GrafTech International Ltd (EAF) 2009 Q3 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech Third Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to our host, Ms. Kelly Taylor. Madam, you may begin.

Thank you, Brandy. Good morning, and welcome to GrafTech International's Third 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 Marie Noar at 216-676-2160 and she will be happy to fax or email a copy to you.

As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also, to the extent that we 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 GrafTech's conference call. Today we'll take you through our third quarter highlights and then open it up to questions.

Net sales were $165 million, a 5% improvement over the second quarter.

Operating income increased 29% to $25 million as compared to Q2. Operating income margin expanded nearly 3 percentage points, to 15.2% of sales.

Net income before specials increased more than 25% to $18 million, or $0.15 per share.

Q3 operating cash flow was $61 million, or slightly higher than operating cash flow generated in the entire first half of 2009.

This solid cash flow allowed us to complete the quarter with $4 million of net debt. Today, post Q3 closing, and given continued cash flow, we are now net debt free. Since the global economic crisis began 12 months ago, we've paid down over $130 million of debt.

In our industrial materials segment, sales increased 5% to $137 million, while operating income for the segment was $24 million, a 50% increase over Q2.

In our engineered solutions segment, sales were $28 million in the third quarter, flat as compared to Q2. Operating income was $1 million, a $2 million decline from Q2, largely as a result of unfavorable period cost absorption.

Turning to total overhead for the first nine months of this year, SG&A was reduced $8 million year over year as a result of our team's tight cost control and successful execution of previously announced productivity initiatives.

Turning to outlook, while global economies have begun to stabilize, end-market demand for the majority of our products remains far below pre-crisis levels and the pace of recovery is anticipated to be slow. Third quarter results came in better than expected due to stronger-than-anticipated European steel operating rates as well as continued increase in steel operating rates in several other geographies. As a result, we believe customers in several geographies have completed their graphite electrode destocking activities earlier than initially expected and began reordering in the third quarter.

Accordingly, we are increasing our full '09 operating income guidance by over 25% percent to $80 million to $85 million to reflect the improved third quarter performance and expectation that Q4 will be another solid quarter. We have issued operating cash flow expectations for 2009, which is expected to be approximately $150 million for the full year.

Looking beyond fourth quarter, visibility remains limited for 2010. We have recently begun building our 2010 order book, and at the end of February next year, we'll be in a better position to give guidance. We have secured pricing for our key raw material, petroleum needle coke, which will be up, as expected, 45 to 50% over our prior purchase price. We have utilized the remainder of our low-priced needle coke in '09 and will begin to see the impact of the higher-priced needle coke in 2010.

The structural improvements we've made to the business position us well to confront what could be a long and slow recovery of the global economy.

Finally, our strong balance sheet has positioned the Company to seize future growth opportunities.

That's the end of our prepared remarks. Now Brandy, can we open it up for Q&A? Brandy, go ahead -- open us up for questions.

(OPERATOR INSTRUCTIONS) Luke Folta, Longbow Research.

Good morning, guys.

Morning, Luke; how are you today?

Not bad, not bad. Just first, on your needle coke statement -- the 40 to 50% up. Are you referring to off of 2008 levels?

Yes, you're correct, Luke. Basically there was very little bought in '09, so it's really off our last real purchases, and that would be '08. So they're up about 45 to 50%.

Okay. So that would actually suggest that-- last time we spoke, I think you were saying about 50%. That would actually suggest that you maybe have seen a little bit lower needle coke versus earlier expectations. Is that the right read on that?

Yes, I think what's-- the trend-- I think when we started out the year, the needle coke producers were looking for a 90, 80% increase and that's come down over time as we've proceeded through this year. And a 45% increase, 50% increase, that's kind of at the lower end of the range. So they've come in as expected and maybe a little bit lower than what we initially expected and where they started.

Okay. Can you tell us, in the third quarter, how much of last year's needle coke was a part-- I mean, as a percentage of your consumption, how much of it was last year's?

