Koppers Holdings Inc (KOP) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Koppers Holdings Inc. third-quarter 2012 earnings conference call on 8 November 2012. (Operator Instructions). I will now hand the conference over to Michael Snyder. Please go ahead, sir.

Thanks, Kev, and good morning, everyone. Welcome to our third-quarter earnings conference call. My name is Mike Snyder and I'm the Director of Investor Relations for Koppers.

At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website or you can call Rose Hilinski at 412-227-2444, and we can either fax or e-mail you a copy.

Before we get started, I'd like to remind all of you that certain comments made during this conference call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the cautionary statements included in our press release and 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 does not regard the inclusion of such information or the 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 obligation to update any forward-looking statements made during this call.

References may also be made today to certain non-GAAP financial benefits. 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'm joined on this morning's call by Walt Turner, President and CEO of Koppers, and Leroy Ball, our Chief Financial Officer, who are calling in from Denmark today. At this time, I'd like to turn the call over to Walt Turner. Walt?

Thank you, Mike, and good morning and welcome, everyone, to our 2012 third-quarter conference call, and I trust that you can hear us well. As Mike said, Leroy and I are sitting here in Denmark this evening. So I hope things go well with the call.

I'd like to start off by talking about our lower-than-expected performance for the quarter. The performance from our Carbon Materials and Chemicals business overshadowed what was one of our best quarters for our Railroad and Utility Products business. There were several reasons for the Carbon Materials and Chemicals lower-than-expected business performance that I will explain in more detail shortly.

I will give you a fairly detailed account of how we ended up with the $0.82 of adjusted EPS for the quarter. After that, I will give you several reasons why I believe that in the fourth quarter we will record the highest adjusted earnings per share that we have ever recorded in any fourth quarter of Koppers' history as a public company. The end result should translate into a 10% to 15% full-year increase in adjusted EPS over 2011, which is below our previously communicated expectations due to some of the items that affected our third quarter, which I will talk about in a moment.

In addition to reviewing the third-quarter results and our fourth-quarter expectations, I also plan to update you on some of the growth projects, including the recently announced agreement to acquire an Australian utility pole business, the progress we are making on our margin-improvement initiatives, and some early thoughts on what we are seeing for Koppers as we get close to the beginning of a new year.

Now beginning with the third quarter, we entered the quarter knowing that our expectations were going to be lower when compared to 2011's third quarter because of two specific issues that we were dealing with at the time.

The first was a spike in our coal tar costs in North America due to a short-term shortage of supply that caused us to import coal tar at a significantly higher cost than our averages for the year. The second was the expected decline of profitability of our European businesses year over year, due to several factors, including the struggling European economy, plant operating issues at our Uithoorn, Netherlands, plant that caused us to be down for almost a month, and a euro that was approximately 10% weaker than the third quarter of 2011.

The combination of those two events was expected to have an approximate negative effect of $0.18 on EPS for the quarter, compared to 2011. After allowing for the expectation of improved results for the railroad business, partially offset by expected lower results from Carbon Materials and Chemicals, as a result of lower pitch volumes and lower naphthalene pricing compared to last year's third quarter, that would have put us at an adjusted EPS of about $0.90 to $0.95 for the quarter, which is where I thought we would be when I communicated the range of $0.75 to $1.07 on our last quarterly call.

The good news is that the short-term supply problem has been corrected and our Uithoorn plant is up and running with no lingering effects. So those two issues won't carry into the fourth quarter.

Unfortunately, there were several other items that we knew were risks as we entered the quarter that did end up being realized, and ultimately brought the $0.90 to $0.95 range down to the $0.82 adjusted EPS that was reported for the quarter.

The first was that our European operating income ended up coming in at $900,000 worse than we had projected. While the market situation is still poor in Europe, there are some specific short-term opportunities that we believe we can act on that will make the fourth quarter better than the third, but we will still see ongoing volatility in Europe and it will remain a risk for us in the foreseeable future.

Second, we incurred approximately $1.2 million of additional costs, net of insurance recoveries, related to the February pitch leak at one of our Australian terminals. It was our thought, coming into the quarter, that our insurance recoveries would have offset any costs incurred during the quarter, but unfortunately, the claims process hasn't progressed at the pace that we thought it would.

We do expect that in the fourth quarter we will record an insurance recovery in excess of costs incurred, and that this issue will have little to no remaining impact on our income as we enter 2013.

And third, a reduction in interest rates and increased medical costs caused us to record additional expense of $600,000 for various benefit plans. As long as rates don't go much lower by the end of the year, then we would not expect to incur any significant additional expense in the fourth quarter.

When you total the impact of the preceding three items, it comes to a reduction in income of about $2.7 million before tax. The impact of those items on EPS was approximately $0.08 per share, which explains the difference between where I expected us to be and our reported $0.82 per share.

Leroy will now provide some additional detail on the quarter. After his review, I will update you on some details of our growth projects and margin improvement issues before I tell you why I believe that the fourth quarter will be Koppers' best ever and how things are looking for next year as we take a look at our first draft of our 2013 program. Leroy?

Thanks, Walt.

On a consolidated basis, sales for the third quarter increased by 2%, or $6.7 million, to $387.9 million compared to the prior-year quarter, as higher Railroad and Utility Products sales, driven by price increases, more than offset lower sales for Carbon Materials and Chemicals, driven by lower sales volumes for pitch and creosote, lower naphthalene prices, and a negative effect from foreign currency translation, which more than offset higher selling prices for pitch and carbon black feedstock.

Third-quarter adjusted EBITDA was $40 million, or $6.9 million lower than 2011 third-quarter adjusted EBITDA of $46.9 million, and adjusted EBITDA margins of 10.3% for the third quarter of 2012 trailed adjusted EBITDA margins of 12.3% for the third quarter of 2011, after restating for discontinued operations for both periods. The lower margins were driven by $1.9 million of charges from the plant outage in the Netherlands; $1.2 million of costs, net of insurance recoveries for the pitch tank leak in Australia; higher raw material costs, driven in part by tar imported into North America; lower sales volumes for pitch and creosote; and lower selling prices for naphthalene.

Adjusted net income and adjusted earnings per share for the third quarter of 2012 were $17.2 million and $0.82 per share, compared to $22.2 million and $1.07 per share for the third quarter of 2011. The impact on adjusted earnings per share for the third quarter of 2012 from the pitch tank leak and plant outage amounted to about $0.09 a share.

Our tax expense as a percent of pretax earnings for the quarter was approximately 34%, compared to 33% in the prior-year quarter, with the increase due mainly to the mix impact of lower earnings in Europe. As mentioned in our last call, we continue to benefit from our European consolidation project, but due to lower earnings from Europe for the year, we expect the effective rate for the year to be in the 34% to 35% range, consistent with our most recent expectations.

Looking at Carbon Materials and Chemicals, revenues fell by $4.5 million, or 2%, over the prior-year quarter as lower sales volumes for pitch and creosote and lower selling prices for naphthalene, combined with approximately $9 million of negative foreign translation impact, more than offset higher selling prices for pitch and carbon black feedstock. The volume reductions were driven mainly by lower demand for pitch in Australia and North America and lower third-party creosote sales.

Pitch products accounted for a 4%, or $8.7 million, decrease in sales over the prior-year quarter as lower sales volumes for pitch were partially offset by higher selling prices for pitch.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 2%, or $3.9 million, as carbon black feedstock volumes increased and selling prices increased 11% over the prior-year quarter, reflecting higher average oil prices. The volume increase for carbon black feedstock was due mainly to our Australian operation 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.

Sales of coal tar chemicals decreased by 1% as higher phthalic anhydride volumes partially offset lower volumes and prices for naphthalene compared to the prior-year quarter. Naphthalene sales volumes were down 10% and selling prices declined 15% compared to the prior-year quarter with the sales volume decline driven by the outage at our plant in the Netherlands, and the sales price decline was primarily in China, due to reduced construction activity.

Our phthalic anhydride business continues to provide increased profitability as phthalic volumes increased by 8% over the prior-year quarter, while prices were up 1%.

The average price for orthoxylene was at $0.64 for the third quarter of 2012, the same as the third quarter of 2011, as oil prices increased slightly to $92 a barrel in the third quarter of 2012 from an average of $90 a barrel in the third quarter of 2011. With orthoxylene prices at $0.67 a pound for October, our expectations are that orthoxylene will average $0.62 to $0.65 a pound for the fourth quarter.

Carbon Materials and Chemicals' operating profit for the quarter of $18.4 million represented a decrease of $12.3 million from $30.7 million in the third quarter of 2011, which equates to operating profit margins of 7.6% and 12.5%, respectively.

Operating margins declined as $3.1 million of charges, net of insurance recoveries from the pitch tank leak in Australia and the plant outage in the Netherlands, combined with higher raw material costs in North America and Europe, lower sales volumes for pitch and third-party creosote, and lower selling prices for naphthalene, more than offset improved pricing for pitch and carbon black feedstock and higher sales volumes for phthalic anhydride.

Turning to Railroad and Utility Products, higher sales prices for crossties more than offset lower sales volumes, resulting in an increase in sales for this segment of $11.2 million, or 8%, for the third quarter, compared to last year's third quarter.

The increase in prices for crossties was due to higher contract pricing, combined with a favorable sales mix. We sold higher sales volumes of value-added products during the third quarter of 2012, compared to 2011.

As of September 30, we had 6 million untreated crossties on hand at our plants, which was 120,000 less than we had on hand at the end of December, even though on a year-to-date basis we have purchased 350,000 more ties than last year. However, the ties designated for commercial customers have increased by almost 300,000 ties since year-end. These ties have been procured for our higher-margin commercial tie and export business.

We continue to see a very strong year for our North American railroad business, including continued strong demand for our commercial crossties and our rail joint products. Even though our volumes for railroad products are down from the first nine months of last year, we have more than made up for that with higher pricing, which has increased our adjusted operating profit and margins by $10 million and 180 basis points over the first nine months of last year.

Adjusted operating profit for the quarter increased to $14.7 million from $9.9 million in the prior-year quarter, with adjusted operating margins at 10%, compared to 7.3% in the prior-year quarter. Higher prices for our railroad products in the third quarter of 2012 highlight the continued strength of the railroad business, and we expect this business to remain strong into next 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 was for utility poles and had been transferred to other Koppers facilities, where we will be able to utilize excess capacity. The expected closure costs are $4 million. $1.4 million of that cost is accrued at the end of 2011, $500,000 of closure costs were incurred in the second quarter, and $1.9 million of costs were incurred in the third quarter.

As mentioned on our last call, we expect to see pretax benefits of $1.5 million to $2 million over the second half of this year as a result of the closure and full-year benefits of $4 million to $5 million beginning in 2013.

Cash provided by operations for the first nine months of 2012 amounted to $54.5 million, compared to cash provided by operations of $44.5 million for the first nine months of 2011, with the difference due mainly to smaller increases in working capital in the current year. One difference in working capital this year is that inventories have increased more than in the prior year, due in part to a change in the mix of crosstie sales, with a higher proportion of ties being targeted for commercial customers, as mentioned earlier.

Our debt, net of cash on hand, at September 30, 2012, decreased to $229 million from $248 million at December 31, 2011, as cash increased during the quarter by $18.6 million to a balance of $68.9 million at September 30, 2012. As of September 30, we had $1.4 million borrowed on our revolver and we had total estimated liquidity well in excess of $300 million.

During the third quarter, we used approximately $6.4 million in cash to repurchase 200,000 shares at an average share price of a little over $32 per share. The 200,000 shares approximately offset the dilution from shares of awarded and/or issued earlier this year under the Company's equity incentive program.

We will continue to consider share repurchases as a component of our overall capital deployment strategy, taking into account the relative attractiveness of our alternative deployment options and the market's perception of our share value compared to the intrinsic value of our stock. During the fourth quarter, we will also plan to deploy approximately $25 million of cash related to the agreement to purchase the Australian pole business and the required equity contribution to our new Chinese joint venture.

While we have historically seen seasonal trends in our business that makes our first and fourth quarters significantly weaker than our second and third quarters, we see less of that seasonal separation as we enter this year's fourth quarter. Walt will give some further details in his upcoming commentary, but in summary, our expectations are that we should reach a fourth-quarter EPS well above our all-time fourth-quarter public company high of $0.44 that was achieved in 2007.

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

Thanks, Leroy.

Moving now on to the subject of growth initiatives, you may have seen our press release earlier this week announcing an agreement to acquire a utility pole business in Western Australia, which will complement our existing utility pole business there. This business accounts for 3% of our consolidated sales, but it has generated about 7% of our consolidated operating income through September of this year and generates the highest EBITDA margins in the Company.

This agreement to enter this acquisition is expected to generate over $10 million of annual revenue.

We also recently attended a signing ceremony in China related to our new 300,000-ton tar distillation plant in Jiangsu Province, which represented another milestone to advance this project. The plant is expected to be fully operational by the middle of 2014 and is expected to generate $150 million to $200 million of sales on an annualized basis. The joint venture will be a net contributor of earnings in 2014 and will generate above-average segment margins beginning in 2015.

In addition to the positive sales and profit, this project represents what we hope is just a first step in an effort to penetrate a new end market that has the potential to achieve significant growth rates as China continues to generate large quantities of scrap steel as a result of the economy's growth over this last decade. Having another end market for our pitch will further enhance the diversity in our business that has served us well over the past 24 years.

In one of our largest end markets, the global aluminum industry, recent projections indicate a 4% increase in consumption for 2012 and an additional increase of 7% in consumption for 2013, which are positive indications for our global carbon pitch business moving forward. We continue to focus on maintaining our strong market shares in North America, Europe, and Australia, while expanding our presence in the developing markets of the Middle East, China, India, and Brazil. And as a result, you should expect to see those emerging markets continue to grow each year as a proportion of our overall business.

Now I'd like to talk about where we stand on the progress towards meeting our margin improvement goal of achieving a sustainable 12% EBITDA margin by the year-end 2015. There's no question that we have been very successful thus far on the Railroad and Utility Products side of the business in generating margin expansion. Through the first nine months of 2012, this business is showing adjusted operating margins that are already 180 basis points higher than the similar period in 2011.

Pricing has, by far, played the biggest role in capturing that improvement, but there have been other significant contributors as well, such as the closure of the Grenada, Mississippi, facility; the development of the export market for railroad products; and the further development of new higher-value products, such as the borate-treated crossties and new joint rail bar products.

How high can we possibly go in the Railroad and Utility Products business is hard to tell at this point because some of the margin improvement is being generated as a result of the overall strength of the North American railroad industry. So there is a portion of the current increased margin run rate that could be vulnerable to a decline in a softer market. However, most of the near-term results have come on the commercial side of the business, and we are early in the process of evaluating the possibilities that we have on the cost side to help insulate us during a potential market downturn.

The Carbon Materials and Chemicals progress has been more difficult to gauge at a high level because of all the unusual items that have affected their margins this year. Between the Australian pitch tank leak; the larger reserve for the European bad debts; and the plant outage at the Uithoorn, Netherlands, plant, the Carbon Chemicals and Materials business has incurred an additional $8.8 million of expense through the first nine months of this year. Their adjusted operating margins through September 2012 are 8.6%, compared to 9.9% through September 2011.

I need to remind everyone, however, that the 9.9% margin through September 2011 was based upon operating income that is restated to show the Australian carbon black business as a discontinued operation. If you compare the adjusted operating margins with the $8.8 million of unusual costs added back to the as-reported adjusted operating margins through September 2011 the picture looks quite different. The margins through September 2012 and 2011, in that case, are 9.8% and 9.0%, respectively, an 80 basis-point increase.

So that indicates that we are making progress, but it is, unfortunately, being masked by several large, nonrecurring items. The specific areas that account for the pro forma margin increase are improved pricing, the shutdown of the Australian carbon black facility, and the increased use of lower-cost substitute feedstocks in our chemical production process.

We have a lot more work to do in this business and we are actively working on several cost-reduction initiatives that are in various stages of implementation. And I will continue to update you on our progress with these initiatives as we move forward.

As I look out of the remainder of this year, we will continue to have a few headwinds with our raw material availability and costs, as well as the weak European economy. Despite these headwinds, we believe that we will finish the year with an adjusted EPS level of 10% to 15% higher than last year's restated adjusted EPS of $2.86.

This will require us to have a much stronger fourth quarter than 2011 and I believe we will, for the following reasons -

The first is pricing. One constant throughout the year has been our ability to achieve stronger year-over-year pricing and this will not change in the fourth quarter.

The second is demand. While railroad products will see a seasonal drop-off, demand is still expected to be relatively strong in the fourth quarter. In the utility business, we are already seeing an increase in sales due to the damage caused by Hurricane Sandy. Additionally, in Carbon Materials and Chemicals, carbon pitch demand is expected to be considerably stronger than the fourth quarter of last year, due to a change in timing of the production campaign of one of our larger customers, combined with higher export sales.

The third is the benefit generated from the shutdown of the Grenada, Mississippi, utility pole treatment plant, which should provide approximately $1 million of pretax benefits.

A fourth is the combination of the contribution from the other margin improvement initiatives that should have a positive impact on the quarter.

And finally, fifth, it's not only avoiding the $1.5 million of unusual charges that we incurred in last year's fourth quarter, but also adding net insurance recoveries in excess of charges incurred during the quarter of approximately $1.6 million.

So as a result of these items I just outlined, our fourth-quarter adjusted results should be the highest ever recorded as a public company.

Potential risks to achieving this level of earnings for the fourth quarter include a worsening European economic conditions that results in lower than expected sales volume and a delay of expected insurance recoveries related to the pitch tank leak in Australia.

So now I'd like to give you a few thoughts on the outlook for 2013.

For Carbon Materials and Chemicals, we see growth in all of our key end markets in 2013. As mentioned previously, global aluminum consumption is expected to grow 7% in 2013, which is a positive indicator for our carbon pitch sales. The automotive industry has seen significant growth in North America, as well as globally, in 2012, and we see additional strong growth projections for 2013, which should benefit our carbon black feedstock and phthalic anhydride sales.

Additionally, the US housing market, which is also a key end market for phthalic anhydride, has recently been showing signs of improvement as housing starts in September were up 15% to the highest level in four years. There are indications that this momentum will continue into 2013 and hopefully accelerate even further.

With the relatively weak steel and coke production this year, we've experienced tightness in tar supplies in certain regions, particularly North America and Europe. That has resulted in higher tar costs. However, through our global supply base and logistics network, we have been able to procure adequate amounts of coal tar to meet our customers' requirements, although at higher cost.

As mentioned in our last call, we expect to have access to additional tar in the US in early 2013 from the new U.S. Steel coke battery and are hopeful that by the end of 2013, the coke plant in Monessen, Pennsylvania, will be back up and running to provide additional sources of tar for us.

The additional production should lead to stabilization of raw material pricing in North America and, combined with growing end markets, should lead to a stronger year in 2013 for the global Carbon Materials and Chemicals business.

In regard to our Railroad and Utility Products business, we should have another strong year in 2013 as continued strong demand and improved pricing for railroad crossties, increased sales of value-added products, the agreement to acquire the utility pole business in Australia, and further expanding our export crosstie businesses should result in a stronger year than 2012.

So when you put this all together for 2013, early indications are that we should see moderate growth in sales for both businesses, but, more importantly, double-digit earnings growth as once again the diversity of our global markets and geographic footprint provide us with stability in our overall business, which allows us to continue to generate attractive earnings growth in an overall challenging economic environment.

So at this time, I would like to open the lines for any questions that you may have.

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

Question would be on the $6.50 of earnings that you had targeted for 2015 before. And part of the move relates to value pricing in your pitch business. What type of steps have you taken already and when would this start to catch up that you're facing right now with higher raw materials?

On the Carbon Materials and Chemicals side, in talking about the coal tar costs we've been telling you about lately, yes. We're taking, I would say, a stronger approach. We have contract formulas. We are also negotiating different ways of buying the coal tar, which, for a time there, there were some tars that were being priced off of oil-related indices, which just is not working in today's world.

So we are doing on both sides, Ian, both on the raw materials purchasing, as well as moving closer to having more success with the negotiations on the pitch pricing, as well as the contract terms and conditions.

And are you also reducing lag time for re-pricing for your pitch contracts?

As much as we possibly can. I know Europe, it's taken us a while, but we have gotten that to a quarterly basis which has certainly helped out when you compared to where we were two years ago or three years ago.

And yes, around the world, I think it's becoming more and more of a quarterly -- not price negotiation, but quarterly evaluating the tar cost and the different components that make up the cost.

Okay. And then, the other question would be acquisitions in Europe. What have you seen with one of your competitors?

Ian, are you referring to the recent acquisition of the Ruetgers business, or --

Yes. Yes. First they weren't, then they were.

Right. It was just announced about 10 days ago or so.

An Indian company by the name of Rain Commodities, who primarily owns the former calciner industries business, which is calcined petroleum cokes produced here in the US, primarily. So Rain has purchased the Ruetgers business and so it has been taken off the market. It has been sold.

Not quite sure what to expect just yet, but from what we've read, the purchase price included a fairly high multiple, and just based on that alone, I think we'll have maybe even a more disciplined competitor out there because of the higher price that was paid for the business.

So this company, Rain Commodities, knows the aluminum industry very well because, as you may recall, the anodes that they are producing and consuming consist of about 85% petroleum coke and 15% pitch, so he does know the aluminum industry, based on the coke supply side. Now, as a coal tar distillation business, they will be supplying pitch.

But I really don't see much of a change in the marketplace just because of a new owner. It doesn't happen that simply. But I think I do see a more disciplined competitor coming down the road.

Okay. Thank you very much.

Laurence Alexander, Jefferies.

Good morning. This is Rob Walker on for Laurence. I guess first question would be update your thoughts on pricing and margin trends for phthalic anhydride and the other coal products as a result of softening oil prices for the quarter?

Well, as we just said, I think the average price of orthoxylene in the third quarter was $0.65. It increased to $0.67 in October, and we're not quite sure where it's going to settle out yet for November, but that's why we're sort of forecasting a range of $0.62 to $0.65.

I really haven't seen what happened yesterday or today on crude oil pricing, but I think it has started to decline a little bit. And as you may recall, orthoxylene does track that fairly closely with the mix to xylene pricing products.

Phthalic has been a very good business for us. As you know, we have a little bit of a competitive edge in that we are using naphthalene from coal tar as the majority of our feedstock, and less orthoxylene, which does help our cost structure, but we've seen ortho fairly strong the last two years. We also see our phthalic demand up this year, primarily in the plasticizers areas, which a lot of it goes into housing and automotive. We'll just have to see where it goes.

But as I mentioned, having naphthalene from coal tar as sort of our majority of our feedstock goes a long way versus competitors using 100% orthoxylene.

Great. Thanks. Then just, can you update where your utilization rates are right now for carbon pitch?

It varies a little bit around the globe. For instance, we're probably -- the three plants we operate in Europe are probably in the mid-70%s range. In the US, we're in the high 70%s range. Australia, with the one plant there, we're again probably mid to high 70%s. China is well over its capacity with our two plants there probably operating at 110% or so. And then basically, if you add those all up, we're probably mid-70%s, around.

Okay. Great. That's helpful. The last is clarification about the kind of puts and takes for the CapEx this year were helpful. I don't know if I missed it or if it was just too small to quantify or the headwind from the higher coal tar costs this year, if they normalize, what that benefit could be next year for you guys. Thanks.

Rob, could you please repeat that again? We just had a little bit of static on this end, but you were talking about FX

Oh, no, sorry raw material costs.

For tar?

I'm curious what the total value was for what you quantified the headwinds from higher coal tar costs this year.

Well, I think we feel a little bit better going into 2013, specifically in North America where there will be additional coal tar available to us because of the U.S. Steel coke and new battery coming onstream.

Again, Europe is a tough one because when you look at the steel industry, you're operating -- in at least Western Europe, I think you're talking mid to low 60s, but we are reaching further into Russia, Ukraine, where we do have a very good supply network set up. But again, you're paying a little additional freight cost there.

So the headwinds, I think, are going to be there, but on the flip side, there is less demand for pitch with the aluminum industry. With the exception of China and the exception of the Middle East, we're still seeing the aluminum industry probably operating in the 60% range of capacity, when you exclude those two parts of the world. But as far as headwinds ago, I think they continue to be there. Leroy, maybe you can comment.

I agree. And it does vary based upon the region. We talked about some of the things that we think will lead to a stabilization of pricing in North America.

China, as we have seen over the past couple of years, can be volatile. We've seen the reduction in coal tar cost this year, compared to last, when we -- and then go back to 2010 when we were seeing coal tar costs in China as the highest in the world. I think our view for next year on China is that coal tar costs will probably trend upwards.

I think we would expect that in Europe we would see higher coal tar costs as well. In Australia, maybe flat, while in North America, I think we mentioned, we think will probably stabilize based upon the additional capacity coming online.

So how that all pulls together in terms of numbers, we haven't quantified it to communicate it on the call, but all in all we think that we'll be in a good enough position to be able to offset that with any additional cost increases with pricing.

Great. Thank you very much.

Steve Schwartz, First Analysis.

Just to switch gears and talk about railroad a little bit, if we could.

Sure.

What is your typical volume of exported ties these days, I guess, on a quarterly or annual basis? I'm just trying to get a feel for how that plays out over the next several quarters, and I do acknowledge you guys stated a 300,000 tie inventory for export, if I'm correct.

They're not all for exports. I mean, that was the commercial total, but exports is a part of that commercial.

I guess I'd like not to get too detailed on volumes, Steve, but I think, as we've mentioned before, we're probably going to be in the $11 million to $13 million range this year and expect that to increase next year. I can't really say how much at this particular point, but in terms of dollars, probably $11 million to $13 million this year.

Okay. For 2012, and then up for next year.

Yes.

And it's just, plus or minus, it's the low hundreds of thousands of ties, right, that you're exporting? Or is it high five-digit number? Can you, Walt, at least get us in that ballpark?

Export orders. A lot of these ties, a majority of them, are going into South America, specifically into Brazil, and because of the moisture, wetlands area and so forth, they're getting tie life of anywhere from, I've heard, anywhere from five to 10 years.

So I can tell you -- in fact, we actually have one of our guys there this week on a quarterly -- we visit quarterly, if not maybe more often, but there is a major need for a much better quality treated hardwood tie. And each year, that's going to continue to increase. I just wish I could tell you how much, whether it's 10% or 15% or whatever it is. It's just difficult at this point. It really depends upon how quickly the railroads want to increase their ties and improve their railroad maintenance of way.

Okay. And then, just as a follow-up in railroad again, I think, based on comments from some of your competitors in the North American market, it sounds like you guys are definitely taking share with your creosote borate treated ties. And I'm just wondering how long those share gains continue.

Well, I hope they continue for a long time. I mean, I will say this. We have the best process out there to ensure that the borate is contained within the ties with the creosote overlay treatment.

We've been working on this for a long time. We've got four plants that we use, have in service, and we're looking at increasing that. So as we go forward, we'll have more facilities that have that process capability, and it truly depends on the railroads and how many ties they want to insert.

And we've got all the Class Is looking at them. Four of them are actually taking borate ties, so I think with the process and the quality that we have that goes with that process to ensure that the material stays in there, I think we've got a great shot at maintaining our market share, and growing them as we go forward.

Yes, okay, great. Thanks, Walt, and safe travel.

Thank you.

Liam Burke, Janney Capital Markets.

Can I just go back to the rail tie business? You mentioned that pricing was more favorable in the quarter. You mentioned, though, that commercial business was up. Are you seeing favorable pricing in the Class I segment of the business as well?

Yes, we are seeing -- third quarter compared to last year's third quarter, yes. We're definitely seeing pricing improvements, as you've heard us talk in the past.

Every time we -- typically, these contracts are anywhere from three to five, some are actually longer than five years. But each time you negotiate a contract, you've got to realign the pricing that goes with those specific railroads, and so we have. Last year, I think, completed two of those contracts and completing one shortly this year.

And yes, the pricing is from the Class Is. But also, the demand for the commercial ties continues to be very strong, and with a strong market, obviously pricing has been good for us.

Okay. And on the rail acquisition front, you did mention the bonded insulated joint business. Do you see any more opportunity there to pick up some of those types of rail infrastructure products?

Well, I tell you what. We are looking everywhere we can. I think the world knows that we are very much interested in acquiring businesses that are -- to be complementary to what we're wanting to do.

We have nine wood-treating plants out there. We've got the joint bar business we acquired two years ago from the Portec Foster deal. I think we've shown the railroad industry that when we buy something like the joint bars, we do a great job at it, and we'd love to look for some more, and we're turning over a lot of stones looking for them, Liam.

Great. Thank you, Walt.

Andrew Dunn, KeyBanc Capital Markets.

I apologize in advance. Some of the call has come in fuzzy, so if I missed anything and I ask it again, I apologize. In any event, I was hoping you guys could maybe just explain a little bit more why you didn't take out those charges associated with the Netherlands facility, either that or the pitch tank leak. It looked like you only took out that $1.2 million of after-tax charges associated with the plant closure in the quarter. So can you maybe explain that a little bit more?

Yes, well, I'll explain that. I guess certainly we called it out, and quite frankly, we'll leave that up to you and your colleagues as to whether that's something that you would adjust for.

I mean, we incurred the cost during the quarter. That's one of the things that certainly has resulted in us moving our expectations down for the year a little bit. Obviously if you add those back, that gets us back to where we thought we were going to be coming into the year. So certainly they affected the numbers, but, quite frankly, I think we'd rather that you decide whether that should be added back or not. We just want to draw it out so you understand what it is.

Okay. And then, moving on, it looks like that U.S. Steel coke battery is ramping up through 4Q into 1Q. You guys benefit from that at all in your fourth quarter, or is that really only starting in the first quarter of 2013?

No, no. We'll definitely -- we will gain a fair amount of that tar. They actually applied heat on those ovens about six weeks ago. In fact, they might be charging coal here within the next few weeks, but we will definitely start getting coal tar, perhaps maybe even in December, starting out then.

I can't tell you how long it takes to ramp up all of the coke ovens, but I think they'll be pretty aggressively charging the ovens as quickly as they can. So we will benefit from that increased tar.

Great. And then, last question, you mentioned that the impact of Hurricane Sandy might benefit your utility business. Under your current arrangement with your supplier of wood and products for that business, would you be able to meet a significant volume increase currently, or do you think it won't be that significant of an increase, perhaps?

We're doing everything we can. We are a major supplier of utility poles to FirstEnergy, PHI, Con Ed, and I can tell you those three, as well as probably three other utilities, are calling us, asking us for assistance, and we're doing everything we can.

In addition to newly-treated poles coming out of our Florence, South Carolina, plant, we're working with our customers pulling poles out of distribution yards, out of inventory wherever we've got it. In fact, it looks like we've got requests in excess of 10,000 poles that are headed to the New Jersey, New York area.

And as far as working with -- it's primarily inventory right now, but we're producing as much as we can. Then for the white poles that we procure are readily available. And so, we're helping out these utility companies as much as we possibly can.

All right. Great. Thanks, again, guys.

Sure.

Chris Shaw, Monness, Crespi, Hardt & Co.

I have one question on the Monessen coking plant. That's the one that Koppers owned, right?

Yes. Back in 2008.

And when did it stop producing?

It was towards the end of 2008, so it's been sitting idle for, gosh, unfortunately, almost four years.

I'm curious. If you'd still own it, would you be running it at this point or would you have shut it down as well, do you think?

That's tough. I mean, when we owned the plant, we were selling coke into the merchant market. The buyer is an internal user, so had we kept it, I would have hoped that we would have been selling 100% of it into the merchant market, but it has been closed, and based on the announcements that have come out, they have to, I think, to run $50 million of capital expenditure that they have to meet. I think it's primarily in the wastewater area, but I'm not sure where all of it is. And the last I heard, if the game plan continues on, word is they announced that they could start up as early as fourth quarter of 2013.

Okay. And then, about Rain, the company, Ruetgers. Are they -- do they -- are they integrated to tar at all in either -- I know Ruetgers might be, but in India, do they have any facilities in India that do coal tar?

No, they do not have coal tar at all. This is a very new business for them. As I mentioned, they're supplying calcined petroleum cokes around to the aluminum industry globally. I believe they have a small calciner in India, but most of their calcining assets are sitting in the US.

Right, right. And then, finally to clarify, you said the Australian utility pole business was your highest EBITDA margin. Was that for the Company or for the sector?

No, no. It's the highest in our Company.

Yes. Okay. Oh, actually, another thing. You guys produce -- I think it's mostly seasonal, but don't you produce roofing tar at some point?

No. No, we do not. Years ago, we used to, Chris.

Maybe that's something I missed. All right. Thanks a lot.

Okay. Thank you.

Bill Hoffmann, RBC Capital Markets.

Just a quick question about capital expenditures for 2013 and other cash uses, i.e., the JV investment, et cetera, JV, you could help us get a sense of that.

First, the Australian potential acquisition, as well as putting money into our China project, and that amounts to --

About $25 million that we're expecting in the fourth quarter related to those two items.

The expectation next year for the JV is that we will be -- that we'll be spending about, I think, $32 million or so for the JV, again, our share being 75%. Most of that will be in the form of borrowing, and then we'll have another equity contribution that will be made at some point next year. It won't be large. I'm not sure at this point exactly where it will end up, if it will be in the $5 million, $6 million range, but from that standpoint, that won't be that big.

From an overall CapEx standpoint, we're probably looking in the $32 million to $35 million range. Right now, we're actually going through, looking at what discretionary projects that we have that have returns associated with them that we want to put in our program. So depending upon ultimately what we have there, we'll ultimately get to the number that I -- the range I just gave you, $32 million to $35 million.

Okay. And the Grenada spending is all done, at this point?

Grenada spending is not all done, but we have some -- we do have some additional -- we have some offsets there that we would expect would ultimately come close to netting out whatever additional costs we have remaining.

Okay. Terrific. Thanks.

There seems to be no further questions. Please continue.

Thank you. And obviously, thank all of you for participating in today's call and we appreciate very much your continued interest in the Company.

We will continue to do the right things for our businesses by pursuing prudent growth opportunities and looking for ways to enhance profitability within our existing businesses. We believe the diversity of our business, along with our margin-improvement initiatives, will continue to provide us with a very stable company with strong and -- during strong and also during weak economic climates.

And finally, we do remain firmly committed to enhancing shareholder value by maintaining our strategy of providing our customers with the highest quality products and services, while we continue to focus on our safety, health, and environmental initiatives. Thank you.

Thank you. This concludes the Koppers Holdings Inc. third-quarter 2012 conference call. Thank you for participating. You may now disconnect.