Koppers Holdings' (KOP) CEO Walter Turner on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Koppers Holdings (KOP)

Koppers Holdings Inc. (NYSE:KOP)

Q2 2014 Earnings Conference Call

August 07, 2014, 11:00 AM ET

Executives

Michael Snyder - Director, Investor Relations

Walter Turner - President and Chief Executive Officer

Leroy Ball - Chief Operating Officer

Analysts

Ian Zaffino - Oppenheimer

Ivan Marcuse - KeyBanc Capital Markets

Liam Burke - Janney Capital Markets

Steve Schwartz - First Analysis

Chris Shaw - Monness, Crespi

Kevin Hocevar - Northcoast Research

Richard O'Reilly - Revere Associates

Operator

Good day, and welcome to the Koppers Holdings Inc. second quarter 2014 earnings conference call. Today's presentation is being recorded. At this time, I would like to turn the call over to Michael Snyder. Please go ahead, sir.

Michael Snyder

Thanks, Liam. Good morning, everyone. Welcome to our second quarter earnings conference call. My name is Mike Snyder, and I'm the Director of Investor Relations for Koppers.

At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website or you can call Rose Helenski at 412-227-2444 and we can either fax or email 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.

Company assumes no obligation to 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 financial measures.

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

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

Walter Turner

Thank you, Mike, and welcome everyone to our 2014 second quarter conference call. First of all, I am pleased to announce today that we've hired Michael Zugay, as our new Chief Financial Officer, effective August 18. Mike was recently the Co-Chief Executive Officer and Chief Financial Officer for Michael Baker Corporation, here in Pittsburg. We are looking forward to Mike's arrival and his contributions to Koppers going forward.

By now, you've probably seen our headline numbers. Our second quarter results reflect continued industry headwinds related to the availability of hardwood lumber for the railroad crossties, resulting in lower sales volumes for that business.

Additionally, our Carbon Materials and Chemicals business was negatively impacted by lower sales prices for phthalic anhydride, and lower sales volumes and prices for carbon pitch, as a 15% drop in aluminum production in the U.S., resulted in lower sales volumes for pitch compared to the prior-year quarter.

We also incurred approximately $5.8 million of incremental cost for consulting services related to the Osmose integration cost, operations improvement projects, employee benefits and the KJCC startup cost in China. Additionally, a plant outage during the quarter adversely affected net income by an estimated $2 million. Without these charges our adjusted EPS would have been $0.62 a share for the quarter instead of $0.39 a share of adjusted EPS that we've reported.

I'd like to point out that we will continue to incur the integration, operational improvement and startup cost for the balance of 2014. These necessary and foundational investments will continue to have a negative impact on the earnings for the rest of the year. However, these charges as well as the restructuring cost we continue to incur are all related to projects that will benefit us in the near future and position us for sustainable long-term success.

This year is a transitional year for Koppers, and we are taking the decisive actions and making progress towards our three strategic priorities of growth, margin improvement and capital deployment. We believe these efforts will drive long-term sustainable changes at Koppers.

Let me start by giving you an update on our growth initiatives. Our new China joint venture, know as KJCC, was completed in July and is currently producing pitch and carbon black feedstocks, which are currently being sold into the local Chinese markets. Our expectations are that the plant will also begin producing naphthalene within the next 30 days, when enough raw material is available for the production process.

The project was finished on-time and on-budget, and we anticipate that our partner on the sales side, Nippon Steel Chemical, will have their carbon black and needle coke plants completed by the end of the year. Until their plants are up and running, we don't expect to seen any meaningful bottomline impact from the joint venture, but it will give us an opportunity to introduce our products into the local Chinese markets during this time.

We continue to anticipate the closing of the Osmose acquisition in the third quarter, which should add more than $400 million of sales at EBITDA margins that are expected to be above our 2015 target level of 12%. The integration process continues to go well, and as I mentioned in our last call, we expect the North American integration to be completed by the end of the year. The estimated pre-tax synergies from the acquisition are expected to be at least $12 million, and we anticipate the annual run rate will be realized by the end of 2015.

The Ashcroft acquisition in Canada is fully integrated and we expect it to be accretive to earnings in the second half of the year, now with the integration and purchase accounting expenses are behind us. As a reminder, this is a wood trading plant that was acquired in January for about $30 million with anticipated revenues at around $30 million on an annual basis.

Moving to our second strategic priority of margin improvement. There are several areas I can point to that are currently contributing towards reaching our 12% EBITDA margin target by 2015. In the second quarter, adjusted operating margins for our European operations improved by over 400 basis points over the same period last year, as we start distillation activities at our Uithoorn facility in the Netherlands in April, and moved those production volumes to our remaining few European facilities.

For our U.S. Carbon Materials and Chemicals operations, the restructuring of our Follansbee, West Virginia and Portland, Oregon facilities is providing cost savings. But the impact is not resulting in overall margin improvement, due mainly to plant outages and difficult market conditions, which have more than offset the cost savings we achieved there.

