GrafTech International Ltd (EAF) 2011 Q1 法說會逐字稿

Good morning. My name is Thea and I will be the conference operator today. At this time, I would like to welcome everyone to the GrafTech first quarter 2011 earnings conference call.

All lines have been placed on mute to prevent background noise. Thank you. At this time, I would now like to turn the conference over to Ms. Kelly Taylor, Investor Relations Manager. Please go ahead, ma'am.

Good morning, and welcome to the GrafTech International's first quarter 2011 conference call. On the call today is GrafTech's Chief Executive Officer and acting Chief Financial Officer, Craig Shular.

We issued our earnings release this morning. If you did not receive a copy please contact Marie Nor at 216-676-2160 and she'll 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. The same language applies to this call. Also, to the extent that we discuss any non-GAAP financial measures, you'll 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, for joining our call. Today, we'll take you through first quarter highlights and then open it up to questions.

In Q1, sales improved to $306 million, driven by improved demand in both our business segments as well as sales growth of $65 million as a result of the acquisitions of Seadrift Coke and St. Marys. EBITDA was $70 million, excluding acquisition accounting and related items and an increase of more than 27% year-over-year. Q1 2011 EBITDA compared to Q4 2010 which was $42 million is up 35%.

Net income was $27 million or $0.19 per share. Excluding the impact of purchase priced accounting, net income was $37 million an increase of 19% year-over-year. Operating cash flow was a use of $1 million as we increased working capital to support our growing sales.

Net debt was $321 million at the end of Q1. Our borrowings were used primarily to fund planned CapEx to support growth and a recent acquisition of Micron Research. The integration of Seadrift and St. Marys continues to proceed very well. In the first quarter, these businesses contributed $18 million of EBITDA.

Excluding the elimination of profit and inventory on sales of Needle Coke, their EBITDA was $28 million. We are tracking well against our targeted synergies and EBITDA contribution of $90 million in 2011. Regarding the quarter's overhead expense, Q1, 2011 was $35 million up $10 million from a year ago. $7 million of the $10 million is SG&A at Seadrift and St. Marys which, of course, was not in our Q1 2010 numbers. $2 million is applicable to support growth and $1 million is an increase in R&D, again, to propel growth. For total Company this year, we expect to deliver record sales and our second best year in EBITDA performance consistent with our guidance.

In our Industrial Materials segment, sales increased nearly 45% to $263 million in the first quarter. Sales in the quarter increased primarily as a result of higher graphite electro sales volume and third party needle coke sales. Operating income for the segment was $47 million, excluding $13 million of acquisition accounting and related items. The year-over-year improvement was driven primarily by higher electrode and needle coke sales volumes, offset in part by low electrode selling prices and higher raw material costs. After consideration of purchase price accounting and related adjustments, our first quarter results represent the Industrial Materials highest in two years.

If we compare Q1, 2011 versus Q4, 2010 clean Industrial Materials of $47 million, it is up 42% over Q4's reported operating income of $33 million. Graphite electrode Q1 operating rates 71% for the quarter versus 75% in Q4.

First quarter operating rates were lower due to softer operating rates in January and a bit into February. We exited the quarter; however, with electrode operating rates over 80%. We expect this rate will continue to increase over the course of the year exiting the fourth quarter with electrode operating rates over 90%.

In our Engineered Solutions segment. Sales were $43 million in the quarter. An increase of $9 million as compared to Q1 2010. Segment operating income was $3 million or 8% of sales an improvement of nearly 3 basis points year-over-year. The increase was primarily the result of higher sales volume across multiple product lines including solar and electronics, offset in part by unfavorable product mix.

On the tax front, we benefited from a lower rate of 18% as a result of favorable jurisdictional profitability. We do not believe this lower rate is applicable to our full year, and therefore reiterate our full year tax guidance of 22% to 24%.

Regarding our capital structure and interest expense. P&L interest expense $4 million in first quarter 2011. However, actual cash for the quarter was $1 million. The remainder is largely related to GAAP required imputed noncash interest on our five year $200 million senior subordinated non-interest bearing notes.

As a result of solid capital structure, our balance sheet remains very well positioned to seize growth opportunities as the global opportunities continue to recover. Turning to outlook, based on IMF projections and other economic forecasts, world output is projected to expand an average of 4.5% in 2011. And as we've seen in the first quarter, steel production was up in virtually every segment of the world other than perhaps northern Africa. So, steel continues to recover nicely.

As we assess the impact of rising oil prices, we do not expect the recent volatility in the oil markets to materially impact our 2011 results, as we have hedged virtually all of our 2011 net exposure. Reported first quarter 2011 of $57 million came in stronger than our targeted EBITDA of $50 million to $55 million primarily due to increased third party needle coke sales at Seadrift. In the second quarter, we are targeting EBITDA to be in the range of $55 million to $60 million.

We expect stronger -- we expect second quarter EBITDA to be negatively impacted by one, lower shipments to the Middle East as a result of the continued unrest there and two, previously discussed acquisition accounting head winds of $6 million $8 million related to the elimination of inter-company profited inventory on needle coke sales and $2 million of inventory step-up.

As previously discussed, we expect these aforementioned acquisition accounting head winds to be largely behind us by Q3. We expect our second half of 2011 to benefit from improved volumes across all of our businesses. Increased operating leverage as a result of higher operating rates at our facilities, IE, moving from Q1 graphite electrode operating rate of 71% to over 90% in Q4. And previously discussed acquisition synergies which will flow through in the second half.

Finally, we reiterate full year guidance metrics as detailed in the press release. Targeting EBITDA to be in the range of $285 million to $315 million and cash flow from operations to be in the range of $185 million to $215 million.

Thea, that concludes our prepared remarks. Please open it up for questions.

(Operator Instructions)

Luke Folta, Longbow Research.

A couple of questions relating to supply and demand of needle coke. As I understand, in the last peak, global EAF production was around 415 to 420 million metric tons globally. At that run rate, I recall needle coke capacity being pretty much sold out globally. Does t hat sound about right to you?

That's right. Things were tight back at that peak. Absolutely correct.

Since then, has is there been any expansion in needle coke capacity?

There's been a little bit in a couple of the facilities. But I wouldn't call it materially different than what you've commented on in the '08 peak.

Okay. And based on what you're seeing as far as your order book, and discussions with customers regarding 2011, can you give us a sense of where you think the EAF production number could be for 2011? How it shakes out?

What we see is each quarter continuing to improve. We are very pleased with the improvement we saw in Q1 in steel production. Rates around the world, virtually every segment up nicely, South America up double digit. US 6% plus. So, we see that trend continuing. As far as needle coke, we've been very pleased with the Seadrift acquisition. Our third-party sales have gone very, very well, and we are currently running that facility at 90% plus.

Okay. And so when you put it all together, a number for EAF production of something north of 410 metric tons, north of that number, does that seem reasonable?

I think if you look at all of the analysts and the various agencies that comment, I think a lot of them are around 400 or so. I think 400, 405, 410 are common numbers we see for EAF production.

Okay. And, in the last cycle, I understand there's a percentage of electrodes that are produced using coal tar pitch instead of coke. Can you give us a sense of what that percentage was in the '07-'08 time frame.

I don't have that exact number, but from what I see, in the last peak, whether it was from oil based or coal tar based, both those tracked very closely as far as the tightness in supply and demand; and both tracked very closely as far as cost structure. So, I don't see a lot of differences. You're referring to '08. And back in '08, you're right, we got to those EAF production numbers and things got tight. I don't think we're far away from those kinds of tightness currently.

Okay. And has there been any expansion that you are aware of in the capacity of electrode producers that can use coal tar pitch since then?

No, all of us can use coal tar pitch. You fire your furnace a little bit different. But we all know very well how to use either type of coke. So, think of the cokes as quite interchangeable. You have to change a little bit of your operating practice at the facility. The quality is very similar. And historically, whether it's cost structure, or supply/demand trends, the coal tar and the petroleum bases have tracked each other very closely.

I guess what I'm trying to get at is, is there any reason to suspect that should we get back to this 420 plus sort of global EAF production number, that we are not going to see the market as tight as it was in the last cycle? Has there been any changes in that sense?

I think your logic holds, and I think as we continue to get positive data points on the global recovery, to us, it's very encouraging. And I think your analysis that, hey, we're not that far off the last peak; we're not that far off the last time things started to tighten up -- I think it's pretty accurate. I think, as we look forward, is it 2012? Is it sometime in 2012? I don't think anyone actually knows. But all of the trends, from what we see, are intact. They look very encouraging to us.

And just look at our situation. We're going to run our facilities over 90% operating rate in Q4. And demand is picking up; it's broad based. If you look at the Q1 steel production numbers, almost every segment of the world had very nice sequential improvement. And so it's encouraging to us. As I look forward to big picture, 2012, 2013, I think it looks very exciting to us.

Okay.

Thanks for that, and one last question. You had published a price increase on your website here, I think this week. And I just wanted to put that in perspective. You had mentioned that you've locked in your needle coke costs for this year, and you've hedged whatever exposure you have as far as Seadrift is concerned. Does that price increase -- does that pretty much suggest margin expansion, or is there some other inputs that are increasing that you're trying to offset, there?

Well as you know, and as we talked in the last conference call, virtually all of our book is either put together or bid. So, this increase will not have any kind of material impact on this year. I think that's important, and I think it's important everyone stay within our annual guidance on EBITDA.

But, this price is reflective of some of the cost increases that are coming. As you mentioned, some of ours are hedged very nicely. But others are -- freight continues to go up around the world. I think many industries are facing that. This increase is targeted at trying to offset some of those, and get a price for our product that represents a fair price to offset some of those costs.

I think everyone's costs have been going up quarter after quarter. I know our customers' costs have for sure, and a lot of it being driven by improving economies, as supply and demand tightens up in many sectors.

If I could squeeze one more in.

I just wanted to understand -- this price increase is effective until the end of this year. This is not the number we should necessarily be hanging our hat on for 2012.

That's a good way to look at it. Obviously, oil, and the significant movement in oil since the needle coke books were built for this year, which really is last year, Q3 -- oil has moved from the $70s, low $80s, to $115, $125. So, that large move in oil is not in this 15%.

As we said, we're virtually all hedged for this year. That huge cost increase driven by petroleum and related products is not yet in there. And it's still early in the game, looking all the way out to 2012, to really access yet what is that cost push like.

Okay. Thanks a lot, guys, for all the color.

Ian Zaffino, Oppenheimer and Company.

Great, thank you.

Question would be on -- your estimates as far as that 90% utilization. Is that based on basically what's written in your book, and your discussions with customers, or based on projections of EAF, or industry EAF projections?

That's based on what we have to service from our book and our customers.

Okay.

We need to be at that level to take care of our sales.

Okay.

Maybe and add on to that -- we will not be adding significantly to inventory year end, with that 90% plus operating rate.

Okay, good. And now as far as inventory in the channel, where is that, relative to historical levels?

I think if we go across the whole supply chain, I think steel inventories everywhere other than China are very, very thin. I don't see any major inventory bubbles. China has had a buildup in the first quarter. Everyone is monitoring very closely.

Some of the China buildup -- we all have to always remind ourselves every year because us westerners tend to forget about it -- is Chinese New Year's holidays. There's almost always a buildup in many industries to accommodate for that. So, China has had a buildup in steel; it's something that I think everyone in the industry is watching. It's a data point. But I think that's going to work out fine.

The rest of the world steel inventories are very lean. On the electrode front, I don't see any significant inventories or bubbles at all in the supply chain of electrodes. I think it's a very healthy view of where electrode inventories are at our customers, and our own facilities. Our facilities do not have a lot of finished good inventory. And so the supply chain for electrodes looks very good from our vantage point.

