Koppers Holdings Inc (KOP) 2007 Q3 法說會逐字稿

Good morning my name is Terri and I will be your conference operator today. At this time I would like to welcome everyone to the Koppers Holdings Incorporated Third Quarter 2007 Earnings Call. (OPERATOR INSTRUCTIONS) Thank you. Mr. Snyder you may begin your conference.

Thanks Terri and good morning everyone. Welcome to our third 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 else please call Rose Salinsky 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 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 and welcome to our 2007 third quarter conference call. I was very pleased to see that the momentum from the first two quarters of the year continued through the third quarter. When compared to the third quarter of 2006, sales increased 15% to $347 million. Adjusted EBITDA great 19% to $48 million. And adjusted basic earnings per share increased to $0.91 compared to $0.60.

During the quarter we continued to benefit from the positive fundamentals in our core markets as well as strong contributions from our more seasonal products. In our global carbon materials and chemicals segment, third quarter 2007 sales increased 17% to $223 million as volumes increased 4% primarily as a result of higher sales of carbon materials and coal tar chemicals. Average prices in the quarter increased 8% due to higher sales prices for carbon material products primarily as a result of higher raw materials costs and higher contract pricing. Overall prices for chemical products remain strong as global commodity price increases for naphthalene offset a small decrease in prices for phthalic anhydride. Third quarter adjusted operating margins in this business segment increased to 13.7% from 12% in 2006.

Sales of railroad and utility products in the quarter were $124 million, an increase of 12% from the third quarter 2006. The key drivers of this growth were average price increases that totaled just under 9% and higher volumes of treatment services and creosote partially offset by marginal lower volumes of treated crossties due to lower sales to a Canadian railroad. Average adjusted margins decreased to 8% from 8.6% in 2006 due primarily to the recognition of approximately $1.8 million of environmental costs associated with Australian properties that are being prepared for sale. Without this impact operating margins for the third quarter would have been 9.4%.

Early in July we sold our majority interests in our Koppers Arch Joint Venture. As I mentioned in our last call this business was a non-core chemical business with no linkage to our carbon materials business. For the first six months of 2007 this business contributed $27 million of revenues and approximately $100,000 of net income. Through the sale we were able to realize cash proceeds of approximately $15 million in the third quarter which was used for debt and interest reduction and a gain net of tax of $6.7 million that is shown outside of income from continuing operations.

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

Thanks Walt. Before I get started I want 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. Adjustments identified in the third quarter relate to the gain on the sale of the Koppers Arch Joint Venture. This gain and the prior period income associated with the Joint Venture's operations has been reflected as a discontinued operation below the operating profit line in the income statement and is therefore not included in EBIT and EBITDA or in our guidance. In addition the impact of the gain has been eliminated from our adjusted EPS calculation.

Sales for the third quarter increased 15% to $347.1 million as compared to $301.5 million for the prior year's quarter. The increase in sales was a result of higher sales in the carbon materials and chemical segment which increased 17% or $32.3 million and higher sales in the railroad and utility segment which increased 12% or $13.3 million. The sales increase in the carbon materials and chemicals segment was due primarily to an 11% or $20.3 million increase in sales of carbon materials, a 2% or $2.9 million increase in sales of distillates, a 3% or $5 million increase in sales of coal tar chemicals and a 2% or $3.9 million increase in sales of other products.

Carbon materials sales were positively impacted by $2.3 million due primarily to higher volumes of refined tar sales and $14.5 million due to price increases attributable primarily to higher raw material costs and new contract pricing. Carbon pitch volumes marginally impacted by lower demand from European pitch customers and the timing associated with Chinese exports was more than offset by increased demand for product elsewhere in the world.

Sales of distillates were positively impacted by higher prices for creosote of $2.3 million partially offset by lower benchmark prices for carbon black feedstock of $200,000. Sales of coal tar chemicals were positively impacted by higher volumes for both naphthalene and phthalic anhydride that contributed increased sales of $2.8 million and $1.7 million respectively. Volume increases for both products were partially offset by $600,000 due to lower prices in the quarter for phthalic anhydride. Overall carbon materials and chemical sales were positively impacted by 5% or $9.3 million of foreign exchange.

Sales of railroad and utility products increased 12% in the third quarter to $124.1 million. Approximately $2.3 million of this increase was due to increased sales of treatment services, $3.3 million due to increased sales of distribution poles and $7.7 million due to sales of other products that most significantly includes treatment chemicals.

Third quarter sales of railroad crossties were impacted by lower volumes of railroad crossties offset almost entirely by higher prices. Decreases in volumes associated with the sales of treated crossties were partially offset by increased volumes for untreated crossties and switch ties in the quarter.

Third quarter EBITDA increased 19% to $48.2 million compared to 2006 adjusted EBITDA of $40.5 million. Third quarter EBITDA was negatively impacted by $1.8 million of environmental reserves for costs associated with the clean up of two sites in Australia that we hope to market and sell next year. After eliminating the impact of these reserves on profit margins we saw EBITDA margins in the overall business increase to 14.4% in the third quarter of 2007 compared to 13.4% in the third quarter of 2006. EBITDA margin dollars in the quarter were positively impacted by approximately $1.2 million due to favorable foreign exchange. EBITDA profits in the railroad and utility product segment increased $300,000 over prior year but reflect the $1.8 million of additional environmental reserves recognized in the third quarter of 2007. Absent these reserves EBITDA in railroad and utility products would have increased $2.1 million or 18% above the prior year due primarily to positive impacts from pricing and shift in product mix towards higher average margin treatment services.

Adjusted net income for the third quarter excluding the $6.7 million net gain from the sale of Koppers Arch was $18.8 million compared to net income of $12.4 million in the third quarter of 2006. The Company's effective tax rate in the third quarter was 33% compared to 35% in the third quarter of 2006 and reflects the recognition of non-conventional fuel tax credits in 2007 due to favorable mix of domestic and foreign earnings.

Adjusted basic EPS for the third quarter is $0.91 per share, $0.60 per share in 2006.

On a year-to-date basis, 2007 adjusted net income was $51.5 million compared to adjusted net income for the same period in 2006 of $23.9 million. Year-to-date adjusted basic EPS is $2.48 per share compared to the prior year period adjusted EPS of $1.15 per share.

Net debt at September 30, 2007 was $422.3 million compared to $451.5 million at December 31, 2006 and reflects our seasonal borrowing patterns and proceeds realized from the sale of Koppers Arch. On and LTM basis our proforma debt to adjusted EBITDA ratio is 2.6 times.

Capital expenditures through the first nine months were $15.6 million compared to $18.6 million in 2006. Based on our year-to-date run rate for CapEx, current expected timing of required investments in China that may be required in 2008, we are lowering our estimate for 2007 CapEx from $32 to $34 million to $27 to $30 million for the year.

Before I turn it back over to Walt I would like to reemphasize that our business is seasonally impacted by demand for our products. The first and fourth quarter's financial performance are historically lower than the second and third quarter run rates. We see this trend continuing as we move into the fourth quarter of 2007 and the first quarter of 2008. At this time I would like to turn it back over to Walt.

Thanks Brian. 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 to 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 9 months of 2007 and represents one of our core products. The global aluminum story continues to reflect a consistent 5 to 6% long-term annual expansion of smelting capacity that will lead to consistent growth in the demand for carbon pitch. In response to this increase in demand you will continue to hear more about strategic expansions of our distillation capacity in China and possibly Russia.

We continue to see consistent long-term growth in the North American railroad business. Koppers's cross ties, services and treatment chemicals accounted for 30% of our revenues for the first 9 months of 2007. Although the growth rates have moderated in 2007 we still see long term growth potential in this market as the Class 1 railroads continue to invest in their infrastructure. We are also watching the impact of the sale of the DM&E Railroad to the CP Railroad with interest since investment in this line could lead to incremental growth opportunities for us.

Demand for distillates representing 6% of our 9-month revenues remain strong. Carbon black feedstock is a raw material used in the production of carbon black that is consumed in the 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 treating chemical. The primary markets for carbon black feedstocks are serviced by our facilities in the Europe and Asia. Market demands for rubber products is forecasted at a consistent growth rate of about 4 to 5% per annum. Much like the growth in aluminum demand, most of this growth will be driven by Asian markets.

