Koppers Holdings Inc (KOP) 2007 Q4 法說會逐字稿

Good morning. My name is Shatina and I will be your conference operator today. At this time I would like to welcome everyone to the Koppers fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the conference over to Mike Snyder. Please go ahead, sir.

Thanks, Shatina, and good morning everyone. Welcome to our fourth quarter conference call. My name is Mike Snyder and I'm the Director of Investor Relations for Koppers. At this time each of you should have received a copy of our press release. If you haven't, one is available on our website or else you can 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 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 and welcome again to our 2007 fourth quarter conference call. I was very pleased to see that the momentum from the first three quarters of the year continuing into the fourth quarter. When compared to the fourth quarter of 2006, sales increased 21% to $327 million. Adjusted EBITDA grew 20% to $33 million. And adjusted basic earnings per share increased to $0.44 compared to $0.31 in the fourth quarter 2006.

During the fourth quarter we continued to benefit from the positive fundamentals in our core end-markets. For the year 2007, our sales increased 20% to $1.3 billion and adjusted EBITDA rose 34% to $170 million. We have seen consistent demand in our end-markets throughout 2007, and see this continuing through 2008, and even more so into 2009, with new aluminum smelting capacity coming online in the Middle East.

In our global Carbon Materials & Chemical segment, fourth quarter 2007 sales increased 27% to $217 million, as volumes increased 10%, primarily as a result of higher sales of carbon materials and coal tar chemicals. Average prices in the quarter increased 12% due to higher sales prices for carbon material products and distillates, primarily as a result of higher raw material costs and higher contract pricing. Overall, volumes for chemicals products remained strong, driven by higher volumes for naphthalene.

Sales outside North America were particularly strong, with total revenues up by 34% over the prior quarter. Fourth quarter adjusted operating margins in this business segment increased to 8.2% from 8.1% in 2006, reflecting seasonal demand for certain products.

Year 2007 sales for Carbon Materials & Chemicals increased 26% to $848 million, due to the full year of Reilly, higher pricing for all major products, which reflects even higher raw material costs, higher contract pricing and higher volumes, reflecting stronger product demand. The year 2007 adjusted operating margins increased to 11.4% from 9.5%, due primarily to the full year of Reilly, higher contract pricing and strong product demand for naphthalene and carbon black feedstock in the Asian market.

Sales of the Railroad & Utility Products in the fourth quarter were $110 million, an increase of 11% from the fourth quarter 2006. The key drivers of this growth were price increases and higher volumes of untreated crossties, treatment services and utility poles, partially offset by marginal lower volumes of treated crossties. We believe there was some optimistic buying by the Class 1 railroads, in advance of their 2008 requirements.

Average adjusted operating margins in this business increased to 6.5% from 6.0% in 2006, due primarily to price and volume increases. The year 2007 sales increased 11% to $480 million, driven by higher volumes and prices for railroad crossties and preservatives and higher prices for the utility poles. Year 2007 adjusted operating margins increased to 8.9% from 7.2%, due to higher contract pricing and higher volumes for treating services and preservatives.

As you undoubtedly are aware, we announced a share buyback program of $75 million that extends over the next two years. We also announced a 29% increase in our quarterly dividend to $0.22 per share.

I want to be very clear here, so that the message is understood. We still strongly believe in the opportunities offered by expansion in growth markets and through the consolidation of more mature markets. This is a priority of our capital utilization. The share purchase plan will allow us to take advantage of buying opportunities that will no way impair the company's ability to grow or to access the credit markets to provide funding growth or refinancing opportunities.

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 in 2008. 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 fourth quarter of $6.8 million relate to the write-off of acquisition costs related to the possible purchase of a tar distiller that appears to have been sold to a private equity firm. While we are naturally disappointed by the outcome, we continue to believe that there are acquisition opportunities in our core markets that will be available in the future.

The other adjustment of $6.8 million also relates to the gain realized in the third quarter from the sale of our interest in the Koppers Arch Joint Venture.

Sales for the fourth quarter increased 21% to $326.8 million as compared to $269.2 million for the prior year's quarter. The increase in sales was a result of higher sales in the Carbon Materials & Chemical segment which increased 27% or $46.6 million, and higher sales in the Railroad & Utility segment, which increased 11% or $11 million.

The fourth quarter sales increase in the Carbon Materials & Chemicals segment was due primarily to a 13% or $22 million increase in sales of carbon materials, a 6% or $10 million increase in sales of distillates, a 3% or $4.8 million increase in sales of coal tar chemicals, and a 6% or $10.1 million increase in sales of other products.

Fourth quarter carbon materials sales were positively impacted by $5.4 million, due to higher volumes of carbon pitch sales, and $12.2 million due to price increases attributable primarily to higher raw material costs and higher contract pricing.

Sales of distillates were positively impacted by higher volumes amounting to $2.4 million and higher prices, totaling $6.3 million. And sales of coal tar chemicals were positively impacted by higher volumes for both naphthalene and phthalic anhydride, that contributed increased sales of $3.3 million and $1.5 million respectively.

Overall Carbon Materials & Chemicals sales in the quarter were positively impacted by 6% or $9.9 million due to foreign exchange.

Sales of Railroad & Utility Products increased 11% in the fourth quarter, to $110.3 million. Approximately $1.8 million of this increase was due to increased sales of treatment services, $4 million due to increased sales of distribution poles, and $4.8 million due to sales of other products that most significantly includes treatment chemicals.

Fourth quarter sales of railroad products were impacted by higher prices and volumes, marginally offset by lower pass-through prices for raw materials. Decreases in volumes associated with the sales of treated crossties were more than offset by increased volumes for untreated crossties and switch ties in the quarter.

On a consolidated basis, fourth quarter adjusted EBITDA increased 20% to $33 million compared to 2006 adjusted EBITDA of $27.6 million. EBITDA margin dollars were positively impacted by approximately $1.4 million due to favorable foreign exchange.

Adjusted EBITDA for 2007 was $170.5 million compared to $127.3 million in 2006, with the increase due primarily to a full year of the Reilly assets, higher volumes and prices for most core products due to higher raw material prices, and strong product demand and higher foreign exchange rates.

Adjusted net income for the fourth quarter, excluding the $6.8 million pretax write-off of acquisition costs, was $9.1 million compared to adjusted net income of $6.5 million in the fourth quarter of 2006. Adjusted net income for the fourth quarter of 2006 included an incremental tax benefit of $3 million from timing of energy tax credits, compared to $900,000 of energy tax credits in the fourth quarter of 2007.

Adjusted basic EPS for the fourth quarter is $0.44 per share compared to $0.31 per share in 2006. 2007 adjusted net income was $60.6 million compared to adjusted net income in 2006 of $30.4 million. For 2007, adjusted basic EPS was $2.92 per share compared to the prior year adjusted EPS of $1.47 per share.

Total debt at December 31st, 2007 was $440.2 million compared to $475.9 million at December 31st, 2006, reflecting $53.2 million of debt reduction, including the impact from the sale of Koppers Arch and before $17.5 million of accretion on our discount notes.

Bond debt increased to $387.3 million from $369.8 million, due primarily to accretion on the discount notes. And bank debt decreased 50% to $52.9 million from $106.1 million. Current rates on our US bank debt, which comprised the majority of our bank debt, is LIBOR plus 150 basis points and was approximately 5% at year-end.

Revolver availability at December 31st, 2007 under the current structure was approximately $94 million. We believe that based on current levels of Receivables and Inventories, this facility could be increased by an additional $30 million if necessary.

The balance sheet, driven by operating cash flow of $65.2 million in 2007, an increase of $33.6 million over 2006, is well positioned for capital deployment for M&A, refinancing opportunities and as previously noted by Walt, an increase in our dividend and a stock repurchase program.

On a year-to-date basis, our debt to adjusted EBITDA ratio is 2.5 times.

For 2008, we anticipate debt reduction before share buybacks, of approximately $47 million before accretion of $17 million, for a net reduction in debt of $30 million.

Capital expenditures for the year were $24.3 million compared to $28.5 in 2006, as certain projects, including growth capital for the China expansion were moved into 2008. Estimated CapEx for 2008 is expected to be $35 million, including JV investment and plant expansion in China.

We have seen accelerated delevering of our balance sheet in 2007, as profits and cash flows have exceeded expectations. We continue to believe that consistent cash generation and delevering is a unique characteristic of the Koppers story.

Before I turn it back over to Walt, I would like to emphasize 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 do see this trend continuing as we move into the first quarter of 2008.

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

Thank you, Brian. Before I provide our guidance for 2008, I would like to take a few moments and talk about our core end markets. Growth in the global aluminum smelting capacity is expected to grow by 17% through 2009. There are new projects coming on line in Oman and Qatar in the Middle East. In order to meet this demand, we have increased our raw materials sourcing in Russia and we are in the process of building new capacity, as well as increasing existing capacity in China. As these and other new smelters come on line over the next several years, we anticipate adding additional distillation capacity in China to meet the increased pitch demand.

We have continued our efforts in both China and Russia to convert these markets to our pitch products, based on the benefits realized by the conversion of Western smelters decades ago. This is a long-term process, but the benefits of converting these markets can lead to accelerated growth for Koppers. To support this initiative, we are adding chemical resources in China to work more closely with the Chinese smelters.

Although we have not seen a slowdown in our US-based businesses, we have seen the 40% of our sales outside the US remain quite robust, with fourth quarter sales increasing 34%, helped by higher prices, strong product demand and foreign exchange.

Product pricing for Carbon Materials & Chemicals, particularly in North America, are expected to increase in 2008, due to the increase in oil prices we experienced in the second half of 2007. Due to our contract terms for carbon pitch and higher benchmark pricing of our downstream chemical products, we have been and will continue to recover these increased costs throughout the year.

The US railroad demand for crossties in 2008, is expected to be somewhat flat, with demand for commercial ties for the short-line railroads increasing moderately. We saw one of the Class 1 railroads accelerate buying in the fourth quarter of 2007. However, we have found increasing interest in exports of railroad ties, primarily in the support of various mining projects in Africa and South America. As an example, we have recently entered into an agreement with the world's largest steel company to supply approximately 140,000 crossties to a mining expansion project in Africa. We remain very optimistic about this business and see the North American railroads continuing to invest in their infrastructures.

On the raw materials side, we've seen the short-term crossties availability tighten as a slowdown in the housing construction, coupled with wet weather conditions has resulted in an overall reduction in logging activities by the various sawmills. Although this may indicate a more difficult procurement market, we are well positioned with the largest and most geographically diverse crosstie procurement organization in North America.

We believe that this may result in lower untreated tie volumes in the first part of the year, but we do expect availability to improve as we move into the second and third quarters. This is another example of why we view our business on an annual rather than a quarterly basis.

Demand for carbon black feedstocks, a raw material used in the production of carbon black for the rubber industry, and naphthalene, which is used as a concrete additive and also in the dyestuffs industry, continue to remain strong. The demand for these products is primarily driven by growth in the Asian economies and contributes significantly to the profitability of our European and Asian operations that supply these markets. Carbon black feedstocks are generally priced off of a benchmark oil index, which has resulted in higher selling prices.

And speaking of Asian economies, we are looking forward to the completion of the construction of our new Chinese joint venture, which we refer to as TKK. Construction of the 300,000 ton distillation plant is on schedule for completion at the end of this year. This new construction will be in tandem with the 33% expansion of our existing plant in Tangshan, which should also be completed by the end of 2008.

These two projects combined will provide for an additional 350,000 tons of distillation capacity, which will allow us to supply our customers who will have new smelting capacity coming on line in 2009.

