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Executives

Kelly Taylor, Investor Relations

Craig S. Shular, Chairman, President & Chief Executive Officer

Lindon G. Robertson, Vice President & Chief Financial Officer

Analysts

Luke Folta – Jefferies & Company, Inc.

Ian A. Zaffino – Oppenheimer & Co. Inc.

Michael Gambardella – JPMorgan

Rob Pohly – Samlyn Capital

Timothy Hayes – Davenport & Company

Mark Parr – Keybanc Capital Markets

Daniel Whalen – Auriga USA

Sandy Harmon (Matthew) – IronGate Partners

Charles Bradford – Bradford Research, Inc.

Graftech International, Ltd. (GTI) Q1 2012 Earnings Call April 26, 2012 11:00 AM ET

Operator

Good morning. My name is Brooke and I will be your conference operator today. At this time, I would like to welcome everyone to the Graftech First Quarter 2012 earnings conference call. All lines have been place 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 like to turn the call over to your host, Kelly Taylor. Ma’am, you may begin.

Kelly Taylor

Thank you, Brooke. Good morning and welcome to Graftech International’s First Quarter 2012 conference call. On the call today is Graftech Chief Executive Officer, Craig Shular and our Chief Financial Officer, Lindon Robertson.

We issued our earnings release this morning. If you did not receive a copy, please contact Marie Nor at 216-676-2160 and she’ll be happy to fax or email a copy to you.

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

Also, to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release, which is posted on our website at www.graftech.com in the Investor Relations Section. For your reference, a replay of the call will be available on our website.

At this time, I’d 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’ll take you through our first quarter highlights and then open it up to questions.

In Q1, sales were 241 million, down 21% versus a year ago. As previously guided, Grafite Electrode sales were lower, largely due to customer destocking initiatives, especially in Europe where the steel market has slowed considerably in response to recessionary conditions in the region.

We believe the majority of the destocking initiatives were completed in Q1 and the balance of the destocking will be completed by mid-year.

EBITDA came in at 40 million, in line with our targeted estimate. Net income was 18 million, or $0.12 per share. We had a couple one-time benefits in the quarter. One, higher Q4 electrode utilization rates that allowed for better fixed cost absorption, which flowed through our P&L in Q1 and provided about a $0.03 benefit. And then secondly, a non-reoccurring insurance reimbursement, which provided a $0.02 benefit.

Net debt increased to 466 million, largely the result of planned increase in working capital and CapEx expenditures.

Turning to the segment, Industrial Material sales were 193 million and Operating Income came in at 25 million.

The previously-mentioned benefit resulting from higher Q4 operating rates was also a major driver of gross margin expansion in Q1, which will not be carried forward given our previously-reviewed plans to turn our Grafite Electrodes plants at approximately 70% operating rate for the balance of the year.

As an update to our Grafite Electrode book building process, we currently have approximately 80% of our 2012 targeted book completed. This is up from the 50% level we highlighted in our last conference call at the end of February.

In our Engineering Solutions segment, sales came in at 48 million and operating income was a loss of 1 million. This was primarily due to the previously-discussed and expected weakness in the solar sector.

Increases in SG&A and R&D to support future growth also weighed on operating income in the first quarter. We expect Engineer Solutions to return to a profit in Q2 as increased sales to the Advanced Consumer Electronics and Oil and Gas sectors compensate for the low solar sales.

Turning to outlook. As highlighted in prior conference call, we continue to see a slow and very uneven recovery in the global economy. The European economies are struggling with massive debt and sever austerity programs while growth out of emerging economies, particularly China, is also slowing. The U.S. economy, while showing signs of recovery, is still a very fragile and uneven recovery.

For the second quarter, we expect EBITDA to be in the range of 60 to 70 million. We continue to target a full-year EBITDA range of 250 to 290. We have reduced our capital expenditures for 2012 by approximately 10% in light of the continued uncertainty in the global economic environment. We now anticipate capital expenditures to be between 125 and $145 million. We expect our maintenance capital to approximate 80 to $90 million. The majority of the CapEx above maintenance will go to grow our Engineer Solutions business, execute on cedar quality improvements and finally, overall productivity improvements across our global production platform.

That concludes our prepared remarks, Brooke, let’s open it up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from Luke Folta with Jefferies.

Craig Shular

Good morning, Luke, how are you today?

Luke Folta – Jefferies & Company, Inc.

Well. You?

Craig Shular

Excellent, thank you.

Luke Folta – Jefferies & Company, Inc.

So you talked about 80% of your order book being built for the Electrode business and in your press release you said pricing up 10 to 15%. Is that a final number for the year you think? Or is there room for that to move around?

Craig Shular

Obviously, with a 20% to go in our targeted book there’s still room to move around on that and so I would look at that as a risk factor. As we’ve stated the economies are volatile, fragile in some areas, in some areas declining, and so we have 20% of the targeted book to go and obviously price has the ability to move around as well as risk on the volume in the final 20%

Luke Folta – Jefferies & Company, Inc.

Okay but you’re generally seeing a pretty established market as far as pricing’s concerned?

