Koppers Holdings Inc (KOP) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Koppers Holdings Inc. second quarter 2011 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions.

(Operator instructions)

This conference is being recorded today, Thursday August 4, 2011. I would now like to turn the conference over to Michael Snyder, director of Investor Relations. Please go ahead, sir.

Thanks, Brittany. Good morning, everyone. Welcome to our second quarter conference call. My name is Mike Snyder and I am 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 Hilinski 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 am 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. Welcome, everyone to our 2011 second quarter conference call. In regard to our second quarter results, I am pleased to say that sales increased by 20% and adjusted earnings per share increased by 22% over the prior year quarter as our major end markets continue to strengthen and we are in a stronger seasonal quarter.

Revenues for our global carbon trails and chemicals business grew by $48 million or 23% over the prior year quarter, benefiting from increased aluminum production, improved product pricing, and overall improved in market demand.

In regard to the global aluminum industry, recent estimates show that the growth rate for global aluminum consumption is 12% for 2011 and the L&E cash price for aluminum ingots is currently around $2500 per ton, down a bit from April, but about the same year end.

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 portion of this increased demand will need to come from restarts of idle 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. These restarts should be at the desired levels of production during the fourth quarter, which should allow us to further increase our pitch volume to North America and our capacity utilization throughout the rest of the year.

With the projected increases in aluminum consumption we could also see additional restarts later this year or early next year. Our pitch volumes were up 3% over the prior year quarter, due mainly to increases in the US and Australia. During the second quarter we were able to increase our prices for coal tar products by 6% over first quarter levels, excluding foreign exchange effects, while tar costs increased 1% from the first quarter. This increase in product pricing was driven in part by quarterly pricing adjustments which allowed us to improve our margins and bring our pricing more in line with our increased raw material costs.

We anticipate further price increases in the second half of the year through long term sales contracts that allow for semi-annual repricing, as well as for shorter term commitments that are repriced as high coal tar costs from the first half of the year are included in the pricing formulas.

Our Phthalic anhydride business continues to provide increased profitability as prices were up by 28% over the prior year quarter, driven by higher orthoxylene prices. The average price for orthoxylene which drives phthalic prices, increased to an average of $0.64 for the second quarter, compared to an average of $0.47 for the second quarter of 2010. This increase reflects higher crude oil prices, which increased on an average of $77 a barrel in the second quarter of 2010 to an average of over $100 a barrel in the second quarter of 2011.

With the recent pullback in oil prices, the price for orthoxylene for July is $0.595 cents, down from $0.62 in June, although OX prices for August appear to be trending up again. However, even at the reduced orthoxylene pricing, this should continue to be a favorable driver for our business.

For our railroad and utility product business, higher sales prices and volumes for cross ties resulted in an increase in sales of $12 million or 10% for the second quarter compared to last year's second quarter. As of June 30, untreated crossties on hand at our plant were 5.9 million ties, similar to the year-end 2010 level, as treating volumes, particularly for the 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 to 20 million ties installed in 2010. This should result in contingent increased demand for crossties as lower than normal inventories continue to be replenished.

We continue to see improvement in the commercial crosstie market as volumes and prices were up 31% and 32% respectively for the second quarter over the prior year quarter. The extension of Section 45 tax credits for new construction projects, combined with the rebound in the US economy have had a significant positive impact on the commercial market. These tax credits are currently scheduled to expire at the end of the year, but there are indications that legislation will be introduced that will provide for additional extensions throughout next 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. Looking at the results on a consolidated basis, sales for the second quarter increased by 20% or $66.5 million to $393.6 million 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.

Second quarter adjusted EBITDA was $44.1 million or $4.2 million higher than 2010 second quarter adjusted EBITDA of $39.9 million. We remain pleased with the fundamental improvement in the end markets of our businesses and 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 did see nearly a 400 basis point improvement in margins from the first quarter and we anticipate margins improving further in the third quarter. We continue to execute the margin improvement initiatives that are in place with the goal of driving margins higher as we move throughout 2011.

Adjusted net income and adjusted diluted earnings per share for the second quarter of 2011 were $19.8 million and $0.96 per share compared to $16.3 million and $0.79 per share for the second quarter of 2010.

Higher volumes for carbon pitch and railroad crossties and higher prices for carbon pitch, phthalic ahydride and carbon black feedstocks were the main drivers for the improvement in earnings for the quarter.

Our effective tax rate for the second quarter was approximately 35% compared to 37% in the prior year quarter due to a mix of US and foreign earnings and certain discrete tax adjustments. For the year we estimate our effective tax rates, including discrete items, to approximate our rates through the first six months of 35%.

We do, however, anticipate a significant discrete item to be recognized in the third quarter of between $3 million and $5 million due to an integration project related to our March 2010 Cindu Chemicals acquisition that I will talk about in further detail shortly. The charge is non-recurring. It will serve to increase our expected tax rate in the third quarter and have a corresponding effect on our full-year rate, the magnitude of which will depend upon our full year pre-tax earnings.

Moving on to the carbon materials and chemicals business, second quarter sales for carbon materials and chemicals increased 23% or $47.8 million, $256.2 million compared to the prior year quarter. The increase consisted of $18.9 million from the effect of foreign currency translation, $15.5 million driven by higher average pricing of pitch, carbon black feedstock, phthalic anhydride, and $13.4 million that was driven by increases in carbon pitch, carbon black, and creosote sales volumes.

In the second quarter we saw positive growth year over year in the three main components of our carbon materials and chemicals business. Carbon materials had a 7% or $14 million increase in sales as sales volume prices and foreign currency translation were higher.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 5% or $11 million. Creosote volumes and carbon black feedstock pricing where higher than the prior year quarter.

Third main component, coal tar chemicals, increased 3% or $7 million driven by higher phthalic anhydride prices compared to the prior year quarter. Carbon materials and chemicals operating profits for the quarter were $24.5 million, increased from $21.4 million in the second quarter of 2010, which equates to operating profit margins of 9.6% and 10.3% respectively. Operating margins were negatively impacted by the decreased profitability of our Australian carbon black business and an increase in overhead costs as a result of higher consulting and management incentive expenses, combined with the impact in the prior year quarter of a reduction in our self-insured retention liabilities as a result of favorable claims experience.

As mentioned on our last call, the strength of the Australian dollar has had a negative effect on our Australian carbon black business for the last couple of quarters. Due to the rather small domestic market for carbon black in Australia, a significant portion of our production in Australia is exported to parts of Asia and denominated in US dollars. As the Australian dollar has strengthened against the US dollar, our export sales have been converted into fewer Australian dollars, which has diminished that businesses profitability.

In addition, a stronger Australian dollar has put pricing pressure on our domestic carbon black business by making imports of carbon black more cost competitive. As a result the 2011 second quarter results reflected a negative impact of $1.1 million on operating profits compared to the second quarter of 2010 for this business.

The Australian dollar closed July at $1.10 per Aussie dollar, which was the highest month-end close for that currency thus far in 2011. If it stays at that level throughout the third quarter, then we would expect the operating profit of this business to be negatively affected by anywhere from $1 million to $1.5 million compared to the third quarter of 2010.

We will continue to watch this business closely in order to determine the best alternative for profitability and cash flow given the current situation regarding demand levels and the Australian dollar. In the near term we believe it is prudent to monitor this situation for at least another quarter before determining and implementing our strategy for this business.

On the plus side of the ledger, our European CM&C business had a tremendously successful quarter compared to last year, driven primarily by the improved results or our Netherlands business now that we are over a full year removed from the acquisition of Cindu Chemicals.

The integration of that acquisition has been extremely successful, as evidenced by the increase in operating profit of approximately $2 million for the second quarter of 2011, compared to 2010. Much of that improvement is related to the movement of the production of petroleum pitch and specialty chemical products from our Scunthorpe facility in the U.K. to the Uithoorn facility in the Netherlands, which occurred near the end of the third quarter last year and that we have highlighted on previous calls as being the biggest area of potential synergy.

While that may be true, we have made a number of other changes that we believe will result in both tangible and intangible benefits for our European business moving forward which I would like to highlight as follows.

First, we now have the management and commercial organization responsible for our entire operations located at the Althorn office. This has allowed us to be closer to our customer base as well as centralize efforts in the area of operation efficiency.

Second, raw material procurement is also now centralized in the Netherlands, where we have a strong and growing relationship with the major steel manufacturers that provide our coal tar raw material.

