GrafTech International Ltd (EAF) 2010 Q1 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 First Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS) Miss Kelly Taylor, you may begin your conference.

Thank you, Brandy. Good morning, and welcome to GrafTech International's First Quarter 2010 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'd like to turn the call over to Craig.

Thank you, Kelly. Good morning, everyone, and thank you for joining GrafTech's call today. Today we'll take you through the highlights of our announced acquisition of Seadrift and C/G and then review Q1 results. We are very pleased to announce the acquisition of both Seadrift and C/G today, subject to regular regulatory approvals.

GrafTech will become 100% owner of Seadrift -- and as you are aware, we already own 18.9% -- and 100% of C/G for a purchase price of $692 million. The transaction is structured such that the current C/G and Seadrift owners, excluding GrafTech's interest, will receive 24 million shares of GrafTech common stock, $232 million in cash, and a face value $200 million noninterest-bearing five-year senior subordinated note which, since they are interest-free, have a discounted value of $136 million.

We expect the transaction to be accretive to earnings with synergies in the first full year following closing prior to purchase price accounting adjustments, and expect the acquisitions to close independently after customary regulatory clearances. These acquisitions are anticipated to generate operational synergies of approximately $8 million per year, primarily related to savings associated with manufacturing, transportation, and overhead efficiencies.

By leveraging the tax efficiencies inherent in our business model and effectively using our tax attributes, we anticipate that we will realize favorable tax benefits of about $8 million annually. In addition, we expect to generate working capital improvements of approximately $10 million. These acquisitions underscore our belief in the strong graphite electrode industry fundamentals.

The acquisition of Seadrift secures a large portion of our key raw material, needle coke, which strategically positions GrafTech to participate in a broader graphite electrode value chain and better serve our global steel customers. You will recall that needle coke represents 40 to 45% of the total cost to manufacture a graphite electrode.

Seadrift is an asset we've become familiar with over the past two years through our minority interest. Seadrift is the world's second largest manufacturer of petroleum-based needle coke, located in Seadrift, Texas. Very well positioned to serve our global electrode platform, including our largest facility, in Monterey, Mexico, that is less than 300 miles away. The Seadrift plant was built in 1983 and has a current capacity to produce 160,000 metric tons of needle coke annually and has approximately 140 team members.

Seadrift shipped 148,000 metric tons of needle coke in '08 and reported revenues of $330 million and adjusted EBITDA of $65 million. In 2009, shipments declined dramatically, in light of the global economic crisis, to 39,000 metric tons, resulting in a revenue of $74 million and adjusted EBITDA of $16 million.

Ensuring long-term ample supply of our most critical raw material, petroleum needle coke, has been an objective of ours that began with the acquisition of our minority interest in Seadrift almost two years ago. Obtaining the remaining ownership of Seadrift represents a major step forward towards achieving this goal. On completion of the Seadrift acquisition, we are confident that our collective teams of scientists and engineers working together will propel the Seadrift operation into one of the most efficient and highest-quality needle coke production facilities in the world.

C/G is in St. Mary's, Pennsylvania, and is an excellent graphic electrode facility. It has approximately 150 team members and has current capacity to produce over 27,000 tons of electrodes annually. C/G sold approximately 26,000 metric tons of electrodes in '08, resulting in revenues of $143 million and EBITDA of $43 million. In '09, revenues were $76 million and EBITDA was $29 million due to depressed shipment volumes of only 10,000 metric tons.

The eventual joining of C/G and GrafTech will provide our respective customers with several benefits, especially in the area of quality, service, and innovation. The combination of our technologies, processing know-how, and production capabilities will allow us to achieve several cost, quality, and lead time improvements.

Assuming global economies continue their steady recovery, we would expect both businesses to contribute EBITDA, after synergies, in the range of $90 million to $110 million 2011.

We are looking forward to welcoming the excellent Seadrift and C/G team members to team GrafTech. Nathan Milikowsky, majority owner of both Seadrift and C/G, will be named to GrafTech's Board of Directors. Mr. Milikowsky, who received a bachelor's degree from Yale University, is a very experienced steel industry executive who brings very valuable business experience to our board.

Now turning to Q1 results -- net sales were $216 million, a 61% improvement over prior year. Gross profit more than doubled, to $68 million. Operating income improved over five times, to $43 million. Net income was $30 million, or $0.25 per share, excluding the $4 million benefit of currency gains on the remeasurement of intercompany loans. This compares to net income of $3 million, or $0.03 per share, on the same basis in Q1 '09.

In our Industrial Materials segment, sales increased to $182 million in the fourth quarter -- I'm sorry, in the first quarter -- a 73% increase, as a result of higher graphite electrode sales volume. Operating income for the segment was $42 million, as compared to $7 million in the first quarter. We experienced improving electrode sales volumes as our steel customers steadily increased their operating rates throughout the first quarter. This has allowed us to benefit from significant operating leverage in the quarter.

In our Engineered Solutions segment, sales were $33 million in the first quarter, an increase of $3 million versus Q1 '09. Operating income was $1 million, as compared to $2 million in the first quarter last year. The year-over-year decline was primarily the result of unfavorable product mix.

Regarding our recent refinancing, the improvements made to the balance sheet and subsequent recognition by the rating agencies enabled a very successful refinancing in a still weak credit environment. Our revolving credit facility was oversubscribed substantially and closed in three weeks. The new $260 million revolver represents a $45 million increase over the prior credit agreement and extends the maturity date to April 29, 2013. Securing this new credit agreement is a key component of supporting and propelling growth. Our bank group tailored the credit agreement to support the aforementioned acquisitions.

Turning to outlook -- based on the International Monetary Fund projections and other economic forecasts, the global recession has eased in most regions and recovery is underway in advanced and emerging economies, although to varying degrees. The recovery is expected to continue; however, obviously, numerous risks remain to global economic stability as we go forward.

Steel producers have raised operating rates to respond to current market demand and have begun to extend their electrode buying patterns throughout the balance of the year. First quarter results came in stronger than expected as a result of improved global steel demand, which necessitated higher operating rates at our graphite electrode facilities versus what we had initially anticipated.

