GrafTech International Ltd (EAF) 2011 Q3 法說會逐字稿

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

(Operator instructions). Thank you. Ms. Kelly,you may begin your conference.

Thank you, April. Good morning. Welcome to GrafTech International Ltd.'s third quarter 2011 earnings call. On the call, Chief Executive Officer, Craig Shular; and Lindon Robertson, CFO. We issued our earnings release this morning. If you did not receive a copy, call 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 the call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about the 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'll find reconciliations in our Press Release at www.graftech.com in the Investor Relations section. At this time, I'd like to turn the call over to Craig.

Thank you, Kelly, good morning, everyone, thank you for joining GrafTech's call. Today we'll take you through the third quarter highlights and then open it up to questions. In Q3, sales improved $346 million, up 35% year-over-year. Driven by increased volumes in our graphite, electrode, and needle businesses. $47 million, increase 45%. Net income increased 55% to $40 million or $0.28 per share. Op rating cash flow -- turning to segment performance. In our Industrial Materials segment, year-over-year sales increased 45%, to $302 million in the third quarter. The sales increase was primarily as a result of higher graphite electrodes sales volume and the addition of needle coke sales from Seadrift. Operating income increased to $52 million due to favorable mixed cost absorbs associated with higher electrodes buying and operating income, offset in part by expected increases in raw material costs. GrafTech Q3 up 85% from Q2 and expect the rate to increase over the course of the year with fourth quarter electrodes operating rates over 90%.

In our engineer solutions segment, $43 million and operating income of $3 million, lower revenue and operating income in the quarter due to solar and oil and gas industry. International Monetary Fund IMF reduced 2011 estimate for global GDP growth to 4% from 4.3% in the June 2011 estimate. This is due to slower than expected recovery in advanced economies and the continuation of financial market volatility. IMF reduced the 2012 global GDP growth forecast to 4% down from 4.5% in the June 2011 estimate.

Overall, the recovery is progressing slower than anticipated and uncertainty in global financial markets is further weighing on the recovery. While downside risks remain, the outlook discussed for future recovery is expected to continue. In the fourth quarter, we project GrafTech sales volume to increase slightly over the third quarter as customers fulfill their annual contract requirements. It is important to note, however, that our customers' visibility to fourth quarter demand has been reduced due to uncertainty in the global economic environment. In light of the increased business risk, we are targeting full-year EBITDA to be in the range $275 million to $285 million. Recapping 2011, we are on track to achieve all-time record sales and the second-best EBITDA performance in our Company's history. We completed three excellent acquisitions that have significantly improved our business model.

We have entered agreements with the Seadrift , St. Mary's and Micron Research teams and are pleased with the contribution. EBITDA contribution from the acquisitions is on track to meet the original guidance of $90 million. We recently concluded the refinancing of the revolving credit facility, five-year, $570 million revolver, representing a $310 million increase over the prior facility. And this extends the maturity date to October 2016 with improvements in rates, terms, and conditions. We have successfully increased our borrowing capacity at very favorable rates which provides us with improved financial flexibility and positions us very well for future internal and external growth opportunities. We are very well ready for 2012.

Turning to 2012, the latest forecast issued by the World Steel Association, about 15 days ago, has come in cautiously optimistic for 2012. They project more than a 5% increase in steel consumption in 2012. Consistent with projections, this anticipated recovery of steel demands will be slower for advanced economies compared to emerging economies today with better growth.

WSA and other steel forecasts. We expect solid growth in 2012 steel projection, this would represent a record EAF steel production level in response to global steel demand for next year. We are now in the process of building our 2012 electrode book and, as usual, we'll provide additional commentary in our Q4 earnings release. That concludes our prepared remarks. April, let's open it up for

(Operator instructions). We will pause for just a moment and compile a Q&A roster. We have a question from Luke Folta with Jefferies & Company.

Morning, Luke, how are you today?

Not bad, Craig, how are you?

Superb. Thank you.

Congratulations on the results in the quarter.

Thank you, sir.

To be clear, the purchase accounting charge, if we adjust that out for EBITDA? The quarter -- somewhere under $85 million, is that the right way to look at it?

Yes, that's right. $6 million to $7 million purchase.

You're spot-on, Luke.

Guidance, you know, you guided to $75 million to $85 million for the full year. You mean, if I read the way that you have written it, if you get the slight increase in sales volumes that you expect in the fourth quarter, that -- is that the $285 million? And something should fall short, you see downside risk to potentially $275 million. Is that the way to think about it?

I think the way to look at it, obviously, as we've gone through the year, each quarter is more volatile than the past. The way I would look at it is there's volatility in our customers' orders. You've seen a number of steel customers come out worldwide now, and they've all talked about Q4 volatility. So, in our guidance, that kind of volatility is billed. If the orders all come in, we'll be at the higher end of the range; if the volatility continues or little bit greater, we'll probably be at the lower end of the range.

Okay . Electrodes next year, are you able to talk about what percentage of that is completed at this

Yes. Very good question. Let me frame it this way. Because of all of the volatility in the market place and customer base and economically and Europe and the debt crisis in Europe, our normal book building process is like Tropical Storm Dean. I would say electrodes is probably 90 days behind a normal year. The customers delayed the request for bidding of 2012. We believe in response to the volatility and lack of line of sight that they have.

So, the order book for electrodes has gotten off to a very slow start. In turn, needle coke building, book building for next year, is also delayed. And so, I don't see it company-specific. In fact, I don't even see it specific to the electrode industry. I think all of the raw material suppliers in the -- to the steel industry are seeing that our steel customers are going slower as they approach 2012, and it's really a macro economic response than anything company or supplier-specific.

That's the landscape we face right now. Obviously, from my vantage point, to me, it is not concerning. I think it is normal, when we look at the macro events and I'd rather approach this in a very orderly fashion as we approach 2012. We're off to a slow start, driven by the customers. Net-net, as I step back and look at it, though, I'd expect next year steel production up 5% over this year.

Okay. Think about the timing as the contracts settle, expect it to play out as you typically would, settle on needle coke first and move on to electrodes?

Yes. I expect that's probably the trend, as it's usually been. Customers want to know the cost structure before they start making commitments for next year. I think that trend will continue. As I said, I think it is delayed this year.

I think it is normal, given the volatility and economic macro issues we're confronted with. I want to emphasize I think it's normal in the response to Europe and the debt crisis and some of the other political implications around the world. And so we're being patient. We will build, I think, a book for next year that will represent, probably, steel production up 5% year-over-year.

Okay. Then, when you think about how the contract is going to work for needle coke, are we expecting any deviation from the typical annual fixed price contract? And do those prices apply to January 1? For all of those contracts?

Luke, everything we see right as of now, I see annual contracts. Recall when we had the start of the economic crisis, back in the beginning of 2009, our customer base went to quarterly contracts because they just had no line of sight. I don't see that situation as we sit here today. And I'm not hearing that from our customer base. So, I'm hearing that they're going to want annual contracts, but they're off to a slower start, just because of their lack of line of slight of what next year will look like. So, I expect annual contracts, and I expect that the pricing will begin as of 1-1-2012, yes, calendar year contracts.

I guess talking more on the needle coke side?

Same for both. I'd expect annual contracts and pricing starts 1-1.

One last question, thanks for answering the questions. Supply side situation, can you give us a sense of where you see inventories right now? Regarding your customer base for coke and electrodes? Also are youseeing any pre-buy ahead of what looks like a meaningful price increase for each next year?

We see very lean inventories at our customers in needle coke and graphite electrodes, speaking worldwide.

So, from our vantage point, there is not a build-up of needle coke or graphite electrodes in the supply chain. I think that's good news. Buy-in, I'm sure there's going to be some customers will try that. That really doesn't work for us. So, we are not a proponent of the buy-in -- we want our contracts honored. We want the electrodes taken when they were committed under the contract. So, I don't expect there's going to be a big buy-in impact.

Okay. Excellent, guys, I'll get back in line.

Luke, thanks so much.

Let me add to Luke's question on the pricing effective January 1. It is true, all of our book buildings starting on January 1 will take the new pricing. We do carry some contracts since the first quarter that are booked on an annual rate from the 2011 contracts. So if you're looking to calculate based on price, when that starts to lift, you'll see a mixed impact in one Q and a full impact in Q2.

Yeah, what Lindon is referring to, these are the customers that every year book Q1 to Q1. They're budget year Q1 to Q1. As you all know, we've talked about it many times. That's very, very normal in our business. That's a portion of what Q1 will be. Thanks, Luke.

Your next question comes from Michael Gambardella, JPMorgan.

Good morning, Craig.

Good morning, Mike. How are you doing?

Good, good. Can you give us an idea how much of Q1 would start off with a new price, January 1? Because I thought years ago, I kind of remember, you know, the Mexicans were kind of on an April calendar, or April fiscal year, I should say.

Yes. There's customers around the world that their budget cycle, historically, for 20 years, has been Q1 to Q1. You're absolutely right, Mike. It varies a bit every year, but I would say carry-over might only be 20%, maybe even less -- customers that do it that way.

Okay.

Most of our customers are calendar year.

Then, how much of a carry-over would you expect from the fourth quarter volumes to be shipped in the first quarter that wouldn't get a price increase? I'm just trying to get to -- how much of the first quarter is going to see a price increase?

Well, I would say, you know, based on 20%, about 80% or 75% should see the increase.

Okay.

20%, 25% percent would carry-over. And it's not really a carry-over, just these customers have booked their annual contract Q1 to Q1 because that's their planning cycle and they've done it that way for 20 years.

Okay. And then, have you settled anything on needle coke pricing yet?

It is virtually just getting started, Mike, so I really can't give any color there. And it is about 90 days slower start than a more normal year. And it's much slower than last year. I think all in response to what we've all seen in the last couple months in the global economy and the political arena and the debt crisis in Europe.

And in the past, I thought you would not book electrode business until you either booked your needle coke or had a very firm understanding what the needle coke pricing would be for you. Now, this year, do you still have that same strategy even though you have your own needle coke?

Mike, we have exactly that same strategy. It is very important for us to understand our cost structure before we start making commitments for next year. So we have exactly the same strategy, even though we are back integrated to needle coke.

I think on the last call, you said you were looking for needle coke pricing, you know, to charge $26.50 a ton, about a 65% increase over 2011. Is that still the same, you know, asking price?

That's the same asking price. And time will tell where that finally settles. That really hasn't gotten under way. I would expect, probably, over the next 60 days or so, that really starts to pick up, because customers are going to need needle coke, and I think that will pick up as we said earlier, probably first; then, after that, we'll really start to get momentum on the electrode book building.

Last question, in terms of how it normally goes, Conoco is about three times your size on needle coke and then you're the next biggest guy. Does Conoco basically set the price for everybody?

Well, it's a very global market, so there's producers in Asia, Europe, and the US, so I wouldn't normally look at that that way. It is a very global market, and the customers will come to all of the suppliers with their bid requests. That's, as I said, about 90 days behind what it would in a normal year. So, that will happen in the next 60 days. Everybody will bid and then the customers will tell us what share we got and how many tons and production plans will get made. Where and when it's to be delivered.

After that, I would think, Mike, the electrode book building will gain some real steam just because, as we said in the earlier call, we don't see the trade with excess needle coke or excess electrodes. There's always the one-off customer that's got a bunch on one site. But when you look at the world, there's a very lean supply chain, which I think is a healthy supply chain.

And how much switching would you see with customers on electrode -- needle coke sourcing?

Well, it's early to tell -- too early to tell for 2012. Historically, it's price and quality and the value you bring. If either get too far away, then the customer will switch.

Uh-huh. Very last question.

Yes.

Seriously. Did you see any mix change in your electrode business? Or do you expect any in the fourth quarter?

No. Pretty normal.

yes.

I see, as I said, kind of recapping this year, obviously, recovery has been slower than everyone would like or even anticipated back in the beginning of the year, but net-net, you know, record sales for us, second-best EBITDA ever. I don't see any big switch in the mix. I like the book that was built this year. Disappointed with the price because, as we've all talked on our calls, our cost has gone up this year.

But I -- as I look forward to 2012, Mike, I see Europe working through its issues; I see global steel probably running about 5% higher production tons next year than this year; and I even see -- I'm sure you probably see it, Mike -- a lot of blast furnaces that are closed or slowed down the last six months. And that's usually an environment where EAF, the lower cost producer, the green producer, if you will, fares even better. If total steel does 5% next year improvement, maybe EAF is even a little better than that because of these dynamics.

Okay. Thanks a lot, Craig.

Thank you, sir.

Your next question from Mark Parr with KeyBanc Capital.

Morning, mark, how are you today?

Good, Craig, doing okay. Staying dry.

Yes, wet day here in Cleveland.

Once again, we never seem to have those, right?

Agree.

Hey, I also wanted to add my congratulations, nice quarter.

Thank you, sir. I'm very pleased with the team's performance. Obviously three new sets of team aids coming in, great integration, and everybody hit the numbers. We know the backdrop, it's a very challenging, volatile global economy that we're all servicing.

I've got a couple questions here around that. You said guidance commentary for the third quarter, you called it $70 million to $75 million. I'm just curious, when you set that, this extra $4 million or $5 million, this kind of cost that seemed to show up in the P&L, additional purchase accounting. Was that $4 million to $5 million in your thought process on the 70-75?

Yeah, that was pretty much in our range. That wasn't a surprise. Where we came out ahead a bit, I think sales came in a little bit better. I think our operating rate and absorption of period costs came in a bit better. Then, you know, 1,000 of other things that have to happen in a quarter the team delivered on. They got shipments out the door; they leaned the Sigma program; they hit some cost savings. In this volatile economy, the team did a lot of things right to make the numbers.

I know. Very credible. Good performance. Curious; you mentioned in the release you saw the pricing realization as a bit , call it, less

That's right.

Perhaps a bit better. Now, I think, if memory serves me correctly, that pricing started rolling over in the second half of last year. So what I'm interested, could you give us some color on the sequential pricing between Q3 and Q2?

Yeah, I can. I think if we go back to the Qs this year. Q1 -- probably a slippage of 7%; Q2 about 7%; then Q3 I think the slippage is probably only about 4% slippage is about 4% or so. So the negative slippage is getting smaller.

But that's the year-over-year. But I'm wondering if, sequentially, was the third quarter price realizations higher than the second quarter? I guess that's --

That came in pretty flat.

Okay.

That was pretty flat.

All right. So, things are kind of hanging in there?Is there -- would that be your expectation for the fourth quarter, that prices would remain flat with the third quarter? Based on what you got on the book right now?

Yes, sure. So, the point you made before, that you remember last year, that there was the slippage at the second half, so, the year-over-year comps look better, 7% slippage now going to only a 4% slippage. Then to your point, the sequentials. Yeah, it's flat. So, prices held as we built that book. You know, good news as we go into 2012.

Okay. That's really helpful color. If I had -- could ask one more question?

Yes, sir, please. Please.

I like to get an update as far as your expected Seadrift take for 2011 and 2012, if you could give us some color on what you expect 2012 versus 2011 on Seadrift?

Yes, sure. I can give you 2011. 2012 is too early, for the reasons we talked before, the book building off slow. But on 2011, I would expect it's going to be right around 70,000 metric tons to what we guided, could be a little bit less, perhaps. So no surprises there. As expected, that team's performed very well. They run at a very high op level. They've delivered to virtually all of the GrafTech locations as well as taking great care of their external customers.

So for 2012, I think initially, the last kind of soft discussions we've had is that you were looking for, perhaps, to pick -- to increase your take of Seadrift in 2012. I heard numbers anywhere from, I think, maybe, 90,000, maybe a little more than that. I mean, has there been any change in that thought process?

On that I can help. I would say it's going to be much closer to 70. So, I don't see a big change next year in our take for Seadrift. So we'll probably take around 70-ish. And then the rest will be sold worldwide. I wouldn't expect a big change there, no.

Okay.

Year-over-year.

That's really helpful. Congratulations again. Good luck on the fourth quarter.

Thank you, sir, have a good day.

Thanks, Craig.

Your next question comes from Dan Wayland with Auriga.

Good morning, Dan. How are you today?

Doing great. How about yourself?

Excellent, thanks.

Great. One of my questions has been addressed. Helping us frame here, you mentioned a lot of announced talents are on the blast furnace side. In the case of electric arc furnaces curtailments and given the inventory levels in the market, generally speaking, if we see further curtailments, how long does it take to flow through the supply chain and hit your volumes?

Well, you know, I would say, when you see, like, Arslan Middle has announced a number of curtailment, a lot in Europe and in response to what's going on there, economy and debt crisis. When you see that, I would say, depending on where the customer is in the annual cycle, you know, if he's doing those in the second half or in Q3, Q4, probably his adjustment will come in what he orders the next year.

So, think of it, it could be, you know, three months to six months before we see any difference, right? Like this year, I think those customers that have had some curtailments, I think they'll probably take the electrodes that they've ordered this year. And then next year they may take a few less.

Okay. Okay. That's great. Then, in the Engineered Solutions segment, you mentioned that the solar and oil and gas impacted in the quarter. What are you kind of seeing so far where you stand today in terms of trends on the solar side?

We see a slowdown in solar. I think many solar accounts have announced it.

Yep.

We see that continuing. Some of it is in the face of some of the European solar subsidies. That some of those governments are reassessing, et cetera. What I see in solar is, probably the next two quarters, three quarters, probably going to be softer. But after that, talking to a lot of different solar customers, I think we'll start to see improvements and we start to see that sector continue to come back and grow.

So I think we probably got two or three quarters of softness in solar. I think there will be a shaking out of some of those solar players, some are much lower-cost and better run than others. Then probably three quarters from now, start to see solar doing a little bit better.

Great. I suspect on the oil and gas side, probably this is just more of a pause and quicker recovery?

That's correct.

Okay.

I see oil, you know, continuing recovery is our outlook and I think the majority of the outlooks out there for next year, slower than anybody would like or expected. I see next year, probably, greater demand for steel and greater demand for oil.

Great, great, thank you.

Thank you, Dan, have a good day.

Your next question from Wayne Cooperman with Cobalt Capital.

Good morning, Wayne. How are you today?

Good. How are you? Guess it's more of a follow-up to the last one. If you start to see iron-ore go down a lot and scrap not, at what point do you see guys shutdown electric arc furnaces instead of the blast furnaces, or does that never happen?

In general, if you go back the last 20 years, there's been very few points where the blast furnace really had advantage over EAF. Wayne, I think the right way to look at it, if we have that, it is relatively a short period. It is temporary. So, I think in general, what you see is, when steel producers need to slow down, they look at their blast furnace collection. And we all know the blast furnaces well, the analysts know them well, there's a lot of them that are very, very old and they're high cost.

Yes.

We see these same ones. Whenever there's a slowdown, these same ones get closed.

Right.

And these same ones, they're really not getting a lot of CapEx. They're not getting much environmental investment, et cetera. It's something we watch very closely, Wayne, but this -- what we see so far is a number of blast furnaces getting slowed down or shutdown. On the EAF side, obviously, some get slowed and shutdown. What we've seen so far is much smaller shutdown activity on EAF. Then, parallel to all of this, remember, there's still new EAF going in the ground.

There's been a healthy component each of the last five years going in the ground. We detail it quite well in our Q's. That continues. So any time that cross curve, blast would get a little bit better, because scrap hasn't rashed it down yet, we see as very short-term and I think our customer base does also. I would like with this cost squeeze, and the excess steel a lot of steel producers are talking about, will primarily impact blast. Wayne, any other questions?

Your next question comes from Tim Hayes with Davenport & Company.

Tim, how are you today?

I'm fine, how are you Craig?

Excellent, thank you, sir.

Good, good. Two questions. First, you mentioned that the needle coke contracts are seeing 90 days behind the normal schedule. Is that for yourself as well in terms of locking in contracts from your needle coke suppliers? Have you already locked those in?

We've seen it for the whole industry. Everyone has gone slower this year because of the lack of visibility. It's a macro-driven item versus company-specific or even specific raw material. I think if you went to the host of raw materials that are steel customers do require every year, they're all only much, much slower than the normal year. So, our cost structure, our needle coke sales, all of that off to about a 90-day delay.

Okay. Then, second question, on the graphite electrodes pricing, I noticed on your website, what? -- September 1, you had an update on prices, was that an increase from the previous price that was posted?

Yes. That's right. What you saw there, increase over the prior pricing that we had. So you saw kind of the latest price that we have posted there.

I thought that was an interesting, given all of the macro weakness and all of the negative headlines that we read that you're confident enough to increase prices on September 1. Anymore color on why you felt comfortable to do that?

Well, remember behind that, a lot of that cost structure is oil-dependent.

Yes.

And you know if you follow that market, you got rent up $110, $111, $115 a barrel. So oil has remained high. Anytime it had a dip, it's been short-lived. So, Tim, that's driven, really, by oil, which feeds the decant, which is the key raw material in needle coke, and needle coke is about 45% or 50% of the total cost of graphite electrodes. Tim, it's driven by that cost pressure.

Yes. That's what I thought, thank you.

Thank you, sir, have a good day.

Your next question comes from Chitra Sundaram from Cardinal Capital.

A couple of questions that I had. In terms of the effect impact on margins and revenues, is it possible since the 10-Q is not out to get a sense how that would work in the natural materials? In the third quarter. Sorry.

Let me toss that over to Lindon. Chitra, thanks for your question on effects.

I would say that the pricing didn't have impact sequentially as Craig mentioned earlier. You saw the impact or margins squeezed on year-to-year basis definitely impacted on the pricing. Connect a couple of dots from the questions, on the cost, you know, if you looked at our guidance coming into the quarter, the cost came in a little bit better. This really reflected a better-than expected operating absorption benefit. So our operating rates in on track with what we had projected. We were very pleased with the operating rates of our electrodes plants. Cost absorption came in a little bit better.

A second point is, there was a question earlier on the purchase price accounting impacts that we had guided. Sometimes we hear a little bit of confusion on this point. The purchase price accounting very predictable and came in exactly as we predicted. We had referenced in our guidance an intercompany profit elimination of possibly $2 million to $4 million this quarter. That came in lighter and what that reflects is that we've now seen a level off the Seadrift consumption inside of our electrodes, so since that wasn't continuing to increase from the quarter-to-quarter, we didn't see an increase in that profit elimination. And so we had a little less impact to that than what we anticipated.

So, that cost absorption and Seadrift integration is completely behind us, and more at a normal level. The cost was a bigger impact to our margin in the quarter versus our guidance. On the year-to-year basis, the price impact certainly continued to squeeze our margins.

All right. Okay. That's great. Craig, just going to the fourth quarter, I guess I'm confused if we are probably going to be averaging slightly better rates than third quarter. I think if I understood you correctly, potentially exhibiting fourth quarter at or above 90%. It is not clear to me how we land up having to bring down the EBITDA guidance for the year. You know --

Well, remember Q4 with our guidance will be our best quarter of the year. So --

Right.

So let's start with that.

Right.

It will be our best quarter. But, let's look at the volatility in the macro economic picture. So, Europe is -- has gone through tremendous events the last three-six months. We've had a number of customers announce shifts in their production levels and shutter plants. And so we felt that just prudent to open up that guidance, given this volatility.

Our customers' line of sight, I would say, is very, very short right now. Yes. Their order books are shorter than they were two months ago. So, given that lack of line of sight, I just think it is prudent to open up and acknowledge that, gee, there's an awful lot of volatility that has increased into this market place. Europe is a big part of that. The debt crisis there continues to play out over the next couple of months.

What gives you comfort that we might accept Q4 at 90%? It sounded like it is something that is almost inevitable. Is that just what the people are filling out their -- schedules for ordering for the year; is that right?

That's correct. Very good question. You know, we said Q3 we ran about 85% OP level. We exited the last month of Q3 at 88% OP level. So we feel very comfortable we'll be 90%-plus over the course of Q4.

You're spot-on, Chitra, it's contracts we haven't had. It's orders to be filled and customers are completing their annual requirement orders. Obviously, you know, there's always some risk around that in these volatile markets. We've built that into our guidance range that we gave.

Could we have a situation where you do end up having to operate like you do, for whatever -- is there something in the mix that causes absorption to be -- to deviate from the utilization profile? That's what causes, um, EBITDA to be, you know, at the lower end, whatever? Just -- I'm just trying to understand how the range goes down. That's all that I want --

The range can go down, obviously, our ES business seen solar slow down. So there's that, that's one. Two, our steel customers have very limited line of sight to Q4. And here we are virtually November and, then, a number of our customers around the world are shuttering blast furnaces. In some cases, also, EAF.

There's a lot of moving pieces. And then all of that, on top of that, the European debt crisis continues. Negotiations everyday in the paper, et cetera. Even that's not quite settled yet. In that backdrop, we think it's prudent to open up that range.

Okay. Should I assume from your comments the operations continue to be at full capacity. Utilization? Or has there been a --

No, no, Chitra, we're running full-out.

Okay.

That Team has done a great job of running full-out there. Our expectation is that next year, steel will produce 5%more than this year.

Yes.

And so needle coke will be needed and more electrodes will be needed.

Lindon, would you be able to just identify what the revenue contribution? I think this is probably the last sort of full quarter of the Seadrift coming into the numbers. Would you be able to just tell how much was acquisition-related in the revenues?

We haven't guided these --

Just for Q3.

We haven't guided the breakout of our acquisitions. What I can assure you, what we've seen, we've seen a terrific utilization of these acquisitions. And so what you're seeing is, as Craig just mentioned, Seadrift at full production, St.

Mary's plant fully utilized and all of the capacity we acquired, even the emporium plant on the engineering solution side. We have made complete use of the capacity of the assets there to facilitate some of the furnace requirements that we had for the engineered solutions space. So, it -- definitively is contributing. When we look at the synergies, we're right on track with what we would have anticipated when we acquired these.

Lastly, do you have a sense -- or do you have data to share on how the graphite electrodes utilization has appeared to trend for as much as much of October as we've been through, or is that something you can't comment on?

As I said, the first month of this quarter, Q4, was at -- I'm sorry -- yes, already at 88%. We're already at 88%. So. You know, I have every confidence we're going to be above 90%, 90% for the quarter, that's already setup, locked, and loaded.

Those operations are running well. The only thing that's going to deviate that, if we had some unexpected outage. And that is not been our history. So I feel good. We'll be 90%-plus in the electrode facilities in Q4 and that will allow us to meet our customers' orders and finish up their annual contracts for 2011.

Yes. Thank you so much. Congratulations, again.

Thank you, Chitra. Have a great day.

You, too.

Your next question comes from Zahid Siddique with Gabelli & Company.

Hello, Zahid. How are you today?

Good, good, good morning.

Good morning.

Congratulations.

Thank you, sir.

Couple of questions. One, you mentioned that your take on the needle coke was about 70,000?

Yes. We'll take about 70,000 metric tons this year. As the other gentleman asked, said, gee, could it be 90,000? I wanted to, you know, make sure that he wasn't under that assumption. I think next year will be very close to 70,000 also, yes.

Okay. And, um, I understand that you are running at full capacity, right?

Yes.

At Seadrift? And is the capacity 160,000?

It depends on mix. They make a couple of different products. Depending on mix, it can be 140-ish, or so. Remember, we've been doing a lot of work on quality and productivity there. Mix can affect it. Then, the work we do on quality, productivity, sometimes, requires a bit of capital or adjustment of the equipment so we have to stop equipment.

So that can also impact it. So I think if you think of -- Seadrift can do steady state, good, solid, around 140. If we don't interrupt things, and everything goes perfect, 150-ish. So, 140-ish, 150-ish, probably good numbers.

And are the Seadrift electrodes on top of that?

Yes. That's a completely different business. The 140 I'm talking about is just needle coke. Then, St. Mary's is electrodes. And St. Mary's, you'll recall, some of our Synergy items there.

And we were moving graphite electrode pins that they used to make down to our dedicated pin facility in Monterey. All that's been done, and St. Mary's has accomplished that very, very well. Very pleased with that Team. In fact, that Team in Q3, one of the months of Q3 broke all-time, single-month production records. So that facility is running a full-out. And eating up liens and sigma and productivity improvements.

As a company, how much do you -- what percentage of your needs do you take from Seadrift? Does GrafTech take from Seadrift?

Well, we take 70,000 metric tons and we don't, as a point of guidance, talk a lot about our other suppliers or our needs, et cetera. It is not an item we give guidance to, Zahid. I would say if you look at our capacity, we can do a good 230, 240, 1,000 metric tons of electrodes at capacity. You know, those kind of numbers. It is one ton of needle coke for one ton of electrodes. Think of it that range. So 240-ish capacity, 230-ish. Mix, of course, plays into that, but we're taking 70 from Seadrift.

Okay. And, my next question is, actually, on competitor of yours, there's been talk in media, SGL Carbon, there were a couple of companies, I believe. BMW and Volkswagen, they were interested, I believe, in carbon composite products. What's your take on that? Really from strategic perspective, how much do you have in terms of carbon composite? Anything else that you can add to that?

Yes. I really can't comment on SGL. Or their developments, obviously, like you said, there's probably a lot of things in the press. I really can't comment on that. I don't have any comments on that. As far as ourselves, no, we do not have any kind of significant carbon composite business today.

But having said that, we have an awful lot of carbon composite history and technology in our Company. And, in fact, carbon fibers in the United States were first developed in our R&D facility here in Parma. 30 years ago, that business was sold by a prior owner. We're not in that business today. But we have a rich history, and knowledge base, and skills in that sector.

Okay. Great. Thanks, thank you for your answers.

Thank you, Zahid. Have a good day.

Your next question from Lee Bressler with Cobalt Capital Management.

Hi, Craig. First, congrats on a nice quarter.

Thank you, sir.

Absolutely. I'm curious if you've been getting pushed back from customers on the posted prices you'd published or given the 90% utilization rate. Whether you're finding it easier to achieve those posted prices without discounts?

Good question. First point, still very early in the game; second point, customers also push back on price increases. So, our challenge is to really show them what we've got on cost. The impact of oil on the feed stocks into the ultimate cost of graphite electrodes. Demonstrate them what's happened to the cost profile as well as the service and value we bring. So, customers always push back, always.

Yes. Fair enough. Great. Thanks.

Thank you, sir have, a good day.

You, too.

Your next question from Charles Bradford with Bradford Research.

Good morning.

Good morning, Chuck, how are you today?

Good. How are you?

Superb, thank you.

Just a couple of simple questions. Are you seeing much of a change in the technology at the EAF level as far as usage of electrodes? There had been a big push a few years ago at DC. Seems to have quieted down a lot?

Yes. Chuck, we don't see major changes on that front. And on the DC furnaces, you're right. If you go back seven years or so, there was a push on that. Then, seven or eight years ago, a lot of people said this is really going to become the way. And what we've seen, like you said, yes. And DCs put in but the growth rate of DCs has really, really slowed off.

We see the typical AC furnace, the bread and butter of the industry. We service both. I'm more than delighted to service both, but we see AC furnaces, 24 by 110s. Some super sized 28, 30 inch electrodes, kind of the bread and butter of the industry and we don't see any significant changes there.

One of the larger steel companies in the US, which has not an electrode or EAF producer has talked about, maybe, switching one or more plants of theirs to EAF, being US Steel. Have you seen any actual movement in that direction by them?

Well, I really don't want to comment on customers. It's probably best to ask him. But a number of the customers worldwide, to your point, have studied very hard EAF. And especially customers that have solely been in BOF integrated steel. As a trend I've seen a number of steel producers worldwide, including in China, analyze, request our help, and ask us to join some studies.

And I see a number of blast furnace customers really evaluate it, should they put in EAF in? Does it give them flexibility? Does it help them with their carbon footprint? Does it help them be lower cost and more nimble? Chuck, that's probably a continuing trend.

It seems pretty clear that the emissions of carbon are, maybe, a third of much with an EAF compared to a BOF.

That's right.

Even the Chinese seem to be working in that direction. Haven't seen much actually done. So far it's mostly talk. Then, the other issue is, Northern Japan, where you had the earthquake and tsunami, there was a lot of talk about rebuilding quickly. Have not seen much of it. Because that would be mostly electric furnace steel that would be used. Have you seen much in that activity area?

What we see is in front of the government the last couple of weeks and continuing this week are significant reconstruction proposals. So, what we see, it's under way in the Japan Government. They've got proposals and projects. The Japanese Government is ferreting through that. What I would expect over the next several weeks, they'll come to conclusion on a very large significant reconstruction program for Northern Japan. And that will get underway and that will be part of that year-over-year steel production increase in 2012 that we're expecting. So, I think that could be a nice add to the 2012 steel production.

Final question; the Russians had at one point talked about building a number of mini mills. I haven't heard too much about that recently. Have you seen any developments, completions, or plans almost ready to go, which would be electric furnace-based?

We see a number of customers studying, dialoguing. Russia has a good scrap reservoir. So over time, I think we'll see that come, Chuck. Obviously today's macro economic environment has caused a lot of those things to get paused. Trend line-wise, we see more EAF growth in Russia.

Pretty clear that Servicestahl through the Columbus plant really has learned a lot about EAF usage?

You're right. I think that was one of the Synergies they saw in that acquisition, and they're going to take that back to Russia market and make a lot of EAF steel there some day.

Thank you very much.

Thank you, Chuck. Have a good day.

Your next question from Luke Folta with Jefferies & Company.

Hey, Luke.

Couple quick follow-ups.

No worries.

Just on the internal coke usage for next year. Your strategy is to use 70,000 tons. Does that have anything to do with Conoco's step-down agreement with them, and how much you're able to use or is that just the kind of rates you want to use on normalized basis going forward?

On a normalized basis, what we've said is, probably, you know, I don't want to get above 100 or so. You know, 90, 100. We don't want to become overly dependent on any single coker around the world, because it's so fundamental to the business. As long as we sell out Seadrift, the economics are the same. So think of -- next year will probably be around 70. The balance will sell in the global market, and I think it gives us great business risk diversification. And so, in reference to the Conoco contract, no. That's just one of our suppliers. Obviously it gets factored in, but it's one of many variables. I don't see that as the main driver at all.

Okay. Given that Seadrift has historically the marginal supplier of needle coke to the market, is it unreasonable to assume if we end up in sold out position for coke next year you that you might actually end up getting a better price for Seadrift than what you might be paying out of Conoco?

Time will tell. It will have to evolve. That's a possibility. If you just do the numbers and economics, it could be, depending on the market and timing and how the book is built. That's a possibility, yes.

Okay. Just last one, just on hedging, when you think about your strategy on hedging, your E-can input for Seadrift next year. I'm just trying to understand. I know you get some by-product and protection because of the by-products so there's a natural hedge built in, but then outside of that, are you going to be hedging, as you sign contracts, are you going to be putting on hedges at that point for each individual contract you sign? How do I think about that?

Yeah. You are pretty close to the way we work it. So, we have decant oil buy and then we also have some by-products. We hedge that net exposure and we like to say very closely hedged to what the actual net exposure is in our books. Not contract by contract, but pretty close to that. And so you saw this year, oil moved all over the place this year. And we really were well-protected and hedged against that. Our goal would be to do the same thing next year. That we take that volatility out of our numbers, and we enjoy the operating margins of that business rather than get whip-sawed with spot oil prices.

Right. Okay. Guys, thanks again.

Thanks, Luke, have a good day.

Your next question comes from Mark Parr with KeyBanc Capital.

Hey, Mark.

Hey, Craig. Thanks for the follow-up.

No worries.

First question, on solar, you know, there's a couple of competing technologies out there, one is poly silicone based the other cadmium telluride. Just curious if you have any greater exposure to either one of those technologies?

Our exposure would be greater to the silicone solar avenue. So, the fin-film, like first solar, we would have virtually no exposure. Kind of the main part of that market, which is the more productive conversion of solar to energy, which is the solar silicone cells, most of what's in the market place, that would be our main market.

Okay. That's helpful. I had another, you know, question, just in general. And you know, there's been a little commentary about the shortfall in the ES profitability in the third quarter. Relative to where the profit momentum had been earlier in the year. and I'm -- I'm just curious if you could give us a little bit more color on perhaps what other growth opportunities?

What other product categories would have an opportunity to, perhaps, you know, offset more of the down draft in profits that you've seen there to date? And, you know, also, if you have any comments about have you really seen the bottom of the solar and the oil and gas down draft that you saw in the third quarter? Could we see further deterioration there over the next several quarters before it bottoms?

Yes. ES slowdown and the lower profits is directly related to what's going on in the global economy. So we've seen solar slow down. They've got segments of their business in chemicals and broad industry, general industry are some of their segments, oil and gas, they've got some transportation segments. What we've seen in virtually all of those has been a slowdown. The bright spot in their portfolio has been advanced consumer electronics. Primarily, the smartphone segment.

Other than that, most of their segments, not company-specific, but macro economic-related has seen a slow down. I don't know where the bottom of that is. I think in Q4 can be slow, also. That's one of the reasons we opened up our guidance. I think this could carry into next year. As the global economies kind of work through this, the EU debt crisis works through this. I don't know, yet, Mark.

Does ES have a significant amount of sales or disproportional amount in Europe? Or is it primarily a US-based business?

No, it's global. It's feeling Europe. I mean, there's some LED lighting, there's automotive, you've seen all of the auto companies have really guided lower on European activities. LED lighting, solar, oil and gas, chemical, basic industry, transportation, we've seen all of those start to slow down to different extents. I think we'll continue to see that in Q4. It's built into the guidance we've given, and I think it could carry into the first part of next year. I think some of it is EU related. I think the EU consumer and project that was on the table have all really been slowed down. Given the situation in Europe.

Okay. And anything on the horizon that could offset this macro exposure?

Well, you know, obviously, they continue to work on new technologies. And you know, add advanced consumer electronics continues to go nicely. So, smartphones, the intelligent pads, and whatnot. To the extent those continue to grow nicely, that can help. I think we're probably in a period, Q4, can go right into the first half of next year, ES can feel slowdown. It is general macro economic-related.

Okay. Thanks for that additional color.

Thank you, sir.

Your next question comes from Garo Norian with BlackRock.

I just wanted to ask, considering that's gone on with kind of the lag and setting things contract-wise for next year, I mean, just logistically, is it reasonable to expect that with the holidays coming up as they are and the time that we have between now and the end of the year that things could actually go into next year before you get all of your contracts settled?

Garo, there could be some of that, but I think what will cause it to move along is that the supply chain is quite lean now. So you're going to get to a point here in December-January where globally customers need to secure their raw materials. So, as I've mentioned a couple of times, it is not just electrodes, many of the raw materials that our steel customers require, they're just going slow on because of the global economic picture. So, I would expect, probably, December-January, this will move quite quickly. And a lot of it, that speed will pick up just because the supply chain is lean for needle coke and electrodes.

So, kind of related to that, have you seen in your own customer order patterns, through the third quarter, and maybe starting here in the fourth quarter, that there was this pull back and now customers have found the new level of inventory they're going to go with? Or is this kind of an expectation? Because the idea that these guys are all announcing blast furnace shutdowns and slowdowns and you have China guys saying that they're going to be slowing down. It doesn't sound like there's a particular leanness, necessarily, on the way in, if demand is slowing as much as certain things imply?

Well, recall a lot of those closures, and they've been quite significant, have been blast furnaces.

Yes.

So, sizeable quantities of blast furnace steel around the world, a lot in Europe has been shuttered. I think that's going to improve the economics of my customers. Some of the customers come out, and when they've articulated it, they've said, I'm going to shutdown the number of higher cost facilities and they've I.D.'ed three or four blast furnaces, and said in the same release or the same conference call. But the rest of my portfolio, I'm going to run at a very high operating rate. Because it's much better for my cost structure, and so, I'm going to run my lower cost facilities. And Garo, that was our point that EAF will probably benefit a bit out of the process.

I think it's probably good for my customers. I think it's good for their economics. And probably, their better costed facilities which tend to be EAF could run at a higher operating rate. So I think all of these changes we're talking about is another reason why they've gone slow in lining up the requirements for next year. They've just got to analyze their portfolio. Their portfolio is kind of a moving target here the last the 60 days.

Got you. Thank you.

your next question from Wayne Cooperman with Cobalt Capital.

I remembered my other question. It was just about China and the scrap supply there and what you're seeing happening there?

The steel level in China has been slowing down here, of recent. Remember, China is 90% to 91% blast. So if you follow it over the last few months, individual blast furnace steel producers there have been announces specific blast furnaces. We're going to enclose these two --

I was curious what you're seeing on their development of a scrap reservoir and any building of EAF furnaces there?

Well, the trend on scrap for them has been very, very strong the last five years. And, Wayne, it has been propelled by things like the emergence of their auto industry. Here they sit today as the largest manufacturer of automobiles in the world. Five years ago, a relatively small participant. Here, number one. So their scrap reservoir has been making very, very nice strides the last five years.

We expect that to continue, Wayne, and their drive on environmental issues, etcetera, I think will continue to grow EAF there. What is only 9% of steel in China today, for EAF, will march. I think at some point in the future we'll look back and they'll be 30% of steel. Not unlike all of the other countries that have gone through that development process.

All right. Thanks.

Thank you, sir.

There are no other questions at this time.

All right. Much appreciate your attendance on our call. I look forward to talking to you early next year when we go over Q4. Thank you, everyone. Have a great day.

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