GrafTech International Ltd. (NYSE:GTI)
Q3 2007 Earnings Call
November 27, 2007 2.00 pm ET
Mark Widmar - Chief Financial Officer
Kelly Powell - Manager of Investor Relations
GrafTech is one of the world’s largest manufacturers and providers of high quality synthetic and natural graphite and carbon based products with customers in 80 countries. GrafTech’s core business, graphite electrodes, are products essential to the production of electric arc furnace steel. GrafTech also manufactures thermal management, fuel cell and other specialty graphite and carbon products for the electronics, power generation, semiconductor, transportation, petrochemical and other metals markets. So without any further unnecessary introduction I’d like to introduce Mark Widmar, Chief Financial Officer and he’s accompanied by Kelly Powell, Manager of Investor Relations and we’ll just ask Mark during the Q&A component of the program to repeat the questions that he’s asked by the analysts in the room so that the investors attending the web cast hear both a question as well as an answer.
Alright, thank you. If I can get the slides to work here. What I’m going to do is obviously first the forward-looking statements. I just want to make sure that everyone’s aware of that and the presentation will include some forward-looking statements which should be consistent with any previously communicated information that was provided during the press releases or anything else we’ve communicated recently.
What I want to do though, let me start off here first with looking at our business because I’m going to go there and then I’ll go back a slide. The other slide starts off with the key investment considerations and I think its better to maybe help you understand our business and then we’ll go back to some of the key investment considerations. I think they’ll make more sense.
If you look at our business, our business last year was about $855 million in revenue. Now that is also after we’ve done some rationalization of our portfolio. We’ve divested one business which was about $120 - $125 million of revenue. It was a joint venture that we had with Alcan that was used for the production of cathodes, and cathodes are products that is used in the smelting of aluminum. We had a joint venture; we had about 70% ownership in a business that generated about $120 million of revenue. We sold that last year for about $150 million in cash including working capital.
And we’ve exited our carbon electrode business which is around $35-40 million revenue, so when you think about our business, $855 million, essentially $1 billion when you include the divested businesses of which now will grow this year to be about $1 billion. So we divested assets that were underperforming, essentially $140 -$150 million of revenue, really no cash contribution and really no EBIT contribution associated with that. We’ll now take that $855 million and we’re going to leverage the four main parts of our portfolio that we have and I’ll go through each one of these, lead the first two in a little more detail.
Our key segment is graphite electrodes and we’ve mentioned that a little bit in the introduction, and about what is the product used for, and its used for the, electric arc furnace environment for melting of scrap. And that’s about 80% of our business. So that business this year will be about $800 million in revenue.
Advanced graphite materials, which is our second largest segment, which is about 10% of our business, that business will do a little bit over $100 million this year, $110, $112 million. If you actually look at that business over the last three years, its grown about 50% accumulatively. So if you look at it a few years ago with a little bit less than a $70 million business and its grown to be north of $100 million. So, if you think about the two core products of our business, graphite electrodes is kind of more of a GDP type of growth rate and advanced graphite materials is going to grow at a multiple of GDP.
Then we also have the other segments which is our advanced energy technology and our refractory business. Advanced energy technology is where you’ll find electronic thermal management products, products that will sit in your cell phone, products that will sit in your lap top. So as devices get smaller, and more functionality, and have thermal issues that they have to deal with, you’ll find our solutions sitting in there. Essentially what it will do, like in a cell phone, or even in a small ultra lap top, is it will replace other components that are there today like fans. So you take a graphite material product, you put it into the cell phone, it dissipates the heat, manages the heat in the thermal environment and replaces fans and copper, aluminum and some other solutions that may be there today. So our fuel cell business is also included in our advanced energy technology business and then you have our refractory business and refractory is basically bricks that are used for the lining of integrated blast furnaces for melting steel.
When you think about our products portfolio you have graphite electrodes and refractories that are tied to the steel industries, one part is EAF, electric arc furnace, the other part is integrated. And then the other parts of our business are diversified, they are not necessarily tied to the steel industry and I’ll go through that in a little bit more detail.
If you go back to the key investment considerations, leading market position, if you think about our core business, graphite electrodes, it is a relatively concentrated market. Its about, think of it as between us and our primary competitor we have about 40-45% share in the market. There’s three other, four other Japanese that make up 25% of the market and there’s a couple of companies in India that make up the balance. So you’ve got less than ten players that are really controlling the majority of the worldwide demand.
If you think about sustainable competitive advantages, the couple that we have identified in there is economies of scale and the other one is our R&D platform, we have 120 years of R&D experience that we can leverage and think about, how do you take graphite and make it a solution that meets some of the problems a lot of our customers are facing today?
Strong industry fundamentals, demand for our products is increasing. Steel industry is still globally a strong industry. I think one of the things that’s highlighted that is that about 80% of our business is outside of the US. So when you think about our business and where we have exposure its’ not necessarily to the US economy. Its more to a global economy and what’s happening from that standpoint.
There’s no commercially viable substitutes for graphite electrodes. If you want to produce steel in an electric arc furnace environment the only thing you can do today is use a graphite electrode.
Commercialization of advanced technologies - we’ve won five consecutive R&D 100 awards. We’ve also received funding from the US Department of Energy and we have nearly 800 patents. So most of this sits in our advanced specialty business as well as our advanced energy technology business. So the growth aspect of our business, we’ve got a very strong patent portfolio and we’re well positioned to take advantage of some of the trends that are happening in the marketplace.
And then strengthening cash flows, a couple of things in there is that this company is, to the extent that you’ve spent much time looking at it, came through a number of challenges and one of them is highlighted in bullet number two. You’ll see the comment, before antitrust, and when you think about it most companies wouldn’t highlight that in any communication externally. But it’s important to understand this company did go through an era that really burdened it with, because of price fixing and other things that happened in the industry in the mid nineties, that management team is all gone though what they left the current management team is significant fines that had to be paid. So if you think about the antitrust fines that we had to pay over the last few years from ’02 until the last payment that was May and January, antitrust is completely behind us. We actually paid out $120 million in antitrust fines. We had to restructure our business, we used to have 11 plants, we now have five. That cost us a little over $100 million to do the restructuring. And then we also had to deal with our pension obligations that our company GrafTech was a spin-off of Union Carbide so we had very significant pension obligations that we had to deal with which also cost us about $80 million. So if you add up all those, kind of, nonrecurring over the last few years, there’s north of $300 million of cash outflows that had to happen. All that’s behind us.
The antitrusts' last payment was made in January. The restructuring projects are completed so those activities are down. We’ve got five plants now on a global platform and the pension funding is largely behind us. We still have some smaller pensions that we have to deal with but the majority of those obligations are behind us. So we’ve got strengthening cash flows and we’ve got a stronger balance sheet. And if you look out over the last six quarters we generated about $175 million of operating cash.
I’m going to go into the graphite electrode business in a little more detail. When you think about the business drivers there’s five fundamental business drivers. One as I mentioned before is the global economic fundamentals and again we’re not necessarily tied to a US economy, it’s a global economy. The statement here is that steel applications (consumer versus fixed assets), I’ll go into that in a little bit more in another slide but that’s important to understand as well. The short takeaway is our products, EAF, is integrated versus EAF steel, EAF steel largely will be used for more infrastructure applications versus consumer driven demand applications such as automotive and appliances. So when you think about the economy and where there may be a slowdown, it is important to understand if you’re seeing it in the infrastructure side or are you seeing it on the consumer spending side.
Steel industry, what we all look at from the steel industry standpoint to understand the strength of our business is what’s happening with steel prices and what’s happening with scrap and iron ore prices. To the extent that steel prices are staying strong they will normally use the benchmarker somewhere around $500 a ton or so for [lateral] product. As long as it stays north of $500 that’s a good indicator for us.