I think for Q3 we should think about the majority. The vast majority of Q3 was all low-cost coke. I think that's the best way to look at it. Q4, the same kind of thing -- the vast majority will be the lower-cost coke. Obviously we have many different grades and we should think that really Q1 next year will be virtually all newly purchased coke. I think that's the right way to look at it.

Okay. And just finally on the pricing front for electrodes -- can you give us some feel of direction?

Well, we've gone out with our pricing -- in early Q3 we announced a price increase and we posted a $7,795 pricing. And as I said, we're at the front end of the book-building process so it's really too early to give much color around that.

Okay. But would you expect the average kind of discounts-- that an out-spot price to be anything different than it has been in recent years?

Well, it's too early to tell, (1). And (2), of course this is kind of a different operating environment than what everyone's used to. So it's hard to give color on that. Obviously we're seeking a price increase to overcome the cost increases, and that's what we're trying to execute.

Okay. I'll get back in; thank you very much.

Thanks, Luke.

Ian Zaffino, Oppenheimer.

(Inaudible)

Morning, Ian.

Hi. I just wanted to get in on a little bit of a follow-up on that needle coke because I remember you guys mentioning that needle coke was up 30%, and now you're coming back and saying it's 45 to 50. Has there been an uptick in that, and is that because some of the other producers have come off line and there's limited supply now? Can you just give us an idea of what's going on there?

Really, they've never been at the 30% level out there in the marketplace for needle coke. It's kind of been 90%, 80%, in the beginning of the year they were seeking, and then I think in this environment they had to modify their expectations. And then it's come down kind of 60 to 50, and we're in here at that 45, 50% type increased level. They never showed us a 30%; we have never seen that. So this is pretty much what we expected and, as was asked before, maybe it's a little bit at the lower end of what we were expecting.

Okay. And how should we think about the new pricing that's on the website as far as your listed price? I know we have historically taken a 10% discount to that -- is that relatively the way we should be thinking about the new prices on your website? Or is this year different?

As we said earlier, it's very hard to compare this to prior years because the operating environment is so different this year for everybody and every industry. So that's our posted price. Larger accounts tend to get a discount and so really, to see where that settles in we're going to have to build the book and see where it kind of falls out.

Okay, thank you very much.

Thanks, Ian.

Ray Rund, Shaker Investments.

Thank you. I have some questions about two items. One had to do with-- where do you think demand at your customers is running now? Do you think it's picked up off the bottom at all or are they still pretty much running at the rates they had been running for the last quarter?

Ray, if I had to look at this year, beginning of the year, Q1, many of our customers in many geographies were running down in kind of the 40%, 45% operating rate level. And then since Q1 they've steadily increased; especially beginning in July, a number of them increased. And right now, they're running, in many cases, in the 60% or 60%-plus operating rate. So Ray, yes, operating rates have come up for our customers in many, many geographies.

And a lot of that, I would say, is attributed to them destocking. And now they've worked off much of the excess inventory through their supply chain and I think the steel supply chain, even in front of them, has leaned itself out quite a bit. So they're now running in the 60s and I think kind of the 60% level is where it's at right now.

So is it prudent to say that you see that their operating rates will continue to grow through the remainder of the year and into 2010, or do you have any visibility on that?

Well, visibility is very limited in this environment. I would say in Q4, many times global steel has some slowdowns. There's some year-end holidays, some customers plan their maintenance around those year-end holidays. So many times Q4, especially December, is a slower operating rate period for steel producers.

So as I look at the market and the order books that we see out there in some of our customers and the number of them have recently come out with their earnings release -- I think they're looking for kind of a stable Q4. Not a lot of up side is what we're hearing from our customer base, and they expect to run kind of in the 60s. So I would say kind of a status quo around the world in Q4, and maybe December's a slower month, as it normally is.

So I don't see an uptick at all Q4. I think they'll use Q4 to lean out more of the supply chain, which I think is good news. I think we'll enter 2010 with a very lean supply chain across much of that steel supply chain, and then 2010, we'll build our book and end of February I think we'll have a much better line of sight to what 2010 will look like.

