GrafTech International Ltd (EAF) 2014 Q4 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference operator today. At this time I would like to welcome everyone to the GrafTech fourth-quarter and year-end 2014 earnings call.

(Operator instructions)

Thank you. I would now like to turn the conference over to Ms. Kelly Taylor.

Thank you, Kimberly.

Good morning and welcome to GrafTech International's fourth-quarter and year-end 2014 conference call. On the call with me 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 didn't receive a copy please contact Marie Noar at 216-676-2160, and she'll be happy to fax or email a copy to you.

As a reminder, some of the matters discussed during this call may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Please note the cautionary language about our forward-looking statements contained in our press release. That same language applies to this call.

Also, to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release 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 the non-GAAP financial items of EBITDA and adjusted operating income. As noted in our press release, we've updated the segment operating income presentation based on the new management and operating structure. We have revised the allocation of corporate R&D and other expenses to present them separately.

For your reference, a replay of this call will be available on our website. At this time I'd like to turn the call over to Joel.

Thanks, Kelly. Good morning, everyone, and thanks for joining us on the call today.

Today I'll review the Company's fourth-quarter and full-year 2014 financial and operation highlights, provide an update on the rationalization initiatives, and provide commentary on our 2015 outlook, then open the call up for questions after that.

Looking at our 4Q results, total Company sales were $260 million, a decrease of 16% year over year, but flat with the third quarter of 2014. EBITDA, excluding the special charges, came in at $37 million, an increase of 13% year over year, and a more than 55% increase over the third quarter of 2014. The significant EBITDA improvement was driven by the actions the team has taken, and we've implemented and are executing on some further cost structure and increased efficiency across our global platform.

Operating cash flow from the quarter was $38 million. And available liquidity on our credit facility year end was more than $300 million. This excludes the announcement we made this morning on the credit facility amendment and the new term loan.

Turning to our segments, in our Industrial Materials segment, sales were $206 million in the fourth quarter, a decrease of 13% year over year and essentially flat with the third quarter of this year. In the fourth quarter we recorded a $76 million non-cash impairment charge against the goodwill associated with the 2010 acquisition of Seadrift, as explained in the press release. We continue to believe needle coke serves as a valuable differentiator in determining electrical quality, and the backward integration of Seadrift provides supply chain synergies and economic advantages, which we will continue to optimize.

Adjusted operating income for the segment was $22 million, as compared to $14 million in the fourth quarter of 2013 and $12 million in the third quarter of 2014. Graphite electrode volumes were 47,000 metric tons in the fourth quarter of 2014, as compared to 50,000 metric tons in the fourth quarter of 2013, down 4% year over year and essentially flat with the third quarter of 2014. Our graphite electrode facilities ran at an average operating rate of 86% in the fourth quarter, as we have reduced production rates to efficiently work down and reduce our inventory.

Our needle coke facility continues to run in excess of 95% of capacity, essentially full. As you know, graphite electrode sales have been significantly impacted by a pricing decline we experienced in 2014. In the fourth quarter of 2014, average graphite electrode prices, excluding currency, were down 8% year over year. Despite this very challenging global steel and graphite electrode market, our team increased Industrial Materials' adjusted operating income 50% year over year due to the rationalization initiatives and business model improvements.

Turning to our Engineered Solutions segment, sales in the fourth quarter declined 26% to $54 million compared to the prior year. Adjusted operating income was $4 million as compared to adjusted operating income of $7 million in the third quarter of 2013, but higher than the third quarter of 2014.

Weak demand from one of our major customers for products in our advanced consumer electronics business persisted into the fourth quarter. However, aggressive cost reduction efforts led to improved profitability, as I mentioned, compared to third quarter of 2014.

Turning to the full year of 2014, we achieved sales of $1.1 billion, about 7%, or $81 million below 2013, primarily driven by lower pricing in both our segments. EBITDA after special charges came in at $121 million compared to $144 million in 2014. The drop is slightly over $20 million despite the steep revenue decline of more than $80 million on price as we increased volumes. Operating cash flow for the year was $120 compared to $117 million, reflecting the effect of working capital management.

