Koppers Holdings Inc (KOP) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Koppers Holdings first quarter 2011 earnings conference call, on the 5th of May 2011. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would now like to hand the conference over to Michael Snyder. Please go ahead, sir.

Thanks, Diana, and good morning, everyone. Welcome to our first quarter conference call. My name's 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 Salinsky 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 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, everyone, to our 2011 first quarter conference call.

In regard to our first quarter results, I am pleased to say that sales increased by 31% over the prior year quarter, as our major end markets continue to strengthen. Revenues for our global, Carbon Materials and Chemicals Business grew by $63 million, or 36% over the prior year quarter, benefiting from increased aluminum production, higher oil, and overall improved end market demand.

In regard to the global aluminum industry, recent estimates show the growth rate for global aluminum consumption at 12% for 2011, and the LME cash price for aluminum ingot has continued to increase and is currently around $2,700 per ton, up from about $2,500 per ton at yearend.

The 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 smelters in the Middle East. Our expectation continues to be that a substantial amount of this new production will need to come from restarts of idled capacity around the world.

During the first quarter, capacity restarts were implemented by Ormet, Century Aluminum, and Alcoa in response to increased demand and higher aluminum pricing, along with projections for additional increases in demand in 2011. This additional production has enabled us to increase our pitch volumes in North America and should provide an increase in our capacity utilization throughout the year.

With the projected increases in aluminum consumption, we could also see additional restarts later this year or early into next year.

Increases in electric-arc steel production have also added increased volume for our carbon pitch and petroleum pitch, as both products are used in the manufacturing of the electrodes consumed in the electric arc furnaces. One of the largest US electric steel producers reported capacity utilization of 80% for the first quarter of this year, up from 68% in the fourth quarter of last year.

Our pitch volumes were up 47% over the prior year quarter, with the majority of the increases due to the acquisition of the Netherlands and increased volumes from China. However, increased demand for carbon pitch and higher oil prices have resulted in higher coal tar costs in certain regions where we operate.

In response to a tight coal tar market, we incurred about $1 million in abnormal charges related to the transportation and storage of coal tar during the quarter, as we increased our inventory levels in anticipation of the reduced availability of coal tar as we moved through 2011. We plan to increase our pitch prices going forward in order to improve our margins and bring pricing more in line with our increased raw materials.

Our phthalic anhydride business continues to provide increased profitability, as prices were up by 15% over the prior year quarter, driven by orthoxylene prices. The average price for orthoxylene, which drives phthalic pricing, increased by 16% for the first quarter compared to the prior quarter, partly as a result of higher crude oil prices, which increased from an average of $79 per barrel in the first quarter of 2010, to an average of $93 a barrel in the first quarter of 2011. Additionally, the amounts priced for orthoxylene for April is $0.64, up from $0.59 in March. And early indications are that prices will push even higher in May.

For our Railroad and Utility Products Business, higher sales volumes of untreated crossties to the class 1's, resulted in an increase in sales of $9 million, or 43% for the first quarter compared to last year's first quarter. As of March 31st, untreated crossties on hand at our plants were at about 5.8 million ties, similar to the yearend 2010 levels, as treating volumes, particularly for commercial crossties generally kept pace with higher levels of untreated tie purchases.

Tie insertions for 2011, are expected to be in the 20 to 21 million range, compared to the 19.5 to 20 million ties installed in 2010. This should result in continued increased demand for crossties, as lower than normal inventory levels continue to be replenished. In fact, a recent Railway Tie Association report indicated that crosstie production from sawmills in the first quarter of 2011, was the highest level over the past six quarters.

We also continue to see improvement in the commercial crosstie market, as volumes and prices were up 69% and 29% respectively, for the first quarter over the prior year quarter. The extension of the Section 45 tax credits for new construction projects, combined with a rebound in the US economy have had a significant positive impact on the commercial markets. We expect this to continue for the balance of the year.

After Leroy completes the financial review, I'll 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 first quarter increased 31% compared to the prior year quarter, as volume increases in both Carbon Materials and Chemicals and railroad and utility products drove significant sales increases in both business units compared to the prior year.

First quarter sales for Carbon Materials and Chemicals increased by 36%, or $62.9 million, to $236.2 million compared to the prior year. Approximately $15 million of the increase was due to incremental sales from the March 1st, 2010 acquisition in the Netherlands. $8.4 million was from the positive effect of foreign exchange translation due to the weaker dollar. And the remainder was due to higher volumes for carbon pitch and higher prices for carbon black feedstock and phthalic anhydride.

In the first quarter we saw positive growth year over year in the three main components of our Carbon Materials and Chemicals Business. Carbon Materials had a 19%, or $33.5 million increase in sales, as sales volumes increased in all geographic areas due to increased global aluminum demand and production.

First quarter carbon pitch volumes from our Chinese operations increased 150% from the first quarter of 2010, but unfortunately within the last several quarters these higher volumes did not provide a significant profit contribution, as higher Chinese tar prices offset an 11% increase in pitch prices, and, therefore, were dilutive to both our Carbon Materials and Chemicals and overall operating margins.

Sales of distillates, which include third-party creosote sales and carbon black feedstock increased 8%, or $13 million, as both creosote and carbon black feedstock enjoyed higher sales volumes. Additionally, higher benchmark pricing for carbon black feedstock, driven by higher oil prices resulted in higher selling prices.

The third main component, coal tar chemicals, increased 4%, or $7 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 accounted for $3.5 million, or half of the $7 million increase in coal tar chemicals over the prior year quarter. The higher phthalic prices were mainly driven by higher orthoxylene prices brought on by the increasing cost of oil during the quarter.

After increasing to $0.59 a pound in March, from $0.51 in December, orthoxylene prices increased to $0.64 in April, with indications of a further increase for May.

Carbon Materials and Chemicals' adjusted operating profits for the quarter of $12.7 million, increased from $12.3 million in the first quarter of 2010, which equates to adjusted operating profit margins of 5.4% and 7.1% respectively.

There are three main items contributing to the margin decline. First was a $1.3 million negative impact on our Australian carbon black exports denominated in US dollars, caused by the stronger Australian dollar relative to the first quarter of 2010.

Second was the $1 million of cost incurred during the quarter for additional freight and storage costs for our North American operations that Walt referred to earlier. The last item was the dilutive effect of an additional $22 million of lower margin sales out of China in the first quarter of 2011, compared to the prior year.

The good news is that the additional freight and storage costs should dissipate as we continue to move through 2011. And while the lower margin sales out of China will continue in the near term, margins there should continue to improve comparatively for the remainder of this year, as they did in the first quarter.

The bad news is that the Australian dollar has only continued to get stronger since the end of the first quarter. And in addition to the negative effect that has on our export pricing, it has also resulted in increased competition in Australia in terms of imports of carbon black related to our domestic customers. As a result, our second quarter results may be negatively impacted by deteriorating profitability for this business.

Average oil prices for the first quarter of 2011, were about $93 a barrel, compared to about $79 a barrel in the first quarter of 2010. As mentioned previously, this has led to higher benchmark pricing for our carbon black feedstock, which should continue to provide upside for pricing.

Sales of Railroad and Utility products increased $21.9 million, to $122.9 million in the first quarter, compared to the first quarter of 2010, due to higher volumes of untreated crossties for the class 1 railroad, higher volumes in crossties sold to commercial customers, and the sale of rail joint bar products in the December 2010 Portec acquisition.

Adjusted operating profit for the quarter increased to $7.5 million from $6.7 million with adjusted operating margins of 6.1% compared to 6.6%. Higher volumes and prices for our railroad products in the first quarter of 2011, nearly offset the margin impact of a 2.9 million environmental reserve reversal in the first quarter of 2010, that related to the sale of a treating plant in Australia.

Excluding the reserve reversal in the prior year, adjusted operating margins for the first quarter of 2011, would have been 2.3% higher than the prior year quarter, which better highlights the relative strength for the railroad business compared to this point last year.

On a consolidated basis, 2011's first quarter adjusted EBITDA was $26.8 million, or $1.9 million higher than 2010's first quarter adjusted EBITDA of $24.9 million.

We remain pleased with the fundamental improvement in the end markets of our businesses. We're glad to see sales and volumes increase over the prior year quarter. While margins continue to be lower than we would like, we anticipate margins improving as we move into our better seasonal quarters. Additionally, we have several margin improvement initiatives in place that should enable us to drive margins higher as we move through 2011.

