GrafTech International Ltd (EAF) 2012 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the GrafTech second quarter 2012 earnings call. (Operator Instructions). I would now like to turn the call over to your host, Kelly Taylor.

Thank you. Brooke. Good morning and welcome to GrafTech International second 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 Noar at 216-676-2160 and she will be happy to fax or email a copy to you.

As a reminder some of the matters discussed during this call may include forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Please 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 is posted on our website at www.graftech.com in the Investors Relations section. For your reference, a replay of the call is 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 GrafTech's call today. We will take you through our second quarter highlights and then open it up to questions. In Q2 sales were $316 million, down 1% versus a year ago. EBITDA increased 11% to $67 million.

Net debt came in at $597 million, up largely the result of our 10 million share buyback, and increased working capital. During the second quarter we repurchased 8.8 million shares and another 1.2 million in July, at an average purchase price of $10.17. This completes our 10 million share buyback program that was announced in December 2011.

Upon completion, the Board of Directors approved a new share repurchase program for up to 10 million additional shares of common stock. With the recently completed 10 million share buyback program, coupled with the 2 million shares that were repurchased in the fourth quarter last year, we have now bought back 8.2% of our outstanding shares. This underscores our commitment to delivering long term sustainable value for our shareholders.

Wrapping up the second quarter highlights, as discussed in the last earnings call, our Seadrift production team has worked with scientists from our Engineered Solutions segment to develop a super premium grade of needle coke. Seadrift has successfully commercialized this product and has begun sales to third parties. This development demonstrates our continued commitment to leverage our core competencies in graphite material science to grow our company by commercializing new products and technologies.

While we do not anticipate these sales will be material to our 2012 results, we are encouraged by the market acceptance, and believe it will prove strategically valuable to our business in the future.

Turning to the segments, industrial material sales were $260 million and operating income came in at $42 million, a $10 million increase over Q2 a year ago. The increase in operating income was largely due to higher year-over-year realized pricing of graphite electrodes and needle coke, partially offset by lower volumes. Also adding to operating income in the quarter, was the carry over benefit of lower cost from inventory related to high Q4 2011 production rates and lower cost raw materials purchased last year. It is important to note that the lower cost inventory has largely been utilized and we anticipate that the impact of 2012 raw material increases and higher fixed cost absorption will be more fully reflected in the second half of the year.

In our Engineered Solutions segment, sales came in at $53 million and operating income was $5 million, or 9% of sales. As expected, our Engineered Solutions segment has returned to profitability this quarter, as we continue to see solid demand in our advanced consumer product line. We expect this segment will continue to grow in the second half of the year, and are targeting a double digit operating income margin percentage in the fourth quarter of this year.

Turning to outlook. Based on IMF projections, the estimate for global GDP growth has been reduced to 3.5% for this year, representing the second downward revision to growth estimates this year by the IMF The IMF highlights in its July report that the global economic recovery has weakened considerably, and continues to face significant downside risk.

The European economies continue to struggle with massive debt and severe austerity programs while growth out of emerging economies, particularly China, Brazil, and India, has continued to slow.

Uncertainty in the global economies has impacted steel customer sentiment and production rates. Major markets such as the EU are down more than 5%.

Since our Q1 earnings release, we have seen economic conditions in virtually every region we serve deteriorate further. Uncertainty in Europe has increased. Growth rates in China, India, and Brazil have slid further and the U.S. is now showing signs of a slowdown in the second half. Given the waning expectations of global economic improvement in the second half of the year, and resultant weaker demand environment, we now expect full year EBITDA to be in the range of $235 million to $255 million.

In the third quarter of this year, we are targeting EBITDA to be in the range of $55 million to $65 million. Additionally, relative to prior expectations, the second half of the year will be negatively impacted by one; weaker customer demand due to the global economic conditions, which continue to decline, which result in lower graphite electrode and needle coke volumes for this year, and two; average realized pricing for 2012, we now expect to increase at the lower end of our previously target range of 10% to 15%. Right now it looks like it will probably be 11-12% the increase.

As a result of the weaker outlook, we are adjusting op rates at our facilities to better align to customer demand. We now expect our GE plants to run between 60% and 65%. And our Seadrift to operate at below 80% of capacity for the balance of the year.

