Koppers Holdings Inc (KOP) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Koppers Holdings Inc. Second Quarter 2010 Earnings Conference Call on the 5th of August 2010. (Operator Instructions)

I will now hand the conference over to Mr. Michael Snyder, Director of Investor Relations. Please go ahead, sir.

Thank you, Pamela, and 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 you can call Rose Helenski at 412 227 2444 and we can either fax or e mail 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 Bryan McCurrie, Senior Vice President Global Carbon Materials and Chemicals and currently acting CFO. As noted in our press release on July 16, Mr. Leroy Ball, who until recently was CFO for Calgon Carbon, will be joining Koppers on September 1 as our new Chief Financial Officer. At this time I'd like to turn over the call to Walt Turner. Walt?

Thanks, Mike, and welcome everyone to our 2010 second-quarter conference call. I first want to echo Mike's comments on Leroy Ball, our new CFO, who will join the Company, as Mike said, on September 1. We're very pleased to have Leroy being a part of our strong management team here at Koppers. His strong financial background as well as his international business exposure will certainly be a great addition to the Company.

For the second quarter, I was pleased to see that revenues for our Global Carbon Materials and Chemicals business increased by 30% over the prior year quarter. End markets for Carbon Materials and Chemicals in the US, Europe and Australia showed improved stability and our Asian and Middle Eastern markets continued to show progress in our carbon pitch, carbon black feedstocks and napthalene products.

Steel production increased 30% globally year over year through May and 69% in the US which has continued to provide relief on the raw materials side. Our supplies in certain areas around the world are currently in excess of demand with one exception being China where tar prices are currently the highest in the world. Related increases in electric steel production have also helped our carbon pitch and petroleum pitch volumes as most products are used in the manufacturing of electric arcs consumed in the electric arc furnaces. For example, one of the largest US electric arc steel producers reported capacity utilization of 72% in the first six months of 2010, up from 46% in the first half of 2009.

our acquisition in Europe, the pitch we are supplying to Middle East and our petroleum pitch products going from the target shooting and the electrode impregnation markets. Recent projections have increased the forecasted annual growth rate for the aluminum demand for 2010 to 12%, from previous projections of 10% which we feel is a very positive sign. The projected increases in the production for 2013 amount to about 10 million to 12 million tons, of which about 3 million tons is expected to be supplied by the smelters in the Middle East. Our expectation is that a portion of this new production will also need to come from restarts of idle capacities around the world.

We were also encouraged to hear that primary aluminum production in the US for June was up about 7% over June of last year, which is hopefully a sign that production is on the increase after being down nearly 8% for the first half of 2010, compared to the first half of 2009 when production capacity was still being reduced. Additionally, where recent third party projections showed increased LME pricing for aluminum by the end of the year with an additional increase projected for 2011. We believe that the higher levels of pricing will attract the attention of some of the idle capacities in North America and in Europe.

Our phthalate anhydride business continued to provide increased profitability for us volumes and prices were up by 12% and 28%, respectively, over the prior year quarter. That's some improvement over the prior year quarter for the automakers in the US combined with higher market shares for Koppers resulted in higher volumes. The US auto production is currently estimated to increase by 9% in 2010 over the prior year and is one of the key end market drivers for the phthalic anhydride product. Average prices for orthoxylene for the second quarter have increased by 26% for 2010 compared to the prior year quarter as a result of higher oil prices pushing phthalate prices higher. However, early in the third quarter we have seen some softening of (inaudible) pricing.

For our railroad and utility products business, our expectations of a difficult second quarter compared to last year's quarter was further impacted by lower demand for untreated crossties in the Class 1 railroads as they have continued to reduce inventories. We believe the reduction in procurement we saw earlier this year has resulted in an over correction of the railroad inventories, leading to higher procurement volumes currently. As of June 30, untreated crossties on hand at our plants were down 17% from year end levels. The good news is that tie insertions for the year are expected to be in the 19.5 million to 20 million tie range, the same as last year. And the projected insertions will continue at this level next year. Furthermore, the availability of untreated ties continues to improve each week. Since the beginning of July, we are averaging about 126,000 ties weekly in our procurement group compared to about 85,000 ties in the first quarter and about 110,000 ties in the second quarter. The issue that has impacted us is that the rail industry purchased about 21 million ties last year with a tie insertion rate of about 19.5 million ties. Untreated tie procurement for the industry will drop to about 17.5 million ties this year, reducing inventories to more normalized levels. We continue to purchase about 38% of the total ties procured but at lower volumes.

We've also seen some improvement in the commercial crosstie market as volumes were up 32% quarter over quarter. However, this increase was largely offset by reductions in volumes of treated crossties by our Class 1 customers as a part of their inventory reductions noted earlier.

After Brian completes a financial review of the quarter 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 into 2010.

Brian?

Thanks, Walt. I'll leave it up to you guys to determine whether I'm still acting like a CFO.

On a consolidated basis, sales for the second quarter increased 12% or $35.5 million compared to the prior year quarter as higher sales for Carbon Materials and Chemicals were partially offset by lower sales for railroad and utility products as the railroad business declined as expected over the prior year quarter. This reduction being caused in part by reduced demand for untreated crossties from the Class 1 railroads.

Carbon materials and chemical sales were driven higher by increases in volumes for carbon pitch and phthalic anhydrides, higher prices for products linked to oil and incremental sales from our acquisition in the Netherlands.

Second quarter sales increase 30% to $208.4 million in car materials and chemicals compared to the prior year quarter due to higher volumes for carbon pitch coupled with higher prices for carbon black feedstock and phthalic anhydride as well as the acquisition in the Netherlands. Carbon pitch volume increases are marginally attributable to sales in the Middle East and the addition of the Netherlands facility. Other geographic areas are not seeing increases as smelting volumes are still relatively flat.

In the second quarter, we had a10% or $15.5 million increase in sales of carbon materials as higher volumes were partially offset by lower carbon pitch prices, a 9% or $13.9 million increase in sales of distillates to the higher volumes and higher benchmark pricing per common black feedstock and 9% or $14.1 million increase in sales of coal tar chemicals as napthalene and phthalic volumes and prices improved and a 3% or $4.1 million net increase in sales of other products which include carbon black, benzol, fuels, freight and other products. We do estimate that our problems at our carbon black plant in Australia negatively impacted sales by about $7 million in the quarter.

Sales of distillates, which include third party creosotes sales and carbon black feedstock were positively impacted by higher prices amounting to $7.7 million, reflecting higher oil prices along with higher volumes due mainly to the acquisition in the Netherlands which amounted to $6.7 million.

North American sales of phthalic anhydride experienced a 12% increase in second quarter volumes, reflecting improved end market demand from the automotive markets in the United States. The impact of higher average prices for phthalic as compared to the prior year quarter, mainly driven by higher oil prices amounted to $5.4 million.

Orthoxylene prices at the end of June were $0.45 but were down a bit at $0.425 for the month of July. Carbon materials and chemicals' operating profit for the quarter of $21.4 million increased 8% from $19.9 million in the second quarter of 2009. Operating profit margin dollars were positively impacted by higher prices for carbon black feedstock and higher prices and volumes for phthalic anhydride.

Second quarter carbon pitch volumes from Chinese operations increased dramatically from the second quarter of 2009 reflecting new volumes from our Chinese operations going to new smelters in the Middle East. These expected higher volumes did not provide a significant profit contribution due to high Chinese power prices and excess supplies of carbon pitch in Asia that have challenged selling prices. As the economic recovery continues we expect that this situation will normalize as we move into next year. In the meantime we're managing the situation very carefully.

Results for the second quarter were also negatively impacted by about $1.6 million due to operating issues at our Australian carbon black plant. This was partially offset by about $1.2 million of reserve reversals.

Our new facility in the Netherlands that was acquired March 1 contributed $14 million of revenues for the quarter. As part of the acquisition, we announced in the second quarter the ceasing of tar distillation at our UK plant in Scunthorpe, re directing the majority of this production to our new plant in the Netherlands. This should allow for additional profit realization later this year and into next year.

Overall, carbon materials and chemical sales in the second quarter were not significantly impact by foreign currency exchange rates as compared to the prior year. Average oil prices for the second quarter of 2010 were about $77 a barrel, compared to about $57 a barrel in the second quarter of 2009. This has lead to higher benchmark pricing for carbon black feedstock and should continue to provide upside for pricing in 2010.

Although carbon black volumes are up year over year, beginning in early March our carbon black plant in Australia had been having operating issues related to its boiler. The impacted the second quarter by an estimated $1.6 million. The operations at this plant have been addressed and the plant is currently operating at full capacity, although I do expect some nominal negative impact in the third quarter.

Sales of railroad and utility products decreased $12 million or 9% to $118.7 million in the second quarter compared to the second quarter of 2009 due to lower volumes of untreated crossties for the Class 1 railroads. As mentioned previously, in 2009 our railroad business was front loaded into the first half of 2009 so the Class 1 could take advantage of reduced rail traffic to maximize maintenance efficiencies and reduce overall costs. This resulted in abnormally high sales and profitability for our railroad business in the first quarter, first and second quarter of 2009 that we indicated was not typical. This already tough comparison for the second quarter was made more difficult due to lower volumes as the Class 1 railroads reduced existing inventories on hand. The reduction in untreated crosstie purchases by the Class 1 impacted sales and profitability as operating profit declined from $14.1 million to $11.9 million, with operating margins at 10% compared to 10.8% in the prior year; this, despite strong results from our Australian coal business and $1.2 million of incremental profit from insurance reserve reversals due to improved lost control.

Plant closure expenses of $300,000 were incurred from the utility coal plant in Gainesville, Florida, that was sold in December of last year. On a consolidated basis, the second quarter adjusted EBITDA was $39.9 million, slightly above second quarter 2009 adjusted EBITDA of $39.4 million, although we certainly took a very different route to get there. We remain very pleased with the fundamental improvement in our CM&C business, which was offset by an expected tough comparison of our railroad and utility products business.

Adjusted net income for the second quarter of 2010 was $16.3 million or $0.79 per share compared to adjusted net income for the second quarter 2009 of $11.8 million or $0.57 per share, and reflects improved results from $3.1 million of lower interest expense.

The Company's effective tax rate in the second quarter of 2010 decrease to 37% compared to 45% in the prior year quarter, due to the expectation in the prior year quarter that we would repatriate earnings from Europe. As a reminder, in the third quarter of 2009 we determined that we would not repatriate these earnings. This resulted in a catch up adjustment in our taxes that reduced the effective tax rate for the third quarter of 2009 to an artificially low 25%. In contrast, the rate for the third quarter of 2010 should be more like the current year's quarter 37% rate. This will make EPS comparison difficult, quarter over quarter, due to the timing of the adjustment as we move into third quarter.

Cash from operations remained strong and amounted to $33 million for the first half of the year, compared to $63 million for the prior year with the difference mainly due to working capital. Our debt net of cash on hand on June 30, 2010, was $292 million, including $22 million of acquisition expenditures for both Cindu and the Barham Sevier projects, compared to $277 million on December 31, 2009.

Our leverage ratio on June 30 was 2.3 times compared to 2.2 times at the end of 2009. The Company currently has total estimated liquidity of about $240 million.

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. As expected, the second quarter reflected seasonal increases in our business. At this time I'd like to turn it back over to Walt.

Thank you, Brian. Our two business segments, Carbon Materials and Chemicals and Railroad and Utility products are about 60% and 40%, respectively, of our total revenues. The Carbon Materials and Chemicals segment is closely tied to the production of steel and aluminum. As you may recall we use a byproduct of the [large] coke making process, coal tar, as our raw material to produce carbon pitch for the aluminum industry, carbon black feedstock for the rubber market and napthalene as feedstock for concrete additives and also for further processing into phthalic anhydride for the plastic and resin markets. Beginning in late 2009 and continuing into 2010, we have seen increases in global steel and coke production that have led to increases in coal product availability in certain regions where we operate, with the exception of China.

As mentioned earlier, the electric arc steel furnaces are increasing production which should not only strengthen our carbon pitch and petroleum pitch businesses but also should absorb some of the excess capacity from Asia and hopefully restore product pricing to more normalized levels in those areas.

But at least aluminum production continues to come on line as scheduled. Currently the Sohar smelter in Oman is at full capacity and the EMAL smelter in Abu Dhabi and the Qatalum smelter in Qatar have announced that they expect to be at full capacity during the fourth quarter. As mentioned on our last call, during 2009 and 2010 we took advantage of market conditions and expanded our market share for carbon pitch in the Middle East and into Europe as well as with petroleum pitch and phthalic anhydride in North America.

We continue to be the global market leader in tar distillation and related products and believe this increase in market share will be beneficial to us in the balance of 2010 and beyond. We are confident in the longer term growth of the global aluminum production and believe that we will emerge in a stronger position to capitalize on this growth. For example, recent projections indicate that global aluminum consumption will increase by an average annual growth rate of over 6% for the next 10 years, increasing from 39 million tons of metal in 2010 to 73 million tons by 2020. Using a ratio of 1 ton of carbon pitch for every 10 tons of aluminum produced, this means an additional 3.4 million tons of carbon pitch will be required to meet this projected increase of demand. To put this in context, as the largest global producer of carbon pitch our total production capacity is about 1.2 million tons of carbon pitch so clearly, there is an opportunity for volume growth for Koppers as global demand continues to expand in this market. We fully expect to participate in this growth in carbon pitch demand and we believe we are well positioned to capture more than our current market share.

Our position in China has provided a base from which we are capturing business for increased smelting in the Middle East which is estimated to be producing 10% of the world's aluminum by 2012, up just from 4% in 2007. In late 2009 we began our initial shipments of carbon pitch to the new smelters in Qatar and Abu Dhabi and this will continue through 2010, boosting our carbon pitch volumes to the point that they more than make up for the lost volumes we've experienced in North America and in Europe during 2009.

In Europe, the acquisition of the Netherlands has improved our market share in Europe and has provided us with synergies to better access continental markets and provide easier access to the export markets. We are optimizing our European production as part of our synergies and expected to cease tar distillation at our Scunthorpe facility in the UK in September, in order to increase our capacity utilization in our other facilities in Europe. We also anticipate savings from logistics efficiencies and shared services there as well.

Expectations for Railroad and Utility products for the remainder of 2010 are that the second half should be stronger than the second half of last year as the railroads begin to restock their inventories. As mentioned earlier, we have seen volume reductions in untreated crossties in the first half of 2010 but we are encouraged by the consistent levels of tie insertions by the Class 1 railroads. They've also seen higher volumes from the commercial market, but due to the current competitive conditions in this market, prices and margins have been reduced to achieve higher volumes and maintain market share.

Looking ahead to 2011 as the global economic recovery continues, we see the potential for tangible volume improvements in our carbon materials and chemical products around the world. We'll trend of drive profitability to higher levels as demand and capacity utilization levels increase. For the railroad business, we expect high insertions and trading volumes to continue at current levels while we anticipate higher untreated crosstie procurement volumes as inventory levels are increased to sustain current insertion models.

To conclude, we continue to experience increased stability in our end markets as the global economy has stabilized and we remain very positive about the long term strength of our primary end markets aluminum and railroads. We will continue to focus on our cash flows, retaining expense reductions, reducing raw material costs, and growing our market share to position the Company as the global economy continues to rebound. We continue to look for consolidation opportunities as well in highly accretive acquisitions and believe we are well positioned to successfully execute our fundamental strategy going forward.

At this time I would like to open it up for any questions that you may have.

Operator? Pamela?

Thank you, sir. (Operator Instructions) The first question comes from Steve Schwartz from First Analysis. Please, go ahead.

Good morning, guys.

Good morning, Steve.

I guess if I could ask you just about the Scunthorpe. You take that plant down in September, that's about a quarter of your capacity. What happens to your utilization in Europe? And I guess if you could give us an idea of how much that takes out in fixed cost?

Well, first of all the distillation capacity that we're going to take out of the industry is about 90,000 tons of tar distillation. As far as increasing the capacity, I'd like to better answer that question a little bit later once we get the transition going and so forth but it will certainly add to the Port Clarence distillation as well as the Netherlands distillation volumes, obviously improving not only the throughput but obviously our production costs there as well. As far as the fixed costs go in regard to Scunthorpe, Brian, do you have -- ?

Yes. I think one other comment sort of on the capacity, even though it was a 90,000 ton plant, it was running at a fairly low level of utilization. So the plant that will benefit probably the most from that will be in our Port Clarence operation, but probably primarily the plant that will benefit will be the Netherlands operation. It will probably have ultimately an increase in its utilization of maybe 10% to 15%. The benefit of that is probably going to be more fully realized as we move into next year.

From a fixed cost perspective, there's really not a huge amount of fixed costs that are out there from our Scunthorpe operations so I think the headcount reduction that resulted from this was not significant. So I think from a sort of going forward profit perspective, it's really going to be enhanced capacity utilization in our other UK plant as well as the Netherlands.

Okay. Then if I could ask just relative to the carbon materials segment, you saw a very nice increase in revenue year over year. I realize a good portion of that did come from Cindu but can you break out the even though you had that, your operating profit increase was modest. Can you break out the impact of Cindu and the Middle East pitch business in terms of how that's affecting your operating profits?

Maybe a couple of things. When you look at the operating profit numbers, and I assume you're referring back into the press release, a couple things that are impacting CM&C -- one, there's about $1.6 million, I think, of transaction costs that are impacting the first half of the year in 2010; the other, I think, is there's probably, if you do a year over year comparison, there's probably about a $2 million, $2.5 million impact on reduced profitability of China. So I think from a margin perspective those are the probably the two things that are impacting operating margins the most when you look at that improvement.

Okay. Very good. Thank you.

Thank you. The next question comes from Daniel Rizzo from Sidoti and Company. Please, go ahead.

Hi, guys.

Hi, Dan.

A couple sources have indicated that steel production volumes are going to decrease in the second half of the year. Do you anticipate that's going to have any effect on the cost of raw materials or the availability of raw materials?

Well, there could be. I guess there's a slight reduction in steel around the world in the third quarter. That's what we've been hearing as well, but as far as the coking operations, I think we'll be fairly sustainable which is going to continue to generate the coal tar volumes that we're buying from the many integrated steel producers from around the world. At this point in time, no, we don't see any issues with availability of coal tar. In fact, I think as was mentioned earlier, we're really having a little bit of an excess of supply which will hopefully help us with pricing going forward.

Yes, I think the one exception to that is China. And I think the Chinese steel production that's also softening is probably going to lead to the continuation of raw material costs there being quite high, which, as you can see is impacting us as well as the first six months of this year.

Okay. Thank you, guys.

Sure.

Thank you. The next question is from Ivan Marcus of North Coast Research. Please, go ahead.

Hey, guys. How are you doing?

Hi.

In China, so how is the pricing from is there still dumping of carbon pitch into the Middle East from Chinese competitors or is the pricing sort of firmed up a little bit and it's more of a raw material issue impacting profitability?

Well, it's definitely raw material cost which is impacting the profitability but also as you may recall from last year, it's not really China, it's other Asian producers who had lost a fair amount of pitch business primarily into the [Needle Coast] markets that really gave them additional materials that they were supplying this Middle Eastern part of the world as well, which forced some pricing downward, unfortunately. But it's the higher raw material costs in China that's also, with the weak market conditions for other carbon pitch applications which also allowed for more carbon pitch available to the aluminum industry.

Okay. Then when you I know you talked about it a little bit but I had bad reception what's the coal tar pricing like per region, per major region that you compete in? It's up significantly in China. Is it down in North America, or?

When you look around the world, as we said, China is a very high cost raw material from the coal tar that we're buying. And that's primarily because there is the (inaudible) industry is a little weaker there. Some of the cokeries are still idle but it's really supply and demand for the coal tar, whether it's for distillation or fuel and in some cases going into the carbon black industry as the feedstock. When you look at sort of the next in line you'd probably look at the North American market and then further down, we're seeing some reductions, perhaps a little bit, nothing significant, but a little bit in Europe and also in Eastern Europe.

Okay. And then, is the current interest rate expense, is this a good run rate going forward, assuming no other debt pay down, keeping everything else the same?

I think we have a little bit outstanding on our revolver but it's not that much so I'd say it's probably a pretty good run rate.

Okay, great. Thanks for taking my questions.

No problem, Ivan.

Thank you. The next question is Chris Shaw, from [Winnis Christy]. Please, go ahead.

Good morning, guys. How are you doing?

Good morning, Chris.

Could you guys break I think you gave a revenue number for the contribution from Cindu this quarter. Did you break out a profit as well?

The profit was not that significant for the quarter. Most of the synergies that are being implemented are going to be related to the Scunthorpe closure which is going to happen in the third quarter. So I would say if you look at the second quarter, the profit impact is pretty nominal from the Netherlands plan.

Okay. And then when you were talking about in the rail business about the commercial business being coming back but being low margin, that's talking about short lines, right?

Yes, that's what we call our commercial business. I think we saw an increase of 32% quarter-over-quarter. And again, because of the lower demand overall for the crosstie market pricing, pricing did slide a little bit in the marketplace but we continue to maintain that fairly strong market share that we have out there on the commercial which are the short lines and various contractor projects around the country.

Are margins there now for the short lines lower than sort of the segment margins? Bottom line?

Again, some of these are very short term owners, very small orders. I really am not quite sure how to answer that, Chris, because I would have to take a look and see what that would be.

I would say they probably trended more closely to the segment margins but those are starting to come back a bit.

Okay. And then, lastly, just in carbon pitch, I mean, are you hearing anything from your customers about maybe plans for them to restart or are they still just they don't know when it's going to happen, either?

We send them emails every day telling them to restart their stoppage. We haven't received a response back yet.

We really haven't seen any. We thought we were seeing some strong signs. I think pricing is starting to improve a little bit, consumption is improving a little bit, as we mentioned earlier, but specifically no announcements on restarts.

Yes. Thanks a lot.

Sure.

Thank you. (Operator Instructions) We have a follow up question from Steve Schwartz. Please, go ahead.

Sources are saying that there is a serious supply chain disruption in the tie market, particularly with millers and loggers, a significant number having gone out of business because of the recession. Are you guys seeing a major impact in the supply chain from that effect and if so, how do you see that playing out over the next couple of years?

Going back over the last probably three years or so, Steve, we have seen several saw millers exiting the business because of primarily in the lumber side and looking at that verses crosstie markets, if you will, but again they were doing both. But I can tell you, with the increased demand of the white crossties by the Class 1s these last few months, the saw millers are out there. We've seen our availability increasing. I think we commented that we averaged about 85,000 ties the first quarter and going up to 110,000 ties in the second quarter and now we're up to about 126,000 and that's even increasing at as we go forward. So I think it's going to be a very strong next couple four, five months as the railroads sort of readjust where they are with their crosstie inventories of untreated ties. What I'm trying to say is that we're seeing enough saw millers out there to meet the demand.

Okay. It looks like your current white tie inventories are at about 6 million, if I've done my math correctly?

It was a 17% reduction from year end. I don't have the actual number in front of me

7.5 million.

That's about right, I think.

Okay, so that's about where you started 2009 with. What is your long term average inventory at year end of white ties, if we were to say average the last 5 or 7 years?

To be honest, probably somewhere between the two. I don't have that number handy, Steve, but I would say probably at the end of last year inventories were probably higher than were needed for the run rate of insertions. I think at the beginning of '09 they were probably lower. So probably somewhere in between is probably more appropriate.

Okay. So

We'll check that number and again, that's more a guess than it is a

But your gut feel is that we're running within a normalized range right now.

No, I think our gut feeling is that we've overcompensated and we're a bit low and I think that's what the increased volumes are starting to indicate is that we're in inventory replenishment mode at this point.

Okay. And you don't see an issue with getting wood like you did before? And so you you'll be able to supply that demand?

Yes. Again, the first quarter, Steve, was really truly weather related, trying to actually get sawmills started up and that actually didn't happen till like April, May. But I can tell you, based on the volumes I'm saying no, not an issue.

Okay. And if you guys could give me just one number the SG&A expense for Carbon Materials and Chemicals? Do you have that? I think it's ex corporate...

For the second quarter?

Second quarter, please.

About $10 million.

$10 million. Okay. Very good. Thank you.

Thank you.

Thank you. The next question is from Gregory McCusker from Lloyd Abbot. Please, go ahead.

Yes, thank you. You talked a bit about the ten year demand for aluminum growth, etc., 6% etc., could you and you also said that you're well positioned. Could you just give us a little more color on that and describe why you believe that? Clearly, you're the leader now why do think you're going to be better going forward? Obviously there's (inaudible -- background noise) factors that have been different than they have been in the past.

Well, let me Greg, we're having a little bit of difficulty hearing you. Let me play that question back to make sure we understood it. I think what I heard was that you wanted us to comment on why Koppers was positioned to gain market share, at least gain it's relative market share growth relative to the 6% aluminum projection and why we would benefit from the growth on the rail side?

No, China. Not rail side, but China, is what I meant.

Oh, China. I'm sorry.

You're right, Greg, it's the 6% annualized growth rate going from currently 39 million tons of consumption up to 73 million tons. We are definitely in an excellent position around the world. We're truly the only global player in these markets. We follow these projects very closely, just like we did back in 1999, 2005, 2007 in China where we're constantly working on the raw material sourcing, looking at when we need distillation capacity. These projects take at least three or four years to build so there's a lot of planning that goes into that. But then you look around the world, you recall we have a great logistics system setup in Europe where we're taking raw material out of Russia and out of other countries there in Eastern Europe. We've got distillation capacities that can be increased but also, looking around the world at raw material supplies, we are there. We are where we need to be. And then you look at the quality side.

Typically, going forward, just like these Middle Eastern smelters that are operating these very high amperage smelters, they truly need a very high quality carbon anode that's going to give them the efficiencies they're looking for to operate these higher amperage pots, and we have the carbon technology that we work with with our customers. So those are various reasons why we are the leader today and why we will continue to be a leader tomorrow.

Given that the supply of this stuff in China, is there any risk that you will be maybe forced to take on a partner relative to gaining access to that supply?

Well, we currently have partners in China, Greg. That's how we really sort of look at it going forward. We need strong partners who hopefully would have raw material, who hopefully would be even on the customer side users. So it takes partnerships to be successful in this business.

Thank you.

Thank you once again, ladies and gentlemen. (Operator Instructions) There appear to be no further questions. I'll hand the conference back to Mr. Turner. Thank you.

Thank you, Pamela. And we thank all of you today for participating in our conference call and appreciate your continued interest in our company. In 2010 our expectation continues to be that our Carbon Materials and Chemicals business will improve over 2009, while the Railroad business will be down due to weather in the earlier part of the year and combined with lower demand for untreated ties from our Class 1 customers as inventories are being reduced to manage working capital.

At this point, we are optimistic that 2011 will be a stronger year for the company as this global economy continues to rebound. Although some of our markets remain impacted, we do continue to see signs of stability in our aluminum and steel markets, as well as strong demand for our downstream products in China and the Middle East.

We see continued strong demand in our end markets in the long term, particularly based on the committed aluminum capacity additions coming on line in the Middle East in 2010 and beyond. And we're very well positioned, as we mentioned earlier, given capacity additions in China. Our balance sheet strength continues to provide potential opportunities to stimulate growth as well as create shareholder value and we will continue to operate the business and manage our capital structure in a prudent manner as we believe in the long term strength of end markets and our position as the market leader in our business.

And finally, we will remain firmly committed to enhancing 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 initiatives. And thanks again for attending the conference call today.

Thank you. Ladies and gentlemen, this concludes the Koppers Holdings Inc. second quarter 2010 earnings conference call. Thank you for participating. You may now disconnect.