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

Koppers Holdings Inc. (NYSE:KOP)

Q1 2009 Earnings Call

May 7, 2009; 11:00 am ET

Executives

Walt Turner - President & Chief Executive Officer

Brian McCurrie - Vice President & Chief Financial Officer

Mike Snyder - Director of Investor Relations

Analysts

Laurence Alexander - Jefferies & Company

Steve Schwartz - First Analysis

Saul Ludwig - KeyBanc

Operator

Welcome to the Koppers first quarter earnings conference call on May 7, 2009. (Operator Instructions)

I would now hand the conference over to Mike Snyder.

Mike Snyder

Welcome to our first quarter conference call. My name is Mike Snyder, and I am 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 else you can call [Rosa Linski] 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 company’s filings with the SEC. 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.

I am joined on this morning’s call by Walt Turner, President and CEO of Koppers; and Brian McCurrie, Vice President and CFO.

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

Walt Turner

Welcome to our 2009 first quarter conference call. Our first quarter sales for the company were $273 million compared to the prior year first quarter sales of $331 million. The Carbon Materials & Chemicals sales for the first quarter were significantly impacted by the global recession. However, sales for the quarter increased significantly in our Railroad & Utility Products business as the Class 1 railroads increased their buying untreated volumes.

We were very pleased to see that we were able to navigate through a difficult quarter, generating not only profits, but also positive cash flows. The first quarter volumes of carbon materials to the aluminium and steel industry declined 27% from the prior year’s first quarter as a result of declines in aluminium and steel production and foreign exchange.

Sales volumes for carbon black feedstock to the carbon black producers declined 12%, as many of the global rubber producers continued the reduction in production and raw material purchases that began impacting the fourth quarter.

Sales volumes of phthalic anhydride declined 22% in the first quarter compared to the prior year. We are seeing some improvement trends over the fourth quarter levels, but end market demand in Carbon Materials & Chemicals remains quite depressed over the prior year levels.

Those prices potentially for phthalic anhydride and carbon black feedstocks declined from the prior year quarter as lower demand and lower benchmark oil reduced prices. In addition to end market demand, due to reductions in metallurgical coke production, availability of coal tar is tight, leading to price increases in North America and Australia.

On the positive side, our Railroad & Utility Products business had a very strong first quarter as sales were up 17%. As we stated in our last call, Class 1 railroad customers have continued to buy and insert ties despite challenging economic conditions. We believe this in part to restock inventories after some destocking appeared to occur in the first half of 2008.

We expect that the strong buying and insertion patterns to continue through the first half of 2009, although we anticipate some moderation in the second half of the year.

In the first quarter, our adjusted EBITDA was $25 million compared to last year’s first quarter adjusted EBITDA of $39 million. This decrease was result of the previously discussed margin decline that impacted the quarter, as well as negative margin compression, as higher cost yearend inventories, phthalic anhydride, orthoxylene and carbon black feedstocks were worked through production, along with a negative impact from foreign exchange. Adjusted EPS for the first quarter was $0.22 compared to $0.58 in the first quarter of 2008.

You will recall that the first quarter is normally a weak quarter due to the seasonality of our businesses. First quarter cash flows from operations amounted to $22 million compared to $6 million in the first quarter of 2008, as inventory reductions made a negative contribution, reducing working capital.

I think it’s important to note that the first quarter is typically not a strong cash flow quarter for us and that even in the current environment we were able to generate significant positive cash flow primarily as a result of the initiatives designed in response to the current conditions.

Our capital structure was enhanced as net debt was reduced to $304 million during the quarter from $312 million at December 31 of last year. And cash on hand increased from $63 million to $76 million in March 31 of this year.

As announced in the last call, we have initiated steps to reduce costs and optimize plant production and inventory levels around the company. Specific expense reduction targets included not only staff reductions, but also plant capacity optimization.

I expect that end market demand will remain soft and the supply of coal tar will continue to be depressed, and these operating conditions will continue not only into the second quarter, but most probably through the end of the year.

