Koppers Holdings Inc (KOP) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Koppers second quarter 2009 earning conference call on the 6th of August 2009. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator instructions)

I will now hand the conference over to your host, Mr. Michael Snyder. Thank you, sir. Please go ahead.

Thanks, Raymond. Good morning, everyone. Welcome to our second 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 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, everyone, to our 2009 second quarter conference call. Before we get into the results, I would like to speak briefly about what I believe is the current status of our end markets. Like most companies, our second quarter results have been heavily impacted by the global recession. Fortunately, our business with North American Class I Railroads has proven more resilient than the global economy, providing exceptional results through the first half of 2009.

Our Carbon Materials and Chemicals markets that declined rapidly in the fourth quarter 2008, seem to have found some level of stability in the second quarter. Carbon Materials and Chemicals end markets in North America and in Europe remain stable, but still at lower levels.

Our Asian and Middle Eastern markets have rebounded somewhat and are providing opportunities for growth. Fuel production has started to increase, providing some relief on the raw materials side. And although what we hear from the aluminum industry and see in the aluminum pricing is more positive. This was not yet translated into tangible growth for our Carbon Materials and Chemicals business in our North American and European markets.

With that backdrop, we continue to manage our business in a conservative manner. We are focused on reducing costs, emphasizing cash flow, and taking advantage of consolidation opportunities in our core businesses when they present themselves. I will talk more about these later.

I am confident that our fundamental business prospects remain strong, and, as the market leader, we will emerge even stronger as the global economy recovers.

Since we seem to be dealing primarily with whether we are at the bottom of our product demand and whether we are seeing increases from our current levels, my primary focus will be on sequential, rather than year-over-year results. Brian will provide the year-over-year comparisons later on in our call.

After seeing the first quarter volume reductions in carbon pitch sales of 21%, second quarter volumes declined 11%. This slowing of decline in volumes, combined with the anticipated demand for carbon pitch gives us reason to believe that we have seen the market bottom and that aluminum and steel production are stabilizing and, in certain areas, increasing.

Sales volumes of carbon black feedstock to the carbon black producers declined in the second quarter, as many of the global rubber producers continued the reduction in production and raw material purchases that began in the fourth quarter. We believe this has stabilized in Europe at these levels and as vindication of some growth, the increased volumes of carbon black by 34% in Australia, as Asian demand increased. Prices for carbon black feedstocks increased from the first quarter as a result of the increase in oil prices.

Sales volumes of phthalic anhydride in the second quarter were relatively stable compared to the first quarter.

Recent news relating to housing, US housing, and auto industries seems to indicate some improvement, giving us reason for optimism. However, we still find near-term volumes will remain depressed around current demand levels.

Additionally, higher oil and gasoline prices resulted in an increase in selling prices of phthalic of almost 11% compared to the first quarter. Relatively speaking, end market demand for Carbon Materials and Chemicals still remains depressed over prior year levels. However, we seem to have found some signs of stability in these end markets.

As noted earlier, our Railroad and Utility Products business remains strong in the second quarter. 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 is to restock inventories, as well as to take advantage of the efficiencies and inserting ties with fewer trains running over the tracks as a result of the economic downturn.

We do expect the sales patterns to moderate in the second half of 2009, inline with the railroad's original budget expectations.

As announced at the last call, we have initiated steps to reduce costs and optimize plant production and inventory levels around the company. I expect that end market demand, although stabilizing, will remain soft, and that the supply of coal tar will increase as demand for steel rebounds. We believe these operating conditions will continue, not only through the end of this year, but most probably into 2010.

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

Thanks, Walt. Sales for the second quarter decreased 22.3% to $291.6 million, as compared to $375.3 million for the prior year quarter, with approximately $17 million of this decrease relating to foreign exchange. We continue to see the most significant impact of the global economic decline in our Carbon Materials and Chemicals business, where we saw global volume declines lead to lower sales of 35.9%, or $90 million, more than offsetting higher sales in the Railroad and Utilities segment, which increased 5.1%, or $6.3 million, based on increased volumes and pricing for untreated crossties.

