GrafTech International Ltd (EAF) 2013 Q3 法說會逐字稿

Good morning. My name is Jody, and I will be your conference operator today. At this time I would like to welcome everyone to the GrafTech third-quarter 2013 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Kelly Taylor. Please go ahead.

Thank you, Jody. Good morning, and welcome to GrafTech International's third-quarter 2013 conference call.

On the call today is GrafTech's Chief Executive Officer, Craig Shular, and our Chief Financial Officer, Eric Asmussen. This is Eric's first call as our CFO. By way of background, since joining GrafTech in 1999 as Tax Director, he has also served as our Worldwide Controller, Treasurer, and Director of Finance, as well as VP of strategy planning and corporate development. Eric has a tremendous depth and breadth of financial and business experience and wealth of knowledge about GrafTech's operation and strategies.

We issued our earnings release this morning. If you do not receive a copy, please contact Marie Knorr 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, including those surrounding the planned rationalization of our graphite electron production platform. That same language applies to this call.

Also, to the extent that discuss any non-GAAP financial measures, you will find reconciliations in our press release. They are posted on our website at www.graftech.com in the Investor Relations section. For your reference, a replay of the call will be 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 you for GrafTech's call. Today we will take you through our third-quarter results, detail our announced plans to improve our industrial materials segment business model competitiveness, provide outlook commentary and open it up for questions.

In Q3, total company sales came in at just over $300 million EBITDA, excluding the impact of rationalization related charges, came at $35 million, in the middle of our guidance range. Adjusted net income was $6 million, or $0.04 per share.

We remain in a difficult operating environment, particularly for our industrial materials segment. We have announced initiatives today designed to significantly improve our competitiveness, allow us to better serve customers and well position our industrial materials business as global economies and steel demand recovers.

In our industrial materials segment, sales decreased 10% to $231 million. Operating income for the segment was $4 million, excluding the impact of rationalization and related charges.

During the quarter we announced price increases to our customers for needle coke and graphite electrodes. In August, we announced new pricing for normal premium grade needle coke of $1,875 per metric ton, which represents an increase of approximately 15%. In September we announced new pricing for standard-size melter graphite electrodes of $5,400 per metric ton, which represents an increase of approximately 20%. We do not expect a material impact to 2013 results from these price increases, as our 2013 business is largely booked.

In our engineered solutions segment, sales increased 15% to $70 million in the quarter. Operating income for the ES segment was $5 million. Our ES business had its second quarter in a row of $70 million in sales.

Despite solid growth in our advanced consumer electronics product line, operating income was negatively impacted by continued weakness in advanced graphite material products serving industrial sectors and normal startup costs as we add production capabilities to serve growing markets. We expect the majority of the startup expenditures to be behind us and therefore target double-digit operating income margins for the segment in the fourth quarter as production ramps up.

Turning to our announced initiatives, these actions position our Company to significantly reduce our industrial materials cost base and improve our global competitiveness position. The plan focuses is on three key areas -- one, improving profitability; two, optimizing cash flow; and three, positioning for future growth.

We intend to close, subject to normal ongoing union workforce help consultations, our two highest-cost graphite electrode plants located in Brazil and South Africa, as well as a machine shop in Russia. Reductions in corporate overhead are also included in these initiatives. These initiatives reduce our graphite electrode capacity by approximately 60,000 metric tons, which would leave us with sufficient capacity to serve our customers worldwide and satisfy near-term projected global demand.

The planned closures and related overhead initiatives would yield approximately $75 million of annual cost savings. The rationalization is expected to be substantially completed by the end of the second quarter of 2014 and would contribute approximately $35 million in savings next year. These three facilities employee 600 people, or approximately 20% of our global workforce.

We will continue to have adequate capacity to serve all GrafTech's customer needs and can do so over competitively with lower overhead and fixed costs. Importantly, additional capacity can be added incrementally at our lower-cost -- at a lower cost than required to operate the current facilities.

We have identified debottlenecking opportunities through lean six sigma efforts at our remaining four large graphite electrode plants. These four electrode facilities offer best-in-class production capabilities, and can expand their capacity, in increments, up to a total of approximately 60,000 metric tons to respond to changes in demand.

Additionally, we estimate the average cost increase capacity by 60,000 metric tons across our production net work is approximately $2,500 per metric ton which, compares very favorably with industry averages for comparable projects. The first increment of 15,000 metric tons of potential expansion has been identified at our Monterrey, Mexico, plant, one of our lowest-cost facilities, strategically located just 350 miles from our needle coke plant in Cedar, Texas. When global economies and steel demand recover, we will add these 15,000 metric tons. Growing this low-cost production site would further lower our overall graphite electrode cost structure.

Our team really reviews global customer demand and as the EU and other key markets recover, we will determine the best timing to commence the Mexican debottlenecking initiative.

The rationalization plan will also focus on improving supply-chain efficiencies and reducing inventory levels across our production network, which along with the completion of the wind down agreement for third party needle coke, is expected to generate working capital improvements up $75 million in 2014 and another $25 million in 2015. In addition to the above, this initiative will also allow us to reduce future maintenance capital expenditures. We are targeting annual maintenance at our graphite electrode plants to be reduce up roughly 25%, or over $10 million annually.

While these are difficult choices, as they impact members of our worldwide team, these initiatives will enable GrafTech to drive operating efficiencies and significantly lower our cost base. Our aim is to ensure that GrafTech is very well-positioned to capitalize on global recovery in steel and GDP growth.

Turning to outlook, in its October 8th report, the International Monetary Fund reduced its estimate for 2013 global GDP growth to 2.9%, representing the fourth consecutive downward revision this year. The IMF noted that global growth remains slow and downside risk remain high. On the positive side, the IMF noted that financial conditions in the EU you are stabilizing and the region is expected to gradually emerge from the five-year recession and return to growth sometime in 2014.

On October 21st, the World Steel Association cited that global steel production, excluding China, declined 2% in the nine months of 2013, as compared to the same period prior-year. Looking into 2014, WSA expects global steel consumption, excluding China, to rise 3.5% year-over-year.

We are targeting EBITDA for the full-year 2013 to be in the range of $145 million to $155 million, a $5 million reduction from out prior guidance midpoint, and fourth-quarter EBITDA to be in the range of $35 million to $45 million. As result, we targeting operating cash flow guidance to be in the range of $100 million to $120 million.

Given the difficult operating environment, and in addition to the plan outlined above, we are reducing targeted overhead expense to approximately $130 million in 2013. Year-to-date, we have reduce overhead by approximately 18%.

Market conditions for our global steel customers continue to be very challenging. However, there are leading indicators that point to an improvement in US nonresidential construction and that the EU recession is in the bottoming process. Some of our US customers are cautiously optimistic looking forward into next year.

Finally, we have a well-established track record cutting cost, improving profitability, and ultimately of cost leadership in our industry. We have built an advantaged, low-cost, back-integrated business model supported by a strong capital structure that we believe is well positioned to deliver results above our prior peak EBITDA performance of $369 million. In fact we believe the business model is the power to deliver $500 million to $600 million in EBITDA when market demand and global economies recover in the future. These initiatives further prepare us to deliver on that objective.

That concludes our prepared remarks. With that, Jody, could you open it up to Q&A please?

(Operator Instructions)

Luke Folta, Jefferies.

Good morning, Luke. How are you today?

Great, Craig, how are you?

Excellent, thank you.

So, first on this $75 million of expected cost savings. Can you talk about how much of that you think is going to be cash versus non-cash items?

Luke, the best way to look at that $75 million, about approximately $10 million of that will be non-cash.

Okay. And the other thing I had was -- with you closing these facilities in Brazil and South Africa, how much shipment potential do think you give up by not having facilities in those local markets?

We do not think we give up any at all. The remaining four large low-cost facilities can pick up all of the requirements in those markets. And in fact, as we've said on the call and in the release, can do it much cheaper. They've got tremendous quality. So they are very well-positioned to do that, so I do not see in any constraint there at all Luke.

Would you say the operating cost advantage of the remaining facilities exceeds that of the freight costs to get the electrodes over there?

Absolutely. Spot on. And that's just some of the power of this rationalization. You're absolutely correct.

Okay. And then, on Seadrift it seems like you expect inventory reduction through next year and a bit more into 2015 just based on your working capital outlook. Should we assume that -- will 2015 see the full benefit of utilizing Seadrift 100%, in terms of internal consumption goals?

I think 2014 and 2015. Remember, the wind down agreement finishes the end of this year. So 2014, we'll see the full benefits of the integration of Seadrift. We have literally no constraints, so I expect the coker to run full out from here forward.

Okay. And then, just on the -- in prepared remarks you talked about there being some union consultations going on or something. Is that something that could kind of hold up this whole process? Do you expect -- what do you think the risk in complications around those factors are in terms of closing the facilities?

Those are the very normal union and workforce consultations, so there is not anything out of the ordinary there. That is normal course, adhering to local regulations, having a very professional transition. So that is built in all of our numbers and in the goal to be substantially finished by the middle of next year. So I do not see any major issues there.

Okay great one last one for me. Thinking through -- when these facilities close, is this going to have any meaningful change on your mix, in terms of what's UHP and non-UHP electrodes?

No, the mix will stay pretty much the same. No change.

Okay.

Thanks very much. Have a good day.

You, too.

Edward Marshall, Sidoti & Company.

Good morning, Craig, Kelly. Welcome, Eric. So I just want to, I guess -- it is interesting that you announced the cost reductions and at the same time you highlighted that you can add this back pretty quickly. I guess -- the question is, you know, in your mind, and I think you mentioned it several times, that structurally, the industry, despite the capacity additions really has not changed your outlook for the future for electrodes.

That is spot on, Ed. We see EAF growth, cost competitiveness, looking forward to be a very bright future for EAF. And so, when the EU emerges from this tough recession, the US recovers, nonresidential construction recovers in the US, you're going to see the EAF industry, I believe, do very, very well. The advent of DRI is tremendous for EAF and cost competitiveness. So we are very bullish on EAF, go forward, we get out of these recessions, demand picks up, EAF is advantaged, DRI just grows that advantaged. They are nimble and so, looking forward, we will over time, at the right time, when demand recovers, put this capacity in.

When that capacity comes back on, and I think it is equivalent capacities look -- optically it looks that way. But what kind of cost savings from the places that you are seeing today versus where they are -- where they are structurally located today, what are the cost savings to you? Are they going to be meaningful from serving, say, Monterrey versus Brazil or South Africa?

Yes, they are actually meaningful. South Africa and Brazil -- great teams, but these are our smallest plants, our highest-cost plants, some of our oldest plants. And in tough environments, to be a manufacturer, electricity costs have gone up so much, social costs, et cetera. So, growing the remaining four plants, which are already large, world-class -- we've done a lot of automation, obviously there's been a lot of preparation to get to this day. The four plants are prepared for this, and have been getting prepared through lean, six sigma, automation, majority our capital is gone into the four large plants getting ready for this day.

They have a much lower cost structure. It is a step change, and so -- the starting point is significant, but then as we further grow those sites, and you still have the same one-plant manager, engineer et cetera. For instance, when we do the 15,000 tons in Monterrey, at the right time when the market returns, that is just going to further lower the cost structure at plants. These are very, very attractive -- I think as you see from the numbers, I mean, the cash that they generate, and if you do the math, you will see that -- if you lay out to replace the 60,000 tons, this rationalization more than pays for to replace the 60,000 tons. And you get the low-cost platform and you get more throughput at these advantage sites. This is a major rationalization for us and we'll really improve our competitiveness.

Arguably, you are doing what you've done in the past cycles, your improving the operational -- and throughout the cycle, improving operations and becoming a stronger company. And I'm curious, as you look to the longer-term goal, and I think you confirmed that $500 million, $600 million today, you know, does that -- I mean you're changing the cost structure, could you actually see that being much higher than that $500 million, $600 million over the term? Or is this something that you previously planned into that guidance?

Well, we have been thinking $500 million to $600 million. I would keep in that range here. We need a EU recovery to move the needle, and so I think any reassessment of that $500 million to $600 million will be after we get these economies back on their feet. As we've talked, Ed, when non-res construction comes back in the US, that is so beneficial to the EAF shops in the US. It's virtually all EAF, so that will burn a lot of electrodes. And then the EU, as we've talked, is 30%, 35% of our total company sales. Next year is probably going to be the first sign of growth there in five years. As the EU start to come back, that gives us a tremendous amount of leverage in our business model.

So there's $35 million of cost savings next year, and am I right there's $20 million from the coker that is coming on from EBITDA savings as you wind down those agreements? Essentially, you're starting with a $55 million head start from where you started in 2013? Is that the right way to think about it?

Well, obviously, we can take care of the vast majority of our needle coke needs now. We do not to buy from a third party. There is going to be benefit from that, you are right Ed. And because now we can really enjoy and orchestrate the full integration of the needle coker with our electrode plants. Prior -- the last three years, per the wind-down agreement with the DOJ we had to buy from a third party.

So, just think of -- what we're trying to do here is, next year we are completely on our own in needle coke so we do not have the constraint of a wind down. This is a dramatic improvement in our cost structure. So the four large low-cost electrode plants that remain can get very integrated to Seadrift and they've got great product quality, and all we are trended do is get position for the term. EU, it is starting to look like a bottoming. The US is come a ways, but we need non-res. We just want the right cost structure, a very aggressive low-cost structure for when the term comes, and then the capability to take care of it, and then incrementally, at the right time, when the demand returns, to our industry, we will add that first 15,000 in Monterrey which is -- that's probably the lowest cost 15,000 in our industry.

Finally, pricing. You mentioned -- I do not know how much you'll talk about this, but you mentioned the 2014 price increases that you announced, both in coke and electrodes. Is there any frame work that you can put around it to talk about how the market is looking at that? I know there has been several announcements from some of your competitors, et cetera. But, kind of how the industry is kind of accepting it or not accepting those price increases? And maybe the shape up for 2014? I understand you are not giving guidance today for 2014.

Yes, absolutely. Well, needle coke, as we've said, we've announced an increase of 15%, electrodes up about 20%. Cost in both of those businesses is going up. And so, we are out there seeking a price increase. I think cost are going up for all of our competitors. So we will see how this plays out in the marketplace. It is very early in the bid-season. There is virtually no activity yet there. So it is really too early to say much there. In our February release, we will give guidance. We will have, I think, by then a fair amount of the book put together. End of February.

Okay. Excellent. I appreciate your comments today. Thank you.

Thank you, sir. Have a good day.

Chelsea Bolton, Goldman Sachs

Hi, Chelsea. How are you today?

This is Sal, I will ask questions on behalf of Chelsea. A couple of things, first of all, what is -- where did you buy -- where are you buying the needle coke for those two facilities in -- the one that you are shutting down?

We buy from all the producers. We do not detail individual suppliers. That is not our practice. But we buy literally from all of the other produces out there.

Got you. Is there a rationalization in needle coke, you think, happening at the same time? Or just you guys are not doing it?

Yes. I do not know what the others are doing. I know this one, we've prepared for quite some time for this. As I said with our CapEx, our lean six sigma, this is been a well-thought-out plan. We've looked at many alternatives. And I do not know what the others are doing on this front. I do know though, that our cost structure is going to make a nice step change down. The integration, you will see the real power of it over 2014 and 2015.

Those are facilities that you're erasing it. I mean, you're not selling that to somebody or leaving it. You're just totally going to wipe it out? Totally finish?

Correct. We will not be selling. What we will do is -- we are very skilled at this, we will be taking some of the equipment that we can use at the four remaining low-cost sites, we will pull equipment out and then what we do over time, we will level that. We will not sell an electrode plant, no. That will all get leveled, and down the road the land will get sold.

You did make some comments about how the price will do, the price increases. I'm just wondering, if -- how do you see the market, because it is still pretty weak. I'm remember 2012, middle 2012, Seadrift plant increased the coke price by 20% but it ended up down 10% for 2013. I'm just wondering if you think market has strength to -- is it all cost push? Or is it some demand pull also in the price increases you announce?

There is a lot of cost push on this. I agree with you. As we said in our comments, global still remains very, very challenging. There are some data points, though, there's been some price increases that have been achieved. There is the ABI index here in the US -- out of the last 14 months, 13 have been positive, and just if you look at history, 13 months out of 14, that is a long, very positive trend. Okay? If I look back to prior cycles.

That really points that 2014 non-res should be better in the US and it looks like consensus is -- and even some of my customers in EU see that EU is definitely in the bottoming process. It may take a few months to get there, but it looks like next year, we should start to see the return to growth in the EU. So I think all of those things point that we need to try and get some price here. Our costs are up and our customers are getting some price, and we'll just let that play out, Sal.

Thank you very much.

Thank you, sir. Have a good day.

Michael Gambardella, JPMorgan.

Good morning, Mike. How are you today?

Good, Craig. How are you doing?

Excellent, thank you.

Congratulations on the announcement and not just sitting on your hands waiting for someone else to do it. I have a couple of questions for you with the strategic objectives that you have here with cutting this capacity. Because I remember -- you know in past years, you actually made a point of saying, how important it is to have a local production site to supply the customers in that country or that region. And I'm just wondering when you pull out of South Africa and Brazil, is that kind of open up the customer base, it's fair game in the world? And customers probably favor of the local producer, you. They could get quicker deliveries, right there and everything like that.

I do remember you saying, that you would get a preferential pricing because you had such a close proximity to the consumers, so I'm just wondering, especially with some of the new capacity coming on around the world -- even in the United States, I think, (inaudible) bringing on 30,000 tons next year and the end of this year. How this is all going to play out in terms of the actual cost savings and the risk losing some of the business down in South America particularly in Brazil and South Africa?

Yes, Mike, good point. In both of these geographies that we're talking about, South Africa and Brazil, obviously that there is no local producer. So there won't be a resident local producer after we exit. And obviously, we know the customers very well because we have been there, we know the furnaces. We will still have a sales and customer tech service team local on the ground. And so -- and then obviously the cost structure will be dramatically improved and then I also think what the customers will see locally is, better quality. I think they're going to see better quality out of these four large plant than what they had from our variable small plants.

So I do not expect a lot of shift in market share there. Our customers are global, a lot of the bids are global bids from the big accounts, they have got factories in many continents. So our industry's really become very, very global. Electrodes move all around the place. It is a well-taken point, Mike. It is something we have our eye on the ball on that, but I think we well prepared for that. And the cost structure will help us a lot also.

And of the 60,000 tons capacity you are cutting, at the Brazil and South Africa, what was the approximate shipment number, say this year or last year?

You mean the local shipments in the South Africa/Brazil?

As of the plants you are shutting down, was 60,000 tons of capacity, how much are they actually shipping?

Well, we have been running all of our plants on a program where obviously you fill the low-cost plants first. So both of these have been our highest-cost plants for quite some time. They have been at lower operating rates than the other four. Some of that has been as we have been preparing for the exercise. So I cannot give you specific numbers, some of that is market-sensitive et cetera. But these have been our two lowest-running plants. They have gotten this small slice of capital to keep them going as we have prepared for this over the last few years.

I mean, have these two plants been running under 50% of capacity?

Yes, absolutely.

I'm trying to figure out the cost savings from such low volumes. Can you give us the components besides the DB&A of being $10 million of the $75 million some of the major components, and how you figured the $65,000 -- $65 million in cost savings?

Yes, it's the period cost, the fixed cost in there, variable cost -- those locations in many cases that build the graphic electrode do not have local raw material supplies. And so a lot of that gets imported. So when you look at the $75 million, $65 million of it is variable in period. You are right, Mike. They were running at low operating rates, and your take away should be that's how high the cost was in those jurisdictions for us.

But you are very confident that you can maintain your share of the business with those local consumers?

Yes. I mean, we -- remember, we ship to 80 countries today. Electrodes move all around the world. It is a very global market, and so -- we have been doing that in many countries, you know, to have share and a good portion, a large portion of customer's business based on service and quality and what not. So this is not something new to us. You know, we will build this and do it. I do not see a big loss in share there, Mike, at all. I think the cost structure is great, obviously we know the customers, we know their furnaces, very, very well.

Okay. Last question, with, you know, you guys shutting some capacity here, shouldn't they go increasing 30,000 tons of capacity next year. In your view of the markets is becoming more cost competitive? How do you make that new 30,000 ton capacity at that one producer into the marketplace?

Yes, I think that will be very interesting. Obviously, you see our first move was going to be Monterrey. I guess all I will say is, I really like the cost structure that we have in Monterey. It is a very large plant, it is a spectacular machine. Great cost structure.

All right, thanks, Craig.

Thank you, sir.

Phil Gibbs, KeyBanc.

Good morning. How are you?

Excellent, thank you.

Good. Welcome, Eric, to the CFO ranks.

Thank you, Phil.

I had a question just in some of your longer-term assumptions, Craig, on the EBITDA power of the business, and that $500 million to $600 million. I know there is going to be a lot of moving pieces there, but the two that I am, I guess, curious about is, how you're thinking about pricing on the electrode side. Are we having to get back to prior peak levels, one? And then two, where would this type of thought process put your ES business?

Yes, let me answer the ES part first. As you all see, they are in a path here to do $255 million in sales. This is a business we've taken from kind of $80 million, $85 million to $255 million. So ES, we think ES has the potential out there, three, four, five years, three to five years, to be a $500 million business. So that is the way we look at ES.

In the case IN, remember our last peak, when things -- when steel was running at good op levels we were running at 90% plus, and the ES business was still a small business -- we did $369 million of EBITDA. So what we are saying is, and you've seen this in our IR deck and our IR road shows, what we have seen when steel recovers, and when the global economies recover, we will have back-integrated Seadrift, which we did not have in that $369 million EBITDA. We will have a much lower graphic electrode cost structure based on what we have talked about here today. And so we think the potential from IM is much greater the next upturn in the cycle, and then, like I said, ES will be a much bigger contributor.

Our team objective is $500 million to $600 million, and I think your takeaway of what we talked about today is, how driven we are towards that objective. We have a long track record of cost cutting, productivity improvements, quality improvements, and making tough decisions. And so that's the way I would frame these actions here today.

How would you frame it up, just as far as the benefit, all else equal you would get from moving away from P66 and using your own material? I think that is a little bit lost on me. I guess I understand, but if the price in needle coke right now is fairly competitive in the marketplace, and you've got your own internal costs, how you are passing that through? I'm just try to think about how to frame that up into next year as far as how the benefit would be? Because it's obviously a big part of your longer-term EBITDA potential.

Yes, I would look at it on two fronts, one on utilization rates, and one on quality. Utilization rate, now that we are done with the wind down agreement, looking forward I see Seadrift running virtually full out always. There is no need for it not to. So you have that steady high operating rate, and what that delivers in cost structure. On the quality front, we've talked a lot since we acquired Seadrift and what we've done on quality. We've talked about break throughs in super premium needle coke. We've talked about just the normal premium needle coke and the quality improvements we have made.

I will tell you this right now, our graphic electrode plants prefer to make electrodes out of Seadrift needle coke, than to buy on the outside. And that is just the statement on how far they have taken quality. So the other portion to our business model is, the Seadrift needle coke is a very, very good coke today, normal premium and super premium. We are putting a lot of R&D into that. That's continued out of our scientist and tarma. What I see over time is that gap widening, Seadrift getting a much better, more consistent needle coke. Like I said, my plant managers today want Seadrift needle coke to make electrodes. Don't send the others, I want Seadrift each and every day.

Okay, Craig. Lastly, at current levels of utilization, assuming your same 70%, 30% mix -- I think that's what you've been at, right?

Correct.

Melter/non-melter? That would mean that you would be a little bit long coke at 150,000 metric tonnes, assuming that 70% takes the real high -- the premium and super premium stuff. Do you need Seadrift coke for the non-melter piece of the business?

Yes. Remember, some of that 30% does use high-quality needle coke, so factor that in. And then Seadrift also has some third-party sales that are very attractive to it. So, I think your take away should be, Seadrift is going to run full-out, so that is very nice to have in our business model. And we remember, it's going to run full-out throughout the cycles. So we have an asset, large asset, second largest needle coke producer in the world. We are going to run full-out in the trough and going to run full-out in the up cycle. And then with the quality improvements, we think it makes a better electrode for us and we are the ones putting R&D and making breakthroughs in needle coke, so I think over time that sustainable competitive advantage will grow, and be very beneficial to our electrodes and our steel customers.

Thanks, Craig.

Thank you, sir. Phil, have a good day

Charles Bradford, Bradford Research.

Hey, Chuck. How are you today?

Good morning. Can you talk a bit about what you see worldwide in DRI output? Obviously, the new core plant has been delayed. What that's going do for the electrode use per ton of electric steel?

Yes on the electrode consumption front, we do not see a big change. There is a number of DRI units around the world that we service today. We have a lot of experience with putting electrodes into DRI applications. So when we look across all of the furnaces, and all of the records that we maintain on consumption and utilization rates, we don't think it's going to have a material difference at all, DRI or scrap.

What we do think it is going to do is, it is going to be very beneficial to EAF. And it's going to give EAF more scrap to melt, which is good, and where it's utilizing low-cost natural gas like the new core project, I think it's going to be very beneficial to EAF. And so we are very bullish on DRI. I think what new core is doing is outstanding, tapping into low-cost natural gas, and helping out their cost structure. And so, Chuck, that is the way we see DRI.

When we look at electric furnace output around the world, it looks like third-quarter was up about 2.3%. But if I take out China, it is basically unchanged. Is that basically the way you see it as well?

Yes, that is pretty much -- I mean, it is still a very, very sluggish demand out there. We see the EU in the bottoming process, I think that is very clear to a lot of people. So if the EU stays its course, it should return to growth next year. And then I believe, and I that many of our customers think that non- res construction in the US will have a much better year next year, if everything stays the course.

European Union was down I guess 6.1% for the third quarter.

Correct.

Some of the areas like Brazil and Africa were actually up.

They were up a bit. Middle East was up. So it is that kind of recovery. It is very uneven, and spotty, but if I look at the trends, we are getting closer to the end of this recession. It has been five brutal years, I think the longest our steel customers have ever seen and the deepest. But I think we are closer to the end. Next year I think could still be a transition year depending how -- I think the EU is going to take a while, but I think next year we will have a number of pluses for our steel customers in various geographies.

Thank you very much.

Thank you, sir. Have a good day.

Chelsea Bolton, Goldman Sachs

Hi, this is Sal again.

Hello, Sal.

I was a little late in your prepared remarks. Did you give us the utilization rates for Q3 for the electron business?

Yes, we were around 75%, Sal.

And what are you expecting Q4? Do you have any idea?

Yes, it's going to be higher. I think it will be into the 80%s as the transitioning that we're going through that we talked about. You will see us probably in the 80%s, even mid-80%s.

Okay. And on Seadrift, what utilization rate you have been running in 2013, 2012 and 2013? You say you'll be running it full-out in 2014 and beyond?

Yes. There has been some quarters where it is dipped down, so it has been in the 80%s, 90%s. From here forward it's going to be full-out.

Great. Now, I just want to get more understanding on the vertical integration. We went through this in the steel business, where many bought scrap companies and it did not materialize, probably because the purchase was done at the peak of market. It didn't materialize because in the end, you cannot subsidize steel mills by (inaudible) at cost of scrap. I just want to understand in Seadrift situation, my understanding is that you will still be using land in terms of economics for transaction between the two groups. And is Seadrift in this current environment, our current agreement, is it selling below the market price? Would you be able to get better pricing on the Seadrift side? That means that the third-party that's selling it right now, is that a discount to the market price at the moment?

No, no. It is all within the market price. We do an arms-length to our electrode business, so they pay market price, because I want them to stay competitive, I do not want them to get complacent. So it is arms-length at the marketplace. As far as the analogy with scrap, and remember there is only a handful of needle cokers, there's only two in the Western Hemisphere. The challenge with scrap is, that the barriers to entry are quite low and many, many people have bought shredders and set up shredders, and so that makes for a tough business model.

In the case of needle coke, there is only a few of them, and then the other big difference to always remind ourselves of, there is a big quality difference. Scrap is kind of scrap. Right? But in needle coke, a lot of technology, and what we are doing at Seadrift with our needle coke, and SSP or super premium and whatnot, has the ability to drive a sustainable competitive advantage. My electrode plants managers only want Seadrift needle coke right now. It's all the same price to them. They are indifferent on the economics because we charge them market. But since we bought it, since today, they want Seadrift needle coke now because it makes one hell of an electrode.

One last thing, what is the thought process regarding the capacity rationalization of you doing it. Is all because of the cost side that you are doing it? Or some factor was that in those regions there a lot more competition from Chinese and Indian's electrode? So it was becoming uncompetitive for you in that region?

No. It is not that latter at all. It is the cost side. Sal, we have worked hard on this. It is well-thought-out. We have prepared for this. The four plants are ready for this. They are large, they have been automated, they have got the majority of our capital, they have got yield improvement, so that they are ready to seize this opportunity. So it's all on the cost side.

Brazil, South Africa disadvantage on the cost side -- labor cost, electric cost, tremendous inflation in the last 10 years. And like I said, they do not have a lot of the other local raw materials that we need to make an electrodes, so a lot of items get imported there. When we compared to what we can do in Mexico or Spain, it is so much more cost competitive. And so it is driven by the cost side, Sal. We are making a step change improvement in our cost structure.

Are you going to do any write-down on these assets?

Yes. Let me let Eric jump in. Yes, we will do a write-down. He will give you the timing for GAAP.

Sal, the write-down will happen over the third and fourth quarter and the second quarter of next year. Again, GAAP requires that you accelerate the depreciation over the new lines of the assets. So to some extent, you are going to see the write-down come over the next few quarters.

You have any idea what kind of number we are looking at?

In our guidance we put of the cash and non-cash approximately $50 million, $52 million will come in the fourth quarter.

Okay, great. Thank you very much.

Thank you, sir. Have a good day.

Phil Gibbs, KeyBanc.

Phil, are you there?

Craig, I'm here. I had a question on the capacity utilization that you've provided for the fourth quarter. Does that assume your new base? Or is that your old basis? As far as, before or after these --

That's still the old basis. It is coming up, one to finish off the pipeline in the two plants that are being closed, and it's coming up in the other plants to pick up the future.

Okay. And how do we think about the year, your inventory position into year-end as relative to where it finished the quarter?

Yes, I expect it to come down a little bit more. I think you will see the trend is downward on that. We will be running down the inventories at the two site that are closed and so you will see that And then the end of 2014, obviously what we talked about in this release you will see a significant reduction.

Okay. Just lastly, Craig, just from a broad perspective, what was really the thought process for the capacity rationalization now, as far as today with global growth stabilizing and recovering? I think you talked a lot about the US potentially getting better next year, and Europe. Just want to see what it is indicative of? Is it indicative of the new capacity, or just longer-term market demand factors?

Yes, I don't think it is anything particular about today. Remember, we had to prepare the four large sites, so they've been, like I said, getting the majority of our CapEx, and so they have had to be prepared, our teams had to be prepared. We've looked at many alternatives, from moth-balling, to closure, and so this has been something we've analyzed, literally, on a regular basis, how to dramatically improve this cost structure? So there is nothing specific or particular about today.

One of the things we looked at as we studied through this was, how to do this and be ready to capture the upside? And so, we've also worked very hard on what are our debottlenecking opportunities, and drive those in deep detail. What is required? How much time will they take? What equipment? Can the team do it? Is the team ready? How long a lead time will they need?

And so there has been both ends of this, one that the transition out, prepare the four sites, and then also have the incremental increase at the right time. When demand recovers, ready to go. So our aim out of all this is not to miss one bit of the recovery. The aim is capture all of that recovery upside and do it in a much lower cost base.

Makes sense. Appreciate it.

Thank you, sir. Jody, we do not show anyone else in the queue. Is that it?

Yes, sir.

With that, thank you very much for joining our call, and I look forward to talking to you in February in our Q4 call. Thank you all, and have a great day.

Thank you. That concludes today's conference call. You may disconnect.