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Koppers Holdings Inc. (NYSE:KOP)

Q1 2013 Results Earnings Call

May 3, 2013 11:00 AM ET

Executives

Michael Snyder - Director, Investor Relations

Walt Turner - President and CEO

Leroy Ball - Chief Financial Officer

Analysts

Laurence Alexander - Jeffries

Ivan Marcuse - KeyBanc Capital Markets

Liam Burke - Janney Capital Markets

Steve Schwartz - First Analysis

Chris Shaw - Monness Crespi

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Koppers Holdings Inc. First Quarter 2013 Conference Call on Friday, the 3rd of May, 2013. Throughout today's recorded presentation 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 hand the conference over to Mr. Michael Snyder, Director, Investor Relations. Please go ahead, sir.

Michael Snyder

Thanks, Alix and good morning everyone. Welcome to our first quarter earnings conference call. My name's 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 today to certain non-GAAP financial measures. The Company has provided with its press release which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financials measures.

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 good morning and welcome, everyone to our 2013 first quarter conference call. I'd like to spend a few minutes providing a recap of our first quarter results before I turn the call over to Leroy, who will provide additional financial details for the quarter. The theme that you're going to hear quite frequently during our call today is that our European business continues to struggle and we will likely do so for at least the remainder of this year.

The positive news is that we continue to execute our business strategy, and have been successful in many areas that I will highlight throughout this call. I want to make sure that the progress that we are making towards realizing sustainable earnings and larger improvements going forward is not overshadowed by the difficult economic environment that we and many others continue to face in Europe.

I believe that when the European economy does stabilize and perhaps begins to grow again, the positive impact from the steps we have already taken and continue to take, will trigger an acceleration in our earnings that will move us quickly towards our long-term goals.

In regard to the first quarter results, I mentioned in the last call that our expectations at that time were that we would be significantly below our prior year -- first year quarter adjusted EPS of $0.74. We finished the quarter with an adjusted EPS of $0.54, which was at the low end of the range, we had communicated to you. To begin with we had a tough year-over-year, comparison as last year's first quarter was our highest first quarter since going public back in 2006. If you remember several of the smelter closures and production cutbacks that occurred last year in Europe and in Australia did not begin until the second quarter.

So we knew that our pitch volumes, in this year's first quarter would be down in both regions and have an impact on our results. We also knew entering the quarter, that our tax rate was going to be higher due to Europe's earnings being down and we also expect that our SG&A cost to be higher as last year's first quarter SG&A expense represented a quarterly low for us. What we did not fully anticipate was the extreme difficulty that our European businesses would have during the quarter.

Not only were volumes down in all major product categories but pricing was down in carbon pitch and distillates as well. To give you some perspective, on the impact from Europe, if their results would have been the same as last year's first quarter we would have exceeded last year's adjusted operating profit by $1.9 million. And our adjusted operating margins would have been a full 140 basis points higher than the 6.8% that we reported.

Another negative effect that was caused by Europe's profits coming in even lower than expected was an increase on our effective tax rate to the level that was over 200 basis points, higher than what we had anticipated. While consolidated sales for the first quarter were down 3% due primarily to lower sales volumes in our Carbon Materials and Chemicals business, the Railroad and Utility Products business showed nice growth with the addition of the Australian utility pole business, that we bought back at the end of last year, and a continued strong North American railroad market.

Our adjusted operating profit for the first quarter was $25.3 million down 13% from last year's first quarter adjusted operating profit of $29.2 million. The continued strong performance from our Railroad and Utility Products business was unfortunately overshadowed by the overall negative impact from our European Carbon Materials and Chemicals business.

Leroy, will now provide some additional financial detail on the quarter. After his review, I'll give you an update on the progress we are making with several of our strategic initiatives and provide more, insight into the changes we are seeing in our end markets.

I'll also explain why I think that 2013 will continue to represent a significant step forward to achieving our 2015 financial goals despite the challenges we face in certain parts of our business. Leroy?

Leroy Ball

Thanks, Walt. Starting with the consolidated results, sales for the first quarter decreased by 3%, or $10.5 million to $370.4 million compared to the prior year quarter, as higher sales volumes for the railroad crossties and utility poles was more than offset by lower sales volumes for all Carbon materials and chemical products in the US and Europe and lower pricing for pitch and distillates materials.

First quarter adjusted EBITDA was $33.1 million or $3.6 million lower than 2012 first quarter adjusted EBITDA, or $36.7 million. And adjusted EBITDA margins of 8.9% for the first quarter of 2013 were below adjusted EBITDA margins of 9.6% for the first quarter of 2012.

Our margins were primarily driven by lower profitability from our European Carbon Materials and Chemicals business due to lower sales volumes and pricing more than offset higher margin for Railroad and Utility Products driven by higher sales volumes for railroad crossties and utility poles.

Our tax expense as a percent of pretax earnings for the quarter was 38% compared to 31% in the prior year quarter. With the increase due to the unfavorable mix impact of significantly lower European operating results in the first quarter of 2013. Higher effective tax rate for the quarter had an approximate impact of $0.07 on the quarter's results compared to 2012.

On the positive side of things, we do expect some discrete tax benefits to occur in each of the next three quarters, which could reduce our full year, effective tax rates to approximately 36%. Adjusted net income and adjusted earnings per share for the first quarter of 2013 were $11.2 million, and $0.54 per share compared to $15.5 million and $0.74 per share for the first quarter of 2012. When comparing our results for the first quarter to what we had expected, our adjusted EPS of $0.54 was at the low end of that range that we had indicated on our last call.

Lower than expected results from Europe combined with the higher effective tax rate for the quarter were the main items causing us to finish at the low end of the range. As Walt mentioned earlier if Europe had provided just the same level of earnings as last year's first quarter, we would have easily exceeded the last year's first quarter operating profit.

Turning to Carbon Materials and Chemicals, in our Global Carbon Materials and Chemicals business in the first quarter revenues were down 8% to $230.5 million compared to $249.5 million in the prior year quarter, due mainly to lower sales volumes for the pitch and phthalic anhydride.

Pitch products accounted for 7% or $16.8 million decrease in sales over the prior year quarter driven by lower sales volumes for pitch. Reduction in pitch volumes was due primarily to smelter closures in Europe and Australia that occurred in 2012 and reduction in lower margin business in North America that is in the process of being redirected to other customers.

Additionally the development of export markets for carbon black feedstock from our china operations resulted in lower carbon pitch production as more raw material utilized to produce carbon black feedstock instead in order to optimize profitability.

Sales of distillates, which includes third party creosote sales and carbon black feedstock increased 2% or $3.9 million carbon black feedstock sales volume increased and more than offset lower sales volumes for the third party for creosotes, the volume increase for carbon black feedstock was due mainly to higher volumes being produced in Chinese operations instead of carbon pitch [top notch] profitability.

Sales of coal tar chemicals decreased by 1% or $1.8 million of lower sales volume for phthalic anhydride and naphthalene totaling 2% of sales were partially offset by higher prices totaling 1% of sales compared to the prior year quarter. Our phthalic anhydride volumes were negatively impacted by our customer plants closure, increased levels of European imports and delays in orders of customers anticipated prices increases in the second quarter.

The average price for orthoxylene was at $0.71 for the first quarter of 2013 compared to $0.67 for the first quarter of 2012, despite the fact that oil prices decreased $94 a barrel in the first quarter of 2013 from an average of $103 a barrel in the first quarter of 2012. Orthoxylene prices for April decreased to $0.62 a pound to $0.70 in March which will have a negative impact on the second quarter both sequentially and on a year-over-year basis.

Carbon Materials and Chemicals adjusted operating profit for the quarter $13.1 million represented a decrease of $7.4 million from $20.5 million in the first quarter 2012, which equates to operating profit margins of 5.7% and 8.2% respectively. Operating profit and margins declined due to lower volumes for pitch and phthalic anhydride combined with significantly lower profitability from Europe.

For our global Railroad and Utility Products, business sales increased by $8.5 million or 6% for first quarter compared to last year's first quarter. Majority of the sales increase was due to additional sales added from our November 2012 utility pole acquisition in Australia while the North American railroad business showed modest year-over-year growth.

Adjusted operating profit for the quarter increased to $12.7 million from $9.1 million in the prior year quarter with adjusted operating margins of 9.1% compared to 6.9% in the prior year quarter. Profits from the Australian pole acquisition, stronger railroad demand and benefits derived from the consolidation of our Canadian Mississippi wood treating facility into our other treating plants in the second half of 2012 all contributed to the higher operating profits and margins for this segments.

Looking at our cash flow and liquidity, cash provided by operations for the first quarter 2013 amounted to $5.7 million compared to cash used in operations of $15.8 million in the first quarter of 2012 as lower working capital increases in the first quarter of 2013 more than offsets lower net income compared to the prior year quarter. Our debt, net of cash on hand at March 31, 2013 increased to $240 million from $229 million at December 31, 2012 as cash was used for working capital and capital expenditures.

As of March 31st, we had nothing borrowed on our revolver and we had total estimated liquidity well in excess of $300 million. Speaking of our revolving credit facility on March 27th we closed on an amendment to that facility that extends as an additional three years to March 2018, while also realizing a 50 basis point reduction to our borrowing rates. Extension also provides for additional flexibility from foreign investments and a simplification in terms of our financial covenants.

The last thing I'd like to mention is that we are around a year and half away from the first call date of our 7 7/8% Senior Notes due in 2019. We are keeping a close eye on interest rates to determine whether an early tender offer for the notes makes sense at some point.

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

Walt Turner

Thanks, Leroy. Now I'd like to give you an update on the status of our key end markets and how we see these markets impacting our results for the rest of the year. First, I'd like to talk about our railroad utility products business. Our first quarter volumes for crossties were up from the first quarter of last year led by higher sales volumes for commercial crossties and higher sales volumes for untreated crossties for our Class I customers.

We also continue to see a higher portion of our crossties being treated with borates and we expect this trend to continue. The commercial crossties business should be strong again this year as the short line railroads continues to upgrade the rail lines to take advantage of the benefits of the Section 45 tax credits to accommodate the heavier car roads that the Class I railroads are running.

We also expect to see higher volumes of crossties going into South America as railroads there are looking to replace ties produced from Eucalyptus species with a more durable creosote treated hardwoods that we produce here in North America. Our rail joint bar business also continues to perform well. And in addition to having a strong U.S. presence, we have been expanding our international presence as we increase our exports sales for these products around the world.

On the utility side, our Australian utility pole business should show improvement over strong 2012 results due to the acquisition of the utility pole business that was completed in last year's fourth quarter. Additionally, we have a full year's benefit of $4 million to $5 million from a closure of the Grenada, Mississippi plant, which should improve results for our North American utility whole business.

Now, I'd like to talk about the outlook for our Global Carbon Materials and Chemical business. In one of our largest end markets the global aluminum industry, recent projections indicate a 6% increase in consumption for 2013. Following a 5% estimated increase in consumption for 2012, which are positive indicators for our global carbon pitch business moving forward.

These projections would implies total consumption for 2013 of over 15 million tons of aluminum which should be a record level for global consumption. Excluding China, which produces and consumes about 40% of the world's aluminum, both aluminum consumption and productions are projected to increase by 4% in 2013.

The aluminum consumption is ultimately the driver for aluminum production, the production side more directly impacts pitch volumes for us. Unfortunately, the aluminum pricing continues to be depressed at around $1800 to $1830 a ton. And the aluminum inventory levels are estimated at over 5 million tons. This level of pricing is clearly a deterrent for any smelters considering whether to restart idle production especially in mature regions.

With regard to capacity increases in the Middle East, Alcoa's modern smelter in Saudi Arabia continues to ramp up production during 2013 and is expected to reach full capacity by next year.

The (Inaudible) expansion in the United Arab Emirates continues to be on pace, for their start-up in early 2014 and its capacity continues to grow in this well energy-fast region. We expect to see higher sales volumes on pitch in Middle East beginning in 2014 as production from these facilities ramps up to full capacity and results in a more favorable pricing environment.

Our pitch sales volumes were down in the first quarter, as a result of smelter closures in Europe and Australia that occurred during 2012. Lower sales volume in North America, as a result of redirecting lower margin business and producing a lower ratio of pitch from our Chinese' operations in order to produce more carbon black feedstock.

We continue to focus on maintaining our strong market shares in North America, Europe and Australia while expanding our presence in the developing markets here that we say in Middle East, China, India and Brazil and as a result we should expect to see those emerging markets continuing to grow each year, as a proportion of our overall business.

In regard to our phthalic end markets, passenger car production in U.S. was up about 9% in the first quarter of this year and the U.S. housing market continues to show signs of improvement, as housing starts in 2013, are estimated to be up more than 20%. However, we have seen reduced sales volumes for phthalic in the first quarter compared to last year. As a customer's facility was closed and European imports have increased due to the weak market demand for the depressed European economy. As mentioned earlier, we did see a drop in the price of orthoxylene in April compared to March and of course we will be keeping a close eye on this situation.

Our carbon black feedstock product which is largely driven by tire demand should continue to be strong for the rest of 2013, with exception of Europe as global rubber demand is projected to be 2% higher than in 2012. This growth is being driven mainly by higher demand from the emerging markets in Asia, which are the primary markets that we serve by our facilities both in China and Australia.

Our carbon black feedstock sales volumes were up 15% in the first quarter compared to the prior year operating with the increase driven mainly by Chinese operations as carbon black feedstock action that has then increased in place of carbon pitch production in order to maximize profitability.

Naphthalene demand, which is driven mainly by concrete used in new construction, was poised to benefit from the continued infrastructure expansions and the stimulus programs of the emerging economies such as China and the Middle East. Additionally, with new phthalic anhydride plants being open in China demand for naphthalene feedstock phthalic anhydride is expected to increase by about 400,000 tones over the next few years.

Due to lower cost of naphthalene compared to 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 2013. We did not see a 9% increase in sales prices for naphthalene in China in the first quarter compared to a year ago.

Regarding the outlook for our coal tar raw material, we have been able to buy additional tar here in the U.S. from the new U.S. [built] coke battery and are hopeful by mid of 2014 the Arcelor Mittal Coke Plant in Monessen, Pennsylvania will be back up and running to provide an additional source of tar for us.

Outside of North America, we have experienced tightness in supply, in Europe especially but we have been able to continue to bring tar in from Russia and Ukraine to supplement our European supply base. Raw material availability in China has also become tighter due to lower coke production and as a result tar cost in that region did increase sequentially from the fourth quarter and in comparison to the first quarter last year.

As we evaluate how these end market trends and projections are expected to affect our business in 2013, we see our North American Carbon Materials and Chemical business being flat compared to 2012.

We have been saying for some time now, that establishing fair pricing for the value of our products and services is an important component of our long-time strategy. While we have been successful, thus far in getting necessary price increases, in Railroad and Utility Products segment, gaining pricing traction in the Carbon Materials and Chemicals business has proved to be a little more challenging.

The (Inaudible) has pricing is been around the $1800 mark, which is obviously hurting the aluminum business, while the North American railroad business environment is as strong as it's been in quite sometime. We have been making some tough decisions here on what pricing, we are willing to expect for our products, which has resulted in us accepting reduced orders from certain customers and we are in the process of placing in other markets or with other customers.

In addition, we do select rate production from electric arc furnace -- electric arc furnace steel customers while also put some pressure on our pitch volumes for the balance of this year. The positive in all this, is that we were able to increase our price in North America in the first quarter to offset the profitability and lost from reduced volumes and we look to continue to maintain, if not improve that balance over the remainder the year.

The area that we are likely to most challenged with on the sales side is phthalic anhydride, where volume reductions driven by a plant closure for a phthalic customer and competition from higher levels of lower priced European imports with combined with a likely lower pricing environment and result in lower sales compared to 2012.

We believe that near term, weakness will be offset by the continued development of several margin improvement initiatives that I will discuss in more detail, shortly. For Australia, we expect the year to be moderately higher than 2012 as lower pitch sales volumes, from smelter closures are offset by the avoidance of the pitch tank leak costs that were incurrec last year.

China's results should continue to improve and the higher than last year -- as a higher overall volumes and product mix will benefit the sales and profitability. One of the improvements, we have been working on is to ship some of our pitch production to a more favorable carbon black feedstock market. If you recall, in China there are three major markets that compete for coal tar, the pitch market, the fuels market, and the carbon black feedstock market for a less refined feedstock can be used for carbon black production.

With our recent development on the export markets in Japan and Korea for carbon black feedstock, currently is more profitable for us to use more of our row material for carbon black feedstock production rather than carbon pitch. China has been the only region where we had this level of flexibility to produce various product mixes to maximize our profitability. However, we are now investigating this alternative in other regions of the world in which we operate.

That brings us to Europe which has been by far the most challenging part of our operations over the past year. In addition to continued difficulties in obtaining raw material the markets for carbon pitch and carbon black feedstock has been depressed due to recessionary conditions for the European economy.

As a result in the first quarter, we experienced lower sales volumes and prices for pitch and carbon black feedstocks and as I mentioned earlier that the [Europe's] first quarter would have been flat with the last year's first quarter we would have been more profitable overall compared to the last year's first quarter results.

Unfortunately, we do not see the situation in the Europe improving this year and with this level of uncertainty, our European operations continue to be the most significant downside risk that we have to achieving our expectation for earnings growth this year.

Turning now to some more positive news regarding our progress towards the goal supported by our three strategic priorities, which include growth, margin improvement and capital deployment. I'd like to start by giving you a growth update. The detailed engineering has been completed and construction is now underway on our new coal tar distillation facility in Jiangsu Province in China, which is still expected to be operating by mid 2014. And will add $150 million to $200 million to the top-line in 2015. As we mentioned previously our carbon pitch output from this facility will be utilized primarily for the production of needle coke, which is a new and exciting end market for us.

In November 2012 the Australian utility pole acquisition that we already mentioned several times in the call is already exceeding expectations and is now projected to add over $20 million in sales this year, while generating the same impressive margins that we enjoyed in our existing Australian pole business.

We are currently preparing for a second large order of crossties to be exported to South America from our North American railroad operations this year and we are devoting more resources to further develop this exciting new growth market for our railroad products. As for other new growth opportunities, we have several M&A possibilities in different stages in the pipeline and I fully expect that we will be announcing at least one if not two of these growth opportunities before this year ends.

Moving on to our second strategy priority of margin improvement, there are several areas I can point to that are currently contributing or will be by the end of the year towards reaching 12% EBITDA margin that we targeted by 2015. In our Railroad and Utility Products segment we continue to see year-over-year margin expansion as well as growth opportunities for this business.

We have already talked in the call about continuing benefits of the Grenada, Mississippi treating plant consolidation and the additional higher margin business brought on by our Australian utility pole acquisition but we still another quarter of year-over-year benefit of the Grenada's operations to capture as well as most of the remainder of this year the Australian pole business benefits to our margins.

Sales for our value-added creosote borate treating process continues to grow and we maybe adding borate treating capacity of at least one if not two more plants by the end of 2014. We are currently in discussions to add additional treating capacity at least one and possibly even two of our existing facilities as demand is expected to ramp up with certain customers beginning within the next two years.

Finally, there are several capital projects in our pipeline to upgrade [high] unloading and sorting equipment that will result, that's not only an efficiency improvement but real savings for reduced labor requirements and lower repair and maintenance cost. When you look at the carbon fills and chemicals and adjusted for Europe's decline we would obtain operating margins that would have been flat with last year's first quarter, despite lower pitch volumes in our other regions.

What we have done that has allowed us -- what have we done that has allowed us to do that? First, we've made certain strategic changes on the sales side of things that has redirected products into markets that are currently receiving higher values. I already mentioned how we have changed our strategy towards our market for pitch produced out of our China locations that has allowed us to maximize our profitability and continue to grow margins in that area in the world.

While it certainly can't be seen in our results for the first quarter, we are also getting margin benefits by redirecting naphthalene from our European locations to the U.S. to replace higher cost orthoxylene in our phthalic anhydride production process.

We are also continuing to see how we can continue to push the envelope by maximizing orthoxylene naphthalene feedstock mix to phthalic that's well beyond the traditional mix to take advantage of the price arbitrage between these two chemicals. We're also in a process of implementing a new transportation management system, here in U.S. that will effectively consolidate the work that is currently being conducted in three separate systems. This new system will be in place, in the third quarter and once operating should allow us to lower our logistics cost here in the U.S.

Finally, there are several other cost reduction issues in various stages of implementation that we've targeted at least $7 million in annual savings in our Carbon Materials and Chemical plants by the end of 2014.

In addition, to these cost savings initiatives our efforts to further reduce our pension expense continues to gain momentum. In the first quarter, we negotiated a [hard freeze] on defined benefits pensions and one on our remaining two-hourly contacts but still have this benefit.

The one remaining contract is up for negotiation later this year and once finalized all of our defined benefit plans in U.S. will be frozen for future benefits accruals. Our efforts to fund the plan by increasing our contributions beyond the minimum requirements has already begun to yield benefits as our pension expenses is expected to approximately $3 million lower than 2012.

When it comes to a third first strategic priority of capital deployment, much of what we've already done thus far, or in the process of [Leroy] has already been mentioned during the call, so I'll just give you a quick rundown of our progress fourth meeting of 2015 capital deployment target. Our risk rate committed to funding our share of $70 million to $80 million that will be required for construction and working capital to our new tar distillation facility in China.

We made our first equity contribution of $10 million in the fourth quarter of last year and we will make our second contribution of $7 million in the next couple of months. The project will be financed with 65% debt and we are close to finalizing the local project financing that we're going to affect in the second quarter.

When you include the 2012 Australian utility pole acquisition, we've either paid or committed the approximately $80 million of the $250 million to $335 million we had targeted for growth initiatives and as I previously mentioned I would expect that we will be announcing further commitments later this year.

Regarding the capital committed to our margin improvement initiatives, I expect that by the end of this year we will have spent approximately $50 million of the $135 million to $165 million that we have targeted between our additional pension contributions productivity capital and investments in new products.

In the area of returning capital to our shareholders with our recent dividend increase and expected stock repurchases this year. We will spend $30 million to $60 million in the first half of the strategic planning period towards the $80 million to $135 million that we have targeted for this area of capital deployment.

Also as Leroy previously mentioned, we have locked in our $300 million of revolving credit financing for the 2018, at lower interest rates and we will be considering the possibility of an early refinancing of the $300 million of outstanding bonds at the first call date in December 2014.

Looking at the remainder of 2013, a further deterioration we seeing in Europe, will continue mask the improvements we are making in other parts of the business and making a net contribution to earnings less than what we had originally projected.

I am still confident that 2013 will be a better year than 2012 but not to the degree that I thought we were as we entered this year. How will that likely play out, is that the second half of the year will be stronger than the first, but our third quarter being by far our strongest while this year's second quarter will finish toward in the neighborhood of $1 per share.

Similar to last year our fourth quarter is also is also expected to be strong and should actually exceed last year's fourth quarter. And as with any plan we knew that there would be bumps in the road but we will not let that deter us and we will continue to push forward with our strategy to significantly increase the profitability of these businesses.

While I can't get into the specifics of some of the larger actions that we will be implementing by the end of this year, I expect to be in position to announce and discuss some of these actions in greater detail on our next quarter's call.

At this time I'd like to open the meeting up for any questions that may be there.

Questions-and-Answer Session

Operator

(Operator Instructions). The first question comes from Laurence Alexander from Jeffries. Please proceed with your question.

Laurence Alexander - Jeffries

Good morning.

Walt Turner

Good morning. How are you doing?

Laurence Alexander - Jeffries

Very well. Just a couple of questions. First, on the European side. Can you give us a sense to roughly of what you see is the range of outcomes, because obviously if you do see more of a downturn in Europe you’d be able to sort of pull back and cut cost a little bit to offset those, can you give us a sense for what you see is this lack that you could see in the business model?

Walt Turner

Well. As we mentioned on the call, the two areas of concerns that we have are the carbon pitch demand with the aluminum industry in Western Europe as well as carbon black feedstocks that are also being depressed with the indirect cause of the automotive industry there. And as you probably heard in the previous calls, we attempting and somewhat successful with shifting some of our products to other customers around the world such as South America and South Africa and so forth. To what degree we see this impacting us has been a tough one because as we said early in the call, we really didn't fully anticipate the real negative impact, we're seeing here, but in terms of a financial outlook or how it differs, Leroy, you may have a closer handle on the percentages that we're looking at.

Leroy Ball

Laurence, maybe the best way I can describe it is as we're looking out over the rest of this year, we see Europe when you take into account the effect it will have on our effective tax rate as well, that Europe will have almost $0.50 impact on our results, our expected results for the year. And we have several items that -- that are serving to offset that when you consider the contribution from the Western Pole acquisition, the pension expense reductions, the stronger business in China in the railroad business, it will serve to more than offset that, but that's the sort of headwind that we're looking at for the remainder of this year.

Laurence Alexander - Jeffries

And, secondly as you think about the different cost cutting measures that you're putting into this year, you mentioned the $7 million figure. What do you see is the run-rate tailwind for next year from the cost control measures and efficiency programs this year and also the growth projects that you're doing?

Walt Turner

As I mentioned we've identified about $7 million of cost savings that will take us through the year 2014. As far as tailwinds associated with it, it's really difficult to comment at this particular time with the implementation that we are doing. And that's tough one, Alex -- Laurence, to really comment on but as I mentioned, I think the second - the next call that we have coming up I guess in August we will have a lot more information.

Leroy Ball

Yeah.

Walt Turner

But Leroy, anything you'd --

Leroy Ball

Yeah. Well, just to I guess confirm what you had said there, right, we've already identified $7 million on the CMC side that we believe we'll be having at tailwind going into 2014. And there's some other significant items that I think Walt mentioned in his prepared comments that we're just not quite ready to get into details about that we should we able to speak about on the second quarter call that will give you a much better sense for the cost savings that we think that we'll be seeing in 2014.

Laurence Alexander - Jeffries

And then just lastly I guess just very quickly it sounds as if just parsing between the cadence in the back half loaded that your Q4 results could be pretty close to the Q2 given how soft the current environment is and then the pickup in the back half, is that fair?

Walt Turner

Well the fourth quarter will certainly be as good as or stronger than the fourth quarter of last year. And again it depends upon a couple of things here but that's currently that's not we're looking at.

Leroy Ball

Yes, I don't know it will be quite as strong as the second quarter, Laurence, but I think we did see some (inaudible).

Liam Burke - Janney Capital Markets

Okay, perfect. Thank you.

Operator

Thank you. The next question comes from Ivan Marcuse from KeyBanc Capital Markets. Please proceed with your questions.

Ivan Marcuse - KeyBanc Capital Markets

Hi, thanks. I only have a couple. You gave a lot of good detail. Are you still profitable in Europe?

Walt Turner

Yes, we are for sure. It's just, it's not as much we'd liked to be nor as much we were last year.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And then you mentioned -- and so if you look at you still the Europe headwind - the $0.50 headwind that you mentioned and then Alcoa, the big customer’s out earlier this week announcing that they kick out another slug of capacity. So does that add to any sort of uncertainty about your earnings for the full year or do you have an idea that even where Europe is and what –Alcoa is doing you should still be able to drive higher earnings?

Walt Turner

Yes, I think it's going to take a little time for Alcoa to review where this 460,000 tons of potential cutbacks will take place, I mean they mentioned Europe as well as the U.S. and Australia. So we really are not sure that could be down the road but that could have a negative effect on our overall business, but again I think one of our strategies here is to really focus on other markets that we can divert the potential pitch production into other markets as well. But the impact on that would be almost impossible to comment on at this particular time. But we are looking at that, Ivan, for sure.

Ivan Marcuse - KeyBanc Capital Markets

Great. And then you mentioned share buybacks. You haven’t been all that aggressive in share buybacks at least in the last couple of years. How much do you have available now, I don't know if you may have mentioned this, but how much is available on your authorization and when will that authorization expire?

Leroy Ball

The current authorization essentially has about I think $25 million in place for us to be able to repurchase, we repurchased about 6.4 million last year. There is no end date for that and obviously we can go and get that increased at any point we wanted. I think the share repurchases that Walt was referencing that we would expect to do this year would be kind of in line with what we've been talking about in terms of buying back shares to offset dilution. And I think that's essentially the approach we took last year.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And if interest rates were sort of the - according to the Fed it looks like the interest rates are going anywhere anytime soon. So if there is this time next year be where they're at this level, what kind of savings in your interest expense do you think you will be able to get if you're able to sort of refinance in today's environment?

Leroy Ball

Good question. I would put that somewhere in the neighborhood of 175 to 200 basis points.

Ivan Marcuse - KeyBanc Capital Markets

Okay. And that's not included in the $7 million in the cost savings that you identified for 2014, correct?

Leroy Ball

That's correct.

Ivan Marcuse - KeyBanc Capital Markets

Great. Thanks for taking my questions.

Walt Turner

Thank you, Ivan.

Operator

Thank you. The next question comes from Liam Burke from Janney Capital Markets. Please proceed with your question.

Liam Burke - Janney Capital Markets

Thank you. Good morning, Walt. Good morning, Leroy.

Walt Turner

Good morning.

Leroy Ball

Good morning, Liam.

Liam Burke - Janney Capital Markets

Walt, you mentioned that you are going to step up borate production or borate crossties and you are going to probably expand the two plants, understand that borate creates a longer live tie how do you anticipate the borate ties effecting the crossties business long terms?

Walt Turner

There has been a lot of excitement over the last two years from the railroads and wanting to use more of a creosote borate treatment. Basically because of what you just said it does have longer life to the tie. And as we go forward talking with our customers there's more and more interest to do more ties from a creosote borate if it's good for the areas in the South where you've (Inaudible) because of the wet swampy zones and so forth if there is a thought process I want to be good for other location regions around the U.S. So that's the primary focus and as we forward do we are going to have more facilities to meet our customers' demands.

In regard to expanding our treating and it doesn't take much for us to increase our treating capacity by adding another (inaudible) or two and what we're seeing with a couple of specific customers, we do see tie demand actually increasing a little bit, which would require us to add additional treating capacity. So again customers are our driver and we've have got great relationships with our customers and we want to continue to do what they would like us to do with the treating service company.

Liam Burke - Janney Capital Markets

Longer terms though Walt, wouldn't that mean a longer life tie would create lower volumes in long-term wouldn't it?

Walt Turner

Well it's normally I am there high replacements or high insertions are probably addressing no more than 2.5% increase, so something that total pie is that are already in services and there is a lot more work to do and then I can tell you there is more and more focus on maintenance. The car weights turn all up to 286,000 pounds and that's why we see the short-lines with some pretty aggressive projects and the same thing with the Class-1 they also have lot of work to do. These ties it's going to be replacing 3% per year still lot of concerns a lot of ties to be replaced out there that would help with this better creosote borate treatment.

Walt Turner

And Lee need to be talking about at least 10 to 15 years before you would ever see any sort of impact from the borate treatment I think.

Liam Burke - Janney Capital Markets

Okay. And then, Walt on the export business on the crossties it looks like you are growing. Do you see any opportunities to add any more customers either in Brazil or go into other countries in South America?

Walt Turner

Absolutely as I mentioned we are going to actually put more man power and more support behind us and we do see based on what we have learned last two years or so there is an opportunities for using I would say a more like the North America railroad type products. I know we've noticed a lot of companies from Brazil, from Chile and other countries, Latin America as well that want to really do some serious upgrading of their railroads there. And so these railroads throughout South America and other places are saying, you know what -- what can we do to be just like a Class-1 railroad in North America. So we are seeing opportunities there.

Liam Burke - Janney Capital Markets

Great. Thank you, Walt. Thank you, Leroy.

Walt Turner

You're welcome.

Operator

Thank you. The next question comes from Steve Schwartz with First Analysis. Please proceed with your question.

Steve Schwartz - First Analysis

Hey, good morning guys.

Walt Turner

Hey good morning Steve. How are you?

Steve Schwartz - First Analysis

Hey, good thanks. If we can just stand on railroad and talk little bit about the commercial business, the short-line business. How significantly did your mix change towards that business in the first quarter and then how do you expect the year to play out with respect to the 45G tax credit?

Walt Turner

First part of your question I don't have the number in front of me, Steve, but second part yeah the 45G tax credits are helping the short-lines but it's probably a lesser degree than the short-line having to seriously upgrade their [track-age]. I just mentioned the heavier loads and a lot of increased freight traffic coming out of the mid-west especially North South Dakota with the Duncan Gas industry and oil industry and so forth. So it's probably even more so on just upgrading and to make sure that they don't have any -- elements so what have you to keep for revenues going from the Class-1. As far as the mix quarter-over-quarter I would have to get back to you Steve and give you more specific number on that.

Steve Schwartz - First Analysis

Okay you know in that business as said was there any benefit from Hurricane Sandy?

Walt Turner

For the railroad side?

Steve Schwartz - First Analysis

No, not well I guess that in the utility poles, I mean on the call you pretty much mention the utility pole strength, is Australia but.

Walt Turner

We did have a nice uptick back in the fourth quarter on the utility sales, but not lower side if there was anything it was minor as far as repairing railroad tracks.

Steve Schwartz - First Analysis

Okay. And then just my follow up question it relates to the carbon material business. Walt, it’s been a over 20 years since I took class in distillation, but when you talk about shifting more of your products to carbon black feedstock. Is it that you are changing the type of tar you running through the facility are you changing getting your customers to change their specs for carbon black seed to open for the range that you supply are you blending different products? How exactly are you pulling that off?

Walt Turner

Well, I pull out a secret process and I will share little bit with you. It continues to be distillation buyback and when you are going through distillation process you have always heard us talking about three primary distillation streams coming up the process the first is the light oil stream which we further distillate to naphthalene and other correct materials and second products the primary distillates but we either correct – for – wood preservation chemicals or we do some other correct oils for carbon black feedstock markets.

And when it comes to producing pitches we continue to further distillation process with higher temperatures and going through our pitch column to obtain a specific softening point for a customer’s carbon classification. But in between the distillates stream coming off and the final pitch product coming off we can do certain things there that we feel can offer the carbon black manufactures a better quality material which include little more carbon content and would help them with being more on a quality side improving their carbon black for the tire manufacturers and other rubber applications.

Steve Schwartz - First Analysis

So, it sounds like through perhaps an R&D effort on your part. You have gotten your customers to consider a wider spec range of raw material that allow you to sell more volume. Is that a good way to summarize it?

Walt Turner

Well some of that is true, but more specifically it continue to have to deal with the raw material quality but more importantly through the distillation process and coming up with increased carbon content. So it doesn’t increase the range of the specification it would more so narrow the range where we are providing a consistent quality which is what the carbon black manufacture is what the carbon pitch customers really want.

Steve Schwartz - First Analysis

Okay. Good luck and continuing to develop that initiative. Thanks for the color.

Walt Turner

Sure.

Operator

Thank you. The next question comes from (Inaudible) from [Keeley] Asset Management. Please proceed with your question.

Unidentified Analyst

Yeah my question has been answered.

Walt Turner

Thanks David. Good to hear from you.

Unidentified Analyst

Yeah good to hear you.

Operator

Thank you. The next question comes from (Inaudible). Please proceed with your question.

Unidentified Analyst

Good morning, Walt, Leroy and Mike.

Walt Turner

Hi, Scott.

Unidentified Analyst

Leroy just a couple of housekeeping things here. Was there any foreign country impact during the quarter?

Leroy Ball

Very low.

Unidentified Analyst

Okay. Did you give a percentage decrease Walt carbon pitch volumes year-over-year or the pitch price. I probable missed them.

Walt Turner

We did I think the volumes were up was it 9% or 13%, I think it was 13%, let me verify it a little quick.

Unidentified Analyst

Okay. And pricing for a pitch?

Walt Turner

9% on the [buy].

Unidentified Analyst

Okay. And was pricing, I'm sorry?

Walt Turner

The pricing was down about 4% but we'll reconfirm that to you, Scott.

Unidentified Analyst

Okay, thank you. Leroy are the borate treated ties that you're selling to your Brazilian customer, are those treated as a sale in the U.S.?

Leroy Ball

They're not borate treated ties, they're export ties -- or export ties are not borate treated, they're different.

Unidentified Analyst

Okay, sorry about that. The export ties are treated as a sale in the U.S. though?

Leroy Ball

Yes.

Unidentified Analyst

Okay. For tax purposes, correct?

Leroy Ball

Yes.

Unidentified Analyst

Okay. I guess those are all my questions. Thank you.

Walt Turner

Thank you, [Scott].

Operator

Thank you. The next question comes from Chris Shaw from Monness Crespi. Please proceed with your question.

Chris Shaw - Monness Crespi

Good morning, guys. How are you doing?

Walt Turner

Good Chris. How are you?

Chris Shaw - Monness Crespi

If I could ask again on the --, I know you obviously don't know there was any detail as the company -- doesn't but if you assume some sort of pro-rata amount of capacity curtailment as bounce us to how you supply them prorata share of your I guess carbon pitch sales to them, I mean was that impact you I mean was that the volume you could just to make up and send somewhere else in the world or do you think is that being made up for the Middle East the modern projects or something like that or would you be natural sort of net loss do you think?

Walt Turner

It's really difficult to answer that question Chris because it really depends upon where they would chose to cut back or – hot lines in the U.S. I mean we do see aluminum consumption increasing about 2% again this year primarily because automotive and packaging but it's Australia was another location I can look at, but I think probably what they're looking at here is there are high up synergy cost operations and I think Europe would put into that as well. It's just it's impossible to really understand what they will be looking and obviously with the modern smelter in Saudi Arabia cranking up and being at full production sometime mid late next year and appraising for aluminum – doesn't get over the 2,000 plus ton mark it's just difficult to understand what they might do. It's very expensive to shut down a pipeline or two, it's very expensive to bring them on. So I am sure we will have a lot of serious discussions before they make the decisions.

Chris Shaw - Monness Crespi

Okay. And then if you look at rail, I know in sometimes there is I guess was there any pull forward into the first quarter from I think sometime I don't know the weather is good or when people buy the treated ties earlier, was there any sort of real seasonality there in the first quarter or pull forward?

Walt Turner

No, I think it's in the past years we would typically say that first quarter tail end of the fourth quarter are very, very slow for cost and the construction work is replacing ties, but I think with all the work that we're seeing with the short lines and so forth it's not been quite a seasonal as we have seen in past years.

Chris Shaw - Monness Crespi

And there was some of weird wet and cold weather in the country in the spring is that going to impact 2Q at all or?

Walt Turner

I don't know, we normally don't see that I think that's just a normal situation for us there as far as the North-West because authentically they will not do much for 3 or 4 or 5 months depending on the weather, but that's not something that we really monitor or would impact us.

Chris Shaw - Monness Crespi

Alright. Got it. And then if I can just ask on CapEx, I think last you are sort this thing you say $32 million to $35 million for this is that changed I am just trying to get an idea of what then ultimately 2014 might be with the amount you have to fund the Chinese JV.

Walt Turner

Yeah, excluding the Chinese JV we're still looking at the $32 million to $34 million mark on our CapEx this year and really truly putting more and more of that into productivity projects, which will obviously have some pretty good pay backs going forward.

Chris Shaw - Monness Crespi

But, with the Chinese JV it's going to be above that above 40 probably.

Leroy Ball

Yeah, the Chinese JV itself we will probably spend close to $40 million this year.

Chris Shaw - Monness Crespi

This year. And how much next year another 20 or maybe.

Leroy Ball

Yeah, there will be probably another 20 or so next year.

Chris Shaw - Monness Crespi

Okay. I forget what's your percentage – 75.

Walt Turner

Yeah, that will be between 65% and 75%. 65%.

Chris Shaw - Monness Crespi

Okay. Great, thank you.

Operator

Thank you. We have a follow-up question from Ivan Marcus from Keybanc Capital Markets. Please proceed with your question.

Ivan Marcus - Keybanc Capital Markets

Great. Just a real question, you may have said this your coal fired cost, I know you went through each of the regions, we feel if it's a total global basket would it be up on a year-over-year basis for 2013 or would it be basically flat with 2012?

Walt Turner

Total at various regions but it's pretty much flat for year-over-year or maybe a slight decrease.

Ivan Marcus - Keybanc Capital Markets

Great. Thank you.

Operator

Thank you. I will now hand back to Mr. Turner for closing remarks.

Walt Turner

Thank you, Alix. And again we thank you as always for your participation in today's call and appreciate your continued interest in our company for sure. But we will continue to do the right things for our business by pursuing prudent growth opportunities and looking for ways to enhance our profitability within our existing businesses and despite some of the current challenges due to the European economy, we believe that the diversity of our business is along with our margin improvement sand growth initiatives will continue to provide us with the stability in both strong and weak economic climates.

And finally we remain firmly committed to enhancing shareholder value by maintaining our strategy of providing our customers with the highest quality products and services while continuing to focus on our safety health and environmental initiatives.

Thank you, again.

Operator

Thank you. This concludes the Koppers Holdings Inc. first quarter 2013 conference call. Thank you for participating, you may now disconnect.

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