Koppers Holdings Inc (KOP) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Koppers Holdings Inc. third quarter 2011 earnings conference call. 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 will now hand the conference over to Mr. Michael Snyder, Director of Investor Relations. Please go ahead, sir.

Thanks, Pamela, and good morning, everyone. Welcome to our third 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 Hilinski at 412-227-2444 and we can either fax or email you a copy.

Before we get started, I'd like to remind all of you that certain comments made during this conference call may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the Company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking statements included in the Company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans, and projected results will be achieved. The Company's actual results could differ materially from such forward-looking statements.

I'm joined on this morning's call by Walt Turner, President and CEO of Koppers, and 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 third quarter conference call. I would like to begin by saying that despite the uncertainty and volatility that we have been hearing about regarding the global economy, our businesses and end-market demand remain solid. We continue to see strong end-market demand and higher volumes in most of our major product lines compared to last year.

While I acknowledge that there is some evidence of at least a pullback in the economy, particularly in Europe and for the global steel industry, we are not seeing it in our order patterns from the majority of our customers, especially the global aluminum industry and the North American railroads. In fact, in a few regions of the world, we continue to have to reach farther to obtain an adequate supply of our coal tar raw material, as steel production has not kept pace with the increases in aluminum production this year.

However, because of our global presence and a strong supply chain network, we expect to continue to be able to meet all of our customer requirements, but at higher pricing levels. We're also expecting this tar availability trend to continue into next year, based on global steel operating projections. These continuing higher raw material costs will be passed along to our customers, as our contracts are either repriced or renegotiated.

In regard to our third quarter results, I'm very pleased to say that our sales increased by 19% and our diluted earnings per share increased by 44% over the prior year quarter, as our major end markets continue to strengthen and we are in our stronger seasonal quarters.

Our global carbon materials and chemicals revenues grew by $47 million or 22% over the prior year quarter, benefiting from increased aluminum production, improved product pricing, and overall improved end-market demand.

Our pitch volumes increased 5% over the prior year quarter due mainly to increases in the US. During the third quarter, we were able to increase our average global pitch pricing over second quarter levels. This increase in product pricing was driven by quarterly and semiannual pricing adjustments which allowed us to bring pricing closer to the increased raw material costs that we have been experiencing.

Global aluminum demand continues to be strong, with projections of a 12% increase in global consumption in 2011, as the major end-markets including aerospace, automotive, packaging and construction, have increased global consumption of aluminum on a year-over-year basis. We continue to see strong demand for our carbon black feedstock, which is sold into the rubber markets, as volumes were up 28% in the third quarter compared to the prior year quarter.

Naphthalene demand also improved over the prior year quarter, as volumes were up 14% due to continued strength in the commercial construction markets. As a reminder, this product is used primarily as an additive for high-strength concrete used in the construction industry.

Our phthalic anhydride business continues to provide increased profitability as prices were up by 35% over the prior year quarter, driven by higher orthoxylene prices. The average price for orthoxylene increased to an average of $0.63 for the third quarter, compared to an average of $0.44 for the third quarter of 2010. This increase reflects higher US crude oil prices, which increased from an average of $76 a barrel in the third quarter of 2010 to an average of $90 a barrel in the third quarter of this year.

We have begun to see some softening of demand for phthalic in the third quarter, as volumes were down about 13% from last year's quarter. However, the increase in phthalic pricing has continued to provide substantially higher profitability compared to the prior year.

For our railroad and utility products business, higher sales prices and volumes for crossties resulted in an increase in sales of $7 million or 6% for the third quarter compared to last year's third quarter. As of September 30, we had 5.9 million untreated crossties on hand at our plants, similar to year-end 2010 and June 2011 levels, as treating volumes, particularly for commercial crossties, kept pace with untreated tie purchases. Tie insertions for 2011 are expected to be in the 20-million-plus range compared to about 19.5 million ties that were installed in 2010.

We continue to see strength in the commercial crosstie market as volumes and prices were up 12% and 16% respectively for the third quarter compared to the prior year quarter. The extension of the Section 45G tax credits for new construction projects has had a positive impact on the commercial market for us. These tax credits are currently scheduled to expire at the end of this year, but there are several legislative bills pending in Congress that would allow for an extension of these tax credits.

After Leroy completes the financial review, I'll give you a status update on our core end markets, as well as offer a few thoughts on the rest of 2011. Leroy?

Thanks Walt. Looking at the consolidated results, sales for the third quarter increased by 19% or $65 million to $401 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.

Selling, general and administrative expenses were $19.7 million or 4.9% of sales in the third quarter of 2011 versus $15.4 million or 4.6% of sales in the third quarter of 2010. The $4.3 million increase is the result of a $1.7 million increase in certain employee benefit expense due to changes in estimates, $1.3 million compensation-related expense due to increases in personnel and higher incentive compensation expense as a result of stronger operating performance in 2011, $0.7 million due to foreign currency translation as a result of a weaker dollar compared to 2010's third quarter and $0.4 million of consulting expense related to the European management, sales and supply chain centralization project. For the previous items, the $1.7 million benefit expense, and $0.4 million consulting expense are not expected to recur in the fourth quarter.

Third quarter adjusted EBITDA was $47.8 million or $7.3 million higher than 2010's third quarter adjusted EBITDA of $40.5 million. We continue to see improvement in overall product demand and as expected, we saw prices as well as volumes increase over the prior year quarter.

Net income and diluted earnings per share for the third quarter of 2011 were $22.4 million and $1.08 per share compared to $15.6 million and $0.75 per share for the third quarter of 2010.

Higher volumes for carbon pitch, carbon black feedstock and railroad crossties and higher prices for carbon pitch, phthalic anhydride, carbon black feedstock and railroad crossties were the main drivers for the improvement in earnings in the quarter. All regions significantly outperformed the prior year quarter's operating profit, except for Australia, for reasons that I will explain later in the call.

Looking at carbon materials and chemicals, third quarter sales for CM&C increased 22% or $47 million to $265 million compared to the prior year quarter. The increase consisted of a $22 million increase from pricing that was driven by carbon pitch, carbon black feedstock, phthalic anhydride, and creosote, a $13 million increase in volumes, due mainly to pitch and carbon black, and an increase of $12 million from the effects of foreign currency translations.

In the third quarter, we saw positive growth year-over-year in the three main components of our carbon materials and chemicals business. Carbon materials had an 8% or $18 million increase in sales as sales volumes, prices and foreign currency translations were higher.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 8% or $18 million, as volumes and prices were higher for both carbon black feedstock and creosote compared to the prior year quarter.

The third main component, coal tar chemicals, increased 2% or $5 million as higher phthalic anhydride prices were partially offset by lower prices for naphthalene and lower volumes for phthalic compared to the prior year quarter. As Walt mentioned earlier, we have begun to see some softness in our phthalic anhydride volumes and that is expected to continue into the fourth quarter, but due to higher pricing, our profitability for this product should continue to be substantially higher than last year.

Carbon materials and chemicals operating profit for the quarter of $30.9 million increased from $26.1 million in the third quarter of 2010, which equates to operating profit margins of 11.6% and 12% respectively.

Operating margins fell slightly, as improved pricing for carbon pitch, carbon black feedstock and phthalic anhydride was offset by higher raw material costs and higher overhead costs as the result of increased consulting and compensation-related expenses.

I'm pleased to report that our Chinese operations reported an operating profit for the third quarter of $0.9 million compared to an operating loss of $0.2 million in the third quarter of 2010 as tar prices declined and pitch prices increased over the prior year quarter. While our Chinese operations have shown signs of improvement thus far, we still anticipate some volatility in their operating results until the global economy fully stabilizes.

Our European CM&C business had another nice quarter compared to last year, driven primarily by the improved results of our Netherlands business, as the expected synergies from the March 2010 acquisition of Koppers Netherlands are being realized. Much of the $3.7 million European operating profit improvement is related to the movement of certain production from our Scunthorpe facility in the UK to the Uithoorn facility in the Netherlands.