Do you think that some of the customers that you have who were still using up their graphite inventories in Q3 -- do you think that you should see increased demand from them in Q4 simply because they've run down their inventories?

That's correct, Ray; we'll see some of that. So we'll have definitely cases around the world where customers are at the end of their destocking. We had that in Q3, and that was kind of the up side we had in Q3 performance and I think we'll see some more of that. We have a number of customers, that's exactly their case. So we should benefit from that and that's why we believe Q4 will be another solid quarter for us.

Steel may run a little bit softer, may do some annual maintenance work, but I think the exact item you're talking about, some of our customers finishing their destocking, will allow us to continue to have another solid quarter in Q4.

Okay. And just one follow-up question, if I may. During the quarter, your other income showed, I think, an $11 million loss, you said, because of a currency translation on a loan that you have to a subsidiary. Is this a one-time sort of thing or do you think these types of issues will continue, going forward?

Ray, this is Mark. You can look at our historical results -- we have had the remeasurement of the intercompany loans impacting our results since they've been put in place. And they largely were put in place back in 2002 timeframe or so, when we actually did the senior note financing.

And they are noncash items; they are driven strictly off the movement of foreign currencies so we [cull] them out as nonrecurring items. Now, with the final pay-down of the senior notes -- we paid off the final $20 million in Q3 -- we will be looking at collapsing and restructuring those loans, which will help mitigate the ongoing impact of those items.

But again, since they're nonoperational, noncash items, we have culled them out. If you look at just year-on-year comparison, last year I think we had about a $17 million gain in the quarter, which obviously we culled out of our operating results. This year, because of the movement of the euro, in particular, we've had a loss. So they create quite a bit of volatility. We do cull them out of the operational results but we would expect, going forward, with the paydown of the senior notes, that we'll be able to collapse those notes and hopefully minimize the effect going forward.

Okay; thank you very much.

Thanks, Ray.

Charles Bradford, Affiliated Research.

Good morning.

Morning, Chuck; how are you today?

Not too bad; not too bad. Baseball didn't work out too well last night, but what can you do?

I'm with you.

Can you discuss a bit the engineered solutions situation? What's happening with the solar-related silicon products and all those other alternate energy potentials that you've had?

Absolutely. Chuck, in general engineered solutions business, when we go into a downturn, it goes into its own downturn cycle after steel. And I think you saw that in this downturn we've just had here at the beginning of the year. And it also tends to come out after steel. So I would look at engineered solutions this year as-- you kind of look at the first three quarters this year, I don't see much improvement; it's still very soft. Q4 will be a similar kind of complexion.

And then, over the course of 2010, and I don't know if it's Q2 or Q3, I think we'll start to see some improvement in engineered solutions. And I think it'll be driven by some of those items you've mentioned. Solar -- many of the solar companies are starting to come back. Many of them have had tough balance sheets; many of them have been affected by the financial market's inability to raise capital, tough liquidity situations. Many of those companies are in China.

And I think the other thing is some of the government stimulus programs around the world have a fair segment for some of the alternative energies. So I think some of that will start to gain traction in kind of the Q2, Q3 next year. So this year, I would say engineered solutions -- soft year, down year, tough markets, end demand very much down. And next year, maybe starting Q2, see it start to pick up.

On the electrodes side, can you break down for us the sales from the ultra high power EAF furnaces to ladle furnaces? And do you do anything for submerged arc furnaces?

Yes, our breakdown, Chuck, would be about 70% for EAF furnaces, and these would be the larger diameters for EAF melters. And then about 30%, the balance, would be in ladles, supporting steelmaking; nonferrous applications, foundries, would be in that category. Titanium dioxide, various other products, would be in that 30%. Submerged arc would also be in that 30%.

Thank you very much.

Thanks, Chuck.

Brad [Langston], Sandwood Capital.

Hi, guys; congrats on the strong quarter.

Thanks, Brad.