Both of our chemical products, naphthalene and phthalic anhydride represent 12% of our 9-month revenues. Naphthalene markets serviced by our European, Asian and Australian facilities continue to be driven by strong demand primarily for construction in the Middle East and Asia. In North America we utilize our naphthalene as a feedstock that is combined with orthoxylene to produce phthalic anhydride that we sell to our primary customers in the paint and plasticizer industries. Although we have expressed caution concerning these end markets we do not see a reduction in product demand in the third quarter. Quite the opposite, phthalic volumes increased 8% in the third quarter over prior year levels. We did see some moderation in phthalic pricing in the quarter but certainly not enough to substantially impact profitability. Given all the market concerns we here we continue to closely monitor the strength of North America phthalic market.

As I mentioned in our prior call we had completed an Australian carbon black plant expansion early in the second quarter of this year. However we experienced several operating issues that continued into the third quarter and did not allow us to realize the full benefit of the expanded production. The issues relate to equipment performance. Although very frustrating, these are technical issues that will be resolved and are not reflective of end market demand which continues to be quite good. We expect t have better news on this next quarter.

We continue to monitor the construction of our new tar distillation plant in China and I am pleased that we have recently hired a new general manager to monitor construction and ultimately plant start-up and operations. This project continues to target completion in late 2008 with commissioning initial deliveries of product to our customers beginning early 2009. I have a trip planned to China scheduled for later this year and anticipate a first hand review of the project's progress as well as our progress towards future capacity expansions in China.

We are in the process of beginning our discussions with raw material suppliers for pricing in 2008. Given the end market demand of our products and the higher cost of oil we are anticipating escalation of raw material costs above a general inflationary trend. Although historical fluctuation in raw materials has been somewhat limited. We have seen costs escalate at a higher rate which has been influenced by higher oil prices. I would like to reemphasize that we have price formulas built into our long-term contracts that will ultimately allow these costs to be passed along to our customers. I expect to have more detail on this at our next call and after we have completed our negotiating cycle.

Based on our strong results for the first nine months and the continued strong demand expected of our products excluding Arch from the current and prior year results, we now expect 2007 sales to grow between 17 and 20% from our previous forecast of 13 to 16%. We also expect adjusted EBITDA excluding the gain on the sale of the interest in Koppers Arch to grow between 30 and 33% from the previous forecast of 20 to 23%.

So at this time I would like to open the meeting for any questions that you may have and turn the call back over to Terri please.

(OPERATOR INSTRUCTIONS) (Technical Difficulty) Okay at this time we have Mr. Lawrence Alexander on line for a question. (Technical Difficulty)

This is Lucy Watson speaking for Lawrence Alexander.

Hi Lucy.

Hi, how are you?

Good.

Congratulations on a good quarter.

Thank you.

I just had a couple of questions. One, I was wondering if you could expand on the pricing in the phthalic anhydride and how it contributed to year over year EBITDA growth.

I'm going to start by saying pricing for phthalic anhydride is really based off the price of orthoxylene plus the margin. And we have had a little fluctuation in the third quarter with the ortho pricing which was down somewhat. Brian, based on --?

Yes, I think the lower pricing had a negative impact in the third quarter of about $600,000 on phthalic anhydride. So third quarter of 2006 if we go back and remember that well was a very strong pricing quarter for phthalic. So although we saw stronger volumes than what we had expected we did have some price deterioration.

Great. Thank you. And just one question moving to the railroad crosstie business. Can you give more detail on the outlook for the treated crosstie business over the next couple of years given the orders that you already have on the books?

We continue to look at, as we mentioned earlier, going forward over the next several years a fairly strong market for us especially with the businesses that we have with the various Class 1's. And I would have to say that we are looking at a 2 to 2.5% overall increase demand of crossties for the total North American industry.

We've been pretty consistent I think in saying that the growth rates that we saw in these volumes over the last year or so really were extraordinary. And that from a longer term perspective we do see this as Walt said sort of in a low single-digit sort of consistent growth rate.

Great. Thank you very much.

The next question comes from Scott Blumenthal.

Good morning Walt, Brian, Mike.

Good morning Scott.

How you doing?

Okay. Walt since you, I think it was Walt, mentioned the contracts, it might have been Brian. Can you talk about what percentage of your contracts you expect to come due in 2008 and how contract pricing is trending now compared to say this time last year?

I think in general we contract about I think 55% of our revenues under long-term contracts. And long-term contracts for us generally mean 3 to 5 year contracts. We do have contracts that could be as long as 10 years, but for the most part generally we are talking about 3 to 5 year contracts. So in any given year there's approximately say $100, $150 million worth of contracts that will come up for renewal.

Okay.

