Koppers Holdings Inc (KOP) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Koppers First Quarter Earnings Conference Call on the 7th of May, 2009. Throughout today's presentation, all participants will be in the listen-only mode. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions)

I will now hand the conference over to Mike Snyder. Please go ahead.

Thanks, Vivian, and good morning, everyone. Welcome to our first 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'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 SEC.

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 different materially from such forward-looking-statements.

I'm joined on this morning's call by Walt Turner, president and CEO of Koppers, 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 2009 first quarter conference call. Our first quarter sales for the company were $273 million, compared to the prior year first quarter sales of $331 million. The Carbon Materials & Chemicals sales for the first quarter were significantly impacted by the global recession. However, sales for the quarter increased significantly in our Railroad & Utility Products business, as the Class I railroads increased their buying and trading volumes.

I was very pleased to see that we were able to navigate through a very difficult quarter generating not only profits but also positive cash flows. First quarter volumes of carbon bits to the aluminum and steel industry declined 27% from the prior year's first quarter as a result in declines in aluminum and steel production and foreign exchange.

Sales volumes from carbon black feedstock to the carbon black producers declined 12%, as many of the global rubber producers continued a reduction in production and raw material purchases that began back in the fourth quarter. Sales volumes of phthalic anhydride declined 22% in the first quarter compared to the prior year.

We have seen some improvement trends over the fourth quarter levels, but end market demand in carbon materials and chemicals remains quite depressed over the prior year levels. Sales prices, particularly for phthalic anhydride and carbon black feedstock, declined from the prior year quarter, as lower demand and lower benchmarked oil reduced prices.

In addition to end market demand due to reductions in mill eligible coke production, availability of coal tar has tightened, leading to price increases in North America and Australia.

On the positive side, our Railroad & Utility Products business had a very strong first quarter. Sales were up 17%. As we stated in our last call, our Class I railroad customers have continued to buy and insert ties despite challenging economic conditions. We believe this in part to restock inventories after some destocking appeared to occur in the first half of 2008.

We expect the strong buying and insertion patterns to continue through the first half of 2009, although we anticipate some moderation in the second half of the year.

Our first quarter adjusted EBITDA was $25 million, compared to last year's first quarter adjusted EBITDA of $39 million. This decrease was a result of the previously discussed market declines that impacted the quarter, as well as negative margin compression as higher cost year-end inventories for phthalic anhydride, orthoxylene, and carbon black feedstock were worked through production, along with a negative impact from foreign exchange.

Adjusted EPS for the first quarter was $0.22, compared to $0.58 in the first quarter of 2008. You will recall that the first quarter is normally a weak quarter due to the seasonality of our businesses. First quarter cash flows from operations amounted to $22 million, compared to $6 million in the first quarter of 2008, as inventory reductions made a major contribution to producing working capital.

I think it's important to note that the first quarter is typically not a strong cash flow quarter for us and that even in the current environment, we were able to generate significant positive cash flow, primarily as a result of the initiatives designed in our response to the current conditions.

Our capital structure was enhanced as net debt was reduced to $304 million during the quarter, from $312 million at December 31 of last year. And cash on hand increased from $63 million to $76 million in March 31 of this year.

As announced at the last call, we have initiated steps to reduce costs and optimize plant production and inventory levels around the company. Specific expense reduction targets included not only staff reductions but also plant capacity optimization.

I expect that end market demand will remain soft and the supply of coal tar will continue to be depressed and that these operating conditions will continue not only into the second quarter, but most probably through the end of the year.

After Brian completes the financial review, I'll give you a status update of our core end markets as well as provide some insight into what we are expecting as we move forward in 2009. Brian?

Thanks, Walt. Sales for the first quarter decreased 17.7% to $272.7 million, as compared to $331.2 million for the prior year quarter, with approximately $23 million of this decrease relating to FX.

We continue to see the most significant impact of the global economic decline in our carbon and chemicals business, where we saw global volume declines lead to lower sales of 34.6% or $77 million more than offsetting higher sales in the railroad and utilities segment, which increased 17% or $18.5 million based on increased volumes and pricing for cross-ties.

The first quarter sales decline in Carbon Materials & Chemicals was comprised of a 9% or $21.1 million decrease in sales of carbon materials; 5% or $10.8 million reduction in sales of distillates; 7% or $15.5 million decline in sales of coal tar chemicals; and a 13% or $29.6 million in sales of other products, which include carbon black, benzol, fuels, freight, and other miscellaneous products.

First quarter carbon material sales were negatively impacted by $25.1 million due to lower volumes of carbon pitch sales, as smelter closures and curtailments impacted customer volumes for carbon pitch, along with $8.5 million of foreign exchange impact, partially offset by $12.6 million of higher prices due primarily to higher cost coal tar resulting from reduced availability. Particularly impacted were operations in Europe and North America where aluminum production curtailments were concentrated.

Sales of distillates, which include creosote and carbon black feedstocks, were negatively impacted by lower volumes amounting to $4.4 million. Lower prices for distillates amount to $5.1 million, reflecting the decline in oil prices from the prior year quarter.

We have seen some increases in this business late in the first quarter when compared to the fourth quarter and believe partial restocking is taking place. This is particularly true in our Asian markets.

North American sales of phthalic anhydride representing less than 6% of total sales for Koppers experienced a 22% reduction in first quarter volumes due to significantly lower end market demand from customers, as the housing and auto industries continue to struggle. We have not seen volumes for this product increase late in the first quarter as we have seen in prior years, and believe that lower volume demand will continue into the second quarter.

With the stabilization of oil prices, OX prices closed the first quarter at $0.365, compared to $0.28 in January, providing some relief from higher prices as we head into the second quarter.

Carbon Materials & Chemicals adjusted EBIT for the quarter of $6.4 million declined 75% from $25.7 million in the first quarter of 2008. EBIT margin dollars were negatively impacted by approximately $5 million, as higher cost year-end inventories, primarily for phthalic anhydride, orthoxylene, and carbon black feedstock were processed. Margins were also impacted by $1.3 million for FX as well as the pressed end market conditions, as adjusted operating margins dropped from 11.2% to 4.5%.

Exclusive of the impact of processing higher cost of raw materials, first quarter margins would have been approximately 8%. At this point, higher cost products in raw materials have been processed, so we should see some improvement as we move into the second quarter.

As Walt mentioned, we saw the average cost of coal tar raw materials increase in North America and Australia, as availability was limited. These increases were passed onto our carbon pitch customers, but were diluted to margin percentages. We continue to see availability of coal tar due to lower steel production as a risk, at least for the remainder of 2009.

Overall, Carbon Materials & Chemicals sales in the first quarter were negatively impacted by 9% or $20.8 million due to foreign exchange. As an attempt to isolate the FX impact on prior year for comparability, we estimate the impact on the first quarter 2008 sales and profit using first quarter 2009 exchange rates would have reduced first quarter 2008 sales and EBIT by $30 million and $3 million respectively.

Average oil prices so far in 2009 are about $44 per barrel, compared to about $94 per barrel in the first quarter of 2008. This has led to lower benchmark pricing for carbon black feedstocks and has led to raw material cost reductions in certain markets. Given the spike in oil prices in the second and third quarters of 2008, we would expect a negative impact in year on year profits of our carbon black feedstock and phthalic anhydride products.

Sales of railroad and utility products increased in the first quarter to $127.2 million. Higher sales of untreated crossties drove the increase as the Class I railroads continued to buy untreated ties at increased levels to restock inventories that were drawn down in 2008.

Adjusted EBIT in railroad and utilities increased 76% to $12.7 million, from $7.2 million in the prior year. Operating margins for R&UP increased at 10% from 6.6%, due primarily to better cost absorption related to the increase in untreated tie sales to the Class Is along with higher trading volumes than the prior year quarter.

We have seen significantly less spending in the export market and by the short lines in the first quarter and anticipate continued pressure on volumes and margins in this part of our business in 2009, as volumes in the first quarter of 2009 were down 45% from what was an exceptionally strong prior year quarter. We do expect that the strength in the Class I business will more than offset the declines in this part of the business.

On a consolidated-basis, first quarter adjusted EBITDA decreased 36% to $24.8 million compared to first quarter 2008 adjusted EBITDA of $38.7 million. Of this decline, approximately $5 million and $1 million related to yearend inventory costs and FX respectively.

Adjusted net income for the first quarter of 2009 was $4.5 million, compared to adjusted net income for the first quarter of 2008 with $12.2 million. First quarter adjusted EPS was $0.22 compared to prior year's adjusted EPS of $0.58.

