Koppers Holdings Inc (KOP) 2016 Q2 法說會逐字稿

Good day and welcome to the Koppers Holdings Inc. second-quarter 2016 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Quynh McGuire. Please go ahead.

Thanks, Aimee, and good morning. My name is Quynh McGuire, and I'm the Director of Investor Relations and Corporate Communications. Welcome to our second-quarter earnings conference call.

We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.koppers.com or call Rose Halinsky at 412-227-2444, and we can send a copy to you. As indicated in our earnings release this morning, we've also posted materials to our investor relations website that will be referenced in today's call. Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our website, and a recording of this call will be available on our site for replay through September 6, 2016.

Before we get started, I'd like to remind all of you that certain comments made during this conference call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the cautionary statements 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 Leroy Ball, President and CEO of Koppers; and Mike Zugay, our Chief Financial Officer. At this time I would like to turn the call over to Leroy Ball.

Thank you, Quynh. Welcome, everyone, to our second-quarter 2016 earnings call.

To begin today's discussion, I'd like to provide you with an update on events that occurred during the June quarter, as we continued to implement our long-term strategy of transforming Koppers from a commodity chemical company primarily focused on emerging market growth in the aluminum industry to a company centered around the concept of delivering customer-focused solutions, primarily through technologies to enhance wood.

Now let's start with an update on our progress of moving to a zero-harm culture. I remain steadfast in my belief that zero is possible, because it is already being achieved on a daily basis at several of our facilities. I will continue to drive this point home as we assemble our operations team from around the globe in Pittsburgh next month for a zero-harm leadership forum to share best practices and reinforce our vision to move from compliance to commitment and the steps it will require to get there. An important part of our mission is having a culture that safeguards employees, the environment, and the communities where we operate. And we will be relentless in our approach to achieving zero harm.

Now, moving on to our June quarter highlights: the second-quarter outperformance was primarily due to our performance chemicals, or PC, business, which delivered extremely strong operating profitability. This was due to a whole host of factors, which include continued strength in existing home sales; remodeling spending that continues to accelerate toward its previous 2006 peak; raw material costs that have settled in at lower levels; and a move by certain retailers to higher-retention pressure-treated products.

In our railroad and utility products and services or RUPS segment, sales decreased, primarily from lower sales volumes and pricing of treated crossties sold into the commercial market. As there has been a flattening in demand for crossties in the Class I market, it has created greater competition for non-Class I business, which has resulted in competitive pricing pressure.

Added to this situation is that the pricing for hardwoods began to soften and also contributed to lower pricing as that gets passed on to customers. Even so, operating profit on an adjusted basis for RUPS improved from prior year due to a positive sales mix more heavily weighted to treatment services, as untreated tie inventories are starting to level out.

Regarding CM&C, sales declined year-over-year for the June quarter as market conditions continued to be challenging. Sales volumes were lower for carbon pitch, carbon black feedstock, and naphthalene. The reduced sales volumes were the result of our decision to size our operations to serve the North American creosote market, which results in the need to distill less coal tar to serve the byproduct markets.

Another driver to the decrease in prior year was due to lower sales prices for carbon pitch and naphthalene, which were affected by lower average oil prices, with a partial offset from increased sales volumes for phthalic anhydride. Despite those headwinds, CM&C operating profitability on an adjusted basis increased from the prior-year quarter due to the benefits of restructuring cost savings as well as lower average raw material costs.

Now, regarding debt, our balance at June 30 was $721 million, reflecting a $14 million debt paydown from year-end 2015. We expect the September quarter to be a strong cash flow quarter due to favorable operating results in the second quarter. The combination of improved profitability in 2016 as well as lower working capital needs in the second half this year puts us on track to achieve our goal of reducing our debt to $650 million by the end of this year.

The transformation continues for Koppers, with our Company's vision centered primarily on developing solutions for and applying our proprietary technologies to enhanced wood products. As we make progress, we believe Koppers can achieve sustainable profitability and a solid return for our shareholders.

Now I'd like to turn it over to Mike to discuss some key highlights from the second quarter of 2016.

Thanks, Leroy. Starting on slide 2 of our presentation, consolidated revenues for the quarter were $385 million, a decrease of $47 million or 11% compared to $432 million in the same quarter last year. The sales decline was primarily related to our CM&C segment due to lower sales volumes for carbon pitch, carbon black feedstock, and naphthalene.