And contract negotiations for those are all, they are individually based with customers. I think from a general perspective, demand is pretty good. So I think it is a good time to be negotiating these contracts. But these are very large companies who exert a lot of influence and they are very difficult negotiations.

Okay, you talked about the 8% price increases in the EMC segment, 9% crossties, are those generally what you are looking to pass on in contract negotiations were they to be going on currently.

Actually that is a very good question; I'm glad you asked it. There are two elements to our price escalations. Our long-term contracts for the most part have price escalation formulas that allow us to pass along cost increases. So when you look at something that we describe as a price increase, you are seeing modification of contract pricing based on increases in things like raw material costs or labor costs or energy costs. So you have to break that number between what would be sort of the price increase that comes from a new contract negotiation versus what is the price increase that is really a contract formula that is passing along a cost increase. And I think the cost increases have been pretty significant in this business over the last couple of years. Please don't think that those are all new contract negotiation price increases.

Right, a lot of that is just escalation of raw materials and the energy cost I would say.

Primarily raw materials.

Exactly.

And can you talk about maybe the costs that you are seeing in the wood ties. I know that you get those from a number of different sources. But since there is not as much competition from other markets, I guess most notably the housing market, are you seeing a little bit of a, I guess, a better price for wood crossties than you had been when housing was going crazy last year and the year before?

Well on the railroad side, Scott, we are talking hardwoods. And basically from the hardwood supply a saw miller will get more than just a crosstie, they will obtain other product uses as well which (inaudible) guard down a little bit when you look at the flooring market and housing and so forth. But basically we have seen crossties being a fairly flat in the cost over these last 9 months, I think Brian.

And I think for most, or at least a large portion of our Class 1 business, we do two services for the railroads. One is a procurement service where we actually buy the white tie or the raw timber. And those prices are generally dictated to us by the railroads. So price fluctuation up or down does not necessarily benefit us in our margin. So it is more of a pass through for us. That is not all of the business, but that is a large part of the business. So I think what Walt said is right, we have seen certainly not increases in wood cost, but it is not something necessarily that in a declining market we would be taking advantage of. We would be passing that along.

Okay, and one last one Brian. You did mention that you were reducing your '07 CapEx estimates. I guess these are going to be things that are not going away but they are just going to be pushed out.

Right. I mean the largest element in there frankly was the China Joint Venture. And although it is progressing according to schedule we have not had to make capital contributions as quickly as we had thought. But that being said, we are still progressing on that project so it is just a matter of time.

Okay, I'm sorry, one last one. I guess we saw a decrease in D&A sequentially. Can you talk about that? Was that something that -- I don't think that it came from the JV, so can you talk about that?

You're talking about from the second to the third quarter?

Yes, sir.

I don't think there is anything overly significant. I've got D&A going from about $8 million to $7.8 million from the second to the third quarter. Other than some things that are rolling off, I don't honestly think there is anything of any real significance in there.

Okay, great. Thank you.

Thank you.

Your next question comes from Saul Ludwig.

Good morning Saul.

Good morning. Can you hear me this time?

Yes, you're on.

We know the technical problem was on your end Saul.

I'm sure it was. You talked about, I think you said that your carbon pitch volume was sort of mushy in the quarter yet aluminum production continues to increase globally. What is happening to link your carbon pitch volume with what is going on in the aluminum world? And if you are not supplying it to those who are producing aluminum, where are they getting it?

I think we mentioned 4% increase in volume.

The carbon pitch total volumes on a year-to-date basis Saul they are up about 2%. Third quarter alone I think they were fairly flat. I think they were actually up maybe 1% in aggregate but not --

Okay, called 01%. But --

Some of what you are seeing in the quarter may be timing.

I guess one example is that we're [finally] shipments are increasing with the motion Norway carbon plant that is supplying anodes to the (inaudible). That was delayed probably 4, 5, 6 months or so, and so that is finally picking up with the (inaudible) I think is scheduled, I think, to be up full capacity by first quarter of next year.

But if aluminum production is up 6% this year, and you are up 2%, somebody is -- they're getting the pitch to make that aluminum and they are not getting it from you.

Well, another area would be in Europe as well where we saw a reduction on our pitch production primarily because of aluminum and really as far as aluminum production increases go, it would be in other places that were [distributing ] supply perhaps.

Our year-to-date volumes out of Austral-Asia which includes China are actually up 15%. I think you are seeing some noise in Europe, Saul.

Okay, now in carbon black in Australia you talked about some hiccups in getting your production up. As of here in November, (a) are those problems sold and is the thing running the way it should be and (b) how much do you think that hurts your profits in the third quarter by not having it run smoothly?

The issues Saul were really two areas. One was we were having some trouble with a new boiler operation which is now, we think we've got good arms around the boiler. And the other was on sort of the [back] house collection area which we are hoping we have our arms completely around that one. I really can't give you an update on this past week. But it is getting better and yes we hope at the end of the fourth quarter we can give you better news.

How much do you think that hurts you from an operating income standpoint in the quarter?

Probably about $1 million, $1.5 million Saul.

And you say Goodyear is producing more tires there, I mean demand is good or just good for you because you are the only game in town?

Well the latter comment is true in that we are the local producer with the long-term contract with STT. I can't answer the question about their current operating rates but it has been running fairly similar volumes since last year.

Okay, next question. You talked, Walt, about this DM&E Railroad sale. And why that might be good for you. You really hit that quickly. But a little more color on what that could mean?

First of all I think the Surface Transportation Board just recently said that it is going to be until October of '08 until they make a final decision or final OK on the transaction with the CT Railroads. As far as going back to when the DM&E was going to or looking for money and they did this on their own, and I forget the exact amount but we are talking about I think a $3 million tie program over a long period of time. And most, at least half of that or more was going to be, others obviously creosote or concrete rather. Concrete. And we are in a great position with our plant location and we do anticipate once this gets approved by the Surface Transportation Board, but it will give us opportunities to grow in that area which they are expanding the lines and looking at the increased coal shipments out of the outer river basin.

But this is a 2009 impact?

Well that is what we are currently looking at. It could be fourth quarter '08. But for sure '09.

And then finally, Brian talk about, in the EBITDA guidance that you have provided it would imply -- I think last year you had $30 million EBITDA in the fourth quarter. So your guidance would imply $32 to $36 million of EBITDA in this year's fourth quarter, (a) is that correct and (b) there's something screwy with last year's taxes where you actually had a tax credit in the fourth quarter and this year you might have your 30 some odd percent tax rate. So does that imply that your pre-tax earnings have to be up a huge amount to have the same level of after tax earnings?

Yes, I think the -- and I don't have the exact number in front of me Saul -- but I think the EBITDA number for the fourth quarter was about $28 million last year. But yes, you are right on the effective tax rate. Last year because of certain phase-out provisions of the fuel tax credit, which didn't get repealed until the fourth quarter, it ended up weighting our effective tax rate calculation into the fourth quarter of last year. So if you look at fourth quarter effective tax rate it was much, much lower than what it would be on a normalized basis. And this year we don't have the phase-out provision to deal with so you are seeing a much smoother effective tax rate. So you will have to be careful how to reflect that EBITDA projection into net income. Don't use the fourth quarter of 2006 effective tax rate of being representative. I would use our current effective tax rate.

And what is your '06 EBITDA number that the base on which you are talking about increasing?

I think it is about $28 million, I think.

No, for the full year.

Oh, I'm sorry, it is $130, but you have to take out the Koppers Arch so I think it is about $127 without Koppers Arch.

Gotcha. And are you going to provide us with restated quarterly numbers for '06 and first two quarters of '07 so we can get our models adjusted from a revenue standpoint correctly?

Yes, we can do that.

That would be great. Thank you very much.

No problem, Saul.

Your next question comes from Bob Fetch.

Good morning. Very solid results.

Good morning Bob.

Thanks Bob.

It's nice to see. Curious in regards to your expectation comments on the higher sales which you've, this call lifted by maybe about 25 to 30% in terms of rate of change. But your EBITDA guidance is 50% higher. So what is the major contributor there to the significantly higher EBITDA growth rate? Is it, I'm sure it's a combination possibly of utilization pricing, productivity, so forth. But if you can at least identify the primary contributors?

