mean, it would be -- I guess you wouldn't quantify it, but clearly it is going to be down year-over-year, correct? (multiple speakers) dollars.

Yes, Mike, if you look at our track record, it is not an item we guide to. But if I point you to our track record, I think SG&A has been managed very tightly, very prudently. If you go back you will find -- if you really strip out some of the one-offs, it is almost flat over the last five, six, seven years.

So I think you see these steps we have announced here today. Many we have already implemented of course. So we are off and running. What I would expect is probably at a lower rate, you're right. Directionally it should be down.

Is there any reason why you're not being -- just sharing more with us on these expenses that are not related to gross margins and therefore might have some issue? You don't want to talk about things because it would hurt your competitive positioning or your negotiations with your customers. But why not be a little bit more transparent on the costs for things in operating expenses?

Well, good point, Mike. It has just not been our practice over the years to identify each action as far as what is the value attached to it or the total. We have in times in the past during our turnaround, when we had very large, broad projects, identified the savings we expected out of it.

But in these types of items, given we have what I would say is a tight SG&A expenditure already in '08, these types of one-off items, we are not going to give the individual dollars.

I just feel, gee, at the rate we are running now we are going to improve upon it. It is not a material item on our P&L. It has not been a problem area.

If it had been a problem area, I think you would see Mark and I being very, very detailed and pricing out each one. But since it's really not been a problem area and it has been running at a very good level -- I mean if you look at the percentage SG&A to sales etc., you look at the trends we have had, they are very, very good. We are just not going to price out each one.

I think the message for the Group should be GrafTech has a history here, a well-earned track record. They are proactive. And I think when you look at the breadth of the initiatives we have taken, from officers and team members' salaries, to unfortunately having to lay off some full-time team members, we will hit every available opportunity to be more efficient.

Okay, thank you.

Sven Hintz, Berenberg Bank.

Yes, actually just three questions if I may. The first one is regarding your writedown on Seadrift. I mean basically, since they are looking to increase prices on a high double-digit basis, we probably cannot assume that their EBIT is going to suffer significantly unless the volumes are going to be down significantly as well.

So is it mostly some stuff you did with [CDCF], why you have taken this writedown?

Yes, think the primary driver you hit on is the volume reduction. As we looked at needle coke in the overall industry, six, nine months ago it was completely sold out and very tight.

In the market we are in right now with EAFs running somewhere 40% to 50% of capacity, and therefore demand for electrodes has fallen, and subsequently the demand for needle coke has fallen. All that had to be taken into consideration, and we now had to reassess the fair value of our investment. And ultimately that is what led to the writedown.

Are there any other plans concerning increasing the stake or are you quite happy with the stake you have at the moment?

Sven, we are very pleased with the stake we have right now. We bought, of course, what was available and on the market. The balance of Seadrift is not on the market so it is not for sale.

So we sit at 18.9% and we are very pleased with it. We are very pleased with the Seadrift team. The interface and the quality of the Seadrift team is very impressive.

Okay, excellent. Then just two more questions. The volumes of the electrodes shipped in 2008, either I have missed it or can you just elaborate on those; and also on your expectations for Q1?

Yes, Sven. Volume is not a guidance we are going to give at this time. And Q1 I'm really going to stick with the guidance that we gave thus far. It's really driven by my customer base.

My customer base, especially if you go through their calls or I get a chance to interface directly with them, they just do not have good line of sight. So the color we have given so far, the guidance is all we have at this time, Sven.

Okay, and the volumes shipped in 2008, the total volumes?

That is going -- I think we are going to have -- some color on that comes out to in the K.

Yes, we won't quote the exact quantity in terms of metric tons. But you will be able to at least see the volume change year-on-year. We should have the K out here in the next few days and you'll be able to look at that detail.

Okay, excellent. Then just one last question. On the SG&A, you said, pointing at your track record, that they are going to be down year-on-year. Now, that is an absolute terms, right? Relative to sales they are probably going to be up?

That is correct. Down in absolute terms and, depending on where sales come in, the percentage obviously is going to change.

Okay, excellent. Thanks very much.

[Rebecca Berry], Defiance.

Yes, I have two questions for you. The first is around the operating rates and your comments about breakeven in Q1. Can you just talk about what kind of operating rate you would need to see to break even? And maybe to put that in perspective, what you were operating at in Q4?

