GrafTech International Ltd (EAF) 2011 Q4 法說會逐字稿

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech fourth quarter and year end 2011 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host, Anita Fontana. Ma'am, you may begin.

Thank you, Tiffany. Good morning and welcome to GrafTech International's fourth quarter and year end 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 did not receive a copy, please contact Marie Knorr at 216.676.2160 and she'll be happy to fax or e-mail a copy to you.

As a reminder, some of the matters discussed during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. 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 are posted on our website at www.GrafTech.com in the Investor Relations section. In particular, on this call we will be discussing the non-GAAP financial items of adjusted EBITDA, operating income, net income, and EPS that exclude the non cash impacts of pension-related charges and the release of a tax valuation allowance, both which have been accounted for in the fourth quarter of 2010 and 2011. Any year-to-year growth comparison reflects these same adjustments. Further information on the methods we use to account for these items can be found in our SEC filings. For your reference, a replay of the call is available on our website. At this time, I'd like to turn it over to Craig.

Thank you, Anita. Good morning, everyone, and thank you for joining GrafTech's call. Today we'll take you through our full-year and our fourth-quarter highlights and then open it up to questions. Recapping our full-year results for 2011, sales increased 31% to $1.3 billion, and our EBITDA was $269 million, up 30%. 2011 EBITDA was our second best in the Company's history. Operating income improved to $188 million, while net income was $141 million or $0.96 per share. Net debt at year-end was $419 million. The increase year-over-year was primarily attributed to an increase in working capital needs to support the 31% increase in sales and the 2 million share buyback we concluded in Q4.

In October, we successfully completed a $570 million five-year refinancing of our revolving credit facility. This represents a $310 million increase over the prior facility. We secured better terms and conditions and the credit was rated investment grade by Moody's. This new facility will provide us excellent liquidity as we continue to grow our Company and will keep us well-positioned in the volatile and still recovering global economy.

In 2011 we completed two acquisitions, Micron Research and FMI. Over the past 14 months, we have closed on four acquisitions that enhance both our Industrial Materials and Engineered Solutions business segments, furthering our strategic growth goals and improved the competitiveness of our business model. The integration is now complete with Seadrift and St. Marys. In 2011, they delivered $91 million of EBITDA, slightly more than the $90 million we guided to. In the fourth quarter, after completion of the 2 million share buyback, we announced a new repurchase program for up to 10 million additional shares.

Turning to our Q4 results, total Company sales improved 24% to $348 million. EBITDA came in at $75 million, up 47% versus 2010. Net income was $45 million, or $0.31 per share. In our Industrial Materials segment sales increased 26% to $297 million in the fourth quarter. Operating income for the segment was $49 million, up over 50% compared to the prior year. In our Engineered Solutions segment, sales were $51 million in the fourth quarter. Operating income was $4 million. The decrease in operating income was primarily due to a decline in the solar market.

Turning to outlook. The IMF in its latest report dated January 24, 2012, projected world output to expand by approximately 3.25%. This projection represents the second time since June 2011 they have reduced their numbers as the global recovery continues to move at a slower than previously expected pace. Furthermore, the IMF is now projecting a mild recession in Europe as a result of the continued European debt crisis. The January report highlights that downside risks have intensified globally over the past few months.

Also noting the slowdown in Europe, the European Steel Association issued a report on February 3, 2012, highlighting the European recession and expectations that recessionary conditions will continue through much of 2012. According to the World Steel Association, total steel production declined approximately 5% from Q3 to Q4 last year, with Europe accounting for much of the decline. GrafTech also saw an impact on Q4 sales to steel producers in that region, as a number of our customers reduced production levels, closed furnaces, and executed sizable layoffs. It is important to note that typically 30% of GrafTech's annual sales are in Europe. Considering the above, we are expecting lower sales volumes of Graphite Electrodes compared to last year in our Industrial Materials business. Our 2012 Graphite Electrode book continues to lag behind prior-years, especially in Europe as customers continue to assess their 2012 requirements. In addition, some customers in Europe have carryover inventory of electrodes due to their low production rates in Q4.

