Koppers Holdings Inc (KOP) 2012 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Koppers Holdings second-quarter 2012 earnings conference call held on 9 August, 2012. Throughout today's presentation all participants will be in a listen-only mode. After the conference there will be an opportunity to ask questions. (Operator Instructions). I would now like to hand the conference over to Mr. Michael Snyder. Please go ahead, sir.

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

Before we get started, I would like to remind you all of you that certain comments made during this conference call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the Company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the Company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans, and projected results will be achieved. The Company's actual results could differ materially from such forward-looking statements.

The Company assumes no obligations to update any forward-looking statements made during this call. References may also be made today 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. Walt?

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

In regard to our second quarter results, I am pleased to report that our sales and adjusted EBITDA both increased by 10% over the prior year quarter as selling prices of our major products continue to be more closely reflected on our increased raw material costs.

While business was strong in North America and Asia our results were negatively impacted by European operations, where sales and profitability were substantially lower than the second quarter of last year.

In our global carbon materials and chemicals business revenues grew by $30 million or 12% over the prior year quarter benefitting from higher prices for pitch, carbon black feedstock and the phthalic anhydride which more than offset the lower sales volume from the European operations, lower prices for naphthalene and an $11 million negative impact from foreign translation. The increases in product pricing were driven mainly by pricing adjustments which allowed us to recover the increased raw material costs we experienced in the second half of last year and higher pricing for carbon black feedstock and phthalic anhydride due to higher oil prices.

Global aluminum demand continues to be strong with projections of a 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 to the aluminum industry.

Despite reduced pitch sales in North America, Europe and Australia in the second quarter compared to the second quarter of 2011, our global carbon pitch volumes were 11% higher than the second quarter of last year as pitch volumes from Chinese operations going to the Middle East increased.

While we continue to see uncertainty in the European aluminum market, we expect 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 increase our global market share. We are very optimistic that the transaction contemplated by our previously announced memorandum of understanding with Nippon Steel Chemical to supply carbon pitch for needle coke production will be finalized in the near term and the construction of our tar distillation plant will begin in the fourth quarter of 2012.

We continue to see strong demand for our carbon black feedstock, which is sold to the rubber markets, as volumes increased due mainly to higher volumes in China and increased sales in Australia. Additionally average prices increased in the second quarter compared to the prior year quarter, reflecting higher average oil prices. We do expect to see a drop in pricing for carbon black feedstock in the third quarter as pricing begins to reflect lower oil prices.

Naphthalene volumes were up 7%, but prices declined by 19% compared to the prior year quarter with the price decline coming primarily from China due in part to slower construction activity.

Our phthalic anhydride business continued to provide increased profitability as average selling prices were up by 10% over the prior year quarter, which was primarily driven by higher orthoxylene prices. Additionally phthalic volumes increased by 8% over the prior year quarter. The average price for orthoxylene increased to $0.68 for the second quarter this year compared to $0.64 a pound for the second quarter of 2011 despite oil prices decreasing from an average of $103 a barrel in the second quarter of last year to an average of $93 a barrel in the second quarter this year.

After decreasing to $0.59 a pound in July, orthoxylene prices were back up to $0.65 a pound for August. While we welcome the increase for August, average orthoxylene prices for the third quarter will still be below the average prices we saw for the second quarter, which will have a negative impact on the third-quarter profitability.

For our railroad and utility products and services business, higher sales prices for cross ties more than offset lower sales volumes, resulting in an increase in sales for the segment of $7 million or 5% for the second quarter, compared to last year's second quarter. The increase in prices for cross ties was partly due to favorable sales mix as we sold more volumes of creosote-borate treated ties during the second quarter of 2012 compared to last year's quarter.

As of June 30, we had 6.2 million untreated cross ties on hand at our plant which was 140,000 ties more than we had on hand at the end of March. The increase is due mainly to building inventory for anticipated volume increases in our commercial tie business in the second half of this year.

Tie insertions for 2012 are expected to be in the 20.5 million range, slightly above estimated insertions for 2011. We continued to see a very strong year for our North American railroad business including continued strong demand for commercial cross ties and our rail joint products. Even though our volumes for railroad products were down from the first half of last year, we have more than made up for that with higher pricing which has increased our operating profit and margins by $4.9 million and 1.3% over the first half of last year.