While we also went live in the Netherlands during the second quarter on our global ERP system, which improves our controls, standardizes our data collection activities, provides a framework for being able to improve both our operational financial reporting and analysis.

One of the final things remaining for us related to the Cindu Chemical integration is the last phase of the project that I referred to earlier that was just given the final green light to proceed with in July. It is a project that builds upon our consolidation of sales and procurement activities in the Netherlands, allows us to improve even further on the coordination of activities while improving inventory controls and allowing us to run Europe truly as one company.

The ongoing financial benefits are expected to be meaningful but difficult to quantify and separate from the benefits of the first phase of operation consolidation that has already occurred, except for the effect on the consolidated effective tax rate, which could amount to anywhere from a 2% to 4% reduction on an annualized basis beginning in 2012.

We incurred approximately $0.5 million in expense in the second quarter related to this project that was expensed through operations and expect that we will recognize approximately another $0.4 million related to this project in the third quarter.

Now moving on to railroad and utility products, sales of railroad and utility products increased $18.7 million to $137.4 million in the second quarter compared to the second quarter of 2010. The increase consisted of $12 million of sales driven by higher prices for crossties, partly due to covering our higher raw material cost, $5 million in higher sales volume driven by increased sales of treated and untreated crossties to the Class I railroads and commercial customers, combined with the sale of rail joint bar products, and lastly $1.7 million due to foreign currency translation.

Operating costs for the quarter increased to $12.8 million from $11.9 million with adjusted operating margins of 9.3% compared to 10% in the prior year quarter.

Higher volumes and prices for railroad products in the second quarter of 2011 highlight the relative strength of the railroad business compared to this point last year. Charges were lower due primarily to higher consulting and management incentive expense in the current quarter combined with the impact of a reduction in self-insured retention liabilities from the prior year quarter, along with the mix impact of untreated tie sales displacing higher margin treating service for our class one customers in the current quarter.

However, we expect volumes of treating services to increase in the third quarter compared to the second quarter.

Moving over to cash flow and liquidity, cash provided by operations for the first six months of 2011 amounted to $26 million compared to cash provided by operations of $33 million for the prior year quarter with the difference due mainly to increases in trade receivables related to higher overall sales volume. Our debt net of cash on hand at June 30, 2011 decreased to $256 million from $261 million at December 31, 2010. As of June 30, we had $14.5 million borrowed on our revolver and we continue to have estimated liquidity of well over $300 million.

Before I turn it back over to Walt, as I typically do I'd like to remind everyone that our business is seasonally impacted by the demand for our products. Financial performance in our first and fourth quarter tends to be similar and is historically lower than the second and third quarters. As mentioned on our last call we expected that second quarter adjusted earnings would 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 on our seasonally lower fourth quarter. This continues to be our expectation and as a result the second half of 2011 should be stronger than the first half of the year.

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

All right, thank you, Leroy. The carbon materials and chemicals segment, which provided 64% of our revenues in 2010, is closely tied to the production of steel and aluminum. We use a byproduct of metallurgical coke making process, coal tar, as our primary raw material to produce carbon pitch for the aluminum electrode industries, carbon black feedstocks for the rubber market, and naphthalene as feedstocks for concrete additives and also for further processing into phthalic anhydride for the plastic and resin markets.

Recent projections indicate 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 1 million tons of carbon pitch will be required to meet this projected increase in demand.

We are hopeful that the increased demand, along with the relatively stable ingot price, will result in additional restart announcements in North America and in Europe as we move through 2011.

Additionally, Middle Eastern smelting capacity continues to expand and the new Qatalum smelter in Qatar, which has been operating at about 70% of capacity, recently announced that they expect to reach full capacity by the end of the third quarter this year.

Our acquisition in the Netherlands has increased our market share in Europe and has provided easier access to export markets, adding a large global presence with expanding global aluminum industry in the Middle East, India, China, and other emerging economies will continue to be a key to our future growth in the carbon materials and chemicals business.

As we continue to move through 2011 and the global economic recovery continues, we are seeing volume improvements in our carbon materials and chemical products around the world, which is driving sales and profitability to higher levels as demand and capacity utilization levels increase.

In addition to our carbon pitch products, the recovery of the global economy has also resulted in increased demand for our profitable downstream products, carbon black feedstocks, which are 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 increases in the production of rubber from the tire industry and concrete from the construction industry as Asian economies continue to generate high growth rates.

Phthalic anhydride volumes should continue to be strong over the next quarter as domestic auto production is up 10% year over year through June and continues to be strong and the warmer weather allows for more construction and remodeling activity.

Regarding the outlook for our coal tar raw material, in certain regions where we operate we continue to see 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 supplies, we continue 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, price increases for coal tar products are required in order to keep pace with these increased coal tar costs. We did achieve a 6% increase in prices for coal tar products in the second quarter and we expect to see additional price increases in the second half of the year as certain sales contracts incorporate higher coal tar costs from the first half of the year into the pricing formulas.

In North America smelter restarts have ramped up production during the first half of the year. Related increase in carbon pitch volumes has necessitated higher levels of coal tar purchases. In Europe, Australia, and China coal tar supply continues to tighten due to higher customer requirements for carbon pitch, but we expect to be able to manage the situation through the year and obtain adequate supplies of raw material.

Regarding our railroad and utility products business, maintaining the rail structure of the class ones is a necessity, especially with the revenue base increasing as a result of increased rail traffic. We estimate total capital spending by the class one railroads to be about $12 billion in 2011, with approximately $7.5 billion of this amount going into maintenance of way spending, which includes ties and rail joint products. We expect these high levels of spending to continue for at least the next several years.

Through June 2011 carloads of class ones were up 3% year over year, providing higher revenues for this important customer base. We are confident that with our multiple online wood treating locations we will continue to benefit from increases in capital spending by the class one railroads.

We continue to see high levels of crosstie purchases as the railroads continue to replenish historically low inventory levels. Through the first half of 2011 we have purchased 3.4 million ties, compared to 2.5 million through the first half of 2010, and for the year we expect to purchase a total of 6.8 million ties, compared to 5.9 million in 2010.

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 extension of the Section 45 tax credits this year.

Our proprietary borate treatment process has been operating at several of our treating plants in 2011 and this has resulted in increased revenues and profitability in our railroad business. We also believe the addition of this product, along with the rail joint bar products from the Portec Acquisition has enhanced our relationships with our important class one railroad customer base with the overall range of products and services we provide.

Regarding our rail joint bar business, our second quarter results benefited from this business as our expectations for revenues and profit continue to be exceeded. Along with our track panel and preplating services, the joint bar business acquisition enhances our strategy of providing a diversity of products and services to the railroads.

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 in railroads as we move through 2011.

LME prices for aluminum have stayed at high levels. Smelter restarts in the US have been implemented and volumes from the class one and commercial railroads are up significantly over last year. Auto production in the US continues to increase as vehicle sales for 2011 are projected to be 12.9 million units, up from 11.7 million in 2010, which also helps demand for our phthalic anhydride.

Considering all these positive end-market fundamentals, I continue to believe that our operating profit in 2011 will be stronger than our 2010 results. More specifically, I expect to see margins continue to improve over the next quarter compared to the current quarter from improved product placing and from various margin improvement initiatives.

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

Thank you, sir. We will now begin the question and answer session. (Operator instructions). Our first question comes from the line of Ian Zaffino with Oppenheimer. Please go ahead.

Great, thank you. As far as the future price increases that you need, what's the order of magnitude? And as far as the pricing that you tried to recover in the market, what's been the receptivity? I mean obviously no one wants their prices raised, but what are they really saying back to you and how have they been received?

Ian, in most of our large long term contract, we do have specific pricing formulas that are associated with the particular product that that customer will be buying and those pricing formulas are typically based off of raw material increases. So it really depends upon how we receive those increases from our raw material suppliers and how those increases are used within the pricing formulas we have for customers. So it's difficult to answer your question as to how much. It's based off of raw material cost increases or decreases, but at the moment it's more on the increase side.

Okay, thank you.

Thank you. Our next question comes from the line of Kevin Hocevar with North Coast Research. Please go ahead.

Hi, guys. I'm calling on behalf of Saul Ludwig, who can't be here today.

Good morning.

Hi. The Railroad Tie Association indicated there was some slowing of tie purchases in the second quarter. Why might that be the case and do you see this continuing in the third quarter?

Well, as I mentioned earlier, our tie procurement through June continues to be fairly strong compared to last year. I'm not quite sure what RTA was inferring, but we continue to see the demand for ties increasing on both the class ones and the -- and the commercial side and we're going to be up fairly significantly over last year's tie procurement.