If I look at the WSA global steel production numbers, while you highlighted that overall mill utilization is about 60%, I see global EAF utilization is closer to 70%. If I assume -- which I think you guys just confirmed on a prior question -- that the fact that you've run year to date at about 40% utilization, that the delta between 40 and 70% EAF utilization is really a function of just channel destocking, and now that the mills have destocked, do you believe that your utilization should begin to more closely reflect utilization of EAFs globally?

Brad, we agree with that. We should see, as this destocking is completely behind us in Q4, all things being equal -- and that's a big item -- all things being equal, we would expect, next year, our operating rates to come up.

Okay. So then, is it a fair assumption that unless we see a global decline in EAF production off of current levels, you'll be running at least 70% utilization next year -- all else equal?

It'll be hard just for me to say it'll be 70, but I would say instead of being in the low 40s, it should definitely come up. Does it finish at 50, 55, or get all the way to 60? Time will tell. But the direction will be up for the reasons you just articulated.

Thanks, guys.

Eric Glover, Canaccord.

Hi, good morning, guys.

Morning; how are you today?

Fine. I was just wondering if you could comment a little bit more about why the margins declined so significantly in the engineered solutions product segment? Can you just supply some more color there?

Yes, Eric. Primarily, it's period cost absorption. That business is running at a very, very low op rate. In fact, its largest facility, in the quarter, we shut down for a number of days and let everybody go home. Everyone was good enough to take their vacation time around a plant shutdown. So it's running (1) at a very low op rate, so period cost absorption is an issue there. And then also in the quarter there was a little bit of just product mix that brought down the margin.

Okay, thanks. And then, if you could just sort of speak about your confidence level that you'll be able to increase the graphite electrode pricing sufficiently as you build the order books. I mean, what's it looking like so far?

Well, as I said, it's early; so it's too early to tell. Obviously, I believe everyone in our industry's confronted with very significant needle coke cost increases. So I think there's a lot of pressure from the cost side. And the amounts are large -- as we said, 45, 50% of that item that's a key raw material, by far. So I think that should be a driver. Where it turns out, you've really got to let the book-building process go forward. The market's going to determine that.

Okay, thanks a lot, guys.

Thank you, sir.

Bob Richard, Iron Edge Research.

Good morning; thanks for taking my call. Your inventory position -- your destocking comments are appreciated. Would you say the inventory position is differentiated by geographic region, or is it pretty much the same, let's say, in Europe as it is here in North America? Or are they a little leaner here than there, or can you add any color to that?

Yes, Bob, I would say in North America, the stock supply chain is leaner than Europe. Europe's a bit behind -- the US producers reacted very quickly and right now when you look at all the metrics around steel inventories, service center inventories in the US versus Europe, Europe is behind. So Europe is working on it; I don't have a customer in Europe that's not working on it and driving their team, but they are behind.

Okay. And one follow-up. The 70-30 mix that you alluded to, that doesn't change-- let's say that doesn't change much, let's say, from two days ago until now, right?

That's correct.

It's just a smaller pie, but that 70-30--

That's correct -- the 70-30 has pretty much remained in that ratio for the last several years.

Okay, thanks for your time.

Thank you, sir.

Scott Blumenthal, Emerald Advisors.

Thank you for taking my question. Craig, could you give us an idea as to what percentage of sales during the Q3 were at spot and what came under contract, and what your expectations are for the current Q4?

Yes, Scott; thanks for your question. The orders we've seen this year have been in much shorter time frames than historically. Historically, 90, 95% of our business would have been annual contracts. This year, a much more typical pattern has been three-month contracts or six-month contracts. We haven't had that much-- let's call it spot, one-offs. So there hasn't been that much but there's been a lot of three-month-type business. So unlike the past, I would say that the typical this year has been three-month or six-month. Very, very few annual contracts.

The margins on a three- or six-month contract are obviously a little bit better than they would be on a yearly contract?

Well, many variables there -- timing, raw material, market pressure. So I don't know that you can make a general statement on there. Where's the overall market when you book it would maybe be a bigger driver. But I would say most of our customers have had very limited line of sight in their own books so they've tended to go very short. And when we see those that have completed destocking, the longest they've gone is six months or three months. So those that finished in Q3, they've given us orders pretty much just for the balance of this year and nothing into next year. That's been the trend, and it's driven because of their lack of visibility much beyond a few months.

Okay. So then, what does a customer do in such as case from the end of the year until the book is built in the middle of February? Or are those people customers that you are going to negotiate with and you might close between them?

What'll happen is-- and it's happening right now. Customers will come in and they'll put bids in. And let's say very typical would be, "All right, please give us a bid for our first-half business." And we're seeing-- this would be very typical of what's coming in this very early part of the bid season. We're not seeing a lot of annual contracts. There's some, but it looks like, I would say, going into 2010, they will more likely be on the shorter end than on the annual contract. So very typical -- someone come in November, December, "Give me a quote for my first six months." We give a quote and then we would start shipping that in January.

Okay, so then just what would your approach be, then, Craig, to quoting on that three- or six-month contract as opposed to a yearly contract? I understand what the benefit would be to the customer, but can you talk about how GrafTech would try to derive some benefits from there, giving up the long (inaudible) of the contracts?

Well, we would go ahead and quote off of our pricing that we posted -- the $7,795 price basis. We'd price off that base. The fact that it's shorter does not necessarily in itself adjust where we're going to price that. That customer and ourselves will both face the market risk when he comes back for, let's say, his final six months of the year. And depending on where the economies are, where government stimulus money gains traction, the price could be even higher for him. That's a risk he faces and we face.

Okay, thank you.

Thank you.

Zahid Siddique, Gabelli and Company.

Hi, good morning. I have a couple of questions. First is on the needle coke. What is the dollar price, the current before the increase, for needle coke, on average?

Zahid, we don't give guidance or color around our specific needle coke prices. It's a competitive item -- I mean, everyone out there is trying to buy needle coke at the best price they can get it; it's very important for your cost structure. So we don't really give color around where our price is and we only talk about year-over-year percentage increases.

Okay, that's fine. Now, if you mean that there is a 50% needle coke price increase, to offset that, what percentage increase do you have to implement on your graphite?

It is built in the price that we're out there in the marketplace looking for. So that $7700 price, we have factored that in. So we fix our needle coke first, which is the large cost structure item. And then based on that, we go out to the marketplace and start building the book. So we have factored that in and, like I said, it's really early to tell where that's going to come in. We're just going to have to let the book come together. And as I said before, everyone faces that same kind of coke cost increase and we're just going to have to see what the marketplace determines.

Okay. Looking at, I guess, the price cost curve next year, just kind of from a trend perspective, what do you see over the next three, four quarters? It's hard to tell but I'm trying to just get a sense of the trend.

Well, the big item -- and the needle coke is 40, 45% of our cost structure. So that 40, 45% of the cost structure is going up, let's say, 50%. So I think that's probably your biggest driver. If you want to get a look at trend, I would look at it that way. And you can see our actuals that are posted for that segment each quarter.

Okay. And just a last question, that's on the Seadrift. Did you write off any of the value of the assets in Q3?

No, there was no write-off in Q3.

And do you have any plans to possibility acquire more stake in Seadrift?

Well, right now we own 18.9%. It's a very good company, very good asset; the balance is not for sale. So if it came to market, we obviously would look very, very hard at it, but right now, it's not for sale.

Okay, thank you so much.

Thank you, Zahid. Have a good day.

Asad Abedi, Merrill Lynch.

Good morning; thanks for taking my question. Just a follow-up on that question. Your balance sheet is now very strong; your cash generation is excellent. What do you intend to do with the cash you're generating from this point forward?

Asad, we're going to direct our cash and our balance sheet's strength towards growing our company. So obviously, we are positioned to take on any internal growth opportunities, we've been developing a number of new products. So that will continue.

And then obviously, with this balance sheet and liquidity we have, we're also looking at external growth opportunities. So we're open for business on the acquisition front. We've gone through a number of years where really that wasn't an alternative for our company, and obviously, where we have the balance sheet today, that is a case where we're open for business.