Blast furnaces versus EAF furnaces, again while we have a small part of our business which is refractories that actually is used in a blast furnace environment, the majority of our business is used for electric arc furnaces. What drives EAF will be new EAF growth and we track those very closely and understand new furnaces that are going to be coming online. The other thing is that you’re seeing a conversion of blast furnaces to electric arc furnaces and I’ll go through that in a little bit more detail. Typically what you’ll see is integrated furnaces are a leading indicator for EAF growth. And what’s happened over the last few years has been significant growth in integrated blast furnaces largely in China and what that means is that you’ll see a curve that will happen in the future that most of that EAF will happen in China as you generate more scrap. Scrap will be generated as you produce more integrated steel, it goes into the ground, goes into automotives, goes into other applications and then it has to be recycled and that fuels the engine for EAF growth.
The other thing is small furnaces moving to large furnaces. Even in more mature economies, for example here in the US is what you’ll see is that new core steel and [amex] they all want more fish and larger furnaces and what’s happening is the smaller furnaces are being taken out and larger furnaces are being put in. And what that means is that you have to have a higher quality of better performing products to work in those types of environments.
Electrode industry fundamentals, supply and demand is critical, we have to have a good balance between supply and demand and where we sit today is that it is a very good balance between supply and demand in our industry, largely because of the last point which is needle coke availability, I’ll show you a chart on that. But the largest raw material that goes into the production of a graphite electrode is needle coke. And needle coke is currently short in the market and I’ll show you a little bit more detail on that.
And there’s specific consumption rate and that’s the rate at which the electrode is consumed in the production of steel and today its about 2.2 kilograms of an electrode produces a ton of steel. What’s happened in say 5, 10, 15 years ago it was as high as 10-12 kilograms per electrode per ton of steel. And so what’s happened is through efficiencies used through producing better performing products that we do or through efficiencies in how our customers operate their furnaces, the specific consumption rate has been coming down. Where we are right now is kind of plateaued. And so with the industry to go back and look at the industry of the last few years, as people were adding capacity and then the performance of the electrode was improving, in essence you were getting incremental capacity each year through improvement in specific consumption rate, at the same time people were putting actual capacity into the ground and it created an imbalance between supply and demand. So that’s another element that we look at very closely to understand supply and demand. And what I would say right now, if you take all these elements, as we think about 2007 in particular, I’m not sure there’s been a better balance between these drivers at any point in time in our history.
The other thing that we’ll look at real closely is another indicator of growth is trying to understand the global economic fundamentals and what we typically will do is we’ll look at the emerging countries from the established countries and there’s a metric that a lot of people will look at which is GDP for capital relative to steel intensity or metric tons per person. And what this chart shows you clearly is that in emerging countries, steel intensity is relatively low. And what’ll happen over time is you’ll see the migration towards some level of steel intensity that is more aligned with the emerging countries which is going to fuel further growth in our industry.
This chart is important to understand and it helps maybe to try and connect some of the dots between integrated growth and EAF growth. If you look at the chart, I know there’s a lot of information here, but if you look at the grey bars, and the grey bar is actually the integrated steel production by year from 1990 to 2006, you’ll see the yellow bar being the EAF and you can see around 2003 or so there’s been a spike in growth in integrated steel which is somewhat, if you go back from the period of 2002 backwards you can see was relatively flat. All that has been driven by China. China is putting somewhere between 400 plus million metric tons of steel into the ground today. So they are producing about a third and using about a third of the steel on a global basis. Again, what will happen over time is that that integrated will now create scrap that’s going to drive growth in an EAF environment. And the way we look at this chart is if you look at the orange bar, the line that shows the triangles, that shows you the EAF percent of steel production in the advanced economies and as you can see it has continued to grow from 1990 until where it’s at right now, about 42-43%. If you look at the line in between that has the little circles in it, that actually shows you the growth of the world EAF percent including China. And you can see if you look at it EAF has actually come down because of what’s happened in China. If you pull China out of the equation, then you look at the rest of the economies, the emerging economies excluding China, you clearly can see that they have been growing up.
So what we’ve seen over the last few years is kind of a China phenomenon that’s actually showing EAF declining at the percent of the total of steel production only because of the rate at which integrated steel has been increasing in China. What’ll happen in the future though is you’ll see those integrated production starting to come down and EAF production starting to grow in China. Can I have a question?
Question and Answer Session
Electric arc furnace.
No, you can’t shoot, these are dense, they can go up to 32 inches in diameter, an extremely dense product, very strong, hard to cut [Conoco] machine. But yeah they’re very dense solid products. SGL is our largest competitor, which is a German based company so we and SGL have 40 to 45% of the market. We have three Japanese competitors [Toki] is one of them, NCK is another and SCK is another. And then we have two Indian competitors HGG and GIL so again this is in our core business.
When you look at this, this is important again I just want to try and connect the dots as I mentioned before when you think about end market applications and what drives the growth for our product. There’s two different ways to try and produce steel, the chart tries to depict that. At the end of the day where everything ends up is through, where it says steel refining facility you can either get it through an EAF environment or you can get it through an integrated process which basically flows into the basic oxygen furnace. It all goes through a steel refining facility which different end products can be produced and we typically will call those products either flat or long products. Flat products, there are exceptions to this, but typically flat products will go into automotive appliances, ship building and machinery and are largely produced through an integrated production route and the reason that is, is that you need a very smooth high quality finish. If you use a scrap product at times you can get imperfections in the end product and so if you’re trying to put steel on the outside of a car you don’t want any imperfections in it. So again flat products largely for automotive appliances and the like will be produced through integrated. And long products, wire, beam, rail and the like is largely for construction infrastructure to build out bridges and the like and primarily will be used through what here is called mini mill but essentially it’s an EAF Environment. So that’s why its important if you think about the global economy and if you think about the drivers for steel and what you’ve seen here in the US in particular in the last year or so, you’ve seen some softness in the flat product, but the long product has been relatively strong still and so you haven’t really seen much of an impact in our business as a result of that.
(Inaudible) if you were to very high temperatures, the elements in a layer according to what the capability of the furnace can handle the temperatures can eliminate waste in the scrap and things like that and in the very nature of what’s in scrap metal but, so it’s possible to use and to [team] with these steel products with the flat products from the integrated field but your furnaces have to be able to handle the (inaudible).
Right. And that’s why like what I’ve said, what you’re saying in growth, growth segment, I think I may show it in this chart or the next one, it’s the chart after this, large diameter electrodes higher demanding more intense environments, higher electricity currents would have to run through electrodes require larger diameter electrodes. So as you move up – I call it moving up to stacks – so in a melter type of application you can take a type of product or electrode that’s 14 inch or you can go up to 30-32 inches. As you get into those furnace as you mentioned and Newport does produce flat products through an EAF environment as an example, but they need the best most demanding electrodes that are out there. If you think about the concentration of our competitive landscape there are only really four of us at play in large diameter electrodes so you’re right. As you move up there and if you want to produce in a more demanding high thermal environment that can take scrap and produce a good flat-end product you’re going to need a high diameter electrode which actually is our sweet spot that actually fits in really well for us. Okay.
When you think about this, the key fundamentals for EAF steel production, just a few that are important to understand, it’s a consumable and its consumed every 8-10 hours, which is a beauty of our business, every kind of steel is going to consume some amount of graphite electrode and its not a capital intensive product so there’s going to be an ongoing revenue stream and demand for our product and also it represents a relatively small percentage of the total cost of producing steel. Throw out a number say its $400, $400 to produce a ton of steel, okay, we’re at 3% of that, we’re at $12 so if you think about and we’ll go into this little bit of how do we look at the spread and pricing dynamics in our market. We’ve been very aggressive in trying to get the price for our product up and when you think about the ability of our customers to absorb that when its only 3%, if I take a 10 % increase it’s a $1.20 in the total cost of producing steel and they can’t produce the steel without my product, and there’s no available substitute and high various (inaudible).
