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Koppers Holdings Inc. (NYSE:KOP)

Q2 2008 Earnings Call

August 7, 2008 11:00 am ET

Executives

Mike Snyder - Director, Investor Relations

Walt Turner - President and Chief Executive Officer

Brian McCurrie - Vice President and Chief Financial Officer

Analysts

Saul Ludwig - KeyBanc Capital Markets

Lucy Watson - Jefferies & Company, Inc.

Steve Schwartz - First Analysis Securities Corp.

Chris Shaw - UBS

Lee Lignos - Lakeway Capital Management

Operator

Welcome everyone to the Koppers Holdings Inc. second quarter 2008 results conference call. (Operator's Instructions) Mr. Snyder, you may begin your conference.

Mike Snyder

At this time, each of you should have received a copy of our press release. If you have not, one is available on our website or please call Rosa Relinsky at 412-227-2444 and we can either fax or email you a copy.

Before we get started I would like to remind all of you that certain comments made during this conference call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties including risks described in the company’s filings with the 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 has objectives, plans and projected results will be achieved. The company’s actual results could differ materially from such forward-looking statements.

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

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

Walt Turner

I am very pleased overall with our second quarter results. When compared to the second quarter of 2007, we saw sales increase 15% to $375 million, adjusted EBITDA growing 4% to a $54 million and adjusted earnings per share before the sale of Monessen increasing 12% a $1.20 compared to a $1.07 in the second quarter of 2007. We saw particularly strong revenue growth outside US where sales grew by 34%. Sales outside US represented approximately 40% of the total company sales in the quarter.

During the second quarter, we continue to benefit from the positive fundamentals in our core end markets of aluminum, rubber and construction. We also benefited from an increased in the pace of buying by the Class 1 railroads from the first quarter. We continue to see strong demand in our end markets in the quarter and see those trends continuing to the remainder of 2008 and in the 2009 which is crossing us to revise our guidance upwards as you can see from our second quarter earnings release.

To meet the demand of the new smelters in the Middle East we continue to execute our strategy of adding new tar distillation capacity in China with production expected to come online in early 2009. We are also benefiting from the Class 1 railroads while continuing to invest in their infrastructure and most probably we are continuing to their tie insertion program levels at or above those of the prior year. In our global Carbon Materials & Chemical segment, second quarter 2008 sales increased 24% to $251 million as volumes increased 11% primarily as a result of higher sales of carbon pitch, carbon black and carbon black feedstocks.

Average prices in the quarter increased 7% due to higher sales prices for distillates primarily as a result of higher oil prices. Overall, demand for carbon pitch and distillates which include creosote and carbon black feedstocks remain strong. Sales outside North America were particularly strong with total revenues of 35% of the prior year quarter. Sales of railroad utility products in the second quarter were a $124 million slightly higher than the second quarter of 2007 as higher volumes and prices for commercial crossties, offset by lower volumes of untreated crossties and treating services for the Class 1 railroads.

As indicated during our last call, we get also a slow start in the second quarter due primarily to a poor weather coupled with a weak lumber market but we did see volumes increased in June. Our expectation is that the increase in demand for into the crossties from the Class 1 customers that we saw on June will continue through the rest of the year and that sales of untreated ties in the second half will be up significantly over the first half. A long term outlook remains very strong for this segment as tie insertions continue at high levels.

As you probably know in August, we entered into an agreement to sell our coke facility in Monessen, Pennsylvania for approximately $160 million. This unique opportunity provided by the strength of the global coke market will result in a substantial profit from the sale but more importantly had monetizes a non core asset and results in a significant cash in flow to Koppers presenting us with an opportunity to deploy capital for growth. Brian will cover this in more detail during his remarks.

I would also like to mention that we have opportunistically purchase shares of Koppers stock under a share repurchase program that was announced in February. To date, we have purchased 338,000 shares resulting in a total cash outlays of a little over $14 million. We believe the share repurchase plan offers us an opportunity to effectively utilize our strong liquidity position. We continue to monitor the financial markets with respect to opportunities for repurchasing additional stock.

After Brian completes the financial review, I will give you a status update on our core end markets as well as provides an insight into what we are expecting for the balance of 2008.

