GrafTech International Ltd (EAF) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's GrafTech's Q1 2009 results conference call. Please be aware that 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, ma'am.

Thank you, Tamika. Good morning, and welcome to GrafTech International's first quarter 2009 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 Raedake at 216-676-2281 and she'll 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 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'd like to turn the call over to Craig.

Good morning, everyone. Thank you for joining our call. Today, we'll take you through our first quarter and then open it up to questions.

In the first quarter, net sales were $134 million, primarily the result of lower volumes associated with significantly reduced demand in both our business segments. Gross profit was $32 million or approximately 24% of sales as a result of lower sales volume and unfavorable fixed cost absorption associated with reduced operating rates.

Our Graphite Electrodes facilities ran at a 38% operating rate, which aligned with market demand. We believe this is the lowest=ever operating rate for our facilities. Operating income was $8 million. Net income before specials was $5 million or $0.04 a share. Operating cash flow was $14 million, and net debt during the quarter, we were able to reduce by $2 million.

As a result of our successful deleveraging initiatives over the last couple of years, interest expense has dropped nicely in the quarter. It was $2 million versus $8 million a year ago.

And so to recap the first quarter, we were profitable in Q1; cash flow positive; and we paid down debt -- all of this in a very, very tough environment.

In our Industrial Materials segment, sales were $105 million, while operating income was $7 million. The reduction in operating income in the quarter was primarily due to lower sales volume for Graphite Electrodes related to the drop in global steel demand. The decrease in sales volume impact on operating income, however, was mitigated in part by an execution of previously announced cost reduction and productivity initiatives that we laid out in our last call.

In our Engineered Solutions segment, sales were $30 million in the first quarter. Operating income for that segment was $2 million as a result, again, of lower sales volumes across multiple product lines, which event, of course, impacted by the very steep global economic slowdown.

Turning to the status of our Graphite Electrode book building process. As reviewed previously in our last call, the normal '09 book building process has been disrupted by the significant decline in demand. The process, however, is underway, and bidding activity is incurring in all geographies. However, it remains too early in the process to speculate on settled contract prices at this point. We do expect higher Graphite Electrodes selling prices in '09, due to the significant cost increases for our key raw material, needle coke.

As a result of the volatile global economy, we are also seeing a change in the time horizon of the contracts currently being booked. Given the limited visibility our customers have to demand, many have been more inclined to take shorter contracts quarter-to-quarter or even month-to-month. It's important to note that in the current environment, this is generally not treated as spot business and, of course, is not conducted at spot prices.

Finally, turning to outlook, very weak end market demand is expected to persist with a high degree of uncertainty surrounding the timing of any anticipated recovery. As a result, steel producers continue to operate at very low rates in order to reduce inventories, de-stock, and of course, match with current market demand.

The majority of our customer base has very limited or no visibility to third and fourth quarter '09 operating rates. Given current global economic conditions, which continue to be extremely volatile and uncertain, our ability to project full-year guidance is very limited.

We expect '09 to be very challenging for both our business segments. First quarter results came in better than expected and we generated a small profit. We believe second quarter results will be similar to those in the first quarter. However, second quarter loss is possible, given the variability in customer demand.

Also important to note that historically, the third quarter is a weaker quarter, as many of our European customers schedule plant shutdowns during the summer holidays in Europe. Given the current economic conditions, it is possible that the planned customer shutdowns in Europe could be extended, resulting in further reduced demand for our products in the third quarter of '09.

While a high degree of uncertainty around forward-looking projections remains, we expect a marginal improvement in the second half of the year, as our customers should have largely completed inventory de-stocking initiatives, and the anticipated benefit of higher Graphite Electrodes selling prices should be realized, offset in part by higher raw material costs.

Finally, in '09, we are targeting capital expenditures to be approximately $50 million to $55 million; depreciation expense to be approximately $35 million; and our effective cash rate to run somewhere between 28% and 32%.

That completes our fixed response here. Let's go ahead, Tamika, and open it up to questions, please.

(Operator Instructions). Ian Zaffino, Oppenheimer & Co.

I just wanted to think about your operational breakeven point. As you look at the second quarter, you're projecting a potential loss. Does that mean that operating rates need to fall below that 38%? Or what are kind of the moving parts that we need to consider?