Craig Shular

Yes, we’ve been pretty please the way the book’s come together. I would say since our last conference call it’s come together as expected. Customers have come to the market having burned off their excess electrodes carried over from last year and they’ve come and ordered and that process has gone pretty much as expected. And thus we stay with our targeted annual EBITDA guidance.

Luke Folta – Jefferies & Company, Inc.

Okay, and then secondly on needle coke, could you give us a sense of what’s happening there with the order book. I remember hearing some fairly optimistic – I don’t want to say optimistic – some encouraging data points last quarter about some initial sales that have happened this year and some positive pricing trends there. Can you give us an update on what you’re seeing there and also how this maintenance [inaudible] second quarter plays into your full year plan?

Craig Shular

Yes, as we said, needle coke prices are up 25, 30%, so that’s gone well. That book is coming together very nicely. That book also, like the electrode book, has been a bit delayed and so sales, like the electrode book, will be heavier in the second half and that’s along the similar lines as the reason for the electrode book, that entire supply chain, if you will, has backed up a bit with the slowdown the last six months of last year. But we’ve been very pleased with the needle coke business, we’re pleased with the price increase, we should have margin expansion in that business, and that’s been a very, very good acquisition for us. On your last – I think you had one last part of question in there, Luke, what was your last part?

Luke Folta – Jefferies & Company, Inc.

Just how the maintenance outage plays into your thoughts on how – on [inaudible] for the year? Did you over produce kind of going into that so you’d have the tonnage available? I just want to understand how you were thinking about it.

Craig Shular

Yes, we always do that. It’s a very much a planned and well-scheduled annual process. So we usually build up some inventory so we can meet all of our customer’s needs and that will go down for a number of weeks as planned and then come back. So that fits very well with the annual plan and fits exactly where our targeted guidance for a full year EBITDA.

Luke Folta – Jefferies & Company, Inc.

Okay and just on the guidance, you’re going to see a 60% or so step up in the EBITDA in the second half relative to the first half. I mean when you think about how you get to that forecast are you assuming any incremental growth and consumption for electrodes or [inaudible] or is that just basically you getting the inventory destocking, abating, and then your market share kind of normalizing, and that driving the shipments higher. Is that how to think about it?

Craig Shular

The ladder statement you made is absolutely apart of it. I would put it in a few buckets. One because of the phenomena you just mentioned, we will have larger GE volume the second half of the year. The destocking will be behind us by mid-year so one is larger graphite electrode volume the second half. The other part is, which is an important part, is the flow through of the see drift [inaudible] price increases and the profit there too that are in the pipeline of our internal graphite electrode machine. Remember that 25, 30% plus increase and the benefits of that flow through ultimately to our results after we sell a finished electrode. So you will see some of that in the second, which is very important. And lastly as I said, you will see larger [inaudible] sales is what we expect in the second half as I mentioned earlier, that’s the way the book has come together. So those are three big buckets, lastly ES obviously slow, very slow first quarter and I think over the course of the year we’ll see ES start to do better. So those are the three or four items main buckets of why our second half will be better than our first half.

Luke Folta – Jefferies & Company, Inc.

So just finally to characterize it, there’s not – you’re not looking for a meaningful recovery in the European economy or the global steal consumption in the second half. It seems like a lot of the drivers that are driving your income higher are due to factors that are fairly – not a lot of risk around those, a lot of them are kind of in the cards just the way they supply in a channel and in the pricing pulls through.

Craig Shular

You’re absolutely right, we’re not planning on some great improvement in the global economies over the course of this year. We see the recovery to be slow and uneven and so that’s not a major factor, some recovery benefit in this. Ours is the four items that I mentioned. Now having said that those four items are never without risk, we’ve got to build the rest of our electrode book, we’ve got to build the rest of the needle coke book, but based on what we see in the order book building process, what we see at our customer’s shops, we think that will come together nicely and we will fall within our targeted EBITDA range.

Luke Folta – Jefferies & Company, Inc.

All right Craig, thanks for the call, I’ll turn it over.

Operator

Your next questions come from Ian Zaffino with Oppenheimer.

Ian A. Zaffino – Oppenheimer & Co. Inc.

Just a quick question on – you talk about the target order book, is that 100% of your capacity or is that a portion of your name plate capacity?

Craig Shular

Our targeted order book would be the order book that relates to our full year EBITDA guidance.

Ian A. Zaffino – Oppenheimer & Co. Inc.

And what portion of you production – of your capacity is that?

Craig Shular

Well as we said we’ll probably run our facilities in electrodes over the course of this year at about 70%. Obviously we have inventory we built inventory last year as planned, so as we see our order book and we look at the market, we think of about a 70% op level over the course of the year plus the inventory we have will be sufficient to fill our customer’s needs.

Ian A. Zaffino – Oppenheimer & Co. Inc.

Okay, and then you know just looking forward into – I know you gave second quarter guidance, can you give us a little bit of a better break down of what maybe third or fourth quarter might look like. I don’t know if there’s any seasonality in there or how we should look at third, first, and fourth quarters from the EBITDA standpoint.

Craig Shular

Yes, recall we’re still building out those books, as I said earlier, so I can’t give you a definitive guidance on that but as far as color I would look for Q4 to be bigger than Q3 and I think that’s the way you should weight the balance of those two quarter Q4 bigger than Q3 we’ll exit with our best quarter of the year in Q4.

Ian A. Zaffino – Oppenheimer & Co. Inc.

Okay, perfect, thank you.

Operator

Your next question comes from [Inaudible] with Longbow Research

[Inaudible] – Longbow Research

Hi guys, thanks for taking my questions, I guess I wanted to clarify, so the 250 – can we interpret that to mean that if you continue to run at 70% operating rates and you just complete the book as you see it that would land you – would that land you at the midpoint of your guidance or for the full year?

Craig Shular

That will land us within that range. So we will come in 250 to 290, midpoint is probably a good place to look but is there a risk around that midpoint, absolutely because we still have a book to build and the economies are still moving around quite a bit.

[Inaudible] – Longbow Research

Right so if you were to actually see steal operating rates potentially move up through the year from high 70s in the U.S. and potentially higher in Europe – I’m just painting a more optomistic scenario, would you be able to capture a great amount of the year or would you not be able to ramp production in that manner?

Craig Shular

Obviously we could react to that if that was the case, so we have the ability to move our plants quite quickly but what we see right now – as I said in the economic review, we see a slow recovery and very uneven and everything we see coming out of Europe economic front has been very negative to somber and we’ve seen China continue to slow it – it just had one of its worst quarters in three years. So we think at this time it’s prudent to remain precautious as we move forward, we’ve to finish up our book building process, and if that goes as planned for us, we will be in that EBITDA full year guidance we’ve given.

[Inaudible] – Longbow Research

Okay and jus as a follow up, have you noticed a change in your customer’s behavior? I understand that they’re potentially more cautious this on the economic front but on specific consumption or other areas, you know are they running the electrodes to absolute completion or have you seen a change in their own consumption patterns?

Craig Shular

We have seen no changes in the way they utilize electrodes or consumption patterns. What we’ve seen across our customer base because many of them lost money in Q4 last year and a number have reported loses so far that have come out in Q1 we’ve seen that they’ve been very cautious and I think – you listen to the same conference calls I do, I think they’re trying to be very prudent, cautious, and subdued as they look forward. Our typical customer probably has an order book that goes out five weeks, six weeks and literally that’s their line of sites so what we have seen from our customer base is very good prudent caution.

[Inaudible] – Longbow Research

Thank you.

Operator

Your next question comes from Michael Gambardella of JPMorgan.

Michael Gambardella – JPMorgan

Good morning Craig, you know I’ve been covering the stock for a long time before you even got there and I’ve been asking this question for a while and I’ll say it again because it’s kind of frustrating, I mean the pricing practice – and I know it’s not all up to Graftech but the pricing practice that you and the rest of the industry has to set prices once a year is a practice where it’s like you know heads you lose, tails your customer wins. It’s a no win situation for you and looks like you’re giving up almost 10% of your annual EBITDA the way you price your product because you give your customer the option to load up in the fourth quarter on volume if he thinks the prices are going up on January first and then you have this destocking phenomenon just because you’re client gets the advantage of pulling forward 2012 higher priced product into the 2011 fourth quarter at lower prices. And when is this going to end? It’s just insane.

Craig Shular

Yes, Mike our industry for a long, long time is that an annual contract process and those annual contracts typically in a more normal global economy are put together primarily in the fourth quarter of the prior year for the upcoming year and annual commitments are made by our customers on volume and on price. And then like last year where they come into a year, I mean the first part of last year was very good, steal production numbers were up all through right up till May. May was the peak and so if you go back to Q4 of the year before when they were building their electrode requirements and making the orders the outlook was quite good, things had turned nicely, first five months good steal production, and so they ordered their volumes based on that outlook and then of course the last six months of last year really fell off dramatically so they ended up with more on their contract. We have an annual contract, we maintain our commitments, we’ve signed a contract agreed to a volume and price, and our customers pretty much across the board do the same thing, so they got the electrodes that they asked us for and did a contract with us and last year of course it turned out they had access. So we share your frustration, Mike, I understand it and obviously it’s impacted our Q1 and time will tell where that goes, I guess that’s about what I can say on that annual process.

Michael Gambardella – JPMorgan

I mean, but it always affects the Q1 and the customers, kind of, now in the summer what the next calendar year pricing is going to do in terms of is it going to be up or down and then they can kind of jockey with the volumes you know either pull back if they think prices are going down the next calendar year or load up as much as they can and it’s tough for you guys to say I guess, no you can’t, you know, load up.

Craig Shular

Well remember though, typically the steal customer has fixed and placed his order and done his contract in Q4 the year before, that’s the typical.

Michael Gambardella – JPMorgan

Right but you don’t have a take or pay, you know, contract so the customer’s just giving you a volume indication and locking in the price. So it’s not like he has to take that volume, so if he thinks pricing is going down in the next calendar year he’ll be reluctant to take the volume.

Craig Shular

Well I’ll tell you our experience with the customers I think the general experience on our industry is yes the contract is not take or pay but if a customers in the fourth quarter for this upcoming book for 4000, 5000 tons of electrodes at a certain price, they honor that. And then if they come back in Q4 for more and price has gone up, they face that increased price. So that’s the typical pattern in, let’s say a typical global economy. I agree with you in what’s going and kind of since the 2009 crash things have gotten a bit ragged. But our typical customer honors the contract, honors the volume, honors the price, that’s our typical experience.

Michael Gambardella – JPMorgan

Thank you.

Operator

Your next question comes from Rob Pohly with Samlyn Capital.

Rob Pohly – Samlyn Capital

Hi, I just wanted to focus on the cap backs. I saw that you brought it down but even so over the last, certainly last year and maybe even the end of 2010 there’s been a pretty steep increase in cap backs. You know you say 80 to 90 million is maintenance cap backs but it seems like even that number is high, relative, to both Graftech, Seadrift and St.Mary’s standalone but quibble what you will about what’s growth cap backs or what’s maintenance cap backs but the company is spending al ot of money on cap backs, a lot more than it’s historically spent. Can you give me a break down between how much of that is going ES versus how much of that is going to IM? One and two, I understand there’s a lot of cap backs going to upgrade Seadrift are going into Seadrift. How should we think about the return on that cap backs? What are operating income pick up are we likely to see in the next, say, year or two years as a result to all the cap backs being spent because we spent a lot of money last year and it doesn’t seem like we got any pick up this year.

Craig Shular

Rob just to answer your questions in order. Our annual maintenance capital with including the four new businesses that we purchased over the last 18 months, two years we’ll probably run – looking out over the horizon, 80 to 100 million and you should look at that as – that’s probably our – that kind of range I what’s required to keep our plants in good running order, efficient, reliable, etcetera.

Rob Pohly – Samlyn Capital

But that’s like double normalized DNA because if you exclude the step up, right because you had a big step that matches DNA so it seems like that makes sense but there was an enormous step up in DNA when you bought St. Mary’s and Seadrift so that number just seems really high. It was never that high prior on a stand – two company standalone, for maintenance.

Craig Shular

Well now six large electrode plants – the second largest needle coker in the world that is what I consider very normal maintenance capital to keep those assets running well. The electrode plants of course are all 30, 40 year old plants, the needle cokers are very, very large facility, a very complex high tech type of facility, so our view would be that 80 to 90, 80 to 100 looking out over time. That would be very normal, well spent maintenance to keep that machine running very, very well.

Rob Pohly – Samlyn Capital

But if I just look at ’07 and just look at total cap backs so not even adjusting for what was growth cap backs. The two companies combined spent around 70 million in total cap backs growth cap backs included, so that’s 20 million below what you’re saying is maintenance cap backs.

Craig Shular

When you say the two companies combined, what do you mean?

Rob Pohly – Samlyn Capital

I mean Graftech standalone and Seadrift and St. Mary’s.

Craig Shular

Very good, let me make an observation for you, obviously and I don’t mean anything negative out of this, but this is just reality. Seadrift and St Mary’s were purchased from private equity and [inaudible] is a little bit shorter advantage point and it wouldn’t be the first time we’ve seen private equity maybe spend a little less on cap backs that’s somebody that’s running the business for the next 30 years might spend. So when I look at what Seadrift and St Mary’s spent on cap backs I would – prior to our ownership – I would say that was on the skinny side and that’s just being fair.

Rob Pohly – Samlyn Capital

Maybe we can just – we can quibble about the numbers but you’re clearly spending a lot on growth cap backs this year, you spent a lot on growth cap backs next year. What is the split between ES and IM?

Craig Shular

On the growth, obviously the majority right now is going into ES and in the ES business our advanced consumer electronics business has been growing very nicely and this of course is all of the smart phones, flat screen TVs, all of that area.

Rob Pohly – Samlyn Capital

So the majority – so just 51% to IM 49% to ES?

Craig Shular

No the majority is to ES growth and then the second biggest bucket would be the work that we’ve talked about that we’re doing on Seadrift quality, which I might add is very, very important, and which I might add we’re making excellent progress on. So Seadrift makes a very good coke don’t get me wrong, they make a very, very good, normal premium coke, where Seadrift can improve significantly is, they have not made a great super-premium coke which is a very important coke to have in your portfolio. Combined with our technology on our R&D team, they are not making some very, very exciting super-premium coke. So the money’s go to enable them to make this whole grade of needle coke that they have not had in their portfolio and super-premium needle coke goes in the most demanding electrodes which is probably the fastest growing segment in electrodes, so strategically it’s very important Graftech to have that in its portfolio. The other thing –

Rob Pohly – Samlyn Capital

What does that mean for revenues though? What does that mean for how much more dollars what kind of [inaudible] increased relative to what Seadrift was doing before can you expect from this upgrade?