Brian McCurrie

Before we get into the detail of financial results for the quarter, I would like to walk you through the Monessen transaction that Walt mentioned. Most of you will recall that we produced a relatively small amount of metallurgical coke about 2% of total North American production that we sold entirely to Arcelor Mittal under what was essentially a fix price, long-term contract expiring at the end of 2009.

Barely speaking on an annualized basis, the plant generated about $70 million of revenues with an expected EBITDA of about 5%. We also realized about $5 million of energy tax credits that were included as a reduction of tax expense as a result of alternate fuel tax credit legislation that also expires at the end of 2009. Initial sales price of a $160 million will be adjusted for working capital at closing but using today's working capital amounts, it will result in gross proceed to Koppers of approximately a $170 million.

Closing the subject to among other things, Hart-Scott Rodino approval and assignment of certain rights by the Pennsylvania department of environmental protection that could take up to 60 days to complete. Based on the current book value basis of the plant, we will recognize a gain of approximately a $140 million at closing. Net cash proceeds of the company will be about $90 million and for projection has been assumed to pay down debt. I do expect that the company's effective tax rate will be impacted by the loss of tax credits and should note that the rate for the remainder of the year will be in the 37% range. These represents about 1% to 2% reduction in prior years effective tax rate after excluding tax credit and is due to the interaction of this year's foreign and domestic profitability and lower foreign tax rates.

The purpose of the analysis we have excluded the Monessen results from our discussion since it is not a part of our ongoing operation. Specific details of the impact on the second quarter and year-to-date sales are included in our press release as well as our 10-Q. Included as an adjustment to EBITDA and net income in the second quarter is $1.4 million and $900,000 respectively related to a boiler failure at our Green Spring, West Virginia wood treating plant. Boiler repairs were completed in July and the plant is offering at full capacity.

Now, let us get into the results for the quarter. Sales for the second quarter increased 14.9% to $375.3 million as compared to $326.7 million for the prior year's quarter. Increased in sales was a result of higher sales in the Carbon Materials and Chemical segment which increased 23.6% or $47.9 million coupled with slightly higher sales in the Railroad and Utility segment which increased $700,000.

Second quarter sales increased in the Carbon Materials and Chemical segment was due primarily to a 5% or $10.9 million increased in sales of carbon materials, a 7% or $14.3 million increased in sales of distillates, a 1% or $1.7 million increase in sales of coal tar chemicals and an 11% or $21.1 million increased in sales of other products. Second quarter carbon materials sales were positively impacted by $3.7 million due to higher volumes of carbon pitch sales primarily from European operation and $2.4 million due to price increases attributable primarily to higher costs of raw materials and higher car truck pricing.

Underscoring the impact of the timing of ship movements on our quarterly results, we did have a relatively large shipment in Australia occurred at the end of the month that resulted in about $2 million positive profit impact in the quarter. Sales of distillates were positively impacted by higher volumes amounting to $3.8 million and higher prices totaling $8.3 million. Benchmark pricing was affected by a substantial increase in average oil prices from the second quarter of 2007 to the second quarter of 2008.

North American sales of phthalic anhydride in the second quarter representing 7% of total sales for Koppers continue to be strong. On a year-to-date basis, phthalic volumes have increased about 2% over prior year levels. We continue to monitor this product since it does sell into end markets that can be impacted by US economic conditions however year-to-date volumes has been promising.

Overall Carbon Material and Chemical sales in the quarter were positively impacted by 6% or $12.3 million due to foreign exchange. Sales around utility products increased slightly in the second quarter to a $124.4 million. Higher sales of commercial crossties essentially offset lower sales of treated and untreated crossties to the Class 1 railroads as several of our Class 1 customers reduced the requirements due to fore weather conditions and a weak lumber market and only began to accelerate buying towards the end of the second quarter. We expect their tie purchasing programs to be backload into the second half of the year to maintain current higher replacement programs into 2009.

Sales of commercial ties both domestically and into the export market have remained strong with volumes increasing 12% in the second quarter of 2008 compared to 2007. On the consolidated basis, second quarter adjusted EBITDA increased 4.5% to $53.6 million compared to second quarter of 2007 EBITDA of $51.3 million. EBITDA margin dollars were positively impacted by higher volumes and prices for most product lines in the car materials and chemical segment which more than offset of reduction in profit in railroad and utility product segment.

Net income from continuing operations for the second quarter was $22.3 million compared to net income from continuing operations of $19.7 million in the second quarter of 2007. Diluted EPS from continuing operations for the second quarter was $1.11 per share compared to $0.94 per share in 2007. In terms of reference, second quarter 2008 adjusted net income and EPS before the effect of discontinued operations which relates the Monessen transaction amounted to $25.2 million or $1.20 per share compared to second quarter of 2007 net income and EPS of $22.3 million or a $1.07 per share.

Total debt at June 30, 2008 was $445 million compared to $440 million at December 31, 2007 reflecting seasonal borrowings for working capital primarily as a result of higher sales. On an LTM basis, pro forma for the sales of Monessen and the share buybacks, our net debt to adjusted EBITDA ratio is 2.1 times. Capital expenditures for the quarter were $7.9 million compared to $5 million in 2007 and include $1.2 million for capacity expansion at our existing JV in China and $2 million for our new JV in China.

Estimated CapEx for the full year 2008 is $35 million including JV investment and plant expansion in China. Before I turn it back over to Walt, I would like to emphasize that our business is seasonally impacted by demand for our products. Financial performance in the first and fourth quarter is historically lower than the second and third quarters. We see this trend continuing.

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

Walt Turner

In the past, you have heard me mentioned that longer term projections coming for global aluminum productions are growing on an annualized rate of 78%. In the nearer term, the industry is estimated with global aluminum smelting capacity expected to grow by 17% through 2009. With new projects coming on line in a Oman, Qatar and the United Arab Emirates and the release by 2011. As you are aware, our primary product, carbon pitch, which represents 50% of our tar distillation process, is consumed as a part of the electrolysis process providing us with the opportunity to grow as well.

In order to meet this growing global demand for our pitch products, we have increased raw material sourcing in Russia and Eastern Europe and in the process of building new capacity as well as increasing existing capacity in China. In addition, we have continued our efforts in both China and Russia to convert these markets to our pitch product based on the quality benefits realized by the Western smelters decades ago. This is a long term process but the benefits of converting these markets can lead to accelerated growth for Koppers.

To support this process, we are adding chemical resources to work more closely for the smelters in these regions. In the near term, we continue to execute on our fundamental strategy of capacity expansion to meet this increase in demand for carbon pitch. Our progress is continuing at both our capacity expansion projects in China which will amount to a total increase in distillation capacity of 400,000 metric tons of coal tar.

The expansion of the plant in our existing joint venture and the construction of the plant for a new joint venture continued to move towards completion by yearend and will provide growth opportunities for us in 2009. We continue to focus on additional capacity expansion opportunities in China and are seeing increasing potential for opportunities in India and Russia as well.

You may have seen recent announcements regarding aluminum production cutbacks in China due to energy restrictions; this should not impact us and may actually benefit us as metal is imported to China from Western smelters. We also continue to see a greater emphasis being placed on the construction of new more efficient smelters being built in China for the future. We may end for carbon black feedstocks that represent at about 30% of our tar distillation process and raw materials used in the production of carbon black for the rubber industry, and naphthalene 20% of our tar distillation process which is used as a concrete additive and in dye stuffs remain very strong.

Demand for these products was primarily driven by growth in Asian economies and contribute significantly to the profitability of our European and Asian operations that supply these markets. Carbon black feedstocks are generally priced at a benchmark oil index which has resulted in higher selling prices in 2008. Worldwide growth the rubber industry is very positive with industry growth projections of about 4% per year through 2015 but higher growth in China and in Russia.

Demand for concrete, a primary market for naphthalene outside of North America also remains strong in China and other Asian markets for a construction continues to be robust. As you may have heard, our largest carbon black customer in Australia, South Pacific Tire, which is a part of Goodyear, recently announced the closure of their tire plant in Australia. This closure impacts about 15% of our plants output. We expect that about half of their loss sales can be replaced within the Australian market with the remainder being sold into the export market which is already absorbing about 50% of the plant production.

We do not expect this to significantly impact us as we go in to 2009. We expect demand for North American Class 1 railroads or crossties in 2008 to be more a backloaded into the second half of the year as the demand for increases in the lumber markets strengthens. Insertions of wood crossties are expected to remain at or above levels seen in 2007 which reaffirms our belief in the fundamental strength of this market. Despite a slow start in the first half of 2008, we remain very optimistic about this business and see the North America railroad continuing to invest in their infrastructures in 2008 and over the long term.

I was pleased to see that we were able to be profitable managed our way through the first half of raw material price increases. Our strategy of linking our long term procurement contracts and our sales contracts with price formulas has proven an effective way of managing in a volatile cost environment as we have been able to preserve and grow our EBITDA dollars.

Now, I would like to talk about our outlook for the rest of 2008. I am certainly pleased that year-to-date results are above expectations and fully expect that trend to continue toward the remainder of 2008. Therefore, after excluding Monessen's operating results and special charges from all periods, we are increasing our annual guidance for 2008 sales growth to be between 14% and 17% from reinstated 2007 sales of $1.26 billion, adjusted EBITDA to grow between 14% and 17% from reinstated 2007 EBITDA of $162 million and earnings per share to increase between 37% and 41% from reinstated 2007 earnings per share of $2.49.

Please refer to our press release for a schedule of the excluded operating results for Monessen. We remain very positive about the long-term strength of our primary end markets all over the main railroads and are optimistic about the new distillation capacity in China that will come online in 2009 which reflects our optimism about the continuing global growth with aluminum demand. We look forward to the opportunities of the balance of this year and into the future.

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

Question-and-Answer Session

Operator

(Operator's Instruction) Your first question comes from Saul Ludwig - KeyBanc Capital Markets.

Saul Ludwig - KeyBanc Capital Markets

I am curious at the end of the first quarter call, you did not change your guidance. You expressed some reservation about wanting to see how economic conditions were to play out. It was removed through the second quarter before reconsidering any change in outlook. What is it that sort of change that gives you so much more optimism now than you had at the end of the first quarter because for sure, economic conditions did not get any better as we move through the second quarter. So, I am curious as to why so much more optimistic now than you were just three months ago.

Walt Turner

The first answer of the answer to that is that we really were sort of concerned about the availability of the white ties for the untreated price of the platform and as we mentioned earlier in the call, that really started happening in early June and because availability is increasing I think that was also part of our conservatism at that point in time back in May.

Brian McCurrie

I also think, I do not that we were expecting a potentially bad news. I think we wanted to get a better perspective on year particularly because of the seasonality of our business to be able to get a better hand on what the year is going to be. So, I do not know that we were necessarily pessimistic about the year. I think we just wanted to get a little bit more of the year behind us before we adjust the guidance.

Saul Ludwig - KeyBanc Capital Markets

Next question is you do not sell any pitch in China yet. There is aluminum production there. What are your marketing people tell you about opportunities for potentially penetrating the Chinese market?

Walt Turner

Well, actually Saul we are selling pitch in the Chinese market. It is in a fairly small line but I can tell you the interest continues to grow very rapidly on the oil for and as we mentioned we had some chemical resources there and continue to really work with potential and current customers we have in China. I can tell you that it is not just the aluminum industry there. It is also what I will call the commercial carbon or the electrode manufacturers and that interest and actually selling more pitch, you will see more of it going forward.

Operator

Your next question comes from Lucy Watson – Jefferies & Company, Inc.

Lucy Watson - Jefferies & Company, Inc.

Just a quick question on the Monessen impact, do you have year-to-date EBITDA number?

Brian McCurrie

It is about $2 million.

Lucy Watson - Jefferies & Company, Inc.

And are you seeing the CM&C business, are you seeing any signs of capacity reductions on the part of your competitors in phthalic anhydride?

Walt Turner

On phthalic anhydride, our primary market really our early market is really North America and I think we mentioned on our last call that there were about 250 million pounds or so of production taken out of the industry down in Texas.

Lucy Watson - Jefferies & Company, Inc.

Okay and just one last question, can you give any more clarity on the weather impact on the crossties business and possibly if there was an impact from the flooding in the Middle East on order timing?

Brian McCurrie

Virtually, the sun is shining here in Pittsburgh today. So that is good. Actually that is a good question. I think on the Midwest flooding, most in the Midwest flooding was in the upper Midwest and that actually help bring us some additional volumes in the month of June so that flooding was not a negative impact on us. I think earlier in the second quarter, we did have a lot of rain sort in the lower Midwest which is about were of our procurement area and we were struggling at that point in time which weather to get our ties out of the woods.

Walt Turner

And so that is an annual deal where the first quarter obviously from winter to rain to whatever. That is an ongoing thing that we simply have each year.

Operator

Your next question comes from Steve Schwartz – First Analysis Securities Corp.

Steve Schwartz - First Analysis Securities Corp.

If you could just help me reconcile something, I am referring to this table on the left, table on the press release. The adjusted EPS guidance range now if we just call that say 345, I we were to assume Monessen was going to bring in $0.30 of earnings this year, that puts you up at around 375 which is way above where consensus is right now and consensus assume Monessen existed. Where has the street missed by so much what you guys are going to do this year particularly in the second half?

Brian McCurrie

I think, couple of things, first the $0.30 per share on Monessen is too high a number but I think if we look at the long-term contract that we have with Mittal and again it was pretty well married up with the long-term raw material supply agreements. Plant was actually experiencing deteriorating profitability that if you still look at last year's numbers and this year's numbers you could see that. So, I think part of what you are seeing is the fact that Monessen if ever going to be generating that level of profitability for us. And I think to offset that is to really, a couple of things really, three things.

One is the increased profitability to business. A lot of which we are seeing overseas and that is having a positive impact on us in our effective tax rate that I mentioned during the rep and that is probably a 1 to 2 percentage reduction in effective tax rate and also earning with the net proceeds coming in from the sale, there is also interest and expense reduction.

Steve Schwartz - First Analysis Securities Corp.

Okay so you took out $0.47 from last year for Monessen, you did $0.15 in the first half of this year so you are saying this was actually a declining business at a pretty rapid rate.

Brian McCurrie

If you look at the year-to-date results, I think in the press release I think that shows you that.

Steve Schwartz - First Analysis Securities Corp.

It looks like the second quarter was better than the first. So, that is why I wondered if there was an upward trajectory to Monessen this year and that is where I thought I was conservative in assuming $0.30 this year.

Brian McCurrie

If you look the 6 months profitability for Monessen, it went from essentially $4 million to $1 million so it was about a 75% profit reduction year-on-year.

Steve Schwartz - First Analysis Securities Corp.

On the railroad business, you mentioned that the Class 1's did not really step up their buying until June and you mentioned that the tar insertions are at or above previous year levels. If you consider that it takes 6 to 9 months to season a tie, what that means is we do not see a pickup in your more profitable treatment business until '09. Do you so something different than that in the second half? Do you see some higher profit, what I will call urgency business for treating in the second half?

Walt Turner

Well, I am sorry just the first answer Steve, I think where I mentioned that the commercial ties which is a sort of different size, different specification tie increase, and I think I said that market looks like it is going to continue to be fairly strong as it was in the first half. If we got that overshadowing some of the Class 1 issues but I think I mentioned on the last call we can also go to the vulcanizing, which sort of gives us a better opportunity to treat to ties earlier than earn seasoning. That sort of things as well but I think you are right. We are going to see a stronger with the earn growing and most of the ties are going to see that happen later.

Brian McCurrie

I think maybe a couple additional thoughts on that. I think the second quarter probably was less impacted by the railroads buying patterns than it was by the availability or ability to get ties out from the saw millers because of weather and also because just the overall hard wood market. We did see the railroads increasing the price that they are willing to pay for the crossties which to us is a signal that they are getting a heightened level of urgency in getting these ties into their inventory system but I think your point is probably right although we are expecting the second half of the year to be stronger.

I think one of the things that we are seeing is that we are pushing probably some of these into 2009.

Steve Schwartz - First Analysis Securities Corp.

Okay and then if you could just confirm on this commercial business, is this typically higher margin, out of contract type business that you sell?

Brian McCurrie

Yes it also does include the export orders which itself is a pretty large order such in most of this business in commercials much smaller in our sales orders but I think to one exceptionally be a very large export order that we have in there.

Steve Schwartz - First Analysis Securities Corp.

