GrafTech International Ltd (EAF) 2012 Q1 法說會逐字稿

At this time I would like to welcome everyone to the GrafTech first quarter 2012 earnings call. (Operator Instructions). I would like to turn call over to your host, Kelly Taylor. Ma'am, you may begin.

Thank you, Brooke. Good morning and welcome to GrafTech International's first quarter 2012 conference call. On the call today is GrafTech 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 will be happy to fax or email a copy to you. As a reminder, some of the matters discussed during this call may include forward 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 press release which is posted on our website at www.graphtech.com in Investor Relations section. For your reference, a replay of the call will be available on our website. At this time I would like to turn the call over to Craig.

Thank you, Kelly. Good morning, everyone and thank you for joining GraphTech's call today. Today we will take you through our first quarter highlights then open it up to questions. In Q1 sales were $241 million, down 21% versus a year ago. As previously guided GrafTech electrode sales were lower largely due to customer destocking initiatives, especially in Europe where the steel market has slowed considerably in response to recessionary conditions in the region.

We believe the majority of the destocking initiatives were completed in Q1 and the balance of the destocking will be completed by mid-year. EBITDA came in at $40 million in line with our targeted estimate. Net income was $18 million, or $0.12 per share.

We had a couple one time benefits in the quarter. One, higher Q4 electrode utilization rates that allowed for better fixed cost absorption which flowed to our P&L in Q1 and provided about $0.03 benefit and then secondly, a nonrecurring insurance reimbursement which provided a $0.02 benefit. Net debt increased to $466 million largely the result of planned increase in working capital and CapEx expenditures.

Turning to the segments, Industrial material sales were $193 million and operating income came in at $25 million. The previously mentioned benefit resulting from higher Q4 operating rates was also a major driver of gross margin expansion in Q1 which will not be carried forward given our previously reviewed plans to run our graphite electrode plants at approximately 70% operating rate for the balance of the year.

As an update to our graphite electrode building process, we currently have approximately 80% of our 2012 targeted book completed. This is up from the 50% level we highlighted in our last conference call at the end of February. In our Engineered Solutions segment, sales came in at $48 million and operating income was a loss of $1 million. This was primarily due to the previously discussed and expected weakness in the solar sector.

Increases in SG&A and R&D to support future growth also weighed on operating income in the first quarter. We expect Engineered Solutions to return to a profit in Q2 as increased sales to the advanced consumer electronics and oil and gas sectors compensate for the low solar sector sales.

Turning to outlook. As highlighted in prior conference calls, we continue to see a slow and very uneven recovery in the Global Economy. The European economies are struggling with massive debt and severe austerity programs, while growth out of emerging economies particularly China is also slowing. The U.S. economy, while showing signs of recovery is still a very fragile and uneven recovery. For the second quarter we expect EBITDA to be in the range of $60 million or $70 million. We continue to target a full year EBITDA range of 250 to 290.

We have reduced our capital expenditures for 2012 by approximately 10% in light of the continued uncertainty in the global economic environment. We now anticipate capital expenditures to be between $125 million and $145 million. We expect our maintenance capital to approximate $80 million to $90 million. The majority of the CapEx above maintenance will go to grow our Engineered Solution business, execute on Seadrift quality improvements and finally overall productivity improvements across our global production platform. That concludes our prepared remarks. Brooke, let's open it up for question answer.

(Operator Instructions). Your first question is from Luke Folta with Jefferies.

Good morning Luke, how are you today?

Good morning. So you talked about 80% of your order book being billed for the electrode business and in your press release you said pricing up 10% to 15%. Is that a final number for the year do you think or is there room for that to move around?

Obviously, with 20% to go in our targeted book there is room to move around on that. So I would look at that as a risk factor. As we have stated the economies are volatile, fragile in some areas, in some areas declining. We have 20% of the targeted book to go. Obviously, price has the ability to move around as well as risk on the volume in the final 20%.

But you are generally seeing a pretty established market as far as pricing is concerned.

Yeah, we have been pretty pleased with the way the book's come together. I would say since our last conference call it's come together as expected. Customers have come to the market having burned off their excess electrodes carried over from last year. They have come in and ordered and that process has gone pretty much as expected. And thus, we stay with our targeted annual EBITDA guidance.

Okay. Secondly on needle coke, could you give us a sense of what is happening there with the order book? I remember hearing some fairly optimistic, I don't want to say optimistic, some encouraging data points last quarter about some initial sales that have happened this year and some positive pricing trends there. Can you give us an update on what you're seeing there and also how this maintenance outage in the second quarter plays into your kind of full year plans?

Yes, as we said needle coke prices are up 25%, 30% so that's gone well. That book is coming together very nicely. That book also like the electrode book has been a bit delayed. So sales like the electrode book will be heavier in the second half. That is along similar lines as the reason for the electrode book. That entire supply chain, if you will, has backed up a bit with the slow down the last six months of last year. But we have been very pleased with needle coke business. We're pleased with the price increase. We should have margin expansion in that business. That's been a very, very good acquisition for us. On your last, I think you had one last part of a question in there, I believe. What was your last part there?

Just how the maintenance outage plays into your thoughts on [procedure] for the year? Did you overproduce kind of going into that so you would have the tonnage available? Just want to understand how you are thinking about it.

We always do about. That is very much a planned and well scheduled annual process. We usually build up some inventory so we can meet all of our customers' needs. That will go down for a number of weeks as planned and then come back so that fits very well with the annual plan and fits exactly where our targeted guidance for full year EBITDA is.

Just on the guidance. You're going to see a 60% or so step up in EBITDA in the second half relative to the first half. When you think about how you get to that forecast, are you assuming any incremental growth in consumption for electrodes or needle coke or is that just basically you getting the inventory destocking abating and then your market share kind of normalizing and that driving the shipments higher, is that how to think about it?

The latter statement you made is absolutely part of it. I would put it in a few buckets. One, because of the phenomena you just mentioned, we will have larger GE volume the second half of the year. The destocking will be behind us by mid-year. So one is larger graphite electrode volume in the second half. The other part, which is an important part, is the flow through of the Seadrift coke price increases and the profit thereto that are in the pipeline of our internal graphite electrode machine. Remember that 25%, 30% plus increase and the benefits flow through ultimately to our results after we sell a finished electrode. So you will see some of that in the second half which is very important.

And then lastly as I said, you will see larger needle coke sales is what we expect in the second half as I mentioned earlier. That's the way the book has come together. So those are the three big buckets. Lastly ES obviously a very slow first quarter and I think over the course of the year, we will see ES start to do better. Those are the three or four items, main buckets of why our second half will be better than our first half.

So just finally to characterize it, you're not looking for a meaningful recovery in the European economy or the global steel consumption in the second half. It seems like a lot of the drivers that are driving your income higher are due to factors that are fairly, I mean, there's not a lot of risk around those. A lot of them are kind of in the cards just the way the supply and the channel and the pricing flows through?

You are absolutely right. We're not planning on some great improvement in the global economies over the course of this year. We see the recovery to be slow and uneven. And so that's not a major factor of some recovery benefit in this. Ours is the four items that I mentioned. Now, having said that those four items are never without risk. We have got to build the rest of our electrode book. We have got to build the rest of the needle coke book. But based on what we see in the order book, building process, what we see at our customer shops, we think that will come together nicely and we will fall within our targeted annual EBITDA range.

All right, Craig, thanks for the color. I will turn it over.

Thanks, Luke, have a good day.

Our next question comes from Ian Zaffino with Oppenheimer.

Hi, just a quick question. You talk about the target order book. Is that 100% of your capacity or is that a portion of your nameplate capacity?

Well, our targeted order book would be the order book that relates to our full year EBITDA guidance.

What portion of your capacity is that?

As we said, we will probably run our facilities in electrode over the course of this year at about 70%. Obviously we have inventory, we built inventory last year as planned. So as we see our order book and we look at the market, we think about a 70% op level over the course of the year, plus the inventory we have will be sufficient to fill our customers' needs.

And then just looking forward into, I know you gave second quarter guidance. Can you give us a little bit of a better breakout of what maybe 3rd and 4th quarter might look like? I don't know if there's any seasonality in there or how we should look at 3rd and 4th quarters from an EBITDA standpoint.

Recall, we're still building out those books as I said earlier, so I can't give you definitive guidance on that. But as far as color, I would look for Q4 to be bigger than Q3 and I think that's the way you should weight the balance of those two quarters, Q4 bigger than Q3. We will exit with probably our best quarter of the year in Q4.

Okay, perfect. Thank you.

Your next question comes from Arun Viswanathan with Longbow Research.

Hey, guy, thanks for taking my question.

Our pleasure.

I just wanted to clarify. So the 250, can we interpret that to mean if you continued to run at 70% operating rates and you have just completed the book as you see it, that would land you -- would that land you at the midpoint of your guidance or for the full year?

That will land us within that range. So we will come in 250 to 290. Midpoint is probably a good place to look but is there risk around that midpoint? Absolutely, because we still have book to build and the economies are still moving around quite a bit.

Right. So if you were to actually see steel operating rates potentially move up through the year from, you know, high 70s in the US and potentially higher in Europe, I'm just painting a more optimistic scenario, would you be able to capture a greater amount of the year or would you not be able to ramp production in that manner?

Obviously, we could react to that if that was the case. So we have the ability to move our plants quite quickly. But was we see right now, as I said in the economic review, we see a very slow recovery and very uneven. Everything we see coming out of Europe on the economic front has been very negative to somber. We have seen China continue to slow. It just had one of its worst quarters in three years.

We think at this time it's prudent to remain cautious as we move forward. We have got to finish up our book building process. If that goes as planned for us, we will be within that EBITDA full year guidance we have given.

And then just as a follow up, have you noticed a change in your customers' behavior? I understand that they are potentially more cautious just on the economic front, but on specific consumption or other areas, are they running the electrodes to absolute completion or have you seen a change in their own consumption patterns?

We have seen no changes in the way they utilize electrodes or consumption patterns. What we have seen across our customer base because many of them lost money in Q4 last year and a number have reported losses so far that have come out in Q1. We have seen they have been very cautious. And I think you listen to the same conference calls I do. I think they're trying to be very prudent, cautious and subdued as they look forward. Our typical customer probably has an order book that goes out five weeks, six weeks. Literally that is their line of sight. So what we have seen from our customer base is very good prudent caution.

Thank you.

Your next question comes from Michael Gambardella with JPMorgan.

Good morning, Craig.

Good morning. How are you today?

Craig, you know I have been covering this stock for a long time before you even got there. And I have been asking this question for a while. I will say it again, because it's kind of frustrating. The pricing practice, and I know it is not all up to GrafTech, but the pricing practice that you and the rest of the industry has to set prices once a year, is a practice where it's like, you know, heads you lose, tails your customer wins. You know, it's a no win situation for you.

And it looks like, you know, you are giving up almost 10% of your annual EBITDA the way you price your product because you give your customer the option to load up in the 4th quarter on volume if he thinks the prices are going up on January 1. Then you have this destocking phenomenon just because your client gets the advantage of pulling forward 2012 higher priced product into the 2011 4th quarter at lower prices. And, you know, when is this going to end? It's just insane.

Yeah, Mike, our industry for a long, long time has had an annual contract process, and those annual contracts typically in a more normal global economy are put together primarily in the 4th quarter of the prior year for the upcoming year. Annual commitments are made by our customers on volume and on price. And then like last year where they come into a year, I mean, the first part of last year was very good. Steel production numbers were up all through right up till May. May was the peak.

So if you go back to Q4 of the year before when they were building their electrode requirements and making the order, the outlook was quite good. Things had turned nicely. First five months, good steel production. They ordered their volumes based on that outlook. Then, of course, the last six months of last year really fell off dramatically. So they ended up with more on their contract.

Now, we have an annual contract. We maintain our commitments. We have signed a contract, agreed to a volume and price, and our customers pretty much across the board do the same thing. They got the electrodes that they asked us for and did a contract with us. And last year, of course, it turned out they had excess. So we share your frustration, Mike. I understand it. Obviously it's impacted our Q1. And, you know, time will tell where that goes. I guess that's about what I can say on that annual process.

But it always affects the Q1. The customers kind of know in the summer what the next calendar year pricing is going to do in terms of is it going to be up or down. Then they can kind of jockey with the volumes either pull back if they think prices are going down the next calendar year or load up as much as they can. It's tough for you guys, I guess, to say oh, no, you can't load up.

Well, remember though, typically, the steel customer has fixed and placed his order and done his contract in Q4 the year before. That's the typical.

Right. But you don't have a take or pay contract so the customer is just giving you a volume indication and locking in the price so it's not like he has to take that volume. So if he thinks pricing is going down in the next calendar year, he will be reluctant to take the volume.

I'll tell you, our experience with the customers, I think the general experience in our industry is, yes, the contract is not take or pay. But if a customer is in the 4th quarter for this upcoming year booked for 4,000 or 5,000 tonnes of electrodes at a certain price, they honor that. If they come back in Q4 for more and price has gone up, they face that increased price. So that is the typical pattern in let's say a typical global economy. I agree with you with what has gone on kind of since the 2009 crash, I think things have gotten a bit ragged. But our typical customer honors the contract, honors the volume, honors the price. That's our typical experience.

Thank you.

Thank you, Mike.

Your next question comes from Rob Foley with Sandling Capital.

Hi, how are you?

Morning, Rob, how are you today?

I'm okay. I just wanted to focus on the CapEx, I saw that you brought it down, but even so over the last -- certainly last year and maybe even the end of 2010 there's been a pretty steep increase in CapEx. You say $80 million to $90 million is maintenance CapEx but it seems like even that number is high relative to both GrafTech stand alone and Seadrift and St. Marys stand alone. But quibble what you will about what's growth CapEx or what's maintenance CapEx but the Company is spending a lot of money on CapEx, a lot more than it's historically spent. Can you give me a breakdown between how much of that is going to ES versus how much of that is going to IM, one.

And two, I understand that, you know, there's a lot of CapEx going to upgrade Seadrift, or going into Seadrift. How should we think about the return on that CapEx? What operating income pick-up are we likely to see in the next, say, year or two years as a result of all the CapEx being spent? Because we spent a lot of money last year and it doesn't seem like we got any pick-up this year.

Just to answer your questions kind of in order. Our annual maintenance capital including the four new businesses that we purchased over the last 18 months, two years, will probably run -- looking out over the horizon -- $80 million to $100 million. And you should look at that as -- that's probably our -- that kind of range is what is required to keep our plants in good running order, efficient, reliable, etc.

But that's like double normalized D&A. If you exclude the step up, because you had a big step -- that matches D&A. So it seems like that makes sense. But there was an enormous step up in D&A when you bought St. Marys and Seadrift. So that number seems really high. It was never that high prior on the two companies stand alone for maintenance.

Well, now, six large electrode plants. The second largest needle coker in the world. That is what I consider very normal maintenance capital to keep those assets running well. The electrode plants, of course, are all 30, 40 year old plants. The needle coker is a very, very large facility, a very complex, high-tech type of facility. So our view would be that 80 to 90 or 80 to 100, looking out over time, that would be very normal, well spent maintenance to keep that machine running very, very well.

But if I just look at '07 and just look at total CapEx. So not just even adjusting for what was growth CapEx, the two companies combined spent around $70 million in total CapEx, growth CapEx included. So that's $20 million below what you are saying is maintenance CapEx.

When you say the two companies combined, what do you mean?

I mean GrafTech stand alone and Seadrift and St. Marys.

Let me make an observation for you. Obviously, and I don't mean anything negative out of this but this is just reality. Seadrift and St. Marys were purchased from private equity. Many times private equity has a little bit shorter vantage point. It wouldn't be the first time we have all seen private equity maybe spend a little less on CapEx that somebody that is running the business for the next 30 years might spend. So when I look at what Seadrift and St. Marys spent on CapEx, prior to our ownership, I would say that was on the skinny side. That's just being fair.

Maybe we can quibble about the numbers, but you're clearly spending a lot on growth CapEx this year. You spent a lot on growth CapEx next year. What is the split between ES and IM?

On the growth, obviously the majority right now is going into ES. In the ES business, our advanced consumer electronics business has been growing very nicely. This, of course, is all of the smartphones, flat screen TVs, all of that area.

So the majority, so just 51% to IM and 49% to ES?

No, the majority is to the ES growth. Then the second biggest bucket would be the work that we talked about that we're doing on Seadrift quality which I might add is very, very important and which I might add we're making excellent progress on. So Seadrift makes a very, good coke. Don't get me wrong. They make a very, very good normal premium coke. Where Seadrift can improve significantly is, they have not made a great super premium coke, which is a very important coke to have in your portfolio.

Combined with our technology and our R&D team they are now making some very, very exciting super premium coke. So the money has gone to enable them to make this whole grade of needle coke that they have not had in their portfolio. Super premium needle coke goes in the most demanding electrodes which is probably the fastest growing segment in electrodes. So strategically it's very important for GrafTech to have that in its portfolio.

What does that mean for revenues though? What does that mean for how much more dollars? What kind of IRR increase relative to what Seadrift was doing before can you expect from this upgrade?

Well, I can talk to you in general about the hurdle rates that we look at and the hurdle rates we look at on these types of projects are 18%, 20%, 20% plus. So these are very attractive projects for us to do. Again, I underline we're talking about the world's second largest producer of high quality needle coke now entering and having in its portfolio the ability to make super premium. There's many things that we can do with that super premium being one of the world's largest manufacturers of graphite electrodes. We think over time that's an outstanding sustainable competitive advantage to have on cost, on quality for our customers, performance of our electrodes. And as I said, those are probably -- that area is probably the fastest growing segment in the world in graphite electrodes.

What are you targeting for CapEx? Of the 135 in CapEx, what is going into Engineered Solutions? How much of that is that is going into Engineered Solutions? I know you said the majority but specifically what is going into Engineered Solutions in 2012 and how much was in 2011?

(multiple speakers) guidance, but I would say probably -- it's probably in the range of 35 of that to 45 is Engineered Solutions.

For '12?

For '12 and the rest is IM which would be electrodes and Seadrift.

Okay. Thank you.

Thank you, sir.

Your next question comes from Tim Hayes.

Good morning. A question on the volumes of graphite electrodes in the first quarter, how much was that down from the first quarter of 2011?

We don't guide on volumes, but obviously as we planned and had highlighted in our prior call, it was down significantly. So you see sales down 21%, I think you can look at a sizable, that type of sizable down on volumes.

Right. But pricing was up 10% to 15%, correct? Does that mean the volumes were down like in the neighborhood of 30% from a year ago?

Well, remember on price that price increase in Q1, and remember we have talked about this on a number of conference calls, gets diluted a little bit because we have some customers that book Q1 to Q1. There's a group of steel customers that is their budgeting process. They have had that for 30 years. So there are some Q1 sales that were booked at the old prices that are just finishing their full 12-month contract. So the Q1 increase will, because of that weighting of the old price in Q1, you will not see the full price increase. Q2 forward, then you will see the full impact of the price increases.

Then you have your customers on that April to April was about what? 20% of the --.

Yeah, it can bounce around a little bit. It might be 15%, 20%. It's that kind of a number. That's their budgeted program. They have, like I said, they've been doing that for 20 years. That's the year they're on, that's the way their purchasing program works.

Right. But so even if I factor that in, so pricing is not up to the full amount. But that certainly implies that volume was down more than the decline in revenue, correct?

Yes, volume was down significantly. So we showed you sales down 21%, and volume was down also a very sizable number.

The volume last year ramped up considerably during the year. Do we, I mean, which, I guess, on the service seems like it could be some tough comps as things were ramping up last year. Do we expect the volume decline that we saw in Q1 versus a year ago, should that decline start to get smaller as we progress through the year?

Absolutely. I think if you look at our guidance for Q2 EBITDA, it looks like Q2 last year. So as you go through the quarters this year, you will see increase in our volumes. As I had mentioned earlier in the call, we will have larger graphite electrodes volumes in the second half and we also expect larger needle coke sales to third parties in the second half.

Second half larger than the first half?

Larger than the first half.

Right. So it could be down from a year ago --.

Right. That's correct. Absolutely.

Okay. I think that helps get the pattern a little better. Thank you.

I apologize. Tim Hayes is with Davenport & Company. Your next question comes from Mark Parr with KeyBanc.

Morning, Mark. How are you today?

Good morning. I'm doing all right. Hope you are doing well.

We're doing great. Thanks.

Hey, I wanted to talk a little bit about the Asian market. You know, China has indicated a significant increase in its use of EAF steel making to go into effect over the next decade. You are already seeing some indications that the country is increasingly short of scrap as it tries to implement more EAF production. I'm just wondering, how you are feeling about, you know, the next growth phase in terms of the timing of it. Is this something that you are feeling more aggressive about? Could you give us some color just on your thought process as far as how GrafTech is going to avail itself of growth opportunities in Asia over the next several years?

Yes, Mark, we follow those same things that you mentioned on China and the signs are very, very encouraging to us. We see EAF production coming up. We see the Government initiating it, encouraging it. We see the local scrap supply in China growing very nicely propelled in part by the very large increase in local auto production. So we're very encouraged by what we see in China. We think the next 10 to 15 years in China EAF production will grow very, very nicely. Their scrap supplies and their scrap reservoir will go up very, very nicely. To date we have been servicing China from our large, low-cost plants around the world. To date, that's been going very well for us. It's been very profitable to us.

We have looked at a number of acquisition opportunities in China and we haven't found one that fits us. We haven't found one that we consider really low cost. We haven't found one, in fact, that is more attractively able to produce electrodes at low cost high quality than our existing portfolio. Remember our electrodes usually coming out of very large plants that have been in this business for a long time.

Very low cost back-integrated to needle coke and so we have been able to service China very profitably. I think this year we will have some very nice growth going into China. As I look forward the next 10 years, we are very bullish on China electrodes and EAF. If we find the right opportunity, you will see us move into local manufacturing. But it won't be just to get a local plant because a lot of those local plants really don't make much money.

What we have done though is invested a lot in building out our sales, market coverage and distribution system in China. So if you went back a few years we have very little presence. We now have three established sales offices, three very skilled teams of sales, customer tech service, marketing. So we've built a very nice market coverage in China. We have CTS people on furnaces there. We have been very pleased with our progress into that market. It's a tough market. But I'll tell you, so far, servicing from our low-cost offshore plant that's very large, high quality, back integrated to needle coke, we have been able to make some good profit going into there.

Okay. I appreciate that. If I could just ask another question. You had indicated that Seadrift is now capable of making a super premium needle coke and congratulations on that.

Thanks. Thank you very much. It's a very important development. I have been very impressed with the Seadrift team. They are working with the GrafTech R&D, putting some technology in. They have jumped on our lean Six Sigma program. They have come up that curve very nicely. I think the variation in their product, the quality and specs has narrowed very nicely. And now making a super premium coke.

Do you have an estimate for either this year or next year in terms of what percentage of Seadrift's production will be the super premium?

Well, it is driven by the market. It's driven by some of our own needs and third party sales. But I would say often super premium can be a good 20% to 25% of a portfolio. So we would probably drive towards that kind of a percentage of the portfolio over time. As I said, it tends to be one of the fastest growing portions of the portfolio.

You think you will be there in '13?

I say '13/'14. Some is going to depend on the economies and how they progress and recover.

I appreciate that. Good luck on the second quarter.

Your next question comes from Dan Wayland with Auriga USA.

Good morning, everyone.

Good morning Dan.

If you could touch on pricing disciplines throughout the industry and certainly earlier in the year I think some of the smaller higher fixed cost players were certainly a bit loose in terms of the pricing discipline. Now that things are firming up a bit, has that changed dramatically? What are you seeing in marketplace from that perspective?

We have got 80% of the book built. Have been pleased the way that's come together. Still got 20% to go. So that 20% still has to be earned and achieved in the marketplace. But pricing, we expect to be north of 10% up for electrodes and for needle coke probably 25%, 30% plus up.

If I could, more of a longer term question. Just use of cash. Certainly we've heard a lot of talk about acquisitions and share repurchases. We have seen some other companies with excellent reception either initiate or increase dividends. Has there been much discussion on the dividend?

We look at internal and external growth initiatives. We look at acquisition opportunities. We have also on a regular basis evaluate dividends. We have followed some of those same companies you're talking about and seeing how their dividends either adding or starting a dividend or increasing a dividend has been received. So we study and look at all of those. We will look at any opportunity to increase shareholder value. Last year you saw us buy back a couple million shares in the fourth quarter. So every one of those is on the table, regularly reviewed by ourselves as opportunities to enhance shareholder value, including dividend.

Thank you.

Thank you, sir.

Next question comes from Sandy Harmon with IronGate Partners.

Hi Craig, it's Matthew for Sandy. Just following up on that last question which was a couple of points that I had with regard to use of cash and stuff. We have the buyback in place, the newly recreated buyback. Did we buy back any stock during the first quarter?

You will see when our Q comes out we did not buy back any shares in the first quarter. As I said to the earlier question, we continue to review all those items. Obviously we are a proponent of buyback. You have seen our actions there. We do acquisitions. You have seen us there. And we also make internal investments on great project like the Seadrift one we have talked about, EAFs, advanced electronics.

I'm kind of curious and I'm sure some of the other shareholders -- I've been a shareholder for a long time. Just curious what your opinion of the stock price is here, you know, at $12 a share. Is the Company being undervalued by the market, overvalued in terms of the stock price?

Yeah, in the last call after we reported and summarized the 2 million share buyback we did at the end of last year, we highlighted the average buyback price was about $14.60. I think I said at that time, I think we got the shares back at a very good price. So yeah, I would see the share price in this range even below the $14.60 as undervalued.

Yeah, that's good. I mean, certainly want to hear your CEO say that the stock is undervalued here. You know, kind of leads to the point why we would want to see some buybacks. I know you have spoken a lot about your desire for acquisitions. You know, and I applaud the fact that you have been cautious with regard to making sure you are making an acquisition at the right place. With the debt levels increasing, obviously a big chunk of that had to do with the Seadrift acquisition, the St. Marys acquisition which I think were very good acquisitions. I would like to see Management spend a little less time focusing on acquisitions and maybe really focus more on the core businesses that we have and the growth opportunities within the specialty space.

And I would be surprised if other shareholders didn't have similar viewpoints. Just a comment from my seat in terms of the acquisition sort of mantra and mandate that the Company is working off of. I think we'd like to see a little bit more focus on the internal growth prospects which I think are very broad. I was wondering if you could just spend a quick second just talking about the contract that SGL or the arrangement that they have with Mittal and the 5-year arrangement which seems to be unprecedented in the GE space and just what that means for the overall universe and GrafTech and whether or not we can look for some of our larger customers going down that path with us or with some of our competitors or something along those lines.

Just on SGL middle contract, they had a contract in place prior to this for a number of years. I think they have had a 3 or 5 year contract going back for a number of 3/5 year periods. So this is a continuation or renewal of a contract that was previously in place also for the prior 3 years or so.

Got you.

I don't see it as a big change in the operating environment.

Got you. How aggressive currently -- maybe you can give us some sort of sense as to the global sales team. You have mentioned how you've ramped up and gotten fairly aggressive in parts of Asia from the sales and marketing side of things. With the book 80% full and the world looking how it looks, where can you kind of guide us as to how full bore the sales team is out there now or just kind of sitting back waiting to see how things develop and get aggressive again in Q3 or Q4?

The team has been very aggressive. In these tough economies and variable economies they have had to literally be extremely aggressive looking for opportunities. As we said, the solar industry literally is like a tennis ball falling off a table. It has just gone away. And so they have had to work very hard to find other opportunities, earn other business. So I am delighted that we have built out that network especially in Asia and China. It has been very important for us as we fill out the book in some of these variable economies. We've stayed very, very aggressive on that.

Terrific. I will get back in the queue and look forward to some continuing improvement results in the quarters to come. Thanks very much, Craig.

Thank you for your input that you made prior on focus and acquisitions and whatnot. We welcome and I appreciate your input on that.

(Operator Instructions). Your next question comes from Luke Folta with Jefferies.

Hey, Luke.

Just to follow up, I thought your comments on the super premium coke were really interesting. Are you guys selling any of this stuff now externally?