Excluding the impact of first quarter foreign currency gains on the remeasurement of intercompany loans, we expect Q2 results to be slightly better than Q1 as improving graphite electrode volumes are offset in part by lower graphite electrode prices and, of course, rising material costs, especially needle coke.

The third quarter, which historically has been a weaker quarter, is expected to be lower than the second quarter as graphite electrode volumes decline in response to weaker demand associated with the very normal European holiday season. As a result, we expect operating income to be lower in the third quarter as compared to Q2, with demand anticipated to return in the fourth quarter.

Our Engineered Solutions segment historically entered a recession three to six months later than our Industrial Materials segment and likewise historically has exited later. Therefore, we expect increasing traction in this business in the second half of 2010.

In conclusion, we expect full-year operating income of $170 million to $180 million and operating cash flow of $100 million to $110 million.

Brandy, that concludes our formal remarks; let's open it up for questions.

(OPERATOR INSTRUCTIONS) Luke Folta, Longbow Research.

Good morning, guys.

Morning, Luke. How are you today?

Good. Congratulations on the excellent results getting this deal done. It's great news.

Thank you, sir. We are obviously delighted.

I've got a bunch of questions. I'll ask a few and then maybe I'll get back in. The first one was just related to your sourcing strategy, kind of short term and long term. How much of the needle coke are you expecting to source now from Seadrift, both in the coming 12 months and then a few years out?

Well obviously, Luke, we have to wait for full regulatory approval and time will tell when that is. We kind of think that could be over the next two to three months. Perhaps Seadrift will go quicker; that could be one or two months. And C/G may be a bit longer; that could be three to six months or so.

So I can't give you an exact number there, so let's step back from it and look big picture. I would expect, once we really get into operations, we would take about 100,000 tons or so from the Seadrift coker, leaving 50,000 or 60,000 that we would sell on the open market. Part of our business strategy is not to source all of our requirements from Seadrift, but to diversity our sourcing.

And we anticipate to be large buyers from the other current coke producers. In the case of Conoco, I think we will continue to be a very large buyer, and maybe one of their largest customers. And then for the other producers, I expect we'll continue to buy significant quantities. It's a matter, Luke, of diversification of supply. So think of perhaps 100,000 metric tons out of Seadrift, the balance of our needs from other cokers, and then the remaining available capacity in Seadrift -- 50,000, 60,000 metric tons -- would go to market.

And is there any related CapEx that would be required to get the Seadrift coke up to a quality standard with you could use in your operations?

Well, we can use 100,000 today. So that can start today, pending all those other things we discussed. But can the quality of Seadrift get better? Yes. I think over time. We're inheriting two great teams here in Seadrift and C/G, and the Seadrift team is a very, very fine team. And I think the Seadrift team, together with our technology team and our large Parma research institute here, I think over time we're going to improve the quality of that coke significantly. I think also operationally, together we can improve the efficiencies there. So I think quality's going to come up over time -- the first 100,000 we can use now. And then efficiencies, I think-- we've got two great teams and they're going to get very efficient there.

If I can ask one more, just quick. Your current operations -- as far as your needle coke consumption costs in the first quarter -- did that reflect the full uptick in costs or was there still some benefit from lower-cost inventory that you had?

Luke, there was a little benefit from carry-over. I mean, the bins are never exactly empty on 12/31 so there is a bit of carry-over. And likewise on some of our other raw materials -- pitch and some of the other things that we put into electrodes -- there was a little bit of carry-over. So yes, there was some of that. So we had a little tailwind from some of that. But some time in the quarter, maybe some time in January, that pretty much ran out.

All right, guys, I'll get back in line; thanks.

Thank you, Sir.

Ian Zaffino, Oppenheimer.

Great; thank you very much.

Morning, Ian; how you doing?

Good, good. The question would be -- as far as the assumptions for guidance, what type of operating rates are you assuming? What are you assuming on the pricing side and where would any of the potential up side come from?

Okay, excellent question. On our op rates, just to give some background for some of the other listeners, as you recall from last year's conference calls, we ran an average rate of about 40% op level in our electrode business over the course of 2009. We exited Q4 at a rate about 51% operating rate, and then in Q1 this year, up to about 65%. So it's come up very nicely.

And it's in response to all of the moves you see on the steel side. The steel operating rates have come up very nicely. I think if we look at those, kind of the first part of last year global steel was down in the low 60s, and then over the course of the year started to get up into the 70s. And here more recently, March has been a tremendous month. Much of steel worldwide is in the high 70s to the low 80s. So steel's come up and in response to that, we've come up. And Q1 operating rate was over 65%.

On the pricing in the book, Luke, as I mentioned a bit in the script-- or, I'm sorry, Ian -- as I mentioned in the script, our customer base in the last two months I think feels much more confident about the year. I mean, I think everyone still sees a fragile recovery so they're cautiously optimistic. But we've seen a trend of customers the last six weeks, eight weeks, where they've come back in-- versus what they were doing months before, only booking a quarter. They've come in and said, "Hey, Craig, we want to book the rest of the year. Let's get our year done." And that's been kind of a trend. So right now the guidance we've given you -- our book's about 95% full on that guidance. So the book is together. Most of our costs are already fixed and locked in, like we'd like to do, very prudently. So we feel very good about the guidance.

On pricing, if I could give some color on graphite electrode pricing, as I said on earlier calls we haven't hit our target pricing so it's been softer. And kind of at the beginning of the book-building season it started out higher. And then there was some weakness and it trended down, but it's stabilized now. And when I say it trended down, it trended down single digit -- 5%, 6%, 7, 8% kind of trend there. But right now we see stabilization in the price and our book, Ian, is 95% full. We're done. We're done with the guidance we've given you.

Okay. Now, the other question would be if you're saying you're 95% done, I thought the intentions were -- really from way back when is to break away from the annual pricing. And that allows you targeting on a better pricing. Have we returned to annual pricing again?

Well remember, Ian, our customer base drives how long a contract they want. We don't tell them, they tell us. And so they started out this year, I think because of the global economy situation, a fragile recovery, and very little line of sight, they wanted quarterly. That's all they could see; that's all they wanted to buy.

