GrafTech International Ltd (EAF) 2009 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Ms. Kelly Taylor, you may begin your conference.

Thank you, Casey. Good morning, and welcome to GrafTech International's fourth quarter and year end 2009 conference call. On the call today is GrafTech Chief Executive Officer Craig Shular, and our Chief Financial Officer, Mark Widmar.

We issued our earnings release this morning. If you did not receive a copy, please contact Marie Noar at 216-676-2160, and she will be happy to fax or e-mail a copy to you. As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release which is posted on our website at www.graftech.com in the Investor Relations section.

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

Thank you, Kelly. Good morning, everyone, and thank you for joining our call today. Today we'll take you through our fourth quarter and full year highlights and then open it up to questions. Net sales were $202 million in the fourth quarter, a 23% improvement over the third quarter, and our strongest quarter of the year.

Gross profit was $67 million, or 33% of sales, an increase of $20 million over the third quarter. Operating income excluding special items increased 68% to $42 million representing the highest quarterly operating income of the year. Net income before specials increased more than 70% to $31 million or $0.26 per share.

Recapping the full year, sales were down 45% to $659 million versus 2008, largely as a result of lower volumes associated with significantly reduced demand driven by the global economic recession. Full year gross profit declined to $191 million, or 29% of sales, largely the result of unfavorable fixed cost absorption associated with lower sales volume.

2009 operating income excluding special items declined to $95 million. Net income before special items was $69 million or $0.57 per share. 2009 was an exceptionally difficult operating environment, however, our team was able to achieve productivity and cost control initiatives allowing us to be profitable and cash flow positive.

We've proactively managed areas within our control which included reducing operating rates at our production facilities. We operated at an average rate of 40% in 2009 across our graphite electrode platform. We right-sized the organization, placing several facilities on shortened work weeks or furloughs and sharply reducing head count, hours worked and overtime. A 10% pay reduction for officers of the Company was implemented.

We also implemented hiring freezes and suspension of salary merit increases. CapEx was also reduced by $16 million year-over-year, and finally we reduced discretionary expenses by 20% to 25% year-over-year. As a result, we completed the year virtually debt free and with the strongest balance sheet in our Company's history, closing the year with $50 million in cash and an undrawn $215 million revolver.

Standard & Poor's recognized the improvements made to the balance sheet by raising our corporate credit rating to BB+ and increasing the rating on our revolving credit facility to BBB, or investment grade. Our solid balance sheet has the Company well positioned for growth.

Turning to segment results, in our Industrial Materials segment sales increased to $167 million in the fourth quarter, a 22% increase over Q3 as a result of higher graphite electrode sales volume. This compares to Q4 2008 net sales of $219 million.

Operating income for the segment was $42 million as compared to $59 million in Q4 2008. The year-over-year decline was largely a result of lower graphite electrode sales volume and unfavorable currency movement offset in part by higher graphite electrode selling prices. During the fourth quarter of 2009, we began to replenish our needle coke raw material inventory at the 2009 purchase price which was approximately 45% higher than the 2008 purchase price.

As of December 31, 2009 essentially all of this higher cost material was still in inventory. And, therefore, our 2009 cost-to-goods sold does not reflect the impact of the 45% increase in needle coke. For 2010 needle coke purchases, we have completed negotiations with our largest supplier and the 2010 cost per metric ton is essentially flat with the 2009 cost per metric ton.

As we start our production in 2010, we will begin to use the higher cost needle coke purchased in the fourth quarter of 2009 and we'll have to replenish the needle coke raw material inventory at the 2010 purchase price. The inventory flow-through of the higher cost raw material will significantly increase our cost-to-goods sold in 2010 as compared to 2009.

Our ability to pass this increased cost to customers depends on a large extent on the strength of the global economic recovery. In our Engineered Solutions segment sales were $35 million in the fourth quarter, an increase of $7 million versus Q3. This compares to sales of $46 million in the fourth quarter of 2008.

Operating incomes was $4 million as compared to $11 million in Q4 2008. The year-over-year decline was primarily the result of lower sales volume across multiple product lines and an unfavorable product mix.

Turning to outlook, based on the current International Monetary Fund projections and other global economic forecasts world output is projected to rise in 2010. IMF notes that the recovery in advanced economies is anticipated to be weak by past standards, while emerging economies are poised for a quicker and stronger recovery given the robust internal demand.

While recovery has begun in certain regions, electric arc furnace steel end market demand is anticipated to be below pre-crisis levels. As a result, graphite electrode industry recovery is anticipated to be slow as operating rates remain subdued compared to historical standards. Weak end market demand remains a risk to price realization as we work to complete our 2010 graphite electrode order book.

We expect 2010 results to benefit from improved volumes in our graphite electrode business, however, this impact will be partially offset due to significantly higher raw material costs that we discussed earlier. Given the fragile state of economic recovery, limited customer visibility, and the resultant shift in customer order patterns to shorter-term contracts our ability to project full year detailed guidance is limited.

We expect the first quarter will be our weakest quarter of the year with operating income targeted to be in the range of $30 million to $34 million. A marginal improvement to earnings is anticipated in subsequent quarters driven by a slight increase in industrial material volumes and the expectation that our Engineered Solutions segment will begin to recover in the second half of 2010.

