Koppers Holdings Inc (KOP) 2006 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Koppers third-quarter 2006 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. McCurrie, you may begin your conference.

Thank you, and good morning, everyone. Welcome to our third-quarter earnings conference call. My name is Brian McCurrie, and I am the Vice President and Chief Financial Officer 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 please call [Rose Selinsky] at 412-227-2444, and we can either fax or e-mail you a copy.

Before we get started, I would like to remind all of you that certain comments made during his 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 its objectives, plans and projected results will be achieved. The Company's actual results could differ materially from such forward-looking statements.

On the call this morning, in addition to myself, we have Walt Turner, President and CEO of Koppers. At this time, I would return the call over to Walt.

Thank you, Brian, and welcome again to our third-quarter conference call. The third-quarter results reflect a very strong performance for Koppers, with sales increasing to $314.4 million, or $44.8 million above 2005 levels, and adjusted EBITDA increasing to $40.7 million or 28% above those 2005 levels.

Not only have we continued to see strong demand in our core businesses, including exceptional chemical pricing in the quarter, we began also to realize certain synergies in our North American Carbon Materials and Chemicals business from the Reilly transaction. In our global Carbon Materials and Chemicals segment, third-quarter sales increased 26% to $203.6 million over 2005, primarily as a result of the contributions from the Reilly transaction and higher sales prices on our chemical products.

As mentioned on our last call, we anticipated a shortfall in pitch volumes, due to several supply issues that forced us to declare force majeure on our North American carbon material contracts. We believe that this condition is temporary, and are confident that we will be on a force majeure by year end.

Sales of the Railroad and Utility Products in the third quarter were $110.8 million, an increase of 3% or $3.2 million above 2005. Consistent with our normal seasonal buying pattern, we saw a sales mix shift to lower-dollar but higher-margin treatment services. We continue to be very positive about the demand for our railroad products and the overall strength of this market segment as we move into 2007. As confirmation of this statement, our wide tie inventories at September 30, 2006 were 7.5 million ties, compared to 6.8 million ties at September 30, 2005.

During October, we had communicated an interruption of our plant operations, due to a pipeline failure at our Monessen, Pennsylvania coke facility. I am pleased to tell you that within eight days, the plant was back in full operations. However, we do expect that there will be about a $600,000 negative impact on the fourth quarter, caused largely by energy costs that had to be expended while the ovens were on hot idle.

After Brian completes his review of the financial results, I will wrap up with closing remarks and answer any questions that you may have.

Thank you, Walt. Before I get started, I would like to refer everyone to our press release, where we have provided detailed reconciliations between GAAP numbers and the numbers we refer to as adjusted, as well as the nature of the specific adjustments that we are making.

Sales for the third quarter increased 17% to $314.4 million, as compared to $269.6 million for the prior year's quarters. The increase in sales was largely a result of higher sales in the Carbon Materials and Chemicals segment, which increased 26% or $41.6 million. The increase in this segment was primarily due to $21.2 million of sales from the acquisition of certain assets of Reilly Industries, $16.2 million due to higher chemical pricing for phthalic anhydride, carbon black feedstock, carbon black and naphthalene, partially offset by reduced volumes due to lower levels of coal tar distilled in the quarter. These increases were negatively impacted by lower carbon pitch sales of $1.1 million, reflecting lower volumes, partially offset by increased prices.

Sales in the quarter were also positively impacted by increased freight of $3.3 million and exchange rate movement of $2.8 million. Sales in the U.S. railroad market increased $3.2 million or 3% for the Railroad and Utility Products group.

On a year-to-date basis, sales were $876.9 million, compared to $767.9 million in 2005. The increase of $109 million or 14% was due to higher sales of $29.8 million or 10% in the Railroad and Utility Products segment, primarily due to higher volumes of ties for the U.S. railroads and $79.2 million or 17% from increased sales in the Carbon Materials and Chemicals business, driven primarily by stronger pricing due to higher raw material costs and increased volumes from the Reilly transaction that increased sales by $36 million.

Adjusted EBIT for the third quarter was $32.4 million, excluding $100,000 of charges. This compared to $23.5 million of adjusted EBIT for the third quarter of 2005 that excluded $1.4 million of charges. The increase in adjusted EBIT of $8.9 million or 38% relates to $7.5 million of higher profits in the Carbon Materials and Chemicals segment, due primarily to increased prices caused largely by higher raw material costs, improved chemical prices and higher margins on incremental volumes from the Reilly transaction and increased EBIT in the Railroad and Utilities segment of $1.4 million, due primarily to higher prices and favorable expense experience compared to the third quarter of 2005. This was partially offset by increased unallocated expenses of about $400,000.