Yes, as we said, we exited, Rebecca, Q4 with about a 45% op rate. Then as we did in Q4, we will continue to do this year, we will adjust our operating rate with customer demand. So as customer demand starts to move up or down, we will make accordingly the changes in our production facilities.

I would say thus far in Q1, we are running -- it bounces around 40% to 45% op levels. So we are in that kind of range, and that is kind of where our customers are. As we said, worldwide they are kind of 40% to 50% depending on which country, which customer, which product portfolio our customer has.

So if you kept these rates 40% to 45% in Q1, would you be about breakeven then?

Well, this is not a guidance we give. I mean you've got a lot of variables into that. As we said our biggest issue in Q1 and probably continuing into Q2 is just the volatility in the marketplace and the uncertainty in this marketplace.

So as we said, we expect to virtually break even in Q1; and it could be a loss because of that volatility. So our breakeven run rate or our breakeven volume rates are not guidance we give.

Okay. Okay. A follow-up on Bob's balance sheet question. Can you talk a little bit about maybe acquisitions going into '09 and what the industry looks like? Do you feel like there is opportunity there with a lot of small players to maybe consolidate and gain share? Or are you more concerned with debt paydown at this point?

Well, last year we did our first acquisition, the Seadrift one we talked about. Very pleased with that. Obviously, we enter '09 with a very solid balance sheet, low debt, and well positioned.

So, we will continue to look at opportunities in the marketplace. However, we will examine them on a very prudent basis. The last thing we want to do is increase debt in a very uncertain time.

So we continue to look. We have got a balance sheet that allows us to continue to look. But having said that, before we added any kind of debt to the balance sheet, we would look very, very hard at that, market risk, length of this recession, et cetera.

A large deal with a lot of debt, don't see it. That is just not us. Not prudent in this very uncertain time. Not going to happen.

A small one with a little bit of debt that we thought was strategic, improved our business model, great buy, great price, yes, we will look at that. But we will be very prudent before we pulled the trigger on something like that.

Are you seeing any distress at all now with some of your smaller competitors?

Too early to tell. I don't see that right now. I think there has been some pretty good improvement in a number of the balance sheets. So I don't see any really screaming issues on that front right now, Rebecca.

Okay, great. Thank you.

Mark Parr, KeyBanc.

This is Phil for Mark. He is actually out of town today. Can you talk about progress with working capital initiatives? Where do you see things like your inventories trending in the next year?

I know you have some potential offsets on the upside given needle coke increases. But where should we look at your working capital?

Good question, Phil. Our team in Q4 obviously got after this very early. Slowed down our production facilities to match customer demand. Worked very hard on AR collections. And as you see from our cash flow numbers, had a very solid Q4.

As we go into '09, the team's mission will be to reduce our investment in working capital. So we will look to keep our AR very current. Our AR today and our AR aging is in good, good shape right now. We will look to keep that very current and look for opportunities to reduce our investment in accounts receivable.

In the case of inventory, you are spot on, Phil. We are going to reduce the tonnes, for sure, and the quantities. But the fact that the needle coke costs are going up, we will be swimming against the tide, let's say, on the dollar value. So that is our challenge.

The goal is to reduce the tonnes significantly and also hopefully reduce some of that dollar investment in inventories. Right now, we closed the year of course at $290 million, and so there is lots of size to go at.

The tide we are swimming against is the increase in coke cost that will come out of the balance sheet.

Okay. This one is for Mark. As far as the supply chain financing, the $30 million, where does that tuck into the balance sheet? And what was that really about?

On the balance sheet, you are going to see it in the other accrued line, so that is where you will see it. It will be in current liabilities in the other accrued liabilities section of the balance sheet.

We also show it in the footnote around the net debt, where you can kind of see the amount that was outstanding as of the end of the year, which is right around $30 million. So you can see it in both places, give a little bit more detail on the net debt calculation.

Essentially what it allowed us to do is to -- our key raw materials, trying to leverage our payables and in actual terms in which we have to settle those obligations. By leveraging the supply chain financing we effectively have been able to elongate that payment cycle time and we have been able to do that at very attractive financing costs.

