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GrafTech International Ltd. (NYSE:GTI)

Q1 2010 Earnings Call Transcript

April 29, 2010 11:00 AM ET

Executives

Kelly Taylor – Manager, IR

Craig Shular – CEO

Mark Widmar – CFO

Analysts

Luke Folta – Longbow Research.

Ian ZaffinoOppenheimer

Michael Gambardella – JP Morgan

Mark Parr – Keybanc Capital Markets

Charles Bradford – Affiliated Research

Chuck Murphy – Sidoti & Company

Scott Blumenthal – Emerald Advisers

Tim Hayes – Davenport

Eric Glover – Canaccord

Davis Haddock [ph] – Invesco

Titrus Sandall [ph] – Cardinal

Luke Folta – Longbow Research

Operator

Good morning. My name is Brandi and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech first 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. Ms. Kelly Taylor, you may begin your conference.

Kelly Taylor

Thank you, Brandi. Good morning and welcome to GrafTech International’s first quarter 2010 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 Marie 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 Relations section.

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

Craig Shular

Thank you, Kelly. Good morning, everyone, and thank you for joining GrafTech's call today. Today, we will take you through the highlights of our announced acquisition of Seadrift and CG and then review Q1 results.

We are very pleased to announce the acquisition of both Seadrift and CG today subject to regular regulatory approvals. GrafTech will become a 100% owner of Seadrift, and as you are aware, we already own 18.9% and a 100% of CG for a purchase price $692 million.

The transaction is structured such that the current CG and Seadrift owners excluding GrafTech's interest will receive 24 million shares of GrafTech common stock, $232 million in cash, and a face value $200 million noninterest bearing five year senior subordinated note, which since they are interest free, have a discounted value of a $136 million.

We expect the transaction to be accretive to earnings with synergies in the first full year following closing, prior to purchase price account adjustments and expect the acquisitions to close independently after customary regulatory clearances. These acquisitions are anticipated to generate operational synergies of approximately $8 million per year primarily related to savings associated with manufacturing, transportation, and overhead efficiencies.

By leveraging the tax efficiencies inherent in our business model and effectively using our tax attributes, we anticipate that we will realize favorable tax benefits of approximately $8 million annually. In addition, we expect to general working capital improvements of approximately $10 million.

These acquisitions underscore our belief in the strong graphite electrode industry fundamentals. The acquisition of Seadrift secures a large portion of our key raw material needle coke which strategically positions GrafTech to participate in the broader graphite electrode value chain and better serve our global steel customers. You will recall that needle coke represents 40% to 45% of the total cost to manufacture a graphite electrode.

Seadrift is an asset we have become familiar with over the past two years through our minority interest. Seadrift is the world's second largest manufacturer of petroleum based needle coke located in Seadrift Texas, very well positioned to serve our global electrode platform, including our largest facility in Monterrey, Mexico that is less than 300 miles away.

The Seadrift plant was built in 1983 and has a current capacity to produce 160,000 metric tons of needle coke annually and has approximately 140 team members. Seadrift shipped 148,000 metric tons of needle coke in '08 and reported revenues of $330 million and adjusted EBITDA of $65 million. In 2009, shipments declined dramatically in light of the global economic crisis to 39,000 metric tons, resulting in a revenue of $74 million and adjusted EBITDA of $16 million.

Ensuring long-term ample supply of our most critical raw material, petroleum needle coke has been an objective of ours that began with the acquisition of our minority interest in Seadrift almost two years ago.

Obtaining the remaining ownership of Seadrift represents a major step forward towards achieving this goal. On completion of the Seadrift acquisition, we are confident that our collective teams of scientists and engineers working together will propel the Seadrift operation into one of the most efficient and highest quality needle coke production facilities in the world.

CG is in St. Marys, Pennsylvania and is an excellent graphite electrode facility. It has approximately a 150 team members and has current capacity to produce over 27,000 tons of electrodes annually. CG sold approximately 26,000 metric tons of electrodes in '08, resulting in revenues of $143 million and EBITDA of $43 million. In '09, revenues were $76 million and EBITDA was $29 million, due to depression in the volumes of only 10,000 metric tons.

The eventual joining of CG and GrafTech will provide our respective customers with several benefits, especially in the area of quality, service, and innovation. The combination of our technologies, processing know-how, and production capabilities will allow us to achieve several cost, quality, and lead time improvements.

Assuming global economies continue their steady recovery, we would expect both businesses to contribute EBITDA after synergies in the range of $90 million to a $110 million in 2011. We are looking forward to welcoming the excellent Seadrift and CG team members to team GrafTech.

Nathan Milikowsky majority owner of both Seadrift and CG will be named to GrafTech's Board of Directors. Mr. Milikowsky who received a bachelor's degree from Yale University is a very experienced steel industry executive who brings very valuable business experience to our Board.

Now turning to Q1 results; net sales were $216 million, a 61% improvement over prior year. Gross profit more than doubled to $68 million. Operating income improved over five times to $43 million.

Net income was $30 million or $0.25 per share, excluding the $4 million benefit of currency gains on the re-measurement of intercompany loans. This compares to net income of $3 million or $0.03 per share on the same basis in Q1 '09.

In our industrial material segment, sales increased to a $182 million in the first quarter, a 73% increase as a result of higher graphite electrode sales volume. Operating income for this segment was $42 million as compared to $7 million in the first quarter.

We experienced improving electrode sales volumes as our steel customers steadily increased our operating rates throughout the first quarter. This has allowed us to benefit from significant operating leverage in the quarter.

In our engineered solution segment, sales were $33 million in the first quarter, an increase of $3 million versus Q1 '09. Operating income was $1 million as compared to $2 million in the first quarter last year. The year-over-year decline was primarily the result of unfavorable product mix.

Regarding our recent refinancing, the improvements made to the balance sheet and subsequent recognition by the rating agencies enabled a very successful refinancing in a still weak credit environment. Our revolving credit facility was oversubscribed substantially and closed in three weeks.

The new $260 million revolver represents a $45 million increase over the prior credit agreement and extends the maturity date to April 29th, 2013. Securing this new credit agreement is a key component of supporting and propelling growth. Our bank group tailored the credit agreement to support the aforementioned acquisitions.

Turning to outlook, based on the International Monetary Fund projections and other economic forecasts, the global recession has eased in most regions and recovery is underway in advanced and emerging economies although to varying degrees. The recovery is expected to continue; however, obviously numerous risks remain to global economic stability as we go forward. Steel producers have raised operating rates to respond to current market demand and have begun to extend their electrode buying patterns throughout the balance of the year.

First quarter results came in stronger than expected as a result of improved global steel demand, which necessitated higher operating rates at our graphite electrode facilities versus what we had initially anticipated. Excluding the impact of first quarter first foreign currency gains on the remeasurement of intercompany loans, we expect Q2 results to be slightly better than Q1 as improving graphite electrode volumes are offset in part by lower graphite electrode prices and of course rising material cost, especially needle coke.

The third quarter, which historically has been a weaker quarter, is expected to be lower than the second quarter as graphite electrode volumes decline in response to weaker demand associated with the very normal European holiday season. As a result, we expect operating income to be lower in the third quarter as compared to Q2 with demand anticipated to return in the fourth quarter.

Our engineered solution segment historically entered in the recession three to six months later than our industrial material segment. And likewise, historically, has exited later. Therefore, we expect increasing traction in this business in the second half of 2010.

In conclusion, we expect full-year operating income of a $170 million to a $180 million and operating cash flow of $100 million to a $110 million. Brandi that concludes our formal remarks, let's open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Luke Folta with Longbow Research.

Luke Folta – Longbow Research

Good morning guys.

Craig Shular

Good morning Luke, how are you today?

Luke Folta – Longbow Research

Good. Congratulations on the excellent results on getting this deal done, it’s a great news.

Craig Shular

Thank you, sir. We are obviously delighted.

Luke Folta – Longbow Research

I have got a bunch of questions. I will ask a few and then maybe I will get back in. But the first one was just related to your sourcing strategy kind of short term and long term. How much of the needle coke are you expecting to source now from Seadrift, both like maybe in the coming 12 months and then a few years out?

Craig Shular

Well, obviously Luke, we have to wait till a formal regulatory approval and time will tell when that is. We kind of think that that could be over the next two to three months. Perhaps, Seadrift will go quicker and that could be one or two months and CG maybe a bit longer that could be three, six months or so. So I can't give you an exact number there, so let's step back from it and look at the big picture.

I would expect once we really get into operations, we would take about a 100,000 tons or so from the Seadrift coker leaving 50 or 60 that we would sell on the open market. Part of our business strategy is not to source all of our requirements from Seadrift, but to diversify our sourcing. And we anticipate to be large buyers from the other current coke producers.

In the case of Conoco, I think we will continue to be a very large buyer and maybe one of their largest customers. And then for the other producers, I expect we will continue to buy significant quantities. It's a matter Luke of diversification of supply. So think of perhaps a 100,000 metric tons out of Seadrift, the balance of our needs from other cokers, and then the remaining available capacity in Seadrift 50,000, 60,000 metric tons would go to market.

Luke Folta – Longbow Research

Is there a relative CapEx that would be required to give the Seadrift coke up to a quality standard, which you could use in your operations?

Craig Shular

We can use a 100,000 today now, so that can start today and in all those other things we discussed. But can the quality of Seadrift get better? Yes, I think over time we are inheriting a two great teams here in Seadrift and CG. And the Seadrift team is very, very fine team. And I think the Seadrift team together with our technology team and our large part of our research institute here, I think over time we are going to improve the quality of that coke significantly. I think also operationally together, we can prove the efficiencies there. So I think quality is going to come up over time. The first 100,000 we can use now. And then efficiencies, I think we have got two great teams and they are going to get very efficient there.

Luke Folta – Longbow Research

If I could ask one more just quick on –

Craig Shular

Please.

Luke Folta – Longbow Research

The current operations – as far as your needle coke consumption costs in the first quarter, did that reflected the four uptick in cost or was there still some benefit from lower cost inventory?

Craig Shular

Luke, there was a little benefit from carryover. I mean the bins are never exactly empty on 12/31, so there is a bit of carryover. And likewise on some of our other raw materials, pitch and some of the other things that we put into electrodes, there was a little bit of carryover. So yes, there was some of that. So we had a little tailwind from some of that. But sometime in the quarter, maybe some time in January that pretty much ran out.

Luke Folta – Longbow Research

Alright guys, I will get back in line, thanks.

Craig Shular

Thank you, sir.

Operator

Your next question comes from the line of Ian Zaffino with Oppenheimer.

Ian Zaffino – Oppenheimer

Great. And thank you very much.

Craig Shular

Good morning, Ian. How are you doing?

Ian Zaffino – Oppenheimer

Good, good. Question would be as far as the assumptions for guidance, what type of operating reach you are assuming – what are you assuming on the pricing side and where would any potential upside come from?

Craig Shular

Okay, excellent question. On our operates – just to give some background for some of the other listeners, as you recall from last years’ conference calls, we ran an average rate of about 40% op level in our electrode business over the course of 2009. We exited Q4 at a rate about 51% operating rate, and then in Q1 this year up to about 65%. So it's come up very nicely and it's in response to all of the moves you see on the steel side. The steel operating rates have come up very nicely. I think if we look at those that are kind of the first part of last year, global steel was down in the low 60s. And then over the course of the year, started to get up into the 70s. And here more recently, March has been a tremendous month, much as steel worldwide is in the high 70s to the low 80s.

So it’s come up – steel’s come up, in response to that, we have come up and Q1 operating rate was over 65%. On the pricing in the book, Luke, as I mentioned a bit in the script, I am sorry, Ian, as I mentioned in the script, our customer base in the last two months, I think feels much more confident about the year. I mean I think everyone still see a fragile recovery. So it’s – they are cautiously optimistic. But we have seen a trend of customers in the last six weeks, eight weeks where they have come back in versus what they were doing months before only book in the quarter. They would come in and say, “Hey, Craig, we want to book the rest of the year but let’s get our year done.” And that's been kind of a trend. So right now the guidance we have given you, our book is about 95% full on that guidance. So the book is together, most of our costs are already fixed and locked in like we’d like to do very prudently. So we feel very good about the guidance.

On pricing, if I give some color on graphite electrode pricing, as I said on earlier calls, we haven’t hit our target pricing. So it’s been softer. And kind of at the beginning of the book building season, it started out higher and then there is some weakness and it trended down but it’s stabilized now. And when I say it trended down, it trended down single digit, 5%, 6%, 7%, 8%, a kind of trend there. But right now we see stabilization in the price and our book, Ian, is 95% full, we are done. We are done with the guidance we have given you.

Ian Zaffino – Oppenheimer

Now the other question would be if you are saying you are 95% done, I thought the intentions were really, weigh that one is to break away from the annual pricing and that allows you (target) on a better pricing. Have we returned to annual pricing again?

Craig Shular

Well, remember, Ian, our customer base drives how long a contract they want. We don't tell them, they tell us. And so, they started out this year I think because of the global economy situation, a fragile recovery and very little line of sight, they wanted quarterly. That's all they could see, that's all they wanted to buy.

I think what we have all seen in steel pickup and it’s early and it’s fragile and I think our customer base would be the first one to tell you, but the pickup everyone is seeing has been encouraging and there is limited line of sight, but I think most of the customer base has felt confident enough that on the electrode side, they have come to us and I am sure to the marketplace and say, “Hey, I want to finish off my annual book.” So they have driven it, they have come to us and “Hey, Craig, we would like to – give us a price for the last two quarters of the year, we want to firm that up and put – take that off the table. Now I can refuse to participate in that, but I won't get any business then.

So our customer base drives that, Ian. And like I said, I think it – you add all that up, things started to stabilize in our marketplace, pricing started to stabilize a bit and we have put together I think a very nice book and we have got an annual guidance there for everybody.

Ian Zaffino – Oppenheimer

Okay, so if I can kind of summarize this, of the guidance, 95% is booked. So I think if upside would come may be towards the end of year, the utilization rates come up or pricing is better, is that right just as I guess?

Craig Shular

Yes, upside will come this way. I mean we are 95% booked per the guidance, right? Obviously, we have more capacity in our facilities. So if market demand picks up, and (finish) continue to move forward very nicely or better than expected, we can get all of that upside, absolutely. And we have great relationships with our customers, like I said, they drive it, they come and ask for six month contract. We respond accordingly and give them great service. So I think we got a great chance. If they need more, they are going to make the phone call.

Operator

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

Michael Gambardella – JP Morgan

Hey, Craig, congratulations on the deals.

Craig Shular

Thanks, Mike, much appreciate it.

Michael Gambardella – JP Morgan

Got a question, on the Seadrift material, historically how much of that material have you used in your own operations?

Craig Shular

Historically, we have not used a lot at all, Mike and it’s been our strategy and we have done a lot of trials. We have used it in trial quantities, truck load, some of our customers have run the material. So we have had a sliver of it in our production and out in furnaces. So we are very familiar with the material. It’s very good product, okay. It makes an excellent electrode. And our strategy was until we get majority or a 100% of it, we really didn't want to – why put a lot of volume in there. I think all we would have done is improve the value of the asset before we bought it.

Michael Gambardella – JP Morgan

But you are very confident that you can use the material based on the trials that you have done?

Craig Shular

Yes, based on everything we have done, we feel very confident that in our current portfolio we could use 100,000 metric tons of it, yes.

Michael Gambardella – JP Morgan

Okay. And the CG get all of their graphite electrodes from Seadrift?

Craig Shular

The vast majority of the CG Coke comes from Seadrift, yes.

Michael Gambardella – JP Morgan

And coke, I might say and will that continue?

Craig Shular

I would expect so. I think that plant will also have a diversification. Like we talked earlier, we will buy from other coke producers. So there will be some diversification in the CG plant portfolio but the majority has been and probably will be in the future Seadrift coke.

Michael Gambardella – JP Morgan

Okay, and then just a question in terms of your comments on the steel industry utilization rates, in the U.S., as you know there is a difference between the electric furnace who have flat rolled and then some of them also have long products but the majority of the electrodes go into the long products area where the utilization rates are very low compared to utilization rates of the electric furnaces doing sheet.

Craig Shular

That's right. We agree a 100% and I see that in virtually every customer. And those long products, as you and I know well, that's – the structural steel etcetera, the residential is still very, very tough shape and the non-residential even tougher shape. So we have factored that into our outlook and the book we are talking about is from our global customer base in the book.

Michael Gambardella – JP Morgan

And the 95% book, that's the $170 million to $180 million guidance for the year?

Craig Shular

That is correct.

Operator

Your next question comes from the line of Zaheed (inaudible).

Unidentified Participant

First question, you have allocated 24 million shares toward the financing of the deal. Now that the price your has come up, how does the various components of valuations – or financing change? Are you going to use less cash now or if you could walk through that process?

Craig Shular

Well, the price is done, okay. So, the consideration is 24 million shares, the cash has delineated in the press release and a senior unsecured five-year note that has no interest on it is all fixed. It does not change sir.

Unidentified Participant

So what is the price that – so you are using a roughly $13.50, a share?

Craig Shular

Yes, yesterday’s close.

Unidentified Participant

So, even though once you allocate 24 million shares, the Seadrift and CG would actually end up getting more than the total 692 million consideration because the prices have gone up, but it doesn't matter from your perspective?

Mark Widmar

Yes, this is Mark Widmar. The way the deal was constructed, again it was determined that the value of the share at the time that we signed the agreement. The value of the shares was essentially $13.50 as we disclosed in our release and that equated to 24 million shares of consideration as Craig has identified. So there will not be any adjustment to the shares or the cash of the no consideration between now and the close day.

Unidentified Participant

Okay, that’s helpful. Now that you are going to use cokes from Seadrift, who are you going to replace them with?

Craig Shular

Well, it will be spread around the other producers we have had over time. Obviously, we have many contracts in place with our current suppliers, those will all be honored and we will continue to buy from all of our current suppliers. And then over time, that 100,000 tons of coke will be migrated to Seadrift. So some will come out of a number of suppliers of the current supplier, (Zaheed).

Unidentified Participant

Okay. Last question, you said will use 100,000 tons of Seadrift. What is your medium term projection in terms of how much tonnage would you be using?

Craig Shular

Well, we have got to let the regulatory approval finish. So I don’t know when we actually get the assets into our portfolio. So that’s scheduled, let’s wait until we clear our regulatory approval and we actually own the assets and we join these two great teams.

Unidentified Participant

Okay, let me rephrase my question. I basically was asking, what’s your basically longer term or medium to longer term needs, usage needs in terms of the coke needle?

Craig Shular

Well, a way to think about it, (Zaheed), it’s one ton of coke for one ton of electrodes. And so, we have a capability before this acquisition to do 220,000 metric tons of electrodes. And of course, Seadrift as we said is 27,000. So we are looking at something like 250,000 tons of capability.

Operator

Your next question comes from the line of Mark Parr – Keybanc Capital Markets.

Mark Parr – Keybanc Capital Markets

Good morning.

Craig Shular

Morning, Mark, how are you today?

Mark Parr – Keybanc Capital Markets

Well, I have had worst day. I really enjoyed watching your stock go today.

Craig Shular

Thank you sir. Thanks for all your support. We have had a great time and like I said, we are inheriting together two great teams. We are very, very excited about this.

Mark Parr – Keybanc Capital Markets

I can certainly see why you would be excited and if Nathan is there, I can say congratulations to him too. But I wanted to ask about the potential, looking a little bit beyond, we can see the situation as it is right now. I believe that there is infrastructure in St. Marys, Pennsylvania for more than 27,000 tons of electrodes. And I think at least – I heard in the past that there might been opportunity to do brownfield expansions at Seadrift. I was wondering if you could talk about whether or not you have thought about that in your longer term planning and more importantly what would the cost be to add brownfield capacity at Seadrift?

Craig Shular

Excellent question, Mark. Let me take the Seadrift coker first, big picture. Let’s start big picture and the maybe try to answer to some extent your question, some color. Obviously, it’s very, very early in the process. But if I look at the coker and here we are back integrated very large graphite electrode producer, the coker does a few tremendous things for us. The first one is on our cost structure. Let’s recall that this needle coke is 45% of the total cost to make a graphite electrode. It is by far the number one. After needle coke, you are dropped down to 9% or 10% which is the labor and obviously, we have built a very lean platform, very efficient and a lot of our labor is located in very competitive, attractive regions.

So number one, huge impact on our cost structure. Number two, just as important and maybe ultimately when we look back years from this, it will be the most important is to enable growth. This ensures we have got the right supply of needle coke. And then lastly we talked a little bit about quality. Our two teams are going to overtime improve the quality of that coke, which is going to mean so much to my customers. I see tremendous advances in quality and service that is going to really allow us to serve North America and global steel customers much better.

Mark Parr – Keybanc Capital Markets

Is that in terms of the preprocessing that you might do on the decant inputs?

Craig Shular

It’s across the whole supply chain and I will stay away from getting into the details because some of it is competitive intelligence. But let’s think about it this way, Mark. All of the other producers of needle coke are really refineries and their number one mission is to make unleaded gasoline usually. And they get a byproduct by accident in some cases of needle coke. And we – that’s mission critical for the graphite electrode supply chain. Seadrift is not connected to our refinery, which we like, it fits our model. It’s very flexible model. They ran last year below 25% op level, still made money and cash flow positive. So it’s a very flexible supply chain. A refinery with a needle coker, it runs 24x7, good times, bad times, and here is needle coke coming all the time, okay. So they can’t slow down. They can't shut down when it’s 25% op level.

So one is tremendous flexibility on the cost structure, which fits our model. On quality, Seadrift is the only coker whose sole mission in life is to make great needle coke for graphite electrodes. It is not a byproduct, it is their mission and combined with our technology center in Parma, which is one of the largest graphite material science technology centers in the world, we have tremendous expertise on coke, tremendous. We have not made it before on ourself but we have tremendous technology here and information and know how on coke.

So this will be only coker back integrated whose sole purpose is to make the highest quality coke to make the best electrodes on the planet. Everybody else is making needle coke as a byproduct. In big picture, it’s cost structure, it’s gross enabled and then it’s that quality feature we just talked about. That’s the big picture value.

As far as their capability, right now it’s 160,000. I think if you look at the incremental steps, they could get to 200,000 and then ultimately I think they could get to 240. It’s way premature to talk about that. But if you look long term, what can that site do, what can the combined teams do? 160,000 to 200,000 metric tons to 240,000 metric tons, I believe is within their grasp. There is a lot of room. Only half of the footprint down there is used, so there is plenty of land that the company owns and there is two highly energized motivated teams coming together.

Mark Parr – Keybanc Capital Markets

And what do you think, I mean do you have any sort of a ballpark in terms of what it costs to add a ton of needle coke capacity? Or well, you put those things in 40,000 ton batteries or how does that work?

Craig Shular

That one, Mark is premature. So I hate to give some numbers. Obviously, there is been some costing out of the increments we just talked about. But until we actually own it and we (colless) the two teams and really get them working on it, I think it’s premature to talk about CapEx number and what not.

It’s a great facility to make a 160,000 metric tons and I think ultimately it could get to 240,000 with great teamwork.

Mark Parr – Keybanc Capital Markets

Okay, how about on CG? Let’s see, there is infrastructure there do more than 30,000, isn’t there?

Craig Shular

Right now I think, they have been doing about 27,000 and I think there is some things that the two teams together will work on. There is two technologies there. They have gone down a graphite electrode path on their own for decades. We have done the same. And so, ultimately what I want to do is combine these two great teams, (colless) them into one team and get their best technology, process know how from both the teams. And I think if we do that, St. Marys is going to produce outstanding electrodes. The connecting pins they make today, we will probably do that in one of our connecting pin centers. Today we make our connecting pins primarily in Monterrey, Mexico for a host of reasons, technical reasons, etcetera, etcetera.

So we would probably start using our pins in the electrodes from St. Marys. That will immediately upgrade their performance I believe. And then don’t get me wrong, CG makes a great electrode and I think that team combined with our team and our joint technologies, they are going to make a better electrode. And I think even the GrafTech portfolio worldwide will make a better electrode because of the addition of the St. Marys team and what they bring to my global team.

Mark Parr – Keybanc Capital Markets

All right. Craig, thanks again and congratulations on the great transaction.

Craig Shular

Operator, any other questions?

Operator

Yes, your next question comes from the line of Charles Bradford with Affiliated Research.

Charles Bradford – Affiliated Research

Purchase accounting is always tricky. Obviously you got to write up the inventories to market. Any idea how long it will take you to work off whatever inventories you are buying, so that we can get a more normal profitability out of this thing?

Mark Widmar

Chuck, this is Mark Purchase pricing accounting, there is one, obviously on the inventories that will have an adjustment. Obviously, the other will be the other intangibles and other items that we will have to evaluate as we our purchase price accounting. From the inventory standpoint, as we write that up to a fair market value, I mean you would think that that inventory should flow through, kind of in a six month window is what we would expect that inventory turn to be but the other larger components of the purchase price accounting, which will be a write up to the fixed assets, that we had an assignment of values to intangible assets, those will be amortized over a much longer period, somewhere in the range of 10 to 15 years, what we would expect to see that amortization.

Charles Bradford – Affiliated Research

But when I look at first of all the guidance that you gave, obviously, it’s only the existing company because you don’t own this thing yet. But you are going to at some point maybe within the next few months provide 24 million shares to these folks or to Nathan, at the same time, you are not going to get because the purchase accounting, the other side of the equation and also the write-up of the assets. So might not we see some degradation of the earnings power over the shorter term?

Mark Widmar

Yes, again the guidance that we provided too is on an EBITDA basis that Craig referenced to. So again that will exclude into the amortization whether it’s depreciation or amortization related to the write-up of the assets, so that’s independent of that. We have not completed the entire purchase price accounting. But there will be some amount of purchase price accounting, there will be some amortization. And as we get closer to understanding the complete impact, we will provide that information.

Charles Bradford – Affiliated Research

In looking at your other issues, because we have talked obviously the whole call about the electrode side of the business. What about the rest of it? Are you seeing any recovery in the engineered solutions, is the solar coming back at all?

Craig Shular

Yes, Chuck. Excellent question. And let me make a comment before on that one. Let no one misunderstand our intentions and very strong commitment to grow this engineered solution business. Most of its markets are double-digit growth. So don’t think we have gotten sidetrack because of this great transaction in industrial materials. Our mission here ultimately is to have tremendous cash flow and that it will help us propel engineered solution growth.

So engineered solution generally as we said enters the recession a little bit later. If you go back in the numbers you will see that. It kind of – it usually has another good quarter sometimes longer after everything else has started rollover and it comes out a little bit later.

So going into this second quarter, yes, Chuck. Order entry is up, remarkably up. So it is starting. Solar up. Most of its markets, transportation, electronics, all starting to point up. And that’s we think kind of the second half of this year, I think we will be talking about the traction that engineered solutions is getting.

So given its normal three to six months, I am encouraged by the order entry and it is coming. On the data points, all point that engineered solutions second half will start to really be contributing.

Charles Bradford – Affiliated Research

Some of the transportation companies that we have talked to are talking about the problems with truck availability, driver availability. Are you having any problems getting your goods transported?

Craig Shular

We have had none of that. Absolutely none. We have seen the data points like everyone else sees on the economy starting to turn. And we – I will give you a little anecdotal. Where we sit is the return of railcars. So last year, someone sends you a railcar with some raw material in it, they don’t call you for weeks to get it back. Now they are like where is my railcar, I need it back.

So transportation is picking up and turning. We have had no supply issues for ourselves at all or shipments to our customers, issues around that.

Analyst

Terrific. Thank you very much.

Craig Shular

Thanks Chuck.

Operator

Your next comes from the line of Chuck Murphy with Sidoti & Company.

Chuck Murphy – Sidoti & Company

Good morning, guys.

Craig Shular

Hi, good morning, Chuck. How are you doing?

Chuck Murphy – Sidoti & Company

Just to reiterate everyone else’s congratulations on the deals. I think they are a great addition to the company.

Craig Shular

Thank you, sir.

Chuck Murphy – Sidoti & Company

You may have mentioned it before, but what was the utilization rate in the quarter for the electrode business?

Craig Shular

It was a little over 65% Chuck, up from the average last year of 40% and up from Q4 last year of 51%. So nice steady, sequential increase as steel operating rates have kept up.

Chuck Murphy – Sidoti & Company

Got you. Okay. And in terms of –

Craig Shular

I may add, I may add Chuck, while you are on that topic. The supply chain is nice and lean. It’s – there is no electrodes out there, there is no bubble, so it is nice and lean, and I think even looking at many geographies. Likewise on steel inventories which is good.

You like that kind of setup if you will as things start to turn. And I think some of that is why you see our customers want to finish off the year of electrode booking. So the supply channel is healthy, it doesn’t have a big bubble at all, that’s all been worked off last year. And I think we are in a healthy place and position for this steady uptick which of course is without – is not without global economic risk. But so far it’s been pretty nice.

Chuck Murphy – Sidoti & Company

Got you. Okay. And for the cost of goods sold, what percentage of that is including the higher price needle coke and the lower price. Is it all higher now?

Craig Shular

Yes, like we said in our prior question, it doesn’t exactly empty out all the storage bins on 12/31, a little bit carries over. But yes, it’s done now. So there is some carryover to January. Remember, we have many different raw materials and many different types of needle coal. So yes, it’s all out now, it’s done now. But yes, we have got a little tailwind in the beginning of the quarter.

Chuck Murphy – Sidoti & Company

Okay, got you, okay. And you normally start your needle coke price negotiations in the June, July timeframe and do the electrode ones thereafter. I mean is it going to happen that way this year?

Craig Shular

Yes, I don’t see a big change. Historically, we have liked, of course, because it’s such a huge cost component, that 45%. If you get needle coke, it will run you over, and if you just can’t make up 45% over the course of the year with savings and efficiencies. So I think you will see us again early try to wrap up what’s the cost position like in needle coke with all of our coke suppliers that we will continue to be working with and buying a lot of coke. Wrap that up and then begin building an electrode buck.

Chuck Murphy – Sidoti & Company

Got you, okay. And what has kind of been the general direction of needle coke and electrode prices in the past couple of months.

Craig Shular

The color here and I will take even beyond in the last couple of months. Needle coke in the last few years has gone up dramatically, so the increases have been double digits, 45%, 50% last year, right? Coming into this year increase in our cost. And in the case of electrodes, just to reiterate, started the book building – we had a target price, we didn’t get that. So early part of the booking season, price was higher.

I think there was some fatigue in the marketplace, plus remember customers were only booking one quarter. So it tended to have some slippage and softness. Electrode prices slipped throughout kind of the booking cycle in some geographies, not all, but in some. And the slippage was single digit, so it wasn’t a huge amount, but there was some sliding. And then I think some of the improvements in steel demand which brought a lot of our customers in, then say, we want to finish up our year, let’s book the full year. I think we saw some stabilization electrode prices. And now we sit 95% booked against our guidance.

Chuck Murphy – Sidoti & Company

Got you, okay. That’s all I had. Thanks guys.

Craig Shular

Thank you, sir.

Operator

Your next question comes from the line of Scott Blumenthal with Emerald Advisers.

Craig Shular

Good morning, Scott. How are you today?

Scott Blumenthal – Emerald Advisers

Good morning. Congratulations on the deal.

Craig Shular

Thank you, sir.

Scott Blumenthal – Emerald Advisers

Craig, a couple of follow-up. I am not as smart as Mike, Mark, Ian, Lou, the Chucks.

Craig Shular

No problem, we welcome the question. Don’t be bashful.

Scott Blumenthal – Emerald Advisers

I appreciate it. To follow-up on what Ian said, we were talking about upside at one of his questions and you talked about customers possibly coming back as utilization rates improved. And when they come back to you, is there anything contractually that obligates you to provide them with product at the book price, the price that you have actually booked with them or are there coming back at spot?

Craig Shular

There is no obligation to give them the same price as what they had previously contracted. So they will face the market at that time. An example, so let’s say if things picked up beyond expectations in Q4, someone’s exhausted their electrode buy that they had originally booked. They will come to market and then the market will determine the price and they will pay that price. And so if the market has started to pickup and electrode prices have started to pickup globally, they will face a higher electrode price.

Scott Blumenthal – Emerald Advisers

Okay. And conversely if things slack up a bit, then they are going to get a little bit of a break, right?

Craig Shular

Absolutely, so price could. And remember also Scott, our contracts are not take or pay. In our industry, historically for a 40 years, if they have contracted for a 3,000, they could cancel part of that order. Now that in our industry it tends to be the exception that happens. Usually our customers take the full allotted amount, we honor each other, that’s no problem. But there has been a practice in the industry where things have really changed and I don’t need the last 500 tons, they can cancel that last 500 tons.

Scott Blumenthal – Emerald Advisers

Okay, fair enough, thank you.

Craig Shular

Thank you, sir.

Scott Blumenthal – Emerald Advisers

And Craig could you give a maybe some rationale – it’s very clear as to what Seadrift provides you. But I guess historically one of the selling points of GrafTech has been that we operate facilities in lower costs labor countries, and CG kind of those against that theory, and also you are operating now with basically 35% slack in your system, why would you need to go out and buy some more capacity there?

Craig Shular

Let me help. This is an excellent question. Because we used have a graphite electrode plant in the US and the graphite electrode plant we had in the US was not a fully integrated plant. And what I mean by that, it made only half of the electrode processes.

So it did not actually make the front-end, make the electrode, it baked and graphitize the electrode. So it wasn’t a whole plant. And we have found that situation in the US very costly. So we migrated all those capabilities down to Monterrey which is fully integrated graphite electrode plant that takes raw material and process it all the way to a finished electrode and it’s very compelling.

Labor, remember, is only 8%, 9%, 10% of the cost structure. So don’t get me wrong, it’s important, but it’s 8% or 9%, 10%. In St. Marys, we have a fully integrated electrode plant. It makes steel, it takes the raw material, it makes the electrode, it bakes, it graphitizes, et cetera. So it starts out with a much better advantage than the plant that we closed.

It’s not only about the labor. St. Marys also has one of the newest what we call mill, mix and forming departments on the plant. And this is the front end of the graphite electrode production process which is very important. So they have a very modern on. That had some great technology in there, which also helps the cost structure.

Lastly, St. Marys went through as did in its history Seadrift, both these companies went through bankruptcy and then they were owned by private equity, which – ladies and gents, which kind of makes them look a little bit of like the GrafTech model. They don’t have old costly pensions, they don’t have old costly retiring medical, they don’t have an old mentality, they are also non-union shops, these are very efficient nimble teams. And if you recall, as part of our turnaround back in 2003, we got out of our old pension, medical, et cetera, all that.

Well, part of the good news of these two new teams join us, they look like us. They have a 401(k) that looks a lot like ours, there are benefits, their programs look a lot like ours, and they have been run by some great private equity management in Nathan Milikowsky, so they run lean, they are highly incentive on cash bounces and profit. And so I look at St. Marys as a very competitive platform.

When we look at man power to units produced, to turns produced, it looks very good to us. And as I said before, combined with our team’s technology process, both of us are going to get better and both of us are going to better serve customers.

Lastly, St. Mary sits up here in the Northeast of course, our plants down in Monterrey Mexico. There are some great synergies for the two locations to serve those customers that are closest to them, very important.

And then lastly, bigger picture, Monterrey, Mexico, we have been building and using it to source increasingly so the China market. Monterrey is very well positioned to attack the China graphite electrode market. It’s got a great cost structure. It now has a needle coker less than 300 miles away, which it owns a 100% on it and all the benefits we talked to that.

Mexico has like all of our countries have huge imports from China. And literally if I took you to the Western deepwater ports in Mexico, you would see container after container, ship after ship come in from China. And you would see all those ships and all those containers go back empty to China. And Mexico has a very well delineated program to expand those ports, develop those ports.

We are now working with the Mexico government to help and get support, to make Monterrey increasingly sell a much more strategic exporting location to attack the China market. So we need all of the capability of St. Marys, it’s integrated, they can make the whole electrode, we need them to do that. And this will also facilitate Monterrey team attacking that large China market. That’s the rationale for St. Marys.

Scott Blumenthal – Emerald Advisers

Terrific, great answer. Thank you.

Craig Shular

Thank you, sir.

Operator

Your next question comes from the line of Tim Hayes from Davenport.

Tim Hayes – Davenport

Hi, good morning, everyone.

Craig Shular

How are you doing, Tim?

Tim Hayes – Davenport

Good. How are you?

Craig Shular

Super, thank you.

Tim Hayes – Davenport

Just two questions. In your annual guidance for 2010, what operating rate for the graphite electrodes are you assuming?

Craig Shular

Tim, we don’t usually give that and we won’t at this time either. What we would have usually done is look back. So I won’t give you a number like that that’s such a precise number. And so you have got to rely on our full-year operating income guidance of 170 to 180. And after we finish up Q2, we will give you that number.

Obviously, from the color we gave on the guidance, Q2 looks like it will be another very solid quarter. I listened to some of the Mittal discussion earlier today, and I think he is global, he is in so many locations, he has got a lot of integrated yes, but he has a bunch of (inaudible) in different locations, and he is looking for continued improvements in some of the steel operating rates.

So I would expect Q2 to be higher, but it’s early, it’s too early to tell.

Tim Hayes – Davenport

Okay. And now you have owned or will be owning Seadrift, you will be shipping the electrodes to some of your competitors. Any concerns about maintaining those relationships?

Craig Shular

We will be shifting from needle coke to other – yes sir, we will be shipping. Now, obviously, there is some risk there. But I can tell you we plan to be an outstanding supplier to all of the current customers of Seadrift. And what I talked about quality before, the quality of the Seadrift coke I believe will come up overtime.

And so if you talk to our steel customers on supply, dependability, doing what we say we are going to do, customer tech service, our team is superb. We will be the same out of Seadrift to all of the current Seadrift customers. I would like to work with all of them. If they need a long-term contract, I think that would excellent, excellent to have a long-term contract with them.

Tim Hayes – Davenport

Okay, thank you.

Craig Shular

Thank you, sir.

Operator

Your next question comes from Eric Glover with Canaccord.

Eric Glover – Canaccord

Hi, good morning.

Craig Shular

Good morning, Eric. How are you today?

Eric Glover – Canaccord

Fine, thanks. Sorry if this question has been asked previously.

Craig Shular

No problem, no problem.

Eric Glover – Canaccord

Were there any other bidders for Seadrift or any other interests for the stake that was for sale?

Craig Shular

Both these assets a couple of years ago had a market look. They came to market, some books were put together by investment bank and there were many, many, many interested parties. It was a global deal and nothing got done.

Shortly after that, we seize the 18.9% from the other minority private equity fund that was in Seadrift. And our dial forward, we have been on the Board, we have gotten a very good relationship with Nathan and gotten to know him and the Seadrift team very, very well. And obviously we have been trying to put something together.

Getting the 18.9, I think I explained to all of you back then, some didn’t quite get it, but I think I told you the bigger vision what we were trying to do. I think it’s very clear now. But add all that up two years later, we were able to do this directly with Nathan. There were no other bidders at the table. This was just us and Nathan doing a great deal.

And I may highlight that Nathan is obviously staying in this industry, a very strong believer in graphite electrode business, obviously a very strong believer in his two teams that will join us and a very strong believer in our team. So this combination let’s look what he has on the table.

He will keep the majority of the 24 million shares. I think at the end of this, he will have 18 million shares or so his – the Milikowsky Group, he has got a two-year lockup, first six months he can’t sell anything and then after that, each quarter there is a little dribble, and I think the dribble he can do like 2.9 million shares a quarter. So he is a very serious long-term investor.

Obviously he is holding the majority of the senior unsecured 200 million note with the 136 million value discounted, five years, he’s holding that. So he believes very, very strong in this business model. So we came together, we have had a chance to work together for a couple of years, and we were the only ones at the table, put this fine deal together, and we are looking so forward to call (inaudible) into one global team here and better serving customers.

Eric Glover – Canaccord

Great. The second question is you will likely be reducing your purchases from Conoco needle coke. And I was wondering even though needle coke prices have gone up so considerably over the two past two years, were you getting any sort of volume pricing discounts from them that maybe reduced or eliminated now that you are buying most of your needle coke from Seadrift?

Craig Shular

Yes, we will reduce some from Conoco and some others. But like I said, I would expect to be one of Conoco’s major customers go forward as well as with our other current suppliers. As far as price, we are big buyer do we get a bit of volume discount perhaps you’ll price on raw materials we don’t comment on. Its competitive advantage area, so we don’t comment on that, but obviously owning and running a coker we will enjoy that full chain of economics and then tailor the coke and all those quality and supply and growth enabling issues that we get with Seadrift.

Eric Glover – Canaccord

Hey you said the acquisition for Seadrift will close in say two to three months and then that mean immediately you’ll start obtaining raw material or additional raw material from Seadrift?

Craig Shular

I don’t know when they’re going to close, that’s like I said it’s in the hands of the normal regulatory review. So Seadrift could be one or two months, one we get regulatory approval then immediately we can start working with the teams, before that we can't and if there is anyone anxious to start working, it’s me, we cannot and so once we get formal regulatory approval and we get their final OK, then we can start coalescing the two teams and then we would start working on production schedules, quality initiatives, all of those types of things between both teams. This is not one way, this will come both teams are going to benefit from each other’s assistance.

Eric Glover – Canaccord

Okay, thank you very much.

Craig Shular

Thank you sir.

Operator

Your next question comes from the line of Davis Haddock [ph] with Invesco.

Davis Haddock – Invesco

Good morning.

Craig Shular

Good morning Davis, how are you today?

Davis Haddock – Invesco

Thank you, good, thank you. Couple of questions to clarify. The $170 to $180 million of guidance, that’s GrafTech’s standalone right, does not incorporate …

Craig Shular

That is correct, that is 100% just the current GrafTech before these two acquisitions.

Davis Haddock – Invesco

And once we close, we’ll get an update I guess on the client entities.

Craig Shular

Once it close you get a very detailed update on all of this what it means to us in the numbers, just like you get on a regular basis with GrafTech. So yes, you would get that, the operating income, depreciation, cash flow etcetera.

Davis Haddock – Invesco

Great. And then switching gears a little bit, you talked about the utilization being around 60% in the first quarter.

Craig Shular

More than 65%. A little bit above 65%.

Davis Haddock – Invesco

And just curious, you mentioned that your steel customers are in the high 70s utilization in the quarter and then during ’09 that difference was explained by some destocking but that the destocking is over why is your utilization rate lower than your customers?

Craig Shular

Well I think that’s time to catch up. Think of it this way when – let's go back when we all started, let's look at last year, steel was running kind of 60 in the 60s, we were 40 and below and the needle coker, remember Seadrift was below 25%, that’s kind of the chain, right, so that’s the chain in the progression. And so steel has come up, we’re coming up, when will we catch them is the big question. And it is a hard one to answer, global economy and how does the steady increase continue from here, what kind of risks, but overtime Davis, we would expect to catch up with steel. Is that end of this year, is it early next year, time has to tell that sir.

Davis Haddock – Invesco

Okay. And the contract situation have been quarterly from say a year or so now or even less than that, days of quarterly contracts over in your opinion that were basically going back, we’re going – for 2010 we’ll go for kind of the rest of year and then 2011 we’ll get back to the annual contracts?

Craig Shular

Sir, I don’t know, the customers drive that. Now in all the dialogue with them the last month and a half, obviously when they come and say we want to finish up the year, let's get the year off the table, they are starting to see a pick up, things are looking a little bit better. Still a lot of risk as we keep saying over and over. So when they go into next year I think one of the determinates will be, if things are running really well and their view of 2011 is increasing improvement and operating rates and the economies have been stable and the banks have gotten a bit better, they may lean towards an annual contract. I don’t know yet though, they drive it, but historically when it’s been that environment they’ve lean towards an annual contract.

Davis Haddock – Invesco

Would you say for 2010, the majority of your sales that you booked are still expected to be on something less than the manual contract?

Craig Shular

Well, yes really it was really few annual contracts done back that started January, right? So we had a lot of quarterly ones and then our typical customer, hey book first quarter or part of the second quarter, then he just come in March and says, hey let's finish up the year, I want to take the year off the table. Give me a price for this volume, for my 20 locations around the world, here they are, give me the rest of the year, this is how much volume I need until the December 31. So if you don’t have many annual, but OK, add up maybe a quarter and then I got one that’s three quarters, so I’ve got one that’s a quarter Q1, another one that’s Q2 for the same customer and then I got a six month with that customer. They kind of look like that.

Davis Haddock – Invesco

Okay, so most of the sales for 2010 are kind of or it may not be all under one contract but for the rest of the year.

Craig Shular

That’s right and that was the point sir, 95% of our electro contracts are in the book as a relate to the guidance of 170 to 180 full year operating income. So that’s the way to look at that.

Davis Haddock – Invesco

Last question, there has been a number of announced EAF capacity expansions kind of globally, doest the Seadrift acquisition enable you or encouraged you to want to do some more electro capacity expansion?

Craig Shular

Not near term but overtime, yes. So when we talk about Seadrift at 160 and then consideration going to 200,000 metric tons and from that going to 240,000 metric tons, it’s to support our customers growth over the medium and long term. So sir when the market is there on our customers need those great electrodes we now have the ability to make sure we have the coke to supply them.

Davis Haddock – Invesco

Okay, great. Thank you very much.

Craig Shular

Thank you sir.

Operator

Your next question comes from the line of Rob Crystal with Goldman Sachs.

Craig Shular

Good morning Rob, how are you today? Rob are you there?

Operator

If your line is on mute, would you please un-mute your line?

Craig Shular

Brady, maybe we lost him.

Operator

Your next question comes from the line of Titrus Sandall [ph] with Cardinal.

Titrus Sandall – Cardinal

Yes, thank you. The question was the cash flow. So $170 to $180 million of EBIT and really tax being the main sort of non-operating item because there isn’t too much of interest, and recognizing the 2009, was an unusual year and generated cash out of working capital, this is early significant swing occurring, it would appear in 2010, even though you all have through this vendor financing in place for the year. Could you just help us understand how that venture as we go out of 2010?

Craig Shular

Right, let me repeat the question as I understood, to just make sure I’ve got the question right. I believe it was in the area of our cash flow.

Titrus Sandall – Cardinal

Yes.

Craig Shular

The cash flow we had last year versus this year?

Titrus Sandall – Cardinal

Well I mean the point being that we’re seeing obviously revenues cover pretty dramatically because of utilization but from a cash flow perspective I guess, I was surprised that the gap between the EBIT guidance to the operating cash flow of $100, $210 million it seem to imply quite a decent swing in working capital, you probably can make sense?

Craig Shular

Thank you, I understand your question. There is a couple of key items why is the cash flow lower this year than last year and one is yes, working capital will be going up as we start to run our plants at a much higher operating rate, that’s one. Two, remember in needle coke when up 45%, so the same ton in my factory is a 45, 50% higher value. So that drove just the dollar value because that cost increase drives up my working capital requirement. The other area is in capital CapEx, last year we had quite a leaned out CapEx expenditure was around $50 million. This year our guidance is $70 to $75 million and most of that increase is in the area of engineered solutions, because engineered solutions as we said earlier, the order rates are starting to come up and as we work with our global engineered solution customers and look at their demand and what they’ve been doing in their businesses we can see we need more capability in engineered solutions.

So most of the increase is engineered solutions, adding some capacity and number two, adding some capability to make some newly developed products. We have some new products for solar, for electronic, etcetera that we are now putting capital in the ground to produce and there is some great products that we’ve developed out of our technical center here in Parma. So that’s the increased capital and those are the two biggest buckets why the cash flow is lower this year.

Titrus Sandall – Cardinal

Yes, so what it would mean is as we go into 2011 all of the things remain in scene assuming when stop getting some pricing power back with the more invigorated economy and so forth. The operating item should be able to offset the working capital usage.

Craig Shular

Well, it’s too early to comment that far forward but let me make point of color. On this transaction you see that there is a cash component and we’ve obviously got cash on hand and so I don’t know the net drawn revolver might be $170 million or so and we are doing that on the revolver, attention that’s the level of confidence we have on the future cash flow. So we’re putting a 170 on the 260 revolver, so lots of headroom, but we’re going to pay that down and so as I look forward on cash flow, I see solid cash flow coming in 2011, if all the economies continue this state of recovery we see that’s always a risk and stability is always a risk, but if we continue what we’ve seen so far here in the first three, four months of the year we would see a solid cash flow in 2011 and then we’ll start paying down that revolver.

Titrus Sandall – Cardinal

Yes and then if I could, on the CapEx side, the snapback in 2010 is obviously completely understandable. Is that the run rate then because it then creates sort of a permanent gap between D&A and CapEx which doesn’t makes sense.

Craig Shular

It’s too early to tell the normal run rates more or like 50 and so if we are above that 50, it’s going to be growth opportunities that the company and its shareholders are going to want us to seize and I think that’s the best way to frame it. So now 50 is our normal run rate right in there and it covers the D&A and a little bit of the productivity enhancements we do every year to cut cost, but above that those are going to be usually very attractive growth initiatives solar, electronics etcetera.

Titrus Sandall – Cardinal

Got it. And lastly was I wrong in one of the comments on the acquisition, you all said in the first full year after whatever the closing dates might be, the contributions on these acquisitions would be $90 to $110 million in EBITDA.

Craig Shular

That is correct, the first full year of operation the contribution to EBITDA with synergies will be $90 to $110 million EBITDA. That is our expectation and obviously that also assumes the economies continue their steady recovery is not without risk, it’s a fragile recovery and stability is important, the banks continue to improve, but if stay on that track that’s how we look at these two acquisitions.

Titrus Sandall – Cardinal

Thank you so much and congratulations.

Craig Shular

Thank you very much and I very much appreciate your questions. Thank you.

Operator

Your next question is a follow-up question from the line of Luke Folta with Longbow Research.

Craig Shular

Hey Like, how’s it going?

Luke Folta – Longbow Research

Good. So I just to understand your guidance. You had said, how to interpret that is your 95% constant, you can hit the 170 to 180, is that what you’re saying?

Craig Shular

Well I wouldn’t say…

Luke Folta – Longbow Research

95 was in one of the notebook [ph].

Craig Shular

Here is what we say, a 95% is in the book. So let's step back from it. So 95% of the graphite electrodes that are applicable to that $170 to $180 million of full year operating income are in the book. On the cost side, our needle coke is fixed, we’ve already fixed those cost. Most of our raw materials, we’ve all fixed that’s what we, that’s the team’s mission here, that’s what we try and get done every year, it’s not easy but we try to take a lot of that risk off the table. So most of that’s done also. I’m just trying to give you a level of confidence in the 170, 180. What could knock us off that, well global economy. If there is a double dip, if there is unforeseen political or middle east something upset there, but if we continue what we’ve seen so far in the first three, four months of this year on a recovery pace, our customers are going to burn and use those electrodes, I think there is steel operating rates will be decent and that 170, 180 looks very good to us.

Luke Folta – Longbow Research

Yes, I guess I was trying to highlight was that there is potential upside of that if shipments trend better than expected?

Craig Shular

Absolutely and the upside is how does steel run, if they run very strong and strongly than what people are expecting and stronger even what they are expecting, remember they don’t have a lot of line of sight, I think they’re feeling a lot better after March than they were after January because everything that’s happened in the marketplace and there is still very soft point, structural steel is in tough, tough shape, non-res, residential construction tough, tough shape.

So like in any turn, it’s never smooth, there are some bumps in the road and there is some pockets are that are in tough shape. But if things could move better than expected we have the capability to serve our customers and sell more than that, absolutely.

Luke Folta – Longbow Research

And just one last one, with the potential negotiating leverage here now starting to shift back towards the electrode producer as inventories are no longer burden someone in the channel, there have been any talk recently on potentially announcing a price increase?

Craig Shular

Well, the market determines that and it’s been soft, stabilized. So I think it’s way too early to talk about that, and the marketplace to determine what that is and then we’ll know the new price.

Luke Folta – Longbow Research

Okay, thanks a lot.

Craig Shular

Up or down.

Luke Folta – Longbow Research

Thank you very much.

Craig Shular

Thank you sir.

Operator

There are no further questions at this time.

Craig Shular

Thank you very much, Brandy. Everyone, thank you very much for your support. I would again like to close welcoming the new team members to team GrafTech. We are very, very excited this end and we look forward very much to working together. Everyone thank you, have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: GrafTech International Ltd. Q1 2010 Earnings Call Transcript
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