Koppers Holdings Inc (KOP) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Koppers Holdings Inc. fourth quarter conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, February 13th, 2014.

I will now turn the conference over to Mr. Michael Snyder, Director of Investor Relations. Please go ahead.

Thanks, Sarah, and good morning, everyone. Welcome to our fourth quarter earnings conference call. My name is Mike Snyder, and I am the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release. If you haven't, one is available on our website or you can call Rose 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'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 the non-GAAP financial measures to the most directly comparable GAAP financial measures.

I'm joined in this morning's call by Walt Turner, President and CEO of Koppers; and Leroy Ball, our Chief Financial Officer. I would like to turn the call over to Walt Turner. Walt?

Good morning and thank you, Mike. Welcome, everyone, to our 2013 fourth quarter conference call. I would like to start the call by talking about the full year's results. On the surface, 2013 shaped up to be a disappointing year, as we saw both sales and earnings decline from our record 2012 results. Like most years, there were positives and negatives and I will review some of those later in the call.

If I had to boil it down to the primary reason for the decline in 2013, I would clearly place the blame on the deterioration of the European end markets. We experienced volume shortfalls in other regions and pricing was a challenge, but the Railroad and Utility Products markets continue to be very strong for us. However, we were able to more than offset any negative impacts from the lower volumes and a challenging price environment to give us positive impacts realized in both businesses.

First, let me put into perspective the impact that Europe had on our consolidated results in 2013. For the year, we finished with an adjusted operating profit of $118.3 million, compared to $130 million in 2012, an $11.7 million decline. Europe's adjusted operating profits alone fell by $17.8 million year-over-year, which puts the net improvement of the rest of our businesses at $6.1 million for the year.

The European impact gets even wider when you look at the effect that Europe had on our effective tax rate and adjusted EPS during the underutilizing of the total tax structure we put into place at the end of 2011. Our estimates of the overall impact that Europe on had on our consolidated results, including the higher tax rate, was just under $1.00 per share. Just to make this point even more clear, had our European business posted flat results in 2013 compared to 2012, we would have reported an adjusted EPS of just under $3.60 per share. That represents about $0.30 per share or 10% of earnings improvement in the other businesses for the year.

All told, in 2013 we realized approximately $9 million of real sustainable profit improvement to add to the $18 million we generated in 2012. As we head into 2014, that puts us well on track to exceed our 2015 target of $40 million in annualized savings a year ahead of schedule. I will provide more detail later that will give you a better understanding of where those savings are coming from.

Our financial results for the fourth quarter were a continuation of what we experienced in the first three quarters of this year. Adjusted operating profit was $24.8 million compared to $26.3 million in the fourth quarter of 2012. Europe alone had a $6.6 million negative impact on the comparison, which means the other businesses did better by $5.1 million in the quarter compared to the prior year.

Part of the reason for the significant difference in comparison for Europe was a large customer order for carbon pitch in the fourth quarter of 2012 that did not repeat in the fourth quarter of 2013. The effect of Europe on adjusted EPS for the quarter due to a slower operating profit and subsequent impact on the consolidated tax rate was approximately $0.36, which more than accounts for the $0.22 reduction in 2013 compared to 2012.

I will now turn it over to Leroy to provide some additional 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 status of our end markets. Leroy?

Thanks, Walt. On a consolidated basis, sales for the fourth quarter decreased by 9% to $33.1 million to $341.8 million compared to the prior year quarter, driven mainly by lower sales of carbon pitch as aluminum production in the mature geographies has been reduced due to lower global aluminum pricing, combined with an unfavorable pricing environment. Additionally, difficulty in procuring crossties due to competing markets for hardwood lumber reduced crosstie sales for the fourth quarter compared to the prior year.

Fourth quarter adjusted EBITDA was $33 million or $0.6 million lower than to 2012's fourth quarter adjusted EBITDA of $33.6 million. But adjusted EBITDA margins of 9.7% for the fourth quarter of 2013 were above adjusted EBITDA margins of 9% for the fourth quarter of 2012.

Excluding the effect of the non-deductible impairment and restructuring charges for our plants in China and in The Netherlands, our tax expense as a percent of pre-tax earnings for the quarter was 58% compared to 25% in the prior year quarter, with the increase due mainly to the unfavorable impact of lower European earnings in the fourth quarter of 2013. The negative impact of the higher tax rate on fourth quarter results amounted to about $0.20 a share. We anticipate an overall tax rate for 2014, excluding discrete items and European restructuring charges, of around 40%, compared to our 2013 rate, excluding restructuring charges and discrete items, of approximately 46%.

Adjusted net income and adjusted earnings per share for the fourth quarter 2013 were $9 million and $0.44 per share, compared to $13.9 million and $0.66 per share for the fourth quarter of 2012.

Items excluded from the adjusted results for fourth quarter include pre-tax charges of $14.1 million related to plant closures and rationalizations and $2.9 million related to the tank and tank car cleaning programs due to our decision to accelerate the cleaning and dismantling of certain tanks, as a result of our recently completed global study of our storage tanks initiated because of the Australian pitch tank leak that occurred in 2012.

Turning to Carbon Materials and Chemicals. The fourth quarter revenues of $213.7 million were $28.7 million or 12% lower than sales of $242.4 million in the prior year quarter due mainly to lower sales volumes and prices for carbon pitch.

Pitch products accounted for a 9% or $22.8 million decrease in sales compared to the prior year quarter, as sales volumes and prices for carbon pitch declined. As mentioned earlier, the global carbon pitch markets have been challenged as a result of the difficult aluminum market which has had a negative impact on sales volumes and pricing compared to the fourth quarter of last year.

Sales of distillates decreased 1% to $2.9 million as lower sales volumes for creosote and lower sales prices for carbon black feedstock sales were partially offset by higher sales volumes for carbon black feedstock compared to the prior year quarter.

Sales of coal tar chemicals were flat as higher sales prices for naphthalene were offset by lower sales volumes for phthalic anhydride compared to the prior year quarter. Phthalic anhydride sales volumes were negatively affected by a customer plant closure, reduced demand from plasticizer markets, and European imports.

The average price for orthoxylene was at $0.61 for the fourth quarter of 2013 compared to $0.66 for the fourth quarter 2012, despite the fact that average oil prices were $97 a barrel in the fourth quarter compared to $88 a barrel in the prior year quarter. Orthoxylene prices were flat at $0.60 a pound in January, the same as in December and dropped to $58.5 a pound in February as lower seasonal demand had a negative impact on spot xylene prices.

Carbon Materials and Chemicals adjusted operating profit for the quarter was $13 million, representing a decrease of $5 million from $18 million in the fourth quarter of 2012, which equates to adjusted operating profit margin of 6.1% and 7.4%, respectively. Operating profits and margins were lower mainly as a result of lower profitability from European operations.

For the year, sales for carbon materials and chemicals of $906.1 million decreased by $93.6 million or 9%, on sales of $999.7 million in the prior year. Sales of carbon materials were down 6% or $61.5 million mainly due to lower sales volumes for carbon pitch. Sales of distillates were flat as lower sales volumes for creosote in North America and lower sales prices for carbon black feedstock in Europe were partially offset by higher sales volumes for carbon black feedstock. Sales of coal tar chemicals for the year were 2% or $17.7 million lower than the prior year, as lower sales volumes for phthalic anhydride and naphthalene were partially offset by higher sales prices for naphthalene.

Adjusted operating profit for the year amounted to $60.4 million, 27% or $22.7 million lower than adjusted operating profit of $83.1 million in 2012, due mainly to lower profitability from European and US operations. The reduction in profitability for European operations was due to lower sales volumes for pitch and naphthalene and lower sales prices for carbon black feedstock. The reduction in profitability for US operations was due mainly to lower sales volumes for phthalic anhydride.

Moving to the Railroad Products and Utility business, sales decreased by $4.4 million or 3% for the fourth quarter, compared to last year's fourth quarter. The sales decline was due to lower sales volumes for crossties mainly due to the timing of orders and increased competition from hardwood lumber markets. The reduction in sales volumes for crossties was partially offset by incremental sales from the November 2012 utility pole business acquisition in Australia.

Adjusted operating profit for the quarter increased to $12.2 million from $8.6 million in the prior year quarter, with adjusted operating margins at 9.5% compared to 6.5% in the prior year quarter. Profits from the Australian pole business acquisition, a favorable product mix for the US railroad business, and lower pension expense contributed to the improved results for the quarter.

For the year, sales from Railroad Utility Products were up 3% or $16.9 million to $572.2 million, mainly due to the acquisition of the Western Pole business in Australia in November of 2012 as lower sales volumes for untreated crossties were largely offset by higher sales volumes for treated crossties.

Adjusted operating profit for the quarter increased by 23% or $11.3 million to $59.8 million from $48.5 million in 2012, due mainly to a favorable product mix that includes higher sales volumes for borate treated crossties, cost savings from the closure of the Grenada plant in mid-2012, and the incremental profitability from the acquisition of the Western Pole business in Australia in November of 2012.

Cash provided by operations for the year 2013 amounted to $117.6 million, compared to cash provided by operations of $77.8 million for 2012 as working capital decreased in 2013 more than offset lower net income compared to the prior year period.

Debt net of cash on hand as of December 31st, 2013 decreased to $221 million from $229 million at December 31st, 2012. As of December 31st, we had $6.6 million borrowed on our revolver and total estimated liquidity in excess of $400 million. During the fourth quarter, we increased the size of our revolving credit facility to $350 million and added to it a $100 million accordion to give us additional borrowing capacity if needed.

Our seven and seven-eighths notes are inching closer to the first call date in December of this year and we are keeping a close eye on when might be the right time to refinance them. To give you a sense of the cost of refinancing the notes, today it would cost approximately $27 million to do an early tender while if we waited to call them in December, it would cost us approximately $12 million. As we continue to move towards the call date, the $27 million will continue to drop, which would reduce the cost of the refinancing.

However, if interest rates make a significant move upward between now and then, it could wipe out any savings generated by trying to wait to the last possible moment. Based upon where things stand today, we could probably save at least $6 million per year in interest costs through a note refinancing. We will continue to keep our eye on the situation and act when we feel it is most appropriate.

Capital expenditures for the year 2013 were $73 million, up from $29 million last year, mainly as a result of $37 million of expenditures related to the new coal tar distillation facility being constructed in the Jiangsu province in China.

One final note that I would like to update everyone on is our progress towards fully funding our US pension obligations. As of the end of year 2013, we stood at a funding status of 92%, which equates to a $12.9 million shortfall. As we have increased our funding status, we have changed our asset allocation towards more longer term fixed income products in order to hedge our risk against the funding gap widening again. According to our assumptions, which include another $20 million contribution this year, we would be at 105% funding level by the end of 2014, which would allow us to consider a plan termination which would effectively transfer our pension obligations from our balance sheet.

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

Thanks, Leroy. I would like to give you an update on the status of the key end markets and how we see these markets impacting our results for 2014. First I would like to talk about the Railroad and Utility Products business. Our fourth quarter sales volumes for crossties were down compared to the fourth quarter of last year, as sales volumes for untreated ties were lower due to a difficult lumber market.

Sales volumes for treated ties were also lower, mainly due to timing related to the completion of annual insertion programs for some of the Class I customers. As we mentioned in previous calls, we expected a headwind in the second half of the year and into 2014 due to increased competition for hardwood lumber from the flooring and crane mat markets that would provide a challenge in obtaining adequate supplies of raw materials.

We have had to draw down on the untreated tie inventory this year for both Koppers owned and railroad owned ties to be able to meet our customer commitments. As a result, our untreated tie inventories were reduced from 6.2 million ties at the end of 2012 to 5.2 million ties at the end of 2013. While we see continued challenges for crosstie procurement, we expect to be able to manage through this temporary shortage and we believe we are in a stronger position than our competitors due to the size of our procurement buying network.

The shortage we are currently experiencing will likely result in fewer seasoned crossties available for treatment next year. But fortunately, we have the option of using an accelerated drying process, referred to as boultenizing that should help mitigate most if not all of the shortfall.

The commercial crosstie business in 2014 is expected to have another strong year as the short line railroads continue to upgrade the rail lines to accommodate the heavier car loads from the Class I railroads. While the Section 45 tax credits expired at the end of 2013, there appears to be strong support in Congress to extend the credits for at least a few more years.

On the M&A front, we completed the acquisition of Tolko's Ashcroft crosstie treating business in Canada in early January. This addition to the network of treating plants gives us a broader footprint in Canada as well as the Northwest region of the US. We expect this business to add about $30 million in revenues and be accretive to earnings in 2014, as well as providing synergies that should further enhance our profitability.

On the utility side, our Australian utility pole business showed significant improvement over its strong 2012 results due primarily to our acquisition of the Western Pole business that was completed in last year's fourth quarter. This acquisition generated over $25 million in revenue and was a strong contributor to the margins and profitability in the segment.

The creosote-borate treated tie volumes continued to increase in terms of the percentage of total ties treated, and this ratio should continue to grow in 2014, enhancing revenues and profitability for the railroad business. The three year contract extension with the Norfolk Southern that we recently announced also provides for additional volumes of creosote-borate treated ties.

During the fourth quarter, we discontinued operations at our cogeneration operation facility in Muncy, Pennsylvania. And I will talk more about that in the margin improvement discussion.

Now, I would like to talk about the outlook for our global Carbon Materials and Chemicals business. For the global aluminum industry, an estimated 5% increase in consumption for 2013 is projected to be followed by a 5% to 6% increase in consumption in 2014 and 2015. Excluding China, which produces and consumes nearly half of the world's aluminum, both consumption and production are projected to increase by 3% in 2014. While consumption is ultimately the driver for aluminum production, the production side more directly impacts pitch volumes for us.

Our pitch volumes were down globally in 2013, as aluminum production in the US was down 6% for the year and we also had to contend with depressed pricing environments in Europe and Middle East. Additionally, there were smelter closures in the Europe and Australia in 2012 that had a full year's impact in 2013. Aluminum prices continue to be depressed and under $1,700 a ton, and the inventory levels continue to be around 5.5 million tons. However, with the reductions in smelting capacity, along with the projections for increased aluminum consumption, we are hopeful that the aluminum industry and our pitch business will improve going forward.

The aerospace and automotive industries continue to use large amounts of aluminum in their products, which along with the emerging market growth, should continue to increase consumption. For example, the Ford Motor Company recently announced that 97% of the truck bodies from the best-selling F-150 Ford model year 2015 will be made from aluminum to improve fuel efficiency. A recent forecast is projecting aluminum demand to outpace production in 2015, which is the first time this happened since 2006, and should be beneficial to the aluminum pricing and industry as a whole.

With regard to capacity increases in the Middle East, Alcoa's Ma'aden smelter in Saudi Arabia and the Emal expansion in the United Arab Emirates should be at full production levels by the last half of 2014, as capacity continues to grow in this low energy cost region. We hope to increase our sales volumes of pitch into the Middle East in 2014 as production at these facilities increases the demand for pitch, which will hopefully result in a more favorable pricing environment for us.

2013 was a tough year for phthalic anhydride volumes as we experienced pressure from a closure of a customer's facility, lower demand from the plasticizing markets, and increased competition from European imports. However, due to a contract extension with one of our major customers that includes increased volumes, and positive signals from some key leading indicators like auto production and housing starts, we anticipate a moderate increase in phthalic anhydride sales volumes in 2014.

Looking at those key indicators, light vehicle production is expected to increase slightly in 2014 to just over 16 million units. Housing starts are currently projected to be up by 24% compared to 2013, which will be positively -- which should both positively affect our phthalic volumes.

Our carbon black feedstock sales were up in the fourth quarter and for the year on a comparative basis, although sales prices were lower mainly as a result of the depressed market we have into Europe. Carbon black feedstock, which is largely driven by the tire demand, should be strong in 2014 as growth rates for global rubber demand are projected to average 3% annually 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.

Naphthalene demand, which is driven mainly by its use as a surfactant additive in concrete, resulted in higher sale volumes for our Chinese operations in 2013 due to the infrastructure expansions and the stimulus programs in emerging economies. Global surfactant markets are projecting a 4% annual growth rate through 2016, with higher growth levels in China and other emerging market economies.

Additionally, with new phthalic anhydride plants currently being built in China, demand for naphthalene as a feedstock for phthalic production is expected to increase significantly over the next few years. The increased levels of demand in China resulted in higher sales prices and volumes for naphthalene for our Chinese operations in 2013, as selling prices for naphthalene for the year were up over 30% compared to a year ago.

Regarding the outlook for our coal tar raw material, the tar supply in the US should be relatively stable and we should receive additional tar from the ArcelorMittal coke plant in Monessen, Pennsylvania by mid-2014, when it is expected to be producing coke again.

Outside of North America, we expect to continue supplementing our tar supply into Europe by bringing tar in from Russia and the Ukraine to supplement our European supply base. We will also continue to have access to the majority of the coal tar currently used by our plant in The Netherlands after it discontinues operations. Raw material costs in China increased in 2013 due mainly to higher demand from the naphthalene market. And that will likely continue to be an upward pressure on tar prices in 2014. Our Australian operations will continue to supplement their limited domestic tar supply with soft pitch raw material from both Taiwan and China.

Our North American Carbon Material and Chemicals business continues to be challenged by the European imports of carbon pitch, and phthalic anhydride. Additionally, aluminum LME pricing continues to stay below the $1,700 mark, which has resulted in lower production level in the mature markets, resulting in a difficult pricing environment for carbon pitch. In addition, reduced electrode production for electric arc furnaces in North America has also put pressure on pitch volumes this year.

In October, we curtailed operations at our tar distillation facility located in Follansbee, West Virginia to lower the overall cost structure. And I will talk more about that shortly as part of the margin improvement discussion. We anticipate that this business will be moderately better than 2013 due to the benefit of lower costs from the curtailment.

It appears that the European economy has begun to recover but we don't anticipate an increase in aluminum production in Europe going forward. As a result, we announced in January that we are discontinuing distillation at the plant in The Netherlands in mid-2014, which will lower our overall cost structure in Europe and increase our throughputs at our plants in Denmark and the UK. This consolidation should improve Europe's profitability compared to 2013.

For Australia, we expect 2014 results to be similar to 2013 with some downside risk in the event that the Point Henry aluminum smelter closes. The outlook for China for 2014 will include additional revenues from an expected six months of sales from the new joint venture. But any incremental profitability may be offset by start-up costs. Overall, we expect profitability from the Chinese operations to be flat to slightly up compared to 2013.

As mentioned in the last call, Tangshan Iron and Steel, or TISCO, our partner in our 60% owned joint venture in the Hebei province, received notice from the Chinese government requesting TISCO to cease operations for their two coke batteries as a part of the government's air quality improvement efforts. Our adjacent tar distillation plant known as KCCC receives most of its utilities and raw materials from the two coke batteries. We will need to find alternate sources if the coke operations do cease production.

As a result, we continue to consider various alternatives including relocation as well as alternative power and raw material sources. But it is possible we could ultimately decide to close this plant. We are currently in discussions with our joint venture partner as well as the local Chinese government authorities requesting a delay of the closure as well as financial and other assistance.

KCCC contributed about $3 million to operating profit, after minority interests, in 2013. After recording an impairment charge of $4 million in the fourth quarter, of which $2.4 million represents our ownership interest, Koppers' share of the book value of the fixed assets is approximately $6 million. Of the $6 million, about $5 million relates directly to the plant and will be depreciated over 36 months in anticipation of a closure.

In the event that we have to close the facility, we expect to fully meet our customer commitments, both in the domestic and export markets, by utilizing our other tar distillation facility in the Hebei province, as well as our new facility being built in Jiangsu that will begin operations in mid-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.

As mentioned earlier, in January we acquired a crosstie treating business in Canada that should add about $30 million of additional sales in 2014, while being accretive to the company's earnings and margins. This acquisition was in line with our strategy of looking to grow by either expanding our core business or adding near adjacent maintenance of way opportunities. Just as important, it now gives us a strategic presence in the Canadian and Northwestern US markets, which we believe can open up additional commercial business and procurement opportunities.

Regarding the new joint venture in China, construction continues to be on time and on budget for our new coal tar distillation facility in Jiangsu, which should be complete and operational by mid-2014. As mentioned previously, the majority of our production will ultimately be sold to Nippon Steel Sumikin Chemical, the owner of the adjacent needle coke and carbon black plants, when the carbon complex is completed. We continue to anticipate that the completion of construction for the needle coke and carbon black facilities will be in the fourth quarter of 2014.

In the interim, we plan to operate our tar distillation plant at capacity and sell the products into the domestic Chinese market. As a reminder, the delay in the construction of the plants will extend timing for maximum sales and profitability for the project.

The Australian utility pole business that we acquired in late 2012 has exceeded our expectations and added over $25 million in sales this year, while generating margins that are in line with the legacy Australian utility pole business, which happen to be the highest for any segment or geography in the entire company.

We continue to work diligently and are evaluating M&A opportunities that fit within our targeted growth areas and have devoted much time to this effort over the past year. Unfortunately, most opportunities that aren't going through a formal auction process like the three we are currently evaluating, take time to develop and that is why -- that is what we are experiencing at the moment. We are currently engaged in various stages of negotiation and due diligence for each of these three companies. And we hope to be successful in acquiring at least one of these additional opportunities during the year.

Moving on to the second strategic priority of margin improvement, there are several areas I can point to that are currently contributing towards reaching our 12% EBITDA margin target by to 2015. Before I go to the specifics of the progress that we have made on various margin improvement initiatives, I think it is important to highlight the European performance, how much it has masked the success that we have had to date.

As we made clear for some time now, we are working towards achieving an increase in our EBITDA margins that would take us from the 9.6% that we achieved in our base year of 2011 to a 12% margin by the end of 2015. If you look at the raw adjusted numbers, we have essentially improved upon the 9.6% base EBITDA margin by only 60 basis points so far, as we finished 2013 at 10.2%.

Not only that, but the raw numbers will also show a 10 basis point decline from 2012 to 2013. That certainly is not reflective of the approximate $27 million of cumulative sustainable cost reductions or profit enhancers that we have achieved over the last two years. Once again, Europe is the prime reason. If we look at the non-European business in isolation, they would show 140 basis point EBITDA margin improvement from 2011 to 2012 and an additional 50 basis point improvement from 2012 to 2013, for a total 190 basis point improvement over this last two year period.

We have talked extensively on past calls about the success the Railroad and Utility Products business has had and they have improved their EBITDA margins since 2011 by 420 basis points over that time frame, 180 of which was achieved in 2013.

If you remove Europe from the consolidated results, we would show an 11.8% EBITDA margin in 2013, which would have had us more or less reaching our goal two years early. It is not my intent to try to divert any attention away from what was a disappointing year, only to make sure that everyone understands that a lot has already been done to mitigate most of the damage caused by the end markets that are in turmoil. As I also indicated on prior calls, we've only scratched the surface and I believe we have considerably more potential for both reducing costs and enhancing profits through various initiatives. With that as a back drop, I will give you more color on some of the items, both completed and in progress.

In the category of items completed that have contributed to the $27 million of cumulative annual margin improvements are the repricing of expiring contracts, introduction of our creosote-borate treating process at four treating facilities, the low cost substitution of key raw materials in our chemical collection process, the closure of our Australian carbon black facility at the end of 2011, the closures of our wood-treating facility and cogeneration facility in the United States in the third quarter of 2012 and 2013 respectively, a restructuring of our Australian administrative office, and a reduction in pension expense, in line with management's goal of fully funding US plans.

As for the items in progress that will contribute to next year's margin improvement totals, they include the restructuring of our European operations through the ceasing of distillation activities at our Uithoorn, The Netherlands facility, and movement of those production volumes to our other European facilities, the restructuring of our plants in Follansbee, West Virginia and Portland, Oregon, various operations focused projects including productivity capital aimed at reducing plant operating costs, and the continued spillover improvements related to some of the previously mentioned projects that have already generated savings in 2012 and 2013.

We are expecting to generate over $13 million of improvements in 2014 related to the items just mentioned, which would bring our three year annualized total to just over $40 million. That does not include the margin benefit added by the 2012 Australian pole acquisition and the early 2014 Canadian wood treating acquisition, both of which generate above average margins when absorbed into our larger network of treating facilities. Finally, the projects just mentioned, plus the addition of our creosote-borate treating processes at two or three of our facilities by the end of 2014, should contribute at least another $15 million of improvement in 2015.

Now, to summarize, our progress on our third strategic priority of deploying capital -- in order to maximize returns, we have generated approximately $188 million of free cash flow over the past two years, which equates to about 6.2% of sales generated over that time period. As a reminder, we have targeted average free cash flow generation of 5% of sales over our planning period so we are tracking ahead of that goal as it stands today.

The $188 million has been deployed as follows: $66 million has been returned to shareholders through a combination of $40 million of dividends and $26 million of share repurchases, equal to about 3% of shares outstanding; $53 million has been used on growth areas, such as the $37 million that has been spent on our plant currently under construction in China and the $16 million on our Australian utility pole business acquisition; and finally, $57 million has been spent on margin improvement initiatives such as productivity capital, excess pension contributions, plant rationalization, and business development costs.

That leaves a balance of $11 million of excess cash that, combined with $17 million of net other non-operating cash generated in the last two years, equates to a $27 million increase in our cash balance over that same time period. Our debt has been flat over that same period, as we repaid $6 million in 2012 and borrowed $6 million in 2013.

To summarize, while 2013 has been a challenging year in many respects, there are still several positive areas that we can point to for the future of our businesses. These include the railroad and utility products business having another banner year while continuing to show further upside, implementing several margin improvement initiatives that contributed $9 million to operating profit and helping to offset some of the European decline, and successfully integrating our Australian pole acquisition while doing the work that allowed us to be successful in landing another tuck-in acquisition in the Railroad and Utility Products segment in early 2014.

I would like to close by summarizing at a high level my earlier comments about what we are expecting as we enter 2014. Let me start with the top line, where are expecting a minimum revenue increase of 5% over 2013. Contributing to that will be our new China joint venture coming online in mid-year and the addition of our new Canadian wood treating facility acquired in January.

Potentially offsetting that would be any net reductions in the Carbon Materials and Chemicals volumes in Europe and Australia, as our own markets continue to be challenged in those geographies, and any reductions we have experienced in our crosstie business as the industry continues to deal with a shortage of ties.

From a profitability standpoint, I'm not prepared to offer specific guidance but I will start by reminding you of the $13 million of improvement we expect from the margin initiatives I spoke of earlier. In addition, better than average profit margins should be contributed by our new Canadian wood treatment acquisition. Also from the EPS standpoint, we can also see a benefit from refinancing our bonds at some point between now and the December 1st call date. Partially offsetting those positive items would be a potential increase in incentive compensation expense above the considerably lower number recognized in 2013 due to most of our business regions not meeting expectations.

As I previously mentioned, in the interest of conservatism, we are not expecting much contribution from the new China operation in 2014 as they will incur an increasing amount of start-up costs as they get closer to start-up by mid-year but that could provide some upside compared to current expectations. None of what I mentioned contemplates the impact from the early shutdown of the KCCC facility in China, which could have up to a $3 million negative effect on the 2014 results. And it doesn't include any assumptions related to the acquisitions, which I'm hopeful to be successful on at least once within the first half of 2014.

The bottom line is that 2014 will continue to be a very active year for Koppers as we work diligently on adjusting our asset footprint to better manage our current and future expected business through rationalization of mature geographies that we operate in, while we bring up new capacity to serve the growth in the developing markets. While that is going on, we will be diverting a great deal of energy towards driving margin improvement through identified projects while we continue to look for more ways to reduce costs and enhance profitability.

Finally, as we are doing work throughout the year to integrate our new wood treating acquisition, we will continue to search for other pieces that make sense to meaningfully add to the existing businesses and lead us closer to our long-term sales and profitability goals.

As most of you on the call know, we spent a lot of time over the past couple of years reviewing our plans and goals through 2015. Now, that we are halfway through that four-year planning period, we are in the process of updating our scorecard and investor communications to revise and extend our expectations out another two years, through 2017. As of now, it is our intention to disclose and begin discussing that in the late first quarter, early second quarter timeframe.

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

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator Instructions). Your first question comes from the line of Ivan Marcuse of KeyBanc Capital market. Please go ahead.

Hi, guys. Thanks for taking my questions. Real quick, your last comments on extending the goals out to 2017; that was the 12% EBITDA margin goal that you were referring to?

Ivan, no, all we mean -- the 12% EBITDA margin goal is still a 2015 goal. And we think it is still realistically achievable. What we are trying to say is we are halfway through that and it is time to refresh the numbers and extend it out another couple of years.

Got you. It you look at it with all of the detail you gave -- I understand that you will have about $13 million in cost savings and profitability and everything you just went through. If the environment in the carbon pitch business sort of continues as it is and phthalic continues to be pressured, are you going be able to grow earnings next year?

That is what we are saying with all of the things we are doing, Ivan, we definitely will increase our earnings 2014 over 2013, for sure.

The expectation is I think even in the challenged markets that -- with the initiatives that are in progress, that we have been pretty successful on getting results on so far, that we would be able to offset any reductions that would come from those challenged markets.

Great. And two more quick questions. One, what is your tax rate expectation for 2014? And then if you look at --

Tax rate expectation for 2014 is at 40%, excluding the restructuring items and any discrete items that might be recorded.

For modeling expectations you would put it at 40%?

Yes.

Got you. And then the last question on the acquisitions, you talked about three. Were these obviously similar in the railroad business or are they both in the carbon chemical business? Or how would you -- or where would you put them?

They reflect both core businesses, Ivan.

Great. Thanks for taking my questions.

Sure.

Your next question from the line of Laurence Alexander of Jefferies. Please go ahead.

Good morning.

Good morning, Laurence.

How much of a headwind, if any, was the inventories reduction in Q4. As you think about the bridge into 2014, if you do see better volumes in the crosstie business later in the year or CM&C, how would you think about incremental margins? Probably a little stronger than historically, is that fair?

On the railroad ties, as you heard, we reduced our inventories on the seasoned ties by one million ties and we continue to struggle a bit. It is a challenge out there with the flooring and the crane mats competing with lumber. But we do expect shortly the Class I's to be raising prices here and get this turned around a little bit.

But at the moment, if we have to, as I mentioned -- if we have to use higher pricing as a way to drive the ties, that is what we will do. But going forward yes, at this time, I think we are going be all right with -- not all right, it will be a challenge. But we will be looking at increasing procurement through higher prices. At the moment, the difference between a tie and what the flooring and crane mats are paying is almost $5 a tie. So the railroads have got to catch up with that equivalent for the crosstie point of view.

For the Carbon Materials and Chemicals inventory, we are status quo. We have not seen much reductions over raw materials. We have been managing that well throughout the regions. Coal tar supplies, I think we are pretty stable in the US. We continue to bring coal tar in from Russia and the Ukraine. And once we close distillation capabilities at The Netherlands plant, we will continue to have the coal tar that we are using there into both Denmark and the UK.

And speaking of pricing, have -- are you seeing any shift in your carbon pitch customers to tie in contracts to coal tar passthroughs?

No, not at this point. When you have got the mature markets still operating at low rates in regards to smelting, it has been a challenge from a weak pricing environment.

And then just lastly, how much of a headwind do you think you will have on the incentive comp and just overall cost inflation this year?

We had a reduction this year from the prior year, Laurence of close to $5 million in overall incentive compensation costs so that gives you some idea of the benefits.

Thank you.

Your next question comes from the line of Chris Shaw of Monness, Crespi, Hardt. Please go ahead.

Good morning.

Good morning, Chris.

Talk about Europe and the carbon materials, specifically with the shut down or the plant shutdown of your Dutch plant now, how do you think that is going to change the overall industry utilization rates? How does it change it actually for -- what utilization rates will you see now at the other two plants? And what do you think that that market is going to -- how much more rationalization within the whole industry do you think there is required to get better pricing or more stable pricing? Your thoughts on European carbon pitch market?

First of all, when we were operating the three plants, we were operating at about 60% of capacity. Now, we're going from three plants to two plants, that will get us up to 85% plus of operating capacity. It will help us incrementally on the cost side. What others are doing in the industry, I really don't know. When you see older high cost aluminum smelters closing and not returning to the industry, the industry must adapt to this mature market. We had no choice but to rationalize our capacity and focus on two plants which will get us at a much higher rate. Beyond that, I really don't know what others might be doing, Chris.

I feel like even in the past, when conditions for margins were better in Europe, that even then I thought some of the smaller plants that were operating there might be losing money or not be making much money and probably needed to shut down. Any sign, I know there are a lot of small -- like one in Czechoslovakia and one in Spain -- any sign for those guys or even the big guys, that they might be taking some capacity offline?

As you say, Deza in the Czech Republic and you've got Nalon in Spain I thought for sure by now something would have happened. They are definitely operating at low rates. We do know that. We keep knocking on their doors but they want to continue to operate these facilities, even at low rates. and as you say, even I think losing money, as well. But nothing has really happened there. And you have Rain operating the two plants, one in Belgium and one in Germany. I have not seen any signs of any cutbacks there.

Just curious on the Norfolk Southern contract renewal, is there any pricing indication to give there, in terms of -- is it up significantly or sort of normal increases you would see for when a Class I contract rolls over?

As you heard us talk in the past, when we renew contracts there is always adjustments on pricing and so forth. And this is a three-year extension of those contracts. And it also includes us having capability to also have the Creosote borate treatment. It was a good contract for us to extend out three years.

Okay. Thank you.

Your next question comes from the line of Liam Burke of Janney Capital. Please go ahead.

Thank you. Good morning, Walt. Good morning, Leroy.

Good morning, Liam.

I apologize for asking this question again. You stated you will hold the line on the 12% EBITDA margin for the goals of 2015. Have your EPS targets changed?

Well, Liam, that right now, will be part of the revision that we would be preparing to take out in 2014 -- or take out at the end of the first quarter beginning of second quarter. So it is just a little premature for us to say anything on that at the moment.

Okay. Thanks, Leroy. And then I understand that in the US that plasticizers are using less phthalic anhydride and using different processes. Do you anticipate that to affect the overall long-term demand for the naphthalene?

The naphthalene would only impact on us, Liam, in that we are only -- of the three phthalic producers, we are the only using naphthalene as opposed to orthoxylene. There is some decline in plasticizers using phthalic anhydride. The most we can get is looking at maybe a 5% per year decline on that end of it. But we do see offsets on the polyester resins. If there is a decline, I think most, if not all will be offset by the resins and the alkyd -- the paints.

Great. Leroy, could you give me a split on CapEx for 2015 between the joint venture and normal maintenance?

For which year?

For 2014.

For 2014. For 2014, CapEx -- we are expecting something in the range of probably -- one second here -- about $48 million.

Okay. Would there be spillover from the JV in there?

There would be spillover from the JV. That would be something, actually -- in probably the $25 million range.

Great.

So the $23 million-so the difference between the $48 million and $25 million would essentially be more along the line of the maintenance and then we had some productivity CapEx on top of that.

Okay. And then lastly, Walt, are you going to be able to revive the export program that you had on the rail tie business to Latin America?

Yes. That is something that is definitely a growth area for us, Liam. We have people on the ground there and actually getting some RFQs in the last two weeks. Yes, it is definitely a market that we plan to extend our tie treating business.

Great. Thank you very much.

Your next question from the line of Steve Schwartz of First Analysis. Please go ahead.

Hi, good morning, guys.

Good morning, Steve.

Hey, if we could go back, Walt, in your response to Chris' question about Europe -- so at one time you had an acquisition strategy that revolved around consolidation in that market. But given that demand is so weak, you mentioned you are still knocking on some doors there. So you are in fact still thinking of acquiring to consolidate there? Or are you now starting to think that it is better just to walk away from that region all together?

We are definitely not walking away from that region at all, Steve. If we had the opportunity to take out capacity, which still some needs to be taken out, we would definitely take a hard look at it.

So there is an opportunity to still do some good business in Europe?

I think so. It is not going to be what it was two or three years ago. But this is an important region for us. By closing The Netherlands, we are not walking away from the region whatsoever. We're just trying to adapt to what happened the past two years and make it more profitable for us.

Okay. If we could expand this discussion to the global perspective. Certainly in the Middle East you are getting pressure from Asian pitch suppliers. And so as you think about what you are doing with your capacity, how do you think that compares to what global pitch capacity is doing?

It has been a little bit of a difficult market, Steve. You look at production from 2012 to 2013, it increased 5.5%, 6%. But 65%, 70% of that increase was in China and the rest of it in the Middle East. Meanwhile, you have the mature markets, US and Europe and a few other places, Australia, that actually reduced. Here we are sitting in the wrong geographies with the higher cost smelters.

And as you know in China, the increased smelters are in areas that we just have not been able to supply because of logistics. Now, the third plant that we are building in China, which we can add on to eventually we are much, much closer to the aluminum industry there. So there has been -- we are adapting it. Just unfortunate it takes time to adapt to the mature market conditions that we are seeing.

Okay. And then just on my last question, Walt, did you mention that there was a capacity buildout in the industry for naphthalene in China?

That continues to get -- the market continues to grow because of the plants being built and even more construction. Even though GDP might be in the 7% range now in China, there is still a fair amount of naphthalene consumed in the surfactant added to concrete. As you heard me say, naphthalene pricing was up 30% from last year, again because of the demand for the product throughout China.

Now, Chinese producers generally have been known to sometimes be overzealous and overbuild capacity and then get irrational with dumping that globally. It doesn't sound like you see those build-outs as a risk to the currently strong pricing and maybe even volume?

Well, seriously not over the next -- let's say over the next three years or even longer, perhaps, that you would see that. But you are right, though, it seems like they have do have a tendency to overbuild certain markets. But I think phthalic continues to grow in China. And what is happening now with the construct of phthalic plants, there's is a market there internally for it.

Thank you, Walt.

Sure. Sara?

Sorry. Mr. Turner, there are no further questions at this time.

Okay. Thank you very much, everyone, for participating in today's call. We appreciate your continued interest in Koppers. We continue to do the right things by pursuing growth opportunities that make sense for us as well as looking for ways to improve our profitability within our existing businesses. Despite facing challenges in 2013 and 2014, due to the European economy and lower aluminum prices, we do believe the diversity of our business along with our margin improvement and growth initiatives will continue to provide us with relative stability in both strong and weak economic climates.

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

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.