Adjusted EBITDA for the quarter was $40.7 million, including $8.3 million of depreciation, amortization and accretion, compared to $31.9 million in the third quarter of 2005. As we have previously discussed, we expect that due to normal seasonal buying patterns and lower phthalic pricing in the fourth quarter, that profits will be below those earned in the third quarter.

Year-to-date adjusted EBITDA of $101.5 million that excludes $6.4 million of charges, compared to 2005 adjusted EBITDA of $86.8 million that excluded $3.6 million of special charges. The increase of $14.7 million or 17% resulted from higher profits in Carbon Materials and Chemicals of $11.1 million, primarily from increased prices and margins, and $3.9 million in Railroad and Utility Products from higher volumes for the U.S. railroads and improved margins for utility products in both North America and Australia, partially offset by $300,000 of increased unallocated expenses.

Net income for the third quarter before after-tax charges of $100,000 was $12.5 million, compared to $5.4 million in the third quarter of 2005 before after-tax charges net of minority interest of $800,000. This is due primarily to higher operating profits, lower interest expense and a reduced effective tax rate that was impacted by $2.2 million for energy tax credits recorded in the third quarter.

Quarterly earnings per share, adjusted for charges and using shares outstanding at September 30, 2006, were $0.60 per share compared to $0.26 per share in 2005. I believe that the spike in the phthalic pricing in the third quarter and energy tax credits positively impacted EPS by about $0.09 and $0.11 per share respectively in the third quarter.

We do expect that if oil prices remain where they are, that our effective tax rate for 2006 will more than likely be in the 35% range. We will address 2007 more specifically when we discuss next year's guidance at our next call.

Year-to-date net income excluding after-tax charges of $12.7 million, was $24.1 million, compared to year-to-date 2005 net income excluding $1.9 million of after-tax charges net of minority interest of $11.3 million. Year-to-date 2006 EPS before after-tax charges were $1.16 per share, compared to year-to-date 2005 EPS before after-tax charges of $0.55 per share. In order to be comparable, 2005 EPS was calculated using the same number of shares used to calculate that 2006 EPS.

Net debt at September 30, 2006 was $442.9 million, compared to $493.3 million at December 31, 2005, and reflects a $101 million decrease for the redemption of debt in March from the IPO proceeds, partially offset by increased borrowings of $12.3 million for the payment of a pre-IPO dividend and IPO-related costs and $45 million for the Reilly transaction. We have seen working capital increases, not only related to the Reilly transaction but also due to increased cost and prices in our markets.

Capital expenditures, excluding the Reilly transaction, through September of 2006 were $18.6 million, compared to $13.6 million in 2005, with the largest part of the increase related to the Australian carbon black plant expansion project.

Turning to our operating segments, first the Carbon Materials and Chemicals segment, where sales for the third quarter were $203.6 million compared to $162 million in the third quarter of 2005. This increase of $41.6 million or 26% was driven primarily by increased sales related to the April 28, 2006 acquisition of certain assets of Reilly of $21.2 million and $11.7 million, due primarily to higher prices in phthalic anhydride and naphthalene.

Prices for carbon pitch increased on average 13% over 2005 levels, and primarily reflect higher raw material costs, offset by lower volumes of pitch sales due to raw material supply restrictions in North America. Prices for naphthalene, phthalic anhydride and carbon black feedstock increased over 2005, due to higher prices that for phthalic and carbon black feedstock related to their oil-based benchmarks used for market pricing.

On an EBIT margin percentage basis, we did see adjusted EBIT margins in this segment increase from 9.5% in 2005 to 11.2% in 2006. 2006 adjusted EBIT in the segment of $22.9 million compares to 2005 adjusted EBIT of $15.4 million before $700,000 of New Zealand penalties.

Turning to our other operating segment, sales for Railroad and Utility Products were $110.8 million for the third quarter of 2006, compared to $107.6 million in 2005. This third-quarter increase of $3.2 million or 3% was positively impacted by higher prices, a 7% increase in treatment service volumes, a 2% increase in wide tie purchases, partially over offset by lower volumes for utility poles and treated crossties.

On a year-to-date basis, we saw sales increase 10% to $334.3 million for the first nine months of 2006, compared to sales of $304.5 million for the first nine months of 2005. This increase resulted as sales of North American railroad products increased $27.8 million or 11.5% in the first nine months of 2006 compared to 2005. The increase in North American railroad sales was driven by increased nine-month volumes for crossties that averaged 9% above 2005 levels, at an average 4% price increase.

