Koppers Holdings Inc (KOP) 2012 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Koppers Holdings Inc. fourth-quarter 2012 earnings conference call held on February 14, 2013. Throughout today's conference 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 the Director of Investor Relations, Michael Snyder. Please go ahead, sir.

Thanks, Mark, and good morning, everyone. Welcome to our fourth-quarter earnings 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 Hilinksi 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 statement 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 not regard the inclusion of such information as a representation that its objective, 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 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'm joined on this morning's call by Walt Turner, President and CEO of Koppers, and Leroy Ball, our Chief Financial Officer. At this time I'd like to turn over the call to Walt Turner. Walt.

Thank you, Mike, and welcome, everyone, to our 2012 fourth-quarter conference call. I'd like to spend a few minutes providing a recap of our fourth-quarter results before I turn it over to Leroy who will provide additional fourth-quarter and full-year financial details for you. After that I would like to summarize a few of our major accomplishments this past year before turning to 2013 and giving you my thoughts on how I see the new year progressing.

Beginning with the fourth quarter, I mentioned on our last call that our expectations at that time were that we would finish the year with an adjusted EPS that was 10% to 15% higher than our 2011 adjusted EPS of $2.86. That expectation translated into a $0.53 to $0.67 range of EPS for the fourth quarter.

I'm happy to report that even without some sizable tax benefits that were recorded; we generated a fourth-quarter EPS that was well within our projected range. With the tax benefits included we finished the quarter with an adjusted EPS of $0.66, which was at the upper end of our range and significantly higher than our previous high as a public company of $0.44 in 2007.

Sales for the fourth quarter were up 2% driven by higher pricing for railroad products, higher volumes for utility products for our Railroad & Utility business and higher volumes of distillates for our Carbon Materials & Chemicals business.

Our adjusted operating profit was $26.3 million for the fourth quarter, up 14% from last year's fourth-quarter adjusted operating profit of $23 million as higher profitability in Railroad & Utility Products, combined with the recognition of estimated insurance recoveries in excess of costs of $1.2 million more than offset lower results in our global Carbon Materials & Chemicals business.

Our adjusted operating margin for the fourth quarter was 7% compared to 6.2% for the fourth quarter of 2011. That 80 basis point increase was driven by the outstanding performance in our fourth quarter of our global Railroad & Utility Products business, as both our North American business as well as our Australian pole business exceeded prior year operating profits and margins.

Overall I am quite pleased with our fourth-quarter results given the continuing volatility in certain regions of the world, particularly in Europe, and the impact that lower aluminum prices have had on smelter production levels in mature geographies where we enjoy high market shares.

Achieving the highest fourth-quarter adjusted net income and EPS in our history as a public company is an important accomplishment and is a tribute to the diversity of our geographic footprint, our products and our end markets.

Leroy will now provide some additional detail on the quarter. After his review I will summarize our accomplishments for 2012, give you an update on our progress we are making on our margin improvement initiatives, and provide some insight into what we are seeing for our end markets and our outlook for 2013. Leroy.

Thanks, Walt. Starting with the consolidated results, sales for the fourth quarter increased by 2% or $5.9 million to $374.9 million compared to the prior year quarter due to higher Railroad & Utility Products sales driven by higher sales volumes of value added products.

Sales for Carbon Materials & Chemicals for the quarter were flat as higher sales volumes for carbon black feedstock and creosote offset lower sales volumes for carbon pitch and phthalic anhydride due to reduced demand that was due in part to year-end inventory de-stocking by certain customers.

Fourth-quarter adjusted EBITDA was $33.6 million or $2.7 million higher than 2011's fourth-quarter adjusted EBITDA of $30.9 million, and adjusted EBITDA margins of 9% for the fourth quarter of 2012 compares favorably to adjusted EBITDA margins of 8.4% for the fourth quarter of 2011 after restating for discontinued operations for both periods.

The higher margins were driven by significantly higher margins for Railroad & Utility Products due to higher contract pricing and higher sales volumes of value added products, and $1.2 million of insurance recoveries in excess of costs incurred during the quarter for the February 2012 pitch tank leak in Australia, which more than offset higher tar costs and lower volumes for pitch and phthalic anhydride.

Our tax expense as a percent of pre-tax earnings for the quarter was 25% compared to 46% on an adjusted basis in the prior year quarter with the decrease due mainly to the unfavorable mix impact of European operating results in 2011 and certain discrete tax adjustments in 2012. For 2013 our expectations are that our effective rate will be in the 35% to 36% range based upon our current expected mix of geographic earnings.

Adjusted net income and adjusted earnings per share for the fourth quarter of 2012 were $13.9 million and $0.66 per share compared to $8.7 million and $0.42 per share for the fourth quarter of 2011. The difference in tax rates for the two quarters had a $0.19 benefit to fourth-quarter 2012 EPS.

When comparing our results for the fourth quarter to what we had expected our adjusted EPS of $0.66 was at the high-end of the range that we had indicated on our last call.

The lower effective tax rate for the quarter was the main driver for us finishing at the high end, but partially offsetting that benefit were insurance recoveries in excess of costs that came in approximately $0.4 million lower than previously communicated. That's purely a timing issue and should be realized in the first quarter of 2013. The net effect of those two items on our fourth-quarter adjusted EPS was approximately $0.06 per share.

Sales for the full year of $1.6 billion were 6% higher than restated 2011 sales of $1.5 billion with higher pricing in both of our businesses being the main driver behind the increase. Adjusted EBITDA of $159.5 million for the year 2012 was 7% higher than 2011's restated adjusted EBITDA of $149.4 million.

At a high level, stronger pricing was able to more than offset increased raw material and operating costs as well as a host of other large unusual items that I will address as I get into more detail on the business units. Adjusted EPS of $3.27 was 14% higher than restated adjusted EPS of $2.86 for the year 2011 and represents a new public company high for Koppers.

In our global Carbon Materials & Chemicals business for the fourth quarter revenues were flat at $242.4 million compared to $241.8 million from the prior year quarter, as lower sales volumes for pitch and phthalic anhydride were driven by lower demand and customer inventory de-stocking while higher sales volumes for carbon black feedstock were driven by increased volumes from Chinese operations.

Pitch products accounted for a 7% or $15.8 million decrease in sales over the prior year quarter driven by lower sales volumes for pitch. The reduction in pitch volumes was due primarily to smelter closures in Europe and Australia that occurred in 2012.

Additionally, the development of export markets for carbon black feedstock from our China operations resulted in lower carbon pitch production as more raw material was utilized to produce carbon black feedstock in order to optimize profitability.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 11% or $26.3 million as carbon black feedstock volumes increased significantly and more than offset lower selling prices for carbon black feedstock for the quarter due to lower average oil prices. The volume increase for carbon black feedstock was due mainly to higher volumes from Chinese operations combined with our Australian operations selling carbon black feedstock to outside customers.

Sales of coal tar chemicals decreased by 1% as lower phthalic anhydride volumes were partially offset by higher prices compared to the prior year quarter. Naphthalene sales volumes were up 8% which offset lower selling prices of 9%. Our phthalic anhydride volumes were negatively impacted by customer inventory de-stocking as well as increased levels of imports.

The average price for orthoxylene was at $0.66 for the fourth quarter of 2012 compared to $0.60 for the fourth quarter of 2011 despite the fact that oil prices decreased $88 a barrel in the fourth quarter of 2012 from an average of $94 a barrel in the fourth quarter of 2011. Orthoxylene prices have now increased to $0.72 a pound for February which is another record high pricing level.

Carbon Materials & Chemicals' adjusted operating profit for the quarter of $18 million represented a decrease of $0.6 million from $18.6 million in the fourth quarter of 2011, which equates to operating profit margins of 7.4% and 7.7% respectively. Operating margins declined as lower volumes for pitch and phthalic anhydride and higher raw material and operating costs more than offset $1.2 million of insurance recoveries net of expenses from the pitch tank leak in Australia.

For the year sales for Carbon Materials & Chemicals increased by $56.6 million or 6% to $999.7 million compared to $943.1 million for the prior year as higher sales prices for all major products except naphthalene, coupled with higher sales volumes for carbon black feedstock, more than offset lower sales volumes for pitch and lower sales prices for naphthalene.

Adjusted operating profit for the year ended December 31, 2012 for Carbon Materials & Chemicals decreased by $5.1 million to $83.1 million. Contributing to that decline were higher raw material and operating costs, a $3.1 million reserve for bad debt taken in the second quarter arising from a customer bankruptcy; $2.2 million in net costs in excess of insurance recoveries for the February 2012 pitch tank leak in Australia; $1.9 million of costs related to our third-quarter plant outage in Europe; and $0.9 million of costs related to our new Chinese joint venture.

A combination of all of these items was unfortunately enough to more than offset the pricing benefits we received compared to 2011 and drive our adjusted operating margins in Carbon Materials & Chemicals from 9.4% in 2011 to 8.3% in 2012.

As for the discrete items just mentioned, the only costs that are expected to have a negative comparative impact in 2013 are the joint venture costs which are expected to add an additional $1 million of incremental expense in 2013 while the costs associated with the Australian pitch tank leak should at the very least be offset by insurance recoveries moving forward.

For our global Railroad & Utility Products business, higher sales prices and volumes for utility poles more than offset lower sales volumes for crossties resulting in an increase in sales for the segment of $5.3 million or 4% for the fourth quarter compared to last year's fourth quarter.

Adjusted operating profit for the quarter increased to $8.6 million from $4.6 million in the prior year quarter with adjusted operating margins of 6.5% compared to 3.6% in the prior year quarter. Higher prices for our standard railroad products and a more favorable sales mix weighted towards our value added products in the fourth quarter of 2012 highlight the continued strength of the Railroad business.

