GrafTech International Ltd (EAF) 2010 Q3 法說會逐字稿

Good morning my name is Ashley and I will be your conference operator today. At this time I would like to welcome everyone to the GrafTech third quarter earnings 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.

I would now like to turn today's conference over to Kelly Taylor. Ms. Taylor, you may begin your conference.

Thank you, Ashley. Good morning and welcome to GrafTech International third 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 were contact Mary Nore at 216-676-2160 and she will be happy to fax or e-mail a copy to you. As a reminder some other factors discussed in this call may include forward-looking statements as defined in the private securities litigation act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. At this time attempt like to turn the call over to Craig.

Thank you Kelly. Good morning everyone, and thank you for for joining GrafTech's conference call. Today we'll take you to our third quarter highlights and then open it up for questions.

Net sales were $255 million in the third quarter a 55% improvement over the prior year. Gross profit improved 61% to $75 million or 29.4% of sales. Operating income increased almost 90% to $47 million, excluding $6 million in customary transaction expenses associated with the acquisitions of [Sea Drift and CG]. Excluding acquisition costs and the effective intercompany loans, net income was $40 million or $0.33 per share, 2.5 times greater than Q3 last year on the same basis.

Our third-quarter results came in stronger than anticipated as electrode and refractory sales held up well in the quarter and our tax rate came in lower than expected. The lower tax rate benefited Q3 results by approximately $0.03 per share and the timing of shipments in our refractory business benefited the quarter by approximately $0.02a share. We do not expect this $0.05 benefit to repeat in Q4.

Turning to our industrial materials segment; sales increased to $208 million in the third quarter a 52% increase over Q3 last year. Excluding the impact of acquisition related expenses, operating income for the segment was $40 million a $17 million improvement year-over-year, as result of higher graphite electrode sales volume offset in part by lower average graphite electrode selling prices and increased raw material cost.

In our Engineered Solutions department sales were $47 million in the quarter a 67% increase. Operating income grew to $6 million. Operating income margin in the quarter more than tripled to 13.3%. As anticipated, our engineered solution began to recover in the third quarter, enabled by solid demand in solar, oil and gas drilling and electronics.

Now turning to our previously announced acquisitions. We have completed all work associated with the announced customary second request for additional information from the antitrust division of the US Department of Justice concerning the Sea Drift and CG acquisition. The work has gone very well. Feedback from the Department of Justice has been excellent and we expect to receive clearance and close before year end. These acquisitions are components of our company's growth strategy and will allow us to better serve our global steel customers. We are looking forward to welcoming the excellent Sea Drift and CG team members to team GrafTech.

Turning to Outlook based on IMF reduction is another economic reports, global economies continue to recover. To varying degrees however, down side risk remain high. Global economic recovery continues to be fragile and slow. According to the World Steel Association and other industry sources, global steel operates have fallen steadily since the second quarter of this year and are not anticipating to improve significantly in the near term. As a result, electric arc furnace steel operator rates are expected to ease in the first fourth quarter.

Given the slowdown in Q4, we expect graphite electrode sales to be flat to down as compared with the third quarter. Our expectation is that operating income in the fourth quarter will decline slightly as compared to the third quarter. In conclusion, excluding the impact of acquisitions and related costs, we are targeting full year operating income to be in the range of $175 million to $180 million and we reiterate our target rated operating cash flow guidance of $100 million to $110 million. That concludes our prepared remarks. Ashley, could open it up for Q&A please?

(Operator Instructions) Your first question comes from Ian Zaffino from Oppenheimer.

Hi, thank you guys, it's actually Brian and for Ian.

Hi, Brian, how's it going?

NIce quarter.

Thank you, sir.

The question will be as we get to this time of the year, is there any update you can give us on the 2011 book building? Any type pricing outlook? What are you hearing from your customers there?

On the book building front, Brian, this year the book building has started off very slow. We have not seen customers rushing to build their 2011 book. And I think a lot of that is the function of the impart the slowdown in Q4 and especially the lack of line of sight they see into 2011. So there is a lot of uncertainty and our customer base really isn't rushing to build out there 2011 books. It's very in the process, so I have very little really to give in the area of any guidance or color over the 2011 book building, other than it's just getting started. It's orderly, but it's at a slower point that was let's say in the more normal years.

So is this another year where you could see several of your customers go revert to quarterly contracts rather than the annual contracts, as you did a couple years ago? We would expect in 2010 that more customers will go for annual contracts. The dialogues that have started off, they have in general all looked to annual contracts versus what we saw in 2009 were the majority went quarter by quarter for a while. So I would expect the majority of our 2011 book, once it gets put together, will be under pinned by annual contracts. Okay that's helpful. As far as it relates to the first third quarter -- is there any way -- can you break out as far as the industrial materials business, the electrode business pricing versus volumes in that 52% revenue increase?

It's really not a point of guidance that we give. Between the businesses.

Okay. And the last question would be on the Sea Drift more so than the CG acquisition, as you're a minority holder for a while. As you wrap your arms even further around this acquisition, how creative could this be to EPS or to margins?

As we've gotten closer to both the acquisitions -- and recall while we're in the DOJ process that is limited in nature, we are allowed to do some pre-planning in areas like accounting, IT, HR, et cetera. That work is gone very well. I am very impressed by the two new teams that will be joining team GrafTech. We are inheriting two superb teams, so been very impressed with that interaction. As far as integration or any additional color around what it will look like next year, we don't have any further updates at this stage, other than what we gave a quarter or two ago when we announced the acquisition.

Okay. Well great quarter and thank you for taking my question.

Thank you, sir.

(Operator Instructions) Your next question comes from Luke Folta from Longbow Research.

Morning, Luke, how are you doing?

Not bad. Couple of questions. First of all, appreciate the detail on the DOJ work that they're doing. Can you give us a feel -- do they have a date at which they have to make a decision?

Yes working with the DOJ, there is a rough schedule that is always put together with the DOJ team. As I said all of the work really has been completed, I'm very pleased the way that's gone. It's been a very, very detailed and exhaustive and it's gone very, very well. And I would expect the DOJ will complete their final little bit of work here over the next few weeks and we'll be able to close this by the end of the year.

Okay, but there is not a strict date that you're aware of that they have to -- No. The way these normally go there is not a fixed date, there guidelines. So we all have different work requirements around different guidelines. But, Luke, there is not a fixed date that on this date this has to happen. But we've had many deliverables from both sides from GrafTech side and from the government side and I'm very pleased the way that works gone. Okay and secondly do you have a first feel on how you think we'll Needle Coke negotiates might go for next year?

That also is early; it's in process. And so I can't give much color around it. As we've done in the past, we like to line up our cost structure before we build out the large parts of the book. And so our lining out our cost structure, negotiating Needle Coke, all of those items are under way right now.

Can you give us a broad directional feel of where my be heading?

I think it's still early. And I think really we should wait until when we release in February. I think we'll have much more of a the book activity behind us then, the raw material picture will be behind us. And I think February will be a very good time to dialogue on that.

Okay and then just lastly in the past you have given capacity utilization rates for the quarter for your electrode business. The year-over-year change in electrode pricing, can you please provide those for the quarter?

On the op rates, if you recall, just refresh everyone -- last year 2009 we averaged around a 40% op rate we exited in Q4 of last year around 51%. And this year they've steadily come up, Q1 was 66% op rate Q2 was 76% and in Q3, with the slowdown that we discussed earlier on the call coming in Q4, we're down around 72% 73% operate.

Any color on the year-over-year change in electrode prices?

When you get the queue you'll see our usual analysis in there. But as we said I think the last couple calls we would expect somewhere in a high single-digit slippage year-over-year.

Alright. Great, thanks a lot.

Thank you sir. Luke, have a good day.

Your next question Zahid Siddique with Gabelli.

Hi good morning. Most of my questions have been answered, but I will take the opportunity to ask a couple. What is the capacity utilization within the steel industry? How has that been trending?

Steel utilization peaked worldwide and in the US in Q2. If you look back I think the peak worldwide back in Q2 in April was about 82% utilization. And then it's pretty much slid sense that and we exited Q3 I would think and steel utilization worldwide total steel around 74%. What we are getting from the marketplace, and I am sure you have heard on a number of steel customers own conference calls that Q4 looks like it's going to be softer, so we would expect that to trend down some further in Q4.

Okay. And you mentioned something about February, is that when you would disclose all the details about your negotiation?

February is when we give our Q4 release. Towards the end of February we'll release Q4 and we'll give next year's guidance. And historically what we've done is we've got an annual electrode book built out versus quarterly, we've done our debt best to give annual guidance. Last year we gave quarterly guidance because a lot of the customers ordered quarter by quarter. So our goal would be to give annual guidance and we'll have to wait till we get there, but from what I see now, it looks that the majority of the customers are booking annually. So if we've got the book pretty much put together, line of sight on annual contracts, we would tend to try and give annual guidance if possible.

And in what month to actually start the book building process? Have you just started in October?

Yes sir. It's just starting out. On a more normal year, lets o back to the before the 2009 crash, which was all quarterly contracts for much of the year. We would start building -- some customers would come in June and July. But this year I think a function of the uncertainty in the marketplace and the lack of sight out there that many of the global steel producers have, I think they've gone slower on their own raw materials book building. And it's not just electrodes,I think that they've done a lot of the same thing on the metallics and a number of their other raw materials and it's driven by a really lack of line of sight and uncertainty in economic picture.