After Brian completes the financial review, I’ll give you a status update of our core end markets as well as provide some inside into what we are expecting as we move forward in 2009. Brian?

Brian McCurrie

Sales for the first quarter decreased 17.7% to $272.7 million and as compared to $331.2 million for the prior year quarter with approximately $23 million of this decrease relating of FX.

We continue to see the most significant impact of the global economic decline in our Carbon Materials & Chemicals business where we saw global volume declines due to lower sales of 34.6% or $77 million, more than offsetting higher sales in the Railroad & Utility segment which increased 17% or $18.5 million based on increased volumes and pricing for crossties.

The first quarter sales decline in Carbon Materials & Chemicals was comprised of a 9% or $21.1 million decrease in sales of carbon materials, a 5% or $10.8 million reduction in sales of distillates, a 7% or $15.5 million decline in sales of coal tar chemicals and a 13% or $29.6 million decrease in sales of other products, which include carbon black, benzole, fuels, freight and other miscellaneous products.

First quarter carbon material sales were negatively impacted by $25.1 million due to lower volumes of carbon pitch sales, as smelter closures and curtailments impacted customer volumes for carbon pitch, along with $8.5 million of foreign exchange impact, partially offset by $12.6 million of higher prices due primarily to higher cost coal tar resulting from reduced availability. Particularly impacted were operations in Europe and North America where aluminum production curtailments were concentrated.

Sales of distillates, which include creosote and carbon black feedstocks, were negatively impacted by lower volumes amounting to $4.4 million. Lower prices for distillates amounted to $5.1 million, reflecting the decline in oil prices from the prior year quarter.

We have seen some increases in this business late in the first quarter when compared to the fourth quarter and believe partial restocking is taking place. This is particularly true in our Asian markets.

North American sales of phthalic anhydride, representing less than 6% of total sales for Koppers, experienced a 22% reduction in first quarter volumes due to significantly lower end market demand from customers as the housing and auto industries continue to struggle. We have not seen volumes for this product increase late in the first quarter, as we have seen in prior years, and believe that lower volume demand will continue into the second quarter.

With the stabilization of oil prices, OX price closed the first quarter at $0.365 compared to $0.28 in January, providing some relief from higher prices as we head into the second quarter.

Carbon Materials & Chemicals adjusted EBIT for the quarter of $6.4 million declined 75% from $25.7 million in the first quarter of 2008. EBIT margin dollars were negatively impacted by approximately $5 million as higher cost yearend inventories, primarily phthalic anhydride, orthoxylene and carbon black feedstock, were processed.

Margins were also impacted by $1.3 million for FX as well as depressed end market conditions, as adjusted operating margins dropped from 11.2% to 4.5%. Exclusive of the impact of processing higher cost raw materials, first quarter margins would have been approximately 8%. At this point, higher cost products and raw materials have been processed. So, we should see some improvement as we move into the second quarter.

As Walt mentioned, we saw the average cost of coal tar and raw materials increase in North America and Australia, as availability was limited. These increases were passed on to our carbon pitch customers, but were dilutive to margin percentages. We continue to see availability of coal tar due to lower steel production as a risk, at least for the remainder of 2009.

Overall, Carbon Materials & Chemicals sales in the first quarter were negatively impacted by 9% or $20.8 million due to foreign exchange. As an attempt to isolate the FX impact on prior year for comparability, we estimate the impact on first quarter 2008 sales and profits using first quarter 2009 exchange rates would have reduced first quarter 2008 sales and EBIT by $30 million and $3 million respectively.

Average oil prices so far in 2009 are about $44 per barrel compared to about $94 per barrel in the first quarter of 2008. This has led to lower benchmark pricing for carbon black feedstocks and has led to raw material cost reductions in certain markets. Given the spike in oil prices in the second and third quarters of 2008, we would expect a negative impact in year-on-year profits of our carbon black feedstock and phthalic anhydride products.

Sales of Railroad & Utility Products increased in the first quarter to $127.2 million. Higher sales of untreated crossties drove the increase as the Class 1 railroads continue to buy untreated ties at increased levels to restock inventories that were drawn down in 2008.

Adjusted EBIT in Railroad & Utilities increased 76% to $12.7 million from $7.2 million in the prior year. Operating margins for R&UP increased to 10% from 6.6% due primarily to better cost absorption relating to the increase in untreated ties sales to the Class 1s, along with higher treating volumes than the prior year quarter.

We have seen significantly less spending in the export market and by the short lines in the first quarter and anticipate continued pressure on volumes and margins in this part of our business in 2009, as volumes in the first quarter of 2009 were down 45% from what was an exceptionally strong prior year quarter. We do expect that the strengthened Class 1 business will more than offset the declines in this part of the business.

On a consolidated basis, first quarter adjusted EBITDA decreased 36% to $24.8 million compared to first quarter 2008 adjusted EBITDA of $38.7 million. Of this decline, approximately $5 million and $1 million related to yearend inventory cost and FX respectively.

Adjusted net income for the first quarter of 2009 was $4.5 million compared to adjusted net income for the first quarter of 2008 of $12.2 million. First quarter adjusted EPS was $0.22 compared to prior year’s adjusted EPS of $0.58.

As Walt mentioned, we have targeted cost reductions of between $35 million and $40 million that include raw material cost reductions in addition to reductions in personnel, logistics, fuel and other costs. Although we have made progress in all areas, achieving coal tar raw material cost reductions in this environment has proven most difficult.

We have increased production to two-thirds at our carbon black facility in Australia, increasing from one-third production levels earlier in the first quarter, as mentioned on our previous call. We expect this curtailment to continue until rubber demand strengthens.

In addition, we have temporarily curtailed production at one of our North American tar distillation plants to maximum throughput efficiency. Until end markets stabilize, we will continue to mange production capacity around end market demand and raw material availability. We foresee this continuing at least through yearend.

It’s important to note that our cost structure is such that about two-thirds of our cost of sales is raw materials. We believe about 85% to 90% of our cost of sales is variable. This allows us to reduce a significant portion of our cost structure by curtailing operations until raw material supply and end market demand returns to some level of stability and also allows us to optimize production around the most cost-sensitive areas such as access to raw materials, logistic costs and respective plant costs.

As noted earlier, we managed to generate positive cash flow in the first quarter totaling $21.6 million compared to $5.5 million in the prior year quarter despite operating in a difficult environment. We have targeted specific inventory and CapEx reduction objectives for the year and are progressing well towards achieving these goals. We are planning to reduce CapEx by about $15 million over 2008 totals to $23 million in 2009. This excludes any acquisitions or expansions that may present themselves.

Our debt, net of cash on hand at March 31, 2009, was $304 million compared to $312 million at December 31, 2008. We ended the quarter with $76 million of cash on hand compared to $63 million at December 31, 2008. We continue to maintain a very defensive capital structure. Should incremental investment for expansions or consolidation arise, we will review these prudently, but would like to be able to take advantage of business improvement opportunities as they present themselves.

Due to the interaction of foreign earnings on our estimated tax rate, we would anticipate an annual rate in line with the first quarter rate of between 41% and 42%.

Before I turn it back over to Walt, I would like to emphasize that our business is seasonally impacted by demand for our products. The financial performance in the first and fourth quarters is historically lower than the second and third quarters. We see this trend continuing.

I would like to point that as painful as the first quarter was, we were able to manage the business certainly from a cost perspective to maintain profitability and generate cash in this uncertain environment.

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

Walt Turner

In 2008, our two business segments, Carbon Materials & Chemicals and Railroad & Utility Products, were 65% and 35% respectively of our total revenues.

The Railroad & Utility Products segment is growing, as we expected, in 2009, as the demand for untreated wood crossties primarily to the North American Class 1 railroads increases. We believe that we are seeing a shifting of these volumes into the first half of the year, and we will see moderation of buying patterns in the second half.

We continue to believe that the rate of the tie insertions in 2009 will not be significantly impacted by the economic conditions we see today. Due to the importance of crossties to the rail infrastructure, we believe that the railroads will reduce spending on ties only as the last resort.

We see this business, although having some risk for volatility in a very uncertain economic environment, as having a more consistent performance in the market downturn. We also continue to review the government stimulus plan closely and are hopeful that infrastructure spending will have a positive impact on the railroads.

The Carbon Materials & Chemicals segment is largely tied to the steel and aluminum markets. As you recall, we use a byproduct of metallurgical coke-making process, coal tar, as our raw material to produce carbon pitch for the aluminum industry, carbon black feedstock for the rubber market and naphthalene as a feedstock for concrete additives and also for further processing in the phthalic anhydride for the plastics and resins markets.

Beginning in late 2008 and continuing to this point in 2009, we have seen significant reductions in steel and coal production that have led to reductions in coal tar availability. Although we are constrained in certain regions of the world due to lower volumes of tar, we have been able to meet customer demand by blending tar with certain petroleum feedstocks or by importing and exporting products through our global network of plants.

This has allowed us to meet demand, but at a higher cost. In certain parts of the world, we saw coal tar prices declining for 2009. However, in certain geographic regions like North America and Australia, we have seen prices increase as constraints on availability have delayed price declines. We continue to believe that this will normalize in the second half of 2009, but ultimately lead to cost reductions as we head into 2010.

Our primary product is consumed in the smelting of aluminum. However, our prices are not tied to aluminum prices or coal prices, but rather based on terms that largely reflect the cost of our raw materials. Like the steel industry, we have seen significant decreases in aluminum production around the world, targeting high cost or older smelters. As such, we have seen curtailments in production more heavily in the Europe, North America and China.

In North America where traditionally 25% of the carbon pitch demand has been serviced by imports, we do see the risk of permanent reductions in aluminum production, but do not believe that this will ultimately be at the expense of import pitch market.

In Europe, our facilities are located in close proximity to the Scandinavia market, we believe permanent closures of high cost smelters in Europe will favor the Scandinavian smelters that have access to lower energy cost. We believe that production in Australia, where we have significant market share, will remain largely intact.

As noted in our last call, lower production in China and even Russia will not impact those directly, since we do not sell significant volumes into these markets. The one area where production is increasing is in the Middle East where more efficient, new smelters have come online in 2008 and 2009. We’re well positioned with our production facilities in China, serve a large part of this market, as evidenced by our recent announcement of a long-term supply contract for the EMAL project in Abu Dhabi.

As a side note, we did complete expansion of our majority-owned venture in China in December of last year, increasing our capacity from 150,000 tons to 200,000 tons, and have also completed our recently commissioned new 300,000 ton plant in China that is 30% owned by us. We feel that these capacity expansions uniquely put us in a strong position to compete for the pitch contracts where these new smelters in the Middle East as they near completion.

Unfortunately, it’s still difficult to tell you exactly where 2009 aluminium production levels will end up. However, I can assure you that we will manage our planned capacities, raw materials and production costs to optimize our results. We still believe in the longer-term growth of global rubber production and believe that we will emerge in a strong position to capitalize on this growth.

Although we still see 2009 as a challenge, we believe our management team has the experience to manage through this accretive correction. Additionally, the strength of our balance sheet has put us in a strong position not only to get through this period, but to use this turmoil as a possible catalyst for further consolidation in our core markets.

You may ask me what am I looking for as lead indicators for a rebound in our Carbon Materials & Chemicals business. I think initially, I am looking for increased steel production to provide relief on raw material availability, first. And second, I am also watching the aluminum inventories and prices to see a trend towards increased production. Unfortunately, I am still waiting for both of these.

In our last call, we said we hoped we will be in a position to give you guidance after the first quarter results were in. However, given the continuing volatility in some of our key end markets, coupled with the seasonal demand patterns for some of our core products, we do not believe it is prudent for us to provide 2009 guidance at this particular time.

While we hope that the second quarter results will put us in a better position to provide 2009 guidance, the ability to provide guidance would be dependent on the level of clarity in our key end markets. In the meantime, we will continue to focus on optimizing profits and prudently managing our cash flows.

To conclude, although today there is continuing volatility in most of our end markets, we remain very positive about the long-term strength of our primary end markets, aluminum and railroads. We see positive impacts in 2009 from our railroad business and the new distillation capacity in China, there is always the flexibility afforded to us by the strength of our balance sheet.

Although softness in demand, lower foreign exchange rates and lower oil prices will have a negative impact on our 2009 results, lower oil prices should eventually work their way back over raw material costs. [The past] expenses in China, we will be well positioned to capitalize on increased global demand for rubber when the markets return back to normal.

Additionally, anticipated stimulus spending in the U.S., China and other regions where we operate or sell products could also provide some upside to our businesses, especially to the extent funds are spent on infrastructure projects.

We hope that the current market conditions in places like Europe and China will create opportunities for additional consolidation, as we are well positioned to take advantage of such opportunities. We look forward to these opportunities over the balance of this year and into the future.

At this time, I would like to open up for any questions that any of you may have for Brian and I.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Laurence Alexander - Jefferies & Company.

Laurence Alexander - Jefferies & Company

First, would you mind discussing given some color on how you think carbon pitch price negotiation might evolve this year?

Walt Turner

Most of our long-term contracts contain pricing formulas that we have which are semiannual or in even some instances quarterly. So, as we go forward, negotiating our raw material coal tar contracts, obviously those prices would fluctuate accordingly. It’s really feel focusing on lowering raw material cost, which will be eventually benefit from those pitch contracts.

As far as the demand for carbon pitch, we’ve seen the global aluminium industry operating somewhere around 70% to 75% of capacity. And unfortunately, as I mentioned, we’ve seen some of these older higher cost smelters in the U.S. and Russia and Europe who’ve cut back more [smelter] than other places around the world.

In the U.S., the current operating capacity is something like 43%, 45% of capacity, which as you know we have a fairly a strong market share in.

Laurence Alexander - Jefferies & Company

In any of the regions or end markets that you serve, are you seeing any signs of restocking, even if it’s probably temporary in nature?

Brian McCurrie

We were just over in China a few weeks ago. Probably China has shown us the most activity and particularly in things like carbon black feedstock -- or recommend to carbon black. Places like Europe and North America have been fairly quiet still. Probably the most optimistic region of the world that we’ve seen has been China.

Laurence Alexander - Jefferies & Company

Finally on the Railroad & Utility Products segment, the surge in white tie volume gives you a clear amount of visibility on coated ties sales later on in the year?

How would you estimate a rough band or how that segment should come in for the entire year? I understand the lack of visibility on the CM&C segment, but that segment you should have quite a bit of clarity on.

Brian McCurrie

First of all, you’ve heard us talking that we had a very strong first quarter on the railroad side. Part of that obviously was an increased white tie procurement into our operation, which actually was a nice increase when you look at the first quarter, probably 25%, 30% versus last year.

When you look at more so how many ties did we have in our plants that were being air-stacked for drying, at the end of March, we had 6.6 million ties air-stacked. At the end of the year 2008, we had 6.2 million. So that was a nice increase and that does give us some insight as to what the treating will be over the next five or six months or so.

Walt Turner

Laurence, maybe he has sort of an order of magnitude, the first quarter sales were up about 17% year-on-year. That growth rate is probably won’t continue through the end of the year. It will moderate to something lesser than that, maybe half to 10% kind of a thing. Then you’ll probably see a bit more leverage and profitability as the additional volumes work their way through the system.

Brian McCurrie

It would be nice to annualize first quarter, but I don’t think that’s going to happen.

Laurence Alexander - Jefferies & Company

Last question is on the utility side of that segment. Any restructuring that can be done there to help to improve segment EBITDA next year?

Brian McCurrie

Actually, the utility sales volumes have been pretty flat throughout these last few quarters. We are always looking at ways to improve that margin, which, as you’ve heard us say the fact that it’s not been variable perhaps, but we are always focusing on ways to improve that margin.

Walt Turner

It’s actually interesting, Laurence. Because we have plants that run both poles and ties, some of the volume increases in the railroad business have helped some of the overall margins on the utility business as well.

Operator

Your next question comes from Steve Schwartz - First Analysis.

Steve Schwartz - First Analysis

Can you guys possibly explain the difference in the buying patterns between the commercial railroads and the Class 1? Does it simply come down to this the credit crunch that had gone on?

Walt Turner

From the commercial business, I think it primarily is. I think it’s interesting as sort of time moves on, the ultimate demand is probably there, I think their ability to finance the projects is less. So, what we believe is a lower buying pattern on the commercial side that ultimately will create a demand that needs to be satisfied, maybe as we move into next year, as the financial crisis settles out.

The Class 1s, I think it’s a bit of a different [yeast]. They seem to have the financial capacity to be able to do the work and with the lower revenue volumes that they are able to get a lot more work done ultimately at a lower cost for them. So we think they are using this as an opportunity to upgrade the maintenance of their infrastructure.

Brian McCurrie

Also hopefully, on the commercial shore line railroads, we didn’t see a small sign of some stimulus money being used out of the Midwest for the commuter and track application. Hopefully, as the stimulus money starts move into the states and move out, that some of the shore lines will take advantage of some of that money later on.

Steve Schwartz - First Analysis

This white tie purchases were strong, and I could see where that would affect the topline, because hardwood prices are up. This is typically the low margin part of the total sale you do. So I am wondering if there is something else that helped boost your margin in that business.

Walt Turner

Yes. It’s mainly throughput absorption.

Brian McCurrie

The volume was a major result.

Steve Schwartz - First Analysis

The white tie purchases is just simply procurement with very little profit dollar for you relative to the treating portion of the sale. So, when you say throughput, can you explain to me how that maybe is factored into margin on the white tie purchase?

Walt Turner

If you have a 15% or so fixed cost in your plant, if you are able to move 15% more volume through your plant, you’re going to have a per tie cost reduction.

Steve Schwartz - First Analysis

Okay. So you are assigning that to the white ties even though it’s simply procurement?

Walt Turner

Yes, yes.

Steve Schwartz - First Analysis

Okay. I think that pretty well answer it for me.

Walt Turner

Be a little bit careful. If you remember, the first quarter of last year was a pretty poor, relatively for white tie procurement, quarter for us overall. So, I think there is a positive comp there for us that’s partially affecting us.

Operator

Your next question comes from Saul Ludwig - KeyBanc.

Saul Ludwig - KeyBanc

What percentage did you coal tar cost increase in the quarter?

Brian McCurrie

North America was the largest area that we saw some increases in. It was in excess of 30% going into this year. I mean the two markets that we saw the most significant increase in coal tar cost were in North America and Australia.

Saul Ludwig - KeyBanc

And they were both about 30%?

Brian McCurrie

Yes, somewhere in that range. In Australia, it wasn’t because the cost of material went up. They actually didn’t have enough material, so we had to input more raw materials into Australia, and that ended up costing us more.

Saul Ludwig - KeyBanc

If you have a 30% increase in your coal tar cost, what percent increase do you need in selling prices of pitch to just match dollar for dollar?

Walt Turner

If the formula allows for a 30% increase in our pitch price, where we end up losing margin is in the downstream products. Now, we have more ability in things like creosote pricing around the world than we do in carbon black feedstock pricing, which has went to oil. So, where we have markets that pitch and creosote sales were able to better manage that cost increase.

Saul Ludwig - KeyBanc

Your SG&A total costs were down $2.4 million. Your corporate cost were the same. So, the $2.4 million decrease in SG&A was in the segments. Was the SG&A in railroad ties basically flat, and the whole $2.4 million decline in carbon materials or how did that SG&A change by the segments?

Brian McCurrie

There was a piece of SG&A reduction in the Railroad & Utility Products segment, Saul.

Saul Ludwig - KeyBanc

How much was that?

Brian McCurrie

In that segment, it’s about little less than $1 million, $900,000.

Saul Ludwig - KeyBanc

It would be much bigger in the coal tar and the carbon materials?

Brian McCurrie

Right, because I think the Carbon Materials & Chemicals business are not only getting the true cost reduction initiative, it’s also getting the benefit of the FX rate.

Saul Ludwig - KeyBanc

Part of that is due to FX?

Brian McCurrie

Correct. The CM&C business has more volatility around FX than the Railroad & Utility Products business has.

Saul Ludwig - KeyBanc

Walt, you mentioned that in the U.S., the 25% of the coal tar needs by the aluminium company is imported. Is that imported by you from your operations or are you out of the loop on that such that if the imports are cut out, is that cutting out somebody else or are you getting cut out as well, as the import component is reduced?

Walt Turner

Well, we share in that import market as well, and we have for quite some time now. So, we are actually on both West Coast and East Coast. So, it’s something that we did not see some of these older smelters returning back to operation that would impact imports, and we would be a small part of it.

Brian McCurrie

On a relative basis, the margins for us on import product are a lot lower than what we predict.

Saul Ludwig - KeyBanc

Where does that come from? Which plants of your’s does the imported product come from?

Brian McCurrie

A certain amount came out of China or came out of Europe. A lot of it came from third parties.

Saul Ludwig - KeyBanc

Finally, you’re a heavy variable cost company, but did you have unobserved overhead that was also a component of the earnings decline in the carbon materials sector? If so, how much was that?

Walt Turner

The answer is yes. The quantification of that, I don’t really have on my fingertips. I think if you look around the world, we’re probably operating at a lower production capacity than we would have certainly last year or early in the year, but there is a negative impact to that. Saul, I don’t have that number right in front of me.

Saul Ludwig - KeyBanc

Then finally, as you’ve pointed out in your release and as occurs historically, there is a seasonal influence that goes from the first quarter to the second quarter. Normally, the second quarter is at least two times the first quarter and maybe even little more sometimes.

If you look at your first quarter where you had that $5 million of high class inventory, which I imagine is about $0.15 a share, should we be looking at sort of somewhere in $0.70 to $1 wide range? Is that the right arena to be thinking about?

Brian McCurrie

No. We are not giving guidance, but I do think the normal seasonal pattern for us, which is always a broad statement, Saul, the movement saying from first and second quarter will be two times is a lot higher than what it would normally be.

I do think the impact of higher cost of raw materials will help us, but I don’t think you’re going to see a two times increase in profitability in the business into the second quarter.

Saul Ludwig - KeyBanc

Adjusted versus this sort of pro forma, a $0.35 number. We didn’t have the $5 million of high cost inventory hitting you. That’s about $0.15 a share, right?

Brian McCurrie

I think you have to tax affect that.

Saul Ludwig - KeyBanc

So, 5 million?

Brian McCurrie

3 million.

Saul Ludwig - KeyBanc

3 million on [14 million] is $0.15?

Brian McCurrie

Yes.

Operator

(Operator Instructions) Your next question comes from Steve Schwartz - First Analysis.

Steve Schwartz - First Analysis

Brian, how much cash did you generate from working capital?

Brian McCurrie

It’s a bit of mixed bag. If you look at some of the larger movements, the cash that was generated from reduction of inventories in the first quarter was about $15 million, but we used about 14 million in the reduction of accounts payable. So, it’s a bit of mixed bag. Most of it is really dropping through net income EBITDA through the bottomline, which is actually a good thing for us, Steve. I think it wasn’t solely driven by inventory reductions.

Operator

(Operator Instructions) Your next question comes from [Inaudible]

Unidentified Participant

I just have a question regarding the railroad business. Can you explain again what are the drivers behind the net sale increase in the quarter? What was the main driver behind the uptick there?

Walt Turner

There are really two main things. One, if you go back in history, if you go back to the first quarter of 2008, first quarter of 2008 was actually a period where the railroads come off a very high procurement cycle in the year before. So we actually had a lower procurement cycle in procuring the white ties, these are the untreated crossties.

In 2009, the railroads not only were in the restocking mode but we actually saw an increase in acceleration of demand for the white ties themselves. But we believe that this is being driven not only by restocking inventories, but also the fact that the railroads were to accelerate some of their tie procurement and ultimately treating to accelerate maintenance on their infrastructure.

Brian McCurrie

And just a bit of side notes, Sam, with fewer [rail creosotes] going down the various railroad system, this is getting a little more maintenance time on the lines, so with less disruptions with the trains. So they are actually improving their productivity as well throughout this maintenance yield.

Unidentified Participant

Do you see, I know it maybe early for you guys to comment on this, but any sort of repercussion from the infrastructure sort of plan from the new administration? Would there be an impact from your perspective in terms of the infrastructure that has to be lead?

Brian McCurrie

I’d say there is certainly a lot to talk about and I think what we’ve seen tangibly has been relatively small and mainly around some upgrades around the impact. We have not seen, so we don’t have orders in hand for significant upticks related to infrastructure stimulus spending.

Operator

We actually do have one more question. Do you have time to take it, sir?

Mike Snyder

More question, sure.

Operator

Your next question comes from [Ivan Matthews]

Unidentified Participant

What was the gross margin in the carbon materials and also on the railroad?

Walt Turner

The gross margin?

Unidentified Participant

Yes. My second question is, are you seeing in Europe any view of the smaller competitors going out of business? And are you seeing any sort of consolidation opportunities?

Walt Turner

With the second question first, we generally work constantly looking at opportunities for any M&A whether it’s Europe or anywhere else. I think we do know that struggled companies are operating at very low capacities. And I liked them say, as we get a closed eye on what is going on and would love to take advantage of the opportunities that would make sense for us to look at that.

Unidentified Participant

One quick follow-up to that. In your last release, you said that when both your JV and the other project was done in China, is there any opportunities to grow in China to start shipping product in there? Are you seeing some of their smelters get up into the technology that the western smelters use?

Walt Turner

We are definitely pursuing those opportunity as well, especially with some of the newer higher anchorage smelter part lines that will be built in China. I think we mentioned in the past we’ve already implemented sort of a technical private testing support there that we are utilizing in calling on the larger smelters that are both, in operation, as well as new projects coming on-stream. Going forward, that’s part of our strategy.

Brian McCurrie

Gross profit percentage for global carbon material and chemicals in the first quarter of 2009 we’re little over 10%, compared to about 16% last year. And in railroad and utility products, its 14% compared to about 12.5%.

Operator

Thank you. And there appear to be no further questions. I’ll hand the call back to Walt Turner. Please go ahead, sir.

Walt Turner

We certainly thank you for participating in today’s call and appreciate your continued interest in our company. You often hear us refer to the diversity of our end markets as a strength of confidence, and I believe you are seeing this benefit in 2009 as the strength of our railroad business is mitigating the negative impact of the global recession on our car material and chemical businesses.

We see continued strong demand in our end markets in the long-term, particularly based on the committed aluminum capacity additions, coming online in the Middle East in 2009-2010. And we are very well positioned given the capacity additions we have in China.

Our balance sheet strength should provide potential opportunities to stimulate growth or create shareholder value in the future. And finally, we remain firmly committed to enhancing our shareholder value by executing our strategy of providing our customers with the highest quality products and services while continuing to focus on our safety, healthy and environmental issues.

We certainly look forward to speaking to you again in the near future. Thank you very much.

Operator

And this concludes the Koppers first quarter earnings conference call. Thank you for your participation. And 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 Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts