GrafTech International Ltd (EAF) 2011 Q2 法說會逐字稿

Good morning, my name is Thea, and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech second quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions).

Thank you, I would now like to turn the call over to your host, Ms. Kelly Taylor. Ma'am, you may begin.

Thank you, Thea. Good morning, and welcome to GrafTech International's second quarter 2011 conference call. On the call today is GrafTech's Chief Executive Officer, Craig Shular, and our Chief Financial Officer, Lindon Robertson. We issued our earnings release this morning. If you it didn't receive a copy, please contact Marie Noor 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 not the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call. Also, to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release which is posted on our website, atwww.graftech.com in the Investor Relations section. At this time, I would like to turn the call over to Craig.

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

Let me start by welcoming our new CFO, Lindon Robertson, to our team. Lindon joins us from IBM where he has had over 25 years of experience in finance and international business. During his time at IBM, Lindon held multiple senior financial leadership positions which included international assignments in China and Japan, totaling ten years. Lindon brings his extensive financial and business growth skills. We are all delighted to have him on our senior leadership team.

In Q2 sales improved to $320 million, up over 25% from the same last quarter last year, driven by improved demand in both of our business segments. EBITDA was $67 million, excluding previously reviewed acquisitions accounting and related items, and an increase of more than 35% year-over-year.

Net income was $29 million, or $0.20 per share. As expected, net income declined year-over-year as we recognized charges related to purchase price accounting and delay in profit recognition associated with inter-company sales of needle coke.

Operating cash flow, was a use of $17 million as we increased working capital to support our growing sales. Net debt was $375 million at the end of Q2, our borrowings during the quarter were used to primarily fund CAPEX to support growth and higher working capital requirements.

The integration of Seadrift and St. Mary's has progressed very nicely and is expected to be largely completed by the end of the third quarter. Year-to-date, these businesses have contributed approximately $40 million of EBITDA before purchase price accounting adjustments.

We're tracking well against our targeted synergies, and the full year targeted EBITDA contribution $90 million. Our balance sheet remains very well-positioned and will allow us to grow and seize opportunities as these economies continue to recover over the next several quarters.

Turning to segment performance. In our industrial materials segment, sales increased nearly 30% to $270 million in the second quarter versus the same period a year ago. Sales in the quarter increased primarily as a result of higher graphite electrode sales, volume, and third-party needle coke sales. Operating income for this segment was $39 million excluding $7 million of acquisition accounting and related items. Graphite electrode Q2 operating rates came in at approximately 80% for the quarter versus 71% in Q1.

We are currently operating at approximately 85% utilization. We expect that this rate will continue to increase over the course of the year, exiting the fourth quarter with electrode operating rates over 90%.

Due to raw material increases and supply/demand factors, we have announced price increases to our customers in our graphite electrode and needle coke businesses. In June we announced new pricing for normal premium grade needle coke of $2,650 per metric ton. In early July we announced new graphite electrode prices for standard sized melter electrodes of $6,900 per metric ton.

While we don't expect the material to impact the 2011 results from these price increases, as the majority of our 2011 business is booked. It better, though, positions us for 2010 to manage margins amid increasing cost structure.

In our engineered solutions segment, we had record quarterly sales of $50 million. Segment operating income was $7 million, or nearly 15% of sales, an improvement of three full percentage points year-over-year. This business segment has continued to gain traction and is now at a $200 million annual run rate.

On the tax front, we benefited from a lower rate of 19% in the second quarter as a result of favorable jurisdictional profitability. We do not believe that this lower rate is applicable to our full year, and therefore, we reiterate our full year tax rate guidance of 22% to 24%.

Turning to outlook,the IMF estimate for global GDP growth was revised downward slightly to expand by approximately 4.3% this year. IMF lowered economic forecasts for the United States, Japan, Italy and the UK, while reiterating its forecast for stronger growth in emerging economies given robust internal demand.

In total, the global recovery is expected to continue, but is progressing slower than previously anticipated. The weaker-than-anticipated activity in advanced economies and continued financial volatility has resulted in a less positive customer sentiment through these summer months. We continue to expect our full-year EBITDA to be in the range we previously provided, but at the lower end of the range as a result of this mild summer slow down.

We are seeing solid demand into the fourth quarter and expect this to continue into 2012. In the third quarter of 2011, we are targeting EBITDA to be in the range of $70 million to $75 million. Third quarter targeted EBITDA reflects the previously discussed less positive customer sentiment and weaker demand associated with the normal European holiday season.

Due to customer order patterns in the second quarter, the impact of inter-company profit and inventory on sales of needle coke are expected to carry over into the third quarter, resulting in a headwind to the third quarter EBITDA of approximately $2 million to $4 million.

In the fourth quarter, we're targeting EBITDA in the range of $90 million to $95 million. We expect that this quarter-over-quarter improvement will be driven by the following; one, we will realize a full-quarter's impact of a backward integration of Seadrift. Graphite electrodes made with Seadrift coke will flow through as third-party sales. These electrode sales will yield margins on both the electrode side and the embedded Seadrift needle coke side. So we'll have a double margin, if you will, on these sales.

Number two, we project the fourth quarter will represent our highest third-party needle coke sales of the year. Seadrift profits will be recognized immediately on these third-party sales, versus the delayed profits associated with Seadrift needle coke [sourced] for internal consumption.

Thirdly, our operating rates continue to increase across all of our businesses, and we expect that fourth quarter graphite electrode operation will be 90% or more, yielding better cost absorption. Finally, our team is pleased with the acquisitionsthat have been executed to promote growth. The integration of Seadrift, St. Mary's, and Micron research have been successful, and our two new team members have performed exceedingly well.

Synergies and targeted EBITDA contributions from these acquisitions are on track. The full benefit of these acquisitions will be more than apparent in the fourth quarter of this year, and as we move into 2012, our low cost, advantage business model will position us very well to deliver long-term share holder value. With that, Thea, let's open it up for Q and A.

(Operator Instructions). The first question will come from Luke Folta with Jefferies.

Hello, Luke, how are you today?

Not bad, how are you?

Superb, thank you.

First question, I appreciate you putting the numbers you did regarding electrode and needle coke prices in the press release, that's really helpful. But I wanted to understand -- ask you if you could provide some more color on what the year-over-year changes in those numbers would be. In other words, what were the 2011 expected realizations?

On the electrode side, we had previously announced an increase earlier in the year, and I think you should think of that around a 15% increase. And then this last increase, we announced at the beginning of July, is about another 15%. So I think you could think of about a 30% increase when you take those two together.

On the needle coke side, something that we must all recall, is that needle coke prices have been pretty much flat for two years. So if we want to look back to the cost structure of oil and decant oil as it relates to the needle coke business, we need to go back two years. And so if you go back two years,really, oil was in the low $60s a barrel, and of course now Brent is $118 and WTI is $100 or so. And so, on the needle coke side, our increase reflects that two-year cost increases that we must absorb.

So the needle coke percentage increase is much larger and much more reflective of what the cost structure is doing. So I think as I look at the needle coke prices, and where they are in relationship to the $2,650, that's probably a 65%-plus increase. And again, recalling that is a two year increase, if you will, because needle coke prices have been flat for two years.

So for 2011, I'm just trying to understand, the 55% increase, does that apply to the needle coke that you've sold in 2011 to that pricing?

No --

Because I know it was an increase in 2011 relative to two years ago, so I'm just trying to get your year-over-year impact.

Needle coke has been pretty flat for two years, so the price increases that we have announced on graphite electrodes and needle coke, the way you should look at those is, this year they will have virtually no impact. Our books are pretty much put together. So you should look at those, our 2012 pricing actions, just trying to get ahead of the large cost increases that we're facing across the supply chain.

Okay. That's helpful. Thanks, and the same question I had was regards to the average selling prices in the quarter. When I think about your revenue growth in industrial materials, it looks like it was up a few percent. And if I use your operating rates as a proxy for shipments, you went from having low 70% to 80% from the first quarter to the second quarter. I'm trying don't to get a sense of why the increase and revenues wasn't a little higher from the second quarter. Was there a step-down in the sequential pricing to that magnitude that would offset that?

Yes, pricing is lower in graphite electrodes, and that's the biggest drag on Q-2 sales, and obviously the volumes across all of our businesses are up. We're very pleased with the volumes. Utilization rates are coming up very nicely. The needle coke business is running at 100%, and the electro-grade is now at 85% utilization rate, headed to 90% plus. So we're very happy with the volumes.

But you're spot on when you get the Q, you'll see that electrode prices in the quarter were down about 7%. If I look at the full year, I would expect them probably to finish the year down around 5% or less. The reason they're down 7% in Q-2 is the year-over-year comp. If you recall a year ago, we had a bit over carry-over higher prices from the prior year. So the comp year-over-year makes it a 7% slide for the quarter. So I think that fills the gap that you were looking at.

But for the year, I would think that our electrode prices will probably be down 5% year-over-year, maybe a little bit less. So pricing is where we're feeling it.

Volumes have come up nice, and the steel production is coming up nice in total terms, it's going to be 400 million plus, and the estimates I look at, it could be north of 425 million metric tons of [EAF] steel. Those are very good EAF steel production quantities.

Okay, and the last one if I could, could you just tell where you see graphite electrode inventories in the channel? I'm trying to get a sense of where we could be heading in the second half relative to expectations for 2012.

We don't see any buildup in the channels. The channels look pretty good. We don't have anything like that in 2007, 2008 when there was a bubble. So as I look across the entire global market, I don't see a lot of excess electrodes out in the channels. So I would say the inventories are healthy. They're at the right place, and there's not an excess out there.

Ok, great, thanks, guys.

Thank you, Luke, have a good day.

The next question will come from Ian Zaffino with Oppenheimer.

Thank you very much. Can you tell us about the dynamics in needle coke, how much of the production has been taken offline in Japan and how does that impact your price and go out look at all?

Good morning, Ian, how are you today?

Good, good. Can you talk about the supply/demand dynamics in needle coke? How much of the production has been taken offline in Japan, and has that impacted your pricing and outlook at all?

As it relates to Japan, the tsunami and the unfortunate tragedy in Japan really did not have much impact on the needle coke production in Japan. It has to do, one, where the needle cokers sit. They sit primarily in the western grid, and that grid, and that section did not have much impact at all. So as I look at the needle coke industry worldwide, I see it's running well. Japan did not miss a beat. We're running well, and we're at full-out. So we were at full capacity. Demand is nice and solid.

As we've said, we're taking about 75,000 metric tons as planned, and as previously reviewed, from the Seadrift coke for our own electrode facilities, and the rest is all sold to third parties. So needle coke has tightened up very nicely this year.

And I may highlight, just -- there's a sister to the needle coke, it's a anode coke, it's a lower-grade coke, it's much easier to make, there's a lot of producers, a lot of it goes into the anode industry for aluminum. The anode coke business is probably 20 times larger than needle coke. And anode coke, the sister coke, is running full-out right now, as we speak. So the entire coke market has tightened up really nice.

We have a very large anode coke market running full, sold out. And now you have the needle coke market running at a very high op level. So a lot of it, when you look at the volumes and whether it's in aluminum, or looked across our platform, the volumes have come up very nicely.

And EAF steel production is going to have an all-time record year here. It should be north of 425 million metric tons, that's a record year. So the volume side of our business, I like the dynamics, the supply chain is tightening up, our sales volume are good. We just got to get ahead of rising cost picture. And that's been our [nemesis] this year. Price of electroding, electrode prices has been down, and of course, cost across the front areon the upswing.

And the other question, when you talk about the results coming in at the lower end of guidance, is that primarily from the electrode business or is there -- how do you (inaudible) the electrode from the ES business?

ES is running very nicely, set at an all-time record quarter here in Q-2. So it's not the ES business, it not our needle coke business, it's our electrode business. That's where we're feeling the softness on the price, that's where we're feeling the summer slow down that we're seeing.

I think the number of the large steel producers over the last five, seven days have announced, and I think, virtually every one of them has seen a soft patch here in the summer. I think most of them see that that's going to come back in Q4, and auto production will probably come back up in Q4. But it's the electrode business, Ian, and it's a soft patch that we're all facing, and virtually all of my customers in all geographies are seeing it.

Okay. Thank you very much.

Thank you very much, sir, have a good day.

The next question will come from Michael Gambardella with JP Morgan.

Good morning, Mike, how are you today?

Good, Craig, how are you?

Excellent, thank you.

Good. A couple of questions; one, can you give us a feel for the quarterly progression of utilization rates in your electrode business from the beginning -- from the first quarter through the rest of the year? You said over 90% in the fourth.

Yes. Q-1 came in about 70%, 71%, and then this quarter came in just a tad under 80%, and now we're at 85% right as we speak today. And I would expect that the entire Q-4 will be 90% plus. So we have been ramping up in some cases and at some facilities, we have had to add some people. So electrode operates at a very good level.

On the needle coke front, we're full-out, and then on the ES business, very good off-take as you see record sales in the quarter. So volumes have picked up nicely, and our soft spot, as we said, is GE.

And on a global perspective, on electric arc furnace utilization rates, what are you seeing?

I would say globally we're probably in the mid 70%s, something like that. I think, a couple of the large accounts that have reported some, they've had their own little nuances, I saw a couple -- one or two that were in the low 70%s, but if I added them all up, they're probably at about a 75% operate. What we always have to remember in the global ES industry, a lot of new furnaces have been put in the ground.

So obviously, it has changed the base. Even in my team we tend to forget that sometimes. So the utilization rate obviously is one indicator.

But when I go to the tons that they produce of EAF steel, that's my closest correlation to electrode consumption. This year looks definitely north of 400 million metric tons. I think it's going to set an all-time record, 425 million metric ton-plus in global EAF steel production. To me, that's a nice healthy data point, and that is probably the closest correlation to electrode consumption.

And on Seadrift, you're currently running at capacity?

We're full-out.

And I know you've talked in the past about moving capacity up. And any updates on that?

No update yet. What we have done this year is there are some normal maintenance turnarounds, we've already done those, we did those in the last couple of months. We put in some quality things we wanted to do, and we had some of our own needle coke technology and patents. The [Seadrift] team did a great job with normal maintenance turnaround, that went flawlessly. And then when we had the equipment down and open, we also did some quality and technology enhancements, so that has gone very well for us.

So Mike, they're running full-out right now, and if you follow the weather, just to give you some color, there's a tropical storm down in that area, and we're prepared for that. I may lose a couple of days of production down there. I don't think it's material. But looks like it's going to be a tropical storm, maybe a hurricane 1 right now, and it could hit somewhere on that Gulf Coast. Our team is very well prepared for it. This would kind of be a normal type weather disturbance, but we could lose a couple of days there. But other than that, we're full-out and have been very pleased with the new team members there.

One last question, just a couple of days ago, USsteel reported their second quarter results. And then in the Q & A, John Surma, the CEO mentioned that they're looking at the potential of building direct reduced iron units and even electric arc furnaces as a way to really avoid -- well not avoid, but lower their coal exposure on their total business since you don't need coal for EAF or DRI.

Do you see others doing that? And how much of an opportunity is that? It's obviously incremental tonnage if they go ahead for electrodes in the US, but do you see or hear anybody talking about doing it elsewhere?

Mike, we see that to be a growing theme. It's obviously a huge opportunity for our Company, and we see it in the growing theme of electric arc furnace steel production is the low-cost way to make steel environmentally friendly. My group of customers in that space are the largest recycler of any kind on the planet.

So that entire theme, whether you're getting away from excess energy consumption, or carbon footprint, or trying to improve your cost structure, or the nimbleness of your facility. Obviously an EAF shop is so much more nimbler than a large, integrated shop. We see that trend.

I've seen others talking about DRI production, putting it in the ground. Obviously it takes electrodes to make that steel and we love to work with DRI. We have great electrodes that work very well in a DRI system,and I have DRI customers all around the world.

Thanks as lot, Craig.

Thank you, sir. Have a good day.

The next question will come from Tim Hayes with Davenport & Company.

Good morning.

Good morning, Tim, how are you today?

I'm good how are you? .

Excellent, thank you, sir

The one question that your ramp-up in utilization rates for graphite electrodes from Q-1 to Q-4, seemed to be more than what the EAF industry operating rates would be increasing. My first thought was maybe customer restocking, but you seemed to indicate that that's probably not really happening.

Is there any -- are you getting market share gains or is it just simply the EAF capacity has gone up so much more than the graphite electrode industry has taken it's capacity up?

Yes, Tim, you bring up a very good point. And we talked a bit about this in the last quarter. We have some customers in the book in the second half of this year that we did not have in the first half of this year. So some of that ramp-up is just the way that our booking went.

If you recall, going into the year, we worked very hard to get an increase on graphite electrode prices to offset some of these cost pressures we're talking about now. We saw them coming, and costs have been going up across the platform. As we talked earlier, that wasn't successful and the prices are down, of course, year-to-date. So we lost some business in the first half due to those efforts. We had that business in the second half, sothat's a significant portion of it.

In a normal year, we would have that business across the platform, obviously we have great electrodes, great service models, and so it's not that we don't work well and those shops haven't earned our way in. It was that initiative, so that has affected our book.

We have customers and business in the second half that we did not have in the first half, Tim. And then, additionally, it's this growing EAF steel production across the board. This should be an all-time record year of EAF steel production across the global platform.

And finally, the pricing on graphite electrodes, you give the year-over-year change. Was that actually down sequentially from Q1?

I've got to recall back to the Q. I think the first quarter we were down around 5% or 6%, so yes, it's down a little bit -- most --so it is down a little bit more than Q1. But I would expect the full year to come in down less than 5%.

As I said earlier, part of it is, in the year-over-year comps, the first part of last year, we had some carry-over business that was at a higher price, so the comp challenge is a little bit harder in the first half. I think the next couple of quarters you'll see that the year-over-year comps aren't as -- the hurdle rate isn't as high, so we should finish the year with prices down 5% or so.

I know those are the year-over-year, but even though the year-over-year may be coming down a bit in terms of how negative it was, we really can't back into the sequential change Q1 to Q2. Can you give that?

I don't think it was much, I'm just recalling, I think Q1 was 6% or 7%, and this quarter is around 7%, so that's the first half. The second half, and it's just a comp issue, because the first half of last year there was higher priced business that carried over into the beginning of the year. So I think we're going to finish this year --the way you should look at it, we'll probably finish this year with year-over-year, full-year GE prices down 5% or less.

Okay, thank you.

Thank you, sir.

The next question will come from Mark Parr with KeyBanc.

Good morning, Mark, how are you today?

Good, Craig, doing all right. How are you today?

Superb. Thank you, sir.

You're always superb, and you got your new CFO so that makes it extra encouraging that you've got your team back together again. So good luck with that.

We are delighted to have Lindon on, he has hit the ground running, obviously he brings seasoned skills to us. He has been involved in a lot of growth initiatives at his prior company, and he has also been the go-to guy that they threw into Beijing, and those kinds of things, so we're delighted to have him. And you're actually right. I would much rather do the one job than the two jobs, so I'm delighted to have Lindon on board.

Now all he has to know is how to work with all of us guys.

I didn't tell him about you guys before he signed up.

That's probably a good thing. Oh, boy.

I get the weakness in electrode pricing, but I am encouraged by the fact that volume typically comes before pricing. One of the things that I'm a little bit curious about, your comments. If you go back and look at say the time frame 2003 to 2007 or 2004 to 2008, when you were consistently above 90% utilization. But there are really only a couple of years where pricing unfolded aggressively, and I think the utilization rates for GrafTech at that point was -- you were over 95%, over 98%, I think one year, you were even over 100% utilization.

And I'm wondering, do you think that with your utilization looking in low- to mid- 90%s for 2012, is that going to be good enough utilization to really get the pricing traction against these nominations that's you've shared with your customers in the last 60 days?

The way we should think of our GE plants, and I think just the GE business. When you get to about 95% operating rate, that's about all you can really get on a consistent basis. Could you get a month or a very fortunate quarter where everything goes right? Yes, it would be a little bit higher but at 95%, we're pushing the envelope in our graphite electrode facilities, because it's a multi-stage batch process.

So looking back in history, north of 90 % has been an operating rate that we have enjoyed. It's better absorption, our plants plants run well, they get to run steady, so the cost profiles tends to improve , and then, as you said, the supply chain gets tight.

So I would think of 95% plus. Those are --you have to run your plants very is hard,things have to go well. You can't have too many speed bumps to get 92%, 93%, 95% operating rate on a consistent basis in an electrode

I appreciate that, thanks. And I have two other questions. What I was wondering, if you could give us an update on your longer-term vision to work on improving the quality or differentiating the quality of the Seadrift output. I know there are a couple of different levels of needle coke, and Seadrift has made it pretty far up the curve but still could move further, and I would curious as to an update on how that progress is going.

Absolutely. We had, as I mentioned before, we had our normal annual maintenance kind of mid-year here, and that went very, very well. And during that time, when the equipment was down, and we had the team implement some process improvements, some new technologies, building on, what we talked about maybe two quarters ago.

My science team has been living down there. So a [SWAT] science team, very skilled in this area, has been living with the Seadrift team since we owned the assets. They implemented that, those kinds of improvements and putting some of that technology, during the maintenance shutdown.

The second part is we have been working very hard on SPC at that facility, we see tremendous opportunities on SPC, so that is under way. And I think over the next 12 months, we'll start to see some of the benefits of both of those actions. What I can share with you is Seadrift makes a very good normal premium. So kind of the bread and butter of the market, they make a very good normal premium.

In fact, some of those electrodes that we have been making through the facilities with Seadrift coke are just starting to come out. And some of them we've pushed through the system. And then of course, our customer tech service team has monitored them. We've gone right to the customer's furnace and [lived down those furnaces for days]. And we started to see a couple of instances where we have been in a shop for 20 years, and those new electrodes have set all-time shop performance records in consumption.

So the way I would look at it, Mark, a lot of activity has already been done in our first six, seven months of ownership. It will take a while to work through the system, it will be an ongoing process, but I think over the next 12 months or so, we'll see a much more consistent needle coke from Seadrift at a much higher performance level.

The team is also going to work on the super premium. There's another premium in the much smaller market above. But there's a super premium grade above normal premium, and our team is working very hard on that. And I think, also, in another 12 to 18 months, you'll see a super premium come out of that facility that is very, very competitive with the best out there.

I appreciate that up update. And one last question, if you look at the new pricing that you've announced for needle coke, does that imply a widening spread, based on your underlying decant oil cost expectations heading into next year?

Our goal is, let's get ahead of this early. Costs have gone up an awful lot. And as we remind everybody, needle coke price has been flat for two years so, really we have to go back two years and look at what were the input costs then. Oil then was $62, $63 back in those kinds of time frames.

So our mission here, let's get ahead of it. Oil, needle coke, electricity, labor, all of those items are going up, and they're all going up a continuing improving global economy. So there's more pressure on all costs as the economy starts to improve.

One, let's get ahead of it, and had two, the goal will be let's see if we can't achieve some margin expansion here. And we get margin expansion from many vantage points, our lean [six sigma] program, productivity improvements. And then also, historically when the supply/demand curves have been tight, we've been able to drive through some margin expansion, So that will be the goal for 2012.

With Seadrift operating at full capacity,and the industry operating fairly full, that would make that a little bit more credible or more predictable. So that's good timing from your end.

Thank you, sir.

All right, thank you.

Alright, Mark, have a good day.

(Operator Instructions). Okay, we do have a question from Chitra Sundaram with Cardinal Capital.

Yeah, thank you.

How are you today?

I'm doing well, thank you. Sir, thee first question I had was on margin for industrial materials. It was down sequentially year-over-year, even though I see you adjusted for the various step ups and other costs. What is it that caused that decline?

On the IM business, when we look at the big components, the graphite electrodes and our needle coke business, that year-over-year decline is in the graphite electrode business, it's weaker prices in the face of rising costs across the graphite electrode production facilities.

Sequentially from Q1 to Q2, [FX] seemed to play a role from Q4 2010 to Q1 2011, and then raw materials, that it would impact margins by 400 base points. Sequentially from Q1 to Q2, would you be able to track for us what the step-down was, what role raw materials played, and what role FX might have played?

In the raw materials, we have seen increases across the broad base on electric power, so electricity rates have gone up, as the economies have recovered, demand for electricity has gone up for most geographies that we operate in. So electric power is up. Natural gas is up in some regions depending on thethe economies. South America is performing well, Brazil is running well, a lot of construction in Brazil so there's a lot of pressures on cost in Brazil, like natural gas electric power.

So labor is going up, we've been recruiting, adding people coming up the operating rate. I'd say most of our costs that we see is rising costs. We buy some anode coke, and anode coke, unlike needle coke, has not been flat for two years. Anode coke prices have gone up dramatically. We use the anode coke in some of our lower-grade electrodes, in our non-melter grade electrodes, and anode coke, as I mentioned earlier, it very , very tight, very hard to find 500 metric tons of anode coke So those prices have been going up

Is there a way to quantify it? How much of the decline would have been because of at least raw materials or cost inflation versus if there was an impact from FX (inaudible)?

I would say it's not a guidance we usually give, but the big piece was the lower price of graphite electrode, so that's a big piece, and literally, and every cost up year-over-year, other than the needle coke, which has been flat, as I said, but the anode coke cost's up, which is another important input. So all the cost up. FX in the quarter, some little swings, but not much impact when you're looking across the quarters, $1 million, $2 million, that kind of thing, not material.

The other question I had was on the guidance. You talked about being at the lower end of the EBITDA guidance, and having the sequential step-up in utilization, coming in at the lower end, what exactly was in the higher end of the guidance to begin with? That you are not seeing?

We have seen many speed bumps, if you will, over the course of this year. When you go back to where we first gave guidance, there have been a number of little speed bumps. We had the Japan tsunami, slowed down Japan steel, affected a lot of global auto production.

We had the Middle East crisis that affected many countries, and that took orders that we already had right out of our book, so that was an impact. Let's see, other little speed bumps we have been through, we had a national strike in South Africa that was about three weeks, and so that was this past month. Our teams worked through that, but it has affected the entire economy.

It wasn't pointed at our business or our plant, but literally, the major unions in South Africa went out for two or three weeks, and some of them are still out, some of the oil and fuel unions are still out. So we had that speed bump.

So we had a number of those kinds of items, and then you throw on where global steel is today with this summer soft patch. I think all of the USsteel producers that have reported, I heard a couple of Europeans report,and they're all seeing a summer soft patch. Even the Japanese, I listened to a couple of the Japanese reports in the last few days, and they're seeing a soft patch. So I think that's what has pushed us down to lower end of our guidance.

So it's not so much from a volume stand point, but just a duplicate cost redundancy and those kinds of things that eat into the EBITDA?

Well, some volume, the customers are softer, and the ES customers, like I said, year-over-year performing very nice record quarter, but there's some pauses there, too, from some of those economies that were affected. Our ES business in South Africa just lost three weeks, and Japan ES and some of the auto industries, some of those applications we have felt it.

So it's been a number of those three or four speed bumps we have talked about that pushed us to the lower end, in addition to the slow down we see right now, I see in stainless steel Europe, I see it in the Japan steel producers that have all come out and reported, the US. steel producers have all come out and said, "Yes, we see a soft spot in the summer, and we think we were going to work through it." The general comment would be auto production should be is much stronger in Q4, and I think most of our customer bases across the globe see Q4 coming back and picking up and running into 2012 in pretty good shape.

Stepping away from this, from a pricing standpoint, Mark's question I thought was quite on the mark, which is that, in previous cycles, other than that period of 2007, 2008, where we did indeed see very strong pricing power, you've been able to operate very high utilization without seeing dramatic pricing benefits. And I could be wrong, so please correct me if I am, but if that is the case, what has changed today -- or what is different in today's environment that would allow you to have significant pricing?

I think the marketplace determines the price so, at the end of the day, the market is going to determine all of that. Looking at where we are, I see the needle coke business running full-out, I see the sister business, which is 20 times larger than the global needle coke business, running full-out.

The electrode business, now at 85% headed to 90% plus, and I see all of that driven by, to a large extent, electric arc furnace and the steel production headed for an all-time record volume year. The historic volume record before was 2007, I think it was 417,000, and we are going to be back over that level.

So I think that's more the driver. My customers are burning an awful lot of electrodes, and we face cost pressures now, and the marketplace will determine where that finishes up.

On engineered solutions, where do you see the margins for this business evolving because there seem to be many applications that you could potentially sell into, although there have been sequential improvement in margins, it doesn't feel like we're where we should be, is that's because you're still in investment mode?

On the ES business, the way we would look at it, we see growing margins over time. It's never a straight line. So we could have quarters that it slips a little bit.

But what we've been doing in that business is developing new technologies, and many times patenting it, and commercializing it. And so the percentage of the portfolio of the ES business, that is new products, new technologies and sometimes protected technologies, has been growing every year. And on that part of the business, we get better margins, so I would look for a growth in the sales there. Many of the markets we serve there, solar and advanced electronics are double-digit growth.

So now we're to $200 million a year run rate on sales, and I would see over time more and more of the new technologies and the new solutions we are selling to customers, will make a greater percentage of our portfolio, it has higher margins, so I look for margin expansion over the few years in that business, and I look for continued significant sales growth for that business.

Are you comfortable discussing some sort of -- over the next five years, where are those higher margin businesses today and where they might be?

You raise a good point, and I think what you'll see us do at the right time, maybe sometime next year, as the global economies have come back, and they get more stable, and some of the wild volatility in the economies is behind us, what we'll probably do, it could be next year or the year after, and the economies will tell us the right time, but we'll give a three- to five-year outlook.

We'll feel good to do that when we have more stable economies, and what we'll do is layout our three- to five-year vision, for our IM business, which has gotten much bigger now and back integrated. We'll lay that out, and our ES business that's now running at a $200 million run rate.

So it's become a real substantial and a very global business with huge customer names in it. We'll give a three- to five-year outlook for both of those business segments, and lay out where we see those going on sales, where we see those going on EBITDA margins, and expansion of those margins, and maybe where we see some of the technologies moving.

Finally, I forgot, can you give the contribution on the revenue line from the acquisitions that we still (inaudible)?

Yeah, we have been doing that in the Q and it will come out shortly. But I think what you'll see is that the year-to-date revenue contribution from Seadrift and St. Mary's will be a bit north $120 million. So those have come along very nicely.

We're delighted with the new team members from all three acquisitions. All three acquisitions are running full-out. We have Micron running full-out. It was at 50% when they joined our team. St. Mary's, the electrode facility, is already full-out, and Seadrift and needle coke is full-out. So we have been delighted with that, and that has gone very well.

Wonderful, thank you so much for your time.

Thank you, Chitra.

The next question will be from Eric Glover with Canaccord.

Good morning, Eric, how are you today?

Good morning. I wanted you to talk about the competitive landscaping in graphite electrodes, because based on your commentary, you're projecting a record-level for ES steel production globally this year, customer inventories are in fine shape, no excess there. Is there an additional graphite electrode capacity that has come online or additional pressure from competitors that you're seeing that is pressuring prices?

Eric, there's no real significant material additions to capacities. We have had 10 tons to 15 tons here or there of added,but nothing material. This is an [800, 5,900] thousand metric ton market. So the addition the addition of 10 tons or 15 tons is pretty small in the global context, so not really new capacity of any materials side. But having said that, it's a very competitive market.

Electrode producers, they've got large plants, they like those plants to run at a high operating level, they run much better at a higher operating level. So at the lower end of the operating rate, it can be hand-to-hand combat. Even at the higher levels, there's no free lunch, this is a very competitive industry, and the competitors range from Russia, China, Japan, Germany, the US, and it is a very competitive business, and you have to have great service, you have to have a global platform that can take care of the customers and the world, and you have to have a spectacular product. That can give you nice stickiness with customers, but it's very competitive.

Can you describe an environment where you're actually able to generate fairly decent pricing increases on graphite electrodes? What would you see globally in terms of economy, steel utilization rates, et cetera?

If we point back to our history. If we look back to 2007, 2008, we were operating at 93%, 94%, 95% operating rate in electrodes, there were a lot of cost pressures, oil was running up, needle coke prices were going up. Needle coke was very tight, anode coke back then -- this is the first time I've ever seen anode coke sold out in my career.

I think we're headed toward that kind of environment. I think, as I keep reminding people, let's look at EAF production levels, and EAF has set an all-time record for production this year. But at the end of the day, we have to recall, this is a very competitive landscape,and the market is going to determine where this goes. And I think that's the same as steel or any of the other industries. At the end of the day, it's a global market, it's very competitive, and the marketplace will determine all of this over the course of next year.

Thank you.

Thank you, sir, have a good day.

The next question is a follow-up question from Luke Folta with Jefferies.

Hi, Luke.

Firstly on needle coke, the $2,650 that you have on your press release, is that a price that you've locked in at this point?

the negotiations for needle coke are really at the front end. I've had very few customers come in yet for needle coke pricing for next year. We wanted to get ahead of it, as I said, because it has been flat for two years, and the cost increases are up dramatically. We have nothing in the book for next year for electrodes or for needle coke. It is all wide open.

Okay, and your expectation to run at 90% capacity utilization toward the end of the year, does that apply to you, or do you think that would also apply to the industry as a whole?

Well, I think you have to listen to our competitor's calls, and see where they're at. Generally, some of our smaller competitors, as I listen to their public conference calls, they have been running at even a higher level already,which is not unusual.

The smaller competitors often are at higher op levels during a recession, and that has been very is typical in our industry, i think many industries. But Luke, I think you have to listen to the calls. Many of them are publicly traded and just see where they're at.

I guess where I'm going is, there's a pretty substantial increase in needle coke, 60% like you were saying, and looks like the industry is going to be operating at 90% toward the end of year, and you've announced a pretty substantial increase in graphite electrode pricing for next year, quite a bit above, at least what we were expecting. Do your customers and the competitors in this business get it in the sense that -- do you think they're prepared for this level of price increase for next year?

Time will tell. I think our dialogue, obviously what we do, we go out to letters in June and July, with the various customers, needle coke and graphite electrodes, and we are very diligent and explain all of the cost increases that we face, the two businesses. With the larger customers, we sit down face-to-face.

I don't think it's a surprise to them, what's happened on the cost structure. Many of our customers are using a lot of the same cost inputs, electric power, labor, natural gas, they all see the oil prices, and those are public, everyone knows those.

So I don't think these are big surprises. I think the anticipation is oil has moved a lot, it's back to $118 a barrel. So I think they'll all see that oil has gone way up, electric power is coming up almost every other month, natural gas is up in many regions. So in my discussions with customers, it hasn't been a big surprise to them, and they know what's happening on the cost structure.

Thank guys.

Thanks, Luke, have a good day.

At this time, there are no further questions, and I would like to turn the conference over to Mr. Shuler for closing remarks.

Thea, thank you very much. Everyone, thank you very much for your questions and your interest in our Company and we look forward to talking to you at the end of next quarter. Have a great day.

Thank you for participating in today's conference call. You may now disconnect.