This is because of our decision to size our operations to serve the North American creosote market, which results in distilling less coal tar. Another factor was due to lower sales prices for carbon pitch and naphthalene, which are tied to oil prices.

Moving to slide 3, adjusted EBITDA was $53 million in the quarter compared to $46 million in the prior-year quarter. This was due mainly to increased profitability from the performance chemicals business -- although, as you can see on the slide, all three operating segments contributed to the year-over-year improvement.

Now I'd like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $19 million in the quarter compared to $14 million in the second quarter of 2015. Adjustments to pretax income for the second quarter of 2016 amounted to $8 million, and these were primarily restructuring expenses related to our CM&C consolidation efforts.

Adjusted EPS for the quarter was $0.93 compared to $0.68 in the prior-year quarter. And our adjusted income tax rate, excluding discrete items for the second quarter, was approximately 31%.

Cash provided by operations for the six months ended June 30 was $34 million compared to $78 million in the prior period. The decrease was mainly due to an increase in accounts receivable balances in the current year and the receipt of a $30 million cash payment to our KJCC joint venture in the prior year.

Capital expenses for the first six months in 2016 were $21 million compared to approximately $17 million last year. As stated in our earnings release, we are increasing our estimate for 2016 CapEx to be in a range of $42 million to $47 million in order to accelerate the construction of the new naphthalene unit at our Stickney, Illinois, facility, which is expected to be completed by the end of 2017.

At quarter-end, we had approximately $132 million borrowed on our $300 million revolver. Also, we had $247 million borrowed on our term loan; $300 million in existing bonds; and approximately $42 million of loans in China, which result in a total debt at the end of the quarter of $721 million.

Our leverage ratio at June 30 was 4.32 times, well below the covenant of 5.25 times. Our long-range goal continues to be a leverage ratio of approximately 3 times. Our fixed charge ratio was at 1.54, also well above the required covenant of 1.1. Based on our 2016 projections, we are very confident that we will remain in compliance with our loan covenants throughout this year and next year as well.

Now let's go back to the slide presentation and look at slide 4. We continue to anticipate bank paying down our debt in 2016 by $85 million, bringing it from $735 million to $650 million by this year-end. When combined with our 2015 debt paydown, this would achieve our minimum two-year paydown target of $200 million. On a quarter-over-quarter basis, our debt decreased from $738 million to $721 million, and this was in line with our expectations.

Now I'd like to turn the call over to Leroy for an update on our businesses.

Thanks, Mike. Let me now speak to the outlook for each of our business segments as we look out over the remainder of this year. Beginning with performance chemicals, as I mentioned in my opening remarks, this segment is benefiting from a number of different market factors that have moved in our favor.

First and foremost has been a very hot building products market. As discussed on our first-quarter call, we saw unseasonably high volumes early in the year, which we partly attributed to the mild winter weather that allowed people to pull projects forward. We still won't know just how much that affected our first six months' results until we get through the third quarter, which is the backend of the outdoor construction season.

With interest rates continuing to be low, that has only spurred continued increases in existing home sales. With June representing the fourth consecutive month of increases, home sales are now up by 3% over June 2015 and remain at their highest annual pace since February 2007. That activity has had a dramatic effect on home remodeling spending, which is now running at about a 5.7% annualized improvement over prior year.

The projections are for that to continue to accelerate before peaking at around 8% in the first quarter of 2017. Throw in the fact that more retailers are moving their product lines to higher retention treated products while raw material prices have remained consistently on the lower end of the recent historical averages, and you see the results that we have posted for the first six months in our PC segment.

So what does that mean for the rest of the year? Well, we now expect to generate EBITDA of approximately $71 million to $74 million in the PC business in 2016, as reflected on page 6 of our slide presentation. This is a net increase of $6 million to $7 million from our previously forecasted EBITDA of $65 million to $67 million and reflects a $10 million to $13 million improvement from prior-year EBITDA of $61 million.

This increase in guidance essentially captures the gains that we have seen over the first half of this year and somewhat hedges our bets over the second half, as we still won't know whether there will be a correction in the latter half of the third quarter from the pull-through of projects in the first quarter. In addition, last year's fourth quarter was particularly strong from a volume standpoint and was likely the inflection point for the beginning of the much stronger volumes we've been seeing throughout this year.

The final factors that make us a little cautious about the second half is that we know our costs will go up, as we cannot continue to supply the recent demand with current staffing levels, and we still have pricing provisions on a few agreements that need to get finalized. While North America makes up approximately two-thirds of this business and therefore tends to drive the results, all regions have posted strong performance over the first six months and are either at or better than the first six months of last year.