We have had sales, yes, and we've had good customer feedback thus far. We have also used it in our own network. And this is some of the synergies of being back integrated. We have the ability to take that -- well, one, we're involved in the production process and the tailoring of that coke from its inception. And then we also have the luxury and benefit to run it right through our own electrode manufacturing machine. And so that coke is looking very good to us. So yes, there are sales. You will see more sales of this. This is a premium priced product. It has a good spread on it. There's only a few people that make needle coke and there's even less that make a great super premium. Our Seadrift team has done a nice job.

I was going to ask just on the economics on the super premium, is it a similar cost structure? Much higher sales price? When we think about the margins on super premium versus a more regular grade coke, how do they compare?

The issue is a higher cost structure but it is a higher selling price and ultimately a better return and margin to the Company.

Okay. And then just lastly, the initiative, whatever spending that you have done to expand your abilities in this arena on the super premium side, is that actually -- do you think that is going to result in any net increase in the capacity of Seadrift or is that a separate CapEx program?

That is a completely separate CapEx program.

All right. Guys, thanks a lot.

Thanks.

Your next question comes from Charles Bradford with Bradford Research.

How are you?

Super. Thank you.

Can you talk a bit about your conversion costs? A lot of people have been talking about natural gas cost coming down. Obviously, it's much more the US than elsewhere in the world. Can you address conversion cost in general and energy in particular?

Yeah, Chuck, in the US we have enjoyed very much these lower natural gas cost. For us to make a graphite electrode, think of natural gas about 5% of the total costs to make a graphite electrode. It's a relatively small one but we have enjoyed the benefit there. But overall when you look at energy costs, they have been going up, oil, electric power and natural gas in many other regions around the world. So we have had cost pressure from all of the energy related inputs that we use.

Are there any other significant costs like labor where you have any kind of an issue this year? Contracts up and so on?

We do not have any issues. We have a great working relationship with our global team. We don't have a history of outages that have caused us problems. We have a great working relationship with the teams. And labor is usually only 10%, 12% of our cost structure. So labor really, although very important for us, is an item because of where we are, because we have large plants that can be very efficient has not been a major issue. More important that we have a well trained team that embraces lean Six Sigma and that team will perform superbly. So 10%, 12% of our costs and no labor issues.

Finally, could you give us some idea what maintenance cost is in general as a percent of cost?

Again, that's another relatively small one. That would be some maintenance parts, maintenance team at the plant. Sometimes you use some outside contractors for specific skills. But you're down to something that is single digit percent for us around the world.

Terrific. Thank you very much.

Thank you, sir.

Your next question comes from Rob Foley with Sandling Capital.

Hi, I just want to follow up on the buyback question. It sounds like the decision not to buy back stock wasn't a reflection of your thoughts on whether or not the stock was cheap or expensive. It sounds like you feel like the stock was pretty cheap. So therefore, it must have been weighing the CapEx dollars versus buying back stock. And clearly you chose CapEx dollars. Maybe you could just walk through your thoughts on how you came to that conclusion of spending $35 million of CapEx or planning on spending $35 million of CapEx in Engineered Solutions in 2012 for a business that over the last four years including this year will generate around cumulative $50 million versus buying your stock back in the $12 range.

Rob, I think your view that our trade-off was CapEx or share buyback is incorrect. We have the ability to fund the CapEx program as well as we have the ability to buy back stock. It definitely was not an either or decision.

Why then didn't you buy back the stock?

As I said we look at many alternatives. There's acquisition opportunities that come to us all the time. There's other capital items that are not in this number that we weigh at different times. And so it's not just oh, would we spend money to grow our Engineered Solution business or buy back. It would be that full slate of items that one reviews including other acquisitions. And so, if we found an acquisition that we thought was spectacular and unique, we would look very, very hard at that.

Do you weigh that acquisition versus buying your own stock back?

Absolutely. We weigh that one near term, medium term and long term. An if an acquisition would give us a sustainable, significant, competitive advantage that might last for many, many years and change the dynamics in our industry, then we would look very hard at that.

Great. Thank you.

Thank you, sir.

At this time there are no further questions. I will turn the conference back to presenters for closing remarks.

Thank you, Brooke. Thank you all for your interest in our company and we look forward to talking to you next quarter. Have a great day.

Thank you. This concludes the conference. You may now disconnect.