GrafTech International Ltd (EAF) 2013 Q4 法說會逐字稿

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

(Operator Instructions)

Thank you. I would now like to turn the conference over to Quinn Coburn. Please go ahead.

Thank you, Christy. Good morning, and welcome to GrafTech International's fourth-quarter and year-end 2013 conference call. On the call today is GrafTech's Chief Executive Officer, Joel Hawthorne, and our Chief Financial Officer, Erick Asmussen.

We issued our earnings release this morning. If you did not receive a copy, please contact [Marie Noir] 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 that is posted on our website at www.graftech.com in the investor relations section.

In particular on this call, we will be discussing, for the periods reported, a non-GAAP financial items of EBITDA and adjusted operating income. For your reference, a replay of the call will be available on our website.

At this time, I would like to turn the call over to Joel.

Okay. Thank you, Quinn.

Good morning, everyone, and thank you for joining GrafTech's call. Today we will take you through the fourth-quarter and full-year highlights, give an update of our rationalization initiatives, provide commentary on our 2014 outlook, and then I will open up the questions at the end.

Just a brief summary on our 4Q results. Looking at them, total Company sales were $309 million. EBITDA came in at $33 million, just slightly below our guidance range, and operating cash flow for the quarter was a solid $52 million. In our Industrial Materials segment, sales were $236 million in the fourth quarter. Adjusted operating income for the segment was $4 million.

As you know, sales and operating income of our Dust Materials segment has been significantly impacted by the pricing declines we experienced throughout 2013. However, we are encouraged to see that prices stabilized in the fourth quarter and remained essentially at the same levels as the third quarter.

In our engineered solutions segment, sales in the fourth quarter increased 19% to $72 million, compared the prior-year period. This is the third quarter in a row with sales over $70 million, and represents another record sales quarter for our ES business.

Adjusted operating income was $4 million in the segment, as profitability was below our target level, due to continued weakness in our industrial sectors we serve, as well as startup costs associated with added production capabilities for new products that are serving our growing markets.

In this segment, our advanced-electronics technology business continues to generate record revenues, and in our advanced composite materials, which is the acquisition we did a couple of years ago, had its best year in sales in the last 10 years.

Turning to full-year results for 2013, we achieved sales of $1.2 billion, about 7% below 2012. EBITDA came in at $144 million. Operating cash flow for the year was $117 million. In our Industrial Materials segment, revenue for the full year was slightly over $900 million, at $909 million, down about 11% compared to 2012, again driven primarily by lower graphite electrode pricing.

The steel environment continued to be challenging in 2013, with steel production in North America and Europe down about 2%. Global steel production, excluding China, was flat compared to 2012. We saw steel capacity utilization rates remaining below 80%.

As we navigated through this cyclically-low period in our industry, we made the strategic decision to close our two highest-cost graphite electrode production facilities to optimize our capacity. This will allow us to significantly improve our cost structure, enhance our global competitiveness. These initiatives are proceeding very well, and I will give more detail updating them in a moment.

While it was a difficult year, we continue to be optimistic about the long-term prospects for this business. Our value proposition, the quality of our products, the customer relationships we have, remain very strong. And our overall electrode volumes for 2013 were very solid.

Turning to our Engineered Solutions segment, we had another record sales year, finishing at $257 million, up 16% from 2012. This represents the third consecutive year of record sales for the business, which has averaged over 20% revenue growth per year since 2009.

Our continued focus on new product development, along with capital investments we have made in the recent years, has propelled this growth. A significant portion of this growth was driven by increased demand from our advanced thermal-management products for consumer electronics industry.

As a result of this increased demand, we opened our newest facility in Sharon Center, Ohio, which began production in the spring of 2013. The state-of-the-art manufacturing facility was a key expansion to allow us to service the growing volume requirements of our GrafTech thermal-management solutions customers in advanced electronics, such as smart phones, laptops, and tablets.

Also during 2013, we took several additional actions to strengthen our business. First, we took aggressive measures to reduce SG&A through headcount reduction, frozen salaries, and discretionary-spending cuts, which allowed us to reduce the spending by $25 million, or 18%.

We continued our emphasis on cost savings and productivity improvements using our LEAN Six Sigma framework, and we had the most successful year ever with regards to the number of LEAN initiatives, over 200, and the savings identified greater than $20 million. We maintain our investments in R&D at the appropriate levels, at the same levels as in the past.

We will continue to focus on new product development and commercialization. We believe our leadership in carbon-graphite material science is a key competitive advantage. Lastly, from a balance sheet and cash flow perspective, we were able to reduce working capital, increase our operating cash flow, reduce and manage our capital expenditures, and reduce debt.

Now turning to 2014, the overall economic environment is expected to improve somewhat in 2014, and the IMF projects global GDP growth of 3.7%. We see a stable-to-moderately-improving demand environment in our industrial end markets. Our plan for improving profitability and cash flow in 2014 has four key elements.

First, successful execution and completion of our announced rationalization and related initiatives from October of 2013. Second, continued revenue growth and improved profitability in our Engineered Solutions segment. Third, continued productivity improvements in savings from LEAN, Six Sigma and procurement initiatives. And lastly, moderate demand improvements in Industrial Materials.

Let me address each of these four key elements of our 2014 plan. First, rationalization plans. We expect the biggest driver of improved profitability in 2014 will be the successful execution and completion of our rationalization initiatives. Late last year, we embarked on a series of global initiatives to significantly reduce our industrial-materials cost base and improve our global competitive position.

These initiatives, including the closure of our two highest-cost electrode plants, located in Brazil and South Africa, as well as a machine shop in Russia, and planned reductions for corporate overhead, will all add significant value. We are pleased to let you know that these initiatives continue to proceed smoothly, and now are expected to be completed ahead of schedule, resulting in increased savings in 2014.

We now expect 2014 savings to be $50 million, up from the $35 million originally announced. Annual savings after 2014 are still expected to be $75 million. The overall cost of these initiatives is expected to be slightly lower than originally anticipated, down from $105 million to $100 million, $30 million of which is expected to be cash.

In addition, we now expect these initiatives, along with the completion of our wind-down agreements for third-party-supplied needle coke, to generate approximately $150 million of working capital improvements. That is up from the previous estimate of $100 million.

Approximately $75 million of that is expected in 2014. The remaining $75 million in 2015. We believe these global initiatives will significantly improve our operating efficiencies, enhance our global competitiveness, and drive our improved profitability.

The second key element of our 2014 plan is improved profitability and continued revenue growth in our Engineered Solutions segment. We are very pleased with the growth that we have sustained in this business over the last several years, and we expect it to continue. The investments that we have made in new product development and production are paying dividends.

We are focused on capitalizing on growing megatrends that utilize our products, our technology, and leverage our expertise in graphite material science. Much of our growth has come from our thermal-management solution products for advanced electronics markets. We expect this to continue as the market continues to expand and as we penetrate new opportunities with our products.

We also expect meaningful growth from the launch of our high-temperature furnace system products for the recovering solar market, LED market, and consumer electronics market. These furnace systems leverage GrafTech's full graphite product family of isomolded, molded, and extruded graphite, along with our soft and ridged installation products.

This will represent approximately $30 million of new business in 2014. About of which 70% is already committed, and we have solid line insight to the remainder.

Our advanced composite material business is also growing, and continues to play an important role in aerospace and defense industry. Again, one example, we are providing advanced composite material and propulsion components for NASA's Orion mission. The majority of our capital-intensive investments required for engineered-solution business have now been made, and we expect productivity and cost efficiency to improve as our volume continues to increase.

For 2014, we expect 15% to 20% revenue growth for the full year, and average operating income margins to be in the range of 10% to 15%. We expect the first quarter to be the weakest due to the typical seasonal demand for advanced consumer-electronics offerings, and then we expect the operating income to be similar to the fourth quarter 2013 in Q1.

The third element of our 2014 plan, improve productivity and savings through our GrafTech LEAN Six Sigma procurement efforts. We are now in the sixth year of our LEAN Six Sigma journey. Our teams around the world, at every level of our organization, are fully engaged in this process of driving savings and productivity improvements.

As mentioned earlier, 2013 was our most successful year yet for LEAN and Six Sigma and procurement projects, as we conducted over 225 events. We identified and implemented LEAN and procurement initiatives, expected to generate savings of approximately $20 million or more in 2014.

Fourth element, is a moderate demand improvement in Industrial Materials. Overall, we're quite encouraged about what appears to be an improving outlook in the steel industry in 2014. GrafTech steel customers are generally optimistic about 2014.

According to the World Steel Association, global steel consumption is expected to increase 3.3% in 2014. Steel consumption for geographies, excluding China, are expected to increase by 3.5% percent in 2014. The steel environment in Europe, which comprises 30% of our electrode sales, or thereabouts, is also improving, with the World Steel Association forecasting a 2% increase in steel consumption.

Leading indicators appear to be pointing to increased demand in the US, a key component in nonresidential construction, and several of our US steel customers are seeing improvements in this area for 2014. Improvements in nonresidential construction, generally the increase in demand, and electric arc furnace markets that we serve.

Based on these data points, we expect moderate EAF growth in 2014. With this improvement steel environment as a backdrop, we expect graphite electrode volumes to improve somewhat in 2014, in line with EAF growth. However, because of the steep decline in graphite electrode pricing throughout 2013, we expect that average prices in 2014 will be down about 8% from the average prices of 2013.

We believe the price for graphite electrodes will continue to stabilize in 2014, as evidenced by our order book, which is currently about 80% firm and in final negotiations with many of our customers. With the initiatives we have taken, we believe we are very well positioned to take advantage of what appears to be a somewhat beginning improving steel cycle.

We continue to capitalize our advantage backwards-integration business model by continuing our optimization of our Seadrift assets. Seadrift is now consistently making the best needle coke it has ever made, and with breakthrough of super-premium needle coke, we can now internally source the full range of our needle coke requirements. And most importantly, we continue to provide our customers with leading customer technical service, superior quality, and product innovation, something GrafTech is well known for.

To recap, the key drivers of profitability-improvement plan for 2014 are: successful execution and completion of our announced rationalization initiatives; continued revenue growth and improved profitability in engineered solution; productivity improvements and savings from LEAN and Six Sigma and procurement initiatives; and a moderately improving demand environment in Industrial Materials.

Turning to our guidance, based on these initiatives, we are targeting full-year EBITDA to be in the range of $150 million to $180 million. We expect EBITDA in the first half of the year to be in the range of $50 million to $65 million. In the second half of the year, we expect improved profitability as the result of realizing the full impact of our rationalization and related initiatives, along with the continued growth in our ES segment.

We expect second-half EBITDA to be approximately $100 million to $115 million. And we expect depreciation, amortization expense $90 million, excluding the impact of rationalization-related charges.

We expect our overhead expenses, as C&A and R&D combined, to be in the range of $125 million to $130 million. We are targeting cash flow from operations to be $130 million to $160 million. This includes approximately $30 million of cash cost for our rationalization initiatives.

We're targeting capital expenditures in the range of $100 million to $110 million. Capital expenditures will be somewhat higher in 2013, due to about $10 million of carryover from the prior year, and about $20 million for our Seadrift of business for one-time related safety expenditures, as well as the scheduled major maintenance event that is done about every five years.

These items will be partially offset by the $10 million of lower capital in our electrode business due to closure of two electrode plants. Lastly, from a balance-sheet and cash-flow perspective, due to the working capital reductions, increasing operating cash flows, we expect our leverage ratio, debt-to-EBITDA, to decrease to approximately 3 times by the end of 2014. In looking ahead to 2015, to be under 3 times.

In conclusion, we believe GrafTech is positioned as one of the best carbon and graphite material-science companies in the world. We have taken significant actions to further strengthen our backward-integrated low-cost model in Industrial Materials. We continue to see compelling long-term prospects for EAF steel industry that we serve.

Looking at that demand side, today, slightly less than 30% of the world's steel is produced using EAF. We believe the EAF-share total steel production will continue to grow for the long term. We believe that EAF production has better growth prospects in integrated production, driven by obviously increased scrap pools around the world, DRI environments, and greater manufacturer flexibility that EAF provides.

We saw an example of this EAF growth recently when one of the largest integrated steel companies in the US announced that it's planning to construct an advanced EAF steel-making facility to replace one of its existing blast-furnace facilities.

We estimate over the long term, based on continued growth of EAF, that graphite electrode demand will continue to grow at the annual average net growth rate of 2%. However, as you exit the bottom of cycles, growth rates tend to exceed that annual average as you are exiting.

On the supply side, we estimate graphite electrode and instrument manufacturing capacity utilization rates worldwide around approximately 70% in 2013. As a lot of you are aware, there have been many recent announcements of capacity rationalization in the worldwide graphite industry, and we expect that these activities will improve that capacity utilization.

Lastly, in Engineered Solutions, the investments we have made have driven double-digit revenue growth over the past four years. Engineered Solution provides us with a solid platform for continued growth, improved profitability, and diversification against steel cycles.

We have targeted long-term revenue potential of approximately $500 million, when all our capital growth investments are fully operational and utilized. We believe we are well-positioned for improved profitability in 2014, as well as long-term growth and value-contributing prospects.

That concludes my prepared remarks. Christy, I would like now to open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Luke Folta, Jefferies.

Welcome, Joel.

Hello, Luke.

Nice presentation.

Thank you, sir.

I guess I have some questions around, in terms of your guidance for this year, implicitly I guess based on a pretty big step up from the first half to the second half, and I think it seems like the cost cuts are obviously a big part of that.

I guess, firstly, when you think of terms of cash-cost reduction in association with these facility closures for next year, how do you expect that to flow through? How much of the $50 million is cash, and then how much of that's second half versus first half?

Great question Luke. As we've said, the cash-cost portion is about $30 million, and we expect that cash portion to be mainly in the first half of the investment. Predominantly, probably when you think of probably Q2 oriented.

I mean of the $50 million in savings, not so much the cost of it, but of the $50 million in savings, how much of that's cash and when did that flow through?

Yes the $50 million in savings that will flow through is part of the operating income in the back half of the year. Again, of the $50 million savings, predominantly it is cash, about $45 million of the $50 million is cash-oriented, and again you'll see that through the back half of the year.

Okay. And then in terms of the shipment side of it -- so you are calling for a flat-to-modest improvement in overall industry shipments for electrodes this year.

You've got two facilities winding down. Can you talk about what GrafTech electrode shipments are expected to be this year, and to the extent are you seeing any share loss in those regions where you're closing capacity?

Sure. Couple points there. Again, the first one I'll go through the share loss in the regions we're closing. Again, as we've said before, our team has done an excellent job in those regions, managing the shutdowns, managing service to the customers.

We see no real long-term impact, and again, Luke, I have been here, obviously on the commercial side, many years ago when we closed facilities, and we've been able to manage through that, so I see no share issues as we wrap down those facilities. You know, from a volume standpoint in graphite electrodes, again, I'd say when you look at our back-half volumes, and going into 2014, those back-half volumes were obviously higher than the first half of last year.

So we say moderately improved -- moderately re-proved from the levels of our back half. Obviously, with the shutdown of our facilities, we'll be operating at decent levels. But what you'll see is obviously in the first half, as we operate, you will see -- we are operating through the transition so our facilities are creating the right inventory and the right place to be able to service the customer, and obviously that will work through our back-half demand.

So would you say, in aggregate, you'd expect your shipment growth to be similar to that of the industry?

Yes, I'd say no doubt. Actually we talked about the 3%, 3.5% EAF growth we see overall. Ours would be similar to that, absolutely.

Okay. And then, I guess in terms of the range $150 million to $180 million in EBITDA for next year, can you talk about the factors -- what the difference is between the low end and high end, in terms of what the assumptions that go into that?

Yes. I'll start, middle-of-the-range, one of the factors that would drive us toward the top end would be a little stronger recovery than what we've seen on that demand equation that possibly could be out there from our moderate view to maybe it gets better, and let me just comment on that.

We are seeing in our order book, as I mentioned, 80% book, we are seeing when the customers are coming to us, they're asking for more volumes than they did the prior year. So that's what gives us the confidence that the market looks like it's improving.

So one would be maybe a little better than what we expected. Second one will be, which we will always drive and which we manage, is our obviously our LEAN initiatives, Six Sigma, cost reduction through the system, as we drive on that and the ability to bring those forward, because we have some great projects that pay off maybe 6, 9 months down the road. We'll look at -- how do we bring those in faster. And that will be another driver towards the top end.

You know, on the bottom end is going to be just two areas: does the market not modestly recover, and is some of the EAF growth that we've foreseen in those markets -- is maybe a little slower. Not that it won't be there, because I am confident that the markets we target, the products we have, is going to be there. If the market adoption sometimes, it does not go as fast as you would like. So that would be the other thing that would put us, slant us down toward the lower end of that scale.

This is all very helpful, Joel. One last one. In terms of Seadrift, you know we have gotten the impression that needle coke prices are going to be down pretty significantly this year, relative to what we've seen. Can you just talk about what margins could look like in Seadrift? And are you seeing any relief on the cost side there? We don't have much visibility into what [D-camp] prices are doing or what's happening on that side.

Let me summarize our strap-backward integration strategy first, Luke, and then I'll give you some color on it. Obviously, our strategy, from a graphite electrode source of raw materials, is to be 50% from our Seadrift facility, 50% from the market. We think that's a great hedge to have when you look at our backward-integration strategy over the cycle.

Obviously, depending on where you are in the cycle, the advantages are different, but that's our strategy. So what that means back at Seadrift is, we've said this publicly, 70%, 75% then of their capacity would be internally directed and a little bit then out on the open market for sale.

No doubt, when you are in the cyclical environment we are in, and you see on the graphite electrode prices, prices come under pressure, back in the needle coke, and we said last year prices were down anywhere between 12% to 13%, around 14%. I'd say going into 2014, the market is probably similar. Probably in the range of 10% to 14%.

Now, because of our inventory position that we are holding right now in the wind-down agreement, we are not actively out there buying in the market per se. We are watching and seeing what's going on. Obviously for the customers out at Seadrift, that buy from us, we do see that.

All that price is built into our guidance, Luke, that we see and what we think in that relative range. And again, I am still very confident, over the cycle, the leverage you get, from that edge of the 50% for our graphite electrode business, will be powerful as the market recovers.

We should assume that there is a chunk of -- that there is a fairly meaningful decline baked in in terms of earning from Seadrift year-over-year in 2014 because of that price?

Yes, Luke, absolutely.

Got it. Thanks, Joel. Good luck.

Thank you.

Edward Marshall, Sidoti & Company.

Hello, guys.

Hello, Ed.

So to continue on the Seadrift discussion, did you say that you're going to be -- essentially, I think you said you were going to use roughly 50% percent of your material from inventory this year. So I am assuming that's going to be higher-priced inventory and therefore a headwind for you. Could you quantify, from a cost perspective, what that drag would be on the margin?

Sure. Let me clarify when I said the 50%. That is our strategy of longer-term over cycle that we would -- 50% to our electrode business would come from Seadrift, and 50% would come from the market. With our position, then, so you are correct: what we will be consuming this year will be out of inventory from what we had, purchases last year.

Against that penalty of cost, as we kind of said, we'll see in the first half of this year because of the headwind as we move that through the system. That penalty could be -- and you will see again, that's why you see an uplift in the second half anywhere on the IM on a per-ton basis, margin basis, about $100 to about $150.

So, if we switch over to the order book, I think you mentioned that 80% is bulk. And you're seeing bigger order sizes, so I wanted to talk about maybe the spot market, and something that you haven't seen for maybe the last year, or maybe the last two.

And I am curious to find out first if it's reflected in your guidance, any spot business at all for 2014? And does the bigger order book size suggest that maybe spot won't be around this year in all?

Good question, Ed. Let me, again, from a spot business perspective -- typically we'd see, in an average year, 5%, plus or minus, that would come from the spot market as the market is increasing.

And I think that's going to be one of the challenges, back to that comment, that will get us to the upper end, when -- if the market starts to increase in the back half of the year, there may be some spot market opportunities that we'd take advantage of. And also looking at that, we would gauge very carefully what that would do for price as the market improves.

So we would measure that and say, okay, is that a good opportunity for price to increase for us? Or do we take it at current levels to fill the order book up and round it out for the rest of the year? Again, you are right, normally we'd see those things hit us probably late 2Q, early 3Q for the back half.

We look at utilization rates. I don't know if the best way to look at it is exiting 2013. I don't think that is because I think you run it full out, or pretty close to 80%, 85% or 90% on utilization. But maybe we ought to look for the blend of 2013, and look at the blend that you expect to run the business in 2014 at the end --?

No problem, Ed. Referring to needle coke, or graphite electrode?

Graphite electrode. I'm pretty -- you're with Seadrift I think you run pretty close to 100%. Is that right?

You are correct on that. I wanted to make sure we clarified on Seadrift we run full, and will continue to do than in 2014. Graphite electrodes -- yes, you're right. What we publicly said about the capacity and bringing the capacity down, the 255, bringing it down to 195 in 2014, you will see us running at high operation rates, definitely over the 90% plus, if you just do the math of the capacity coming out in 2014.

So again those four remaining plants, and that's some of the leverage of cost savings for the system that we're going to take advantage because they are low-cost, we will operate and run those 90% plus.

Okay and what was the blend for 2013? Roughly?

2013, again, because of where we are -- 255 -- you're probably closer somewhere in the mid-70s to high-70s on average. Throughout the year.

And then looking at the rationalization that you're seeing, in the industry as well as yourself, first: you think the industry still has capacity revisions to go? Or do you think that we've seen the bulk of it for now? And I guess secondly, have you identified, have you considered identifying addition facilities of your own?

Let me address the first one, industry-wide we see, which again, relates to the demand equation where we see demand short-term long-term. In the current cycle, what we've seen is probably with our announcement, we've seen -- obviously I've seen [El's] announced as public -- in China we have seen rationalization from the mode that because of their distressed financial situation, the facilities have stopped running because they have not gotten the financing from the government that was sustaining them.

So we have seen, you are right, somewhere in the range of overall capacity, 10% of the overall global capacity, being rationalized out here in this period. Is that enough?

Again, I think from our standpoint, we think GrafTech is positioned to sell very well at the platform we have. The four assets that we have running are all low-cost on a global basis, and we don't foresee anything in the future that says we're going to go below the four. We are very pleased with the four we have, and the backward-integration strategy we have with Seadrift.

I think the financial situation of the industry will be up to those players under financial distress. Some of our players are pretty highly leveraged, unlike us, as we've talked in our discussion, the balance sheet is in great shape. The cash flow generation from this year and next year is looking good. So we feel we are very well-positioned. For some of our competitors in the space that's not necessarily true. They're a little highly leveraged. So I think time will tell.

The issue there is, there's not many multisite plants. Most are single sites. So the financial distress will be the issue that they'll have to face.

I guess that's a good springboard to my final question. Looking -- and I don't want to get ahead of ourselves here -- but when you look at what GrafTech has historically done, especially in the troughs of the cycle, and its pursuit of acquisitions, you've talked about decent free-cash generation, and a balance sheet that can support it. When you think about acquisitions, is that something that's still in your forefront of your mind for growth, and maybe consolidation in the industry as a whole?

Yes. Let me say a couple things. I think you see from our past history that may give you an idea for the future. And again, first was that free-cash flow. Our focus will be making sure we maintain the right leverage ratios in the business, making sure we're very comfortable with that, but if the right acquisition comes along and looks very good to us, we will not hesitate to weigh that, the value that may bring.

Again, examples are obviously Seadrift and St. Mary's, some very strong acquisitions we made last time around this period, or the trough period. And also smaller acquisitions that we made -- ES business -- our important facility in Pennsylvania, FMI up in Biddeford for ES, both are running full today, big contributions to ES's strength. Paybacks have been in the 2- to 3-year period, so we are very pleased with that.

So, long-winded answer to say -- we're focused on the balance, we make sure we maintain the right leverages we need, but yes, if the right opportunity comes up, we will be open and view those and determine if it's the right time.

Okay. Thanks very much.

No problem, Ed.

Our next question comes from the line of Phil Gibbs, KeyBanc Capital Markets.

Good morning.

Good morning, Phil.

Give me some color on when you'll fully call a desist-production in the facilities you target to close this year? (multiple speakers)

Right now, our timing is, as I said in my comments, we are ahead of schedule. And again, I can't complement the teams that have been managing that and the great work they have done.

We are on track to stage that production down, so again, various components of the operations have already been shut down as you walk the product through, so to give you an indication, as you know, our production cycle is three, four months, so you can look at it and say probably as we get into 2Q, early 2Q, the operations have been probably fully shuttered.

Okay. And the predominant step up in the EBITDA, second half, is related to the cost savings and then just the seasonality, essentially, for you guys?

Absolutely. Predominantly our step up, from first half to second half, is the rationalization. You'll see a little bit of that in 2Q. Again, as we just mentioned with the facilities being shuttered, April we will begin to see a little bit of that in 2Q, and then in IM, the drive in the back half, that step up is going to be driven by the cost savings of the rationalizations.

And for the seasonality, you're right, that's more in the ES ramp as we've said. Q1 tends to be the weakest, and then the consumer electronics side, we see strong 2Q, 3Q, and 4Q efforts. So you'll see some of that seasonality also built-in to the second half.

And just two things I wanted to clarify: your 15% to 20% growth in ES topline. How much of that, again, is new products, versus just market growth?

Actually, I mentioned in my comments that there's $30 million of new products, right? So again, we are here at 257 this year. That $30 million is all new products. So I would say that most of that growth is, again, our implementation of new products into the marketplace and the adoption of those products.

Where do you see the solar side of the business? I know that was strong a couple of years ago, and then it went away, and where do we stand on that?

Yes. Again, looking back in that period, that part of the business, which again to show you the strength of our ES business, used to be $50 million to $60 million in revenue in the ES segment, which in the last couple of years has been under $5 million, been very small.

So what we see is not a recovery growth of solar. And what the recovery is, for us, is we make graphite components that are reusable. And in those furnaces they get reused --and it depends on the customer -- anywhere from a year to two years, depending on what furnace it is and the part in the furnace.

We are starting to see the replacement-part elbows come to market. And again, we think that will hit us a little bit here in 2014, be good trajectory in 2015 as those furnaces come online. So again, well-positioned for that solar recovery, and again, also we are very well-positioned LED technology, which is the Sapphire technology, what we see in LED and other markets, we see that potential, not only in 2014 as I mentioned, but carried into 2015 also.

I appreciate all that. I just have one quick one. And it's another one of clarity, so I apologize if I missed it. But you made comments on electrode blended realizations for this year. Any comments you made on needle coke?

Yes, I just mentioned -- and again, that needle coke pricing is down. We said, again, that we -- because we're not active in the market because of our inventory position, Seadrift does have some customers with, which aren't finalized yet, so we're working through that and I just gave my view of what we see from the market, was that 10%, that 15% range is what you'd see in needle coke.

But again, in our standpoint, we're not finalized with our customers yet. We're still working through that. And again, from our buying standpoint, we have the inventory that we will be working off that will hit us in the first half.

Thanks a lot.

Yes, no problem, Phil.

Our next question comes from the line of Dave Katz from JPMorgan.

Hello. I wanted to come back to the comment that you'd said on acquisitions, and tie that in also to your comment on leverage.

You said, obviously, that you expected leverage to go down to three turns at the end of this year, and then (inaudible) thereafter, but yet you wouldn't step away from an acquisition if a compelling one came along. How do you reconcile that the two? Would any acquisition be done through stock? Or do you anticipate possibly you taking on more debt?

Yes, again, my comments in general were, when you look at where we are today, our focus short-term here is obviously the cash generation and positioning us on the balance sheet to be in a position if the right acquisition comes.

Obviously, the view of using debt or equity depends a lot on what that acquisition would look like. So it would be hard for me to speculate at this time any matter of what it would be. You've seen us in the past, obviously, at past acquisitions, use a combination of debt and equity.

You have also seen us in some of our other past acquisitions, we've used all cash, depends on the size and the magnitude of it. So again, our focus here in 2014 is to reduce our leverage, as you said, by the end of the year. My comments were, target to get down to the three times, keep our leverage ratio around 30% percent, then evaluate if opportunities come.

And that leverage target of 30% is a gross target?

Yes, the range would be 25% to 35%. That range is going to bounce around quarter-to-quarter, but 25% to 35% would be the target.

Okay, thank you. And then, obviously, in the past, the Company had a view that pricing of its products would follow a better path than the pricing actually has, for a variety of reasons. What gives you confidence, when looking out now, that your present outlook is not overly bullish, or I guess on the under hand, overly bearish?

Sure, great question. I can tell you this: in our book, 80%, where we're booked in the 80%, as we mentioned, it has an average decline year-over-year of 8%, so we have not built in price depreciation.

When we look at where we exited the year, we are fairly confident in what that book looks like on a price front, so I do not think we are being over-optimistic on price at this point in time. We are being a very measured approach, understanding the market dynamics in 2014, and again, [sites-down], very comfortable our pricing expectations we have, in that guidance, are very reasonable based on what I am seeing out of the order book.

Okay. Thank you very much.

Okay.

Your next question comes from the line of Michael Gambardella of JP Morgan.

Hello, Mike. Congratulations on your new role.

Thank you.

I have a couple of questions. One on needle coke and your Seadrift operations. You said we've seen needle coke pricing down now somewhere around 14% in 2013 and 14% again 2013 and 2014.

This is a product that I believe does not have a substitute threat. It's a consumable product in the graphite electrode business, and I think you've been saying that the demand for the product has been fairly flat to slightly up last year and this year.

If you have a product that has no substitute threat, the demand for the product is flat to slightly up in 2013 and 2014, why has the price gone down 14% last year and 14% this year?

Mike, I'll give you my view, Mike, and again, positioning where Seadrift is in the global market, we represent maybe 10% to 15% of global capacity of the product. You are right about the product. No other substitute for it. There's two types: there is needle coke, as you are very well aware of, and the pitch cokes that are produced.

When you are in a downdraft, like we're seeing the competition, much like in electrodes, maybe tends to overreact to the market environment. And our view would be, yes, there has been an overreaction of price in that segment, based on what we see and what we believe is a fair value for electrode pricing.

Mike, as you are aware, last August we tried to implement a price increase ourselves that was -- which we're still working on. As I said, for our commercial customers, we're not totally concluded at this point yet. And so again, Mike, it's a great question. All I can do is control the environment that we operate in, both internally with our needle coke in the market, and also externally, as we try to view our external customers.

So again, [it is an area that] you are spot on that we are kind of curious our self what has caused such a large price drop.

But what I don't understand is, you mentioned the word downdraft in the market, but then I think last year you said that graphite electrode demand would be flat to slightly up, and I think you are saying basically the same thing this year. So if demand for graphite electrodes is not going down, and possibly going up, and there's no substitute for needle coke, why is needle coke falling like a rock in pricing?

Again, when you balance where they are in their capacity versus supply and demand, they did feel that same downdraft, right? We go back two, three years as the market's unwinding, coming down. They feel that same thing. As the market recovers, they are doing no different than what we do with electrodes. You try to balance the supply-demand equation, which will determine if you are able to have the price and economic value out of the market.

So my assessment would be: utilizations for needle coke around the world came down pretty low for a couple reasons, right? And we've talked about this inventory of coke throughout the global system, and how the graphite electrode producers are managing that with their needle coke supply. That created a little bit of a jerky reaction of the market, that's being worked through. And again, as the market comes back up, you are seeing -- and that's what we're trying to gauge, that needle coke will be better balanced with supply and demand.

Are you aware of any new needle coke capacity that could come on in the world?

When we look out there in the world there is, again as I say, there is needle coke capacity and pitch coke. You can use both, and there is some capacity that's been announced, mainly over in Asia, that is some of which has come on and started up, some of which is still in the process of being built.

That capacity, by our estimates, is somewhere around -- our best guess, depending on what type of coke it is, at 10% add to the market overall capacity, so somewhere around, again, 100,000 tons that is out there coming on, some of which is on, and some of which we see in the future. Again, our long-term view is, that will be absorbed as the recovery happens again from this low cyclical position that will be absorbed as the market increases over the next couple years.

And then last question on your ES guidance. I think you mentioned $30 million of new sales, new product sales for 2014, so that alone I think accounts for about 12% sales growth in the segment.

So on your existing ES business in 2013, going into 2014, you're only expecting about a 3%, as high as 7% growth rates from existing business. Could you comment on that level?

Sure, absolutely. In our business, or what we call our Advanced Graphite Materials business, which services the industrial markets, which is very similar to obviously the steel business or graphite electrodes supply, we're seeing that business kind of in the same mode, right? So it is still at a trough mode in those chemical markets, metallurgical markets that we serve around the world.

So we don't see much growth. Again, same comment there, modest growth. Where the other growth will come is in our AET business, our thermal management business, we do continue to see growth there of their product lines as they bring into the market. So again, that majority of that incremental growth will probably come from AET, and a little bit from the industrial market improvements in the AGF.

And then, just on the ES business -- again, your guidance -- you mentioned that 70% of the $30 million in new sales are pretty much committed already, but overall, in terms of the big jump in margins that you are projecting in your guidance for ES, you know 10% to 15% margin, how much of that do you feel is really locked in?

Yes, when you look at that, obviously from the revenue side, I feel really good about that. The biggest component of that will be, as we have said the last couple quarters, is startup costs, inefficiencies related to the new products as we roll them out.

Throughout last year, as I mentioned, we brought in Sharon Center facility. We have other product developments. Within the system, a lot of that is behind us. You may see a little bit here in the first half as we continue to ramp up in Q1, as we go to Q2, but then that should be behind us. And those assets will be operating and functioning, so by the time we get to that second half, I feel pretty good about it.

So again, if you looked at second-half ex-rated ES operating-income percentage was 6%, 7%. I would say the incremental improvements to the midpoint of the range -- half that's going to come through the growth of the revenue, and the other half will come in this efficiency improvement that we see with our assets.

Okay. Thanks, Joel.

No problem, Mike.

(Operator Instructions)

Your next question comes from the line of Charles Bradford of Bradford Research.

Hello, Chuck.

Hello. A couple questions regarding weather. Have any of your facilities in the US, maybe St. Mary's or whatever, been impacted by this really fun winter we've been having?

(Laughter) Short answer is no major impact to the operations. But you know, of course it has that impact on how cold people are standing out there in the operations. But we haven't seen any major impact, any of our facilities here in the US that have been impacted by the weather.

Okay. One of the integrated steel companies in the US apparently has just had another of its blast furnace problems, and they are talking about increasing their production at an electric furnace-based operation in Butler. Have you seen any impact from that at all?

You know, again, you see minimal throughout our whole system at one site. Again, we think long-term, Chuck, that is still something that will drive the EAF operating rates as more companies see the efficiency of EAF. But short-term, not a major impact to again, the guidance that we talked about. But we see that throughout the world quite a bit, people making decisions about -- Run EAF or the blast furnace.

We're also hearing from some of your customers, or some of the buyers of electrodes, that they are paying between a 10% and 12% lower price right now than they paid in the first half of last year. Does that square with your 8% at the end-of-the-year decline?

Yes, Chuck, that was our average year-over-year, so if you are comparing to the front half of the year, your range would be somewhere in the range you actually just talked about: 10% to 12% to 13% in that front half of the year, and then the back half of the year, if you are comparing to that, it would be lower, probably closer to 5%.

So that's why we said -- Look, the average year-over-year would be 8%, but you're correct, depending on what time period you're comparing to, you'd see very similar numbers to what you said for a first-half comparison. The other one, Chuck, would be geographically, also, depending on where you're talking geographically. Around the world prices also move a little bit different.

Can you talk a little bit more about the pitch coke? Because I've talked to some of the coke makers in Asia, and they claim to have been making a lot of progress in the use of pitch coke, which apparently requires more time in the furnace, and therefore potentially more energy usage, but in the way they -- I guess it's the curve of the heating cycle, they've been able to moderate that issue.

What is the, or what can you tell us about the cost differential of making electrodes using needle coke versus pitch coke?

Let me answer it this way: you're absolutely right. Again, the competitors out there, including ourselves, we can utilize needle coke versus pitch coke. Obviously our view is right now the cost advantage of needle coke in our production process, the cost efficiency, the quality of the electrode in the marketplace, we feel gives us a competitive advantage.

We continue to look at it, you're right, like in any business, people have made some improvements in pitch cokes, but again, long-term, we still see the value of the structure of the needle coke and that quality to the benefit that brings to you there is a lot of ways to measure the benefit. Obviously, on the cost side, there is a benefit of the cost, because you're right, if you use pitch coke, the process is longer, more energy-intensive than if you used needle cokes.

I put that gap somewhere, again, in the single-digits percentage when you compared it to. The bigger one for us is the value on the furnace. The consumption utilization of a pitch coke versus a needle coke. And we are aware that some of the competition has blended technologies out there a little bit.

Thank you very much.

No problem, Chuck, thank you.

Your next question comes from the line of Sal Tharani of Goldman Sachs.

Hello, Sal.

I want to ask a couple of questions. How are you? And welcome to this position.

Thank you. I'm doing fantastic, and thank you.

Okay. First is, I wanted to make sure that you said that Seadrift had run full out last year? Is that what you said?

Correct.

I thought that we were told in last conference call that one of the benefit of winding down of these contract third party that Seadrift was running at 80% and it would have a high utilization rate, which is going to help the fixed-cost absorption. I thought that it was not running at full-out last year.

Again, when you look at utilization rates for the full year of 2013, and I'll go back over a couple of years, right? So go back to 2012. Compared to its capacity, we are running, again, full-out in 2012. In 2013, as you came through, and actually running full-out, we're running full-out through the system, adjusting for the P66, the wind-down agreements they have in place.

Again, in various quarters, in the back half of the year coming into this year, we are at very strong levels coming into this year. So again, the average overall -- to answer your question for 2013 -- we were running very full. In 2012 is when we were probably at a lower level that you may be remembering we talked about. But definitely in 2013 we were running at a full level.

Okay great. I wanted to understand about the guidance. Of all the companies you've covered in the fuel-supply chain, you have generally a better outlook because you tend to book your orders at price and volume early in the year, and right now you're at 80%.

But if I look at the last three years' guidance, and compared to what was reported in the end in 2011, 2012, and 2013. And let's take at the midpoint of the guidance, your reported numbers, in the end, came out about 18% average lower, and also even the -- if I look at that bottom end of that guidance, your reported numbers were about 12% lower than the bottom end of the guidance of last year.

I'm just wondering how comfortable you are, especially now you're talking about the second half loaded, how comfortable you are as considering that 80% of your electrode business is booked, that this guidance is conservative?

Sal, great question. Let me give you two things there. One is, when your prior guidance, and you're trying to see where the cycle is bottoming out, that's always a tough thing to do when you're looking ahead a year. So back to your comment about 2011, 2012, and 2013, I think as an industry, as a business, we're trying to see where it was going to cycle out and bottom out and not knowing that

So, that guidance is trying to figure that out. That's always difficult early in the year, which I believe, if I look at the numbers you are saying, that was our first guidance out of the box at the first part of the year, where also we talked about the booking rates were much lower, just as an example, last year at this time, we were 60% booked versus 80%. So, first part of the question.

The second part -- because we are 80% booked, also seeing where our book is, and seeing what I'll call more normal, and if you remember, Sal, recall -- I worked a lot of years leading the commercial effort on the IN side, so I'm very familiar with the booking process and what we do. Seeing a more normal booking process kind of points to us that things are starting to normalize from the supply-demand booking side of the equation.

There is always the risk, Sal, of what I see today, and what could happen, that the market changes, but from what we see today, from our order book, from interactions with our customers, feel pretty good about that.

The second part of that guidance is, it is driven by the cost-initiatives improvements of our rationalization. So I'm not relying on any price increases. I'm not relying on any improvement of market demand. The main driver behind that first-half, second-half improvement is in the efforts where you control the rationalization efforts cost improvements within our system. So for me -- confident in that, as I said, ahead of schedule, team's doing a great job, confident on the execution of that.

Great. Just quickly, what utilization rate at the electrode, you are assuming in your -- is embedded in your guidance?

You know, when you look at our guidance, and again, what we said for capacity -- the 255 we said publicly, taking the 60,000 tons out takes us down to 195. If you look at what we said last year about the utilizations were of the overall industry in our 10-K, and assuming moderate increases, you'd see we would run 90% plus utilization of our graphite facilities for the four this year.

Thank you very much.

You're welcome, Sal. Thank you.

I will now turn the conference back over to Joel Hawthorne for closing remarks.

All right. Thank you, Christy. I want to thank all of you for joining our call today. On behalf of the 3,000 men and women of GrafTech, thank you for your interest and participation on our call. I look forward to talking with you at the end of the first quarter. Have a great day. Thank you.