So should we be expecting a big step-up in CapEx over the next years, and what kind of level (inaudible)?

Well, I think it's early to tell on that. Obviously, we are monitoring very closely the global recovery. We see it as fragile, and I think most economists would say that this could be prolonged. So we're going to balance whatever we do against market demand. And so as we see market demand out there, you may see more CapEx from us. If we develop some new products for solar and some of those growth industries, you may see more CapEx to support those initiatives on internal growth.

And then external growth, as we all know, are kind of one-offs. They're hard to predict. All I can say is we've worked very hard to position our company to look at any great acquisition opportunity that would come along, and obviously with this balance sheet, we don't have a lot of constraints around seizing one of those if we feel it's right for the business model.

Okay. And then, to some back towards pricing. You talked about the $7700 price you're looking for right now. Would you mind reminding me what the price you were going for before that was, what you've gone for this year?

Well, just before the collapse of the global markets, remember, we were running full out; I think most of the electrode industry was running full out. And so the supply chain was very tight. And going into the quarter before the collapse, we were seeking pricing over $9000. And of course we were running-- all of our facilities were running at capacity. And then of course the collapse came and the world kind of changed for everybody.

Okay, that was the pricing you were going for. And then (inaudible)

That was back in July of last year. July 1, we came out with a price increase. We were running absolutely full out, working every day, every night, and we were seeking a price over $9400. And then as we all know, kind of end of Q3, beginning of Q4, the world really change and we had to switch gears on many fronts -- cost, headcount -- and be very, very nimble to position us to be cash flow positive and get to where we are today debt free.

And last time you had a conference call, you talked, I think, about a 12% pricing increase across the board in these electrode products?

Correct.

Was that-- (inaudible) falling short of the $9400. I mean, what kind of level would that have reached?

Yes, that was falling short. And that was just the year over year. So I've got to get you to go back to the public data in the Q. This quarter Q3 versus last year, I think we're up about 15%.

That's wonderful; thanks for your help.

Thank you, sir.

Sayan Gosh, Citadel Investments.

Hi guys. Good quarter and thanks for taking my question.

Thanks, Sayan.

A lot of the questions have been answered, but three follow-up things. Firstly, can you comment a little bit on sort of costs outside of needle coke? What visibility do you have on that for going into 2010, and perhaps some color on comps versus other energy, pitch, that sort of stuff, costs versus 2009.

The second question is, we're obviously seeing very, very strong production and utilization levels in steel in China, and can you give us some color as to if you're seeing any increased business? What that really means as an order magnitude, if anything, for you guys?

And the third question -- I'll just put it out there -- is when you think about building your order book for 2010, would you be disappointed if you didn't improve margins, whatever they are, versus where they are today? Or would you be disappointed if you didn't maintain margins versus where they are today?

Very good. On your first one -- outside the needle coke, we have not had any other raw materials go up near as dramatic as needle coke. So on the other raw materials, they've been pretty much single-digit-type increases thus far. Obviously in today's environment it can change, but so far, on the balance of the other raw materials, the increases have been much, much smaller than needle coke. So think of them as single digit.

As far as sales into China, I would expect-- China's operating rate on the EAF has come up nicely; they have a very good infrastructure stimulus program. So I would expect China -- and, in fact, slash, all of Asia, our sales in 2010 will probably be higher than in '09. A number of economies there have a much larger infrastructure component to their stimulus program so sales should be up in 2010 in that zone.

As far as the 2010 order book on margin increase, I would say our goal is absolutely to try and increase some margin increase. So that's the goal. Where it comes out is really going to be dependent on where we build this order book, and that's just really going to take some time here to get that done. But our team's goal is to get margin expansion in 2010 over this very, very brutal '09.

Got you. Just one follow-up on the China/Asia-Pac market. I mean, can you give us some sense of just order of magnitude, either China specifically or China plus Asia-Pac right now? What percentage of your electrode sales, ballpark, are going there, and what would that number have been, say, middle of 2008? Just percentage of electrode sales?

Well, percentage -- thinking the percentage is roughly around 10% of our sales is in Asia.

That's today.

Yes. And I would say in '08, it was probably not that far off that number. But if you look-- I'd say if you took more of a four-year look, you would see an increasing trend of our sales in Asia. So we've been growing our sales in Asia over the last four years. So going into 2010, if Asia continues to run well, I would expect to get above 10%.

Okay. And is there any-- there is local domestic Chinese production capacity of electrodes. Apart from quality-- I mean, how important is quality to some of your customers in that region, and do you have any other differentiating edge versus quality in selling to those customers versus selling to more localized suppliers?

Quality's important on the larger furnaces. And so in general, some of the very large or very newer furnaces, quality becomes important. They're more demanding furnaces, they have higher current put into them, and they require a much better-performing electrode. And so that tends to be the segment where we perform the best, pricing is good, and it's a performance/quality issue that's important to the customer.

Great. Okay, thank you.

Thank you very much; have a good day.

[Sharak Patel], Jefferies and Company.

Good morning; good afternoon, actually. Well, we're getting close to whatever it is right now.

Morning, Sharak; how are you today?

Good. Just wanted to follow up on the Asia question here one more time. Just on the higher mix in Asia into 2010. You're seeing that pricing is going to be comparable to what you're getting in the US and European markets?

Too early to tell. We've got to get that book built, so we're at the front end. The market many times tends to start in the US. So it's early to tell but I'd say the trend for our Asia sales the last four years has been upward. And what we see in Asia, 2010, I would expect it's probably higher in 2010 than '09.

And the margin is comparable historically between the US, Europe, and Asia?

Well, it depends on matching up the products in the segments. Sometimes China tends to be a little bit lower on pricing. So I wouldn't necessarily say it's comparable; I would say it would tend to be a little bit lower.

Okay. And then wanting to move on to the inventory side, I wanted to get a clarification. Did you comment that the inventory for steel is leaner in the US than it is in Europe, or is it the inventory for electrodes leaner, or is it both?

It's both. Absolutely, steel is leaner in the US than Europe, and also in the electrode inventories. We've had US accounts finish destocking ahead of European accounts.

Okay. Large accounts, smaller accounts -- is there a trend one way or the other?

Across the board. It's literally people's pile. And sometimes they finish the pile-- Well the pile, given the low operating rate, has been so large that some customers even lose track of the pile and we get an emergency order to -- "Quick, let's get going." So the good news is I think by the end of this year, virtually all the destocking will be behind us. It should mean, as was asked before, that our operating rates come up at our company next year, all things being equal.

And then, I also think it means that as we do see some improvement in the end markets for steel or we start to see some stimulus money around the world on infrastructure, that we should see perhaps some up side in our business.

Okay. And then, just one last thing on contracts. Now that some customers are looking for more three- to six-months contracts versus the normal annual contracts, do you feel like maybe you might be publishing base prices a little more often or still you see yourself doing that on an annual basis?

Well, I would say if I look at the orders that have come in so far, we've had some come in for annual, so some big names want annual contracts. And then some others have, because of visibility or what not, they're three or six months.

I think a lot of it depends on the customer's strategy. The ones that have gone three to six, obviously they're going to face the marketplace again when they come out. And where is global stimulus, where are the economies, where's the raw material cost, where's oil? All those things will determine where is the price of electrodes when they start to come out.

So the color we're giving is, I don't see us back to '08, where we had a lot of annual contracts. I think we're going to have a bunch of annual but we're also going to have some three and six months in the book.

So seeing that you will have more three and six, do you think you might publish a base price number in March or June of next year versus doing it-- I think it's July, first time we saw it in the '08 period, and then September for the first time in '09. Will it be just more often?

Well, it's hard to tell if it'll be more often. But let's put it this way -- if we have a lot of three- and six-month in the book, the opportunity will be there to re-price those accounts.

Okay, that's fair. I appreciate the time; thank you guys.