Looking at the Industrial Materials segment for the full year, revenue for the full year was $909 million, down approximately 8% compared to 2013, driven primarily by lower graphite electrode pricing which, on average, declined approximately 10%, excluding currency. Adjusted operating income in this segment was $63 million, or 7.5% of sales, down from $76 million, or 8.4% of sales in 2013.

Global and EAF steel production, excluding China, was essentially flat compared to 2013. But when comparing the first half of 2014 to the second half, we saw a weakening of production. Global steel capacity utilization rates declined to 76% from 78% in 2013 and exited the year at approximately 73%. Our estimated global graphite electrode demand was roughly flat year over year, but we experienced a similar demand softening during the course of the year.

Our graphite electrode volumes rose 4% to 188,000 metric tonnes shipped. Our graphite electrode facilities ran at an average operating rate of 89% in 2014, as we reduced production to work off inventory and reacted to weaker demand in the second half of the year.

In our Engineered Solutions segment, sales decline 5% to $245 million versus last year. 2014, as we've mentioned many times throughout the year, was negatively impacted by a slowdown in demand of our advanced consumer electronics products.

Adjusted operating income was $19 million, or 7.9% of sales, as compared to $26 million or 10.2% of sales in 2013. This reduction was largely due to lower than expected demand and pricing pressure in our advanced consumer electronics product line.

Despite the lower than expected demand impact on our recent results, it is important to note that we have strong customer relationships in our advanced consumer electronics market that we serve and we will continue to as we move forward. We continue to diversify our customer base and the product offerings to other end markets. Of the top 10 advanced consumer electronics vendors, we have provided product solutions to all in the past and currently supply to over half of them.

Moving forward, we will work to leverage our core competencies in the graphite materials science in our new innovation and technology center, where currently today we have more than 20 projects in active developments that will provide us with sustainable long-term growth opportunities and diverse high tech markets. I am extremely pleased with the progress our team continues to make on our cost savings programs and our ability to generate and increase positive cash flow as we navigate through these industry challenging times.

During 2014 we took numerous actions to further strengthen our Business. We delivered approximately $50 million in cash savings, ahead of plan during the year as part of our announced ongoing Company-wide cost savings program. This enabled GrafTech to achieve total annual cost savings of more than $120 million, approximately $100 million of which are cash savings, which represents 10% of annual sales, which directly improved EBITDA.

We also optimizes the graphite electrode manufacturing platform by rationalizing the two highest costs at manufacturing sites, including significant manufacturing head count reductions of 20%, which we also reduced annual maintenance expenditures by approximately $10 million for these two plants. We simplified the operating and management structure to decentralize the organization, accelerate decision-making, and improve responsiveness to changes in customer demands and we're seeing the benefits of that.

We redesigned the research and development function to accelerate innovation for new product development and commercialize introduction and to maximize the efficiency of development costs. We downsized corporate functions, including head count and other SG&A, achieving a reduction of approximately 20%. We have rationalized and streamlined under-performing product lines.

Also during the year we increased borrowing capacity by $125 million in the past 12 months, excluding the further impacts of the financing initiatives that we announced this morning. We reduced inventory significantly, generating approximately $80 million in cash in 2014.

And, lastly, we continue to develop new innovative products in Engineered Solutions, which contributed to approximately 30% of the revenue in that segment in 2014. And we will continue to do so with the intent of providing long-term value creation for GrafTech and its stockholders.

Looking at our balance sheet, our financial position remains solid. Our debt to capital ratio at the end of 2014 was 35%. However, due to lower EBITDA over the past year, our debt to EBITDA ratio is 4.4 times, which is higher than our targeted level. This will continue to be a focus for us in 2015.

