Koppers Holdings Inc (KOP) 2011 Q4 法說會逐字稿

(Operator Instructions). Ladies and gentlemen, welcome to the Koppers Holdings, Incorporated fourth quarter 2011 earnings conference call. On the 16th of February, 2012.

(Operator Instructions). I'll now hand the conference over to Mr. Michael Snyder. Please go ahead sir.

Good morning. Welcome to our fourth quarter conference call. My name is Mike Snyder and I'm the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release.

If you haven't, one is available on our website, or call Rose Hilinski, at 412-227-2444 and we can fax or ex-mail you a copy. Before we get started, I would like to remind you that certain comments may be characterized as forward-looking statements 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 result 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 would like to turn the call over to Walt Turner. Walt?

Thank you, Mike, and welcome everyone to our 2011, fourth quarter conference call. I'd like to begin by reviewing 2011 in total before focusing specifically on the fourth quarter results.

2011 was a historic year for Koppers. In the year that we celebrated our fifth anniversary as a public company, we posted a record sales year of $1.5 billion, which represented a 24% increase over 2010. As a result of that record sales year, we were able to report an adjusted EPS of $2.80 which represents a 21% improvement over our 2010 adjusted EPS of $2.32. While I look back at the challenges that we experienced in the last year, I am especially pleased with our achievements in earnings growth.

In most regions of the world we were faced with significant increases in coal tar costs that due to the nature of our contracts, we were unable to pass on to our customers. For the year, coal tar costs increased on average by approximately 9%; price increases for our coal tar based products more than offset this increase in dollars; however, we were not able to increase prices to the level that would have allowed us to maintain profit margin percentages.

Our Carbon Black Operations in Australia suffered during all of 2011, recording an operating loss of $2.6 million compared to an operating profit of $200,000 for 2010. As the strengthening of the Australian dollar made it difficult for us to compete in what had become primarily an export business. Coupled with an uncertain environment for the cost and supply of raw materials, we were forced to make the difficult decision to cease operations at the plant in December.

In Europe, operating issues resulted in our plant in Denmark being down for about 45 days beginning in late November, but the problems have been corrected and the plant has been fully operational as of mid January. This, along with the softening of the European economy, resulted in the fourth quarter being the only quarter of 2011 that our European operations did not significantly outperform the prior year quarter.

On the positive side, we completed the full integration of the Cindu Chemicals acquisition and substantially completed the integration of the Portec rail joint bar business into our operations into 2011, and both businesses contributed meaningfully to our increased earnings. In response to our railroad customers' requests, we moved forward with the installation of borate treatment for railroad ties at four of our tie treating plants in the US, which will be a win-win scenario for both of us. The railroad will be inserting a tie, with increased life in higher decay areas in the South, and we will be supplying a higher quality product that enhances our relationships with our customers.

We continued to solidify our relationships with our major customers in both business segments, as we completed negotiations on a number of long-term sales contracts that we think will better address some of the margin dilution elements that we had been experiencing in the past years.

On the litigation front, we improved our risk profile by settling the Grenada toxic tort cases in the amount of $3 million, which we accrued in December of 2010, but actually paid out in the third quarter of 2011. In addition to the Grenada cases, we had several other positive developments occur in 2011 in regard to outstanding litigation that we believe reduces the Company's overall risk and puts us in the best position from an open litigation standpoint that we have been in for some time.

Our net leverage ratio continued to improve in 2011, as we finished the year with net debt of 1.7 times our full year adjusted EBITDA.

We believe the combination of these things, along with the general improvement in our end markets contributed to us being added to the Standard and Poor's Small Cap 600 Index back in March, which has increased our exposure to the investment community.

As you may have seen, we announced an increase to our quarterly dividend to $0.24 a share from $0.22, representing a 9% increase. The increase will not hamper our efforts to grow the business through acquisitions or keep us from deploying cash for other priorities that we believe will also increase shareholder value. The increase is a reflection of the strength of our liquidity position, combined with the confidence in our outlook and end markets.

Now on to the fourth quarter.

In regard to our fourth quarter results, sales increased by 25% and adjusted EBITDA increased by 12% over the prior year quarter, after excluding the impact of the plant closure in Australia. Adjusted EBITDA for the fourth quarter was negatively impacted by $2.9 million compared to the prior year quarter due to the Carbon Black operating loss and the naphthalene plant outage.

In our global Carbon Materials and Chemicals business, revenues grew by $63 million or 32% over the prior year quarter, benefiting from increased aluminum production that resulted in higher volumes and prices for carbon pitch. Our pitch volumes increased 34% over the prior year quarter as all regions except Australia enjoyed increased demand.

During the fourth quarter we were able to increase our average global price pitching over third quarter levels; this increase in product pricing was driven by quarterly and semiannual pricing adjustments, which allowed us to recover the raw material costs that we experienced in the first half of the year.

Global aluminum demand continues to be strong with projections of a 7% increase in global consumption in 2012 after an increase of 10% 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 pricing for our carbon black feedstock, which is sold into the rubber markets, as average prices were up 14% in the fourth quarter compared to the prior year quarter. Naphthalene volumes were flat compared to the prior year quarter, due mainly to an outage experienced in our plant in Denmark during the fourth quarter. As a reminder, this product is used primarily as an additive for high strength concrete in the construction industry.

Our phthalic anhydride business continued to provide increased profitability as prices were up 28% over the prior year quarter, driven by higher orthoxylene prices. The average price for orthoxylene increased to an average of $0.60 for the fourth quarter, compared to a average of $0.50 for the fourth quarter of 2010. This increase reflects higher crude oil prices which increased from an average of $79 a barrel in the fourth quarter of 2010, to an average of $94 a barrel in the fourth quarter of 2011. Orthoxylene prices have subsequently increased to a historic high of $0.69 a pound in February.

For our Railroad & Utility Products business, higher sales prices and volumes for crossties sold to commercial customers resulted in an increase in sales of $8 million or 8% in the fourth quarter compared to last year's fourth quarter.

As of December 31st, we had 6.2 million untreated crossties on our hands at our plants, compared to 5.9 million at the end of 2010. Tie insertions for 2012 are expected to be in the 20 million plus range, similar to the estimated insertions for 2011.

We continue to see strength in the commercial crosstie market, as volumes were up 71% for the fourth quarter over the prior year quarter. The extension of the Section 45 tax credits for new construction projects had a positive impact on the commercial market. These tax credits expired at the end of the year, but there are several bills pending in Congress that would allow for an extension of the tax credits. Even without the extension of the credits, we see the potential for continued strong demand in 2012, as the short line railroads continue to upgrade their rail lines to accommodate heavier carloads for the Class I railroads. In fact, we currently have a sales backlog of about 755,000 crossties for the commercial railroad market, as compared to about 600,000 ties at this time last year.

Finally, in regard to 2011, we have made major progress in updating our strategic plan and have recently modified our investor presentation to reflect the changes that came from that process. We have also added more transparency to our long range goals and how we expect to achieve our continued growth in financial performance. We will continue to keep you updated on our progress as we move forward.

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 2012. Leroy?

Thanks, Walt. Looking at the consolidated results, sales for the fourth quarter increased by 25% or $77 million to $385 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 businesses compared to the prior year.

Fourth quarter adjusted EBITDA was $29.7 million or $3.1 million higher than 2010's fourth quarter adjusted EBITDA of $26.6 million. As mentioned earlier, fourth quarter EBITDA was negatively impacted by $2.9 million for the carbon black operating loss plant compared to the fourth quarter of 2010. 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.

Adjusted net income and adjusted earnings per share for the fourth quarter of 2011 were $8.0 million and $0.37 per share, compared to $7.9 million and $0.38 per share for the fourth quarter of 2010. During the quarter we had several items that affected our comparative results.

Beginning with tax, our tax expense as a percent of pre-tax earnings was 45% compared to 34% in the September year-to-date period due to an unfavorable mix of US and foreign earnings and certain tax adjustments. Since the required change in the annual effective tax rate was pushed into the fourth quarter, the negative impact to adjusted EPS for the fourth quarter was approximately $0.07 per share.

We incurred an operating loss of $1.5 million for the carbon black plant in the fourth quarter, which was $1.1 million more than the average loss of the first three quarters as operations continued to wind down. The estimated impact of the naphthalene plant outage in the fourth quarter was about $800,000 on a pre-tax basis.

Finally, our depreciation expense increased by $700,000 over the third quarter as many projects were completed and capitalized during the fourth quarter and we recorded six months of depreciation expense on these assets due to our half year convention depreciation policy. Because of this, our fourth quarter depreciation expense of $7.8 million excluding the write-off of the carbon black facility, does not reflect 2012's quarterly run rate. Currently we expect our depreciation expense in 2012 to approximate our 2011 full year adjusted number of $28.6 million.

For the year 2011, consolidated sales increased 24% to $1.5 billion as both segments enjoyed higher volumes over the prior year. SG&A expenses increased by $12 million and included about $3 million of foreign exchange, $2.1 million of expense as a result of declining interest rates on our post retirement benefit plan liabilities, $1 million of cost related to the Netherlands consolidation project and approximately $700,000 of IT cost primarily related to the implementation of our ERP system at certain locations.

The remainder of the increase is due primarily to increased compensation and benefit expenses partly as a result of full year SG&A for the Cindu acquisition along with the impact of the acquisition of the rail joint bar business in December of 2010. As a percent of sales, even with these additions, SG&A actually dropped to 4.9% in 2011 from 5.1% in 2010.

In 2012, our expectation is that overhead should be relatively flat from a dollar prospective, which means with rising sales this should provide a boost to operating profit margins. Adjusted EBITDA for 2011 increased by 13% to $148.4 million driven by stronger results from both business segments. Adjusted EPS for 2011 amounted to $2.80 representing a 21% increase over 2010 adjusted EPS of $2.32.

Looking at our Carbon Materials and Chemical business segment, fourth quarter sales for CM&C increased 32% or $63 million to $258 million compared to the prior year quarter. The increase consisted of a $31 million increase from volumes due mainly to pitch and creosote, $28 million in pricing driven by carbon pitch and phthalic anhydride, and an increase of $4 million from foreign currency translation.

In the fourth quarter we saw positive growth year-over-year in the three main components of the Carbon Materials and Chemicals Business. Carbon Materials had a 23% or $46 million increase in sales, as sales volumes, prices and foreign currency translation were higher.

Sales of distillates, which includes third party creosote sales, increased 4% or $8 million due to higher prices for carbon black feedstock and higher volumes for creosote compared to the prior year quarter.

Coal tar chemicals increased 2% or $3 million as higher prices were partially offset by lower prices for naphthalene compared to the prior year quarter.

On a year-to-date basis, sales for 2011 for Carbon Materials and Chemicals increased by $220 million or 28% driven by higher volumes and prices for carbon pitch and higher prices for phthalic anhydride.

Carbon Materials and Chemicals adjusted operating profit for the quarter of $17.4 million increased from $17.3 million in the fourth quarter of 2010, which equates to operating profit margins of 6.7% and 8.8% respectively. Operating margins fell as improved pricing for carbon pitch, carbon black feedstock, and phthalic anhydride was offset by higher raw material costs, operating losses at the carbon black plant in Australia, and the impact of the naphthalene plant outage in Denmark.

Our Chinese operations reported another positive operating profit for the fourth quarter of $.5 million compared to an operating loss of $.4 million of the fourth quarter of 2010 as tar prices declined and pitch prices increased.

Our European CM&C business had a challenging quarter compared to last year due to operating issues that resulted in a shutdown of our naphthalene plant in Denmark for about a month and a half. While the fourth quarter results were lower than the prior year quarter for Europe, the results for the year were substantially improved over 2010 driven by the improved results of the Netherlands business as the expected synergies from the March 2010 acquisition of Koppers Netherlands were realized.

Speaking of Koppers Netherlands, I am pleased to report that we have completed the final phase of our European integration project that should result in a 2% to 4% reduction in our consolidated tax rate on an annualized basis beginning in 2012. We incurred a fourth quarter tax charge of $3.5 million related to this project, plus approximately $1 million in consulting expense during the year that was expensed through operations.

Adjusted operating profit for Carbon Materials and Chemicals for the year ended December 31, 2011 amounted to $85.5 million or 8.4% compared to $77.1 million or 9.7% in 2010, with the reduction in margins due to higher raw material costs, operating losses for our carbon black pant in Australia and the naphthalene outage in Denmark for the fourth quarter.

As announced previously, due to deteriorating operating conditions we have closed our carbon black plant in Australia resulting in impairment and closure costs of approximately $41 million in the fourth quarter. As mentioned in our press release, we expect the overall cash impact to be neutral or even positive as a result of reduction in working capital as operations cease.

Sales of railroad and utility products increased $15 million or 13% to $127 million in the fourth quarter compared to the fourth quarter of 2010. The increase consisted of $7 million from higher sales volumes driven by increased sales of treated and untreated crossties to Class I railroads and commercial customers combined with the sale of rail joint bar products and $8 million for higher pricing due mainly to increased demand for commercial crossties.

Adjusted operating profit for the quarter increased to $4.6 million from $3.4 million with adjusted operating margins at 3.6% compared to 3% in the prior year quarter. Higher volumes and prices for our railroad products in the fourth quarter of 2011 highlight the relative strength of the railroad business compared to this point last year.

As you may have seen, earlier in the week we announced the planned closure of our wood treating plant in Grenada, Mississippi. While we don't disclose profitability by plant location, I will say that the plant has run at an operating loss over the last couple of years, and future prospects for that location do not indicate that things have turned around. The plant, which primarily treats utility poles, is expected to cease operations around the end of July, at which point treatment services will be transferred to other Koppers facilities where we will be able to use excess capacity. The expected closure costs of $4 million, of which $1.4 million was previously accrued, are expected to be incurred over the next two years.

Looking at cash flow and liquidity, cash provided by operations for 2011 amounted to $77 million compared to cash provided by operations of $105 million in 2010, with the difference due mainly to an increase in trade receivables related to higher sales volumes. Despite the increase in working capital, our debt net of cash on hand December 31, 2011, decreased to $248 million from $261 million December 31, 2010. Our debt to adjusted EBITDA ratio at December 31 was at 1.7 times, a historical low for Koppers. As of December 31, we had $6 million borrowed on our revolver and estimated liquidity of just under $350 million.

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

At this time, I would like to turn it back over to Walt.

Thanks, Leroy. During 2011, we saw volume improvements in our Carbon Materials and Chemicals products around the world, driving sales and profitability to higher levels as demand and capacity utilization have increased.

The major end market for the Carbon and Chemicals segment is aluminum. Although pricing for aluminum has fallen during the year and resulted in capacity reductions in certain regions, the price has rebounded somewhat and recent projections indicate that global aluminum production will increase by 5% or about 2.3 million tons in 2012. Using a ratio of one ton of carbon pitch for every ten tons of aluminum produced, this means an additional 230,000 tons of carbon pitch will be required to meet this projected increase in production.

According to recent projections, the Middle East expects primary aluminum production to increase by 1.5 million tons by 2015. This growth includes expansion of the EMAL smelter in Abu Dhabi and is expected to increase capacity from 750,000 tons to 1.4 million tons starting in the fourth quarter of 2013, and Alcoa's Ma'aden facility in Saudi Arabia which will have a capacity 740,000 tons, with the first metal being produced by the end of 2012.

In addition to our carbon pitch products, we saw 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 continues to be highly profitable and we believe the long-term outlook is favorable as it is tied closely to the US automotive and housing industries. Current projections indicate that 2012 North American automobile production will increase by 860,000 units in 2012, with US light vehicle sales increasing to 13.6 million units. As mentioned earlier, orthoxylene prices, which drive phthalic anhydride prices, hit an all time high of $0.69 a pound in February.

Our carbon black feedstock and naphthalene products have benefited 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. Global tire production is projected to grow annually at 4%, representing an additional 50 million tires per year through 2015, with the majority of this growth coming from emerging markets in Asia. The Asian growth in tire demand is being driven mainly by automobile production, as automobile ownership rates in emerging markets continue to grow. Reports indicate that current ownership rates in the Western economies are in the range of around 500 vehicles for each 1,000 inhabitants, while ownership rates in China and India are less than 50 vehicles for each 1,000 inhabitants, implying many years of strong growth ahead in this market.

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 more than 3.8 billion tons in 2012, also with most of this growth coming from Asia.

As we continue to grow our tar distillation capabilities in the Asian regions, we continue to benefit for strong demand for naphthalene and carbon black feedstock products.

We also announced earlier today that we have entered into a Memorandum of Understanding with Nippon Steel Chemical to build a 250,000 metric ton tar installation plant and two downstream plants producing coke and carbon black in Jiangsu Province in China. While the downstream plants will be owned by Nippon Steel Chemical, Koppers will be the majority owners of the tar installation plant. I'm excited about the expansion of our presence in the growing Chinese markets and becoming a supplier of pitch for needle coke to a new partner.

Regarding the outlook for coal tar raw material, we've seen reduced availability of coal tar in North America, Europe, and Australia due to the idling and lower production rates of coke batteries due to lower steel production, as well as alternative technologies that reduce coking requirements. This reduced availability coupled with increased demand for carbon pitch is expected to result in higher tar costs in these regions as we move through 2012.

To the extent necessary, we have the ability to increase our current imports of carbon pitch into these regions from other operations or from third parties, and we will also have the ability to expand our carbon pitch supplies through the use of certain petroleum feedstocks that are compatible with coal tar.

In our North American railroad business, we continue to see strong levels of crosstie purchases. For 2011, tie procurement volumes were up 17% compared to 2010, with expectations for continued strong levels in 2012. As noted earlier, we continue to see increases in volumes for commercial crossties as the short lines continue to upgrade their lines to accommodate heavier rail cars.

We estimate total capital expenditures by the class I railroads to be about $12 billion in 2011 with approximately $7.5 billion of this amount going into the maintenance-of-way spending which includes crossties and rail joint products. Recent projections from the railroad industry indicate that capital spending by the Class I railroads is expected to increase by about 8% to $13 billion in 2012.

In addition to our North American railroad market we'll be exporting $9 million to $11 million of crossties into South America in 2012, which is a new growth market for this business.

Our proprietary borate treatment process was utilized at several of our treating plants during 2011, and this 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, has enhanced the relationships with our important Class I railroad customer base by expanding the overall range of products and services we provide.

As mentioned earlier, we closed our non-core carbon black plant in Australia due to difficult market conditions, and more recently we announced we are closing our wood closing plant in Grenada Mississippi. It has been a low performing operation over the last several years and the closure will allow us to consolidate production to other wood treating plant locations.

While decisions like these are never pleasant, we felt they were necessary to reduce our overall cost structure and improve the profitability of our business. We will continue to review additional consolidation options that could improve on our return on invested capital for the Company as a whole.

Regarding the profit outlook for 2012, as I mentioned earlier, we have reflected our strategic plan targets in our most recent investor presentation. As noted in the presentation, our earnings per share target for 2015 is $6.50 a share, which will require significant earnings growth on an annual basis going forward. Without providing a specific number for 2012, we believe our earnings growth will be in the range required to keep us on pace to meet our 2015 EPS target.

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

Thank you, sir. (Operator Instructions). Thank you. Our first question comes from Saul Ludwig from Northcoast Research. Please go ahead with your question.

Good morning, guys. Good, complete analysis here. I have two questions. The first, a simple one.

With regard to your negotiations with either rail customers or chemical customers and part of those negotiations were driving for adequate pricing to recover costs, was there any what you might say push back or any loss of share in your relationship with any of your customers? That's sort of a question one. And question two, you had your margin in the chemical business at 8.4% in 2011.

Now, that 8.4% had a lot of different cross currents in it. You discussed some of them in the fourth quarter. I recall that in the first half of the year you were -- you sort of missed the price increase.

Your coal tar cost increased, but you didn't have anywhere near appropriate recovery. When you look at what your margins have been historically in this chemical sector, you go back two, three years they were well over 10%, 9%. What should we be thinking about the margin sort of target, if you will, in the carbon material and chemicals business in 2012, given that your comments about pricing were made and you won't have the plant costs, you shouldn't have the carbon black loss?

Thanks for that long question. I'll try to remember everything you've mentioned there. Starting off with negotiating sales contracts. As I mentioned, we did negotiate and complete several long-term contracts in both of those segments, and yes, one of the priorities here was to make sure that we would negotiate pricing and pricing formulas going forward that would help us with our large and improved initiatives. I think overall we've maintained our market share in both business segments. You might see one area where we did lose a little market share, but increased market share in another contract.

Overall, I'm pretty confident that we'll maintain the market shares we've had historically in both business segments going forward. In regard to the margins that you were talking about in carbon and chemicals, I think we mentioned over the last two calls, we do have some very strong plans to improve margins going forward. It's starting to work and we're seeing improvement every quarter.

When you look at the carbon materials and chemicals business, you have to remember there's been a fairly strong paradigm shift I'll call it in the aluminum industry. We're seeing increased production. 2011 was an increase in consumption of aluminum. It was in the 8% to 10% range as well.

2012, we're looking at aluminum consumption around 7%, 8%, increasing over 2011. We're also seeing aluminum production of at least 5%, maybe a tad higher. As we'll see in 2012 and we have seen over the last two years, an increased production is going to be primarily in the Middle East where we mentioned there's another million and a half tons of aluminum coming on by 2015, as well as increased production of aluminum in China. As you recall, a lot of what we supply is coming out of China out of both joint ventures, and as you recall we have lower margins coming out of those two locations, so with this paradigm shifting of aluminum and coming out of China and coming out of two joint ventures, you will see a lower margin as we go forward. It's not really looking at margin improvement per se, but also looking at margin dollar increases as we go forward here.

Okay, that sounds great. And the tax rate, you said 200 to 400 basis points lower. What would that get you to, Leroy?

That would be 32% to 34%.

32% to 34% in 2012?

Yes.

Gotcha. Thank you very much.

Thank you, Saul.

Thank you. Our next question comes from Steve Schwartz from First Analysis Securities Corporation. Please go ahead with your question.

Good morning, guys.

Good morning, Steve.

You've had some better quarters in China and I'm wondering is that solely because you've seen lower costs or is the competitive pricing situation also improving in Asia?

It's really a combination of several things, Steve. I think first of all, as we've been tell you the last couple of calls, both of our operations are running at full capacity, in fact, maybe a tad more than full capacity. Also, we've seen a little bit of reduction in coal tar these last six months or so, and on top of that seeing general improvement because carbon pitch demand continues to increase, so that puts us in a little bit of a better position as far as pricing of the product.

So it sounds like perhaps the over-supply condition in that region has improved?

And I think it will going forward as we just mentioned about the Middle East growth in production.

Sure, sure. Okay. And then let's see, got a couple here. Walt, for my last one right now, on the railroad business, thank you for your granularity on kind of talking about the short line situation in your backlog.

Tell me if this is right, then, this perspective. Assuming the short line tax credit is not renewed in 2012, it sounds like your railroad business would be flat, and with the tax credit there could potentially be upside. Is that a correct prospective?

It's difficult to comment going forward here, but I guess a couple of comments. First of all, if the tax credits are not extended in 2012, based on what we're seeing currently, based on the backlog that I mentioned, and based on the money that's going to be spent by the Class I's, and also based on additional ties using borate creosote treatment, I would think it's going to be a tad higher than flat.

Okay. You know, we finished the year at least according to the RTA with I believe a 12-month purchase rate of 23 million ties. You noted that the insertions were about 20 million and are expected to be similar in 2012. Do you believe that there is a build in inventory right now and that purchases themselves could dip below the level of insertions in 2012?

Steve, I have difficulty with the 23 million number. I really don't think it was quite that high, but again if that's what RTA is commenting, I can't argue with RTA. I would think it was not quite that high, but I can tell you 2011 was a very strong procurement year for Koppers because as I mentioned, procurement was up about 17% or in rounded numbers, we were a little over a million ties higher in '11 than we were in '10, and we continue to hold up pretty, pretty good position on the share that we're procuring for the railroad industry out there. There was a little bit of inventory perhaps, but I can tell you that with the increased commercial business, 2012's going to be a very aggressive procurement year as well.

Okay, that sounds very good. Thanks, Walt.

Sure.

Thank you. Our next question comes from Laurence Alexander from Jeffries & Company. Please go ahead, sir.

Good morning.

Good, how are you?

Pretty well. A couple of questions. First, your comment on CM&C margins and how it focuses less in 2012 in margin improvement than on just profit improvement. Are you implying that there's a chance that margins will be down this year or are you fairly comfortable margins will be up because it's just hard to tell how much because of the moving parts?

I'm fairly confident that the margins will go up. I think we've seen improvement over the last two quarters and our goal is to continue that as we have had dilution over the last two years, so our focus is on that. It's focused on managing our raw material costs better.

It's focused on improving plant operation costs. It's also on product pricing. We've had some improvements on carbon black pricing, naphthalene has been a little weak in the last let's say four or five months, but overall our focus is on getting margins to a point that the way we think it's justifiable for this business.

Then in terms of the new carbon pitch contracts, should we be thinking of this as a multiyear benefit that's going roll in slowly in 2012 or is most of the benefit going to be realized in 2012?

I can say that we've made changes in our pricing formulas every chance we get and I think you're going to see more semiannual and quarterly pricing than you have in the past, and in the multiyear contracts would include those. As we go forward here and you continue to see the aluminum industry growing, a 7% CAGR, if you will, each year is going to continue to be a little tighter on materials.

I think we've got the assets and the capabilities to expand our raw materials supplies. It's going to be a little costlier, but there's going to be some pressure there. To answer your question, Laurence, the initiatives going forward as we've been talking about here are to improve margins and to really be providing quality, on-time pitch shipments to the smelters.

Lastly, could you give an update on your thoughts on allocation of capital particularly for pension funding and M&A away from your core businesses into the maintenance-of-way adjacent?

I'll take the second question in regard to acquisitions and what have you. As you know, we did not make an acquisition in 2011, even though we're working in many different areas and have some fairly good areas that we're working on. I can tell you this announcement that we made this morning on signing an MOU, and also with Portec and we're looking to others similar to that.

We'll continue to focus on M&A, continue to focus in our capital spending which has been running about $32 million to $33 million a year, that will continue, but again it's really I look at Koppers as being a procurement arm for the aluminum industry as well as the other markets that we're involved in here, and as we see product demand increasing around the world, Koppers will be there working with our current and potential new customers. The pension...

Yes from a pension standpoint, we have required contributions of approximately $13 million as we've communicated in our investor presentation, are evaluating put it this way, with our goal to get a to a fully funded by 2013, it's going to require additional contributions, so we're evaluating at this point how much in the timing of those contributions over the next couple of years, so I can't say anything at this point because we haven't made a decision, but certainly I would think you would see higher contributions this year.

Okay, thank you.

Our next question comes from Janney capital markets. Please go ahead.

Thank you. Good morning.

Good morning.

Walt, you mentioned briefly about exporting ties to South America. How do you see that opportunity over time?

Well, it's a little bit early to comment about the future, but I can tell you the purchase order that we received from Vale in Brazil I think is a great opportunity to continue on a longer term basis. Typically, what they're using in Brazil, for example, is a species of eucalyptus type wood that some is treated, some is not treated, but the life that they're getting from these specie ties is a very short life compared to what we see here in North America, so obviously their interest is to increase that life by using hardwoods.

With our large procurement arm and our ten wood treating plants, I guess after the Grenada closure we are under that, but with nine treating plants in the US we have a great opportunity of supplying continually into the long-term, and it's not just Vale, we're talking to other railroads as well in South America. There's I think a great prospect here for longer term export markets for our railroad products, including other joint bars and other areas that will be a strong partner with the South American operations.

Now, would you be able to service the growing demand out of North America, or would it require actual distribution locally?

We're just focused on 2012 at the moment and obviously we have treating capacity in the procurement arm to do that with. Going forward, I think you'll be seeing some other strategies that will be in place to continue on with that.

Great, thank you.

Sure.

Thank you. Our next question comes from Richard Johnson from RBC. Please go ahead with your question.

Good morning, gentlemen.

Good morning.

Good morning.

I have a broad question and it may have been covered during your discussion, but I understand that if your raw material inputs go up and can you pass those through that your gross profit percent will go down. I understand that. I look at the quarter-over-quarter of 2011 versus 2010, the gross profit percent went down, which understand, but the gross profit dollars went down 30% from to 27.5 to 39.3.

It's probably a complex question. Are there a couple of major things and what level of gross profit percentage you think you might come back to? I'm mostly asking about the 30% decline in the gross profit dollars quarter-over-quarter.

Let me address the margin issue first. Again, going back to things that we have publicly stated in terms of our goals and Walt has discussed a little bit of that earlier in terms of initiatives that we have to grow our EBITDA margins and there's a good piece of that, that will come from growing the gross profit margins as well as keeping our operating expenses in check.

Our goal over the next several years is to get a 200 basis point bump from our overall consolidated margins, and we expect a good part of that to be front-end loaded. How it might be split between CM&C, R&UP, I would say CM&C would be a little more than the 200 where as the R&UP would be on the lower end of it, but with the combination of the two we're shooting for that 200 basis points, and the expectation would be that, that a lot of that would come within the first two years. That's the overall goals.

Okay, thank you.

Thank you. Our next question comes from Chris Shaw from Monness Crespi Hart and company. Please go ahead.

Good morning.

Good morning, Chris.

First, the Danish plant, that was naphthalene and that was $800,000 impact, did I hear that correctly?

Yes.

None of the other parts of the plants were down, the pitch or anything like that?

No. We continued to distill coal tar, it was just the naphthalene unit that was down for about 40 something days.

Okay, thank you. Then you might have mentioned this. The SG&A saw a spike a bit sequentially from third quarter to fourth quarter. What was the reason for that?

The SG&A from the third quarter to the fourth quarter?

Yes. Is that normal seasonality and share-based compensation or something?

Let me go back to take a look at the items. I know I outlined a bunch of them from a year-to-date standpoint. Certainly, we talked about previously our compensation and people costs are up, that I know for sure. Looking at some of the other items here, we had increased benefit costs during the quarter that would have contributed to that. We had some costs again for our European consolidation project.

Yes.

Probably a combination of those that would considered into the quarterly increase.

Going back to the raw material and the pricing issue. Are there any you talked about some contracts, new contracts that you have done? Does the year-end or as we enter 2012, is that like a significant date when new pricing can come in or new contract be negotiated? Can we see any meaningful step up in the first quarter for pricing?

Can't comment too much about that, but I can tell you when we negotiate the longer term contracts, which we had several going into 2012, is that you usually do see an increase in pricing and sort of setting a new standard or a new margin if you will for that contract as it starts, but I think you'll hopefully see that at the end of the first quarter.

Okay. On the China MOU, are you going to be producing only needle coke or not pitch as well?

No, this memorandum of understanding was primarily with Nippon Steel Chemical, who will be building and operating a needle coke plant and obviously needle coke would be supplied to the electrode industry and they would also build a carbon black plant next door to the tar installation plant that we, along with a partner, would build the distillation unit and supply the necessary pitch feeds tock for the needle coke operation.

This is going to be pretty much self-contained?

Yes. It's a very exciting project for us and we're obviously working on a lot of work to do here yet, but on the surface I can tell you it's one of the more exciting projects that I've seen for Koppers in China.

Great, thanks a lot.

Thank you. Our final follow-up question is from Steve Schwartz from First Analysis Securities Corporation. Please go ahead, sir.

Thanks for taking the follow-up, guys. Walt, if we could just go back to the new joint venture opportunity, I'm trying to understand what you guys also take from that plant. If you send off all of the heavies to the needle coke plant, maybe it's not all, that's what I'm asking.

If you send out the heavies you don't have much pitch left, then it sounds like your creosote/carbon black feed goes to the carbon black plant. Does that leave you really with only naphthalene? Can you give us an idea of what you walk away with?

Sure, Steve. We still have a little bit of work to do here, but I can assure you that we will have more products as we go forward from that operation. I mean, you're right, the product that we would be selling for the needle coke application you would have naphthalene stream that would come off of that which would be ours, and maybe a little bit of carbon black feedstock per se, but we will be producing more than just the requirements for the needle coke plant, so it would be more product volume than what we're talking about just on the MOU.

Okay. If you're distilling 250KMT, you're getting about 125 in pitch just to use basic numbers. How much of the pitch do you actually get to sell? What doesn't go to needle coke?

I really can't comment on that just yet.

Okay. What kind of capital requirements for the facility? In the past, you've been able to offer your technological expertise. Will this be the first one that actually require dollars?

This is a tad early, but the current investment for the installation, we just built a plant three years ago and we're looking at somewhere of $55 million to $60 million of investment, and obviously we've got a lot of interested parties there that will assist us in looking at the borrowings and so forth, so I really cannot comment yet how much cash we'll put up front, but it would be similar to what we've done in the past.

Okay. Leroy, you confirmed for Chris the $800,000 impact, I think that's to profit. You guys were also in your prepared remarks using 2.9 million. Is that the revenue impact?

No, the $2.9 million included the carbon black, the difference in the carbon black operating loss compared to I think, it would have been the carbon black loss, for the full year number.

That sounds right then. So you would have $2.1 million.

That's right.

For the carbon black.

Two for one.

That's right.

Okay. For the carbon black facility, Leroy, you mentioned probably a draw down in working capital, but for the first quarter of '12, should we expect any kind of impact to margin or gross profit from the facility of sell out of inventory or anything like that?

Yes. It will take maybe a quarter or two before this gets classified as discontinued operations. We would expect maybe $0.5 million dollars or so of impact probably over the first quarter or two, but it will ultimately be classified as discontinued operations. It's a question of whether it's in the first or second quarter.

In connection with the tie opportunity in Latin America, I recall seeing the Axiom, the composite tie producer opened a facility in the area. Did you have to compete against like composite ties and so forth to get this business and what -- how would you classify the profitability on this opportunity?

Well, I really can't comment on whether we were competing with Axiom or not. I know that Valley and other railroads there in Brazil are looking at a very good quality wood tie, which is what we negotiated on. Again, I have not heard too much recently about this Axiom tie, but I think they have got a ways to go to really prove the credibility of the tie.

Okay. Would you rate the profitability of this Latin American business above, at, or below your typical or where the tie business overall stands?

It certainly has to be at or above or we wouldn't provide that product.

Sure. Will you be borate treating these ties going down there?

Not in the beginning, but that could lead to something further down the road, Steve.

Because that could boost profitability. Is that right?

It could. But at the moment it does not include the borating.

Thank you, Mr. Turner. This concludes the Q&A session. Please continue with any points you would wish to raise.

Thank you. We thank you all for participating in today's call and appreciate your continued interest in the Company. We are optimistic that sales growth we enjoyed throughout 2011 will be sustained and will increase in 2012. Our acquisitions over the last several years have helped us capitalize on our global growth and demand for our end products and we will continue to pursue our strategy of expanding our presence in the key end markets and the geographic regions where we make and sell our core products. While we didn't complete any acquisitions during 2011, be assured that this continues to be a strong focus for us in 2012 and we are hopeful that we will successfully be able to grow our strategy of providing our customers with the highest quality products and services while continuing to focus on safety, health and environmental initiatives that we have. Thank you.

Thank you. This does conclude the Koppers Holdings, Inc. fourth quarter 2011 earnings conference call. Thank you for your participation. You may now disconnect.