Okay. My last question is on on the industrial business. Your revenue was up at least roughly 50%, 52% in Q3. What's the breakdown of that volume price mix, et cetera?

It's not a detailed guidance we give. But if you wait until we publish the queue, we refine some of that in the final Q and you can see some of that year-over-year movement in our Q.

Okay and that's where you said the pricing was about slippage of high single digits?

Yes sir.

Thank you so much.

Thank you, sir. Have a good day.

And you next question comes from Ian Zaffino with Oppenheimer.

Hey guys. It's Brian again. Just trying to get your operating and combined -- 175 to 180. If you're going to have a lower fourth quarter in the third quarter, how do we get to this?

The way I would look at op income Brian, is if you take our first nine months op income you've got about $123 million. And then recall the acquisition expenses year-to-date first nine months are about $12 million. So you have to add those back. So add that back and so you get to about $135 million clean. And then the balance, if we just do the math in the range we gave for the full year -- $175 million to $180 million, that would imply a Q4 39 to 43 for --

That clears it up. Thanks again.

My pleasure. Anytime. I welcome the question.Thank you sir.

(Operator Instructions) Your next question comes from Luke Folta from Longbow Research.

Hi guys

Hey, Luke.

Another question. You talked about the refractory business a bit. Can you give us a sense of how big that businesses is? If I were to say something in the $50 million to $70 million in annual revenue run rate, am I in the ballpark there?

It's a point of guidance we don't give Luke. What I can tell you -- it's a global business, we're one of the major players in that segment of the refractories. And we line really in blast furnaces the most difficult sector within the blast furnace the most challenging from a temperature and abrasion issue and it would be the hard wall. So it's a global business, we're a major player there. We've got a unique technology. And whats come up that we highlighted in Q3 is those orders tend to be lumpy and when they come they're large. And we had one that shipped in Q3, that if anything one or two that shipped earlier than maybe what we thought and so they all fell in Q3 and that was the extra benefit and Q3 we got that you won't see in Q4.

Okay typically how do margins compare in the refracture business versus electrodes?

Again, it's not a point guidance, but it's a good business. It's a premier technology that we developed at GrafTech and commercialized and we have a different offering. Our refractories is have a tremendous performance history of long-lasting, greater productivity for the steel manufacturers. So we have a great value equation. And like I said, it's global. Big business in China, North America, Europe, et cetera. And the orders tend to be lumpy. You literally build all of the blocks for a furnace and in some cases we even assemble it at our facility for a review and inspection by the customers and then it all ships that once. And that's what you had in Q3.

Okay and just last question. You guys had put out a press release with some spot pricing information in May. As we think about the 2011 contracts, once you have a better sense of what your Needle Coke costs are going to be and your books are built -- should we see another spot announcement for 2011 that should help guide us on 2011 pricing?

I don't know where prices are going to go. The market place will determine that, so I really can't say where that is. As far as color, on the book and next year, that'll be at the end of February.

Okay thank you a lot.

Thanks Luke. Have a great day.

Your next question comes from the line of [Asad Avetti] from GLT.

Good morning guys

Morning Asad. How are you today?

Not too bad, yourself?

Excellent, thank you.

I want to understand what the developments were in Q3 that surprised you positively relative to guidance on Q2. Because I mean as I saw it, steel volumes did decline in Q3 versus Q2. Yet you posted very strong results. Did you take market share?

Know what I would say it's the two items we highlighted. The refractory orders that shipped in Q3. The tax rate was a benefit, that came in lower than expected. And then I would say in general, our graphite electrode business held up a little bit better in the quarter than we expected. Q3 is generally a softer quarter with the European slowdown and so we obviously saw the European slowdown, that all took place with the holiday schedules. That happens every year.

But in general, in a lot of the other regions graphite electrode sales held up better than what we had expected. As you all heard from the steel customers releases thus far -- Q4 slowing down. And that's in the numbers it's in the utilization rates and it's in our customer interfaces. They're telling us and we are seeing it. So that's why Q3 was better and that's why Q4 will be a bit softer.

Great thank you.

Thank you Asad. Have a good day.

There are no further questions at this time do have any closing remarks?

Ashley, thank you very much. Everyone, thank you for joining the call and look forward to talking to you at the end of February when we report Q4 and then hopefully our position to give annual guidance. If we're, not depending on how the book comes together and the customers put their orders, then we would give our quarterly guidance as we did this year. Thank you all very much have a good day.

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