I don't want to dissuade, there probably is not one primary contributor. There really are a series of things, I think in my mind. I think obviously the success of the Reilly Transaction has had a positive impact on our operating efficiencies and I think that translates into higher margins. I think that benefit has probably been, certainly trended towards the higher end of what we had talked about. I think the positive mix impact on the railroad side, the shift in volumes, more towards treatment service which are higher margin for us has had a positive impact in our margins for the year. If you go back to 2006, the volume increase in 2006 that we saw a lot of was white tie volume which is relatively speaking lower average margin. It takes 6 to 9 months for that product to [err] season until we can treat it -- when we treat it we get a higher margin billing for the railroads. And I think you are seeing that come through in the year. And I think you look at the CSX contract that I think we talked about earlier in the year. There is some pricing benefit there. But I think, Walt probably has some comments, but those are probably the three main things that I think I see.

I want to add too that if you just look at the first 9 months of this year the same types of things are going to happen in the fourth quarter Bob.

And I think phthalic pricing has held in and naphthalene pricing has held in. So it has been pretty good on the downstream chemical side as well.

Okay, one thing, I don't think I saw it in the release, what are your international sales as part of the total? What level were they at and are they running higher or lower equivalent to North America?

Third quarter was -- give me a second here -- was about $110, so 30 to 40% revenues internationally which is pretty consistent I think with our longer-term trends.

32, 33%, yes. That has not changed. It is still in line with where it was the first half of the year.

And on that score what, based on current composition of your business, what would you expect that to look like in say three years out?

Obviously going higher because of our growth and planning that we have with the new plant in China.

I think as Walt has said, as this growth in aluminum smelting capacity comes online and demand for carbon pitch grows, our capacity will grow overseas. So I think that will drive it. I think the other side, although we don't really project this, sort of M&A activity -- probably more so in CM&C than in the railroad side of the business is probably more opportunistic overseas than it would be in the US.

Is there anything that is taking place currently in the environment that would drive you to be somewhat more aggressive on the acquisition front in the intermediate future?

I don't think -- when you say more aggressive I don't know if there's anything that would make us be more aggressive. We tend to approach these things pretty conservatively I think in our core businesses. So if aggressive you mean diversification I don't think that is really something that we're focused on. That doesn't mean that an opportunity might not come down and fall in our laps, but I think we are pretty much sticking to our knitting.

Oh sure, we are obviously continuing to look anywhere around the world for anything that would add value benefit of these two core businesses that we have, Bob.

What I was actually more implying was are financial terms of any particular property that you might have an interest in or are becoming ever more attractive or not?

We are not compelled to do the M&A I think on CM&C as a critical part of our strategy. Our strategy is to grow with the aluminum industry. So I think the expansions in China and maybe to a certain extend opportunities in Russia are very attractive, sort of the other opportunities, consolidation opportunities, I don't know that there are reasons there to be overly aggressive. That being said, these businesses are doing pretty well right now I would imagine.

Okay. Are there any unusual, lumpy expenses/investments that you are looking at in the next two to three years?

I think on a CapEx side, plant capacity in Asia or Russia would be lumpy, but we call that incremental. I think we always have our sort of environmental expenses that we continuously invest in in our business.

You might see some increase SG&A with our China expansions going forward.

Okay, but nothing too out of the ordinary, IT spending or anything of that sort?

Well we have a global IT implementation going on now. So we have implemented a new system in Europe and in part of our North American operations. So I think you will see that continue but that is pretty much in our historical spend rates.

Okay, so it is not out of the ordinary and it's not something that if you have been doing it for awhile is going to begin to fall off to a much lower level.

I would never describe an ERP implementation as being ordinary.

And then lastly, when you now look at your balance of business and again the business initiatives that you have, in order to reach some of the growth and profitability objectives you are looking at, what would you say would be the most important two to three drivers to satisfying those objectives over the next three years?

Well obviously one of our growth initiatives is following this global primary aluminum industry. There are already three projects that are actually going forward at the moment. Two of those are in the Middle East which allows us to plan, our planned operations is having the capacity which is what you see us doing with the new plant that we are building in China. And that we can follow. Obviously other parts of the -- half of our coal tar is going into pitch, the other half would go into carbon black feedstock for the carbon black industry which has continued to be very growth oriented as well as the naphthalene, going into different [plastic sizes] which is also growing with the construction that we are seeing in Asia and so forth. So that is really what we are focusing on at the moment is making sure that we are following, which we are, and just going right along with this primary aluminum growth. And that is the real focus basically.

Okay and you going to be able to more than fund these projects internally?

I think so. If you use our current China project, about 70 to 75% of the financing comes from bank financing in China and the rest is equity that would be split between the joint venture participants. We are not talking, I think the total plant estimated cost is around $60 million. So I think it is pretty well within the cash flow potential of the company to be able to handle that.