Year-to-date adjusted EBIT was $25.7 million, including equity interest in our concrete tie investment and excluding $4.7 million for loss on sale of Alorton, plant closure costs, severance, IPO-related costs and the Grenada verdict, compared to adjusted EBIT of $21.1 million for the first nine months of 2005. Adjusted nine-month EBIT margins for the segment increased 7.7% in 2006, compared to 6.9% for the same period in 2005, as a result of increased volumes and prices in North American railroad products, the benefit of lower fixed costs for the closure of the Montgomery facility in 2005 and improved pricing for utility products, partially offset by increased SG&A allocations to the Grenada trial in the first half of 2006.

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

Thank you, Brian. With respect to our overall markets and key business drivers, such as the global aluminum production, railroad tie insertions and the chemical markets, we continue to have a positive outlook for the remainder of 2006 and into 2007. We were pleased by Alcoa's recent announcement to restart its second potline at the Intalco smelter in Ferndale, WA. I'm sure you all noted the announced merger of the Russian aluminum companies RUSAL and SUAL, and the announcement of their planned investments totaling approximately $16 [billion].

This could be a very interesting development for Koppers. If the Russian aluminum producers invest in newer technologies, as opposed to the older Soderberg technology which they currently use, demand for our higher-quality pitch could actually escalate. This can further accelerate increased demand for carbon pitch that we see developing in the future.

The construction of our Australian carbon black plant continues to be on schedule. We plan to bring that expansion online in the very early part of 2007. [Global] construction at the site is well underway, and all major equipment deliveries have been completed.

Negotiations for a second joint venture in China continue. We are targeting the end of the year for a formalized joint venture agreement, with a completion date of 2008. We are also currently evaluating other opportunities in China, but one of the benefits of the Reilly transaction is that we have additional access to coal tar and carbon pitch in China. We're looking to fully utilize this resource to meet increased demand for carbon pitch that we see in the future.

We have recently seen an easing of the supply shortage of North American coal tar materials, with the conclusion of the Sicartsa strike, a large portion of this line is expected to be back online by the end of the year. Although we have not yet been able to lift our force majeure, we do expect to do this by the end of this year. It is important to recognize that in North America, all domestic coal tar resources are fully committed, and that Koppers is already quite actively importing coal tar products. Future increases or decreases in coal tar availability will be made up or offset against the quantities being imported and the blending of petroleum feedstocks. I think this reinforces the importance of being a global player in his industry, and underlines Koppers' unique position in the market as both a market leader and a global supplier.

To wrap up what we are confirming as an outlook for the year, as Brian mentioned, we do have seasonality in our business, and expect the fourth quarter to be seasonally adjusted downward, compared to the third-quarter results. In addition, even though our plant operations have fully resumed our coke facility in Monessen, there will be some negative impact in our fourth-quarter profits, as previously disclosed. I expect that we will have more tangible guidance for our 2007 year on our next call.

At this time, I would like to open the lines for any questions that you may have.

(OPERATOR INSTRUCTIONS). Bill Hoffman, UBS.

(Technical difficulty) supply in North America. You said you see some of this capacity coming back on, and you are also importing --

I'm sorry. We missed the first part of your question. There was an interruption there. Could you please start over?

Sure, no problem. I just wonder, Walt, if you can talk a little bit more about the coal tar supply domestically. You mentioned one of these facilities coming back on would put some more supply into the market, and then the fact that you are also importing. I just wonder, one, how much of your supply are you importing, and two, if you could just give us some insight into the cost differential for you?

Sure. I mentioned the Sicartsa steel plant in Mexico is back online now after several months of being on strike. So that coal tar is now resumed, and we should have the full impact of that coming into our plants here by the end of this year. That represents around 4.5 million gallons of coal tar annually, so that will certainly help the situation.

As far as the other two areas we talked about, one being one of our tar suppliers is going through a major rebuild of their coke battery, that has been delayed into the fourth quarter, I think primarily because they are waiting for refractory brick which is coming offshore to finish that particular project.

There are a couple of other smaller instances out there where the coke batteries are on a longer coking cycle, producing less coke, generating less coal tar. So we're still working with that. But as you mentioned, having the global presence and the ability to import products, and we are currently doing that, as well as blending petroleum feedstocks to extend, if you will, our total raw materials.

As far as what we're looking at as far as a percentage of -- basically, this is carbon pitch going into the aluminum industry primarily. We are importing a significant volume, but in total, the percentage would be around 20% to 25%, thereabouts, in total, when you look at our carbon pitch total volume. That is in North America.

Of that 20% to 25% that you are importing, what is the cost differential to you all?

That varies, and a big component of that is logistics, as well as the ups and downs in a global regional market that we are buying that at. But most of it is coming from Asia, primarily China.

Could you help us a little bit on the dollar cost differentials?

I think at the current quarter, it is probably say around 20% more expensive to do that, although that business is essentially contracted at that price. It does fluctuate at times. It does flip-flop.

It is a moving target sometimes.

Right.