Moving now to our railroad and utility products and services business, I'm extremely pleased with our relatively strong performance during the quarter and first six months of 2016 in what continues to be a challenging rail environment. During the second quarter we saw crosstie procurement pull back from a very strong first quarter, while overall treatment volumes actually exceeded the second quarter of 2015. That shift in mix allowed us to maintain consistent profitability year-over-year, while pricing in the commercial market has begun to soften, which is a trend that is expected to continue over the back half of this year.

When you boil it all down, our adjusted EBITDA for the RUPS segment sits at midyear $1.5 million behind last year. Rail joints and the discontinuance of utility pole toll treating have had a combined $2.3 million negative impact on the year-over-year comparison.

Now for the back half of this year, we are expecting to finally see the impact of lower car loadings spread to our crosstie business. While we expect the overall impact from a decline in Class I volumes to be minimal on our business, it will continue to put pressure on pricing in the commercial market as the supply of crossties begins to outpace demand.

Part of our pricing decline is absorbed by lower raw material costs, as hardwood prices have started to soften. As a reminder, just like hardwood increases flow through to our Class I customer base, so do hardwood price declines. We are able to maintain our margin in a declining price environment, but it is on a lower sales number, which will also have some impact on expected results.

We will be selective about the commercial business we go after but do expect to see some impact on our overall volumes and pricing for the remainder of this year, as reflected on slide 7. Overall, we are reducing guidance for our RUPS segment to $76 million to $80 million in 2016 compared to our prior estimate range of $79 million to $82 million, and $84 million in 2015. Now, we still expect to realize a net savings from cost reduction initiatives -- primarily the closure of the Green Spring plant -- that should net $3 million this year and serve to offset some of the lost profitability from volume reductions.

The last thing that I'd like to highlight in our RUPS business is our recent announcement regarding two nice, long-term rail joint contracts with two of our largest railroad customers, which should stem the general market declines we have seen in that business throughout the first half of the year. Both contracts represent nice market share gains for a critical maintenance-of-way part of the RUPS business, and I congratulate our sales and engineering team for being able to land them.

Now let's review the outlook regarding our CM&C business. On slide 8, we are maintaining our 2016 anticipated EBITDA guidance for CM&C in the range of $18 million to $21 million, which would represent a $9 million to $12 million improvement over 2015. While we still have a long way to go to get to that improvement number over the last six months, as I have consistently stated, CM&C's year-over-year improvement is going to be realized in the second half of this year.

As of the end of July, we have ceased distillation at our Clairton, Pennsylvania, facility and are now preparing that facility for closure. The fixed-cost savings from that action and a step-down in raw material costs will combine to offset volume declines in all product lines, other than creosote and phthalic anhydride, and lower overall average pricing due to lower crude oil prices.

While we have increased our crude oil assumption to an average of $40 a barrel, which is right around the average for the first six months, we are not changing our full-year EBITDA range, because the $2 million to $3 million of pricing improvement that should result from that is being offset by unanticipated demand declines in some of our seasonal products, which we believe will come back in 2017, and higher-than-anticipated raw material levels that are at elevated 2016 first-half prices.

With steel capacity running at lower rates, we were not expecting to take as much contractual coal tar volume in the first half than we ultimately did. While our first-half average raw material prices are lower than 2015, there is an additional step-down that occurs during the second half. Due to elevated inventory levels, we will not begin to realize the lower-cost raw material in our finished goods costs until the latter part of the third quarter.

It has also served to mute the pricing gains we would expect as a result of higher crude. The good news is once we work the higher cost inventory out of our system, we will be realizing gains consistent with our expectations, which should still allow us to see considerable improvement in CM&C into 2017.

As a result of our improved performance and my confidence in a more stable outlook, I am authorizing slightly higher capital spending for the remainder of this year to ensure that we complete our new naphthalene unit in Stickney by year-end 2017. Excluding additional plant closure and remediation work, our goal is to have our CM&C operations fully restructured by January 1, 2018, and the results of that business normalized on a go-forward basis. It is still our expectation that we can generate $40 million-plus of annual EBITDA at the lower end of crude oil price spectrum.

