Koppers Holdings Inc (KOP) 2014 Q2 法說會逐字稿

Good day and welcome to the Koppers Holdings Inc. second-quarter 2014 earnings conference call. Today's presentation is being recorded.

At this time I would like to turn the call over to Michael Snyder. Please go ahead, sir.

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

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

Before we get started, I'd like to remind all of 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'm joined on this morning's call by Walt Turner, President and CEO of Koppers; and Leroy Ball, our Chief Operating Officer and CFO. At this time I'd like to turn over the call to Walt Turner. Walt?

Thank you, Mike, and welcome, everyone, to our 2014 second-quarter conference call.

First of all, I am pleased to announce today that we have hired Michael Zugay as our new Chief Financial Officer effective August 18. Mike was recently the co-Chief Executive Officer and Chief Financial Officer for the Michael Baker Corporation here in Pittsburgh. We are looking forward to Mike's arrival and his contributions to Koppers going forward.

By now you have probably seen our headline numbers. Our second-quarter results reflect continued industry headwinds related to the availability of hardwood lumber for the railroad crossties, resulting in lower sales volumes for that business. Additionally, our carbon materials and chemicals business was negatively impacted by lower sales prices for phthalic anhydride and lower sales volumes and prices for carbon pitch, as a 15% drop in aluminum production in the US resulted in lower sales volumes for pitch compared to the prior-year quarter.

We also incurred approximately $5.8 million of incremental costs for consulting services related to the Osmose integration costs; operations improvement projects; employee benefits; and the KJCC startup costs in China. Additionally, a plant outage during the quarter adversely affected net income by an estimated $2 million. Without these charges, our adjusted EPS would have been $0.62 a share for the quarter instead of the $0.39 a share of adjusted EPS that we reported.

I'd like to point out that we will continue to incur the integration, operational improvement, and startup costs for the balance of 2014. These necessary and foundational investments will continue to have a negative impact on the earnings for the rest of the year. However, these charges, as well as the restructuring costs we continue to incur, are all related to projects that will benefit us in the near future and position us for sustainable, long-term success.

This year is a transitional year for Koppers, and we are taking the decisive actions and making progress towards our three strategic priorities of growth, margin improvement, and capital deployment. We believe these efforts will drive long-term, sustainable changes at Koppers.

Let me start by giving you an update on our growth initiatives. Our new China joint venture known as KJCC was completed in July and is currently producing pitch and carbon black feedstocks which are currently being sold into the local Chinese markets. Our expectations are that the plant will also begin producing naphthalene within the next 30 days when enough raw material is available for the production process.

The project was finished on time and on budget. And we anticipate that our partner on the sales side, Nippon Steel/Sumikin Chemical, will have their carbon black and needle coke plants completed by the end of the year. Until their plants are up and running, we don't expect seeing any meaningful bottom-line impact from the joint venture, but it will give us an opportunity to introduce our products into the local Chinese markets during this time.

We continue to anticipate the closing of the Osmose acquisition in the third quarter, which should add more than $400 million of sales at EBITDA margins that are expected to be above our 2015 target level of 12%. The integration process continues to go well. And as I mentioned in our last call, we expect the North American integration to be completed by the end of the year.

The estimated pretax synergies from the acquisition are expected to be at least $12 million, and we anticipate the annual run rate will be realizable by the end of 2015.

The Ashcroft acquisition in Canada is fully integrated and we expect it to be accretive to earnings in the second half of the year now that the integration and purchase accounting expenses are behind us. As a reminder, this is a wood treating plant that was acquired in January for about $30 million, with anticipated revenues at around $30 million on an annual basis.

Moving to our 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 2015. In the second quarter adjusted operating margins for our European operations improved by over 400 basis points over the same period last year, as we stopped distillation activities at our Uithoorn facility in the Netherlands in April and moved those production volumes to our remaining two European facilities.

For our US carbon materials and chemicals operations, the restructuring of our Follansbee, West Virginia and Portland, Oregon, facilities is providing cost savings. But the impact is not resulting in overall margin improvement, due mainly to plant outages and difficult market conditions which have more than offset the cost savings we achieved there.

Our railroad and utility products business continues to invest in structural improvements, such as the addition of the borate treatment process at three additional facilities this year, as well as the Ashcroft acquisition in Canada. We also expect that the benefit from the consulting costs related to operational improvements will begin materializing in the second half of the year. And lastly, the acquisition of the Osmose businesses should be accretive to our existing margins in 2015, and this acquisition should have a significant impact on our progress towards achieving 12% EBITDA margins on a consolidated basis by the end of next year.

In regard to our progress on our third strategic priority of deploying capital in order to maximize our returns, in the first half of 2014 we spent approximately $68 million for the Ashcroft acquisition; construction and start-up costs for the KJCC joint venture; the Osmose integration costs; and cash costs for restructuring. These strategic steps we've taken, along with the positive signs of a stronger global aluminum market and the recovering economy in Europe, gives me more confidence that 2015 will be a strong year for Koppers for significant and sustainable profit improvement over 2014.

I would now like to turn the call over to Leroy to provide some additional detail on the quarter as well as an update on our end-markets. Leroy?

Thanks, Walt. Starting with the consolidated results, sales for the second quarter decreased by 4% or $14.1 million to $356.8 million compared to the prior-year quarter, driven mainly by lower sales volumes for railroad crossties due to lower raw material availability combined with lower sales volumes and prices for carbon pitch. This more than offset the additional $8.2 million in revenue contributions from the Company's recent Ashcroft acquisition.

Second-quarter adjusted EBITDA was $27.3 million or a decrease of $9.9 million compared to 2013 second-quarter adjusted EBITDA of $37.2 million, with adjusted EBITDA margins of 7.7% compared to adjusted EBITDA margins of 10% for the second quarter of 2013. The reduced margins reflect a decrease in sales volumes for crossties due to reduced raw material availability, lower sales prices for carbon pitch and phthalic anhydride, higher overhead related to consulting costs for acquisitions, operations improvement projects, employee benefit and KJCC startup costs, and higher cost and lost profit due to unplanned plant outages.

Adjusted net income and adjusted earnings per share for the second quarter of 2014 were $8.1 million and $0.39 per share compared to $14.7 million and $0.70 per share for the second quarter of 2013. Items excluded from our adjusted results for the quarter include $6.7 million of pretax charges related to impairment and plant closure costs. This comprises $4.7 million related to the ceasing of distillation at our tar plant in the Netherlands, $1.4 million related to impairment charges and accelerated depreciation at our KCCC facility in Tangshan, China; and $0.6 million related to the closure of our wood treating plant in Grenada, Mississippi, in 2012.

As mentioned earlier, we also incurred $7.8 million of integration, plant outages, consulting, employee benefit, and plant startup costs in the quarter. Without these charges our adjusted EPS would has been around $0.62 per share.

As Walt mentioned, we have taken deliberate steps to lay a strong foundation for building sustainable growth beginning next year. And we view these charges, which will continue to impact earnings in 2014, as a necessary investment in our future.

For the second quarter of 2014 our effective tax rate before discrete items was approximately 65% compared to 42% in the second quarter of 2013. As I mentioned in our last call, our unadjusted effective tax rate for 2014 is unusually high due to the non-deductibility of our restructuring charges in Europe and China that has the effect of lowering our pretax income with no corresponding tax benefit. Adjusting for those non-deductible charges will result in a normalized effective tax rate of approximately 41% for 2014, due primarily to a heavier-weighted earnings mix in our higher tax rate jurisdictions.

On an additional note, the effective tax rate with discrete items for the second quarter of 2013 included a $1.4 million benefit. Regarding the 41% effective tax rate for this year, another benefit that we expect to leverage from the Osmose transaction is the reorganization of our legal entity structure that will provide for a much more efficient tax structure. This project, which we continue to study, will bring both significant long-term cash and effective tax rate benefits.

It is expected that this reorganization will give us the ability to continue to redeploy excess foreign cash in a tax-efficient manner while deferring US tax of future foreign earnings for some period of time. We expect the effective rate benefit from the reorganization is estimated at approximately 600 basis points based upon our current adjusted pretax income.

In other words, were the structure in place today, our normalized effective tax rate would be tracking at 35% as opposed to 41% and the earnings per share benefit will be approximately $0.30 on an annual basis. There is a cost to putting this structure in place from the standpoint that we will need to recapture the overall foreign loss that we have accumulated through the years, which will result in a one-time accelerated tax payment of approximately $25 million that would also be charged to tax expense.

If the project moves forward, this tax payment would occur sometime before the end of the year. In addition, we would incur implementation costs of approximately $2 million that would be recognized ratably over the last two quarters of this year.

Now I'd like to give you an update on the performance of the CMC and RUPS businesses and provide some color about our key end markets and their impact on our results for 2014. Starting with carbon materials and chemicals, that business for the second quarter had sales of $208.6 million, which were $11.7 million or 5% lower than sales of $220.3 million in the prior-year quarter, due mainly to lower sales volumes and prices for carbon pitch.

Pitch products accounted for a 6% or $12.6 million decrease in sales compared to the prior-year quarter, as sales volumes and prices for carbon pitch declined. The challenges we faced in the global carbon pitch market in the first quarter continued into the second quarter, which had a negative impact on sales volumes and pricing compared to the second quarter of last year.

Sales of distillates were flat, as higher sales volumes for carbon black feedstock were offset by lower sales prices for carbon black feedstock, driven by lower prices in Asia.

Sales of coal tar chemicals increased 1% or $2.6 million as higher sales volumes for phthalic anhydride and naphthalene were partially offset by lower sales prices for phthalic anhydride compared to the prior-year quarter.

The reduction in sales prices for phthalic anhydride was driven by lower prices for orthoxylene. The average price for orthoxylene was $0.56 for the second quarter of 2014 compared to $0.64 for the second quarter of 2013, a 12% reduction, which correlated to a similar reduction in our phthalic pricing. Orthoxylene prices were higher at $0.65 a pound in July, which was up $0.09 from $0.56 in June, although expectations are that OX will drop a few cents in August.

Carbon materials and chemicals adjusted operating profit for the quarter of $9.9 million represented a decrease of $2.6 million from $12.5 million in the second quarter of 2013, which equates to adjusted operating profit margins of 4.7% and 5.7%, respectively. Operating profit and margins were lower mainly as a result of lower profitability from North American operations, driven by lower carbon pitch and phthalic anhydride pricing and the plant outage that had an estimated pretax impact of $2 million.

For the global aluminum industry, consumption for 2014 is projected to increase by 5% to 6% and is expected to outpace production for the first time since before the recession. As a result LME inventory levels have declined to under 5 million tons, and aluminum pricing has risen to around $2,000 a ton.

Our pitch revenues were down globally in the first half of 2014 due to lower sales and some prices, particularly in the US and Middle East. We continue to take actions to remove costs from the business, including rationalizing capacity in regions where aluminum production has declined.

In the Middle East, despite the growth in production in this low energy cost region, competition remains strong, and pitch prices continue to be depressed. We continue to produce more carbon black feedstock material and less pitch at our Chinese facilities in order to maximize profit. As a result, second-quarter sales volumes for pitch were down 8% for Chinese operations, but carbon black feedstock volumes were up 43% compared to the prior-year quarter.

For phthalic anhydride, our sales prices declined by 12% from last year's second quarter, due mainly to lower orthoxylene prices. The revenue and profit impacts from the price drop were partially offset by a 12% increase in sales volumes in the quarter. Demand is being positively impacted by North American light vehicle production that is expected to increase 5% in 2014 to 17 million units combined with total US housing starts that are currently projected to be up by 12% compared to 2013.

Our carbon black feedstock sales volumes were higher in the second quarter compared to the same period last year, but the impact was offset by lower sales prices driven mainly by lower sales prices in Asia. Carbon black feedstock sales volumes are impacted by global rubber demand, which is projected to have average annual growth rates of 4% through 2015, driven by higher demand from the emerging markets in Asia. Prices for our carbon black feedstock are based off of a Platt's oil index due to the fact that the major feedstock for carbon black is a petroleum-based product. The advantage of using coal tar-based feedstocks is that they provide a higher-value product for the carbon black industry, as they have a higher carbon yield and lower sulfur content than the competing petroleum feedstocks.

Naphthalene sales volumes and prices were higher in the second quarter compared to the same period last year. Naphthalene demand is projected to grow by 4% annually through 2016, with higher growth levels in China and other emerging market economies.

On a global basis coal tar prices have been down slightly compared to last year, as availability remained stable.

Our North American CMC business continues to be challenged by difficult market conditions, and we are working hard to lower our cost structure and right-size our business to adapt to these conditions. We recently announced that we are looking into the possibility of building a new chemicals plant at our Stickney, Illinois, facility, which would significantly lower costs and potentially allow us to discontinue production at our Follansbee facility. We expect material savings from this project if it proceeds, and we will update you going forward.

It appears that the European economy has begun to recover, and a modest increase in end-market demand, combined with cost savings from the closure of our plant in the Netherlands, resulted in substantially higher earnings from our European operations in the second quarter compared to the second quarter of last year.

Our Australian operations continued to perform well despite the closing of the Point Henry smelter, and overall sales volumes have been higher on a year-over-year basis compared to 2013, as we moved the majority of those volumes to other smelters.

Our Chinese operations reduced production of pitch in favor of carbon black feedstocks in the second quarter, and as a result, sales volumes for pitch were lower but were more than offset by higher carbon black feedstock volumes. Sales prices for both products were lower than the prior-year quarter, as excess product continues to be available in China as well as the Middle East. The outlook for China for 2014 includes additional revenues from an expected five months of sales from the new JV into the local Chinese markets, but any incremental profitability is expected to be offset by startup costs.

As mentioned on our last call, we expect to cease production at our KCCC facility by the end of this year as a result of the anticipated closure of our JV partner's coke ovens. In order to continue meeting our customer commitments, we currently have a tolling arrangement with Huarui Coal Chemicals Company to toll produce carbon pitch and carbon black feedstocks for us.

In our global railroad and utility products business, sales decreased by $2.4 million or 2% for the second quarter compared to the same period last year. The sales decline was due to lower sales volume for crossties, mainly due to increased competition in hardwood lumber markets, which offset the growth we realized from the Ashcroft acquisition.

Adjusted operating profit for the quarter decreased to $13.4 million from $16.9 million in the prior-year quarter, with adjusted operating margins at 9% compared to 11.2%. The reduction in margins was driven by reduced throughput volumes and the addition of Ashcroft sales with no earnings contribution due to purchase price amortization and consulting costs related to operations improvement projects.

Our second quarter sales volumes for crossties decreased compared to the second quarter of last year, as procurement volumes for untreated ties were substantially lower due to a competitive lumber market that is just now starting to improve.

We continue to draw down our untreated tie inventories this year for both Koppers-owned and railroad-owned ties to be able to meet our customer commitments. After drawing down our untreated tie inventories by a million ties in 2013, our tie inventories were reduced by another 800,000 ties at the end of the second quarter to 4.4 million ties. The extended period of lower untreated tie availability has now also begun affecting our treatment service volumes, as they were also lower than 2013's second quarter by 14%.

We do believe this crosstie shortage is temporary. Overall, rail traffic and profitability continue to be strong as higher shipments of oil, fracking sand, and other products more than offset lower coal shipments. Continued high levels of rail traffic with heavier carloads require additional track maintenance, which translates into a need for more crossties. We expect procurement volumes to rebound in the second half of the year as sawmill capacity continues to grow in response to increased end-market demand. In the second half of July our crosstie procurement volumes were up 15% from June volumes, and we are hopeful that this trend will continue through the rest of the year and into 2015.

We continue to treat a higher portion of our crossties with the creosote borate process, and we are making capital investments at three more of our treating plants this year to add the borate treating process. The addition of borate treatment at these plants should take us from our current proportion of about 40% of ties being treated with borates to around 65% in 2015, which should continue to help us achieve higher profit margins in our railroad and utility products and services segment.

Cash used for operations for the first six months of 2014 was $8.7 million compared to cash provided by operations of $20 million for the same period in 2013, due mainly to lower net income and higher working capital usage. Our debt net of cash on hand at June 30, 2014, increased to $304 million from $221 million at December 31, 2013, mainly due to the Ashcroft acquisition and higher capital expenditures driven by spending for the KJCC joint venture in China. As of June 30 we had $24 million borrowed on our revolver, $37 million of construction loans related to KJCC, and we had total estimated liquidity in excess of $300 million.

Our capital expenditures for the first six months of 2014 were $36 million, up from $16 million for the first six months last year, mainly as a result of $21 million of expenditures related to our new facility in China.

As mentioned in our last call, we plan to obtain bank financing to acquire the Osmose businesses. The new capital structure will include a new $300 million term loan and an increase in our existing revolving credit facility to $500 million from the current $350 million limit. The estimated initial borrowing rate of about 3.25% will substantially lower our average borrowing rates. The funding is expected to occur simultaneously with the closing of the acquisition. While this additional debt will initially take our leverage to over 4 times, our goal will be to get this down to 3 times within two years.

I will now turn it back over to Walt for a few closing comments.

Thank you, Leroy. I would like to close by summarizing what we are expecting for the second half of 2014. In our last earnings call we indicated that we were expecting a minimum revenue increase of 5% over 2013, excluding the impact of the Osmose acquisition. At this point we estimate that the incremental revenues from the new China joint venture and Ashcroft will be offset by reductions in sales volumes for both pitch and crossties for the year and as a result, we expect revenues to be slightly higher than last year.

We do expect that sales and operating profit will be stronger in the second half of the year, with crosstie procurement improving, the new China joint venture ramping up, profit accretion from the Ashcroft acquisition, continuing benefits from capacity rationalization in Europe, and operational improvements in the railroad business.

As noted earlier, we will continue to incur costs related to the integration, plant startup, and operational improvements that will have a negative impact on our earnings for the rest of this year. However, we view these costs as foundational investments which will position us for higher sustainable earnings and operating margins beginning in 2015.

2014 continues to be a very active year for Koppers as we work to adjust our asset footprint to match our current and future expected businesses through the capacity rationalizations in these mature geographies where we are involved.

We continue to devote resources towards driving margin improvement to identify projects while looking for more ways to reduce costs. The acquisition of the Osmose businesses should also add meaningfully to our sales and profitability and help us achieve our long-term goals.

When I look at the various actions we have already taken this year and the continuation of cost savings initiatives that are in place for the balance of the year for restructuring and expanding our businesses in order to grow the top and bottom lines in a sustainable fashion, I am confident that 2015 is shaping up to be a very strong year for Koppers.

With that, I'd like to now turn the call over for questions that may be out there.

(Operator Instructions) Ian Zaffino, Oppenheimer.

The questions would be on sourcing the rail ties. Could you improve your ability to source the rail ties or at least sourcing the rail ties with Osmose? Is there any angle there? Or is this where you are going to face the same situation whether or not you have Osmose? Thanks.

No. It's sort of two different areas. The procurement of ties has been going on now for the last 9, 12 months, I would think. It's all been based off of the pricing of ties.

We had competition coming from both the crane masts, which are going basically into the oil and gas construction projects; as well as flooring hardwoods for the flooring industry. Now that pricing has been increased substantially, I will say, by the railroads these last five or six months, that has opened doors for more sawmills to cut more ties.

And as Leroy pointed out earlier, we are definitely seeing an uptick in tie availability, starting about mid-July. So it is improving. And with the pricing in line with the other end-markets of these hardwood ties, it's starting to improve very nicely for us, finally.

Okay. And then on the carbon pitch side, are there any areas or regions where you are seeing particular pressure on the pricing? Or are there other areas where you are seeing more favorable pricing? Thanks.

Not really favorable pricing, but for the most part --

Or less bad.

I'm sorry?

I said, or less bad.

Okay. No, the pricing pressure is primarily in the Middle East. That pitch market today is about 450,000 to 470,000 tons of pitch. And we continue to share about a third of that market. However, based on a surplus of pitch, both in China and elsewhere around the world, that pricing has been fairly depressed there.

All right. Thank you very much.

Ivan Marcuse, KeyBanc Capital Markets.

If you look at -- so you talked about the elevated costs with the consulting, etc., and restructuring and startup costs continuing for the remainder of the year -- will it stay at sort of the same level, or will it decrease as you move through the year?

Ivan, the way probably to look at that is if you think about the second half of the year, I guess from a consulting standpoint related to Osmose, once we close that transaction, the costs associated would kind of, hopefully, be offset or absorbed within the operations of that business.

As I think of it as we move forward, I kind of put that one aside. Consulting costs related to the Operational Excellence projects -- we are finished on the railroad side of the business. So July was the last month with that project.

We have begun a similar project on the CMC side. So we will continue to see consulting costs at that level continue throughout the remainder of the year. But we will also start to see some of the benefits on the railroad side, I think -- to partially offset some of those costs.

And the KJCC startup costs -- I think we would probably expect to continue to see them out into, certainly, the third quarter, sliding a little bit into the fourth. So those were the main elements I think of the additional costs that we incurred during the quarter and how we see them going out over the second half of the year.

So I guess to sum it up and just make sure I'm on the same page, if you say the second half is going to be better than the first half, is this more of a function of perhaps slightly better sales in the railroad business and a little bit less in costs, with a little bit of benefit from restructuring?

Yes, that's correct.

Got it. And then if you look at -- you talked about how the aluminum industry is -- the fundamentals are improving, you see, with the pricing. However, historically the smelters that have been shut down -- it takes a lot longer if they are to even bring them back up.

A lot of the capacity has shifted to China. And historically, you've never really sold into China. So with sort of this changing dynamic in the industry -- and it looks like it's probably not going to change for a long time -- are you going to change your strategy and start selling more pitch into China? How do you see that longer-term?

I guess a couple of comments -- we are seeing sort of the end-market uses of aluminum improving -- automotive, aerospace, what have you. Consumption is now outpacing production globally. So there are some good signs out there, especially the ingot pricing, which is around $2,000 a ton, thereabouts, which really puts a lot of smelters back into sort of a positive cash position -- and also the premiums that they are getting in certain areas like the Midwest and so forth, which is around $400 a ton.

So we are seeing, definitely, improvements on the demand for aluminum. And we are seeing the inventories reducing.

As you pointed out, very, very much so, when you announce restarts and so forth, it is very expensive. So I think that before an aluminum company restarts an idle line or an idle smelter, that they are going to have to see a few more positive indications before that happens.

But it does look positive. It's been a while, going back a few years, but yes, aluminum demand is increasing.

And to your point, though, on getting involved in China, with our new joint venture for sure we will be looking at that a lot closer. The plant is in Jiangsu province, which is very close to Shandong and Henan provinces, where we do see a lot of aluminum smelting going on there.

But we will have that opportunity. And as you remember, our two plants in the North were really designed for exporting of products.

But we are, as Leroy pointed out, we are -- because of the depressed pitch markets, on pricing we are looking more and more at going into the carbon black feedstocks, which has more profitability and less pitch production, as we did the last six months. So we've got that option to play out and until we see how the increased pitch demand will evolve going forward with increased aluminum demand.

Great. And my last question -- I guess it's more for Leroy. If you look at -- your EBITDA has obviously taken a step down this year thus far, and it probably continues to be a bit depressed. As you put the debt on for Osmose, it looks like your debt to EBITDA ratios will probably be a little bit higher than maybe you would have thought three or four months ago. Is that going to impact your borrowing costs?

We don't expect it to. I guess the short answer, Ivan, is we don't expect it to. We expected originally to be somewhere above the 4 times leverage multiple. We still expect to be there, maybe a couple of ticks higher. But overall it shouldn't impact the borrowing rates.

Great. Thanks for taking my questions.

Liam Burke, Janney Capital Markets.

Leroy, you mentioned higher working capital needs for the first six months of the year affecting your cash flows. Revenues were down year over year.

Yes.

Was there anything unique in there regarding working capital needs?

No. The funny thing is that even though crosstie volumes were down because pricing of them has gone up by so much, we really didn't get a benefit from that that you might expect in terms of procuring a lower amount of ties. I think our inventories over in Europe -- we had to increase it as we were taking down stuff in Europe -- in the Uithoorn business. So that also contributed to some of the working capital build, as did us preparing to bring up KJCC for some of the reduction in payments on the operating costs -- the startup costs related to KJCC.

So you have itemized some of the things that have -- your needs, so to speak. I'm presuming the second half of the year, some of these things will reverse themselves, and your cash flow position will be better?

Second half of the year cash position -- I guess I -- free cash flow we do expect to be better. We haven't spent a lot of the money related to the Uithoorn shutdown at this point in time. We've taken certainly some charges associated with that that have flowed through the financial statements, but there's not been a lot cash spent on that to date. That will occur more in the second half.

Overall, we do expect stronger cash generation in the second half. I think historically we have shown a much stronger second-half cash generation than we have in the first half. We don't expect that to be any different, but we will have cash needs to basically pay out some of the severance costs related to the Uithoorn shutdown.

We will continue to deal with some cash need related to inventory build for the railroad business, things like that. But still, overall, net-net, we expect the second-half cash flow to be strong.

Great. Thank you, Leroy.

Steve Schwartz, First Analysis.

If you could, just give us a little more color on these special items that you did not back out in your non-GAAP bridge -- the plant outage. If you could give us just some details about that?

The plant outage -- I think we mentioned on the call that we are looking at a $2 million negative impact for that. That had to do with an operational issue that we had to actually take about an eight- or nine-day shutdown for.

That obviously backed up production, which we had to move to a couple of plants to keep the product flowing to our customers and so forth. So it is something that was process related, and it's now taken care of. And it's moving forward. But that's what we were talking about the plant outage.

And it's on carbon materials?

Yes.

Steve, I will talk to that item. The costs -- we've incurred some costs related to preparing for day one and integration related to the Osmose acquisition. We are very keen to the fact that this is a much larger acquisition than we have ever done, and we want to mitigate any potential integration risk that would be there.

So we have gone out and gotten help to put a full and very detailed integration plan together, and we believe we are very prepared to hit the ground running and begin realizing the synergies that we have identified relating to this transaction. So we are bearing the expense now, but we think the benefits will come back in terms of being able to realize those synergies much quicker than we otherwise would have.

Okay. So Leroy, how would you split that $5.8 million, then? Some is obviously in railroad, but there's also some in carbon materials, too, right?

Well, the stuff related to the Osmose integration -- we have actually kept that out separate, so it's not in either. It is in the all other category. And then you have the operations excellence cost related to the projects that we undertook in the railroad and utility products earlier this year that ended in July. We have costs associated with that that are in their numbers -- somewhere in the quarter, somewhere a little over $1 million, maybe $1.25 million. And again, that cost will end in July for railroad and utility products, but it would pick up on the CMC side for the second half of the year.

Okay. That's helpful. Thank you.

Chris Shaw, Monness, Crespi.

The tax benefit or savings that I think Leroy mentioned on Osmose -- is that the same tax benefit that you were talking about at the time of the acquisition, the 338 tax election? Or is this something different?

No. It's separate and different. The 338(h)(10) tax election is a cash benefit. There's no effective rate in tax from that. It's just a cash tax benefit that we realize over a particular period.

This other benefit that I talk about comes as a result of an overall reorganization of our legal entity structure, which would essentially -- if through our further investigation looks like it is something that would work, would allow us to essentially push debt into our foreign jurisdictions, and then use cash generated from those foreign entities to be repatriated into North America.

So that will provide a nice cash tax benefit for us that those -- that that cash that would come back to repay the loans would not be taxed. And then we would get an effective rate benefit by basically unchecking the box on our Australian business right now that essentially is taxed twice, right? It's taxed in Australia, the earnings; and they are taxed in the US. And as a result, we have an effective rate just on our Australian operations of about 54%, which is what ultimately drives our overall effective rate up to the 41% that we have been generating here for the past several quarters.

All right. And then speaking of Australia, then, did you guys -- Port Henry, that smelter is closed already. Has that impacted your volumes there, or have you been able to find other outlets for it?

Actually, I guess the Point Henry smelter that Alcoa has in Australia -- it closed by the end of July. And, then, of course we were impacted maybe two weeks before that. It will impact us a little, but I would say a majority of that lost pitch sales will be moved to other customers in that region of the world.

And then did you mention where -- the plant outage in carbon materials, did you say which plant it was?

No, we didn't. No.

Okay. And then just in the sort of reorganization and restructuring of the United States in carbon materials, are you going to be -- is Follansbee and the Oregon -- are those facilities going to be completely closed if you go through with the relocation of the naphthalene unit? Will you be just down to two plants?

As I think Leroy mentioned earlier, we are going through an evaluation of how we will proceed forward with a couple of different options there. But, no, they are not closed.

Okay. And then I just wanted to make sure -- with the higher wood costs, I know -- you guys wouldn't bear any of that or see any of that even run through your P&L. It's all incurred by the railroad customer, right?

For the most part. I would say probably 80% plus of the ties that we are procuring are on behalf of the railroad. So the majority of that, yes, would be on their inventory side, not our balance sheet.

And I'm sorry; can I ask one more? I'm just curious -- all the news we see around the rail derailments recently, a lot of -- you know, over on the oil tankers, do you guys have any idea what's the main cause of that? Obviously, there's, I guess, a weight issue. But have railroad ties ever been part of the reason for the derailments?

Well, I mean over the last, I guess, what, nine months or so, there's been two that I can think of: the one in Canada and the one down in South Carolina, I think. But I really don't know the root cause of the derailments. It's not been because of ties, perhaps. But no, I really don't know.

I was just trying to see if there's an opportunity, if they plan to replace a lot of the ties.

No, but to sort of turn your question around, Chris, I think this increased rail traffic and a lot of other things going on, for not only the Class 1s but also the short lines, the mechanical wear continues to increase. And that's certainly going to strengthen the maintenance programs out there, which will benefit Koppers, for sure.

Great. Thanks for taking all my questions.

Kevin Hocevar, Northcoast Research.

Wondering if -- so with the China JV kind of up and running here, I think the expectations were at some point they would reach $150 million to $200 million in sales and have margins in excess of your 12% EBITDA margin target. So I'm wondering -- and I think the initial expectations were kind of a ramp-up in the back half of this year, and then kind of hit that in 2015. So with how it's going, and I think your customers on the site are maybe taking a little longer than expected, how should we think of that contribution in 2015 compared to those kind of initial expectations?

Well, I think -- just to start off with, and Leroy can finish it up -- but you are right. In the very beginning, when we announced this project, the Nippon Steel Chemical, we signed a very long-term sales agreement with margins that were was going to be at least at or higher than our 2015 EBITDA goal.

So the issue now is that they were about six months delayed in getting started with their construction. So here we are, and our plant is now up and running as of July. And as we mentioned, they should complete their carbon black plant and their needle coke plant, which would take primarily the pitch that we are producing, would be starting up in the first quarter of 2015.

But it will take them approximately 6 to 9 months to really ramp up, get their product approved, and so forth. So it's going to have a delay in what we announced in the very beginning.

Yes. I guess the only thing I would add to that is just to reinforce -- we said, I think, earlier in our prepared comments, we don't expect really much of any contribution from that plant in 2014. It will certainly pick up in 2015, but not reach its annualized expectation of margins until probably near the end of the 2015 period. So we would probably be hitting the run rate sometime in the fourth quarter of 2015.

Okay. And then I don't think I caught any commentary about phthalic anhydride imports into the US on this call. So is that something that is still occurring? Or is it mitigating as the Europe economy picks up? I'm wondering if that still a headwind for you guys at this time.

I don't think as much as it was going back in the fourth quarter or first quarter of this year. Unfortunately, these numbers that we monitor on imports are typically two or three months late. But I think we've got a pretty good indication that imports have been reduced. But I really can't tell you by how much at this point.

Okay. And I'm curious, too: in terms of the carbon black feedstock, it seems like particularly in China that you called out that pricing was softer. And my understanding is that tire production has been pretty solid -- up 8% or 9% or something in the first half of this year. So I'm just wondering, what's driving stronger volumes, I would assume, in China but softer pricing?

Well it basically has to do with -- the pricing of carbon black feedstocks is based off of some sort of a petroleum index. So that's why you see a fluctuation up and down quarter to quarter. I think that's the biggest reason. But, again, with demand increasing on a 4% annualized basis, still a very strong market for us, but you will continue to see some fluctuations up and down based on the indexes that they use out of Singapore.

I see. So the profitability wouldn't -- the pass-through price changes, but the profitability doesn't really change?

Well, not to any large degree, I don't think, no. But it does, depending on the pricing, obviously.

Okay. Thank you very much.

Ivan Marcuse, KeyBanc.

A couple quick questions. What's your CapEx expectations for the full year of 2014?

For the full year of 2014?

Yes, or the back half? I could add it together.

I'd say for the back half we are probably looking at something in the $35 million to $40 million range.

Per quarter, or total?

Total.

Got it. And if you end up as going forward with building a plant, how much would that cost you?

You are talking about the naphthalene plant?

Yes.

To be honest with you, Ivan, we really don't want to get into that at the moment. It's just a little bit premature, because there's a lot of work that is going on related to quantifying the cost and benefit.

There are other things associated with a potential plant build that would go towards kind of adding some value-added components to it. So we just don't want to throw a number out right now and then come out with something different a couple of months from now.

Great. And then the tax charge that you are thinking about taking, the $25 million to get your -- is that cash, or is that a non-cash charge?

It is both. It's a cash and earnings charge.

Okay. And did you mention -- I may have missed it. Do you expect your cash from operations to improve as we go through the year? Or do you -- we just remain at this level?

We do expect an improvement in our cash from operations.

Is that just a function of higher earnings, or do you expect working capital to become a source?

Mostly from higher earnings.

Richard O'Reilly, Revere Associates.

I'm still a little concerned about the sourcing for the rail ties. I guess my thinking is if housing and the energy production continue to remain strong, supplies are just going to continue to be a headwind for you, with periodic relief.

Is that true? Will it take ramp-up of sawmills to relieve the pressure? How should I be thinking about that?

Well, I guess it really boils down to the pricing of the ties. And you are exactly right. I think the increased pricing has enticed more sawmills to cut more ties.

They typically -- most of these sawmillers, for years and years and years, family-owned operations rely on the railroad industry. And as long as they can be somewhat profitable on ties, they would just as soon continue their long-term end markets of their ties with the railroads versus -- you know, how long this is going to last in the oil and gas industry, I don't know. But it could last a long time.

But the main point here is getting a price on the tie that is at least comparable to the other competitors. And it has opened a few sawmillers to cut more ties for the railroads.

Remind me: the price of the ties -- is that what the railroads are willing to pay, or what they are selling?

What they are willing to pay for based off their maintenance programs, yes.

Okay. Great. Thanks a lot, then.

Ladies and gentlemen, that does conclude today's question-and-answer session. At this time I will turn to call back over to Mr. Turner for any additional or closing remarks.

Thank you, Leah. Again, we thank all of you for your participation in today's call and appreciate your continued interest in Koppers. Despite facing challenges in 2014, we truly believe the diversity of our business, along with our margin improvement and growth initiatives, will continue to provide us with growth and stability in both strong and weak economic climates.

We will continue to pursue growth opportunities that make strategic sense for us, as well as focusing on areas to improve profitability within our existing businesses. So we remain firmly committed to enhancing shareholder value by maintaining our strategy and providing our customers with the highest-quality products and services while continuing to focus on safety, health, and environmental initiatives. Thank you.

And that does conclude today's conference. Thank you for your participation.