The other thing that’s happened in our industry that we would like to highlight is that there is just global consolidation. There’s no doubt about that and we believe it’s very good for our industry. The stable end customer makes it for a more viable supply chain from our perspective and through consolidation they’ve been able to do things like rationalising production volumes when they’ve seen softness in demand.
What has happened in the past is they were reluctant to cut back on production, more people were competing on variable costs, and they were trying to drive production form that standpoint and it was a land grab to try and get a variable margin dollar. That’s changed and we’ve seen that behavior even here in the US over the last – if you look at the last 36 months or so there’s been a couple of points where we’ve seen some softness in the US steel market, we look at operates, operates falling below kind of 80%, 75 to 80% and what’s happened there is they’ve been able to cut back production mainly though an integrated blast furnace environment and as a result of that they’ve been able sustain pricing in the market. So from our standpoint we believe that consolidation is good. The other reason we believe it’s good for us is because we’re well positioned to serve a global customer. We have plants in four different continents and they align very well to where our end-customers are. And if you think about the middle as an example they’re going to require 80,000 tons of electrodes on an annual basis, which is about 8% of the total demand.
Eighty or eight?
Eight. If you think about it, 80,000 tons is about a million tons of electrodes on an annual basis which would include ladle applications, essentially that’s the total market requirement. So in terms of being able to meet their requirements, us and SGL are large global suppliers that align very well to their plants and they don’t want to fragment their buy if they can avoid it. They are willing to do it but if possible they would like to leverage the supply chain, two to three suppliers versus eight to ten. We’re well positioned to do that. If they don’t have us and SGL in their book they’re going to have to go to six or seven other suppliers to meet their requirements because no one has the capacity to meet 80,000 tons of electrodes on an annual basis.
This one is just the segmentation of the market and it’s just important to understand there’s melter application, which is really that the electrodes that are used are the electrodes in our furnaces and there’s two market segments. Large diameters the point Bill was trying to mention before, this is more of a growth segment in the market. It requires – the performance of the electrodes is highly valued – you typically would get a better price premium and at the growing market most of your new EAF furnaces are going to require large diameter electrodes. The smaller diameter electrodes that go into melter applications is the performance of the electrode is valued but we typically would use our customer technical services as a value add and what we’ll do in those situations so we can still ensure a price premium relative to our competition is we’ll work with them to help them understand how they can operate their furnaces more efficiently. So, we have the advantage of selling into hundreds of customers around the globe and seeing a number of different furnaces and the environments in which they operate and we’re able to leverage some of those best practices with our customers. So, we sell that as a value add and as well as that we’re able to pull through a better price and a higher demand for our product in that segment. And then the other part of our business is that ladle applications its more a commoditized market at 30% of our total business and I call it an opportunistic market – what we’ll do in that segment is that when we have customers that are close to our plants, we have the advantage of in terms of delivery to the customer or we have an advantage raw material change that we can leverage – we’ll take advantage of that and we’ll sell it to those customers that are close to our market, are close to our plants and still demand a high margin from that standpoint. But it is a more commoditized and cost competitive environment.
This is just to get an indication of what’s happened with the graphite electrode spread which is essentially the gross profit dollar per ton is just to help you understand where we were and where we’ve come and at the end of the day, through pretty aggressive pricing action as well as management of our cost and productivity projects we’ve been able to significantly increase the spread on a gross profit per ton basis and as of today we have it at a level of that’s the highest in this company’s history.
When you look at our raw material and the only thing I’m going to highlight here is just to give you 35% of our raw material cost is needle coke. Essentially a graphite electrode is needle coke. It takes a ton of needle coke to produce one ton of a graphite electrode and its 35% of our total cost. The reason that’s important to understand, and as I’ve mentioned early on in terms of the drivers from our graphite electrode business, is the balance of supply and demand. And one of the things that’s helping to create that balance of supply and demand, even though there’s a little bit of capacity, if you look at it on a global basis – we’re running about 95% op levels, you’ll be running a little bit north of that op level, for example graphite runs a little bit higher than that cos we have the raw material of needle coke. Some of our competitors that have some capacity are running in the lower 90s because they’re short of needle coke and what’s happened over that time as we look at 2005-2007 is that there’s two different types of needle coke, one is the petroleum base product and another is the coal based product.
The majority of needle coke in the world is produced as a by product of petroleum. You can use the coal tar pitch, the only issue you have with that is that it normally takes a longer bake cycle. So your firing occurs in the furnaces you’re bake cycles are longer – so most people would use petroleum –only if you’re short of petroleum or needle coke and you have no alternative you typically would then have to go to a coal based product.
The majority of what service is used in the world today is though is petroleum base. And what happened in 2005 is one of the large refineries, UNICAL, which had a plant in Vermont, Illinois stopped producing needle coke and the reason being is that you need a low sulfur content, high sweet crude feed stock in order to produce needle coke. If the sulfur content gets too high you’re unable to produce needle coke and what you then have to put is a filtering system on the front end that actually takes the sulfur content down. When you’re in the business of refinery and just trying to generate as much liquids as possible the last thing you want to do is have to make capital investments that could be $20, 30, 40, million capital investment and then reduce the sulfur content of your feedstock in order to produce a byproduct and so they made a decision economics said it didn’t make sense to continue to produce needle coke. What that did is that it continued to reduce the supply in the market by about 10% and so where we sit today is the market is short needle coke.
There’s only four producers of needle coke in the world. When you think about the refinement process of oil there’s three different types of coke that you can get. One is the fuel grade coke, another is an anterograde coke and then you get a needle coke. It’s about 75 on a global basis about 75 million tons of coke, 1 million of that goes to needle coke, 24 million is anno and then rest is just fuel coke and fuel coke is basically just a substitute for coal. You don’t see as much here in the US but Europe in particularly you’ll see them burning fuel coke instead of coal. And so there’s really not a strong economics. If you’re not in the business today you won’t find too many people deciding to make a capital investment decision to start producing needle coke. So what we’ve seen over the last three years or so is no new capacity in coming on board, which has helped create that strong balance between supply and demand even though there’s limited capacity in the market. If there was additional needle coke there probably would be - some of our competitors would take advantage of that capacity - which would create a little bit of imbalance between supply and demand.
The other point I just want to mention on here is Conoco of the largest producer of needle coke in the world. They produce about 60% of petroleum based needle coke in the world today. We have a strategic relationship with Conoco. Before Lamont took their production off the market we entered into a long-term evergreen contract with Conoco, which basically guarantees buying to us. The only thing we negotiate on an annual basis is price. So in a market that has gone short we’ve been advantaged because we’ve got a guaranteed supply. The only thing we have to deal with every year is trying to manage the best price we can get with Conoco.
The advanced graphite material business – I won’t spend a lot of time on this - like I said it’s about a $100 million business. It has grown significantly over the last three years. The key things to look at from this standpoint is that it’s a business that’s going to grow at a multiple of GDP and its end markets are outside of our core steel business, which would include aerospace and defense and alternative energy, wind and solar are some of the drivers. Oil and gas exploration, industrial heat management, all those would be products, industries that are growing very well and at the niche market, so at the $100 million or so we’ve got the 8 to 10 niche market, that’s a good margin business for us. It’s more of an engineered solution, so we find our customer needs then we take our product and we engineer new solutions for them which as a result of that we typically command pretty good prices and good margins.
