Koppers Holdings Inc (KOP) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Koppers fourth-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, February 17, 2009.

I would now like to turn the conference over to Mr. Michael Snyder, Director Investor Relations. Please go ahead, sir.

Thanks, Adrienne, and good morning, everyone. Welcome to our fourth-quarter conference call. My name is Mike Snider 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 Zalinski] 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 am joined on this morning's call by Walt Turner, President and CEO of Koppers, and Brian McCurrie, Vice President and CFO. At this time, I would like to turn over the call to Walter Turner. Walt?

Thank you, Mike, and welcome, everyone, to our 2008 fourth-quarter conference call. Before I get into the 2008 results, I would like to make a few comments on the global economic environment and how it has affected our business.

Obviously, we have seen some dramatic changes in our end markets in the fourth quarter. These changes have led to certain negative financial consequences that we will discuss during the call. I would like to emphasize a few key points to make sure that they are not lost in the details of explaining a difficult quarter. We remain confident in the longer-term opportunities offered by our key end markets and in our ability as a market leader with an experienced management team to successfully navigate what may be a difficult 2009.

Our business model has not changed. We will continue to offer critically needed high quality products to our customers at the utmost effective cost-effective price we can. We will focus on maximizing profits and generating cash flows, which are both hallmarks of Koppers. I am confident that the future will be bright. We expect not only a return to the high performance we achieved in earlier in 2008, but also expect continued improvement as we expand our presence in China and further consolidate our mature markets.

I would like to discuss our fourth quarter of 2008. Fourth-quarter sales for the Company were $289 million, compared to prior year fourth-quarter sales of $309 million, reflecting the decline in the global economy. Sales in the fourth quarter were significantly impacted by a decline in demand and in some cases prices for certain products particularly in our global carbon materials and chemicals business.

Fourth-quarter sales of carbon pitch to the aluminum and steel industry declined 9% from the prior year's fourth quarter as a result of declines in aluminum and steel production. The areas where we saw the most significant changes were in our downstream chemical products. European and Asian sales volumes of carbon black feedstock to the carbon black producers declined 16% as many of the global rubber producers dramatically reduce fourth-quarter production and purchases of raw materials.

Sales volumes of naphthalene and phthalic anhydride declined 27% and 32% respectively in the fourth quarter based on what we believe was in part a destocking of inventories in these end markets. Sales prices particularly for phthalic anhydride and carbon black feedstock declined as significantly lower demand led to increased price volatility including the impact of lower benchmark oil that reduced prices in some instances in excess of 45%.

Profits for the fourth quarter were not only significantly impacted by the decline in volumes in Carbon Materials & Chemicals, but also by the negative margin impact of processing higher cost raw materials into lower priced end markets. In addition, the rate of decline and demand left the Company with significantly higher inventories at year-end and as a result significantly -- significant LIFO and lower of cost or margin reductions of inventory values were recorded at year-end as were other special charges that totaled $17 million of net income. I will leave it to Brian to discuss those in more detail.

Fourth quarter adjusted EBITDA was $26 million compared to prior year fourth quarter adjusted EBITDA of $32 million. This decline was a result of the previously discussed declining markets that impacted the fourth quarter. Adjusted EPS for the fourth quarter was $0.27 compared to $0.37 in the fourth quarter of 2007. I will speak more about our outlook later, but I do believe that we did not see the full financial impact of the economic downturn in the fourth quarter and foresee a more significant impact in the first quarter of 2009. You will recall that the first quarter is normally our weakest quarter due to the seasonality of our businesses.

On a more positive note, fourth-quarter cash flows from operations and net cash realized from the Monessen sale have allowed the Company to end the year with a very strong and flexible balance sheet that includes $63 million of cash on hand and unutilized balances net of letters of credit of $283 million on the new $300 million revolving credit facility.

Full-year cash flow from operations excluding the tax on the gain of the Monessen sale was $104 million compared to prior year of $65 million. Net debt was reduced from $423 million during the year to $308 million at December 31, 2008. As a result of the decline in the demand of our end markets, we had initiated steps to reduce costs and optimize plants and inventory levels throughout the Company.

Specific expense reduction targets have been identified. That includes staff reductions, [plant] capacity utilization that is being managed based on our end market demand. Supplies of raw materials and as a result, we have temporarily reduced production at our Australian carbon black facility by 70% for the first quarter of 2009. And currently taking temporary shutdowns at plants in Denmark and in the United States. I expect that these cutbacks will impact the first quarter. Should demand continue to be soft and the supply of coal tar continue to be uncertain, these reductions would continue in the second quarter and possibly beyond.