In 2010, we are targeting overhead expense to be in the range of $105 million to $110 million, capital expenditures to be in the range of $70 million to $75 million, depreciation expense to be approximately $35 million, and the effective tax rate to be in the range of 24% to 27%.

Given our strong, solid balance sheet and our commitment to grow our Company, we expect an increase in overhead expense and CapEx in 2010 to position our Company for future growth. We increased our R&D spending 13% year-over-year in 2009 and have successfully leveraged state and federal funding to invest in new technologies.

Most recently, we were awarded a $410,000 Third Frontier grant from the state of Ohio to continue work on lithium ion battery technology. The increase in overhead expense in 2010 will also focus on investing in organic growth by increasing our sales and marketing coverage, supporting our lean initiatives and funding new product development. These actions will position our Company for future growth, providing long-term value for our shareholders.

With that, Casey, let's open it up for questions. Thank you.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. And your first question comes from Bob Richard with Southridge Investment.

Thanks very much for taking my question. Craig, in the last conference call we discussed electrode destocking. Is it safe to assume that it is probably complete here in North America and probably a little more sluggish over in Europe in some of that activity ongoing?

Yes, Bob, I think that is pretty accurate. U.S., North America, pretty much behind us. Europe is maybe a little bit behind that. But in total as I look at the supply chain for graphite electrode around the world I see very lean supply chain.

So very pleased the way that process has gone, and as I look forward I see a tight supply chain. I don't see large pockets of excess graphite electrode inventories. So I think as we look forward in 2010 the supply chain is in very, very good shape.

Understood, thank you. And we discussed, last call, needle coke up maybe 45% to 50% next year, I think you may have given that number in your discussion or did you, or is that still a good number?

That is a good number, and, yes, that's the exact range we've been talking previously and that's where it has come in, 45%, 50% up.

And my last question, on these increased overhead costs, I appreciate all the detail and what you're trying to do, I appreciate that.

None of that is capitalizable, any chance of a reclass of that going along, or do you think that is all going to be straight expense?

No, no, Bob, that is truly admin and selling and marketing, R&D type efforts that would be expensed. The CapEx, as we called out, the incremental CapEx as well which clearly would be capitalized and then amortized, but the selling and marketing and R&D will be expenses on the P&L.

Okay, the R&D, okay, will be expensed. Okay, thanks for your time, guys, and thanks.

Thanks, Bob, have a good day.

And your next question comes from the line of Luke Folta with Longbow Research.

Hi, good morning, guys.

Good morning, Luke. How's it going?

Oh, not bad. Couple of quick questions for you. Just, firstly, on the order book can you give us a feel for how much on the full year order book you have secured at this point?

Luke, the way I would color it is that looking at Q1 we're probably 90% plus booked for Q1. The balance of the year, really too early to talk about. What we have found is the majority of the customers are pretty much booking quarter-to-quarter.

There is a few out there that have done six months. But it is quarter-to-quarter. And that is why we can give guidance on Q1. But the balance of the year I think we're just going to have to let the year play out and let us get the book together.

Can you give us a feel on what the interest is from -- just looking at the buyers it seems like we've seen some price declines, maybe you can comment on that, whether you are seeing that or not. Seems like prices are starting to weaken, at least a little bit here, and no one wants to secure contracts. But at the same time, you are saying that the inventory levels are very lean at the channel. And I'm just trying to understand how you think this is all going to play out?

It is too early to tell. But you're right, prices are coming and below our targeted levels. The supply chain is lean. I think we are very well positioned to seize all the opportunities that are out there.

And as the global economies recover, and let's make a point of it, they are recovering. It is slow, it's still fragile. I think a lot of customers are optimistic but they are very, very cautious because of everyone's been through in 2009.

But I think what we've tried to do is get ourselves very well positioned to seize those opportunities. Obviously 2009 has been a solid year for us, we've worked on productivity improvements, cost reductions, cash flow, have no debt. And so I think as we look forward in 2010 we'll be positioned to seize those opportunities, but it will be right now I think from our customer base on a quarter-to-quarter basis.

Okay. And just lastly, can you give us a feel for what the pricing percentage change has been, just over, either over 2008 or over 2009, that you're seeing in the first quarter?

It is too early to tell. What we've built into our guidance, that operating income, $30 million to $34 million, we have built in our pricing assumptions based on what is in the book and what we see.

So, Luke, we're just going to have to let the quarter finish out. There is still more booking to go. And like I said, the customers are booking short, but the backdrop to that, which I think is good news, is the supply chain for electrodes is nice and tight, nice and lean.

Thanks, Craig.

Thank you, Luke.

And your next question comes from the line of Brett Levy with Jefferies & Company.

Hey, Craig.

Hey, Brett. How are you today?

Not bad at all. Just so I get the timing straight, needle coke from 2008 to 2009 was up what percent? 2009 and 2010 is up 45% to 50%. What percentage of cost of goods sold for needle coke is going to be sort of pre-purchased in 2010? I'm just trying to figure out sort of when the 2009 pricing runs out and what the exact increments between 2008 and 2009 and 2010 were?

Let me lay it out this way, Brett. And thank you for the question because this can be a little confusing. But think of in 2009, needle coke prices went up 45% to 50% versus 2008. But in 2009, we bought very little at the new price and what we did buy was at the end of the year. And so it really wasn't reflected in our costs for 2009.