Thank you, sir.

David Haddock, AIM.

Good morning.

Morning, David.

Can you say what your utilization was in Q3? In Q1 and Q2 it was kind of between 35 and 40%.

That's right. In Q3 we came up just above 40. So we were kind of 41, 42%, so it' s come up. And I would expect, as we've said, we'll probably see it continue to come up over the next few quarters.

Great. And then, last quarter conference call you said that you expected by Q4 you would have worked through most of your 2008 needle coke supply and therefore the 2008 needle coke costs. Your sales came in a little better in Q3 so you would have thought that that would happened, but you think you still have -- most of Q4 will be under 2008 needle coke?

Yes. I think the vast majority of Q4 will still be the old, lower-cost coke. And then in Q1, we should think that that's going to be new coke. So that's going to face the new, higher-cost coke.

Is there something that changed over the quarter that--?

No. Remember, there's five, six, seven grade of needle coke. So there's different grades, you've got a customer base that's ordering much different than they did in the past because of destocking. And then you've got varying operating rates in different geographies. So I don't think we're too surprised that we finished up this year primarily with lower-cost old coke and virtually the vast majority of it in Q4 will be the lower cost. I'd say that hangs pretty much with what we thought.

I would say the Q3 rate is up higher than what we thought because steel operating rates were up higher. So we used more in Q3 than what we would have expected.

All right; last question. For Seadrift, when you bought it you were going to, I guess, do some process improvements and try to improve the quality of the product they produce there. Can you give us an update of where you are in implementing those process improvements?

Well, David, we don't control that; we're the minority shareholder. So we don't run the facility; we have a seat on the Board. So we don't drive process improvements there; we're the majority investor there.

Okay. Thank you very much.

Thank you.

Our final question comes from Luke Folta with Longbow Research.

Hi, guys. Just a quick follow-up. I really don't mean to belabor the point on this whole pricing spread situation. I don't think it does any good for anybody if expectations get too far one way or the other. But my question is -- if you were able to achieve dollar spreads, electrodes less needle coke, in 2010 similar to 2008, would that be a favorable outcome to you? Kind of similar to Sayan's question.

Well, I guess the best way for us to answer-- I agree with you. With the limited visibility, I think it's very prudent that we take an approach that we're in the front end of building the 2010 book. We know that the costs have gone up significantly. We're out in the marketplace trying to execute a price increase to offset those costs. And we just have to let that play out. So I think the goal will be to get margin expansion, and time will tell.

And I think if you listen to our customers' Q3 calls, they also-- I think they'll be the first to tell you that there's limited visibility out there in length of their order books. And obviously looking all the way into 2010, they have even less visibility.

So I think, Luke, it's very prudent to take that approach. And you just have to let us put together the book, and then we'll do our darndest to come out the end of February, and if we're comfortable with line of sight, we'll give guidance for what that is. If it's for the full year, we'll give annual guidance; that's always been our preference. But if the global economic condition is such that it's limited visibility and hard to give annual guidance, then maybe we have to do like we did this year and kind of give quarter-by-quarter or maybe six-month guidance. And it'd really be driven by the environment we face.

Okay. But just as you see the world today, do you think it's fair to use that as a base case scenario, is 2008?

Well again, you've got me in a tough position just because of visibility. I think, all things being equal, what's safe to think about is our operating rates should come up. So we've gone through this massive destocking globally of excess inventory of electrodes everybody had because of the huge drop-off in operating rates.

And now all that has worked through the supply chain in destock and the supply chain for steel is getting very lean in electrodes, other raw materials -- and, very importantly for us indirectly -- steel. So I think our operating rates should come up. That's good news; that's better absorption. Making more electrodes, selling more electrodes.

Where the price will be and where the balance of the costs are going to be, that we still have to work out.

Okay, guys. Thanks a lot for the color; good luck.

Thanks, Luke. Much appreciated; have a great day.

There are no further questions at this time.

Brandy, thank you very much. Everyone else, thank you for supporting our company and your participation and look forward to talking to you next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.