Koppers Holdings Inc (KOP) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Koppers Holdings second-quarter 2013 conference call on August 8, 2013. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to the Director, Investor Relations, Mr. Michael Snyder. Please go ahead, sir.

Thanks and good morning, everyone. Welcome to our second-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 email 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. Good morning, everyone and welcome to our 2013 second-quarter conference call. I would like to start by spending a few minutes providing a recap of our second-quarter results before I turn the call over to Leroy who will provide additional financial details for the quarter.

Similar to our last quarter, our European business continues to struggle and will likely do so for the remainder of this year. The impact of the weak European economy has spilled over into our North American Carbon Materials and Chemicals business in the form of increased imports that negatively impacted our North American sales, volumes and prices during the quarter.

The good news is that when the European economy does stabilize and begins to rebound, the positive impact from the steps we are taking from a strategic standpoint should accelerate our earnings and move us closer to our longer-term goals.

In regard to our second-quarter results, I mentioned in our last call that our expectations at that time were that we would be roughly in the range of $1 per share for the second-quarter EPS. We finished the quarter with an adjusted EPS of $0.70, which was well below what we communicated to you.

There were two major factors that caused our lower-than-expected earnings. First, our European operations came in lower than we expected as all of our major end markets there continue to struggle. Second, and larger in terms of its impact, we saw an increase in imports from Europe, which negatively impacted our sales, volumes and prices for our North American business. In particular, our phthalic anhydride business was negatively impacted as a result of these higher levels of European imports.

Other factors included are seasonally refined tar sales, which were lower than anticipated as a result of wet weather in the eastern United States and lower profitability from our Chinese operations as a difficult pricing environment in the Middle East resulted in reduced pitch shipments compared to what we had anticipated. Additionally, we had lower sales volumes for carbon black feedstock in the export markets to Japan and Korea than what we had expected.

In terms of the relative impacts of our EPS for these items, we estimate that the impact from the European operations, including the effect of the European imports of our phthalic anhydride profitability, was about $0.15 and the combined impact of the other items mentioned above was about $0.10. We do expect to recover in the third quarter some of the volumes that were lost due to timing and weather issues.

While consolidated sales for the second quarter were down 10% due primarily to lower sales volumes in our Carbon Materials and Chemicals business, the Railroad and Utility Products business showed continued growth with the addition of the Australian utility pole business that we had acquired at the end of last year and a continued strong North American railroad market.

Our adjusted operating profit for the second quarter was $28.9 million, down 31% from last year's second-quarter adjusted operating profit of $41.8 million. The continued strong performance from our Railroad and Utility Products business was overshadowed by the overall negative impact of our global 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 are making with several of our strategic initiatives and provide more insight into the changes we are seeing in our end markets. I will also explain where I think we are with regard to our 2015 financial goals given the challenges we currently face in certain parts of the business. Leroy?

Thanks, Walt. Starting with our consolidated results, sales for the second quarter decreased by 10% or $40.4 million to $370.9 million compared to the prior-year quarter as higher sales volumes for railroad crossties and the acquisition of the Western pole business in Australia in November 2012 were more than offset by lower sales volumes for all Carbon Materials and Chemicals products and lower pricing for pitch and carbon black feedstock in Europe.

Second-quarter adjusted EBITDA was $37.2 million, or $12 million lower than 2012's second-quarter adjusted EBITDA of $49.2 million and adjusted EBITDA margins of 10% for the second quarter of 2013 were below adjusted EBITDA margins of 12% for the second quarter of 2012. The lower margins were primarily driven by lower profitability from our European Carbon Materials and Chemicals business combined with lower volumes and prices for phthalic anhydride due in part to lower cost European imports.

These factors more than offset higher margins for Railroad and Utility Products that were driven by higher sales volumes for railroad crossties and the acquisition of the Western pole utility pole business in Australia in November 2012.

Our tax expense as a percent of pretax earnings for the quarter was 35.4% compared to 38.1% in the prior-year quarter, with the decrease due to favorable discrete tax adjustments, which more than offset the unfavorable mix impact of lower European operating results in the second quarter of 2013. We anticipate an overall tax rate for the year, including discrete items of around 37%.

Adjusted net income and adjusted earnings per share for the second quarter of 2013 were $14.7 million and $0.70 per share compared to $22.1 million and $1.05 per share for the second quarter of 2012. When comparing our results for the second quarter to what we had expected, our adjusted EPS of $0.70 was well below the range that we had indicated on our last call. Lower-than-expected results from Europe combined with the negative impact on our North American Carbon Materials and Chemicals business from cheaper European imports were the main contributors to the reduced results.