Craig Shular

Well I can talk to you in general about the hurdle rates we look at and the hurdle rates we look at on these types of projects are 18, 20% plus, so these are very attractive projects for us to do. And again I underline we’re talking about this – the world’s second largest producer of high quality needle coke. Now entering and having in its portfolio the ability to make super-premium and there’s many things that we can do with that super-premium being one of the world’s largest manufactures at Grafite Electrodes and we think over time that’s an outstanding sustainable competitive advantage to have on cost, on quality for our customers, performance of our electrodes and Rob, as I said those are probably – that area is probably the fastest growing segment in the world in Grafite Electrodes.

Rob Pohly – Samlyn Capital

What are you targeting for cap backs, of the 135 in cap backs what is going into engineered solutions? How much of that is that going to engineered – I know you said the majority but specifically what is going into engineered solutions in ’12 and how much was it in ’11?

Craig Shular

[inaudible] but I would say probably – it’s probably in the range of 35 of that to 45 is engineered solutions.

Rob Pohly – Samlyn Capital

For ’12?

Craig Shular

For ’12 and the rest is IM which would be electrodes and Seadrift.

Rob Pohly – Samlyn Capital

Okay thank you.

Operator

Your next question comes from Tim Hayes.

Timothy Hayes – Davenport and Company

Hey, good morning, the question on the volume of Grafite Electrodes in the first quarter, how much was that down from the first quarter of ’11?

Craig Shular

Well we don’t guide on volumes but obviously as we planned and had highlighted in our prior call, it was down significantly so you see sales down 21% you know I think you can look at it like, okay a sizeable – that type of sizeable down on volumes.

Timothy Hayes – Davenport and Company

But pricing was up 10 to 15 correct? Does that mean the volumes were down like in the order – neighborhood of 30% from a year ago?

Craig Shular

Well, remember on price – that price increase in Q1 – remember we talked on a number of conference calls – gets diluted a little bit because we have some customers that book Q1 to Q1. There’s a group of steal customers that’s their budgeting process, they’ve had that for 30 years. So there are some Q1 sales that were booked at the old prices that are just finishing their full 12 month contract. So the Q1 increase will because of that waiting of the old price in Q1 will not – you will not see the full price increase. Q2 forward then you’ll see the full impact of the price increases.

Timothy Hayes – Davenport and Company

And you have your customers on that April to April was about what, 20% of the –

Craig Shular

Yes it can bounce around a little bit, it might be 15, 20% it’s that kind of a number and that’s their budget program and they – like I said they’ve been doing that for 20 years. That’s the year they’re on, that’s the way their purchasing program works.

Timothy Hayes – Davenport and Company

Right, okay so even if I factor that in, you know, so prices not up to full amount but that really implies that volume was down more than the decline in revenue, correct?

Craig Shular

Yes, volume was down significantly, so we showed you’re sales down 21% and volume was down also, very sizeable number.

Timothy Hayes – Davenport and Company

And now the volume last year ramped up considerably during the year, I mean do we – which I guess on the service seems like it could be some tough comps as things were ramping up last year do we expect that the volume decline that we saw in Q1 versus a year ago, should that decline start to get smaller as we progress through the year?

Craig Shular

Absolutely and I think if you look at our guidance for Q2 EBITDA you know it kind of looks like Q2 last year. As you go through the quarters this year you’ll see increase in our volumes as I mentioned earlier in the fall, we will have larger Grafite Electrodes volumes in second half and we also expect larger needle coke sales to third parties in the second half.

Timothy Hayes – Davenport and Company

Right, second half larger than the first half? Or larger than second –

Craig Shular

Yes, larger than the first half.

Timothy Hayes – Davenport and Company

Right but so it could be down from a year ago …

Craig Shular

That’s right, that’s correct, absolutely.

Timothy Hayes – Davenport and Company

And then, okay, I think that help get the pattern a little better. Thank you.

Craig Shular

Thank you, Tim. Have a good day.

Operator

And I apologize Tim Hayes was with Davenport and Company. Your next question comes from Mark Parr with Keybanc.

Craig Shular

Good morning Mark, how are you today?

Mark Parr – Keybanc Capital Markets

Good morning. I’m doing all right, hope you’re doing well.

Craig Shular

We’re doing great, thanks.

Mark Parr – Keybanc Capital Markets

That’s good to hear. I wanted to talk a little bit about the Asian Market. China has indicated, you know, significant increase in its use of EAF steel making, you know, to go into effect over the next decade. You’re already seeing some indications that the country is increasingly short of scrap, as it tries to implement more EAF production. I’m just wondering how you’re feeling about the next growth phase in terms of the timing of it. Is this something that you’re feeling more aggressive about? Can you give us some collar on your thought process, as far as how Grass Tech is going to avail itself of growth opportunities in Asia over the next several years?

Craig Shular

Yes Mark, we follow those same things that you mentioned on China, and the signs are very, very encouraging to us. We see EAF production coming up, we see the government initiating it, encouraging it. We see the local scrap supply in China growing very nicely, propelled in part by the very large increase in local auto production. So, we are very encouraged by what we see in China. We think the next 10 to 15 years in China EAF production will grow very, very nicely. Their scrap supplies and their scrap reservoir will go up very very, nicely.