Our Railroad and Utility Products business continues to invest in structural improvements such as the addition of the borate treatment process at three additional facilities this year as well as the Ashcroft acquisition in Canada. We also expect that the benefit from a consulting cost related to operational improvements to begin materializing in the second half of the year.

And lastly, the acquisition of the Osmose businesses could be accretive to our existing margins in 2015. And this acquisition should have a significant impact on our progress towards achieving 12% EBITDA margins on a consolidated basis by the end of next year.

In regard to our progress on our third strategic priority of deploying capital in order to maximize returns. In the first half of 2014, we spent approximately $68 million for the Ashcroft acquisition, construction start-up cost for the KJCC joint venture, the Osmose integration cost and cash cost for restructuring.

These strategic steps we've taken along with the positive sings of a stronger global aluminum market and the recovering economy in the Europe, gives me more confidence that 2015 will be a strong year for Koppers, with some significant and sustainable profit improvement over 2014.

I would now like to turn the call over to Leroy, to provide some additional detail on the quarter as well as an update on our end-markets. Leroy?

Leroy Ball

Thanks, Walt. Starting with the consolidated results, sales for the second quarter decreased by 4% or $14.1 million to $356.8 million compared to the prior-year quarter, driven mainly by lower sales volumes for railroad crossties due to lower raw material availability combined with lower sales volumes and prices for carbon pitch, more than offset the additional $8.2 million in revenue contribution from the company's recent Ashcraft acquisition.

Second quarter adjusted EBITDA was $27.3 million or a decrease of $9.9 million compared to 2013 second quarter adjusted EBITDA of $37.2 million, with adjusted EBITDA margins of 7.7% compared to adjusted EBITDA margins of 10% in the second quarter of 2013.

The reduced margins reflect a decrease in sales volumes for crossties, due to reduced raw material availability, lower sales prices for carbon pitch and phthalic anhydride, higher overhead related to consulting cost for acquisitions, operations improvement projects, employee benefit and KJCC startup costs, and higher cost in loss profit due to unplanned plant outages.

Adjusted net income and adjusted earnings per share for the second quarter of 2014 were $8.1 million and $0.39 per share compared to $14.7 million and $0.70 per share for the second quarter of 2013. Items excluded from our adjusted results for the quarter include $6.7 million of pre-tax charges related to impairment and plant closure costs.

This comprises $4.7 million related to the ceasing of distillation at our tar plant in the Netherlands; $1.4 million related to impairment charges and accelerated depreciation at our KCCC facility in Tangshan, China; $2.6 million related to closure of our wood treating plant in Grenada, Mississippi in 2012.

As mentioned earlier, we also incurred $7.8 million of integration, plant outages, consulting, employee benefit and plant startup cost in the quarter. Without these charges, our adjusted EPS would have been around $0.62 per share.

As Walt mentioned, we have taken deliberate steps to lay a strong foundation for building sustainable growth, beginning next year. And we view these charges, which will continue to impact earnings in 2014, as necessary investments in our future. For the second quarter of 2014, our effective tax rate before discreet items was approximately 65% compared to 42% in the second quarter of 2013.

As mentioned in our last call, our unadjusted effective tax rate for 2014 is unusually high due to the non-deductibility of our restructuring charges in Europe and China that has the effect of lowering our pre-tax income with no corresponding tax benefit.

Adjusting for those non-deductible charges will result in normalized effective tax rate of approximately 41% for 2014, due primarily to a heavier weighted earnings mix in our higher tax rate jurisdictions. On an additional note, the effective tax rate with discreet items for the second quarter of 2013 included a $1.4 million benefit.

Regarding the 41% effective tax rates for this year, another benefit that we expect to leverage from the Osmose transaction, is a reorganization of our legal entity structure that will provide from a much more efficient tax structure. This project, which we continue to study, will bring both significant long-term cash and effective tax rate benefits.

It is expected that this reorganization will give us the ability to continue to redeploy excess foreign cash in a tax efficient manner, while deferring U.S. tax of future foreign earnings for some period of time. The expected effective rate benefit from the reorganization is estimated at approximately 600 basis points based upon on our current projected pre-tax income.

In other words, were the structure in place today, our normalized effective tax rate will be tracking at 35% as opposed to 41%, and the earnings per share benefit will be approximately $0.30 on an annual basis.

There is a cost of putting this structure in place from the standpoint that we will need to recapture the overall foreign loss that we have accumulated through the years, which will result in a one-time accelerated tax payment of approximately $25 million that would also be charged for tax expense.

If the project moves forward, this tax payment would occur some time before the end of the year. In addition, we would incur implementation cost of approximately $2 million that will be recognized ratably over the last few quarters this year.

Now, I'd like to give you an update on the performance of the CMC and R&UP businesses and provide some color about our key end-markets and their impact on our results for 2014.

Starting with Carbon Materials and Chemicals, that business for the second quarter had sales of $208.6 million, which were $11.7 million or 5% lower than sales of $220.3 million in the prior-year quarter, due mainly to lower sales volumes and prices for carbon pitch. This product accounted for a 6% or $12.6 million decrease in sales compared to the prior-year quarter, as sales volumes and prices for carbon pitch declined.

The challenges we've faced in the global carbon pitch market in the first quarter continued into the second quarter, which had a negative impact on sales volumes and pricings compared to the second quarter of last year. Sales of distillates were flat as higher sales volumes for carbon black feedstock were offset by lower sales prices for carbon black feedstock driven by lower prices in Asia.

Sales of coal tar chemicals increased 1% or $2.6 million, as higher sales volumes for phthalic anhydride and naphthalene were partially offset by lower sales prices for phthalic anhydride compared to prior-year quarter. The reduction in sales prices of phthalic anhydride was driven by lower prices for orthoxylene.

The average price for orthoxylene was $0.56 for the second quarter of 2014 compared to $0.64 for the second quarter of 2013, a 12% reduction, which correlated to a similar reduction on phthalic pricing. Orthoxylene prices were higher at $0.65 a pound in July, which was up $0.09 from $0.56 in June, although expectations are that OX will drop a few cents to target.

Carbon Materials and Chemicals adjusted operating profit for the quarter of $9.9 million represented a decrease of $2.6 million and $12.5 million in the second quarter of 2013, which equates to adjusted operating profit margins of 4.7% and 5.7%, respectively. Operating profit and margins were lower mainly as a result of lower profitability from North American operations, driven by lower carbon pitch and phthalic anhydride pricing and a plant outage that had an estimated pre-tax impact of $2 million.

For the global aluminum industry, consumption for 2014 is projected to increase by 5% to 6% and is expected to outpace production for the first time, since before the recession. As a result LME inventory levels have declined to under 5 million tons and aluminum pricing has risen to around $2,000 a ton.

Our pitch revenues were down globally in the first half of 2014, due to lower sales volumes and prices, particularly in the U.S. and Middle East. We continue to take actions to remove cost from the business, including rationalizing capacity in regions where aluminum production has refined.

In the Middle East, despite the growth in production in this low-energy cost region competition remains strong and pitch prices continue to be depressed. We continue to produce more carbon black feedstock material and less pitch at our Chinese facilities in order to maximize profit. As a result, second quarter sales volumes for pitch were down 8% for Chinese operations and carbon black feedstock volumes were up 43% compared to prior-year quarter.

Phthalic anhydride, our sales prices declined by 12% from last year's second quarter, due mainly to lower orthoxylene prices. The revenue and profit impacts from the price drop were partially offset by a 12% increase in sales volumes. Demand is being positively impacted by North American light vehicle production and is expected to increase 5% in 2014 to 17 million units, combined with total U.S. housing starts that are currently projected to be up by 12% compared to 2013.

Our carbon black feedstock sales volumes were higher in the second quarter compared to the same period last year, but the impact was offset by lower sales prices, driven mainly by lower sales prices in Asia. Carbon black feedstock sales volumes are impacted by global rubber demand, which is projected to have average annual growth rate of 4% through 2015, driven by higher demand from the emerging markets in Asia.

Prices for our carbon black feedstock are based off of a flat oil index, due to the fact that the major feedstock for carbon black is a petroleum-based product. The advantage of using coal tar based feedstock is that they provide a higher value product for the carbon black industry, as they have a higher carbon yield and lower sulfur content than a competing petroleum feedstocks.

Naphthalene sales volumes and prices were higher in the second quarter compared to the same period last year. Naphthalene demand is projected to grow by 4% annually through 2016 with higher growth levels in China and other emerging market economy. On a global basis, coal tar prices have been down slightly compared to last year, as availability remains stable.

Our North American CMC business continues to be challenged by difficult market conditions and we are working hard to lower our cost structure and right size our business to adapt to these conditions.

We recently announced that we are looking at the possibility of building a new chemicals plant at our Stickney, Illinois facility, which would significantly lower cost and potentially allow us to discontinue production at our Follansbee facility. We expect material savings from this project, if it proceeds, and we will update you going forward.

It appears that the European economy has begun to recover, and a modest increase in end-market demand combined with cost savings from the closure of our plant in the Netherlands resulted in substantially higher earnings from our European operations in the second quarter compared to the second quarter of last year.

Our Australian operations continue to perform well, despite the closing of the Point Henry smelter and overall sales volumes have been higher on a year-over-year basis compared to 2013, as we move the majority of those volumes to other smelters.

Our Chinese operations reduced production of pitch, in favor of carbon black feedstock in the second quarter. And as a result, sales volumes for pitch were lower or more than offset by higher carbon black feedstock volumes. Sales prices for both products were lower than the prior-year quarter, as excess product continues to be available in China, as well as the Middle East.

