Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Michael Snyder - Director, Investor Relations

Walt Turner - President and CEO

Leroy Ball - VP and CFO

Analysts

Ivan Marcus - Keybanc Capital Markets

Daniel Rizzo - Sidoti & Co.

Ian Zaffino - Oppenheimer

Steve Schwartz - First Analysis

Liam Burke - Janney Capital Markets

Laurence Alexander - Jeffries

Kevin Hocevar - Northcoast Research

Chris Shaw - Monness Crespi

Richard O'Reilly - Revere Associates

Koppers Holdings Inc. (KOP) Q4 2012 Earnings Call February 14, 2013 11:00 AM ET

Operator

Ladies and gentlemen, welcome to the Koppers Holdings Inc. Fourth Quarter 2012 Earnings Conference Call held on February 14, 2013. Throughout today’s conference all participants will be in a listen only mode. After the conference there will be an opportunity to ask questions. (Operator Instructions).

I will now like to hand the conference over to the Director, Investor Relations, Michael Snyder. Please go ahead, sir.

Michael Snyder

Thanks Mark, and good morning everyone. Welcome to our fourth quarter earnings conference call. My name is Mike Snyder and I'm the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website or you can call Rose Helenski at 412-227-2444 and we can either fax or e-mail you a copy.

Before we get started, I'd like to remind all of you that certain comments made during this conference call may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the cautionary statement included in our Press Release, and in the Company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking statements included in the Company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The Company's actual results could differ materially from such forward-looking statements. The Company assumes no obligation or update any forward-looking statements made during this call. References may also be made of certain non-GAAP financial measures. The Company has provided with the Press Release which is available on our website, reconciliations of these non-GAAP financial matters for the most directly comparable GAAP financials.

I'm joined on this morning's call by Walt Turner, President and CEO of Koppers and Leroy Ball, our Chief Financial Officer.

At this time I'd like to turn over the call to Walt Turner. Walt?

Walt Turner

Thank you, Mike. And welcome, everyone to our 2012 fourth quarter conference call. I'd like to spend a few minutes providing a recap of our fourth quarter results before I turn it over to Leroy, who will provide additional fourth quarter and full year financial details for you. After that I would like to summarize a few of our major accomplishments this past year, before turning to 2013 and giving you of my thoughts and how I see the New Year progressing.

Beginning with the fourth quarter, I mentioned on our last call that our expectations at that time were that we would finish the year with an adjusted EPS that was 10% to 15% higher than our 2011 adjusted EPS of $2.86.

That expectation is translated into a $0.53 to $0.67 range of the EPS for the fourth quarter. I am happy to report that even without some sizable tax benefits that were recorded, we generated a fourth quarter EPS that was well within our projected range. With the tax benefits included, we finished the quarter with an adjusted EPS of $0.66, which was at the upper end of our range and significantly higher than our previous high as a public company of $0.44 in 2007.

Sales for the fourth quarter were up 2%, driven by higher pricing for railroad products, higher volumes for utility products for our railroad and utility business and higher volumes of carbon materials and chemicals business.

Our adjusted operating profit was $26.3 million for the fourth quarter, up 14% from last year’s fourth quarter adjusted operating profit of $23 million as higher profitability in the railroad utility products, combined with a recognition of escalated insurance recoveries, an excess cost of $1.2 million, more than offset lower results in our global carbon materials and chemical business.

Our adjusted operating margin for the fourth quarter was 7%, compared to 6.2% for the fourth quarter of 2011. The 80 basis point increase was driven by the outstanding performance in the fourth quarter of our global railroad and utility products business, as well as our North American business as well as our Australian coal business exceeded prior year operating profits and margins.

Overall, I am quite pleased with our fourth quarter results, given the continuing volatility in certain regions of the world, particularly in Europe and the impact that lower aluminum prices had had on smelter production levels in mature geographies where we enjoy high market shares. Achieving the highest fourth quarter net income and EPS in our history as a public company is an important accomplishment and is a tribute to the diversity of our geographic footprint, our products and our end markets.

Leroy will now provide some additional detail on the quarter. After this review I will summarize our accomplishments for 2012, give you an update on our progress we are making on our margin improvement initiatives and provide some insights into what we are seeing for our end markets and outlook for 2013. Leroy?

Leroy Ball

Thanks, Walt. Starting with the consolidated results, sales for the fourth quarter increased by 2% or $5.9 million to $374.9 million, compared to the prior year quarter due to a higher railroad and utility products sales driven by higher sales volume in the value added products.

Sales for carbon materials and chemicals for the quarter were flat at higher sales volume for carbon black feedstock increased though offset lower sales volumes for carbon pitch and phthalic anhydride, due to reduced demand that was due impart to year-end inventory de-stocking by certain customers.

Fourth quarter adjusted EBITDA was $33.6 million or $2.7 million higher than 2011 fourth quarter adjusted EBITDA of $30.9 million and adjusted EBITDA margins of 9% for the fourth quarter of 2012 compared favorably to adjusted EBITDA margins of 8.4% for the fourth quarter of 2011 after restating for discontinued operations for both periods.

The higher margins were driven by significantly higher margins for railroad utility products due to higher contract pricing and higher sale volumes of value added products and $1.2 million of insurance recoveries in access of cost incurred during the quarter for the February 2012 pitch tank leak in Australia, with more than offset higher car cost and lower volumes for pitch and phthalic anhydride.

Our tax expense as a percent of pretax earnings for the quarter was 25% compared to 46% on an adjusted basis in the prior year quarter, with the decrease in mainly to the unfavorable mix impact of European operating results in 2011 and certain discreet tax adjustments in 2012. For 2013, our expectations are that our effective rate would be in 35% to 36% range based upon our current expected mix of geographic earnings.

Adjusted net income and adjusted earnings per share for the fourth quarter of 2012 were $13.9 million and $0.66 per share compared to $8.7 million and $0.42 per share for the fourth quarter of 2011. The difference in tax rate for the two quarters had a $0.19 benefit in fourth quarter 2012 EPS.

When comparing our results for the fourth quarter to what we had expected, our adjusted EPS of $0.66 was at the high end of that range that we had indicated on our last call. The lower effective tax rate for the quarter was the main driver for us finishing at the high end, but partially offsetting that benefit where insurance recoveries and excess of cost that came at approximately $4 million lower than previously communicated. That’s purely a timing should be realized in the first quarter of 2013. The net effect of those two items on our fourth quarter adjusted EPS was approximately $0.06 per share.

Sales for the full year of $1.6 billion was 6% higher than re-stated 2011 sales of $1.5 billion, with higher pricing in both of our businesses being the main driver behind the increase. Adjusted EBITDA of $159.5 million for the year of 2012 was 7% higher than 2011’s restated adjusted EBITDA of $149.4 million.

At a high level, stronger pricing was able to more than offset increased raw material and operating costs, as well a host of other large unusual items that I will address as I get into more detail on the business area. Adjusted EPS of $3.27 was 14% higher than restated adjusted EPS of $2.86 for the year 2011 and represents a new public company high for properties.

In our global car materials and chemicals business for the fourth quarter, revenues were flat at $242.4 million compared to $241.8 million in the prior year quarter, as lower sales volumes for pitch and phthalic anhydride were driven by lower demand and customer inventory de-stocking while higher sales volume for carbon black feedstock were driven by increased volumes from Chinese operations.

Pitch products accounted for a 7% or $15.8 million decrease in sales over the prior year quarter, driven by lower sales volume for pitch. Production in pitch volumes was due primarily to smelter closures in Europe and Australia that occurred in 2012. Additionally the development of export markets for carbon black feedstock from our China operations resulted in lower carbon pitch production as more raw material was utilized for the carbon black feedstock in order to optimize profitability.

Sales of distillates, which include third-party sales creosote and carbon black feedstock increased 11% or $26.3 million as carbon black feedstock volume increased significantly and more than offset lower selling prices for carbon black feedstock for the quarter due to lower average oil prices. The volume increase for carbon black feedstock was due mainly to higher volumes in Chinese operations, combined with our Australian operations selling carbon black feedstock to outside customers.

Sales of coal tar chemicals decreased by 1% as phthalic anhydride were partially offset by higher prices compared to the prior year quarter. Naphthalene sales volumes were up 8% which offset selling prices of 9%. Phthalic anhydride volumes were negatively impacted by customer inventory de-stocking as well as increased level of imports.

The average price for orthoxylene was at $0.66 for the fourth quarter of 2012 compared to $0.60 for the fourth quarter of 2011, despite the fact that oil prices decreased $88 a barrel in the fourth quarter of 2012 from an average of $94 a barrel in the fourth quarter 2011. Orthoxylene prices have now increased to $0.72 a pound for February, which is another record high pricing level.

Carbon materials and chemicals adjusted operating profit for the quarter of $18 million represented a decrease of $0.6 million from $18.6 million in the fourth quarter of 2011, which equates operating profit margins to 7.4% from 7.7% respectively. Operating margins declined as lower volumes for pitch and phthalic anhydride and higher raw material and operating costs more than offset $1.2 million of insurance recoveries, net of expenses from the pitch tank leak in Australia.

For the year sales of carbon materials and chemicals increased by $56.6 million or 6% to $999.7 million, compared to $943.1 million for the prior year with higher sales prices for all major products except Naphthalene coupled with higher sales volume for carbon black feedstock more than offset lower sales volume for pitch and lower sales prices for naphthalene.

Adjusted operating profit for the year ended December 31, 2012 for carbon materials and chemicals decreased by $5.1 million to $83.1 million. Contributing to that decline were higher raw material and operating cost, a $3.1 million reserve for bad debt taken in the second quarter arising from a customer bankruptcy, $2.2 million in net costs in excess of insurance recoveries for the February 2012 pitch tank leak in Australia, $1.9 million of costs related to our third quarter plan out in Europe and $0.9 million of cost related to our new Chinese joint venture.

A combination of all these items is unfortunately enough to more than offset the pricing benefits we received compared to 2011 and drive our adjusted operating margin for carbon materials and chemicals from 9.4% 2011 to 8.3% 2012. As far as the three items just mentioned the only costs that are expected to have a negative comparative impact in 2013 are the joint venture costs which are expected to add an additional $1 million of incremental expense in 2013, while the costs associated with the Australian pitch tank leak should at the very least be offset by insurance recoveries moving forward.

For our global railroad and utility product business, higher sales prices and volumes for utility poles more than offset lower sales volumes for cross ties, resulting in an increase in sales for the segment of $5.3 million or 4% for the fourth quarter compared to last year's fourth quarter.

Adjusted operating profits for the quarter increased $8.6 million from $4.6 million in the prior year quarter, with adjusted operating margins of 6.5% compared to 3.6% in the prior year quarter. Higher prices for our standard railroad products and a more favorable sales mix weighted toward the value added products in the fourth quarter 2012 highlight the continued strength of the railroad business.

Our utility business contributed to the quarterly improvement through the strong sales volumes brought on by the damage from Hurricane Sandy and the benefits consolidating our Grenada, Mississippi pole treating operations into another of our treating plants. All business that we acquired in Australia in November actually had a $0.4 million negative impact on operating profits for the quarter with large onetime acquisition costs, key to profitability for that business.

2012 was a record sales and profit year for railroad and utility products as sales increased by $32.2 million or 6% to $555.3 million. Both the North America and Australian businesses contribute to the year-over-year improvement as stronger pricing and demand for value added rail products in rail joints in North America and utility poles in Australia were the reason for the top line increase, and more than offset lower volume for railroad crossties.

Adjusted operating profit margins for the year for railroad and utility product were $48.5 million and 8.7%, compared to $34.8 million and 6.7% in 2011. We re-negotiated several large contracts for railroad during 2012 which helped us recapture some of the margin erosion we experienced over the last couple of years. Additionally a favorable sales mix, a strong Australian pole market and a half year benefit of the consolidation of our Grenada treating plant allowed this segment to achieve a 200 basis point operating margin increase.

As of December 31st, we had 6.2 million untreated crossties on hand at our plant, which was the same number we had on hand at the end of 2011, even though we purchased 300.000 more ties in 2012. However the ties designated for commercial customers have increased by more than 300,000 ties and these ties have been procured for our commercial tie and export business. Cash provided by the operations for the year 2012 amounted to $77.8 million, compared to cash provided by operations of $76.9 million for the year 2011, as higher earnings more than offset increases in working capital in 2012.

One difference in working capital this year is that inventories have increased more than the prior year due to change in the mix of crosstie inventories with a higher proportion of ties being targeted for commercial customers as mentioned earlier. Our debt net cash on hand at December 31st, 2012 decreased to $229 million from $248 million at December 31st, 2011 as increased during the year by $13 million, with a balance of $67 million at December 31st, 2012 and debt declined slightly.

We were able to achieve this despite the fact that during 2012, we contributed $20 million to our U.S. pension plan, spent approximately $19 million on a full business acquisition, nearly $10 million on productivity oriented capital expenditures, $6.4 million on share repurchases and increased our dividend by 9% in February 2012.

Our balance sheet has also never looked healthier as we reduced our debt as a percent of total capitalization from 74% at the end of 2011, just 64% at the end of 2012, and the book volume of shares as of December 31st, 2012, with $7.30 a share after being negative just a few short years ago. As of December 31st, we had nothing borrowed on or revolver and we had total estimated liquidity, well in excess of $300 million.

As we typically remind you, we have historically seen seasonal trends in our business that make our first and fourth quarter significantly weaker than our second and third quarters, We expected less of that seasonal separation for this year’s fourth quarter.

In summary, our expectations were that with a strong fourth quarter, we would reach our previously stated goal of 10% to 15% increase of our 2011 adjusted EPS of $2.86, which we were in fact able to achieve. However, our expectations for the first quarter of 2013 are that we will be below our adjusted EPS of $0.74 for first quarter of 2012, which was the highest first quarter in our history as a public company.

We expect to revert back to our more normalized pattern of achieving significantly higher results in the second and third quarters compared to first and fourth quarters. Walt will expand on this later on our call.

At this time, I would like to turn it back over to Walt.

Walt Turner

Thanks, Leroy. I’d like now like to summarize a few of our achievements for the year 2012, which should set the tone for a stronger year in 2013. First, in terms of growth initiatives, we were able to complete the acquisition of a full business in Australia that will add up about $12 million to $15 million annually in revenues and be accretive to margins.

We also entered into an agreement to build a 300,000 ton tar distillation plant in Jiangsu Province in China, which would generate $150 to million $200 million in annual revenues at favorable margins. We invested $10 million in initial funding of this project during the fourth quarter. The plant is expected to be fully operational by the middle of 2014.

During the year we were also able to secure a large crosstie order in Brazil that we expect will continue and hopefully increase going forward. Second, after incurring operating losses in our existing Chinese operations just a few years ago, due to difficult market conditions, we have been able to significantly improve our profitability to the point that we are achieving meaningful operating profit contributions that tripled in 2012 from 2012.

Although, the margins from Chinese operations are still below our margins in the mature markets, we expect that the upward trend in profitability and margins will continue going forward as this region becomes a larger part of our overall business.

Third, 2012 was a best year in our history for sales and profitability for our railroad utility products business. We significantly improved our sales mix by increasing the volume of our value-added railroad products and our rail joint bar business generated results that were even stronger than in 2011. Additional factors were the positive impact of the Grenada closure, strong results from our Australian utility pole business, improved contract pricing and the implementation of our margin improvement initiatives.

And as Leroy mentioned, we also generated free cash flow to finance the acquisition of the Australian pole business, increased our dividend by 9%, buyback 200,000 shares for $6.4 million, and fund our pension plans by $7 million more than the minimum funding requirement.

After these cash deployment initiatives we were still able to reduce our debt net of cash on hand by $19 million and reduce our debt to adjusted EBITDA ratio to a record low level of 1.4 tons, down from 1.7 tons at the beginning of the year. Our ability to achieve these accomplishments despite difficult global market conditions is a tribute to the strength and the diversity of our underlying businesses.

Now I would like to give you an update on the status of our TN markets and how we see these markets impacting our results in 2013. First, I’d like to talk about our railroad and utility products business. Our railroad business, after enjoying its best year ever should continue its upper trajectory in 2013 as the Class 1s are planning to spend at least as much as they did in 2012 and the commercial short line railroads should also have a strong maintenance program to take advantage of the extension of the Section 45 tax credits.

Additionally, our sales volumes of value added products and our export orders are expected to increase as well. On the utility side, our Australian pole business should show improvement over its strong 2012 results due to the acquisition of the utility pole business that was completed in the fourth quarter of last year. Additionally we will also have a full year’s benefit of $4 million to $5 million from the closure of the Granada plant, which should improve results of our North American utility pole business.

Now I’d like to talk about the outlook for our global carbon materials and chemicals business. In one of our largest end markets, the global aluminum industry, recent projections indicate a 7% increase in consumption for 2013, following a 6% estimated increase in consumption for 2012, which were positive indications for our global carbon pitch business moving forward. Excluding China both aluminum consumption and production are projected to increase by 4% in 2013.

While aluminum consumption is also we believe the driver for aluminum production, the production side more directly impacts our pitch volumes for us, although our pitch volumes were down in 2012 compared to 2011, mainly as a result of smelter closures in Europe and Australia. Our expectations for 2013 are that the pitch volumes will be higher than they were in 2012, mainly as a result of higher volumes from our Chinese operations.

We continue to focus on maintaining our strong market shares in North America, Europe and Australia, while expanding our presence in the developing markets of it Middle East, China, India and Brazil, and as a result you should expect to see those emerging markets continuing to grow each year as a proportion of our overall business. The automotive industry has seen some net gain growth appear in the U.S. as well as globally in 2012 with projections for increasing U.S. auto production of about 6% for 2013, which should benefit our phthalic anhydride sales.

The first quarter of 2013 is already off to a strong start for the U.S. auto production. As reported car sales for January were up nearly 16% from January 2012. Additionally the housing market, which is also a key end market for phthalic anhydride continues to show signs of improvement as housing starts in 2012 were estimated to be up by 20%, the most since 2009, and with projections for an additional 18% increase in 2013.

Our carbon black feedstock product, which is largely driven by tar demand should be strong in 2013 as well, with the exception of Europe, as global rubber demand is projected to be 2% higher than 2012. This growth is being driven by higher demand from the emerging markets in Asia, which are the primary markets that are served by our facilities in China and Australia. We also expect to benefit from higher pricing for carbon black feedstock with the higher oil prices as the pricing is based off of a flat oil index.

Naphthalene demand, which is driven mainly by concrete used in infrastructure expansion and improvements was also poised to benefit from the continued infrastructure expansions and the stimulus programs of the emerging economies such as China and the Middle East.

Additionally demand for naphthalene as a feedstock for phthalic anhydride production in China is expected to increase by over 400,000 tons over the next few years, due to the lower cost of naphthalene, compared to the alternate feedstock, orthoxylene. This increased level of demand should tighten the market for naphthalene and as a result, in an improved pricing environment for us compared to 2012.

Regarding the outlook for our coal tar raw material, as we mentioned in our last several calls, we now have access to additional tar in the U.S. from the new U.S. coke battery that's recently completed and are also hopeful by the end of 2013 if the Arcelor Mittal Coke Plant in Monessen, Pennsylvania will also be back and running to provide an additional source of tar for us. The additional production should lead to some stabilization of raw material pricing here in North America.

Outside of North America we expect to continue experiencing tightness in supply into Europe but we will continue to bring tar in from Russia and the Ukraine to supplement our European supply base. Due to the cutbacks in aluminum production in Australia we should be able to reduce the volume of high cost raw material imports from China, which will help offset any lost profits from the lower pitch volumes that we see there.

Raw material availability in China may become somewhat tighter due to higher expected demand, but we anticipate tar costs in that region to be only modestly higher than in 2012. Now I'd like to talk about where we stand on the progress towards meeting our margin improvement goal of achieving a sustainable 12% EBITDA margin by year end 2015.

There's no question that we have successful thus far on the Railroad and Utility product side of the business, in generating margin expansion. For the year 2012 this business achieved operating margins that already more than 200 basis points higher than in 2011.

In addition to the strength of the Railroad market itself, pricing has by far held the biggest role in capturing that improvement, but there have been other significant contributors as well such as the closure of the Grenada, Mississippi facility, the development of the export markets for the Railroad products and the further development of new higher value products such as the borate treated crossties and new rail joint products.

For the carbon materials and chemical business, the abnormal expenses Leroy mentioned earlier had a negative impact on operating profit that amounted to $8.1 million and as a result adjusted operating margins for the year were 8.3%, compared to 9.4% in 2011.

If you add back these charges and compare the margin to our 2011 four year margin that included the carbon black plant operations, the margins would be 9.1% for 2012, compared to 8.4% in 2011, a 70 basis point improvement. The major areas that account for that pro forma margin increase are improved pricing, the shutdown of the Australian carbon black facility and the increased use by the lower cost substitute feedstock in our chemical production process.

On a consolidated basis, adding back the impact of the abnormal charges and including the carbon black plant operations in 2011, our margins will be 8.9% for 2012, compared to 7.7% for 2011, a 120 basis point. That is more than half way to our goal. We expect to continue making progress on our margins in 2013 for the reasons outlined earlier.

When you put this all together for 2013, we should see moderate mid-single digit growth in sales for both businesses, but more importantly double digit earnings growth for the fourth consecutive year. The diversely of our global end markets and the geographic footprint we have provide us with earnings stability in our overall business, which allows us to continue to generate attractive shareholder returns in an overall challenging economic environment.

Looking more specifically at the first quarter, it is highly unlikely that we will meet or exceed our 2012 first quarter EPS of $0.74. While I already mentioned that we are expecting modest mid-single digit sales growth in 2013, we will now begin in realizing that until the second quarter, as the first quarter sales are expected to be relatively flat.

But of the sales growth in the first quarter, we will lack the leverage to absorb projected increases in our SG&A, and our depreciation and amortization expenses and that will cost us anywhere from $0.07 to $0.10 a share, comparatively to the quarter and on top of that, a higher expected effective tax rate, that will cost us approximately another $0.05 of EPS, compared to first quarter 2012, and you get a pretty good sense of how we are seeing the first quarter, plus or minus 10%.

Once the top line growth begins in the second quarter, some of our more recent margin improvement initiatives begin taking effect and the unusual charges that we incurred in the second through the fourth quarters of the last year don’t recur, we expect to see improvements in the quarterly comparisons for the prior year that we believe will lead us to bottom line growth for the year somewhere in the low to mid-teens.

Also you may have seen recently we announced a 4% percentage increase in our dividend that further demonstrates our confidence in the outlook for earnings and cash flows for 2013 and is also a testament to our belief in the fundamental strength and diversity of our businesses and end markets going forward.

At this time, I’d like to open the call up for any questions that you may have.

Question-and-Answer Session

Operator

Yes of course. (Operator Instructions). Thank you. And the first question comes from Ivan Marcus from Keybanc Capital Markets. Please go ahead.

Ivan Marcus - Keybanc Capital Markets

A couple of quick questions and, sort of you’re looking out a few years 2015, you said, 650 is the sort of the target right now. Now, you imply sort of 20% to 25% type of growth rate on the bottom line. With the first quarter being sort of down, would you expect to achieve that sort of growth rate or do you think it will be slower and more of a ramp up going into ‘14 - ‘15?

Walt Turner

We’re continuing to see the double digit growth for 2013. We may not be, when you look at the sort of the five year projection that we started out with, with this 2015 goal, you could easily look at 20% per year but you will probably see now with the little more on the tail-end especially with the Chinese plant coming on screen mid-2014. It’s moving forward and still very confident with our projection Ivan.

Ivan Marcus - Keybanc Capital Markets

And then on the margin improvement for the carbon material business, your improvement of margins, is that including or excluding sort of the abnormal charges that you had. So if you could exclude those, I think you said your margins are 9%, would you expect the improvement after that or off the lower number?

Walt Turner

Off of that number.

Ivan Marcus - Keybanc Capital Markets

And then you have several projects coming online in the Middle East and I expect and they sort of ramp up through ‘13 or ‘14 as you would. So would you sort of expect to see an acceleration in your total carbon material volumes as going to the back half of the year. That’s sort of how to think about it?

Walt Turner

We are going to see a little heavier shipments in the second half of this year, as you just pointed out. The lease is continuing to increase production, We have got the margin smelter that’s ramping up. I think by the end of this year, they should have the margin smelter pretty much at full production. So because of that and other increases in production in that part of the world, so you will see a little heavier concentration in the last half of the year on the pitch demand.

Ivan Marcus - Keybanc Capital Markets

And then Leroy, you a bunch of numbers out there. If you look at the carbon materials business and you just sort of consolidate everything you said into it, your sales were flat year-over-year. So was it volumes up, pricing down or could you just give me sort of the sales bridge of how you connected quarter-over-quarter?

Leroy Ball

Fourth quarter ‘12 to ‘11?

Ivan Marcus - Keybanc Capital Markets

Yes.

Leroy Ball

With pricing up, volumes down, volume in pitch down, I think volumes in carbon black feedstock up and generally pricing up in most major product categories.

Ivan Marcus - Keybanc Capital Markets

Okay so if you look at the total thing, pricing would be up, volume will be down and was there any impact on FX?

Leroy Ball

Small, very small.

Operator

Thank you. And our next question comes from Daniel Rizzo from Sidoti & Co.

Daniel Rizzo - Sidoti & Co.

You indicated that one of the reasons why things aren’t going to be so great in the first quarter was because of a higher tax rate. Is there a number we should be using tomorrow?

Leroy Ball

I think we had mentioned between 35% and 36%.

Daniel Rizzo - Sidoti & Company

And that should be relatively standard for the rest of the year?

Leroy Ball

That's what we would expect for the year, yes. Any discreet items that we might record throughout the year.

Operator

And our next question comes from Ian Zaffino from Oppenheimer. Please go ahead.

Ian Zaffino - Oppenheimer

So couple of questions here on the, you talked about the drivers of I think it was the phthalic anhydride, I would imagine some of the similar drivers that were driving your pitch business, but I guess you are looking for different kind of growth in each one, one being flat while being growing. What's causing that discrepancy in the growth rates between the two of those?

Walt Turner

Between the phthalic anhydride market demand and what?

Ian Zaffino - Oppenheimer

And the pitch

.

Walt Turner

Well obviously you are talking two different market applications. Phthalic anhydride, as we mentioned was primarily into auto products and also into housing products and it’s basically going into the plasticize, there was some plastics and resins which gets into the various plastic piping and what have you.

And we are seeing here in U.S. which is our only phthalic operation, at or perhaps even slightly higher this year than last year, just because of what we’re seeing in the auto industry and what we’re seeing in the housing starts and so forth, the point I think you might be getting at perhaps which is helping us out is that we are using naphthalene more so as the feedstock versus orthoxylene which is a petroleum derivative.

And so two things there, one we are the only producer in North America that can utilize naphthalene as a feedstock but secondly we are selling naphthalene into the surfactants market, concrete additives, what have you and with more phthalic production increasing in China, these new phthalic operations are going to be looking at using naphthalene versus orthoxylene because of the pricing differential between the two and that’s going to help support the sort of naphthalene pricing around the world, which is something that we're watching very closely, but it should be a positive for us going forward in 2013, because of the increased demand of naphthalene globally.

Ian Zaffino - Oppenheimer

Okay, okay. It's just because I would have also thought maybe the auto industry would have helped the aluminum side of the equation too, but I guess there's geographic issues and…

Walt Turner

As well aluminum, I mean, the use of aluminum in auto production continues going year-over-year especially with the lighter weights that they are looking at for improved fuel usage and what have you. Just in the U.S. alone aluminum consumption has increased almost 3% last year and projecting to increase another 3% this year and most of that increase is really related to the auto industry. So you're right there as well, Ian.

Ian Zaffino - Oppenheimer

Okay - and then on the leverage side of the equation, you brought down the leverage. Do you intend to bring it up? Are there some deals out there that you could do to bring it up, or maybe increase the buyback or even increase the dividend or I guess let me ask you in a different way, what's your ideal capital structure and how do you get there?

Walt Turner

First of all, we continue to look at acquisitions, sort of having a EBITDA ratio of 1.4. I think we would like to see it at3, 3.2, 3.5, but that's going to require the right acquisitions that we continue to look for and we’re constantly looking at growth opportunities, whether it's an acquisition or a joint venture project we have in China or working with other companies in joint ventures like Nippon Silicon Chemical Company. So I can't say specifically to you but I can tell you that we continue to look at favorable acquisitions that will more than get us to exceed our expectations of being $2 billion company in 2015.

Operator

Thank you. And our next question comes from Steve Schwartz from First Analysis. Please go ahead.

Steve Schwartz - First Analysis

Walt, correct me if I misheard you, but I think you said that your pitch volumes in '13 would be up year-over-year, in large part due to higher production out of China. If I recall China, has been running at higher than nameplate capacity, so how do you expect to get additional volume out of those two facilities.

Walt Turner

Well as I think Leroy touched on, you saw a large increase in our carbon black feedstock sales in 2012 and part of the increase in the carbon black feedstock sales was actually converting potential pitch production to carbon black feedstocks. At that particular time primarily in the third and fourth quarters we saw opportunities to supply carbon black feedstocks instead of supplying pitch, just because of the market demand and what have you at that point in time. So now what I'm saying is we're going to convert some of that feedstock sales back to pitch production because of the increased demand on pitch.

Steve Schwartz - First Analysis

Okay, all right I thought the ratio was kind of locked and I also thought CBS volumes were up because of your change in Australia because you shut down the carbon black.

Walt Turner

But also Steve, we have the option. There is three different types of feedstocks that carbon black producers can use. Some unfortunately can use raw coal tar. Others will use the distillates from our process where we're producing carbon pitch and generating a distillate that represents about 30% of our total tar, and the other option is producing a soft pitch which allows you to take out the chemical oil and some other value added components and then add back some other types of distillates there still meet a carbon black feedstock specification. So you can actually approach that market in three different ways.

Steve Schwartz - First Analysis

I see, okay, as my follow up, this is in regards to the railroads business, your incremental margin fourth quarter, looking year over year, you only added a little over $5 million in revenue but profit went up by $4 million. I know Grenada has something to do with that but I think Walt, you said you expected $4 million to $5 million of incremental profit in ‘13 from the Grenada closure. So what else is behind what happened there in the fourth quarter? Is the rest of that all mix because you are selling more commercial or short length ties.

Walt Turner

Well actually it’s the combination of three other items. You mentioned Grenada, so that is helping our utility margins improving for sure because we were able to retain a majority of the utility poles that we were treating in Grenada but you add to that, that as the year went on Steve through 2012, the borate creosote treated tie and demand continued to increase throughout the year. So every quarter we were seeing additional increases in that product. We’re also seeing increases in our joint bar business which continues to be going very strong. In fact I think I mentioned even much stronger than 2011 was.

And then the third area (inaudible) Timex and looking at improvements there. So overall it’s with a Class-1 venture lining businesses and going fairly strong and still looking at spending as much or maybe a tad more in 2013. This is a very good business for us, the treated wood, both on the railroad and the utility side and then on top of that Australia continues to do very well with their margin improvements and then you are going to see a nice improvement in 2013 with the acquisition.

Steve Schwartz - First Analysis

Okay, so that $4 million to $5 million from Grenada in 2013, that is incremental to what you had in ‘12. Is that correct?

Walt Turner

No, not incremental because we had four months, five months.

Leroy Ball

We did about $1 million to $2 million this year. So that’s the annualized benefit.

Operator

The next question comes from Liam Burke from Janney Capital Markets. Please go ahead.

Liam Burke - Janney Capital Markets

Well, you have mentioned you had two contract renewals with higher pricing in 2012. In 2013 do you have any more contracts for renewals on the crossties business?

Walt Turner

We have one that we completed at the end of 2012, which would start benefitting this year. Yeah, so another one that’s going to help us this year.

Liam Burke - Janney Capital Markets

And do you anticipate export volumes on crossties to increase in 2013.

Leroy Ball

Yes we do. We expect an increase in the export of ties.

Liam Burke - Janney Capital Markets

And then lastly, Leroy, you explained why the inventory levels were higher year-over-year with the increased product mix in the inventory you carry for corporate rail customers. Will those inventory levels stay at that point or should we anticipate some moderation of inventory through 2013?

Leroy Ball

That’s a tough one. I guess, for the most part, if the business is strong we expect, I think we expect for those inventory levels to remain at that level.

Operator

Thank you. And the next question comes from Laurence Alexander from Jeffries. Please go ahead.

Laurence Alexander - Jeffries

I guess, first question on the Borate export, can you give a sense for what the tailwind could be in 2013?

Walt Turner

We are not currently supplying the borate portion of the crossties that we’re shipping to South America. That could happen down the road Laurence but it’s basically the creosote treated ties that we are supplying in South America.

Laurence Alexander - Jeffries

Do you have a sense for a roughly how much of a change year-over-year that could be?

Walt Turner

I really can’t comment on that at this time but we are expecting to have an increase over what we had this past year for sure.

Laurence Alexander - Jeffries

And on the cash flow statement, can you walk through some of the gives and takes for 2013 and will there be any further outflows for productivity related costs, or there be any, how you view working capital?

Walt Turner

I’ll start answering the question and then turn it over to Leroy on our capital expenses that we are planning for 2013. I think we have a program of about $38 million, which is maybe 10% higher than previous years and then the focus there with have additional capital money alliance is really looking at productivity projects and we’ve got a couple already underway and planning on hopefully having some more as we go through the year but the productivity is something we are taking very seriously. It’s also part of our margin improvement initiatives and so you are going to see capital spending up probably $5 million or $6 million over this past year. Leroy?

Leroy Ball

Yes, excluding the joint venture construction.

Walt Turner

Yes, then you’ve got that as well.

Leroy Ball

Laurence, maybe I’ll take a different take on it. From our goal standpoint we’re looking at free cash flow as a percent of sales, about 5% is typically what we target. We were pretty much right on that for 2013 when you take out the additional pension contribution we made over the minimum and the productivity capital part of our capital expenditures. I think we see a similar sort of view in 2013. So from an operating cash flow standpoint we expect about 5% free cash flow as a percent of sales. Now what we’re going to have is we’re going to have about $13 million of additional pension contribution in excess of the minimum this year.

So, again total of $20 million like we had last year but this year the minimum required is a lower number. So with that $20 million it will be an additional $13 million. That will equate to, and you have your productivity type of capital that will be in the $10 million to $15 million range. I would expect there would be some increases in working capital as our sales continue to grow but all in all you can figure that we pretty much target that 5% number and like I said, we’ve been fairly consistent getting orders there.

Laurence Alexander - Jeffries

Okay and then lastly on the Chinese operations, can you a sense of how much of a margin lift you could get over two or three years and how much of a tailwind you could have in 2013? Just a very rough kind of range?

Walt Turner

I think you’re going to continue to see margin improvements that we had in 2012 over ‘11 inching up quarter over quarter, not dramatically but inching up but whenever our third project comes on stream mid-2014. I think with the markets that we’re going to go after here you are going to see higher margin on that particular operation, which will obviously impact our overall trend of operations, but I can't really say much more than that at this time Laurence, except that it’s improving and should continue to improve.

Leroy Ball

There is a couple of things I can add, Laurence. I mentioned within the scripted comments of about an additional $1 million that we would expect to spend in 2013 and that would be related to the Chinese joint venture. A lot of that would be in kind of the SG&A category. Our SG&A as a percent of sale, we expect to basically be able to keep it at that level, if not a little bit better. We will see an increase over the last year but part of that will be attributed both to this additional $1 million of cost for the joint venture. From an interest expense standpoint that will be capitalized as part of the construction cost. So you won't see in effect of interest expense on any borrowings related to that joint venture in 2013.

Operator

Thank you. Please confirm if there is more time for another question?

Walt Turner

Sure.

Operator

Thank you. Then the nest question comes from Kevin from Northcoast Research. Please go ahead.

Kevin Hocevar - Northcoast Research

Most of my questions have been answered at this point but just one on the crosstie volume outlook. What are your thoughts on this positive train control systems that seem to be eating into class 1 CapEx budgets for 2013? Do you expect us to have any impact on your crosstie volumes? Are you seeing anything as of yet or what are your expectations for that in terms of impact on crosstie volumes?

Walt Turner

Crosstie volumes for 2013, we obviously are very close to that, working with all the Class 1s, both U.S. and Canada and solutions on top of that for the Class 1s, you also have I think what we’re seeing as another strong commercial line railroad, maintenance program as well, especially with the extended tax credits that they get. So what we’re seeing is the same level or maybe even a tad higher volumes in 2013 for total tie insertion. The positive train control, now the spending continues to be quite heavy there but also at the same time the railroads must continue to focus on your maintenance of weight operations and again we’re getting some pretty strong confirmations that maintenance of way spending will continue at the same level or maybe even higher than last year.

Operator

Thank you. And the next question comes from Chris Shaw from Monness Crespi. Please go ahead.

Chris Shaw - Monness Crespi

Maybe just for Leroy, but between all the things you pointed to as sort of a negative for ‘13, the bad debt expense, the planned outage costs, the expenses for the JV in China and I guess the tank leak, year-over-year going into 2013 do you know what the net I guess EPS tailwind is going to be from all of that or earnings? Do you have that --?

Leroy Ball

We don't have that quantified within our comments. I think we totaled that up in the neighborhood of the $8 million dollars in terms of a pretax impact. There is pieces that apply to different jurisdictions that would have different rates associated with them. I think if you just generally take somewhere in the neighborhood of 35% to 40% rate on that number, you can back into a rough EPS impact.

Chris Shaw - Monness Crespi

Okay, and then in your coal tar cost for the quarter sequentially, have they improved at all in North America? Did they come down at all or you’re just hoping that they will just doing coming 2013?

Walt Turner

Where? North America coal tar costs?

Chris Shaw - Monness Crespi

Yes.

Walt Turner

At this point we are still seeing some upward pressures but not dramatic but unfortunately there is still some upward pressures on tar costs.

Chris Shaw - Monness Crespi

And when did you think that your old coke facility, when did you think that might online?

Walt Turner

The earliest would be by the end of this year. So we are looking at it. The last I had read about the potential comeback was December of 2013. So it wouldn’t be much help this year but certainly would be going forward.

Chris Shaw - Monness Crespi

And just a quick rail question, did you say that the crosstie volumes were down for the quarter and if it was then what was the moving parts there?

Walt Turner

Well, when you look at for the year and probably the fourth quarter as well, crosstie lines were down a little bit but going back earlier in the year, with our margin improvement initiatives sometimes you have to give up a little bit of volume to get better pricing and better profits and that's pretty much what happened throughout the year.

Operator

Thank you and the last question comes from Richard O'Reilly from Revere Associates. Please go ahead.

Richard O'Reilly - Revere Associates

Two quick questions. On your railroad business in the first quarter, I would think your weather impact on your customers would depend how much they can do maintenance wise or need to do. How is weather for your customers in the first quarter?

Walt Turner

Well as we're already midway into February you're right, exactly right on two fronts, one weather related, it has to do with when the railroads bring their construction crews back up from the south or back to work in the north but we've had what I'd call sort of a normal winter where we've had some slowdowns here and there.

As far as I know at this point in time Richard that the northern construction business is pretty much on schedule as it typically is starting late February, early March. The other piece related to weather is getting the ties or the logs out of the woods into the sawmills and we had, it just depends what region you're looking at, Midwest, Kentucky, Missouri, there's been some concerns there but right now we don't see any major issues with getting the white ties from the sawmills that we’re getting. There's always interruptions, like there were two weeks ago, especially in the New York area. But yes, it's not been a real negative for us this year along the weather, thank goodness.

Richard O'Reilly - Revere Associates

And a second question, I couldn't hear your last call because of Sandy, but seeing any, what type of carry over effect have you seen from Sandy?

Walt Turner

Well we, I think in our call back in early November, we actually mentioned that we shipped over 10,000 utility poles up into New Jersey, New York. A lot of those were needed immediately. Some were put into distribution yards and so we continue to actually benefit a little bit from that by just replacing a lot of inventory that was diminished. In fact unfortunately even with the snow storm we're actually, now that the roads are open, we're actually moving additional utility poles north because of the unfortunate destruction that has taken place there with the snow storm last week.

Operator

Thank you ladies and gentlemen; there seems to be no further questions. I would like to return the conference over to your President and CEO, Walter Turner. Please go ahead.

Walt Turner

Thank you Mark, and again we thank all of you for your participation in today’s call and appreciate your continued interest in our Company. We will continue to do the right things for our businesses, by pursuing prudent growth opportunities and looking for ways to enhancing our profitability with our existing business. We believe that the diversity of our businesses along with our margin improvement initiatives will continue to provide us with stability in both strong and weak economic climates, as we have experienced over these past three years.

And finally we remain firmly committed to enhancing shareholder value by a maintaining our strategy, by providing our customers with the highest quality products and services while continuing to focus on safety, health and environmental issues throughout our global operations. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude the Koppers Holdings Inc. fourth quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect.

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

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

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Koppers Holdings CEO discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts