GrafTech International Ltd (EAF) 2010 Q4 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the GrafTech fourth quarter and full year 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, at this time I would like to turn the conference over to Mrs. Kelly Taylor.

Good morning and welcome to GrafTech International's fourth quarter and year end 2010 conference call. On the call today is GrafTech's Chief Executive Officer, Craig Shular and Chief Financial Officer Mark Widmar. We issued our earnings release this morning. If you didn't receive a copy, please contact Maureen Norr at 216-676-2160 and she will be happy to fax or email a copy to you. As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also to the extent we discuss any non-GAAP financial measures, you will find reconciliations in our press release which is posted on our web site at www.grafTech.com, in the Investor Relations section. Finally, we would like to thank you who joined our call Tuesday to discuss accounting related to recent acquisition, for your reference, a replay is available on our web site. At this time, I would like to turn the call over to Craig.

Good morning, everyone, and thank you for joining our call today. Today, we will take you through our full year and fourth quarter highlights and then open it up to questions. 2010 proved to be a historic year for our Company. We successfully completed the strategic acquisitions of Seadrift and St. Mary's. These are the first major acquisitions in GrafTech history and are important to generating sustainable, long term value for our shareholders and better serving our customer needs.

Following the completion of the acquisitions we exited the year with a very solid balance sheet well positioned to capitalize on opportunities for future growth as the global economies continue to recover. The integration process with Seadrift and St. Mary's is well underway and progressing nicely. We have inherited two great teams. The cultural fit of our Companies is excellent. Our values around safety, ethics, team work, productivity, cost control, and continuous improvement are well aligned. Our current expectation is that Seadrift and St. Mary's will contribute EBITDA after synergies of approximately $90 million in 2011.

Our assessment of operational tax and working capital synergies potential is consistent with our earlier expectations. Recapping our results, excluding the contributions from the acquisitions and other special items, our 2010 sales increase 50% to $988 million. Operating income improved 85% to $174 million, net income more than doubled year-over-year to $146 million, or $1.20 per share. Turning to Q4 results, sales improved to $262 million, operating income in the quarter was $39 million, or approximately 15% of sales.

Net income was $39 million, or $0.32 per share. Net income was favorably impacted by a lower tax rate resulting in a $0.06 benefit to the quarter for a normalized EPS of $0.26 per share. The improvement in the rate resulted from realization of a portion of the acquisition-related tax synergies in the quarter. In our industrial materials segment sales increased 29%, to $215 million in the fourth quarter. Sales in the quarter increased primarily as a result of higher GrafTech electro sales volume, partially offset by lower prices. Operating income for the segment was $33 million.

In our Engineered Solutions segment sales were $47 million in the quarter an increase of 26% as compared to Q4 '09. This was due to higher sales volume across multiple product lines including solar, oil and gas, transportation, and electronics. Operating income was $6 million as compared to $4 million, in Q4 '09.

Our team has grown the engineered solution business from essentially a break even business in '06 to a solid contributor today. The segment sales in 2010 came in at $173 million, our second best year ever. On February 9 this year, we executed our first external growth initiative in engineered solutions. We acquired Micron Research Corporation. A privately held producer of super fine grain graphite for $6.5 million. Micron uses a unique technology to manufacture graphite materials suitable for applications in solar, electronics, EDM and the medical industries. This addition fills a gap in our technology portfolio and is very complimentary to our existing Engineered Solutions product portfolio. It will aid in continuing to propel this segment forward.

Turning to outlook, based on current IMF projections and other global economic forecasts, world output is projected to expand at an average of 4.5%, in 2011. IMF has stated that the degrees of growth will vary in both advanced and emerging economies and downside risk remain to the stability of the global recovery. According to the World Steel Associations published report, total steel production levels are expected to improve in 2011. We expect our 2011 results to benefit from improved volumes in our graphite electrode business. However, this impact will be partially offset due to lower electrode prices.

As a result, in 2011, we are targeting EBITDA to be in the range of $285 million to $315 million. This represents an increase of approximately 40% over 2011. We anticipate that our electrode operating rates in 2011 will continue to improve from the fourth quarter utilization rate of 75% as we move throughout the year in response to increased demand in an improving global economy. We expect that the first quarter will be our weakest quarter of the year with EBITDA targeted in the range of $50 million to $55 million, which includes the impact of inventory step up costs and inter Company profit and inventory on sales of needle coke.