Okay. Thank you.

Sure.

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

Good morning, guys.

Good morning.

Good morning, Steve.

Walt, you gave a number for tie purchases, 3.4 million versus -- this was in the quarter. Can you restate that number for us?

Sure. What I said was through the first half we purchased about 3.4 million ties compared to 2.5 million in the first half of 2010. So it's up about 900,000 ties over last year's first half.

So you noted in the release and in the commentary that treatment services was down. Are you surprised, then, by that? Is this due to the air seasoning in the lag?

There is a little bit of the -- air seasoning and the -- timing of the ties to be -- for treating, but overall when you look at the first half and you sort of look ahead a little bit here with the ties we have physically at our plants, that's not a surprise, but we're still pretty bullish on the treating services going through the year.

Yes. And then that would carry over into the first half of next year, too, right?

Well, we're now sitting here August 4, so there would be -- sure. I mean as we see some of the continued inventory build-ups to replenish lower than normal inventories, you would expect that.

Yes, yes. Okay. Different area -- orthoxylene, phthalic anhydride. You talked a little bit about the relationship there. I think your coal tar costs have become much more dynamic, fluid, volatile. I think globally they've become closer -- more closely tied to a BTU value. So can you tell us or talk a little bit about how your advantage in that area has changed over the past year or two?

Our advantage -- well, let me -- let me talk a little bit about what's been happening with coal tar costs. I mean coal tar availability and pricing continues to be related to region to region of the world, where we see some areas of the world, the supply is stronger than the demand has been -- sorry, the demand is stronger than the supply.

So it's still a regional sort of a pricing, but for sure over the last, I'll say let's say 18, 24 months, we have seen more and more of our tar suppliers linking what their desired prices are for coal tar based on the BTU concept. And I think -- and that's going to continue to be that way, so going forward, we're really looking at sort of an oil index, whether it's a Platts or whether it's number six oil. That's going to, in the future, be a stronger indication of what we're looking at for coal tar cost.

The advantages we have in buying coal tar globally are truly the multiple global locations we have in all these various regions of the world, areas where you've got fairly large steel production, which generates the coal tar from the coking processes. We have those global facilities where we can offer a lot more as far as commitment as far as storage tanks and those types of things that they really need to ensure that we can live up to our commitments on our raw materials contract.

So it's really the global presence that we bring as an advantage.

So Walt, so as far as procurement is concerned, you guys are fine. You'll figure it out.

Yes, sure.

As far as cost is concerned, though, we can expect a volatility to go up as tar prices more closely link to oil prices, essentially. So then as we go back to this PAA situation where you had an advantage over your competitors using orthoxylene coming out of the refining stream, that advantage you have may diminish over time, is that right?

I don't quite think that it's quite right, Steve, because as you know, we use about 50% of our feedstocks for producing phthalic anhydride. We use our coal tar naphthalene in the US here. So we still have that little bit of advantage, but it is declining a little bit, but it's narrowing the gap, but I -- that's -- I'm not quite sure if the coal tar costs, for instance, are going to be unilaterally the same as crude oil pricing. But it's -- you're right. It's narrowing the gap a little bit.

Okay. Well, thanks for that, Walt. Appreciate it.

Sure.

Thank you. Our next question comes from the line of Lawrence Alexander with Jeffries and Company. Please go ahead.

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

Good morning, Lucy.

I was wondering if maybe you could provide a little bit of -- a little bit more information on any impact you might have seen during the quarter from elevated freight or distribution costs to ship either tar or pitch globally?

I'm sorry. Distribution costs, logistics cost, Lucy?

Right.

And you might be referring back to our first quarter where we had higher than normal logistics costs for moving coal tar. That was primarily North America, but -- and that had to do with some severe winter conditions and that sort of thing. For sure that's improved dramatically in the second quarter.

Globally, and our logistics are working very well. We have a very good logistic system set up in Australia for both raw material and finished products. In Europe we have a very good supply chain logistic system set up for acquiring coal tar in Russia, Ukraine, and other Eastern European countries that supply our three distillation plants there.

I can really say that logistics improved dramatically in the second quarter when you look back on the first quarter with some of the excess logistics costs that we unfortunately had at that time.

Okay, and what is your capital spending outlook for the year?

Through the first half of the year we spent about $12.5 million, which is about 40% of our $32 million capital program, so we're still on track to be in the $30 million, $32 million, Leroy?

Yes, that's the ballpark.

Okay, and just one final question. In terms of M&A, I guess just maybe a little color on types of targets you're evaluating or how active the environment is?

On the M&A front, as you've seen in the past with -- there've been new chemicals acquisition with the joint bar business from Portec and the smaller acquisition we had with the Stella Jones Terre Haute, Indiana operation that we bought that business.

Those are all related to our two core businesses, so as we go forward and continually look at potential acquisitions, it's primarily going to be related to those either core or adjacencies to those two core businesses that will give us a better position in the marketplace to supply more products and services to our customers in additional end market customers.

That's really about all I can say at this point, is that we want to continue to focus on coal tar distillation. We want to continue to look at additional products and services that would go well with the various wood treated products that we have, and that continues to be what we do well at.

Thank you.

Thank you. Our next question comes from the line of Eric Glover with Canaccord Genuity. Please go ahead.

Hi, good morning.

Good morning, Eric.

Yes, I was wondering if you could repeat something you said earlier. You were talking about third party creosote sales in the second quarter. Did you say those were up 5% year over year?

Third party creosote sales?

Yes.

Trying to remember where that was. That sounds about right, Eric, yes.

Was that --

As you know, the majority of our creosote that we consume is in our own wood treating plants, which gives us a nice little edge over other wood treaters where we've got not only the wood procurement but also the creosote we generate from the carbon materials and chemicals business that we can utilize at our wood treating plants here in the US

Yes, Eric, just to clarify, we did say that third party creosote sales and carbon black feedstock increase 5.

Sales increased 5% year over year?

That's correct.

And was that in line with your expectations heading into the quarter, or how did that compare to what you thought might happen?

Well, it's -- as you also heard us say, our pitch sales have increased also because of pitch demand increasing for the aluminum industry, so along with pitch, don't forget that in the distillation process the pitch is only 50%. The other important products are carbon black feed stocks, creosote, and naphthalene. So you will see increases in those sales as our pitch volumes increased

And are you willing to provide an outlook for a third party creosote sale for the remainder of the year?

That's something I really can't quite answer at the moment.

Okay, thank you.

Sure.

Your next question comes from the line of Chris Shaw with Moness Crespi. Please go ahead.

Hi, good morning, guys.

Good morning, Chris.

How're you doing?

Great, how are you?

Good. Just follow-up on some of Steve's questions on the coal tar. I forget -- your coal tar contracts or supply contracts, do they renegotiate pricing monthly, quarterly, or is just sort of -- can they just pass through market prices to you?

Again, it varies a little bit from region to region around the world, but typically these are long term commitments that we make with the steel companies around the world. There's also quarterly negotiations that take place in certain countries as well, but I would say the majority under long-term contracts with pricing negotiated typically annually and in a few cases perhaps semi-annually, but it's truly the most important part of the purchasing coal tar is the commitments and the agreement that we will take the production of the coal tar from the various companies. That's the first important factor.

The second factor is negotiating what we think is a fair price for that coal tar and typically it could be six months, but on the most part it's 12 months. But again, variations around the world

Okay. And then your carbon materials business this quarter, the margins (inaudible) still down year over year. Do you anticipate that -- head of year over year margins in the third quarter? Do you think they can come back that quickly?

That's our goal. I mean we've got some serious initiatives and we also, as I mentioned, we have semi-annual price formulas in certain contracts that we'll be implementing in the third quarter, so that's our goal.

Okay, great. And then finally, I got a little confused when Leroy was talking about the tax issues for the third quarter. So for the remainder of the year you expect the effective, I guess, rate to be sort of like the first half, but there'll be, was it $3 million to $4 million in discrete extra tax expense?

That is correct.

That's how I should look at it? Okay.

That's how you should look at it.

That's perfect. Thanks, guys.

All right, thank you.

Thank you. (Operator instructions). Our next question is a follow-up question from the line of Steve Schwartz with First Analysis. Please go ahead.

Yes, thanks for taking the follow-up, guys. Walt, can you give us an update on the profitability of the China JVs and give us an idea of how the pricing situation in the Middle East is looking these days?