Can you pass that through to your customers, or --?

Actually, a lot of the customers on the import markets are contracted for supply out of China. So the price is essentially already in the contract. If it is not, if we were to supplement the supply, then it would flow through our contract escalation formulas.

Ray Kramer, First Analysis.

Looking at the seasonality, Q3, Q4, was there any unusual benefit in the third quarter or any business taken out of the fourth quarter that you saw?

Not really. We didn't condition you guys very well to our seasonality. If you go back to the fourth quarter of last year and the first quarter of this year, we probably had a much more linear growth than we would normally have. I think when you see the third quarter and the fourth quarter, I think what we're really talking about -- this is probably more of our tradition and our normal seasonal pattern.

Can you take me through it? I think you hinted at some of the seasonality there, but can you walk me through maybe in a little more detail what the various moving pieces are in terms of the seasonality?

Yes, in the railroad business, for instance, or even in the utility business, as the weather turns, it is going to be much more difficult to get the raw material out of the woods to our plants. So we tend to do less of our raw material procurement in the fourth quarter, and really the same in the first quarter. On the Carbon Materials and Chemicals side, we have seasonal products. We have roofing products and refined tar products that their applications tend to be used in summer months, not in the winter or early spring.

As it gets back to the 13% to 15% EBITDA growth guidance, given what we have seen year to date, I calculate that translates to $24 million to $26 million in EBITDA in the fourth quarter. Year-ago quarter, it was $25 million, and you have done the Reilly since then, so is there anything else going on here? Is it likely that we may see fourth quarter that gives you a full-year EBITDA above that range?

I don't think so, and I think one of the things that we are missing is in the fourth quarter of last year, railroad sales were actually up just under 20%. So if you look at the fourth quarter of 2005, it was really an extraordinary quarter on the railroad side. We do not see that buying pattern to continue.

The second piece is there is a little bit -- if you remember, oil prices peaked at about, what, $78 a barrel, I think, in the July/August timeframe. They have since come down, so we will see some softening in our particularly phthalic pricing.

Since your raw material there is coal tar-based, you get a benefit when oil price goes up relative to coal tar? That is how that works?

Correct. We use coal tar naphthalene as part of our raw materials stream in into our phthalic operations.

Laurence Alexander, Jefferies & Co.

First is just on the phthalic anhydride. When oil was sort of peaking, can you give us a sense of how wide your margins were relative to the industry competitors who are using orthoxylene as their input?

This is just to go with the typical margins. It is basically ortho plus a $0.09 to $0.095 margin for the pricing. So we are obviously getting that off of the ortho. But we're using about 50% naphthalene, with the other 50% obviously being ortho. We do have a cost advantage there. I really do not have the actual number in front of me to give you that number.

But maybe to come at it from another angle, if we are thinking about how the comps will look next year in a more normalized environment, how should we think about the degree of margin compression?

Maybe just another -- if you said the first and second quarter were probably more representative of phthalic pricing for us than the third quarter, the third quarter probably added about, what, $3 million -- $3 million to $3.5 million of additional profitability because of that spike in oil prices.

Can you give us an update on trends in the Koppers/Arch JV, particularly on the demand side?

The Koppers/Arch -- obviously, we are producing wood chemical preservatives for the wood treating industry in the Australasia market. I do not have specifics, but I can tell you that as an example, Japan was a little weak this year of that market on wood treating chemicals, and also some of the other Asia countries were a little weaker than normal. But overall, it has been a fairly steady business for us. It is a small business, about $[15] million of revenue per year, and we continue to really look at expanding some of those preservation chemicals into China, which as you recall, we have got two people on the ground there doing that.

So it is, I guess, a little bit of a downturn overall in total, depending on which country you are looking at. Australia/New Zealand continue to be pretty much at normal levels, I would think.

Earlier in the year, we had seen some compression in margins, particularly because raw material costs were escalating. A large part of their business is around [CCA]. But in the latter half of the year, the price increases have been going through, so we have actually seen some improvement in this business over the year, although I would not say it's been overly dramatic.

Then finally, you mentioned the -- as the Russian technology, if the Russian producers switch to more modern technology, that would be beneficial for your carbon pitch demand. I just wanted to see if there was any rules of thumb you might want to give us as we trace announcements coming from that side?

It is a little too early to talk about that. Basically, when you looked at Soderberg technology, there is a different quality of pitches there, and I think the technology available in Russia to supply carbon pitch to the industry there is an older distillation technology. So we really see this as these smelters now under one ownership continue forward, I am sure they're going to spend more money on getting more Western standard quality products, such as carbon pitch or calcined petroleum coke. So as we see that developing, that's when we will be able to talk a little bit more about the specific opportunities that we might have there. But for sure, we're following that going forward.