We are also hopeful that we will be announcing another joint venture in China at some point during 2008.

In addition to the strong markets for the downstream distillation products, naphthalene and carbon black feedstocks and the Asian economies, this area of the world is also producing the majority of the world's coal tar, our primary raw material.

I'm pleased to tell you that production levels at our Australian carbon black facility were at optimal capacity levels in January, and we expect the profit contribution that did lag in 2007, to be more fully realized in 2008.

I was very pleased to see that the higher levels of profitability and cash flow of the company, that includes the divestiture of our investment in a joint venture in Australasia, allowed us to exceed our debt reduction target. We see cash flows increasing as profits have improved over our expected level. We are well positioned for supporting the refinancing of our bonds when appropriate and M&A opportunities, even though we are in sort of an uncertain credit market.

Now I'd like to talk about our outlook for 2008. Our expectations for 2008 are that sales will increase between 5 and 8%, adjusted EBITDA will grow between 6 and 9%, and that basic earnings per share will increase between 10 and 13%.

We remain very positive about the long-term strength of our primary end-markets, aluminum and railroads and we're excited about the new distillation capacity in China that will come on line in 2009, which reflects our optimism about the continuing global growth in aluminum demand.

The 29% increase in our dividend and a $75 million stock repurchase plan, an action announced today, support our belief that the underlying strength of the profitability and the cash flows we saw in our business in 2007, and that we expect continuing in 2008 and 2009. Again, these actions will in no way impair our ability to deploy capital as additional growth opportunities present themselves. We look forward to those opportunities in 2008 and beyond.

At this time I would like to open the conference call to any questions that anyone may have out there. Operator, are there any questions there?

(OPERATOR INSTRUCTIONS) Saul Ludwig with KeyBanc.

A couple of nitty-gritty. What do you expect in energy tax credits this year?

It should be another $5 million, Saul.

Okay. Then on the comments that Walt made about the carbon black in Australia, that you didn't have all the act together in 2007, and it appears that you're off to a good start in 2008, how much delta could that mean in terms of operating income?

It might be in the couple of million dollar range, Saul. That facility ramped up over the end of 2007.

So it could be $2 million more in operating income?

Yes.

Okay. And you commented also, Walt, that you expect short-line railroad volume to actually be up a little bit in ties. Do they have some sort of a tax credit that really boosted their purchases in 2007, and the expiration of that tax credit, particularly as it relates to the first part of the year, why are you expecting short-line railroad volume to be up when sort of logic would suggest maybe it's going to be down?

Well, Saul, back in 2007, you're right. The tax credits that had been passed and going through were projected to expire at the end of the year, so that's why you saw acceleration of the short-line buying the first six months of last year and then it did slow down a little bit the second half.

Currently, the tax credits have been passed by the House and have not yet been passed by the Senate. But at this particular point, we see and continue to see a lot of projects out there and continue to see it moderately being a tad higher than they were last year at this particular time in the year.

You're assuming the tax credit is going to ultimately pass?

Saul, I think the other thing is, you have to remember this business has a pretty long cycle to it. The ties have to air season for six months. So the forecast that the sales people are getting today are pretty reflective of what expected demand is going to be as well.

Okay. And then finally, you mentioned the export opportunities for railroad ties. I don't think we've heard anything about that in the past.

You haven't. I mean, obviously, we continue both on the railroad crossties as well as utility poles, continue to look for potential export sales, which we have in the past. Right now though, however, there are a lot of iron ore and other mining projects that they're really trying to open up in South America and South Africa, as well as all of Africa actually, and this particular order is a fairly large order for us and we're fairly excited about that.

But further to that, we're looking at a couple of other mining projects that would open the doors for perhaps more exports of railroad ties. So, this is something that you haven't heard us talk about too too much, because of the smaller volumes, but this happens to be a fairly larger volume and we're looking at additional potential opportunities in that part of the world.

I just want to ask a final financial strategic question. You're on the verge of moving into positive equity, but what's the rationale behind going out and repurchasing $75 million worth of stock, because that will move you back into a negative equity versus using that cash for repaying high-cost debt at the end of 2008?

It's a couple of things. Number one, I think the negative equity is not something that concerned us. Although it's a nice thing to turn positive, I don't know if that fundamentally changes the way the business runs or the cash flow that it generates. And I think the amount of the sizing for the stock buyback, when we designed that, we certainly had the refinancing opportunities that were out there ahead of us in mind. So, we're not looking at this being something that would preclude any refinancing opportunities.

Steve Schwartz with First Analysis.

I guess the first question, looking at 2008, as you finished up '07, your operating margins were at historic highs. And in part, I think that was because of the first half of the year and all the short-line buying. I'm wondering, are you expecting to hit that same level? It seems as if you are, and if so, how? Because, if I look at the fourth quarter, it looks like your operating margin growth tapered off a little bit on a sequential basis.

I think a couple of things. One, you have to be pretty careful with us because of our seasonal products. Margins for us tend to compress in the first and fourth quarters versus the second and third quarters. So, I don't know the fourth quarter I would hold out as indicative of what we look at for full year margins for next year.

Okay. But even still, you saw over a 200 basis point increase in operating margin in railroad, 2007 versus 2006, and I know that short-line buying had a huge impact on that. You know, it doesn't sound like you're going to see that type of business come through in '08.

Well, I think the short-line business should be there. The short-line business is important to us, but it's not a huge part of our business--.

But weren't you, in the first half of the year--.

More reflective, I think, in the movement in the margins is things like the new CSX contract that we talked about. But we do tend to get some decent traction in our contract negotiations.

Okay. And then Brian, I think you mentioned the carbon pitch volume added like $5.5 million to revenue in the fourth quarter, is that right?

I think that's right. Yes.

5.4 -- I guess on a base of 160 million in the fourth quarter of '06, that would be about 3% volume growth, and you know, we've been talking, you guys especially, about this huge growth in aluminum production and yet it doesn't look like your carbon pitch volumes over the past couple of quarters have been keeping up with that. What's happening there?

I'll start the answer. First of all, I think just in the US, but if you looked at, let's say the month of January, Steve, primary aluminum production in the US increased 16% and half of that was Ormet aluminum down in Ohio that imports from various places around the world, so that sort of takes away from it. And there were some other increases out on the West Coast, which did not happen to be our particular customer in that case.

But, when you look at what's going on around the world, I think you do see our carbon pitch increasing, but you're going to see more of a significant increase once we bring in more capacity and production in China for these new smelters starting up.

Okay. And then the last thing, I know, Brian, in your commentary you talked about the differential in the tax credits. Did you mention what else was in that dropped the tax rate so low in the fourth quarter of '07?

2007 the tax rate drop is really just due to the interaction of our foreign and domestic income. And so we get some volatility in that as our mix changes. And I think what you saw in the fourth quarter was some higher warrant earnings that affected the tax rate.

Okay. Would you consider that one-time or will that carry over into the first and maybe second quarters?

I think if you're using a tax rate for '08, I'd stick with the 32% range. I think that would reflect a pretty good approximation of the year. Again, we may get some volatility as that shakes out in the year, but 32% would be a good number to run with.

Okay. In '07 you took maybe 60% or more than half of your tax credits in the first half of the year. Do you have a feel for how you'll lay out, you know, using up the tax credits through '08?

I think maybe just to give a little history there, in 2006, most of the benefit of the tax credit resided in the fourth quarter. The legislation still had phase-out provisions in it that weren't modified until the end of the year. That caused us to concentrate that benefit in the fourth quarter. That's about the $3 million benefit I think that impacted EPS in that $0.31 per share fourth quarter 2006--.

Oh, I'm sorry if I said '06. I meant '07--.

