Koppers Holdings Inc (KOP) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Koppers Holdings Inc. fourth-quarter 2010 earnings conference call. (Operator Instructions) This conference is being recorded today, Wednesday, February 16, 2011. I will now turn the conference over to Mr. Michael Snyder. Please go ahead, sir.

Thanks, Damien. Good morning, everyone. Welcome to our fourth-quarter conference call. My name is Mike Snyder and I'm the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website or you can call Rose Hellinski 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 inherit 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 mornings call by Walt Turner, President and CEO of Koppers, and Leroy Ball, our Chief Financial Officer. At this time I'd like to turn over the call to Walt Turner. Walt?

Thank you, Mike. And welcome to our 2010 fourth quarter conference call. I would like to start today by mentioning that we recently celebrated our fifth anniversary as a publicly traded Company. Despite going through the global recession the last few years, I'm very proud to say that since our IPO, we've generated over $500 million in cash from operations and asset sales. We've paid dividends and bought back shares totaling over $100 million. And we've made capital investments on over $200 million and also reduced our debt by $150 million. Moving forward into 2011, we expect to continue to generate strong cash flows and we will continue to grow the business achieve our primary goal of increasing shareholder value.

Before we discuss results for the quarter, I'd like to say that overall I'm pleased with our performance for 2010. Our revenues for the year increased by 11% over 2009, despite continued weak demand in many parts of our global economy. Much of this increase was due to acquisitions, new products, and increased market shares. I'm also pleased that we were able to grow our adjusted EPS by 27% compared to the prior year. Revenues for 2010 benefited from our new petroleum pitch products, the acquisition of Cindu Chemicals in the Netherlands, increased pitch volumes to new smelters in the Middle East, and two acquisitions for additional services to railroads. As a global economy continues to rebound to normalized levels, we are in a strong position, competitively and financially, to further grow our revenues and profitability, both organically and through M&A activities.

After I summarize our fourth quarter results, I'll give you my thoughts on what we see for the year 2011. In regards to the fourth quarter results, we're pleased to say that revenues increased by 14% over the prior year quarter and adjusted EPS grew by 65%. Revenues for our global carbon fuels and chemical business grew by $20 million or 11% from the prior quarter, benefiting from a European consolidation, new products, and improved end markets. End markets for the carbon fuels and chemical business in the US, Europe, and Australia, continue to show stability and our Middle East markets continue to show top-line growth in our Carbon Pitch and Naphthalene products.

In regard to the Global Aluminum industry, recent estimates show the growth rates for Global Aluminum consumption at 12% for 2011 and the LME cash price for aluminum ingot has increased by more than $200 a ton since the end of November, to around $2,500 per ton. Projected increases in production over the next three years, amount to more than 10 million tons of which about 1.4 million tons is expected to be supplied by the Middle East smelters. Our expectation continues to be that a substantial amount of this new production will need to come from restarts of idle capacity around the world.

During the fourth quarter, capacity restarts have been announced by or met, Century Aluminum and Alcoa, in response to increased demand in higher aluminum pricing, along with projections for additional increases demand in 2011. We believe Koppers is well positioned to participate in this increased fixed demand over the next three years and beyond.

Related increases in Electric Arc steel production have also added increased volumes for our Carbon pitch and Petroleum pitch. As both products are used in the manufacturing of the electrodes consumed in the Electric Arc furnaces. For example, one of the largest US electric arc steel producers reported capacity utilization of 70% for the year 2010, up from 54% from 2009. Our pitch volumes were up 14% over the prior year quarter. With the increased volumes coming primarily from our acquisition in the Netherlands and higher Carbon pitch volumes in North America. We believe we have gained market share in our pitch products in the Middle East and also our Petroleum pitch products going into the target shooting and the electrode impregnation work have also grown, making us the number one supplier in North America.

Our Phthalic and Hydrate business continued to provide increased profitable. But prices were up 20% over prior year quarter, driven by higher Orthoxylene prices. The average price for Orthoxylene, which drives Phthalic pricing, increased by 22% in the fourth quarter, compared to the prior quarter, partly as a result of higher crude oil prices. Additionally, the announced price for Orthoxylene for February of 2011 is $0.55, up from $0.51 in December.

For our Railroad and Utility products business, higher sales volumes of untreated Crossties, classes ones, resulted in an increase in sales of $18 million, or 19% for the fourth quarter, compared to last year's fourth quarter. As of December 31, untreated Crossties on hand at our plants were at 5.9 million ties, down nearly 20% from year end 2009 levels. But increasing by 240,000 ties since the end of September. High insertions for 2011 are expected to be in the 20 million to 20.5 million range, a 3% increase over the 19.5 to 20 million ties installed in 2010. This should result in increased demand for Crossties, as lower than normal inventory levels continue to be replenished by the railroads.

We also continue to see improvement in the commercial Crosstie market as volumes were up 36% for the fourth quarter over the prior year quarter. We are encouraged by the extension of a section 45 tax credit for new construction projects by the commercial railroads, and also the number projects that we've been bidding on in the commercial markets. And we're optimistic that we will get our share of this business that has been depressed over the last two years. With US rail freight car loads up 7% and [inamotive] volume up 14% for the year 2010, compared to 2009. This was a highest year-over-year increase for rail traffic in the last 22 years. The increase in Rail traffic, combined with normal than lower Crosstie inventories, should bode well for a strong tie insertion program in 2011.

After Leroy completes the financial review, I would you like to give you a status update on our Core end markets, as well as provide some additional insight into what we are expecting for the year 2011. Leroy.

Thanks, Walt. On a consolidated basis, sales for the fourth quarter increased 14% compared to the prior year quarter. And both Carbon materials and Chemicals and Railroad and Utility products reported increases over the prior year quarter. Our Carbon materials and Chemicals, fourth-quarter sales increased by 11% or $19.8 million to $195.5 million compared to the prior year quarter due to the acquisition in the Netherlands, combined with higher volumes for Carbon pitch and higher prices for Phthalic Anhydride.

In the fourth quarter, we saw positive growth year-over-year in the three main components of our CM&C business. The Carbon materials piece of the CM&C business had 3% or $5 million increase in sales, as sales volumes increases in the US, China, and the Netherlands, due to our March acquisition more than offset carbon pitch lower average carbon pricing realized in all regions except China.

Speaking of China. Fourth quarter carbon pitch volumes from our Chinese operations increased 25% from the fourth quarter of 2009. But within the last several quarters, these higher volumes did not provide excess significant profit contribution due to high Chinese car prices and excess supplies of Carbon pitch in Asia.

We are encouraged by the increases in Electric Arc steel production in Japan which have continued to increase over 2009 levels. Since we believe the reduced production of electrodes in Japan contributed to excess pitch supply as Japanese electrode manufacturers utilized [ Inaudible ] at Carbon Black feed stock. For this reason, as well as the projected overall tightening in the Asian pitch market, we do expect pricing to continue to improve moderately in the Middle East as we move through 2011.

Sales of distillates, which include third party creosote sales and Carbon Black feed stock, increased 2% or $3.1 million due to higher sales volumes as a result of the March 2010 acquisition in the Netherlands. In addition higher bench mark pricing for Carbon black feed stock, driven by higher oil prices in 2010 fourth quarter, enabled us to realize increased pricing for our TDS products.

The third main component, Coal tar chemicals increased 4% or $6.9 million, as we realized higher Naphthalene sales volumes in all regions. And both Phthalic Anhydride and Naphthalene prices improved over the prior year quarter. The impact of higher average prices for Phthalic anhydride, as compared to the prior year quarter, is mainly driven by higher Orthoxylene prices that amounted $3.1 million. After increasing to $0.51 a pound in November from $0.455 cents in September, Orthoxylene prices have continued to $0.51 in December and were up again to $0.55 in February.

Carbon materials and chemicals adjusted operating profit for the quarter of $17.3 million, increased 53% from $11.3 million in the fourth quarter of 2009. Prior year quarter included $6.1 million of negative LIFO inventory impact, compared to a insignificant adjustment in 2010. We also realized higher sales volumes due to our acquisition in the Netherlands, as well as organic sales volume growth in most other regions for all product lines other than creosote. In addition, higher pricing for Carbon Black feed stock, Naphthalene, and Phthalic Anhydride also contributed to the increase over 2009. Overall, carbon materials and chemical sales in the fourth quarter were not significantly impacted by foreign currency exchange rates, as compared to the prior year. As weaker currencies in Europe were largely offset by the stronger Australian dollar.

Average oil prices for the fourth quarter of 2010 were about $84 a barrel compared to about $73 a barrel in the fourth quarter of 2009. As mentioned previously, this has led to higher benchmark pricing for our Carbon Black feed stock and should continue to provide an up side for pricing. On a year-over-year basis, carbon material sales increased $43.1 million or 7%, as we experience higher volumes totaling 10% in all regions, with China and the acquisition in the Netherlands leading the way. The volume gains were partially offset by 5% lower average pricing across the region.

Distillate sales increased $28.1 million, or 4%, comprised of a 2% increase in volumes, mainly from the Netherlands, coupled with a 3% increase in prices as Carbon Black feed stock prices increased due to higher oil. Coal Tar chemicals for the year were up 7% for $44 million due primarily to higher prices of 4% on average for both Naphthalene and Phthalic Anhydride compared to the prior year. Also contributing to the sales increase for Coal Tar chemicals, were higher volumes of 3% that were driven by the addition of Naphthalene sales from our acquisition in the Netherlands and higher sales volume at Phthalic Anhydride in North America.

Changes in Foreign Exchange rates on a net basis added $14.9 million for year-over-year sales for the segment. On a year-over-year basis, adjusted operating profit of carbon materials and chemicals increased to $77.1 million from $61.5 million in 2009. Due to higher prices for carbon black feed stock, Phthalic Anhydride, combined with the additional volume added from our acquisition in the Netherlands. Partially offsetting these increases in operating profit is the reduced profit from our China operations due to significantly higher raw material costs in 2010 compared to 2009.

Moving on to Railroad and Utility products. Sales of Railroad and Utility products increased $17.7 million to $112.3 million in the fourth quarter compared to the fourth quarter of 2009 due to higher volumes of untreated crossties on the Class 1 railroad coupled with higher volumes of treating services. As mentioned previously the Class 1 railroads are reducing existing inventories on hand for much of 2010, and we are continuing to restock inventory to more normalized levels. Adjusted operating profit for the quarter increased to $3.4 million and $2.4 million with adjusted operating margins at 3% compared to 2.5%. That increase in volume in prices for the product in this operating segment versus 2009 fourth quarter were unfortunately offset by higher plant costs. On a year-over-year basis sales increased $19.3 million or 4% driven by lower volumes and prices in both treated and untreated crossties in Class 1 railroads to reduce higher than normal inventory levels through most of the year. On a year-to-date basis profit decreased from 39.2 million to $29.7 millions as crosstie volumes and prices decline. The (inaudible) utility products were reduced from the prior year.

On a consolidated basis 2010 fourth quarter adjusted EBITDA was $26.6 million or $6.2 million higher than 2009's fourth quarter adjusted EBITDA of $20.4 million. We remain pleased with the fundamental improvement in our CM&C business and glad to see the top line up tick in our R&D business in the fourth quarter. On a year-over-year basis, our adjusted EBITDA was $131.9 million compared to $124 million in 2009, at a stronger year for carbon materials and chemicals more than offset lower profits from the Railroad and Utility products.

Adjusted net income for the fourth quarter of 2010 was $7.9 million or $0.38 per share compared to adjusted net income for the fourth quarter of 2009 of $4.7 million or $0.23 per share. The increase in earnings is due to the assets in 2010 of the $5.5 million, $6 million LIFO and inventory charge that was recorded in the fourth quarter of 2009, combined with higher volumes and prices for Phthalic Anhydride, higher carbon Black feed stock prices, and higher volumes for untreated crossties in (inaudible) services in the fourth quarter of 2010, partially offset by the inn creased raw material costs in China and higher plant operating costs at our railroad facilities.

Cash from operations have remained strong and amounted to $105 million for the year compared to $112 million for the prior year with the difference due mainly to an increase in train receivables and higher revenues. Our debt net of cash on hand as of December 31, 2010 improved to $261 million compared to $277 million as of December 31st, 2009. And this was after the $36 million of acquisition expenditures in 2010. As of December 31, we have no balance on our revolver, no debit maturity until 2019 and we have total estimated liquidity of over $300 million.

We believe our current financial position continues to be strongest it has been in our history. Before I turn it back over to Walt I would like to emphasize that our business is seasonally impacted by demand for our product. Financial performance in the first and fourth quarter tends to be similar and historically lower than the second and third quarter. While we expect 2011 we'll see continuing growth in end market demand along with margin recovery, we do not expect the first quarter of 2011 to be significantly different from the first quarter of 2010. Due to normal seasonality, along with our expectations for smelter restarts in North America and the accepted increase in treatment services for the railroads we'll only start to significant impact our volumes beginning in the second quarter. At this time I would like to turn it back over to Walt for additional commentary.

Thank you, Leroy. The carbon materials and chemical segment which represented about 64% of our revenues in 2010 is closely tied to production of steel and aluminum. We used a byproduct (inaudible) of a Coke making process [Copar] as our primary raw materials to produce carbon fits into the industry, (inaudible) feed stocks for the Rubber market and Naphthalene as feed stocks for concrete and further processing in the Phthalic Anhydride. The Plastics and Resin markets. As I mentioned in our last call, during the 2010 wee extended our market share for carbon pitch in the Middle East and New York as well as west Petroleum pitch and refined cars in North America.

We continue to be the Global market leader in [car distillation] and related products and believe this increase will be beneficial to us in 2011 and beyond. We are confident in the growth of the Global Aluminum production and believe we are in a strong position to capitalize on its growth. Recent projections indicate that Global Aluminum production will increase by over 10 million tons over the next three years, increasing from 42 million metric tons in 2010 to 52 million tons by 2013.

Using our ratio of one ton of Carbon pitch for every ten tons of Aluminum produced, this means an additional one million tons of Carbon pitch will be required to meet this projected increase in demand. All with the projected increase in production we've seen substantial increases in the LME pricing (inaudible) in the last several months. We're pleased to see the long awaited restart announcement in North America and hopeful we'll be able to see additional announcements in North America as well as in New York as we move through 2011.

Our position in China has improved -- has provided a base on which we are capturing business from increasing melting in the Middle East which is estimated to be producing 10% of the world's aluminum by 2012 and 20% of Global production by 2020 which is up from 4% in 2007.

In late 2009 we began our initial shipments of Carbon pitch to new Smelters in [Qatar ] and Abu Dhabi, and this continued in 2010 boosting our Carbon pitch volumes to the point they more than made up the temporary loss of volumes in North America and New York due to idle smelters. In New York the acquisition of the Netherlands has improved our market share and provided easier access to export markets. Having a global presence with the standing Global aluminum industry in the Middle East, India, and China and other emerging economies, will continue to be a key to our future success in the Carbon Materials and Chemicals business.

Looking ahead to 2011, as the Global economic recovery moves, product demand toward normalized levels we see the potential for volume improvement in our Carbon (inaudible) and Chemical products around the world that should drive profitability to higher levels as demand in capacity utilization levels increase. In addition to our Carbon pitch products we believe the recovery in the global economy will result in increase demand for our profitable down stream products, such as Carbon Black feed stocks which are used in the production of Carbon Black for tires; Naphthalene used in the production for concrete and textiles. Phthalic Anhydride used as a plasticizer for products related to autos and housing, and specially refined cars used in pavement sealers in industrial coating applications.

Our Carbon Black and Naphthalene products should benefit from increases in the production of rubber for the tire industry, and concrete for the construction industry as the Asian economies continue to generate high growth rates. Phthalic Anhydride should be strong in 2011, as automobile production is expected to increase in North America and higher oil could have a positive impact on pricing and margins.

More specifically, the Asian (inaudible) demand is projected to increase by 6% to 7% in 2011, which along with higher oil prices should result in increased profitability for our Carbon Black feed stock. Global growth in cement production which is the largest end market for our Naphthalene product outside of North America is expected to be in the low to mid single-digit range with higher growth rates in the Asian and Middle Eastern markets which is where most of our Naphthalene is sold. Phthalic Anhydride should benefit from strong demand in pricing in 2011 due to high oil prices and a projected increase of 10% in US automobile production compared to 2010.

Our specially refined tar products which are used as pavement sealer bases and industrial coatings are produced as alternative products to Carbon pitch. Our refined Tar business in the US should benefit from our increased market share as a result of the recent acquisition from [Stellar] Jones in Terre Haute, Indiana combined with stronger demand due to the economic recovery. Regarding our Railroad and Utility products business, maintaining the rail structure of the Class 1 is a necessity especially with the revenue base increasing as a result of increased rail traffic.

We are confident that with our multiple online wood trading locations we'll continue to benefit from increases in capital spending by the Class 1 railroads. As a result, we expect high insertions and treating volumes to be of higher levels in 2011 as the US economy continues its rebound. Additionally, untreated crossties procurement should continue at high levels to sustain these projected insertions. We believe this view is supported by the fact that our untreated crosstie inventories are down from year end 2009 and at the lowest levels we've seen in years.

Our proprietary Borate treatment process is in place at two of our wood treating plants. And a production of ties treated with borates and creosote should expand revenues and profitability in our railroad business in 2011. We also believe the implementation of the product will enhance relationships with our important Class 1 railroad customer base by expanding the range of products and services which we provide.

We also expect to benefit from recent acquisition of the Portec (joint bar) business which should provide over $20 million in sales at margins that could be higher than the segment margins as a whole. I'm pleased to report that the acquisition is progressing as planned. And we're excited to have this business added to our existing portfolio of products and services for the railroad industry. Along with our track panel and pre-plating services, the Joint Bar business acquisition continues our strategy of providing additional products and services to the railroads to further expand our profitability, as well as our relationships with this important customer base.

To conclude, we continue to experience improvement in our end markets as the global economy continues to grow. And we remain very positive about the long-term strength of our primary end markets; Aluminum and Railroads, as we move towards an expected stronger year in 2011. I certainly feel more optimistic right now than I felt a year ago. LME prices for aluminum have been at a $2,500 per ton range, smelter restarts in the US have been announced, and spending by the Class 1 [inclerkrroad] should be up over last year.

Auto production in the US and globally is expected to increase, which helps demand for Phthalic Anhydride in the US and for our carbon black feed stocks outside of the US. Considering all of these positive end market fundamentals, I am optimistic that our results in 2011 will take us closer to pre-recession levels of profitability. At this time, I would like to ask for any questions you may have.

Thank you, Mr. Turner. We'll now begin the question-and-answer session.

(Operator Instructions)

Our first question is from the line of Laurence Alexander with Jefferies and Company. Please go ahead.

Good morning.

Good morning, Laurence. How are you?

Very well. I guess first question I have is on the crosstie business, you mentioned the likely uptick in volumes this year. What does that translate into for pricing? Should we expect pricing to be stable, or could crosstie and treatment prices move higher as well?

Well, at this point we really have not seen too much of a move in the pricing of the white ties that we're procuring. But I think as the year goes on, perhaps you could see some uptick, only because of the current inventory levels and where they need to be for the insertion program that they have. So, it's a little bit of an uptick. But as if you recall, they take - they, the railroads, primarily take the risk of both pricing and volume, and we're out there as the procurement arm basically providing procurement services for their white ties.

And, secondly, is there anything you can do as you negotiate with your customers to smooth out the seasonality so you do not get so much as a fixed cost absorption hit in the first and fourth quarter?

It's really not. A couple of comments, first of all on the railroads, tie insertion area, there is nothing we can really change because it's basically weather-related where typically a lot of the crews that are on the construction side will basically stop in the northern half of the US and resume back in the springtime. The actual seasonal products on the carbon materials and chemicals side, refined cars and industrial coatings, again, it's more seasonal because of weather. So it's very difficult for us to change the seasonality.

We do continually try to convince the railroads on the white tie procurement, if that could be at consistent volume more than it is today, that would certainly help our relationships and our buying power with the various saw millers around the country.

And then just lastly, on the carbon pitch side, last year when you were not able to capture the full benefit of favorable cold tar prices, is that dynamic starting to change, or do you expect that to change this year? Are utilization rates tight enough?

Typically, carbon pitch pricing, for the most part, the majority of the increases or decreases [stability] is dependent upon the raw material costs. Even though we continue to push the raw material costs bound everywhere we can based on the regions we're involved with, it becomes a little more difficult because of supply/demand. And as we go forward here in 2011 and beyond, with the increase demand of carbon pitch based on the projected increase in aluminum production, it could get a little tighter, and you could see prices increasing there.

Thank you.

Our next question is from the line of Ian Zaffino with Oppenheimer & Co. Please go ahead.

Hi, guys, this is Brian Bittner in for Ian.

Hi, good morning.

Hi, Brian.

Keeping in mind that utilization rates really are the main drivers of earnings here, you talk about trying to get back to pre-recession margins. What type of utilization rate would you have to see in Europe and North America to really get back there?

In North America, 2010, fortunately because of the petroleum pitch business that we were able to tuck in under our deflation plans, we were operating at about 70% to 72% of the distillation capacity. And if you could get that capacity up over 80%, maybe closer to 85%, that would certainly have a very positive impact on our through-put, if you will, as far as the coal tar that we are distilling. And we're not too far from that, with the recent announcements of Alcoa and Century -- and it will take time for them to get the volumes going through the supply chain, if you will -- that could easily happen here by midyear sometime perhaps.

And in Europe, where we have the three distillation plants that we are operating, Denmark, UK and the Netherlands -- and we were about that same utilization rate, 70% to 75% of capacity. We did get an uptick there when we stopped distilling coal tar at our Suncore plant and putting more emphasis on the remaining three plants.

So, again, if you have one or two smelters that announce a pot line or two, it doesn't take too, too long to get to a point where we can benefit from the additional fruit. But last year in total, we were operating our 2.2 million tons of distillation capacity globally at about 75%. And, so that means we're not doing too badly, but we could certainly do much better from the utilization point of view by getting that up to closer to 90% or higher hopefully.

All right. Thanks for that. And then focusing on the Middle East. We know that pricing has been a little bit lower than you wanted there because of some competitors and just wondering if the improvement in electrode production in Asia has helped alleviate some of that competition yet? Or if you are still seeing some tough pricing there? And on top of that, what type of tail wind improved pricing could be for 2011 in that region?

First of all, we are seeing improvements in pricing. As you alluded, there were some excess pitch to the market, in the marketplace, basically because of less coal tar pitch going into [Inaudible ] production for electrodes. It is starting to improve on the pricing side and the other issue we have is when the coal tar pricing rate in China which continues to be a concern. The distill industry in China is operating at about 75% to 80% capacity. Less coke is being produced, which does lower the overall volumes of coal tar, which we share the other end markets for coal tar. In addition to distillation, coal tar is used as a fuel. It's also used in certain places as a direct feedstock for our carbon black production.

Prices of tar in China continue to be the highest in the world. So we have to continue to focus on that but at the same time pricing has to further improve as we go out throughout the year. And I think the demand on pitch going forward will allow that to happen. It's a problem that's slowly improving, I'll put it that way

Was that business profitable in the quarter? The China business?

In the fourth quarter? It saw some improvements in the fourth quarter compared to the previous three quarters, yes.

And the very last question for me, as far as orthoxylene pricing goes what type of lag do you see in your phthalic anhydride and carbon black feedstock prices if it goes up whatever percent in a month, do you see it right away in your phthalic and anhydride prices? Or is it a three-month lag? How does that work exactly?

Typically on phthalic pricing, it's at least a 30 day lag. And in most cases it's a 30 day lag, and in some cases up to 60 days, but no longer than that. And on the carbon black feedstock, that's basically a 30-day lag.

Great. Thanks.

Thank you.

Our next question is from the line of Steve Schwartz with First Analysis. Please go ahead.

Good morning, Steve.

Did you mention -- maybe this was in Leroy's commentary -- that pricing for pitch was down in the rest of the world outside of China or the Middle East?

I think that I said that. I'll have to go back and check my notes. I believe that's what I said.

Okay. I'm just wondering why in the fourth quarter, I think, Walt, you mentioned that the pricing tends to move in line with tar prices. And I think most of your western hemisphere tar supply agreements reset in July or January. What would prompt a decline in pitch pricing elsewhere in the world?

Thanks, Steve. It's exactly what happened. One of the areas -- in the fourth quarter volumes were up 14%. Prices were down slightly, but we're going to have to go back and get specific with you on that.

Okay. We can follow up later. As far as your tar price for 2011, what is that looking like now that we're into February? And this would be relative to 2010?

Well, we made, again, you have to look at coal tar supply and demand and availability region by region around the world, and in some areas we were able to reduce tar costs slightly. In some areas a slight increase, but nothing major. The only issue that we keep talking about is the continued demand on coal tar in China based on the availability is actually forcing prices up, not down.

And that is a concern. And when you look at this projected increase in pitch demand based on additional aluminum production, the question really is the still industry going to increase production similar to the annualized growth of aluminum which is around 6% or 7% annually. So as you go forward, that could be an even more interesting question.

Yes, so, but I mean between your two facilities in China, they are maybe 25% of your tar processing, so just on a consolidated basis, it sounds like maybe your tar pricing is flat to slightly down in '11 versus '10.

I think I would like to say flat to slightly up.

Okay. Okay. We can stop at that then. As far as working capital in 11, you generated money out of working capital in '10. Typically, you consume $20 million to $30 million as a ballpark. Do you suspect you'll be back into that pattern in 2011?

I think it's probably closer to the $30 million.

There is definitely an expectation of an increase and it will probably be what would be our historical rates.

Okay. And then just for some nuts and bolts, you noted in impairment in railroad and utility depreciation $1.7 million. So the $7.7 million that you reported for consolidated, is that X special figures $6 million and if so that seems kind of low relative to prior quarters. Can you help me understand what D&A is going to look like for the next couple of quarters?

D&A, Steve, I think it should go slightly higher, I believe, than probably where we were running over the first three quarters of this year. Our capital spending is expecting to be up slightly and so we'll see increases in depreciation as a result of that.

Okay. You understand, though, where I'm looking at $7.7 million reported and then in the foot note it calls out a depreciation impairment of $1.7 million. So, Leroy, let's just say then that it's going to be up from $7.7 going forward?

I'm looking at the $7.7 million that you're talking about right now. Right. The $7.7 million that you're looking at right now should have the $1.7 million in it.

Okay.

So that would make it $6 million.

$6 million. Okay. And then up slightly in coming quarters.

That's right.

Okay. That's great. Very helpful. Thank you.

Sure.

Our next question is from the line of Douglas Chudy with KeyBanc Capital Markets. Please go ahead.

Hi, good morning.

Good morning.

First, can you remind us how quickly these US smelter restart announcements should flow-through to you in terms of increased carbon pitch demand? I think you mentioned you didn't expect to see a material benefit in 1Q. You might start to see some in Q2. Do you see the demand before the smelters restart, or just what does the process look like there?

We would obviously see the demands on our carbon pitch. Obviously, if you recall, typically, and I'm guessing this, but as an example, [Clarksville], Kentucky, or [Mendocino], New York, they are going to manufacturer anodes before they can actually restart costs. So they would need a minimum of two to three months, maybe four months time to produce anodes to increase the smelting capacity. I can tell you we've already begun shipments of pitch to some of these announced re-starts. But it does take maybe three to five months before we'll actually see the aluminum being produced.

Okay. Thanks. And, secondly, it seems like we've seen some fairly harsh winter weather conditions to start the year, particularly in the Midwest and the East. Any material impact expected on Q1 results? As I recall, I think you had a pretty harsh winter in early 2010 as well.

Yes. This year it has been very harsh. As you said, very cold temperatures and so forth. I think operationally we've done very well keeping the plants going forward. The issue though like we're going to have as we end the quarter is going to be things like the supply chain concerns with [ Inaudible ] and other additional clients faced on moving barges or moving rail cars, that type of thing. So there will be a negative once we get through the first quarter here, looking back.

Okay. And then lastly, just one last one here. When you take a look at the current footprint of the carbon materials business, are there any areas you see opportunities to expand in the near term? You are currently serving the Middle East. Does another market such as Brazil make sense sometime down the road here?

We are actually exporting product into Brazil from time to time, as well as other areas in South America. But, sure, the aluminum industry globally is our primary market. And we continue to look at plays whether it's through tankage or supply chain initiatives to expand those lines of shipping products. So Brazil definitely, and I think as you look further down the road, South America is continuing to grow and doing quite well. And it's an area that we want to continue to increase our, not only pitch volumes, but other products as well, whether it's naphthalene going into the leather tanning chemicals, or what have you.

All right. Thanks, guys.

Our next question is from the line of Saul Ludwig with Northcoast Research. Please go ahead.

Good morning.

Good morning, Saul.

Leroy, would you have handy the gross margin in, unencumbered with special items, for the two segments in the fourth quarter?

By segments?

Yes, sir.

Let me see here, if I have something handy.

Or gross profit dollars, or cost of goods sold, whichever number is handy. We can get to the same place.

So gross profit for the quarter? Talking about gross margin, Saul?

Yes, sir.

It's 15% for the CM&C segment and about 8% for railroad and utilities.

And that's extra specials?

Yes.

Got you. Did you say that you thought the first quarter of the year might be very similar to the $0.40 that you earned in the first quarter of 2010?

Yes. Considerably right. That would be looking significantly, not expecting significantly different.

You know, we'll go back from the beginning, from when you've been public. Your first quarter has, with the exception of the first quarter of '09, if you are looking at the first quarter compared to the previous fourth quarter, your first quarter has always been better than the preceding fourth quarter. First quarter '09 was different because the world was ending that time at that cycle.

And if you think about the comments that were made, phthalic, this on a sequential basis, and the phthalic situation should be better in the first quarter than the fourth quarter. And the pitch business with the start-ups of these plants in the fourth quarter should be better in the first quarter than in the fourth quarter. The railroad tie business is moving ahead with vicious pace. They should be better in the first quarter than the fourth quarter.

Carbon black feedstock, because of increasing tire production, should be better in the fourth quarter than the first quarter. Why would you not have some improvement from the fourth quarter to the first quarter? Because if you say it's going to be the same as last year, that's in essence, the same as the fourth quarter.

Saul, first of all, these upticks, at least these positive trends in these very thin markets, we're not saying it's all going to happen the first quarter. It's going to happen throughout the year. And, yes, first quarter 2011, and going back to most years in the past, it is a slow seasonal first quarter for us. And just talking about weather conditions and so forth.

For sure, these end markets trends are very positive for us. And I think we have to look at that as sort of, over the entire year. And the aluminum smelters, it's going to take time for them to make anodes and get their pitch consumption going. On the phthalic side, typically phthalic, January and February, are really slow months for the phthalic producers -- excuse me, plasticizer companies using phthalic. So, unfortunately, I don't like it either, but unfortunately first quarter of each year is a fairly slow, weak quarter for us.

No, I know that on an annual basis. It clearly is one of your lowest. But sequentially, from fourth quarter to first quarter, historically there has been improvement. And that is the relationship that I'm looking at, nothing dramatic. But you make $0.39 in the fourth quarter. If we look at historical patterns, that first quarter might have been more like, I don't know, $0.45, $0.50, $0.55 or something, and I'm trying to understand why this sequential pattern from fourth quarter in '10 to first quarter '11 is going to be different than what has happened in four of the last five years.

I think we definitely see upside that we had the first quarter shifted to what we're seeing right now is that a lot of these positive developments are looking like they won't have a material effect until we get out late in the first quarter and into the second quarter.

Okay. Very good. I appreciate that. And what's do you expect for cap spending this coming year?

This year, I believe this is about $30 million, about $30 million.

And did you say that you're going to consume about $30 million in working capital?

Somewhere between $20 million and $30 million.

Between what was what?

Between $20 million and $30 million.

Between $20 million and $30 million? Okay. Great. Thank you very much.

All right. Thank you.

Our next question is from the line of Corewin Dolphin with Orga Investment Management. Please go ahead.

Hi. Is there going to be any material impact in Australia from the flooding that has occurred down there on you folks?

Fortunately for us, Corewin, very small. We had one of our floor wood treating plants which is located in [Saccora], which is in Queensland, fairly close to the coast. And they had some minor damage but most of the negativeness on that is going to take probably two or three additional months to get the procurement of the falls going again. So it's a negative, but it's a minor negative to the first quarter.

Thank you.

We're fortunate. And especially with some of the (inaudible) that was going on with shipments of coal and aluminum and other things, it did not really impact the aluminum smelters.

Thanks again.

Our next question is from the line of Chris Shaw with Monness, Crespi, Hardt. Please go ahead.

Yes, good morning, everyone. How are you doing? Do you guys know in the last peak, do you know if it was 2007, 2008, where phthalic prices peaked out at?

I'm sorry, Chris, could you please repeat the question?

During the last peak, whether it was 2007 or 2008, do you know where phthalic anhydride prices peaked out at?

I'm trying to go back and look at ortho pricing. It was --

Or even maybe where ortho peaked at? That would be helpful

Without looking back to see what ortho has done. I'm looking at -- well, actually, it's currently at $0.51. So, actually, it's $0.51 going to $0.55 in February. Looking back to January of '09 is all I have in front of me, and so the $0.51 is the highest in the last 24 months. So you would have to go back to probably 2007, 2008 range, and I'm guessing it was in the high $0.50s at that time.

Okay, thanks.

Not a big difference.

And then you might have mentioned, but what kind of tax rate do you think we should use for 2011?

About 39%.

39%. Okay. And then just a theoretical. In your discussions with the rail customers, I know they have to outlay a significant amount of capital for this new -- for the positive train control systems. Would that cause them at all to cut back maybe on tie insertion, or do you think, does it affect their CAPEX plans at all as you see it?

I personally do not think so. As you recall, Chris, the 90% or more of the tie insertions are maintenance related. They are going to continue to focus on maintenance. I think overall capital spending by the class ones, the four primary class ones anyway, is about $1 billion higher than last year, a little over $10 billion. And I think a large chunk of that will go into the positive trade control system. But I really I don't see the maintenance slowing down whatsoever. Especially with their rail traffic picking up here.

Okay. Thanks a lot.

Our next question is a follow-up question from the line of Steve Schwartz with First Analysis. Please go ahead.

Hey, guys. Thanks for taking the follow-ups. Almost to Saul's point about fourth quarter, first quarter. In looking at railroad in the fourth quarter, it was sequentially down only about 5% in revenue, and typically it's down more like 11% or 12%. You noted in the release the impact of the 45G tax credit. Some of our sources were saying there was very heavy buying in December after that got approved. Can you guys give us an idea to what extent that would have helped the quarter?

As you just mentioned, and as we also said earlier, the quoting and a lot of other projects on the short lines for the commercial business is improving a lot compared to what it was a year ago. Again, these quotes, these projects, typically happen in the second and third quarter.

So even though we are bidding and the bidding is higher, a lot of more projects, that's probably -- a lot of them will not happen in the first quarter. But it's certainly very positive for the second and third quarters for sure. And, yes, there is a strong uptick on white tie procurement. But, again, you have to get through that February/March time frame to really make things start to happen like they should, or like we're projecting them to happen.

And it's going to be a good first quarter. But it's going to be -- but I hear you. You think it would be much higher than what we're looking at. But it's going to be a fairly strong first quarter. And more importantly when you look at second and third quarters, you'll see these things unfolded as the year goes through.

But just, Walt, looking at that fourth quarter as a basis, did you get several million dollars of additional business in December after the 45G was passed? I mean, there are some of your competitors that were saying, they were getting expedited shipment requests from the short lines trying to get, basically receive ties within the three weeks they had left in the year after that credit was extended. So did you guys get some extra revenue dollars from that in December?

Well, Steve, definitely our volumes were up in the fourth quarter, especially the last few months. But you just do not turn untreated ties like that. It takes time to acquire the white ties and treat the ties. And then we definitely had an uptick but not millions and millions of dollars, no.

Okay. Understandable. And then correct me if I'm wrong, did you guys say that treatment services, TSO, was up year-over-year in the fourth quarter? And, if so, considering the seasonality, can you give us some color on what was driving that?

Well, the volumes on TSO treating were up 10%, and pricing was up a little bit as well. And, again, I think what has happened, going through the first three quarters, I think a lot of the railroad activity inventories were going further down than they really wanted them to. And it takes time to get them back. So we did see an uptick on demand both on the white tie as well as the treated tie going out the door.

Okay. And then since we don't have the actual numbers in front of us, Walt, would you characterize that uptick as being an unseasonal, or atypical uptick, versus what you would normally see just from normal recovery here?

In the fourth quarter?

Yes.

I would say it would be an additional uptick under a normal fourth quarter activity. And, again, it happened, it slowed down because of the winter. And now it's going to pick back up again. At least, that's our projection, once we start to get through into the spring weather.

Okay. And then my last one. And, Walt, in the press release you were quoted as noting on working on operating margin through 2011, and I think a previous analyst asked about capacity utilization. Are there also some restructuring efforts in there or anything else that we should know about that you guys are thinking in that regard?

Obviously, these last few years we've seen margin deterioration for most of our products and we have to get back, and it's going to take some time to do that. Part of it is plant utilization. Product demand increasing, we won't see utilization happen, but that's only a part of it. The other part is managing our raw material costs, lower and managing our pricing of our products. So between those three areas, plant utilization, raw material costs, and plant operations and product pricing, that will hopefully allow us to get back to these margins we were at two years ago or so.

Okay. That's helpful. Thanks again, Walt.

Sure, Thank you, Steve.

Mr. Turner, there are no further questions at this time. Please continue with any closing remarks.

Thank you.

Ladies and gentlemen, this concludes the Koppers Holding's Incorporated --

No. No, let me make my closing comments. Okay?Sorry. Are we still on?

Yes, you are.

Okay. Well, we certainly thank you for your participation in today's call and appreciate your continued interest in our Company. While we believe that 2010 was a good year for us, given the recovery in the global economy, we also are optimistic that 2011 should be considerably stronger than 2010, and that it should move us closer to regaining pre-recession levels of profitability.

And, finally, we remain firmly committed to enhancing shareholder value and executing our strategy of providing our customers with the highest quality product and services while continuing to focus on our safety, health and environmental initiatives throughout the company. So thank you very much for participating today.

Ladies and gentlemen, this concludes the Koppers Holdings Incorporated fourth-quarter 2010 earnings conference call.