So we'll continue to look at that as another source of liquidity, especially in this challenging environment. Any opportunity along leveraging supply chain or leveraging our factoring lines we will continue to engage with.

The last question, just about the macro environment. You pointed in the past to 70% of your mix being in larger diameter and 30% of the mix being now non-melter applications. Have we seen that non-melter portion of the mix come under some more relative near-term pressure versus the other portion of the mix? Just given the lower-grade feedstock components.

Phil, what we see today is we would expect still that 70%/30% relationship to hold as we go forward. We as of today haven't seen any real material difference in that.

But material difference as far as potential pricing pressure on one versus the other?

We haven't seen that yet. No. We are just getting started in the book building, as we said; but macro look we haven't seen that yet. Could come, but really we haven't seen any indication of that yet.

Okay, thank you.

Lavon Von Redden, Hocky Capital.

Good morning, guys. Quick question. If I take at the linearity as it relates to your capacity utilization in the fourth-quarter, could you just help me kind of understand how that moved and whether that was a little bit better than your original expectations when you last came out and warned about, I guess, the quarter and this year?

Well, if I look at the average, run for Q4 it is probably around 70% op level average in Q4; and we exited at 45% op level.

So obviously, we started the quarter, I think, like everybody. Okay, it kind of looked -- things still look good, customer demand is still good. And then of course as we all know, it deteriorated rapidly for our industry and many industries.

So, the falloff November, December, obviously, was steep. December we had a number of customers around the world that just kind of shut down for the last two weeks. Said that's it; sent everybody home. So that is kind of the way it went, about 70% op level in Q4.

Did you get any sense that there was some forward buying related to -- we all know that needle coke prices are going higher?

I wouldn't call it forward buying. What I would call this is virtually every customer took every tonne of electrode that was on their '08 contract. Because if they didn't, they lose that price; and then they would face the new price.

So 98.9% of the customers wanted every electrode on their '08 contract and took them.

Got you. Maybe you can help me just take a look at and think about the global [G] market and get a sense for what is happening there. There have been some capacity closures announced by some of your competitors.

It seems to me, at least to a certain extent, that the world is a much smaller place. But you guys have not really talked about reducing your overall capacity as well. Maybe you can help me think about globally what is happening and your own thoughts.

Well, we haven't changed any of our capability. I.e., total capacity. But we have made significant changes of course in the op level, the staffing, and the cost structures across the organization.

So the way we look at it, the capacity that we have on four continents is the capacity that will be required down the road. And the big question is -- when do we all come out of this severe global recession? But down the road, that capacity and capability as it was required in '07 and '08 will be required to service our customers' needs in those geographies.

So we don't have any plans at this stage to eliminate any capability or capacity. But we have proactively really lowered the op levels as you can hear from the numbers we are discussing.

Do you have any comments related to your competitors like [HEJR], et cetera?

Well, what I see in the customers, a number of them have had their conference calls. A number of them we hear through their dialogs with customers, and the customers talk about it. The steel customers talk about it.

It appears that everyone is trying to really manage their working capital closely and not let the warehouse build up with inventory that can't be moved. And so I think as you listen to the conference calls thus far, the competition has tried very hard not to let inventory balances get out of control and tie up a lot of working capital in those inventory accounts.

Okay. One point of clarification. When you do not have a contract, Craig, how -- are the sales basically done at spot at that stage?

Yes, they would be at spot. Lavon, that is rare. Most of our customers, because they must have an electrode to of course melt the steel, have contracts.

Now there's a few that might only do a six-month contract, but that is rare. I don't have any customers that are just on spot.

Okay. Okay, thanks.

(Operator Instructions) Chuck Murphy, Sidoti.

Just wonder as far as the Seadrift impairment again, if volumes of needle coke to Seadrift's customers are going to be so much lower, how is it that needle coke prices are up high double-digits?

Chuck, as I said, there is only four producers. They have alternative uses for those assets. So they can make different kinds of coke. Or especially in the case of Seadrift, they can adjust their cost structure and just make less. So the producers are seeking and getting increases.

Okay. Then on the SG&A, I think the press release mentions something about it containing some severance charges.

That's right.

And some bad debt expense. Could you kind of give us some idea of what that was -- or how much that was, I should say?