Well, right now, as we said in our guidance, we expect Q2 to look like Q1; so, a small profit, that we did $0.04 in Q1. But as we highlighted, a loss is possible because what we find in our customer base, their order requirements are so volatile that many are moving orders around forward and back. And that at these low profit levels, it's very easy to have a loss, if some of that occurs in the second quarter or even towards the end of the second quarter.

So operating rate, 38% first quarter. What we will do go-forward, we will match that operating rate with what we see from our customers. And so it will line it up with demand. And if it goes lower in the customer demand, we'll lower it; if it has to remain the same, we'll do that. So right now, we expect Q2 to kind of look like Q1. And that was $0.04 in the case of Q1.

Okay. And how close to the end of the destocking do you think we are?

Well, we've watched this very closely, and I think, in general, as you've seen from the steel producers -- and this is a generalization, of course -- but I'd say most of them, if you talked to them in January/February, their outlook was stronger than what it is when they finished the quarter.

I think most of them have run slower in Q1 than what they anticipated in the front half of Q1. And you saw a number of them over the course of the quarter even downsize some of their outlook. So that, of course, result in delaying and slowing down some of the de-stocking process and extends some of that longer than what it might otherwise be.

But having said that, we see a number of customers should be done in Q3. And then by Q4, from our vantage point, pretty much most of the customer base worldwide is done with its destocking. So what we see is in Q3, some of the customer base is going to be on new electrodes. And probably by Q4, the vast majority of the customer base is going to be on new electrodes. And that's why we think there's going to be a marginal improvement in the second half of the year.

Okay, then one final question. There's a comment in the press release about the pricing being partially offset by needle coke. Does that effectively mean that you're able to raise prices beyond needle coke? If that's the case, what type of price increases are you seeing?

And are you locked in on needle coke right now? Or is that still very much spot purchases?

No, needle coke -- we have secured our pricing on needle coke on volume; obviously, given the volatility in the marketplace, we have a lot of flexibility on volume. So, we will not be in a position where we have to take or will take excess needle coke.

But the price of our needle coke is fixed. It is up, as we've highlighted in the last several calls. And the goal will be to get graphite electrode price increases to offset and, hopefully, more than offset the significant price increase that we're seeing in needle coke.

Okay. And that price is locked in for the remainder of '09?

That's right. It's secure for '09. Volume, we will take exactly what we need to meet market demand. We will not end up taking excess volume or being required to pay for excess volume -- no, that's not what we have lined up. We will manage the working capital aggressively and line that exactly up with market demand.

Okay, great. Thank you very much.

Luke Folta, Longbow Research.

I just had a question first on your needle coke inventory position. Can you talk to the extent of how much you have in stock at last year's pricing and when you think that you're going to start chewing through the higher cost material?

Luke, I won't give you, for competitive reasons, obviously, our exact position or picture. But in directional-wise, we've got some coke inventory that will benefit us a little bit here in the first half, lower cost. But the second half we will start seeing the impact of higher cost needle coke.

And so, first half, a bit of a benefit. Second half, it will begin to drag on us. And that's why we're seeking price increases to offset that increased cost in the second half.

Okay. And you had mentioned that people are looking for shorter-term contracts now. How do we look at pricing if we get into, like, a quarterly contract situation? Is it still fixed pricing based on quarterly volumes? Or how does that work?

Yes, Luke, it is. And I guess why we highlighted it was obviously -- there's not an annual contract out there to be done. And our customers' line of sight is so limited that we've seen a few go month-to-month. And we've seen a larger percentage go quarter-to-quarter, just because they have no line of sight at all to Q3 or Q4.

And so, one, we want to highlight that too. What we do in pricing then, if the customer comes and books, let's say, a quarter with us, then that's all fixed price for that quarter. And then that customer would come back to the market at the end of that quarter and then face the market again to secure their Graphite Electrodes.

So that's what we're seeing right now. It's early in the process, but I will say it's going orderly. It's going smoothly and the destocking at our customers is well underway and it's orderly. And towards the second half of this year, the supply chain at our customers is going to be very, very lean. And they will need new electrodes.

Okay, and just one more, if I may. Can you give us a breakdown of what the international versus domestic business was in the quarter? And your expectations of where you expect to see a rebound or -- you expect to start building your book first?

Luke, I'll give you in general. In general, our US sales are somewhere around 25% of our total portfolio. And so we've got a very good geographic mix. We sell into 80 countries. So US 20% to 25% is where it usually bounces.

What we're seeing is obviously, like everyone else and you listen to our customers' calls, North America, Europe, no signs of a rebound yet. In China, we're starting to see the first part of some positive indication. Obviously, China has a very large stimulus program. It's gotten underway maybe quicker than some other countries and money is being spent.

And so in China, we're starting to see the first positive signs of a little steel production coming up, order activity, ordering some durable goods. And so I would expect China will be probably the first one that we see really start to turn.

All right, great. Thanks a lot, guys, and thanks for all the color.

Mark Parr, KeyBanc Capital Markets.

Congratulations on making money at 38% utilization.

Thanks, Mark. Our team has done an awful lot of heavy lifting the last several years. And as I told them early this morning after we released, it's really a testament of what's been accomplished the last several years -- to run at the lowest op level ever in our Company's history, to make money, cash flow positive, and still pay down some more debt -- a nice way to start out the year in a very, very tough environment.

Yes, it is tough. If I was going to just try to sum up any potential changes that you're making in your commentary today compared to the last time you made commentary, would it be fair to say that you think perhaps a pickup is a bit more extended now than you did, say, 30 days ago?

I would say, Mark, probably the destocking is going to take longer because, in general, the steel customers globally have run slower than what they anticipated in Q1. And you've seen that, I think, in the earnings and in some cases, some of them had to -- came out mid-quarter to readjust their outlooks.

So, destocking is going to take a little bit longer. And I would say instead of some of those customers being completely destocked in Q3, that looks like right now it will roll over to Q4. But net-net by Q4, the vast majority of the customer base will be running on new electrodes -- which I think, obviously, is good news for us -- and will start to pick up the supply chain, which at that stage, will be very, very lean and will need replenishment.

Have you had the opportunity to do any, like, melt shop by melt shop analysis? Or I guess maybe another way of thinking about this is -- what are your -- what's the capacity utilization assumptions you have in terms -- are you assuming any pickup in steel production, utilization rates in the second and third quarter?

Not in the second quarter. What we see the run rates right now and the feedback from our customers, and just the round of conference calls they've had, we think there's no real pickup that is material in Q2. We don't see that and they aren't communicating that to us, aside from maybe a little bit in China. But recall, China is 90% integrated and only 10% electric arc furnaces using electrodes. So Q2, we have no uptick in there at all in our guidance for Q2.

Okay. All right. In terms of your existing needle coke supply, will you have some '08 needle coke into the second half of the year? Or will it all be consumed in the second quarter?

I think the best way to look at it is that most of that will be behind us in the first half of the year. So I wouldn't plan on a benefit in the second half of the year for that. So we'll see some benefit here in the first half. And obviously, it varies by grade.

Some grades are already on new coke because you have different grades for different products and different applications. So I think if you add it all up, I think a little benefit in the first half, but by second half, no; that benefit is not something you want to plan on.

Okay. Is there anything that you can say as far as the pricing on a quarter contract? Let's just use Q2 for an example. Say somebody comes in and says, okay, I don't really know what my business is going to look like, but I'll give you a contract for April, May and June. Just pick a time frame -- 90-day time frame.

Is that -- how do you look at that in terms of how you price it in the context of your current spot price? I mean, is it the same kind of pricing that you would use for a 12-month contract? Or is it because you say your costs right now are perhaps a bit lower, would that allow you to pull the pricing expectation in a little bit?

Mark, the way it would tend to look, it would not look like a spot price. And generally, these are larger accounts and so they have the volume and the volume commands a better price. So the pricing would tend to look more like what you would associate with a contract price.

Okay. All right. So, that's interesting, though, that that change is working into the situation. (multiple speakers) I've got a couple -- I don't want to tie this thing up, but I'll pass it on and get back in queue -- but I do appreciate the exceptional performance that you guys put out in the first quarter, though. That was really solid.

Thank you, Mark. Much appreciated.

Michael Gambardella, JPMorgan.

So it sounds to me what you're saying is that you haven't felt the needle coke cost increases in the first quarter and probably not in the second quarter. Is that correct?

That's correct, Mike. And because the volume and the op levels are so low, the older inventory is lasting a little bit longer. And in general, that's the way I would look at it.

But I do highlight, like, obviously there's different grades of coke for different applications. And some grades, we would already be on new coke price. But in general, the way to look at it is -- yes, in Q1 and probably to a good part of Q2, we should enjoy some benefit from the lower-cost needle coke.

Now, in Q1, what percent, just a percentage of the book did you have a repricing on the sales prices of graphite electrodes that you had booked earlier in the year, before the debacle in the economy?

Well, some of it, obviously, was booked before the downturn. And in some cases, depending on the customer and the size of the customer, some of those were much-improved prices.

Right. So I'm just trying to get an idea, like -- I know you can't tell us the price, but just a percentage of your volumes in the first quarter, how many -- at what percent got a higher price from those contracts that were signed early last year?

Well, maybe the way to look at it is -- let's go to those accounts that tend to book Q1 to Q1, okay? And so those accounts that book Q1 to Q1, they had, let's say, the old prices in them, right? And so, in general -- I'll give you just generality -- in general, that Q1 to Q1 in the first quarter might be 20% of our sales in Q1.

So that group, of course, they were already booked. They had an annual contract before the market downturn and they had the old price. The balance of the book would start looking at newer prices.

So, in the first quarter -- are you saying -- I don't understand -- are you saying that 20% got new prices, higher prices?

No, 20% would be the carryover of annual contracts for accounts that go Q1 to Q1. So those are old (multiple speakers) --

So, end of Q1.

That's right. We've got -- every year, there's a group of customers; that's just their budget cycle. So (multiple speakers) --

So then 80% would be starting calendar year -- so, January 1?

Yes, more like 70% to 80% would start being newer business now. The thing that clouds it a little bit is this, Mike -- and that's the general, right? So generally, we got 20% of Q1 is carryover.

The thing that clouds it is, this year is so different -- remember, we had customers in Q4 that didn't want to take the product, right? And so some of that slipped into Q1. And so that 20% that would normally be at old price, you've got to also add those that slipped Q4 to Q1. So you had some of that in Q1. But as far as giving exact percentages, that's not what we do here. (multiple speakers)

But I mean, you also -- I thought you had said, like, after the summer, you stop booking new prices because people didn't have any visibility in the marketplace, right?

Well, no, the book building process stopped. They just stopped asking for bids, yes.

So all I'm trying to get a feel for, like -- before the book building stopped, what percent of your business got the -- a price increase that was effective January 1?

I don't have a percent of my business, because I'm not giving you the total business for the year, right? Everybody that was booked before the downturn, everything that was put in the book before the bidding season was stopped by the customers, had a price increase -- everybody.

Right. Sure. No, I understand that. I'm just trying to get a feel -- how much was that, percentage-wise?

Well, again, that's something we don't guide to. Right? All I'm trying to tell you is the general themes, right?

So every Q1, you've got about 20% that carries over -- those accounts that are Q1 to Q1. And then all the new business we booked before the bid season was suspended by the customer base all had increases -- across the board -- every geography. (multiple speakers)

But that was some percentage of the 70% to 80%?

Mike, this is Mark. Let me try to help out here a little bit as well. When you think of Craig's reference to the 20%, the 20% would have been at normal historical volumes, okay. So you know we normally -- somewhere around, call it 50,000 -- 55,000 tonnes a quarter.

The 20% would have been relative to that normal historical volume. So we rolled that into Q1. And similar to what happened in Q4, most of our customers that were on the '08 contracts would have taken the full annual commitment that they had on those fiscal years, okay?

So then what happens with the new contracts, when you look at what we provided in terms of our operating rates, you can kind of get a gauge that we're probably down 60% year-on-year. Well, most of that drop in volume year-on-year would have been those new contracts, the new annual contracts that would have been sent January 1.

So I think what Craig was trying to give you an indication of, 20% is the normal roll, using a normal run rate, you can calculate kind of what percentage of tonnage that would get you. And then there was some amount of additional carryover, as Craig said, from '08 annual contracts that we allowed to carry over. So that gives you a very small percentage still of new contracts with '09 pricing that would have happened in Q1.

All right. But you have some price increases in Q1, is that right?

Yes, there was some.

And you have no cost increases on needle coke?

I would not say no. Primarily, most of it was carryover coke, but we do have some grades that we run out of and we've got to replenish.

All right, so very little. I guess my point is, is the third quarter the critical quarter where you're probably not going to book any higher prices yet in the third quarter, because it's still going to be a weak quarter. You've got GM down for the whole summer basically. You've got a lot of OEMs probably taking extra vacation to soak up some inventories as well. But you guys will have the hurdle of getting the higher needle coke costs flowing through in the third quarter without the benefit of higher pricing yet.

I would say in Q3, as we said earlier, some of our customers would have completed their destocking. So some customers absolutely will be burning brand-new electrodes purchased this year at the higher price in Q3.

The offset to that is the European summer holiday phenomena that usually Q3 is a slower quarter for us. And what we highlighted was when those European steel plants go out, do some of them extend that outage? But we will have some business in Q3 for those customers that have completed their destocking, that will be at newly-priced electrodes.

Have you booked, though, much business with the new higher pricing since the economy fell off a cliff?

That's been ongoing, yes. Every week now there's new prices being put in the book for Q3 and Q4.

That are high enough to offset the needle coke?

Well, as I said in the release, it's too early to tell other than we expect them to be higher to offset and the goal is to offset. But yes, the price is up.

Okay. I won't take any more time. Sorry.

Chuck Murphy, Sidoti and Company.

Just kind of wanted to follow up on that last question. Just to be clear, you are trying to say that, like, 80% of your customer base is on a calendar year contract, right?

That's right.

You weren't saying that that 80% of the volume in the first quarter was at 2009 pricing levels, right?

That's right. That's correct. 80% is calendar and then about 20% go Q1 to Q1 -- that's the way they've been for [decades].

Okay, that's what I thought, okay. My first question was that [Tokai] came out a few weeks ago saying that they wanted the $7,000 prices from their domestic customers. I was wondering if you're seeing similar type pricing from other competitors?

Well, I think it's too early really to tell. The book building process is underway. Obviously, there's pressure on the cost side and I'm sure that's probably what's driven some of our competitors to try and get higher prices also, because of the needle coke we've talked to.

But Chuck, it's really too early to talk about the book building process until we get it completed and behind us. And so it's kind of quarter-by-quarter this year, really because of the lack of visibility our customers have. And I think our customers would be the first to tell you, they have little or no line of sight to Q3 or Q4. And we're kind of part of that supply chain, so we're in the same position.

Okay. And then in terms of what you said before, that you expected the electrode prices to offset the needle coke prices, when you say offset, do you mean if needle coke is up 80%, you expect the electrode prices to be up 80%? Or is there something I'm missing?

Well, no, you'll recall the needle coke is 40%, 45% of our cost structure. So that's what we've got to offset. It's not dollar for dollar. But the goal will be to get enough price increased to offset significant increase in that key raw material.

Okay. And my final question was just kind of -- can you give us a little sense of what's going on with Engineered Solutions markets? Will that business be flat or up in the second quarter? I know Brush Engineered is kind of feeling that way.

What we see is we expect Engineered Solutions in the second quarter to look like the first quarter. We do not see an upturn in any of the geographies or businesses [at] ES services. So, you add all that up, IM and ES, we expect Q2 to look like Q1.

Okay. And what were the particular markets that were weak for that segment?

Well, it's across the board. So, it's everything -- solar is down, transportation is down, consumer electronics is down quite significantly. And you saw that in Q1 in ES's results. And I would expect a similar kind of profile for ES in Q2. There is no turnout there just yet.

Asad Abedi, Merrill Lynch.

A couple of questions for you. You talked about a risk that customers that extend their Q3 normal shutdown in Europe. Would that be to maintain stock levels at the kind of levels they want to maintain them at? Or would that be part of if they, say, were restocking?

The reason we highlighted, one, was just to re-highlight and remind everyone that Q3 is generally slower because of the European holiday. But also to remind that -- if we go back in time to other downturns, there have been occasions where European customers, once they shut down a facility for the summer holidays, they extend it. It's very easy to extend those once you've got everybody off, out on holiday.

And given the current economic environment, it's very possible that some of our customers may extend it. So it would be, Asad, not so much in response to destocking -- as I said earlier, a lot of that destocking is going to be behind the market place -- it will be more related to demand.

What is ultimate steel demand like? What's auto production like in Europe? Where are durable goods in Europe at that time? And if the European steel producers have everybody out for three or four weeks for the natural holiday, do some of them decide to keep people out longer? It's been a phenomenon that we've seen sometimes in other prior downturns.

Okay. And how about the amount of production that you've actually shut down so far in your graphite electrodes business? Can you give us a feel for how much that amounts out of total production ability?

Well, we haven't shut anything down, per se. What we've done is significant reductions in headcount, hours worked, and we have the operating rate down to 38%. But none of our facilities have been fully shut down. But obviously, their capability has been curtailed and obviously, a lot of costs has been driven out.

Okay, that's great. Thank you.

Yvonne Varano, Jefferies & Company.

I just wanted to make sure I was clear on that whole pricing discussion. It seems like it's safe to assume that your 2Q pricing could be up directionally just a little and more so in 3Q?

Yes, Yvonne, in general, I think that's a good way to look at it. There'll be some more new electrodes in Q2. In Q3, as I said, a lot of our customers will finish their destocking. And then by Q4, the vast majority of customers will be done with their destocking.

So, Q2, a few more new electrodes; Q3, I think a bigger number. And then Q4, pretty much most of the customer base will be on new electrodes.

Okay. So, hopefully, seeing the prices trend up in Q4?

That's correct. So you may see a little bit of juice from that in Q2; increasingly more in Q3; and likewise, I would expect increasingly more in Q4, with the one caveat that we talked about Q3 -- Q3, the volume could be impacted from that European phenomena we talked about.

Right. So then, I guess, translating that into gross margin and taking into account that the comments on the needle coke, were probably flat in Q2, could see some pressure in 3Q, as that higher cost comes in, but hopefully, leveling back off in 4Q as we get pricing up?

Yes, I think that's a good way to look at it, in general terms. However, as we said, we're still building the book, so we do not have line of sight to the volume. We do not have the final picture on the price.

And so, as we've said, our customers have such little line of sight to Q3 or Q4. And that just backs up into our line of sight. And some of them right now, as I said, are booking month-to-month, quarter-to-quarter. So, in general terms, I think you're correct, but there is such little visibility right now.

Okay. Did you sell anything on spot in 1Q? Or you've just gone to these shorter contracts?

Yes, I'd say there's very little spot business out there right now. I mean, right now, the general theme is destocking. Customers are working off and reducing working capital. So there's just not a lot of -- there's just not the phenomena of spot business out there.

Okay. And then lastly, I know you've talked about the book. Is there any way to look at it on a percentage basis as maybe where, like, 35% through it or 40% through it?

Yvonne, that's just not a guidance we can give at this stage. And in part, it's line of sight -- what's the total book? So, there is so limited line of sight in Q3 and Q4, that we're just not in a position to say. I think we've got to kind of take this year quarter-by-quarter. And in fact, I think that's the way most of our customers are kind of taking it -- quarter-by-quarter.

And so, Q2 we expect to look like Q1. Q3, Q4, we expect a marginal improvement for the reasons we've talked. Q3 could be weaker volume depending on what the customers do, especially in Europe. And we're just going to have to take it quarter-by-quarter.

But I think the feeling is that Europe is going to take a little longer to come back than the US?

I don't know. Now, obviously none of our customers have announced formally and they've not communicated to us. But what I'm relating to you is kind of our experience. If I go back the last two or three or four major downturns, when they've gotten to the European summer holiday, some of the customers have decided instead of taking three or four weeks, well, let's leave everybody out for six weeks; or let's leave everybody out for seven weeks because demand is slow.

And so we're just highlighting that attention. That could be in Q3. And so that would obviously impact our Q3 more than normal. Our Q3 is usually a weaker quarter and this could make it an even weaker quarter than what it has been historically.

And then lastly, the customers that you've negotiated with, would you say they're mostly your larger customers or your smaller customers?

It's across the board. It's completely across the board. A lot of the smaller customers have come in. Some of the smaller customers have tended to take maybe longer contracts. And some of them have taken for the balance of the year.

And in general, the larger customers maybe have gone a little bit shorter. They've gone quarter-to-quarter, some even -- they're just looking month-to-month. They just don't know their book yet. They just don't have line of sight to Q3 or Q4.

And then just on Seadrift -- any comments that you could give us in regard to what's going on there?

Yes. As we reported, Seadrift made money in the first quarter. Obviously, being a key raw material to the graphic electrode industry, and you see us running at a 38% op level, you see us working off needle coke -- so the way I think you should look at Seadrift is they've probably got very limited sales opportunities right now.

People are working off their needle coke like we are. So Seadrift, the way I would look at them, running at a very low op level. And I would not factor into our earnings in any kind of significant contribution.

I think '09 for Seadrift will be a low operating rate. And really, we've got to look to 2010 and 2011 as stimulus starts to give traction before we really start to think about Seadrift making a contribution. So I would not plan on them making any kind of significant contribution to us this year. They're our -- we're their type of customer, and as you know, we're not buying much in the first half.

Right. But then we could probably see that tick down maybe a little in that minority interest line?