And that export order is that that it is like 360,000 tires or something like that?

Brian McCurrie

Three-sixty.

Steve Schwartz - First Analysis Securities Corp.

Okay and at the time you announced that order you were expecting a pretty consistent shipment rate across four quarters. Is that still the pace at which that is occurring?

Brian McCurrie

Yes.

Steve Schwartz - First Analysis Securities Corp.

Okay and then just one last question, there have been some articles out recently about the Middle East and Abu Dhabi and Saudi because of the value of natural gas, I understand that they either put on hold or cancelled a number of smelter projects. Is that what you are seeing or hearing about?

Walt Turner

Actually because of the gas in the Middle East, it is becoming more available because of the liquification in ships being built to liquefied gas. That does put a little bit of a concern on some of smelters based on they are going there for cheaper energies so gas values might be increasing but I mean there are four projects right now that three of which have already being built. We have got aluminum consumption that is continuing to grow every year. We know for a fact that three of these projects are going to be completed before it will be starting here really soon. I think one project that was sort of taken up the list if you will was a Rio Tinto project in Abu Dhabi but that really was not even on a rater stream because that was projected that it was built to come on stream late 2012. So, that is really out there but Middle East is still going very strongly. We still expect the aluminum production in release to grow from about 1.8 million tons up to about 4 million tons over the next 2 ½ to 3 years. So, it is still very much there but back to your point, the energy cost might be a tenth higher than what to expect when we first started these projects.

Operator

Your next question comes from Chris Shaw - UBS.

Chris Shaw - UBS

What I wanted to asked has been asked but I guess just on the rail side, I mean are there any new CapEx plans there buying those guys? Mostly what you expect over the next six to nine months mostly maintenance track work and maintenance tire replacement. Is there any one got any new track plan?

Walt Turner

I think from what we have been reading in the short terms 2008 there may have been a couple of new projects that were basically delayed and that goes back maybe six or seven months ago actually but no, I think overall with the long term, those projects are still for real and the railroads, I am not going to quote a number because it is a very large number and I do not want to just quote it but a very large number of these railroads are planning to spend going out several years.

Brian McCurrie

I think the DM&E acquisition is still waiting approval. I think that is for early fourth quarter, that was October that was the last and we have not heard of that slip but that is probably the next really major projects that we see this near term that might get some…

Chris Shaw - UBS

I am sorry because the DM&E might be the approval is up for October?

Brian McCurrie

That is our understanding. It is still on schedule to be approved in October. We do not sort of thing government approval process but that is probably a fairly significant project that will be out there in the late and that will be…

Walt Turner

For next year, yes.

Chris Shaw - UBS

Right, that is a good point and I forget, naphthalene is that price on a formula as well or is it, I know it is based on oil in some regards but was the actual formula?

Walt Turner

Not really, it is truly a market pricing. The demand is really the very strong over the last several years and I think we were expecting it to continue to be quite strong with all of the construction going on and specially in the Asian economies with the, it has been very strong, I think we are going to see it that late for a while.

Operator

Your next question comes from Lee Lignos – Lakeway Capital Management.

Lee Lignos - Lakeway Capital Management

Can you talk about any kind of working capital arrangements you have with Mittal going forward. The second one you mentioned in terms of the proceeds of the sales in $90 million or so, I think you mentioned, I was on the call late but you mentioned paying down debt was a priority, if you could talk about that and I guess so that point where do you guys see the balance sheet kind of towards the end of the year? What coming up close to the refinancing of half of the notes outstanding and maybe you can kind of give us an update Brian in terms of what the market looks like there if you talk to you bankers and then also I guess now that you are I guess historically probably towards the very low end of the range in terms of leverage kind of what the view is going forward as far as proceeds of free cash flow.

Brian McCurrie

That is the working capital with Mittal. I am not quite sure I understand.

Lee Lignos - Lakeway Capital Management

Did you get any favorable terms of them as far as gaining access to coal tar and was that part of the agreement?

Brian McCurrie

We buy a lot of coal tar from Mittal. One of the benefits for us to sell the Mittal obviously is that it helps us to met that relationship.

Lee Lignos - Lakeway Capital Management

Right, okay and so you will be the only purchaser of coal tar from that facility there?

Brian McCurrie

In that facility, yes. We included a contract of long-term contract for that facility's coal tar to come to us. I think one of the things you mentioned I am not sure whether I misspoke or whether maybe you may have misheard I mean I would not say our priority is to pay down debt in the projections that we gave in our guidance estimates. We assumed that the proceeds went to pay down the bank debt.

We have not done anything with refinancing in our guidance that we are giving. We have not reflected any other use of proceeds on paying down bank debts.

Lee Lignos - Lakeway Capital Management

So, the guidance would reflect a lower interest rate then assuming you pay down a $100 million of debt?

Brian McCurrie

No, we did not assume any calling of that debt. It is just it pay down the bank debt.

Lee Lignos - Lakeway Capital Management

The bank debt okay.

Brian McCurrie

Now, a couple of things I think as I look over the balance sheet to reflect at the end of the year, I mean it sort of rolling out the way we are projecting it and something that may not actually happen depending on refinancing or other uses of proceeds. It was an update on the refinancing market. Yes, we watch this a lot. We talk to our bankers. In the market, it certainly seems to be fairly choppy right now. What we are getting sort of as a word is generally speaking is that the refinancing can get that. The pricing may not be beneficial so I would say I our perspective on refinancing right now with the refinancing date coming up in mid October is pretty much the same as it was before which is we do not see a reason to do it soon and if the market is behaving and it gives us a compelling economic answer then we will probably look through refinance and around the middle of October.

I think the cash proceeds certainly from Monessen give us an opportunity to do touch on to really take a look at the capital structure of the company. And from the use of proceeds, I think it is pretty much the same as it has always been. I mean we would love to be able to use our borrowing capacity. I think now it is up 2.1 times that is the EBITDA assuming the Monessen cash closes and we do not want get ahead of our selves we will get 60 days to close.

Lee Lignos - Lakeway Capital Management

Right, what is that in aggregate dollars if you are assuming you pay down all of things that how much debt will there be go former for that?

Brian McCurrie

It would not be any bank debt.

Lee Lignos - Lakeway Capital Management

Oh, I am sorry, how much debt from the notes would have been roughly?

Brian McCurrie

If we use the proceeds to pay down the notes?

Lee Lignos - Lakeway Capital Management

If you assume zero bank debt at the end of the year at the note out.

Brian McCurrie

Okay, it is about, it is a $50 million of bank debt right now and about $90 million of proceeds so it is roughly $40 million we would go against the notes. That sort of methodology.

Lee Lignos - Lakeway Capital Management

Okay so it is a 300 range then, right? Both 300s?

Brian McCurrie

Yes.

Operator

Your next question is a follow up from Steve Schwartz – First Analysis Securities Corp.

Steve Schwartz - First Analysis Securities Corp.

Just one on Monessen from an operational standpoint, given the coal tar situation in North America, you are giving up some captive supply. Was that a significant part of your total coal tar supply?

Walt Turner

No, we are going to continue to purchase that coal tar, Steve and that is about 3.5 million gallons of tar per year but the long term Mittal seems to purchase it for us.

Steve Schwartz - First Analysis Securities Corp.

Okay, 3.5 million gallons and so of your total coal tar, consumption, how much is that?

Walt Turner

Globally, it is less than 2% I would guess.

Operator

There are no further questions at this time.

Walt Turner

We certainly thank all of you for participating in today's call and appreciate your continued interest in our company. I believe that we continue to be well positioned for a strong 2008 and beyond. Diversity is a key word for us in our major products, our end markets and our geographic locations around the world. We see continued strong demand at our end markets particularly based on the committed aluminum capacity additions coming online in 2009. We are very well positioned given the capacity additions on their way in China, our balance sheet can easily support not only these additions but also other potential opportunities to stimulate growth or create shareholder value particularly in the light of the cash in flow that resolving from the sell of the Monessen coke plant.

And finally, we remain firmly committed to enhancing shareholder value by executing our strategy and providing our customers the highest quality products and services while continuing to focus on safety, health and environmental issues. We look forward to speaking to you again and again thank you very much for participating.

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Source: Koppers Holdings Inc. Q2 2008 Earnings Call Transcript
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