One of the final things remaining for us related to the Koppers Netherlands integration is the last phase of the project that I referred to on our last call, which is a project that built upon our centralization of management, sales and procurement activities in the Netherlands, and allows us to improve even further on the coordination of these activities, while improving inventory control 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 and consolidation that have 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 $1 million of expense in the second and third quarters related to this project that was expensed through operations.

As I mentioned earlier, our Australian CM&C business is the only region that did not show improvement over last year's third quarter. Operating profit for the third quarter of 2011 was $3.9 million compared to $4.3 million in the third quarter of 2010. The cost of coal tar increased significantly in the third quarter comparatively, as domestic availability of this key raw material declined due to a soft steel market that has caused domestic producers to pull back on production. While we did see an increase in selling prices both sequentially and compared to the prior year period in Australia, it was not enough to offset the raw material cost increase.

Our carbon black business benefited near the end of the quarter as exchange rates moderated, which enabled us to recognize some foreign exchange gains to partially offset losses incurred early in the year and allowed that business to show a small profit for the quarter.

Speaking of the carbon black business, since the fourth quarter of 2010, our carbon black facility in Australia has faced an uncertain operating environment that has drawn into question its ability to maintain an acceptable level of long-term profitability without some change in operating structure.

As a result, we have spent the past several quarters reviewing various options to restore the carbon black operations to a more stable level of earnings going forward. Unfortunately, the viability of those options has recently been affected by events that have led us to conclude that we will likely realize a substantial increase in the cost of our raw material beginning at some point in the fourth quarter of 2011. As a result, we expect to recognize a one-time, non-cash, pretax impairment charge of approximately $22 million in the fourth quarter of 2011.

In addition, the most recent events have caused us to reevaluate our strategic options for this facility moving forward, the conclusion of which will likely result in restructuring and other costs being incurred over the next several quarters. Estimates of such costs are currently being developed and will be integral in coming to a decision during the fourth quarter as to the alternate strategic alternative selected.

Moving onto railroad and utility products, sales in that division increased $18 million to $136 million in the third quarter compared to the third quarter of 2010. The increase consisted of $11 million from higher sales volumes driven by increased sales of treated and untreated crossties for the Class I railroads and commercial customers combined with the sale of rail joint bar products, $5 million for higher pricing due mainly to increased demand for commercial crossties, and lastly, $2 million due to foreign currency translation.

Operating profit for the quarter increased to $9.9 million from $7.7 million with operating margins at 7.3% compared to 6.5% in the prior year quarter. Higher volumes and prices for our railroad products in the third quarter of 2011 highlights the relative strength of the railroad business compared to this point last year.

Our consolidated tax expense as a percent of pretax earnings for the third quarter was 33% compared to 41% in the prior year quarter due to a more favorable mix of US and foreign earnings and certain discrete tax adjustments. For the year, we estimate our effective tax rate, excluding discrete items and the tax effect on restructuring charges, to approximate 36%.

We do anticipate a significant discrete item to be recognized in the fourth quarter of between $3 million and $4 million due to an integration project related to our March 2010 Koppers Netherlands acquisition that I talked about on our last call, as well as earlier in this call. That charge was originally expected to occur in the third quarter. The charge is non-recurring and will likely be mitigated by the tax benefit resulting from the expected carbon black impairment charge.

Cash provided by operations for the first nine months of 2011 amounted to $45 million compared to cash provided by operations of $64 million for the prior year quarter with the difference due mainly to increases in trade receivables related to higher sales volumes. In spite of the working capital increase, our debt net of cash on hand at September 30, 2011 decreased to $251 million from $261 million at December 31, 2010. As of September 30, we had $15 million borrowed on our revolver and we continue to have total estimated liquidity of well over $300 million.

Before I turn it back over to Walt, I'd like to remind everyone that our business is seasonally impacted by demand for our products. Financial performance in our first and fourth quarters tends to be similar and is historically lower than the second and third quarters.

As mentioned on our last call, we still expect the second half of 2011 to be stronger than the first half of the year and consistent with that expectation, we do expect our fourth quarter results to be better than the prior year fourth quarter.