I think what we've all seen in steel pick-up -- and it's really and it's fragile; I think our customer base would be the first one to tell you -- but the pick-up everyone's seeing has been encouraging. There's limited line of sight but I think most of the customer base has felt confident enough that on the electrode side, they've come to us, and I'm sure to the marketplace, and said, "Hey, I want to finish off my annual book." So they've driven it. They've come to us and, "Hey, Craig, we'd like to-- give us a price for the last two quarters of the year. We want to firm that up and take that off the table."

Now, I can refuse to participate in that but I won't get any business then. So our customer base drives that, Ian. And like I said, I think you add all that up, things started to stabilize in our marketplace. Pricing started to stabilize a bit. And we've put together, I think, a very nice book and we've gotten annual guidance there for everybody.

Okay. So if I can kind of summarize this -- of the guidance, 95% is booked. So any type of up side would come maybe towards the end of the year if utilization rates come up or pricing's better. Is that right?

Yes, up side would come this way. I mean, we're 95% booked per the guidance, right? Obviously, we have more capacity in our facilities. So if market demand picks up and things continue to move forward very nicely, or better than expected, we can get all of that up side. Absolutely. And we have great relationships with our customers. Like I said, they drive it. They come and ask for a six-month contract, we respond accordingly and give them great service. So I think we've got a great chance. If they need more, they're going to make the phone call.

Okay, great. Thank you very much.

Thank you, sir.

Michael Gambardella, JP Morgan.

Hey Craig, congratulations on the deals.

Thanks, Mike; much appreciated.

Got a question on the Seadrift material -- historically, how much of that material have you used in your own operations?

Historically we've not used a lot at all, Mike. And it's been our strategy-- and we've done a lot of trials. We've used it in trial quantities, truckloads. Some of our customers have run the material. So we've had a sliver of it in our production and out in furnaces. So we're very familiar with the material. It's a very good product; it makes an excellent electrode.

And our strategy was, until we get majority or 100% of it, we really didn't want to-- why put a lot of volume in there? I think all we would have done was improve the value of the asset before we bought it.

But you're very confident that you can use the material based on the trials that you've done?

Yes. Based on everything we've done, we feel very confident that in our current portfolio, we could use 100,000 metric tons of it. Yes.

Okay. And does C/G get all of their graphite electrodes from Seadrift?

The vast majority of the C/G coke comes from Seadrift -- yes.

Coke, I meant to say. And will that continue?

I would expect so. I think that plant will also have a diversification like we talked earlier. We will buy from other coke producers so there will be some diversification in the C/G plant portfolio. But the majority has been, and probably will be in the future, Seadrift coke.

Okay. And then, just a question in terms of your comments on the steel industry utilization rates -- in the US, as you know, there's a difference between the electric furnace guys who have flat rolled and then some of the also have long products. But the majority of the electrodes go into the long products area, where the utilization rates are very low compared to the utilization rates of the electric furnaces doing sheet.

That's right. We agree 100% and I see that in virtually customer. And those long products, and you and I know well, that's the structural steel, etc. The residential is still very, very tough shape; and the nonresidential, even tougher shape. So we have factored that into our outlook and the book we're talking about is from our global customer base in the book.

And the 95% book -- that's the $170 million to $180 million guidance for the year?

That is correct.

Okay, thanks a lot, Craig.

Thank you, sir. Have a great day.

Zahid Siddique, Gabelli.

Hi, good morning.

Hi Zahid -- how are you today?

Good. How are you? Congratulations.

Thank you, sir.

First question -- you have allocated 24 million shares towards the financing of the deal. Now that your price has come up, how does the various components of valuation or financing change? Are you going to use less cash now? If you could walk through that process.

Well, the price is done. So no, the consideration is 24 million shares. The cash is delineated in the press release and the senior unsecured five-year note that has no interest on it is all fixed. It does not change, sir.

So what is the price -- so you're using the roughly $13.50 a share?

Yes, yesterday's close.

So even though-- once you allocate 24 million shares, I guess the Seadrift and C/G would actually end up getting more than the total $692 million consideration because the prices have gone up. But it doesn't matter from your perspective?

Zahid, this is Mark Widmar. Yes, the way the deal was constructed -- again, it was determined the value of the shares at the time that we signed the agreement. The value of the shares was essentially $13.50, as we disclosed in the release, and that equated to 24 million shares of consideration, as Craig has identified. So there will not be any adjustment to the shares or the cash or the note consideration between now and the close date.

Okay, that's helpful. And now that you are going to use coke from Seadrift, who are you going to replace them with?

Well, it'll be spread around the other producers we've had over time. Obviously, we have many contracts in place with our current suppliers -- those will all be honored and we will continue to buy from all of our current suppliers. And then over time, that 100,000 tons of coke will be migrated to Seadrift. So some will come out of a number of suppliers, of the current suppliers, Zahid.

Okay. And last question, you said you will use 100,000 tons of Seadrift. What is your medium-term projection in terms of how much tonnage would you be using?

Well, we've got to let the regulatory approval finish. So I don't know when we actually get the assets into our portfolio. So that schedule -- let's wait until we clear regulatory approval and we actually own the assets and we join these two great teams.

Okay. Let me rephrase my question. I basically was asking, what's your basically longer-term, or medium- to longer-term, usage needs, in terms of the coke needle?

Well, a way to think about it, Zahid, it's one ton of coke for one ton of electrodes. And so we have a capability, before this acquisition, to do 220,000 metric tons of electrodes and of course, Seadrift, as we said, is 27,000. So we're looking at something like 250,000 tons of capability.

Okay, thank you so much.

Thank you, sir.

Mark Parr, KeyBanc Capital Markets.

Good morning.

Morning, Mark. How are you today?

Well, I have had worse days. I really enjoyed watching your stock go today.

Thank you, sir. Thanks for all your support. We've had a great time. And like I said, we're inheriting, together, two great teams. We're very, very excited about this.

I can certainly see why you would be excited. If Nathan's there, I can say congratulations to him, too.

But I wanted to ask about the potential-- looking a little bit beyond, we can see the situation as it right now. I believe, though, that there's infrastructure in St. Mary's, Pennsylvania, for more than 27,000 tons of electrodes. And I think-- at least, I had heard in the past that there might have been opportunity to do brownfield expansions at Seadrift. I was wondering if you could (a) talk about whether or not you've thought about that in your longer-term planning and, more importantly, what would the cost be to add brownfield capacity at Seadrift?

Excellent question, Mark. Let me take the Seadrift coker first, big picture. Let's start big picture and then maybe try to answer, to some extent, your question, some color. Obviously, it's very, very early in the process.

But if I look at the coker, and here we are back-integrated, very large graphite electrode producer, the coker does a few tremendous things for us. The first one is on our cost structure. Let's recall that this needle coke is 45% of the total cost to make a graphite electrode. It is by far the No. 1. After needle coke, you drop down to 9 or 10%, which is the labor. And obviously, we've built a very lean platform, very efficient, and a lot of our labor is located in very competitive, attractive regions. So No. 1, huge impact on our cost structure.

No. 2, just as important -- and maybe ultimately, when we look back years from this will be the most important -- is to enable growth. This ensures we've got the right supply of needle coke.

And then lastly, we talked a little bit about quality. Our two teams are going to, over time, improve the quality of that coke, which is going to mean so much to my customers. I see tremendous advances in quality and service that is really going to allow us to serve North American and global steel customers much better

Is that in terms of the pre-processing that you might do on the decant inputs?

It's across the whole supply chain. And I'll stay away from getting into the details because some of it's competitive intelligence. But let's think about it this way, Mark -- all of the other producers of needle coke are really refineries. And their No. 1 mission is to make unleaded gasoline, usually. And they get a byproduct -- by accident, in some cases -- of needle coke. And that's mission critical for the graphite electrode supply chain.

Seadrift is not connected to a refinery, which we like. It fits our model. It's a very flexible model. They ran, last year, below 25% op level, still made money and cash flow positive. So it's a very flexible supply chain. A refinery with a needle coker, it runs 24/7, good times, bad times, and there's needle coke coming all the time. They can't slow down; they can't shut down when it's 25% op level. So one is tremendous flexibility on the cost structure, which fits our model.

On quality, Seadrift is the only coker whose sole mission in life is to make great needle coke for graphite electrodes. It is not a by product. It is their mission. And combined with our technology center at Parma, which is one of the largest graphite material science technology centers in the world -- we have tremendous expertise on coke; tremendous. We've not made it before ourselves, but we have tremendous technology here, and information and know-how, on coke. So this will be the only coker, back-integrated, whose sole purpose is to make the highest-quality coke to make the best electrodes on the planet. Everybody else is making needle coke as a byproduct.

And big picture, it's cost structure, it's growth-enabled, and then it's that quality feature we just talked about. That's the big picture value.

As far as their capability, right now it's 160. I think if you look at the incremental steps, they could get to 200. And then ultimately I think they could get to 240. It's way premature to talk about that.

But if you look long term, what can that site do? What can the combined teams do? 160 to 200,000 metric tons to 240,000 metric tons I believe is within their grasp. There's a lot of room. Only half of the footprint down there is used so there's plenty of land that the company owns and there's two highly energized, motivated teams coming together.

What do you think -- do you have any sort of a ballpark in terms of what it costs to add a ton of needle coke capacity? What do you put those things in -- at 40-ton batteries, 40,000-ton batteries? Or how does it work?

That one, Mark, is premature so I'd hate to give some numbers. Obviously, there's been some costing-out of the increments we just talked about. But until we actually own it and we coalesce the two teams and really get them working on it, I think it's premature to talk about CapEx numbers and what not. It's a great facility, can make 160,000 metric tons and I think ultimately it could get to 240 with great teamwork.

Okay. How about on C/G? There's infrastructure there to do more than 30,000, isn't there?

Right now I think-- they've been doing about 27,000 and I think there's some things that the two teams together will work on. There's two technologies there. They've gone down a graphite electrode path on their own for decades; we've done the same. So ultimately what I want to do is combine these two great teams, coalesce them into one team, and get the best technology, process know-how, from both the teams.

And I think if we do that St. Mary's is going to produce outstanding electrodes. The connecting pins they make today, we will probably do that in one of our connecting pin centers. Today we make our connecting pins primarily in Monterey, Mexico, for a host of reasons -- technical reasons, etc., etc. So we would probably start using our pins in the electrodes from St. Mary's. That will immediately upgrade their performance, I believe.

Don't get me wrong -- C/G makes a great electrode. And I think that team, combined with our team and our joint technologies, they're going to make a better electrode and I think even the GrafTech portfolio, worldwide, will make a better electrode because of the addition of the St. Mary's team and what they bring to my global team.

All right. Great. Thanks again and congratulations on a great transaction.

Thank you, sir. Operator, any other questions?

Charles Bradford, Affiliated Research.

Good morning, Chuck.

Good morning, good morning. Good day.

Excellent day.

A question for you -- purchase accounting is always tricky. Obviously, you've got to write up the inventories to market. Any idea how long it would take you to work off whatever inventories you're buying so that we can get a more normal profitability out of this thing?

Chuck, this is Mark. On the purchase price accounting -- there's one, obviously, on the inventories that will have an adjustment, obviously. The other will be the other intangibles and other items that we'll have to evaluate as we do our purchase price accounting. From the inventory standpoint, as we write that up to the fair market value, you would think that that inventory should flow through kind of in a six-month window is what we would expect that inventory turn to be.

But the other, larger, components of the purchase price accounting, which will be a write-up to the fixed assets, there'll be an assignment of values to the intangible assets -- those will be amortized over a much longer period, somewhere in the range of 10 to 15 years we would expect to see that amortization.

Okay. But when I look at, first of all, the guidance that you gave, obviously it's only the existing company because you don't own this thing yet. But you're going to at some point, maybe within the next few months, provide 24 million shares to these folks -- or to Nathan. At the same time you're not going to get, because of purchase accounting, the other side of the equation and also the write-up of the assets. So might not we see some degradation of the earnings power over the shorter term?

Yes. Again, the guidance that we provided to is on an EBITDA basis, that Craig referenced. So again, that would exclude any of the amortization, whether it's depreciation or amortization related to the write-up of the assets. So that's independent of that. We have not completed the entire purchase price accounting. But there will be some amount of purchase price accounting, there will be some amortization. And as we get closer to understanding the complete impact, we'll provide that information.

In looking at your other issues -- because we talked, obviously, on the whole call about the electrode side of the business -- what about the rest of it? Are you seeing any recovery in the Engineered Solutions? Is solar coming back at all?

Yes, Chuck; excellent question. Let me make a comment before on that one. Let no one misunderstand our intentions and very strong commitment to grow this Engineered Solutions business. Most of its markets are double-digit growth. So don't think we've gotten sidetracked because of this great transaction in Industrial Materials. Our mission here ultimately is to have tremendous cash flow that will help us propel Engineered Solutions growth.

So Engineered Solutions generally, as we said, enters the recession a little bit late. And if you go back in the numbers, you'll see that. It usually has another good quarter, sometimes longer, after everything else has started to roll over. And it comes out a little bit later.

So going into this second quarter, yes, Chuck, order entry is up, markedly up. So it is starting. Solar, up. Most of its markets -- transportation, electronics -- all starting to point up. And that's why we think kind of the second half of this year, I think we'll be talking about the traction that Engineered Solutions is getting. So give it its normal three to six months. I'm encouraged by the order entry, and it is coming. The data points all point that Engineered Solutions' second half will start to really be contributing.

Some of the transportation companies that we've talked to are talking about the problems with truck availability, driver availability. Are you having any problems getting your goods transported?

We have had none of that, absolutely none. We have seen the data points like everyone else sees on the economy starting to turn and we-- I'll give you a little anecdote. Where we see it is on the return of rail cars. So if last year someone sends you a rail car with some raw material in it, they don't call you for weeks to get it back. Now they're, "Where's my rail car? I need it back." So transportation is picking up and turning. We've had no supply issues for ourselves as well, or shipments to our customers, issues around that.

Terrific. Thank you very much.

Thanks, Chuck.

Chuck Murphy, Sidoti and Company.

Morning, guys.

Morning, Chuck; how you doing?

Just to reiterate everyone else's congratulations on the deals. I think they'll be a great addition to the Company.

Thank you, sir.

You may have mentioned it before, but what was the utilization rate in the quarter for the electrode business?

It was a little over 65%, Chuck, up from the average last year of 40 and up from Q4 last year of 51. So a nice, steady sequential increase as steel operating rates have picked up.

Got you. And in terms of--

I may add, Chuck, while you're on that topic-- the supply chain is nice and lean. There's no electrodes out there; there's no bubble. So it is nice and lean and I think even looking a many geographies, likewise on steel inventories; which is good. (Inaudible) But you like that kind of setup, if you will, as things start to turn. And I think some of that is why you see our customers want to finish off the year of electrode booking. So supply chain is healthy, it doesn't have a big bubble at all. That's all been worked off last year. And I think we're in a healthy place and position for this steady uptick which, of course, is what-- is not without global economic risk. But so far, it's been pretty nice.

Got you. And for the cost of goods sold, what percentage of that is included in the higher-priced needle coke and the lower priced? Is it all higher now?

Well, yes. Like we said on a prior question, it doesn't exactly empty out all the storage bins on 12/31 -- a little bit carries over. But yes, it's done now. So did some carry over to January? Remember, we have many different raw materials and many different types of needle coke. So yes, it's all out now; it's done now. But yes, we got a little tailwind in the beginning of the quarter.

Okay, got you. And you normally start your needle coke price negotiations in the June-July timeframe and then do the electrode ones thereafter. Is it going to happen that way this year--?

Yes, I don't see a big change. Historically we've liked, of course, because it's such a huge cost component, that 45% -- if you get needle coke wrong, it'll run you over. You just can't make up 45% over the course of the year with savings in efficiencies. So I think you'll see us again early try to wrap up what's the cost position like in needle coke with all of our coke suppliers that we will continue to be working with and buying a lot of coke. Wrap that up and then begin building an electrode book.

Got you, okay. And what has generally been the direction of needle coke and electrode prices in the past couple of months?

The color here -- and I'll take you even beyond the last couple of months. Needle coke, the last few years, has gone up dramatically. So the increases have been huge double digits -- 45, 50% last year, coming into this year, increase in our costs.

And in the case of electrodes, just to reiterate, start of the book-building, we had a target price. We didn't get that. So early part of the booking season price was higher. It think there was some fatigue in the marketplace. Plus remember, customers are only booking one quarter. So it tended to have some slippage and softness. Electrode prices slipped throughout kind of the booking cycle in some geographies -- not all, but in some. And the slippage was single digit so it wasn't a huge amount. But there was some sliding. And then I think some of the improvements in steel demand, which brought a lot of our customers in and say, "Hey, we want to finish up our year; let's book the full year." I think we saw some stabilization in electrode prices and now we sit 95% booked against our guidance.

Got you. Okay. That's all I had. Thanks, guys.

Thank you, sir.

Scott Blumenthal, Emerald Advisors.

Good morning, Scott; how are you today?

Good morning. Congratulations on the deal.

Thank you, sir.

Craig, a couple of follow-ups. I'm not as smart as Mike, Mark, Ian, Luke, the Chucks.

No problem; we welcome the question. Don't be bashful.

I appreciate it. To follow up on what Ian said, we were talking about up side in one of his questions and you talked about customers possibly coming back as utilization rates improve. And when they come back to you, is there anything contractually that obligates you to provide them with product at the book price, the price that you've actually booked with them? Or are they coming back on spot?

There is no obligation to give them the same price as what they had previously contracted at. So they will face the market at that time. An example -- let's say things picked up beyond expectations in Q4; someone's exhausted their electrode buy that they had originally booked. They will come to market and the market will determine the price and they'll pay that price. So if the market has started to pick up and electrode prices have started to pick up globally, they'll face a higher electrode price.

Okay. And conversely, if things slack off a bit, then they're going to get a little bit of a break, right?

Absolutely. So price could drop. And remember also, Scott, our contracts are not take or pay. In our industry historically, for 40 years, if they've contracted for 3,000, they could cancel part of that order. Now, in our industry it tends to be the exception that happens -- usually our customers take the full allotted amount. We honor each other; that's no problem. But there has been practice in the industry where, "Hey, things have really changed and I don't need the last 500 tons," they can cancel that last 500 tons.

Okay, fair enough. Thank you.

Thank you, sir.

And Craig, could you give us maybe some rationale -- it's very clear as to what Seadrift provides you. But I guess historically one of the selling points of GrafTech has been that we operate facilities in lower-cost labor countries. And C/G kind of goes against that theory. And also, you're operating now with basically 35% slack in your system. Why would you need to go out and buy some more capacity there?

Let me help. This is an excellent question. Because we used to have a graphite electrode plant in the US. And the graphite electrode plant we had in the US was not a fully integrated plant. And what I mean by that, it made only half of the electrode processing. So it did not actually make the front end, make the electrode -- it baked and graphitized the electrode. So it wasn't a whole plant.

And we found that situation in the US very costly so we migrated all those capabilities down to Monterey, which is a fully integrated graphite electrode plant that takes raw material and processes it all the way to a finished electrode. And it's very compelling.

Labor, remember, is only 8, 9, 10% of the cost structure. So don't get me wrong -- it's important. But it's 8 or 9, 10,%. In St. Mary's, we have a fully integrated electrode plant. It takes the raw material, it makes the electrode, it bakes, it graphitizes, etc. So it starts out with a much better advantage than the plant that we closed. It's not only about the labor.

St. Mary's also has one of the newest what we call mill mix and forming departments on the planet. And this is the front end of the graphite electrode production process, which is very important. So they have a very modern one that has some great technology in there, which also helps the cost structure.

Lastly, St. Mary's went through -- as did, in its history, Seadrift -- both of these companies went through bankruptcy and then they were owned by private equity. Which -- ladies and gents, which kind of makes them look a little bit like the GrafTech model. They don't have old, costly pensions. They don't have old, costly retiree medical. They don't have an old mentality. They are also non-union shops. These are very efficient, nimble teams. And you'll recall as part of our turnaround back in 2003, we got out of our old pension, medical, etc. -- all that.

Well, part of the good news of these two new teams joining us, they look like us. They have a 401-k that looks a lot like ours. Their benefits, their programs, look a lot like ours. And they've been run by some great private equity management in Nathan Milikowsky. So they run lean. They are highly incented on cash bonuses and profit.

And so I look at St. Mary's as a very competitive platform. When we look at manpower to units produced to tons produced, it looks very good to us. And as I said before, combined with our team's technology process (inaudible), both of us are going to get better and both of us are going to better serve customers.

Lastly, St. Mary's sits up here in the Northeast, of course. Our plant's down in Monterey, Mexico. There are some great synergies for the two locations to serve those customers that are closest to them. Very important.

And then lastly, bigger picture -- Monterey, Mexico, we have been building and using it to source increasingly so the China market. Monterey is very well positioned to attack the China graphite electrode market. It's got a great cost structure. It now has a needle coker less than 300 miles away, which it owns 100% of, and all the benefits we talked to that.

Mexico, like all of our countries, has huge imports from China. And literally, if I took you to the Western deepwater ports in Mexico, you'd see container after container, ship after ship, come in from China and you'd see all those ships and all those containers go back empty to China. And Mexico has a very well-delineated program to expand those ports, develop those ports. We are now working with the Mexico government to help and get support to make Monterey, increasingly so, a much more strategic exporting location to attack the China market.

So we need all of the capability of St. Mary's. It's integrated, they can make the whole electrode. We need them to do that and this will also facilitate Monterey team attacking that large China market. That's the rationale for St. Mary's.

Okay, terrific. Great answer; thank you.

Thank you, sir.

Tim Hayes, Davenport.

How you doing, Tim?

Good; how are you?

I'm super; thank you.

Just two questions. In your annual guidance for 2010, what operating rates for the graphite electrodes are you assuming?

Tim, we don't usually give that and we won't at this time, either. What we've usually done is look back. So I won't give you a number like that that's such a precise number. And so you've got to rely on our full-year operating income guidance of 170 to 180. After we finish up Q2, we'll give you that number. Obviously, from the color we gave on the guidance, Q2 looks like it will be another very solid quarter.

I listened to some of the [Middle] discussion earlier today and I think-- he's global, he's in so many locations. He's got a lot integrated, yes, but he has a bunch of [EF] in different locations. And he'll looking for continued improvements in some of the steel operating rates. So I would expect Q2 to be higher, but it's early; it's too early to tell.

Okay. And now that you will be owning Seadrift, you'll be shipping electrodes to some of your competitors. Any concerns about maintaining those relationships?

We'll be shipping some needle coke to other-- yes sir, we'll be shipping. Now obviously, there's some risk there. But I can tell you, we plan to be an outstanding supplier to all of the current customers of Seadrift.

And when I talked about quality before -- the quality of the Seadrift coke, I believe, will come up over time. And so if you talk to our steel customers on supply, dependability, doing what we say we're going to do, customer tech service, our team is superb. We will be the same out of Seadrift to all of the current Seadrift customers. I'd like to work with all of them. If they need a long-term contract, I think that would be excellent. Excellent to have a long-term contract with them.

Okay, thank you.

Thank you, sir.

Eric Glover, Canaccord.

Hi, good morning.

Morning, Eric; how are you today?

Fine, thanks. Sorry if this question has been asked previously.

No problem.

Were there any other bidders for Seadrift or any other interests for the stake that was for sale?

Both these assets, a couple of years ago, had a market look. They came to market, some books were put together by an investment bank, and there were many, many, many interested parties. It was a global deal. And nothing got done.

Shortly after that, we seized the 18.9% from the other minority private equity fund that was in Seadrift. And now dial forward -- we've been on the board, we've gotten a very good relationship with Nathan and gotten to know him and the Seadrift team very, very well. And obviously we've been trying to put something together. Getting the 18.9, I think I explained to all of you back then, some didn't quite get it, but I think I told you the bigger vision, what we were trying to do. I think it's very clear now.

But add that all up -- two years later, we were able to do this directly with Nathan. There were no other bidders at the table. This was just us and Nathan doing a great deal. I may highlight that Nathan is, obviously, staying in this industry. A very strong believer in graphite electrode business. Obviously a very strong believer in his two teams that will join us and a very strong believer in our team.

So this combination -- let's look what he has on the table. He will keep the majority of the 24 million shares. I think at the end of this, he'll have 18 million share or so, the Milikowsky Group. He's got a two-year lockup. The first six months he can't sell anything and then after that, each quarter there's a little dribble. And I think the dribble, he can do, like, 2.9 million shares a quarter. So he is a very serious long-term investor. Obviously, he's holding the majority of the senior unsecured $200 million note with $136 million value, discounted, five years. He's holding that. So he believes very, very strong in this business model.

So we came together, we've had a chance to work together for a couple of years. And we were the only ones at the table, put this fine deal together, and we are looking so forward to coalescing into one global team here and better serving customers.

Hey, great. Second question is you will likely be reducing your purchases from Conoco of needle coke. I was wondering -- even though needle coke prices have gone up so considerably over the past few years, were you getting any sort of volume pricing discounts from them that may be reduced or eliminated now that you're buying most of your needle coke from Seadrift?

Yes, we'll reduce some from Conoco and some others. But like I said, I would expect to be one of Conoco's major customers go forward, as well as with our other current suppliers. As far as price, we're a big buyer. Do we get a bit of a volume discount? Perhaps. Price on our raw materials, we don't comment on. It's a competitive advantage area so we don't comment on that. But obviously, owning and running a coker, we will enjoy that full chain of economics. And then tailor the coke and all those quality supply and growth-enabling issues that we get with Seadrift.

You said the acquisition for Seadrift will close in, say, two to three months. And that means immediately you'll start obtaining raw material, or additional raw material, from Seadrift?

I don't know when they're going to close. Let's surmise. Like I said, it's in the hands of the normal regularity review. So Seadrift could be one or two months. Once we get regulatory approval, then immediately we can start working with the teams. Before that, we can't. And if there's anyone anxious to start working, it's me. We cannot.

So once we get formal regulatory approval and we get their final okay, then we can start coalescing the two teams and then we would start working on production schedules, quality initiatives, all of those types of things. Between both teams -- this is not one way, this will come-- both teams are going to benefit from each other's assistance.

Okay, thank you very much.

Thank you, sir.

[Davis Haddock], Invesco.

Morning.

Morning, Davis; how are you today?

Good, thank you. A couple of questions to clarify. The $170 million to $180 million in guidance, that's a GrafTech stand-alone, right? It does not include--

That's correct. That is 100% just the current GrafTech before these two acquisitions.

And once we close, we'll get an update, I guess, on combined?

Once it's closed, you get a very detailed update on all of this -- what it means to us in the numbers, just like you get on a regular basis from GrafTech. So yes, you would get that -- operating income, depreciation, cash flow, etc.

Great. And then, switching gears, you talked about the utilization being around 60% in the first quarter.

More than 65%, sir. A little bit above 65%.

Oh. And just curious -- you mentioned that your steel customers were in the high 70s utilization in the quarter. And during '09, that difference was explained by some destocking. But now that the destocking's over, why is your utilization rate lower than your customers'?

I think that's time to catch up. Think of it this way. Let's go back when we all started this -- let's look at last year. Steel was running kind of in the 60s; we were 40 and below. And the needle coker -- remember, Seadrift was below 25%. That's kind of the chain. So that's the chain and the progression. And so steel's come up, we're coming up. When will we catch them is the big question, and it's a hard one to answer. Global economy and does the steady increase continue from here? What kind of risk? But over time, Davis, we would expect to catch up with steel. Is that end of this year? Is it early next year? Time has to tell that, sir.

Okay. And the contract situation -- they have been quarterly for say a year or so now, or even less than that. Are days of quarterly contracts over, in your opinion? That we're basically going back? For 2010 we'll go for kind of the rest of the year, and then in 2011 we'll get back to the annual contracts?

Sir, I don't know. The customers drive that. Now, in all the dialog with them the last month and a half, obviously when they come and say, "Gee, we want to finish up the year; let's get the year off the table," they're starting to see a pick-up; things are looking a little bit better. Still a lot of risk, as we keep saying over and over.

So when they go into next year, I think one of the determinants will be if things are running really well and their view of 2011 is increasing improvement in operating rates and economies have been stable and the banks have gotten a bit better, they may leans toward an annual contract. I don't know yet, though. They drive it. But historically, when it's been that environment, what've leaned towards an annual contract.

Would you say for 2010 the majority of your sales that you booked are still expected to be on something less than an annual contract?

Well, really, it was very few annual contracts done back that started January. We had a lot of quarterly ones. And then, a typical customer, booked first quarter or part of second quarter. Then he's come in in March and said, "Hey, let's finish up the year. I want to take the year off the table. Give me a price for this volume for my 20 locations around the world. Here they are; give me the rest of the year. This is how much volume I need until December 31."

So we don't have many annual, but okay, add up maybe a quarter and then I've got one that's three quarters. Or I've got one that's a quarter -- Q1 -- and another one that's Q2, for the same customer and then I've got a six-month with that customer. They kind of look like that.

Okay. So most of the sales for 2010 are kind of for-- they may not be all under one contract, but for the rest of the year.

That's right. And that was the point, sir -- 95% of our electrode contracts are in the book as they relate to the guidance of 170 to 180 full-year operating income. So that's the way to look at that.

All right. Last question -- there's been a number of announced [EAS] capacity expansions globally. Does the Seadrift acquisition enable you, or encourage you, to want to do some more electrode capacity expansion?

Not near term; but over time, yes. So when we talk about Seadrift at 160 and then consideration -- going to 200,000 metric tons; and from that, going to 240,000 metric tons, it's to support our customers' growth over the medium and long term. So, sir, when the market is there and our customers need those great electrodes, we now have the ability to make sure we have the coke to supply them.

Okay, great. Thanks very much.

Thank you, sir.

Rob Crystal, Goldman Sachs.

Morning, Rob; how are you today? Rob, are you there?

(OPERATOR INSTRUCTIONS)

Brandy, maybe we lost him.

Chitra Sundaram, Cardinal.

Yes, thank you. The question was the cash flow. So $170 million to $180 million of EBIT (inaudible) and really taxing the main sort of non-operating item because there isn't too much of interest. And recognizing that 2009 was an unusual year in your generated cash out of working capital, is a fairly significant swing occurring, it would appear, in 2010, even though you'll have this vendor financing in place for the year. Could you just help us understand how that then trends as we go out of 2010?

Right. Let me repeat the question as I understood it just to make sure I've got the question right. I believe it was in the area of our cash flow. And it's the cash flow we had last year versus this year?

Well, I mean the point being that we've seen, obviously, revenues recover pretty dramatically because of utilization. But from a cash flow perspective, I guess, I was surprised at the gap between the EBIT guidance to the operating cash flow, $100 million to $110 million. It seemed to imply quite a decent swing in working capital. It obviously makes sense--

Thank you; I understand your question. There's a couple of key items -- why is the cash flow lower this year than last year? And one is, yes, working capital will be going up as we start to run our plants at a much higher operating rate. That's one.

Two, remember, needle coke went up 45%. So the same ton in my factory is a 45, 50% higher value. So that drove-- just the dollar value because of cost increase drives up my working capital requirement.

The other area is in capital -- CapEx. Last year we had quite a leaned-out CapEx expenditure -- it was around $50 million. This year, our guidance is $70 million to $75 million. And most of that increase is in the area of Engineered Solutions. Because Engineered Solutions, as we said earlier, the order rates are starting to come up. And as we work with our global Engineered Solutions customers and look at their demand and what they've been doing in their businesses, we can see we need more capability in Engineered Solutions. So most of the increase is Engineered Solutions, adding some capacity.

And No. 2, adding some capability to make some newly developed products. We have some new products for solar, for electronics, etc., that we are now putting capital in the ground to produce. And there's some great products that we've developed out of our technical center here in Parma. So that's the increased capital. And those are the two biggest buckets why the cash flow is lower this year.

Yes. So what it would mean is as we go into 2011, all other things remaining the same, assuming one starts getting some pricing power back with the more invigorated economy and so forth, the operating items should be able to offset the working capital usage (inaudible).

Well, it's too early to comment that far forward. But let me make a point of color. On this transaction, you see that there's a cash component. We've obviously got cash on hand so I don't know -- the net draw on our revolver might be $170 million or so. And we are doing that on the revolver attention. That's the level of confidence we have on the future cash flow. So we're putting $170 million on the $260 revolver -- so lots of head room. But we're going to pay that down.

So as I look forward on cash flow, I see solid cash flow coming in 2011 if all the economies continue the state of recovery we see. That's always a risk, and stability's always a risk. But if we continue what we've seen so far here in the first three, four months of the year, we would see a solid cash flow in 2011 and then we'll start paying down that revolver.

Yes. And then, if I could, on the CapEx side, the snap-back in 2010 is obviously completely understandable. Is that the run rate, then? Because it then creates sort of a prominent gap between DNA and CapEx, which doesn't make sense.

It's too early to tell. The normal run rate's more like 50. And so if we're above that 50, it's going to be growth opportunities that the Company and its shareholders are going to want us to seize. I think that's the best way to frame it. So no, 50's our normal run rate, right in there. It covers the DNA and a little bit of the productivity enhancements we do every year to cut costs. But above that, those are going to be usually very attractive growth initiatives -- solar, electronics, etc.

Got it. And lastly, was I wrong -- in one of the comments on the acquisition, you said in the first full year after whenever the closing dates might be, the contribution from these acquisitions would be $90 million to $110 million in EBITDA?

That is correct. The first full year of operation, the contribution to EBITDA, with synergies, will be $90 million to $110 million EBITDA. That is our expectation and obviously, that also assumes the economies continue their steady recovery. It's not without risk, as you know. It's a fragile recovery and stability is important; the banks continue to improve. But if we stay on that track, that's how we look at these two acquisitions.

Thank you so much, and congratulations.

Thank you very much, ma'am, and I very much appreciate your questions. Thank you.

Luke Folta, Longbow Research.

Hey Luke, how's it going?

Good. So just to understand your guidance, you said-- how to interpret that is, you're 95% confident you can hit the $170 million to $180 million. Is that what you're saying?

Well, I wouldn't say-- here's what we say -- 95% is in the book. So let's step back from it. So 95% of the graphite electrodes that are applicable to that $170 million to $180 million of full-year operating income are in the book. On the cost side, our needle coke is fixed; already fixed those costs. Most of our raw materials, we've all fixed. That's the team's mission here. That's what we try and get done every year. It's not easy but we try to take a lot of that risk off the table. So most of that's done, also. I'm just trying to give you a level of confidence in the $170 million, $180 million.

What could knock us off that? Well, global economy -- if there's a double dip; if there's some unforeseen political or Middle East upset there. But if we continue what we've seen so far in the first three, four months of this year on a recovery pace, our customers are going to burn and use those electrodes. I think their steel operating rates will be decent. And that 170, 180 looks very good to us.

I guess what I was trying to highlight was that there's potential up side to that if shipments trend better than expected.

Absolutely. And the up side is, how does steel run? If they run very strong and stronger than what people are expecting and stronger even than what they are expecting-- remember, they don't have a lot of line of sight. I think they're feeling a lot better after March than they were after January because of everything that's happened in the marketplace.

And there's still very soft points. Structural steel is in tough, tough shape. Non-res, res, residential construction -- tough, tough shape. So like in any turn, it's never smooth. There's some bumps in the road and there's some pockets that are in tough shape. But if things move better than expected, we have the capability to serve our customers and sell more than that; absolutely.

And just one last one. With the potential negotiating leverage here now starting to ship back towards the electrode producer as inventories are no longer burdensome in the channel, has there been any talk recently on potentially announcing a price increase?

Well, the market determines that. And it's been soft, stabilized. So I think it's way too early to talk about that. And the marketplace will determine what that is and then we'll know the new price, up or down.

Thank you very much.

Thank you, sir.

There are no further questions at this time.

Thank you very much, Brandy, everyone. Thank you very much for your support. I would again like to close welcoming the new team members to team GrafTech. We are very, very excited at this end and we look forward very much to working together. Everyone, thank you; have a great day.

This concludes today's conference call. You may now disconnect.