Turning to 2012 electrode pricing. We expect the average price of all our grades of electrodes we sell to be up 10% to 15%, which will help offset cost pressures. In our Engineered Solutions business, we have also felt the impact of the slowdown in the European region and in the solar sector. Globally, the solar industry has continued to reduce production and is expected to be at levels significantly below 2011. Recovery in solar is not expected until late 2012 or 2013. As a result of the above, we are targeting full-year EBITDA to be in the range of $250 million to $290 million. We expect Q1 2012 to be our weakest of the year, with EBITDA targeted to be in the range of $35 million to $45 million. Our sales volumes are expected to increase over the course of the year and looking at Q4 exit EBITDA, we are targeting $85 million to $95 million for Q4.

Going into the 2013 environment, assuming continued improvement in the operating environment, we would expect to be building upon this Q4 EBITDA base of $85 million to $95 million. For the full year 2011, we are expecting cash flow from operations to be in the range of $140 million to $170 million. On the capital front we are expecting expenditures to be approximately $140 million to $160 million. Interest expense, we expect $18 million to $22 million in the year. And then, finally, on the tax front, we are targeting an effective tax rate in the range of 23% to 25%, and a fully diluted share count of approximately 145 million shares. That concludes our formal remarks. Tiffany, let's open it up for questions.

(Operator Instructions) Luke Folta; Jefferies.

A number of questions there. Firstly, can you give us some sense of how much of your order book is complete at this point for electrodes and needle coke out of Seadrift?

Yes. I can on the electrode side. As I said, the electrode side has been lagging prior years and we are probably in the range of about 50% booked. So it is still early in the game. And as I said in the guidance, things are still volatile, and we have a relatively limited line of sight. And so our guidance is based on what we see today in our book and two, what we are hearing from our customers and expectations of the operating environment. And especially in the EU zone, it has gotten very, very slow, as we said.

So, you said the guidance is based on what's in the book today. How would you characterize your confidence that you could at least hit the range that you are talking about? Are you setting it up as if this is what you can see today, then if things improve over the course of the year there's potential upside? How do you think of that?

We have good confidence in the guidance we have given. We think it's very prudent. I think the drivers will be, how does the operating environment proceed from here? Our view is the EU will be in a recessionary condition, so that's going to be slow. Solar will be very slow compared to last year. And so, any change in our guidance would be, operating environment improves significantly, or the European region cascades and affects some other parts of the world, which I think is what the IMF has been highlighting, the intensified risk that if the EU gets worse than where it sits today, then it risks maybe impacting some of the other regions further.

Okay. And as you think about pricing, the 10% to15% assumption that you are using for the full year, is that based on the pricing that you have been able to achieve to date so far for the first half? My understanding is that in some regions there still isn't a full-year price established. That there is maybe some variation between what expectations are for the second half, relative to the first half. I guess what I'm asking, is the 10% to 15% representative of today or are you assuming some different price in the second half?

No, that's what we see today. We feel pretty good. 10% to 15% price increase across the entire portfolio. Obviously, the larger diameters will be higher than that, but the average will be 10% to 15%, and Luke, that's based on what we see in the book today and what we see in the market place. The marketplace price we see is in that range. It's established.

Okay. And then as far as needle coke is concerned, you didn't talk about what sort of increase are you seeing there? Can you give us a sense of what that did for you?

Yes. Needle coke -- just to give you some color, we would expect prices in needle coke to be up 25%, 30% over last year. Maybe even a little bit more. The needle coke book also is proceeding a little bit slower than maybe other years because of all the economic events that we talked about.

Okay. So in terms of your spread, or how you think about your margins, are you happy with the pricing that you have negotiated this year? Or do you think that just because of the recessionary scenario that you weren't able to achieve optimum margins? I know when you look at your margins in 2012, a lot it's going to be impacted by volume and that's going to have a big impact on earnings. But as we think about that spread, are you back to where you need to be? Or do you think you still need to improve that going forward?

Luke, we think there's a lot of upside. We are not happy with this year. I think that the economic environment we faced in Q4 and then coming into this year has weighed on the results. Volumes are going to be lower. And so, when you look back at historical margins, or peak margins, we have achieved in the past, we are not happy where they sit today. They're being dragged down by lower volumes, especially in Q1 and the first half. And what we would look to is try to get to that exit rate EBITDA Q4 we talked about. $90 million EBITDA exit rate type number. And then build upon that in 2013, assuming 2013 is continuous improvement in the global economies. So we have been disappointed.

