Koppers Holdings Inc (KOP) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Koppers first quarter 2012 earnings conference call on Friday, May 4, 2012. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) I will now hand the conference over to Mr. Michael Snyder.

Thanks, Alex, and good morning, everyone. Welcome to our first quarter conference call. My name is Mike Snyder, and I am the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website, or you can call Rose Hilinski at 412-227-2444, and we can either fax or 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 result will be achieved.

The Company's actual results could differ materially from such forward-looking statements. The Company assumes no obligation to update any forward-looking statements made during this call. References may also be made to certain non-GAAP financial measures. The Company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. I am joined on this morning's call by Walt Turner, President and CEO of Koppers; and Leroy Ball, our Chief Financial Officer. At this time, I would like to turn over the call to Walt Turner.

Thank you, Mike. Good morning, and welcome everyone to our 2012 first quarter conference call. Due to the accounting rules for reporting discontinued operations, the discussion of our first quarter results will reflect our GAAP financial statements and, therefore, exclude the impact of our carbon black plant closure in Australia for both 2012 and 2011.

In regard to our first quarter results, sales increased by 12% and adjusted EBITDA increased by 37% over the prior year quarter, as selling prices of our major products more closely reflected our increased raw material costs. Additionally, the prior quarter was negatively impacted by $1.2 million of storage and logistics costs for coal tar in North America compared to the first quarter of 2012, as well as significantly higher raw material costs that had not yet been able to be passed on to our customers.

In our global carbon materials and chemicals business, revenues grew by $31 million, or 14%, over the prior year quarter, benefiting from higher prices for pitch and phthalic anhydride and higher volumes and prices for carbon black feedstock, which more than offset lower volumes for pitch, lower prices for naphthalene, and $1.7 million of estimated costs related to the tank rupture that resulted in a pitch spill in Australia. The increase in product pricing was driven by quarterly and semiannual pricing adjustments, which allowed us to recover the increased raw material costs we experienced in the second half of last year.

Global aluminum demand is expected to be strong, with projections of 6% to 7% increase in global consumption in 2012, although most of this increase is projected to be in China, a region where we currently do not sell pitch directly to the aluminum industry. Due to reduced aluminum production in Europe and Australia, combined with the abnormally high sales volumes for pitch in Europe in the first quarter of 2011 due to timing of shipments, our pitch volumes in the first quarter this year were 8% lower than the first quarter of 2011.

While we see some uncertainty in the European aluminum market, at this point we expect that our global pitch volumes for the year will be comparable to 2011 volumes. We continue to focus on expanding our pitch volumes in regions of the world where aluminum and steel production are growing, in order to maintain our global market share.

We continue to see strong pricing for our carbon black feedstock, which is sold into the rubber markets as volumes increased 46% due partly to the closure of our carbon black plant in Australia, and average prices were up 9% in the first quarter compared to the prior-year quarter.

Naphthalene volumes were up 8%, but prices declined 25% compared to the prior-year quarter, with the price decline coming primarily from China, due in part to the slower construction season.

Our phthalic anhydride business continued to provide increased profitability, as average selling prices were up by 17% over the prior-year quarter, driven by higher orthoxylene prices. The average price for orthoxylene increased to $0.67 a pound for the first quarter of 2012 compared to $0.55 for the first quarter of 2011. This increase reflects higher crude oil prices, which increased from an average of $94 a barrel in the first quarter of 2011 to an average price of $103 per barrel in the first quarter of 2012. Orthoxylene prices were at an historic high of $0.71 a pound in March and April.

For our Railroad and Utility Products business, higher sales prices and volumes for crossties sold to commercial customers, combined with higher volumes and prices for treating services, more than offset lower sales volumes for untreated crossties and resulted in an increase in sales of $8.5 million, or 7%, for the first quarter compared to last year's first quarter.

As of March 31, we had 6.1 million untreated crossties on hand at our plants compared to 6.2 million ties at the end of 2011, as commercial tie volumes and treating services were up in the first quarter compared to the first quarter of last year. Tie insertions for 2012 are expected to be in the 20.5 million range, slightly above estimated insertions for 2011. We continue to see strength in the commercial crosstie market, as volumes were up 7% for the first quarter over the prior-year quarter.

After Leroy completes the financial review, I will give you a status update on our core end markets, as well as offer a few thoughts on our 2012. Leroy.

Thanks, Walt. Starting with the consolidated results, sales for the first quarter increased by 12%, or $39 million, to $381 million compared to the prior-year quarter as volume and price increases in both Carbon Materials and Chemicals and Railroad and Utility Products drove sales increases in both business units compared to the prior year.

First quarter adjusted EBITDA was $36.7 million, or $9.9 million higher than 2011's first quarter adjusted EBITDA of $26.8 million, and adjusted EBITDA margins increased to 9.6% from 7.8% in the first quarter of 2012, after restating for discontinued operations.

As mentioned earlier, first quarter EBITDA was negatively impacted by $1.7 million for the estimated costs related to a pitch tank rupture and spill in Australia. For the first quarter of 2011, we also incurred an additional $1.2 million of storage and logistics costs in North America compared to the first quarter of 2012, and we were also negatively impacted by unexpected increases in tar costs in certain regions that we were not able to recover until the second half of 2011. We continue to see strong overall product demand, and, as expected, we saw prices increase over the prior-year quarter for the majority of our products.

The adjusted EBITDA margin increase of 180 basis points over 2011's first quarter is not a spread that we expect to be sustainable in the near term. While we have undertaken many actions within the Company to address the past few years' trend of declining margins, we are only in the beginning stages, and the first quarter 2011 comparison is not a strong one. With that being said, we have already seen positive benefits from some of our plans, which include new contract pricing, increased new product sales such as borate-treated crossties, the closure of our Australian carbon black facility, and general cost containment initiatives. We expect those benefits to continue throughout the year and put us by year-end, somewhere in the neighborhood of a 100 basis point to 140 basis point EBITDA margin increase over 2011's EBITDA margin of 9.6%.

Adjusted net income and adjusted earnings per share for the first quarter of 2012 were $15.5 million and $0.74 per share compared to $8.4 million and $0.41 per share for the first quarter of 2011. Our tax expense as a percent of pretax earnings for the first quarter was 31% compared to 36% in the prior-year period. Excluding discrete items, our tax expense as a percent of pretax earnings for the first quarter of 2012 was 33%. There were no discrete tax items recognized in the first quarter of 2011. The decrease in our effective tax rate excluding discrete items is due mainly to the implementation of our European integration project that was finalized in the fourth quarter of 2011. Looking ahead, we anticipate our effective tax rate excluding discrete items to approximate 33%, which is within the range that was communicated on our last call.

Looking at Carbon Materials and Chemicals, first quarter sales for CM&C increased 14%, or $30.9 million, to $249.5 million compared to the prior-year quarter. The increase consisted of a $7 million increase from volumes, due mainly to carbon black feedstock, and a $23 million increase from pricing that was driven by pitch, carbon black feedstock, and phthalic anhydride. In the first quarter, we saw positive growth year over year in two of the three main components of our Carbon Materials and Chemicals business. Pitch had a 6%, or $13.6 million, increase in sales, as higher selling prices offset lower sales volumes from Europe and Australia.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 8%, or $18.5 million, due to higher volumes and prices for carbon black feedstock compared to the prior-year quarter. Part of the volume increase was due our Australian operations selling carbon black feedstock to outside customers instead of selling to our own carbon black plant, which was closed during the fourth quarter of 2011.

The third main component, coal tar chemicals, was flat, as higher phthalic anhydride prices were offset by lower prices for naphthalene compared to the prior-year quarter.

Carbon Materials and Chemicals adjusted operating profit for the quarter of $20.5 million increased from $14.1 million in the first quarter of 2011, which equates to operating profit margins of 8.2% and 6.5%, respectively. Operating margins increased due to improved pricing for pitch, carbon black feedstock, and phthalic anhydride.

As announced previously, due to deteriorating operating conditions, we 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 at the close to be neutral or even positive as a result of a reduction in working capital as operations cease. For the first quarter, the net cash impact of the carbon black plant closure was a positive $500,000. The operating results for the plant are being reflected on a net basis as discontinued operations within our financial statements.

Sales of Railroad and Utility Products increased $8.5 million, or 7%, to $131.4 million in the first quarter compared to the first quarter of 2011. The increase consists of $3.7 million from higher sales volumes, driven by increased sales of treated crossties to commercial customers; increased volumes for treating services for the Class 1 Railroads and increased volumes for utility poles; and $4.3 million from higher pricing, due mainly to treated crossties and treating services.

Adjusted operating profit for the quarter increased to $9.1 million from $7.5 million, with adjusted operating margins at 6.9% compared to 6.1% in the prior-year quarter. Higher volumes and prices for our railroad products in the first quarter of 2012 highlight the continued strength of the railroad business.

