GrafTech International Ltd (EAF) 2012 Q3 法說會逐字稿

At this time I would like to welcome everyone to the GrafTech third quarter 2012 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 call over to your host, Ms. Kelly Taylor. You may begin.

Thank you Sade. Good morning and welcome to GrafTech International's third-quarter 2012 conference call. On the call today is GrafTech's Chief Executive Officer Craig Shular and our Chief Executive Officer Lindon Robertson. We issued our earnings release this morning. If you did not receive a copy please contact Marie Noor at 216-676-2160 and she will 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 is posted on our website at www.graftech.com in the investor relations section. For your reference, a replay of the call is available on our website. At this time I'd like to turn the call over to Craig.

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

In Q3 sales came in at $321 million, EBITDA was $65 million, net income was $30 million or $0.22 per share. Our results came in at the high end of expectations due to -- one, continued growth and improved performance of our engineered solutions segment; and then secondly, continued tight cost management in response to a weakening global economy. We have reduced headcount by over 8% since the beginning of the year in addition to cutting discretionary spending and CapEx.

Net debt was $604 million. The year-to-date increase was largely the result of our 10 million share buyback, substantially completed in the second quarter. Turning to the segments, industrial material sales were $260 million and operating income came in at $37 million.

Operating income declined due to lower volumes and rising costs across the segment partially offset by higher realized pricing. During the quarter, as a result of anticipated rising raw material costs, we announced price increases to our customers for needle coke and graphite electrodes. In September we announced an increase of approximately 15% year-over-year from our current pricing for normal premium grade needle coke.

In early October, we also announced an 8% increase to our current prevailing prices for standard sized melter grade graphite electrodes. While we do not expect a material impact to our results this year from these price increases, as the majority of our 2012 business is substantially booked, they potentially position us in 2013 to better manage margins and rising costs.

In our engineered solutions segment, sales increased 39% to $61 million and operating income doubled to $6 million, or 10% of sales. Our engineered solutions segment continued on its growth path, achieving record sales in the quarter. We expect to exit the year with approximately $220 million in annual revenue for the segment, representing a compounded growth rate of 22% over the last three years. This solid performance is in spite of an approximate $35 million decline in our solar-related sales this year.

The investments we have made to leverage our core compensate in graphite material science and create a sustainable platform for growth is beginning to pay off as we attack and penetrate high-growth markets. The diversification and growth potential that our ES business provides will prove beneficial and valuable to our Company as we expect to continue to face a challenging steel market next year.

Based on IMF projections, the estimate for global GDP growth has been reduced for the third time this year to 3.3%. The IMF highlights in its recent October report that downside risk to the global economic recovery have risen considerably. Continued uncertainty has led to low confidence levels and a fragile outlook in both advanced and emerging economies. The IMF went on to state that global manufacturing has slowed significantly, the crisis in Europe has deepened, and emerging markets continue to lose momentum, with no sign of significant improvement in the near-term. As a result, the IMF also cut its 2013 global GDP growth forecast to 3.6%.

Weakening momentum in the global economic recovery has impacted steel customer sentiment and business confidence. The early expectation from the World Steel Association for an improved second half of this year has not materialized. Accordingly, to the recently published October World Steel Association report, year-to-date nine-months global steel production, excluding China, has declined 0.4%. Steel production in key markets for GrafTech including the EU, South America, and Africa have each decreased approximately 5%.

The United States is the one bright spot with production up over 5% year-over-year. Despite this challenging global economic environment, we are targeting full year EBITDA to be in the range of $235 million to $245, million which would represent our Company's fourth best performance ever.

Finally, early indications for the 2013 global economy show little signs of improvement. We have strengthened our business model over the past few years and we are well-positioned as we enter 2013. We have built a solid balance sheet, improved our business model with the back integration in needle coke, and the addition of our excellent St. Mary's electrode team to our portfolio. And, our ES business is beginning to gain size and contribute to our results with approximately $220 million in expected sales this year. Several of the markets' ES services will be beneficial to us next year as steel continues through this current difficult part of the cycle.

That concludes our prepared remarks. Sade, let's open it up for Q&A.

(Operator Instructions). Luke Folta, Jefferies.

First question on needle coke. Have you seen a price announcement yet from your competitor, Phillips, as it relates to what you might be paying for needle coke next year? And then just as a follow-up, we are hearing petro coke out of Japan has some capacity off-line. Curious to know if that impacts your electrode operations in any way or, if it is having any impact on the Seadrift book building process for next year.

Let's knock off the petro cokes. Yes, they are one of the key producers in the world. So any issues that they have would potentially affect the global market for our Company, yes, specifically, in regards to any issue that petro cokes may or may not have no impact, so nothing there.

As far as looking forward on needle coke, it is way too early really to think about 2013. Book building process is just getting underway in needle coke. I think to look at pricing or where that may come is very premature. Obviously, there are many moving variables though, one being just the oil price. Oil prices have moved all over. They've been down recently. Time will tell where that ends up. And then obviously, the global economic environment is a real variable. Too early to talk about needle coke. I think at our Q4 call at the end of February, we will be better-positioned to talk about the book and the outlook at that time, Luke.

Okay. But so far Phillips has not given any indication of where it's going to be shooting?

It is too early.

Second one, can you talk about where production rates are? It will be helpful to hear the evolution of production rates throughout the course of 2012 and how you expect utilization rates to trend into the first part of 2013. And also I'm more focused on what happens to unit costs in 2013 as a result.

Well, let's start with the graphite electrode business. In the last quarter we talked about bringing down the op levels to kind of 60% to 65% for the second half of this year. And we have done exactly that, it's followed exactly what we said. They have been running 60% to 65%, probably closer to 60% in this environment. They would be at the lower end of that range. So, we have slowed down our operating rates in graphite electrodes. We've taken out costs.

We have unfortunately had to lay off a number of teammates around the world, salary and hourly, adjusting for the realities of the global marketplace. So, GE is tracking exactly what we said, 60 to 65% op level, we're probably closer to 60% than we are 65%.

Needle coke, we said last quarter we'd get that down around 80% and that's right where that's running. We're right down around 80%. And again, that just reflects the reality of the global marketplace. This second half is slowing down. We have talked about it in our prior calls. I think you see it from our steel customers.

And then looking forward to 2013, really too early to talk about any specifics whether it be GE, graphite electrodes, or needle coke. But what I will say is, based on everything we see from economic numbers around the world, everything we hear from our customers around the world, we are preparing for and expecting a very challenging year next year. So, we are doing what we do in all other cycles. We get ahead of it. We cut costs. And you will see us continue down that path to be very, very competitive and very, very lean and efficient as we move through 2013.

Can you give us an estimate for what you think the inventory reduction will be between now and year's end?

I can't give you a specific number other than it is headed down. We will be taking out of inventory. And we will have a lower number at the end of the year than what we currently showed you at the end of nine months. You recall that our strategy was well delineated that we would run at a higher operating rate the first part of the year. We said we would build inventory and then that would allow us to do some right-sizing, drive out some costs.

And running at a higher rate at the first for the year let us hit some of the sweet spots in the operating cost side of it in some of our facilities. So, inventory will be lower at the end of the year. We don't have a specific guidance, and I daresay that we will continue to cut costs over the fourth quarter. I would expect we will probably have a lower headcount by year end and an improved cost structure, just reacting to what we see in the marketplace.

Substantially lower you would think? I know you don't want to give a number, but is it going to be something just slightly or a fairly big decline would you expect?

Look at our cash flow guidance. I think with the cash flow, in fact, we move to the upper end of the range. We feel good about that cash flow guidance number. I think you can infer there that we will be pulling a significant quantity out of inventory per our strategy. And I would say, going into next year, we will have some inventory to work out of also per our strategy. And that just allows us to get to the right size in our operating platforms.