If you look back in last year, the first six months were quite strong. Each month was better. Steel production ran up. But steel production kind of peaked around May, June, and started to come down after that and then really fell down in Q4. So no, we are not happy the way the profile went. We are building a book when a lot of our customers are losing money, shutting down furnaces, laying off, so it's a tough environment right now from an operating standpoint. So no, I don't view this year as good by any means.

I think the business model we have built is well-positioned to seize every opportunity in this environment. The balance sheet is great. The liquidity is great. You saw us in the past when it was tough operating environments, we picked up 4 companies. So I think we are able to play offense all through this. But the global economies still have a long way to go to get back to a more normal level. And when they do get back there, then I think you'll see the full impact of the business model we have put together, back integrated to the needle coke, et cetera. So we've got a long ways to go, Luke, to get to what we consider a good place on operating margins and whatnot.

Just last question and I will get back in line. On Seadrift, you talked about needle coke prices being up 25% to 30% and maybe even more in some cases. How do we think about the contribution for Seadrift in 2012 versus 2011? I imagine it probably takes some time for the profitability to work through the system there with the way it's accounted for on internal sales. And also, I wanted to get a sense, are you fully hedged out for the year? Because oil prices continue to go up. Could we see a situation where you are increasing needle coke prices further? Or how should we think about that?

Yes. What goes on further in needle coke pricing is probably too early to really make a call on that. Obviously cost pressures are going up. We see breadth of 125 plus here. So cost pressures are there. Time will tell where that goes. We've got 25%, 30% price increase so far and in some cases even more. So we are very pleased the way Seadrift has gone.

Seadrift, as you saw together with St. Marys last year, contributed over $90 million EBITDA. This acquisition's gone very well for us. We're delighted. And the two teams are great teams we have added. They deliver. Seadrift, as you know, ran at 90% plus all last year and I would think this year it's still going to run at a good operating rate. And so time will tell. If the market continues to have 125 plus oil, then yes there will be cost pressures and perhaps you've got to look at the selling price. Time will tell.

Okay. Thanks for all the color, Craig. I will get back in line.

Thank you, Sir.

Ian Zaffino; Oppenheimer.

As far as -- I wanted to build on the first question about the guidance. You said it's based on 50%. So, that assumes you get no incremental volume beyond what you have booked?

No, Ian. Not at all. It's based on the 50% we have in the books so far, and looking forward, talking with our customers, those customers that have not booked yet and what we would expect to get of their business. So there's still booking to go that's in our guidance.

What type of utilization would that bring you up to for the year, per se?

Well, last year, as you know, we came up throughout the course of the year, and it paralleled steel production rates. They started out low in the beginning of the year, came up, kind of peaked midyear. Our book was built last year with the second half volumes larger than the first half. So, last year I think the average run of the GE business was about 82% operating rate, and Q4 was around 90% as we expected. Q1, I would expect we are going to be down probably 75% op level, 70%, 75% because of all the things we talked about, the de-stocking in Europe and whatnot. And as the year goes on, and the book, and the customers, and the operating environment, we'll adjust that accordingly. It's part of our flexible cost structure. Unfortunately, we have had to do a number of layoffs around the world in both of our businesses to adjust the cost structure. And Q1 op levels will probably be 70%, 75% in GE.

Okay. And then on the inventory front, both on year end and at customer. On year end, how much inventory do you have made with cheaper needle coke? And then also, how much would you say your customers are, per se, overstocked that they need to burn off?

Let's start with the customer. On the customer front, I think a lot of the European customers, because Q4 was slow, have inventory and they will be going through some destocking. I think that's why a lot of them really aren't in a real rush to book their 2012 requirements. I think the second part, they are just trying to get line of sight to 2012. They don't have a lot of visibility in the EU region. They have been laying off, closing furnaces, you see them, they have been announcing 1,000, 1,500 layoffs at a pop. There is inventory in Europe for sure.

Around the world, there may be a little bit, some other packets, depending on certain other things. China has slowed down quite a bit. Coming into January, the January numbers are just out for total steel and you see it was down 8% year-over-year, with a number of the countries down double digit year-over-year. So there is going to be some excess inventory in the trade that is going to work out. That destocking that we are expecting is baked into our Q1 guidance and our full-year guidance. As far as ourselves, yes, because of some of that we've got a little bit extra inventory. But to your point, does that give us a cost advantage or is that something like that? All of that is factored into our annual guidance.

Okay. Perfect. Thank you very much.

Tim Hayes; Davenport & Company.

On your needle coke side of business, specifically the decant oil costs. Can you give us some guidance on how much your cost of decant oil will be up in 2012 versus 2011?

It's not a point of guidance. We have some regular suppliers that we have contracted with, and so the way I would look at it is we have a good track record of hedging our decant exposure. Last year, as you know, was quite volatile and I don't think you heard us talking much at all about getting squeezed, because we have a very good, professional, proactive hedging program. This year I would expect the same kind of approach. We like to hedge. When we know the exposure, we have the orders, we like to hedge and take that noise out of it. We are not expecting a lot of volatility on that side. Our track record says we won't have that.

Having said that, I see this year, across all our businesses, as more volatile than last year. Last year, remember, EU was not in a recession. We had the wind at our back in solar, which is an important sector for Engineered Solutions. This year, I view the operating environment much more tougher than last year. First half of last year, the wind was at everybody's back. Everything was picking up from nice levels. Steel operating rates coming up nicely.

This year Q4 has been down. January has been very, very slow at our customers, evidenced by the steel numbers that have just come out. I see Europe very volatile. When we sit with our customers in Europe, they don't have line of sight, and so they are taking their time on the booking. So, having -- in answer to your question, yes, I don't expect any volatility there. We have a good hedging program. But, I think overall, I would expect more volatility in our business this year.

So if you had the hedges in place on decant oil, you should have a good idea of how much that would be increasing. I'm guessing increasing from what you locked in, in 2011. Is that correct?

Yes. That is fair enough. It's just not a point of guidance that we give. Obviously, I want to keep as much of that as I can for ourselves and then sell at a fair market price. It's just not a point of guidance that we give, or our competitors in needle coke. They don't provide that either. We all have our own technology, efficiencies in yields, and we don't provide that.

And if I could then, when you did put on the hedges for decant oil, did you put them on later in 2011 than you did in 2010 just because the needle coke contracts got off to what? About three-months delayed?

Yes. They got off to a later start so that's fair enough. They would have -- the booking and the dialogs with the customers would have been behind last year's schedule and they would have gotten put on later.

Lastly, did you get any small benefit from the natural gas prices coming down?

Yes. That's a positive for us. Most of our other raw materials are going up, but we have been enjoying the relatively low rates of natural gas here for a while. Natural gas has been a benefit across our portfolio. That's been a plus for us.

Would that just be a few pennies in Q4?

I can't quantify that for you, but gas is -- we have been under our budgeted rate almost every quarter. It's come out very, very nice for us. I would just look at natural gas has not been an issue, and we usually have been ahead of every number we have planned, it's come in lower.

Thank you.

Thanks, Tim. Have a good day.

Phil Gibbs; KeyBanc Capital Markets.

First question is what are your expectations for global steel production growth and/or decline outside of Europe? And what is your view of steel production growth and/or declines in Europe for 2012?

Europe is a wild card. I think Europe could definitely be down. The customers we all talk to, when you talk to them about what's their expectations, you go through Italy, Spain, France, Germany. Germany's numbers for January were down 8.5% year-over-year, so Europe we see lower production rates. The US, and where a lot of you sit, is probably one of the brighter spots around the globe, but I think I would view the US cautionary. I see the recovery here very fragile. It's started to come under way. But I think Europe -- there's a big possibility Europe affects it. You see in steel a lot of our customers have reported they don't have good line of sight to this year. You follow steel prices, scrap prices, they have been going down. They've been going the other way.

And so, US we would expect to be up this year, but I think it's very fragile. And I think the risk that Europe spills over and affects some of these US cust -- the US environment is very possible. So we have a very cautious look economically on 2012. China, almost every data in China is showing a slowdown, as the government tries to rein in the property market. And you look at PMI, almost every index there, inventories at the ports of iron ore are at tremendous levels. We are not expecting a lot of growth in 2012. Could it be a couple percent? It could but it -- we think it's going to be a very volatile couple percent.

We see big picture, over the course of the year, our volumes increasing. Q1, first half, lower, take care of the destocking in Europe and some of the other places. And then, Q3 and Q4 much higher and then an exit rate in Q4, assuming the economies continue to pick up over the course of the year, of that $85 million to $95 million type EBITDA in Q4.

Assuming that the supply chain was in balance right now on the electrode side and there were no destocking pressures, and you are operating in line with your customers, where do you think your operating rates would be?

Let's go down that path. What if? What if instead of middle of last year Q3 rolling over for steel production, and then Q4, going even lower. Let's say we would have continued on that nice trend that was the first half. I think we would be looking much more like $90 million to $100 million EBITDA across each of our quarters for four quarters this year. Unfortunately, that's not the operating environment. And I think the strength of our business model would be much more apparent in that environment. We would still be running to your questions at high op level in electrodes, 90% plus. Seadrift runs at a very high op level last year and probably will be at a good operating level this year. So I would have said maybe we have $100 million each quarter of EBITDA. If that was the operating environment.

I think it was well-positioned that way. If you go back and look at the trajectory on Q1 and Q2 in operating rates, [bars], electrode demand. Even some of our competitors also had said gee, they are in the high 80s and so if that trend line would have continued, I think we'd have those kind of numbers. And then hopefully, we can see that kind of environment start to improve in 2013.

Lastly, here. I appreciate the answers you've given so far. As far as hedging the decant oil exposure in the needle coke business, can you explain how there wouldn't be pressure on the spreads in that business in 2012 given the meteoric run we've seen in Brent crude over the last several weeks? And the needle coke costs were seemingly somewhat in line with at least recent market expectations. Are we assuming that there is pressure on that business in 2012, more so than the electrode business?

Cost-wise, I think both have pressures. Oil at 125 has increased the pressure, more so, on needle coke. We are actively hedged there. And then, as we go forward, let's say looking at Q4 shipments, if they are still in this price environment, then obviously one might look at the pricing. Because it's still in this cost environment. Then one would have the alternative to consider the pricing environment. It's way early to think about that. But those are our levers. We are very active here. We try to take all that risk out. We have a good track record on that front and if there are still costs to be offset, then we would look at the marketplace. Is the marketplace such that we can pass those on in Q4 or the end of the year?

You feel good about where you are hedged then. At Seadrift it's just a matter of the price increases on the electrode side more than enough to overcome the other cost pressures outside of energy. And I think you said it's somewhat offsetting, but not more than offsetting? Is that the way we should read it?

I think that's a pretty good recap.

Thanks, Craig. I appreciate it.

Thanks, Phil. Have a good day.

Charles Bradford; Bradford Research.

Good morning. When I look at the steel production data in Europe, the three biggest EAF producing countries actually all reported up Januarys. The bad one, obviously, was Germany but that's not as big as Turkey, Italy, or Russia. What are you seeing that may be different than what the statistics are reporting?

Yes, those ones you have picked out have been up. But we are looking at the totality of it. January numbers in total worldwide were down 8% and Japan was down double-digit. Remember we are in all of these markets. Spain was down huge. Italy was down huge.

Italy was actually up, which is surprising. But it was as far as steel production.

Perhaps, but all the numbers I saw, when you do most of the countries there, they were not attractive.

Right. I was just separating the three biggest EAF producers, which were Italy, Turkey, and Russia. All of which were up, even though the total was clearly influenced by Germany; was pretty gruesome.

Absolutely. We have a facility in Spain. That was ugly. France was slow. So in the totality and at our customers, they've got the inventory. They've closed a number of furnaces. You go through ArcelorMittal, Tata, there's been a lot of closures of EAF furnaces in Q4. And I think Tata laid off 1,500 or so. ArcelorMittal laid off 1,500 in Europe.

What are you seeing in places like Brazil and Mexico?

