Koppers Holdings Inc (KOP) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Koppers Holdings Inc. first quarter 2013 conference call on Friday, May 3, 2013. Throughout today's recorded presentation, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions). I will now hand the conference over to Mr. Michael Snyder, Director, Investor Relations. Please go ahead, sir.

Thanks, Alex, and good morning, everyone. Welcome to our first-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 Hilinski at 412-227-2444, and we can either fax or e-mail you a copy.

Before we get started, I would like to remind 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 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 measures. The Company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

I am joined on this morning's call by Walt Turner, President and CEO of Koppers; and Leroy Ball, our Chief Financial officer. At this time I would like to turn over the call to Walt Turner. Walt?

Thank you, Mike, and good morning and welcome, everyone, to our 2013 first quarter conference call. I would like to spend a few minutes providing a recap of our first-quarter results before I turn the call over to Leroy, who will provide additional financial details for the quarter.

The theme that you are going to hear quite frequently during our call today is that our European business continues to struggle, and will likely do so for at least the remainder of this year. The positive news is that we continue to execute our business strategy and have been successful in many areas that I will highlight throughout this call.

I want to make sure that the progress that we are making towards realizing sustainable earnings and margin improvement going forward is not overshadowed by the difficult economic environment that we and many others continue to face in Europe. I believe that when the European economy does stabilize and perhaps begins to grow again, the positive impact from the steps we have already taken and continue to take will trigger an acceleration in our earnings that will move us quickly towards our long-term goals.

In regard to the first-quarter results, I mentioned on our last call that our expectations at the time were that we would be significantly below our prior-year first quarter adjusted EPS of $0.74. We finished the quarter with an adjusted EPS of $0.54, which was at the low end of the range we had communicated to you.

To begin with, we had a tough year-over-year comparison as last year's first quarter was our highest first quarter since going public back in 2006. If you remember, several of the smelter closures and production cutbacks that occurred last year in Europe and in Australia did not begin until the second quarter. So we knew that our pitch volumes in this year's first quarter would be down in both regions and have an impact on our results.

We also knew entering the quarter that our tax rate was going to be higher due to Europe's earnings being down, and we also expected our SG&A cost to be higher, as last year's first quarter SG&A expense represented a quarterly low for us.

What we did not fully anticipate was the extreme difficulty that our European businesses would have during the quarter. Not only were volumes down in all major product categories, but pricing was down in carbon pitch and distillates as well.

To give you some perspective on the impact of Europe, if their results would have been the same as last year's first quarter, we would have exceeded last year's adjusted operating profit by $1.9 million and our adjusted operating margins would have been a full 140 basis points higher than the 6.8% that we reported. Another negative effect that was caused by Europe's profits coming in even lower than expected was an increase in our effective tax rate to the level that was over 200 basis points higher than what we had anticipated.

While consolidated sales for the first quarter were down 3%, due primarily to lower sales volumes in our Carbon Materials and Chemicals business, the railroad and utility products business showed nice growth with the addition of the Australian utility pole business that we bought back at the end of last year and a continued strong North American railroad market.

Our adjusted operating profit for the first quarter was $25.3 million, down 13% from last year's first quarter adjusted operating profit of $29.2 million. The continued strong performance from our railroad and utility products business was unfortunately overshadowed by the overall negative impact from our European Carbon Materials and Chemicals business.

Leroy will now provide some additional financial detail on the quarter. After his review, I will give you an update on the progress we're making with several of our strategic initiatives and provide more insight into the changes we are seeing in our end markets. I'll also explain why I think that 2013 will continue to represent a significant step forward in achieving our 2015 financial goals despite the challenges we face in certain parts of our company. Leroy.

Thanks, Walt. Starting with the consolidated results, sales for the first quarter decreased by 3% or $10.5 million to $370.4 million compared to the prior-year quarter as higher sales volumes of railroad crossties and utility poles were more than offset by lower sales volumes for all Carbon Materials and Chemicals products in the US and Europe, and lower pricing for pitch and distillates in Europe.

First quarter adjusted EBITDA was $33.1 million or $3.6 million lower than 2012's first quarter adjusted EBITDA of $36.7 million, and adjusted EBITDA margins of 8.9% for the first quarter 2013 were below adjusted EBITDA margins of 9.6% for the first quarter of 2012. The lower margins were primarily driven by lower profitability from our European Carbon Materials and Chemicals business due to lower sales volumes and pricing which more than offset higher margins for Railroad and Utility Products, driven by higher sales volumes for railroad crossties and utility poles.

Our tax expense as a percent of pre-tax earnings for the quarter was 38% compared to 31% in the prior-year quarter, with the increase due to the unfavorable mix impact of significantly lower European operating results in the first quarter of 2013. The higher effective tax rate for the quarter had an approximate impact of $0.07 in the quarter's results compared to 2012. On the positive side of things, we do expect some discrete tax benefits to occur in each of the next three quarters, which could reduce our full-year effective tax rate to approximately 36%.

Adjusted net income and adjusted earnings per share for the first quarter of 2013 were $11.2 million and $0.54 per share compared to $15.5 million and $0.74 per share for the first quarter of 2012. When comparing our results for the first quarter to what we had expected, our adjusted EPS of $0.54 was at the low end of the range that we had indicated on our last call. Lower-than-expected results from Europe combined with the higher effective tax rate for the quarter were the main items causing us to finish at the low end of the range. As Walt mentioned earlier, if Europe had provided just the same level of earnings as last year's first quarter, we would have easily exceeded last year's first quarter operating profit.

Turning to Carbon Materials and Chemicals, in our global Carbon Materials and Chemicals business in the first quarter, revenues were down 8% to $230.5 million compared to $249.5 million in the prior-year quarter, due mainly to lower sales volumes for pitch and phthalic anhydride.

Pitch products accounted for a 7% or $16.8 million decrease in sales over the prior-year quarter, driven by lower sales volumes for pitch. Reduction in pitch volumes was due primarily to smelter closures in Europe and Australia that occurred in 2012 and a reduction in lower-margin business in North America that is in the process of being redirected to other customers. 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 instead, in order to optimize profitability.

Sales of distillates, which include third-party creosote sales and carbon black feedstock, increased 2% or $3.9 million as carbon black feedstock sales volumes increased and more than offset lower sales volumes to third parties for creosote. The volume increase for carbon black feedstock was due mainly to higher volumes being produced from Chinese operations instead of carbon pitch, to optimize profitability.

Sales of coal tar chemicals decreased by 1% or $1.8 million as lower sales volumes for phthalic anhydride and naphthalene totaling 2% of sales were partially offset by higher prices totaling 1% of sales compared to the prior year quarter. Our phthalic anhydride volumes were negatively impacted by a customer plant closure, increased levels of European imports and delays in orders as customers anticipated price decreases in the second quarter. The average price for orthoxylene was at $0.71 for the first quarter of 2013 compared to $0.67 for the first quarter of 2012, despite the fact that oil prices decreased to $94 a barrel in the first quarter of 2013 from an average of $103 a barrel in the first quarter of 2012. Orthoxylene prices for April decreased to $0.62 a pound from $0.70 in March, which will have a negative impact on the second quarter, both sequentially and on a year-over-year basis.

Carbon Materials and Chemicals' adjusted operating profit for the quarter of $13.1 million represented a decrease of $7.4 million from $20.5 million in the first quarter of 2012, which equates to operating profit margins of 5.7% and 8.2%, respectively. Operating profit and margins declined due to lower volumes for pitch and phthalic anhydride combined with significantly lower profitability from Europe.

For our global Railroad and Utilities Products business, sales increased by $8.5 million or 6% for the first quarter compared to last year's first quarter. The majority of the sales increase was due to additional sales added from our November 2012 utility pole acquisition in Australia, while the North American railroad business showed modest year-over-year growth. Adjusted operating profit for the quarter increased to $12.7 million from $9.1 million in the prior-year quarter with adjusted operating margins of 9.1% compared to 6.9% in the prior-year quarter. Profits from the Australian pole acquisition, stronger railroad demand and benefits derived from the consolidation of our Grenada, Mississippi wood treating facility into our other treating plants in the second half of 2012 all contributed to the higher operating profits and margins for the segment.

Looking at our cash flow and liquidity, cash provided by operations for the first quarter of 2013 amounted to $5.7 million compared to cash used in operations of $15.8 million in the first quarter of 2012 as lower working capital increases in the first quarter of 2013 more than offset lower net income compared to the prior-year quarter. Our debt net of cash on hand at March 31, 2013 increased to $240 million from $229 million at December 31, 2012, as cash was used for working capital and capital expenditures. As of March 31, we had nothing borrowed on our revolver and we had total estimated liquidity well in excess of $300 million.

Speaking of our revolving credit facility, on March 27 we closed on an amendment to that facility that extends it for an additional three years to March 2018 while also realizing a 50-basis-point reduction to our borrowing rate. The extension also provides for additional flexibility for foreign investment and a simplification of some of our financial covenants.

The last thing I would like to mention is that we are around a year and a half away from the first call date of our 7.875% Senior Notes due in 2019, and we are keeping a close eye on interest rates to determine whether an early tender offer for the notes make sense at some point.

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

Thanks, Leroy. Now I would like to give you an update on the status of our key end markets and how we see these markets impacting our results for the rest of the year.

First, I would like to talk about our Railroad and Utility Products business. Our first-quarter volumes for crossties were up from the first quarter of last year, led by higher sales volumes for commercial crossties and higher sales volumes for untreated crossties for our class I customers. We also continue to see a higher portion of our crossties being treated with borates and we expect this trend to continue.

The commercial crosstie business should be strong again this year as the short-line railroads continue to upgrade their rail lines to take advantage of the benefits of the Section 45 tax credits to accommodate the heavier carloads that the class 1 railroads are running. We also expect to see higher volumes of crossties going into South America as railroads there are looking to replace ties produced from the eucalyptus species with the more durable creosote-treated hardwoods that we produce here in North America.

Our rail joint bar business also continues to perform well, and in addition to having a strong US presence, we have been expanding our international presence as we increase our export sales for these products around the world.

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

Now I would like to talk about the outlook for our global Carbon Materials and Chemicals business.

In one of our largest end markets, the global aluminum industry, recent projections indicate a 6% increase in consumption for 2013 following a 5% estimated increase in consumption for 2012, which are positive indicators for our global carbon pitch business moving forward. These projections would imply total consumption for 2013 of over 50 million tons of aluminum, which would be a record level for global consumption.

Excluding China, which produces and consumes about 40% of the world's aluminum, 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 pitch volumes for us.

Unfortunately, the aluminum pricing continues to be depressed at around $1800 to $1850 a ton and the LME inventory levels are estimated at over 5 million tons. This level of pricing is clearly a deterrent for any smelters considering whether to restart idled production, especially in mature regions.

With regard to the capacity increases in the Middle East, Alcoa's Ma'aden smelter in Saudi Arabia continues to ramp up production during 2013 and is expected to reach full capacity by next year. The EMAL expansion in the United Arab Emirates continues to be on pace for their start-up early 2014 as capacity continues to grow in this low-energy cost region. We expect to see higher sales volumes of pitch into the Middle East beginning in 2014 as production from these facilities ramps up to their full capacity and results in a more favorable pricing environment.

Our pitch sales volumes were down for the first quarter as a result of smelter closures in Europe and Australia that occurred during 2012, lower sales volumes in North America as the result of redirecting lower margin business, and producing a lower ratio of pitch from our Chinese operations in order to produce more carbon black feedstock. We continue to focus on maintaining our strong market shares in North America, Europe and Australia while expanding our presence in the developing markets that we see in the Middle East, China, India and Brazil. As a result, you should expect to see those emerging markets continuing to grow each year as a proportion of our overall business.

In regard to our phthalic end markets, passenger car production in the US was up about 9% in the first quarter of this year and the US housing market continues to show signs of improvement. Those housing starts in 2013 are estimated to be up more than 20%. However, we have seen reduced sales volumes for phthalic in the first quarter compared to last year as a customer's facility was closed and European imports have increased due to the weak market demand from the depressed European economy. As mentioned earlier, we did see a drop in the price of orthoxylene in April compared to March, and of course, we will be keeping a close eye on this situation.

Our carbon black feedstock product, which is largely driven by tire demand, should continue to be strong for the rest of 2013 with the exception of Europe as global rubber demand is projected to be 2% higher than in 2012. This growth is being driven mainly by higher demand from the emerging markets in Asia, which are the primary markets that we serve by our facilities both in China and Australia. Our carbon black feedstock sales volumes were up 15% in the first quarter compared to the prior-year period with the increase driven mainly by Chinese operations as carbon black feedstock production has been increased in place of carbon pitch production in order to maximize profitability.

Naphthalene demand, which is driven mainly by concrete used in new construction, is poised to benefit from the continued infrastructure expansions and stimulus programs of the emerging economies such as China and the Middle East. Additionally, with the new phthalic anhydride plants being built in China, demand for naphthalene as a feedstock for phthalic anhydride is expected to increase by over 400,000 metric tons over the next few years, due to the lower cost of naphthalene compared to orthoxylene. This increased level of demand should tighten the market for naphthalene, and result in an improved pricing environment for 2013. We did see a 9% increase in sales prices for naphthalene in China in the first quarter compared to a year ago.

Regarding the outlook for our coal tar raw materials, we have been able to buy additional tar here in the US from the new US Steel coke battery and are hopeful that by mid-2013, the Arcelor coke plant in Monessen, Pennsylvania will be back up and running to provide an additional source of tar for us.

Outside of North America, we have experienced tightness in supply, in Europe especially, but we have been able to continue to bring tar in from Russia and the Ukraine to supplement our European supply base. Raw material availability in China has also become tighter due to the lower coke production, and as a result our cost in that region did increase sequentially from the fourth quarter and in comparison to the first quarter last year.

As we evaluate how these end market trends and projections are expected to affect our business in 2013, we see our North American Carbon Materials and Chemicals business being flat compared to 2012. We have been saying for some time now that establishing fair pricing for the value of our products and services is an important component of our longtime strategy. While we have been successful thus far in getting necessary price increases in our Railroad and Utility Products segment, gaining pricing traction in the Carbon Materials and Chemicals business has proved to be a little more challenging. The LME pricing has been around the $1800 mark, which is obviously hurting the aluminum business, while the North American railroad business environment is as strong as it has been in quite some time. We have been making some tough decisions here on what pricing we are willing to accept for our products, which has resulted in us accepting reduced orders from certain customers that we are in the process of placing in other markets or with other customers. In addition, reduced electro-production from electric arc furnace steel customers will also put some pressure on our pitch volumes for the balance of this year.

The positive in all this is that we were able to increase our pricing in North America in the first quarter to offset the profitability loss from reduced volumes and will look to continue to maintain, if not improve that balance for the remainder of the year. The area that we are likely to be most challenged with on the sales side is phthalic anhydride, where volume reductions driven by a plant closure for a phthalic customer and competition from higher levels of lower-priced European imports will combine with a likely lower pricing environment and result in lower sales compared to 2012. We believe that near-term weakness will be offset by the continued development of several margin improvement initiatives that I will discuss in more detail shortly.

For Australia, we expect the year to be moderately higher than 2012 as lower pitch sales volumes from smelter closures are offset by the avoidance of the pitch tank leak costs that were incurred last year.

China's results should continue to improve and be higher than last year as the higher overall volumes and product mix will benefit the sales and profitability. One of the improvements we have been working on is to shift some of our pitch production to a more favorable carbon black feedstock market. If you recall, in China there are three major markets that compete for coal tar -- the pitch market, the fuels market and the carbon black feedstock market where a less refined feedstock can be used for carbon black production.

With our recent development of the export markets in Japan and Korea for carbon black feedstock, currently it is more profitable for us to use more of our raw material for carbon black feedstock production rather than carbon pitch. China has been the only region where we have had this level of flexibility to produce various product mixes to maximize our profitability. However, we are now investigating this alternative in other regions of the world in which we operate.

That brings us to Europe, which has been by far the most challenging part of our operations over the past year. In addition to continued difficulties in obtaining raw material, the markets for carbon pitch and carbon black feedstock have been depressed due to recessionary conditions for the European economy. As a result, in the first quarter we experienced lower sales volumes and prices for pitch and carbon black feedstocks. And, as I mentioned earlier, if Europe's first quarter would have been flat with last year's first quarter, we would have been more profitable overall compared to last year's first quarter results.

Unfortunately, we do not see the situation in Europe improving this year, and with this level of uncertainty our European operations continue to be the most significant downside risk that we have to achieving our expectations for earnings growth this year.

Turning now to some more positive news regarding our progress towards the goal supported by our three strategic priorities, which include growth, margin improvement and capital deployment, I would like to start by giving you a growth update. The detailed engineering has been completed and construction is now underway on our new coal tar distillation facility in the Jiangsu province in China, which is still expected to be operating by mid-2014 and will add $150 million to $200 million to the top line in 2015. As we mentioned previously, our carbon pitch output from this facility will be utilized primarily for the production of needle coke, which is a new and exciting end market for us.

In November 2012, the Australian utility pole acquisition that we already mentioned several times on the call is already exceeding expectations and is now projected to add over $20 million in sales this year while generating the same impressive margins that we enjoyed in our existing Australian pole business.

We are currently preparing for our second large order of crossties to be exported to South America from our North American railroad operations this year and we are devoting more resources to further develop this exciting new growth market for our railroad products.

As for other new growth opportunities, we have several M&A possibilities in different stages in the pipeline, and I fully expect that we will be announcing at least one if not two of these growth opportunities before this year ends.

Moving on to our second strategic priority of margin improvement, there are several areas I can point to that are currently contributing or will be by the end of the year towards reaching our 12% EBITDA margin that we targeted by 2015. In our Railroad and Utility Products segment, we continue to see year-over-year margin expansion as well as growth opportunities for this business. We have already talked on the call about the continuing benefits of the Grenada, Mississippi treating plant consolidation and the additional higher-margin business brought on by our Australian utility pole acquisition, and we still have another quarter of year-over-year benefit of the Grenada operation to capture as well as almost the full remainder this year of the Australian pole business benefits to our margins.

Sales for our value-added creosote borate treating process continue to grow and we may be adding borate treating capacity at at least one if not two more plants by the end of 2014. We are currently in discussions to add additional treating capacity in at least one and possibly even two of our existing facilities as demand is expected to ramp up for certain customers beginning within the next two years.

Finally, there are several capital projects in our pipeline to upgrade tie unloading and sorting equipment that will result not only in efficiency improvements, but real savings through reduced labor requirements and lower repair and maintenance costs.

When you look at Carbon Materials and Chemicals and adjust it for Europe's decline, we would have seen operating margins that would have been flat with last year's first quarter despite lower pitch volumes in our other regions. What we have done -- what have we done that has allowed us to do that? First, we have made certain strategic changes on the sales side of things; that is, redirected products into markets that are currently receiving higher values. I already mentioned how we have changed our strategy towards our market for pitch produced out of our China locations that has allowed us to maximize our profitability and continue to grow margins in that area of the world. While it certainly can't be seen in our results for the first quarter, we are also getting margin benefits by redirecting naphthalene from our European locations to the US to replace higher-cost orthoxylene in our phthalic anhydride production process. We are also continuing to see how we can continue to push the envelope on maximizing the orthoxylene/naphthalene feedstock mix for our phthalic as well beyond the traditional mix to take advantage of the price arbitrage between these two chemicals.

We are also in the process of implementing a new transportation management system here in the US that will effectively consolidate the work that is currently being conducted in three separate systems. This new system will be in place in the third quarter and, once operating, should allow us to lower our logistics cost here in the US.

Finally, there are several other cost reduction initiatives in various stages of implementation that we have targeted at least $7 million in annual savings in our Carbon Materials and Chemicals plants by the end of 2014.

In addition to these cost savings initiatives, our efforts to further reduce our pension expense continue to gain momentum. In the first quarter we negotiated a hard freeze on defined benefit pensions in one of our remaining two hourly contracts that still have this benefit. The one remaining contract is up for negotiation later this year and, once finalized, all of our defined benefit plans in the US will be frozen for future benefit accruals. Our efforts to fund the plans by increasing our contributions beyond the minimum requirements has already begun to yield benefits as our pension expense is expected to be approximately $3 million lower than 2012.

When it comes to our third strategic priority of capital deployment, much of what we have already done thus far or are in the process of doing has already been mentioned during the call, so I will just give you a quick rundown of our progress towards meeting our 2015 capital deployment targets.

First, we have committed to funding our share of the $70 million to $80 million that will be required for construction and working capital for our new tar distillation facility in China. We made our first equity contribution of $10 million in the fourth quarter of last year, and we will make our second contribution of $7 million in the next couple of months. The project will be financed with 65% debt and we are close to finalizing the local project financing that will go into effect in the second quarter.

When you include the 2012 Australian utility pole acquisition, we have either paid or committed approximately $80 million of the $250 million to $335 million we had targeted for growth initiatives. And as I previously mentioned, I would expect that we will be announcing further commitments later this year.

Regarding the capital committed to our margin improvement initiatives, I expect that by the end of this year we will have spent approximately $50 million of the $135 million to $165 million that we have targeted between our additional pension contributions, productivity capital and investments in new products.

In the area of returning capital to our shareholders, with our recent dividend increase and expected stock repurchases this year, we will have spent $50 million to $60 million in the first half of our strategic planning period towards the $80 million to $135 million that we have targeted for this area of capital deployment. Also, as Leroy previously mentioned, we have locked in our $300 million of revolving credit financing through 2018, have lowered interest rates and will be considering the possibility of an early refinancing of the $300 million of outstanding bonds at the first call date in December 2014.

Looking at the remainder of 2013, the further deterioration we are seeing in Europe will continue to mask the improvements we are making in other parts of the business and make the net contribution to earnings less than what we had originally projected. I'm still confident that 2013 will be a better year than 2012 but not to the degree that I thought we were as we entered this year.

How that will likely play out is that the second half of the year will be stronger than the first with our third quarter being by far our strongest while this year's second quarter will finish more in the neighborhood of $1.00 per share. Similar to last year, our fourth quarter is also expected to be strong and should actually exceed last year's fourth quarter.

As with any plan, we knew that there would be bumps in the road. But we will not let that deter us and we will continue to push forward with our strategy to significantly increase the profitability of these businesses. While I can't get into specifics of some of the larger actions that we will be implementing by the end of this year, I expect to be in a position to announce and discuss some of these actions in greater detail on our next quarters call.

At this time, Alex, I would like to open the meeting up for any questions that may be there.

Laurence Alexander, Jefferies.

So just a couple of questions -- first, on the European side, can you give us a sense roughly of what you see as the range of outcomes? Because obviously, if you do see more of a downturn in Europe you will be able to pull back and cut costs a little bit to offset. But do you have a sense for what you see as the flex that you could see in the business model?

As we mentioned on the call, the two areas of concern that we have are the carbon pitch demand with the aluminum industry in Western Europe as well as the carbon black feedstocks that are also being depressed with the indirect cost of the automotive industry there. And as you probably heard on the previous calls, we are attempting and somewhat successful with shifting some of our products to other customers around the world, such as South America and South Africa and so forth.

To what degree we see this impacting us has been a tough one because, as we said earlier in the call, we really didn't fully anticipate the real negative impact we are seeing there. But in terms of the financial outlook or how this differs, Leroy, you may have a closer handle on the percentages that we are looking at.

Maybe the best way I can describe it is, as we -- we're looking out over the rest of this year we see Europe, when you take into account the effect it will have on our effective tax rate as well, that Europe will have almost a $0.50 impact on our results, our expected results for the year. And we have several items that are serving to offset that when you consider the contributions from the Western Pole acquisition, the pension expense reductions, the stronger business in China and the railroad business. It will serve to more than offset that, but that's the sort of head wind that we are looking at for the remainder of this year.

And secondly, as you think about the different kind of measures that you are putting into place this year, you mentioned the $7 million figure. What do you see as the run rate tail wind for next year from the cost control measures and efficiency programs this year and also the growth projects that you are doing?

Well, as I mentioned, we have identified about $7 million of cost savings that will take us through the year 2014. As far as the tail winds associated with it, it's a little difficult to comment at this particular time with the implementation that we are doing. And that's a tough one, Laurence, to really comment on. But as I mentioned, I think the next call that we have coming up, I guess in August, we will have a lot more information. But, Leroy, anything you --

Yes. Well, just to confirm what you had said there, we have already identified $7 million on the CMC side that we believe we will be having as tail wind going into 2014. And there's some other significant items that I think Walt mentioned in his prepared comments that we are just not quite ready to get into any details about that we should be able to speak about on the second quarter call that will give you a much better sense for the cost savings that we think that we will be seeing in 2014.

And then just lastly, just very quickly, it sounds as if, just parsing between the cadence and the back half loaded, that your Q4 results could be pretty close to the Q2, given how soft the current environment is and then the pickup in the back half. Is that fair?

The fourth quarter will certainly be as good as or stronger than the fourth quarter last year. Again, it depends upon a couple of things there, but currently, that's how we are looking at it.

I don't know that it will be quite as strong as the second quarter Laurence, but I think we did $0.66.

Okay, perfect, thank you.

Ivan Marcuse, KeyBanc Capital Markets.

I only have a couple; you gave a lot of good detail. Are you still profitable in Europe?

Yes, we are, for sure. It's just -- not as much as we would like to be nor as much as we were last year.

Okay, and then you mentioned -- and so if you look at you are still -- Europe had the $0.50 head wind that you mentioned. And then Alcoa just came out earlier this week announcing that they kicked out another slug of capacity. So does that add to any sort of uncertainty about your earnings for the full year, or do you have an idea that even where Europe is and what Alcoa is doing you should still be able to drive higher earnings?

Well, yes. I think it's going to take a little time for Alcoa to review where this 460,000 tons of potential cutbacks will take place. They mentioned Europe as well as the US and Australia. So we are really not sure; that could be down the road. But that could have a negative effect on our overall business. But, again, I think one of our strategies here is to really focus on other markets that we can divert the potential pitch production into other markets as well. But the impact on that would be almost impossible to comment on at this particular time. But we are looking at that, Ivan, for sure.

Great. And then you mentioned share buybacks. You haven't been all that aggressive in share buybacks, at least in the last couple of years. How much do you have available now? And you may have mentioned this, but how much is available in your authorization? And when will that authorization expire?

The current authorization essentially has about I think $25 million in place for us to be able to repurchase. We repurchased about $6.4 million last year. There is no end date for that, and obviously we can go and get that increased at any point we wanted. I think the share repurchases that Walt was referencing that we would expect to do this year would be in line with what we we've talking about in terms of buying back shares to offset dilution, and that's essentially the approach we took last year.

Okay, and if interest rates were -- according to the Fed, it looks like the interest rates aren't going anywhere anytime soon. So if they were to sort of this time next year be where they are at, this level, what kind of savings on your interest expense do you think you would be able to get if you were able to refinance in today's environment?

That's a good question. I would put that somewhere in the neighborhood of 175 to 200 basis points.

Okay, and that's not included in the $7 million in cost savings that you identified for 2014; correct?

That's correct.

Great, thank you for taking my questions.

Liam Burke, Janney Capital Markets.

Walt, you mentioned that you are going to step up the borate production on borate-coated ties and you are going to probably expand the two plants. I understand that borate creates a longer-lived tie. How do you anticipate the borate ties affecting the crosstie business long term?

There has been a lot of excitement over the last two years from the railroads and wanting to use more of the creosote borate treatments, basically because of what you just said -- it does add longer life to the tie. And as we go forward, in talking with our customers, there's more and more interest to do more ties in the creosote borate. If it's good for the areas in the south where you've got a shorter life because of wet swampy zones and so forth, I think their thought process is why wouldn't it be good for other locations, regions around the US. So that's the primary focus. And as we go forward, we are going to have more facilities to meet our customers' demands.

And in regard to expanding our treating it doesn't take much for us to increase our treating capacity by adding another cylinder or two. And what we are seeing with a couple of specific customers -- we do see tie demand actually increasing a little bit, which would require us to add additional treating capacity. So again, customers are our driver. We've got great relationships with our customers and we want to continue to do what they would like us to do, as a treating service company.

Longer-term, though, Walt, wouldn't that mean a longer-lived tie would create lower volumes in the long-term, wouldn't it?

Well, at the moment, Liam, tie replacements or tie insertions are probably addressing no more than 2.5% or 3% of the total ties that are already in service, and there's a lot more work to do. And I can tell you there's more and more focus on maintenance. The car weights are now up to 286,000 pounds and that's why we see the short lines with some pretty aggressive projects. And the same thing with the Class I's; they also have a lot of work to do.

These ties, if you are only replacing 3% or 4% -- or even 3% per year, there's still a lot of concerns, a lot of ties to be replaced out there that would help with this better creosote borate treatment.

And, Liam, you would be talking about at least 10 to 15 years before you would ever see any sort of impact from the borate treatment, I think.

Okay. And then, Walt, on the export business on the crossties, it looks like you are growing. Do you see any opportunities to add anymore customers either in Brazil or go into other countries in South America?

Absolutely. As I mentioned, we are going to actually put more manpower and more support behind this. We do see, based on what we've learned that last two years or so, there is an opportunity for using, I would say, more of the North American railroad type products. I know we've noticed a lot of companies from Brazil, from Chile and other countries in Latin America as well, that want to really do some serious upgrading of their railroads there. So these railroads throughout South America and other places are saying, what can we do to be just like our Class I railroads in North America. So we are seeing opportunities there.

Great, thank you, Walt, thank you, Leroy.

Steve Schwartz, First Analysis.

If we could just stay on the railroad and talk a little bit about the commercial business, the short line business, how significantly does your mix change toward that business in the first quarter? And then how do you expect the year to play out with respect to the 45G tax credit?

I think the -- the first part of your question, I don't have the number in front of me, Steve. But the second part, yes, the 45G tax credits are helping the short lines. But it's probably a lesser degree than the short lines having to seriously upgrade their trackage. I just mentioned the heavier loads and a lot of increased freight traffic coming out of the Midwest, especially North/South Dakota with the Benton gas industry and oil industry and so forth. So it's probably even more so on just upgrading it to make sure that they don't have any derailments or what have you to keep their revenues going from the class 1s.

As far as the mix quarter over quarter, I would have to get back to you, Steve, and give you a more specific number on that.

Okay. In that business, that segment, was there any benefit from Hurricane Sandy?

For the railroad side?

No, no, on the -- well, I guess that and the utility poles. On the call, you've already mentioned the utility pole strength (multiple speakers) in Australia. But --

We did have a nice uptick back in the fourth quarter on the utility sales. But the railroad side, if there was anything, it was minor as far as repairing railroad tracks.

And just as my follow-up question, it relates to the carbon materials business. And Walt, it's been over 20 years since I took a class in distillation. But when you talk about shifting more of your product to carbon black feedstock, is it that you are changing the type of tar you are running through the facility? Are you changing -- getting your customers to change their specs for carbon black feed to open up at a range that you can supply? Are you blending different products? How exactly are you pulling that off?

Well, it's a little of the secret process but I'll share a little bit with you, Steve. It continues to be distillation by vacuum. And then you are going through a distillation process, you have always heard us talking about three primary distillation streams coming off the process. The first is the light oil stream, which we further distill into naphthalene and other correction materials. The second product is just the primary distillates that we either correct in specification for creosote for wood preservation chemicals, or we do some other correction oils for the carbon black feedstock markets. And when it comes to producing pitches, we continue to go through the distillation process with higher temperatures and go on through a pitch column to obtain a specific softening point for a customers' carbon pitch specification.

But in between the distillate stream coming off and the final pitch product coming off, we can do certain things there that we feel can offer the carbon black manufacturers a better quality material which includes a little more carbon content and would help them with being more on a quality side, improving their carbon blacks for the tire manufacturers and other rubber applications.

So it sounds like, through perhaps an R&D effort on your part, you have gotten your customers to consider a wider spec range of raw material that allows you to sell more volume. Is that a good way to summarize it?

Well, some of that is true. But more specifically, it continues to have to do with the raw material quality. But more importantly, it's through the distillation process and coming up with increased carbon content. So it doesn't increase the range of the specification. I think it would more so narrow the range where we are providing a consistent quality, which is what the carbon black manufacturers as well as carbon pitch customers truly want.

Okay, well good luck continuing to develop that initiative. Thanks for the color.

David Woodyatt, Keeley Asset Management.

My questions have been answered.

Scott Blumenthal, Emerald Advisers.

Leroy, just a couple housekeeping things here. Was there any foreign currency impact during the quarter?

Very little.

Okay, and did you give a percentage decrease, Walt, for carbon pitch volumes year-over-year or the pitch price? I probably missed them.

We did. I think the volumes were off -- was it 9% or 13%? I think it was 13%, but let me verify it here real quick.

Okay. And pricing for pitch?

9% on the volume.

Okay. And was pricing -- I'm sorry.

The pricing was down about 4%, but we will reconfirm that to you, Scott.

Okay, thank you. Leroy, are the borate-treated ties that you are selling to your Brazilian customer -- are those treated as with borate in the US?

They are not borate-treated ties. Our export ties are not borate treated.

Okay, sorry about that. The export ties are treated as a sale in the US, though?

Yes.

Okay. For tax purposes; correct?

Yes.

Okay. I guess those are all my questions. Thank you.

Chris Shaw, Monness, Crespi.

If I could ask again on the Alcoa news, I know you obviously don't -- no one has any detail on the company, Alcoa itself really doesn't. But if you were to assume some sort of pro rata amount of capacity curtailment at -- balance as to how you supply them, pro rata share of your, I guess, carbon pitch sales to them, how would that impact you? Would that be volumes you could just make up and send somewhere else in the world? Or do you think -- is that being made up for in the Ma'aden area -- Middle East, in the Ma'aden projects and things like that, or would it be an actual net loss, do you think?

It's really difficult to answer that question, Chris, because it really depends upon where they would choose to cut back or idle pot lines. In the US, we do see aluminum consumption increasing about 2% again this year, primarily because of automotive and packaging. But Australia was another location they could look at. But I think probably what they are looking at here is their highest energy cost operations. And I think Europe would fit into that as well. It's just -- it's impossible to really understand what they will be looking at. And obviously, with the Ma'aden smelter and Saudi Arabia cranking up and being at full production sometime mid, late next year and the pricing for aluminum ingot doesn't get over the 2000-ton-plus mark, it's just difficult to understand what they might do.

It's very expensive to shut down a pot or two; it's very expensive to bring them on. So I'm sure that they'll have a lot of serious discussions before they make their decisions.

Okay. And then to look at rail, I know sometimes there's -- was there any pull-forward into the first quarter from -- sometimes I don't know whether the weather is good or when people buy the treated ties earlier. Was there any weird seasonality there in the first quarter, or pull forward?

No, I think it's -- in the past years we would typically say that first quarter, tail end of the fourth quarter are very, very slow for the construction workers replacing ties. But I think with all the work that we are seeing with the short lines and so forth, it has not been quite as seasonal as we've seen it in past years.

And with some of the weird wet and cold weather in the country this spring, is that going to impact 2Q at all?

I don't think -- we normally don't see that. I think that's just a normal situation for out there as far as the northwest because, typically, they will not do much for three or four or five months, depending on the weather. But that's not something that we really monitor or that would impact us.

All right, got it. And then if I could just ask on CapEx, I think last call, you were suggesting -- you said $32 million to $35 million for this year. Has that changed? I'm just trying to get an idea of what, then, ultimately 2014 might be with the amount you have to fund the Chinese JV.

Yes. Excluding the Chinese JV, we are still looking at the $32 million to $34 million mark on our CapEx this year, and really, truly putting more and more of that into productivity projects, which will obviously have some pretty good paybacks going forward.

But with the Chinese JV it's going to be above that, about $40 million, probably?

Yes. The Chinese JV itself will probably spend close to $40 million this year.

This year? And how much next year, another $20 million or so, maybe?

That will be, yes, probably another $20 million or so next year.

Okay. I forget, what is your percentage ownership there? 75%?

Well, it's going to be between 65% and 75%, minimum 65%.

Okay, great, thank you.

Ivan Marcuse, KeyBanc Capital Markets.

Great, just a real quick question here -- you may have said this. Your coal tar costs -- I know you went through each of the regions. But if you look at the total global basket, would it be up on a year-over-year basis for 2013, or would it be basically flat with 2012?

(multiple speakers) total-total, it varies region to region. But it's pretty much flat for year-over-year, or maybe a slight decrease.

Great, thank you.

I will now hand the call back to Mr. Turner for closing remarks.

Thank you, Alex. And again, we thank you, as always, for your participation in today's call and appreciate your continued interest in our Company, for sure.

We will continue to do the right things for our business by pursuing prudent growth opportunities and looking for ways to enhance our profitability within our existing businesses. And despite some of the current challenges due to the European economy, we believe the diversity of our businesses, along with our margin improvements and growth initiatives will continue to provide us with the stability in both strong and weak economic climates.

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

Thank you. This concludes the Koppers Holdings Inc. first quarter 2013 conference call. Thank you for participating. You may now disconnect.