As mentioned in our last call, we are closing our wood treating plant in Grenada, Mississippi. The plant, which primarily treats utility poles, is expected to cease operations this summer, at which point the majority of the treatment services are expected to be transferred to other Koppers' facilities where we will be using 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. No closure costs related to Grenada were incurred in the first quarter.

Looking at cash flow and liquidity, cash used in operations in the first quarter of 2012 amounted to $15.8 million compared to cash used in operations of $9.5 million for the first quarter of 2011, with the difference due mainly to increases in trade receivables and inventories related to higher sales volumes. We've talked in the past about having a free cash flow target of 5% as a percent of sales on average over the next several years. While I see our cash flow improving dramatically as we move through the year, with where we are at as of the end of the first quarter, I would expect this year's percentage to come in somewhere between 4% and 5%.

Our debt net of cash on hand at March 31, 2012, increased to $272 million from $248 million at December 31, 2011, primarily as a result of higher working capital. Our debt-to-adjusted EBITDA ratio at March 31 was at 1.7 times, the same level as December 31. As of March 31, we had $18.5 million borrowed on our revolver, and we had total estimated liquidity of $321 million.

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

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

Thanks, Leroy. The major end market for our Carbon Materials and Chemicals segment is aluminum. Although pricing for aluminum has fallen during the first quarter and resulted in capacity reductions in certain regions, recent projections indicate that global aluminum production will increase by 5% in 2012, with most all of this increase expected to be in China. Regarding the reduction in pitch volumes for the first quarter, while acknowledging the potential for volatility in Europe, at this point we still expect pitch volumes for the year to be similar to that of 2011.

According to recent projections, the Middle East expects primary aluminum production to increase by 1.3 million tons by 2015. This growth includes the Ma'aden facility in Saudi Arabia, which will have a capacity of 740,000 tons, with the first metal being produced by the end of 2012, and the expansion of the EMAL smelter in the United Emirates, which is expected to increase capacity from 750,000 tons to 1.4 million tons starting in the fourth quarter of 2013.

Although pitch volumes dropped from the previous year quarter due to reduced aluminum production in Europe and Australia, combined with abnormally high sales volumes for pitch in Europe in the first quarter 2011 due to timing of shipments, we saw increased demand of our profitable downstream products, carbon black feedstocks, which are 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 US automobile production will increase by 1.3 million units in 2012, with US light-vehicle sales increasing to 14 million units.

As mentioned earlier, orthoxylene prices, which drive phthalic anhydride prices, hit an all-time high level of $0.71 a pound in March 2012 and continued at that price level for the month of April.

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 the 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 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 to 3.8 billion tons in 2012, representing a 6% increase over 2011, and to 4 billion tons in 2013, also with most of this growth coming from Asia. We did see lower prices for naphthalene the first quarter of 2012, but we are hopeful that pricing will improve, as we anticipate a stronger construction season in China in the second quarter.

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

As announced previously, we have entered into a memorandum of understanding with Nippon Steel Chemical, the Pizhou City government, and the Yizhou Coking group in China to build a 250,000 metric ton tar distillation plant there, which includes two downstream plants producing needle coke and carbon black in the Jiangsu Province area. At this point, we are working through the details of the joint venture agreements, and we continue to anticipate that the tar distillation plant will break ground before the end of this year.

Regarding the outlook for coal tar raw material, we have seen reduced availability of coal tar in North America, Europe, and Australia due to the idling of lower production rates for certain coke batteries due to lower steel production, as well as alternative technologies that reduce coking requirements. As mentioned in our last call, this reduced availability, coupled with increased demand for carbon pitch, is expected to result in higher coal tar costs in these regions in 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. 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 North American railroad business, we continue to see strong levels of crosstie purchases and, as noted earlier, we continue to see increases in volumes for the commercial crossties, as the short lines will continue to upgrade their rail lines to accommodate heavier rail cars. Our expectations are also positive for our Class 1 Railroad customers, based on a projected increase of $1 billion in maintenance of way budgets for 2012 compared to 2011. As you may have seen, we recently announced five-year contract extensions for both the CSX and the UP Railroads, with a combined value for these contracts of more than $800 million over the next five years.

As I mentioned in our last call, we will also be exporting about $10.5 million of crossties into South America in 2012, a new growth market for this business. The first shipments of this order began in April, and we are optimistic that this market will continue to provide opportunities for us in the future.

Regarding the profit outlook for 2012, the improvement for the first quarter compared to last year's first quarter was in line with what we had expected coming into the year. As a result, we still believe our earnings growth in 2012 will be in the range required to keep us on pace to meet our 2015 earnings per share target of $6.50 a share, as we communicated to you in our last call. At this time, I would like to open up the meeting for any questions that you may have.

(Operator Instructions) Kevin Hocevar from Northcoast Research.

I have got a question on the pricing. It seems the pricing was a big driver here in terms of the increased profitability. How much of that pricing came from your ability to renegotiate the terms on your contracts that came due this year versus the regular price-to-raw relationship that comes up each quarter?

I would have to say, Kevin, that the majority of the increases obviously are tied to our long-term contracts and pricing formulas. And two things -- one, as we mentioned, we are doing everything we can to decrease the lag time that we've had in the past with the escalating raw material increases. And secondly, when we do negotiate new contracts, which we have -- we have negotiated several last year and, more recently, the two I just mentioned with the railroads. But each time we negotiate a contract, obviously, we go in with a different view of the various components of those pricing formulas. So to answer your question, the majority of the increases have come from revised formulas and doing a better job of our pricing leaks and getting more value from what we are supplying to our customers.

And in terms of the carbon black feedstock volumes, I know you touched on it a little earlier. Could you elaborate a little bit on that? I know tire demand in this first quarter was down a bit and also volumes at -- from carbon black manufacturers were also down. So I was just wondering how are you able to increase volume so well in an industry that is -- had a down quarter?

Two things on that, Kevin. One, coal tar-based carbon black feedstocks are -- contain more carbon and, really, they are a better quality raw material than the petroleum, which is the majority. So you still see the coal tar-based carbon black feedstocks going into the specialty applications, which I think have been fairly strong, but also when it comes to choices, coal tar based is a little better quality than the petroleum.

And finally, in terms of volumes in North America, or I guess really globally, in terms of -- we had nice weather here in the northern part of the United States. Did that have any impact on bringing volumes forward and perhaps like the railroad industry or maybe naphthalene? Did that have any impact at all, or was it pretty minimal?

On the naphthalene side, it was minimal. Construction here in North America was still going at a fairly slow rate. On the railroad side, depending on which part of the country you were in, some areas there was a fairly mild winter, which did not have a major impact on white tie or tie procurement areas, but some areas did. But I think on the tie procurement area, we saw just a little bit of a concern there with weather. But overall, it's going to be a fairly strong year on the tie procurement area.

Okay, Great. Thank you very much.

Ivan Marcuse from KeyBanc Capital Markets.

Hi, nice quarter. Thanks for taking my question. In terms of -- on your comments on raw materials and being in a shorter supply, does that mean costs go higher? And you mentioned that your pricing is higher due to the higher costs last year. So do you see the same phenomenon that we saw last year, where your margins get compressed a little bit, at least until the contracts go through? If you could just give me a little more detail of how higher costs or shortage of material will impact the margins and how to think about it going forward, I'd appreciate it.

Really, I think it really depends upon what region of the world what have you, but just to take Europe as an example, we are going to continue to see increases in raw material costs, hopefully much lower than what we've experienced in the last, let's say, 24 months. Europe especially, when you have got a steel industry that's probably operating at about 70% thereabouts over the last year, it has obviously put a lot of pressure on supply and demand of coal tar in Western Europe, and as we've been saying for the last several calls, that requires us to extend further out into Eastern Europe and other parts of the world to make sure that we're procuring enough coal tar to meet our customer demands.

So in two parts, one- logistics increases cost, because if you are taking tar out of Russia or Ukraine or wherever, you're adding costs to get the material to our plants. And then secondly, it's supply and demand for the coal tar that is available in our normal markets. There is more pressure on demand, which drives prices as well. So we will continue to see increases in raw material, and I'm hoping that they won't be near the magnitude that they have been.

Got you. And then if you -- you commented on your earnings outlook, and to get to that -- the range you talked about in 2015, it's sort of a 20% to 25% if you just normalize it, on an average basis per year to get there, which is a nice growth rate. Is there -- is that how you're looking at it as more of a consistent-type growth rate like that, or are you looking for maybe growth to be much higher in the first couple of years versus the last 3 or -- how should I think about that?

I'll start by saying we are aggressively accelerating, but Leroy, maybe you should answer this

It is tough to say, Ivan. There could -- you could see -- you could see a little volatility in that over that period. I think we're looking at it longer term and figuring where we need to get at by 2015 in having those plans in place. So you could in -- obviously, in any given year, see a much higher growth rate than others. I think for this year we see us pretty much right on -- on that 4-year CAGR. Looking out beyond that, tough to say, and I don't think we are ready really to say what we expect going beyond that.

Got you. And then, I don't know if you said that, I may have missed, but how did the China operations perform this past quarter? Is profitability continuing to move in the right direction?

Right, both plants were operating in China continue to operate at capacity or actually at slightly above capacity. And, yes, we did see profit improvement over the previous quarter, primarily through better product pricing, as well as better managing raw material costs available to us.

Got you. And then last question and I'll jump back in the queue. How much did the Grenada -- the plant that you are shutting down in Mississippi -- is that running at an annual loss, and how should we think about that impacting profitability on an annual basis after it is shut down?

I guess going back -- when you go back and look at Grenada the last 2 or 3 years, it has been an underperforming asset. And we -- once upon a time would treat both railroad ties as well as utility poles. During the last, let's say, 12 to 15 months, it's been more dominant on the utility side, so it is hard to really -- you would have to go back further as far as losses, but --.

Yes, obviously, it will help us from an absorption standpoint, in terms of being able to retain a vast majority of those sales and take the production into our existing facilities. I'd say that that facility has probably been somewhere at break-even to a losing proposition over the past -- over the past couple years. To what level, I would -- it is certainly not significant in the context of our overall earnings, but that's more or less what --.

So maybe the best way to think about it is it may not be a big swing in profit, but it will increase your utilization rates in your other plants, which ultimately impacts your -- it will be a positive impact on your margin versus a $3 million or $5 million loss leaving the P&L

Exactly, it definitely will have a very positive impact on utilizing the capacity and, obviously, a positive note on the margins for that business.

Great. Thank you for taking my question.

Steve Schwartz from First Analysis.

Walt, I do this to you every call, and I have to apologize ahead of time, but I have to bring up the RTA data again.

RTA

Yes, of course. And they have been reporting annualized purchase rates at a 23 million unit level, which is well above even the high end of the typical range. That makes me inclined to believe, at a certain point, there is going to be a correction. Is that reflective of what you guys are seeing? As -- I understand if you don't want to necessarily comment on RTA data, but if you could just talk a little bit about whether or not you are seeing that kind of froth in the demand for ties.

I guess my first comment is I truly am a person who needs to understand much more about the RTA numbers. But, Steve, I think first of all, they, I believe, are reporting on ties produced. And ties produced means that the ties are either sitting at a wood-treating plant or they're sitting in a sawmill somewhere. I know back in 2011, I think they reported ties produced of about 22.5 million or thereabouts, which includes the softwoods as well. When I say softwoods, up in the northwest, that continues to be southern pine type ties, wood species that are used out there. And I think that is one of the differences.

And typically, I think you would see the softwoods of that total tie produced that RTA reports of somewhere around maybe 750,000 to 1 million ties. So if you take, let's say, 1 million off the 22.5 million, so that gets you down to 21.5 million. That is very close to what we think was produced on the hardwood side for 2011, which was around 21 million ties, we were thinking. Looking at the first quarter, I did get the first quarter RTA numbers, and they are showing a procurement of about 6 million ties for the quarter.

Supposedly, and I haven't had the chance to confirm this, but of that 6 million, about 500,000 to 600,000 were softwood ties, again, which seems like an awful big number. But assuming if that is correct, that gets you down to about 5.4 or 5.5 million hardwood ties. And I think we are pretty well agreeing with that number. But also, just to further the answer, I really think that if you take, let's say, 5.4 -- 5.5 million ties for the first quarter, that is going to be somewhat normalized throughout the balance of the year. So you could end up with another 21 to 21.5 million ties procured or produced for the hardwoods, and then you add a little bit more for the softwoods.

So it certainly sounds like, as far as Koppers is concerned, you and your team are not expecting a major correction of any sort?

We don't really see it at this point. We continue to see a fairly strong demand on the commercial ties side. So we are doing a lot of boultenizing, if you will, to keep up with those orders. So that's going to continue throughout the year. And we know that the railroads have about $13 billion worth of capital. Not everything is going into ties, but again, another strong year for tie insertions for the Class I's as well. So, yes, I think we're looking at 20.5 to 21 million tie insertions this year.

And then, as my follow-up, related to aluminum, I think the commentary you have provided, at least for 2012, is that the majority of the new capacity or any additional production -- what would lead to aluminum production growth is coming out of China. In the past, we have talked about the fact that the level of their production, the quality of product, and so forth doesn't necessarily give you an opportunity to compete in that market. Is anything changing there now where you see a potential opportunity to develop business?

Yes, absolutely. And you are right on as far as our strategy the last 7, 8 years has really focused on exporting the carbon pitch to smelters outside of China, because of the higher quality -- and the higher prices actually, I'll be quite up front with that -- versus the Chinese smelters using a lower quality and even a lower price. We are going to continue to stick with that strategy for the two plants we are currently operating. But assuming we get this third tar distillation plant built in the Jiangsu Province, which is much, much closer to Henan, and Shandong, and Jiangxi Provinces, where you see more aluminum smelters and see some of the older technology plants being shut down with modern technology, I'm sure you'll see us going more towards the Chinese aluminum industry from that perspective.

Okay. So it will be with your new capacity and over the same medium to longer term that you get some of that volume?

Yes, you could see us changing our strategy at that time, yes.

Okay, but nothing in the near term where, all of a sudden, you think you're going to pick up business there?

No, and when you look at the Middle East -- with the Ma'aden smelter coming on stream in December of 2012, which will take them 9 months probably to get up to full production, that is another 70,000 to 74,000 tons of pitch, and then you tack onto that the EMAL smelter, which will be another 70,000 to 74,000 tons, starting in the fourth quarter 2013, that is more attractive to us at the moment.

Okay. That's great color. Thanks, Walt.

Laurence Alexander from Jefferies.

Just wanted to check how you are thinking about the M&A pipeline. Are you seeing valuations moderate at all?

Well, we continue to look for opportunities around the world. Actually, this joint venture potential with the MOU we signed, I like that a lot. That's a unique way of growing our businesses when it comes to M&A activities closer to the ground, and we'd like to continue to grow in these two core businesses. As far evaluation goes, there's --.

I would say there's still maybe a little higher expectations from people out there, certainly, than I think what we've been willing to -- to move forward with. But we are hoping that the gap will be closing here as we move through 2012, but we continue to look pretty strongly at various opportunities there and hope that we will be able to act upon something here at some point this year.

And then, this may be -- just to delve into a little bit more on that topic. As you think about the maintenance of way acquisitions that you might be looking at, is it fair to say that most of them will be stand-alone segments as opposed to what could simplistically be described as fixer-uppers?

It would vary, Laurence. It would vary. I am very, very much pleased with the joint bar acquisition we made back in late December 2010. We continue to look for those types of potential acquisitions, more so on the hardware side than I would say on the treating side. The wood treating industry -- there is enough capacity for treating wood. And it's very, very much easier to add a cylinder at a current location than it is building a new wood treating plant somewhere. So there is enough treating capabilities, and as far as our M&A activity on that side, I'd rather go for other products and services that would add benefit to our already good customer relationships that we have with the Class I's.

Okay. Thank you.

Chris Shaw from Monness, Crespi.

Speaking about the Ma'aden project, is that -- do you know yet whether you will be supplying that? Has the contract announcement been made there?

I don't think there's been any announcements made, but whether it's directly us supplying or indirectly, that additional pitch demand will certainly add benefits to the overall pitch market.

So even if someone else gets it, it will tighten up the market, that's what you think?

Right, right.

When would they actually be -- beginning to take pitch product from whoever might be supplying them? Is it going to start up late in the year?

Yes, actually, I remember the date very well; it's December 12, 2012 when the first pot will pour metal, and that means they have got to either buy or produce anodes, let's say, by July, August timeframe.

Okay. And then, the Century Aluminum -- the Ravenswood smelter -- do you guys have any idea when that might be starting up, and do you have an idea of whether you might be supplying that one?

I think our chances would be very good. Ravenswood is probably less than 75 miles away from our plant -- one of our tar distillation plants. But I'm reading what you are reading, and I think the last article I saw was the earliest would be fourth -- late fourth quarter this year.

What are the softwood ties used for? Is that just for more temporary tracking?

I think the softwood ties -- you're going to see them more in Western Canada and up in the Western states. I really -- the only thing I can think of, Chris, is that softwood prices are much, much lower than hardwood. So there is a tick-up in using those. But the hardwood species are still the preferred, more dominant species, but they do use a fair amount. And also you've got the few issues from time to time with shipping hardwood species out West because of certain decay and certain potential of fungus that you can get on the hardwoods when you ship them out West.

Do softwoods last the same amount, or last shorter, or --?

Shorter. Shorter time, yes.

Okay, great. Thanks so much.

Scott Blumenthal from Emerald Advisors.

Walt, just a follow up to Kevin's question on the revised pricing formulas. Can you -- or would you be able to tell us whether you have gotten through most of those or if you have gotten through half of those, and if you are able to -- if those were revised formulas or if you have price escalators or maybe characterize that some way?

I'll try. I would say that we've been through at least two-thirds of our contracts, and we still have a ways to go as they expire and being renegotiated and so forth. But it is looking at different -- depending on the product, depending on the customer, depending on the region of the world. But the one thing we are focusing more on is quarterly pricing that sort of matches up with our raw material purchasing process, but also it is looking at more direct costs that really can and have impacted our plant costs. So we are focusing more on specific areas of escalators versus just a general consumer price index or situations like that.

Do you have surcharges in there, or do you actually have to go back and revisit and renegotiate the formula?

Surcharges would apply to products that we are trucking, obviously, we've had surcharges in that -- on the logistics side for several years. So surcharges would apply to more so logistics than raw material.

Okay. Would you be able to tell us how much of what you're procuring then ends up being trucked?

I would have to do some work on that. In the US, most all of our raw material is -- not all, but probably 50% is trucked, 50% is either barge or rail car. On the wood side, fortunately, we are moving a lot of raw material by rail, which utilizes our customers' rail lines. It varies around the world. In Australia, as an example, a lot of that is moved by ship versus truck, but it varies. A little bit of everything, actually, when you look at each country -- trucks, barges, ships, rail cars, what have you. I would have to go back and really dig into that.

Okay. And for Leroy, Ivan asked a question about the magnitude of the benefit from the closure at Grenada. I was wondering if you might be able to talk a little bit about the costs that were mentioned and how you see those playing out through the rest of the year?

Going back to the cost that I mentioned, I think we had said that we had already recognized about $1.4 million in the overall cost that we were expecting to incur from that, yes, of the $4 million. Certainly, we'll start to see some costs here in the second quarter. I can't say exactly how they will play out throughout the remainder of the year. Some of that actually will most likely move into next year as well. But, I guess in terms of this year, maybe you'd be looking at half that or something like that, but it is not a big number.

You are talking about half of the $4 million?

Half of the remaining piece, which was about $2.6 million.

Okay. That's really helpful. Thank you.

Gregory Macosko from Lord Abbett.

Just to catch up on a couple things from last quarter. Denmark is all straight; everything is fine there -- I know you had some planned outage. That's back up to speed?

Absolutely. Yes, we had some issues with the naphthalene distillation unit there back in December, but everything is running well.

Okay. And then talk to me about the short-line tax incentives. You mentioned that the short lines are driving the demand or a part of the demand in ties. Where does that stand, and where do -- what's next there?

Well, I think you are referring to the section 45 tax credits, which we -- not we, but the short lines have benefited over the years from time to time. The tax credits did expire in December of 2011. They have not been reinstated yet. I think there are a couple or three legislative bills that have introduced it again. What this does, Greg, it gives the short lines an opportunity to take -- for every dollar, they can save $0.50 on taxation, if you will.

So it is a driver incentive for them to put more money into their infrastructure and do more work and get a tax advantage off of it. However -- and that has been working over the last 4 to 5 years -- however, with the increased loadings of these larger rail cars that the Class I's are really using more and more each day, in order for the short lines to accommodate these heavier loads with their infrastructure, they are spending a lot of money to do that to make sure that they can, number one, receive the heavier load cars, but, secondly, that they don't have a derailment or disrupt their service. For the past, let's say, year and a half, we have seen a lot of activity with or without the tax credits to get this work done.

So the point is, maybe they bought a lot last year --last -- in the fourth quarter to get that last bit of that tax incentive, but you really -- what you are saying is you haven't really felt it relative to the short line part of your business?

Right. I think we are going to continue to see a pretty -- pretty aggressive tie replacement program on the commercial side because of the higher, heavier load cars.

Glad to hear that. With regard to the joint venture in China, you were talking about internal demand for product there. Right now, I guess you are exporting a lot of it now. Talk about -- you are going to produce needle coke out of that operation too, right?

No, Greg, we will not be producing needle coke. That's Nippon Steel Chemical's expertise. Nippon Steel Chemical -- a part of the MOU, is that we would supply them with the coal tar pitch feedstock that they are -- that they are required to have to produce their higher quality needle cokes. So from this, we will build the tar distillation plant; we will sell them the pitch, which will be right next door by pipeline into their tank; they will produce needle coke; and then will ship or sell their needle coke into the electrode markets in China. Needle coke is used, again, with a binder pitch, such as coal tar pitch, to extrude electrodes for the electric arc furnaces. So this is sort of a next-door customer that will take the majority of our products that we will produce at this proposed distillation plant.

You have educated me. Thank you. But with regard to that end demand, do you perceive that that is Chinese demand or is that more export at the beginning and eventually is Chinese? Where does that portion of the output -- of your output go to?

You are referring to the needle coke?

Yes.

I'm not privy to Nippon Steel Chemical's marketing plan, but just imagine, going forward, all of the scrap metal that the Chinese will be generating, and I'm guessing most of it is going to be the Chinese market.

At this point, the output of that plan, at least as far as for now, is kind of targeted at China and those two new plants that are going to go up there?

Right.

Longer term?

Yes

Liam Burke from Janney Capital Markets.

Walt, as you progress on the Latin American tie contract, are you seeing any logistical challenges, and on the positive side, are you seeing any additional export opportunity?

Sure. On the logistics side, fortunately, we are utilizing our customer, Vale, to handle the logistics on getting the ties from the Gulf down to where they want their railroad ties. So they are obviously moving a lot of ships around the world, and so they are fortunately taking over the logistics piece of this sale. But, absolutely, we see more growth opportunities in Latin America, South America, whether it's Brazil or even other countries, I guess for a couple things. One, the eucalyptus species that they've been using has a very, very short life. I've heard numbers something like 5 to 7 years for the life of the ties, and with the hardwood creosote-treated tie, they could quadruple that life perhaps. Also, on the mining side, when you're seeing companies like Ursula Metal or Vale or others going into other countries around the world, there's really no infrastructure. And I think that's also going to provide us an opportunity to look at exporting more ties.

Leroy, first quarter cash flows were negative, but that's not surprising. You've got seasonally high working capital needs. You talked about being at the 4% to 5% range at the end of the year. Is there anything in the first quarter results that are different that would put you at the lower end?

I'd say we had a few instances with some customers on receivables that were of a larger amount that went into the second quarter, one of which was related to them moving to a new ERP software system. And we have since made some collections there. I don't see any -- I don't have any concerns at this point really in terms of bad receivables or inventory or anything like that that will hurt us throughout the year. So I just -- it can be -- this can move around a little bit, depending upon bigger customers holding things back at the end of a particular quarter, and stuff like that could have a tendency to have a decent effect on the cash flow in a given quarter. So it is just that sort of stuff that you just can't -- you can't sometimes estimate.

A follow-up from Ivan Marcuse from KeyBanc Capital Markets.

If you -- the new JV that is still sort of in agreement -- if it was to be on time and building was to start at the end of the year, how long does it typically take to build a plant of that size in China, and then when would those -- when would you start to expect to see the sales and earnings start running through the P&L? Would that be a 2014, 2015 event?

On the construction side, once we break ground, which hopefully would be before the end of this year, we are talking a minimum 15 months. So hopefully, production would begin, let's say, late or early second quarter -- late first quarter, early second quarter 2014. And I then I would hope that by May, June, you would start to see numbers coming out of the plant for us.

And that, assuming everything goes on time?

Right. Right.

Chris Shaw from Monness, Crespi.

The 2015 target EPS, does that include -- or how much does reduction in debt included in that to lower interest cost? Is there any in there?

Is there any -- is there any lower interest cost factored into there? Is that what your question is?

Yes, exactly.

At this point, no.

None compared to last year.

Thank you. There are no further questions at this time. I would now like to turn the conference back to Mr. Turner.

Thank you, Alex. And also thank you, everyone, for participating in today's call, and I appreciate your continued interest in our company. We are very pleased with our first quarter results, and we are optimistic about our business in 2012. Our acquisitions over the last several years have helped us capitalize on global growth and demand of our end products. And we continue to pursue our strategy of expanding our presence in the key end markets in geographic regions where we make and sell our core products. And finally, we remain firmly committed to enhancing our shareholder value by executing our strategy of providing our customers with the highest quality products and services while continuing to focus on our safety, health, and environmental initiatives. Thank you.

This concludes the Koppers first quarter 2012 earnings conference call.