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GrafTech International Ltd. (NYSE:GTI)

Q4 2008 Earnings Call

February 24, 2009; 11:00 am ET

Executives

Craig Shular - Chief Executive Officer

Mark Widmar - Chief Financial Officer

Kelly Powell - Manager of Investor Relations

Analysts

Ian Zaffino - Oppenheimer

Chuck Murphy - Sidoti & Co.

Charles Bradford - Bradford Research

Yvonne Varano - Jefferies

Bob Richard - Longbow Research

Mike Marburg - Ramsey

Spen Haynes [Ph] - BerenBerg Bank

Rebecca Barry [Ph] - Defiance

Phil Gibbs - KeyBanc

Lavon Von Redden - Hockey Capital

John Lansfield - Royal Capital

Operator

Good day ladies and gentleman and welcome to today’s GrafTech Q4 and full year 2008 results conference call. Please be aware today’s conference is being recorded. At this time I would like to turn the call over to Kelly Powell for opening remarks and introduction; please go ahead.

Kelly Powell

Thank you, Holly. Good morning and welcome to GrafTech International’s fourth quarter and 2008 year end conference call. On the call today is GrafTech’s Chief Executive Officer, Craig Shular and our Chief Financial Officer, Mark Widmar.

We issued our earnings release this morning. If you did not receive a copy, please contact Jen Raedake at 216-676-2281 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, which is posted on our website at www.graftech.com in the Investor Relation section.

At this time, I’d like to turn the call over to Craig.

Craig Shular

Thank you, Kelly. Good morning to everyone and thank you for joining our call today. Today we’ll take you through our fourth quarter and full year ‘08 highlights and then open it up for Q-and-A.

Net sales increased 19% to $1.2 billion. Operating income increased 46% to $329 million. Income from continuing operations before specials increased 69% to $246 million or $2.09 a share. Operating cash flow nearly double to just under $250 million, net debt was reduced to $78 million, the lowest in our company’s history and a $291 million improvement year-over-year.

Finally recapping the full year, ’08 represents a record year for our company and sales, profits and cash flow. During the year we redeemed $180 million of our 10 and a quarter senior notes and we also called our $225 million convertible debentures. This allowed us to complete the year with net debt as I said of $78 million.

Looking at the fourth quarter, net sales were $265 million, virtually flat with the same period last year. Gross profit increased 20% to $97 million or 36.8% of net sales. In the fourth quarter we recorded a $35 million non-cash impairment charge for our non-consolidated affiliate Seadrift. Seadrift is a strategic investment as the world’s second largest producer of petroleum needle coke, the key raw material in the manufacture of graphite electrodes.

Given the uncertain outlook for the steel market and the impact on electrodes and needle coke industries, we determine that the revised fair value of our investment in Seadrift is less than the previously reported carrying value. As a result, we wrote-off a portion of our investment in Seadrift, including intangibles and other assets underlying our original equity investment.

Income before specials improved 40% to $59 million or $0.49 per share in the quarter. Operating cash flow increased to $79 million as a result of the company’s improving operating performance. In our industrial material segment, sales declined 5% to $219 million, while operating income for the segment increased 16% to $59 million.

Operating income in the quarter benefited from higher graphite electrode selling prices, favorable currency movement and in part was offset by lower graphite electrode sales volume in the quarter.

Our Engineered Solutions segment, fourth quarter sales were $46 million as compared to $39 million in the same period in the prior year. Operating income for the segment nearly tripled to $11 million. Our Engineered Solutions segment continues to gain traction during ‘08. Sales for the segment for the full year increased 26% to $182 million, while operating income more than tripled to $41 million in ‘08. For the full year, operating income margin expanded over 13 full percentage points to 22.7%.

Finally turning to outlook, based on IM projections and other global economic forecasts, world growth is expected to decline significantly in ‘09. Both advanced and emerging economies will be affected.

Weak end market demand is expected to persist with a high degree of uncertainty surrounding forward-looking projections. Accordingly, steel producers have significantly cut operating rates and continue to reduce inventory levels in an effort to match production rates with market demand. As a result, we expect reduced electric arc furnace steel production in ’09.

In response with the current environment, we’ve taken a number of actions to improve our cost structure and match our own production rates with market demand. These actions include reducing operating rates at our production facilities. We exited the fourth quarter with an op rate of approximately 45% for our graphite electrode manufacturing facilities. We will continue to align operating rates to meet customer demand and appropriately manage working capital.

Personnel reduction of 150 team members and contract workers in the fourth quarter was taken. We expect a further reduction of approximately 75 team members by the end of the first quarter, again aligning our cost as required. Reduced pay per managerial team members were taking, including that 10% reduction for our officers of our company. We implemented hiring freezes and suspended salary merit increases for the year.

Incentive cash comp for the year will be paid 50% in GrafTech stock and 50% in cash for the company’s leadership team. We also placed several facilities on shortened work weeks or furloughs, thus sharply reducing overtime hours worked. This resulted in a temporary employment reduction of approximately 55 full time equivalent team members. So if you add all that up, we’re probably down over 10% in headcount and worked hours.

We reduced planned expenditures of CapEx by $15 million year-over-year. I think last year, we came in around $71 million, this year we’ll be about $55 million. We also reduced travel and other discretionary expenses some 20% to 25% year-over-year.

Given current global economic conditions which continue to be extremely volatile and uncertain, our ability to project full year guidance is limited. Therefore, we feel it’s appropriate to make adjustments in our usual practice of providing annual guidance.

We expect ’09 to be very challenging for both of our businesses. We anticipate the first half ’09 profits will be weaker with second half earnings potentially improving as we expect customers would have largely completed de-stocking initiatives.

First quarter earnings, I expect it to be essentially breakeven, however a first quarter loss is possible. A marginal improvement in second quarter earnings is expected and in full year’09, we are targeting capital expenditures of approximately $55 million, depreciation expense of approximately $35 million and an effective tax rate that will be in the range of 32 % to 35 %.

With that Holly, let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Ian Zaffino with Oppenheimer; please go ahead.

Craig Shular

Good morning Ian and how do you?

Ian Zaffino – Oppenheimer

Good morning Craig. How are you doing?

Craig Shular

Great

Ian Zaffino – Oppenheimer

The question will be as far as raw material pricing versus electrode pricing, what your thoughts are there and how we should think about that price?

Craig Shular

As we’ve done in prior years, we’re lined up going ahead and locking in our raw martial requirements and prices. So we’ve probably got some were around 60%, maybe a bit more of our raw martial climates for ’09 locked in and this is lined up with the book building process.

As we talked in our last call, kind of in the middle of last year, the book building process kind of just stopped with of course the global economic deterioration and so the restarted that book building if you will, really hasn’t started up yet, we’ve had actually no new orders of any kind of size, but talking to customers we expect that probably get started going to end of March and then roll right through April, May and June.

So, in anticipation of that, we’ve been working with our key raw martial suppliers, coke. We’ve got coke pretty much locked up on prices and some of our other key raw materials and if you add all that up, we’re probably 60% plus that we blocked up. So we understand well and know our cost structure ahead of this book building process.

That as we said it’s really just going to get started and I don’t expect much even in February. We had nothing in January, nothing in February, March I think a little bit will start and then really April, May and June it will get underway and then we’ll build the rest of the book for ’09.

Ian Zaffino – Oppenheimer

Okay and the remaining 40% you need to lock in, you think they’ll be at higher, lower or identical prices to what you’ve locked in so far?

Craig Shular

Well let me compared it not so much to the prices we’ve locked in so far, but maybe last year. In general, I think the balance of the 40% will probably come in at lower cost than last year.

Ian Zaffino – Oppenheimer

Okay, but the 60% is at higher.

Craig Shular

Well in the case of coke it’s at higher. Most of the other ones is a couple exceptions, but most of the other ones are lower than ’08 cost, but coke as we’ve talked in a past, there is many alternatives for the needle coke producers besides making needle coke. Their facilities can make many different kinds of coke and so they are seeking price increases and they appear to be getting them across the board.

So, needle coke as we said before, we expect to be up, it’s definitely going to be up. Spot markets up, contract market is up, but on the balance of the items, the majority of those, we are expecting and have seen so far lower cost from last year.

Ian Zaffino - Oppenheimer

And how does the prices that you’re looking at getting or that you’ve already locked in compared to the coke cost versus last year and how much of your book have you locked in so far?

Craig Shular

Well, it’s not a guidance we’ll give you this time. Let’s say we’ve locked in a very small portion of the book and it’s really the activity that took place kind of in the middle of last year. Since then there’s really been no orders really requested from a customer base as they’ve been in this massive de-stocking exercise, reducing their operating rates and then of course using up and reducing their inventory accordingly.

Pleased with the prices we got in the middle of last year, I think those have got up to a great start, but a couple of observations; it’s a small quantity relative to total book and as I said also, it’s just going to start getting started backup. Some customers are just starting to have dialog saying “okay we’re planning on making a bid” or “can you come meet us?” so they’re just starting to really initiate their process again.

I think one or two may come in March, not a lot. I think the majority will come in April, May and June and so we’ll get to really start to see some pricing I think in kind of the second half of Q2. As I see the inventory in supply chain of our customers and their low operating rates right now, it appears at this time that probably Q3 and Q4 they’ve got a start using new electrodes. I’d say a lot of them, Q1 for sure they’re living off of inventory and then another significant portion of them have enough inventory even in the Q2.

So, I would say second half we’re going to see our customer base really start to require new electrodes and start to utilize newly order electrodes and we’re really going to have to let that process take place before we can really give some indication on what the book looks like or what pricing looks like.

Ian Zaffino - Oppenheimer

Okay and then one final question. The pricing that you are looking at initially, I know it’s very, very far out and it’s very unclear, but versus ’08, how do you view pricing?

Craig Shular

New pricing of graphite electrode is top versus ’08 and driven in large part because the key raw material; that’s 45% plus of the cost structure is going up and so that’s going up more, then the others are coming down. The other miscellaneous ones, they are coming down, but not near enough to offset the increase and then the big 45% guide needle coke.

Ian Zaffino - Oppenheimer

Okay, but let me try and reconcile, because you said that 40% of your needle coke cost will be lower than ’08. So that would indicate higher margins for ’09 versus ’08 in the volume, but as far as the percentage of the…

Mark Widmar

Let me just clarify, why do you say 40% of our needle coke will be lower price?

Ian Zaffino – Oppenheimer

I thought that’s what you indicated.

Mark Widmar

No, all the needle coke that we’re ordering now, all the newly booked needle coke will be higher priced. The needle coke producers are seeking higher prices and they’re getting. So, needle coke is about, call it roughly 40%, 45% of the cost structure of graphite electrode.

So for that portion, which is, call it round at 45% of the cost structure, that’s going to be higher cost in ’09 than in ’08. The balance of the raw materials, in general most of those have come off; natural gas is down nicely, some case electrode power is down nicely in some countries and so some of the other raw materials are coming down nicely and will be lower cost in ’09 than in ‘09

Ian Zaffino - Oppenheimer

Okay, great. Thank you very much.

Craig Shular

Thanks Ian. Have a good day.

Operator

Our next question will come from Chuck Murphy with Sidoti; please go ahead.

Craig Shular

Good morning Chuck. How are you doing?

Chuck Murphy - Sidoti & Co.

Good morning. I thought you said as well that you had locked in 60% of your needle coke requirements, is that correct?

Craig Shular

Chuck, we locked in 60%, it maybe at bit more of our total raw material cost okay, and we’ve done that size not different than other years, maybe later than other years, just because the book building process has been so delayed, but we like to lock that in and we’ll do 60%, 70% of our cost structure; lock it in, before we actually get into the big book building. What I am saying is that larger part of the book building is going to probably begin in April, May and June.

Chuck Murphy - Sidoti & Co.

I got you, okay that helps.

Craig Shular

I apologize if I wasn’t clear. I appreciate that clarifying question.

Chuck Murphy - Sidoti & Co.

And then I was wondering, for the contracts that haven’t been renewed for 2009, I mean for those customers are you just seeing zero sales right now until there is contract in place.

Craig Shular

Yes, what we’re seeing is kind of this. I think the way to look at Q1, ’09; virtually all of our business in Q1, ’09 is from two buckets. It’s those customers that book Q1-to-Q1 contracts, so they’re finishing up the last quarter of their contract that was taken well over a year ago.

Then we have a few customers, not a lot, a small percentage, of a couple of very large key customers that maybe a few of their electrodes slid from December into the first quarter. So, really first quarter is all, let’s call it old booked electrodes from more than a year ago and so our customers are living off of those and then inventory.

Then I think one thing we’ve seen, I think a lot of our customers have seen, obviously the steel industry went through some tremendous consolidation over a relatively quick period and I think the downturn, like all of us, required and drove us to look hard at inventories and I think a lot of our customers see, “wait a minute, we’ve made so many acquisitions, we’ve got a lot of different raw materials, maybe more than what we thought” and I think that’s an aspect of it.

Also I think they understand very well what they have today and then of course they’re operates are so low. I think when you look at not only in the U.S., but I think if you added up worldwide, Op levels are somewhere between 40% and 50% here in Q1 in Global EAS. So obviously what six months ago was two months of inventory, today might be four or five months of inventory.

Chuck Murphy - Sidoti & Co.

Okay, so part of your customer base is essentially down a 100%?

Craig Shular

That’s right. We definitely have customers Chuck that are just living off of inventory and it’s been extended as I said because their Op levels are so low. Now, when I look at the large picture of our customer base, as I said earlier I see that the majority of them in Q3 and Q4 will have to start to use newly ordered electrodes.

From the dialog with them, I see most of the ones are starting to gear up here and in probably April and May we’re going to see a lot of activities, some of them might be in June also, but kind of in the second quarter they’re really going to gear up and secure the second half electrodes and those will be the newly acquired.

Chuck Murphy - Sidoti & Co.

And then for customers who are on the March-to-March contracts, what are shipments to them looking like these days?

Craig Shular

The Q1-to-Q1, they’re taking those electrodes, some have asked because of lower operates, can we push them out. In general we’ve been very resistant to pushing out booked electrodes and the obvious reason is, we brought those raw materials maybe three, four months ago. We’ve already paid from them and I’ve already made their electrodes further requirement and further contract. We really need them to take those electrodes and then of course pay for their accounts receivable. We all have to manage with our supply chain and our cash flow. So, the vast majority of our customers are taking all of the other contracted electrodes when their contract said they would.

Chuck Murphy - Sidoti & Co.

Okay and final question. Any sign of any of your competitors getting more aggressive on pricing?

Craig Shular

Well, Chuck I’d just say I think it’s too early to tell. There’s been so little activity and so it’s literally, since the middle of last year on the new order front been very quite. There’s been a few little orders, but I mean these are small and these are almost tweaks in our customers requirements rather than “Oh, let me get my ’09 requirements.” We’ve had virtually no activity where customers have come and said, “Okay, I’m ready to book my ’09 requirements. Here we go, do a bit process, finish the bit process, communicate the results,” that just hasn’t been happening.

Chuck Murphy - Sidoti & Co.

Okay. Alright, I’ll hand it over to somebody else.

Craig Shular

Thanks Chuck. Have a good day.

Operator

Our next question will come from Charles Bradford with Bradford Research. Please go ahead.

Charles Bradford - Bradford Research

Good morning.

Craig Shular

Good morning, Charles. How are you today?

Charles Bradford - Bradford Research

Good. How are you?

Craig Shular

Great, thanks.

Charles Bradford - Bradford Research

Could you talk a bit about what’s happening in the Engineered Solution? Most of us focused on the electrodes as well we should, but you had quite a bit of success and what are you looking at over the near term?

Craig Shular

Charles, thank you very much for the question; yes, our Engineered Solution business has been gaining traction. I’m pleased with the traction it’s gaining. Obviously that started out as a much smaller business and we’ve developed a number of new products here. We’ve been successful in commercializing them and so they finished ’08 obviously, with sales up almost 30%, over $180 million in sales.

I remember this business when it was an $80 million business. So, it is gaining nice traction on the sales top line and then also because it tailored solutions and because those solutions go into a number of emerging markets like solar, some High Tech markets and they’re tailored, they commence some pretty good economics. So, I’m pleased with the developments there, ’07, ’08 very nice growth and then obviously year-over-year as we said the early part of the conference call, double digit margin expansion. So, the margin expansion has been great.

Looking into ’09, I expect that ES will also be impacted by this global severe recession we’re all seeing, but some of its markets may still be let’s say decent. They’re all going to be down compared to last year, but I think some are going to be decent. Lower sales, but still attractive and it’s going to be primarily some of those solar emerging markets, alternative energy type markets, those should have a decent year.

Charles Bradford - Bradford Research

It was pretty clear that the new administration is really pushing a lot of these areas; especially the solar, the fuel cells and what have you. Do you see anything in the new stimulus legislation that is particularly helpful to you?