So there -- going into 2010, we will be buying at that 40% to 50% up, which because we bought virtually nothing in 2009 is, you really got to compare it to 2008. So the increase since 2008 has been 45% to 50%, there is only one increase for us over that period because of our buying pattern.

And there is not going to be any quarter in which you're going to have previous periods. It is going to be spread out fairly evenly, just assume from 2008 levels up 45% to 50% and flow all of that through all quarters of 2010?

That's right. So think of, we exhausted last year the low cost coke which would have been 2008 price. And that in 2010, we are now on the new price which came out in 2009 and is 45% to 50% up. And in 2010, we will be using that coke throughout all the quarters. Q1, all the way through.

All right. And then, it is awesome to see you touching investment grades here. It does look as if, even with higher raw material costs, you're going to be building up a significant portion of cash.

Can you talk a little bit -- I mean it seems like needle coke supply has always been a concern of yours. Can you talk a little bit about what you might use the cash for? And then sort of by way of a comfort zone, where do you think the leverage should be for this Company on a long-term basis? Single B, BB, BBB, where's your comfort zone?

On the cash front, I think you're right. Our team has done a very solid job focusing on cash flow, productivity improvements, lean initiatives, so we've built a pretty good track record the last several years on really generating cash flow and getting leaner.

So I would look for that to continue in 2010. And as far as uses for that, you see some of that. We're growing our CapEx, so we're getting CapEx back to kind of the 2008 level. We're investing in overhead, which is really R&D and building out our sales coverage model and our sales service model.

So we're hiring people, we're getting better coverage in Asia, more people, more training. R&D, as we said, was up 13% last year over 2008, so we didn't cut a single dollar in that brutal 2009 and we'll probably be up again here in 2010.

So I think, firstly, Brett, we have a number of internal, great internal projects to invest in. There are productivity improvements, there are new product improvements, they are hiring new team members and then externally, really we're open for business on the acquisition front.

You have been with us many years and we really didn't have the opportunity to consider much of that. And obviously today with this balance sheet there is really not much on the acquisition growth front that we can't look very hard and execute today. So that is another big bucket.

Lastly, we always look at share buybacks and we always evaluate that against the former two. And you've seen us in the past, buy back shares, we have a share buyback program and we've actually executed on it. So that is another area we always study in light of internal and external opportunities.

And then target leverage, you know --

I would say, we don't have a specific goal, Brett. Obviously, we have had some very nice improvement. I am very happy where it is today. I think our Company can carry $300 million or so debt very easily throughout the complete cycle with our size Company and cash flow.

So obviously we are under-leveraged today, the first priority will be to exhaust and look at internal and external growth opportunities. And down the road, I think as we execute on some of those, I think we'll get to a more normal debt level which might be $300 million-plus.

I think also as the economies continue to recover, you will see our comfort zone to increase that debt, the financial markets improve, you will see us with a more comfort zone to increase there. I would hate to get ourselves in a position where there is a great internal or external opportunity and we can't execute on it.

And right now I don't see, because of this balance sheet, us missing any of those opportunities. So as the global economies continue to improve, I think we are so well positioned to see those opportunities.

Last question and this is the one I usually ask. You said that you see new supply coming on in the electrode business. Where is it coming from and what makes you think it is either a threat or something that will be brought on rationally?

Well, I see the Indian producers have announced a bit of capacity. I think none of it is -- when you look at the big picture in EAF growth I don't think any of it is really material to the medium-term, long-term. But there has been a little capacity announced, I think it was around 6,000 metric tons by one of the Indian producers, I think he got that going in Q1. But other than that, I don't see in high quality electrodes, a lot of major new capacity coming on market, versus what I see coming in EAF growth, whether it is new starts or higher operating rates as we move forward the next couple of years and the global economy improves.

Thanks very much.

Thanks, Brett, have a good day.

And your next question comes from the line of Ian Zaffino with Oppenheimer.

Hi, guys. This is Brian sitting in for Ian.

Hey, Brian, how are you doing?

Good, good. Now you said you were operating at a 40% rate. Was that in the fourth quarter or the average for the year?

Brian, 40% was our average for the year. Our team, as you know, has reacted very, very quickly and brought down the rate. In Q4, we were around 50%, 51% operating rate.

Okay. And how about now, I mean it's February, where are we at?

That is not a point of guidance that we give so I have got to point you to our operating income guidance that's in our release and all of that's embedded in that guidance we've given.

Okay. And as far as your appetite for acquisitions, and talked about potentially levering up $300 million, what about the possibility of alternately taking Seadrift, the majority out there and wholly owning it. Wouldn't you want to keep your balance sheet available for that?

You are spot on. Those are the types of external growth opportunities that may be out there that we do want to keep our balance sheet very strong and open and ready for.

So I would not want us to be, let's say, levered up and then have an opportunity like the one you mentioned, or another come and we can't seize it. So right now I am very pleased where we sit with cash on the balance sheet and virtually no debt.

And if an opportunity like that came to the market I want us at the table and ready and prepared to execute if the pricing and the overall offer was to our liking.

All right. Well, thanks a a lot.

Thanks, Brian, have a good day.

You too.

And your next question comes from Chuck Murphy with Sidoti.

Good morning, guys.

Good morning, Chuck, how are you today?

Doing all right, thank you. Just a few questions for you. First, what would you say was your average customer's capacity utilization rate at the end of the fourth quarter and what would you expect it to be by the end of 2010?

I think a lot of them, over the course of -- and I'm saying Mr. Average customer. Over the course of the year, they steadily increased. And in Q4 many of them got in kind of the 65% to 70% operating rate. So very nice improvement versus where they were earlier in the year.

So I have seen nice, steady improvement and Mr. Average customer would be close to about a 70% operating rate.

Got you. And what would you expect them to potentially get up to throughout 2010?

I hate to mention a number for them, but if I added them all up I would see that most of them are cautiously optimistic. They don't have a good line of sight like we don't, so they don't have a long order book.

But I think they're optimistic and I think Mr. Average EAF customer would expect over the course of the year to see that operating rate come up. And maybe with the second half being better than his first half in operating rate.

Got you. Okay. And second question was, given that electrode pricing has been a little bit light lately, what are the chances that you might get some relief on the needle coke pricing?

Well, I think there are a couple of things at play here. Obviously, because orders are being booked short like they are in the steel business there is opportunities to look at graphite electrode price increases over the course of a period because the book is open, so that is a factor.

I think in needle coke, depending on operating rates, that price may move around. Now as we've said, we have already fixed a majority of our coke. But if operating rates continue to -- let's say, remain horizontal, I don't know. There may be some opportunities there. Remember, needle coke moves often with the price of oil, it is a byproduct of oil.

And oil has kind of drifted up to the high 70s, $80-type range. The other factor you have to look at, Chuck, is, well, gee, where is the oil market, what does that look like? Right now I'm please we've got it locked in. Gives us nice cost stability, lets us work on the internal things we can control in productivity improvements, quality improvements, et cetera.

Got you. Okay. And, again, kind of with electrode pricing being so-so at least, you're saying that the first quarter should be your weakest. If electrode pricing is still on the light side and volumes aren't changing that much, how will we see the improvement in the bottom line throughout the year? Is it that volumes may be a little bit better than expected or Engineered Solutions?

Here is what we expect, Chuck. As you articulated, we expect Q1 to be our weakest quarter of the year. We expect over the course of the year our EAF customer base to continue to operate at a higher and higher operating rate.

So I think there is some volume opportunities over the course of the year as their business improves. And then, ES, I would expect ES second half to be better than the first half. ES in Q4, as you saw, started to gain a bit of traction.

And ES-type businesses usually lag steel a little bit. So usually you see steel start to improve before ES, so I would expect the second half to be better than the first half. So when you add all that up for us that's why I think our second half will be better than our first half and why I believe Q1 will be our weakest quarter of the year.

Got you. Okay, thanks a lot.

Thank you, Chuck, have a good day.

You too.

And your next question comes from the line of Yvonne Varano with Jefferies & Company.

Thanks.

Good morning, Yvonne, how are you today?

Good, how are you?

Great, thank you. I just wanted to clarify on the needle coke, I know you said you didn't buy very much, most of it was at the end of the year. Did we see any of that cost going in, in 4Q, maybe in the last month? No, Yvonne. The way you should look at this is that was bought at the end of the year and that really impacts Q1 this year and that Q4 really not much impact at all. I think that is the right way to look at it.

Okay. And can you give us any idea of where you saw pricing or volumes relative to 3Q in 4Q?

I can't really speak to Q1 this year, it is still in process, as you know. And any of our assumptions in price or operating rate are embedded in our operating income guidance for the quarter, that $30 million to $34 million. So after we get --

Can you tell us where it looked in 4Q relative to 3Q?

Yes. In operating rate, Q3 was kind of like a 40% operating rate, and then we came up in Q4 to about a 50%, 51% operating rate. So she started to pick up in Q4, a function of the destocking starting to be behind us in many customer locations. And some improvement in the economies.

And I think Q1, most of the data points for our customer, although fragile, and you've listened, I'm sure, to most of their calls, is starting to improve. It is a slow improvement, but definitely it looks like the worst is behind us back in 2009.

Great. And then, just on the needle coke, your recent comment seemed to indicate that you have locked in a certain amount of volume and you might need to adjust that. Can you tell us how much is locked in?

Yes, we've locked in probably 70% or so has been locked in. We fixed the price. So it gives us a target and we know where we need to be on cost, where we need to be on productivity improvements, where we need to be on graphite electrode pricing. The balance is open and that gets negotiated over the next few months.

And so needle coke, I don't have many concerns on needle coke. I see that as pretty much well in hand for us and within what we were expecting. I don't see any surprises there.

Okay. So your needle coke that you have locked in is your entire amount for the whole year if needed?

It is about 70% of our requirement would be locked in. And about 30% --

And the 70% requirement at what kind of utilization rate?

Well, again, that is not an annual guidance item that we can give at this stage. I am going to have to keep us at quarter-to-quarter just because our customers have limited sight and they are booking quarter-to-quarter.

So we're going to have to let the year play out on that. But I think you're take away should be from our vantage point on the cost side, the needle coke, 70% of it we've locked in. Part of ours is take some of that risk off the table. You have seen oil price jump all over the place here.

And so I think the take away should be that needle coke cost we have in hand. The vast majority of that has already been booked and I don't see that as a material issue for us here in 2010.

Great, and how will Seadrift play in it all to your needs in 2010?

Well, Seadrift will, I think, continue to improve in 2010 as the global economies improve. And -- but for planning purposes, we own 18.9%. I would not put into your 2010 plans any material contribution at this stage. I think that is premature also.

I would expect them to have a better year in 2010 as -- if the economies continue to improve. But I think for planning purposes from your vantage point I would really keep that to a very limited contribution to our numbers. And let's let that play out. Let's let that be something extra as that materializes.

Great, we look forward to that. Thanks very much.

Yvonne, thank you very much.

Your next question comes from the line of Eric Glover with Canaccord Adams.

Hi, good morning.

Good morning, Eric, how are you today?

Fine, thanks. Just wondering if you could talk a little more specifically about your CapEx plans for 2010? I think the number you gave was $70 million --

Yes.

Compared to expected depreciation of about half that. So I'm sort of wondering exactly where is this money being spent?

Well, there is a number of buckets. On the CapEx side, as you said, we're bringing her back up to the 2008. Obviously, we have the balance sheet and wherewithal to do that. There is going to be continued focus on incremental high ROIC internal projects.

We continue to ferret out a number of those with our lean initiatives and they're in the area of productivity improvements and cost reductions. I think some other areas might be even in, as we develop some of the R&D new products there is an opportunity to make some capital expenditures to prepare for some new product launches, especially in the area of ES.

So I think you'll see some of this capital and a good portion of the increase go into some ES opportunities we have where they participate, for instance, in the solar industry that has started to pick back up quite nicely.

Okay, thanks very much.

Thank you, sir. Eric, have a good day.

And your next question comes from the line of Charles Bradford with Affiliated Research.

Good morning.

Good morning, Chuck. How are you today?

Very good, thank you. In January, world steel production was up 25.5%. With China pulling down the average and they're obviously light on electrodes, this, I would presume, should set up for a pretty strong recovery, especially since your customer base is very seasonal and much stronger in the second quarter than the first. Are you seeing those kind of numbers?

Chuck, things are improving. And as we talked earlier about kind of give the picture of the average EAF customer. So things are improving. Line of sight is limited. So most of our customers, I think they are cautiously optimistic.

I think most of our customers believe the worst is behind them. And, let's face it, the BRIC countries are doing well in a number of areas. And then even the developed economies, U.S. starting to pick up as you articulate. Europe is starting to come back in some sectors. So things are improving.

But it is relatively slow and I got to say it is cautious. So our customers have booked by quarter. So that is kind of our line of sight. But we all watch the same numbers you're looking at and I'm encouraged by that. But it is still early in the year, I think.

I think we need to get Q1 and deeper into the year and get more data points and more continuously positive data points, and then 2010 could shake up to be a pretty decent year, I think, on EAF steel, but it is early for that.

Your customers are buying scrap to beat the band for second quarter delivery.

Yes, so many of them are starting to feel better. If I kind of gauge, a customer visit 30 days ago was more somber than a customer visit last week, this week. So they're starting to feel better in a number of geographies.

Some product segments -- that non-residential construction, of course, is still in very, very tough shape. But some product segments are starting to come along nicely. So a number of customers are encouraged. But here we are very early in the year.

Have you restored the management pay scales?

What we did is -- the officers all gave 10% last year. The next level of management gave 8%, and then the next level gave 6%. And then we set up kind of a unique situation where if certain targets were achieved and these were stretch targets then we would pay back the reduced salaries for everyone except the officers. And the officers' 10% that was cut would go into the pool for the global team.

And last year our team exceeded those targets. So all of the team got back their salary reduction except the officers. The officers' 10% was put in the pool and paid out pro rata to all the other global team members. So that program went very, very well for us.

This year we have restored everyone's salary back to the old level, but we have had no salary increase. So no salary increase last year. So far this year no salary increase. We will revisit that kind of the middle of this year as we look at the economies.

So the increase in overhead takes into account that restoration?

Yes, sir, that is correct.

Okay, and one other item on the CapEx, can you identify for us what you will spend money on other than maintenance?

Well, there is a number, I won't get into specific new product development launches. But we have a number of product opportunities in Engineered Solutions and capital money is being spent there. R&D money was spent over the last couple of years there and now some of those projects are at a stage where we're ready to scale up.

So some of those are in ES, some nice, I think, good, good growth opportunities for us. Some are in electrodes. We continue to find great lean opportunities to improve our productivity, reduce cost and we continue to generate some very nice high ROIC internal projects in Industrial Materials. And so some of the capital is going in there.

And you've seen some of that over the last couple of years as we continue to do well and challenge ourselves on the cost front.

Thank you very much.

Thanks, Chuck, have a great day.

And your next question comes from the line of Mark Parr with KeyBanc Capital Markets.

Hey, thanks very much. Can you hear me okay, Craig?

Morning, Mark. Comes through loud and clear. Thanks.

Okay, terrific. I had just a couple of kind of follow-up questions. I guess pricing continues to be, I think, a major concern for a lot of people. And I know that Yvonne had asked you kind of specifically if you would be willing to talk about the momentum and pricing in the fourth quarter.

So kind of looking backwards is that something you have a sense you might be willing to do at some point is to give us some sort of historical pricing momentum as these quarters unfold?

Well, let's let the year play out and we'll take that into consideration. I understand everybody's strong interest in that area. And, of course, from our vantage point we still have another six weeks or so to go in the quarter. Customers are booking on a very short basis, but we'll take that under consideration.

And as I said earlier, as everyone, I think, is aware, pricing has come in below our targeted level, so that is a very, very fair point there. And we have got to kind of let the quarter come together and on our next call when we go through Q1, we'll take a look at the bookings in Q2, and if we start to get comfortable with line of sight in the overall economies, maybe we'll give some color there or maybe even some broader guidance for the year.

Once we get line of sight beyond a quarter, like we've done sometimes in the past, we'll articulate a year number.

All right, no, I think that to the extent you feel comfortable with that and it doesn't get in the way of your competitive situation or in the way of your ongoing marketing efforts I think that would be really helpful. I had one other question related to the CapEx. And I know you have got some new product development and you have maintenance.

Can you articulate the approximate level of CapEx just in total dollars in 2009 and 2010 combined that are directly related to productivity initiatives and not new product or not maintenance?

Well, I don't know that we'll give the guidance and that breakdown that detailed, but I think a way the look at the total CapEx is to think about $35 million to $40 million is kind of the maintenance capital. And then everything beyond that is productivity improvements, new products that are starting to scale up and we might be taking into a larger production arena, adding new equipment.

So we'll look at the buckets that way. So take $35 million to $40 million off our number. That is kind of our maintenance number to keep our facilities running well and productive. And everything beyond that is very beneficial projects to growth and to productivity/cost improvements.

Okay. All right. And when you talk about a high return productivity project does that mean, are you looking at a 30% return or are you looking at 50% return? How do you -- I mean how do you define high return projects? I mean can you throw a number on that for us?

Sure, 20%-plus.

Okay. Terrific. I had one last question here and now I can't remember what it is. Anyway, I'll -- we're going the talk, I'll get you off line.

No problem.

But anyway, congratulations on the quarter, we'll look forward to some further commentary on the pricing side as the year unfolds, hopefully.

Thank you, sir. Have a good day.

And your next question comes from the line of Sayan Ghosh from Citadel Investment Group.

Hey, guys, I clearly pressed star one a little late, so most of my questions have been answered. But can you just help us understand and provide a little more color on why you think that you are seeing some weakness at the margin and pricing here given that directionally most other variables in the entire ferrous supply chain are looking up?

And you guys did pretty well on pricing in a tough year last year. Can you just help us understand what has really changed in the last couple of months?

Well, what we're not seeing is we're not getting our targeted pricing. And I think like anything the price is decided in the marketplace. And there are so many variables to price. I don't know that I can really isolate one or two that I would say are the major item, but price is coming in below our targeted level.

We'll have to finish up Q1, and then I think we'll have a little look back there see where it has come. But what we have embedded, say, in our guidance, that $30 million to $34 million has our price assumption in there. What is in the book, 90% or more, is booked already and what we see kind of in the marketplace.

All right, thanks.

Thank you, sir.

And your next question comes from the line of Ray Rund with Shaker Investments.

Good morning, Ray, how are you today?

Fine, thank you. And thank you for taking my question. I really have two questions. The first one has to do with, how do you see yourselves in relationship to competition versus your needle coke costs? I'm just wondering whether your costs are higher or ower or about on par with and if there is any reason to believe that your competitors who are supplying electrodes have any sort of a cost advantage over you?

Ray, we're one of the largest buyers of needle coke. So I would say because of our large buy we have some leverage as a result of that. And that allows us to get the normal large volume price leverage and a better price than someone that buys much less than we do. Or someone that goes in for spot, it's not much different than what you see in the steel industry.

So that says -- as I believe. So I mean in terms of the pricing leverage that you have on your electrodes that you're selling it would seem like it would be difficult for others to undercut you. I mean you should be able to match the prices that others are offering. And, in fact, you might actually have a better cost position than they do.

Yes, well, price -- the marketplace determines, of course, Ray, as you know. Cost, that is our job. And when we attack that on every front, one, is leveraging our large buy for all of our raw materials. And another one, of course, is inside the gates of our facilities and with our team. And so -- the cost -- I think our team has done a good job so far.

And I think there are many more opportunities in 2010. I think we used 2009, which was brutal environment, and got the plants down, as we said, an average operating rate of 40% over the course of the year. We used that time and the balance sheet and the cash we have to work very well in productivity improvements and cost reductions and add to the team.

So on the cost side, coke is one of those items, leverage our large buy, try to get the best coke price. Price is set -- it is a global market, it's a huge market, it's very competitive. There is a lot of producers and so there are many variables that set that.

Okay. The second question I had, had to do with the guidance you gave on your operating expenses. The increases that you are guiding to are fairly significant.

And I guess my question is, is this as a result of restoring salaries? Or is this resulting from restoring salaries plus doing some investing in R&D and marketing and sales to kind of expand your coverage and give you perhaps more coverage and perhaps better coverage in places where you didn't have it before?

Right. Ray, it is not as a result of restoring salaries. Recall, we set up kind of a unique program where the team could get their salary reduction back if they hit some stretch targets.

Right. And I heard your explanation of that, I just wasn't sure if I understood it properly. And what you're saying is, the way I understood it, was the proper way. So --

Yes, sir, we paid that out at the end of the year. So that was in the 2009 numbers. And so 2009 has those numbers in the overhead because they earn back, and then some. Because they blew right through the stretch target. And we ended up with no debt, et cetera, et cetera. So that is not the case.

It is the latter you mentioned. So it is R&D, investing in R&D, adding new scientists, expanding our coverage model. We have added some sales team members to our Asian team. And it is in those areas.

So it is growth areas, productivity improvement, servicing customers better, adding to customer tech service team. So the increase you see is all in lining up to propel growth, better serve our customers, have a better global footprint. As these economies improve I want us positioned to seize the opportunities out there and take better care of our customers than anyone.

I see. I guess it would be reasonable then to expect that if for any reason the productivity and sales improvements that you're expecting to come from this does not develop then you have the ability to cut some of these expenses or not incur them?

We always have that ability where we are very nimble, let me say that. You see our track record. But let me also say this, from what I see coming over the next few years in electric arc furnace growth and in EAF opportunities, I don't see that as being a scenario. I see steady, albeit slowly, global improvement in the economies. Gaining traction, second half of this year better. I see 2011, all things being equal, being better than 2010.

And then I see a number of emerging areas, solar just to mention one, that is on a very nice growth path. Double digit. So I think for us, I want to make sure we're not left short-changed as those markets grow. So you got solar growing all double-digit, it's coming back very nicely. 2010 was kind of a slow year for that sector.

But it is coming back very nicely. So I need team members in the field. I need the right scientists, the right new products to seize those. So that is always a possibility what you mentioned, what if it all slows down.

But I tell you right now I don't see that. I don't see that in solar, I don't see it in ES. All I see is it's going to be a slower, steady, we should be prudent. But as I look medium term, two to three years, I see good growth across that platform.

Okay, thank you very much.

Thank you, sir. Ray, have a good day.

And your next question comes from the line of Tim Hayes with Davenport.

Hey, good morning.

Good morning, Tim. How are you today?

Fine, thank you. A few questions. In terms of the destocking, the supply chain is very tight at this point, is there any geographies where you're actually starting to see a hint of restocking?

Well, I think Tim in many sectors in Q1 people are burning new electrodes, so these are newly purchased electrodes, these are not, let's call it, old inventory that was in a big pile.

So I think as we start this year, many people have had to buy new electrodes. So if you look at our first quarter, virtually, we talked earlier about, tell me about the average EAF customer. The average EAF customer is burning new electrodes. So these are newly acquired electrodes. They probably bought them in Q4 or early Q1 and he is burning those because destocking is behind him.

Right, okay. And then -- specifically to Q4, you had sales year-over-year were down. And this is in the IM segment, sales down year-over-year by $52 million. Of that amount, how much was attributable just to the volume line? Do you have that handy?

Well, the Engineered Solutions business is a little bit different. It is not really a volume. There are so many different products, size and shape. It is not like IM.

Actually, my question was just to the IM segment.

I beg your pardon. On the volume side I think you're going to have the wait for the K to come out. And within the K we give color around that. So big picture, volume down dramatically in 2009.

And most of it attributed to two items, of course, big destocking, everybody had too many electrodes. Our customers not only had too many electrodes, too many of all their raw materials. So they stopped buying, and then when they did start buying at a much lower operating rate and a lower level. So significant reduction in volume 2009 versus 2008.

2010, volume is starting to come back up as customers reorder new electrodes, newly produced electrodes and start to burn those on their furnaces.

Sure, sure. And I'm just trying to get a little bit more detail on the impacts within the Q4 there. The capital expenditures for the quarter, you mentioned averaged 51% for Q4, where did it end the quarter at?

Operating rate was 51% in Q4.

That's an average for the quarter. I'm presuming that was trending higher during the quarter?

Yes, so the year average was 40% operating rate for graphite electrodes. Q4 was the highest quarter and it was about 51%. So, yes, Q4 was trending up. As things improved and as customers had finished their destocking and had to order new electrodes.

All right, and then final question on Seadrift, just to help reconcile pre-tax and after tax numbers, there was a -- well, you showed a pre-tax, a loss of $1.1 million. But after tax was $6 million? I was kind of curious what is happening there?

Yes, this is Mark, Tim. There was some movement in the quarter that created a little bit of confusion on the Seadrift losses that we recognized in our results in the quarter. We had some inter-Company loans which we were able to collapse as a result of paying down the senior notes.

And that had some residual effect on how we were showing the income tax effected impact of Seadrift. So the better way to think of it is about $5 million of that probably should be reclassified down into the other line. And only about $1 million of the operational results for Seadrift would have been an adverse effect on our results during the quarter.

So we should have only added back $1 million for Seadrift and the balance that would have been related to the inter-Company loan collapse which we probably should have called out in a separate line.

Okay, and that is separate from the remeasurement issue that you mentioned?

Yes, it should have probably been included in that line versus included in the Seadrift line.

Got it. Okay, that is all of my questions, thank you.

Thank you, Tim, have a good day.

And your next question comes from the line of Phil Gibbs with KeyBanc Capital.

Guys, I appreciate it. I think all of my questions have been answered. I appreciate it.

Thanks, Phil. Have a good day.