Our Utility business contributed to the quarterly improvement through the strong sales volumes brought on by the damage from Hurricane Sandy and the benefits of consolidating our Grenada, Mississippi pole treating operations into another of our treating plants. The pole business that we acquired in Australia in November actually had a $0.4 million negative impact on operating profit for the quarter as large one-time acquisition costs exceeded profitability for that business.

2012 was a record sales and profit year for Railroad & Utility Products as sales increased by $32.2 million or 6% to $555.3 million. Both the North American and Australian businesses contributed to the year-over-year improvement as stronger pricing and demand for value added rail products and rail joints in North America and utility poles in Australia were the reason for the top-line increase and more than offset lower volumes for railroad crossties.

Adjusted operating profit margins for the year for Railroad & Utility Products were $48.5 million and 8.7% compared to $34.8 million and 6.7% in 2011. We renegotiated several large contracts for railroad ties during 2012 which helped us recapture some of the margin erosion we experienced over the last couple of years.

Additionally, a favorable sales mix, a strong Australian pole market and a half year benefit of the consolidation of our Grenada treating plant allowed this segment to achieve a 200 basis point operating margin increase.

As of December 31, we had 6.2 million untreated crossties on hand at our plant, which is the same number we had on hand at the end of 2011 even though we purchased 300,000 more ties in 2012. However, the ties designated for commercial customers have increased by more than 300,000 ties, as these ties have been procured for our commercial tie and export business.

Cash provided by operations for the year 2012 amounted to $77.8 million compared to cash provided by operations of $76.9 million for the year 2011 as higher earnings more than offset increases in working capital in 2012. One difference in working capital this year is that inventories increased more than the prior year due to a change in the mix of cross tie inventory with a higher proportion of ties being targeted for commercial customers as mentioned earlier.

Our debt net of cash on hand at December 31, 2012 decreased to $229 million from $248 million at December 31, 2011. Cash increased during the year by $13 million to a balance of $67 million at December 31, 2012 and debt declined slightly. We were able to achieve this despite the fact that during 2012 we contributed $20 million to our US pension plans, spent approximately $19 million on a pole business acquisition, nearly $10 million on productivity oriented capital expenditures, $6.4 million on share repurchases and increased our dividend by 9% in February 2012.

Our balance sheet has also never looked healthier as we reduced our debt as a percent of total capital capitalization from 74% at the end of 2011 to 64% at the end of 2012 and the book value of our shares at December 31, 2012 was $7.30 a share after being negative just a few short years ago. As of December 31, we had nothing borrowed on our revolver and we had total estimated liquidity well in excess of $300 million.

As we typically remind you, we have historically seen seasonal trends in our business that make our first and fourth quarters significantly weaker than our second and third quarters. We expected less of that seasonal separation for this year's fourth quarter.

In summary, our expectations were that with a strong fourth quarter we would reach our previously stated goal of a 10% to 15% increase over our 2011 adjusted EPS of $2.86 which we were in fact able to achieve. However, our expectations for the first quarter of 2013 are that we will be below our adjusted EPS of $0.74 for the first quarter of 2012 which was the highest first quarter in our history as a public company.

We expect to revert back to our more normalized pattern of achieving significantly higher results in the second and third quarters compared to the first and fourth quarters. Walt will expand on this later in our call. At this time I would like to turn it back to Walt.

Thanks, Leroy. I'd like now to summarize a few of our achievements for the year 2012, which should set the tone for a stronger year in 2013. First, in terms of growth initiatives, we were able to complete the acquisition of a pole business in Australia that will add about $12 million to $15 million annually in revenues and be accretive to margins.

We also entered into an agreement to build a 300,000 ton tar distillation plant in Jiangsu Province in China that should generate $150 million to $200 million in annual revenues at favorable margins. We invested $10 million in initial funding of this project during the fourth quarter. The plant is expected to be fully operational by the middle of 2014.

During the year we were also able to secure a large crosstie order in Brazil that we expect will continue and hopefully increase going forward.

Second, after incurring operating losses in our existing Chinese operations just a few years ago due to difficult market conditions, we have been able to significantly improve our profitability to the point that we are achieving meaningful operating profit contributions that tripled in 2012 from 2011.

Although the margins from Chinese operations are still below our margins in the mature markets, we expect that the upward trend in profitability and margins will continue going forward as this region becomes a larger part of our overall business.

Third, 2012 was the best year in our history for sales and profitability for our Railroad & Utility Products business. We significantly improved our sales mix by increasing the volumes of our value added Railroad products, and our rail joint bar business generated results that were even stronger than in 2011.

Additional factors were the positive impact of the Grenada closure, strong results from our Australian utility pole business, improved contract pricing and the implementation of our margin improvement initiatives. And as Leroy mentioned, we also generated free cash flow to finance the acquisition of the Australian pole business, increase our dividend by 9%, buy back 200,000 shares for $6.4 million and fund our pension plans by $7 million more than the minimum funding requirements.

After these cash deployment initiatives we were still able to reduce our debt net of cash on hand by $19 million and reduce our debt to adjusted EBITDA ratio to a record low level of 1.4 times, down from 1.7 times at the beginning of the year. Our ability to achieve these accomplishments despite difficult global market conditions is a tribute to the strength and the diversity of our underlying businesses.

Now I'd like to give you an update on the status of our key end markets and how we see these markets impacting our results in 2013. First, I would like to talk about our Railroad & Utility Products business. Our Railroad business, after enjoying its best year ever, should continue its upward trajectory in 2013 as the Class I's are planning to spend at least as much as they did in 2012.

And the commercial short line railroads should also have a strong maintenance program to take advantage of the extension of the Section 45 tax credits. Additionally, our sales volumes of value added products and our export orders are expected to increase as well.

On the utility side our Australian pole business should show improvement over its strong 2012 results due to the acquisition of the utility pole business that was completed in the fourth quarter of last year. Additionally, we will also have a full year's benefits of $4 million to $5 million from the closure of the Grenada plant which should improve results of our North American utility pole business.

Now I'd like to talk about the outlook for our global Carbon Materials & Chemicals business. In one of our largest end markets, the global aluminum industry, recent projections indicate a 7% increase in consumption for 2013 following a 6% estimated increase in consumption for 2012, which are positive indications for our global carbon pitch business moving forward.

Excluding China, both aluminum consumption and production are projected to increase by 4% in 2013. While aluminum consumption is ultimately the driver for aluminum production, the production side more directly impacts our pitch volumes for us. Although our pitch volumes were down in 2012 compared to 2011, mainly as a result of smelter closures in Europe and Australia, our expectations for 2013 are that pitch volumes will be higher than they were in 2012 mainly as a result of higher volumes from our Chinese operations.

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 continuing to grow each year as a proportion of our overall business.

The automotive industry has seen significant growth here in the US as well as globally in 2012 with projections for increases in US auto production of about 6% in 2013 which should benefit our phthalic anhydride sales. The first quarter of 2013 is already off to a strong start for US auto production, as reported car sales for January were up nearly 16% from January 2012.

Additionally, the US housing market, which is also a key end market for phthalic anhydride, continues to show signs of improvement as housing starts in 2012 were estimated to be up by 20%, the most since 2009, and with projections for an additional 18% increase in 2013.

Our carbon black feedstock product, which is largely driven by tire demand, should be strong in 2013 as well with the exception of Europe as global rubber demand is projected to be 2% higher than 2012. This growth is being driven by higher demand from emerging markets in Asia which are the primary markets that are served by our facilities in China and Australia.

We also expect to benefit from higher pricing for carbon black feedstock with the higher oil prices as the pricing is based off of a Platt's oil index. Naphthalene demand, which is driven mainly by concrete used in infrastructure expansion and improvements, is also poised to benefit from the continued infrastructure expansions and in the stimulus programs of the emerging economies such as China and the Middle East.

Additionally, demand for naphthalene as a feedstock for phthalic anhydride production in China is expected to increase by over 400,000 tons over the next few years due to the lower cost of naphthalene compared to the alternate feedstock, orthoxylene. This increased level of demand should tighten the market for naphthalene and result in an improved pricing environment for us compared to 2012.

Regarding the outlook for our coal tar raw material, as we mentioned in our last several calls, we now have access to additional tar in the US from the new US Steel coke battery that was recently completed and are also hopeful by the end of 2013 that the Arcelor Mittal Coke Plant in Monessen, Pennsylvania will also be back up and running to provide an additional source of tar for us.

The additional production should lead to some stabilization of raw material pricing here in North America. Outside of North America we expect to continue experiencing tightness in supply in Europe, but we will continue to bring tar in from Russia and the Ukraine to supplement our European supply base.

Due to the cutbacks in aluminum production in Australia we should be able to reduce the volume of high-cost raw material imports from China which will help offset any lost profits from the lower pitch volumes that we see there. Raw material availability in China may become somewhat tighter due to higher expected demand, but we anticipate tar costs in that region to be only modestly higher than in 2012.

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 year-end 2015. There is no question that we have been successful thus far in the Railroad & Utility Products side of the business in generating margin expansion. For the year 2012 this business achieved operating margins that are already more than 200 basis points higher than in 2011.

In addition to the strength of the railroad market itself, 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 rail joint products.

In the Carbon Materials & Chemicals business, the abnormal expenses Leroy mentioned earlier had a negative impact on operating profit that amounted to $8.1 million and as a result adjusted operating margins for the year were 8.3% compared to 9.4% in 2011.

If you add back these charges and compare the margin to our 2011 full-year margin that included the carbon black plant operations, the margins would be 9.1% for 2012 compared to 8.4% in 2011, a 70 basis point improvement. The major areas that account for that pro forma margin increase are improved pricing, the shutdown of the Australian carbon black facility and the increased use of a lower cost substitute feedstock in our chemical production process.

On a consolidated basis, adding back the impact of the abnormal charges and including the carbon black plant operations in 2011, our margins would be 8.9% for 2012 compared to 7.7% for 2011, a 120 basis point improvement that is more than halfway to our goal. We expect to continue making progress on our margins in 2013 for the reasons outlined earlier.

When you put this all together for 2013 we should see moderate mid-single-digit growth in sales for both businesses, but, more importantly, double-digit earnings growth for the fourth consecutive year. The diversity of our global end markets and the geographic footprint we have provide us with earnings stability in our overall business which allows us to continue to generate attractive shareholder returns in an overall challenging economic environment.

Looking more specifically at the first quarter, it is highly unlikely that we will meet or exceed our 2012 first-quarter EPS of $0.74. While I already mentioned that we are expecting modest mid-single-digit sales growth in 2013, we will not begin realizing that until the second quarter as the first-quarter sales are expected to be relatively flat.

Without the sales growth in the first quarter we will lack the leverage to absorb projected increases in our SG&A and our depreciation and amortization expenses, and that will cost us anywhere from $0.07 to $0.10 a share comparatively to the quarter. And on top of that a higher expected effective tax rate that will cost us approximately another $0.05 of EPS compared to the first quarter of 2012 and you get a pretty good sense of how we are seeing the first quarter plus or minus 10%.

Once the top-line growth begins in the second quarter some of our more recent margin improvement initiatives begin taking effect and the unusual charges that we incurred in the second through the fourth quarters of last year don't recur, we expect to see improvements in the quarterly comparison for the prior year that we believe will lead us to bottom-line growth for the year somewhere in the low- to mid-teens.

Also you may have seen recently we announced a 4% increase in our dividend that further demonstrates our confidence in the outlook for earnings and cash flows for 2013, and is also a testament to our belief in the fundamental strength and diversity of our businesses and end markets going forward. At this time I would like to open the call up for any questions that you may have.

(Operator Instructions). Ivan Marcuse, KeyBanc Capital Markets.

A couple of quick questions. On your -- sort of your looking out a few years 2015, you said you are still -- I think you -- $6.50 is sort of the target right now. That would imply sort of a 20% to 25% type of growth rate on the bottom line. With the first quarter being sort of I guess down, would you expect to achieve that sort of growth rate or do you think it will be slower and more of a ramp up going into 2014 and 2015?

We are continuing to see the double-digit growth in 2013. We may not be, when you look at the sort of the five-year projections that we started out with this 2015 goal, you can easily look at 20% per year. But you will probably see now a little more on the tail end especially with the Chinese plant coming on stream mid-2014. But it's moving forward and still very confident with our projection, Ivan.

Okay. And then on the margin improvement for the carbon material business, your improvement in margins, is that including or excluding the abnormal charges that you had? So if you exclude those you're -- I think you said your margin is around 9%. Would you expect improvement off of that or off the lower number?

Off of that number.

Got you. And then if you -- you have several projects coming online in the Middle East and I expect them to ramp up to 2013 and 2014 as you said. So would you sort of expect to see an acceleration in your total carbon material volumes as going into the back half of the year, is that sort of how to think about it?

We are going to see a little heavier shipments in the second half of this year, as you just pointed out, so at least it's continuing to increase production. We've got the Ma'aden smelter that is ramping up. I think by the end of this year they should have the Ma'aden smelter pretty much at full production. So because of that and other increases in production in that part of the world so you will see a little heavier concentration in the last half of year on the pitch.

Great. And then, Leroy, you threw a bunch of numbers out there. If you look at the Carbon Materials business and you just sort of consolidate everything you said into it your sales are flat year over year. So was it volumes up, pricing down or could you just give me sort of the sales bridge of how you connected quarter over quarter?

Fourth quarter 2012 to 2011?

Yes.

Yes, pricing up, volumes down, volumes in pitch down, I think volumes in carbon black feedstock up and generally pricing up in most major product categories.

Okay. So if you looked at the total thing, it would be pricing would be up, volume would be down on that side. And was there any impact on FX?

Small, very small.

Very small, great. Thanks, I will get back in the queue.

Daniel Rizzo, Sidoti & Company.

You indicated that one of the reason why things aren't going to be so great in the first quarter is because of a higher tax rate, is there a number we should be using to model?

I think we had mentioned 35% -- between 35% and 36%.

And that should be relatively standard for the rest of the year?

That is what we would expect for the year, yes.

Okay.

Plus any discrete items that we might report throughout the year.

Okay. All right, thank you, guys. That's it.

Ian Zaffino, Oppenheimer.

A couple questions here on the -- you were talking about the drivers of I think it was the phthalic anhydride being -- some of this I would imagine -- some of the similar drivers that would drive your pitch business, but I guess you are looking for a different kind of growth in each one, one being flat, one being growing. What is causing that discrepancy in the growth rates between the two of those?

Between the phthalic anhydride market demand and what --?

And the pitch.

Obviously you are talking two different market applications. Phthalic anhydride, obviously that, as we mentioned, goes primarily into auto products, also into housing products and it is basically going into the plasticizers and plastics and resins which gets into various plastic piping and what have you.

And we are seeing here in the US, which is our only phthalic operation, at or perhaps even slightly higher this year than last year just because of what we are seeing in the auto industry and what we are seeing in housing starts and so forth.

The point I think you might be getting at perhaps, which is helping us out, is that we are utilizing naphthalene more so as a feedstock versus orthoxylene which is a petroleum derivative. So two things there -- one, we're the only producer in North America that can utilize naphthalene as a feedstock. But secondly, we are selling naphthalene into the surfactants market, concrete additives, what have you.

And with more phthalic production increasing in China these new phthalic operations are going to be looking at using naphthalene versus orthoxylene again because of the pricing differential between the two. And that is going to help support the sort of naphthalene pricing around the world, which is something that we are watching very closely. But it should be a positive for us going forward in 2013 because of the increased demand of naphthalene globally.

Okay, okay. And just because I would have also thought maybe the auto industry would have helped the aluminum side of the equation too, but I guess there are graphite issues and --.

No, I mean as well aluminum -- I mean the use of aluminum in auto production continues to increase year over year, especially with the lighter weights that they are looking at for improved fuel usage and what have you. Just in the US alone aluminum consumption has increased almost 3% last year and projecting to increase another 3% this year. And most of that increase is really related to the auto industry, so you are right there as well, Ian.

Okay. And then on the leverage side of the equation, you brought down the leverage. Is there -- do you intend to bring it up? I mean are there some deals out there that you could do to bring it up or maybe increase the buy back or even increase the dividend? Or I guess let me ask you a different way -- what is your ideal capital structure and how do you get there?

Well, first of all we continue to look at acquisitions. Instead of having an EBITDA ratio of 1.4, I mean we would like to see it in 3, 3.2, 3.5. But that is going to require the right acquisitions and we continue to look.

And we are constantly looking at growth opportunities whether it is an acquisition or a joint venture project like we have in China or working with other companies in joint ventures like the Nippon Sumikin Chemical Company.

So I can't say specifically to you, but I can tell you that we continue to look at favorable acquisitions that will more than get us -- or exceed our expectations of being a $2 billion company in 2015.

Okay, thank you very much.

Steve Schwartz, First Analysis.

Nice quarter, nice year all things considered. Walt, correct me if I misheard you, but I think you said that your pitch volumes in 2013 would be up year over year in large part due to higher production out of China. If I recall, China has been running at higher than nameplate capacity. So how do you expect to get additional volume out of those two facilities?

Well, as I think Leroy touched on, you saw a large increase in our carbon black feedstock sales in 2012. Part of that increase in the carbon black feedstock sales was actually converting potential pitch production to carbon black feedstock.

So at that particular time primarily in the third and fourth quarters we saw opportunities to supply carbon black feedstocks instead of supplying pitch just because of the market demand and what have you at that point in time. So now what I am saying is we are going to convert some of that feedstock sales back to pitch production because of the increased demand for pitch.

Okay, all right. I thought the ratio was kind of locked and I also thought CBF volumes were up because of your change in Australia because you shut down the carbon black.

Oh yes, that's it as well, but also, Steve, we have the option -- I mean there are three different types of feedstocks that carbon black producers can use. Some unfortunately can use the raw coal tar, others will use the distillates from a process where we are producing carbon pitch and generating a distillate that represents about 30% of our total tar.

And the other option is producing a soft pitch which allows you to take out the chemical oil and some other value added components and then add back some other types of distillates that still meet a carbon black feedstock specification. So you can actually approach that market from three different ways.

I see, I see, okay. As my follow up, this is in regards to the railroad business. Your incremental margin fourth-quarter looking year over year, you know you only added a little over $5 million in revenue, but profit went up by $4 million.

I know Grenada has something to do with that, but I think, Walt, you said you expected $4 million to $5 million of incremental profit in 2013 from the Grenada closure. So what else is behind what happened there in the fourth quarter? Is the rest of that all mix because you are selling more commercial or short line ties?

Well, actually it is a combination of three other items. You mentioned Grenada, so that is helping our utility margins improving for sure because we were able to retain a majority of the utility poles that we were treating in Grenada. But you add to that -- as the year went on, Steve, through 2012 the borate creosote treated tie demand continued to increase throughout the year, so every quarter we were seeing additional increases in that product.

We are also seeing increases in our joint bar business, which continues to be going very strong. In fact, I think I mentioned even much stronger than 2011 was. And then the third area is on the white tie mix and looking at improvements there.

So overall I tell you with the Class 1's and the short line businesses and going fairly strong and still looking at spending as much or maybe a tad more in 2013, this is a very good business for us, the treated wood both on the Railroad and the Utility side. And then on top of that Australia continues to do very well with their margin improvements and then you are going to see a nice improvement in 2013 with the acquisition.

Okay. So that $4 million to $5 million from Grenada in 2013, that is incremental to what you have had in 2012, is that correct?

No, not incremental, no. Because we had four months, five months --?

Yes, about five. Yes, we so we did about $1 million to $2 million this year, so that is the annualized benefit, Steve.

I see, okay. All right, thank you, gentlemen.

Mr. Burke, Janney Capital Markets.

Walt, you mentioned you had two contract renewals with higher pricing in 2012. In 2013 do you have any more contracts for renewals on the cross tie business?

We have one that we completed at the end of 2012, which will start benefiting this year, yes. So there is another one that is going to help us this year.

Okay. And do you anticipate export volumes on cross ties to increase in 2013?

Yes, we do, we expect an increase in the export of ties.

Okay. And then lastly, Leroy, you explain why the inventory levels were so -- were higher year over year with the increased product mix and the inventory you carried for corporate rail customers. Will those inventory levels stay at that point or should we anticipate some moderation of inventory through 2013?

That is a tough one. I guess for the most part if the business is as strong as we expect I think we would expect for those inventory levels to remain at that level.

Okay, great. Thank you.

Laurence Alexander, Jefferies.

I guess first question, on the borate exports, can you give a sense for what the rough tailwind could be in 2013?

We are not currently supplying the borate portion of the treated cross ties that we are shipping to South America. That could happen down the road, Laurence, but it is basically the creosote treated ties that we are supplying in South America.

Okay. Do you have a sense for roughly how much of a change year over year that could be?

I really can't comment on that at this time. But we are expecting to have an increase over what we had last -- this past year for sure.

Okay. And on the cash flow statement, can you walk through some of the gives and takes for 2013? That is will there be any further outflows for productivity-related costs? Will there be any change in how you view working capital?

I will start in answering the question and then turn it to Leroy. But on our capital expenses that we are planning for 2013, I think we have a program of about $38 million, which is maybe 10% higher than previous years. And the focus there with that additional capital money, Laurence, is really looking at productivity projects.

And we have got a couple already underway and planning on hopefully having some more as we go through the year. But productivity is something we are taking very seriously, it's also part of our margin improvement initiatives. And so you are going to see capital spending up probably $5 million or $6 million over this past year, Leroy?

Yes, excluding the joint venture construction.

Yes, we have got that as well.

Yes. Laurence, maybe I will take a different take on it. I mean from our goal standpoint we are looking at free cash flow as a percent of sales, about 5% is typically what we target. We were pretty much right on that for 2012 when you take out the additional pension contributions we made over the minimum and the productivity capital part of our capital expenditures.

I think we see a similar sort of view in 2013, so from an operating cash flow standpoint we would expect about a 5% free cash flow as a percent of sales. Now what we are going to have is we are going to have about $13 million of additional pension contributions in excess of the minimum this year so again the total will be $20 million like we had last year, but this year the minimum required is a lower number.

So with that $20 million it will be an additional $13 million, that will equate to -- and you have your productivity type of capital that will be in the $10 million to $15 million range. I would expect there to be some increases in working capital as our sales continue to grow, but all in all you can figure that we pretty much target that 5% number. And like I said we have been fairly consistent being able to hit that.

Okay, and then lastly on the Chinese operations, can you give a sense for how much of a margin lift you could get over two or three years and how much of a tailwind you could have in 2013? Just a very rough kind of range?

I think you are going to continue to see the margin improvements that we had in 2012 over 2011 inching up quarter over quarter, not dramatically but inching up. But whenever our third project comes on stream mid-2014 I think with the markets that we are going to go after you are going to see a higher margin on that particular operation, which would obviously impact our overall China operations. But I really can't say much more than that at this time, Laurence, except it is improving and it should continue to improve.

There are a couple of things I can add, Laurence. I mentioned within the scripted comments about an additional $1 million that we expect to spend in 2013 and that would be related to the Chinese joint venture. A lot of that would be in kind of the SG&A category. Our SG&A as a percent of sales, we expect to basically be able to keep it at that level if not a little bit better.

We will see an increase over last year, but part of that will be attributable to this additional $1 million of cost for the joint venture. From an interest expense standpoint that will be capitalized as part of the construction cost, so you won't see an effect of interest expense on any borrowings related to that joint venture in 2013.

Okay, thank you.

Thank you. Please confirm if there is more time for another question?

Sure.

Thank you. Kevin Hocevar, Northcoast Research.

Most of my questions have been answered at this point, but just one on the cross tie volume outlook. What are your thoughts on this positive train control system that seem to be eating into Class I CapEx budgets for 2013? Do you expect this to have any impact on your crosstie volumes? Are you seeing anything as of yet or what are your expectations for that in terms of impact on crosstie volumes?

Crosstie volumes for 2013, we obviously are very close to that working with all the Class I's both US and Canada. Insertions and then on top of that from the Class I's you also have -- I think what we are seeing is another strong commercial short line railroad maintenance program as well, especially with the extended tax credits that they get.

So what we are seeing is the same level or maybe even a tad higher volumes in 2013 for total, total tie insertions. The positive train control, the spending continues to be quite heavy there, but also at the same time the railroads must continue to focus on their maintenance of way operations. And again, we are getting some pretty strong confirmations that maintenance of way spending will continue at the same level or maybe even higher than last year.

Okay, great. Thank you.

Chris Shaw, Monness, Crespi.

Maybe just for Leroy, but between all the things you pointed to as sort of a negative for 2013, the bad debt expense, the planned outage costs, the expenses for the JV in China and I guess the tank leak. Year over year going into 2013 do you know what the net I guess EPS tailwind is going to be from all of that or earnings? Do you have that --?

We don't have that -- we didn't have that quantified within our comments. I think we totaled that up in the neighborhood of about $8 million in terms of a pre-tax impact. I mean it -- there are pieces that apply to different jurisdictions that would have different rates associated with them. I think if you just generally take somewhere in the neighborhood of a 35% to 40% rate on that number, you could get back into a rough -- to a rough EPS impact.

Okay, that's helpful. And then in your coal tar costs for the quarter, sequentially, did they improve at all in North America? Did they come down at all or have we -- is it you're just hoping they will start doing that come in 2013?

North American coal tar costs?

Yes.

At this point, I mean we are still seeing some upward pressures but not dramatic. But fortunately there is still some upward pressure on tar costs.

And when did you guys think that your old coke facility -- I forget who owns it now, but when do you think that might come back online?

The earliest would be by the end of this year. So we are looking at -- the last I had read about the potential comeback was December of 2013.

Okay.

So it wouldn't be much help this year, but it certainly would be going forward.

And just a quick rail question. Did you say the crosstie volumes were down for the quarter? And if so, what were the moving parts there?

Well, when you look at for the year it was probably the fourth quarter as well. Crosstie volumes were down a little bit, but going back earlier in the year we -- with our margin improvement initiatives sometimes you have to give up a little bit of volume to get a better pricing and better profit and that is pretty much what happened throughout the year.

Makes sense. All right, thanks, guys.

Richard O'Reilly, Revere Associates.

Two quick questions. On your railroad business in the first quarter, I would think the weather impact on your customers would depend how much they can do maintenance wise or need to do. How is weather for your customers in the first quarter?

Well, as we are only mid-way into February, I mean you are right, exactly right on two fronts -- one, weather related has to do with when the railroads bring their construction crews back up from the south or back to work in the North. But we have had I guess what I will call sort of a normal winter where we have had slowdowns here and there.

As far as I know at this point in time, Richard, the Northern construction business is pretty much on schedule as it typically is starting late February, early March. The other piece related to weather is getting the ties or the logs out of the woods into the sawmills. And we have had -- it just depends on what region you are looking at.

Midwest -- Kentucky, Missouri -- there have been some concerns there, but right now we don't see any major issues with getting the white ties for the sawmills that we are getting. There is always interruptions like there were two weeks ago especially in the New York area. But, yes, it is not been a real negative for us this year on the weather, thank goodness.

And a second question, I was -- I couldn't hear your last call because of Sandy, but seeing any -- what type of a carryover effect have you seen from Sandy?

Well we have -- I think in our call back in early November we actually mentioned that we shipped over 10,000 utility poles up into New Jersey, New York, a lot of those were needed immediately, some were put into distribution yards. And so we continue to actually benefit a little bit from that by just replacing a lot of inventory that was diminished.

In fact, unfortunately with the snow storm we are actually -- now that the roads are open we are actually moving additional utility poles north because of the unfortunate disruption that is taken place there with this snowstorm last week.

Okay, good. That's it. Thank you, gentlemen.

Thank you, ladies and gentlemen there seem to be no further questions. I would like to turn the conference over to your President and CEO, Walter Turner. Please go ahead.

Thank you, Mark. And again, we thank all of you for your participation in today's call and appreciate your continued interest in our Company. So we will continue to do the right things for our businesses by pursuing prudent growth opportunities and looking for ways to enhancing our profitability with our existing businesses.

We believe that the diversity of our businesses, along with our margin improvement initiatives, will continue to provide us with the stability in both strong and weak economic climates as we have experienced over these past three years.

And finally, we remain firmly committed to enhancing shareholder value by maintaining our strategy, by providing our customers with the highest quality products and services while continuing to focus on safety, health and environmental issues throughout our global operations. Thank you.

Thank you. Ladies and gentlemen, this does concludes the Koppers Holdings Inc. fourth-quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect.