Koppers Holdings Inc (KOP) 2007 Q2 法說會逐字稿

Good morning. My name is Amy and I will be your conference operator today. At this time I would like to welcome everyone to the Koppers Holdings, Inc., Second Quarter 2007 Results Conference Call. (OPERATOR INSTRUCTIONS) Mr. Snyder, you may begin your conference.

Thanks, Amy, and good morning everyone. Welcome to our second quarter conference call. My name is Mike Snyder and I am the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website or please call Rose Salinsky at 412-227-2444 and we can either fax or e-mail you a copy.

Before we get started I'd like to remind all of you that certain comments made during this conference call may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties including risks described in the Company's filings with the 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.

I'm joined on this morning's call by Walt Turner, President and CEO of Koppers, and Brian McCurrie, Vice President and CFO. At this time I'd like to turn over the call to Walt Turner. Walt?

Thank you, Mike. Good morning everyone and welcome to our 2007 second quarter conference call. To say the least, I am very pleased with our second quarter results. Sales increased 21% to $360 million, EBITDA grew 66% to $54 million and basic earnings per share increased $1.08 compared to $0.31 in the second quarter of 2006 and $0.51 first quarter 2007. During the second quarter we continued to benefit from the positive momentum in our core markets as well as strong contributions from our more seasonal products. We will offer greater detail of these trends later in the call.

In our global Carbon Materials and Chemicals segment, second quarter 2007 sales advanced 29% to $236 million as volumes increased 11% primarily as a result of contributions from the Reilly transaction and increased sales of distillates and refined chemicals. Average prices in the quarter increased 13% due to higher sales prices for carbon material products as a result of higher raw material costs and higher contract pricing.

Prices for chemical products were strong as global commodity pricing for naphthalene and phthalic anhydride improved an average 30% and 11% respectively over the second quarter 2006 levels. I was very pleased to see second quarter adjusted operating margins in this business segment increase to 14.3% from 8.9% in 2006.

Sales of railroad and utility products in the second quarter were $124 million, an increase of 8% over the second quarter of 2006. The key drivers for this growth were higher volumes of treated crossties, treatment services and creosote, partially offset by lower white tie volumes which were reduced from abnormally high buying patterns in the second quarter of 2006. Average margins increased to 10.5% from adjusted margins of 6.7% in 2006 due to a shift in the product mix towards delivery of treated products and services and new contracts.

Early in July we announced that we sold our majority interest in our Koppers Arch joint venture to our minority interest owner, Arch Chemicals. This business was a non-core chemicals business with no linkage to our carbon materials business.

For the first six months of 2006 this business contributed $27 million of revenues and approximately $100,000 of net income. That's actually from the first half of 2007. Through the sale we were able to realize cash proceeds of approximately $15 million that will be used for debt and interest reduction.

After Brian completes the financial review, I'll give you a status update on our core end markets as well as provide some insight into what we're expecting for the remainder of 2007. Brian?

Thanks, Walt. Before I get started I want to refer everyone to our press release where we've provided detailed reconciliations between GAAP numbers and the numbers we refer to as "adjusted" as well as the nature of the specific adjustments we are making. There are no adjustments that have been reflected in our 2007 second quarter results.

I would like to point out that the pre-tax gain of approximately $9 million from the July 2007 sale of our interest in Koppers Arch will be reflected in the third quarter results of the Company.

Sales for the second quarter increased 21% to $360 million as compared to $297.9 million for the prior year's quarter. The increase in sales was the result of higher sales in the Carbon Materials and Chemicals segment which increased 29% or $52.5 million and higher sales in the Railroad and Utility segment which increased 8%, or $9.6 million.

The sales increase in the Carbon Materials and Chemicals segment was due primarily to a 17% or $31.7 million increase in sales of carbon materials, a 4% or $6.6 million increase in sales of distillates, a 5% or $9.1 million increase in sales of coal tar chemicals and a 3% or $5.1 million increase in sales of other products. Carbon material sales were positively impacted by $16.6 million due to higher volumes of carbon pitch sales primarily related to the Reilly transaction and $9.4 million due to price increases attributable primarily to higher raw material costs and new contract pricing.

Carbon pitch volumes were marginally impacted by lower demand for product in the U.S. and Europe due to production outages at certain smelters and the delay in the start-up of Alcoa's new Anode plant in Norway. We believe that these represent short-term delays in buying patterns and that these volumes will return to expected levels later in the year.

In addition, carbon material sales were positively impacted by $2 million due to increased sales of seasonal refined tar products primarily driven by higher prices in the market.

Sales of distillates were positively impacted by higher volumes of carbon black feedstock and third party creosote sales that increased $3 million and $900,000 above prior year second quarter respectively.

Third party creosote price increases positively impacted sales by $2.7 million and were partially offset by lower benchmark prices for carbon black feedstock of $1 million.

Sales of coal tar chemicals were positively impacted by higher prices for both naphthalene and phthalic anhydride that contributed increased sales of $2.2 million and $2.8 million respectively. Volumes for both products were quite strong with increased naphthalene volumes contributing $2.4 million of higher sales and increased phthalic volumes contributing $1.0 million of increased sales. Overall, Carbon Materials and Chemical sales were positively impacted by 5% or $9.2 million due to foreign exchange.

Sales of railroad and utility products after excluding $2.1 million of sales in 2006 that related to the Alorton specialty track work plant that was sold in June of 2006 increased 10.5% in the second quarter to $123.7 million. Approximately $5.5 million or 5% of this increase was due to increased sales of railroad crossties and treatment services and higher sales of creosote that totaled approximately $6 million.

Second quarter sales of railroad crossties were positively impacted by higher prices that totaled $2.6 million and increased volumes and prices for treatment services of $3.5 million. These increases were partially offset by $600,000 of lower white tie volumes that reflect a reduction from abnormally high volumes in the second quarter of 2006.

Increased sales of creosote due to increased volumes and prices contributed additional sales of $6 million in the quarter and reflect increased levels of tie treatment.

Utility pole and piling sales increased $700,000 to $22.5 million in the second quarter as increased prices were partially offset by lower volumes as we continue our efforts to focus on higher margin business.

The Company's second quarter EBITDA increased 66% to $54.2 million compared to 2006 adjusted EBITDA of $32.6 million that excluded $2.1 million of charges. $17.8 million of this increase resulted from higher profits in carbon materials and chemicals. The increase in carbon materials and chemicals' operating margins from $14 -- I'm sorry, the increase in carbon materials and chemicals' operating margins to 14.3% from 8.9% in the quarter accounted for $13 million of the increase, with remainder resulting from higher volumes.

Adjusted operating profits in the Railroad and Utilities Products segment increased $5.4 million as adjusted operating margins increased from 6.7% in 2006 to 10.5% in 2007 as the product mix shifted towards higher margin treatment services and new contracts.

For the first half of 2007, EBITDA increased 49% to $90.7 million compared to adjusted EBITDA of $60.8 million in the first half of 2006. Net income for the second quarter was $22.3 million compared to adjusted debt income of $6.3 million in the second quarter of 2006 before after-tax charges of $1.3 million.

The Company's effective tax rate in the second quarter was 31.9% compared to 46.2% in the second quarter of 2006 and reflects the recognition of non-conventional fuel tax credits in 2007 and the favorable mix of domestic and foreign earnings.

Basic earnings per share for the second quarter is $1.08 per share compared to $0.31 per share in 2006. On a year-to-date basis, 2007 net income is $32.8 million compared to adjusted net income for the same period in 2006 of $11.7 million. Year-to-date basic EPS is $1.58 per share compared to the prior year period adjusted EPS of $0.56 per share.

Net debt at June 30, 2007 was $450.8 million compared to $451.5 million at December 31st, 2006 and reflects our seasonal borrowing patterns and investment in accounts receivable and inventories. On a pro forma basis, reflecting the proceeds from the sale of our interest in Koppers Arch, our debt would be further reduced to approximately $430 million. On an LTM basis our pro forma debt to adjusted EBITDA ratio is 2.8 times.

Capital expenditures through the first six months of 2007 were $10.9 million compared to $9.4 million in 2006.

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

Alright. Thank you, Brian. Now before I get into the status update of our specific initiatives and provide new guidance for 2007, I would like to take a few moments and talk about our core end markets.

Sales of carbon pitch primarily to the global aluminum industry accounted for 24% of our revenues for the first six months of 2007 and represent one of our core products. Although, as Brian mentioned, we saw some limited declines in the second quarter of carbon pitch volumes due to start-up delays and outages at certain smelters, we see these as only temporary issues. The global aluminum industry continues to invest in new smelting capacity and expansions that is expected to lend approximately 9% more capacity from 2006 to 2008. With global production expected to double in the next 14 years according to our coal and (inaudible) count, we can continue to see consistently growing demand for carbon pitch over that same period. In response to this increase in demand, you will continue to hear more about our strategic expansions of our distillation capacities in China and possibly Russia.

We continue to see consistent growth in the railroad business which accounted for 29% of our revenues for the first six months of 2007. During the second quarter we saw sales of treated ties mostly offset 3% volume declines in white ties being sold. For the most part, this was an isolated case of one of the Class 1 railroads that purchased above their needs early last year driving white tie sale increases in the market above 10% in the second quarter of 2006.

As you may have seen in the recent RTA reports, we are seeing some correction in white tie volumes from unsustainability, high increases in the first half of 2006 that totaled 22% back to amounts more in line with the overall industry trends. We see this, in part, related to the timing of purchases as well as related to the previously mentioned correction by one of the Class 1s. We continue to see growth potential in this market and believe that our strategic positioning will enable us to maintain or even grow our leading market shares. This year it's really a matter of execution. We have substantial quantities of ties at our plants that need to be treated and as you see from our margins this year we have benefited and should continue to benefit from this increase volumes of high margin treatment services.

Demand for distillates representing 6% of our six month revenues remains strong. Carbon black feedstocks which is a raw material used in the production of carbon black that is consumed in manufacturing of rubber products. In North America we sell very little carbon black feedstock since the primary use of our distillate product stream is used as a wood preservation chemical. The primary markets for carbon black feedstock are serviced by our facilities in Europe and Asia. Market demand for rubber products is forecasted at a consistent growth rate of about 4% to 5% per annum. Much like the growth in aluminum demand, much of this growth will be driven by Asian economies.

Pricing for carbon black feedstock is based on a benchmark oil price so there is some volatility as oil fluctuates although we have seen some increases recently. In Australia we do have one carbon black plant that represents 2% of our revenues for June.

Coal tar chemical products representing 4% of our six month revenues are comprised primarily of naphthalene produced in Europe, Australia and Asia with primary end markets in the Middle East and Asia. Although there is seasonal fluctuation of demand for this product, the naphthalene markets have been strong driven by demand primarily for construction in the Middle East and Asia.

Depending on the season, there is price volatility. We have seen some reduction in naphthalene prices recently but they still remain well above historical levels. In North America we utilize our naphthalene as a feedstock that is combined with orthoxylene to produce phthalic anhydride which we sell to our primary customers in the paint and plasticizer industries. For the first six months, sales of phthalic represented 7% of our revenues.

We had originally anticipated reduced demand and pricing for this product in 2007 in anticipation of softening markets. However, second quarter volumes were quite strong. Notwithstanding this recent trend, we continue to monitor end market demand given the somewhat unsettled economic projections for the U.S. Pricing for phthalic anhydride is based on a spread above the cost of orthoxylene and fluctuates accordingly. With the cost of ortho remaining high, we have seen pricing above what was originally expected for the year.

As an update of our profit improvement initiatives, we completed our Australian carbon black expansion early in the second quarter; however we did experience several operating issues that did not allow us to realize the full benefit of the expanded production in the second quarter. We believe these issues are behind us now and that we will see more of a positive impact in the third quarter.

During our recent visit to China, I met with our partners in our new Tar Distillation joint venture to review the status of the new plant construction as well as explore additional opportunities for future expansions there. The engineering phase of the project is nearing completion and we expect to break ground for construction in the next several months and we are still targeting completion by the end of 2008 with commissioning and initial deliveries of product to our customers in early 2009. This fits in very nicely with the new smelter projects coming on line in 2009.

I'm very pleased to be able to tell you that our new raw materials supply contracts in Europe are working quite well and also living up to our expectations.

Based upon our strong results in the first half of this year and the continued strong demand expected for our products, as well as our strong operating environment which creates the opportunity to further improve margins, we are modifying our 2007 guidance. We now expect sales to grow between 13% and 16% from our previous forecast of sales growth of 10% to 13%. We also expect adjusted EBITDA excluding the gain in the sale of the interest we had in Koppers Arch to grow between 20% and 23%, up from the previous forecast of 11% to 14%.

At this time I would like to open the meeting for any questions that any of you may have for us at this time.

(OPERATOR INSTRUCTIONS) Steve Schwartz.

Gentlemen, congratulations on a solid quarter. If I look at U.S. aluminum production, it looks like it was up solidly in the quarter. So despite the outages, do you think that pitch inventories were drawn down during that period or did that business possibly go to a competitor? Where is all the pitch going for this higher production?

Steven, it really depends upon which region of the world that you're looking at. We did, in North America, see a few temporary idles -- a couple of lines in some of the North American smelters. We also, I think as Brian mentioned, the new motion Anode plant that Alcoa is building for the Iceland smelter was delayed a few months which slowed down some pitch shipments there but it just depends which region of the world you're looking at. Typically we're producing carbon pitch to meet customer requirements; therefore, we don't really have major build-ups in, at least at Koppers, on carbon pitch, if you will.

And Steve, specifically with respect to the U.S., I think if certain plants that we supply if they had outages, we would have seen reduced volumes. If other plants that had certain volume increases, they may have been supplied by other suppliers, but that's mainly just timing related. Overall, we're not feeling like we're losing any market share, certainly in North America.

I think coming in the third quarter here you have a tough EPS comp because you took a high level of the tax credits in the third quarter. So that being said, with your outlook would you still expect, even with that tough comp on tax credits, to see a similar number or even better?

Steve, we're not forecasting EPS at this point so we generally are forecasting EBITDA. I think you may see some fluctuation in quarterly EPS, but I think in general, and we try to keep reiterating this, we really want people to look at us on an annual cycle. So, we do have profits that move between quarters -- you do see differences between first and second quarter profitability of the business. We'd like to keep focused on the annual cycle.

And just one last question on gross margin, it was significantly higher in the quarter and typically your third quarter runs at about the same level as the second quarter. Do you expect this higher level to continue?

I think, again, it's a quarterly question versus a year question. You will see differences in our margins from a quarter-to-quarter. Obviously, our margins from first to second quarter were significantly different. And a lot of that is just driven by volumes and timing. One of the things that we see, potentially, in the third quarter is the seasonality. We do start to see a drop off in some of our seasonal business perhaps as early as September. So the timing may drive that.

I don't think -- for an annual cycle I wouldn't use the second quarter margins as our annual cycle. I think you'll see that as the year sort of unfolds but I think you'll -- basically, fundamentally Steve, we have seen margin improvements in the business. I think that's fairly obvious so I think we're fairly confident of that.

Thank you, gentlemen.

Saul Ludwig.

Talk about the tax rate. You had the $1.7 million in credits that would give you $3 million in the first half of the year. What do you expect your full year energy tax credits to be?

Well, I think the full year energy tax credit will be 6. I think one of the things that you'll see is -- because the tax credit amount is a fixed dollar amount it won't offset, as the profitability in the Company moves ahead of our trend, it actually won't provide a fixed benefit or an effective tax rate. But I think the effective tax rate we're still looking at for the year including the tax credits is in the 32% range.

I noticed that you backed off the tax credit in the second quarter. Your tax rate would have been more like, say, 37% or something like that which is much lower than what your historical tax credit is. It had something to do with Australia, I forget.

No. I think one of the things you're seeing -- historically, if you look at last year I think the rate was, what, 40 -- 43%, 44% or something like that? I think you are seeing higher levels of profitability in North America that do drive -- that does drive our effective tax rate down. The earnings that we make overseas has a higher effective tax rate.

You mentioned I think four or five things that were -- that prevented you from even doing better in the second quarter. You talked about some pitch business in the U.S., you talked about the carbon black [hiccup] getting up and running in Australia, you talked about the Alcoa delay in the start of their new project, you talked about railroad ties, white ties being soft because of a tough comp a year ago and I think you mentioned that each of those items should be back to more normalcy in the back end of the year. Just, let's focus on the back end not third and fourth quarters. A, is that true? And B, is there any other anomalies that occurred last year in the back end of the year that we should be mindful of when we're looking at this year's back end of the year?

Yes. I think just to make sure we're balanced, Saul, I think you're right on some of those items, particularly things like the carbon black plant expansion. That's definitely something that we hope to provide better benefit in the second half of the year than in the first half of the year. Things like -- things that I think happened in the last half of last year -- one of the items that was a big driver for us in the third quarter, and I think you will remember this, we were talking about this both at year-end and at the first quarter was the phthalic pricing. And, frankly, orthoxylene prices in the second quarter were higher than what we had expected. Now we have seen those come down a little bit in the third quarter so I think we're still being cautious about sort of phthalic pricing and phthalic volumes as we go into the third quarter.

Now, I think, in context we're talking about 7% of first half revenues. So it's not a huge driver for us but it is something that can give us some volatility in the second half of the year.

And just in terms of the pulse business. You talked about your volume growth, Walt, 11% in chemicals. I forget what you said the volume growth was in railroad ties. What was that?

Well, as you'll remember, I think, from the last call on the railroad side we did have an acceleration of a fair amount of commercial tie sales which we nicely benefited from primarily because of our multiple locations and having the ties available for treatment and so forth. So that really helped out with the railroad, the increase in sales; as well as we saw a very strong tie demand by the Class 1s which they're living up to their tie insertion programs through the first half of this year. On the Carbon Materials and Chemicals side, in addition to the strong global demand for the chemical products, the naphthalene and carbon black feedstocks, again, Reilly's contribution to the first half was quite nice and we continue to take advantage of that transaction that we completed. So, again, more volume throughput through our units and gave us a fairly good improvement in our margins.

It just sounded like from your comments and your press release that you see this business momentum, I guess, in the broad sense, continuing into the second half of the year. Obviously, you had to see a decent July to make that statement. Would that be a correct observation on our part?

Yes.

Great. Thank you very much.

Chris Shaw.

If you look at your EBITDA guidance, even on the highest end of the range, I think, unless I'm using the wrong base for 2006, I think it suggests if you did $91 million in the first half that you would only be doing $72 million in the second half.

Right.

So where --? I know you said to look at the whole year and not the -- well, not quarters, but I thought the halves were a little more closely aligned. So just trying to figure out what you guys are thinking -- I know you already mentioned phthalic as a possible area year-over-year.

I think, generally, Chris, I think -- we didn't condition people very well last year. But I think from a seasonal perspective if you look back at our history we probably have historically had a more significant seasonal impact in the second quarter if you look at the whole year. Now we didn't have that last year. There were a lot of things that happened relative to the first quarter and then the Reilly acquisition that impacted the third quarter that really muddied the waters on that but from just a general trend, we would generally expect second quarter probably to be a bit better than third, and then fourth to be back down with the first quarter. And I think the other one you hit is phthalic does have us a bit concerned although it's been certainly good for the first half of the year. It's just something that we want to be projecting a more conservative approach on.

And then I missed it when you said -- did you give, again, your CapEx for the year? I missed it when you said that.

I did not update it but I think the CapEx guidance we talked about before was around $32 million and I think we're on target for that.

Still the same. Great. Thanks.

Ivan [Markuse].

I have a quick question. You, in the first quarter, you had a delay of contracts coming out of Russia. Did you see some, on the chemical side, was there some lumpiness in the second quarter or would you expect these revenues going forward?

Our contracts in Russia, Ivan, are related to coal tar raw material that we export out of Russia into our European operations. We don't really have any sales contracts in Russia.

Well, I thought you said -- I'm sorry. You rescheduled shipments. Is that true?

No. I don't think so.

That's not ringing a bell with me. As far as Russia goes, our Russian supply contracts which were -- we've had Russian supply contracts for years but we did have some new contracts that we entered into in the early part of this year that have been working tremendously. So they've been very reliable.

And we're actually shipping carbon pitch from Russia to -- or from China into Russia and those -- that contract is still going really well.

Okay. It's great. And then one last question was, can you give a update on any current litigation that's going specifically with Grenada?

Yes. The Grenada litigation, it's still in appeals. There's been actually -- I don't want say there's been very little activity but there hasn't been a lot of activity that's been very visible to us. We are expecting that we'll hear -- probably the next phase will be whether or not there will be oral arguments or not. There will be -- we'll find that out maybe in the third or fourth quarter. But it doesn't look like we'll be hearing anything even on the appeal probably until early next year, second quarter, maybe.

One last question was, I think Steve touched on it but I'm -- I think I missed it. On the operating profit margins for the carbon materials you had significant improvement. Do you see that, I think it was 14% that you had going forward, through the rest of the year or do you think that would probably come down?

No. I think because of the seasonality in the business, it's probably going to come down a little bit anyways just because of the flow of our seasonal products in the business. But I would not use the quarter margins as being indicative of the year because the first quarter and the fourth quarter tend to be lower volume quarters than the second and third. So that tends to squeeze margin percentages up in the second quarter.

Great. Thanks a lot.

Laurence Alexander.

I guess I have a few small questions. I guess, first, did FX have any noticeable contribution to earnings?

Yes. I think if you -- it's not that easy for us because we do -- even though we have functional currencies outside of the U.S., a lot of that sales volume is in U.S. Dollars. But if you sort of extrapolate the 5% impact on the top line of carbon materials down to carbon materials profit, it probably had maybe, say, $2 million of impact in the quarter.

And on the carbon black feedstock issue, is there any lag effect with respect to oil prices or is it a coincident?

Well, typically it's on a quarterly basis and there is a little bit of lag there but not a lot of lag. But it's basically on a quarterly [plats] basis.

We're selling the carbon black feedstock at prices off of the plats quarterly. When we're selling carbon black out of our carbon black plant, that re-prices, I think, semi-annually.

Right.

And if we're looking sort of year-over-year, the 14% margin in CM&C this year, do you think that would be sustainable going forward into future Q2s or how much of it do you think is unsustainable?

Well, obviously, the price of orthoxylene and the oil on carbon black feedstock has a significant impact on that but I think there's been a lot of attention on cost rationalization business over the last couple of years. The Reilly transaction, which I think is a significant contributor. Things that are fairly permanent in the business. I think although we saw fairly flat margins last year, I think the cost escalation has diluted probably the real story in the business and I don't think we were able to show that as well as we had hoped and I think we're seeing some of that this year.

And I guess I'm trying to pin down some of the details. Actually the carbon black and phthalic anhydride pricing this quarter, how much did each of those separately contribute to the EBITDA line?

The carbon black feedstock pricing actually was negative. It was actually $1 million down. And the other one was phthalic?

Yes. On the -- in terms of EBITDA contribution.

So on quarter-on-quarter basis?

On a year-over-year basis.

Hold on a second. Year-over-year, phthalic price increase -- well, it's on an EBITDA, it's going to be a couple million bucks.

And then also in terms of if you look at the first half of the year, do you have an assessment for what the total contribution from Reilly has been on an EBITDA level?

I think we had forecasts from when we talked before that it was going to be, what, a 3 to 4 times EBITDA returns on a $45 million acquisition? I would say we certainly trend more towards the 3. It's been very positive. There's no question that it's been a great acquisition for us.

And finally, in terms of the seasonality that you're seeing in the first half versus the second half. Should we be thinking of it as being at least a $10 million GAAP each year going forward?

That is really a hard thing to predict with weather. You can see how difficult it was even last year, Laurence. That's a hard thing to put a finger on.

With naphthalene going into construction and refined coal tar sales --

Well, I'm thinking more just if you think across say the last five or ten years with the business. Just is there an underlying trend line that you can point us towards around which the variations could happen?

It's hard because you roll in things like the Reilly acquisition. The business isn't necessarily the same business if you look at the -- just the amount of business that we're doing. It's a lot different than it was historically. So I'm a little reluctant to give you sort of a predictor of what our, sort of, first and second quarter movement is going to be every year. Again, I think we want to try to keep this business focused on the annual cycle. The aluminum smelters take more product in the first quarter or the second quarter, some of this stuff ships in such large volume that it can have a significant impact. I'd really like to keep it all focused on the year, if I could.

And I think finally, just one last question if I may, in terms of M&A prospects. Can you discuss what the M&A pipeline could possibly look like particularly in Europe?

Well, we're always looking, always open for potential acquisitions. It's -- especially on the coal tar side or even on the railroad side where you've got certain potential acquisitions that could really add to what our two core businesses here. But we really, Laurence, can't comment on anything specifically.

But I think you're right. If you had to look at the business in general and say, where's there a higher probability of an acquisition candidate in our core business, it would probably be Europe compared to anywhere else. I mean, when you hear us talk about China, potentially Russia, I think you're going to hear us talk about an investment in new facilities, not necessarily acquisitions.

But historically is it easier to get hold of acquisitions when the prospects are improving as they are currently or is it more difficult if you look at the last ten years?

I think if you look back historically at the businesses, Reilly was really not a core business for its parents. If you look at [Erestech], Erestech was not a core business for its parent. BHP, the tar distillation business wasn't a core business for its parent. I think a lot of it is related to timing but I don't know that it -- I think most of these businesses probably, if given the right opportunity, people would exit if they had the opportunity.

Thank you.

Bruce Wilcox.

I have exceedingly trivial questions to flush out the picture here a little bit. Did you say that pro forma for the closing of Arch that net debt is about 430?

Correct.

That's great. And then could you update me with your best guess of annual sustaining or maintenance capital expenditures?

I think if you look -- CapEx this year is about $32 million and in that is probably about $6 million or $7 million of incremental CapEx.

Yes. I've been carrying a 25 number so that sounds about right. And then what happens to your minority interest line when you get Arch closed or for the closing of Arch? Is there anything else in there that's --?

Yes. We have a minority interest in our current existing joint venture in China. So there will still be a minority interest.

That's great. It all sounded terrific. Thanks a lot.

Brian Frank.

Great quarter. I had a question just a follow-up to Bruce on balance sheet. What -- you mentioned the seasonal build in working capital. How does that trend out over the year and how quickly do you think you'll be able to collect those receivables and draw down those inventories?

We tend to build inventory and receivables as the volumes increase through the first half of the year like a [bow] wave as we get in sort of the mid, end of the third quarter, it starts to -- the cash flows start to come flowing out as the business tails down. So probably our best cash flow quarter would be our fourth quarter but you'd probably see some benefit in the third quarter. We'd still like, even absent the Arch sale, we'd still like to reduce debt by another $20 million this year.

And that seems like a reasonable goal getting it done. And then is there any prospect of early prepayment on the debt or are you going to wait for the penalties to come down next year?

They are still priced above a level where it makes sense to take them out. The Koppers, Inc. notes are callable at the end of '08 at 105 and they are still priced above that so the market's probably a little more choppy today than it was six months ago. Wish we could have carried that forward. But we still have time so we're not feeling any pressure to do it.

Understood. Thank you very much.

C.J. [Baldoni].

I guess I also had a question about the capital structure. Given the cash flow that you're generating and it seems to me that you had somewhat of an inefficient structure given the cheaper financing available when the bank markets opened back up. Could you just talk a little bit more about how you think about this going forward and with respect to the debt that's accreting at a pretty high rate?

Yes. I think -- how about if I talk to it from an overall leverage perspective. I think Koppers is the kind of company that's going to always carry a certain amount of debt. I don't think that you're going to see our debt structure go away. I think it's, it's efficient for us given our ability to generate cash flows. Now we've been levered up to as high as 5 and historically, and pro forma we're down below 3 and we sort of talked in the past about 3 being an area that we were very comfortable with. I think from an overall capital structure perspective, I think looking at those notes -- the notes, the publicly traded notes, obviously those are the area that we'll look at but we're only going to be able to do something to optimize that when the cost benefit is there. It doesn't seem to be there right now but certainly if the opportunity presents itself we will. But I think you're going to see debt on our balance sheet.

I understand. It's just that in all likelihood the rates are going to be moving against you.

We still have a long time on those notes. We can always hold onto them.

Thank you.

Chris Shaw.

Does your sales guidance include Arch, the missing sales from Arch?

For the second half of the year. Yes.

Great. Thanks.

Steve Schwartz.

Brian, in answering Saul's question on the tax credits did you throw out a total number of $6 million for the year? I remember it being 5 --

I'm sorry, it's $5 million, 6% is the -- if I said $6 million I misspoke. 6% is the impact on the effective tax rate. $5 million is the annual impact on the tax credit.

And with respect to the treating services and the pick-up from the Class 1s? If I remember correctly in the second half of last year you had only modest growth in railroad. Where are all these white ties coming from through your inventory into the services?

I think -- the white ties, [their] season in our plants is from six to nine months so a lot of what you're seeing us treat now is what was purchased probably in the first and second quarter of even last year.

We had a very large procurement year last year, 2006, and therefore that's where you're seeing the treated ties coming from, Steve.

I thought the second half was a little softer but you're saying it could have come from the first half, as well?

Right. It's not -- the white ties can hit our plants with these quarterly fluctuations depending on availability, weather and even pricing. They'll treat over a much more consistent pattern.

Great. Thank you.

Laurence Alexander.

Just one quick one is Saul had summarized the five negative factors that impacted the Q2 results. If you put them all into one bundle, what was the net impact on EBITDA from those items this quarter that's going away next quarter? Or going away in the second half?

To be honest I don't -- I'm not sure I even agreed with Saul's list of five so I --

Well, how about we --

But you're in the couple million dollar range. But be a little careful. There's probably an equal risk out there with phthalic.

And naphthalene pricing and a few other things, Laurence. So it's a tough one to calculate but it's --

It's probably a couple million dollars.

So those items were probably a drag of about a couple of million?

Right.

And just to revisit it, as we look out into next year, are there any maintenance turnarounds or other possible anomalies that are on your radar that we should be taking into account as possible drag next year?

As far as plant operations, that sort of thing?

Or incremental costs that you have visibility on that might not be apparent?

No. I think one of the things that you'll see in our SG&A is we have invested this year in building up our operations in China. So I think that's something that you're actually seeing creep into the SG&A this year. I don't think that that's going to prove to be an issue for us next year. There's nothing that certainly strikes us right now. I think when we get into a little closer to year-end if there's something specific we'll talk about it. But --

And we typically don't have long-term outages at plant levels, that sort of thing. We continue to maintain those operations and really don't have any down cycles, if you will, on production.

And to just clarify one of those comments, so it sounds as if SG&A should be trending down a little bit next year because you won't be doing the same kind of build-up?

No. It will be consistent. It's an investment in people and infrastructure in China so it will continue. So you won't see -- if you look at SG&A, you see a rate of increase in SG&A. That's probably a bit abnormal for us and what you're seeing is the investment this year.

Should flatten out a little bit?

Right. And I have to learn to talk more clearly. Sorry about that.

No. I can confuse myself quite easily. Okay. Thank you very much.

At this time there are no further questions. I would now like to turn the call back over for closing remarks.

Thank you. And thank you everyone, for participating in today's call. We certainly appreciate your continued interest in the Company. I believe that we will continue to be well positioned for a strong 2007 and even beyond. I still see many opportunities in our core markets and remain very optimistic about our future. We remain committed to enhancing shareholder value by executing our strategy of providing our customers with the highest quality products and services while continuing to focus on our safety, health and environmental issues. And we certainly look forward to speaking to you again and have a great day guys and gals.

Thank you very much.

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