And your next question comes from Tim Rothery with Goldman Sachs.

Good afternoon, gentlemen, it is Tim Rothery here from Goldman Sachs.

Good morning, Tim. How are you today?

I'm very well, thank you. Firstly, on raw materials could you just remind me what share of revenues within Industrial Materials needle coke is, just back of the envelope would suggest that with the 45% increase this is going the hit you by about $20 million in the first quarter. Is that the right sort of magnitude?

Yes, the coke cost that we will be seeing throughout 2010 is up about 45% to 50%, and that goes into our graphite electrode business, as you know, of course. That we will feel, as we said earlier in the call, throughout the year.

And last year, as we said, we used virtually all 2008 purchased coke. So lower cost coke. So we'll start seeing that in Q1. It is in our guidance and so it has been factored in there.

Okay. And -- you have not commented on the sort of magnitude --

Yes, that is correct.

I know you said it's in the guidance --

Yes, that's correct. That is a color we just don't give. I think we got to let the quarter play out. And any of our assumptions are built into that operating income guidance.

Okay. And then sorry to labor a point here with regards to pricing. You mentioned repeatedly that price is below your targeted level.

I was just wondering if you could confirm that sequentially pricing is down in the first quarter versus the fourth quarter in terms of what you're transacting at, and in particular, given that inventory in the chain is down, demand is up.

Again, just sort of just scratching my head here a little bit as to what is driving the softness in prices versus what looked like much worse demand conditions earlier in the year?

Tim, I appreciate the question, but we're still finishing up the Q1 book. Some of it is not all booked. So I think it is premature to really comment on Q1 pricing or what it looked like versus Q4. And, again, I just have to point you to our guidance there on operating income. So what is in the book and our expectation for the balance to come into the book for Q1 is in that operating income guidance.

Okay. Sorry to just labor this but when you talked about your targeted pricing for the first quarter, was your targeted pricing up?

Well, when we say targeted we came out with an effort to get prices up. And we last announced a price increase back in Q3 2009, and our announced increase was $77.95. And we're not getting that, that is when we say we're not getting our targeted pricing Q1 and what is in the book and what we estimate yet is to come is factored in that guidance we gave for operating income.

Okay, thank you very much.

Thank you, sir. Tim, have a good day.

And your next question comes from the line of Marty Pollack with NWQ.

Yes, I just, kind of looking at the whole commentary about pricing, if one just steps away and sort of looks at what is going on in the steel markets, we know cost push pressures are essentially creating an environment right now where prices are going up for just about most products, certainly in the flat roll side, maybe on the long side it is a little bit more questionable.

But I wanted to get, when we we talk about cost push pressures on new customers we're raising prices and then you have your cost push pressure from needle coke, is there any reason why we should not assume that assuming prices continue to trend up, maybe hot roll prices hitting 700 or some number like that, is there any reason why there is not going to be an ability for you to price with that? I'm just sort of in a sense looking at the overall dynamic of your customers as well as yourself.

Marty, let me frame it this way. Because the customers are booking quarter-to-quarter, obviously, much of the year's book is open. So given that, there is an opportunity for price, absolutely, so, yes, absolutely.

An annual contract, no, it's fixed. So there's that opportunity. Whether that materializes or where they run or whether that can be achieved we have got to let that play out. It is way too early to really comment with any kind of specifics on that.

So in theory there should be some ability for everyone in that supply chain to essentially respond to the cost pressures. You, of course, have already built them in. You have got them built in, already in 2010. But presumably this could help you in those quarterly pricing mechanisms to just essentially capture that cost, I mean, again, one would think that that should be an opportunity.

Marty, again, just too early to tell.

Okay.

We've got six weeks to go in the quarter and it is just premature to tell how that will play out. Many, many variables there come to play.

What I can say is because the book is going quarter-to-quarter right now per the customer's requirements, there is that opportunity. But we have got to let it play out.

All right, thank you.

Thank you sir.

Your next question comes from Mark Parr with KeyBanc Capital Markets.

Thanks very much. This is just a follow-up on the cost side. Do you have any guidance you can share with us as far as electricity costs in 2010 versus 2009?

Not specific ones, but as far as the total picture, in the past we've given some pie charts of the breakdown of our key raw materials, Mark. I don't see any material change in the shift between the components of cost.

Okay, all right, thanks very much.

Thank you, sir.

And your next question comes from Luke Folta with Longbow Research.

Thanks a lot for the color on this call, guys. Just one quick follow-up. If someone wanted to buy an electrode from you today on a three-month contract would they have to pay more or less than if they wanted to buy on a full-year basis?

Gee, that is a tough one. Pretty much today the prices that we have been asked to give are -- give me your price on bidding Q1. We have had very little activity on the full year.

And for us, we haven't given a pricing benefit. Oh, if you book for the whole year you get a better price. That has not been our tactic. We have been, here is our price, do you want it?

And the requirement has always been give me your three-month price. So that is the environment we are in, Luke, and we wouldn't give a discount for an annual price.

All right, great. Thanks a lot.

Thank you, sir.

And there are no questions in queue at this time.

Thank you very much for joining, and look forward to talking to you in our Q2 when we articulate Q1 results. Thank you very much for your support, have a good day.

And this concludes today's conference. You may now disconnect.