We're very focused on driving cash flow and lowering our debt to EBITDA ratio to our target of less than three times. To that end we've made excellent progress in our goal of reducing working capital. At the end of the year we had reduced inventory by nearly $80 million. We expect to continue to decrease working capital requirements as we reduce inventory levels in 2015, providing additional liquidity as we move throughout the year.

In addition to lower working capital, we expect to meaningful reduce our capital expenditures in 2015 from 2014. With the successful closures of the two graphite electrode facilities I mentioned, our maintenance capital in 2015 will be reduced by $10 million. We continue to reduce capital expenditures to minimal levels, targeting $60 million to $70 million in 2015 and focusing on maintenance and safety requirements.

At the end of 2014 we had approximately $345 million of availability on the revolving credit facility, of which we utilized approximately $45 million, leaving approximately $300 million of unused borrowing capacity. As you likely read this morning in our announcement, we just completed an amendment of our credit facility, which provides additional liquidity and flexibility. In addition to that flexibility, we issued a new $40 million term loan to be used in connection with the repayment of our senior subordinated notes, which is delayed until the October period. As a result, we have almost $400 million of unused borrowing capacity, providing ample liquidity to repay our current debt maturity and comfortably fund our ongoing operation and initiatives.

Now let me turn to 2015. The overall economic environment is expected to improve moderately in 2015. The IMF projects global GDP growth of 3.5%. GDP has a historical tie to steel production.

This translates into modest growth of global steel production of 1% to 2%. The global steel industry is suffering from overcapacity which, combined with slow demand growth, has put pressure on steel industry profitability, resulting in supply chain pressures.

In North America our steel customers are cautiously optimistic about a second half recovery in 2015. However, there are concerns about the current high level of imports, reduced demand from the oil and gas-related service sectors, and the instability of global growth in certain sectors. Outside of North America, customers are generally less optimistic as weakness has continued in basic material sectors.

Our 2015 graphite electrode order book continues to be built. We are approximately 60% of our targeted 2015 order volumes confirmed. Based on our current order bookings, customer demand expectations are a weak first quarter due to customer destocking and lower utilization rates due to demand fall-off.

We expect graphite electrode volumes to be down for the full year of 2015. We expect that average prices in 2015 will be down from the exit price levels we saw in 2014. Based on our current order bookings, we'd expect average graphite electrode prices to decline approximately 7% to 8% in the first half of 2015, excluding currency, compared to the first half of last year.

Foreign exchange rates, especially the euro, have experienced weakening against the US dollar, placing further pressure on our revenues in the short term. Over time, and as we move in to the second half of the year, the negative impact of the exchange rate fluctuation on revenue is offset by a positive impact of operating costs due to a significant portion of our manufacturing costs being euro-denominated. It's the timing that you'll see flow through the first half to second half results.

Also, pricing for products in our Engineered Solutions segment are under pressure and were down year over year, offsetting the volume growth we expect. The Company's previously announced cost savings programs remain on track, and we are anticipating to deliver $50 million in cash savings to benefit 2015 EBITDA results, which will offset the lower pricing I just mentioned.

We do expect to benefit from the falling oil prices in our needle coke and graphite electrode business. Lower graphite electrode operating rates driven by plans to reduce inventory are expected to largely offset that benefit over the near term. To put this in perspective, we expect to purchase approximately 1 million barrels of decant oil this year on a net basis after byproduct sales.

Given our current inventory position and the time it takes to produce needle coke and graphite electrodes, we do not anticipate the benefit of the lower costs to impact our results until the second half of 2015. Largely offsetting this benefit in 2015 will be the one-time negative impact of running our plants at lower operating rates, which will be slightly below the fourth-quarter rate in order to reduce inventories.

In 2015 we'll focus on five key initiatives. First, as always, customer focus: we continue to believe that delivering differentiated products through our quality, service, and reliability are key in all our product lines and businesses.

Second, we will continue leveraging the backward integration and capacity optimization of Seadrift and our graphite electrode facilities. We plan to use 85% of Seadrift's production internally, representing about two-thirds of our internal requirements.