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

Thanks, Leroy. The major end market for the carbon materials and chemicals segment is aluminum, which represented about 40% of the segment sales in 2010. Recent projections indicate that global aluminum production will increase from 46 million tons in 2011 to 58 million tons in 2015. Using a ratio of one ton of carbon pitch for every 10 tons of aluminum produced, this means an additional 1.2 million tons of carbon pitch will be required over the next four years to meet this projected increase in demand.

This will require additional production beyond the capacity additions currently scheduled in the Middle East. According to recent projections, the Middle East expects primary aluminum production to have a compound annual growth rate of over 13% from 2010 to 2015. This growth includes the expansion of the Emal smelter in the United Arab Emirates, which is increasing capacity from 750,000 tons to 1.4 million tons by 2014, and Alcoa's Ma'aden facility in Saudi Arabia, which is scheduled to come online in early 2013 and will have a capacity of 740,000 tons.

As 2011 winds down, we are seeing volume improvements in our carbon materials and chemicals products around the world, which is driving sales and profitability to higher levels as demand and capacity utilization continue to increase.

In addition to our carbon pitch products, we also continue to see increased demand for our profitable downstream products, carbon black feedstock, which is used in the production of carbon black for tires, and naphthalene, used in the production of concrete and textiles. Our phthalic anhydride product, despite some recent softening in demand, continues to be highly profitable and we believe the long-term outlook is favorable, as it is tied closely to the US auto and housing industries.

Our carbon black feedstock and naphthalene products are benefiting from increases in the production of rubber for the tire industry and concrete for the construction industry, as Asian economies continue to generate fairly high growth rates. For example, global tire production is projected to grow annually at 4%, representing an additional 50 million tires per year through 2015, with the majority of that growth coming from the emerging markets in Asia.

Cement production, an indicator for the concrete end market for our naphthalene product overseas, is projected to increase from 3.3 billion tons in 2010 to nearly 3.8 billion tons in 2012 with most of the growth coming again from Asia.

Regarding the outlook for coal tar raw material, we have recently seen reduced availability of coal tar in North America, Europe and Australia due to the idling and lower production rates for certain coke batteries associated with the lower steel production, as well as alternative technologies that are being talked about, which will reduce coking requirements.

This reduced availability, coupled with increased demand for carbon pitch, is expected to result in higher costs in these regions. To the extent necessary, we have the ability to import carbon pitch into these regions from other operations or from third parties and we also have the ability to extend our carbon pitch supplies through the use of certain petroleum feedstocks that are compatible with coal tar.

In our railroad and utility products business, we continue to see strong levels of crosstie purchases as the railroads continue to replenish historically low inventory levels. Through the first nine months of 2011, tie procurement volumes were up 21% compared to the same period in 2010. As noted earlier, we continue to see increases in volumes for the commercial crossties as well, as the short lines continue to take advantage of the extension of the Section 45 tax credits.

We estimate total capital spending by the Class I railroads to be about $12 billion in 2011, with approximately $7.5 billion of this amount going to 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.

Our proprietary borate treatment process operating at several of our wood-treating plants during 2011 -- and this has also resulted in increased revenues and profitability for our railroad business. We further believe the addition of this product, along with the rail joint products from the Portec acquisition, has enhanced our relationships with our important Class I railroad customer base by expanding the overall range of products and services we provide.

Our utility products products business, which includes operations in both North America and Australia, experienced an overall 11% increase in volumes for utility poles in the third quarter compared to the third quarter of 2010, with year-to-date volumes up over the prior year-to-date period as well. As the utilities in these regions continue to increase their maintenance spending, we should continue to benefit from the higher pole volumes.

To conclude, we continue to experience improvement in our end-markets, especially in the emerging markets in Asia and India. We remain very positive about the long-term strength of our aluminum end-market as we move through 2011. LME pricing for aluminum has decreased from where it was a few months ago, but is still at a level that should sustain current production volumes. Smelter restarts in the US have been implemented and are at planned production levels resulting in higher volumes for our US operations.