The outlook for China for 2014 includes additional revenues from an expected five months sales from the new JV into the local Chinese markets, but any incremental profitability is expected to be offset by startup costs.

As mentioned on our last call, we expect to cease production at our KCCC facility by the end of this year, as a result of the anticipated closure of our JV partners Tolko. In order to continue meeting our customer commitments, we currently have a tolling arrangement with [indiscernible] Coal Chemicals Company, that all produced carbon pitch and carbon black feedstock for us.

In our global Railroad and Utility Products business, sales decreased by $2.4 million or 2% for the second quarter compared to the same period last year. The sales decline was due to lower sales volumes for crossties, mainly due to increased competition in hardwood lumber markets, which offset the growth we realized from the Ashcroft acquisition.

Adjusted operating profit for the quarter decreased to $13.4 million from $16.9 million in the prior-year quarter, with adjusted operating margins at 9% compared to 11.2%. Reduction in margins was driven by reduced throughput volumes, the addition of Ashcroft sales with no earnings contribution due to purchase price amortization, and consulting cost related to operations improvement projects.

Our second quarter sales volumes for crossties decreased compared to the second quarter of last year, as procurement volumes for untreated ties were substantially lower due to a competitive lumber market that's just now starting to improve.

We continue to drawdown our untreated tie inventories this year for both Koppers-owned and railroad-owned ties to be able to meet our customer commitments. After drawing down our untreated tie inventories by 1 million ties in 2013, our tie inventories reduced by another by 800,000 ties at the end of the second quarter to 4.4 million ties. Extended period of lower untreated tie availability has now also begun affecting our treating service volumes as they were also lower in 2013 second quarter by 14%.

We do believe that crosstie shortage is temporary. Overall rail traffic and profitability continue to be strong, as higher shipments of oil, fracking sand, and other products more than offset lower coal shipments. Continued high levels of rail traffic with heavier carloads require additional track maintenance to translate into a need for more crossties.

We expect procurement volumes to rebound in the second half of the year as sawmill capacity continues to grow in response to increased end-market demand. In the second half of July, our crosstie procurement volumes were up 15% than June volumes and we are hopeful that this trend will continue through the rest of the year and into 2015.

We continue to treat a higher proportion of our crossties with the creosote borate process and we are making capital investment to three more of our treating plant this year to add the borate treating process. The addition of borate treatment at these plants should take us from our current proportion of about 40% of ties being treated with borate to around 65% in 2015, which should continue to help us achieve higher profit margins in our Railroad and Utility Products and Services segment.

Cash used by operations for the first six months of 2014 was $8.7 million compared to cash provided by operations of $20 million for the same period in 2013, due mainly to lower net income and higher working capital usage.

Our debt, net of cash on hand at June 30, 2014, increased to $304 million from $221 million at December 31, 2013, mainly due to the Ashcroft acquisition and higher capital expenditures driven by spending for the KJCC joint venture in China. As of June 30, we had $24 million borrowed on our revolver, $37 million of construction loans related to KJCC, and we had total estimated liquidity in excess of $300 million.

Our capital expenditures for the first six months of 2014 were $36 million, up from $16 million for the first six months last year, mainly as a result of $20 million of expenditures related to our new facility in China.

As mentioned in our last call, we plan to obtain bank financing to acquire the Osmose businesses. The new capital structure will include a new $300 million term-loan and an increase in our existing revolving credit facility to $500 million from the current $350 million dollar limit.

The estimated initial borrowing rate of about 3.25% will substantially lower our average borrowing rates. Funding is expected to occur simultaneously with the closing of the acquisition. While this additional debt will initially take our leverage to over 4x, our goal will be to get this down to 3x within two years.

I will now turn it back over to Walt for a few closing comments.

Walter Turner

Thank you, Leroy. I would like to close by summarizing what we are expecting for the second half of 2014. In our last earnings call, we indicted that we were expecting a minimum revenue increase of 5% over 2013, excluding the impact of the Osmose acquisition.

At this point, we estimate that the incremental revenues from the new China joint venture and Ashcroft will be offset by reductions in sales volumes for both pitch and crossties for the year. And as a result we expect revenues to be slightly higher than last year.

We do expect that sales and operating profit will be stronger in the second half of the year with crossties procurement improving, the new China joint venture ramping up, profit accretion from the Ashcroft acquisition, continuing benefits from capacity rationalization in Europe and operational improvements in the railroad business.

As noted earlier, we will continue to incur cost related to the integration, plants startup and operational improvements that will have a negative impact on our earnings for the rest of this year. However, we view these cost as foundational investments, which will position us for a higher sustainable earnings and operating margins beginning in 2015.

2014 continues to be a very active year for Koppers, as we work to adjust our asset footprint to match our current and future expected businesses for the capacity rationalizations in these mature geographies that we're involved. We continue to tune about resources towards driving margin improvement, to identify projects while looking for more ways to reduce cost

The acquisition of the Osmose businesses should also add meaningfully to our sales and profitability and help us achieve our long-term goals. When I look at the various actions we have already taken this year and the continuation of cost savings initiatives that are in place for the balance of the year, for restructuring and expanding our businesses, in order to grow the top and bottomlines in a sustainable fashion. I am confident that 2015 is shaping up to be a very strong year for Koppers.

And Liam, I'd like to now turn the call over for questions that maybe out there.

Question-and-Answer Session

Operator

(Operator Instructions) And first we'll hear from Ian Zaffino of Oppenheimer.

Ian Zaffino - Oppenheimer

The question would be on sourcing the rail ties. Could you improve your ability to source the rail ties releases, sourcing the rail ties with Osmose. Is there any angle there, or this -- so are you going to face the same situation whether or not you have Osmose?

Walter Turner

No. It's sort of two different areas. The procurement of ties has been going on now for the last nine to 12 months I would think, and so all that based off of pricing of ties. And we had competition coming from, both the crane mats which are going basically into the oil and gas construction projects, as well as flooring hardwoods for the flooring industry.

Now, that the pricing has been increased substantially, I'll say, by the railroads these last five or six moths, that has opened the doors for sawmills to cut more ties. And as Leroy pointed out earlier, we're definitely seeing an uptick in tie availability starting about mid-July. So it is improving. And with, sort of the pricing in line with the other end-markets of these hardwood ties, it's starting to improve very nicely for us finally.

Ian Zaffino - Oppenheimer

And then on the carbon pitch side, are there any areas or regions where you're seeing particular pressure on the pricing or are there other areas where you're seeing more favorable pricing?

Walter Turner

Not really favorable pricing, but for the most part --

Ian Zaffino - Oppenheimer

Or less spend?

Walter Turner

I'm sorry?

Ian Zaffino - Oppenheimer

I said, or less spend?

Walter Turner

No. The pricing pressure is primarily in the least. That pitch market today is about 450,000 to 470,000 tons of pitch. And we continue to share about a-third of that market, however, based on surplus of pitch, both in China and elsewhere on the world that the pricing has been fairly different there.

Operator

Ivan Marcuse of KeyBanc Capital Markets has our next question.

Ivan Marcuse - KeyBanc Capital Markets

So you talked about the elevated cost with the consulting, et cetera, and restructuring and startup cost continuing for the remainder of the year. Will it stay sort of at the same level or will it decrease as you move through the year?

Leroy Ball

Ivan, I guess the way probably to look at that is, if you think about the second half of the year, I guess from a consulting standpoint related to Osmose, once we close that transaction, the consulting cost associated with that would kind of be offset or absorbed within the operation to that business. If I think about the existing [indiscernible] forward, I kind of put that one aside.

Consulting cost related to the operations excellence with that project, so we're finished on the railroad side of the business. So July was the last month of that project. We've done a similar project on the CMSC side. So we'll continue to see consulting process at that level continue throughout the remainder of the year, but we will also start to see some of the benefits on the railroad side. I think some to partially offset some of those costs.

And KJCC startup cost, I think we probably expected to continue to see here out into certainly the third quarter, starting little bit into the fourth quarter. So those were the main elements I think of the additional cost that we incurred during the quarter and how we see them going out over the second half.

Ivan Marcuse - KeyBanc Capital Markets

So I guess to sum it up and just to make sure we're on the same page, if you say the second half is going to be better than first half, is this more of a function of perhaps better sales in the railroad business, and a little bit less in cost with a little bit of benefit from restructuring?

Leroy Ball

That's correct.

Ivan Marcuse - KeyBanc Capital Markets

And then if you look at, you talked about how the aluminum industry, as the fundamentals are improving, you see with the pricing hover. Historically the smelters that have been shut down, it takes a lot longer to even bring them back up. And a lot of the capacity has shifted to China. And historically you've never really sold into China. So with sort of this changing dynamics in the industry, it looks like its probably not going change for a long time. Are you going to change your strategy and start selling more pitch into China? Or how do you sort of see that longer-term?

Walter Turner

Well, I guess a couple of comments. We are seeing sort of the end-market uses of aluminum improving, automotive, aerospace, what have you, consumption is now outpacing production globally. So there are some good signs out there, especially the ingot pricing, which is around $2,000 a ton there about, which really puts a lot of smelters back into sort of a positive cost position. And also the premiums that are getting in certain areas like the Midwest and so forth, which is around $400 a ton.

So we're seeing definitely improvement from the demand for aluminum. And we're seeing the inventories reducing. As you pointed out very, very much so when you announced restarts, that is very expensive, so I really think that before an aluminum company restarts, and I don't line, and I don't smelter that we're going to have to see a few more positive indications before that happens. But it does look positive. It's been a while going back a few years, but yes, aluminum demand is increasing.

And to your point on getting involved in China with our new joint venture, for sure, we will be looking at that a lot closer, that that the plant is in the Jiangsu province, which is very closed to Shandong and Henan provinces where we do see a lot of aluminum smelting going on there. So we will have that opportunity.

And as you remember our two plants from the north were really designed for exporting of products, but as Leroy pointed out, we are, because of the depressed pitch markets on pricing, we are looking more and more going into the carbon black feedstock, which has more profitability and less pitch production as we did in the last six months. So we've got that option to play out until we see how the increased pitch demand will evolve going forward with increased aluminum demand.

Ivan Marcuse - KeyBanc Capital Markets

And then, my last question, this is more for Leroy. If you look at your EBITDA has obviously taking a step down this year thus far and it probably continues to be a bit depressed. So as you put the debt on for Osmose, it looks like your debt-to-EBITDA ratios are probably be a little bit higher than maybe would have thought through four months ago? Well, is that going to impact your borrowing cost?

Leroy Ball

We don't expect it to. I guess the short answer arriving is, is we don't expect it. We expected originally to be somewhere above the 4x of leverage multiple. We still expect to be there maybe a couple bit higher, but overall that shouldn't impact the borrowing rates.

Operator

And we'll move onto Liam Burke of Janney Capital Markets.

Liam Burke - Janney Capital Markets

Leroy, you mentioned higher working capital needs for the first six months of the year, affecting your cash flows, revenues were down year-over-year.

Leroy Ball

Yes.

Liam Burke - Janney Capital Markets

Was there anything unique in there regarding working capital needs?

Leroy Ball

No. I mean the funny thing is that even though crossties volumes were down, because pricing of them have gone up by so much, we didn't really get a benefit from that we might expect in terms of procuring a lower amount of tie. I think our inventories are over in Europe, and we had to build as we were taking down production in the European, in the Uithoorn business, so that also contributed to some of the working capital, as did us preparing to bring up KJCC, some of the payments reduction, payments on the operating cost or the startup cost related to KJCC.

Liam Burke - Janney Capital Markets

So if you've itemized some of the things that have, your needs, so to speak. I'm presuming the second half of the year some of these things will reverse itself and your cash flow position would be better?

Walter Turner

Well, second half of the year some of these things will reverse itself and your cash flow position will be better?

Leroy Ball

Well, second half of the year cash position, I guess free cash flow, we do expect to be better. We haven't spent a lot of the money related to the Uithoorn shutdown at this point in time. We've taken certainly some charges associated with that that have closed into financial savings, but there has not been a lot of cash incentive on that to date. And that will occur more in the second half.

Overall, we do expect stronger cash generation in the second half. I think historically we have shown a much stronger second half cash generation than we have in the first half. We don't expect that any different. But we will have cash needs to basically payout some of the severance cost related to the Uithoorn shutdown. We'll continue to deal with some cash need related to inventory build for the railroad business, things like that, but still overall net-net we expect to have that strong.

Operator

And Steve Schwartz of First Analysis has our next question.

Steve Schwartz - First Analysis

If you could just give us a little more color on these special items that you did not back out in your non-GAAP bridge. The plant outage, if you could give us just some details about that?

Walter Turner

Plant outage I think we mentioned on the call that we're looking at a $2 million negative impact on that. And that had to do with an operational issue that we had to actually take about eight to nine day shutdown for. And that obviously backed up production, which we had to move to a couple of plants to keep the product flowing to our customers and go-forward. So it's something that was process related, and it's now taken care of and moving forward. That's what we are talking about, about the plant outage.

Steve Schwartz - First Analysis

And is that carbon materials?

Walter Turner

Yes.

Leroy Ball

Steve, outside of that item, we've incurred some cost related to preparing for day one and integration related to the Osmose acquisition. We're very keen to the fact that this is a much larger acquisition than we've ever done. And we want to mitigate any potential integration risk that would be there.

So we have gone out and got help to kind of put a full and very detailed integration plant together. And we believe we're very prepared to hit the ground running and begin realizing the synergies that we've identified related to this transaction. So we're bearing the expense now, but we think the benefit will come back in terms of being able to realize those synergies much quicker than we otherwise would have.

Steve Schwartz - First Analysis

So Leroy, how would you split that $5.8 million, and some is obviously in railroad, but there is also some in carbon materials too, right?

Leroy Ball

Well, the stuff related to the Osmose integration, we've actually kept that out separate. So it's no in either. It is in other category. And then you have the operations excellence cost related to the project that we undertook in the Railroad Utility Products earlier that year that ended in July. We have cost associated with that that are in their numbers, somewhere in the quarter, somewhere a little over $1 million maybe $1 million a quarter. And again, that cost will end in July for Railroad Utility Products, but it would pick up on the CMC side during the second half of the year.

Operator

And next we'll go to Chris Shaw of Monness, Crespi.

Chris Shaw - Monness, Crespi

The tax benefit or savings that I think Leroy mentioned on Osmose, is that the same tax benefit that you're talking about at the time of acquisition, the 338 tax election or is there something different?

Leroy Ball

No. Separate in differently. The 338(h)(10) tax election is a cash benefit. There is no effective rate in tax on that. It's just a cash tax benefit that we realized over a 15-year period. This other benefit that I talked about comes as a result of an overall reorganization of our legal entity structure, which through our further investigation looks like it is something that would work, would allow us to essentially push that into our foreign jurisdiction, and then use cash generated from those foreign entities to repay into North America.

And so that will provide a nice cash tax benefit for us. That cash, it will come back to repay the loan, but not the tax. And then we would get an effective rate benefit by basically unshutting the box on our Australian business right now that essentially is tax [indiscernible] tax in Australia, the earnings and our tax in the U.S. And as a result, we have an effective rate, just on our Australian operation is about 54%, which is what ultimately drives our overall effective rate up to the 41% that we've been generating here from the past several quarters.

Chris Shaw - Monness, Crespi

And then thinking about Australia then, did you guys -- Port Henry, that smelter is closed already, so has that impacted your volumes or have you been able to find other outlets for it?

Walter Turner

Actually, I guess, the Port Henry smelter that Alcoa has in Australia closed by the end of July. And of course, we were impacted maybe two weeks before that. But it will impact us a little, but I would say majority of that, the last pitch sales will be moved to other customers in that region of the world.

Chris Shaw - Monness, Crespi

And then, did you mention what the plant outage of the carbon materials, that which plant it was?

Walter Turner

No. We didn't know.

Chris Shaw - Monness, Crespi

And then just in the sort of reorganizational restructuring in the United in carbon materials, are you going to be -- is Follansbee and the Oregon, are those facilities going to be completely closed, as you go through with the relocation of naphthalene unit? Will you be just down to two plants?

Walter Turner

As Leroy mentioned earlier, we're going to the evaluation of how we will proceed forward with couple of different options there. But no, they're not closed.

Chris Shaw - Monness, Crespi

And then, just want to make sure with the higher wood cost, I know you guys wouldn't bear any of that, I don't see any of that even run through your P&L, it's all incurred by the rail customer, right?

Walter Turner

From the most part, I would say, probably 80% plus of the ties that we're procuring are on behalf of the railroads. So majority of that, yes, would be on their inventory side, and not on our balance sheet.

Chris Shaw - Monness, Crespi

Can I ask one more? I was just curious that, all the news we see around the rail derailments recently, a lot of around the oil tankers. Do you guys have any idea what's the main cause of that? I mean, obviously, there is I guess the weight issue, but has railroad ties have ever been sort of part of that reason for the derailment?

Walter Turner

Well, I don't know. Over the last, I guess, what nine months or so, there has been two, that I can think of. The one in Canada and the one down in South Carolina, I think, but I really don't know the route cause of the derailments, but it's not been because of ties, but no, I really don't know.

Chris Shaw - Monness, Crespi

I was just trying to see if there is an opportunity, so people replace a lot of the ties.

Walter Turner

To sort of turn your question around, Chris, I think these increased rail traffic and a lot of other things going on, for not only the class ones, but also the short lines, mechanical layer continues to increase and it's certainly going to strengthen the maintenance programs out there, which will benefit Koppers for sure.

Operator

And Kevin Hocevar of Northcoast Research has our next question.

Kevin Hocevar - Northcoast Research

Wondered if so with the China JV, kind of up and running here, I think the expectations were at some point, it will reach $150 million to $200 million in sales, and have margins in excess of your 12% EBITDA margin target. And I think the initial expectations were kind of a ramp up in the back half for this year and then kind of hit that in 2015, so kind of how it's going? And I think your customers on this side are maybe taking a little longer than expected. How should we think of that contribution in 2015 compared to those kind of initial expectations?

Walter Turner

Well, I can just start off, and Leroy can finish it up. But you're right, in the very beginning, when we announced this project, the Nippon Steel Chemical, we signed a very long-term sales agreement with margin that, that there was going to be at least at or higher than our 2015 EBITDA goal. And so the issue now is that they were about six months delayed in getting started with their construction.

So here we are. And our plant is now up and running as of July. And as we mentioned, they should complete their carbon black plant and their needle coke plant, which would primarily use the pitch that we're producing, staring in the first quarter of 2015. So it will take them approximately six to nine months to really ramp up, get their product approved and so forth. So it's going to have a delay in what we announced at the very beginning.

Leroy Ball

I guess, the only thing I would add to that is just to I guess reinforce, we said I think earlier in our prepared comments, we don't expect to really much of any contribution from that plant in 2014. It will certainly pick up in 2015, but not reach its annualized expectation of margins until probably near the end of the 2015 period. So we would probably be hitting the run rate some time in the fourth quarter of 2015.

Kevin Hocevar - Northcoast Research

And then I don't think I caught any commentary about phthalic anhydride imports into the U.S. on this call. So is that something that is still occurring or is that mitigating as the Europe economy picks up, wondering if that's still a headwind for you guys at this time?

Walter Turner

I don't think as much as it was going back in the fourth quarter or first quarter of this year. Unfortunately, these numbers that we monitor on imports are typically two or three months late. But I think we've got a pretty good indication that some imports have been reduced, but I really can't tell you about how much at this point.

Kevin Hocevar - Northcoast Research

And I'm curious to, in terms of the carbon black feedstock, it seems like particularly in China you called out that pricing was softer. And my understanding is entire production is in pretty sold up 8% or 9% or something in the first half of this year. So just wondering what's driving stronger volumes I would assume in China, but softer pricing?

Walter Turner

The pricing of carbon black feedstock is based off of some sort of petroleum index. And so that's why you see a fluctuation up and down quarter-to-quarter, and that's the biggest reason. But again, with demand increasing on a 4% sort of annualized basis, it still is a very strong for us, but you will continue to see some fluctuations up and down based on the indexes that they use out of Singapore.

Kevin Hocevar - Northcoast Research

The pass-through price changes, but the profitability doesn't really change.

Walter Turner

Well, not to any large degree. I don't think, no. But it does definitely on the pricing obviously.

Operator

And now we'll take a follow-up from Ivan Marcuse of KeyBanc.

Ivan Marcuse - KeyBanc

A couple of quick questions. What's sort of your CapEx expectations for the full year of 2014?

Leroy Ball

For the full year of 2014.

Ivan Marcuse - KeyBanc

Yes or the back half, and I could add together.

Leroy Ball

I'd say, for the back half, we're probably looking at something in the $35 million to $40 million range.

Ivan Marcuse - KeyBanc

Per quarter or total?

Leroy Ball

Total.

Ivan Marcuse - KeyBanc

And then if you end up going forward building a plant, how much would that cost you?

Leroy Ball

You're talking about the naphthalene plant.

Ivan Marcuse - KeyBanc

Yes.

Leroy Ball

The answer is, Ivan, we really don't want to get into that at the moment. It's just a little bit premature, because there is a lot of work going on related to quantifying the cost and benefits. And there is other things associated with a potential plant build that would go forward just kind of adding some value-added components to it. And so we just don't want throw a number out right now, and then come out with something different a couple of months from now.

Ivan Marcuse - KeyBanc

And then the tax charge that you're thinking about taking the $25 million, is that cash or is that a non-cash charge?

Leroy Ball

It is both. It's a cash and earnings charge.

Ivan Marcuse - KeyBanc

And then did you mention it, I may have missed it. Do you expect your cash from operations to improve, as we go through the year or would you sort of remain at this level?

Leroy Ball

We do expect an improvement in our cash from operations.

Ivan Marcuse - KeyBanc

And that is a function of higher earnings or do you expect working capital start to become an income source?

Leroy Ball

Mostly from higher earnings.

Operator

And Richard O'Reilly of Revere Associates has our next question.

Richard O'Reilly - Revere Associates

I am still a little concerned about the sourcing for the rail ties. And I guess my thinking is, if housing and the energy production continue to remain strong, supplies is just going to continue to be a headwind for you with periodic belief. Is that true? Will it take ramp up of sawmills to relieve the supplies, to relive the pressure. I mean how should I be thinking about that?

Walter Turner

Well, I guess, it really boils down to the pricing of the ties. And you're exactly right. I think the increased pricing has enticed more sawmills to cut more ties. I mean typically most of these sawmillers for years and years and years, sawmill-owned operations rely on the railroad industry.

And as long as they can be somewhat profitable on tie, they would just assume to continue their long-term end-markets of their ties with the railroads versus how long this is going to last for the oil and gas industry, I don't know, but they can last a long time. But the main point here is getting a price for the tie that's at least stoppable to the other competitor. And it has opened a few sawmillers to cut more ties with the railroads.

Richard O'Reilly - Revere Associates

Remind me, the price of the ties, is that what the railroads are willing to pay or what they are telling?

Walter Turner

What they are willing to pay for is based off of their maintenance programs, yes.

Operator

And ladies and gentlemen, that does conclude today's question-and-answer session at this time. I'll turn the call back over to Mr. Turner for any additional or closing remarks.

Walter Turner

Well, thank you, Liam. And again, we thank all of you for your participation in today's call. And I appreciate your continued interest in Koppers.

So despite facing challenges in 2014, we truly believe the diversity of our business along with our margin improvement and growth initiatives, will continue to provide us with growth and stability in both strong and weak economic climates. But we will continue to pursue growth opportunities that make strategic sense for us and as well as focusing on areas to improve profitability within our existing businesses.

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

Operator

And that does conclude today's conference. Thank you for your participation.

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