So to date we’ve been servicing China from our large low cost plants around the world, and to date that’s been going very well for us. It’s been very profitable to us. And we’ve looked at a number of acquisition opportunities in China, and we haven’t found one that fits us. We haven’t found one that we consider really low cost. We haven’t found one in fact that is more attractively able to produce electrodes at low cost high quality than our existing portfolio. So, remember our electrodes are usually coming out of very large plants that have been in this business for a very long time, very low cost, back integrated to needle coke. So, we’ve been able to service China very profitably. I think this year we’ll have some very nice growth going into China. And as I lot forward the next 10 years, we are very bullish on China electrodes and EAF. If we find the right opportunity, you’ll see us move into local manufacturing, but it won’t be just to get a local plant, because a lot of those local plants really don’t make much money.

What we have done though is invested a lot in building out our sales market coverage and distribution system in China. So, if you went back a few years, we had very little presence, we now have three established sales offices, three very skilled teams of sales, customer tech service, marketing, and so we’ve built very nice market coverage in China. We have CTS people on furnaces there, and we’ve been very pleased with our progress into that market. It’s a tough market, but I’ll tell you, so far servicing from our low cost offshore plant that’s very large, high quality, back integrated in needle coke. We’ve been able to make some good profit going into there.

Mark Parr – Keybanc Capital Markets

Okay, I appreciate that. If I could just ask another question. You had indicated that Seadrift is now capable of making a super-premium needle coke and congratulations on that.

Craig Shular

Thank you very much. I think it’s a very important development, and I’ve been very impressed with the Seadrift team. They’re working with the Grass Tech RND, putting some technology in. They’ve jumped on our Lean Six Sigma Program, they’ve come up that curve very nicely, and I think the variation in their product, the quality of specs is narrowed very nicely, and now making a super-premium coke.

Mark Parr – Keybanc Capital Markets

Do you have an estimate for either this year or next year in terms of what percentage of Seadrift’s production will be the super-premium?

Craig Shular

We’ll it’s driven by the market, it’s driven by some of our own needs and third party sales, but I would say often super-premium can be a good 20 to 25% of a portfolio. So we would probably drive towards that kind of a percentage of the portfolio over time. And as I said, it tends to be one of the fastest growing portions of the portfolio.

Mark Parr – Keybanc Capital Markets

So you think you’ll be there in ’13?

Lindon Robertson

I’d say ‘13/’14. Some is going to depend on the economies and how they progress and recover.

Mark Parr – Keybanc Capital Markets

Okay, all right. Okay look, Craig, I appreciate that, and good luck on the second quarter.

Craig Shular

Thank you sir, have a good day.

Operator

Your next questions comes from Daniel Whalen with Auriga USA

Daniel Whalen – Auriga USA

Good morning everyone.

Craig Shular

Good morning Dan, how are you today.

Daniel Whalen – Auriga USA

Good. If you could touch on pricing disciplines throughout the industry, I mean, certainly earlier in the year I think some of the smaller higher fixed cost players were certainly a bit loose in terms of the pricing discipline. Now that things are firming up a bit has that changed dramatically or what are you seeing in the marketplace from that prospectus?

Craig Shular

Well we’ve got 80% of the book billed, and we’re pleased at the way that’s come together. Still got 20 to go, so that 20% Dan still has to be earned and achieved in the marketplace. But pricing we expect to be north of 10% and up for electrodes and for needle coke, probably 25 to 30% plus up.

Daniel Whalen – Auriga USA

And if I could, more of a longer term question, just use of cash, certainly we’ve heard a lot of talk about acquisitions and share repurchases. We’ve seen some other companies with excellent reception either initiate or increased dividends. Has there been much discussion on a dividend?

Craig Shular

Dan, we look at internal/external growth initiatives, we look at acquisition opportunities, and we also on a regular basis evaluate dividends. We have followed some of those same companies you’re talking about and seeing how their dividends either adding or starting a dividend or increasing a dividend has been received. So we study and look at all of those. We will look at any opportunity to increase shareholder value. Last year you saw us buy back a couple million shares on the fourth quarter. So every one of those is on the table, regularly reviewed by ourselves as opportunities to add shareholder value, including dividend.

Daniel Whalen – Auriga USA

Okay, thank you.

Craig Shular

Thank you sir, have a good day, Dan.

Operator

Your next question comes from Sandy Harmon with IronGate Partners.

Sandy Harmon (Matthew) – IronGate Partners

Hi, Craig. It’s Matthew in for Sandy.

Craig Shular

Hey, Matthew, how are you doing?

Sandy Harmon (Matthew) – IronGate Partners

Okay, thanks. Hey, just following up on kind of that last question, which was a couple of points that I had with regard to use of cash and stuff, we have the buyback in place, the newly created buyback. Did we buy back any stock during the first quarter?

Craig Shular

You’ll see when our Q comes out, we did not buy back any shares in the first quarter and as I said to the earlier question, we continue to review all those items. Obviously, we are a component of buyback, you’ve seen in our actions there. We do acquisitions, you’ve seen us there, and we also make internal investments on great projects like the Seadrift load we’ve talked about, EF, Advanced Electronics.

Sandy Harmon (Matthew) – IronGate Partners

And I’m kind of curious, I'm sure some of the other shareholders – I’ve been a shareholder for a long time and you know, just curious as to what your opinion of the stock price is here, you know, $12 a share or you know, is the company being undervalued by the market, overvalued in terms of the stock price.

Craig Shular

Yes, on the last call after we reported and summarized the 2-million share buyback, we did at the end of last year, we highlighted that the average buyback price was about $14.60 and I think I said at that time, I think we got the shares back at a very good price. So yeah, I would see the share price in this range, you know, even below the $14.60 as undervalued.

Sandy Harmon (Matthew) – IronGate Partners

Yes, no, no, okay, well, that’s a good – I mean, certainly want to hear – want to hear your CEO say that the stock is undervalued here, you know, kind of, at least the point of why we would want to see some buy backs. You know, you’ve spoken a lot about the desire for acquisitions, you know, and I applaud the fact that you’ve been cautious with regard to making sure they are making an acquisition at the right price with the debt levels increasing, obviously a big chunk of that had to do with seizure after acquisition – St. Mary’s acquisition, which I think we’re very good acquisitions. You know, I’d like to see management spend a little less time focusing on acquisitions, and you know, maybe really focus more on the core businesses that we have and the growth opportunities within the specialty space, and would be surprised if other shareholders didn’t have similar view points. So, you know, just a comment from my seat in terms of the acquisition sort of mantra, and mandate that the company’s working off of – you know, I think we would like to see a little bit more of, you know, focus on the internal growth prospects, which I think are, you know, very broad.

I was wondering if you could just spend a quick second, you know, just talking about the contract at SGL, or the arrangement they gave with Mattel and the five year arrangement which seems to be unprecedented in the GE space, and you know, just what that kind of means for the overall universe and Graftech, and whether or not we could look for some of our larger customers going down that path with us, or you know, with some of competitors, or something along those lines.

Craig Shular

Matt, you just found the SGL middle contract, they had a contract in place prior to this for a number or years. So, I think they’ve had a three or five year contract going back for a number of three – five year periods. So, this is the continuation, or renewal, of a contract that was previously in place also for the prior three years or so.

Sandy Harmon (Matthew) – IronGate Partners

Got you.

Craig Shular

So, I don’t see it as a big change in the [inaudible] environment.

Sandy Harmon (Matthew) – IronGate Partners

Got you, and how is the – how aggressive currently, may be you can give us some sort of sense as to the global sales team – you’ve mentioned how you’ve, you know, ramped up and gotten fairly aggressive in parts of Asia from the sales and marketing side of things – you know, with the book 80% full and the world looking how it looks, where can you [inaudible] that says how full bore the sales team is out there now, or is this just going to kind of sitting back, waiting to see how things develop, and you know, get aggressive again in Q3 and Q4.

Craig Shular

The team has been very aggressive in these tough economies and variable economies, they’ve had to literally be extremely aggressive looking for opportunities – you know, as we said the solar industry literally is like a tennis ball falling off a table, it’s just gone away, and so, they’ve had to work very hard to find other opportunities, earn other business, and so I’m delighted that we built out that network, especially in Asia and China. It’s been very important for us, you know, as we fill out the book in some of these variable economies. So, now we’ve stayed very, very aggressive on that.

Sandy Harmon (Matthew) – IronGate Partners

Terrific, well, I’ll get back in the cue, and look forward on some continuing improvement results in the quarters to come. Thank you very much, Craig.

Craig Shular

Thank you, [inaudible], and thank you for your input on – that you made prior on focus and acquisitions and what not. We welcome and I appreciate your input on that.

Operator

(Operator instructions). Your next question comes from Luke Folta with Jefferies.

Craig Shular

Hey Luke.

Luke Folta – Jefferies & Company, Inc.

Hey, just to follow up, I thought your comments on the super-premium [inaudible] were really interesting – are you guys selling anything of this stuff now externally?

Craig Shular

We had sales, yes, and we’ve had good customer feedback thus far, we’ve also used it in our own network – you know, this is some of the synergies of the being back integrated. We have the ability to take that – well, one, we’re involved in the production process and the tailoring of that [inaudible] from its inception, and then we also have the luxury and the benefit to run it right throughout own electro manufacturing machine, and so, that [inaudible] looking very good to us. So, yes, there’s sales, you’ll see more sales of this as a premium priced product, it has a good spread on it, there’s you know, it – there’s only a few people that make needle coat, and there are even less that make a great super-premium – so, our cedar team has done a nice job.

Luke Folta – Jefferies & Company, Inc.

I was going to ask on the – just on the economics of the super-premium, is it, you know, similar cost structure, much higher sales price, or – I mean, when we think about the margins on super premium versus, you know, more regular grade coat, what – how do they compare?