Our railroad end-market had generated higher volumes of crossties in 2011, especially for untreated crossties for our Class I customers and treated crossties sold to the commercial market. Our rail joint bar business continues to generate results that exceed our expectations.

With these positive elements, we expect our fourth quarter results to continue the trend of being above the comparable quarter in 2010.

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

Thank you, sir. (Operator Instructions) Our first question comes from Ian Zaffino from Oppenheimer & Company. Please go ahead with your question.

Hi, great. Thank you very much. What's going to happen in the instance that coal tar production keeps falling in the US and Europe, but the pitch demand actually goes up? What happens in that scenario as far as your margins, etc.?

Well, when you look at, which we do, look at the coal tar availability on a global basis, and even with -- let's assume that the current steel production around the world is around 70%, 74%, something like that, there's still enough coal tar available globally. It's just where it's located regionally, but further to that -- and that's why we talk about we can import additional pitch from other operations we have around the world, but in addition to that, specifically in the US and also in Europe, we definitely have the capability to add petroleum feedstocks, which could enhance our coal tar availability by at least 20%, 25%.

So it's a matter of reaching further out; it's a matter of utilizing our capabilities and I really -- even if we saw steel production decreasing even as low as 60%, 65%, there's still enough raw material out there. It's just a matter of logistically getting either the coal tar or the end product, such as carbon pitch, to the customer locations.

Okay. Thank you very much.

Sure.

Thank you. Our next question comes from Ivan Marcuse from KeyBanc Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my questions.

Good morning, Ivan.

Good morning. Moving onto the Australia business, what's happening there that's going to cause the fourth quarter -- for profitability to drop and the recovery of the carbon black business and what kind of magnitude are you talking about in terms of the loss that you expect in the fourth quarter and going into 2012?

Well, let me start. I'll start with the answer to the question, Ivan, in regard to has been going on and then we'll ask Leroy to talk about the impact financially, but first of all, this has been going on now -- this situation in Australia has been going on now for a couple or three years. It started out with South Pacific Tire closing their last tire manufacturing operation, which forced us further into exporting more product out of Australia to that part of the world as far as the carbon black products go.

And then on top of that, in the last nine, 12 months, we've seen a real issue with the Australian dollar and then further to that, we just discovered here, early October, that we lost a less expensive raw material for that operation. So you couple all these things together and the profitability continues to decline for that operation. So that's sort of what's transpired here and as far as the financial impact, I'd like -- Leroy, you can comment on that.

Yes, and unfortunately, Ivan, there's not a whole lot I can say about that right now. I mean, there are some sensitive issues surrounding that and we're still trying to develop the estimates. The one thing I will point out again related to the impairment charge, Australia is at a significantly higher effective tax rate than our consolidated effective tax rate due to it being a flow-through entity for US tax purposes. So there will be a significant tax, cash tax impact, that will serve to fund any of the restructuring efforts.

And then we continue to look, Ivan, at the various options and hopefully, we can conclude those decisions here sometime in the fourth quarter.

What are the options? Is it -- would there be a buyer there or do you just have to exit the business or do you just shrink it somehow?

Well, there are several options. Obviously, we have three reactors there that have a production capacity of about 57,000 tons that we're looking at -- can we be viable at two reactors or one reactor? If that's not the case, then can we utilize it as a distribution warehouse operation, looking at various ways to continue to be in the marketing end of that product line, and then there's a third and a fourth, but that's what we're focusing on right now are those first two options.

What percentage of carbon black of total Australian sales -- of carbon material sales is the carbon black business? Is it half the business perhaps?

Of the Australian operations?

Yes.

It's -- as far as sales dollars go, I've got it here somewhere. About one-third, or 35%, 40%.

A little over a third.

Got you. And then my last question and I'll jump back in the queue is has there been -- I know in the Midwest, it's been pretty wet the past couple of months. Has there been any -- is there going to be any weather issues on getting ties out of the sawmills over there to think about, or as far as you know, everything should be fine?

Actually, I mean, no, it's not impacted us. This has been a very strong procurement year for us and when you look back -- actually, you look back the last nine months, it's been sort of a rainy, wet area, a lot of different regions of the US, but as you heard me say, our procurement of ties are up about 21% over last year. And so the availability is out there and the demand is out there as well, so I don't see an issue going forward in regard to the availability or getting the logs to the sawmills.

All right, great. Thanks. I'll jump back in queue.

Sure.

Thank you. Our next question is from Steve Schwartz from First Analysis. Please go ahead.

Good morning, guys.

Good morning, Steve.

Just going back to Australia again, carbon black, you're making that stuff with natural gas, resid fuel oil or your own creosote basically. You mentioned higher raw material costs, so I'm going to presume it's the carbon black feed or creosote; is that right?

No. I mean, it's -- you're absolutely right as far as the ingredients or the raw material that are used to produce carbon black, but you're absolutely right. We remove the creosote distillate from our distillation plant down to the carbon black operation. That represents about 35%, 40% of our feedstocks and then the majority of the remainder, we buy next door at the Caltex refinery.

And there was also a third supply, which we just got caught off guard in that they're not going to have that particular product available, which was a lower cost than buying the petroleum materials. But, yes, it's just been a lot of things that could go wrong, did go wrong with that operation. That's what we're trying to look at, how can we resolve the situation.

Okay. So this leads me to ask you what ultimately is the impact on that Newcastle-Mayfield distillery that you guys have there if you should decide to shut or even reduce carbon black feed production?

Actually, that's not a negative whatsoever. First of all, there's a large demand for coal-tar-based carbon black feedstocks in the Asian region and if you recall, we also have two vessels that are constantly moving around over there, so actually, it's not a negative whatsoever. In fact, in one particular scenario, it could be even better.

Okay. And then out of the other product group are you guys selling your creosote, and I understand at least in North America, there's been a recent shift into treaters using more of the P1 grade versus P2 grade creosote. And I'm wondering to what extent that's impacting you.

Wow, Steve, I'm not sure -- I've not really been aware of moving from P2 to P1. First of all, P1 is a little more expensive. The only area I know of that you can use P1 is in conjunction with a 50/50 solution, as they call it, which you're taking as a petroleum oil. And there is a little bit of that going on, but I certainly hope for the railroad's sake that they're not converting more to that because you get a lot less life. The efficacy of the ties starts to drop dramatically if you're not using 100% creosote.

Okay. That was actually information that came from a publicly traded company in the business.

Wow, wow.

So it's interesting to find out more --

Yes.

-- about that then.

Really -- do you substitute long life of ties versus -- I don't know what they're looking at, but I'll look into that.

Yes. The word was that it was beneficial for the railroad, railroads using that material, the P1. Anyway, and then just my last question, Walt, you did talk a little bit about Ma'aden and some of the other smelters, expanding Emal in the Middle East. Can you give us a basic idea over the next couple of quarters of what Koppers' actual volume growth looks like? I think there's going to be some new volume that will anniversary. I think we've kind of lost touch with maybe some of the new wins you guys have had and then of course, from quarter-to-quarter, I think that volume might be fluid given the competitive situation. So if you could help us there?

I can give you a little bit of information, Steve, and first of all, with the various -- there's seven smelters in the Middle East, if you include the Egypt alum smelter, and the production of those current smelters is about 3.5 million tons annually and going to 5 million tons with the addition of the expansion of Emal and the Ma'aden project coming online in 2013, 2014. At the moment, all of the current smelters are operating at very close, if not at, capacity levels. Our market share has continued to grow with the smelters as they come onstream.

We're probably in the 30-plus market share range in that particular area and especially going forward, we're not going to see much of an increase in pitch demand there until probably the fourth quarter 2012, as they're preparing anodes for their pots for starting up first quarter smelting. But, no, it is the quality, and some other areas we're working from a quality point of view to differentiate our higher quality products. That's going very well and we're very excited to be a part of this part of the world that continues to increase their aluminum production and it's even going to continue to increase.

You've got Sohar also talking about doubling their current capacity, so this is -- again, going back three years, five years, that's why we're in China and that's where the raw material is and that's where we can take advantage of this aluminum growth.