I’ll just go through the financial section real quickly. The purpose of this slide is just to give you an overview of how do we think about creating share holder value. This is a pretty simple, more academic view of the world, but its how we’re managing the business. And if you think about what we’ve done over the last few years, the primary result of the efforts that we’ve taken, whether its restructuring, whether its managing our pricing, our value proposition, whether its reducing our cost of capital through refinancing, paying down our debt, its largely the equity appreciation we’ve seen over the past year is associated with the increasing of our RRIC relative to our weighted average cost of capital which is decreasing our spread and driving the equity appreciation we’ve seen. There hasn’t been a lot of additional - as we’ve tried to manage through the challenging environment that we’ve had to manage through the last 4 to 5 years organic and M&A is something that has been as focused on as we would like it to be.
And so as we think about the business going forward there is going to be more of an intense focus on organic growth, and then potentially where it makes sense strategically, how do we then leverage M&A to increase shareholder value?
This one is just to give you a view of the balancing, of understanding, how do we think about growth, liquidity and the profitability is critical, that we continue to stay focused from that perspective as we grow the business. We are very focused on improving our cash conversion cycle and we've seen significant improvement of that over the last year or so as well as looking at capital structure changes and reducing the debt that we currently have.
This is a recap just of our business for the first nine months and the way I look at this chart, as I typically would call this the leverage chart. If you look at the growth in the business, we've taken the [graphite electro] volume, if you see the third line down which basically, volumes been relatively flat, it’s up about 3% year to date. We've taken that and we've leveraged that into 19% revenue growth. Clearly is an indication of our success that we've had in the market in realizing higher prices, as well as the growth that we've seen in some of our other businesses like Advanced Graphite Materials.
We’ve been able to take that if you look at it it’s about $115 million of incremental revenue and we've driven almost $75 million of gross profit off of that. So the incremental margins are north of 60%. So we've taken the 19% sales growth, and we've taken that in to see a gross profit growth of 24%. If you then take it down to an EBIT we've nearly doubled our EBIT income from (inaudible) ops. It was nearly tripled. So every line through the P&L we've continued to leverage as we move down. And if you look at RSG and AN R&D we've actually taken that down 9% year on year as well.
The debt has improved $250 million. And we'll probably, looking at our guidance that we've given right now, our net debt will be below $400 million by the end of the year. And when you think about that, our debts structure today includes a $225 million convert which is like a one in five eighths coupon. And then we have $200 million of senior notes that are ten and a quarter that were initially $550 million, so we've taken $350 million of the senior notes down.
If you look at our annual interest expense going forward it’s something we don't take anything, any of the senior notes outgoings forwards, $25 million of annual interest expense and we were at about $85 million a few years ago.
We first started calling the senior notes in Feb. because that was the first call period. We'll have another call step down to 103; the current call is at 105. They stepped down to 103 and that will happen in February. So it’s another step-down in the call premium that will happen going forward.
Our return on sales which is really a net income return on sales is up 8 points. Operating cash flow is improved. And our EPS is up $0.60. Last year through three quarters we did $0.36. For the full year we did $0.52. We actually did more in the first half of the EPS than we did in all of last year. And we are on track obviously to do a number that would be close to double, north of double what we did last year.
And this is just to give you a view of the revenue growth and the operating income performance as you can see from the five year period the (inaudible) operating income is 51%, the revenue has grown 14%. If you look at year on year, our revenue has grown about $140 million and we've almost taken $100 million of that to operating income on the bottom line. So clearly a lot of hard work that's been done over the last few years in terms of repositioning our product platform, our productivity initiatives, all that is starting to realize benefits, realization of price in our market today. Steel is still running very well.
We also have been very successful in trying to create a tax efficient structure so that we increase our profits. You'll see more of that dropping through to the bottom line. That's one reason why if you look at the EBIT versus the net income for continuing operations we were able to grow that at a higher rate than the EBIT because of improvements in our tax rate. Last year we were around 32%, this year we are around 27%.
So a lot of hard work. Still work to go and the company continues to be focused on how do we increase our shareholder value. The outlook for the year is highlighted here which is consistent with what we gave when we released our earnings at the end of November, so I won't go through any additional information there. And I'll open up for questions.
Question and Answer Session
Say that one more time? Through nano technology…
Nothing I’m aware of along those lines at all. The only thing that has happened to some extent today is people, you can use, when you machine and electrode, you get clippings basically, machine particles. You can take those machine particles and put those back into the production of the electrode. The acronym we use is called [BeO]. So you can take the [BeO] and you can then put that in, but you can typically only blend 5-10% of that. If you go much beyond that you are going to compromise the performance of the electrode.
Could you briefly comment on who owns (inaudible) share?
Our largest shareholder is Jeff Gendell, Tontine and then Fidelity is our second largest shareholder. Jeff got in May or so of '06 and he has increased his holdings over the last year and a half, and Fidelity has been a pretty strong shareholder of ours for a while.
If you include the convert this year we’ll be about 120 million. The convert is at a little less that 14 million. Market where we're trading at today is 1.6, 1.7 billion. Shares today are a little up from 16. We were up at $20 three or four months ago and, if you look at what's happened to steel over the last few months in particular, steel has come down significantly. The markets' had a correction and steel has had an even greater correction. And you know we've moved up.
(Inaudible). Are they give or take a year or two (inaudible) with the quality and who are the competitors there [ensuring] quality?
Again, we play primarily at the bottom of the brick, so there is a tap hole, and from the tap hole down is really where our brick is. So as you move up, you'll find that there is more players like kind of the white refractory bricks. We're in the bottom, we’re in the carbon black kind of bottom part of the furnace. There's really not that many players in that segment either. SCL is our largest competitor. So what you'll find with SCL, again a German based company, very similar in terms of the end markets that we're in. They're in specialty business, we're in specialty. We're in refractory, they're in refractory. They have natural graphite, we have natural graphite. SCL is one of the largest players from that standpoint. So between the two of us we have about 60% plus of the market. It's the most demanding part of the furnace, to be down in the bottom of the pit. Our product performs very well. Its almost like you’re trying to allude that there’s like a burning period or something like that, there’s really not.
Exactly, when you do the maintenance and repair and overhaul, the furnace will have to come down, could be two to three months that they actually do a complete maintenance cycle and take out the bricks and then replace them with ours. We have a unique technology. We have a small brick technology; our competitors use a larger brick. It may seem a little unusual, but it’s actually quicker to do an installation with a smaller brick than with the larger blocks they use because of the radius' that you have to cut. So our product you can typically do a faster installation then say some of our competitors.
What are the technological advantages? Is there a price sensitivity? Because I don’t understand in the European countries where you just have a different economic model and the nature of the interaction of their fuel company, with their governments and their (inaudible) is very different in the way that works to what we are experiencing here. So is there a different economic model in the way that you are (inaudible) or why they buy your product versus the larger block?
Yeah, typically what will happen is because of the life of the lining. Our furnace lining will last longer than our competitors. What you'll find is (life proposition) is sometime challenging and you have to use almost customer testimonials to go out to actually leverage that. So like in Baosteel, the largest producer of steel in China, they have recently lined four furnaces and they've used our product because it's performed very well in their environment. There is actually a process by which the brick, after a while there is what's called a [scall] that will build up on the outer edge of the brick and what will happen is because our bricks are smaller, it allows for a denser [scall] and that creates a better environment for the furnace to operate, more efficient.
And what you'll find sometimes in our competitors, you'll start to see weakening and deterioration of their brick and you'll get something, which in text book terms calls it elephant foot, which means you’re not getting an even distributed firing throughout the furnace. As a result you get hot and cold spots. Our product doesn't allow that to happen. So it is a product that, once we get penetrated into an account, we usually have a pretty good retention rate. Any other questions?
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