Craig Shular

I think in general you’re absolutely right. There’s a lot of emphasize on some of those markets that we participate in, so I’m encouraged; but having said that I expect ES, year-over-year is going to be down in sales and down in income, just because of the severity of the global recession. It hit so many industries and then it’s all exacerbated by the banking and financial industry.

So, I mean we have a lot of customers in these good industries, but they just can’t get the financing, or in some cases maybe we don’t like their balance sheet that much. They are relatively a new think to capitalize and they can’t get the LC and I really want them on LC business. So net-net ES should be down in ’09 versus ’08, but I think some of the segments should do decent, because of some of the stimulate packages and the growth in those areas Chuck.

Charles Bradford - Bradford Research

Understood. Thank you.

Craig Shular

Thank you, sir. Have a good day.

Operator

Our next question will come from Yvonne Varano with Jefferies. Please go ahead.

Yvonne Varano - Jefferies

Thanks. I know you said a very small quantity of your business is actually locked in on the pricing side; can you put a percentage on that? Then if that was locked in say a quarter or plus ago, that will come up for renegotiation, what mid year of ’09?

Craig Shular

Yvonne, what is locked in now is that small quantity when the book building business for graphite electrodes kind of started the middle of last year. So, as I said earlier the pricing is good, but the volume is small. So, I’m hasn’t to really say too much about it. We really don’t guide to what that percentage is, that’s not part of our guidance. Pleased with the pricing, small volume, we really have to let this book building started up in kind of Q2 to really have a line of sight to what the ’09 books going to look like.

Yvonne Varano – Jefferies

Okay, I would guess that this small portion comes up for renegotiation mid year or so again, right?

Craig Shular

No Yvonne, those are annual contract. So those were customer, which often with happens with critical graphite electrodes supply. They go ahead and kind of in the middle to third quarter of the upcoming year; they go ahead and book for ’09. So those contacts run January to December ’09. So, what was booked in the middle of last year is for January through December ’09. They do not come up in the middle of ’09. They are twelve month annual contracts for ’09.

Yvonne Varano - Jefferies

Okay and then just on the cost side, you’ve taken a lot of steps here; anything that you can help quantify in terms of the savings from a dollar perspective?

Craig Shular

You’re right Yvonne. We’ve been very proactive. Obviously, if you go back in a history of our team, we have a well earned track record in this area. As you know if you go back a number of years, we have a large turnaround and we’ve had tremendous experience in very difficult environments in our turnaround.

So we are very proactive, everyone participates. As you saw, the officer’s have gladly taken a 10% cut that came directly from the management team. This was not anyone asking or telling us to do this, this came from my team. So the officers have taken a 10% cut and then as you go through a couple of different grade levels of management, there’s an 8% cut, there’s a 6% cut and then some of our less compensated team members there is no change to their income.

So one, we’re very proactive; two, we have a lot of experience in this area. We have a well are in track record. Its not an item though Yvonne that I’ll price out for you and say “Okay, gee Craig, if I add up your numbers you’re down about 8%, 9%, 10% of your work force, what’s that value?” It’s not buckets we work on and that we will articulate, but what I will point you to is our accomplishments on items that you see clearly on the P&L like overhead.

I think if you look at overhead and you look at our overhead over the last five, seven, eight years, you’ll see very tight control on things like overhead and those expenditures. So, we’re proactive and we will do aggressive actions usually well ahead of the curve on the cost front.

Yvonne Varano - Jefferies

Okay and then I know you said that you’re expecting essentially a breakeven, but maybe a loss. I guess what would need to change in what you are seeing there to get to a loss, would it be fewer volumes or…?

Mark Widmar

I guess the reason we are saying breakeven or could be a loss is it’s that volatile out there. I’ve got customers and I think many of you have listened to their earnings calls the last three, four weeks. They just don’t know their book well. Their book is variable.

I’ve got customers, and I’m talking globally here. I know a lot of you’re focused on a lot of U.S. but this is global customers that they run for a week and they don’t run next week or they run for three days and then next week they run one day. It’s mainly around the variability. The environment right now is that variable.

Yvonne Varano - Jefferies

And then lastly could you just maybe contrast your domestic customers versus the international and where you think they’re on the de-stocking?

Craig Shular

I see it across the board; they have taken very aggressive action and I wouldn’t make a distinction between domestic customers and international overseas customers. Obviously there’s a lot a global steel producer. So, when you see the big global guys institute something, it’s worldwide. So, I don’t see a big distinction.

If I took you to China, yes I would say they lag on de-stocking versus say U.S., European, South American customers. They lag, there maybe less well oil machine on de-stocking. If I took you to kind of Russia, I think Russia, there’s some tough balance sheets in Russia. We watch it very closely. LC business etc, I think some of them have been quite aggressive, because they have been driven by their banks in the lack of financing.

So, yes if you ask me one that’s a little bit soft on de-stocking or really getting an immediate jump on slowing down production, it would be mainly in China. China tends to run production longer in general, not every customer, but in general that maybe some of our other customers in other geographies.

Yvonne Varano - Jefferies

Terrific, thanks very much.

Craig Shular

Thanks Yvonne. Have a good day.

Operator

Our next question will come from Bob Richard with Longbow Research, please go ahead.

Craig Shular

Good morning Bob. How are you today?

Bob Richard - Longbow Research

Good morning guys. Good quarter, thanks.

Craig Shular

Thank you, sir.

Bob Richard - Longbow Research

Last quarter Craig you discussed perhaps high double digit guidance for needle coke cost increases from ’08 to ’09; are you able to maybe provide any further color on that?

Craig Shular

The only color I can give is yes, we have seen high double digit increases in needle coke and as I said, those producers have alternative uses for those assets and many are doing that. They are making different types of coke and they are not making needle coke. Needle coke is kind of top of the food chain if you will, its harder to make, its higher cost to make and they’ve moved on to some other things. So, they are getting double digit increase right now.

Bob Richard - Longbow Research

Okay, so moving onto pricing, would you say your leverage maybe in ’09 versus ’08 is comparable less or more for pricing negotiations in ’09 versus ’08, taking into consideration how many electrodes are out in the channels and who’s making what these days?

Craig Shular

Well Bob, I guess in general, I think anytime you got the kind of severe global recession we have right now the sellers leverage is less, I think that’s a general statement. If you’re trying to sell something, I don’t care what material it is today, in this global environment it’s harder; now point one, general discussion.

Point two, in our case because of where the book building is, we really got to let it start off and time will tell. I think at the end of Q2, we’ll have a much better view. I would expect by the end of Q2, most of our steel customers have booked the balance of their ’09 requirements.

Bob Richard - Longbow Research

That helps and congratulations on your balance sheet improvement. I see you’re cutting back your CapEx, I would presume you are just going to play that very conservative here at least for the medium term?

Craig Shular

Yes, Bob you’re correct. I mean like I said earlier, we have a very well earned track record here. We’re very prudent financially and I think you’ll see us continue that path. If we see the opportunity to delever our $7 million to $8 million, we’ll even do some of that if that avails itself in ’09. So yes, I think you can plan on us being very conservative and prudent. On the balance sheet side we’re very pleased with the progress the team made here over the last few years.

Bob Richard - Longbow Research

And just one quick housekeeping question; Seadrift depletion, where is that on your income statement?

Mark Widmar

Bob its Mark. Yes, actually it’s included on the P&L. It’s the line item that shows the equity and earnings and write-down of the investment. So the write-downs included in that, as well as the earnings associated with it. Actually we booked five months of activity procedure, so we’re on a one month lag, but as five months of the operating results as well the impairment that we discussed.

Bob Richard - Longbow Research

You would expect maybe sequential degradation from those. We could squeeze the math out and get a monthly performance if you will. We should probably expect declining performance there, right, year-over-year?

Mark Widmar

Well, we’re not really providing any guidance from Seadrift at this point in time.

Bob Richard - Longbow Research

Okay, thanks, that helps and great quarter.

Mark Widmar

Thanks, Bob and good day.

Operator

Next we’ll go to Mike Marburg with Ramsey. Please go ahead.

Mike Marburg - Ramsey

Hi guys, just wanted to follow-up quickly on two items. One, just on Seadrift, it was partially addressed, but you had spoken before about giving us a little bit more color as to that business. I mean is there anything else you can tell us about Seadrift operation?

Craig Shular

I think Mike we have the same issue with Seadrift as we do with our own business at this point in time and there’s just really very little clarity at this point in time. So, as we learn more about just the general demand for EAF production, which will require obviously demand for electrodes and then subsequently needle coke we’ll be able to give a little bit more color, but at this point in time, ’09, there’s a lot of uncertainty at this point in time.

Mike Marburg - Ramsey

Would it be fair to assume that if you’re experiencing double-digit price increases from your providers that Seadrift will have that same timing?

Craig Shular

Yes, really we’re going to comment on that at this point in time, but obviously it’s a very dynamic market and there’s obviously a strategic value of that supply chain that is depended upon the sole source of having a needle coke in order to produce graphite electrodes. So, it’s pretty strong value proposition from that standpoint.

Mike Marburg - Ramsey

Okay and then in terms of just the cost on a dollar basis, SG&A cost, I guess you said you wouldn’t quantify it, but clearly it’s going to be down year-over-year, correct?

Craig Shular

Yes Mike if you look at our track records its not an item we guide to, but if I point you to our track record, I think SG&A has been managed very tightly, very prudently and if you go back you’ll find if you really strip out some of the one offs, its almost flat over the last five, six, seven years. So, you see these steps we’ve announced here today, many we’ve already implemented of course, so we’re often running what I would expect as probably at a lower rate. You’re right, directionally it should be down.

Mike Marburg – Ramsey

Is there any reason why you’re not sharing more with us on these expenses that are not related to gross margins and therefore might have some -- you don’t want to talk about things, because it would hurt your comparative positioning or your negotiations with your customers, but why not be a little bit more transparent on the cost for things in operating expenses?

Craig Shular

Good point Mike, it’s just not been our practice over the years to identify each action as far as what’s the value attached to it or the total. We have in times in the past during our turnaround, when we had very large broad projects, identified the savings we expected out of them, but in these type of items, given we have what I would says is a tight SG&A expenditure already in ’08, these types of one-off items, we’re not going to give the individual dollars.

I just feel, gee at the rate we’re running now, we’re going to improve upon it; it’s not a material item on our P&L. It’s not been a problem area. If it had been a problem area, I think you’d see Mark and I being very detailed in pricing out each one, but since it’s really not been a problem area and its being running at a very good level. I mean if you look at the percentage SG&A, the sales etc, you look at the trends we’ve had there, very good; we’re just not going to price out each one.

I think the message for the group should be, GrafTech has a history here, well on a track record, they are proactive and I think when you look at the breadth of the initiatives we’ve taken from officers and team member salaries, unfortunately having to layoff some full time team members, we will hit every available opportunity to be more efficient.

Mike Marburg – Ramsey

Okay thank you.

Craig Shular

Thanks Mike

Operator

Next we’ll go to Spen Hynes [Ph] with BerenBerg Bank.

Spen Hynes - BerenBerg Bank

Yes, actually just three question if I may. The first one is regarding your write down on Seadrift. I mean basically since they are looking to increase prices on a high double digit basis, we probably cannot assume that their EBIT is going to suffer significantly unless the volumes are going to be down significantly as well. So is it mostly some stuff to do with CBCS while you are taking this right on?

Craig Shular

Yes, I think the primary driver you get on is just the volume reduction. I mean as we looked at needle coke in the overall industry six, nine months ago it was sold out and very tight and the market went right now with EAF running somewhere 40% to 50% of capacity and therefore the demand for electrodes has fallen and subsequently the demand for needle coke has fallen. All that had to be taken into consideration as we now had to reassess the fair value of our investment and ultimately that’s what led to the right now.

Spen Hynes - BerenBerg Bank

Are there any other plans concerning increasing of the stake or are you quite happy with the stake you have at the moment?

Craig Shular

Spen mow, we’re very pleased with the stake we have right now. We bought of course what was available on the market. The balance Seadrift is not on the market, so it’s not for sale. So, we said at 18.9% we’re very pleased with it. We’re pleased with the Seadrift team, the interface and the quality of the Seadrift team is very impressive.

Spen Hynes - BerenBerg Bank

Okay, excellent and then just two more questions on the volumes and the electrode shipped in 2008 either are Seadrift or can you just elaborate on those and also on your expectations for Q1?

Craig Shular

Yes Spen, volume is not guidance we’re going to give at this time and Q1, I’m really going to stick with the guidance that we gave thus far and it’s really driven by my customer base, especially we go through their calls or I get a chance to interface directly with them. They just do not have good line or site and so the color we’ve given so far, the guidance is all we have at this time.

Spen Hynes - BerenBerg Bank

Okay and then the volumes shipped in 2008, the total volumes?

Craig Shular

I think we’re going to have some color on that when that comes out in the K.

Mark Widmar

Yes, we won’t quote the exact quantity in terms of metric tons, but you’ll be able to re-see the volume change year-on-year and we should have the K out here in the next few days and be able to look at that detail.

Spen Hynes - BerenBerg Bank

Okay, excellent and then just one last question. Then on the SG&A you said, that I’m pointing at your track record, that they’re going to be down and now that’s in absolute terms, right, relative to sales they’re probably going to be up?

Craig Shular

That’s correct. Down in absolute terms and depending on where sales come in, the percentage, obviously is going to change.

Spen Hynes - BerenBerg Bank

Okay, excellent. Thank you very much.

Craig Shular

Thank you, sir; have a good day.

Operator

Next we’ll go to Rebecca Barry from Defiance. Please go ahead.

Rebecca Barry - Defiance

Yes, I have two questions for you. The first to round the operating rates and your comments about breakeven in Q1, can you just talk about what kind of operating rate you would need to see to breakeven and maybe to put that in perspective? What you’re operating at in Q4?

Craig Shular

Yes, as we said, we exceeded Rebecca. Q4 with about 45% operate and then as we did in Q4 we’ll continue to do this year. We will adjust our operating rate with customer demand and so as customer demand starts to move up or down, we will make accordingly the changes in our production facilities and I would say thus far in Q1, we are running, it bounces around 40% to 45% Op level. So, we are in that kind of range and that’s kind of where our customers are as we said worldwide. They are kind of 40% to 50%, depending on which country, which customer, which product portfolio our customer has.

Rebecca Barry - Defiance

So then, if you cut these rates 40% to 45% in Q1, would you be above breakeven then?

Craig Shular

Well, this is not a guidance we give. I mean you’ve got a lot of variable into that. As we said our biggest issue in Q1 and probably continuing in to Q2 is just the volatility in the marketplace and the uncertainty in this marketplace and so as we said, we expect to virtually breakeven in Q1 and it could be a loss because of that volatility. So, our breakeven run rate or our breakeven volume rates are not guidance we give.

Rebecca Barry - Defiance

Okay and just a follow-up on Bob’s balance sheet question. Can you talk a little bit about maybe acquisitions going into ’09 and what the industry looks like? Do you feel like there is opportunity there with a lot of small players to maybe consolidate and gain share or are you more concerned with debt pay down at this point?

Craig Shular

Well, last year we did our first acquisition, the Seadrift one we talked about, very pleased with that. Obviously we enter ’09 with a very solid balance sheet, low debt and well positioned. So, we will continue to look at opportunities in the marketplace; however, we will examine them on a very prudent basis.

The last thing we want to do is increase debt in a very uncertain time. So, we continue to look, we’ve got a balance sheet that allows us to continue to look, but having said that before we added any kind of debt to the balance sheet, we would look very, very hard at that, market risk, length of this recession, etc, a large deal with a lot of debt, don’t see it, that’s just not us, not prudent in this very uncertain time, not going to happen.

A small one with a little bit of debt that we thought was strategic, improved our business model, great buy, great price, yes we’ll look at that, but we’ll be very prudent before we pull the trigger on something like that.

Rebecca Barry - Defiance

Are you seeing any distress at all now with some of your smaller competitors?

Craig Shular

Too early to tell, I don’t see that right now. I think there’s been some pretty good improvement in a number of the balance sheets. So, I don’t see any really screaming issues on that front right now Rebecca.

Rebecca Barry - Defiance

Okay, great. Thank you.

Craig Shular

Thank you. Have a great day.

Rebecca Barry – Defiance

You too.

Operator

Next we’ll go to Mark Parr with Keybanc. Please go ahead.

Phil Gibbs - KeyBanc

This is Phil for Mark; he’s actually out of town today.

Craig Shular

Hey, Phil how are you today?

Phil Gibbs - KeyBanc

Doing okay. Can you talk about progress of working capital initiatives and where do you see things like your inventories trending into next year? I know you have some potential offsets on the upside given needle coke increases, but where should we look at your working capital?

Craig Shular

Good question Phil. Our team in Q4 obviously got after this very early, slowed down our production facilities to match customer demand, worked very hard on AR collections and as you see from our cash flow numbers, had a very solid Q4.

As we go into ’09, the team’s mission will be to reduce our investment in working capital and so we will look to keep our AR very current. Our AR today and AR ageing is in good, good shape right now. We will look to keep that very current and look for opportunities to reduce our investments and accounts receivable.

In the case of inventory, you’re spot on Phil. We’re going to reduce the tons for sure, and the quantities, but the fact that the needle coke costs are going up, we’ll be swimming against the tide let’s say on the dollar value, so that’s our challenge. The goal is to reduce the tons significantly and also hopefully reduce some of that dollar investment in inventories. Right now, we closed the year of course at $290 million and so there’s lots of a sides to go at. The tide we are swimming against is the increasing coke cost that will come out of the balance sheet.

Phil Gibbs - KeyBanc

Okay and this one is from Mark; as far as the supply chain financing, the $30 million, where does that tuck-in to the balance sheet, and what was that really about?

Craig Shular

Well, and on the balance sheet you’re going to see it in the other accrued line. So, that’s where you’ll see it. It’ll be in current liabilities and the other accrued liabilities section of the balance. We also show it in the footnote around the net debt, where you can kind of see the amount that was outstanding as of the end of the year, which is right around $30 million. So, you can see it in both basis, given a little bit more detail on the net debt calculation.

Essentially, what it’s allowed us to do is, our key raw materials trying to leverage our payables in actual terms in which we have to settle those obligations by leveraging the supply chain financing. We in fact, we’ve able to elongate that payment cycle time and we’ve been able to do that at very attractive financing costs.

So, we’ll continue to look at that in other sources of liquidity, especially in this challenging environment, any opportunity leveraging supply chain or leveraging our factoring line, we’ll continue to engage with.

Phil Gibbs - KeyBanc

The last question just about the macro environment, you pointed in the past to 70% of your mix being a larger diameter and 30% of the mix being non-melter applications. Have we seen that non-melter portion of the mix come under some more relative near-term pressure versus the other portion of the mix, just given the lower grade feedstock components?

Craig Shular

Phil what we see today is we would expect that still that 70%, 30% relationship to hold as we go forward. We as of today haven’t seen any real material difference in that.

Phil Gibbs - KeyBanc

Bu material differences as far as potential pricing pressure on one versus the other?

Craig Shular

We haven’t seen that yet. We’re just getting started in the book building as we said, but macro look, we haven’t seeing that yet. It could come, but really we haven’t seen any indication of that yet.

Phil Gibbs - KeyBanc

Okay, thank you.

Craig Shular

Thanks, Phil. Have a good day.

Operator

Next we’ll go to Lavon Von Redden with Hockey Capital. Please go ahead.

Lavon Von Redden - Hockey Capital

Good morning guys.

Craig Shular

Good morning Lavon. How you’re doing?

Lavon Von Redden - Hockey Capital

Not too bad. Quick question, if I take look at the linearity as it relates to your capacity utilization in the fourth quarter, could you just help me kind of understand how that moved and whether that was a little bit better than your original expectations when you last kind of came out and warned about I guess the quarter and this year?

Craig Shular

Well, if I look at the average run for Q4 it’s probably around 70% Op level, average in Q4 and we exited at 45% Op level. So obviously we kind of started the quarter I think like everybody. Okay kind of things still look good, customer demand is still good and then of course as we all know, it deteriorated rapidly for our industry and many industries.

So, the falloff November, December obviously was steep. December, we had a number of customers around the world that just kind of shutdown for the last two weeks. So that it, sent everybody home. So that’s kind of the way it went about, 70% Op level in Q4.

Lavon Von Redden - Hockey Capital

Did you give any sense if there was some forward buying related to, we all know that needle coke prices are going high?

Craig Shular

I wouldn’t call it forward buying, what I would call this is virtually every customer took every ton of electrode that was on their ’08 contract, because if they didn’t they loose that price and then they would face the new price. So 98.9% of the customers wanted every electrode on their ’08 contract and took them.

Lavon Von Redden - Hockey Capital

Maybe you can help me just take a look at and think about the kind of global GE market and kind of get a sense for what’s happening there. There’s been some capacity closures announced by some of your competitors, it seems to me at least to a certain extent that the world is a much smaller place, but you guys haven’t really talked about reducing your overall capacity as well. Maybe you can kind of help me how you think about globally what’s happening and your own thoughts?

Craig Shular

Well, we haven’t changed any of our capability i.e. total capacity, but we’ve made significant changes of course in the Op level, the staffing and the cost structures across the organization and so, the way we look at it, the capacity that we have on four continents, is the capacity that it will be required down the road and the big question is when do we all come out of this severe global recession, but down the road, that capacity and capability as it was required in kind of ’07 and ’08 will be required to service our customers needs in those geographies.

So, we don’t have any plans at this stage to eliminate any capability or capacity, but we have proactively really lowered the Op levels as you can hear from the numbers we’re discussing.

Lavon Von Redden - Hockey Capital

And any comments related to some of your competitors like HEG or etc?

Craig Shular

Well what I see in the customers, a number of them have had their conference calls, a number them we hear through their dialogue with customers and the customers talk about it, the steel customers about it; it appears that everyone is trying to really manage their working capital closely and not let their warehouse build up with inventory that can’t be moved. So I think as you listen to the conference calls thus far, the competition has tried very hard not to let inventory balances get out of control and tie up a lot of working capital in those inventory accounts.

Lavon Von Redden - Hockey Capital

Okay and one point of clarification, when you do not have a contract Craig, are the sales basically done at spot at that stage?

Craig Shular

Yes, they would at spot Lavon, that’s rare because they must have an electrode to of course melt the steel at contracts. Now, there’s a few that might only do a six month contract, but that’s rare. I don’t have any customers that are just on spot.

Lavon Von Redden - Hockey Capital

Okay, good thanks

Craig Shular

Thanks Lavon. Have a good day.

Lavon Von Redden - Hockey Capital

You too.

Operator

(Operator Instructions) and we’ll go to Chuck Murphy from Sidoti for a follow-up

Chuck Murphy – Sidoti & Co.

Hi, guys. Just wondered as far as the Seadrift impairment again, I mean if volumes of needle coke to Seadrift’s customers are going to be so much lower, I mean how is it that needle coke prices are up high double digits?

Craig Shular

Which I guess I said there’s only four producers. They have alternative users for those assets, so they can make different kinds of coke or especially in the case of Seadrift, they can adjust their cost structure and just make less and so the producers are seeking and getting increases.

Chuck Murphy - Sidoti & Co.

Okay and then on the SG&A, I think the press release mentioned something about it containing some severance charges and some bad debt expense, could you kind of give us some idea of what that was or how much that was I should say?

Craig Shular

Yes, if you look at the SG&A, year-on-year increase is $2 million or so and we would have highlighted the primary drivers towards the severance related accruals that we had to book and then we booked some additional bad debt provision. All of that increases slightly more with associated with those two items. So, if you can think of it, it’s kind of $2 million to $3 million impact, when you aggregate the two up.

Chuck Murphy - Sidoti & Co.

Okay, and last question, nearly all of your customers took the full 2008 contract. I mean what rate were they running at, going into like the third quarter. Did they really kick it up in the fourth quarter?

Craig Shular

No, Q3 in general across the world they’re running at a higher Op level and then they like we did ratcheted down over the course of Q4. So October higher than November, November higher Op level than December was the general pattern of our customer base and we tried to mirror that very closely and I think we’re running right about at that kind of level that we saw them at that period.

Chuck Murphy - Sidoti & Co.

And seeing as far as how many electrodes they were buying, did it look like they were going to use up their full allotment, in the third quarter?

Craig Shular

No, no, what they bought in Q4 remember I would say was more inventory than what they wanted and they’re buying; one, because the price increase; two, that’s the way the contract’s structured. You got to take it or you loss it and from our side, we’ve got contracts and we have to work together of course for long term relationships, but from our advantage point, we have paid for some of those raw materials four months before. Electricity you pay like in 14 days and so we had already made the product, it was in the production process done and we really needed the customer to take it as he had contracted for, and then so we could go ahead and then start kicking down on the AR collection and complete that cash flow collection cycle much quicker than, if we would have said “Oh, take it in Q1 or Q2 when you want it.”

Chuck Murphy - Sidoti & Co.

Okay, thank you.

Mark Widmar

Thank you, Chuck.

Operator

And we have a question with John Mantel with Royal Capital. Please go ahead.

John Lansfield - Royal Capital

Good morning guys.

Craig Shular

Good morning John. How are you doing?

John Lansfield - Royal Capital

Well, thanks. A question on your inventory which ticked up sequentially slightly in the fourth quarter; if you go back to, call it just for round number sake, a normalized quarterly tonnage run rate of 50,000 metric tones and that would happen in the third quarter, can you give a sense of what the needle coke component of that inventory is? Where I’m going with this is, how many quarters would you enjoy the benefit of the lower cost needle coke that you exited ’08 with?

Craig Shular

John if I look at kind of our experience in the last few years, in general we’ve enjoyed the benefit of some of that inventory we have for Q1, and then it carries some into Q2 and then less than Q1, right and it depends on grade and it varies by grade and then demand for that grade, but Q1 usually had some pretty fair benefit from it and then Q2 less and then by the middle of the year it’s completely finished.

Now, given that ’09 should be a slower year, lower volume year, that should go longer. How long, I think it’s too early to tell. It depends on ultimate customer demand, depends on grade, etc, but all things being equal, yes that should last longer than let’s say the last couple of years.

John Lansfield - Royal Capital

Right and I guess taken in combination with your comments as far as when you would see your books starting to be built, it wouldn’t be necessarily, unreasonable to assume that most of ’09 you’d be using in running through your ’08 cost of coke?

Craig Shular

No, we won’t last that long. I think Q1 yes; a good slug of Q2 and maybe into Q3 depending on the grade. So it will be longer lived than let’s say the last couple of years, but the full year, no.

John Lansfield - Royal Capital

Okay then I guess just the corollary question on the coke would be, you’ve looked in as you say pricing for all of your coke requirements, can you give a sense of what if anything you did as far as the volume side of that and also the duration of that contract, is it also a calendar year arrangement

Craig Shular

John yes, its calendar year as we’ve done in all the past years, so it covers ’09 and volume, of course we’ve had to make some estimates on the volume and then obviously in the volume suppliers understand that there needs to be some flexibility in such a volatile year like this year. So pricing is fixed, the volume we’ve got an estimated volume in there, with a little plus, minus around it, of course in a volatile year like this.

John Lansfield - Royal Capital

Okay and final question, on the anti dumping provisions that were instituted on some of the lower grade smaller size electrodes, have you seen any benefit from that the macro conditions not withstanding here in the states?

Craig Shular

Not yet. I mean too early to tell and that’s, NEMA, the National Electronic Manufactures Association which electrodes happens to fall into NEMA. NEMA took that case up and was successful on that case. So John, literally that’s just come out. It’s come out in the last few weeks that it was finalized. So, haven’t seen any impact yet, maybe we’ll see that later in the year as we go forward.

John Lansfield - Royal Capital

Thanks Craig.

Craig Shular

Thanks, John. Have a great day

Operator

Alright, it looks like we have no further questions. I’ll turn it back over to you Mr. Shular for any closing remarks.

Craig Shular

Holly, thank you very much. Everyone thank you for joining our call and I look forward to talking to you in a couple more months when we go over our Q1 results. Thank you and have a great day.

Operator

And that conclude today’s conference, you may disconnect you lines at any time.

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Source: GrafTech International Limited Q4 2008 Earnings Call Transcript
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