Okay. So modest share gains in the near term. Can you confirm that this 4Q '12 boost, those contracts, is that something you've already secured or is that still out there?

I don't really want to get into contracts per se, but whether it's under contract or not, there's only certain options you have when you're looking for carbon pitch and obviously, we're the primary player there.

Of course. Thank you, Walt.

Thank you. Our next question comes is from Laurence Alexander from Jefferies & Company. Please go ahead.

Hi, this is Jeff on for Laurence. Could you guys talk about what you're seeing in terms of the competitive dynamics within the crosstie market and what are your projections for 2012 in terms of the crosstie demand, US and international?

Well, we've got -- in regard to the North American crosstie demand for next year, and we've gotten indications from the Class I's and those current indications are going to be at basically the same levels that they've seen this year, maybe a tad higher with one or two of them. When you look at the increase in revenues this year that the railroads have enjoyed, which some of it's coming from regular rail traffic; other is coming from, I think, a 5% or so increase in the modal rail movements.

That $12 billion kind of number that they're spending this year, and they're all expecting to do at least that much next year, and that tells me that their maintenance of way areas as far as ties and rails and that sort of thing are going to continue.

Now, insertions this year, a little bit above 20 million ties. Could it be 20.5 next year? That's to be seen just yet, but this is again maintenance that's required and I don't think you'll see much of a change. What's happened this year is that the short lines have really picked up the pace with these various projects they have and if you recall, the last two years, they really have not done a lot. So there's some catching up by the short lines as well. But again, we're anticipating a fairly strong year next year on the railroad side.

As far as the change or the dynamics of that market, we have seen Stella-Jones making an acquisition or so. More recently, they acquired the Tangent business and it's -- that's about the only thing I can think of as far as landscape change.

All right. Thank you.

Thank you. The next question is from Liam Burke from Janney Capital Markets. Please go ahead.

Yes, thank you. Good morning, Walt.

Good morning.

Could you give us a little color on what is going on on the acquisition front either in Europe or on the rail side of the business?

In Europe in regard to the coal tar chemicals business?

Yes.

Yep, well, things -- I really don't have much to comment on. I think every coal tar distiller in Europe knows that we continue to be an interested buyer. We've had a great success with the Cindu acquisition that we completed a little over a year and half ago. I do know that it's becoming even more and more of a struggle with the smaller distillers, especially when you look at the coke oven operations and looking at the coal tar available.

Fortunately for us, having the three operations there and having what I'll call a great supply chain network there, even though we have to reach farther out for raw materials, we do it fairly efficiently and at fairly low cost. So nothing has happened yet, but I guess if I was a seller, I don't think I would probably pick this time of the economic downturn to sell, but we're still looking at every location we can -- that we have an interest in.

As far as the railroad tie goes, I mean, I just mentioned Stella making an acquisition here more recently with Tangent earlier in the year, but just not have heard much other than that.

Great, thank you.

Thank you. Our next question is from Saul Ludwig from Northcoast Research. Please go ahead.

Good morning, guys. This is actually Kevin Hocevar calling in for Saul.

Good morning, Kevin.

Good morning, Kevin.

My question is what is -- looking at the carbon materials segment, what's your goal for margins here and what would have to happen in order to reach that goal?

Well, I mean, what's our goal? Our goal is to increase our margin as much as we possibly can, but I sort of go back to 2008 when operations were, let's say, at near capacity levels and the demand was fairly high across the board. And our margins were somewhat -- obviously better, but we're probably 150, 200 basis points or so away and we need to get back there and it's just taking a while with this continued volatility in tar volume availability, as well as the pricing of the tars. But we have to continue and we are focusing on getting those margins to where we can afford to put more capital into these plants and continue to really grow in a respectable way.

Okay. Thanks, guys.

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

Hey, guys, just looking at railroad for the remainder of the year, the RTA, I think, has a similar forecast you mentioned in your script, which is, I think, about 20 million to 20.5 million ties for the year, but through August or September, the LTM rate was up -- for purchases was up around 21 million. So that would kind of imply that things are going to slow down here during the fourth quarter. Is that what you're seeing or are you seeing something different?