As Walt mentioned, we have targeted cost reductions of between $35 million and $40 million that include raw material cost reductions in addition to reductions in personnel, logistics, fuel, and other costs. Although we have made progress in all areas, achieving coal tar raw material cost reductions in this environment has proven most difficult. We have increased production to two thirds at our carbon black facility in Australia, increasing for one third production levels earlier in the first quarter as mentioned on our previous call.

We expect this curtailment to continue until rubber demand strengthens. In addition, we have temporarily curtailed production at one of our North American tar distillation plants to maximize throughput efficiency. Until end markets stabilize, we will continue to manage production capacity around end market demand and raw material availability. We foresee this continuing at least through year end.

It's important to note that our cost structure is such that about two thirds of our cost of sales is raw materials. We believe about 85% to 90% of our cost of sales is variable. This allows us to reduce a significant portion of our cost structure by curtailing operations until raw material supply and end market demand returns to some level of stability. It also allows us to optimize production around the most cost sensitive areas, such as access to raw materials, logistic costs, and respective plant costs.

As noted earlier, we managed to generate positive cash flow in the first quarter, totaling $21.6 million, compared to $5.5 million in the prior year quarter, despite operating in a difficult environment. We have targeted specific inventory and CapEx reduction objectives for the year and are progressing well towards achieving these goals.

We are planning to reduce CapEx by about $15 million over 2008 totals to $23 million in 2009. This excludes any acquisitions or expansions that may present themselves.

Our debt, net of cash on hand at March 31st, 2009, was $304 million compared to $312 million at December 31st, 2008.

We ended of the quarter with $76 million of cash on hand, compared to $63 million at December 31st, 2008. We continue to maintain a very defensive capital structure.

Should incremental investments for expansion 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.

Due to the interaction of forward earnings on our estimated tax rate, we would anticipate an annual rate, in line with the first quarter rate, of between 41% and 42%.

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.

I would like to point out that as painful as the first quarter was, we were able to manage the business, certainly from a cost perspective to maintain profitability and generate cash in this uncertain environment. At this time, I'd like to turn it back over to Walt.

Thank you very much, Brian. In 2008, our two business segments, Carbon Materials & Chemicals and the Railroad & Utility Products were 65% and 35% respectively over total revenue.

The Railroad & Utility Products segment is growing as we expected in 2009 as the demand for untreated wood cross ties, primarily to the North American Class I railroads increases.

We believe that we are seeing a shifting of these volumes into the first half of the year. And we will see moderation of buying patterns in the second half.

We continue to believe that the rate of tie insertions in 2009 will not be significantly impacted by the economic conditions we see today. Due to the importance of cross ties to the railroad infrastructure, we believe that the railroads will reduce spending on ties only as a last resort.

We 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. We also continue to review the government's stimulus plan closely, and are hopeful that infrastructure spending will have a positive impact on the railroad.

The Carbon Materials & Chemicals segment is largely tied to the steel and aluminum markets. As you recall, we use a by-product of Millard's eligible 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 for concrete additives and also for further processing into phthalic anhydride for the plastics and resins markets.

Beginning in late 2008 and continuing to this point in 2009, we have seen significant reductions in steel and coal production that have led to 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 through our global network of plants.

This has allowed us to meet demand but at a higher cost. In certain parts of the world, we saw coal tar prices declining for 2009. However, in certain geographic regions like North America and Australia, we've seen prices increase as constraints on availability have delayed price declines. We continue to believe that this will normalize in the second half of 2009. And also believe, will lead to cost reductions as we head into 2010.

Our prime product is consumed in the smelting of aluminum. However, our prices are not tied to aluminum prices or coal prices, but rather, based on terms that largely reflect the cost of the raw material.

Like the steel industry, given that we have seen significant decreases in aluminum production around the world, targeting high cost for older smelters. As such we have seen curtailments in production more heavily in the Europe, North America and China.

In North America, where traditionally 25% of the carbon pitch demand has been serviced by imports, we do see the risk of permanent reduction in aluminum production, but do not believe that this will ultimately be at the expense of the import pitch market.

In Europe our facilities are located in close proximity to the Scandinavian market. We believe permanent closures of high cost smelters in Europe will favor the Scandinavian smelters that have access to lower energy costs. We believe that production in Australia, where we have significant market share, will remain largely in tact.

As noted in our last call, lower production in China, and even Russia, will not impact us directly, since we do not sell significant volumes into these markets.

The one area where production is increasing is into the lease, where more efficient, new smelters have come on line in 2008 and 2009. We are well-positioned with our production facilities in China, to serve a large part of this market, as evidenced by our recent announcement of a long term supply contract for the [EMO] project in Abu Dhabi.

As a side note, we did complete the expansion of our majority-owned venture in China in December of last year increasing our capacity from 150,000 tons to 200,000 tons. And have also completed our recently commissioned new 300,000 ton plant in China that is 30% owned by us.

We feel that these capacity expansions uniquely put us in a strong position to compete for the pitch contracts for these new smelters in the Middle East as they near completion.

Unfortunately, it's still difficult to tell you exactly where 2009 aluminum production levels will end up. However, I can assure you that we will manage our plant capacities, raw materials and production costs to optimize our results.

We still believe in the longer term growth of global aluminum production and believe that we will emerge in a strong position to capitalize on this growth.

Although we still see 2009 as a challenge, we believe our management team has the experience to manage through this creative correction. Additionally, the strength of our balance sheet has put us in a strong position, not only to get through this period, but to use this turmoil as a possible catalyst for further consolidation in our four markets.

You may ask me, what am I looking for as lead indicators for rebounds in our Carbon Materials & Chemicals business? I think initially I'm looking for increased steel production to provide relief on raw material availability cost. And second, I'm also watching the aluminum inventories and prices to see a trend towards increased production. Unfortunately, I'm still waiting for both of these.

On our last call, we said we'd hope we would be in a position to give you guidance after the first quarter results were in. However, given the continuing volatility in some of our key end markets, coupled with the seasonal demand pattern for some of our core products, we do not believe it is prudent for us to provide 2009 guidance at this particular time.

While we hope that the second quarter results will put us in a better position to provide 2009 guidance, the ability to provide guidance will be dependent on the level of clarity in our key end markets. In the meantime, we will continue to focus on optimizing profits and prudently managing our cash flow.

To conclude, although today there is continuing volatility in most of our end markets, we remain very positive about the long term strengths 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, as well as the flexibility afforded to us by the strength of our balance sheet.

Although softness in demand, lower foreign exchange rates and lower oil prices will have a negative impact on our 2009 results. Lower oil prices should eventually work their way back to lower raw material costs. As our capacity expands in China, we will be well-positioned to capitalize on increased global demand for aluminum when the markets return back to normal levels.

Additionally, anticipated stimulus spending in the US, China, and other regions, where we operate or sell products, could also provide some upside to our businesses. Especially to the extent funds are spent on infrastructure projects.

We hope that the current market conditions 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 these opportunities over the balance of this year and into the future.

At this time, I would like to open up to any questions that any of you may have for Brian and I.

Thank you, sir, (Operator Instructions). Thank you, the first question is from Laurence Alexander. Please go ahead with your question.

Good morning.

Good morning, Laurence.

First, would you mind discussing -- giving some color on how you thing carbon pitch price negotiation might evolve this year?

Well, Alexander, thank you, most of our long-term contracts contain pricing formulas that we have which are semi-annual or even in some instances quarterly. So as we go forward, negotiating our raw material and coal tar contracts, obviously those prices would fluctuate accordingly. It's really focusing on lowering raw material costs which would eventually benefit those pitch contracts.

As far as the demand for carbon pitch, we see the global industry operating somewhere around 70% to 75% of capacity. And unfortunately as I mentioned, we've seen some of these older, higher cost smelters in the US and Russia and Europe who've cut back more so than other places around the world. In the US, the current operating capacity is something like 43%, 45% of capacity, which as you know, we have a fairly strong market share there.

And secondly, in any of the regions or end markets that you serve, are you seeing any signs of restocking, even if it's probably temporary in nature?

Laurence, this is Brian. And we were just over in China a few weeks ago. Probably China has shown us the most activity, particularly in things like carbon black feedstock that go into carbon black. Places like Europe and North America have been fairly quiet still. But I'd say probably the most optimistic region of the world that we've seen has been China.

And then finally on the Railroad & Utility Products segment, the surge in white tie volumes gives you a certain amount of visibility on coated tie sales later on in the year.

Right.

Can you -- how would you estimate a rough stand or how that segment should come in for the entire year? I understand the lack of visibility on the CM&C segment, but that segment you should have quite a bit of clarity on.

Well, really when you look at the, first of all, you heard us talking that we had a very strong first quarter on the Railroad side. And part of that, obviously, was an increased white tie procurement into our operations, which actually was a nice increase. When you look at the first quarter probably 25%, 30% versus last quarter.

But when you look at more so how many ties did we have in our plants that were being air stacked for drying, at the end of March, we had 6.6 million ties air stacked. At the end of the year, 2008, we had 6.2 million. So that was a nice increase. And that does give us some insight as to what the treating will be over the next five or six months or so.

Laurence, maybe as sort of an order of magnitude, the first quarter sales were up about 17% year-on-year. That growth rate probably won't continue through the end of the year. It will moderate to something lesser than that. You know, maybe half to 10% kind of a thing. And then you'll probably see a bit more leverage in profitability as the additional volumes work their way through the system.

It would be nice to have annualized first quarter, but I don't think that's going to happen.

Fair enough, last question is on the Utility side of that segment. Any restructuring that can be done there to help improve segment EBITDA next year?

Actually the Utility sales volumes have been pretty flat throughout these last few quarters. We're always looking at ways to improve that margin, which as you've heard us say in the past has been not desirable perhaps. But we're always focusing on ways to improve that margin.

It's actually interesting, Laurence, I think some of that throughput, because we have plants that run both poles and ties, some of the volume increases in the Railroad business have helped some of the overall margins on the Utility businesses as well.

Okay, thank you.

Thank you.

Thank you, the next question is from Steve Schwartz, please go ahead.

Good morning, gentlemen.

Good morning, Steve.

Can you guys possibly explain the difference in the buying patterns between the commercial railroads and the Class 1s? Does it simply come down to the credit crunch that has gone on?

I think from the Commercial business, I think it primarily is. And I think it's interesting as sort of time moves on, the same amount of work and ultimate demand is probably there. I think their ability to finance the projects is less.

So what we're seeing is what we believe is a lower buying pattern on the Commercial side that ultimately will create a demand that needs to be satisfied. Maybe as we move into next year as the financial crisis levels out.

The Class 1s I think it's a bit of a different best. They seem to have the financial capacity to be able to do the work and with the revenue volumes that they're able to get a lot more work done ultimately at a lower cost for them. So they're using this as an opportunity to upgrade the maintenance of their infrastructure.

And then hopefully they're going to commercial short line railroads. We did see a little small sign of some stimulus money being used out in the Midwest for the commuter Amtrack application. But hopefully as some stimulus money starts to move into the states and move out that some of these short lines will take advantage of some of that money later on.

Okay. So these white tie purchases were strong and I can see where that would affect the top-line because hardwood prices are up, but this is typically the low margin part of the total sale you do. So I'm wondering if there's something else that helped boost your margin in that business.

Yes. I mean, it's mainly throughput. It's mainly throughput absorption.

Volume is a major result.

Well, volume and what though? I mean, the white tie purchases is just simply procurement with very little profit dollar for you relative to the treating portion of the sell. So when you say throughput, can you explain to me how that may be factored in to the margin on a white tie purchase?

If you have a 15% or so fixed cost in your plants, if you're able to move 15% more volume through your plant you're going to have a per tie cost reduction.

Overall. Total.

Overall.

Okay. So you are assigning that to the white ties even though it's simply procurement?

Yes.

I think that pretty well answers it for me.

You've got to be a little bit careful. If you remember the first quarter of last year was a pretty poor, relatively poor, white tie procurement quarter for us overall. So I think there's a positive comp there for us, I think, that's partially affecting that.

Okay. That's helpful. Thank you.

Sure. Thank you, Steve.

Thank you. The next question if from Saul Ludwig. Please go ahead with your question.

Good morning, guys.

Good morning, Saul. How are you?

Doing great. What percentage did your coal tar costs increase in the quarter?

North America was the largest area that we saw increases. It was in excess of 30% going into this year.

The two markets that we saw the most significant increase in coal tar costs were in North America and Australia.

And they were both about 30%?

Yes, somewhere in that range. In Australia, it wasn't because the costs of material went up, they actually didn't have enough material. So we had to import more raw materials into Australia and that ended up costing us more.

If you have a 30% increase in your coal tar price, coal tars are cost, what percent increase do you need in selling prices to pitch to just match dollar for dollar?

To maintain margins you'd be using similar increases obviously.

Right. But if the formula allows for a 30% increase in our pitch price will we end up losing margin as in the downstream products?

Got you. Okay.

Now we have more ability in things like creosote pricing around the world than we do in carbon black feedstock pricing, which is linked to oil. So where we have markets that have pitch in creosote sells we're better able to manage that cost increase.

Your SG&A total costs were down $2.4 million. When you look at it by the different, and your corporate costs were the same, so the $2.4 million decrease in SG&A was in the segment. Was the SG&A in railroad ties basically flat and the whole $2.4 million decline in carbon materials? How did that SG&A change by the segments?

Total SG&A, sorry -- there was a piece of SG&A reduction in the road and utility products segment, Saul.

How much was that?

In that segment it's about, a little less than $1 million, $900,000.

And then it would be much bigger in the coal tar -- in the carbon materials?

Right because I think the Carbon Materials and Chemicals business is not only getting the true cost reduction and initiative it's also getting the benefit of the FX rate.

Right. And part of that is due to FX.

Correct. The CM&C business has more volatility around FX than the Road and Utilities Products business does.

Walt, you mentioned that in the US the 25% of the coal tar needs by the aluminum companies is imported. Is that imported by you, from your operations, or are you out of the loop on that such that if the imports are cut out, is that cutting out somebody else or are you getting cut our as well as the import component is reduced?

We share in that import market as well and we have for quite some time. So both, actually on both West Coast and East Coast. If assuming that we did not see (inaudible) returning back operation they would impact the import picture first and we would be a small part of that. Yes.

And then on a relative-basis, the margins for us on import product are a lot lower than what we reduce.

Where does that come from? Which plants of yours does the imported product comes from?

It might come out of China or come out of Europe or third parties.

A lot of it is third parties.

And finally, do you measure -- with this low operating rate in your factories, granted you're a heavy variable cost company, but did you have unabsorbed overhead that was also a component of the earnings decline in the carbon materials sector? And if so, how much was that?

The answer is yes. The quantification of that I don't really have at my fingertips. But absolutely. I think if you look around the world we are probably operating at a lower production capacity than we would have certainly last year or earlier in the year. So there is a negative to that, Saul. I don't have that number right in front of me.

And then finally, as you pointed out in your release and as occurred historically, there is a seasonal influence that goes from the first quarter to the second quarter and normally the second quarter is at least two times the first quarter and maybe even a little more sometimes.

If you look at your first quarter where you had that $5 million of high cost inventory, which I imagine is about $0.15 a share, would we look at that, maybe from looking at the second quarter is easier than looking at the year, should we be looking at sort of somewhere in the $0.70 to $1.00 range, I mean a wide range, but is that the right arena to be thinking about?

No, I think -- we're not giving guidance but I do think the normal seasonal pattern for us, which is always a broad statement, Saul, that the movement saying from first or second quarter will be two times is a lot higher than what it would normally be. I do think the impact of the higher cost of raw materials will help us but I don't think you're going to see a two times increase in profitability in the business into the second quarter.

Adjusted off versus this side of pro forma $0.35 number? In other words, if you didn't have the $5 million of high cost inventory hitting you, that's about $0.15 a share, right?

I think you have to tax effect that.

So $5 million --.

$3 million --.

$3 million on 20 million shares. $0.15.

Yes.

Okay. Good. Thank you very much.

Thanks, Saul.

(Operator Instructions). To cancel a request please press the star followed by the two. We have a follow-up question from Steve Schwartz. Please go ahead.

Brian, how much gas did you generate from working capital?

Hold on a second here. It's a bit of a mixed bag. If you look at some of the larger movements the cash that was generated from reductions of inventories in the first quarter was about $15 million, but we used about $14 million in reduction of accounts payable. So it's a bit of a mixed bag. Like I said, most of it is really dropping through net income, EBITDA, through the bottom line.

Okay. Very good.

Which is actually a good thing for us, I think, Steve, that it wasn't solely driven by inventory reductions.

Right. Definitely. Okay. Thank you.

(Operator Instructions). Thank you. We have a question from Sam (inaudible). Please go ahead with your question.

Good morning, gentlemen. Nice quarter. I just have a question regarding the Railroad business. Can you explain again what are the drivers behind the net sale increase in the quarter? I'm not sure I fully grasped what was the main driver behind the uptick there. Thank you.

Okay. There really are two main things. One, if you go back in history, if you go back to the first quarter of 2008, first quarter of 2008 was actually a period where the railroads come off a very high procurement cycle in the year before so we actually had a lower procurement cycle in procuring the white ties. These are the untreated cross ties. In 2009, the railroads not only were in the restocking mode but that we actually saw an in increase in acceleration of demand for the white ties themselves.

We believe that this is being driven, not only by restocking inventories but also the fact that the railroads went to accelerate some of their tie procurement and ultimately treating to accelerate maintenance on their infrastructure.

Just a bit of a side note, Sam, with fewer cars, rail cars, going down the various railroad system it is giving the railroads a little more maintenance time on the lines with less disruption with the trains. So they're actually improving their productivity as well throughout this maintenance year.

Okay, and just another sort of big macro question. Do you see, I know it may be early for you guys to comment on this, but any sort of repercussion from the infrastructure, sort of plan from the new administration, in terms of will there be an impact from your perspective in terms of all the infrastructure that has to be laid?

You know, I'd say there's certainly a lot of talk about it. I think what we've seen tangibly --.

Yes, that's right.

-- has been relatively small and mainly around some upgrades around Amtrack. We have not seen, certainly don't have orders in hand, for significant upticks related to the infrastructure stimulus spending.

Okay. Thank you, gentlemen.

Thank you.

Thank you. We actually do have one more question. Do you have time to take it, sir?

One question? Sure.

Thank you. It's from Ivan Marcuse. Please go ahead.

Hey, guys. Where's the gross margin in the Carbon Materials and also on the Railroad?

The gross margin?

Yes. And also why you look that up, my second question is are you seeing in Europe, are you seeing any of the smaller competitors going out of business and is there any, are you seeing any sort of consolidation opportunities?

Ivan, as you know, I'll take the second question first, as you know we're constantly looking at the opportunities for any M&A type activities whether it's Europe or anyplace else. But we do know that several companies are operating at very low capacities and all I can say is we've got a close eye on what is going on and would love to take advantage of any opportunity that would make sense for us to look at them.

Great. And also one quick follow up to that. In your last release you said that when both your JV and your other project was done in China, is there any opportunity to grow in China, to start shipping product in there? Are you seeing some of their smelters getting into the technology that the Western smelters use?

We are definitely pursuing those opportunities as well especially with some of the newer, high amperage smelter front lines that will be built in China. I think we mentioned in the past, we've already implemented sort of a technical carbon testing support there that we're utilizing and calling on the larger smelters that are both in operation as well as new projects coming on stream. So yes, going forward that's part of our strategy.

Great.

Ivan.

Yes?

Those profit percentages were global carbon, fuels, and chemicals in the first quarter of 2009 were about 10%, a little over 10%. That compared to about 16% last year. And in Railroad and Utility Products it's 14% compared to about 12.5%.

Great. Thanks a lot.

Thank you. And there appear to be no further questions so I'll hand the call back to Walt Turner. Go ahead, sir.

Thank you. We certainly thank you for participating in today's call and appreciate your continued interest in our company. You'll often hear us refer to the diversity of our end markets as strength of Koppers and I believe you are seeing this benefit in 2009 as the strength of our Railroad business is mitigating the negative impact of the global recession on our car materials and chemicals businesses.

We see continued strong demand in our end markets in the long term, particularly based on the committed aluminum capacity additions coming online in the Middle East in 2009 and 2010 and we are very well positioned given the capacity additions we have in China.

Our balance sheet strength should provide potential opportunities to stimulate growth or create shareholder value in the future.

And finally, we remain firmly committed to enhancing our shareholder value by executing a strategy of providing our customers with the highest quality products and services while continuing to focus on our safety, health, and environmental issues. And we certainly look forward to speaking to you again in the near future. Thank you very much.

And this concludes the Koppers first quarter earnings conference call. Thank you for your participation and you may now disconnect.