Yes, I would plan very little to nothing out of that for this year, I think is just prudent.

Perfect. Thanks so much for the comments.

Charles Bradford, Bradford Research.

A question for you. Other income -- was most of your income for the quarter with the re-measurement of intercompany loans the item that you highlighted -- how did that come about, since it was inter-company? And what can we look forward to?

It's Mark. The intercompany loans is obviously how we are managing cash flow between various jurisdictions. And those intercompany loans have been in place for a number of years. They do have volatile mark-to-mark impacts; could be a gain one quarter, could be a loss another quarter.

So as I think we may have referenced before, we will exclude those as we look at nonrecurring items. So the EPS that's included in the release of $0.04 does not include the impact of the mark-to-mark. There was a gain associated with it this quarter.

As you can look, last year, we had a $21 million loss in other income. Most of that was losses on the mark-to-mark. So the way we think it's the right way to look at the business operationally is to exclude those impacts.

The biggest exposure we have is to the euro. So it's anyone's guess in terms of what direction that may go. So we may see movement next quarter. It could go against us. It could result in additional gains. It's just really too difficult to project. And that's why we tried to exclude it from how we talk about the business and the EPS that we provide in the release.

So the $0.04 does not include this $6 million?

No, the $0.04 is not included in the $6 million.

Okay. Another area where I would have thought relatively soon your customers would start seeing some business from the so-called shovel-ready infrastructure projects, but it sounds like it's not happening. And this is an around-the-world phenomena and everybody seems to have a stimulus package. So it's just not happening yet?

I think we've talked a bit about this on the last call, too. The way we would look at government spending -- and remember, we've had many highway bills in this country, and so we have some experience with them.

And when highway bills or major government spending comes, we usually find it's at least nine months to 12 months before the impact of those are felt by our steel customers. And so the way I would look at stimulus is, I wouldn't plan on a lot of impact in our business in '09. Stimulus, I think traction will begin in 2010 and 2011.

The one little change you see to that worldwide is China. China has a large program. It's 14% of their GDP. So it's the highest percentage of GDP of any of the other stimulus programs announced. It has a lot of major projects that are very steel-intensive. So, we've started to see that uptick and I think if you look at some of the China numbers, you're starting to see it. They're off and running and spending money.

In Europe and the US, the government spending programs, really we haven't seen anything yet. I think if you talk to a lot of industries here, the same kind of thing because of that lag.

In fact, there was a great article in the Wall Street Journal today on Caterpillar. And Caterpillar started to get some orders from China as a result of the China government stimulus program. So it looks like China's going to lead this -- give us the first positive data points. But probably 2010 for US and European stimulus to really move the dial at all.

Ray Rund, Shaker Investments.

I was going to ask a question on the other income line, but that's already been answered. So I think I'll go back into the queue. Thank you.

(Operator Instructions). Mark Parr, KeyBanc Capital Markets.

One thing, Mark, I was wondering if you could comment -- or Craig -- if you could comment on supply discipline or what you're seeing. I realize there's not a lot of business and the year book is still in a preliminary phase, but -- and I know your goal is to get pricing. Can you give us some color on how disciplined the environment is from a pricing perspective right now?

Mark, it's really too early in the process to comment much, other than what we've said thus far. The bidding process is underway. Most geographies are bidding. Most customers are getting lined up for needs that they're going to have in Q3 or Q4, because their destocking is projected to be done then. So I think it's really too early to comment.

Obviously, the goal is to get prices up. I believe prices will be up across the board and mainly propelled by this deep raw material increase. The last thing you want to have happened is to get behind these raw material increases because they'll just overrun you. So the goal is to get prices up, offset the raw material increases, and participate in an orderly book building process.

Okay, all right. Thanks. And then just to -- and again, I hate to keep coming back to this first quarter scenario -- we were kind of running some numbers and it appears as though, on a year-over-year basis, price realizations for the electrode business was pretty flat compared to '08. Is that correct, based on -- I mean, are we looking at that in a correct way?

Well, again, it's not an item we guide to. I'm going to have to leave it to your individual analysis on pricing. We tend to guide more to the bottom line rather than individual prices in one of our individual businesses. So I'm going to have to leave that really to you, Mark, and your analysis team to kind of tear apart.

Obviously, as we said before, we've had some carryover business. We had the 20% normal, that's Q1 to Q1 bid. And so obviously, a fair amount of Q1 was last year's type business.

Okay, is it -- was there also -- was there a constant mix or was there a greater mix of non-smelter grade material in the first quarter?

No, that's run pretty steady. That mix is pretty steady. We haven't seen any real disruptions in the typical kind of 70/30 type mix.

You had a question?

Okay, I think Gibbs has got a question here, if you don't mind.

Sure, please. Go right ahead.

Just as far as overall inventory levels, how are you looking working capital trend, just on the inventory line from an absolute basis here, given the fact that you're going to see some upside in needle coke but maybe some lower volumes?

Yes, Phil, very good question. The way I would look at our working capital account, I would look in Q2 and then Q3, you should see a reduction in our working capital. So we have a number of teams working on it. We've worked very hard on AR collections and keep them current. And we have a number of teams working on inventory reduction.

So the way I would look at it is -- Q2, you should see our inventories come down. Q3, probably some more reduction in total working capital. So Q2 better, Q3 better than Q2 on working capital.

And just lastly on your CapEx, it looks like your budget there was relatively unchanged. What are you really working on there?

Well, I think if you go back -- last year, $75 million in Q1. Our last guidance I think we said about $55 million or so. And we brought that down even a little bit -- another $5 million. So we've been continuing to work to squeeze down the capital requirement for this year. And over the course of Q1, we were able to find perhaps another $5 million to squeeze out of that.

Okay, I just meant on what type of projects.

Well, let's look at about $30 million is kind of maintenance capital. And then anything beyond that would be primarily productivity-type capital -- how to improve productivity; how to get costs out; there can be some quality items in there; how to improve the quality to our customers, the consistency to our customers. So, a good $30 million of that is maintenance capital.

Okay, thank you very much.

(Operator Instructions). John Lancefield, Royal Capital.

So I guess the last questioner had asked a question about the 70/30 mix that you alluded to before. As far as the 30% of your book, which sounds like it remained fairly stable in the first quarter, are you seeing -- what impact are you seeing of the tariffs on that end of the market? Has that had a meaningful impact as far as keeping prices up?

Well, the tariffs that you're alluding to in the US, of course, have taken place. And yes, they've -- I believe over the course of this year are going to result in the prices of those diameters that were covered under the tariffs, caused those prices to be firmer and up.

But again, as we said on this call, it's really too early. We're early in this book building process. I think you've really got to let us get the book together. And given the limited line of sight our customers have, I think it's just the right guidance to give you all.

You've just got to be patient for us to get the books together over the course of the next several months. And really, the way I would look at it is kind of quarter-by-quarter in this environment.

Okay. As far as the tax rate guidance, what's driving that lower range?

For the first quarter, we actually came in right around 30%. So the guidance is 2 points either north or south of the 30% that we came in for Q1. And again, as we said before, some of that is the jurisdictional mix of profitability. The other component of that is actually some tax planning initiatives that we're doing right now.

Okay. And then Craig, I know you've talked before -- although it's been, I think, a couple of years -- you've talked about what sort of sustained pricing you would need to see in the industry that to actually have greenfield electrode capacity added. I guess, taking that from the other side, what would need to happen as far as industry capacity utilization or contract pricing, or whatever other dynamics to actually see capacity among your competitors come out?

Well, that's a tough one. You've got the overall economic environment bearing on that. I mean, what's the demand level?

When we look at current demand, you can make a case that some capacity could come out. But what's 2010 going to look like? What's 2011 going to look like? What are these massive stimulus programs going to look like?

So John, I think that's such a moving target, really, really difficult to comment on, because what's the underlying demand? And when will it return to kind of the '07, '08 type level?

I mean, are there -- as you look around at the cost structures of your industry, there have to be people who aren't making money in this environment, I would think, meaningfully?

Yes. Maybe the way to look at it -- we're not planning it in our forecast that any significant capacity is going to come out of our industry. So we're not planning for that.

And I think what many people would be looking for in our industry is -- obviously, these massive government spending programs should stimulate steel demand -- 2010, 2011. And so, I don't expect a lot of people to be thinking about taking capacity out today in a permanent way, because looking at 2010, 2011, it could get quite interesting, as this large government spending starts to get traction.

Okay, thanks.

And there are no further questions at this time. I will turn the conference back over to our speakers for any additional or closing remarks.

Tamika, thank you very much. Ladies and gents, thanks very much for joining our call. And we look forward to talking to you at the end of our next quarter results. Thank you. Have a good day.

And that does conclude today's conference call. Thank you all for your participation.