In light of the difficult environment, we have also taken additional actions to manage cost, and effectively allocate capital. We have reduced overhead expense to approximately $160 million for the full year, a decrease of $10 million or 6%. We are also further reducing our capital expenditures to be in the range of $120 million to $130 million, representing more than a 15% reduction from our initial midpoint target established in February of this year.

That concludes our prepared remarks. Brooke, would you please open it up for Q&A?

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

Good morning, Luke. How are you today?

Good morning, Craig. How are you? Doing well, thank you.

Outstanding. Thank you.

First question. Can you let us know where utilization rates were in the second quarter? And you gave some full year targets on what graphite electrode utilization rates will be, 60% to 65%, can you walk us through how that works on a quarterly basis? And also, as far as shipments go, I know you won't disclose the level of shipments, but if you can just walk us through how those move over the course of the second half of the year? Do they step down in the third quarter and then step back up in 4Q? How should we think about that?

Yes, operating rates in Q2 as you recall, we finished up Q1 a little bit above 70%. And in Q2 we started to throttle it down a little bit. So Q2 probably came in around 64%, 65%, and it looks like the balance of the year we will run about 65%.

As far as the shipment pattern you are right, Q3 will come down a bit. We have the normal EU summer holiday, which is going to make that region even slower than it already is, and then Q4 we will have a pick up in the volumes. And Luke, that's just the way our book is built. Our book looks exactly like that.

Given your second half expectation for production, does that include a potential -- are you thinking about potentially idling a facility, or will you keep everything running and just throttle back?

Obviously in tough times like this you look at everything, so I think it is premature to make any definitive calls. But, for sure you can assume that we will be throttling back virtually every one of our locations, just to better serve our customers and have a better cost structure. At this time, I don't see shutting one specific location down, but I think in these very volatile economic times you have to keep all alternatives open.

And in terms of pricing, you talked about coming in maybe a little towards the lower end of the range. Should we look at the second half as a bit lower from an average selling price standpoint than the first half?

Yes. The very tail end of the book came in at a little lower price, so I think when it is all done, everything we see, and obviously the book is pretty much done now. GE prices are probably up about 12%. If you take out the currency impacts.

Okay.

So we'll increase maybe 12%, maybe a little bit more.

And then just lastly and I will get back in line, on needle coke, there's -- we have seen a pull back in oil prices since the peak of this year. And I guess I just wanted to understand how you are thinking about needle coke next year. Does the pull back in oil prices mean that needle coke prices has to go down next year? Or are you thinking about a situation where maybe you can take advantage of that margin benefit by having your inputs go down, but maybe keeping prices flat like they have been, pretty much through the whole recession here.

Well, I think it is premature to talk about needle coke prices, but if I just look at oil, and decant oil, and you go back when some of the price increases were initially targeted, we had oil that was at a much lower level, it was in the 70s. So when you say it's down, yes, it is down from the highs, but when I see oil at $88, and Brent over $100, these are still high levels for oil. So I still see oil and decant inputs as being high, and higher surely than what they were a year and a half ago in the marketplace.

Okay, Craig, thanks a lot, I'll turn it over.

Thanks, Luke.

Your next question comes from Ian Zaffino with Oppenheimer.

Morning, Ian. How are you?

Good. How you doing there? As far as your guidance, is your guidance basically on what you are seeing or is it really based on IMF and their forecast? Is it kind of bottom up or top down?

No, Ian, it is based on what we see. Obviously we work and sell in 70 countries, so it is based on what we see, our interface with our customers whose shops we are in every day, giving service and customer tech activities. So, it is what we see in the geographies we operate in. It is what we hear from our customers. And so I think it's a pretty close reality to the market place that we face today.

Okay, and at what point in the second quarter did you start to slow your production rates?

Well, we have been studying, obviously -- let's say half way through the quarter, we just saw no improvement in any of the economies. Every economic data point coming out was just worse than the prior one. So we started working on it, started to slow down some of the facilities and like I said, you will see some more of that from us, and unfortunately, we will probably have some more reductions in head count, just to reflect the realities of our customers' demands and the markets we face.

Okay. And then can you talk about the inventory at the customer level? Where they are? Are they going to take that lower? Do you see any destocking?

What we see right now, and I think it is because of the environment our customers have been living in the last six plus plus months. They have managed their inventories pretty tight. So, I don't see a lot of excess electrodes in the supply chain right now. Like anything, it's a function of how significant is the demand drop off? I think our customer base has gone into these tough times with much leaner inventories than perhaps some other times.

They are getting very good at it. I think everybody in the supply chain is getting better at it. So, obviously if demand drops off significantly, again, they may have some excess inventory. But right now, one little bright spot is they do not -- there does not seem to be a lot of excess graphite electrodes, other than a few one plant here, two plants here. It looks pretty lean.

Okay, thank you very much.

Thank you, sir.

Your next question comes from Arun Viswanathan with Longbow Research.

Morning Arun, how are you today?

Good, how are you?

Excellent, thank you sir.

Thank you for taking my question. I guess my first question is on needle coke. I think you spoke before about 25% to 30% increase last call, are you still looking at that as the annual kind of expectation?

Yes, Arun. The increase in needle coke is still 25% to 30%, that's come right in that range. It has come in quite good.

Okay. And then I guess just trying to understand the market. So, is there any reason to believe that you would potentially encounter the same situation you did last year, when Conoco got delayed in setting some of the pricing and then the electrode book also got delayed? Maybe you can just help me understand what you see as far as how the next year negotiations will play out.

Yes, Arun. Recall the delay at the end of last year coming into this year was the steel customers had a lot of graphite electrode inventories because the second is half of last year slowed down so dramatically for them. So they had annual contracts as they always do. And they bought those -- got those in the beginning of the year. As we all recall, last year's steel production peaked in May or early June. And then, from then on had a very tough ride down.

So, what delayed the book building for this year was most of the steel customers around the world had excess inventories, because of that steep drop off in steel demand the second half of last year. So this year, I think it's good news. It looks like the trade does not have a lot of excess graphite electrodes but let me caution, that again, the demand picture is going to have a bearing on that.

If demand continues the way we see it now as soft, well, it looks like there won't be a lot of excess out there. If it deteriorates further and things slow down, well yes we could have some excess electrodes at some places. Good news going into it, it looks pretty lean. Everyone has kept their inventories very tight because the environment has been so uncertain for so many quarters now. So, I think our customers have done a good job keeping inventories quite lean in not just electrodes but all their raw materials, again driven by the large uncertainty in the global economies.

Okay thanks. And then another question on engineered solutions. I know that you experienced a weakness in the solar market. And it's likely not coming back, maybe you can just help me understand how much of that you have replaced and where you stand in kind of building the growth in that business?

Yes, Arun, you're right. We had built a tremendous solar business, a lot of new products and technology. We have some premier products and solutions for the solar industry. And then when that fell off dramatically the middle of last year, yes, we felt that. It was about 25% of engineered solutions sales.

But as always, Engineered Solutions has a portfolio of technologies and offerings to the marketplace. And what we have is some of the advanced consumer electronic segments have continued to do well. They have a significant business in the smart phone sector, in all of the readers. So all of those new technology products coming out, you will often find that GrafTech has a solution in there. So that part of the business has continued to grow large double digits. We have done very, very well, and so now you have gotten to a point where that has filled up the hole that the solar slowdown caused.

But what I will remind you of, is there's a lot of installed solar already. And there will be more to come. And what I will remind you on the installed solar today, the products we sell in there are consumables. And they get consumed in furnaces that make the solar silicon. So they have a very nice steady stream of replacement. So there will be a return of solar business that will come back to us, down the road here. Part of it will be the replacements, just for the installed capacity that's out there. That will be very good business for us. And then as you see --

And that's not dependent -- sorry to -- on any kind of subsidy support?

No, that's installed now. That's running. That's an ongoing business that we get. And, like I said, we have some spectacular products and solution for that space.

So many times we have the OEM business, and some of those get consumed in 12, 18, 24 months depending on the furnace type, and how the customer uses it. So that's a steady stream of replacement that will be increasingly coming back to us. And then let's not lose site that the solar industry keeps improving its technologies and its efficiency in converting sun to energy, and continues to get better and better. And so you see Japan, in this last quarter announced a very large solar program. That probably in another year or two, we will start to see some very nice sales from that program.

And so, I see solar probably going to be very soft this year, next year I don't see a huge come back, maybe the second half we will start to see some benefit from it. But when you get into 2014, we will have a lot of replacement business, steady replacement business that will be very attractive to us. And we will start getting new programs like the very large I think it is a $4 billion program that the Japanese government has announced. Again trying to get away from their dependency on nuclear and get to a clean green energy renewable source.

So when we look at the guidance, I guess I'm to construe that most of the variability is due to industry materials not ES.

That's right. Most of it is just our steel portfolio, we have a tremendous steel portfolio, but in very tough economic times like this, people and businesses and governments around the world, just are not going to commit to significant projects that involve steel. So you have a lot of players on the sidelines. And then you have some large geographies, like we talked to EU, just devastated. So there's very little going on in the steel arena right now. That's the big variability, right there.

So that's our graphite electrode business is slowing, our needle coke business is slowing. So we are going to adjust our production platform there, take out some costs and then on the ES, what you have big picture, you have that solar hole that was created middle of last year when solar dropped off; which you have that now being replaced by other growth opportunities that ES has. And in fact they are starting to overrun that with double digit growth, and then in '13 and '14, I think in ES you will see some solar come back, but you will see some other growth sectors also that engineered solutions has for it. So yes, the variability right now is primarily ES, it is primarily steel.

Okay, and just so I'm clear, the $235 million to $255 million, would you say that the low end of that is say running at that 60% operating rate not 65%? And then running at only 10% pricing is that how we should look at it? Or is there something I'm not understanding there?

No, the pricing is pretty much put together. The books are pretty much put together, so GE prices are up a little over 12% real price increase ex the currency. So that's pretty much together. You can always have some customers that have some difficulties. And you can lose an order, you can have customers that get in financial difficulty, and you don't want to ship, so these are that tough times.

We have had maybe four or five steel companies around the world already declare bankruptcy. So, the weak smaller ones are starting to get into some real trouble, some are lacking LCs where we would like to prefer to have an LC, so you have that going on. So that could give you some volatility in the volumes. But the pricing is pretty much -- that's all done, it's in the book.

Got you, thanks a lot.

Thank you, sir, have a good day.

Your next question comes from Tim Hayes with Davenport.

Good morning Tim how are you today?

I'm fine. Good morning to you. A couple questions. For your Seadrift operation, how much are your raw material costs increasing this year versus last year? I just want to get a reminder on how much that is going up?

Well, I would point you towards kinds of oil/decant oil. Decant oil, of course, tracks WTI here in the U.S. quite closely. So their -- if you look at Seadrift, and really we want to look back a couple of years because the price of needle coke hasn't gone up for a couple years. So if you go back, the last price increase before this one that we're talking about the 25% to 30%, you go back, oil was back in kind of the low $70 barrel. So when I look at oil, and I see it is $88 now, and Brent is even above $100, I see oil as still high, and still expensive. So I still see cost pressures.

So Tim, think of decant has steadily gone up for us over the last couple of years and at $88 I still consider oil expensive. And that's our key raw material. When you think of the cost structure at Seadrift, think of decant, look at decant over a couple year period, you're going to see pretty much, yes, there's a lot of movement, but the trend has been up from low $70s to high $80s.

And have you started to do any booking of needle coke for 2013, or with this recent uncertainty with the global economy, is that still not -- those discussions have yet to occur.

Yes, there's been no booking for 2013. I think market volatility has everything really on the sidelines. I think our customer base really just wrestling with the next six months. They are just trying to finish up this year, and uncertainty is so great, there's no activity at all yet on 2013.

Okay, thank you.

Thank you, sir, have a good day.

Your next question comes from Phillip Gibbs with Keybanc Capital.

Hey, Craig, Lindon, Kelly.

How are you today?

Good morning. I don't know if this was touched upon, but regarding Seadrift, you talked a little bit about your utilizations in the electrode business. Did you talk about the utilizations at Seadrift, and what you expect there this year?

Yes, I see Seadrift coming down here the second half, she's going to come down below 80%, and I am just trying to get down to market realities. And so we are going to throttle that back down, help ourselves on the cost front, take some costs out. And I think that's probably the right level with what we see and what's in our guidance here.

Okay did you operate above that level in the first half?

Yes, we've tended to operate 90% plus. Remember in the first -- in the second quarter we had some turn around work, we had the normal annual turn around, so Q2 was already overproduction for Seadrift, because of the regular maintenance we do, and we shut it down for a number of weeks. So think of -- we've gone from -- let's go over the last 12 months, 18 months, we have gone from 90% plus op level there, to under 80%, just to reflect the realities of the global market place we see.

Okay. And then regarding your raw materials -- your price to raw material spreads at Seadrift, given what you have talked about already, with the Brent, and the decant oil pressures, are you looking for spread stability, spread expansion? Stable degradation, what are you seeing this year relative to last?

Well, spreads are up this year. Because of the price increase, so remember there was a 25, 30% price increase, spreads are better this year. Premature to talk about next year, like I said, I still view oil at $88 versus where the economy is today, oil is expensive. I still view it as high priced and the trend for us the last few years is oil has been on the increase.

So just to remind you, too, that we participate in hedging as well.

Okay.

So on this so in the fourth quarter, we take as strong view as we can in terms of what our use of these raw materials will be, and then what our sales equation will be. So we don't leave the fourth quarter 100% hedged, but we do as much as we can based on the usage. So our cost equation with a hedge keeps us pretty stable through the current year. And as Craig says we wouldn't foresee what is going to happen in 2015 yet, but we have a lot of stability through the year.

Okay, and if I could shift over to ES real quick.

Please.

On the consumer electronics piece of your portfolio, seems like it is running well as you pointed out. How do we marry that against the view that a lot of the consumer electronic supply chain has been, for lack of better terms in destocking mode over the last few months?

Well, absolutely that's a risk. This smart phone segment, though, has continued to be very good. New readers virtually, every new reader that comes out we have a very nice position in. So it's a space that has tended to perform much better in downturns. If I take you back to kind of '09, I think if you go back to that period, gee, smart phone sales actually grew in 2009, when everything else was really falling apart in '09. So, there are segments of that that hold up quite nice. And remember, smart phones there's a new generation literally every three months coming out.

Right.

And it is the beauty of that, it is the beauty and the challenge, right? But our team has done a very good job with superior technology. They are very nimble and they have been able to serve these very tough, very large phone companies, technology companies. And so that's one sector within our total company that's continued to perform nice in downturns. And that's really what we try to do in some of the ES technologies. Being a steel company, you face these cycles. We're very good at it, we know what to do, but Engineered Solutions provides us an opportunity to get our graphite material science into some segments that might help mute some of those big downturns. And we have unique solutions, a lot of it is patent protected; so you put all of that together, it is a nice addition to a steel portfolio.

Just lastly here, Lindon, how should we be thinking about your working capital trends here in the back half of the year?

Well, in this environment, where we're balancing the little bit of softness with the production rates as Craig said, it clearly put a little pressure on our working capital. We are trying to manage that as prudently as we can. You can see in our guidance on the operating cash flow, that comprehends the EBITDA drop primarily, and then we have given a little range on where we can manage the working capital. Some of that obviously is in the exercising of payables and receivables, but based on the business, and part of that is on the inventory.

And I would say as clearly in our production rates, signal we are telling you that we aren't going to need everything that we could be producing, so we are trying to manage that down, but we are dealing with that pressure.

Okay, thanks a lot, guys.

Thank you, sir, have a good day.

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

Hi, Luke.

Hi, guys. So question on CAPEX, there was some push out into next year. Can you talk about what the big pieces are in this year's CAPEX number and what has moved forward a bit?

Yes. I will toss this over to Lindon, but big picture, you folks know us well, you have been with us through a number of these cycles. We are very good at managing through the cycle. We are very good at facing current reality, analogizing and moving quickly. And so you have seen our moves so far this year to adjust our production platform, cut costs. Unfortunately we have had to have layoffs at every single location, hourly and salary to adjust to this. Very, very tough, but our track record is we move very quickly on this, and CAPEX is one of the other areas we go very hard at in tough times.

So just to add a little to this, in this environment, as Craig said, we are just going to be as tough as we can on ourselves in terms of being conservative here. But at the same time, all of our convictions where we see the right returns.

So in a production environment, and in this tweak, you saw us bring our CAPEX down, by the way, in the first quarter off of the original February guidance. And we told you that our growth CAPEX is primarily in the ES space, and that we have maintenance requirements across our business that we sustain.

And I would tell you that in this last step down, we're attacking both. Partly it's going to be constraining some of the growth CAPEX in the ES segment, it's going to be participating in some of that reduction. And as these markets are more questionable, we're being more careful in terms of -- well, equally careful, but always careful in terms of how we let go of that CAPEX. I think I have described it at least in some investor circles here, we use milestones. And we check those milestones and make sure that we are able to slow down our stop if we need to.

Now, that's a small tweak to the ES growth, and at the same time, we have our IM site looking at the maintenance in light of lower production rates that where could we minimize some maintenance requirements. And so we feel very confident bringing this CAPEX down into this range that we have given you. And as production picks up, you know, I would expect the maintenance to go back up to the previous guidance we have given.

And in terms of the spending that goes to Engineering Solutions, can you talk about what sort of impact that is going to have on your market exposures there? Is a lot of the CAPEX directed towards a specific end market or the new end markets you are investing in? Can you give us anything to help us understand how to think about that growth going forward?

The markets such as the high end advanced consumer electronics, will get pretty much all the capital we kind of expected this year. So far that growth and the orders are holding up very, very nicely. But as Lindon said, we have it on a short leash. If we see a slow down, we're at different milestones, we reassess each time. The smart phone is still holding on.

Should we still invest or should we push out and delay three months and then reassess? So all of our businesses have gone through that, all of them have had to contribute with lower CAPEX. So that's the process we have gone through, Luke. Some is definitely in ES, some of those that have grown very solidly like electronic thermal management, are on tight milestones, so they are getting their capital right now. As long as that segment holds up, they are going to continue getting 100% of it, because we need that capability.

It is running at that good of an operating rate. But if we see a little falter in the demand there, or phone uptakes -- new smart phones, we literally will adjust immediately slow down the CAPEX, we don't need it. And then push that out a quarter or two quarters. So it is very fluid, and I think it is just prudent in this environment.

We have shown you many times in the troughs how we move quickly, we usually move very, very fast, often ahead of a lot of other companies. But we are so committed to be very, very strong balance sheet in downturns, because in downturns we have seen strong companies in various industries can really outperform everybody else. The M&A opportunities for them abound. Prices are cheap. Share buyback opportunities abound.

There's all of those if you have moved quickly, you have maintained a great team and a great balance sheet, you can position your company to come out of a trough like that, or difficult environments, like we're in today, even stronger than the competition.

And that was our goal back when we had the crash in '08, and you saw us make four very, very good acquisitions back to integrate the needle coke at very good acquisition prices and depending on where this current economic environment leads us, we want to be very well positioned to deliver that. And I think that's what you will see this team do, whether it's on M & A, internal growth, like we are talking about right now, in ES which has some great opportunities, which also offset some of this cyclicality in steel, and also you have seen us buy back 8.2% of our outstanding shares.

We will evaluate all of those and make the best return for our shareholders and just continue to drive shareholder value over a sustainable period.

Okay. Thanks for that. Lindon, can you talk about what the impact on currency was in the quarter and what your hedging strategy looks like these days?

First, just talk about the strategy itself. We on the currency side, we looked at our exposures in the various countries, as you know Europe represents about 30% of our revenue. We also have operating plants in Europe, both in Spain and France. So we have a natural hedge in our cost equation that we take in and factor first, and then we look at the balance of our exposure, and then try to make sure we are covered. And so far currency has not hurt us any this year. And we don't expect it to be.

If you look in terms of the impact, just given that it's not an impact on our EBITDA to speak of, our IM side I would tell you that and the price you will see later in the Q, it's about a 3 point hit on the currency side. So, while in the second quarter, we will show you we had a 13% price increase realized in the IM space, and by the way that's also on the electrodes specifically, that there's about a 3% drag down on the currency side.

Okay. But at this point, you don't have any currency hedges on?

No, we do have some hedges, in fact, in total we ended up with about a penny benefit in the quarter.

Okay.

It is fairly immaterial. That's why I say, between the natural hedge and the instruments that we have, it's not a big factor.

So you see it, Luke, in the price, the Euro slips you see some impact and when we look at real price increase you've got to net -- look at that. But because we have some natural hedges, when it gets down to the bottom line, there's been some offsets on the cost side, and as Lindon said, it is pretty immaterial to us.

Just last one, guys following the Phillips spin off, any change in what Phillips has been doing on needle coke as far as the service levels or commercial aspects? Have you noticed any kind of change there following that deal?

No, none. They are a great competitor. They are very, very good products. They have been in the industry a lot of years. We're also a customer of theirs, so they are a very good supplier of needle coke. They do a great job.

Okay. Thanks a lot, good luck.

Thank you.

Your next question comes from Charles Bradford, with Bradford Research.

Good morning.

Morning Chuck, how are you today?

Hi. And looking at opportunities to reduce costs, are there any that come up from the new medical plan? Because some of the local exchanges that are being contemplated would have pretty significant federal subsidies to cover -- to reduce medical costs? Have you looked at any of that as a possibility?

Chuck, we have. On the medical front, obviously with the four new companies that we added over the last couple of years, we -- immediately integrated them into our low cost plan. And then because we have more participants, we are a larger business to take the marketplace. So we have gotten some nice synergies off of that. On top of that, we continue to evaluate all different local regional opportunities on this front in any way we can.

I have been very pleased with the way we have done medical plans. We early on, years ago, as part of our turnaround, just got to current reality, we couldn't afford those big Cadillac plans. So for ten years now we have been in a very low cost motivated, wellness program, gym facilities, wellness centers at our plants, getting everyone involved in the medical cost game with deductibles. So our families are watching costs, and managing the front end issues with preventive testing, we provide for our teammates to try to catch something early, wellness programs. And then to your point, we also search every regional local program we can, internet shopping on medical programs to reduce costs.

How many employees do you have in the U.S. that would come under the Obamacare plan?

Well, when you say Obamacare, our U.S. plan, the way we run it, we self-insure. We manage our own program. And we have kind of a basket of alternatives for our teammates. There's a bit over 1,000 teammates in the U.S. And there would be a suite of alternatives, with low deductible, up to a high deductible for our families. They would pick it.

We would manage the risk internally. So everyone is highly motivated to be efficient with their medical costs. We motivate everyone into wellness programs. We motivate folks into preventive testing, so there's rewards if you go and get your annual physical, you get a long list of preventive tests to catch something early. So we have done many things like this in addition to motivational programs to quit smoking. We have is the American Cancer Society in, we have team bike rides, all sorts of things like this.

What they have done for us, they have gotten all of our teammates into the medical program, very conscious of what they are spending, very good at preventive testing, and very strong participation in the wellness program. So our medical costs, the last ten years have always run below the national average.

Our increases year-over-year have always been below the national increases, and I want to say I may not have this exactly right, but in the last seven years, I bet there's three of the last seven years where we had zero increase to our U.S. teammates year-over-year on medical costs, because the team did such a great job in what I'm talking about. And so that's the way we manage it here.

It's gone well, and I have to thank the teammates and their families. We have made them all part of this medical incentive and program to be good at it. So Obamacare for us, we like a lot of companies we know we are on our own, right? And so we have managed this and we have tried to drive a very efficient program to protect our families.

Thank you very much.

Thank you, sir.

At this time there are no further questions. I will now turn the conference back to Craig Shular, for closing remarks.

Thank you, Brooke, and thank you for participating in our call, and I look forward to talking to you in November at the conclusion of our Q3. Thank you very much. Have a great day.

Thank you, this concludes the conference. You may now disconnect.