Nils Wallin, Credit Suisse.

A question on these non-conventional tax credits. Could you give us some guidance on how frequent you expect to have this? Is this something that has to do with the relation to oil prices? Just a little bit more guidance on that?

Yes, we are eligible for these energy tax credits because, believe it or not, from our coke production at our Monessen facility. The way the legislation is drafted, it basically equates a BTU value with the coke, and then you calculate a tax credit off of it that is somehow magically worked through the price of a barrel of oil. So if you looked at the way the year started, with oil escalating the way it was -- there was a cap on it, by the way, so theoretically, the higher the price of oil, the less incentive that would be needed for people to introduce alternate fuels. Coke is not alternate fuel for oil, but the way the legislation was structured, that is the way it was structured.

But because of the way that the price of oil had escalated through -- I guess really through August, we had not recorded any tax credit benefit in the year. Now, with the price of oil dropping and with some of the projections we're seeing, we look like we can realize probably about $2.8 million, $2.9 million this year of a full tax credit that would be that would be about $5 million. So if the price of oil conceivably is low enough, we could realize a full $5 million benefit. Based on where the price of oil is now, it looks like to us like we're going to realized roughly say half of that benefit.

Roughly half of that in the fourth quarter, or half -- you've already realized $2.2 million, right?

Right. We have already realized $2.2 million. But what it really is going to do for us is it's going to lower our effective tax rate. So I think if you looked at our effective tax rate for the first six months of the year, it was probably 43%, 44%. So what's going to happen is it's going to be 35% for the full year, although -- one of those things. Although we're not changing guidance at the EBITDA level, there is going to be a fairly significant change, I think, at the net income level.

Now, with regard to the Russian producers switching away from the Soderberg process, I thought that you guys had a particular type of coal tar petroleum pitch blend that actually was successful with the Soderberg process to reduce emissions.

We do, yes.

So is this to say that you win either way, or is it you're going to win --?

Well, it is going to be a little bit of both. I mean, this is not going to happen overnight, as far as transitioning. Obviously, new smelters that would be built in Russia would definitely be used in the pre-baked anode technologies. But again, on the Soderberg -- and I think more so on Russia -- you have had very old operations that have been there for quite some time, and it looks like you're going to see new smelters being built to replace these older plants. I think that is one way they will transition.

But obviously, like we currently do, as we just mentioned, we also have what we call a special Type A pitch that has a lower pH content that is being used by Soderberg. So little bit of both, if you will.

Steven Schwartz, KeyBanc.

To start off, it looks like you got a lot of your gains this quarter from pricing. I'm trying to figure out how much of that came just as an automatic contract step, and then how do those contracts work once raw materials start to back off? Does pricing then step back? What happens there?

Well, I think a couple of things. Do not underestimate the impact of the Reilly volume on our business in the third quarter. The third quarter was really the first quarter that we were able to demonstrate what that acquisition really meant for us. So I do not know that I necessarily agree that is all pricing.

As far as the contract formulas go, these are off the top of my head. I'm not exactly sure what the net impact of the pricing change was in the second quarter. But it would work if the prices were going down. It would work theoretically the same way. There's about a three to six-month lag in our price adjustments. So in an escalating environment, we're a bit behind the curve, but in a declining environment, we are a bit ahead of the curve.

By three to six months?

Right.

Volumes -- it looks like some volumes were down, and you have made it clear that that is mostly due to supply of coal tar. Is it all due to supply of coal tar? I remember in the first quarter that -- I think it was the first quarter, Brian. Correct me if I'm wrong. But I think you guys cut out some low-margin carbon pitch business, and you were expecting to use the seasonal roofing pitch business to make up for that volume until you could recover some of the lost carbon pitch business that would come about now. So with what has happened to the volume, is at all because of the coal tar supply, or are there are other demand factors or policy changes that are affecting that?

Your point is correct that at the beginning of the year that we were planning on doing that, although I think with the reduction in the supply of coal tar, we really prioritized getting all of the coal tar to be used for carbon pitch production. So that -- although we originally talked about doing that, I think a bit of the shortfall in our coal tar supply in North America really put the kibosh on that. So we ended up producing carbon pitch as much as we could, because of the force majeure issue.

So in general, demand is still strong in the end markets, and you have not --?

Yes. That's right.

Some of it, also -- for instance, we do ship carbon pitch by ocean vessels, and at times you'll have timing issues on volume, so there's a little bit of that, too, here or there.

But I think your point is absolutely right. Fundamentally, we do not see any decline in pitch demand. It's strengthening, if anything.

In your last conference call, you talked about the pricing pressure that crude oil was putting on coal tar, because it was high. Can you give us an update, since crude has retreated a little bit, what has is happening with pricing on coal tar these days?

The one concern we had for this year was higher coal tar pricing in China, where we saw a fair amount of tar being burned there. But over the last several months, we have seen -- which makes a lot of sense here, in that coal tar is a very costly energy, if you will. So the Chinese were looking at more on the coal fluidized bed type processes, and obviously when they [bundled some] coal there in a fluidized bed coal, that that certainly puts less emphasis on using coal tar as an energy.

But as we said at the last phone call, coal tar does have a significant BTU content when you compare it to other energy sources. However, there are issues around it, as far as permitting, as far as viscosity being higher, which has to be blended with (indiscernible) of some sort, versus different types of equipment to actually burn the material. So there continues to be, to answer your question, a little bit more of a direction of coal tar values increasing, and we will to see how far that goes down the road here.

But there is a little pressure on higher raw material costs, and obviously, we're watching that closely. Again, that increase would apply towards pricing escalation formulas that we have within our long-term contracts.

At what point or at what price would crude -- if you had to estimate, at what price would crude have to drop to before some of that pressure for BTU value on coal tar subsides?

That is a tough question to answer, as far as picking out a range. I really do not know. Again, it depends on the regions of the world as well. So it would be difficult to say whether a certain range would impact that or not. Obviously, as you get down to $20 a barrel oil, it would have a major impact. But I just do not know what that range would really be.

Than just one last one on the CSX contract. How are things going there?

Well, we are negotiating currently, started I think within the last couple or three weeks, and we're hoping that we would complete those negotiations end of November/early December timeframe.

Kevin Loome, T. Rowe Price.

I was wondering if you could take your EBITDA estimate and try to extrapolate that into a free cash flow estimate? Because while EBITDA is trending much higher versus last year, the cash flow from operations minus CapEx is not. I know that is all because of what we have seen in raw material costs for you guys this year, but I was just wondering if you're willing to throw out a guesstimate of what actual free cash that might be used to pay down debt would be this year. Or maybe you could take a stab at 2007, assuming that raw material prices do not go up anymore or do not get any worse than what you've seen this past year.

Let me just maybe do that the best I can. I would say that although our goal is to continue to pay down debt, the objective this year, because we were investing in things like our carbon black plant expansion, we had a fairly substantial CapEx program that was budgeted this year. That was about $35 million, $36 million. We really were not planning to pay down debt this year. Throw on top of that the Reilly acquisition, which was not in our original plan, and we're probably going to end up with a bit higher debt than what we would have anticipated, although I think our leverage ratios will probably be better as the Reilly profit rolls into our income statement.

I think just from sort of a pro forma free cash flow model, if you want to walk through some of the items, if you start with the adjusted EBITDA and our pro forma cash interest costs probably going to be about $31 million, $32 million. Cash taxes probably around $7 million, $8 million, although these tax credits are very intriguing and can have a very significant impact on that.

Our working capital has been more of an investment for us this year than what we had expected. We normally do not really have much in the way of working capital growth, but with both the Reilly acquisition and I think that raw material cost increases that have raised prices for us, we have seen a bit higher working capital investment this year than what we would normally have seen. I think when we talk at our next call about what our sales growth target is going to be for 2007, you'll probably get an idea I think of what working capital might need to be for next year.

Baseline capital expenditures, we're going to probably -- well, not probably. We will ramp up the carbon black plant expansion I think by the end of this year. Whether some of those bills actually trail over to year end or not, they might, but that is just a timing issue. We would see CapEx next year coming back down.

So I am not exactly giving you the answer that you're looking for. But I think to summarize, we're not anticipating that there is going to be debt to pay down this year, although we do see opportunity for more positive cash flow next year.

So is it safe to assume that for 2007, the working capital situation gets better, directionally at least, for you guys? Or is that not --?

I would not make that assumption yet. I think we're still in a period of certainly raw material cost escalation. So I think we will probably be able to better talk about that at the next call. On the other side of that, is the EBITDA number has grown faster than what I think we had originally anticipated.

Saul Ludwig, KeyBanc.

You went through these volume and price and FX in the carbon materials pretty quickly. How much was the price effect? You said it was $16 million or $12 million?

This is just in the Carbon Materials and Chemicals side?

Yes, we'll get to the other in a minute.

We have a little under $12 million, due to higher prices for phthalic and naphthalene, $21 million of additional sales from Reilly. That is about $32 million --

The pricing was how much?

$12 million, but that is for phthalic and naphthalene.

How about for the whole shooting match?

That is what I am looking for. It looks to be about $25 million in total.

In price?

In price, yes.

In the Carbon Materials section?

That is in Carbon Materials, yes.

That sounds like a big number. So the $25 million from price?

Correct. Then let me just see how much of that is coming out of total pitch. About $6 million of that is coming out of pitch, including the Reilly piece.

(Indiscernible).

Yes, the largest piece was for phthalic, which was about $8 million.

So the total prices were $25 million?

Correct.

So volume would have been down, what, 5%, 6% or something like that?

Well, with Reilly, it was up 13%.

No, but Reilly was -- we already calculated that as 13%. Maybe we can work on this maybe offline.

Just hold on, I am trying to back the Reilly in my total numbers here. I cannot put my hands on those numbers right now.

Okay. We can come back. Then in the railroad ties sector, you said the untreated ties were up a couple percent?

Right.

And you said that the treatment services were up 7%.

Right. Services were up 7%.

How about the treated crosstie sales?

The treated crosstie sales were --

Units and volume, we're talking about.

Yes. Volumes were down about 13%, and prices were up 5% on the treated crosstie piece.

Your gross margins in the Carbon Materials business of 16.6% was the highest we have ever on record. Was that due more to let's say price to raw material cost improvement, or was it due to -- how much was due to fixed costs being spread over more units? In other words, was it due to pricing relative to cost improvement, or --?

It is really two things. Part of it is pricing, but the other part is the Reilly acquisition. It is really --

That would give you the fixed cost absorption.

Right.

So that is going to stay with us now for the next three quarters until it gets anniversaried next year in the third quarter.

Correct. Now there is --

So that is a plus.

There is still some seasonality in that. If you look at Reilly, it probably impacted our profits by about $4 million to $5 million in the third quarter. Because of the seasonality in the business, that will come down a little bit in the fourth quarter, but yes, a full year of the Reilly benefit will be very good.

Then we'll get that next year in the first half of the year, until we anniversary it.

Yes. We will get the other half of that in the first part of next year.

You said something about the tax rate year to date was 44%? It was reported at 34%.

No, no. It was at the second quarter. Yes, it was adjusted to 34%, 35% in the third quarter. I was just giving you the example of what the impact of the tax credits had on the effective tax rate.

Got you. Great. Good quarter.

Michael Eng, TIAA-CREF.

How much availability do you have on your revolver right now?

About $45 million.

Ben Segal, Winchester.

What is your target for next year for your cash levels and debt levels?

We have not given targets out for next year. We're going to talk about 2007 at our next call.

With the upgrade, if the Russians upgrade their plants, I do not really have a sense of what kind of impact that would mean to you, to Koppers. Can you give us some kind of metric to (indiscernible) follow? I know you have got given a lot of general answers, but it does not really help.

I think probably one of the important takeaways for this is there is not going to be anything really coming out of Russia of any substance, I think, in the next year or two. So if they're going to build a smelter, a new smelter with new technology, it is probably going to take two years if they just started today, although I think certainly six or eight months ago, when we were looking at this, the Russian potential was probably not on our radar screen. What But this has done is it has put it on our radar screen, but it is still out there a couple of years away.

I think that is the message, and this is something we have not talked about in the past, and going forward on a two to three-year long-term outlook, Russia is maybe as important to us as China currently is, with our joint venture there and things we're doing. We just have not talked about this in the past. I think this is sort of a (technical difficulty) project that definitely we will be following as we go forward here.

Then over the next year or two, is there anything that could surprise you on the upside?

On the upside? As Brian says, when you're talking aluminum, which is really the driver for us going around the world, it takes a minimum of two years to construct a smelter, so I think over the next two years, we pretty much know what is being built out there. You've got the Oman project going forward. Obviously, Alcoa has announced their Iceland smelter starting up here early 2007. Also, I see opportunities in China that we are looking at. So we pretty much know what is going on out there in the next 18 to 24 months, from an aluminum carbon pitch requirement point of view.

What is your optimal debt level?

When we started off, I think we were at about 3.7 times debt to EBITDA, and I think we are at 3.6 now. We would like to get that down below 3. But I think we're always going to have an amount of leverage, and the Company is very comfortable carrying that amount of leverage. I think the one caveat there would be if an acquisition were to come along, certainly anything that was as good as the Reilly transaction was for us, we would jump on that.

Bill Young, Credit Suisse.

I am still confused on a couple of things. I know you said you were not going to talk much about 2007, but what should we be thinking about going forward as your ongoing tax rate for our model?

That is a hard one to answer. I think if the price of oil was where it is today, for next year, and it stayed where it was -- which is a big if -- I think you would see what potentially our tax rate stay at the 35% level. I cannot do very much, and I am not very good at controlling the price of oil, but I think based on where we are today, it could stay at 35%.

Well, that is helpful. If you cannot control it, at least you should be able to predict it.

Now my second question -- I am kind of getting at, I think, what a couple of people have asked already. Is there any way you can quantify -- I know you have to strip out Reilly and [all this, I think]. How much did you get in price over and above your raw material and other cost pressures? What I am trying to do is figure out do you really have a little bit of price flexibility, or a decent amount, when it comes to say your pitch products or your railroad ties, that type of thing, without really taking advantage of the customer but still improving your overall margin and cash flow? Is there any way you can give us an idea about that?

I think on a pitch contract, because the pitch contracts are longer-term contracts, you are not going to see margin increases on the pitch products until we get to a contract renegotiation stage. The price formulas tend to pass on the costs, so they actually compress our margin percentages.

On the railroad side, it is the same thing. You tend to look more towards when the contracts get renegotiated, which is why the CSX contract renegotiation is an important contract negotiation for us. So I think a lot of the price increases, certainly on the carbon pitch side, other than the mix effect that I think we had on the railroad side between treatment services and wide ties, was not substantial. I think we did see price benefits in the chemicals side of the business, particularly in phthalic anhydride. But you did not see, certainly on the pitch side, you did not see us raising margins with the pitch customers.

A follow-up on that -- on average, what percentage of your pitch contracts are renegotiated every year? Is it highly variable?

About 25%.

So maybe there is a little bit to gain there as you renegotiate, given the environment that is out there.

Yes.

(OPERATOR INSTRUCTIONS). Steven Schwartz, KeyBanc.

Brian, when you gave Saul the answer on the railroad breakdown, you said TSO was up about 7% in the quarter?

Yes.

That's right?

Yes.

About how much of the end of last year's buy from the CSX is passed through in the third quarter that could be contributing to that? Because we expected this to be up, I think, in this quarter and in the fourth.

(Multiple speakers) look at the six to nine months air seasoning cycle. Yes, you're really starting to see the fourth-quarter buys coming through in this quarter, although I think you're going to continue to see it. The first quarter was significantly higher volume also on wide ties for us. So I think that is going to continue here.

So it is not as simple as to simply say just 30% of that CSX slug came through in the fourth quarter, or 40%? You cannot just simply say that?

You're probably not too far off, just because of the normal cycle.

In the Q you guys put out this morning, you made a comment about the Stickney plant and the Illinois EPA. I guess the site investigation is going to come out in the fourth quarter. Will there be any financial impact related to that?

No. Well, probably not. I cannot say no, because it is not done yet. There are other studies that have to be completed, risk analyses and discussions and sitting down with the IEPA to figure out exactly what, if anything, they want done on the plant.

Now, included in that is going to be Beazer, because obviously the environmental legacy issues related to the Stickney plant are going to be Beazer's. So they're going to be an important part of that conversation as well. I honestly do not think we are going to have any real specific news on that until next year kind of timeframe.

Chris Shaw, UBS.

Just a point of clarification on -- you were talking about 2007 [possible] tax rate. If it is our idea that oil will be up next year, does that mean a greater chance that your tax rate will be 35% next year?

No, it's actually if oil goes up, it could phase out part of the tax credit.

Oh, okay, it's the opposite.

So the higher oil prices are, the less likely we get the credit.

All right. That is what I was trying to figure out.

Could you help me understand wide tie volumes? I guess they were like $7 million at the end of this quarter, and they were up year every year. But it is a seasonal pattern that pretty much repeats every year, that they are lowest at some point in the year and they're higher at some point in the year?

Yes. It's supposed to. It just did not do a good job of repeating this year. It is normally much lower in the fourth and the first quarters. Unfortunately, this year -- fortunately for us, not unfortunately, it was actually much higher in the fourth quarter of last year and the first quarter of this year, and that was really the CSX Railroad ramping up their program.

But you would see them declining probably during the fourth quarter from the third-quarter level?

Probably just -- yes, a bit, yes.

Have you updated your view on what the EBITDA contribution from Reilly is going to be? I think before, you had said it was about $10 million? I cannot remember.

Well, we said it was 3 to 4 times on $45 million. So on an annual basis, if you use the 3 times, it is $15 million, and the 4 times, it is $11 million or say $12 million.

And you have not changed that view?

We have not changed that view, although I think the impact in the third quarter of $4 million to $5 million is probably trending more towards the upper end of that range.

At this time, I would like to turn the conference back over to Mr. Turner for closing remarks.

Thank you. We thank you for your participation in today's call, and appreciate your continued interest in our company. We continue to see strength in our core aluminum and railroad markets, and are optimistic that these trends will carry on into 2007. The Reilly transaction looks like a tremendous addition to the Company. We remain committed to enhancing shareholder value by executing our strategy of providing to our customers for the highest-quality products and services, while continuing to focus on our safety, health and environmental initiatives. We certainly look forward to speaking to you again soon. Thank you.

This concludes today's conference call. You may now disconnect.