Brazil has had a good run in preparation of the World Cup and the Olympics there. And what we see there is a lot of that construction has been put in the ground. Stadiums and railroads, subways, apartments, et cetera. So we see that tapering off now as we get close to the events. Their big run-up they've had and so I would also see them a little bit vulnerable to less growth than what they have had in the massive construction they've done in Brazil in the last couple of years.

Thank you very much.

Thanks, Chuck. Have a good day.

Dan Whalen; Auriga USA.

I appreciate the color on the fourth quarter expectations for EBITDA. Does that get us back to the 90% utilization rate area? Or how should we be thinking about that?

Yes. We ran Q4 electrodes as planned and as I think we discussed in prior conference calls at 90% plus. Our customers --. We ended up with extra inventory as we talked before with a couple questions.

I think you made reference to 4Q 2012?

Yes.

Color of $85 million to $95 million EBITDA.

Oh, what will that run rate be?

Yes. Will that get us back up to 90% utilization?

No, I think we've still got room there. We have a lot of upside to the gentlemen's question that asked are you happy with this year or are you approaching peak? No, we won't be 90% at that. We are going to have lower volumes this year so we have a lot of upside. We've got a lot of room to grow in 2013, 2014 as these economies get back on track to some decent growth and stability.

Right. So $85 million to $95 million in EBITDA would probably be closer to 85% utilization or 80% utilization, ball park-ish?

It's too early to tell, but it's definitely a lower rate than the 90% we did this last quarter. There's a lot of upside is my point. We're going to be Q1, 70%, 75%. We'll see how the book comes through and the timing of the orders, and then we'll adjust the ultimate operating rate around that. When I look at what we are envisioning there in the quarter and the EBITDA, it's well below 90%. It is much lower. There's a lot of upside.

Okay. And then you made reference to, in the past, of being acquisitive during the periods of softness. Can you talk a little bit about, one, how you are viewing potential bolt-on acquisitions versus buying your own shares back? And then secondarily, if you could share with us order of magnitude of what the average purchase price of your shares bought back in the fourth quarter were?

Absolutely. Obviously, if we find a good growth opportunity fairly priced, that we think really improves the business model, like St. Mary's, like Seadrift, for instance, in our IM business, that's going to have the priority. So if we can find fairly priced, you'll see us seize that. You see that's why we have such a drive to have a very good balance sheet and great liquidity and an investment grade rated revolver. That will be our first choice.

You saw us, when we had the original 3 million authorized shares, you saw us do 1 million. Then you saw us not do any for awhile, then obviously we did 4 acquisitions in that space. And once we got the acquisitions done, you saw us finish up the last 2 million of that and put a new program in for 10 million. So I think your takeaway should be, we like to buy back our shares. If we think the price is right and it's the best alternative for our shareholders, i.e. we don't have another pending acquisition or we are not working on one that could require our facilities and our lines and our liquidity, then -- and we like the price of the shares, yes, you'll see us buying back shares. And time will tell, obviously we can't telegraph anything here.

But, I think your takeaway should be --, yes, we like buying back our shares. When we see a price that we think is a good price and the economies are still struggling, and we think we are undervalued, you'll see us buy back. It's why we put in a 10 million share program, a big one. And it's why we have $300 million plus of new liquidity here at GrafTech. Lastly, on the 2 million, that final piece we did, that 2 million shares, the average was about $14.60.

Great. That's very helpful.

We were very happy to buy them at that price.

Very helpful. Thank you. Lastly, to help me frame it a little bit here, your commentary on solar. How big of a piece of the revenue pie is that in actuality here? I know that's a very soft end market right now. But how big is it in terms of revenue or whatever frame--?

If you look at ES, so that ES sector. It's one of the drivers. It's been double-digit growth now for a couple -- two, three years, and so if you look at ES, it's a good 25% plus of ES. And it's a good 25%. Wind has been at our back, good growth, we've got a great product line, great technology there, so it's a technology sale for us. And it's one of our new products. It's what our R&D team has developed. Those kinds of products, smartphone products, this is what has been coming out of our R&D machine here and it's great business. It's been nice margin business. It's technology. Sometimes it's IP protected or it's process know-how. That sector, I really don't see that coming back much until really early 2013. So much of the solar industry right now, if you are close to it, it's not a case that it's running slow, they are shut down.