At this point we have not seen lower demand for most of the class one railroads in North America; however, we are anticipating a potential softening in the commercial tie business in 2009. In our global carbon Materials & Chemicals segment, fourth-quarter 2008 sales decreased 13% to $199 million as volumes decreased 14% due to lower sales across all major product lines. Average prices in the quarter increased 12% primarily due to higher sales prices for carbon materials due to higher raw material prices and higher contract pricing.

Sales of railroad utility products in the fourth quarter were $115 million, compared to $110 million in the fourth quarter 2007 as higher volumes and prices for treated crossties offset lower volumes of creosote and utility poles. As indicated during our last call, we got off to a slow start in 2008 due primarily to poor weather conditions coupled with a weak lumber market, but we did see volumes increase in the second half of the year. Our expectation is that the increased demand for untreated crossties from our class one customers should continue at least through the early part of 2009. However, if rail traffic and revenue trends are down, we could see some moderation in buying patterns as we move into the second half of the year.

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 2009. Brian?

Thanks, Walt. Before I get into the financials, I would like to walk you through the $17 million of special items impacting EBIT in the fourth quarter. As Walt mentioned, we recorded a total of $12 million of inventory adjustments in the quarter. These included $8 million of incremental LIFO adjustments in the US beyond those recorded in the prior year. These were largely caused by rapid declines in demand that left us with significantly higher than anticipated inventories at higher costs at year-end.

In addition, we incurred $4 million for lower of cost or market write-downs outside the US where they don't have the pleasure of dealing with LIFO. Due to the nature of the LIFO calculation which is done on a single pool basis unlike the more straightforward LCM calculation, we do expect negative margin impacts in the first quarter of 2009 as higher cost inventories for orthoxylene and phthalic anhydride are liquidated at lower sales prices. These higher cost inventories should be completely processed by the end of the first quarter.

In January of 2009, we received notice that our customer for our glycerin refining operation in the UK was canceling their contract. As of this date, we have not identified an alternative customer for this capacity, so we recorded an impairment charge of $3.7 million at the end of the year. On an annual basis, this operation returned less than $200,000 of profit and is not expected to have a significant impact on future levels of profitability. Should we be able to negotiate a contract with a new customer, we may be able to improve the overall profitability of this operation.

The plant is located at our Port Clarence coal tar distillation facility and its impairment will not result in additional impacts to that operation. This adjustment impacts EBIT and is not an adjustment to EBITDA since it is added back as part of depreciation expense for the period.

Other special charges of $1 million and $800,000 were recorded for an extended maintenance outage at our Susquehanna, Pennsylvania cogen facility and for severance related to year-end redundancies. Unfortunately, the issues associated with restarting the cogen facility have continued into the first quarter and could have an additional $300,000 to $500,000 impact as we work to resume operations.

Severance relates to part of our cost-cutting initiatives for 2009. $140 million gain on sale of Monessen and the results of its discontinued operations have been excluded from adjusted EBIT, EBITDA, and EPS for the quarter in both 2007 and 2008.

In the fourth quarter, we changed our assumption related to reinvestment of foreign earnings, primarily European earnings, that caused us to accrue $6.4 million of incremental tax expense in the quarter. Up to the fourth quarter we had assumed that these earnings were permanently reinvested and had reflected this assumption in our effective tax rate accordingly. Given the volatility of future earnings and to provide flexibly for potential repatriation, we changed this assumption. This changes the annual effective tax rate from 39% to 46% and concentrates the catch-up impact on EPS of $0.31 in the fourth quarter.

We have not repatriated the earnings to the US, so cash taxes will not change. Rather tax accruals will be established. I expect we will maintain the effective tax rate in the range of 43% into 2009 until our end markets stabilize. This will serve to eliminate significant volatility in the 2009 EPS should foreign earnings be repatriated. Should the opportunity to permanently reinvest these funds in Europe present itself, the tax rate would be reduced accordingly.

As a summary for the quarter, we have excluded $17.2 million from adjusted EBIT, $13.5 million from adjusted EBITDA, and $0.83 from adjusted EPS for the purposes of this financial summary.