Okay, thank you very much.

Thank you Bob.

Thanks Bob.

Your next question comes from the line of Sam [EP Bongai].

Good morning.

Good morning guys. Good quarter. I just have a quick question, I didn't see any cash flow statement from your report and I was wondering what your CapEx was for this quarter, what your CapEx plans were for next year?

CapEx for the quarter, the year-to-date CapEx was about $15.6 million and I think we gave some guidance here, we were originally giving guidance on CapEx to be $30 to $32 million and I think we knocked that down a little bit based primarily on timing of our China investment down to $25 to $30 million. That is probably still a little bit above what I think might be a normal sort of baseline CapEx for us. It is probably in the $25 to $27 million range.

That's helpful. Thank you.

Sure Sam.

(OPERATOR INSTRUCTIONS). At this time we have a question from Steve Schwartz.

Good morning guys.

Good morning Steve.

Brian, thanks for your explanation on the source of the price increases. It sounds like they come from either new contracts or mechanisms in existing contracts. Is that right just to clarify?

Correct.

Okay, so can you dig into the formula a little more for us. I remember at one point that it was a dollar for dollar mechanism, so in other words as prices escalated you were only partly protected on margin but it looks like you've got a really nice margin bump in CM&C this quarter. Can you tell us a little bit about that.

If I understand the question, the price formulas, if you look at our cost structure particularly on [slit split] CM&C and RNUP because it is probably more acute than CM&C, about 65% of the costs of what we produce is in the raw material. So in a price formula mechanism the formula is going to be most sensitive to changes in our raw material costs. Okay?

Yes.

And those do tend to pass the raw material cost escalation, or other costs through on a dollar for dollar basis. Am I answering your question?

Yes, and that is exactly what I thought. So how is it you are seeing these huge gross margin increases behind the significant price increases when in reality that dollar for dollar mechanism should be reducing your gross margin?

Right, because it's not -- the margin increases are not necessarily being driven by the price increases. A large part of the price increase as you said is recovering costs. So from a margin percentage basis it is actually dilutive on the margin percentage. You see more impact on the margin percentage on things like operating efficiencies associated with the Reilly transaction, running our North American plants at 90% capacity versus 80% capacity. I think you see that in our segment data that a lot of that is actually due to operating efficiencies. Now obviously the new contracts have some impact, but if you use, I think, the CSX contract as an example, I think that the margin increase that we cited there was between 2 and 3%. So relatively speaking it is not the largest element of that price increase. The operating efficiency is probably the largest element.

Ah, okay. That answers it. Thank you. And if you could help reconcile something for me. Walt talked about you are going into setting up contracts for '08, you expect price increases, if I look at the level of price increases you got in CM&C in the first half, you were at 10%, 11%. You got 8% in this third quarter which would imply maybe they are softening. Do we see it going back up into the double digit growth range for '08.

It's probably too early to talk about that. I think that the big in that, again, is raw material. And we are in the middle of our negotiating cycle with the raw material suppliers. So if our contract formulas, they don't always work day 1. Some have a quarter lag or a semi-annual lag. But in a scenario where you had significant raw material cost increases you would potentially see price increases next year early on.

Okay, and it looks like coal pricing is going to hit historically high levels next year. Does that impact the cost of your raw material?

On our coke side obviously it could. But I think that we have some fairly good coal contracts in place for this year and going forward a little bit. But coal pricing does not really impact coal tar pricing. Coal tar is more driven towards BTU content and oil pricing if you will.

Okay, and then just one last one. Did you give out a number for the amount of tax credits you took in the quarter?

It's about $5 million a year so about, just generally speaking, what is that $1.25 million or so is probably a good guess.

Okay. So at $1.25. So it looks like you've got about less than $1 million left for the fourth quarter and that compares to about $3 million you took last year.

Yes.

Okay, great. Thank you.

At this time I am showing that we do not have any following questions.

Okay Terri thank you very much. Also we thank you for your participation in today's call and appreciate your continued interest in the company. I believe that we continue to be well-positioned for a strong 2007 and beyond. I still see many opportunities in our core markets and I remain very optimistic about our future. We remain committed to enhancing our shareholder value by executing our strategy of providing customers with products of quality and services while continuing to focus on our safety, health and environmental initiatives. So again, thank you and we look forward to speaking to you again soon.

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