GrafTech International Ltd (EAF) 2009 Q2 法說會逐字稿

Good morning and welcome to GrafTech International's Second Quarter 2009 Conference Call. Today's conference is being recorded.

On the call today is GrafTech's Chief Executive Officer, Craig Shular and our Chief Financial Officer, Mark Widmar. At this time I will turn the call over to Mrs. Kelly Taylor. Please go ahead ma'am.

Thank you Andrea. Good morning and welcome to GrafTech International's Second 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 didn't receive a copy please contact Marie Noar at 216-676-2160 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 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 discus 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.

Thank you Kelly. Good morning everyone and thank you for joining our call today. Today we'll take you through our second quarter highlights and then open it up to questions.

Net sales were $158 million, an 18% improvement over the first quarter. Gross profit increased over 40% to $46 million. Gross profit margin increased more than five full percentage points to 29% of sales. Operating income more than doubled to $19 million. Net income before Specials tripled to $15 million or $0.12 per share. Operating cash flow improved $32 million to $46 million in the quarter. Net debt was $48 million, a reduction of $29 million over our first quarter.

In the second quarter, we recorded a $45 million non-cash impairment charge net of tax against the valuation of our investment in Seadrift. The global economic recession has led to historic declines in global steel demand and record low capacity utilization. Seadrift, not unlike other needle coke producers, has been impacted by the dramatic destocking that has occurred throughout the steel supply chain. This together with the uncertainty regarding the timing of a global market recovery has required per GAAP, a reassessment of our balance sheet carrying value.

Additionally, on July 2nd we entered into an agreement with Seadrift to lend up to $18.5 million (sic -- see press release) at a 10% interest rate. Seadrift currently has borrowed $6 million under this agreement in order to reduce its revolver. Aggressive working capital management, successful productivity initiatives, cost reductions, have enabled Seadrift to generate $13 million of free cash flow in the first five months of the year. Seadrift has reduced liabilities by $17 million from yearend '08 to $25 million at the end of May '09, of which $20 million was outstanding debt. So Seadrift sits with solid assets, a good balance sheet, and very few liabilities.

In our industrial materials segment, sales were $130 million while operating income for the segment was $16 million versus $7 million in Q1. Obviously the severe drop in steel production rates has affected our business. However, execution of previously announced cost reduction and productivity initiatives have helped mitigate some of this impact of the very low demand.

In our engineered solutions segment, sales were $28 million in the second quarter as compared to $30 million in Q1. Operating income was $3 million, up slightly from $2 million in Q1.

On July 20th GrafTech was awarded the R&D 100 Award for our new product line, GRAFIHX™, a graphite solution uniquely tailored for radiant floor heating systems. The R&D 100 Award honors the 100 most significant new products commercialized over the past year. This award marks our sixth R&D 100 Award in the past seven years.

Turning to the status of book build, as indicated last quarter our '09 book building process has been disrupted by the severe global economic recession. The trend of shorter term contracts quarter to quarter has continued. We are beginning to see an uptick in the order process as destocking has reduced a number of our customers' inventory levels. Given the pick up in orders, we expect our second half results to be better than those in the first half.

Turning to outlook, we continue to expect '09 to be very challenging for both of our business segments. Second quarter results came in better than expect due to the timing of shipments and a lower tax rate. Given the favorable timing of shipments experienced in Q2 and the usual seasonal lower demand in the third quarter, we believe Q3 results will be below the second quarter and closer to those in Q1. As anticipated, third quarter graphite electrode sales volume will be adversely impacted by the low European steel operating rates and the normal European August holiday season. While a high degree of uncertainty around forward looking projections remains, we expect an improvement in Q4 results as customers should have largely completed inventory destocking initiatives. The fourth quarter should represent our strongest quarter of the year.

Based on the first half year results and anticipation of a modern improvement in the second half of '09, we are targeting operating income to be in the range of $60 million to $70 million, CapEx to be approximately $50 million to $55 million, depreciation expense to be approximately $35 million, and our effective tax rate to be in the range of 22% to 25%.

Andrea, with that let's open it up to Q&A.

At this time -- thank you very much -- we will go to our question and answer session. (Operator Instructions).

Our first question will come from Luke Folta with Longbow Research.

Hi, good morning guys.

Morning Luke. How are you today?

Not bad. Just a couple quick questions right off the bat regarding capacity utilization. Are you able to give us what you operated at in the second quarter?

Yes, in fact Luke, we were even lower than the first quarter so we sold off some inventory and we were down probably close to 35% or so in the second quarter so we've continued to be very prudent on our operating rates and match operating rates with what we see in the marketplace.

You had a step down utilization quarter over quarter. Does that mean, are we likely to see a further step down from that in 3Q then?

I'd say it's early to tell. We've got to see how the quarter rolls out but I think what you can count on is we will line up our operating rates with what we see in the marketplace and as we said, all things being equal, we look for Q3 to be a little bit softer than Q2 and more like Q1 in numbers because of the European holiday slowdown.

Okay and just taking into account -- I mean, if my capacity utilization numbers are reasonably close it would appear that you guys are guiding to fully -- the higher needle coke costs you're seeing. Is that an accurate statement?

Yes, I'd say if I look at Q2 '08 prices in graphite electrodes versus Q2 '09 across our whole portfolio graphite electrodes, I'd say, and remember we make many grades, many sizes, but average price between this Q2 to last year's Q2 is up over 12% and so yes, the goal would be to pass on higher priced needle coke. Needle coke is going up significantly. Obviously with steel running at low rates, some of our inventories are lasting longer and so some of our lower priced inventories, depends on the grade, is lasting longer. We've rolled all that into the annual guidance, the $60 million to $70 million of operating income and I think that's the best way to look at it, Luke.

Okay and I just have one more and I'll turn it over.

Yes sir.

Regarding the, a lot of these contracts now you're putting together are pretty late in the year so the term of the contracts, should we think about in 2010 there to be kind of a renegotiation on calendar year basis or are these contracts, a lot of them spilling over into 2010? How is the timing going to work on most of those?

Luke, right now the contracts literally are Q3 and Q4 or some customers are just Q3 so they're either quarterly or six months. We really haven't put anything into the 2010 book.

Okay great, thanks a lot guys.

Thank you sir.

Our next question will come from Mark Parr with KeyBanc Capital Markets.

Hey, good morning.

Morning Mark. How are you today?

Good Craig, how are you?

Superb, thank you.

Nice quarter, congratulations.

Thank you very much.

I've got a couple of questions. First, just from a housekeeping standpoint, I think your release says that the credit line with Seadrift is $8.5 million and I think I heard you say $18.5 million. I'm just --

No, no, you're right. If I did, I misspoke. I apologize. It's $8.5 million of which they've taken $6 million.

Okay, alright.

Thank you for the correction.

No, I just wanted to clarify that. Okay so that's certainly helpful. Secondly, could you give us an update on your '08 priced needle coke supply and how long you expect it to last at this point given your production environment?

Well Mark, it is lasting a little bit longer and so it is trending into Q3. Obviously there is many grades and so it kind of varies by grade and then of course it depends on the customer demand. Many of our customers are in that process where they're destocking program is either at the end, just starting to get to the end, or they're starting to have line of sight so it really depends on who starts to descend in what order but let's think of it this way in totality -- our coke will last longer than probably prior years because of the slow operating rate and it'll go into Q3. Maybe there's a couple grades that might even carry over to Q4, depending on the demand from our customers.

Okay, so some of that -- the numbers that we heard on needle coke for '09, they originally were at one level that was dramatically above the '08 level. I think that the numbers that we're hearing more recently are still well above the '08 level but somewhat lower than what they had been initially talked about. Is that something you could confirm and do you have any sense along those lines in terms of what sort of pricing upside you might see in 2010?

Yes, good point on the coke. There has been some relatively recent developments in coke price and I know we've been talking about a 90% type year over year increase and that's what the coke producers were out there trying to get and we've seen some reductions in those requests and I'd say right now it's more like around a 50% or so increase. So they've come off the big 90% but as you rightfully point out, that's still a big number, 50%, so we still have pressure on the cost structure, go forward and obviously it looks like needle coke prices will be up quite significantly in 2010 and we'll have to build the book with the goal of overcoming that along with continued work on the productivity and cost front.

Okay terrific, I'll get back in queue but congratulations on the progress.

Thanks Mark.

Our next question will come from Charles Bradford with Affiliated Research Group.

Hi, can you explain a couple items that are in some of your footnotes? What's the valuation allowance?

Yes Chuck, how are you today? I'll toss that over to Mark and Mark will help you out there a bit.

Chuck, per GAAP we have to evaluate the likelihood that we'll be able to benefit from various deferred tax assets and because there's movement in those deferred tax assets every quarter we have to assess whether or not we need to establish valuation allowances against those and as you may remember, at the end of 2005, 2006, I'm trying to remember the exact year. We established a valuation allowance for our U.S. deferred tax assets and so within the quarter we had a valuation allowance associated with the movement of our deferred tax assets in the U.S. and that's what's showing up in the GAAP to the non-GAAP walk. So we had about a $4.8 million impact to that valuation allowance.

And that shows up as part of the tax credit?

Well actually it's an expense so if you look at our GAAP, it actually will show up as an expense booked in the quarter. It's in the overall tax expense line that we show and we will back it out for the purposes of looking at our recurring operating income streams that we're generating.

Okay because then there were two other items that you show in that same table. One of them is an adjustment to reserves for uncertain tax positions and also restructuring and other income expense, net. Both -- I guess they offset each other.

We have obviously certain positions that we take for our tax returns and we have to assess the likelihood that those deductions will be allowed upon audit and so we'll at certain times, certain criteria are met, we will establish a reserve against those tax positions. We have a couple that have been through audit and have been passed and allowed. Therefore we have reversed that reserve. So again that was a credit acknowledged in the quarter and we've pulled that out again. It's a nonrecurring item. The items that show up below in the restructuring/other income expense largely relates to the foreign currency re-measurement of the inter-company loans. We have that one pretty much every quarter. Again it's a non-cash inter-company loan re-measurement that we'll pull out for purposes of looking at our ongoing operational results.

When it comes to needle coke, with needle coke up as much as you describe, say 50%, I would think that would be very helpful to Seadrift and I'm having a little difficulty figuring why Seadrift would be revalued down in they're getting that kind of a price increase because obviously oil and calcian, coke and all those kind of things came down.

Chuck, I think the way to look at it is kind of today's situation and then what the future may look like. In today's situation because needle coke is at the front end of the supply chain and you just see in our case we're buying very little or no needle coke, the rest of the electrode industry is in the same place so Seadrift is running at a very, very low operating rate and they've done a great job taking out costs. In fact they've closed the facility at different times and just ship out of inventory so it's the very low op rate right now that Seadrift is facing, not unlike all the other coke producers so it's not a case that the other competitors of Seadrift aren't facing exactly the same thing. Many of the other competitor, they're not running or they've taken extended maintenance turnaround or they're even making alternative products. Some of the other cokers can make anograde (ph). So that entire coke industry is at a very, very low operating. So that's where it sits today.

Now looking ahead, if they're able to get those kinds of price increases let's say in 2010, yes I think that together with increased operating rate -- obviously in 2010 we're going to have to buy a bunch more coke like I think a lot of the other electrode producers are going to have to do and Seadrift should be positioned to benefit from that quite nicely.

Once you've written it down it's my understanding you can't write it back up again if business does turn upward.

That's correct and we're just being very prudent and following exactly GAAP here and you're right, when it does turn up it'll be on our books at the lower value with the lower monthly and quarterly amortization rate flowing through. You're spot on there.

One of your competitors has told me that ConocoPhillips cut the price of needle coke between $300.00 and $400.00 a ton. Is that the difference between the 50% and the 90% that you're talking about?

Yes, that's very much akin, without getting into specific numbers, with what we talked about with the prior question. There's been a drop in the pricing that they've been seeking and it's kind of come from that 90% level down to a 50% increase type level. So time will tell where that finishes. Obviously oil will move a lot of that and if you look at this recession, oil has held up pretty good. It's at high 60s, $70.00. It's held up pretty good compared to historical levels.

But that's still better than $150.00.

I'm with you, absolutely. So yes, you're spot on. That's the coke picture and I think when we get into 2010 that'll become clearer as we -- we'll go ahead and as always work to lock up our 2010 requirements and price and then start building a book.

How many of your sales contracts require you to pass through that lower coke cost?

None of our contracts require us to pass through. As I said, price of electrodes and again I caution, this is the entire portfolio of electrodes we make, the average price, and we make many grades. We make low end, medium, and then the high grades for the melters, many different diameters but that price in Q2 this year versus Q2 last year is up over 12% so yes, our goal and as we've done the last several years successfully, is to get a price that allows us to pass on raw material costs and parallel to that, drive efficiencies and cost reductions in our own platform and that will continue to be our goal and we have a bit of a track record here. But that will be the goal throughout this year and into next year.

Thank you very much.

Thanks Chuck. Have a great day.

Our next question will come from Ryan Duckworth with Wells Capital Management.

Good morning Ryan.

Hey, I'm sorry. This is John Evans at Wells. How are you?

No problem. Hi John, how are you doing?

Good. I just had a couple questions for you. Help us understand, if you look at your gross margin, obviously your gross margin was really impressive. Sequentially it went up on a percentage basis and you gained $14 million in operating profits when your utilization went down sequentially, so you didn't absorb those fixed costs. Obviously you sold more electrodes but if we get to a point in the back half, how should we think about as you start to sell more and utilization turns, what that does to gross margin because it seems like it has some pretty positive ramifications. Is that right?

Yes that's right, John. That's the model we've built. We've worked very hard over the last several years to build that model and get very lean and low cost and be able to leverage that model depending on the marketplace and so you're right directionally. You're right on the impact, the positive impact on the model. All of that we have factored into our $60 million to $70 million guidance that we've given for the year.

No, no, no. Help me though understand. So if you're in the low 30s, and is there a way to think just in bigger increments so let's say you jump ten points, every ten points you jump in utilization, what does that do to gross margins?

That's not a guidance that we give and obviously we sell in many geographies, many products so that's never a perfect science so --

Can you give us any kind of sense of the incrementals because it seems like that's what we've really got to value the stock on because we're assuming that the business is going to turn.

I know everyone is anxious to catch and find that turn but again I think the best way to look at it is one, the guidance we give in the $60 million to $70 million and then two, obviously our portfolio, cost structure, global footprint, very, very strong balance sheet, virtually no debt, has us positioned to enjoy and participate when things do turn. That's been the goal of the team. Where we've done a lot of productivity improvements they're starting to flow through. We've done a lot of tough decisions. We've cut people unfortunately. We've had layoffs. We've closed facilities for a week to drive out some cost and then restarted them. We've cut salaries, etcetera, etcetera. So that's the power of the model we've been working on over the last several years and you're right, we'll participate and I think the way to look at it, there is very little stimulus money in a lot of the economies yet flowing through to steel other than let's say, China. But in 2010 and 2011, the large U.S. program, European programs, I think you'll start to see those flow to our steel customers and we've talked in the past that that's usually about a 12 month lead time from the time the Bill is announced until it starts to flow to our customers. So sometime in 2010 and then probably across 2011 we'll start to see some of that pickup and my team's goal has been get positioned for that. Have the right balance sheet. Have the right model and we view what's going on in this global marketplace that's been brutal as an opportunity. There's opportunity to get as some paradigms maybe we couldn't get at, an opportunity to drive change faster than what you might do if it wasn't so severe out there, and an opportunity to get positioned for exactly what you're talking about. So I think the way to look at is we've given our guidance for this year, the $60 million to $70 million, but this is a team that's working very hard to be positioned to participate and enjoy that upturn and capitalize on it.

John, this is Mark. Just one thing to highlight, I would not use Q1 to Q2 as a proxy though because we did get very nice flow through with the incremental volume, good mix of product in there and the like.

So you had a positive mix.

Yes, so if we think about the balance of the year and the slight volume benefit that we'll see I would not use Q1 to Q2 as a proxy. It may be more beneficial to look at prior years than what we would have seen as the flow through in those years.

That's helpful. Help me then understand just on numbers questions to R&D. Was the charge that went through there, was it in Seadrift in R&D and then can you just help me think about R&D dollars sequentially, why they went up so much and the same thing with S&A?

There was no charge to Seadrift at all that went through R&D. The Seadrift charge would have gone through the equity income.

Right, it's all below the line, right?

It shows up below pre-tax. It's below operating -

Right.

Right.

Okay, so if we look at S&A and I look at R&D, they grew sequentially and I know you did a great job on the top line and a great job, but you've got these cost cutting in place so why did they grow sequentially and help us think about that because I would have expected them to be flat or down.

Clearly in R&D one of the things that we're trying to stay focused on as we go through this cycle is trying to make sure that we aren't going to compromise any investments in R&D. Craig has already mentioned one of the R&D 100 Awards that we just won and it's six out of the last seven years that we've won an R&D 100 Award and those awards have contributed meaningful revenue and profits over the last few years so one of the priorities that we have through this current cycle is to make sure that we invest in R&D and there's some compelling programs that are underway in the quarter. There's the timing of when the spend occurs. It was a little bit heavier than we would have seen in prior quarters but think of it as commitment that we have to continue to invest in R&D for the future of the Company.

Is this a new level though Craig, because if you look at it, even when you were doing historic blowout numbers in 2008, the biggest you had R&D was $2.5 million run rate. This is $3.1 million and I guess what I'm just trying to understand is is this $3.2 million going to $3.5 million to $4 million or how should we think about it?

No John, I don't look for a step change there. I think it's more of a continuation of our investments in R&D as you've seen the last couple years.

Okay.

I would think it has more to do with timing. If you want to look at a run rate, use a year to date number. It would be more indicative.

Okay.

And then your question on SG&A --

Yes, because it was $21.6 million in Q1 so then you were $23 million and some change here so just help us think about that. Is that the incremental that's driven by the sequential sales increase? Because what I'm really trying to focus on is the incremental leverage, if I think sales are going back to 250 or whatever.

Yes John, some of it is driven by sales. We have some jurisdictions where we sell through agents and they get a sales commission so some of that is driven in there and then some of it is we've got some internal targets around cash flow and whatnot and obviously we had a very solid Q2 year to date cash flow. Operating cash flow is $60 million and so that triggers some accruals on some of our incentive compensation as well as catching up in the first quarter, so some of that is in Q2.

Perfect, and then lastly, you did a great job on the free cash flow. How do we think about the debt? Are you just going to call it when it comes due next year and take that piece out?

We have so much flexibility here, a testament to what's been done over the last several years. But yes, there's a step down in the call in February. One possibility is we wait until then. It's only $20 million and we could do it any time. Another one is we could call early so all of the above is available to us. Our balance sheet lets us do that. We don't guide to cash flow but obviously we've had a very solid first half, $60 million and if that continues we could be at a place where we have zero net debt. So we may call early. We may wait for the step down on the call. The good news is all of those alternatives are available to us and if you went back in our history, obviously we had very few alternatives and I'd say here we have complete flexibility financially and we are also very positioned to grow. There's really no growth opportunity we can't look at, can't afford, can't digest so we are really I think well positioned from a balance sheet standpoint and the remaining $20 million of senior notes could go at any time or could wait until February.

Okay the last question and that is a great segueway is so you probably will exit this year or early next year debt free, obviously totally different from where you've been in the past. How do you start to use your free cash flow to enhance shareholder value here over time? Do you start to buy back stock? Do you make acquisitions? What do you do to take that free cash flow power that you really have and make shareholders rich?

All of the above. We have a buyback program that we have done activity last year so that's an alternative. Obviously growth alternatives in our industry would be very interesting to us. We have a solid balance sheet and growth as we've said in prior calls, on either business segment. Industrial materials or engineered solutions would be very attractive to us. Growth in engineered solutions of course increases the diversification we have. Today we're about 85% industrial materials, 85% steel. As we've said on prior calls we would like to grow that engineered solutions side. We think it provides one, some diversification and two, there's a number of segments in there, solar being one we've highlighted in the past, that's very interesting to us. They have nice double digit growth rates. We think there's a lot of years of good future in some of those segments and so we would look very favorably at some of those. So John, all of the above we will look at to enhance shareholder value, from share buyback to the acquisition front to internal growth, to grow our business.

Thanks so much.

Thank you sir.

Our next question will come from Ray Rund with Shaker Investments.

Thank you.

Hey Ray, how are you today?