Negatively impacting first quarter 2011 EBITDA will be approximated $11 million in inter Company profit and inventory elimination on sales of needle coke and $3 million in acquisition related inventory step up costs. The margin benefit of first quarter inter Company needle coke sells to our electrode facilities will not be recognized until electrodes are sold to third parties. In the second quarter of this year, we expect to incur an incremental $5 million in inter Company profit and inventory elimination related to needle coke sales and $1 million in inventory step up costs at which time the impact of these items will be largely behind us.

As a result of the above, we expect our second half of 2011 to be better than the first half. For the full year 2011 we are targeting cash flow from operations to be in the range of $185 million to $215 million, an improvement of approximately 40%. On the capital front, we are targeting expenditures of approximately $135 million to $150 million, as we fund internal Engineered Solutions growth initiatives support Seadrift and St. Mary's quality improvement plans and improve operational efficiencies across our global platform.

We are targeting overhead expense in the range of $145 million to $155 million. The year-over-year increase largely relates to $17 million amortization of acquisition related intangibles and $10 million higher admin expense due to the inclusion of the Seadrift and St. Mary teams. We are targeting interest expense in the range of $18 million to $20 million, of which only $7 million to $8 million is cash interest expense. For depreciation and amortization expense, we expect approximately $85 million. On the tax front we are targeting an affective tax rate in the range of 22% to 24%. Our fully diluted share count will be approximately $146 million shares. Finally, we are confident in the growth prospects of our Company and continue to invest both internally and externally to position ourselves to capitalize future growth as the global economies continue to recover. Thea, if we can open up for questions. That concludes our prepared remarks.

(Operator Instructions)Luke Folta from Longbow Research.

Good morning, guys.

Good morning, Luke. How are you today?

Not bad. Yourself?

Superb, thank you.

Okay, a couple of questions. Firstly, are you able to tell us how full the order book is at this point for 2011?

Yes, the GE order book is running right now a little bit above 80%, put together. And I would expect that to be in the normal range where we would be in this kind of economy, so I see that on track.

Okay. Then included in your EBITDA guidance for the year, can you give us a sense of the magnitude of pricing decline that you are expecting?

Well, I think that's too early to tell. What we usually do is recap that post-conclusion of a quarter, and you see that in our Q's and K's, so it's early to really try to quantify that, obviously electrode prices are softer. And as we've indicated in all of that, Luke, is baked into the EBITDA guidance we've given.

Okay, and recently there has been an announcement of a price increase from a key competitor of yours. Can you give us some thoughts on, as you think about spot pricing now, or I don't know if spot's the right word to use, but do you think we are at a bottom here in electrode pricing, and do you expect that price increase or other price increases might be realized towards the latter half of this year?

Well, it's hard to project. The marketplace, of course, determines the prices, and as I said earlier, what we've usually done is complete a quarter and then we reflect back for everybody in the Q's and K's what the pricing experience was.

Okay. Can you explain why you think prices have weakened? Last year it seemed to be that it was like an inventory situation where there was still destocking. What are the key issues this year that have led to that price decline.

If we take it a step back from the global market, I would say probably reason number one, two and three, are -- here we've gone through a very difficult 2, 2.5 years of low operating rates amongst all of the electrode producers, and I think, one, you just got some fatigue. Everyone has been running at half speed, and I think that's contributed to it. That would be, I would say, number one, two and three. Number four would be, the industry we serve, the steel industry has had some very difficult results the last couple of years, losing hundreds of millions of dollars each a quarter. So I think that's also weighed on the market, as our customers have been in some very tough shape through this downturn.

I will ask one more, and I will get back in line. Can you give us your thoughts on what needle coke pricing does for this year, and if you expect anything different from Seadrift than you would be seeing on the electrode side of your business from external suppliers.

I can't comment specifically on the prices, but what I can comment on, let's step back from Seadrift. We are very pleased the way that acquisition has come together. We are very pleased with the integration. We see no major issues on the integration, and we are very pleased the way the Seadrift book has come together; that book has come together very, very nicely.And as you see in our $90 million EBITDA guidance on the acquisition, that has come at the lower end of the range, but it has come well within the range, and is a very nice accretive transaction for us.