Looking at Carbon Materials and Chemicals, in our global Carbon Materials and Chemicals business for the second quarter, revenues were down 17% to $220.3 million compared to $266.7 million in the prior-year quarter due mainly to lower sales volumes for all major products combined with lower prices for pitch and carbon black feedstock primarily in Europe.

Pitch products accounted for a 7%, or $19.6 million decrease in sales over the prior-year quarter as sales volumes and prices for pitch declined. The reduction in pitch volumes was due primarily to a smelter closure in Australia that occurred in the first half of 2012 and lower sales volumes from Chinese operations into the Middle East.

Volumes and pricing for our seasonal refined tar products were down compared to the prior-year quarter as they were negatively impacted by wet weather conditions in the Eastern United States. Sales of distillates decreased 4% or $10 million and carbon black feedstock sales volumes and prices declined with significant price reductions in Europe.

Sales of coal tar chemicals decreased by 6%, or $14.9 million driven by lower sales volumes for phthalic anhydride in North America compared to the prior-year quarter. Our phthalic anhydride volumes were negatively impacted by increased levels of European imports, unplanned customer outages and delays in shipments from June in anticipation of a decrease in selling prices in July. The average price for orthoxylene was at $0.63 for the second quarter of 2013 compared to $0.68 for the second quarter of 2012 as average oil prices were flat at $93 a barrel for both quarters. Orthoxylene prices for July decreased to $0.61 a pound from $0.63 in June.

Carbon Materials and Chemicals' adjusted operating profit for the quarter of $12.5 million represented a decrease of $13.7 million from $26.2 million in the second quarter of 2012, which equates to operating profit margins of 5.7% and 9.8% respectively. Operating profit and margins declined mainly as a result of lower sales volumes and prices for phthalic anhydride combined with significantly lower profitability from Europe.

For our global Railroad and Utility Products business, sales increased by $6 million, or 4% for the second quarter compared to last year's second quarter. The majority of the sales increase was due to additional sales added from our November 2012 utility pole business acquisition in Australia while the North American railroad business showed modest year-over-year growth.

Adjusted operating profit for the quarter increased to $16.9 million from $16.1 million in the prior-year quarter. Adjusted operating margins at 11.2% compared to 11.1% for the prior-year quarter. Profits from the Australian pole business acquisition, stronger railroad demand, and benefits derived from the consolidation of our Grenada, Mississippi wood treating facility into our other treating plants contributed to the higher operating profit and margins for this segment.

Cash provided by operations for the first six months of 2013 amounted to $20 million compared to cash provided by operations of $3.4 million in the second half of 2012 as lower working capital increases in the first half of 2013 more than offset lower net income compared to the prior-year quarter. Our debt net of cash on hand at June 30, 2013 increased to $237 million from $229 million at December 31, 2012 as cash was used for working capital and capital expenditures.

As of June 30, we had $5.1 million borrowed on our revolver and we had total estimated liquidity well in excess of $300 million. As mentioned on our last call, we are less than a year and a half away from the first call date of our 7 7/8 senior notes due in 2019. Our current view is that it would not make sense to pursue a refinancing until at least this time next year, but that could change based upon the capital markets. We will continue to monitor the situation and be prepared to act when and if appropriate. At this time, I would like to turn it back over to Walt.

Thank you, Leroy. I would now 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 second-quarter sales volumes for crossties were up from the second 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 proportion of our crossties being treated with borate and we expect this trend to continue going forward. The commercial crosstie business continues to be stronger 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 from the Class I railroads.

Our joint bar business continues to perform well and in addition to having a strong US presence, we have been expanding our export sales for these products around the world. On the utility side, our Australian utility pole business continues to show improvement over its strong 2012 results due primarily to the acquisition of the utility pole business that was completed in last year's fourth quarter.

Additionally, we are seeing a full year's benefit of the $4 million to $5 million from the closure of the Grenada, Mississippi plant, which has improved the results of our North American utility pole business.

While we do see some challenges in being able to procure enough untreated crossties in the second half of the year as a consequence of increased demand for lumber from housing and other markets, we expect to be able to manage through the situation as the industry tries to catch up. Having the largest crosstie procurement network in North America should provide us with the advantage relative to our competitors in obtaining untreated ties in a less than favorable market this year.

Now I would like to talk about the outlook for our global Carbon Materials and Chemicals business. For the global aluminum industry, projections continue to indicate a 6% increase in consumption for 2013, which implies a record level of global consumption of over 50 million tons. Excluding China, which produces and consumes about 44% of the world's aluminum, both 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.

Aluminum prices continue to be depressed, which are under about $1800 a ton and the LME inventory levels are continuing at around 5.5 million tons. This level of pricing and inventory is clearly a deterrent for any smelters considering whether to restart idle production in the mature regions. Several of the larger aluminum producers have indicated that they are looking at further capacity reductions of their higher cost smelters in light of the current market conditions.

Our pitch sales volumes were down in the second quarter as a result of a smelter closure in Australia that occurred in 2012 combined with lower sales volumes from our Chinese operations into the Middle East. With regard to the capacity increases in the Middle East, Alcoa's Ma'aden smelter in Saudi Arabia continues to ramp up during 2013 and is expected to reach full capacity early next year.

The EMAL expansion in the United Arab Emirates continues to be on pace for startup in early 2014 as capacity continues to grow in this lower energy cost region. We expect to see higher sales volumes of pitch in the Middle East beginning in 2014 as production at these facilities ramps up to full capacity, which should result in a more favorable pricing environment for pitch.

Passenger car production in the US was up about 6% in the first half of this year compared to the first half of 2012 and the US housing market continues to show signs of improvement as projected housing starts for 2013 are estimated to be up about 18% over 2012. However, we have seen reduced sales volumes for our phthalic anhydride in the first half of the year compared to last year as there have been several customer plant outages and a closure of a customer's facility. Imports have increased in the first half of the year due to the weakness of the European economy. We expect this situation to gradually improve beginning in 2014 based on a modest recovery in the European economy.

Our carbon black feedstock product, which is largely driven by tire demand, should be reasonably strong for the rest of 2013 with the exception of Europe. Global rubber demand is projected to have an average annual growth rate of 4% through 2015. This growth is being driven mainly by higher demand from the emerging markets in Asia, which are the primary markets that are served by our facilities in China and Australia.

Additionally, naphthalene demand, which is driven mainly by concrete used in infrastructure expansion and improvements, is poised to benefit from the continued infrastructure expansions and stimulus programs of emerging economies such as China and the Middle East.

With new phthalic anhydride plants currently being built in China, demand for naphthalene as a feedstock for phthalic anhydride production is expected to increase by over 400,000 tons over the next few years. This increased level of demand should tighten the market for naphthalene and result in an improved pricing environment for the balance of this year. We did see a 14% increase in sales prices for naphthalene in China in the first half compared to a year ago.

Regarding the outlook for coal tar raw material, we have been able to buy additional tar in the US from the new US steel coke battery and are hopeful that, by mid-2014, the ArcelorMittal coke plant in Monessen, Pennsylvania will be back up and operating to provide additional sources of tar for us.

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

If we evaluate how these end-market trends and projections are expected to affect our businesses for 2013, we see our North American Carbon Materials and Chemicals business being down compared to 2012. We have been saying for some time now that improving the margins for our products and services is an important component of our long-term strategy. While we have been successful thus far in improving the margins in our Railroad and Utility Products segment, margin improvement in the Carbon Materials and Chemicals business has proved to be much more challenging for us.

LME pricing has been below the $1800 mark for most of this year, which is obviously hurting the aluminum industry, while the North American railroad business environment continues to be strong. While we anticipated placing a portion of the lower margin pitch business in North America into the seasonal pavement sealer market, wet weather in the second quarter, especially in June, which is typically one of our highest volume months, resulted in lower volumes than we had expected. In addition, reduced electrode production for electric arc furnaces in North America also put pressure on our pitch volumes in the second quarter and this will likely be the case for the balance of this year.

The more difficult area for the second quarter was our phthalic anhydride business where volume reductions driven by competition from higher levels of lower-priced European imports and a customer plant closure combined with a lower pricing environment resulted in lower sales and profit than we had expected from our last call.

We see the negative impact of cheaper European imports continuing through the second half of the year, which will continue to impact our North American business compared to 2012. For Australia, we expect the year to be moderately higher than 2012 as lower pitch volumes from a smelter closure there are offset by avoidance of pitch tank costs that we incurred there last year.

China's results ended up below last year's second quarter due to a difficult pricing environment in the Middle East that resulted in lower export pitch sales volumes. Unlike the first quarter, we were not able to fully compensate for this with higher carbon black feedstock volumes to Korea and Japan. The sales volumes for pitch and carbon black feedstock that were not exported were instead directed into the domestic Chinese market where pricing was more favorable.

With one of our joint ventures being minority-owned, these revenues and sales volumes are not consolidated and have a reduced impact on our results as they are reported as a part of the equity income in our financial statements.

At this point, we see China results for the year coming in fairly flat with 2012. Of course, Europe continues to be the most challenging part of our operations due to the recessionary conditions in the overall European economy. As a result, after a difficult first quarter, the second quarter was considerably worse as market conditions deteriorated further.

As mentioned earlier, Europe's depressed market conditions are now having a significant negative impact on our North American Carbon Materials and Chemicals business as well. At this point, our best guess on the European economy is that it will bottom in the second half of 2013 and begin a modest recovery in 2014.

Regarding our progress towards the goals supported by our three strategic priorities of growth, margin improvement and capital deployment, I would like to start by giving you a growth update. Construction is continuing on our new coal tar distillation facility in Jiangsu Province in China, which is expected to be operating by mid-2014, adding $150 million to $200 million to the top line by 2015.

As we have 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. The Australian utility pole business acquisition that we completed in late 2012 and previously mentioned is already exceeding our expectations and is projected to add over $20 million in sales this year while generating the same impressive margins that we enjoy in our existing Australian pole business.

We are now seeing more M&A opportunities that fit within our targeted growth areas coming into the market this year. We are currently engaged in several potential transactions and hope to be successful in bringing one if not two of these opportunities to completion by the end of this year.

Moving on to our second strategic priority of margin improvement, there are several areas I can point to that currently are or by year-end will be contributing towards reaching our 12% EBITDA margin target 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. The Western pole business acquired in Australia and the continued consolidation benefits of the Grenada plant closure are responsible for a large part of this margin expansion.

Sales for our value-added creosote borate treating process continue to grow and we may be adding borate treating capacity to at least one, if not two more plants by the end of 2014. There are also several capital projects underway to upgrade tie unloading and sorting equipment that will result in efficiency improvements and lower labor and repair and maintenance costs for this business.

On the Carbon Materials and Chemicals side of the business, we are in the process of implementing a new transportation management system in the US that will effectively consolidate the work that is currently being conducted in three separate systems and give us real-time access to valuable inventory and transportation information for our plant operations. This system is expected to be in place in the third quarter and will allow us to focus on lowering our logistics costs.

We also have several other cost-reduction initiatives, including plant cost reductions and improved production yields for our plant operations. These initiatives have resulted in savings of approximately $4 million in the first half of the year with others that are in various stages of implementation. We have targeted an additional $6 million of savings in the second half of this year.

In addition to these cost-saving initiatives, our efforts to further reduce our pension expense continues 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 currently being negotiated 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 in 2013 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, 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 the construction and working capital of our new coal tar installation facility in China. We made our first equity contribution of $10 million in the fourth quarter of last year and made our second contribution of $7 million in the second quarter. The project will be financed with 65% debt and we expect to finalize the local project financing in the near term.

Thus far, approximately $4 million has been spent towards construction of the facility through the first six months of this year. We expect to spend an additional $30 million to $40 million on this project over the last half of the year. When you include the 2012 Australia utility pole acquisition, we have already 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 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.

In looking at the remainder of 2013, the further deterioration we are seeing in Europe and the overflow of lower-priced products into North America 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. While the issues that we've confronted in the second quarter will result in this year producing lower results than 2012, I do anticipate that the second half of 2013 will be moderately better than the first half as a result of the benefits of the timing issues mentioned earlier, combined with the expected results of the profit initiatives we have underway.

With respect to our 2015 targets that include sales of $2.2 billion and adjusted EPS of $6.50 a share, without significant improvement in the European economy over the next two years, these targets will be more difficult to achieve and we will likely be turning more towards a $5 EPS level.

To provide some perspective on the impact of Europe's decline, for the year 2011, which was a base year for our targets, our European operations contributed almost $1 a share more than they are expected to contribute this year. And this does not include the additional negative impact of European imports into North America that has also impacted our results thus far this year. As with any plan, we knew there would be bumps in the road, but we will not let that keep us from pursuing our longer-term strategy to significantly increase the profitability of these businesses. At this time, I would like to open the conference call to any questions you may have.

(Operator Instructions). Laurence Alexander, Jefferies.

Good morning.

Good morning, Laurence.

I guess three quick questions. First, is it fair to say that the second-half earnings contribution, while up from the first half, probably won't be up year-over-year? Secondly, are coal tar prices now expected to be up year-over-year for the entire year given the dynamics you are seeing? And third, just to be clear, the $6 million in cost savings that you talked about, that is a new initiative on top of the ones you previously announced, is that right?

Okay, taking the first question --

Yes, the first question, Laurence, in terms of the second half and whether that would be up year-over-year, I would say you should not necessarily assume that it would not be. So while we say it will be better than the first half, we can't sit here and say that it could not be better than the second half of last year, but we are certainly not in a position I think at this point to really go out and affirmatively state that.

Fair enough.

And Laurence, the second question had to do with the tar?

Yes, yes. Coal tar prices. I think previously you had expected it to be flat year-over-year overall and it sounds as if overall prices seem to be moving higher, so just want to revisit that.

Sure. I mean obviously I am thinking of the four regions of the world that we are buying. We have got a couple that are maybe a tad higher and a couple that are a tad lower, but I think we can say that we expect tar costs in the second half to be somewhat flat with the first half.

Okay.

And the third question was --

And then the third one was just as you -- actually I will just leave it at that and then circle back.

Okay, okay.

Daniel Rizzo, Sidoti & Company.

Good morning, guys.

Good morning.

The lumber prices you guys alluded to, because of housing, is that something that just started occurring now or is it something that has been around since like the beginning of the year with the anticipation of a recovery of housing? Is it a new phenomenon?

No, we monitor that -- just compare that with our phthalic anhydride, the market overall, as well as the volume that we are supplying into that. So we monitor that and obviously with the increases, especially on the -- not the new construction per se, but overall housing and it does positively impact phthalic anhydride demand, as well as the automotive industry.

And then with the phthalic anhydride, with the plant closure for one of your customers, is that permanent or is it something that maybe would be coming back?

I think this closure was one location that actually produced a phthalate blue material that went into inks and paints. And unfortunately, I think that was a permanent closure, but that production could be picked up by other companies.

Okay. And then, finally, you indicated that a lot of treatment for wood products is borate-based now. Is that -- I mean you guys make that as well, so that is not something that necessarily has a negative impact or can you just elaborate on what is going on there?

No, no, that is a good thing for us in that we supply -- we have a great system where we treat the wood based on the customer's expectations using creosote, as well as the borates and we -- if you had to pick a number, you could probably say out of the 22 million ties that are going to be treated this year, about 28%, 30% would be a creosote/borate treatment, which is good for us.

Is the borate treatment a lower price, lower margin product?

No. It is -- actually it adds value to the customer in that these creosote/borate ties are primarily installed in the South, but there are two Class 1 railroads that are really doing -- a majority of their ties are using the creosote/borate treatment just to add longer life to the ties.

All right. Thank you, guys.

Kevin Hocevar, Northcoast Research.

Hi, good morning, guys. I was wondering, with the phthalic anhydride imports that has been disrupting the North American market, is that just one or two competitors that are doing the exporting or is it more broad-based? And also, if it is just a couple, one or two competitors, what regions do they operate in in Europe because I am just wondering if we should be looking for a more broad-based European recovery or if there are certain regions that they sell into that, when those regions recover, maybe they will start selling domestically and stop exporting to the US?

Phthalate -- there have been -- this is a new -- we have seen phthalic imports coming in over the years primarily from Mexico and Brazil, but in small volumes and in flake form versus liquid form, so that is not new. But what is really new and what is really impacting this business is we have not, in the past, seen much in terms of phthalic anhydride coming from Europe over to the US and when you look at Spain, Italy, Russia, even outside of Europe, Russia and a couple of other countries. So it is not just one or two countries; it is sort of like excess phthalic that is being produced into Europe that is making its way over here. In fact, I don't have the second-quarter numbers yet, but I know the first-quarter phthalic imports were about 36% higher than they were the previous first quarter of last year.

So I think this is temporary. I think once we see the European economy recovering, which I think will be a slow process, but as we see that recovering, I really think sort of these newer import locations in Europe will fade away.

Okay. And in terms of -- would they have entered into longer-term supply agreements or if Europe picks up next month, we could start to see those exports into the US start to fade away?

I am not that close to it, but typically imports are on a spot basis. So it could be X volume for one shipment, something like that.

Okay. And then in terms of carbon black feedstock, it sounded like the volumes were still kind of week during this quarter, but the outlook is more upbeat and I think that coincides with what we are seeing in tire and what the carbon black guys are saying. So I am wondering if during this quarter did you see destocking of inventories from your customers and then looking forward, I am wondering -- it sounded like Europe you didn't have as positive of an outlook, but it seems like tire shipments there have been improving. So just wondering why Europe isn't as upbeat in terms of the outlook?

Well, I certainly hope Europe improves on carbon black and tire manufacturing. I think the automotive industry was down I think 8% the first half of this year, which is a part of it. But the other part is that we are seeing carbon black making its way from China into Europe, which obviously impacts our sales to our customers on the feedstocks. But tire manufacturing is down. There has been some either temporary closures or what have you.

So excluding Europe, I mean we are still very bullish on carbon black growth, tire manufacturing growth everywhere else, especially Asia. And fortunately, we are in a great position there of supplying feedstocks from China and from Australia into China, Korea and Japan carbon black markets. So pretty good there.

Okay. And then just a final question. Do you expect the -- I don't know about shortage, but the crosstie availability, do you expect that to have any impact on your volumes here in the back half of the year? And will that in any way -- have they been trying to increase pricing that might have a negative impact on margins?

Well, it's too early to tell what kind of impact that could have. I think, again, as I mentioned, we have got I think 44 procurement managers running around the country and so we have got a very large network. There has been some slowness in June and July, but I think with increased pricing that we will see more ties coming out of the sawmills going forward for the balance of the year. But it is still a bit of a challenge, but, at the moment, we really can't look at what impact it could have. But it is starting -- actually starting to improve as of last week, a little bit of volume increase, but it is going to take higher prices to get back to where we need to be.

Okay. Thank you very much.

Andrew Dunn, KeyBanc Capital Markets.

Good morning, guys. Just a couple points of clarification if you don't mind. On the tie procurement issue, if you did have a potential near-term margin squeeze based on tougher procurement, your expectation would be that you would be able to ultimately pass that along to the end customer, correct?

Oh, sure. As you may remember, probably 80% of our tie procurement business is on behalf of the Class 1 railroads and they basically dictate volume and pricing for our procurement services. And then don't forget, typically a tie, white tie that we are buying from the sawmills takes anywhere from six to nine months for air drying, but there is a vulcanizing process that we could use to fasten that air drying process.

Great. And then also looking at the European importers that you've mentioned, as you guys maybe have any insight into this, do you see their operating rates coming down or are they kind of at a sustained level and they've been at a fairly steady level over the last couple of quarters? So I guess I am trying to figure out are they just more or less trying to slough off inventory that they have accumulated or are they still producing at a kind of normalized level if you guys have any insight into that?

Not real close to it, but I am guessing that it is both. Working off inventories that they have had, but also continuing to try to operate at a certain rate and that sort of thing. It is difficult to compete with some of the European companies that have a different view on profitability.

Okay. And just one last question. Maybe you could give us a little more color on the kind of breakdown of contribution to the sequential increase in the second half of cost savings versus this timing of shipments.

That is a little difficult to do there, but I think Walt had talked about within his prepared comments about the expected additional cost savings that we expected to see come through in the second half and I think that was an additional $6 million on top of what we had here in the first half. You have that coming into the second half and basically any additional amount would come from shipments that we have moved out of the second quarter into the third.

Okay, understood. Thanks again, guys.

(Operator Instructions). Steve Schwartz, First Analysis.

Hi, guys.

Good morning, Steve. How are you?

Good, thanks. Walt, you mentioned in your prepared remarks you were closer to maybe a couple of acquisitions. What area of the business would those be in?

Actually it is in both core businesses and as I mentioned, we do see more opportunities in the M&A front, but it is actually in both, the Railroad and Utility, as well as the Carbon Materials and Chemicals.

Okay. And can we talk a little bit about your plant utilization, particularly in China where you saw a little bit of a slowdown in the second quarter?

Sure. I mean China, with the two plants we are currently operating, we are still operating in excess of 100% of its nameplate capacity and as you probably heard me say that when we see situations that the pricing is not attractive, we will turn back to different types of products and sell those products into the Chinese markets whether it is additional carbon black feedstock or whether it is pitch sales going into other applications in China such as adding carbon quality to the coal or whatever. So we will continue to operate the plants at full capacity. Unfortunately, because of our joint venture partners having coking operations, we always have enough coal tar available to operate at that level.

Yes, I mean, at this point, we are coming to within a year of starting that third joint venture.

Right.

Do you still feel comfortable that that plant would -- I mean obviously you said it is expected to start up in mid-2014, but do you foresee any utilization issues there with the current demand environment?

No, if you'll recall, our plans are to start that plant basically if not at capacity, a large part of that capacity and once we get going, especially getting into early 2015, at least 80% or so of our pitch product will be going into the needle coke market, which is again pretty attractive and an exciting new end market for us. So I actually can't wait for that plant to come onstream.

Okay. And then if I could just ask -- once again, this was Laurence's first question about the second half earnings on a year-over-year basis. I had a little trouble understanding you, Leroy. I couldn't figure out if there was a double or a triple negative in there in your description.

Glad you caught that, Steve.

Can you clarify that for us? So you expect it up year-over-year, down?

I will take a better shot at that. So we said that the second half of the year is expected to be I think moderately better than the first half and we obviously have not talked about it in relation to the second half of last year, but I guess what I am saying is we certainly won't rule out the fact that we could get to levels that would be near last year.

Okay. So there is a possibility it could be flat year-over-year, up sequentially?

Yes.

Okay, very good. Thank you.

Liam Burke, Janney Capital Markets.

Yes, thank you. Good morning, Walt. Good morning, Leroy.

Good morning, Liam.

Walt, you talked about the benefits of the Grenada plant closing. How does capacity look right now with one fewer plant and how does it match to your demand on the Railroad and Utility side?

Well, if you'll recall, we were treating utility poles only at Grenada and it was a good move to consolidate and close that facility because of higher costs and what have you. And I don't have the exact percentage, Liam, but we did retain most all of the utility pole business that we were doing in Grenada at our Florence, South Carolina plant. And obviously that benefited a lot in our margins for the utility pole business we have at Florence. And so everything worked out well as far as projecting what our benefits would be and we are achieving those.

Okay, and so you are comfortable with the sizing of your plant to serve the demand side of the crossties?

Right. At Florence, we treat utility poles with both [CCA] and [penta] and we have enough cylinder capacity there to handle our volumes and we continue to look actually for a little more business there as well. So capacity is not an issue.

Great. And on the export side of the crosstie business, could you give us an update of how you look year-over-year and if you see any chance of adding any more customers?

Well, as you have been hearing us say for the last couple of quarters, we continually pretty aggressive on increasing our ties internationally. 2012, I think we bid about $11 million of international tie sales. This year, 2013, we are still unfortunately negotiating with a couple of railroads there. There has been some issues, specifically in Brazil where there was some reorganizational changes and engineers versus purchasing, that sort of thing. So we did not say anything on this call through our script, but we are still negotiating and our hopes are that fourth quarter of this year and perhaps no later than first quarter of next year that you will see us hopefully supplying ties into that international market.

Great. Thank you, Walt.

[Richard O'Reilly], River & Associates.

Richard O'Reilly. Hi, thank you. Good morning still. Two questions. On the acquisitions, would you look at something outside your core businesses like a third leg? Would you ever consider that?

Absolutely. I mean we have been looking for a third leg for these two core businesses for quite some time and something that we would know that we could manage well. And yes, that continues to be of interest to us whether it is on the railroad-related side or even on the Carbon Materials and Chemicals side.

Okay. Would you even step further than those? I mean you can become a titanium pigment --.

Yes, I would prefer something that, looking at our culture, looking at the way we operate, looking at that aspect, we would be open obviously, but I would take a close look at the culture and how we would take our current core competencies and add that to whatever third leg there could be available.

Second question. This is a big-picture question. You have talked about the impact of Europe on you for some time and then more recently you are talking about the impact from imports. And I don't think we have really heard that from other companies. Do you think that is just because it is unique to you, your productline, or is this something that could spread to other US companies?

That is an interesting question. When you look at the end markets that we are supplying into Europe, it is basically the same end markets that we are supplying here in North America. And in Europe, we have seen a large volume of aluminum production capacity taken out there the last two, three years and even though North America is short on domestic carbon pitch, we typically have seen 25% to 30% plus of the aluminum demand for pitch being exported into specifically Canada.

What has happened is, with the turndown of the aluminum industry production into Europe, that is giving a couple of tar distillers in Europe more opportunities to produce and ship product here, which is impacting the overall profitability and volume of what we are doing here. Again, I think some of it is temporary, some of it is going to continue because we have always been competing with import pitches into Canada.

Okay, fine.

And then also just to go on, phthalic is something new that I mentioned earlier. We typically do not see phthalic anhydride coming from Europe into North America. So again, I think that is a very short-term situation.

Okay, fine. And a third quick question on the crosstie availability. I just would've thought that the quality or strength of the lumber would be different than for housing use, the two by fours.

I'm sorry. I missed that one part.

I said I would have thought that the quality or the strength of the crossties would be different than for housing application.

Well, housing, it is primarily flooring. That is a large market for the hardwoods. Also, we are competing with these mats these oil and gas contractors are acquiring to run their heavy equipment across streams and swampy areas. And it is also in the pallet cants where pallet producers are competing with us.

So there is more than just the flooring. It is these mats for oil and gas contractors, as well as pallets. But it is -- they are offering more pricing and that is why I mentioned earlier we are going to see -- we are going to have to see more price increases to get (inaudible) back in line with tie production.

Okay. It is the strong woods versus the soft woods pines. Okay, thanks a lot guys.

Laurence Alexander, Jefferies.

Hi, there. So three or four very quick ones, if I may. First of all, just to clarify, you mentioned a cost -- a further round of cost cutting in the second half of the year. And that was I believe about $6 million. Was that a $6 million tailwind in the second half or a $6 million run rate going into 2014?

I would say that it would be a $6 million tailwind in the second half. It's not necessarily new cost-cutting items there. There are things that have been initiated here in the first half that are just starting to pick up steam here in the second half.

And then when you look at the bridge to 2014, you should have a cumulative cost-cutting run rate of probably slightly higher than that, is that correct?

Yes, that's correct.

And then you also have the lower pension costs of about, what, $0.09, $0.10?

For right now, that is correct. For 2013 carried into 2014, that is correct. Any additional in there, there is likely to be additional savings on top of that.

Okay. And then if you look farther out, given the choppiness you are seeing in the end markets, do you see another project like Jiangsu being likely in the next say 12 to 18 months that you might sign something like that for coming on around 2016, 2017 or do you think those kinds of larger projects are off the table for now?

No, I don't think so. I mean I think the next project in the Carbon Materials and Chemicals, similar to the Jiangsu project, would be in China and we are still very bullish on China as far as coal tar availability. We are very bullish on the electrode manufacturing that is going to continue to increase using needle coke, as well as binder pitches and impregnating pitches. And as you well know, when you go out further west, we have been focusing on the East Coast of China basically. Now we are in Jiangsu, which is halfway down the coast, but there are potential opportunities going West to which again a lot of steel production, coke production, coal tar and a continued increase in carbon and chemical materials. So yes, we would still be able to do something like that given the right opportunity.

And is it reasonable cadence for your ability to digest projects like that one every two to three years or do you think that we should see them accelerate?

Well, obviously, we would look at the previous project making sure it meets our expectations, but I mean assuming that goes and again, when we do projects in China, we want a very strong joint venture partner, which would lessen the financial obligations just like the Jiangsu project where we are estimating $70 million to $80 million. That is the total project. And we have 65% of that under the joint venture. So it does help us to obtain partner financing, as well as local financing for some of these projects.

And so, does that sort of large opportunity set change the way you think about hurdle rates or size of potential acquisitions?

Can you say that again, Laurence?

I guess the question is, as you look at potential acquisitions in the near term and you have had a target for M&A for quite some time, if you have the sort of larger series of projects coming down the pike, does that change the way you think about potential acquisitions either in terms of size, hurdle rate, timing?

Potentially, yes. Obviously, when we look at any of these opportunities in terms of growth versus -- more organic type of growth versus M&A, we certainly take into account the risks associated with each one of those. And we would be much more inclined to do let's say an acquisition that is highly synergistic that we think has a very high degree of likelihood of being integrated into our core operations like we have done in the past. We have been successful with those sorts of things and if we are able to do that, that would probably be high on the list. If there is other things where we are trying to get into newer markets that might have some more risk associated with them, that may be a little bit more down on the priority list, but I think that we would look at it certainly from a risk standpoint.

Okay. And then just to close that off, does the $5 number you mentioned earlier include any tailwind from acquisitions or is that say sort of as is or a status quo kind of number?

Well, the $6.50 target included acquisitions. So this is basically all the elements that were incorporated into our original estimates just kind of recalibrated for where the current markets are at particularly in Europe.

But just to make sure I have that clear, that is a demand revision, but not a strategy revision?

That's correct.

Thank you.

Thank you, Laurence.

There appear to be no further questions, Mr. Turner. Please continue with any other points you wish to raise.

All right. Thank you. And again, we thank all of you for your participation in today's call and appreciate your continued interest in our Company. We will continue to do the right things for our business by pursuing prudent growth opportunities as we have been talking about and also looking for ways to enhance the profitability with our existing businesses. I think despite some of the current challenges that we have with the European economy, we believe the diversity of our business and our Company along with our margin improvement and growth initiatives will continue to provide us with relative 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. And again thank you for being with us today.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.