Morning Ray.

Fine thank you. How are you?

Great, thank you.

I was wondering if you could give me some idea of the trajectory of your SG&A and your R&D expenses for the remainder of the year? Do you expect them to come down slightly or do you expect them to remain constant? You've talked about maintaining the R&D investment but how about the SG&A side of the income statement?

As we said here, I think if you look at the year to date, the first six months, I don't see a material change. They could be up a little, down a little bit. We're not looking for any material change there. On the SG&A front, we've taken a lot of that out over the last five years and of course you're never done but I wouldn't look for a major increase in either of those. Do recall that as sales go up we do have a sales commission in certain countries where we have agents and of course that will move with the sales increase. But Ray, don't plan on a material change from kind of the year to date. Plus or minus, nothing material.

Okay, thank you very much.

Thank you sir.

Our next question will come from Brett Levy with Jeffries and Company.

Morning Brett, how are you today?

Hey Craig, one question for you that hasn't been asked yet. Can you talk about what's been done to constrain supply globally on the graphite electrode side? I know I've asked this on other calls but just some sense as to kind of whether or not there's any threat of new capacity or what's been constrained?

Right now I think most producers have excess capacity and they've cut back not unlike the steel industry to try and manage working capital, take down inventories, and meet market demand so I think most have come right down to kind of take care of customers and the current market demand which is very, very low and I've seen that across the entire steel cycle. I think some of that is exacerbated given the current global financial markets. It's very painful to go out to those financial markets so if you're going to carry excess inventory, excess working capital, it's very painful and if your balance sheet doesn't let you do that, well then it gets extremely painful as we've seen many players along the steel supply chain.

So the response has been very orderly. How about from Asia?

Globally pretty much the same picture. I haven't seen much difference throughout the world. Pretty much the same thing. I think our entire supply chain right through to steel has worked very hard not to get excess inventory and be stuck carrying a big pile of inventory that doesn't match up with customer demand.

Alright, that was my one remaining question. Thanks guys.

Thanks Brett. Have a good day.

Our next question is coming from Mark Parr with KeyBanc Capital Markets.

Thanks. I just had a couple of housekeepings. In your full year guidance Mark, can you give us a sense of how the foreign currency assumptions have either added to that or are detracting from it?

Where we're sitting at right now is the balance of the year we're assuming euro stability around the 140 range and then the other currencies kind of holding. Again, we have exposure to the rand, the real and the peso so those currencies kind of holding at their current levels right now and we did receive some benefit in the first half of the year from the currency standpoint. I wouldn't expect that benefit to change dramatically in the second half partly because the second half will have higher revenues than the first half would have and we're long the euro so the strengthening of the euro from say where it was the first half of the year should provide a little bit of benefit. We've got the other currencies going against us so I would say net net, second half benefit should be very close to the first half.

Okay and did you quantify what the magnitude of the first half benefit is?

It'll be in the Q and it's around $7 million pre-tax so after tax, think of it as $4 million, $4.5 million.

Alright, that's currency and I had one other question. I think you may have touched on this and I apologize if it's a repeat but did you share what the volume in the second quarter was relative to the first quarter or on a year over year basis? Did you give us any volume information?

We did not Mark and that's one we don't guide to.

I'm not looking for guidance. I'm just looking for a number, Craig.

I understand completely.

Okay, alright. Actually though that would be something I think that would be really helpful and I would encourage you to think about sharing some numbers. Is there any anecdotal color you can give us? I think some volumes were up in the second quarter from the first quarter. Is that fair?

Yes, the volumes were up so directionally, absolutely correct, fair to say and we'll take your input under consideration.

Any sort of order of magnitude that you'd like to share?

Like I said, they were up.

Okay.

Thanks.

Alright guys, thanks.

Thanks. Have a great day.

Going next to Chuck Murphy with Sidoti and Company.

Good morning guys.

Yes sir.

Just wanted to dig in a little bit more on the margin. Comparing the first quarter to the second quarter, was there any change in the average price of your electrodes or the average price of your raw materials sequentially again?

The only numbers we've given out there, we kind of gave Q2 '09 versus Q2 '08 and you'll see that when we file the Q. They were up over 12%, graphite electrodes, average price across all the electrodes we make, many grades, many sizes, low end, high end, etcetera.

And what about needle coke for that time period?

Needle coke, our inventory, lower cost inventory has been lasting longer because of the slow steel operating rates so there is still a lot of lower cost inventory in there but there are some grades where we're starting to get the higher cost because we just run out of that grade so it's kind of a blend right now but most of it is still the lower cost that we're working down.

Okay, I guess then could you say qualitatively the sequential increase in the gross margin, was that just the usual operating leverage or was that something, a disconnect between what you're selling and what you're buying?

No, no, I'd said it's on price. Graphite electrode prices went up. Remember in Q1 we have historically some contracts that some customers bid and organized around their budget cycle which go Q1 to Q1 so we have some older contracts rolling off, some lower priced stuff in Q1. So Q1 to Q2, graphite electrode prices went up and I've already quantified the year over year increase. So price was up, volume was up, and then a lot of our productivity initiatives are starting to gain traction and so you had some of them take hold from salary cuts to headcount to productivity initiatives in our plants and in our office, so some of that is starting to flow through. So that's really Q2.

Okay, so the electrode prices may have increased sequentially but it doesn't sound like the raw materials changed much sequentially. Is that fair to say?

Yes, I wouldn't say they moved a lot but remember there are some grades of raw materials of coke and various raw materials that were on the new price. We've just run out and so some we've run out of inventory of that grade and so like I said, it's a blend but it's majorily (ph) lower cost, older inventory.

Okay, that's all I had, thank you.

Thanks Chuck. Have a good day.

Our next question will come from Sharad Pastawala (ph) with MK.

Hello?

Morning Sharad. How are you today sir?

I'm fine. How are you doing?

Great, thank you.

Just a few questions. How high (inaudible) realization in the second quarter as compared to first quarter?

Could you just say that -- I didn't quite catch your question, sir.

How high (inaudible) realization (inaudible) in second quarter as compared to your first quarter? Has there been upward movement?

You're not coming through so clear. Maybe, just one more time slowly for me sir.

How has the realization (inaudible) start moving in second quarter as compared to first quarter's CY09?

Are you meaning capacity utilization rate?

Selling prices of graphite electrodes.

Selling price, okay. We talked about this a little bit earlier with a couple questions. Selling price in Q2 of this year as compared to Q2 '08 is up over 12% and that's our average increase across the entire portfolio of graphite electrodes we make. So in there are some very low priced, low end electrodes from ladle to platinum applications, titanium dioxide, all the way to the melter grade. So that's up over 12% and then Q1 this year sir, to Q2, we haven't given any specific numbers there other than to say it's up over Q1 of this year.

And are we still using the needle coke which has been purchased in CY08 at the lower price? Are we still using that same needle coke right now or we have started buying new coke at higher prices?

In most of our applications sir, majorily we're still using old coke and old raw materials but we have some grades of coke, grades of electrodes where we have to use new coke because we're out of that grade or maybe some new raw materials, other raw materials, non-coke raw materials that we've had to purchase because we've just run out. So it's kind of a blend but it's majorily still older, low cost raw materials that flowed through in Q2, sir.

How long do you expect to continue using the similar low cost needle coke?

It's going to go into third quarter and there will be more new in Q3 than Q2 and then again, maybe in Q4 even less as we wind down some of those inventories so I think you should think of it in decreasing fashion. Q3 we're probably going to have probably some less old material in raw and then Q4 even less as we start to produce more electrodes.

Previously you said that Seadrift is operating at a very low capacity utilization so is this operating rate even lower than what the (inaudible) industry has been operating?

I don't know their rate but yes, we've been at a very low rate matching up with the marketplace and our customers' demand and in Q2 we were approximately 35% operating rate.

And even Seadrift is operating at a very low rate, right?

Yes, still.

So that operating rate is even lower than what the (inaudible) industry is operating?

I don't know their rate but I can tell you yes, we're at a rate to match our customers' demand and as our customers start to demand more, we will pick it up. We have seen an increase in the order rate so there's much more order activity here and so as that increases we will pick up our capacity utilization rate, sir.

And you have taken an impairment cost of $53 million against Seadrift so do you expect any further impairments in second half?

It's going to depend on the marketplace. We follow GAAP very, very prudently and GAAP required us to do that in the second quarter and we're just going to have to -- each quarter we reevaluate where is the marketplace, etcetera. Seadrift has been running at a very, very low operating rate but as we said to a couple earlier questions, as the inventories of electrodes get worked off at the steel customers, we are going to have to get more coke. So in 2010 for sure we're going to be buying more coke and I think then Seadrift's operating rate will start to come up so it's too early to tell if there's going to be another impairment charge. That's really driven by GAAP. It's non-cash. Having said that, Seadrift has got great assets and I would much rather Seadrift focus on cash, i.e., not run and overproduce inventory. So I think they're doing the right things. They've slowed down. In some cases they completely stop operations, save cash, layoff key members, and I think that's the right approach rather than building a pile of inventory. So I'm pleased with what they've done. They've been cash flow positive year to date May.

New coke prices have increased by around 50% so I was just want to question what is the main reason behind it? Crude oil prices have come down sharply from a high of $140.00 to as low as currently (inaudible). Despite that, the prices have increased by 50%. Any reason for that?

I don't know that I've got your question. I believe it's this, that -- why is needle coke going up 50%?

Yes.

Oh, okay, yes. Oil is all over the place. You quoted $140.00 oil and that was the peak but oil at $70.00 I'm sure impacts their cost structure and they are demanding a price increase so time will tell if they can get it. They went out initially for 90% increase and now that's slipped off a bit and now it's around a 50% increase. So time will tell what they finally get. I don't know. We haven't booked any coke for 2010.

Okay, thank you.

Thank you very much sir. Have a good day.

Our next question will come from Eric Prouty with Canaccord.

Great, thanks a lot, just a couple quick follow-ups on Seadrift. One, with your loan to the company, is there an option there to increase your ownership stake or is it just straight debt to the company?

It's just straight debt. There's no option to increase our 18.9%.

Okay and then I think you've stated the second largest needle coke producer. Are you their largest customer and can you quantify what percent of their revenue you make up?

Eric, we don't give any supplier content or size in relationship to any of our suppliers. Historically we've not been a big buyer of Seadrift. We've bought from some of the other suppliers that we've had long term arrangements with the others which we still have a very solid, long term relationship, excellent relationship with Conoco. So we've not been a big customer of theirs.

Okay great, that's all for me. Thank you.

Thanks Eric.

Before we go to our next question I would like to provide a final reminder to everyone that that is *1 to ask a question.

Our next question is coming from Charles Bradford with Affiliated Research Group.

Hi, I've got another question in regard to capacity expansions. I understand that there are six plants in China that make ultra high-powered electrodes which are expanding by 50,000 tons. Do you know first of all anything about the Chinese electrodes, quality-wise and whether or not these expansions are still happening?

Chuck, yes there are probably six producers of significance in China and they have been working very hard the last ten years plus to come up the quality curve. Their quality has improved like ours. I haven't really seen real expansions there yet. I'm sure there might be some projects. Maybe they got curtailed. Some are maybe announced but not a lot of activity so I've not seen a lot of impact from any real expansions there but having said there, they're coming up the quality curve. Obviously we aren't standing still on quality. We're making a better electrode, better performing, larger diameter, etcetera. But they are good competitors. We watch them very closely and to date, through the first six months, really I haven't seen a material impact from them yet.

What about the electrodes coming out of India because I believe there are four plants there that are also planning to expand. What's their quality like? I know they've shipped some product to the U.S. to some of the big mini-mills. They're also apparently planning to expand. Is that happening?

There's two producers in India, very good producers. They make a much higher quality than the Chinese and they've done a couple of expansions over the last four years and I think the majority of all their expansions have already been completed. There may be a little tail of a little bit of one left but most of their work has been done over the last three, four years and they've articulated it very clearly in the public domain over the last four years. I haven't seen a major impact there with something brand new announced.

Thank you.

Thanks Chuck.

And with that, there are no further questions. I'd like to turn the call back over to our speakers for any final and additional closing remarks.

Andrea, thank you very much. Everyone, thank you for joining our call and look forward to talking to you in Q3. Have a great day.

Again, this does conclude today's call. Thank you for your participation.