You said the order book is coming together nicely. Can you talk about what utilization you expect out of Seadrift in 2011.

Order book looks very good. Electrode demand we see going up over the course of the year, based on what we see in the global economies, and what we see from our customers and what we see on our own book. And parallel to that, I see Seadrift at a very solid high operating rate as a result of that.

But you don't want to quantify at this point?

No, sir.

Ian Zaffino with Oppenheimer and Company.

Hello, Craig, thank you.

Good morning, Ian.

So the 80%, that's annual contracts, or that's a mixture of quarterly or whatever?

Ian, it is primarily annual contracts, and as we have gone through the trough, you will recall a couple of years ago, it was quarterly, and then a few went six months. I think what the steel customers are seeing in general worldwide is an improving outlook, so the majority of our contracts this year, the steel industry has requested annual contracts. We see that as another positive sign to recovery. Steel ran worldwide around a 75% op level in Q4; we see that starting to come up. Our own op level, I see coming up. We exited Q4 last year at 75%. I see our own operating rate increasing over the course of this year. And I say that because of the book that's been built, and for the work with our customers.

Okay. Last year you had a bunch of, this time last year you had a bunch of quarterly contracts. And as you went from quarterly to annual, you experienced higher pricing. What were really the dynamics? Seeing that last year, maybe it was a little bit of a different time last year, but seeing that last year how pricing rose throughout that period, why the rush to lock in for full year when you are competing with everyone else? Why not wait until they are sold out, or at least they are somewhat sold out, and then you come along and get the higher pricing.

Let me just go back to some of your commentary on 2010. I would say over the course of 2010, GrafTech electrode prices in general were softer over the course. They softened over the course of the year; that should be a reference point. As far as annual contracts or quarterly, really our customer base drives that. They come to a bid, and if they ask for annual, and these are very large global customers in many, many cases, they request an annual contract. If you don't want to give an annual bid to them, they will go to someone else. They really drive that.

Our take-away would be that the fact that they are virtually all moving to annual, their view of the recovery in the steel industry is starting to look better. They have a better line of sight. I view it as a positive, but net net in, they drive the contract. They want quarterly, generally they are going to get quarterly. If they want to go annual, they are going to get annual.

Okay, and the last question would be, with higher oil, how does that flow through your P&L; if you could disaggregate Seadrift and the core GE business separately, I'm trying to get a sense of how each business would fair in higher oil environment.

Ian, a couple of comments on that. Obviously, it's all reported in the IM segment, so those are reported together. Higher oil puts cost pressure on Seadrift, obviously. And oil has had a significant move, point one. Point two, we are very proactive on a hedging strategy; we have a very successful and sophisticated hedging strategy to minimize risk. Everything that you see in the oil movement in price and enhanced cost to Seadrift, we have factored into our annual EBITDA guidance.

Okay, but now, would you be in a disadvantage to what you are without Seadrift, in that, previously you were able to lock in your needle coke at a fixed price, so in a rising environment it didn't really matter because you were locked in, where now you are exposed a little bit more?

No, think of it as, I don't see with a good solid hedging strategy on the decant oil side, the raw material for Seadrift, I don't see that our risk profile has changed at all on the negative side. On the positive side, we have supply, we have input to the quality of that supply and our scientists are working on that, and we are in that business, which is a very good business. And it represents about 45% of our cost structure. When you roll all of that into IM, it's a very powerful addition to our business model. When you add all of that up, at the end of the day, we are the industry's low cost producer, better positioned to serve our customers.

Okay. Thank you very much.

Thank you, Ian.

Eric Glover with Canaccord.

Good morning, Eric.

I want to go back to the graphite electrode pricing issue, it just seems that the steel industry utilization rate as you mentioned is around 75%. It's going to go higher this year; it could get up to 80%, plus even. At what point to graphite electrode suppliers like yourselves regain some of the pricing power, and be able to actually increase average electrode prices?

Obviously, we like to see a much higher steel operating rate, 80% plus, we really like to see that. Two, it indicates global economic recoveries. Three, it means our customer base is probably doing much better financially; that's a better environment to operate with them. But lastly, Eric, electrode operating rates are probably a bigger driver.

And you recall that over the last couple of years, electrode operating rates in general have been below steel operating rates because of where we sit in the chain. Well, now our operating rates have come up over the last couple of years, and now we are right around the 75% with the steel industry. I think as we see steel continuing to improve, it will drive higher electrode operating rates. We would expect for ourselves over each quarter this year we will see our electrode op rates come up each quarter, with probably the second half of the year being the highest we have seen in the last two to three years. And so that will be the big driver. And when we get to that kind of a situation, that's probably favorable to the marketplace to selling graphite electrodes.

Thanks. How much needle coke do you expect to obtain from Seadrift this year, in terms of tons?

We said we would probably take somewhere around 70,000 to 100,000 metric tons, in that range, that it would be an integration process. It wouldn't happen all at once; it would be a transition. So, think of us taking somewhere around two-thirds of Seadrift's production or maybe a little bit less than that, and then the rest we sell to third parties. And as I said earlier, Seadrift's built a very nice global book, an excellent global book so far.

Okay. Final question, how are customer electrode inventories at this point?

There are no excess inventories in the chain. Steel has done a very good job across all the raw materials, not just electrodes, but of really thinning out the supply chain. So another positive I think for all of us as the economies recover. We don't have excess inventories out there in the chain that have to be burned off in the case of electrodes. It's quite a tightly managed supply chain. As demand picks up for our steel customers, and then demand picks up for our electrodes, you will begin to see that in short order; there won't be a large lag because someone is burning off large quantities of electrodes.

Thank you.

Thank you, sir.

Mark Parr with KeyBanc Capital.

Good morning, Mark, how are you today?

Hello, Craig, good morning. Had a couple of questions, if I could.

Please.

First, as far as the 2012 outlook and how it may be unfolding. We are in a period of rising oil prices again, which has all the normal sorts of consequences for the price of decant oil and the cost to produce needle coke. I'm curious, do any of your contracts have the ability to pass through rising needle coke prices as we look at the '11 book; and is this something that you think the industry may move to more aggressively as you head into 2012.

Well, Mark, too early to tell if any of those changes are coming. What I can say, first looking at 2011 as we said, those risks and our hedging and what not is all baked into our EBITDA guidance for this year. What I can also say, we have no sales contracts committed for 2012, so that is wide open. And if there is cost pressure, then that will have to be dealt with in the marketplace to try and recoup some of that cost pressure.

Do you have any, because you have annual contracts, and very volatile commodity markets, and recognizing you do have a hedging strategy, but I guess another way of hedging is to actually include pass-through clauses in contract language with customers. I'm asking, do you have any of that or is there any of that going on in the industry right now?

We really don't comment on that aspect of our book. I guess all I can point you to, Mark, is that on the EBITDA guidance, it's baked into that. What I can say about 2012 is, if steel operating rates continue to come up as they are forecasted by world steel and many others, and electrode operating rates continue to come up, obviously 2012 has the potential to look very, very attractive to our Company.

And you see us on the capital front making a number of moves to put capital in the ground, and a lot of this is going to our ES business; we have a number of product lines in ES that are running at very high op levels, so the demand is good, solar, oil and gas, et cetera. And you have a number of things we are doing at the two companies we acquired. We view 2011 as a lot of work to get ready for what we see in 2012 could be high operating rates where we are going to want those capital projects done and behind us, so we can run our facilities at very high op levels, full out, very efficiently, and take care of customers.

Okay. Another question, is your 2011 EBITDA guidance, does that include any expectation of pre-buying as far as customers who may want to buy now at lower prices in anticipation of stronger market dynamics for next year?

No, sir, that's not in there at all. Obviously, the market is going to determine where price goes, but with cost pressure building, and I think we all see it on many fronts, that won't be our direction as we go into 2012. As I said, 2012, we have no selling commitments or sales prices fixed at all.

I understand that, but any of the purchasing managers at the mills are very cognizant of what is going on in the oil markets, and they know that historically that's had a very high correlation to needle coke, and ultimately electrode pricing. So that's the only reason I bring it up. I was curious if, to the extent that any pre-buying may unfold, do you think that that could positively impact your outlook based on what you've said thus far.

The way we would view pre-buying is, that's really not what we want in a rising cost environment. What we have booked is for this year's requirements, they line up with what we see running in the individual customer shops. And so our view on pre-buying with increasing costs that that would have to be dealt with different, differently than the contracts today. That's all things being equal, the cost has gone up, that's at a higher price.