Sales of Railroad and Utility products increased $6.3 million or 5.1% in the second quarter to $130.7 million from $124.4 million. Higher sales of untreated crossties and higher levels of insertion, taking advantage of operating efficiencies, drove higher sales volume.

Adjusted EBIT in Railroad and Utility products increased 25% to $14 million, from $11.2 million in the prior year. Adjusted operating margins for Railroad and Utility products increased to 10.8% from 9.2% due primarily to better cost absorption related to the increase in untreated tie sales to the class I railroads, along with higher treating volumes compared to the prior year quarter.

We have seen significantly less spending in the export market and by the short lines in the first half of 2009, and anticipate continued pressure on volumes and margins in this part of our business, as volumes in the first half of 2009 were down 48% from what was an exceptionally strong first half in 2008. We do expect that the strength in the class I business will more than offset the declines in this part of the business over the course of the year.

The second quarter sales decline in Carbon Materials and Chemicals as compared to the prior year quarter, was consistent with the global recession, impacting not only our end markets, but also raw material availability. The decline was comprised of a 13% or $32.4 million decrease in sales of carbon materials and 8% or $19.5 million reduction in sales of distillates, a 6% or $15.3 million decline in sales of coal tar chemicals, and a 9% or $22.6 million decrease in sales of other products, which includes carbon black, fuels, freight, and other miscellaneous products.

Second quarter carbon materials sales were negatively impacted by $35.9 million due to lower volumes, as smelter closures and curtailments impacted customer volumes for carbon pitch, along with $6.2 million of negative foreign exchange impact, partially offset by $9.7 million of higher prices due primarily to higher coal tar costs resulting from reduced coal tar availability.

Particularly impacted were operations in Europe and North America, where aluminum production curtailments were concentrated.

As Walt indicated earlier, we believe we have seen some stabilization in carbon pitch volumes in the second quarter of 2009. Sales of distillates, which include third-party creosote sales and carbon black feedstocks were negatively impacted by lower volumes amounting to $14.1 million. Lower prices for carbon black feedstocks amounted to $6.1 million, reflecting a decline in oil prices from the prior year quarter.

North American sales of phthalic anhydride experienced a 15% reduction in second quarter volumes, due to continued lower end market demand from the housing and auto industries. With the xylene prices currently in the $0.40 range compared to $0.365 in March, providing some help in pushing prices up by about 11% over prices in the first quarter.

Sequentially volumes remained relatively stable from the first quarter to the second quarter. As of yet, we have not seen increased demand driven by the positive moves we're hearing in the housing and auto end markets.

Carbon Materials and Chemicals adjusted EBIT for the quarter of $20.8 million declined 42% from $35.9 million in the second quarter of 2008. EBIT margin dollars were negatively impacted by lower volumes across all product lines and lower prices in phthalic anhydride, carbon black feedstocks, and naphthalene.

Margins were also impacted by $4 million for FX as well as depressed end market conditions as adjusted operating margins drop from 14.9% to 12.4%. On a more positive note, we did see second quarter margins increase to 12.4% from first quarter margins of 4.5%, reflecting greater stability in the business, cost reduction, and the absence of higher cost of raw materials that were worked off from the first quarter.

Overall, Carbon Materials and Chemical sales in the second quarter were negatively impacted by 7% or $15.3 million due to foreign currency exchange rates as compared to the prior year. Average oil prices through the first half of 2009 at about $50 a barrel compared to about $105 per barrel in the first half of 2008. This has led to lower benchmark pricing and lower profitability for our carbon black feedstocks and phthalic anhydride products. We did see some benefit in the second quarter as oil prices increased over first quarter levels.

On a consolidated basis, second quarter adjusted EBITDA decreased 26% to $39.4 million compared to second quarter 2008 adjusted EBITDA of $53.6 million. Compared to the first quarter of 2009, adjusted EBITDA in the second quarter increased 59% to $39.4 million from $24.8 million.

Adjusted net income for the second quarter of 2009, was $11.8 million, compared to adjusted net income for the second quarter of 2008 of $23.2 million. The company's effective tax rate increased from 36% in the second quarter of 2008 to 46% in the second quarter of 2009, based on the conservative assumption that foreign earnings would be repatriated, which, to date, they have not. Should this assumption change, second quarter net income would be positively impacted by $2.1 million or approximately $0.10 per share.

Second quarter adjusted EPS, with the higher effective tax rate, was $0.57 compared to the prior year's adjusted EPS of $1.11, and first quarter 2009 EPS of $0.22.

As Walt had mentioned, we have targeted cost reductions of $35 to $40 million that include raw material cost reduction in addition to reductions in personnel, logistics, fuel, and other costs. We believe that at the end of June profit benefited by approximately $15 million with additional cost savings targeted for the second half of the year that will allow us to achieve our goal.

Although we have made progress in all areas, achieving coal tar raw material cost reductions in this environment has been especially difficult. We have increased production to essentially full capacity at our carbon black facility in Australia, increasing from two-thirds production levels in the first quarter, as mentioned in our previous call. We continue to monitor the demand situation for this product.

We have also restarted on a limited basis production at one of our North American tar distillation plants, which had been previously idled, due in part to an increase in coal tar availability and the introduction of our new petroleum pitch products. As noted on our last call, our cost structure is such that about two-thirds of 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 market demand return to some level of stability. It also allows us to optimize production around the most cost-sensitive areas such as access to raw materials, logistics costs, and respective plant costs. We will continue to manage our business on this basis as conditions evolve.

We managed to generate positive operating cash flow in the second quarter, totaling $41.2 million compared to $17.2 million in the prior year quarter, and a year-to-date total of $62.8 million, compared to $19.6 million in the comparable period in 2008. We have targeted specific inventory and capital expenditure reduction goals for the year and are progressing well towards achieving these goals.

As mentioned in our last call, we are planning to reduce capital spending by at least $15 million over 2008 totals, $23 million in 2009, spending $6.8 million in the first half of 2009. Our debt, net of cash on hand, at June 30, 2009, was $274 million, compared to $312 million at December 31st, 2008. Our strong cash flows in the first half of the year have allowed us to keep our leverage ratio under two times on an LTM basis, despite significantly lower earnings over the past three quarters.

We ended the second quarter with $110 million of cash on hand compared to $63 million at December 31st. We continue to maintain a very defensive capital structure. When incremental investments for expansion or consolidation arise, we will review these prudently, but would like to be able to take advantage of additional business improvement opportunities as they present themselves.

Before I turn it back over to Walt, I would like to emphasize that our business is seasonally impacted by demand for our products. Financial performance in the first and fourth quarters is historically lower than the second and third quarters. We see this trend continuing.

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

Thanks, Brian. In 2008, our two business segments, Carbon Materials and Chemicals and Railroad and Utility products were 65% and 35% respectively of our total revenues. The Railroad and Utility products segment is growing, as we expected, in 2009, as the demand for untreated wood crossties, primarily North American Class I Railroads, increases.

As mentioned in our last call, we believe that we have seen a shifting of these class I volumes into the first half of the year and expect to see moderation of buying patterns in the second half [excel] within the program levels. We continue to believe that the rate of tie insertions in 2009 by our class I customers will not be significantly impacted by the economic conditions. Due to the importance of crossties for the rail infrastructure, we believe that the railroads were reduce spending on ties only as a last resort. We see this business, although having some risk for volatility and a very uncertain economic environment, as having a more consistent performance in a market downturn.

We also continued to review the government stimulus plan closely and are hopeful that infrastructure spending will have a positive impact on the railroads, although this would likely be on the commercial side of the business. Considering that we have seen our commercial tie business down more than any time in the past 10 years, this negative impact in 2009 should provide opportunities for volume growth going into 2010.

As some of you may know, we acquired a tie pre-plating business in July, which included three mobile units that are now located at several of our wood treating plants. We expect this business to generate $15 million of revenue on an annual basis. This acquisition is an example of the type of additional services we can provide the class I's in a very cost-effective manner. We will continue to leverage the competitive advantages we have in our existing relationships with the railroads and our logistically favorable plant locations that are online with the class I rail lines.

While the purchase price for this acquisition has not been disclosed, we expect that it will be accretive to earnings and we believe there will be similar opportunities that will present themselves as we continue to look for ways to expand our services to our railroad customers.

The Carbon Materials and Chemical segment is largely tied to the production of steel and aluminum. As you may recall, we use a byproduct of the metallurgical coking process coal tar, as our raw material to produce carbon pitch for the aluminum industry, carbon black feedstock for the rubber market, and naphthalene as a feedstock for concrete additives, are also further processing naphthalene into phthalic anhydride for the plastic and resin markets.

Beginning in late 2008 and into 2009, we saw significant reductions in steel and coke production that have led to reductions in coal tar availability. However, we have recently seen some increases in coke production that have resulted in an increase in coal tar. Although we are constrained in certain regions of the world due to lower volumes of tar, we have been able to meet customer demand led by blending tar with certain petroleum feedstocks or by importing and exporting products throughout our global network of plans. This has allowed us to meet demand, but at a higher cost. We continue to believe that this will normalize in the second half of 2009, and ultimately lead to cost reductions as we head into 2010.

I can assure you that we will continue to manage our plant capacities and our raw material and production cost to optimize our results. We believe in the longer term growth of our global aluminum production and believe that we will emerge as a strong -- in a strong position to capitalize on this [growth].

You may have seen our recent announcement about our expansion into two North American petroleum pitch markets. The new markets include the electric -- or steel electrode market and the shooting target market. Both the electric steel arc -- as the electric arc steel -- excuse me -- industry rebounds, we expect that the size of this market will increase. The entry into these new markets is indicative of the opportunities that we believe will ultimately allow us to expand our markets and businesses by using existing plant capacity with very modest capital outlays, as we continue to keep a close watch on potential acquisition candidates around the world that give us the ability to grow our market shares and expand on market base.

Although we still see 2009 as a challenge, we will continue to manage our businesses to maximize efficiencies through this period of correction. The strength of our balance sheet should put us in a strong position to possibly use this downturn as a catalyst for further consolidation in our core markets. We expect that our Carbon Materials and Chemicals business, along with the global economy, will see slow growth in the second half of 2009. The Railroad and Utility product segment, although maintaining expected levels of demand from the class I railroads will see moderation of profits as volumes return to expected annualized levels.

Our expectation regarding our key raw material supplies is that steel production will rebound before aluminum production rebounds. This is due to the fact that it's very expensive to bring on an idle smelter online, and the aluminum producers will only do this if they see positive fundamentals well into the future.

Like our aluminum customers, we are watching aluminum inventories and prices, hoping to see a trend towards increased production. Although we have not seen inventories decline recently, we have seen price increases for aluminum that we believe reflect positive trends in this end market.

As we said in our last call, the ability to provide guidance will be dependent on the level of clarity in our key end markets. Although we see signs of stabilization in the steel and aluminum industries, there is still the potential for (inaudible) volatility in demands for these markets, and that compromises our ability to provide current guidance for the rest of 2009.

And although we are not out of the woods yet, we do see opportunities for growth through the end of 2009 and into 2010 in these markets and also through potential acquisitions.

To conclude, although today there is continuing 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 also from the new distillation capacity in China, as well as the flexibility afforded to us by the strength of our balance sheet.

With our capacity expansions in China, we are 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 the other regions of the world where we operate or sell products, could provide some upside to our businesses, especially to the extent that the funds are spent on infrastructure projects.

With our recently announced expansion in the petroleum pitch markets, along with the acquisition of our tie pre-plating business, we are well positioned for growth when markets become more normalized.

Regarding our Chinese operations, unfortunately we recently experienced an outage at our new 30 percent-owned joint venture TKK, resulting in a temporary idling of plant operations. We expect the plant to be back online in the fourth quarter. With its recent capacity expansion, our existing joint venture, Koppers China, is expected to be able to meet TKK's customer requirements during this period. As a point of reference, second quarter results, which include one month of the TKK operations, resulted in a loss to equity income of $200,000.

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, Brian and I would address any questions that you may have.

Thank you, sir. (Operator instructions) First question comes from Ivan Marcuse.

Hello, Ivan.

Just wait just one moment, just transferring his line for now.

Guys, can you hear me?

Yes. Good morning, Ivan.

We can hear you, Ivan.

All right. Sorry about that. You were talking about end markets. Was there any specific reasons that you saw stabilization in specific markets like in the coatings, or was it in China? Where were you seeing -- could you give a little bit more color around that?

I think, I mean, basically we're seeing it across the board in general, some stabilization in end markets. We do truly think that most of our end markets have sort of troughed, hitting the bottom, as we're seeing a small increase in demand in products. The aluminum industry has not yet announced any restarts. If they were, they're very minor restarts. I think they still have a fairly large inventory. I think the overall global inventory is around six million tons, so that it's going to be some time that that's worked off before you see aluminum restarts. But fortunately, we're not seeing any other -- any smelters announce closures.

On carbon black feedstocks, I think may be more specific to your question. In Asia we have seen an increase in carbon black demand in the rubber market. As Brian mentioned, I think, our carbon black plant in Australia is back to practically full production capacity. Europe, I think, on carbon black has pretty much stabilized. We've seen some improvements in pricing there.

Phthalic anhydride, again, it was, when you look at volumes first quarter of this year versus second quarter, are pretty much inline, I guess where we're seeing some positive comments coming out of the housing and automotive industry, which hopefully would allow for that to continue to be stable or perhaps even improve. We're just not sure yet how that may work out.

So overall, and, then, obviously, the North American railroad business has been quite strong. And for the wood treating side has been good. Australia, and even in the US, perhaps, a little bit too, the utility pole market has been fairly, fairly stable going through these economic times.

Great. That was a lot of detail. Thanks. Looking at the third quarter, historically third quarter tends to be a little bit stronger than second quarter. I know last year it was the reverse. How should I look at it going this year? Do you see a third quarter being a little bit stronger or do you think because of the moderation of the rail ties that third quarter might be a little bit weaker than the second quarter?

You know, Ivan, we don't really look at the business quarterly, so we hesitate answering a question like that. Things can slide from quarter to quarter on us. We tend to operate in more of an annual cycle. But I think generally speaking, we would expect the third quarter to be somewhat similar to the second quarter, probably directionally more strength out of Carbon Materials and Chemicals, but some weakness -- not necessarily weakness, but timing impact out of the Railroad and Utility products business.

Okay.

With the assumption that we're bottomed out and starting back again, I think that may be another way to look at it too, perhaps.

Okay. Great. And then did you have any absorption costs in the second quarter in the chemical -- in the Carbon Materials? And how much was that, if you have any idea?

I don't know that I have the number in front of me. I mean, actually, the plant capacities around the world are running at different levels. Certainly in Europe and in North America are probably more negatively impacted than elsewhere. I think in the second quarter, having Clairton offline, our one coal tar distillation plant, helped us --

Right.

-- substantially. But I think there's no question there was some negative impact in the second quarter, certainly, from capacity utilization. I just don't know the number off the top of my head, Ivan.

Okay. And then in -- you may have said this in your -- and I think I might have missed it. But can you quantify the cost reductions you have done as far -- like how much do you think you're going to get this year and how much will that translate on a run rate basis?

It's about $35 to $40 million is what we targeted. And we figure we probably realized about a third of that already, about $15 million. Some of that, those savings relate to fuel and logistics, which will move with oil. So if oil stays where it is, then we should be able to keep that, probably 25% of the cost relates to personnel-related costs, which we should be able to maintain.

Okay. And then last question was, the China plant that's idled this quarter, how do I -- how should I look at that financially, I mean, with the impact in it being the third quarter? Do you think a couple million, or?

I think one of the things we struggled with with the plant, and, look, obviously we want the plant up and running. But the plant has ramped up much slower because of the global economy.

Okay.

Look at the results for the second quarter, although we only had one month's operations, it was a loss of $200,000 on it. I don't know that we were seeing a substantial change in that level of profitability before the plant was idled. So I think to a certain extent, obviously, we're focused on getting the plant back up and running and the cost that it takes to do that. But I don't think it was going to have a substantial positive impact for us in the third and fourth quarter.

Now, that being said, the export sales that go out of that plant we're going to pick up at KCCC, our other joint venture in China, so we shouldn't have any loss on export sales volume.

Okay. Great. I'll jump back in the queue. Thanks for taking my questions.

No problem.

Thank you.

Thank you. Your next question comes from Steve Schwartz.

Good morning, guys.

Hi, Steve.

Steve, how you doing?

Good. Good. One of your major customers for pitch has opened up their sourcing options and is really going after price cuts hard. Can you just give us an idea on how you think the pricing might impact you versus your competitors? Whether or not you're seeing that at your other aluminum customers? And then, thirdly, how that might impact your volume?

Well, Steve, obviously, coming off of 2008, where we did have fairly high cost escalations, raw materials, what have you, I mean, we are truly focusing on reducing raw material costs. I think you heard Brian say earlier that's one area that we were somewhat successful, but not completely successful. We are looking at reducing costs constantly for all of our customers. And there's got to be some type of correction based on what we did see in 2008.

So overall, our job is to reduce costs for all of our customers and find ways to improve the economics of that. So going forward, we're going to continue to distill the coal tars that are available to us and going forward we're going to manage our costs accordingly. And, obviously, when you look at where oil was and look at some of the other energy-related situations that happened in 2008, that we would expect reductions in our raw materials and in our end products as well going forward.

So it sounds, Walt, like you're reasonably confident that you can reduce your costs enough to keep this customer and others happy to the point that you won't be losing any volume?

Well, I mean, Steve, look at our global position here, and it's -- sure, I mean, we're focusing on costs all the time. And, obviously, that's our goal. Our goal is to do exactly that.

Okay. And then another question on -- just on carbon black, actually. One of the major global producers is -- or a couple, actually, have taken steps to change their contract pricing with their customers and to reduce the lag between their cost versus the price they get. Are you guys seeing the same thing? Are you shortening up that lag from what happens in your cost versus the price you see?

Yes, that would pertain more and more to Europe, I think, than perhaps other parts of the world that we're selling carbon black feedstocks into. But typically it's been anywhere from 30 to 60 days, sort of pricing correction based on the [price oil] indexes that we use for that product. Beyond that, I really don't know if there's other things going on in the current marketplace, but we'll certainly find out.

Yes. I mean, I think the cycles for selling carbon black out of our Australian plant, because such a significant amount of volume goes into the export market, that it's pricing pretty quickly, anyway, it's not necessarily on long-term pricing formulas.

Okay. I think these other producers were typically or historically seeing anywhere from three to four month lag. So 30 to 60 days is what they're currently shooting for. So it sounds like you're already there.

Lastly, can you give us an update on EMAL? That's the contract in the Middle East. And where are they at with starting up and when do you think those volumes will really pick up for you?

I think the last I heard, the EMAL project is on stream, still following the time lines that they've given us. And we're looking at the, I think second quarter of 2010 as being in the production. But the carbon plant producing the anodes would start up sometime mid-late first quarter.

Okay. And as far as you supplying them currently, that has not been impacted by TKK and the situation there?

Not at all. This is just a two-month, three-month sort of a downturn, or idle.

Okay. Great. Thanks for taking the questions.

Sure.

Thank you. The next question comes from Daniel Rizzo.

Hi, guys. Those two new markets you're entering that you mentioned and you sent a press release in July, how big are those markets? I mean, is that --

Yes. There's basically three markets we mentioned today earlier, the electric arc steel market, which uses electrodes for the process. Those electrodes are about 70% petroleum needle coke and 30% carbon pitch for the extrusion piece. And that market, at capacity, I think 2007-2008 production of electric steel was about 41 million tons. So that would require approximately 20, 25 thousand tons a year of binder pitch.

The impregnating piece, which we're going into with this new market with the petroleum pitch, would represent somewhere around 10 to 12,000 tons at capacity, but currently, as you all know, the steel industry's operating at probably 40%, the electric steel probably in the 40% range. So that sort of gives you an indication of where we're at currently. But the important part here is that these are new markets for us and we are using existing deflation capacities to produce those pitches.

The second market is this clay pigeon shooting target market, which is about at capacity about 35,000 tons annually. And I'm not quire sure they're at capacity. But those are the two major markets. We also use petroleum feedstocks and pitches for other applications. So if you looked at capacity, probably the 80,000 ton range would be the overall market.

Okay. Thanks. And you said you're looking for similar -- looking to acquire some more tie businesses. I would imagine that -- is that in the US or is that more -- are you looking more like -- see more opportunity like international, in the international area?

Well, primarily it's North America. We have ten wood treating plants online with the class I's and that's our primary focus. But we also do a little bit on the international basis too, and then that's primarily the crossties, not necessarily services at this point. But, obviously, we're always looking at how we can duplicate what we do here in North America elsewhere around the world. And, Brian, you had a comment on the petroleum?

No. I was just, I mean in order of magnitude, the distillation of the petroleum products for us is about what, total max market about 20,000 tons a quarter, and that is a substantial portion of our capacity.

Yes.

So it really is a very positive --

Sure is.

-- event for us. The other is, I think in the release we mentioned that the market, just to give you an order of magnitude that was about a $20 million market size currently. If it, as Walt mentioned, if it gets back to where it was back in '07 and '08, it would have essentially doubled.

Okay. Great. Thanks, guys.

Sure.

Thank you. Next question comes from Laurence Alexander.

Good morning.

Good morning.

Good morning, Laurence.

As you look at the volumes in the railroad and crosstie business slowing down, how much of a headwind would you expect from fixed cost absorption? Or alternately, how much of a benefit did you have in the first half of the year?

Yes, it's sort of the same as the question we answered before. I mean, if you look at the margin change in that business year-over-year, that's probably a reasonable estimate of what the absorption benefit is, somewhere in that range. That's because what we moved from second quarter went from 8 to 10%.

Okay.

So a portion of that would be related to absorption, fixed cost absorption.

Okay. And phthalic anhydride, is your business breakeven? Or, to put it another way, do you think your competitors -- are we seeing any shifts in competitor capacity? I mean (inaudible) multiple in capacity or otherwise [equity in] the market?

I think the last mothballing or closing that I can recall, Laurence, is BASF down in one of their Texas facilities. But there's, in general, looking at the market, I don't think there's been much change, perhaps a little tonnage here and there, but it's still coppers and [it's not going to be] BASF primarily supplying that market.

And then finally on the tax rate, the foreign tax issue, would you -- is that something where you need to wait until December 31st, or will there be an earlier date where you will get some visibility as to what the tax rate for the year should be?

I think probably, at best, a fourth quarter item, Laurence.

Okay. Thank you.

Thank you.

Are there any other questions?

We have a follow-up question from Steve Schwartz.

Hi. Just a follow-up on Laurence's question on the tax rate. What, Brian, could we expect for the second half of the year?

I would assume, just assume the 46% for the rest of the year for now. I think that's essentially what we've been guiding you guys to. So I'd rather not have that change yet. So if there is going to be a change, it would be later in the year.

Okay. 46%. Very good. Thank you.

Thank you, ladies and gentlemen. (Operator instructions) There appears to be no more further questions at this time. Are there any further points you wish to raise, sir?

Okay. Thank you very much for your participation in today's call and appreciate your continued interest in our company. I believe what you're seeing is the benefit of diversity, diversity on our end products and end markets in 2009. The strength of the railroad business is mitigating the negative impact of the global recession in our Carbon Materials and Chemicals businesses.

Although our markets remain significantly impacted, I hope you have heard our message today. We are seeing signs of stability in our aluminum and steel markets and we continue to see 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, 2010.

We are very well positioned given the capacity additions we have in China. Our balance sheet strength should provide potential opportunities to stimulate growth and create shareholder value. We will continue to operate the business and manage our capital structure in a very conservative manner. And we strongly believe in the long-term strength of our end markets and our position as a market leader in our businesses.

In conclusion, we remain fairly committed to enhancing -- firmly committed in continuing enhancing our shareholder value by executing our strategy, of providing our customers with the highest quality products and services, while continuing to focus on safety, health, and environmental issues. Thank you very much.

Thank you. This concludes the conference. You may now disconnect.