Craig Shular

Luke, the way [inaudible] eight years of high cost structure, but it is a higher selling price and ultimately a better return in margin to the company.

Luke Folta – Jefferies & Company, Inc.

Okay, and just lastly, you – whenever it’s spending that you’ve done to expend your abilities in this arena on the super-premium side of that, actually do you think that’s going to result in any net increase in the capacity of C-drift, or is that a separate Cap X program?

Craig Shular

That’s a completely separate Cap X program.

Luke Folta – Jefferies & Company, Inc.

Okay. All right guys, thanks a lot.

Craig Shular

Thanks, Luke, have a good day.

Operator

Your next question comes from Charles Bradford with Bradford Research.

Charles Bradford – Bradford Research, Inc.

Good morning.

Craig Shular

Good morning, Chuck. How are you today?

Charles Bradford – Bradford Research, Inc.

Hi, how are you?

Craig Shular

Super, thank you.

Charles Bradford – Bradford Research, Inc.

Can you talk a bit about your conversion cost? A lot of people have been talking about natural gas costs coming down, obviously it’s much more the US than elsewhere in the world, but can you address conversion costs in general and energy in particular?

Craig Shular

Yes, Chuck, in the US we have enjoyed very much these lower natural gas costs, and for us they make a graph out of electrodes – think of natural gas but at 5% of the total cost to make a graph out of electrodes. So, it’s a relatively small one, but we have enjoyed the benefit there, but overall when you look at energy costs, they have been going up – oil, electric power, and natural gas in many other regions around the world. So, we’ve had cost pressure from all of the energy related inputs that we use.

Charles Bradford – Bradford Research, Inc.

Are there any other significant costs, like labor, where you have any kind of an issue this year – contracts up, and so on?

Craig Shular

We do not have any issues, we have a great working relationship with our global team, we don’t have a history of outages that have caused us problems, we have a great working relationship with the teams, and labor is usually only 10, 12% of our cost structure. So, labor really, you know, all though very important for us, is an item because of where we are, because we have large plants that can be very efficient has not been a major issue. It’s more important that we have a well-trained team that embraces lean six sigma, and that team will perform superbly – so, 10, 12% of our cost and no labor issues.

Charles Bradford – Bradford Research, Inc.

And finally, could you give us some idea what maintenance cost is in general as a percent of cost?

Craig Shular

Yes, again, that’s another relatively small one, and so that would be kind of some maintenance parts, maintenance team at the plant, sometimes you use some outside contractors for specific skills, but it’s – yes, you’re down to something that’s a single digit percent for us around the world.

Charles Bradford – Bradford Research, Inc.

Terrific, thank you very much.

Craig Shular

Thank you, sir.

Operator

Your next question comes from Rob Pohly with Samlyn Capital.

Rob Pohly – Samlyn Capital

Hi, thanks for taking my question again. I just want to follow up on the buyback question, it sounds like the decision not to buy back stock wasn’t a reflection of, you know, you’re thoughts on whether or not the stock was cheaper or expensive, it sounds like you feel like the stock was pretty cheap. So, therefore, it must have been, you know, weighing the Cap X dollars versus buying back stock, and you know, clearly you chose Cap X dollars. Maybe you could just – Craig, maybe you could just walk through your thoughts on how you came to that conclusion of, you know, spending 35 million dollars of Cap X, or planning on spending 35 million of Cap X in engineered solutions in ’12 for business that over the last four years, including this year, will generate, you know, around accumulative $50 million versus buying your stock back in the $12 range?

Craig Shular

Rob, I think you’re view that our trade off was Cap X, or share buyback is incorrect.

Rob Pohly – Samlyn Capital

Okay.

Craig Shular

We have the ability to fund the Cap X program as well as we have the ability to buy back stocks, so, it definitely was not an either or decision.

Rob Pohly – Samlyn Capital

Okay, why then didn’t you buy back the stock?

Craig Shular

As I said, we look at many alternatives, so there’s acquisition opportunities that come to us all the time, there’s other capital items that are not in this number that we weigh at different times. And so, it’s not just a, oh, would we spend money to grow our engineer solution business, or buy back, it would be that full slate of items that one reviews, including other acquisitions. And so, if we found an acquisition that we though was spectacular and unique, we would look very, very hard at that.

Rob Pohly – Samlyn Capital

Do you weigh that acquisition versus buying your own stock back?

Craig Shular

Absolutely, we weigh that one near term, medium term, and long term, and if an acquisition would give us a sustainable significant competitive advantage that might last for many, many years, and change the dynamics in our industry, then we would look very hard at that.

Rob Pohly – Samlyn Capital

Right, thank you.

Craig Shular

Thank you, sir.

Operator

At this time there are no further questions. I’ll turn the conference back to the presenters for closing remark.

Craig Shular

Thank you Brooke, and thank you all for your interest in our company, and we look forward to talking to you next quarter. Have a great day.

Operator

Thank you. This concludes the conference. You may now disconnect.

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