Well, I mean, seasonally you're going to see a slowdown of the tie insertions for sure just because of winter weather, that sort of thing. Steve, there were a couple of numbers in that article which I don't quite agree with, or we don't quite agree with, so we're actually going back to RTA to question some of them, one of which was procurement was up by, I think, 46% or something, which was absolutely not accurate. But we're going to see a normal slowdown like we typically have in this business going through December through February, March, but overall, we continue to focus very hard on procurement and really living up to what our customers are wanting.

And then on top of that, this commercial business -- and again, assuming that the Section 45 credits are extended into next year, I think you'll see another strong year there as well.

So sequentially, you think normal seasonality and then from a year-over-year standpoint, the comparison should be favorable in 4Q '11?

That's exactly what we're looking at the moment, yes, Steve.

Okay. And then you mentioned the borate treatment. Is that additive to your volumes in ties or is it is basically replacing ties that you formerly were just treating with creosote?

No, these are -- yes, the borate treatment is not adding -- at the moment, anyway -- adding volume of ties treated. It's really looking at -- in the high decay areas, primarily in the South, where instead of just a creosote-treated tie, they're looking at a creosote-borate treated tie. And I can't give you the current percentages, but if they would use 100% of the ties inserted in the high decay zone areas, it could be as much as 30%, in that range.

And we're not there yet, but I can tell you it's -- there's a lot of excitement around those creosote-borate ties and obviously, if you can increase the life of a tie by another three to five or seven years, that's great. And when you look at that, it doesn't really impact -- I don't think it impacts, going forward, where you'll see reduced ties because they're lasting longer. You'll just give the railroads more opportunities to do further maintenance on their tie insertions.

Yes. You mentioned Stella and Tangent and then we've got the latest news with Thomson Industries and why do you think you guys have not been more active in that area? Have you had opportunities and walked away from some of the prices being asked for these assets, or -- there's certainly consolidation going on in that area.

Yes, and my hat's off to Stella for continuing to look at consolidation. I think when you see consolidation in most industries, it's good, but when you look at our network, Steve, we have 10 wood-treating plants with all of the Class I's basically. And I would rather have fewer plants treating more volumes than I would having more numbers of plants, so typically, to do a million to 1.5 million ties per plant would be a great goal to achieve, fewer plants online, and going out and buying a Thomson or some of the Tangent Plants. If they're not online, I'm not quite sure what it gets you.

So you're not necessarily seeing the value there for Koppers to have picked up some of those assets, in other words?

That's -- yes, you can say that, yes.

Yes. But then you have Boatright Companies, who is actually building plants and going after Class I business. So how do you view them as a threat or a non-issue?

Yes, as far as I know, Boatright has one wood-treating plant down in Alabama, but I've heard a lot of announcements, but I've not seen anything really happen yet. So I'm not sure if they'll be a plant built by him or not, but the most recent wood-treating plant has been built in Hope, Arkansas, by a company called Amerities and that's not in operation.

But no, there's -- to go out today and build a new wood-treating plant, spending $20 million, $25 million, and not having a good relationship with the Class I railroads or being very close to a strong tie-procurement area, I think it would be tough to justify an acceptable payback.

Yes. Okay, Walt. Thank you. Appreciate the perspective.

Sure.

Thank you. There appear to be no further questions. Mr. Turner, please continue with any other points you wish to raise. Thank you.

Well, certainly, thank you, and thank all of you for participating in today's call, and also your continued interest in our company.

We are optimistic that our sales growth trajectory will continue to be strong throughout 2011 because demand has improved in almost all of our key end markets. Our acquisitions over the last several years are helping us to capitalize on the global growth in demand for our end products, and we will continue to pursue our strategy of expanding our presence in 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 and providing our customers with the highest quality products and services, while continuing to focus on our safety, health and environmental initiatives. Have a good day.

Thank you. Ladies and gentlemen for attending the Koppers Holding, Inc. third quarter 2011 earnings conference call. Thank you for participating. You may now disconnect.