Adjusted net income for the first quarter of 2011, was $8.2 million, or $0.40 per share, the same as the first quarter of 2010. Higher volumes for carbon pitch and railroad crossties and higher prices for phthalic anhydride and carbon black feedstock were largely offset by the effects of the stronger Australian dollar on our carbon black business, higher coal tar costs, and higher freight and storage costs in North America.

Additionally, the prior year quarter included the reversal of an environmental reserve of $2.9 million that related to the sale of a wood treating plant in Australia.

The company recorded taxes for the first quarter at an effective rate of 35.9%, which was comparable to the rate during the first quarter of 2010. On an annual basis, we expect our tax provision as a percentage of pretax income to approximate 39% due to the recording of tax reserves during the year, which are reflected as discrete tax items in the quarter they occur.

Cash used in operations for the first quarter of 2011 amounted to $9.5 million compared to cash provided by operations of $16.2 million for the prior year quarter, with the difference due mainly to increases in trade receivables and inventories related to higher overall sales volumes.

Our debt net of cash on hand at March 31st, 2011, increased to $280 million, compared to $261 million at December 31st, 2010, as working capital was utilized to facilitate higher sales volumes and higher inventory levels.

As of March 31st, we have a balance of $24.5 million on our revolver which was recently refinanced to extend its maturity to March 2015. We continue to have total estimated liquidity of over $300 million.

Before I turn it back over to Walt, I would like to remind everyone that our business is seasonally impacted by demand for our products. Financial performance in the first and fourth quarters tends to be similar and it's historically lower than the second and third quarters. At this point we expect that second quarter adjusted earnings will exceed last year's second quarter results and the third quarter should be sequentially even better because of improved end market demand before dropping off in our seasonally lower fourth quarter.

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

Thank you, Leroy. The Carbon Materials and Chemicals segment, which provided 64% of our revenues in 2010, is closely tied with production of steel and aluminum. We use a byproduct of a large coking [make] process of coal tar as our primary raw materials to produce carbon pitch for the aluminum and the electrode industries, carbon black feedstocks for the rubber market, and naphthalene as feedstock for concrete additives, and also for further processing into phthalic anhydride for the plastics and resins markets.

As I mentioned on our last call, during 2010, we continued to expand our market shares for carbon pitch in the Middle East and in Europe, as well as the petroleum pitch and refined tars in North America. We are the global market leader in tar distillation and related products, and believe the increase in market shares will continue to be beneficial to us, as global aluminum consumption and production continue to grow at significant levels.

We are beginning to see the impact of this growth dynamic, as our pitch volumes for the first quarter were up 47% over the prior year quarter, and increased in all geographic regions where we operate, with most of the increase due to the acquisition of the Netherlands and higher volumes from China.

Recent projections infer that global aluminum production will increase by over 10 million tons over the next three years, increasing from 42 million tons in 2010, to 52 million tons in 2013. Using a ratio of one ton of carbon pitch for every 10 tons of aluminum produced, this means an additional one million tons of carbon pitch will be required to meet this projected increase in demand.

Along with the projected increases in production, we have seen substantial increases in the LME price for aluminum in the recent months, with recent pricing at around $2,700 per ton. We are hopeful that the increase of ingot price will result in additional restarts in North America and in Europe as we move through 2011.

The acquisition of the Netherlands business has increased our market share in Europe and has provided easier access to export markets. Having a large global presence with the expanding global aluminum industry in the Middle East, India, and China, and other emerging economies, we will continue to be a key (technical difficulty) to our future growth in the Carbon Materials and Chemicals Business.

As we continue to move through 2011 and the global economic recovery continues to move demands towards normalized levels, we are seeing volume improvements in our Carbon Materials and Chemicals products around the world, which should begin to drive profitability to higher levels as demand and capacity utilization levels increase.

In addition to our carbon pitch products, recovery in the global economy has also resulted in increased demand of our profitable downstream products. Carbon black feedstocks which is used in the production of carbon black for tires, naphthalene used in the production of concrete and textiles, phthalic anhydride used as a plasticizer for products related to autos and housing, and specialty refined tars used in pavement sealers and industrial coating applications.

Our carbon black feedstock and naphthalene products are benefiting from the increases in the production of rubber for the tire industry and concrete for the construction industry, as Asian economies continue to generate higher growth rates. Phthalic anhydride volumes should increase over the next two quarters, as automotive production continues to be strong in North America and the warmer weather allows for more construction and remodeling activity.

Regarding the outlook for our coal tar raw material, in certain regions we are seeing upward cost pressures due to the increased demand for carbon pitch combined with higher oil prices. Because of our global presence and our access to multiple coal tar suppliers, we expect to be able to procure adequate quantities of raw material to meet the increased carbon pitch demand from the anode and electrode producers, but at a higher cost level as we move through the year. As I mentioned earlier, pitch price increases will be required in order to keep pace with these increased coal tar costs.

In North America, smelter restarts are ramping up production during the first half of the year and the resulting increase in carbon pitch requirements has necessitated higher levels of coal tar purchases. In Europe, Australia, and China, coal tar supply is expected to be tighter due to the higher customer requirements for carbon pitch. But we expect to be able to manage this situation throughout the year and obtain adequate supplies of raw material.

Regarding our Railroad and Utility Products Business, maintaining the rail structure of the class 1's 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 treating locations, we will continue to benefit from the increases in capital spending by the class 1 railroads.

We continue to see high levels of untreated crosstie purchases, tie insertions, and treating volumes as the railroads continue to replenish historically low inventory levels. As noted earlier, we are also seeing a significant increase in volumes and pricing for commercial crossties, as the US economy rebounds and the short lines take advantage of the extension of the Section 45 tax credits.

Our proprietary borate treatment process has been installed and is operating at several of our treating plants during the first quarter, and this has resulted in increased revenues and profitability in our railroad business that should accelerate as we move into higher volume treating quarters. We also believe the addition of this product, along with the rail joint bar products from the Portec acquisition has enhanced our relationship with our important class 1 railroad customer base, with the overall range of products and services we provide.

Regarding our rail joint bar business, our first quarter results benefited from this business, as our expectations for revenues and profits were exceeded. I am 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 enhances our strategy of providing various 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 will remain very positive about the long-term strengths of our primary end markets, aluminum and railroads as we begin to move through 2011.

LME pricing for aluminum has increased, smelter restarts in the US have been announced, and spending by the class 1 and commercial railroads has been up significantly over last year. Auto production in the US and globally is expected to increase, which helps demand for our phthalic anhydride in the US and our carbon black feedstocks outside the US.

Considering all these positive end market fundamentals, I am optimistic that our overall results in 2011 will be substantially stronger than our 2010 results. More specifically, I expect to see margin improvements over the next two quarters from the increased throughput in our strong seasonal quarters, from improved pitch pricing and from various margin improvement initiatives which we have implemented.

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

(Operator Instructions) There will be a short pause while participants register for a question. The first question today comes from Ian Zaffino of Oppenheimer. Please go ahead with your question.

Thank you very much. Question would be on the cash flow side and the balance sheet. Given your outlook, you seem very positive, and I see the reasons why. But towards the end of the year, you're going to have a significant amount of cash flow and your leverage ratio's going to continue to come down. I mean, have you guys given any thought to what you intend to do with that cash flow or how you view the balance sheet and your leverage ratio?

Ian, I think that, as we've maintained, our first priority is to try and grow the business. And so we are always looking for opportunities to make acquisitions that would help us consolidate the industries that we're in, as well as any complimentary acquisition, so we're always on the hunt for that.

To the extent that we're not -- that there is nothing out there that would substantially -- that would be substantial in size, we would continue to evaluate whether to increase our dividend, whether to repurchase shares, whether to make additional contributions to our pension. There's a number of different uses, central uses, for the cash, and we would look at each and all of them in order to make that decision.

From a leverage standpoint, I'm comfortable with where the leverage ratio is today. I think I'd mentioned before, I personally would not like to see it get down below two, and if it does, then we would be looking, I think, at what we can do to utilize some of the liquidity that we have.

But I can't answer the question specifically in terms of what we would do, other than our first priority is to grow the business, and beyond that we'll look at all the other potential uses.

Okay. Then the second question would be, as you talk about some of the price increases or price recovery you're looking to get, can you give us an understanding about how the, either the contracts work or how the pricing works, the lag times, and just kind of the nature surrounding that? Thanks.

That would be sort of a question that would take a long, long answer, but it varies throughout the -- both core businesses. I mean, on the -- typically we have long-term contracts anywhere from three to five years.

In most contracts there are pricing formulas that we follow. But if you look back these last two years, it's been very difficult to follow some of these indexes and so forth. Anywhere from a lag time of 30 days to maybe a lag time of six months depending on the process. But specifically in China, these are quarterly prices, but unfortunately there's been some pricing pressures there from other areas that have sort of gave us some issues with that.

But typically it depends on the product, the market, and the terms and conditions we have within those contracts. But as you've been hearing, coal tar prices have gotten out of hand due to higher oil prices, and that comes rather quickly, which it does take a little bit of time, maybe too much lag time, to get there. But that's the correction we have to go to.

Okay. Great. Thank you very much.

The next question comes from Laurence Alexander of Jefferies and Company. Please go ahead with your question.

Good morning. This is Lucy Watson on for Laurence today.

Good morning, Lucy.

First question, how would you characterize your market share now in Europe? And what do you view are I guess other prospects for further M&A?

That was specifically in Europe, Lucy?

Yes.

Well, obviously, the Netherlands acquisition that we did back early March of last year, that generated about $50 million of revenue for us, and it did increase our market share to the point of looking at, now not exactly, but let's say to maybe in a 23%, 25% range.

As we've been saying for several months or even maybe over a year, our continued desire is to further consolidate into Europe. And I think everyone is aware that we are a buyer. And we continue to monitor the availability of any of those tar distillation assets that may come available. We continue to monitor that very closely.

As you've been hearing and seeing, I think the Netherlands acquisition was very positive for us. And so we'll continue to look at those same type of acquisitions going forward.

And is there a typical size of [bigness] that you might be evaluating or are you looking across the board?

I think that would vary. We're certainly not afraid of major acquisitions by any means. So it would vary on the specific project or what we're looking at in Europe or anywhere else around the world.

Okay. And just a quick question on margins, I guess. If I understood correctly, it sounds like the Chinese JV was profit negative in the quarter?

No, the Chinese business was not profit negative, no. In fact, it is improving. When we look back at, let's say the last two quarters of last year versus the first quarter of this year, definitely we're seeing improvements on pricing.

Okay. And the prospects for margins to improve in the Middle East and China with pressure from coal tar prices, I guess just a couple of comments there?

Well, I think as we said on the last call or two, the coal tar costs in China are definitely the highest basically around the world. And it's primarily because it's not just -- coal tar is not just for the tar distillation market, it's also purchased for the fuels market as well as directly to the -- some of the carbon black manufacturers. So there's a little more pressure there on competing for those tars. The coal tar is available, it's just at a very high -- a higher price than elsewhere around the world, and we're dealing with that.

And I can tell you that both of our tar distillation plants in China are operating at 100% capacity. We continue to get the tar, and that's primarily because we have very strong partners there that work with us. And it's going well. The only unfortunate part is we're having to pay market price for the coal tar. And over time product pricing will be improving to sort of match that higher cost.

Okay. And just one clarification question. What percentage of your CM&C volumes will come up to re-price this year?

What percent of our -- I'm sorry, Lucy. Percent of our total products?

What percentage of your contracts will you be pursuing the initial, I guess round of pricing negotiations?

Well, I have to say that basically all of our contracts will be subject to review, both under formulas as well as under the various pressures that we're seeing here with higher oil prices and transportation costs of moving products, it's difficult to answer. But we're going to -- we are or have been monitoring our pricing because of these very quick escalating costs that we're incurring, and not just on raw material costs or -- that also includes plant operating costs as well as transportation costs continue to climb.

Thank you.

The next question comes from Saul Ludwig of Northcoast Research. Please go ahead with your question.

Good morning.

Good morning, Saul. How are you?

Great, thank you. When you were going through the little walk on why the margins declined in the Carbon Materials (inaudible), you said $1.3 million came because of the strong Aussie dollar. You said $1 million came from the freight cost. And then you talked about the lower margins on the Chinese sales. How much dollars would that have affected your gross margin?

It's hard to say, I mean dollar-wise. I'd estimate that it affected our margins by probably about 50 basis points.

Overall?

For CM&C.

Right.

Just if you think about -- if you got a little more clarity on this thing with the coal tar. If we just look first quarter to first quarter, what was the percentage increase in your coal tar costs? Did they go up 50%, 100%? And what was the percentage increase in the selling prices of pitch into the Middle East? Just focusing on that chain for a minute.

And then how much price would you need to cover the increasing coal tar? And the shortages Leroy just explained. But trying to get some percentages here.

Well, first of all, Saul, it's a moving target at the moment. But to get to the first part of your question on coal tar costs quarter over quarter, we're seeing -- Leroy, help me here a minute -- quarter over quarter a 28% increase on coal tar costs.

Would that be total or just the Chinese portion?

That's total. We really won't break out the details. An overall 28% increase, yes.

And what was your selling price, average selling price increase in pitch?

Basically, if you look at our total pitch volumes, it's been basically flat quarter to quarter.

You mean first quarter to first quarter your sales per ton of pitch, your price didn't change at all?

Overall, when you look at the various regions, obviously each region had different fluctuations. But overall in total flat.

Okay. So when you get hit 28% increase in coal tar and you have flat pricing, obviously that explains some margin compression.

Absolutely. And that's why product pricing must go up.

Okay. So granted that the wheels are in motion to do that. You got this problem of you're selling more and enjoying it less, how long is it going to take to start having similar degree of enjoyment with the increased volume?

Well, it's a tough question to answer, but I can tell you it's already started. And I'm hoping by third quarter we've got (sic) much closer to where we need to be.

So this 28% and zero, that gap actually should start to narrow each quarter, and by the third quarter you would hope to have enough price to offset whatever the coal tar cost increase is, you'll be back to normal?

That's our focus and that's our goal, yes.

Okay. Good. Next question relates to this whole Aussie dollar situation. What's the plan to -- what can you do about it? I mean you're losing money there. You got an awkward situation where you produce carbon black and you can't use it locally and -- does it make sense to still produce it? Or what do you do about the problem?

On the carbon black specifically --

Yes.

-- or --

Yes, the carbon black. That's what you have to export.

Yes. Well, you're right. I mean, this is sort of really new territory for us. I mean, I don't know how far you go back to see what the Aussie dollar has been doing. But this is sort of new territory when you see the Aussie dollar at $1.06 at the moment. We are, and we've got a few options we're looking at. We have to do something for sure, Saul, because you cannot continue to compete with that type of negatives that come with this. So I can't say much more than we've got at least three different options we're looking at at the moment.

Do you think that sometime during the second quarter you'll be able to let us know which of these options you're taking?

I would say by the -- our next investor call, yes, we will.

Okay. And then finally, the -- in the railroad tie business, you had a big surge in purchases of white ties, and as you talked about from the Railroad Tie Association, the huge increase in production of railroad ties. When will those move into treated sales which ostensibly would have a much higher margin than you're seeing on just white ties?

Well, as you heard us say, we ended the first quarter with about 5.8 million ties in our plants in inventory, which compares to the same type of volume we had -- we ended the year with back in December of 2010.

So typically in the commercial tie sales, which has increased very nicely for us this first quarter, what we're doing is taking those white ties, coming in and going through the vulcanizing process where we can treat those ties within days or weeks. So that's why you saw the -- sort of the inventory staying the same, but obviously our sales were much higher because we were doing the vulcanizing.

It's difficult for us to go out and procure ties for this commercial business, so we'd rather go through the vulcanizing and then treat the ties and sell them fairly quickly versus the class 1's where we're buying the ties. And definitely our procurement has, as I mentioned earlier, has gone up significantly for the class 1's.

So you'll see that continuing throughout the year, very strong white tie market. And you'll see treating of that picking up, as you typically do in the second and third quarters.

And then just finally, given your dominant position or leading position is the better word, in railroad ties, what should be, on an annual basis, what type of profit margin should this -- should this be a 10% margin business? And what do you have to do to get from where you are to get there? I don't know that 10 percent's the right number. But what do you think the right number is? And what do you have to do to get from where you are to where you want to be?

Well, at the moment, Saul, I mean, it should be at least 200 to 300 basis points more than it is today. So if that gets you into the 8% to 10% range, that's where we need to be.

And you'll be able to move prices to do that, Walt?

Well, I -- really, it's, yes, partially it is pricing, partially is the volume throughput through the plants. And as you well know, last year was a very low volume year for us. And now that is now picking up. And volume going through a wood treating plant is significant. A 10% or 15% reduction in volumes is dramatic when it comes looking at profitability. And so it's something that we will get back through some pricing through, especially on the commercial side which has slipped a lot lately. And we'll get margin improvements on the increased volumes. And then also we don't sit here. We focus on costs and how do we reduce costs at plants. And that's an ongoing thing.

The other thing that always, again, needs to be taken into consideration here as well is the mix of the lower -- of the lower margin white ties and how that can affect the overall margins in that business.

Right. As you said, you're going to have more treated ties --

Yes.

-- second and third quarter than you had in the first quarter, as a percentage.

That's right. So that mix -- that mix should change in our favor. But I'm just saying, from an ongoing basis, you do have -- you do have periods of time where you get -- you get some differences on a comparative basis that could affect the margin comparison.

I mean, you really can't take the first quarter margin, which was 6.7%, I think it was, and, I mean, you'll see a much, much different number in the second and third quarters because of what Leroy just mentioned.

Great. Thank you very much, guys.

Thank you.

Thank you.

The next question comes from Steve Schwartz of First Analysis. Please go ahead with your question.

Hey. Good morning, guys.

Hi, Steve.

Hi, Steve.

Hey. Just to continue that discussion you were having with Saul, Walt, you acknowledged that white tie inventories have not changed much over the past several quarters. And so you send those through vulcanizing, which I -- first part of my question would be the vulcanizing tends to generate a higher profit dollar for you, if I recall correctly. So the 6.1% operating margin would seem to be a disappointment if that's what's happening.

And then the second part of my question is, so if you've moved the white tie purchases immediately through to the finished sale and your white tie inventories haven't increased, should we expect that there will not be an increase six to nine months from now in your TSO business?

No, no, Steve. I think first of all, the white tie procurement continues to be very strong. We had a very strong first quarter. That's going to continue on throughout the year. And so you will see some white tie inventories picking up as we go forward.

And, yes, treating will continue to increase. I mean, as you saw last year, inventories of both white and treated ties were sharply reduced by the Class 1's and it did -- it takes more than one quarter to replenish that inventory. So as the year goes on, you'll see that changing.

So then, Walt, are you expecting your vulcanizing business to continue to remain strong? Because you still have that six to nine month period for seasoning, right? So if the white tie inventories do, in fact, begin to build in anticipation of treated tie sales, you still have that six to nine month gap, right?

Well, sure. I mean, it -- six to nine months depending on which region of the US you're in. But you really can't gauge that on the first quarter.

Okay. Because it's just on a lower base volume?

Yes.

Okay. All right.

And then if you guys could give us a little color around this additional million dollars that you spent for freight and storage on coal tar, you do have terminals in I think the US and Europe. So is the freight cost stuff you're pulling from Asia?

No. Just a little bit more color around that, Steve. It was primarily in the US. And going back to last November, December, I mean, we really, really anticipated smelter restarts being announced as we did here.

We had the opportunity to acquire additional coal tar above and beyond the demand that we would have had in November, December, January, February. So we took advantage of that. And long story short, we were constructing a tank that wasn't quite finished. We took on additional tar that we just did not have. We had to utilize some barges as well as outside storage facilities to accommodate that increased coal tar. And so that was the brunt of it.

And then the winter conditions on the rivers were obviously worse than I think than they have been the last couple of years. So that created some delays in moving barges, that sort of thing.

So long story short, it did catch up with us and we did spend large additional amounts on transportation and storage.

Okay. But it sounds like it was certainly isolated to the first quarter?

Yes, and it should dissipate, I think as Leroy mentioned, pretty quickly.

Okay. And then there was a significant increase in your accounts receivable and it looks like you guys boosted your doubtful accounts allowance by quite a bit, much more so than the increase in sales year over year. So I'm wondering what's behind that.

Well, the big increase in receivables is as a result of the higher sales volume. But we're not seeing any particular issues in those -- in the quality of those receivables. We did record a reserve for a large sale, but one where we have -- we personally have very little exposure to. So there -- I guess the net effect of putting that reserve on was much smaller than the actual reserve increase.

Okay. So this -- the higher cash consumption from accounts receivable is not something we should read as some forward buying or anything like that?

No. No.

Okay. And then just my last question. If you guys could talk a little bit about this sale of technology in China. Just wondering if it's a one-time boost or whether or not there are royalties associated with it. And then if you could discuss it in the context of the fact that you guys have talked, I'll say softly about a potential third JV in China. And in the past you have used your technology as part of your contribution to those arrangements. So how does this latest deal connect with that?

Sure. Steve, this technology is -- that we're talking about here is with one of our joint venture partners in China. And it's -- the benefits to us are several things.

One, we get, as we've done with our other joint ventures, we get exclusivity on exports of products from this plant that will be built using our technology. That's why we wanted our technology to be used. We had an opportunity to be an investor in this, but we decided not to do this particular one because we have other projects we're looking at in China.

So the benefit is really the plant will be using our technology. We will be using that plan for exporting products which we know will be quality materials.

Okay. Very good. Thank you.

The next question comes from Chris Shaw of Monness, Crespi & Hardt & Co. Please go ahead with your question.

Yes. Good morning, guys. How you doing?

Hi. Good morning, Chris.

I just want to -- I hate to beat the dead horse. I just want to make sure I understand. Are coal tar costs going up in North America and in Europe? Or is it -- it was just the sort of shipping and logistics and trying to get supply ahead of the smelter restarts?

Coal tar costs are going up everywhere around the world. It's becoming a supply-demand. It's more pressure from higher oil costs. It's several things that we've experienced in the past when we have oil where it's at today.

Transportation, logistics costs, storage costs, we talked about, was specifically tied to the first quarter. And then it's embarrassing in a way, but we did, unfortunately, have those costs, and but they are behind us. But the more important point is coal tar costs are rising and will continue to rise here. And that's why we've got to make some adjustments on our product pricing, not just the carbon pitch, but all of the products coming out of coal tar.

Okay. And then again, to also beat another dead horse. The Australian situation with the carbon black, I understand that the dollar's getting stronger down there. But how does that affect the export market exactly? What -- more imports are coming into the domestic Australian market? I wasn't completely following what (multiple speakers)-.

Yes, and this goes back -- we have to go back maybe over the last two years, Chris, in that once upon a time, about 65%, 70% of our carbon black production in Australia was sold to domestic customers.

Right.

And then we did see basically all of the tire manufacturing plants, the latest one was the Goodyear Plant in Somerville outside of Melbourne, close here about a year ago.

Yes, I remember.

So that shifting of our sales, which was majority domestic, is now reversed. So it's probably more like 70% export and 30% going into the domestic market. And then that's when the FX negative impact really starts to hit us, with not just the pricing itself, but the -- just the logistics and everything that goes with it, based on where we're located, and then -- and who we're competing against in that Asian market.

Okay.

And then finally, just curious, I forget if you sell any pitch to Rio Tinto now? And just kind of trying to figure out what kind of relationship you might have now with those guys, with any sort of potential changes in the aluminum landscape going forward?

Yes. I mean, Rio Tinto Alcan obviously is a major customer for us --

Right.

-- around the world, not just Canada but also in Australia as well as South Africa. So, I mean, it's a very important customer. I think our relationships are very good there, especially in Australia where they have some of their fairly large smelter locations.

Okay. Great. Thanks a lot.

Sure.

Thank you. Mr. Turner, we have no further questions. Please continue with any closing remarks.

Thank you, Diana. And we thank all of you for participating in today's call and appreciate your continued interest in our company.

We are optimistic that our sales growth trajectory will continue to be strong throughout 2011, and that both our sales and profitability will be substantially stronger than in 2010, as demand has improved in virtually all of our key end markets in line with the continuing global economic expansion.

Our acquisitions over the past several years are definitely helping us to capitalize on economic expansion in the global economy, and we intend to continue to pursue our strategy of expanding our presence in the key end markets and geographic regions where we make and sell our core products.

And finally, we 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.

Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Koppers Holdings first quarter 2011 earnings conference call. Thank you for participating. You may now disconnect.