For us, what we find is, many times, rather than go down gradually, we'd rather do some step changes at various facilities. It is better for our cost structure. So, when we have a team, we will run it hard. Maximize what that team can do, and then we may build some inventory, and then we will step down the cost in a quick move and unfortunately lay off some of our teammates, but we will drive out costs. And then we will run at a much lower operating rate, but we will run full and utilize everything we can at that lower rate very efficiently.

On engineered solutions. My sense is you guys are getting penalized for the amount of CapEx that is going into that business without being rewarded with the offsetting income or return that business is going to generate over time. Can you help put things into perspective for us in the sense of how much you spent this year or over the last couple of years in expanding capacity in engineered solutions? And if you can give any milestones or targets of what you think that could result in as far as earnings into next year or longer-term I think that would be a huge help.

Well, as you see, engineered solutions had a very solid quarter. This business, if I walk you back a number of years, was about an $85 million business and lost money. This business has come a long way. The last three years, as we said, it has got compounded growth there of 22%. So, here we sit, this year we will do $220 million; all-time record. I think the item of note, that $220 million probably contains $30 million to $35 million less solar sales than a normal solar sale market would have.

We expect solar to come back probably in 2014. So, really, that $220 million is probably more like a $270 million if solar was running at a more normal rate. I think the good news is, ES has filled the hole that solar left and more than filled it and it has filled up with advanced consumer electronic applications. It is doing a lot in LED lighting and LED furnaces. A lot of the solar solutions and products we have developed work very nicely in LED furnaces and very similar application and that is starting to pick up some of the slack.

So, if I was to take a look at this business over the next few years, actually here we are at $220 million. Really there's another $40 million or so of solar that will come into that portfolio likely when solar returns. It's really approaching a $300 million business here. We have a line of sight to a $300 million business in the next couple of years. And when I look out five years, our goal is to get this to be a $500 million plus business with double-digit returns. We got a 10% return as you see in Q3. That came a little earlier than what our team expected, so, it is coming along very nicely.

The capital side, you've got to remember, we are running a lot of those applications at 90% plus now as we said. We picked up a piece of land and a nice building. And, that is just to fill customer demand. And, we have a very nice position in many of those double-digit growth segments like smartphones, flat screen TV, LED lighting, e-readers, and a lot of it is IP protected.

When I look at it, this is a very, very nice business to have in our portfolio when the majority of our portfolio service is steel. Steel goes through these cycles, it is just the nature of the industry. I will tell you, it is pretty nice to have an IP-type business that many of the segments that it services in the market are counter-cyclical. I think smartphones will probably do very well next year. I think that part of our business in ES will be a contributor next year and steel will probably face another challenging year next year as it has this year.

As far as CapEx, you see we downsized our CapEx this year. So, we brought that down and, I see the CapEx we are putting there as very necessary to meet demand because we are running at 90% plus in most other segments.

Craig, I hear you on the 90%, but you are spending a lot of money this year on that business. So I would assume there's new capacity there. Is all the capacity that you have or are currently working on included in that 90% number? There has got to be something incremental.

Yes, there's some incremental. Remember, this capacity is all -- they're furnaces and so many different products can go through this capacity. These graphite furnaces and some of the processes we go through, all of our products go through similar furnaces. So the furnaces, in many cases, are interchangeable across the ES product line. And so, you are correct. Some of it is giving us some sprint capacity for future growth. Some of it is giving us some capability for new products we have coming through the pipeline.

Okay. Thanks, Craig.

Joe Krawczak, Longbow.

First question, building off your and Luke's discussion. You'd mentioned hitting that 10% margin mark. I'm wondering if that is the right run rate to use in the engineered solutions segment moving forward or if you could potentially see a return to that low teens level?

Well, our goal is to get obviously into the mid-teen level. That is where we are targeting. So, I think as you see volumes continue to come up, you see us continue to grow some of these double-digit segments, you start to see solar come back. Our target would be the mid-teens for this business. This business, ultimately, when we are three or five years down the road should be our best margin business. It will be our fastest-growing and it will be the best margins in our portfolio.

So, mid-teens likely in that 2014 period? I guess in 2013, where could you see things going prior to the return of solar?

2013, I think you'll see us building on the success you see here in the second half of this year. 2013 I think will look more like this year. I think good sales growth and you will see the 10%, maybe a little bit better than that next year.

Great. And then secondly, on electrode pricing, I know it is early, but, just curious what kind of reaction you have gotten from your customers thus far following the increase announcement and whether or not you have gotten any indications of pre-buying or any sort of pushback.

Yes, Joe, it's very early in the process. So in fact, just a few customers are starting their bidding process as we speak. I think it is way too early to really make much commentary on it. Obviously, it will depend on where costs and our competitors see costs coming next year. That of course is still moving around as we said earlier in the call on needle coke. Oil is moving around a lot so the feed stocks into needle coke moving an awful lot.

So I think just with the variation and the volatility in the global economy, the raw material costs are moving a lot. Some of the other competitors in this space, they have in some cases higher cost structures than ours. I think really, we've got to see where does the cost structure come in and then ultimately the marketplace is going to determine where these prices finally land.

Okay. And then lastly, the macro uncertainty and some of the things that you have alluded to here in the conversation. Do you anticipate that causing a lag in this year's electrode booking similar to what we saw last year and how far out could you see that extending relative to the typical timing?

Joe, I don't see it being as delayed as last year. What I do see is that it is starting off a little later. Here we are just starting out and that might be, even at 60 days, behind the first start up. It is literally just getting started in the last couple of weeks. I see it being delayed but not as much as last year. And the reason it is being delayed this year is just our customers' uncertainty to the future.

They have such limited line of sight and their books are so short, many of them in days. And then obviously, many of them have been going through furnace closures, layoffs, a number of our customers around the world are now losing money so they are going through rationalization reviews.

I would expect some customers, for instance, instead of taking a two-week shutdown in December may take three- or four-weeks shut down. We're hearing a lot of noise at different locations. That is just the reality of the marketplace, Joe. I see the book going slower this year; not as slow as last year, but it will probably be until the end of February, our Q4 call, until we really have a decent line of sight.

Okay. Thanks, that is really helpful, I appreciate it.

Michael Gambardella, JPMorgan.

If you look back at the total company over the last decade, it seems like you have spent more every year in CapEx than depreciation and that's been accelerating, that ratio of CapEx to depreciation, over the last few years. I know one of the other callers mentioned about the excessive amount -- well, maybe not excessive to you, but a lot of CapEx you've spent recent years in engineered solutions. But just overall, on a company-wide basis, the CapEx to depreciation ratio being far above one, in the case of last year, over three times, what are you seeing in terms of returns on that investment?

Let me toss that over to Lindon here in a moment. But if I look over the 10-year period, obviously, the front end of that was a huge turnaround and rationalization of so many facilities. Then we went through many years where there just was no money. We barely kept our facilities running. And then, obviously, we improved the balance sheet. We got many credit upgrades, in fact at one point we even went debt-free. We are in a position to invest in our facilities, improve productivity at our facilities.

We made four great acquisitions. And then, the acquisitions, two of them especially, the first two, St. Mary's and Seadrift, required some attention. They had been probably capital constrained. They had been held by private equity and, like a lot of private equity investments, it is a quick turnaround. It is not about the next five years, it is about the next five months. And so, we brought them up to speed.

We have cut scrap rates. We have improved safety and improved productivity. In Seadrift, we had breakthrough in super premiums, so we made investments that really have improved business model, made us more competitive. So --

But have you seen the hard-core returns there and the profitability recently?

I think we will see all of it. Remember, we are in a very tough time in the global economy. So, you see this year is going to be our fourth-best ever. Okay? But, I think when you're really going to appreciate it is when the economy starts to show some recovery, then you're really going to see what the platform can run. Because it has been prepared to do that rather than run on a shoestring with breakdowns and unreliability, poor quality, et cetera. You see capital has come in and I think we performed well in very difficult environments. But the underlying is, it has been very difficult environments.

Once we get back to a better economy and a better marketplace, we will have higher operating rates. We are running at 60% operating rate right now and still making good money in a very difficult environment. But I think you will really appreciate it and really see the returns when we get back to a better environment. I think any of our customer base, any of our competitors, if you look at their returns in this environment. Everyone's returns are down because the environment is so poor.

Can you get an 8% electrode price increase next year operating at 60%?

Time will tell. Like I said, there are so many risk factors. A big one is, we don't know the cost structure. Oil has made a nice move down, time will tell where that finally ends up. It is way too early to talk about that. I don't know. It is that much risk on the table. Global economy, oil prices, cost structure, competitors. It is too early to tell. If you ask me, I really don't know if we get a price increase next year, the marketplace will determine that. Let me toss it over to Lindon just on -- he has got over a year with us now and he knows our capital program. He goes through every proposal, IRR, and obviously we scrutinize and scrub that in detail.

Mike, I think it is a great question. Because as you pointed out, CapEx has exceeded the depreciation level the last couple of years. And as we've discussed, most of the growth CapEx is going into ES business. So, the business that Craig has talked a fair amount about already in the Q&A is pointing to where do we believe in that investment. The rigor that we put around this is quite strong.

First and foremost, we have got the whole Company focused, including upper to our Board and helping to make our decisions on capital, but also internally in our business segments on ROIC. So, when you drive the team on that, I'll tell you that my segment leaders know how much profit in the year it takes to move that ROIC needle a point how much CapEx it takes to move it a point. They're very sensitive to CapEx.

Now the key point is once you start a project, what kind of discipline do you put into it to make sure that -- one, the project stays on track; and secondly, if anything happens in the interim, how do you adjust that project? So we put milestones in each project and understand when we start something significant, in terms of a timeline, that we have milestones for review to make sure that we don't want to change track.

As you have seen this year, we brought our guidance down substantially this year on the CapEx to conserve and to change some of those project plans in light of the environment that we saw develop from the beginning of the year to this point.

So, I give you assurance that in the IRR review, and business case review, project by project, we keep these things tied to the reality of the current space that we are operating in. And we assess them to expect something well ahead of our weighted average cost of capital. In fact, we target an 18% to 20% as a minimum hurdle and we review in the interim process for that kind of return.

Now, anybody financially astute will say, well that return is going to be good over a long term depending on how fast the payback is on the case. This is exactly what Craig is pointing out, that some of these, we put the capital in the ground and they start producing it. As he described, it's a sprint to payback. And some of them are a little bit longer-term in terms of the product capability that we are building for new product equations.

I think we are seeing the beginning of something much more substantial as you see in this quarter's results of the ES business. We are very, very cautious on the investments we put in. You don't see significant growth CapEx around the IM business this year for very good reasons given the environment we were in last year, this year and what we've seen.

Even on the Seadrift side, we have commented in the past that expansion is possible and it is potential, but it is not something we have stepped into aggressively because we want to make sure that the returns are going to be there over the long term before we do that. So, I think we have taken the right caution and to your question, do we see the returns materializing? Yes, we are on the ramps and we see the returns coming.

On ES, you talked about some of your goals, $300 million to $500 million on the top line. What about some near-term goals on the bottom line for ES?

I would just highlight that last quarter we highlighted that we would be at the double-digit level by the end of this year and we achieved that this quarter. As Craig pointed out, we are in this for margin expansion. We are not going to say does it ever dip below 10%? There might be, fourth-quarter we're not guiding on a specific segment, but, our expectation going into next year is you are going to see margin expansion in this space and you will see it over that five-year horizon that we have referenced.

I would not expect that we go backwards from this point. I would expect that there's a little seasonality in the consumer electronics space. You are going to see probably something that looks similar to this quarter, I am going to guess, plus or minus this next quarter, without specifically guiding it. But, as we step into next year, we expect the aggregate 2013 is going to produce favorable growth as well as margin expansion.

And then just last question. Craig, did I hear you right? Were you saying that for 2013 you thought any kind of weakness on the steel side would be offset by smartphones? Just how much business do you do in smartphones?

I'm not saying that. Obviously the steel portfolio for us is much larger. All I am saying is ES has some segments that continue to do well when steel cycles down. So, it can be a nice offset, partially, obviously, because it is such a smaller business. But that consumer segment, the advanced consumer electronics, is one of the largest in ES. If you recall, all through the 2009 recession, smart phone sales went up. Some of those areas, e-readers, some of the latest TVs, et cetera, they tend to do pretty well when steel is cycling downward. All we're saying is that is not a bad thing to have in our portfolio.

Yes, but can you give us an idea of how big that is in the portfolio, just either top line or profit contribution?

Yes, stay out of the $220 million it's more than 30% of the sales.

Is that just smartphones or you're saying all consumer electronics.

Advanced consumer electronics segment, it's bigger than 30% to 40% of it, it's growing so fast.

All right. Thank you.

Tim Hayes, Davenport & Co.

What was the timing of the share buybacks during the quarter? Was all that in Q3 in July or did some of that occur after that?

No, most of it was Q2 and then a little bit came in July. And then it was done.

And, you have a new program in place, correct?

We have a new $10 million authorization in place and then the way it works, like all companies, management team would approach the Board to get approval to use some of that. But we have put a new $10 million in place, yes.

Could you have bought back shares after July 31? I'm just curious. If so, why not buy back since the price was roughly at the level that you had been making some aggressive share repurchases in the prior quarters?

Yes, we have a program in place. We don't have a constraint. To answer your first question, yes, with the programs in place we could have, we did not. All I would say is, we look at so many factors like other companies do in a decision like that and obviously, we are watching very closely the global economies. From our vantage point, every quarter this year, steel has become more challenging. You see it in my customers' numbers for sure.

The second half of this year, we all recall the World Steel Association at the beginning of the year said the second half is going to be better. I mean they have come out and said, no, that's just not going to happen. It is probably going to be weaker. All we are doing is being very, very prudent as we enter 2013. And obviously, share buyback is one of the possibilities, but it is something we weigh against all kinds of alternatives, as well as the global economy.

Okay. And then a second question is sort of a goal of getting back to -- or eventually getting to the mid-teens margins for the ES segment. How much of that is predicated on solar returning to more normal levels? I guess we have some concern that perhaps that market may not.

A big part of that is solar, obviously, as well as continued growth in the areas we serve today. So, we have spent a lot of time in the solar market. We have been in it from the beginning. And, I will tell you what we see, what a lot of solar analysts see, third parties, we expect 2014 to start to see a pickup there. Remember, it is not just new starts, there's also a consumable we serve. So, it has a consumable element and insulation packages in the solar furnaces we serve. We would expect in 2014 we will start to see solar start to come back. That is definitely a part of it.

Time will tell, obviously. There's risks to that like you have highlighted. But, our sense is the drive on these green energies will continue. One from the governments and from the various geographies. And then two, one of the things I think a lot of folks miss is, we have been from the beginning in the solar business. We have seen how the technologies improved and the conversion of sunlight to energy and the ratio and whatnot. There's a technology improvement curve taking place there. And so I think 2014, 2015, 2016, you will see solar become even lower cost, more viable, and it will continue on that technology curve.

Very good. Thank you.

Mark Parr, KeyBanc.

Most of my question have been answered and I appreciate all the candor. And I certainly would suggest that the global environment is -- remains highly constrained. I want to congratulate you for the good progress you are making despite the macro challenges and the pro-active way that you are really focusing on the economic realities out there.

Thank you, Mark.

One thing we talked about, the ability of Seadrift to manufacture the super premium material. I think initially there was a trade-off associated with the amount of capacity that it took or the runtime. It took a longer time to run the super premium. I'm just curious if there are any goals you have or any benchmarks that you have been able to get to as far as the tie-up of extra capacity to create the super premium needle coke at Seadrift.