After Leroy gives you the financial review I'll give you a status update on our core end markets as well as a few thoughts for 2012. Leroy?

Thanks, Walt. Looking at the consolidated results, sales for the second quarter increased by 10% or $36.8 million to $411.3 million compared to the prior year quarter as price increases in both Carbon Materials & Chemicals and Railroad & Utility Products and Services drove sales increases in both business units compared to the prior year and offset volume declines in the North American railroad business and the negative effect of foreign currency translation.

Second-quarter adjusted EBITDA was $49.2 million or $4.4 million higher than 2011's second-quarter adjusted EBITDA of $44.8 million, and adjusted EBITDA margins of 12% were consistent with the second quarter of 2011 after restating for discontinued operations for both periods. While we have seen some softening in demand in Europe and Australia, we continue to achieve price increases for the majority of our products in most regions of the world.

In the second quarter a refund of approximately $3.6 million resulting from the findings of a supplier audit of material transport weights almost entirely offset a $3.1 million increase in our allowance for doubtful accounts due to a customer collection issue in Europe combined with $0.8 million of costs related to the pitch tank rupture and resulting spill in Australia that occurred in the first quarter of 2012.

We still expect to see significant margin improvement over 2011 but our expectation at this point is probably to be closer to the low end of the previously communicated range of 100 to 140 basis points increase, compared to our as disclosed full-year 2011 EBITDA margins of 9.6%.

Adjusted net income and adjusted earnings per share for the second quarter of 2012 were $22.1 million and $1.05 per share compared to $20.3 million and $0.98 per share for the second quarter of 2011.

Excluding the special charge of $0.8 million that I'll talk about in a moment our tax expense as a percent of pretax earnings for the quarter was approximately 36% which is higher than our previously disclosed guidance of 33%. As a reminder, in 2011 we undertook a project to restructure our European operations by centralizing our sales, supply chain and operations management in the Netherlands. A byproduct of that restructuring was an expected ongoing reduction in our consolidated European effective tax rate which would, in turn, serve to reduce our corporate consolidated effective tax rate to the previously mentioned 33%.

That project was completed successfully near the end of last year, and we are in fact enjoying the lower effective tax rate in addition to the various business benefits that were expected when the project was initiated. The issue is that since our forecast for 2012 European earnings has declined, the benefit we are receiving from the lower European tax rates is having less of an impact on our corporate consolidated tax rate. That change in the expected geographic mix of earnings for the year had an approximate 300 basis point negative impact on our rate for the quarter which would equate to a negative EPS impact of approximately $0.05 per share on our second-quarter results. For the year, that negative impact is expected to be approximately 150 to 200 basis points and should result in a full year effective tax rate, excluding discrete items and special charges of approximately 34% to 35%.

With regards to the special charge recorded during the period it also related to the European restructuring project and was caused by some additional tax planning work completed during the second quarter, which caused us to change our estimate of the nonrecurring potential tax liabilities associated with that project. The $0.8 million is in addition to the $3.5 million of income tax expense, also related to that project that we recorded and classified as a special charge in the fourth quarter of 2011.

To be clear, despite the increase in the nonrecurring potential tax liability and the lower realized benefit as a result of Europe's poor operating performance to date, we still view the project as a success as we expect it will net us approximately $1.3 million in tax benefits in just this year alone plus provide an annual ongoing benefit of at least that amount with the potential to go even higher as Europe recovers and becomes more profitable.

Looking at Carbon Materials & Chemicals, second-quarter sales increased 12% or $29.6 million to $266.7 million compared to the prior year quarter. The increase consisted of a $10.5 million increase from volumes due mainly to higher sales of carbon pitch, carbon black feedstock and phthalic anhydride, and a $29.6 million increase in pricing that was driven by pitch, carbon black feedstock and phthalic anhydride. Foreign translation for the quarter reduced sales by 4% or $10.4 million.

In the second quarter, we saw positive growth year over year in the three main components of our Carbon Materials & Chemicals business.

Pitch accounted for a 6% or $15 million increase in sales over the prior year quarter as higher sales volumes out of China and overall higher selling prices offset lower sales volumes from North America, Europe, and Australia.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 9% or $21 million due to higher volumes and prices for carbon black feedstock compared to the prior year quarter. Part of the volume increase was due to 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 major component, coal tar chemicals, increased by 1% or $3 million as higher phthalic anhydride volumes and prices more than offset lower prices for naphthalene, compared to the prior year quarter.

Carbon Materials & Chemicals adjusted operating profit for the quarter of $26.2 million represented a slight increase from $25.7 million in the second quarter of 2011, which equates to operating profit margins of 9.8% and 10.8%, respectively. Operating margins declined as higher raw material costs in North America and Europe and higher plant costs in all regions more than offset improved volumes and pricing for pitch, carbon black feedstock, and phthalic anhydride. Geographic mix also accounted for approximately 30 basis points of the 100 basis point margin decline.

Sales of Railroad & Utility Products and Services increased $7.2 million or 5% to $144.6 million in the second quarter compared to the second quarter of 2011. The increase was the result of a 10% or $14.1 million increase in prices driven in part by higher volumes of creosote-borate treated cross ties partially offset by a reduction of 4% or $6.1 million from lower sales volumes for railroad cross ties due in part to lower volume commitments in new contracts.

Adjusted operating profit for the quarter increased to $16.1 million from $12.8 million in the prior year quarter with adjusted operating margins at 11.1% compared to 9.3% in the prior year quarter. Higher prices for our railroad products in the second quarter of 2012 highlight the continued strength of the railroad business and we expect this business to remain strong for the second half of the year.

In June we ceased treating activities at our Grenada, Mississippi wood treatment plant and have since been in the process of preparing it for closure. The majority of the plant's treatment services were for utility poles, and have been transferred to other Koppers facilities where we'll be able to utilize excess capacity. The expected closure costs are $4 million. $1.4 million of that cost was accrued at the end of 2011 while $500,000 of closure costs was incurred in the second quarter of this year.

Since we were able to stop operations a month and a half ahead of our original target date of July 31, most of the remaining closure costs will now be incurred in 2012.

As for the benefits I mentioned on our last call that Grenada it has been at breakeven to a slight loss over the past couple of years and that the real benefit of closing the plant was increasing utilization rates at other facilities. At the time we weren't comfortable enough with our savings estimate to disclose or discuss the magnitudes. Now that we are close to two full months into this change I feel confident enough in saying that we expect to see pretax benefits between $1.5 million to $2 million over the second half of this year as a result of the closure and full year benefits of between $4 million and $5 million beginning in 2013.

In the second quarter, we also recorded an impairment charge of $0.6 million related to our cogeneration plant in Muncy, Pennsylvania, which is part of our railroad business. The impairment was due mainly to difficulties in obtaining treated wood waste for fuel at cost-effective prices relative to the power rates we were able to receive from the local utility for selling electricity to them.

Looking at cash flow and liquidity, cash provided by operations for the first half of 2012 amounted to $3.4 million compared to cash provided by operations of $25.8 million for the first half of 2011 with the difference due mainly to increases in trade receivables and inventories. Receivables increased due mainly to increased export sales from Europe and China, and inventories increased due in part to a change in the mix of crosstie sales with a higher proportion of ties being targeted to commercial customers. While we sell the untreated crossties to most of our Class 1 customers shortly after they are procured, crossties for commercial customers are carried as Koppers inventory until they are air seasoned and treated.

Our debt net of cash on hand at June 30, 2012, increased to $264 million from $248 million at December 31, 2011, primarily as a result of higher working capital. Our net debt to adjusted EBITDA ratio at June 30 was at 1.6 times compared to 1.7 times at December 31. As of June 30, we had $5 million borrowed on our revolver and we had total estimated liquidity in excess of $300 million.

This is the part of my commentary where I usually remind everyone of the seasonality of our business. While that of course is still true for the second half of this year, we expect there to be less separation between the third and fourth quarters than what we have seen in the past. As we see things currently, the third quarter is expected to come in comfortably between 2010 and 2011's third quarter as reported adjusted EPS of $0.75 and $1.08 while the fourth quarter is expected to finish significantly higher than 2010 and 2011's fourth quarter as reported adjusted EPS of $0.38 and $0.37. Walt will discuss some of the reasons behind this in his closing summary.

At this time, I will turn it back to Walt.

All right. Thanks, Leroy. The primary end market for the Carbon Materials & Chemicals segment is aluminum. Although pricing for aluminum has fallen during the first half of 2012 and resulted in capacity reductions in certain regions, projections continue to indicate that global aluminum production will increase by 5% this year with most of the increase expected to be in China and India. Regarding the reduction of our pitch volumes in North America, Europe, and Australia for the first half of the year, we still expect our global pitch sales volumes for the year to be similar to where they were in 2011.

According to recent projections the Middle East expects primary aluminum production to increase by 1.3 million tons by the end of 2014. 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 in December of this year, and the expansion of the EMAL smelter in the United Emirates, which is expected to increase its capacity from 750,000 tons to 1.4 million tons starting in the fourth quarter of 2013.

As announced previously, we have entered into a memorandum of understanding with Nippon Steel Chemical, JECT, Pizhou City Government, and the Yizhou Group to build a 300,000 ton tar plant in China in the Jiangsu Province area. This includes also two downstream plants producing needle coke and carbon black. We continue to work through the final details of the joint venture agreements and we anticipate that the tar ditillation plant will break ground before the end of this year. This project is estimated to generate $150 million to $200 million of annualized sales beginning in the second quarter of 2014.

Regarding the outlook for our coal tar raw material we have seen reduced availability of coal tar in North America, Europe, and Australia due to the idling and lowering production rates of certain coke batteries due to the lower steel production as well as some alternative technologies that reduce coking requirements. As mentioned in our last call, this reduced availability coupled with the increased demand for carbon pitch has resulted in higher tar costs in these regions in 2012 that will ultimately be passed through to our customers.

On a positive note in regard to coal tar, US Steel, one of our largest tar suppliers, is expected to start up their new coke battery in Clairton, Pennsylvania, by the end of this year. The coke production from this new battery is expected to generate about 50,000 tons of coal tar on an annualized basis and we expect to receive a majority of this tar for the use in our adjacent Clairton tar distillation plant.

To summarize where we are for the year, our second-quarter results included several negatives including the downturn of our European business due to the overall weak European economy, lower tar availability with increased raw material costs, lower operating rates in Europe and Australia, and a higher-than-expected effective tax rate. However, our Company's geographic and product diversity continues to offset several of these second-quarter negatives that we have experienced. We continue to see strong end market demand for our global railroad and utility products, our carbon black feedstocks for the rubber industry, and continued growth in the Middle East with carbon pitch demand increasing.

As I look out over the remainder of this year, we will continue to have a few of these headwinds with our raw material availability and costs and the weak European economy. And as Leroy mentioned earlier, our effective tax rate is expected to remain higher than our previously communicated guidance.

Despite these continued headwinds we are anticipating, we continue to believe that we will finish the year with an adjusted EPS level of 20% higher than last year's adjusted EPS of $2.86. Stronger pricing in both business segments, increased volumes of carbon pitch from our China operations, continued strong railroad product demand, the benefits of closing the Grenada, Mississippi wood treating plant and the progress we are achieving with our margin improvement initiatives will all continue to have a positive impact on our financial results.

Our third and fourth quarters will look a little different than our past historical results. We do expect our third-quarter results to be lower than last year's third quarter as we carry over some of the second-quarter issues, but we do expect our fourth quarter to be stronger than last year.

While this year's results have been progressing a little differently than I thought back in the first quarter, I am still confident that we will achieve an earnings level that is consistent with the guidance we have been communicating to you throughout the year.

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

(Operator Instructions). Ian Zaffino, Oppenheimer & Co.

The comments surrounding the higher coal tar costs and the lack of availability. I know your contracts have provisions where you can get the pricing through. Can you just walk us through the timing of that and when you would see that happening? Thanks.

Good morning. As we have been saying the last several quarters actually, coal tar availability from our normalized tar suppliers has been declining primarily in Europe. Obviously here a little bit in North America, but primarily Europe. And we have been reaching out to Eastern Europe, Russia and other countries, for additional tar to meet the distillation requirements we have with our customers. And we do have a very good supply-chain system set up through our port and like the other we bring that tar in, it is at higher cost and regarding your question it typically takes us -- has in the past anyway taken us about six months or so to pass through these additional raw material costs. You also I think remember too that we are pushing more and more towards quarterly pricing especially into Europe, where we have had more volatility there on costs. And so far we are trying to push even further to go to quarterly pricing versus semiannual pricing on the raw material increases.

What is the timing? I guess you sort of answered this, but you talk about the six months to recoup it and I guess you are making this effort to now switch to some quarterly context. I mean is there any way you could almost go to monthly contracts and I know that you mentioned Europe accelerating that. But can you accelerate in the US as well and other markets? And really what is the pushback you get when you try to do that?

The pushback I would say is more on a competitive basis than anything else. We would love to go to the monthly pricing if that would be possible. But I think that would be a little more difficult to do.

Somewhere there has got to be some stabilization, some normalization, but I think that is not going to happen until we see the overall global steel demand getting back to some normalized level as well. So, during this period of time, I think we are basically working with customers trying to do what we can to accelerate these increases and I think it is -- I don't think it's going to get to a monthly basis. I think if we can get to a quarterly basis that would be much better than we have been over the last few years.

Okay, great. Thank you very much.

Laurence Alexander, Jefferies & Company.

Hello?

Mr. Alexander, your line is now open.

Good morning. Just a couple of questions. First on the 2012 outlook of roughly 20% above 2011. You know you have a lot of moving parts. Which two or three do you see as being the most volatile or having the least visibility going into the last five months of the year?

Good morning. For sure it is the uncertainties with the European -- the overall European economy and how we are playing a part in the end market that we are supplying there. That's the most volatile area of looking at 2012. The others, I think we've given, no catastrophes or surprises, we feel fairly confident about the rest of the world especially Asia and the Middle East. Pitch demand continues to increase quarter over quarter. We continue to do a good job of actually growing our market share in the Middle East out of China. There is a strong demand for carbon black feedstocks and I think that is going to continue in that part of the world.

But I would have to say Europe is the number one concern. Second, I would have to think a little bit about what the second one is, but typically I think looking out the next five months, we have got a fairly good handle on the third and fourth quarters.

And I guess with -- is concern really about carbon pitch demand in Europe or is it really more about the coal tar products like the phthalic anhydride?

No. Europe would be more so on the aluminum market as well as the carbon black demand in Europe. As you may have seen there've been three smelters that closed in Europe the last nine months. So, we are in the process of shifting our pitch production to other places in the world such as South America, South Africa. The carbon black, I think, is having an impact -- negative impact because of the automotive industry primarily in Italy, Spain and a little bit in Germany.

Phthalic anhydride, as I mentioned we saw a bump up in OX pricing of $0.65 in August. The volumes are still looking pretty good looking out a few months on the demand for phthalic, but obviously orthoxylene is somewhat driven for the most part by oil pricing.

And then lastly as you think -- as you look out toward 2013, 2014, is the change in availability for the coal tar -- for the feedstock going to be enough to materially change margins year over year? Or is it just sort of a helpful swing factor?

Looking out to 2013, 2014, I'm sorry -- you are talking about the coal tar availability versus cost versus demand? Is that --?

Well, thinking with the new supply that you are arranging on the coal tar side, is that going to be enough to make a difference or is it within the normal volatility where we just have to see how the economy plays out?

Well, I think you are going to see over 2013, 2014, increased coal tar supplies for us in China. We talked about this potential project in China which is going to be in Jiangsu Province. There's a nice volume of coal tar available there. In fact, our potential joint venture for that project will also be a supplier of coal tar for that project as well.

We are doing okay at the moment on availability because we are reaching out further and further. It is just a matter of increases in the logistics cost. But I think to your point will we have enough raw material as we go forward the next two or three years the answer is yes.

Kevin Hocevar, Northcoast Research.

Good morning. You touched on the Ma'aden smelter a little earlier, and I believe in one of the earlier calls you said that product would start to get shipped in the July or August timeframe. So I was just wondering if you could update us on if you had won any of this business and if so has that started to get shipped here in the third quarter?

I think as we mentioned in the past, Kevin, we are indirectly -- indirectly at the moment -- supplying materials because when I say it that way I don't think that the carbon anode plant for the Ma'aden smelter is completely finished yet. It is in the process of being finished and I believe the Ma'aden project will be buying anodes as well as buying their coal tar pitch requirements in the fourth quarter from their local aluminum smelter competitors, if you will.

So, you won't see that really truly happening until the first quarter of 2013 as far as ongoing direct shipment of pitch into the Ma'aden smelter.

Okay and with the railroad margin -- saw a nice expansion here in the second quarter compared to what we saw in the first quarter, a nice helping margin expansion. So I'm sorry, I know, Leroy, you were talking about this a little earlier. I might have missed it. But could you put it in perspective how much of this was from borate, how much was from other? I know you have been a long more aggressive on your pricing and are we, should we expect to see this type of margin expansion for railroad in the back half of the year?

Yes. Sure. The railroad segment I would say probably benefited the most from improved pricing. The increased volumes of the creosote-borate treated cross ties certainly had an impact as did some of the other initiatives that we've been working on, including the export sales that we had talked about earlier in the year as well. But a significant margin improvement would have come out of pricing for them.

Do we expect to see again significant margin expansion from the railroad business in the second half of the year? I would say yes. I mean you have the Grenada closure coming, the benefits from the Grenada closure coming in to the second half and again just continuous improvement from some of the other stuff they have going on there. We really expect the full-year railroad result to be much, much improved over 2011. So, you will continue to see that trend as you move out through the rest of the year.

And also we don't talk about this too much, but we also have a very strong utility pole business in Australia that continues to have a nice profit margin as well which is smaller scale but, obviously, helps to improve the margins on this railroad utility group.

Okay and, finally, with carbon pitch, with the outlook that it will be flat for the year, in the first quarter I think it was down 6% to 8% somewhere in that range and maybe up 11% here in the second quarter. So would that imply third and fourth quarter may be flattish, maybe slightly down?

Yes. As I mentioned our pitch volumes will be at the same level, perhaps a tad higher, but basically the same level as we were in 2011. And that obviously includes some downturn in Australia and Europe, but more than enough increases out of China for the increased market share that we are getting in the Middle East.

Okay. Thank you very much.

Ivan Marcuse, KeyBanc Capital Markets.

Hi, guys. Thanks for taking my questions. Europe has gotten, I guess from the first quarter is now a little bit more than you were looking for and the tax rate is now higher and the negative that you -- the other negatives you sort of pointed out. But what are the offsets which are really a lot stronger than you expected just from looking from the first quarter to second quarter that is offsetting that? And is it in one -- is there a specific product group that is a lot stronger than you anticipated three months ago?

I think, as Leroy touched on, we have some very serious margin improvement initiatives going forward. Those are doing well. The carbon black feedstock product continues to be very strong. We are seeing quarter over quarter 7% increase on volume on the -- I'm sorry 40 -- actually a 45% increase on volume which includes the sales that we typically have internally out of Australia. But more importantly we see a 27% improvement on pricing.

So it is carbon black feedstock demand. It's the margin initiatives as well as this very strong railroad and utility products in North America including the exports that are going to South America as well as the utility pole business in Australia.

And also, when you compare the China results we are doing much much better on margins this year versus last year.

So as you gaze at that profitability improvement that you've been putting in place are you ahead of schedule? Or just going a lot more smoothly than you would have anticipated?

We need more than one or two quarters to say yes, but it is definitely headed in the right direction.

I would say on the railroad side of the business it is definitely ahead of schedule and you can see that in their results. In CM&C, there -- some of the improvements that they have already made unfortunately were masked by some of the negatives that occurred in the second quarter, but that stuff is going to happen. It will normalize out over time.

One thing I was a little bit surprised about, you hear about this slowing down in construction in China. And I know that naphthalene will go into that and prices were falling. So I am assuming demand has been down. But it seemed like volumes were up. Is that how to think about it for naphthalene in those regions and why would that be?

Volumes are up by 7% quarter over quarter. But, pricing is down about 19%. But it has increased production, I think, out of Australia a little bit just selling a little more tar there with Blue Scope increasing its tar supply to us in Australia. The other increases, I am trying to remember on the naphthalene volume. Probably to do with Europe as well, because we had some issues around the naphthalene production back in January, February.

Can you touch on the export --. I guess move over to railroad. You touched on the export business in South America. How is that going? Is that above expectations or does that continue to move along or how would you -- could you just give an update to how that opportunity is moving along?

It was, I think, on a $10 million order that we signed with Vale in South America and as far as it is going, it is going well in that we are meeting the shipping dates that we had established back in December, January. And the volume is going well and so, overall, yes. It's a good export business for us. And we are hoping that that is going to continue to lead to other opportunities down there too.

And just so I understand this, the agreement with Nippon Chemical is moving along and you would expect something positive to happen in the next month, couple of months. And then you would start building the plant in the fourth quarter. So what do you see CAPEX rising to in the fourth quarter and then what sort of CAPEX expectation for this project?

Well, assuming we break ground in the fourth quarter you are not going to see a lot of CAPEX spending, very minimal this year, would mostly all be in the year 2013. And as we talked before this is going to be using equity upfront for a portion of it but through the financing we would hope to obtain loans locally to assist in that project.

From an overall cash standpoint I would say it is probably somewhere between $50 million and $60 million for construction of the facility. And you will see, as Walt said, I think you will see probably the majority of that cost coming in 2013.

Thank you very much.

Steve Schwartz, First Analysis.

Good morning. Can you break out? I don't know if this is possible or not, but I would imagine in passing through so much pricing it is dollar for dollar on your costs and that hurts your margin, right?

It would over time, sure.

So what was the impact of that versus the lower plant utilization in terms of gross margin?

I think that it would take some time to calculate that. But obviously when you are passing on raw material increases you do your best to maintain the margins that you would have established with a specific contract or purchase order or what have you. And we do what we can for sure to protect that margin that we established day one of the contract. And so it is difficult at times, but we do our darnedest to keep up with the margin that was established for a specific customer, what have you.

Okay. Looking at the railroad business in the press release you just note lower volumes for railroad cross ties. Leroy, I think in your commentary about working capital or liquidity you noted that commercial sales were up. Does that mean the lower volumes were to the Class 1s?

I think in regards to the particular things that you've noted in my commentary I was talking about how inventories have gone up increasing our working capital as a result of anticipated stronger commercial demand. Reminding you that for the Class I's, we are procuring those ties and essentially selling it to them as we procure it and then putting it on our site for air seasoning. Whereas with commercial we are buying those ties, putting them up for air seasoning and they are our inventory at that point in time. And that is why our working capital went up. So that was the context of the comment I made in the cash flow section.

And, Steve, you have to look back what happened last year second quarter or whatever you are looking at or last year's first half versus this year's first half, but again we purposely lost maybe a 1%, 2% market share in the Class I's, but I think we have made up a lot of that through our stronger commercial sales and through the first half we were probably -- our volume on cross ties was probably off by 8% or so. But I think when you see us in the year we will be pretty much in balance with what we are looking at on the volume versus last year's total year volume.

Okay so the class -- so it is the Class I volumes that are down. That is what you are referring to in the release.

A little bit. Yes, a little bit.

And then the second half -- okay and then, the second half of this year commercials offset that. And what do you think will drive the commercial volumes then without the tax credit this year?

Well, again, it's -- I am hearing this almost every week where all these short lines have much older systems. They weren't really maintaining higher weights the Class I's are now moving when you go from a gross weight of a car from 265,000 pounds to 286,000 pounds and you take -- I guess a good example would be in Wisconsin where they are moving thousands of tons of sand out of Wisconsin to all over the place from Texas to Pennsylvania, what have you. Some of these short lines just aren't capable of hauling these heavy loads consistently and there is a lot of volume that goes over these rails.

So it's situations like that that they have to take -- continue to upgrade their lines or they are going to have derailments or what have you. And so the real driver is for them to be up with the Class I's on this minimum -- or maximum weight that they are now achieving.

Okay. And then if I could ask one last one and I think this would be a quick answer for you guys, but with respect to the Nippon deal, Walt, you did say you were still in negotiations. But you mentioned the construction of a needle coke and a carbon black plant. I would imagine this is going to be like the TKK deal where it is your partner who will deal with that side of the business. Or are you, in fact, going to get into some of these downstream products and the carbon black again?

No. Just to make sure everyone understands, we -- are working with Nippon Steel Chemical and we would sign a very long-term supply agreement to supply Nippon Steel Chemical with a raw material for them to produce needle coke and they, in turn, would also build a small carbon black plant in conjunction with this needle coke operation.

Koppers, in turn, would build a tar distillation plant with a minority merchant coke company in China where they would bring forth a certain volume of coal tar. It would be a minority partner in this project. So Koppers/joint venture partner would be responsible for construction and operating the 300,000 ton tar distillation plant supplying on a very long-term basis the raw material for the needle coke operation as well as this small carbon black plant that would be built beside the needle coke plant.

Good. Thanks for clarifying that.

Liam Burke, Janney Capital Markets.

Good morning. Leroy, you've highlighted on the cash flow the step up in accounts receivable and you explained that but how do you look at DSOs for the end of the year? Do you expect them getting back to more normal levels?

That is a tough thing to answer. I don't think that at this point we anticipate that our DSO will change much between where we're at now and the end of the year. A lot of our increase in receivables is due just to the fact of our higher sales. But I don't see a whole lot of change in the days' sales outstanding as we move forward here.

And, Walt, you have mentioned a lot of initiative here in your plant consolidation project in China. Where -- are acquisitions still important and how do you see the market right now?

Oh, sure. We are continuing to look at acquisitions, small, medium, large, in both business segments. This opportunity that we have to grow the Carbon Materials & Chemicals business in China is a unique opportunity for us. We continue to look at consolidation opportunities especially Europe and other places around the world.

On the Railroad & Utility Products business, we are continuing to look at various opportunities that we have out there and there are opportunities. Not just in North America, but also areas like Australia. And so, I can tell you we are going full speed ahead on looking at areas that we can grow through the M&A activity.

Great. Thank you.

Chris Shaw, Monness, Crespi, Hardt.

Good morning. I just heard you in your response to the last question mention consolidation in Europe. Has your -- I mean from that it sounds like your view hasn't changed, but with smelter shutdowns there, just general weakness in that economy, have your thoughts on trying to consolidate that market shifted at all or --?

Even more so today with some of the smelters. Actually two of these smelters are closed permanently. So, even more so with the distillation capacity that still exists versus the carbon pitch demand, what have you that is even more so important for consolidation and we are obviously ready to get involved in any opportunity that would help that consolidation.

And carbon black, you sell carbon black feed stocks in Europe and in Australia/Asia, right?

Right.

What's the sort of split between those two?

I'm sorry, what is the difference for what?

Is it -- do you sell more in Asia than versus Europe? I am just trying to figure out what the slippage in the carbon black business is.

I would think more in Asia. Only because of the tar distillation volumes that we are distilling in both the two plants in China and now with the Australian tar distillation plant selling to the outside world versus internal. So, you most definitely -- Asia would be the major market for us and I don't recall what the projections are for tire manufacturing to increase, but it is two digit growth numbers for the tire rubber manufacturing.

That business is strong in Asia but not so much in Europe, right?

Yes. At the moment there is a little bit of a lull in Europe and I think that it is just the slow down of the automotive industry in, specifically, Italy and Spain and maybe a little bit in Germany. I've not kept up with that.

And then is there -- were you already railties suppliers to Tennessee Wyoming and Rail America? I and just trying to figure out is there anything that changes now with those two combining?

No, we actually do a good volume of business with not just the one company, but with Rail America and Tennessee Wyoming. I think it is put together to see what is going to happen with their consolidation or how they will combine these two entities. But they are both very good customers of Koppers.

There seem to be no further questions at this present time. Handing the line back to Walter Turner for any closing remarks.

Sure. Thanks Mark. We do thank you all for your participation in today's call and appreciate your continued interest in our Company. Our acquisitions over the last several years have helped us capitalize on 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 geographic regions where we do make and sell our core products. We believe the diversity of our products, the diversity of our end markets and the diversity of our geographic locations has historically provided us with a significant amount of stability for our business in both strong and weak economic climates. And this diversity will continue to benefit us going forward into the future.

In closing, 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 initiative. Thank you all again very much for participating. Thank you, Mark.

Thank you. This concludes the conference call for Koppers Holdings. Thank you for your participation and you may now disconnect.