Third, portfolio optimization -- we will continue to rationalize under-performing product lines to focus on higher-margin business. As an example, we are reviewing plans to further optimize the production platform of our advanced graphite material business. As part of this review, we expect that the optimization could improve operating income by approximately $5 million annually and result in a charge up to $10 million in the first half of this year.

Fourth, innovation: with more than 20 projects in active development, we will continue developing, collaborating and executing on new products, building on our past successes. This will provide us with sustainable long-term growth opportunities in Engineered Solutions.

Fifth, fiscal discipline: delevering and improving liquidity, we will continue reducing capital expenditures to levels I mentioned, as planned, by approximately $20 million in 2015. We will also reduce inventories by approximately $50 million in 2015. We will continue to reduce debt and maximize liquidity to position the Company for growth as evident by the earlier announcement today regarding the new term loan and full availability of the $400 million revolver.

No doubt 2014 has been a difficult year given the continued market headwinds, and unfortunately early indications are that 2015 will not improve materially. As we continue to work through this temporary market dislocation in global graphite electrodes and needle coke, our team remains as focused as ever on executing on our strategy and controlling what is within our control.

Looking forward, I am confident that GrafTech is best positioned to capitalize on future growth of the electric arc furnace steel demand, which will inevitably return. And we are positioned in a great place to generate significant value for stockholders.

Now for some guidance. As I mentioned on our Q3 call, we reviewed our guidance practices and will now provide guidance on a shorter-term basis, reflecting current volatility of market conditions.

We are targeting first-half EBITDA to be in the range of $45 million to $55 million, and operating cash flow in the first half of the year to be in the range from $40 million to $50 million, after approximately $15 million to $20 million of cash rationalization charges in the first half. We anticipate that the first quarter of 2015 will be the weakest of the year, given industry headwinds and usual seasonality in both of our segments.

Also, first-quarter profitability will be further negatively impacted by the timing of currency impacts and inventory flow of costs to our profitability. As we move through the year, we expect an improvement in profitability in the second half of 2015.

We will continue to optimize working capital and expect to further reduce inventory levels by approximately $50 million in 2015. And, lastly, we're targeting capital expenditures to be in the range of $60 million to $70 million for the full year. We will continue to focus on improving the quality of the business model and make sure we deliver exceptional service and quality to our customers.

Our team has had a proven track record of successfully managing through still market and graphite electrode industry cycles. We have doubled revenues in Engineered Solutions in recent years with new project introductions. We will not be deterred by this short-term volatility but will remain focused on creating opportunities to refine our product lines and leveraging our business model.

That concludes my prepared remarks. So, Kimberley, I'll now open the call up for questions.

(Operator Instructions)

Edward Marshall, Sidoti & Company.

Good morning, guys. As we look at the cadence maybe of the inventory reductions, how do you see that playing out? I assume it's probably more second-half weighted than it is first half.

Yes, great view, Ed. We'll obviously, through the first half, continue to work on it, but you'll see the benefit of it more in the second half, Q3, Q4.

Do you have a D&A target for the full year? Is it going to run like $26 million a quarter or something like that?

Yes. We haven't provided that but I think it should be a little bit lower than $26 million a quarter. Probably closer to --.

I would say, if you wanted to shoot a quarterly run rate it's probably more the $20 million to $25 million run rate.

Okay. When I look at the guidance for the first half of the year, are there any costs associated with the new credit facility and the term loan that you bake into that guidance? And equally as important, on the P&L, as you exit maybe 2015 going in to 2016, is it anywhere between $7 million and $9 million of a tailwind on interest expense?

So, two questions. One is have we factored in the guidance the cost of the revolver. And the question there is, yes, that would be factored into our guidance for the first half for the amendment. So factor that in.