Okay. That's what I was trying to get at, so that is very helpful. Another thing, I just wanted to try to confirm based on your, the level of profits that you expect to be transferred in to inventory from Seadrift. Some of the commentary that we have heard, does that imply that your take down from Seadrift this year will be somewhere in the 65,000 to 70,000 ton level?

Mark, this is Mark. I think as Craig mentioned, our view is that we would start to buy backward and integrate up to a range of between 70,000 and 100,000 metric tons. But given where we are, and the timing of when the deal closed, you would expect us to be on the lower end of that range in year one. And we can start to see a little bit more volume coming in, in 2012.

That's consistent with the numbers that I was running. That is helpful. Just last, Craig, you had indicated in the Engineered Solutions area that you are seeing some very strong operating rates. Is there anything you can tell us as far as how you would look for the volume or for revenues in that business in 2011 versus 2010?

Mark, it's not an individual guidance we give, but I would expect that this year will be an all-time sales record for that business, being driven by solar, some of the latest generation electronics products, all those latest generation tablets you see coming out from RIM, iPhones, smartphones all propelling that, oil and gas drilling propelling that. So, ES, we see all-time record year for 2011 in sales.

Thank you very much. Good luck to you this year.

Thank you, sir.

(Operator Instructions) Ray Rund with Shaker Investments.

Thank you for taking my question.

Good morning, Ray.

Good morning. Just wanted to get a clarification, I'm not as familiar with the acquisition accounting as I could be. In the first quarter, you are talking about $11 million in intercompany profit, in inventory elimination, on the sales of needle coke, and an additional $3 million in related inventory step-up costs. Now this is a total of $14 million. Will this be coming out of the cost to good line, or I should say going into the cost of goods sold line. So, it is directly affecting your gross margins?

Ray, this is Mark. So, what will end up happening is the inventory step-up will clearly reflect in cost of goods sold, and therefore, weigh down on our margins. The intercompany profit really will be neutral to results because essentially we will eliminate the intercompany sales, therefore it won't be reflected in the top line, and then we eliminate the profit on the transactions, right? So you won't see that as a margin weight, if you want to use that word, but what will start to happen is we will start to see higher top line revenue in margin flow through associated with those sales as we ultimately produce the electrodes and sell them onto the third-party customer.

I see. That's a good clarification. Thank you.

Luke Folta with Longbow Research.

Firstly, can you remind us when the needle coke sales agreements reset from a pricing standpoint?

Each year it is roughly around Q3-type period. We try to lock in our needle coke cost structure at that period, which is at the front end of the electrode book building.

Okay, so sometime in probably early fourth quarter is when we might start to see some of the impact of whatever happens with needle coke prices next year.

Probably what would happen is, as we get into Q3 this year, somewhere in there, maybe early Q4, Seadrift will begin building its book for 2012.

Okay. Then just on the hedging side, I guess I'm trying to understand how, if I were to tell you that needle coke prices are up 10% or whatever next year, I'm just trying to get a sense of what the sensitivity of earnings would be to those higher needle coke costs for Seadrift, keeping in mind that you are hedging. Are you hedging up the entire book, or how does that work?

What we did, Luke, as we work through the finalization of the acquisition, obviously we did some very important strategic hedging strategy work and development and what not, so that as soon as we completed the acquisition, we were very well prepared to execute on a hedging strategy. That's gone very well for us, and I think that should be your take-away, and that it is baked into the $285 million to $315 million of EBITDA guidance we've given. I think your other take-away should be, there are cross pressures, we all see them from natural gas to [electropower], they're across the entire chain, and especially all of the volatility we see in oil. A lot of that will be influencing, and I think on what the cost structure looks for 2012, and then where the market tries to go.

Luke, this is Mark, too. I think the other thing maybe is helpful to understand is that there is somewhat of a natural hedge position, because Seadrift is buying a decant oil, and then, through the production process of producing the needle coke, they generate liquids that are by-products that are sold into the open market. Those are obviously oil derivatives. Therefore, you have a little bit of a natural hedge in terms of what they are producing versus the value of the byproducts, and as long as the correlation of those two stay relatively in sync, you have a natural hedge from that standpoint. And then what we look at is the net exposure, and we put our hedging strategy in place from that standpoint.