Sales for the fourth quarter decreased 6.6% to $288.9 million as compared to $309.2 million in the prior year quarter. We saw the most significant impact of the economic decline in our global Carbon Materials & Chemicals business, where we saw volume declines in every geographic region result in lower sales of 12.7% or $25.3 million more than offsetting higher sales in the Railroad & Utility segment, which increased $5 million based on increased pricing for crossties due to higher lumber costs.

Fourth-quarter sales decline in the Carbon Materials & Chemicals was comprised of a 1% or $2.4 million increase in sales of Carbon Materials; a 2% or $5.6 million reduction from sales of distillates; a 7% or $11.1 million decline in sales of coal tar chemicals; and a 6% or $11 million decrease in sales of other products. Fourth-quarter Carbon Materials sales were negatively impacted by $6 million to the lower volumes of carbon pitch sales primarily from North American and European operations as smelter closures and curtailments impacted customer volumes for carbon pitch and $6.9 million of foreign exchange impact offset by $15 million of higher prices due primarily to higher raw material costs.

Sales of distillates which include creosote and carbon black feedstocks were negatively impacted by lower volumes amounting to $3.8 million. While prices for distillates were up slightly from the prior year quarter, they were down significantly from the third quarter due to the decline in oil prices.

North American sales of phthalic anhydride representing less than 6% of total sales for Koppers experienced a 32% reduction in fourth-quarter volumes due to significantly lower end market demand from customers as we believe customers destocked inventories as their businesses softened and commodity prices declined. We expect that there may be volatility in first-quarter 2009 volumes for phallic anhydride due to the depressed state of the automobile and housing industries in North America.

Carbon Materials & Chemicals adjusted EBIT for the quarter of $14.6 million declined 15% from $17.1 million in the fourth quarter of 2007. EBIT margin dollars were negatively impacted by lower sales volumes, production throughput, and prices for most product lines in the Carbon Materials & Chemicals segment as adjusted operating margins were flat at 8.5% on lower sales.

Overall Carbon Materials & Chemicals sales in the fourth quarter were negatively impacted by 11% or $21.8 million due to foreign exchange, a trend that is likely to continue and that we see as a headwind going into 2009. Impact on 2008 sales and profits using today's exchange rates would have reduced sales in EBIT by approximately $80 million and $10 million respectively.

Average oil prices at the start of 2009 are about $35 to $40 per barrel compared to 2008 average oil prices of about $95 per barrel or $93 per barrel at the beginning of 2008 will lead to lower benchmark pricing for carbon black feedstocks in the first quarter and has led to raw material cost reductions in certain geographic markets.

Sales of Railroad & Utility products increased slightly in the fourth quarter to $115.3 million. Higher sales of treated crossties helped offset lower volumes for creosote in utility poles compared to the prior year quarter. Operating margins for R&UP decreased to 2.9% from 6.5% due primarily to higher raw material costs for sale to the class one railroads that were passed through dollar for dollar and for commercial crossties sales where the higher costs were not recovered in selling prices due to contractual obligations as well as intense competition for that business.

During the year, we have seen the costs of white ties increase $5 to $7, which has caused some dilution impact to margins even when the higher cost has been recovered dollar for dollar. Due to the competitive nature of the commercial crosstie market along with the current economic situation that has resulted in significantly less spending by the short lines, we anticipate continued pressure on margins in this part of our business in 2009. As a point of reference, the commercial crosstie business represents 15% to 20% of the total railroad business for Koppers.

On a consolidated basis, fourth-quarter adjusted EBITDA increased 18% to $25.7 million compared to fourth-quarter 2007 adjusted EBITDA of $31.5 million. Adjusted net income for the fourth quarter of 2008 was $5.5 million compared to adjusted net income in the fourth of 2007 of $7.8 million. Fourth-quarter adjusted EPS was $0.27 compared to prior year's adjusted EPS of $0.37.

Adjusted net income and adjusted diluted EPS for the years ended December 31, 2008 and 2007 were $65.4 million or $3.15 per share, $51.9 million or $2.29 per share respectively after eliminating discontinued operations for both years and adding back $17.7 million of charges for 2008 and $4.1 million of after-tax charges for 2007.

Our debt net of cash on hand at December 31, 2008 was $308 million compared to $423 million at December 31, 2007 with the reduction reflecting the payoff of our revolver and term loans from the Monessen proceeds as cash flows from operations also funded the purchase of $21 million of shares and $32 million face value of senior secured notes.

Year-to-date operating cash flows excluding taxes on the Monessen sale were $104 million compared to $62 million in the prior year period. Capital expenditures for the year excluding expansions were $37 million compared to $24 million in 2007. We expect CapEx reductions in 2009 as spending is reduced to the $23 million range. Should incremental investments for expansions or consolidation arise, we will review these prudently but would like to be able to take advantage of business improvement opportunities as they present themselves.

Regarding our pension plans and the expected impact on 2009 earnings and cash flows even though the US pension plan for salaried employees was frozen beginning in 2007, we still have a significant pension obligation that will be negatively impacted by the stock market decline in 2008. While pension expense for the US, which comprises the largest part of our global pension expense is expected to increase by $7 million in 2009, there will be no additional funding requirement for the US plans until 2010, when absent a change in the current funding rules, our contribution is estimated to be $20 million.

Closing of the sale of Monessen on October 1 resulted in approximately $100 million of net cash proceeds from the sale after taxes. We used the proceeds to pay off our existing term loans and revolving credit facility which were at $49.1 million at September 30, 2008. On October 31, 2008, we also entered into a new four-year credit agreement that provides for a revolving credit facility of $300 million at an initial interest rate of LIBOR plus 250 basis points. The agreement replaced the existing $125 million revolver and term loan facilities that were due to expire late in 2009.

The new revolver is subject to certain covenants the most significant of which relates to leverage, fixed charges, and domestic interest coverage, all measured at the Koppers, Inc. level. We expect to use this additional liquidity and financial flexibility to look at opportunities to increase shareholder value including growth investment and bond redemptions. As an example during the fourth quarter, we were able to repurchase $32.5 million of our senior secured bonds on the open market at a price below face value.

In the near term, in light of general market uncertainty, we are placing a premium on balance sheet flexibility and liquidity. As the situation stabilizes, we believe that we will be in an excellent position to take full advantage of our strong balance sheet to create shareholder value. As such, we have not yet used the new revolving credit facility to reduce the senior secured notes, which became callable in late 2008. We will be reviewing this on an ongoing basis through the year. Senior secured notes and senior discount notes mature in late 2013 and 2014 respectively. We have no current maturities of debt balances.

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 financial performance in the first and fourth quarters is historically lower than the second and third quarters. We see this trend continuing and anticipate a challenging first quarter of 2009 as the seasonality is coupled with the state of the global economy.

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

Thanks very much, Brian. In 2008, our two business segments, Carbon Materials & Chemicals and Railroad & Utility products were 65% and 35% respectively of our total revenues. The Railroad & Utility Products segments is expected to grow in 2009 as the demand for untreated wood crossties primarily to the North American class one railroads increases by 2% tot 3%. As we currently see it, we don't believe that the rate of the tie insertions in 2009 will be significantly impacted by economic conditions. Due to the importance of crossties to the rail infrastructure, we believe that the railroads will reduce spending on ties only as a last resort.

You see this business, although having some risk for volatility in a very uncertain economic environment as having a more consistent performance in a market downturn. On the profit side, we have been experiencing increases in costs of the untreated crossties due to lower demand for hardwood in the furniture and housing markets that have driven prices up in the hardwood market as sawmills struggle to maintain their sustainability.

The cost of creosote is also increasing as the cost of coal tar raw materials increases. These increases, although absorbed largely by our customers, is having a dilutive impact on our margins. I expect this trend of cost increases to reverse sometime in 2009. Our utility products business in Australia is a market leader and I wholly expect another strong performance there in 2009. In addition, we are reviewing the government stimulus plan closely and are hopeful that infrastructure spending will have a positive impact on the railroads.

The Carbon Materials & Chemicals segment is largely tied to the steel and aluminum markets. As you recall, we use a byproduct of metallurgical coke making process coal tar as our raw material to produce carbon pitch for the aluminum industry, carbon black feedstocks for the rubber market, and naphthalene as a feedstock concrete additive or for further processing in the phthalic anhydride for the plastics and residence markets.

Beginning in late 2008, we saw significant reductions in steel and coke production that ultimately led to the reductions in coal tar availability. Although we are constrained in certain regions of the world due to lower volumes of tar, we have been able to meet customer demand by blending tar with certain petroleum feedstocks or by importing and exporting products to our global network of plans. This allows us to meet demand but ultimately at a higher cost.

In certain parts of the world we saw coal tar prices decline, however, in certain geographic regions like North America we have seen prices continue to increase as constraints on availability have delayed price declines. We believe that this will ultimately normalize in the second half of 2009. Price formulas in our long-term contracts will continue to keep us whole, but we will have margin dilution in the early part of the year.

As I mentioned earlier, our primary product is consumed in the smelting of aluminum. Our prices are not tied to aluminum prices or coal prices, but rather based on terms that largely reflect the cost of our raw materials. Much like the steel industry, we have seen significant decreases in aluminum production around the world primarily targeting higher costs to older smelters. As such, we have seen curtailments in production more heavily in the Europe, North America, and China. The reduction of production in the Europe and North America have and will continue to impact us and as noted earlier, we have temporarily curtailed production at some of our distillation facilities in Denmark and in the US.

Lower production in China and even Russia will not impact us since we do not sell significant volumes into these markets. Interestingly, the one area where production is increasing is the Middle East, where more efficient new smelters have come online in 2008, 2009, and even further in 2010. We are well-positioned in our production facilities in China to serve a large part of this market.

As a note, we did complete the expansion of our majority-owned joint venture in China in December, increasing our capacity from 150,000 tons to 200,000 tons. The physical construction of the new 300,000 ton plant was also completed in December and the plant is currently in its commissioning phase with startup scheduled for the second quarter of 2009.

It's difficult to tell you exactly where 2009 aluminum production levels will end up. What I can assure you is that we will manage our plant capacities, our raw material and production costs, and a way to optimize our results. We sell our distillate feedstock product in the Europe and Asia to the carbon black producers. This product represented approximately 5% of our sales in 2008. These producers remain operating at low levels in Asia and in Europe, we have seen closures of facilities as more expensive capacity is taken off-line.

Our only carbon black plant in Australia is currently running at 30% capacity and will continue at least through the end of the first quarter of 2009. We do expect Asian carbon black production to lead a recovery and have seen some signs of improvement, but certainly not enough to pronounce a recovery. On the pricing side, our carbon black feedstock prices off of an oil benchmark, so we have seen prices decline with the price of oil.

You will remember that our distillate feedstock product in North America is the creosote we use to treat crossties and therefore the volatility of the North American carbon black industry has less of an impact on us.

Our naphthalene product is an interesting story for us. We sell this product into the Middle East, India, China and Southeast Asia. Sales of naphthalene represented 4% of our sales in 2008. Recently the demand and pricing have picked up a bit. The products are seasonal, but it's nice to see a positive sign in our end markets. Since naphthalene is used in the production of creosote additives -- I'm sorry -- since naphthalene is used in the production of creasote additives, regional governmental stimulus plans could have a positive impact on naphthalene demand.

In North America, we use the naphthalene stream in combination with orthoxylene as a feedstock to boost phthalic. Phthalic pricing is based off of a spread above orthoxylene and represented 7% of our 2008 revenues. We saw orthoxylene prices decline to $0.28 in December of 2008 and have seen some recovery to 35% in February. These prices are well below 2008 levels.

Demand for phallic anhydride is seasonal, so first-quarter demand is normally soft. Since the end markets for this product is related to plastic and resins, we expect some negative impact due to the continuing struggles in the North American housing and auto markets.

I am not going to tell you that 2009 will be a better year than 2008. Unfortunately, we need to go through some period of correction. We have an experienced management team that has successfully negotiated its way through economic downturns before. We know how to optimize our plant operations, control costs, and manage cash flows. Our balance sheets and new credit facility have put us in a very strong position not only to get through this period but also to use this turmoil as a possible catalyst to further consolidate in our core markets.

We are still feeling the effects of a volatile economic environment that in addition to normal seasonal buying patterns continues to evolve and impact our business. Therefore, we are not prepared to give specific guidance for 2009 at this time. We hope that we will be in a better position at the end of the first quarter to provide some clarity about what we anticipate for 2009. In the meantime, we will continue to focus on optimizing profits and prudently managing our cash flows.

To conclude, although today there is a volatility in most of our end markets, we remain very positive about the long-term strength of our primary end markets, aluminum and railroads. We see positive impacts in 2009 from our railroad business and the new distillation capacity in China that will come online in 2009 as well as the flexibility afforded to us by the strength of our balance sheet going forward.

Although softness in demand, lower foreign exchange rates, and lower oil prices will have a negative short-term impact, lower oil prices should eventually work their way back to lower raw material costs. And with our capacity expansions in China, we should be well positioned to capitalize on increased global demand for aluminum when markets return to normal levels.

Additionally, anticipated stimulus spending in the US, China, and other regions of the world where we operate and sell products should also provide some upside to our businesses especially to the extent funds are spent on infrastructure projects. As we noted in our last call, those companies that have taken steps to become clear market leaders in their industries and invested for growth have been rewarded in the longer term. We hope that current market instability in places like Europe and China will create opportunities for additional consolidation as we are well-positioned to take advantage of such opportunities.

We look forward to seeing these opportunities over the balance of this year and into the future. At this time, I would like to open up the lines, Adrienne, for questions.

(Operator Instructions) Laurence Alexander, Jeffries.

Good morning. I guess first question, you mentioned that you thought there would also be a LIFO impact in Q1. Will it be of a similar magnitude as in Q4?

No, no. I don't -- the impact -- there won't be a LIFO impact as such in the first quarter. It will be a margin dilution impact. (multiple speakers) LIFO will get measured over a full-year period amortized. So we are not seeing that level of LIFO impact following on in the first quarter.

Then with respect to the concerns on the commercial railroad demand, is that front-end loaded in the year?

Normally it would not be. Because of the seasonal aspects of our business, normally the buying pattern certainly at the commercial would be slower in the first quarter just because of weather. So when we would expect to see any impact in that would probably be starting in the April/May timeframe. Their work is more heavily concentrated in the summer months.

Most of our commercial business is in the north, which is, as Brian says, weather related. So yes.

Okay, then lastly on the raw materials, how much is your coal tar cost likely to be -- to increase in 2009 versus 2008? And is there sort of -- is there a timing issue between your raw material supply contracts and your customer contracts, which implies more of a hit in the first half versus the second half?

In North America, we continue to see raw material increasing as we mentioned earlier in our presentation which continues to be based off of supply and demand primarily. In other parts of the world, it's been a slight increase or basically trying to keep those costs at the 2008 levels.

So on an overall basis, your raw materials would be up double digits or less than that?

That would probably be low double digits, but I think, Laurence, it is very different in each geographic region. So I don't know that just sort of broadcasting it is really the right way to look at it.

Understood, thanks.

Steve Swartz, First Analysis.

Good morning. There's this tax credit hanging out there, the 45G and it expires I guess at the end of 2009. So at this point you guys are expecting that the railroads will not be taking advantage of that this year?

These are the commercial lines?

I think it applies to all infrastructure, rail infrastructure.

I think generally speaking I think because of the volatility in earnings, tax credits may (inaudible) less value. Probably more so to the commercial guys, so I don't know that the volatility in the environment is going to drive certainly the commercial part of the business in the near term.

I'm not aware of any class one credits at the [south there].

Right, but just to underline it, I think the commercial business is about 15% of our total record revenues. Not that it's insignificant, but it's not really the driver. I think the consistency that we saw out of the class ones is really I think a good take away from the call.

And you say you are still seeing solid demand from the class ones for white ties right now?

Both. Yes, both white ties and obviously the treated ties, yes.

Okay, so that's good. So the treatment services TSO should hold up then in the second half of the year from the class ones?

Based on our white tie procurements, yes.

Okay, then regarding the contracts for coal tar, is there a volume component or does that only lock in price?

It's a requirements contract. What's being produced, it's a pricing as well. But it's something that we've seen the coke batteries declining on coke production, therefore they are generating less coal tar, so we are basically taking it on a requirements basis.

And it sounds like the downturn in demand from the aluminum industry is commensurate with what the steel or coke production downturn has been in supplying you coal tar. Is that right? It's one for one?

Well, not really. Again, it's sort of regions of the world. I mean going back to October/November is when we started to see steel production declining cut backs and so forth. Aluminum came a little bit later and again, it's the regions of the world but it's not been one for one and we see more aluminum cutbacks in North America because we think we have higher smelting cost smelters here versus other parts of the world. But it's been primarily Europe and North America where there have been cutbacks and that's where there's been steel production cutbacks as well.

But we are very, very careful with how we are looking at our raw materials and being able to meet that demand based on the cutbacks.

Okay, great. Thanks much.

Saul Ludwig, KeyBanc.

Good morning, everybody. Back to the first question that Laurence asked, with regard to the high cost inventories running through cost of goods at a higher level than what they might otherwise be, what would be the dollar impact of these higher raw material costs in the first quarter versus what they would normally be? And b, will they be worked through by the end of the first quarter?

I think you are probably looking at a couple million dollar impact, Saul. And we do expect that those will be worked through by the end of the first quarter.

Okay. Secondly, with the lower operating rates, how does this unabsorbed hit you? When you are running whether it be your distillation plants or your carbon black plants or your railroad processing plants, are we going to see an impact of unabsorbed overhead as a component?

That's one of our cost reduction initiatives is optimizing plant operations, which unfortunately means reduction headcounts, that sort of thing. So everywhere we can we are looking at optimizing that production. We mentioned Denmark, we mentioned the US. Right now it is primarily on the [carbon] installation plants, not necessarily the wood treating plants. But again, it's doing what we can to keep those costs under control.

I think, Saul, it's probably more -- in the couple million dollar range. You are not talking a huge component of fixed costs in these plants.

So maybe $2.5 million or so?

Right, right. I think probably the largest part of that is probably going to be the carbon black plant in Australia.

Walt, how many distillation plants does Koppers have? Is there any --?

Could I just -- Saul, just to make sure when we are talking about curtailment, other than Australia that is running at 30%, most of the other plants we are talking about running maybe three weeks out of four weeks in a month. They are not --

They are running 75%.

These are pretty nominal -- well not nominal -- these are -- (multiple speakers)

Walt, how many distillation plants does Koppers have around the world and is there any opportunity to actually close or consolidate these? And if so, should we be looking at any -- another round of some special charges sometime during 2009?

Hopefully not. On our tar distillation plants, we have three in the US. We have three in Europe, one in Australia and two in China. I think that's a total of nine. And obviously we just finished the new one, the new distillation facility in China which will be -- is being commissioned now and be starting up second quarter. No, I don't see anything like that. I guess what I'm saying in that regard is that we will be seeing aluminum production coming back. We will see tar distillation continuing when we get back to normalized levels of product demand.

Saul, one of the things, if there was an M&A opportunity in Europe, then that's probably the area that we still -- we've talked about this, that would be a place where plant optimization [we would look at].

Why was your -- I understand about margins when you are matching prices to raw material costs, so margins can be distorted, but why was -- what was the major reason that the railroad tie earnings fell from $7 million to $3 million even on higher revenues in the fourth quarter?

I think a lot of that came from mix but a lot of it also came from commercial ties. We saw the commercial tie business you are not getting a pass-through of the raw material costs. So the raw material cost increases that we saw in the year probably hurt us more on the commercial tie business than would've normally seen. That was fairly heavily weighted in the fourth quarter.

Then a final question. It sounds like from what we are seeing here in the first quarter with not on your company but so many different companies in low business and then you are going to have the unabsorbed overhead, you're going to have a higher raw materials going through. Should we be looking for basically a red number in the first quarter without quantifying the degree thereof? But does it look like the Company will probably have a loss in the first quarter?

Saul, you have figured out how to get us in a position to give guidance on a quarterly basis. (multiple speakers)

On the plus side or neutral or minus not being more pinpointing.

You know, Saul, I would say that the first-quarter results just based on all the turmoil are probably going to be closer to the breakeven in special, whether it's slightly positive or slightly negative, isn't I think that critical. We are not seeing --

That's fair enough. Thank you very much.

Bob Fetch, Lord Abbott.

Good morning. I know you had repurchase authorization. Did you make any? Did you repurchase any shares in the quarter?

No, we did not.

Okay, no current plans to I imagine based on some of the comments earlier?

We have not repurchased any through the current date.

And is it 55 out of 75 left or 75 left?

Around 55 left.

Okay, and I think it was about a year ago you folks last increased the dividend. Will you guys be recommending one at the next Board meeting?

We just had a Board meeting a week ago and did announce a dividend of $0.22 a share. I think that was a week ago.

Okay, it's at the same current rate it's been at though, right?

Right, same rate.

Okay, in regards to you mentioned the new plant in China is up. What level do you expect it to possibly be producing at in the second quarter?

It's a little too early to answer that question, Bob. It will be commissioned, ready to start up. It's really going to depend upon the product demand. About half the products will be consumed in China, which will be the carbon black industry and then the naphthalene going into construction. And the pitch will be focused on export as well as some domestic and it's just too soon to tell you whether it will be at 50% or cranking right up to 100%. (inaudible)

Just to be clear, Bob, we did have the plant expansion that's up and running and that's probably going to -- that's the one that we consolidate. So I would expect that we would see more near-term benefits from that and I think the minority interest in new plant is probably going to as Walt said, phase in second and third quarter.

Just for contrasting purposes, in '03 when we lost a lot of North American aluminum production principally due to hydropower costs, what was that decline in demand either in percent and/or in tonnage? And what do you calculate the current short-term decline to have been at the moment?

I'm trying to remember back, Bob, 2003/2004 timeframe, but at the moment it looks like we are -- the global aluminum industry has cut back about 20% overall around the world. And the question is what cut further and don't really know that. But back in 2003, that's when the aluminum industry was going down, but I just don't recall what the percentage was. Some of that production really has come back.

Correct. So in terms of magnitude, though, tonnage has the decline been less or similar to then?

Well, there's been additional production added on, obviously, over the last five or six years. Obviously it's more this time than before, yes.

On a global basis?

You are right.

Okay. Can you update us on the level if any of business in South Africa with -- relative to the Mittal order that you've had in hand?

Well, unfortunately we did have the export business last year, but unfortunately with the steel cutbacks and the aluminum cutbacks for bauxite and iron ore, a lot of those projects have really slowed down dramatically. We've got a couple of inquiries, but nothing major at this point.

Okay, so at the moment we wouldn't expect anything in '09? (multiple speakers)

Certainly not from the mining side.

Okay. You referenced the opportunities that may be presenting themselves if one were likely to guesstimate on where the activity likely would be the greatest. Are we referencing Europe?

Frankly, we are referencing both Europe and China as well. We continue to look at those two regions quite extensively. So --

And I wouldn't exclude North America either.

Okay, so you have a table full?

Well, a good list, yes.

Your depreciation looks like it was $30 million last year.

I think that included the impairment as well. So probably about $3.7 million of that $30 million is the impairment charge that will go away.

It will go away. Okay. And then what will it be in '09 now that you have these China projects online?

It should be about $27 million.

$27 million. And okay, that's still greater than your CapEx that you talked about earlier at $23 million.

Right, yes.

And do you expect your working capital to likely come down this year?

No. I would say we are focused on it, although it's interesting. A lot of it depends on what happens in the way of recovery in the latter part of the year. So normally I would say yes and certainly we've seen receivables come down and we are focused on bringing our inventories down. If we do see sort of a bump up in demand in late in the year, that could have an impact on us. But I would expect we would still look to be managing our working capital downwards.

Okay, so you don't have any financing demands in terms of maturities though this year, right?

We don't have any debt maturities until end of 2013.

Okay. So with depreciation where it is and possibly some lower working capital requirements, you should be adding to your cash by this time next year?

Yes, I think part of what Koppers tries to do is generate the cash all the time. I do think one of the things, an important type of the seasonality in our business would normally cause us to borrow money earlier in the year then generate more cash later in the year, to the extent you probably have lower levels of profitability in certainly Carbon Materials & Chemicals, I would expect that trend to be holding true. So I would think probably later in the year, yes, but I wouldn't look for it at the end of the first quarter.

Okay. And what would you define as the tightest covenant that you have on the latest financing?

I think it's probably the domestic fixed charge covenant. It is an interest covenant. So it is our domestic EBITDA over our Koppers, Inc. interest.

Okay, and what is the current level?

The current level in it is about -- we're at 6 and the requirement is 3.

Okay. So definitely have some room there.

Most of the covenants have pretty good headroom. But I do think sort of profitability and interest expense are probably the two inputs there and we do have ability to utilize our revolver to take down some of the bonds and put (inaudible) certainly the interest expense (inaudible) on that calculations.

Okay. Well, it sounds like all we all have to do is wait for the globe to start growing again.

True, true.

All right, thanks.

I would like to turn the call back over to Mr. Turner. Please go ahead with any closing remarks.

Thank you, Adrienne. And thank you for participating in today's call. I appreciate your continued interest in our Company. I believe that we continue to be well positioned to weather the storm in 2009 and prosper when things return to more normalized levels. Diversity is a key for us in our major products, our end markets, and in our geographic locations around the world.

We see continued strong demand in our end markets and in the long term particularly, based on the committed aluminum capacity additions coming on line in the Middle East in 2009 and 2010. We are all very well-positioned given capacity additions in China. Our balance sheet can support not only these additions, but also other potential opportunities to stimulate growth or create shareholder value particularly in light of the cash from the sale of the Monessen combined with the new bank agreement which provides significant stability and flexibility going forward.

Finally, we remain firmly committed to enhancing our 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. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Koppers fourth-quarter earnings conference call. Thank you for your participation. You may now disconnect.