Exactly. I appreciate the added color.

Thank you, sir. Have a good day.

Luke Folta; Jefferies & Company.

When we think about your volumes in the first quarter of next year, you said utilization 70% to 75%. Is that about the same rate you expect to be shipping at?

I'd say that's too early to tell, really.

Is it in the same ZIP code?

It's closer to that. Yes, it's similar to that, but Q1 is going to be slow, as we said. $35 million, $45 million EBITDA is really low. Shipment rate is going to be low. So if we're -- let's say we are producing at 70%, 75% -- remember some of that is going to go in Q2 and then also remember, Q4 we ran at 90%. So Q1 shipments are going to be soft. EU destocking has got to take place. Some other places, it's got to take place. And we feel good about the $35 million to $45 million. I think we feel very good about that number.

Okay. I was just trying to get -- I mean that seemed like a low number if you were going to be shipping at 70% to 75%.

Yes, we agree. It's going to be a lower rate. It is very soft out there and I'm sure you've seen some of the commentary from some of the steel guys. It is slow.

Okay. Just on the cost side, SG&A looks like it's going to step up. Is that mostly pension expense? How do we think about that increase? And then also D&A is going to step up $50 million or so year-over-year. What is driving that?

Let me toss it over to Lindon. There's a couple clear buckets on the overhead that we are investing in.

In the overhead, we'll continue to expand some things that we were expanding in the past. Like ES, we still have some investment there. And we have some build out of some other capabilities, including R&D and LEAN initiatives and some of the IT capabilities that we started to support a broader business equation. And then there's a piece, there's a piece of incentives, as well, coming back. And we didn't pay out much incentive this past year. So we are reestablishing that. So all of those combined is really the driver.

Now when you look at the overhead overall, you recognize that this mark-to-market had some impact. We clarified that in the release in 2011. So we don't anticipate that. Of course, we will correct for that next year when we enter accounting treatment. But we don't have anything anticipated in our numbers for that.

Okay. And for D&A? Is that just a function of the increased investment you're talking about?

Yes. We will continue to have, we don't guide on the depreciation and amortization. But one comment I will give you on the -- relative to PPA impacts, we would generally have a constant run of about $6 million, which we have shared with you in the past. And overall, we have been running about $95 million of depreciation. We'll continue to see about that.

And then last one, regarding the import environment. When you think about the volume shortfall that you're seeing in the first half of this year, do you attribute any of that to market share lost to imports? Or is this pretty much just a destocking issue that's a one or two quarter phenomenon and that goes away in the second half?

Definitely, destocking, Luke. And then, obviously, we've been bringing price up. So a part of that is going to be giving up some share for sure, as we execute price increases.

Okay.

And I would say that is a first half phenomenon, Q1. And then the price settles in and then we get back to solid volumes.

Okay. Do have a sense of how big an impact that might be in the first half?

I've got that guidance for Q1. So $35 million to $45 million. To me I think one of the takeaways you should have is GrafTech and the model we have. We can make money -- small, $35 million to $45 million EBITDA at these low operating rates. It's what we've tried to put together, back integrated to the raw material, flexible cost structure, move the cost according to the operating rates and the needs of our customers. Here we are a very low quarter, destocking going on in Europe, executing price increases across our businesses, and still making money in that quarter.

And then looking at Q4, we would expect to be in that $85 million to $95 million EBITDA. You see more of the business model's impact out there. Volumes are up, we believe across all of our businesses. The needle coke flows through. Remember some of that needle coke goes into our own machine and so there's a delay in some of that recognition of the profit and price increase. That flows through. So $85 million to $95 million is the other takeaway I would give you on a Q4 run rate. And hopefully, if 2013 continues to improve, that's the way we would like to start off 2013.

Fantastic, guys. Thank you very much.

Thank you, sir.

Phil Gibbs; KeyBanc Capital Markets.

I just a couple real quick ones here. And I apologize if I missed this.

No trouble.

How should we think about the first quarter electrode pricing flow through? Do we have a little bit of carryover from the fourth quarter impacting that?

There is maybe a little bit. Not much. We didn't have a lot of carry over. We really wanted our customers to try and take their orders as committed. We had some cancellations in Q4. Surprisingly, this happens sometimes. The customer's balance sheet is such, he wants to cancel. He needs to cancel and in a couple cases we were worried about getting our money. So Q1, yes, there's a little bit, not material carry over. Most of it is going to be just low volume, new orders.

And the pickup in the inventory at the end of the year, was that mostly just the finished product that you had with operating at the lower rates in the face of some of these cancellations?

Exactly. That was the majority of it. We also -- in electrodes. We also had some extra in needle coke. And just to share some color with you, we could have sold another 10,000 plus tons of needle coke in Q4. But the customer base was demanding the old price and that just didn't work for us, and so we waved that off. We didn't take that, and so we ended up carrying some extra needle coke also across year end. And, ultimately 25% to 30% plus increase was achieved.

Okay. And then lastly -- I really appreciate this. Lastly, in your needle coke business, strategically, do you have the ability to adjust your prices as we move through the year? Or have you mostly tried to lock in -- call it 6 to 12 month pricing? Or is pricing more fluid based on your (inaudible)?

Time will tell there. We have a lot of customers there that come in and don't necessarily book their annual requirements. It can be quarter-by-quarter, et cetera. So, my point is, costs are going up in needle coke. We are always assessing what's it mean to our cost structure. How much is hedged out. And we are also assessing the price based on the input costs. So needle coke, because a good portion of that business tends to be quarter-by-quarter or 6 months, there are more opportunities to reprice.

Okay. Perfect. Thanks a lot.

Kevin Beck; Paradice.

Two quick questions there. I wondered if you could talk about the CapEx a little bit. $155 million or so in 2011 and then another $140 million or so this year. That's quite a bit of CapEx in the business relative to where we have been the last five, six, or seven years. Can you talk about what you are spending that on?

Absolutely.

And despite lower volumes this year, why you are keeping it as high as it is?

Absolutely. Recall of our 4 acquisitions, all of their CapEx has come in, in the last 14 months. Right, since they have been done. And the first two of them, Seadrift, a very large facility, that we are doing a number of things there on quality -- improving that quality. Seadrift already has very, very good quality, but I think we have an opportunity with our technology, married up with Seadrift, to take that quality and performance of needle coke to a whole other level. So some of that capital is for Seadrift. Remember we picked up St. Mary's electrode plant. So that's instead of 5 plants, we have 6 plants. So that's additive.

And then over on ES, there's some -- some of the businesses over in ES, not -- other than solar, are continuing to grow nicely. The Smartphone sector. Good, good growth. Oil and gas drilling. That's still proceeding quite well in this high oil environment. So there's investments to allow us to continue to grow those businesses.

So is this a more normalized level going forward?

Yes. I would say this is a more normalized, $140 million to $160 million, the type of guidance that we've given. That's more like this platform, plus or minus.

Okay. And so when you look at ES, specifically, and you look at the growth that you expect there in revenues, we still haven't seen a recovery in the profits in that business. So if you look at that business as revenues, in this past year relative to, say, 2008, the profitability is half as much, stripping out the pension. So, we are growing revenues here but we are not growing profits, and it's requiring more and more capital. Can you talk about how you get the profitability back on track in that area?

Yes. Very good point. That business has some mature parts to its product line and we have not been putting money into that capability. The money has been going into smartphones, diamond drill-bit business, solar, et cetera. And so I would expect over the course of 2013, when solar comes back, you'll start to see more of the capability of ES profitability. I think this year, profits will be up in ES, but remember, it probably has virtually no solar -- very low solar business especially in the first half, first three quarters.

So, is solar like -- you said it's 25% of the revenues or something. But is it twice the profitability or something?

Well, it -- yes. Not to give specific guidance of profitability, but it's one of our very good ones, yes. It is good business. Double-digit growth and good profitability.

Right. So, despite solar being down this year, you still expect ES's profit contribution to grow this year from 2011?

Yes. With the other product lines that are growing.

Okay. Sounds good. Thank you.

At this time, there no further questions. I would now like to turn the call back over to the presenters for any closing remarks.

Thank you, Tiffany. And again thank you for your interest in our Company and your questions, and look forward to working with throughout this quarter. Take care. Have a good day.

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