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GrafTech International Limited (NYSE:GTI)

Q3 2009 Earnings Call

October 29, 2009 11:00 AM ET

Executives

Kelly Taylor - Manager, Investor Relation

Craig S. Shular - Chairman, President and Chief Executive Officer

Mark R. Widmar - Vice President and Chief Financial Officer

Analysts

Luke Folta - Longbow Research

Ian A. Zaffino - Oppenheimer & Co. Inc.

Charles Bradford - Affiliated Research

Eric Prouty - Canaccord Adams

Zahid Siddique - Gabelli & Co.

Asad Abedi - Merrill Lynch

Operator

Good morning. My name is Brandy and I'll be your conference operator today. At this time I would like to welcome everyone to the GrafTech Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to our host Ms. Kelly Taylor. Madam, you may begin.

Kelly Taylor

Thank you Brandy. Good morning and welcome to GrafTech International's third quarter 2009 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 the copy, please contact Sami Noor at 216-676-2160 and she will 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 S. Shular

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

Net sales were 165 million, a 5% improvement over the second quarter. Operating income increased 29% to 25 million, as compared to Q2. Operating income margin expanded nearly 3 percentage points to 15.2% of sales. Net income before specials increased more than 25% to 18 million or $0.15 per share.

Q3 operating cash flow was 61 million or slightly higher than operating cash flow generated in the entire first half of 2009. This solid cash flow allowed us to complete the quarter with 4 million of net debt. Today post Q3 closing and given continued cash flow we're now net debt free. Since the global economic crisis began 12 months ago we have paid down over 130 million of debt.

In our Industrial Materials segments sales increased 5% to 137 million, while operating income for this segment was 24 million, a 50% increase over Q2.

In our Engineered Solution segment sales were 28 million in the third quarter, flat as compared to Q2. Operating income was 1 million, a 2 million decline from Q2 largely as a result of unfavorable prior cost absorption.

Turning to total overhead for the first nine months of this year, SG&A was reduced 8 million year-over-year as a result of our teams tight cost control and successful execution our previously announced productivity initiatives.

Turning to outlook. While global economies have began to stabilize, end market demand for the majority of our products remains far below pre-crisis levels. And the pace of recovery is anticipated to be slow. Third quarter results came in better than expected due to stronger than anticipated European Steel offering rates as well as continued increases in steel offering rates in several other geographies. As a result, we believe customers in several geographies have completed their graphite electrode destocking activities earlier than initially expected and began reordering in the third quarter.

Accordingly we are in increasing our full '09 operating income guidance by over 25% to 80 to 85 million to reflect the improved third quarter performance and expectation that Q4 will be another solid quarter. We have issued operating cash flow expectations for 2009 which is expected to be approximately 150 million for the full year.

Looking beyond fourth quarter, visibility remains limited for 2010. We have recently begun building our 2010 order box and at the end of February next year we will be in a better position to give guidance.

We have secured pricing for our key raw materials, petrol and needle coke which will be up as expected 45 to 50% over our prior purchased price. We have utilized the remainder of our low price needle coke in '09 and will begin to see the impact of the higher priced needle coke in 2010. The structural improvements we've made to the business position us well to confront what could be a long and slow recovery of the global economy.

Finally, our strong balance sheet has positioned the company to seize future growth opportunities.

That's the end of our prepared remarks. Brandy, could we open it up for Q&A.

Brandy, go ahead open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Luke Folta with Longbow Research.

Luke Folta - Longbow Research

Hi. Good morning, guys.

Craig Shular

Good morning, Luke. How are you today?

Luke Folta - Longbow Research

Not bad, not bad. Just firstly on your needle coke statement, the 40 to 50% up is that -- are you referring to aut of 2008 levels?

Craig Shular

Yes. You are correct Luke basically there was very little bought in '09. So it's really off our last real purchases and that would be '08. So they are up about 45 to 50%.

Luke Folta - Longbow Research

Okay. So that would actually suggest that I mean from last time when we spoke I think you were saying about 50%, that would actually suggest you maybe have seen little bit lower needle coke versus earlier expectations is that the right read on that?

Craig Shular

Yeah. I think what the trend I think when we started out the year, the needle coke producers were looking for 90-80% increase and that's come down over time as we proceeded through this year. And 45% increase 50% that's kind of the lower end of the range. So they have come in as expected and maybe little bit lower than what we initially expected and where they started.

Luke Folta - Longbow Research

Okay, and can you tell us in the third quarter how much of last years needle coke was a part I mean as a percentage of your consumption, how much it was last year's?

Craig Shular

I think for Q3, we should think about the majority. The vast majority of Q3 was all low cost coke. And I thing that's the best way to look at it. Q4 the same kind of thing, the vast majority will be the lower cost coke. Obviously we have many different grades and we should think that really Q1 next year will be virtually all newly purchased coke. I think that's the right way to look at it.

Luke Folta - Longbow Research

Okay. And just finally on the pricing for the electrodes, can you give us some feel of direction?

Craig Shular

Well we've gone out with our pricing. In early Q3, we announced the price increase and we posted a 7,795 pricing and as I said we're at the front end of the book building process so it's really too early to give much color around that.

Luke Folta - Longbow Research

Okay. But would you expect that the average kind of discount to that announced spot price to be anything different than it has been in recent years?

Craig Shular

Well. It's too early to tell one, and two of course, this is kind of a different operating environment then what everyone's used to. So it's hard to give color on that. Obviously we're seeking a price increase to overcome the cost increases and that's what we are trying to execute.

Luke Folta - Longbow Research

Okay. I will get back. And thank you very much.

Craig Shular

Thanks Luke.

Operator

Our next question comes from Ian Zaffino with Oppenheimer.

C: Craig S. Shular:} Good morning, Ian.

Ian Zaffino - Oppenheimer & Co. Inc.

Hi. I just wanted to -- a little bit of a follow-up on that needle coke because I remember you guys mentioning that needle coke was up 30%. I mean now you're coming back and saying it's 45 to 50. Is there any uptick in that and is that because some of the other producers have come offline and there's limited supply now. Can you just give us an idea what's going on there?

Craig Shular

No, really it's never been, they've never been at the 30% level out there in the market place for needle coke. It's kind of been 90%, 80% in the beginning of the year they were seeking. And then I think in this environment they have to modify their expectations and then it's come down kind of 60 to 50. And we're in here at the 45-50% type increased level.

So they never showed us a 30%. We have never seen that. So this is Ian, this is pretty much what we expected and was asked before, may be its little bit at the lower end of what we would expecting.

Ian Zaffino - Oppenheimer & Co. Inc.

Okay. And how should we think about the new pricing that's on your on the website as far as your listed price end. I know we've been historically given a 10% discount to that. Is that relatively the way we should be thinking about the new prices on your website or prices here are different?

Craig Shular

Well, as we said earlier, it's very hard to compare this to prior years because the operating environment is so different this year for everybody and in every industry. So that's our posted price. Larger accounts tend to get a discount and so really to see where that settles in we're going to have to build the book and see where it kind of falls out.

Ian Zaffino - Oppenheimer & Co. Inc.

Okay. Thank you very much.

Craig Shular

Thanks, Ian.

Operator

Our next question comes from Ray Warne with Shaker Investment (ph).

Unidentified Analyst

Thank you. I had some questions about two items. One had to do with -- where do you think demand at your customers is running now? Do you think it's picked off the bottom at all? Are they still pretty much running at the rates they have been running for the last quarter?

Craig Shular

Ray, if I had to look at this year, beginning of the year Q1 many of our customers in many geographies were running down in kind of the 40%, 45% offering rate level. And then since Q1 they've steadily increased especially beginning in July, a number of them increased and right now they are running in many cases in the 60% or 60% plus offering rate. So Ray, yes offering rates have come up for our customers in many, many geographies and a lot of that I would say is attributed to them.

Destocking and now they worked off much of the excess inventory though their supply chain and I think the steel supply chain, even in front of them has leaned itself out quite a bit. So they're now running in the 60's and I think kind of the 60% level is where it's at right now.

Unidentified Analyst

So is it prudent to say that you see that their operating rates will continue to grow through the reminder of the year and into 2010 or do you have any visibility on that?

Craig Shular

Well visibility is very limited in this environment. I would say in Q4 many times Global Steel has some slowdowns or some year end holidays. Some customers plan their maintenance around those year end holiday.

So many times Q4, especially December is a slower operating rate period for steel producers. So as I look at the market and the order books that we see out there in some of our customers and a number them have recently come out with their earning release. I think they are looking for a kind of a stable Q4, not a lot upside is what we're hearing from our customer base.

And they expect to run kind of in the 60s. So I would say, kind of a status quo around the world in Q4. And may be December slower month as it normally is. So I don't a see big I don't see an uptick at all in Q4. I think they'll use Q4 to lean out more of the supply chain which I think good news. I think we will enter 2010 with a very lean supply chain across much of that steel supply chain. And then 2010 we'll build our book and kind of end of February I think we have a much better line of sight to what 2010 will look like.

Unidentified Analyst

Do you think that some of the customers that you have who are still using up their graphite inventories in Q3? Do you think that you should see increased demand from them in Q4, simply because they have run down their inventories?

Craig Shular

That's correct Ray. We'll see some of that, so we will have definitely cases around the world where customers are at the end of their destocking. We had that in Q3 and that was kind of the upside we had in Q3 performance. And I think we will see some more of that.

We have a number of customers, that's exactly their case. So we should benefit from that and that's why we believe Q4 will be another quarter for us. Steel may run a little bit softer, may do some annual maintenance work but I think the exact item you are talking about some of our customers finishing their destocking will allow us to continue to have another solid quarter in Q4.

Unidentified Analyst

Okay. And just one follow-up question if I may. During the quarter your other income showed I think $11 million loss, you said because of a currency translation on the loan that you had to a subsidiary. Is this a one time sort of thing or do you these types of visuals (ph) will continue going forward?

Mark Widmar

Yeah Ray, this is Mark. You can look at our historical result. We have had the arrangement of the inter company loans impacting our results since they've been put in place. They largely were put in place back in 2002 timeframe or so when we actually did the senior note financing. And they are non cash items. They are driven strictly off the movement of foreign currencies and so we call them on as non-recurring items.

Now with the final pay down of the senior notes we paid a final 20 million in Q3. We will be looking at that collapsing and restructuring those loans which will help mitigate the ongoing impact of those items. But again, since the non-operational, non-cash items, we have called them out. We will look at just year-on-year comparison last year, I think we had about $17 million gain in the quarter which obviously we called out over the operating results. This year because of the movement of the euro and particularly we've had a loss. So there's quite a bit of volatility.

We do whole comb out the operational results but we would expect going forward and with the pay down of senior notes that we will be able to collapse those loans and hopefully minimize the effect going forward.

Unidentified Analyst

Okay. Thank you very much.

Craig Shular

Thanks Ray.

Operator

Our next question comes from Charles Bradford with Affiliated Research.

Charles Bradford - Affiliated Research

Good morning.

Craig Shular

Good morning, Chuck. How are you today?

Charles Bradford - Affiliated Research

Not too bad, not too bad. Baseball didn't work out too well last night. But what can you do?

Craig Shular

I am with you.

Charles Bradford - Affiliated Research

Could you discuss a bit, the Engineered Solutions situation. What's happening with the solar related silicon products and all those other alternate energy potentials that you had.

Craig Shular

Absolutely, Chuck in general Engineered Solutions business, when we go into a downturn it goes into its own downturn cycle after steel. And I think you saw that in this downturn we just had here at the beginning of the year. And it also tends to come out after steel. So I would at Engineered Solutions this year as you kind look at the first three quarters, that this year I don't see much improvement, it's still very soft. Q4 will be a similar kind of complexion. And then over the course of 2010 and I don't if its Q2 or Q3 I think we will start to see some improvement in Engineered Solutions.

And I think it will be driven by some of those items you've mentioned. Solar, many of the solar companies are starting to come back. Many of them have had tough balance sheets. Many of them have been affected by the financial markets inability to raise capital, the tough liquidity situations. Many of those companies are in China.

And I think the other thing is some of the government's stimulus programs around the world have a fair segment for some of the alternative energy. So I think some of that will start to gain traction, kind of Q2-Q3 next year. So this year I will say a Engineered Solutions, soft year, a down year, tough markets, end demand very much down and next year maybe start in Q2 see it start to pick up.

Charles Bradford - Affiliated Research

On the electrode side, can you breakdown for us the sale from the ultra high power EAF furnaces, to ladle furnaces and do anything for submerged arc furnaces?

Craig Shular

Yeah. Our breakdown, Chuck would be about 70% for EAS furnaces, and this would be the larger diameters for EAF smelters. And then about 30%, the balance would be in ladles, supporting steel making nonferrous applications, foundries would be in that category. Titanium dioxide, some of various other products would be in that 30%. Submerged arc would also be in that 30%.

Charles Bradford - Affiliated Research

Thank you very much.

Craig Shular

Thanks Chuck.

Operator

Our next question comes from Brad Links from Fremont Capital (ph).

Unidentified Analyst

Hi guys. Congratulations on quarter.

Craig Shular

Thanks, Brad

Unidentified Analyst

If I look at the WSA global steel production numbers, while you highlighted that overall mill utilization is about 60%. I see global EAF utilization is closer to 70%? If I assume which I think you guys just confirmed on a prior question that the fact that you run year-to-date at 40% utilization. That a delta between 40 and 70% EAS utilization is really a function of just channel destocking. And out of the mills that destocked, do you believe that your utilization should begin to more closely reflect, the utilization of EAS globally?

Craig Shular

Brad we agree with that. We should see as this destocking is completely behind this in Q4. All thing has been equal and that's a big item, all things has been equal we would expect next year, a higher (ph) rate to come up.

Unidentified Analyst

Okay. So then is it a fair assumption and unless we see a global decline in EAS production of the current level. You'll be running at least 70% utilization next year all else equal?

Craig Shular

It'll be hard for me just to say it'll be 70% but I would say instead of being in the 40%, with low 40s it should definitely come up. Does it finish at 50-55 or get all the way to 60, time will tell. But the direction will be up for the reasons you just are articulated.

Unidentified Analyst

Thanks guys.

Craig Shular

Thank you.

Operator

Our next question comes from Eric Prouty with Canaccord.

Eric Prouty - Canaccord Adams

Hi, good morning guys.

Craig Shular

Good morning. How are you today?

Eric Prouty - Canaccord Adams

Fine. I was just wondering if you could comment a little bit more about why the margin decline so significantly in the Engineering Solutions product segment, can you just provide some more color there?

Craig Shular

Yes Eric. It primarily it's clearly cost absorption. That business is running at a very, very low operate. In fact it's largest facility in the quarter, we shut down for a number of days and let everybody go home where everyone was good enough to take their vacation time around our plant shut down.

So it's running one at a very low op. So clearly cost absorption is an issue there. And then also on the quarter there was a little bit just product mix that brought down the margin.

Eric Prouty - Canaccord Adams

Okay, thanks and then you could just sort of speak about your confidence level that where be able to increase graphite electrodes pricing sufficiently as you build the order books. I mean what's it looking like so far?

Craig Shular

Well as said it's early. So it's early to tell. Obviously I believe everyone in our industry is confronted with very significant needle coke cost increases. So I think is a lot of pressure from the cost side and the amount are large, as we said 45, 50% of that item that's the key raw material by far.

So I think that should be a driver. Where it turns out? You really got to let the book building process go forward, the market's going to determine that.

Eric Prouty - Canaccord Adams

Okay. Thanks a lot guys.

Craig Shular

Thank you, sir.

Operator

Our next question comes from Bob Richard with Iron Edge Research (ph).

Unidentified Analyst

Good morning. Thanks for taking my call. You inventory position, your destocking comments are appreciated. Would you say the inventory position is differentiated by geographic region or is it pretty much as same let's say in Europe as it is here in North America or they are little leaner here than there are, can you add any color to that?

Craig Shular

Yeah, Bob. I would say in North America, the stock supply chain is leaner that Europe. Europe's a bit behind. The U.S. producers reacted very quickly. And right now when you look at all the metrics around steel inventories, service center inventories in the U.S. versus Europe, Europe is behind. So Europe is working hard. I don't have a customer in Europe that's not working on it and driving their team. But they are behind.

Unidentified Analyst

Okay. And one follow-up that 70-30 mix that you alluded to, that doesn't change in the outlook, say that doesn't change much, let's say from two years ago, until now, right?

Craig Shular

That's correct.

Unidentified Analyst

It's just a smaller pie, the 70-30...

Craig Shular

That's correct; the 70-30 has pretty very much remained in the contact in that ratio for the last several years.

Unidentified Analyst

Okay. Thanks for your time.

Craig Shular

Thank you sir

Operator

Our next question comes from Scott Finagle with Simon Advisers (ph).

Unidentified Analyst

Thank you for taking my question. Craig could you give us an idea as to what percentage of sales during the Q3 were at spot and what came under contract and what your expectations are for the current Q4?

Craig Shular

Yes, Scott thanks for your question. The orders we've seen this year have been in much shorter timeframes than historically. Historically 90-95% of our business would have been annual contracts. This year a much more typical pattern has been three month contracts or six months contract. We haven't had that much -- let's call spot, one-offs. So there hasn't been that much but there has been a lot of three months type business. So unlike the past I would say that the typical this year has been three months or six months very, very few annual contracts.

Unidentified Analyst

The margins on the three to six months contract are obviously a little bit better than they would be on a yearly contract.

Craig Shular

Well many variables there, timing, raw material, market pressure. So I don't know that you can make a general statement on that and where is the overall market when you book it. It would maybe a bigger driver. But I would say most of our customers have had a very limited line of sight in their own books. So they tended to go very short and when we see those that have completed destocking, the longest they have gone is six months or three months. So those that finished in Q3 they have given us orders pretty much just for the balance of this year. And nothing in the next year. That's been the trend. And it's driven because of their lack of visibility, much beyond few months.

Unidentified Analyst

Okay. So then what does the customer do in such a case from the end of the year until the book is built in the middle of February or the people customers that you are going to negotiate with and you might close between then?

Craig Shular

Well, what will happen is and it's happening right now, customers are coming and they put bids in and let's say very typical would be, all right, please give us a bid for our first half business. And we are seeing, this would be very typical of what's coming in this very early part of the bid season. We are not seeing a lot of annual contracts. There are some but it look like I would say going into 2010 they will more likely be on the shorter end then on the annual contract.

So very typical smelter comes in November, December, give me a quote for my first six months. We give a quote and then we would start shipping that in January.

Unidentified Analyst

Okay. So then just -- what would your approach be then Craig, to quoting on that three to six months contract as opposed to a yearly contract. I understand what the benefit would be to the customer, but can you talk about how GrafTech would try to derive some benefits from that, giving up the longer contracts?

Craig Shular

Well, we would go ahead and quote off of our pricing that we posted, the 7,795 price basis. We price off that base. The fact that it's shorter does not necessarily in itself adjust where we are going to price that. That customer and ourselves will both face the market risk when he comes back for let's say his final six months of the year. And depending on where the economies are, where government's stimulus money gains traction the price could be even higher for him. That's a risky he faces and we face.

Unidentified Analyst

Okay, thank you.

Craig Shular

Thank you.

Operator

Our next question comes from Zahid Siddique from Gabelli & Co.

Zahid Siddique - Gabelli & Co.

Hi good morning. I have a couple of questions; first is on the needle coke. What is the dollar price cut before the increase for needle coke on average?

Craig Shular

Zahid, we don't give guidance or color around our specific needle coke prices. It's a competitive item. I mean everyone out there is trying to buy needle coke at the best price they can get it. It's very important for your cost structure. So we don't really give color around where our price is and we only talk about year-over-year percentage increases.

Zahid Siddique - Gabelli & Co.

Okay, that's fine enough. Assuming that there is a 50% needle coke price increase to offset that, what percentage increase do you have to implement on your graphite?

Craig Shular

It is built in the price that were out there in the market place looking for, so that 7700 price, we have factored in. So we have fixed our needle coke first which is the large cost structure item. And then based on that we go out to the marketplace, start building the book. So we have factored that in, and like I said it's really, really to tell where that's going to come in. We are just going to have to let the book come together and as I said before, everyone faces that same kind of coke cost increase and we are just going to have see with the marketplace determines.

Zahid Siddique - Gabelli & Co.

Okay. And looking at the price cost curve next year just kind of the some more perspective, what do you see over the next three, four quarters it's hard to tell but I am trying to just get a sense of the trend?

Craig Shular

Well, the big item in the needle coke is 40-45% of our cost structure. So that 40-45% of the cost structure is going up, let's say, 50%. So I think that's just probably your biggest driver. If you want to get a look your trend I would look at it that way. And you can see our actuals that are posted for that segment each quarter.

Zahid Siddique - Gabelli & Co.

Okay. Just the last question, that's on Seadrift, did you write-off any of the assets, the value of the assets in Q3?

Craig Shular

No. There was no write-off in Q3.

Zahid Siddique - Gabelli & Co.

And do you have any plans to possibly acquire more stake in Seadrift?

Craig Shular

Well, right now we own 18.9%. It's a very good company, very good asset. The balance is not for sale. So if it came to market, we obviously would look very, very hard at it but right now it's not for sale.

Zahid Siddique - Gabelli & Co.

Okay. Thank you so much.

Craig Shular

Thank you, Zahid. Have a good day.

Operator

Our next question comes from Asad Abedi with Merrill Lynch.

Asad Abedi - Merrill Lynch

Good morning. Thanks for taking my question. Just a follow-up on that question. Your balance sheet is now very strong, cash generation is excellent. What do you intend to do with the cash you generate on this point forward?

Craig Shular

Asad we're going to direct our cash and our balance sheet strength towards growing our company. So obviously we're positioned to take on any internal growth opportunities. We have been developing a number of new products. So that will continue. And obviously with this balance sheet and liquidity we have we're also looking at external growth opportunity. So we're open for business on the acquisition front. We have gone through a number of years where really that wasn't a alternative for our company and obviously where we have the balance sheet today that is the case where we're open for business.

Asad Abedi - Merrill Lynch

Should we expect for a big step up in CapEx over the next year. And what kind of level as you mentioned?

Craig Shular

Well I think it's early to tell on that. Obviously we are monitoring very closely the global recovery. We see it as fragile. And I think most economists would say that this could be prolonged. So we're going to balance whatever we do against market demand. And so as we see market demand out there you may see more CapEx from us.

If we develop some new products for solar and some of those growth industries you may see more CapEx to support those initiatives on internal growth. And in external growth as you all know are kind of one-offs. They are hard to predict. All I can say is we work very hard to position our company to look at any great acquisition opportunities that would come along and obviously with this balance sheet we don't have a lot of contrains around seizing one of those if we feel it's right for the business model.

Asad Abedi - Merrill Lynch

Okay, and then to come back towards pricing. You talked about that $7700 pricing that you can provide now. Would you mind reminding me what the price you were going for before that was a composite here.

Craig Shular

Well just before the collapse of the global markets remember we were running full out. I think most of the electrode industry was running full out. And so the supply chain was very tight. And going into the quarter before that collapse we were seeking pricing over $9000. And of course we were running -- all of our facilities were run at capacity. And then of course the collapse came and the world kind of changed for everybody.

Asad Abedi - Merrill Lynch

Okay and that was you were going for and...

Craig Shular

Yeah, that was back in July of last year, July 1, we came out with a price increase. We re-running absolutely fall out working everyday every night and we will be seeking the price over 9,400 dollars. And that as we all know kind of in the Q3 beginning Q4, the world really changed. And we had to switch gears on many fronts, cost head count and be very nimble to position us to be cash flow positive and get to where we are today debt free.

Asad Abedi - Merrill Lynch

Last time you had a conference call you talked about I think about a 12% pricing increase across the board in new electric products?

Craig Shular

Correct.

Asad Abedi - Merrill Lynch

Would that be without the full the non 400, what kind of level would that have reached?

Craig Shular

Yes there was falling short and that was just a year-over-year. So I got to get you to go back to the public debt data in the Q. This quarter Q3 versus last year I think we are up above 15%.

Asad Abedi - Merrill Lynch

That was wonderful. Thanks for your help.

Craig Shular

Thank you, Asad.

Operator

Our next question comes from Salim Ghosh with Capital Investment (ph).

Unidentified Analyst

Hi guys good quarter and thanks for taking my question.

Craig Shular

Thanks, Ian

Unidentified Analyst

A lot of the questions have been answer but three follow-up things. Firstly can you comment a little bit on sort of costs outside of needle coke, right? What visibility do you have on that for going into 2010 and perhaps some color on comps versus, other energy, hedge, that sort of costs for 2009.

The second question is, we are obviously seeing very, very strong production and utilization levels in steel in China. And can you give us some color as to if you are seeing any increase business what that really means in order of magnitude if anything for you guys.

And the third question I will just put it out there is when you think about building your other book for 2010, would you be disappointed if you didn't improve margins whatever they are versus where they today or would you disappointed if you didn't maintain margins versus where they are today.

Craig Shular

Very good. On your first one, outside the needle coke we have not had any other raw materials drop near as dramatic as needle coke. So on the other raw materials they have been pretty much single digit type increases thus far. Obviously in today's environment they can change. But so far on the balance of the other raw materials the increases have then much smaller than needle coke. So think of them as single digit.

As just far sales in the China I would expect China's operating rate operating rate on the EAF has come up nicely. They have a very good infrastructure stimulus program and so I would expect China and impact slash all of Asia, and our sales in 2010 will probably be higher then '09. So there -- number of economies there have a much larger infrastructure component to their stimulus program. So sales should be up in 2010 in that zone.

As far as the 2010 order book, on margin increase, I would say our goal is absolutely to try and achieve some margin increase. So that's the goal. Where it comes out is really going to be dependant on where we build this order book. And that's just really going to take some time to get that done. But our team's goal is to get margin expansion in 2010 over this very, very brutal '09.

Unidentified Analyst

Got you, just one follow-up on the China/Asia I mean can you give us some sense of this order of magnitude, either China, specifically or China plus Asia Pac, right now what percentage of your electrodes sales ball park are going there? And what would that number had been say in the middle of 2008, just percentage of electrodes sales?

Craig Shular

On percentage, thinking of percentage is roughly around 10% of our sales is in Asia.

Unidentified Analyst

And that's today.

Craig Shular

Yes and I would say in '08 it was probably not that far off that number. But if you look, I'd say if you took more of a four years look, you would see an increasing trend of our sales in Asia. So we have been growing our sales in Asia over the last four years. So going into 2010 if Asia continues to run well, I would expect to get above 10%.

Unidentified Analyst

Okay and is there any local divested Chinese production capacity of electrodes in apart from quality and how important is the quality to some of your customers in that region and do you have any other differentiating edge versus quality in selling to those customers with some more localized suppliers.

Craig Shular

Quality is important on the larger furnaces and in general some of the very large or very newer furnaces quality becomes important. They are more demanding furnaces, they have higher current put into them and they require a much better performing electrode. So that tends to be the segment where we performed the best, pricing is good and it's a performance/quality issue that's important to the customer.

Unidentified Analyst

Right. Okay thank you.

Craig Shular

Thank you very much. Have a good day.

Operator

Our next question comes from Shiraz Patel with Jefferies & Co. (ph)

Unidentified Analyst

Good morning, good afternoon actually. Well we are getting close to whatever it is right now.

Craig Shular

Morning Shiraz. How are you today.

Unidentified Analyst

Good just wanted to follow on the Asia question here one more time. Just on the higher mix in Asia into 2010. You are saying that pricing is going to be comparable to what you're getting in the U.S. and European markets?

Craig Shular

Too early to tell that book; we've got to get that book build so we're at the front end. The market, many times tends to start in the U.S. So it's early to tell. But I'd say the trend for our Asian sales over the last four years has been upward. And what we see in Asia 2010 I would expect it's probably higher in 2010 and '09.

Unidentified Analyst

And the margin is comparable historically between the U.S., European and Asia?

Craig Shular

Well it depends on matching up the products and the segments. Sometimes China tends to be a little bit low run pricing. So I wouldn't necessarily say it's comparable. I would say we tend to be a little bit lower.

Unidentified Analyst

Okay. And then wanted to move onto the inventory side. I wonder if you get the clarification, did you comment at the inventory for steel is leaner in the U.S. then it is Europe or is inventory for electrodes leaner, what's that about?

Craig Shular

It's both. Absolutely steel is leaner in the U.S. and Europe and also in the electrode inventories. We have had U.S. accounts finish destocking ahead of European accounts.

Unidentified Analyst

Okay. Larger accounts, smaller accounts is there a trend one way or another?

Craig Shular

Across the board. It's little early, people's pile and sometimes they finish the pile they work at keeping on the pile given the low operating rate is been so large that some customers even loose track of the pile. And we get an emergency order to quick let's keep going.

So the good news is I think by the end of this year, virtually, all the destocking will be behind us, which should mean as was ask before there our operating rates come up at our company next year all things being equal. And then also I think it means that as we do see some improvement in the end markets for steel or we start to see some stimulus money around the world and infrastructure that we should see some perhaps some upside in our business.

Unidentified Analyst

Okay. And then just one last thing on contracts. Now that some customers are looking for more three to six months contracts versus the normal annual contracts do you feel like maybe you might be publishing base prices a little more often or still you see yourself as doing it that on an annual basis.

Craig Shular

Well I would say if I look at the orders that have come in so far we have had come in for annual. So some names, one annual contract and then some others have because of visibility or what not they are three or six months. I think a lot of it depends on the customer's strategy.

The ones that have gone three to six, obviously they're going to face the marketplace again when they come out. And where is global stimulus, where are the economies, where is the raw material cost, where is oil, all those things will determine where is the price of electrodes when they start to come out. So the color we are giving is, I don't see us back to '08 where we had a lot of annual contracts. I think we're going to have a bunch of annual but we're also going to have some three and six months in the book.

Unidentified Analyst

as you are saying that you will have more three and six, do you think you may published the base price number in March or June of next year versus doing it. I think in July, we first time we saw in the '08 period and then September for the first time in '09. Will it be, I don't know just more often this is...

Craig Shular

Well it's hard to tell if that will be more often. But let's put it this way. If we have a lot of three and six months in the book, the opportunity will be there to replace those accounts.

Unidentified Analyst

Okay. That's fair. I appreciate your time. Thank you, guys.

Craig Shular

Thank you, sir.

Operator

Our next question comes from David (ph) with AIM

Unidentified Analyst

Good morning.

Craig Shular

Good morning, David.

Unidentified Analyst

Could you say what your utilization was in Q3 and Q1 in Q2 it's kind of between 35 and 40%?

Craig Shular

That's right. In Q3, we came up just above 40. So we are kind a 41, 42%, so it's come up. And I would expect as we've said we'll probably see it continue to come up over the next few quarters.

Unidentified Analyst

Great and then, last quarter conference call you said that you expected in by the Q4 you would be mostly work through most of your 2008 needle coke supply

And therefore the 2008 needle coke cost and your sales came in a little better in Q3. So you would have thought that, that would have happened, but you still think you still have most of Q4 will be under 2008 needle coke?

Craig Shular

Yeah so I think the vast majority of Q4 will still be the old lower cost coke. And then in Q1 we should think that, that's going to new coke. So that's going to face the new higher cost coke.

Unidentified Analyst

Is there something that's changed over the quarter and when you think at...

Craig Shular

Remember I think all there is five, six, seven grades of needle coke. So there is different grades. You have got a customer base that's ordering much different than they did in the past, right because they are destocking and then you've got the variant operating rates in different geography. So I don't think we're too surprised that we've finished up this year primarily with lower cost old coke. And virtually the vast majority in Q4 will be the lower cost. I think that hangs pretty much with what we thought. I would say the Q3 rate is up higher than what we thought because steel operating rates were up higher. We use more in Q3 then what we would have expected.

Unidentified Analyst

Last question for Seadrift, when you brought it you are I guess doing some process improvements and try to improve the quality of the product they produce there? Can you give us an update where you are implementing those process impairments?

Craig Shular

Well David we don't control that. We're the minority shareholder. So we don't run the facility. We have seat on the Board. We don't drive process improvements there. We are the majority investor there.

Unidentified Analyst

Okay. Thank you very much.

Craig Shular

Thank you.

Operator

Our final question comes from Luke (ph) Research.

Unidentified Analyst

Just a quick follow-up and I really don't mean to believe at the point on that old pricing spread situation, I just I don't think it does any good for anybody as far expectations gets too far, one way or the other. But just my question is, if you were able to achieve dollar spreads, electrodes, (ph) or coke in 2010, similar to 2008, would that be a favorable outcome to kind of similar of same question?

Craig Shular

Well I guess, the best for us to answer, I agree with you. With the limited visibility, I think it's very prudent that we take an approach that we're in the front end of building the 2010 book. We know that the costs have gone up significantly. We're out in the marketplace trying to execute our price increase to offset those costs. And we just have to let that play out. So I think, the goal will be to get margin expansion and time will tell. And I think if you listen to our customers Q3 calls they also, I think they'll be the first to say that there is limited visibility out there.

In length of their order books and obviously looking all the way into 2010 the have even less visibility. So I think Luke it's very prudent to take that approach. And you just have to let us put together the book and then we'll do our (ph) to come out the end of February and if we are comfortable with line a side, we'll give guidance for what that is, if its for the full year, we'll give annual guidance that's always been our preference.

But if the global economic condition is such that its limited visibility and hard to give annual guidance then maybe we have to do like we did this year and kind of give quarter-by-quarter or maybe six months guidance. And that really be driven by the environment we face.

Unidentified Analyst

Okay. But as you see the world today, you think it's fair to use that as a base case scenario in 2008?

Craig Shular

Well again you got me on a tough position just because of visibility, I think all things being equal, what's saved us to think about is, our operating rates should come up. So we've gone through massive destocking globally, excess inventory of electrodes everybody had because of a huge drop off in operating rates.

And now all that has worked through the supply chain and destocking and the supply chain for steel...getting very lean in electrodes other raw materials and very importantly for us indirectly steel. So I think our operating rate should come up, that's good news, that's better absorption making more electrodes selling more electrodes.

Where the price will be and where the balance of the costs are going to be, that we still have to workout.

Unidentified Analyst

Okay, guys, thanks a lot for the color and good luck.

Craig Shular

Thanks Luke. Much appreciated, have a great day.

Operator

There are no further questions at this time.

Craig Shular

Randy, thank you very much. Everyone else thank you for supporting our company and your participation and look forward to talking to you next quarter. Have a great day.

Operator

Ladies and gentlemen this concludes today's conference call. You may now disconnect.

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