And back to the question around, is the risk profile of our business better or worse with Seadrift, and Craig talked to that as well. What I would say is that even though we had an annual fixed price with Conoco, or other suppliers, that entire value of that contract was opened up to negotiation each year, which had 100% exposure to the volatility in oil markets. What we have now is because there is a natural hedge with the value of the byproducts, we have minimized our exposure. Our net exposure would be lower now than it would have been under a relationship with a third-party supplier. And then with the hedging strategy that we're able to put in place, that allows us to secure a forward position and secure that cost structure, that eliminates more volatility. From my standpoint, I think a risk profile of our business is much improved relative to what it would have been before.

When you think about Seadrift in 2012, you had mentioned that on the electrode business that you could expect to see some pricing power return to that business once operates and volumes improve. Should we think of Seadrift in the same way as where spreads of needle coke over decant oil should it start to improve as operating rates go up. Is that the right way to think about it?

Luke, it's always hard to tell where it's going in the future, but let's just look at where we are now. Q4, our electrode facilities ran at a 75% op level, and steel was about at a 75% op level. Recall that's the first that our op levels have caught up with steel. For the last 2.5 years we have been operating, and the whole electrode industry has been at a low level below the steel level; now we are level with it, and I would expect our electrode op rates will go up each quarter this year, so that we could exit the year at a very attractive op level. That will probably be the primary driver here.

One last one, and thanks for taking all my questions.

No worries, perfect.

Just on free cash flow for the year, looks like based on your operating cash flow guidance and CapEx, that you will have a pretty decent amount of free cash this year. Can you give us a sense of what you plan to do with that in terms of either debt reduction or future expansion of ES or whatever.

All of our internal expansion needs are covered that we see today, opportunities that we see today are covered in the CapEx guidance. All things being equal, we would expect to continue to delever, and then we are continuing to be very proactive on the external growth. You will note just on the timeline, we closed the two large acquisitions for industrial materials November 30. On December 22, we signed the LOI and the exclusive on Micron, and then much smaller deal, of course, so we were able to close that very efficiently, that was closed the second week of February. So we will continue to look for great external growth opportunities, and if we see those and they are fairly priced, you would see us probably use some of our balance sheet for that, Luke.

Okay, thanks, again, guys.

Thank you. Thanks for the questions, we much appreciate it.

Ian Zaffino with Oppenheimer and Company.

Thanks, just really quickly, on the ES side, margins, was there anything negatively impacting the margins other than the usual characters, or was there anything like product launches or anything like that affecting it?

Ian, I'm assuming your comment is more sequentially when you are talking to the margin performance, yes?

Yes.

Really what that was is there was a slight unfavorable mix from Q3 into Q4, as you would anticipate especially a lot of our electronic thermal management products. There is a ramp up in activity, more of a seasonality of that business in advance of the holiday season, so what you will see is electronic thermal management revenue was much higher in Q3 than it was in Q4. And as we stated before, that's some of the highest margin products that we have. Sequentially, a little bit unfavorable product mix, drove the margin down about 80 basis points, I think.

Okay, but going forward, is it safe to assume that might have been one large product launch as opposed to a whole host of them?

Yes, and again, if you want to do anything, I would look at the second half margin profile and say that's indicative of what you ought to think going forward versus just looking at one discrete quarter.

Okay, good, thanks, guys.

Mark Parr with KeyBanc Capital.

Thanks very much. I wanted to just think a little bit more about the Seadrift situation, and so I guess, Craig, to your comments, you believe that the cost situation for Seadrift has been, I will call it, leveled to the pricing that you have committed to over 2011; is that fair?

Fair enough.

Okay. Then there is a hedging strategy associated with this. Another question, I don't know if you answered this already, but do you have any mark-to-market issues associated with hedging that could impact quarterly results. I know some companies that do metals hedging have significant mark-to-market issues with the hedging strategy. Is there any of that up and coming for GrafTech in the next several years.

Mark, obviously the hedging that we did will qualify for hedge accounting treatment, and then that will ensure that the gains and losses associated with those contracts will flow into our results commensurate with the activity throughout the year. We won't have any large spikes in mark-to-market adjustments. You will just see a flow through as part of cost of goods sold, which should normalize our results during the year.