Mark, you are correct. Super premium takes a bit longer to make than normal premium. Our team down there has done a great job, not only with the breakthrough of being able to make a great super premium, but they also upgraded the quality of their normal premium. We've had a lot of feedback from customers around the world complimenting us on the improvement of their normal premium as well as the performance of the super premium.

A few weeks ago I was down in Seadrift, in fact, for a week on a Lean Kaizen with our teammates there. That team is working very hard on productivity improvements across the board and one of them would be this exact area you are talking about Mark, increasing yield out of normal premium and super premium. And this team, through Kaizen and Lean Six Sigma work, has had excellent progress on that front.

I expect over time, yes, we will make normal premium and super premium faster than we ever have. They are getting yield improvements out of the equipment as we speak. They have done almost 40 Kaizens year-to-date this year. This was a team we started with that did not have a Lean Six Sigma program. We have got black belts in place. We have got a great team work ethic.

And like I said, the way we work at GrafTech, our top 80 leaders have to be on two, one-week Kaizens every year. One of my weeks happened to be at Seadrift. They are working very hard on productivity improvements and they are already getting yield improvements out of the Seadrift coker. I'd say the yields this year will be higher than any year they've had since they started that coker.

That is good news. I'm glad you're making progress. Just secondly, one other question related to the ES. And also, it is interesting. You go back a couple years ago and nobody ever asked questions about ES and now there's a lot of discussion, which I think is very interesting. Definitely a change. But could you -- is there any more color you can give as far as the 2013 outlook? You have clearly committed capital. You are going to be putting in ability to produce a lot more for the future.

Do you expect a 20% growth rate next year? Anything in particular you can tell us as far as how that growth is going to unfold in terms of which product areas? Or what we should try to look out for to feel either better or worse about how that growth prospect is unfolding for next year?

Very good. What we can say about our ES business next year, and remember all of this is in the context of a very volatile global economy, with a lot of downside risk as the IMF has highlighted in the global economy. But I would say we would expect and target our ES business to have double-digit growth next year, above the 10% margin that you saw us deliver this quarter. And the segments that it will be attacking hard and we expect to be significant would be smartphones, e-readers, flat screen TVs. So all that would be our advanced consumer electronic space.

And then also this whole area of LED lighting. All the LED raw materials are made in a sapphire furnace. And that sapphire furnace is very similar to a furnace that the solar silicon is made in. About the only difference is, and this plays to one of our strengths and why ES and our technology is so important, is the sapphire furnace, in fact, is even hotter than the solar furnace. So, it is a more difficult application.

You are seeing more and more sapphire furnaces. You are seeing good growth in LED. I think LED next year will be another important area for us. And then I think in 2014, as we say we will start to see some solar coming back. I think 2014, with solar starting to come back, we are going to be north of $300 million in sales and double-digit margins.

Okay. Good luck on that and good luck on the pricing negotiations here for needle coke and electrodes in the fourth quarter.

Ray Rund, Shaker Investments.

I was just wondering, if could you remind us what your sales of needle coke look like as a percent of your total industrial materials segment?

Ray, it is not an item we guide to. All those sales are part of our IM segment. It is not an item that we break down, mainly for competitive reasons. None of our competitors give their specific sales numbers either.

Just as a reminder, the primary acquisition purpose was for integration into our business. So, we are one of the primary consumers of that coke and then we also have third-party sales. So, if we were to start breaking that sales equation out, it would be difficult to draw meaning from that because we are one of the biggest consumers of that.

I see. So, perhaps another way of asking the question to get the information I'm interested in is, are outside sales a significant portion of the production at Seadrift? I noticed that you have been raising your needle coke prices. Is this going to have a significant effect on the profitability?

Ray, outside or third-party sales are a very important portion. They are significant to Seadrift and to the results out of Seadrift. Seadrift would sell in all the geographies around the world where needle coke is utilized, Europe, China, et cetera.

Thank you very much.

[Rob Pully], Salman Capital.

I just want to get back maybe to the question because it is still a little bit confusing and it gets asked every conference call on CapEx. Maybe you can just take away the mystery and outline for us -- break the CapEx into the two businesses, engineered solutions and industrial materials.

Because, Craig, the answer to Mike's question, you went and you kind of emphasized more of the IM side, but then Lindon talked about growth CapEx being in only engineered solutions. Maybe you can just sort of like break it out even for the last five years, the difference in CapEx between engineered solutions and the electrode business. And then even better, what would be considered maintenance and what would be considered growth?

One, we have not given that kind of information out over the last five years, but let me just explain and revisit what we have described and what maybe we can add as insight. In general, as we have described before, this year, you could expect that the maintenance CapEx in aggregate is in the range of I'd call it $75 million to $85 million now because since we brought our CapEx down since our past discussions on this, it would be the maintenance range and growth of about $40 million to $50 million. So, that is the aggregate split of our CapEx.

What we have described is the growth CapEx, largely, almost entirely, largely targeted at the ES business. We have got a little bit on cost improvement and things of that nature in Seadrift, quality improvements, but most of it is driven on ES. Now, if you look back, I think you recognize that our CapEx had expanded one year ago.

We described publicly that that primary driver of that expansion was in the ES segment. And so even if you look back one year ago, I think you can draw a similar picture from those trends. In any given year, the maintenance CapEx for our aggregate business could range from a $70 million to $100 million.

What is the maintenance CapEx in ES because it's $40 million to $50 million in growth CapEx in ES? There has to be some maintenance CapEx in ES as well.

Well, there is. There is maintenance CapEx --

What would that be?

We have not disclosed that and I don't see that as productive for us at this point. We will consider that in future disclosures, but the key point is the investments that are driving the growth in this business equation right now are the types of investments that we have discussed. That being the growth CapEx behind our thermal management solutions and things that are servicing the advanced consumer electronics in large part. But we also have some behind the furnace capabilities in solar and LED and other spaces.

So, the growth CapEx, we've had a fairly consistent track over time. And, so I think the guidance of $70 million to $100 million is the right expectation in any given year for us to have in that space.

I'm sorry, in which space?

In our aggregate maintenance category.

Right, but you're not willing to tell us how much goes to ES or how much goes to the electrode business?

No, and frankly, it is going to vary based on the year and the utilization of the plants. So, I think at a meaningful level, that level of understanding for the GrafTech installations and plants is the right range to have. You see, as I noted earlier in the call, or in the question, that even this year, we have been able to bring down maintenance just a little bit. We've brought down more out of growth CapEx, but we brought some maintenance down this year because operating rates in some of the plants are down lower. So, it is going to have a variation on both sides of our business.

I think it is relevant to know the total CapEx spent in engineered solutions. Because even if they have a portion of that maintenance CapEx, you're talking about, I don't know, it could be anywhere between $70 million and $80 million of CapEx being spent in engineered solutions. If the goal is to get to $300 million in revenues in a couple of years and 15% margins, we're still spending way, way in excess in CapEx than we are getting in income. Maybe I am wrong. Maybe we're not spending that much in maintenance, but it's just --

I understand your point. But you've got to keep in mind that the IM business represents 85% round numbers of our top line. And just -- I'll point out that we have got six electric plants in four different continents. We have got a Seadrift plant. I can assure you the ES maintenance is not the lion's share of this; that's the small (multiple speakers).

I'm sure it's not the lion's share, but even if it's a small percentage it's still -- we are still, we don't have any sort of line of sight even based on the margins that you laid out and the revenues that you laid out for the engineered solutions earning more than what you are spending in CapEx.

I understand your point.

Thanks.

David Bradbury, Courage Capital.

My questions have been answered. Thank you.

You have no further questions at this time, Sir.

I thank everyone for their interest in GrafTech and we look forward to talking to you at our Q4 call at the end of February. Thank you very much. Have a good week.

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