I'll tell you as much as I can for sure. First of all, as I mentioned earlier, the volume, the pitch demand continues to increase in the Middle East. Qatar is a good example of that. And we continue to supply a fairly good portion of that -- of those requirements and most of that is coming out of China and as you heard us talk last year, with some issues around excess, surplus product, if you will, and we also had very high tar costs.

On the tar cost side in China things haven't changed too much. We're still looking at some fairly high coal tar costs there. As far as pricing and negotiation, we have made some nice improvements on the pricing side, but we still have a ways to go. On the margin side in China, it's improved a little bit and I think as we go forward we'll continue to see small improvements. But it's going the right way.

It's understood that China does have high coal tar costs, but they also have a large volume of coal tar, so for a lot of these increased pitch product demands, China is really the place to be and that's where we -- we have two great facilities there that will continue to do that, but the profitability must improve and it's headed that direction.

One of the India -- large Indian pitch producer has been adding capacity over the past couple of years and I'm wondering to what extent you think that might be impacting the pitch supply situation in the Middle East?

In the Middle East? I think you're referring to Himadri and they have increased their capacity, I think a little bit in India. I think I just read somewhere where they've built a small plant in China, but obviously they'll be a player in the Middle East, but also I think, based on what I see, with the next five years out on what projections are for steel production and aluminum smelting increasing, it's going to be more of an attractive market than the Middle East for India.

Do you think the Himadri capacity addition threw off the supply-demand balance in the region?

I don't know, Steve. I really don't know. I don't knew exactly what their capacities are in India. I think obviously the expansion in China must be looking at other markets, but I think that was just recently completed, so I don't think that was in play last year.

Yes. Okay. And can you give us an update on the M&A situation, particularly in Europe. I mean you talked a little bit earlier on the call about where you're focused, but just in terms of -- we've talked in the past about how the situation for coal tar supply has influenced the M&A situation and so can you just let us know how that environment looks? And then of course we're hearing about how valuations are starting to creep up because there's so much cash chasing assets right now.

I can't say too, too much about M&A activity. I can say that we'd love to do another Cindu Chemicals acquisition. It's been going well. I'd like to see another one like that in Europe because Europe still has a lot of capacity that's not doing well and so that would improve, I think the overall marketplace around the world. I mean we continue to look, as I mentioned, for potential acquisitions that really fit into our business.

I mean when you look back, look back at the Rally acquisition in 2006, look back at Cindu Chemicals, and even look at a few of the acquisitions we made on the treated wood side, these are things that we do well and I think I can name off every one of them that has either lived up to or exceeded our expectations. So these are the kinds of things I'd love to do more of.

Yes. And then just lastly, as you give -- gave your outlook here on the call, very bullish long term, of course, but in the near term we've heard from one plastics additive supplier that deals with valid products to PVC and they kind of gave a bearish outlook for the second half of the year. There are a number of headlines, of course, that are kind of saying we're up for a correction. So I don't really hear any of that tone from you guys. How did the quarter finish as it went from May to June? And what did July look like for you guys?

Well, I can talk about the quarter and when you say phthalic anhydride continues to provide a nice share of its profitability to the carbon (inaudible) and chemicals business, when I look at the phthalic market, obviously you've got some negatives. When you look at housing, you look at construction and so forth, but I look at volume and I think when you compare the volume demand of last year versus this year, I don't see a lot of difference.

I think there's -- phthalic is also -- the phthalic consumption is fairly seasonal, too, so for instance, alkyd resin paints, which consumes phthalic -- not to a great degree, but to a fair amount. That's going to slow down. Housing and remodeling, things like that, think that's going to continue to limp along like it has been with some minor improvements, but I'm not saying phthalic anhydride is going to increase over last year's demand, even though it may have picked up a little bit the first half, but I'm not real doom and gloom on phthalic.

Got you. Okay. Appreciate your time, Walt. Thank you.

Sure.

Thank you. And at this time I would like to turn the conference back to Mr. Turner for any closing remarks.

Thank you, Brittany. Again, 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 operating profit 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 last several years are helping us 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. And thank you all again for participating today.

Thank you, ladies and gentlemen. This concludes the Koppers Holdings Inc second quarter 2011 earnings conference call. We thank you for your participation. You may now disconnect.