In 2007, the tax credit is pretty evenly spread over the year and it would be the same in 2008.

Laurence Alexander with Jeffries.

Lucy Watson speaking for Laurence. I just had a question about the CM&C business. Can you give more detail on the trends in phthalic anhydride and naphthalene?

Phthalic anhydride, we have one production facility which is here in the US, and that continues to be a fairly strong market for us. There are three producers of phthalic in the merchant market in the US, ourselves, BASF as well as Stepan. But that goes into the plastics resins industries, if you will, and it's going to continue I think to be somewhat, at least at the moment, the same levels that we saw in 2007.

On naphthalene, naphthalene is a global product that we're primarily supplying out of Europe as well as China and Australia. As I mentioned earlier, that's going into concrete additive for surfactants as well as in the dyestuffs industry. And again, as I mentioned, because of the strong Asian economies, especially China, India and so forth, those continue to be fairly strong end-markets for us.

Just to sort of underline what Walt said, I think we've been talking about the link between phthalic anhydride in sort of the US housing market for probably about almost a year and a half now, and frankly, the volumes have stayed pretty consistent. So, although I mean you should be aware that it is linked into that market, we really haven't seen significant impact on our volumes. Volumes have remained fairly strong. And as a whole, phthalic anhydride is about 7% of our revenues.

We use naphthalene as a raw material to produce phthalic in North America. The naphthalene product that we sell directly into the naphthalene markets is sold primarily in Europe and in Asia and it goes entirely into the Asian concrete dyestuff markets.

Okay, thank you. And in your Railroad & Utilities business, given the amount of double tracking that railroads appear to be discussing, what does that imply for your volume assumptions in 2008 and 2009?

There are, obviously, several double-triple tracking projects, primarily between the West Coast and Chicago, and with what's been going on in the past has been more than half or maybe closer majority would be concrete ties and we are not participating in that particular market, because it's logistically too far away from where our concrete pipeline is located in Ohio.

But going forward, I really can't comment on that as whether it's going to go with concrete or wood or what have you.

As the railroads invest in their infrastructure, I think that's everything you read, that they're putting out, says they're going to continue to invest in their infrastructure. I think that will benefit Koppers, because we have fairly significant market shares in the railroad tie side of the business. I think in the shorter-term we see some fairly flat volumes in that business, but I think in the longer-term, as the year rolls out, I think, again, we're very optimistic about this business.

And just to further answer that, we still see 91 to 92% of all the tie insertions are going to continue to be wood. And with the strong market share that we have on the wood side, it just reiterates the strength that we have with the railroads and the infrastructure that Brian's mentioned.

Chris Shaw with UBS.

I guess I'm just curious, has the competitive environment changed do you think at all now that I guess it was Triton that bought Rutgers? I know they're big in both Europe and North America as a competitor. How are you guys doing that now?

Well, that transaction, I think it was Triton that was the private firm that bought the business, but nothing has changed. It's still in the very early stages, so there's not much we can comment on as far as market concessions or changes.

As far as we know, we're not aware of Triton owning any other coal tar distillation asset anywhere else in the world. I don't know that it looks like it will be much different than what we've done before, frankly.

Are there any coal tar assets left in Europe, outside of Rutgers, that are attractive?

Well, as I mentioned in the past, that tar distillation industry, there are several players over there, some small, some medium, some larger. Is consolidation still needed? We would think so. And will there be opportunities? We continue to think there will be opportunities to look at the situation.

Who are the medium sized players over there?

Well, it would be I guess [Stayza] in the Czech Republic, [Maylon] in Spain, a company called Cindu Chemicals in Holland, would be a few of them.

Okay. And then I guess you just kind of addressed this in the last question, but I was just looking at the RTA's outlook for, I guess, tie demand and I guess a 2% number. Is that relatable to what you guys see? Or maybe you guys feed into that number? Do you give them your outlook and then they produce the number or vice versa?

