GrafTech International Ltd. Q1 2010 Earnings Call Transcript

GrafTech International Ltd. Q1 2010 Earnings Call Transcript
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GrafTech International Ltd. (GTI)

Q1 2010 Earnings Call Transcript

April 29, 2010 11:00 AM ET

Executives

Kelly Taylor – Manager, IR

Craig Shular – CEO

Mark Widmar – CFO

Analysts

Luke Folta – Longbow Research.

Ian Zaffino

Oppenheimer

Michael Gambardella – JP Morgan

Mark Parr – Keybanc Capital Markets

Charles Bradford – Affiliated Research

Chuck Murphy – Sidoti & Company

Scott Blumenthal – Emerald Advisers

Tim Hayes – Davenport

Eric Glover – Canaccord

Davis Haddock [ph] – Invesco

Titrus Sandall [ph] – Cardinal

Luke Folta – Longbow Research

Presentation

Operator

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Good morning. My name is Brandi and I will be your conference operator today. At this time, I would like to welcome everyone to the GrafTech first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Ms. Kelly Taylor, you may begin your conference.

Kelly Taylor

Thank you, Brandi. Good morning and welcome to GrafTech International’s first quarter 2010 conference call. On the call today is GrafTech’s Chief Executive Officer, Craig Shular and our Chief Financial Officer, Mark Widmar.

We issued our earnings release this morning. If you did not receive a copy, please contact Marie Noor at 216-676-2160 and she will be happy to fax or email a copy to you.

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

Also to the extent that we discuss any non-GAAP financial measures, you will find reconciliations in our press release, which is posted on our website at

www.graftech.com

in the Investor Relations section.

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

Craig Shular

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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