As announced on July 5, we closed on the sale of our Port Clarence and Scunthorpe facilities in the UK to Industrial Chemicals Group, who will use those facilities as chemical distribution locations. I cannot emphasize how important that transaction was to reducing future risk for Koppers. Not only does it eliminate the overhand of unresolved environmental liabilities, but it allows us to redirect resources that would have otherwise been tied up on the activities related to those closures and allows us to focus on other elements of our restructuring plan. Without it, we likely would not be able to move forward on our new naphthalene unit as quickly as we now can, and future savings would have been pushed off even further into the future.

We are lowering our 2016 consolidated sales expectations from $1.5 billion to $1.4 billion, as reflected on slide 9, due to an expected decline in our CM&C segment sales of $150 million to $180 million from prior year. Also, the low end of RUPS has been adjusted down from prior expectations of a $25 million sales decline to current projections of a $50 million sales reduction to reflect general weakness in the rail industry and lower pricing as a result of lower hardwood costs. On the other hand, 2016 sales performance chemicals have been revised upward by another $5 million to account for stronger-than-expected sales volumes.

Turning to slide 10, adjusted consolidated EBITDA is anticipated to be in the range of $162 million to $172 million compared with the prior forecast of $160 million to $168 million. As a result, adjusted EPS is projected to be between $1.90 and $2.20 compared with the previous range of $1.85 to $2.10.

Once again, I feel good about where we stand six months into this year, and I'm happy to increase our guidance in light of the many positive things that are going our way. However, I do remain cautious about our RUPS business, how sustainable the demand in our PC business really is, and the inherent risks will that are involved in the massive restructuring effort that we are in the middle of in our CM&C business.

The one thing I will say is I'm extremely proud of our employees, who worldwide have banded together and allowed us to make massive strides in performance in a very short time frame. The messages that they have had to endure have at times been very difficult, but they have proven their strength and resilience through their performance, and I would like to personally thank them for going above and beyond to make all this possible.

I'd now like to open it up for questions.

(Operator Instructions) Laurence Alexander, Jefferies.

Good morning. It's Dan Rizzo on for Laurence. Just with the PC business, if there lumpiness involved with that at all? I mean, is there any, like, pull-forward things that happen at times? Or is it something that doesn't really occur with this business?

Well, it's a seasonal business, and so you have the outdoor construction season that really is strongest in the second quarter, starts to ramp down in the third; and then, of course, first and fourth are lower. So that's normally how it works. This year, we talked about the first quarter really being -- we saw really unseasonably strong volumes in the first quarter, and we attributed that to the mild winter weather and the potential pull-through of projects that might have been planned for later in the year.

Again, we won't really know whether that's true or not until we get through the full construction season and see how it turns out. There could be some pull-through that is in the first six months' results; we just won't know that until we get throughout the third quarter.

So I'm sure that's happened in the past at times, but it's hard to tell. And certainly we won't be able to tell until we get a little further into this year -- whether that's, in fact, happened this year. But volumes have been pretty consistently strong throughout the first six months of the year.

Okay, thank you. And then what does CMC business -- with phthalic anhydride, specifically -- I know in the past that oil can at times -- can be a headwind when it's dropping, but -- and I know it was down to a certain extent year-over-year to this point in time. But it did rise throughout the second quarter, so I was wondering if that was a tailwind for a time before potentially tailing off as we head into the fall here.

The impact on orthoxylene, which is what our phthalic pricing is tied to, it lags a little bit in terms of what's going on in the crude oil markets. And we have talked in the past about it always -- or not always -- it at times becoming disconnected to those movements. I'll say that right now, throughout the year we have seen probably consistent percentage increases in that, as we have in crude, but they do lag by a month to two months in terms of being reflected in the actual pricing. So we haven't seen a whole lot of positive impact so far on the phthalic side of things due to the higher crude.

And compared to last year, still overall the benchmark for orthoxylene is down quite a bit from last year, just as crude has been averaging down quite a bit from last year. I think for the quarter, I want to say crude averaged somewhere in the neighborhood of $46, whereas last year I think it was somewhere -- $57, $58 in the second quarter. And for the first half of this year, it's been around $40, and the first half of last year it was at $48.

So while I know people are certainly encouraged by the fact that we've seen gains in that over the past couple of months, on a year-over-year basis, it's still down a decent amount. And the third quarter -- you know, if it can move back up and maintain price levels that it averaged in the second, then it should be somewhat comparable, I think, to where the third quarter ended up last year.

But all in all, it's still a negative comparison year-over-year, although it certainly is providing us a little bit of a benefit sequentially. On the phthalic side we won't really realize -- start seeing some of that realized until this third quarter.

Thank you. That was actually very helpful. And then just last question -- you mentioned KJCC with the payment last year. Is that still on track for the end of the year and into 2017?

They are going through the start-up phase right now. That kicked in, I think, in May. And there's a six-month time frame there where they have to take the minimum amount of volume through the end of November, and then the contractual volumes kick in from that point forward. So contractually, yes, they are required to essentially kick up demand at the end of this year.

Needle coke pricing continue to be significantly depressed in China. And I know that they have been taking less than contracted demand up to this point in time. But there are some protections within our contract that compensate us for that. So we still feel okay with where things are at in terms of the protections we have, but it's not a good situation for needle coke. That's for sure.

Thank you very much.

Ivan Marcuse, KeyBanc.

Real quick, in the performance chemical business, it looks like, based on your guidance, you're going to see -- I don't know, if you take the midpoint or something -- somewhere around 12% to 13% -- or $12 million to $13 million reduction in the second half versus the first half in terms of EBITDA. I'm just curious: how much of that would be, of that guidance, I know you're guessing a bit in terms of the volume, but how much would of that $13 million decline be volume versus some price giveback, it sounded like, and then higher costs?

That's good question, Ivan. I'd say that probably over half to two-thirds would be probably related to potential volume pullbacks. Something in that range. But I couldn't give you any better guidance than that.

Great. Well, if you look at the -- you talked about you're still expecting -- you know, a risk that there's some pull that -- some impacts on pull-through.

Yes.

If you didn't see it in the second quarter, why would you see it in the third?

Well, I think if you think about the second and third quarters as being -- as encompassing the majority of the outdoor construction season, if there's pull-through in demand, then you are going to see a stronger first quarter. You're still going to see, I would think, relatively speaking, a stronger second quarter. And any of that demand that's been pulled through, you're not going to see it fall off until you get to the back half of what would be the normalized construction season.

So we would expect, even with the stronger first quarter, to see a pretty decent second quarter. But if there's two months' worth of projects essentially out there, and you accelerate those, or you pull some of them through, you're not going to realize the reduction -- or whether there is a reduction -- until you get to the backend of that construction season, and that's the third quarter. So that's why I don't think there was an expectation, necessarily, in the second quarter to see a decline, but the third quarter it remained a question mark as to whether it could be there.

Are you seeing signs? Is there anything out there that's indicating that that gives you sort of the confidence to say it? Or are you seeing customers, you know, like Home Depot or whatever, saying, hey, we ordered a bunch of second quarter, and we're not going to order much in the third?

I mean, are we seeing signs of it at this point? No, we're not. So that is a good sign. That is a good sign. But we still have two months remaining, so --.

Okay, great.

But so far, so good.

All right, sounds good. And CMC -- did you have any cost savings help out in the second quarter? Or of those $11 million to $14 million, basically, of your cost savings guidance, how much has been achieved in the first half versus how much will be achieved in the restructuring savings in the back half?

Of the range that we gave --.

Yes, the $14 million to $17 million.

Of the range we gave, less than half would be encompassed in the first half. So maybe it's 25% to 35%, something like that in the first half, with the bigger chunk of it being in the second half. Because a big chunk of that is that Clairton facility going down here at the end of July.

Okay. And then if you -- just real quick, my other questions, and I'll get back in queue. Your interest expense -- and you may have said this; I missed it -- but your interest expense just sort of jumped up sequentially a couple million dollars, which I guess surprised me a little bit. But is that -- where should interest expense sort of land for the year, or how to think about it going forward, or that line? And then the tax rate: are you still sort of looking at it as mid-to-high 30%s?

Ivan, this is Mike Zugay. The interest expense in the quarter is more or less artificially $2 million high, because what we did in the quarter was we renegotiated our revolving credit line from $500 million down to $300 million. And US GAAP makes you go ahead and reduce your deferred financing costs that you have on the balance sheet because of that $200 million decline. So there was -- actually it was a little over $2 million from deferred financing costs that we had to recognize through the P&L. And the way we record that is through interest expense. So interest expense in Q2 is $2 million artificially high for a non-cash charge.

So would you expect to go back to sort of $11 million to $12 million range in the back half of the year per quarter?

Correct.

Okay. And then tax? Still seeing this 36%, 37%?

Yes. The tax, yes, somewhere in the -- a little bit above 35% is where we are trending. Again, it depends on where the profits are made, because we have many different taxing districts. But we are right around that 35%, 36%, 37% level.

Okay. Thanks. I'll jump back in the queue.

You're welcome.

Liam Burke, Wunderlich.

Leroy, KCC in China has been shut down. Could you give us the status of the other plant that's in the process of -- you're in the process of exiting the operations on?

Sure, TKK -- TKK is the 30%-owned joint venture that we are a part of that we've been in negotiation to sell that interest to the majority partner for quite a while now. It's been hung up -- the approval of that sale has been hung up in the provincial government. We did receive some positive word back early this week, but that is actually in the approval process. So that's a positive sign. And the expectation is that it gets officially through and signed off on, so that we can then work with our partner to work towards a closing date.

I don't know how long that will be beyond getting the official approval. But the official approval should come down here within days, or a week, or something like that. So my hope is that by the end of this quarter that we will have been able to close on the sale and move past that. But that's more or less where that's at right now.

And the terms of the deal haven't changed at all?

I haven't seen all of the details of their approval. So I can't say that with certainty, but from what I have heard, I don't think it -- I don't think that the feedback from them is that it would change substantively.

Okay. And the end markets are still working well for KPC. You have a technology; there are competing technologies out there. Is there any potential to take share based on what KPC has to offer -- the benefits that they do have to offer to the user?

Well, we, with our proprietary product -- I mean, it's made strong market share inroads here over the past 6, 7 years. What potential we have to get even greater market share, that's tough. It's always tough, because in many cases when you end up going down that route, certainly your competitors don't take that lying down. And you end up getting into some price competition. And that's something that we want to avoid.

So we are happy with the share that we have. We always see what we can do to selectively add to that. One of the benefits, I think, of the customer base that we have is we have pretty good long-term partnerships with folks that have been very acquisitive in this space. So in instances where they snap up smaller treaters that might be using competitors' products, there's a very good chance that we can move in and take some of that business. Doesn't happen all the time, but it certainly puts us in a prime position to do that.

So most of our market share gains tend to come as a result of consolidation in the industry. But we have made market share gains outside of kind of consolidation process, though it's probably on the smaller end of things.

Great, thank you, Leroy.

You're welcome.

Chris Shaw, Monness, Crespi.

You spoke in the CM&C segment about weaker volumes for some of the seasonal products. And I always understood that to be sort of the roofing tars and, I guess, maybe road tars. Is that what was weak in the quarter? And why do you think that would be?

Yes, that's some of the products that we are referring to. We're going through -- I can't speak to exactly why we have seen some of that weakness. I can tell you that there's certainly been a few cases where there has been some demand there that we haven't been able to capture because of some things that -- just because of some of the complications of going through the restructuring part of our program.

But the good news is that we still see a fairly strong market on a go-forward basis and think that whatever volumes that we aren't able to put in our pocket this year, that we can get back in 2017. So we don't see it as a long-term issue. It's more short-term as we're a little bit constricted and constrained with some of the things going on in our restructuring program.

Last year was a particularly strong season for those products. It doesn't always land that way from year to year. So tough to say, but all in all we still feel pretty good about the markets moving forward into 2017.

Okay. And can you remind me -- I think you have talked about it before, about what the annualized savings will be when you relocate the naphthalene plant to Stickney?

Yes. It's become a little more complicated, because when we first started talking about that a few years back, I think we were talking somewhere -- I want to say in the $12 million to $15 million EBITDA range, and that involved a number of different things. That project has kind of since been broken down into a couple of different pieces.

There's a piece of those savings that came as a result of the eventual conversion of our Follansbee facility into a terminal. And that involved taking down both our tar operations as well as our naphthalene operations. But we took our tar operations down at the end of last year, so we were able to already recapture -- or capture some of that $12 million to $15 million savings through the shutdown of tar at Follansbee. Then there's an additional piece, when we get to actually stop doing the naphthalene there and turning that into a full-blown terminal facility at the end of 2017, early 2018.

What I would just maybe remind everybody of is what we've talked about right now is we had the $14 million to $17 million of savings from restructuring built into this year, which basically involved a full year of benefits from taking the tar operations down at Follansbee, from pulling back on the operations at Stickney, from shutting down our Clairton facility here in the back half of this year, shutting down KCCC, shutting down Fort Clarence and Scunthorpe.

And then into 2017, we talked about our EBITDA going up to $30 million-plus as a result of getting full-year savings from all those shutdowns while moving into 2018, you know, moving up to around a $40 million or more EBITDA as project adams -- project -- the naphthalene project gets fully implemented in 2018, and some of the other restructuring benefits that we work on by resizing them, going to a smaller operation.

So the step progress is $18 million to $21 million this year, $30 million or more next year, $40 million-plus 2018. And that's what it looks -- and again, that's all at the lower end of the crude oil price spectrum. And we don't know where that will be, obviously, at that point in time. But there's upside as oil would go up, and we don't have other things impacting it and offsetting it the other way.

That's quite helpful. And then just on rail, and I know you're probably not in the market for deals right now, but I was just trying to think about what -- are there products within rail that you were interested in maybe obtaining to sell to the customers that you guys don't have in your portfolio right now?

Sure. It's -- I think that we haven't done a lot in the past couple of years. Yes, certainly we are still limited in light of our current leverage. But yes, I mean, we are and would remain interested in looking at opportunities that involve expanding the maintenance-of-way product and service line that we have. The vast majority of what we do is in the treatment of crossties. But we do have the rail joint business; we do have the railroad structures bridge business that we picked up as a result of the Osmose transaction of 2014.

And, you know, we are always looking for opportunities to add different products along that maintenance-of-way spectrum that we can provide a fuller product and service offering to the railroad industry. I think that there's a lot of great synergy and opportunity in terms of being able to have a broader product suite. So, yes, we are interested.

It would be, again, on the maintenance-of-way side of things. It wouldn't be getting out into other areas involving rolling stock and stuff like that. It would be strictly on the maintenance-of-way.

Okay, great. Thanks a lot.

(Operator Instructions) Scott Blumenthal, Emerald Advisers.

Mike, can you maybe give us an update on coal tar pricing? And were you able to realize maybe some midyear resets as the domestic integrated steel firms seemed to ramp a bit? And I guess where do you see average full-year pricing on a percentage basis this year compared to last year?

Well, Scott, we are still negotiating with two major suppliers. And those negotiations are proceeding very well, but we are not there yet from that standpoint. We can say that coal tar prices have dropped dramatically from the first part of the year. But keep in mind, the agreement we have with one of our large suppliers that we gave notice to didn't expire until mid-July. And that's going to continue, as we work through some of that inventory, to kind of diminish some of the profitability that would fall to the P&L otherwise.

So we are in the process; coal tar pricing is much, much lower than it was in the fourth quarter of 2015 than it was in the first quarter of 2016 and the second quarter. And it's going to drop rather substantially as we move forward in the third quarter and fourth quarter.

Okay. The one major supplier that you mentioned -- are you still doing business with that supplier? And would that be under the terms of the now expired agreement? Or is that kind of a merchant business now?

We currently are not doing business with that supplier, but we are talking to that supplier to take some of their coal tar volume at prices that we believe are market prices.

Okay, super. And then one more: Leroy, regarding the performance chemicals segment, can you -- are you able to speak to how much you think that mix in that business might have worked in your favor? And maybe some of your customers are kind of trading up to some of your more premium -- maybe the micronized copper offering -- product that you are currently offering?

Well, I can't speak to specifics.

Sure.

But mix did have an impact on the results. And it's not because of customers trading up so much as the strength in the residential side of the business as compared to the industrial side of the business -- preservative side of the business.

So the big piece of the volume increases we've been seeing have been in our patented products on the residential side. So that gives us a positive mix, but it's not as a result of kind of a trade-up into new or different preservatives.

Okay, I appreciate that. And have you previously discussed the value of your stake in TKK? Or is that something that's not been disclosed?

The truth is I don't recall. I will say that our stake in -- although I can say that our stake in TKK is rather minor for a couple of reasons. We are only a 30% owner in that business, and that business has made consistent losses over the past several years. So our stake in that business is very small.

I think what we have said is the biggest benefit of getting out of that business is stemming future losses and working to get our shareholder loan back. We have $9.6 million outstanding to that joint venture that we went from Koppers back in 2011 time frame. So it's not about realizing a large amount of money from selling our share. In fact, that will be very, very nominal. It comes from getting out of the business, stopping future losses, and working to get our shareholder loan back.

Okay. So getting out of -- the benefit of getting out of the business is getting out of the business, then, right?

That's right.

And have you in the past placed a probability on full recovery of that outstanding loan? Or are you not prepared at this time to say that?

Well, I can tell you we have not reserved against that loan in our financial statements, which means that we still believe it is probable that we will collect.

All right. Super, I really appreciate that. Thank you. Nice job this quarter.

Thank you.

Thank you.

Piotr Ossowicz, Ironshield Capital Management LLP.

Just following up on CMC and just trying to understand to what extent the EBITDA improvements that you are expecting the second half of this year and just -- well, materially about the first half. And then the further improvements you just quoted in 2017 and 2018: how much of this is going to be driven by new products versus the realignment of the coal tar prices you have mentioned being materially lower as we are going into Q3 and Q4?

I think they both play a critical piece of that. Certainly the restructuring and the taking out of 7 of 11 operating facilities over a three-year period will play a substantial piece of that improvement over that time frame. But a realignment of raw material prices that have just escalated and, quite frankly, have not resembled anywhere close to what's going on in the end markets will also play a significant piece.

I mean, the reality is we've been for several years in a declining price environment for the end products that come out of the distillation of that raw material. And this is not a sustainable business, continuing to buy raw material at those sorts of prices and making products. In fact, you can't continue to run a business like that. And so it required a significant readjustment in raw material for us and people like us to be able to actually continue to take that product and distill it.

And so savings will be significant from the raw material side. Savings will be significant from the cost alignment and restructuring side.

In terms of the proportion, gosh, I don't know. I can tell you it's not -- or at least I'm not prepared to tell you on this call -- it's not 75%/25% either way, I'll tell you that. It'd be much closer -- I think it might be much closer to something that would be a little more towards 50%/50%. But probably -- I'm sure not exactly there. But it's large on both ends of the spectrum.

Okay. Thank you, that's very helpful.

And just to understand a bit better your views on the coal tar pricing, and the coal tar pitch, and the [neder occluse] pricing. So looking now at the oil price strengthening slightly versus the beginning of the year, and aluminum probably remaining fairly weak, I mean, shouldn't we be concerned that while on the one hand the energy prices may end up pushing up the coal tar price to some extent versus on the other hand the very limited capacity from your client side to accept the coal tar pitch price increase or even the current levels?

Well, we've actually reflected some of the changing environment in our updated numbers, because we did bump up our expectations on pricing relative to the coal tar -- to the oil price increases. But we do expect and have seen, right, the -- certainly reduced demand. Some of that has been as a result of the decisions we've made to downsize, and some have been as a result of just the pullback in the aluminum industry.

The good news, Piotr, is we are trying to disconnect our future operating results from what goes on in the aluminum markets. Not that we don't want to serve those markets. We're still going to be dependent upon them moving forward, because we are still going to making carbon pitch. But we're going to be so much less dependent upon them as time goes on, just due to the fact that we are distilling less product.

So the market can contract; it can move. We think we have other options to move some of that product around to defend against any other additional pullback there. But we're -- one of the whole objectives of this strategy was to try and really reduce our reliance upon what we've seen going on in that market over an extended period of time. And we believe that the decisions we're making are going to result in just that happening.

So it's always tough to say, you know, as you look out two, three years, I mean, there's so many things that are moving that could ultimately have a positive or negative impact. But aluminum doesn't concern me the way it would have, certainly, two years ago or three years ago. And it shouldn't concern others as much as it did in that time frame, either. It's just a much, much smaller part of our portfolio. And it's intentional.

Okay. So just to work with that before I jump back to the queue: so the thing about the impact of oil price or coal prices moving up or down currently at your CMC margin: like, should we expect that this correlation is going to be different in terms of the direction of magnitude once you transform your CMC business? Or would it be similar?

No, we don't. Oil is still going to have an impact on orthoxylene, which will have an impact on phthalic anhydride. Oil will still have some at least indirect impact on naphthalene, which uses a feedstock in that process. Oil will still have an impact on carbon black feedstock, which is priced to benchmark Platts oil prices.

So in those product lines, it's still going to have an effect. And that's why we've talked in the past about -- again, at the low end of the range in 2018, when CM&C looks like it's fully restructured, moving forward on the low end of the crude oil price range, we think we can make $40 million-plus.

If oil would move back -- and I know nobody believes it will, but if oil would move back to where it was in the 2013/2014 time frame, high $90s, around $100 a barrel, we think it could be as high as $70. That's still a significant movement between that spectrum. But no, oil is going to continue to have an impact on that business. Our objective is that at the low end of the range, we can still have a adequately profitable business that provides returns on capital in line with the risks associated in that business.

All right. Thank you very much.

You're welcome.

It appears there are no further phone questions at this time.

I'd just like to thank everybody for dialing in for the call. Again, we are -- feel pretty good about where things stand through the first six months. Happy with all the progress that we've made. We will continue to do everything we can to execute on our plan, and look forward to catching up again next quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.