Okay, so while you don't really have the ability to lock in a decant oil cost, per se, but you do have the ability to lock in that cost via your own hedging operations.

Yes, if you look at it from that standpoint, clearly with the supplier, there will be movement in the supplier in terms of the market price of the decant, I'll have forward contracts, which I would have sold or bought forward depending upon the byproduct or the decant oil that we are hedging. That should normalize the cost to the P&L.

So, Mark, there is a forward market that's out there, that's liquid, and we utilize it.

No pun intended, though, right?

There is also a natural hedge we have because we are selling some oil byproducts.

Right.

We have both vehicles. Obviously, we look at the net exposure, and that's what we --.

I understand that. That's very helpful. The capital budget that you have put out, is larger than we've seen in a while. How much of that capital is associated with Seadrift, could you talk a little bit about how much you think it's going to cost to accommodate the capital needs to meet the quality requirements that you are looking for?

One of the biggest components in the increase is in Engineered Solutions. Increasing capability, capacity, and putting some assets in the ground to do some new products that we have developed, so ES is a big portion of that increase. Rather than give you buckets of every one of our businesses, maybe the way to look at it, the CapEx guidance we give, $135 million to $150 million, is our largest number. But on a regular basis, it might be somewhere $100 million to $120 million. It might look like that in more normal years. I think for your longer-term modeling, if you use something in the range of $100 million to $120 million, that's probably indicative of what we would be putting in on a regular basis.

Okay. Any new machining centers going into the electrode manufacturing operations in 2011?

No new discrete centers, separate centers, but a lot of activities at our existing facilities on productivity improvement, quality improvement, et cetera.

Okay. Is there a step-up there from 2010, or are you maintaining that level that you spent in 2010?

For the electrode facilities?

Yes.

Yes, it's at least that. Obviously, we've added a new facility in St. Mary's, so it's been increased for the addition of the St. Mary's facility. There is a number of opportunities at St. Mary's because we are bringing together a couple of different technologies and best learnings. There will be some capital that will go into St. Mary's that is going to transfer some of the best practices we've learned at our other facilities. And then on the other side, there is some capital that is going to go across our platform on some of the great learnings we have from the St. Mary's team. That is baked into our CapEx number.

Okay, terrific. Thanks, Craig.

Thanks, Mark. Have a great day

Charles Bradford with Bradford Research.

Good morning. We have not gotten the World Steel Association's breakdown of output for last year, electric furnace versus BOF, but their total output was up by 15%, China being less than that, and being low in EAF. Do you think the EAF sector, leaving China aside, picked up any share last year.

Too early to tell. We are waiting for those same published numbers. If I look at a trend on EAF, we have seen over the last four years, a lot of very large new EAF furnaces go in the ground. Some of those projects were started in '08 before the downturn and the economic crisis. Some were started in 2010

We have been impressed with the number of new EAF furnaces going in the ground. A lot of them are running at low rates today, one, the economy and demand. Some of them are in their start-up phase, they never run real efficient the first several months. But what is encouraging to us is, as we look forward to the economies recovering, we see a significant portion of the EAF furnace capability are going to be these very largest, latest generation furnaces, which demand very high quality electrodes, and play right to our sweet spot. We believe when we start to see the economies get back on their feet, that there will be wind at our back as a result of all these new EAF starts that are in the ground.

Obviously, there are two big EAF's going in, in the US, one that actually might have just started up, another coming later in the year, but outside the US we've seen mini mills getting built in Russia and a few other places. Is there any specific spots where you happen to be strong geographically, where you have seen the EAF's go in?

Well, remember, we have electrode facilities on four continents, so we believe we serve customers globally better than anybody. Wherever EAF is growing, we are so well positioned to serve, either with a local facility or with a very strong, well-prepared local distribution channel. We see a lot of, very large latest generation EAF's going into Russia, China, Middle East, you mentioned a couple in the US. What is encouraging to us is, they are running at low op level today. When the economies recover, because they are the low cost way, they are efficient, they have a small carbon footprint versus the old integrated; we believe those will run very, very nicely. And they play right to our sweet spot, large diameter, very high-quality electrodes.

Thank you very much.

Thanks, Chuck. Have a great day.

There are no further questions.

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