Tailwind in the second half of the year going in to 2016, obviously you'll get definitely the push of the cost benefits of oil that we'll see in the second half. That will continue to carry over into 2016. And the other one you'll begin to see a little bit is, as you start ramping the plants back up, dependent on where you think 2016 volumes would go, you'll start to see that tailwind late in the year as we move into 2016, the benefit.

Do you anticipate second-half volumes are going to be up over second-half 2015 over 2014?

I would say based on what we see, flattish second half to second half.

Okay. And going back to the costs, if I could, for just a second that's in your guidance, you mentioned a restructuring charge, roughly $10 million that you plan on taking. You talk about the credit facility charges. What is included in the guidance that maybe are more one-time in nature?

What's included in the guidance, especially in Q1, obviously, as I mentioned, is the currency impact for Q1 that we'll see where you just mismatch timing. Currency typically to us is a net impact over a 12-month period. Both the rapid fall of the euro coming out of 4Q into 1Q, that you'll see will correct itself definitely as you move into the second half as the cost flow benefits catch up with it.

The other, which, again, from a timing standpoint is, as we talked about, the flow of oil benefits. Again, the timing of that obviously today on a cash basis, we're seeing the benefits for what we pay, but from a P&L, the timing of that working off through the balance sheet into the P&L will take us six, nine months.

But I'm asking are there any rationalization charges that you're including in that guidance?

No.

And what about the charges for the renewal of the credit facility?

That would be included in the guidance.

And how much dollar amount would that be?

We didn't disclose the dollar amount.

Most of those, Ed, would be capitalized and amortized.

Thanks, guys.

Sal Tharani, Goldman Sachs.

Good morning. Also again on the same line, the guidance, that $10 million charge you have, is that also in the guidance or is excluded in that, the capitalization charge of $10 million?

Yes, that would be a special item that we would call out so it would be excluded from the guidance. And we'd call that out like we've done all the charges through 2014. So, as the team firms up the decisions there, then that would be pulled out, called out.

Okay. When did you start building your 2015 order book?

Sal, as I talked before, if you back up, the order book typically starts around October, November. I've said this before, if it starts earlier, that's a good sign. Here it's been delayed and drawn out over the last three, four months. But we were starting to build it right around November, December, and obviously early in to the year. And, as I mentioned, we're only about 60% of the order book is booked.

Got you. I'm just wondering if, because there has been a significant decline in steel process since then, and also oil prices have gone down which means people understand that your cost is going down, are you concerned that there may be a re negotiation of companies coming back to you? Or are the price set in there or are prices going to be floating through the year?

What I can tell you is for what we booked, and that's why we gave our guidance only for the first half, is for the expectation of what's in the book, that would be the price through the first half.

Got you. And the last thing I wanted to ask you, you mentioned that you have the benefit of lower oil prices will come in the second half. How does that impact your Seadrift sale or the price of needle coke externally and internally? Does that impact negatively on Seadrift side? What is the time lag between that and the needle coke price?

Again, needle coke prices are negotiated on a contractual basis. And, as I said, 85% of that coke in Seadrift will be consumed internally. To, to us, third-party sales, not a material impact to us as we're consuming 85% of it.

Got you. Okay, great. Thank you very much.

Luka Folta, Jefferies.

Congrats on the quarter. Pretty nice cost improvement 3Q to 4Q. When we think about the additional $50 million of cost savings that flows through in 2015, is this essentially just a continuation of the fourth-quarter run rate in terms of the cost structure? Or if we're modeling it sequentially, do we model any further stepdown?

I would say the fourth quarter is the run rate you'd see from a cost perspective -- on IM. There's still some other cost benefits to come on the SG&A line. As we said before when we announced the $30 million savings related to SG&A and a corporate reduction, that still has to flow through. And as I said that will start -- we feel will be done here at the end of Q1 and we'll see more of the benefit in Q2 and beyond. But from an IM perspective, yes, those cost initiatives are there, done, other than the normal things from a lien perspective we do.

Okay. And then when we think about the impact of inventories, you've done a decent job of removing a lot of the excess this year. Obviously more to come into 2015. But with oil and coke and prices stepping down a decent amount this year, any way to handicap what that impact is as you destock through the first quarter? Like if you were to look at your inventory costs relative to what replacement costs would be currently, any sense of what the drag is?

You're right, there's going to be a drag. I think you could see that. And, again, what we gave in our first-half guidance versus what our fourth-quarter run rate cost structure looks like, that can give you a comparable what the drag in the quarter looks like as cost of the benefit of the decant oil versus the cost flow into the P&L. I'd say the best way to look at it is look at the fourth quarter and you can see what the first half looks like. And a lot of that is, again, timing and the drag of the cost matching the revenue.

Okay. So, production rates are expected to decline. Did you have a target for the first quarter and how that progresses throughout the course of the year in terms of your current outlook?

As I said in my comments, fourth quarter we were at 86% utilization rate in the fourth quarter. We would expect in 2015 to be slightly below that. And pretty much run that consistently in the four quarters throughout the year. S, it would be in the low 80s.

Okay. So there isn't a big stepdown and then a gradual comeback? It's just flat throughout the course of the year.

Yes. The best way to run the plants is to run them smooth and evenly throughout the year instead of a step down and step back up.

Okay. All right. And then on the FX impact, that's another one. I guess it could be the same answer as the inventory impact. But any sense of just what that -- if we had to look at the stepdown in profitability in the first half versus 4Q run rate, how much of that is FX impact versus inventory?

I guess the best way to say it is it's going to be the impact on the revenue line, that revenue will drop. And we haven't disclosed how much that's going to be. One way to look at it is to try to look at what the change in the euro has been, and then look at roughly we disclosed what my sales in euros are in that region and that gives you a rough idea of the revenue impact. Again, short term it hits us but then throughout the year we gain it back on the cost side, it's just timing. But we'll see that in Q1.

Okay. All right. Then on ES, it seems like there's some pricing pressure there. Are we looking for growth in revenues year o -year in your current plan? How should we think about margins? I know last year there was quite a bit of noise in the numbers with some program-specific issues. How should we be thinking about that evolution over the course of the year?

I'd say, as I said before, ES, our focus has turned to quality of earnings and making sure we get back to that double-digit operating income. So that's what our focus is on, making sure we get there. I would say again on the revenue line, the Galaxy 6 Samsung was launched today. It depends on how that market demand goes to tell us if we're going to see a big pickup or not. So, we'll just have to gauge the market and see. But I would say we're focused on operating income and really the quality of earnings and getting to that double digit.

All right, Joel. Thanks.

Charles Bradford, Bradford Research.

Good morning. We get a lot of information on the electric furnace usage around the world for, like, 60 countries. But what we don't get, and what might be the most critical, is what kind of inventories are there of electrodes? Pretty clearly in this kind of an environment, when people expect lower prices, they're going to be holding back, but it's a question of how long can they not buy electrodes. Do you have any good information?

I'd say, Chuck, when we look at the inventory levels of our customers around the world, they're in, I'll say, decent position. Some, depending on where you are in the world, are a little bit higher because of the change of production from 4Q to 1Q. But I'd say they're not necessarily really at low levels and they're not at high levels. They're just at an average level of inventory right now.

And, again, in certain pockets we see them working them off here, especially in Q1, depending what region you're in. But nothing that would tell us that it's an extraordinary inventory position at this point.

Okay. Another question. What are you currently paying for decant oil?

We won't disclose that but obviously you can look out there and see where oil prices are going and that tells you roughly the change that we see. There's other factors that come into it for us but that just gives you an indicator.

The second part of the question is, what is running through your P&L in the first quarter compared to what the current market price is? Because obviously, as you discussed, it's going to take you six to nine months to get the full benefit of the lower oil prices. So how bad is that spread?

I'll just tell you the timing because it's the same timing. What's running through our Q1 would be what you'd see Q3 type cost that would run through Q1. So that gives you the idea. You can go back and look at what the oil price was and that will tell you what's running through, because there is a lead-lag effect.

In the US, the American Iron and Steel Institute, with their January data, reduced capacity for the industry by 2 million tons. But they didn't break out where that was or what that was. US Steel, among others, have announced some changes. Do you know what capacity they took out?

No, Chuck. Top of my head, I don't.

Okay. Have you gotten anymore information from people like US Steel who have been talking about replacing blast furnaces with EAF? Anything more current than just the general statements they've made?

I would say, as the spread of metallics, iron ore to scrap, starts to come into more historical levels. As you know, Chuck, the iron oil prices came way off early on. We've got scrap prices still hung up there. Now in the last two months we have seen a tremendous drop in scrap prices.

As those two come back to more historical conversion, I think you'll see more discussions about the EAF route and which way do we want to go. But I don't know of any particular ones. We obviously hear customers talk about, that are doing both, converting more to EAF than integrated, and it depends obviously on their cost structure and the products they make.

Thank you very much.

Phil Gibbs, KeyBanc Capital Markets.

Thank you. Good morning. Appreciate all the transparency. As far as the fourth quarter in Engineered Solutions, I think that appeared a lot better than what you were looking for. I think you were looking for pretty strong negative margins in the quarter and eked out a nice gain, which was really good to see. What changed, maybe, relative to what you were looking for just a few months ago?

If you look at the revenue line Q3 to Q4, relatively flat. Up a little bit. But the team's focused on cost. We've put an all-out effort on reducing cost. I think the teams did a great job managing the plants and the operations to reduce the cost. And, really, it's the flow-through of that cost that you're seeing in the fourth quarter.

Some of that you're seeing is from the initiatives we took mid year in the AGM business. When we rationalized the product line there we saw some of that benefit. So, it was all cost focus, which will continue to be that way here for the first half with the ES business.

As far as your electrode order book for 2015, you said about 60% booked, I would imagine against that 85% utilization. Anything region specific? Anywhere that's maybe a bit tougher relative to some other regions, which ones look a little bit stronger from your order book standpoint versus others that could be lagging at this point?

I'd say, Phil, it's a pretty typical order book from a regional perspective in timing, meaning there's the North American part of the world, the South American part of the world, Europe, Asia. I'd say they're all in their normal patterns. I think the challenge is, yes, we're 60% booked, and we'll continue to book that other 40%, where the market will go when we book that 40%. I think that's the question.

Okay. And just the last one here, as far as some of these FX headwinds early in the year with the euro, is there any other currencies that provide a little bit of a challenge here for you given the fact that the dollar strengthened relative to almost everything at this point in time?

No, nothing that gives us any challenges. Again, the euro, because we're so large sales revenue with the European markets. But no other ones.

Do you have any new products in ES this year that could provide a bit of a tailwind? Anything that you've been working on?

Obviously our AET business, consumer electronics, we're always bringing new products to the market. Again, I think what will determine there will be the end use growth of those markets we're targeting.

I think the other businesses I'd say were -- AGM is a transformation story right now based, unfortunately, with the sapphire issues with GT, AT and Apple that slowed that business down. The other ones, we're working on new products, but I'd say not much this year. We see some opportunities in the markets we're working more down the road at this point in time.

Thanks so much.

(Operator instructions)

Justin Bergner, Gabelli & Company.

Good morning, Joel. A couple questions. First off, with respect to FX, are you actually getting a transaction benefit based upon how your costs geographically match up with revenues or is it pretty balanced?

Pretty balanced. Again, over time the impact of FX is neutral to us. It's timing that will throw you off, and especially when you see a steep decline in the currency as much as you saw the euro. But throughout the year we'd expect it to be neutral.

Okay. My second question relates to pricing in Engineered Solutions. Could you maybe provide a little more detail about some of the headwinds there and how you're seeking to overcome them?

Absolutely. Two business lines I'll point to. One is in the AGM business line. Our traditional industrial markets that we supply has come under a little bit of pressure here in the first half of the year. Again, typical markets -- the chemical industry, oil and gas industry. So, we've seen some pressure in those markets on price.

In our AET business as our partner tries to look to recover from the last year problems, we've seen a little bit of pressure on the price and how we then react as through our differentiation, provide a product that provides them with some value that they can't get anywhere else and make that comparison. Again we're reacting to that and we'll introduce new products in AET to compensate for that pressure. And, again, we'll see a transition from probably first half to second half as some of those products are more successful in the second half of the year.

But we're well positioned, especially in AET, with our customers, our offerings. Really, our key, as I mentioned in my comments, is really to diversify our customers a little bit better, and then also some new markets that we're starting to look at, will be our key.

Okay. And, finally, that's good news for GrafTech on the credit facility amendment and increased liquidity. So, good job there. Should I interpret from the press release that there are no impediments towards using that amended facility towards paying off the $200 million senior subordinated notes come November 2015, covenants or otherwise?

I'll let Erick answer for you.

Justin, no impediments.

Okay. I think that's good news. Thank you.

Brett Levy, Jefferies.

Is there any reason you can't buy these notes back in the open market? You've got $400 million of liquidity on the bank line, new $40 million term loan, bonds at $80 million, an outlook for better two-half results. Can you take advantage of this?

First thing I'll say, Brett, is obviously our focus is on deleveraging, whatever form that may take. And we'll continue to focus on deleveraging the balance sheet at the most economical way we can. And that will be the emphasis throughout the year.

All right. And then in terms of the whole global supply outlook, is the quality advantage you guys have versus the rest of the world still pretty much intact?

Again, I'd say graphic strategy is clearly on differentiation. And you nailed it, Brett -- quality, which means the performance of the electrodes, the service that we provide with that, and obviously the reliability we bring as we service over 500 customer locations around the world.

There is a value equation that goes with that. And, again, depending on the economic cycle you're in, that value equation could be smaller or bigger depending on where you're at. Right now obviously we're probably closer to the smaller end of that differentiation between us and our competition, and depending on what competitor you are. But then as things improve, which we expect they will, then the gap will get wider.

And what do you think turns that dial in your direction?

The furnace, our customers' operations and how they want to run. In different times, as you see, the utilization rates -- hence my comments that we're seeing steel utilization rates come down -- they more apt to try other alternatives because the operating rates are low and they have time. As they speed back up they want the higher-quality electrode. This comes back to how that operator wants to operate.

All right. Joel, guys, thank you. Good answers.

Edward Marshall, Sidoti & Company.

A quick followup, because there's a lot of moving pieces here, especially as it relates to the first half of the year, with cost, volumes, prices, inventory reductions, all of the above. It looks like, on an EBIT line, you're guiding to roughly flat to $10 million. First, is that correct? And then, secondly, I assume you're looking at an operating loss for the first quarter.

Again, Ed, what I'll come back and say is if we're looking at the first half, pretty comfortable with our guidance for the first half of that $45 million to $55 million of EBITDA because that's where we see how our order book flows. With Q1, Q1 will be the challenging quarter, no doubt about it, when you look at the two quarters in the first half. So, Q1 will be challenging on the operating income line. I think you said it. It will be on the loss side in Q1 and then obviously for the first half we start to rebound when we see Q2.

So, much stronger in Q2 versus 1Q in the operating line.

Yes.

Okay, thanks, guys.

There are no further questions at this time. I would like to turn the call back over to Mr. Joel Hawthorne for closing remarks.

Okay. Thank you very much, Kimberley. And, again, thanks for joining the call, taking the time today. On behalf of the 2,400 men and women at GrafTech, thanks for your interest and participation. And I look forward to talking to all of you at the end of the first quarter. Have a great day.

This will conclude today's teleconference. You may now disconnect.