Okay.

And then the last question, and then I'll let someone else hop on, would be -- given where oil prices are now, and it's still very, very early to figure this one out, but given where oil prices are now, I guess you could probably impute where the needle coke costs will be. What would you need to recover as far as pricing to hold your margins? How much would pricing need to be up next year, to hold the same margins you have this year?

I think you're right, Ian. It's awful early to try and surmise that. Price is always hard, really, to forecast. I think what will come to bear is, where is the oil cost driver? Is it still $115, $125? That's a large cost driver everybody faces. Where is supply/demand on graphite electrodes? And then, how is steel running?

And if steel continues its slow, steady improvement, I think, going into 2012 looking at inventories, as you discussed, across the supply chain -- looking at some of the cost push, and looking at the tightness that already is starting to surface in the overall supply chain, whether it's needle coke and electrodes -- we would be very bullish on 2012. To be running at Q4 above a 90% utilization rate is another very positive data point for us.

Okay. Thank you very much.

Thanks, Ian. Have a good day.

Chuck Murphy, Sidoti & Company.

Good morning, guys.

Just a follow-up question on the price increase. If we're still at $115 oil 6 months from now, is it safe to assume that the electrode price would be at least 15% higher?

Remember, the 15%, as we discussed, does not factor in the move in oil prices. So, oil prices, if you go back to Q3 of last year when that book was put together, $70s, low $80s; and now you're $115, $125, and still a moving target; a lot of variables we all are very familiar with in the Middle East. And also, the overall economic recovery is going to probably have a factor into oil pricing, because we see a broad based recovery here. As we talked on the last few conference calls, we see it in virtually every product line. Every part of our business, sales were up. Even if you look at sequential numbers, Q4 to Q1 -- very nice improvement in the EBITDAs.

Got you. As things stand today, assuming a 15% increase in prices from 2010 to 2012 wouldn't be aggressive.

15% will not cover the possible increase in the key cost driver of petroleum. So, that's not even in the 15%. We don't know what the needle coke is going to be for next year. And here we are way out nine months. So, that's not in the 15%. And that's probably the biggest driver.

Okay. All right. And then, next thing was, you mentioned before -- make sure I got my information correct -- you said 71% electrode utilization rate in the first quarter?

Yes, that's right. We did 75% in Q4 if you recall. 71% in Q1 was lower. January, February were a little bit lower in the beginning. We are marching up. We'll be in the 80%s, and then all of Q4 will be over 90%.

And would you assume that 2012, again, all things kept the same, would also be in the 90% range.

All things being equal to what we see, and if steel continues its recovery. We would see that next year we would expect to run each quarter beyond 90% utilization rate.

Got you. Okay. And last question -- how much needle coke did you buy from Seadrift in the quarter, and any update on what you're expecting for the full year?

We don't give the quarterly numbers, but as we talked in prior conference calls, we've been targeting about 70,000 metric tons this year, and I think that's still a good number to think about , about our own internal purchase. And the balance is out to global market third-party sales, and as I said, that's gone very well. I'm very pleased that way that's gone, and Seadrift is running beyond 90% utilization rate right now, because that's gone very well, and because of the supply/demand equation out

Got you. Thank you very much.

Have a great day.

Eric Glover, Canaccord.

You talked a bit about a slowdown in the Middle East in the coming quarter. Could you talk about how much -- what is your exposure there, actually?

The Middle East is not a big item for us. And so, I think a good way for you to think about it, its about $0.01 a quarter for us, is what that would look like in the Middle East. And obviously, things are very, very fluid there. So, think about it as $0.01a quarter.

On the good news, we've been very, very proactive, so as to minimize any AR exposure. We've been very hesitant to ship unless we had a clear line of sight of LC payment, et cetera. This has not just been the case of the unrest. It's a been a very proactive move by the company, not wanting to ship in there, and then struggle to have a collection.

Eric, think of it as $0.01 a quarter; and having said that, we're still within our annual guidance range.

Okay. Could you provide an estimate of what you think your global market share in electrodes is now, with the acquisition of St. Mary's.

Well, it's obviously a moving target, because markets are recovering everywhere. I think if you look at our Qs, you're going to see some numbers in the Qs that range, all together with everything, that are probably around 18% or so. 19%.

Very good. Thanks.

Thank you, sir.

Charles Bradford, Bradford Research.

After the earthquake in Japan, I was able to get some data about the graphite electrode producers in Japan, some of which had shut down. Do you have any information as to whether or not Tokai, or Nippon Carbon, or Showa Senko have come back up?

Yes, Chuck, we've been staying very close to that. And obviously, a very, very sad tragedy. And what we've seen so far, is that in our supply chain of our raw materials, and in our competitors' supply chain and their own operations, we have not seen any significant disruptions thus far.

So far, they've been able to meet their customer orders. We've been able to get any of the raw materials that we need out of Japan. So far, that's gone well. I think it's important we continue to watch that obviously.

With rolling brownouts, less electric power will be more aggravating as we get into the summer months. This is one we have to stay very close to, and during the summer months, I think, when we get to June, July, August, September, that's when it will become clear, is there any impact of this 20%, 25% power drop? And the rolling brownouts.

Right now we don't see any impact. And it's one that we are monitoring closely. And I would say, what we've seen so far, Chuck, in our guidance, the $285 million to $315million, our assessment is that any pluses and minuses that might be in there are within our guidance range.

Terrific. Have you heard anything about electricity cutbacks in China? We're beginning to hear about some pretty massive shortages of electricity, and the plan is to cut back electricity for the Chinese steel companies in particular.

Yes, we've been hearing that also. In Q1 obviously, the steel producers in China were able to run; they've built inventory. But I think the Chinese government is doing a number of things to contain that steel industry. It's gone through tremendous growth.

The latest coming out of the government is, they've announced a very serious plan, and very clear announcement, that by 2015 they want to take the current 800 producers of steel in China and get it down to 100 producers. So, obviously, a huge task and they may fall short. But the numbers are so large, the reduction so large, even falling short is a massive consolidation of the customer base.

We are following this very closely. We think it plays to our strengths. We'd much rather deal with larger, sophisticated customers that are driven by productivity and efficiencies. It plays to our high quality electrodes, our customer tech service.

And your question on power. This move from 800 fragmented, running undisciplined, wild steel production, with many times pollution impacts in China -- consolidating it to 100 bigger players that respect the environment, et cetera, will also perhaps reduce some of that electric power consumption. Many of those 800 are old, old furnaces, they are high consumers; and I think to your question on power, I think, yes, China is talking about it. I think they are serious. I think the power consumption is an issue. And it may help propel this consolidation of steel in China, which I view as a positive for our company for the reasons I've talked -- I think it's also positive for steel.

Yesterday, they apparently put out an 111 page document identifying which industries and companies are going to be favored and which ones not.

Right.

And the big energy consumers are not.

That's what encourages me, that this very clear announcement they made, they're going to go from 800 to 100 steel producers, that they're very series about it. Because their back is up against the wall on electric power. The smaller ones of those 800 are usually the real offenders in pollution and treating the environment.

And so, I think this consolidation is going to be good. I think it will help the power issue you're talking about. And, then, lastly, as I said, I think it plays to our strengths. We really like working with large steel producers that are driven by productivity improvements, customer tech service, growing their business. They have a lot of metrics, performance of the electrode is important, and they understand the performance of the electrode because they have detailed metrics and controls.

I don't know if you listened to US Steel's conference call yesterday. They talked about switching; some of their facilities maybe to electric furnaces.

Yes, we did. And obviously, very encouraging to us, as are all the new builds going in to EAF, that we've been talking about and that we've highlighted in our last few Qs.

Big picture, EAF, we are bullish. We like where the supply/demand picture is headed. We like the trends we see in the global improving economies. And, as I said, we expect to exit Q4 at plus 90% utilization rate.

Thank you very much.

Thank you, sir. Have a good day.

You too.

The next question will come from Mark Parr KeyBanc Capital Markets.

I have had a lot of thoughts this morning about your release, and I think the questions for the most part that have come so far, have pretty well answered everything that I've thought about.

One thing that I think the market -- and again I don't want to throw any stones or any water on this fire, because I think you're doing a great job today, Craig, and I think there's a tremendous outlook here that's continuing to be acknowledged by investors.

But the question always seems to come up about the Chinese production of needle coke; Chinese production of electrodes. And as the Chinese industry gets more electricity availability ,and more scrap, those are emerging trends that are going to help support more EAF steel production in China. But there's also a concurrent electrode production momentum going on as well.

The question I would put to you is -- and it doesn't sound like there is, from your comments -- what is it about the Chinese needle coke or electrode growth initiatives that may concern you, or could potentially impact the outlook for this company over the next couple of years? Is there anything that you see that concerns you?

Very good question. And I think in electrode industry, as well as so many other diverse industries, China competitors have to be at the top of the focus. Yes, we have a lot of respect for Chinese competitors. There's a lot of them. But when you go through and analyze them, and obviously, we've looked at many of them in detail from a growth acquisition standpoint. So, I think we understand them well. And two things surface very clearly. One, their cost structure. Everyone likes to think that China is so cheap to produce. And I would say that when I look at their cost structure versus our cost structure, and even our cost structure with or without the Seadrift acquisition, I like the matchup. So, they do not have an advantage on cost structure, so point one.

Point two, they're behind on quality. They're coming up the curve; So we have a lot of respect for them. We've got to watch them. We use the Chinese many times in our Company as the burning platform, to motivate and drive continuous improvement, because the Chinese have taken and threatened so many industries around the world. But our path is continuous improvement on quality, servicing our customers, and continuing to drive lean into our organization.

So, I don't see that they have a cost advantage at all. We are the low-cost producer, with or without Seadrift, I'm talking. Seadrift just makes it that much better.

And on the quality, they are still behind on quality. And what our team has to do is not stand still on quality. So we are devoting an awful lot to R&D, to grow that gap and not stand still, and have continuous breakthroughs.

Many of the furnaces going in, as you know, are very large furnaces, so they demand the best performing electrodes. The growth plays to our sweet spot. And you're going to see us continue to work on quality, invest in our team, invest in R&D.

We now have 3 sales offices in China. One of our biggest growth of head count has been in China. We have built a very strong China team. Our market coverage in China has grown significantly over the last few years. If you look at total company -- if I took you back 8 years ago, our sales were 8, 9 years ago, $500 million, $600 million. And Asia was 10%. Here we are, this year, all-time record sales. And Asia sales are going to be 20%, maybe more.

So, Mark, your point is well taken. It's something we take very serious here; we use it as a motivator to stretch the team and have break throughs. But it's a competitor we watch very closely. I think we are going to beat them on cost. And I think we're going to beat them on quality and service.

If I could ask just one other follow up, and a little bit different -- and I appreciate that color; thanks very much.

One of the strategic advantages of vertical integration that you and I had talked about over time, was the potential for turning Seadrift's quality into a differentiator in the marketplace. And this certainly feeds into your view of being the highest quality producer in the world along with being the low cost producer. But I'd just like to get an update if I could.

You've had a few months where you've been able to work directly with the Seadrift people on a more intense basis. How much of a differentiation do you feel is achievable, as you work to optimize Seadrift's production capabilities? Is there any update you can give us?

Yes, Mark, let me give you some quality color.

Let's start with where we are today, and where our great Seadrift team is today. Seadrift quality today is equal, just as good as any of our competitors out there. Many of our customers do not segregate the piles of needle coke at their production facilities. They mix it together. It's just as good as anyone else out there.

Our goal is, as you've mentioned, Mark, and as we've talked on previous calls, is to raise the level of quality of Seadrift needle coke. And it's a combination of the technology that my team brings to that acquisition, as well as our capability to invest in the Seadrift facility.

And as far as color, how is that going? That's going very, very well. We are delighted with the team we have inherited in Seadrift, as well as our other two acquisitions. We have a first class team there. We have now taken those assets up over 90% utilization rate. So, we are very pleased with the assets.

Like any acquisition, you really never know until you get in and you own it. And you really never know about any team until you get in and live with the team. And what I can say here, after these few months together, we're delighted with the team. We've got the assets running very, very nicely. And we are tracking very nicely to improve the quality, and take that quality from as good as anybody else's today to something that's better.

And what we've said is, that's probably an 18 month, 24 month process. It takes some time. It takes some capital. It takes some process changes and what not, and that is all underway.

Thanks again for the color. Good luck on the earnings and congratulations.

Thank you, sir. Have a great day.

(Operator Instructions)

The next question will come from Zahid Siddique, Gabelli.

A couple of questions -- the first on the book. How much of your book is done so far?

As we said earlier, Zahid, the book is pretty much either all built or already has been bid. Built into our guidance, the book is pretty much all together. On the price increase discussion we talked before, we shouldn't think of up side for this year, because of that price increase. We should think of sticking with our guidance of $285 million to $315 million EBITDA.

So, that price increase really is then for the 2012 book? Is that a fair assessment?

I think that's part of it. It's starting to reflect some of the other costs, other than the petroleum-related costs we talked about earlier on this call -- the increases we are seeing there. There may be a small spot it would capture that. But as we said, we don't expect that to be material. And again, we urge you to stay within our guidance.

Okay. And what is the steel utilization in the quarter, globally?

Steel utilization? It was over 80%. It was about 82%.

The size of the contract -- I remember it was going back towards being annual. What's that trend -- has been part of the size of the contract?

Zahid, the trend this year has been annual. So, the last 2 years -- '09, 2010, big recovery years -- it was quarter by quarter, or 6 month was a long contract. This year it has been predominantly annual. And so our customers have wanted to lock up their electrode requirements, and also lock up their price.

Okay. And -- the natural gas prices, they want to go up. Does that impact your business in a meaningful way?

Yes it does. So we have natural gas exposure. But we also have a hedging program there, also. So we have an ongoing hedging program to minimize any adverse volatility in the natural gas. I don't expect any material impact there this year.

My last question is on the engineered solutions,. Do you have any products within that, playing into the battery market, the lithium, all that area. Are there any products that are involved?

Yes, sir, there is. In fact, we've gotten some government grants, also, on the energy front and the alternative energy front. Between ourselves and some lithium ion scientists and producers.

Yes, we have a small amount of sales there. R&D is underway. Some of the increase you see in our R&D expenses is to propel that. But it's very small today. We like that sector. I think that sector is very, very attractive. And I think graphite material science technology has a role there, down the road in that attractive business.

That would be compliant within the lithium market?

That's right. That's correct. And this would be within our Engineered Solutions business.

Thank you so much.

Have a good day.

Dan Whalen, Capstone Investment.

Most of my questions have been answered. But I was wondering if you could give us a quick update in terms of the CFO search? Are you narrowing down any candidates? Any update on the time expectations?

Yes, sir, the search has gone well. We've had a lot of candidates apply. We've had a tremendous pool come; and I would expect we'll have a great CFO in place in July. Wonderful. Thanks a lot.

Thank you, sir.

Tim Hayes with Davenport & Company.

Question on your outlook for your utilization rates stepping up pretty nicely, and seems like it's increasing more than what I would have figured for a global EAF utilization rate. Does that imply that maybe customers are restocking electrodes, or does it imply that you're taking some market share?

Very good question. And let me go through it this way, because I think the data you look at is important. If you look at EAF utilization rates, they appear to be lower numbers. But what we have to remember is, over the last few years, a lot of very large EAF furnaces have been put into the ground. So the base is much bigger.

So, it's probably better to look at production rates of EAF steel. And that's more indicative of burning electrodes. And as a prior question said, we're getting close. We're not that far off the peak EAF production of '08. And we talked about numbers that could be around 400 metric tons. And it's not that far off the all-time record. What you have, Tim, is EAF production has come up nicely, and if you look at those numbers, I think they're a better indicator for you. We're not that far off the old peak.

And two, the reason utilization rates look a little low, or maybe a little sluggish to you on EAF, is because the base has grown. Now growth in that base, those new adds as we've said are very large furnaces. And they require the best electrodes, large diameter, right into our sweet spot. As you look forward, as EAF production grows, generally, it's going to be those large furnaces coming up, requiring large diameter electrodes.

Okay. Thank you.

Thanks, Tim.

Matty Pollak, NWQ Investment.

Marty Pollak.

Just two questions. One on CapEx. -- beyond 2011 at the moment, you've got a fairly robust CapEx budget versus DNA. What would it be going forward? As far as comparing both the DNA and the CapEx numbers?

Marty, You're right. We've guided the $135 million to $150 million level, which is a big number for us. And the majority of that is to propel growth. So, I am delighted to have that number. In fact for our company, that's an all time record CapEx.

And the majority of it is new products, increases in capacity in various products in ES, which has a broad return in demand across the product line. Looking forward, we've not given any guidance. I don't know that we're going to have a lot of years of $150 million in a row. But we will be north of $100 million, I would expect, if you want to run your models. I think something above $100 million is probably a good number for us.

And if it's $150 million or $170 million in a future year, it's probably just to propel growth. To me, that's probably a good news for all of us. If I was to come next year with a $170 million behind that, means we're propelling an awful lot of growth.

Second question, on back to the utilization for the company -- 90% by fourth quarter and perhaps same beyond. Steel utilization globally, what did you say was your outlook for that?

We see, Marty, continued improvement over the course of this year. In Q1, virtually every sector globally was up. And, for instance, if you look at the total steel production in Q1, it was up 7% over Q4, 2010. And it was up almost 10% over Q1, 2010.

So, you've had a nice broad base. What I like to see, it was every geography virtually, except for northern Africa. Just another data point, building on so many data points we've had over the last 18 months, of recovering economies.

So, look like total steel utilization rates this year will be in the 80%s. It will be a nice healthy number. It's come from I think 44%, 45%.

Just wondering, with regard to the flat products versus the logs -- logs, certainly in this country are still well below optimal utilization. Looking globally, is logs still have in your forecast, looks about a fourth quarter, are log products continuing to rise and catch up with flat rolls?

Good point. For the long products -- their huge soft point is residential and nonresidential construction. And what you see in the US is not that much different in many, many other markets, other than put China to the side. There's not a lot of construction going on around the world -- ex, maybe China, and a couple instances the Brit countries.

If you think of where EAF steel is today, up in the 80% operating rate, when construction returns, it is going to fill an awful lot of furnaces. Think of construction and long products as the sweet spot for many of our EAF customers. This is the absolute bread and butter. And they are already running in the 80%-type level, and probably one of their best market segments is residential/nonresidential construction. All those projects, et cetera, is still flat on its back. It has shown very little recovery.

So, that is yet to come. And I think that the question is, is that in '12 or '13? When that starts to come, you are really going to have higher EAF. I would say that if they're in the 80%s this year -- call it 85%, 86% -- I don't think anyone knows where they're going to finish up. But that's going to take them, I would expect, deep to the 90%s when that sector returns. It's just nonexistent today.

Your capability in that environment -- can you run in the high 90%s efficiently?

Yes, sir. If you go back in our history, yes, we run very nicely 95%, 96% utilization rates.

Thanks so much.

Thank you, Marty. Have a good day.

You too.

At this time there are no further questions. I would like to turn the conference back over to Miss Taylor for any closing remarks.

Thank you for your attention and your questions, and look forward to talking to your next quarter. Have a great day.

Ladies and gentlemen, thank you for the participating in today's conference.