Yes, if you look at the SG&A, year-on-year increase was $2 million or so. We highlighted the primary drivers which was the severance-related accruals that we had to book and then we booked some additional bad debt provision.

All of that increase, slightly more was associated with those two items. So you can think of it as kind of a $2 million to $3 million impact when you aggregate the two up.

Okay, okay. And last question, you mentioned before that nearly all of your customers took the full 2008 contract. What rate were they running at going into like the third quarter? Did they really kick it up in the fourth quarter?

No. Q3 in general across the world, they were running at a higher op level. Then they, like we did, ratcheted down over the course of Q4. So October higher than November; November higher op level than December was the general pattern of our customer base.

And we tried to mirror that very closely. I think we are running right about at that kind of level that we saw them at that period.

But I'm saying as far as how many electrodes they were buying, did it look like they were going to use up their full allotment during the third quarter?

No, no. What they bought in Q4, remember, I would say was more inventory than what they wanted. They were buying, one, because of the price increase; two, that is the way the contract is structured. You've got to take it or you lose it.

And from our side, I just didn't -- we have got contracts and we have to work together. Of course, we are long-term relationships.

But from our vantage point, we have paid for some of those raw materials four months before. Electricity you pay like in 14 days. So we had already made the product, it was in the production process, done, and we really needed the customer to take it as he had contracted for.

Then so we could go ahead and start ticking down on the AR collection and complete that cash collection cycle much quicker than if we would have said, oh, take it in Q1 or Q2, when you want it.

Okay, all right. Thank you.

[John Lancefield], Royal Capital.

Good morning, guys. Question on your inventory, which ticked up sequentially slightly in the fourth quarter. If you got back to, call it just for round numbers, say, a normalized quarterly tonnage rate of 50,000 metric tons, and that were to happen in the third quarter, can you give a sense of what the needle coke component of that inventory it is?

Where I am going with this is -- how many quarters would you enjoy the benefit of the lower-cost needle coke that you exited '08 with?

John, if I look at our experience the last few years, in general we have enjoyed the benefit of some of that inventory we have for Q1; and then it carries some into Q2; and then -- less than Q1. Right? So it depends on grade and it varies, right? Grade and then demand for that grade.

But Q1 usually has some pretty fair benefit from it; and then Q2 less. Then by the middle of the year, it is completely finished.

Now, given that '09 should be a slower year, lower volume year, that should go longer. How long? I think it is too early to tell. It depends on ultimate customer demand, depends on grade, etc.

But all things being equal, yes, that should last longer than let's say the last couple years.

Right. I guess taken in combination with your comments as far as when you would see your book starting to be built, it wouldn't be necessarily unreasonable to assume that most of '09 you would be using and running through your costs '08-cost coke?

No; it won't last that long. I think Q1, yes; a good slug of Q2; and maybe into Q3, depending on the grade. So it will be longer lived than let's say the last couple years. But the full year, no.

Okay. I guess just the corollary question on the coke would be you have locked in, as you say, pricing for all of your coke requirements. Can you give a sense of what, if anything, you did as far as the volume side of that and also the duration of that contract? Is it also a calendar year arrangement?

John, yes, it is calendar year as we have done in all the past years. So it covers '09.

Volume, of course, we have had to make some estimates on the volume. Obviously, in the volume suppliers understand that there needs to be some flexibility in such a volatile year like this year.

So pricing is fixed. Volume, we have got an estimated volume in there with a little plus minus around it of course in a volatile year like this.

Okay. Final question, on the antidumping provisions that were instituted on some of the lower, lower grade, smaller size electrodes, have you seen any benefit from that, macro conditions notwithstanding, here in the States?

Not yet. Too early to tell. That is NEMA, the National Electronic Manufacturers Association, which electrodes happens to fall into, NEMA took that case up and was successful on that case.

So John, literally that has just come out. It has come out in the last few weeks that it was finalized, so haven't seen any impact yet. Maybe we see that later in the year as we go forward.

Thanks, Craig.

It looks like we have no further questions. I will turn it back over to you to, Mr. Shular, for any closing remarks.

Holly, thank you very much. Everyone, thank you for joining our call and I look forward to talking to you in a couple more months when we go over our Q1 results. Thank you. Have a great day.