Well, the RTA receives a lot of input directly from the Class 1s and I think it's their basis for the numbers that they're putting together and I would guess we--.

We're receiving the same information from the railroads. I don't think we're feeding it to the RTA.

Bruce Wilcox with Cumberland Associates.

A few odds and ends. The evolution of your business, what do you consider your sustaining CapEx to be? You gave us a forecast for actual CapEx, I guess $35 million including the JVs, but what do you consider your sort of baseline maintenance number to be?

Probably around the $25 million range.

Okay. And then I'm curious whether you think there are any opportunities in working capital management? I mean, the increase was about in line with sales, if you just took the year-end points, but can you talk about whether or not there are any working capital management opportunities?

I think if you look at Receivables for us and you see this sort of when you look at the reserves, our Receivables tend to be with very large, well established companies and they turn pretty well. We're always focused on trying to squeeze an extra day out of the Receivable terms and it's a priority for us, because obviously cash flows and returns on capital are a real focus for us.

I think there's probably more of an opportunity on the inventory side, although I think having the product at your sites and being able to secure supply is important for us. But I think as far as a place where we can probably focus and look at maybe trying to improve our cycles is there. But, that being said, our inventory turns on an annual basis are pretty high already. If I had to choose one of those two, I'd say inventory is probably the place that we spend more time trying to optimize.

Okay. So, it sounds like it's humming along pretty well from your perspective. And I'm just curious whether you guys have, sort of monitoring the market, what you think your refi rate would be today if -- you know, I'm not suggesting that you will take that action, but what do you think your pricing would look like?

We liked it more a year ago. I'm sure we all do. We really haven't modeled it to give a specific number. But, there has to be a percent or two benefit in there somewhere. That's off the top of my head.

Okay. And finally just back on Rutgers, I mean, what odds would you give at having another shot at that?

We're really not able to comment on that.

Okay. I'll take that as high odds. Thank you guys very much. Terrific series of actions. The dividend share repurchase, I really appreciate all that.

Andrew O'Connor with Millennium Partners.

One or two. Regarding the new tar distillation plan in China, Walt, I thought I heard you say that the initial output capacity is 300,000 tons for 2009?

300,000 tons of raw material, which equates to about 150,000 tons of carbon pitch that would go into the aluminum industry, and about 90,000 tons or so going into the carbon black industry, and about 30,000 tons of naphthalene.

For a 2009 preview, that production will ramp up over the year. I know Walt's expectations are probably a week, but it will ramp up. And the other thing, it is an equity method with about a 30% joint venture, so we will get 30% of the profits under the equity method. We get 100% of the export pitch products in our sales as we export it through our company and earn a commission on it.

And we also are responsible for the management of the operation in the processes and so forth.

Plus the expansion project at our existing joint venture is fully consolidated.

Okay. What output capacity would you expect by, say, 2012, again for the new tar distillation plant?

On the one that we're building this year, no later than midyear it should be up to full production, by mid 2009 I would think.

From a strategic perspective, I mean this is sort of macro type things. We'd sort of like to be adding new capacity essentially every other year to match the projected capacity increase in aluminum smelting. So we're watching the projected new smelters coming on line and developing our capacity expansions around that.

Okay, so the new facility under construction, you had the chance or the ability to add to this incrementally as market demands evolve--?

That part too, but we're also looking for the third joint venture there as well. It takes minimum two years and in some cases as much as four years, depending on the energy source of these aluminum smelter projects and it gives us ample time to work with our customers and plan ahead, if you will, on the raw material requirements and the distillation capacity needed to produce these products for these expansions. So, to me, it's a very nice situation to be in where you can plan ahead, plan your raw materials, plan your production accordingly.

Got you. Thanks for that. And then secondly, your '08 sales guidance of 5 to 8% increase, can you guys breakout the total sales growth between carbon materials and railroad? How should we apportion the overall 5 to 8%?

We don't normally do that, but I think it's probably going to be weighted more towards carbon materials than railroad. I think someone asked the question, you saw the RTA numbers about a low single-digit projection in volume growth on the railroad, so I'd say the organic growth coming out of the railroad business is probably going to be a bit lower than in the Carbon Materials & Chemicals business.

All right. And then Brian, could I infer then that the '08 EBITDA guidance of 6 to 9% increase, would that also be maybe more weighted towards carbon materials versus railroad?

Correct.

(OPERATOR INSTRUCTIONS) Scott Blumenthal with Emerald Advisers.

Congratulations on the quarter. Getting into the 5 to 8% sales growth plan, can you give us maybe some of your assumptions regarding price versus volume there?

I'm sorry, you were breaking up on me a bit. Could you repeat the question?

Sure. Could you give us maybe some of your assumptions regarding how much of that you expect to get from price versus volume?

Of the 2008?

Yes.

I think generally speaking, the volume growth out of the railroad business is low single-digit. If you look at the growth in volume out of the aluminum side or the smelting side of the business, it generally drives around a mid single-digit.

Okay, so your 5 to 8% sales growth you expect a little bit more pricing from railroad and a little bit more volume from carbon materials?

Not necessarily. We're not really breaking that down, per se. The combination of the two of those is obviously going to drive that answer. We're not giving guidance on specifically growth rates for the railroad business or specifically for growth rates in sales for the Carbon Materials & Chemicals business.

Okay, fair enough. Can we look at the other side of the income statement and maybe do you expect average acquisition cost for raw materials, specifically coal tar, to be up and can you give us maybe some type of a percentage as compared to overall in 2007?

That's going to vary, depending on where you are in the world, but I would say as the price of oil has gone up, it tends to put more pressure on our negotiated price with our coal tar suppliers. Because of our contract terms, we have price formulas that allow us to pass along those escalations into our pricing formulas that will phase in through 2008. Generally speaking, I think oil prices going up is probably going to drive, generally speaking, raw material costs higher, although it does have different effects in the world, depending on supply and demand.

Sure. I understand that there's a fuel component in what it is that you're going after. I was just wondering if your assumptions for next year assume that you're going to be paying more as a percentage or less?

I'd say generally more.

Okay. And just a couple of cleanup items. The SG&A number, which was up significantly sequentially, can you give us some idea as to what was in that?

This is the annual number, the $72 million includes the $6.8 million write-off of the acquisition costs. If you take those out, you're going to get a more representative number. I think if you look at SG&A absent that special charge, it's about 5%, which it generally holds. You heard Walt mention in his talk, I think if you look at a place where we're investing probably a bit more in SG&A is in China.

Okay. And since it was a previous caller that asked the question about the balance sheet, we can see that the dollar value of inventory is up year-over-year. Can you talk about the actual volumes that you are holding in inventory, are those about the same?

We generally target I'd say about 45 days inventory in our plants, generally speaking. Although again, it's a hard thing to point to at the end of the year and say it's that exact number, because we can try to get some more inventory in under a cheaper price formula than the following year. Generally, I think because of the demand in the products, we probably have kept a bit more volumes on hand than you may have seen us in the last couple of years. But I think we're comfortable with the levels of inventory that we have.

Thank you. At this time there are no further questions. I will now turn the conference back over to Management for closing remarks.

Thank you, and obviously, we thank all of you for participating in today's call and really appreciate the continued interest in our company. I do believe that we continue to be well positioned for a strong 2008 and beyond. We see continued strong demand in our end-markets, as we've been talking about and in particular, based on the committed aluminum capacity additions that are coming on line in 2009 and beyond. We're particularly well positioned, given capacity additions underway in China.

Our balance sheet is well positioned, not only for these additions, but also for potential other opportunities to stimulate growth and create shareholder value. We remain committed to enhancing shareholder value by executing our strategy and 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 soon and thanks again for being a part of today's call.

Thank you for participating in today's Koppers fourth quarter 2007 earnings conference call. You may now disconnect.