Koppers Holdings Inc (KOP) 2016 Q3 法說會逐字稿

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

Thanks and good morning. My name is Quynh McGuire and I am the Director of Investor Relations and Corporate Communications. Welcome to our third-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 Helinski at 412-227-2444 and we can send a copy to you.

As indicated in our earnings release this morning, we have also posted the materials to the investor relations page of our website that will be referenced in today's call. Consistent with our practice and 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 December 2, 2016.

Before we get started, I would like to remind all of you that certain comments made during this conference call may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties, including risks described in the cautionary statement included in our press release and in the Company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking statements included in the Company's comments, you should not regard the inclusion of such information as representation that its objectives, plans, and projected results will be achieved. The Company's actual results could differ materially from such forward-looking statements. The Company assumes no obligation to update any forward-looking statements made during this call.

References may also be made today to certain non-GAAP financial measures. The Company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

I am joined on this morning's call by 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, and welcome, everyone, to our third-quarter 2016 earnings call.

And before I get into the details of the third quarter's financial results, I would like to highlight some of our recent milestones. Let's begin with an update on our efforts to instill a zero harm culture, which I firmly believe is vital to our success moving forward.

In September, we convened various leaders from across the globe who have direct leadership responsibilities for over 80% of our employees for the inaugural zero harm and zero waste leadership forum in Pittsburgh. First, the event served as a way to reinforce our commitment to zero harm as an overarching value that places the care of our people, our environment, and our communities first at all times. Second, it also enabled us to begin laying the groundwork for behavioral reliability and empathetic leadership training, which underpins the transformative change we're making at the top levels of the Company.

Also, we were fortunate to have Dr. Sharon Feng, a member of our Board of Directors and the Chairperson of our safety, health, and environmental committee, attend part of the conference and speak to the participants about the Board's support of and commitment to zero harm.

And my goal to build Koppers into a Company with a business model that supports sustainable growth starts with operational discipline with safety at the core. A company that cares about its people, its effect on the environment, and the communities it is a part of is a company that is focused on always doing the right thing and will serve its customers and shareholders well.

As a result, we will continue to invest in additional resources for safety training and process improvement to accelerate our progress over the next several years.

In recognition of our zero harm mindset, Koppers was recently honored for the second consecutive year by the American Association of Railroads with the Grand Slam Award for excellent performance in railroad hazmat shipping. Our employees have worked hard to significantly improve safety and environmental practices while our products are in transit to ensure that our communities are protected on an everyday basis while we reliably serve our customers.

I have not wavered from my belief that zero harm is possible, and together our leadership team from around the world will manage to that rigorous standard.

Recently, we announced a contract extension with Norfolk Southern Railway company, which is one of our four largest railroad customers. In 2015, revenues from Norfolk Southern represented approximately 10% of all railroad-related sales. This agreement extends the contract to 2021 from the previous 2016 expiration and includes commitment for Koppers to provide crossties, as well as other related products to Norfolk Southern, through the contract period.

We are proud of our long-standing relationship with Norfolk Southern, as well as with the overall Class I railroad industry in North America. As Koppers transforms to be the global leader in wood-based technology serving the rail industry with high-quality products and services, it will continue to be an emphasis for our Company.

Now moving on to our third-quarter highlights, the third quarter saw impressive results generated primarily by our performance chemicals, or PC, business, which again delivered high sales volumes and strong profitability. The sales increase was driven primarily by favorable market trends in the repair and remodeling markets and existing home sales, as well as customers continuing to stock and sell treated wood with higher preservative retention levels. Our PC business is well positioned as it continues to strengthen its market-leading position and benefit from near-peak consumer trends for high retention treated wood products.

In our railroad and utility products and services, or RUPS, segment, sales were lower year over year, but profitability held relatively steady on an adjusted basis, due to a favorable sales mix related to the crosstie treatment and bridge services, as well as cost efficiencies related to a wood treating plant closure. Overall, the RUPS business delivered solid margin performance, despite the softening market conditions that we previously forecasted as a result of the North American rail industry's spending cutbacks in response to lower car loadings and rail traffic.

For our carbon materials and chemicals, or CMC, business, sales declined from the prior-year period as a result of our streamlining efforts, which has reduced distillation capacity and therefore led to lower sales volumes, as planned. However, CMC adjusted operating profitability increased from the prior-year period as a result of cost savings related to our consolidation strategy and lower average raw material costs, partially offset by decreased volumes and lower selling prices of certain products.

Regarding debt, our outstanding balance at September 30 was $691 million, reflecting a $42 million debt paydown from year-end 2015. The fourth quarter is anticipated to be another strong cash flow quarter, due to favorable operating results in the third quarter. We are on track to achieve our goal of reducing our debt to $650 million by the end of 2016, due to improved profitability and lower working capital needs as a result of rebalancing and refocusing our business mix.

As part of transforming Koppers' profile, we continue to advance our strategy to significantly reduce our coal tar distillation capacity. We have already started to see positive outcomes in terms of increased profitability and a shrinking environmental footprint.

As our CMC restructuring plan reaches full implementation during 2018, we expect to have effectively decoupled our wood preservation business from the significant volatility that has affected CMC throughout our history. At the same time, we have ensured that our RUPS business has reliable access to the supply of creosote, since creosote plays such an important role in serving the North American rail industry.

What that means is that from peak to trough in what seems to be the new normal for oil markets, this segment is being restructured to have less EBITDA variability than any of our segments, while also providing for an acceptable return on capital for the business.

There is no question in my mind that our strategy continues to build momentum, as evidenced by the continued improvement in our CMC segment results on a year-over-year basis.

Now I would like to turn it over to Mike to discuss some key highlights from the third quarter of 2016.

Thank you, Leroy.

Starting on slide 2 of our presentation, revenues for the quarter were $371 million, a decrease of $63 million or 14% compared to $434 million in the same quarter last year. The decline was primarily related to CM&C reporting lower sales volumes from carbon pitch and carbon black feedstock. This reduced volume was driven by our strategy to curtail total distillation capacity and direct as much as possible to the higher-value wood preservation market.

Also, CM&C was affected by lower sales prices for carbon pitch and phthalic anhydride, and this was partially offset by higher phthalic anhydride volumes. Another driver was that our RUPS segment experienced lower year-over-year sales volumes of treated crossties and utility products.

Moving on to slide 3, adjusted EBITDA was $51 million in the third quarter, compared to $48 million in the prior-year quarter. This was mainly due to higher profitability from the PC business, partially offset by lower profitability for the RUPS segment. Adjustments to EBITDA for the third quarter of 2016 consisted of approximately $9 million of pretax charges, and these were related primarily to restructuring expenses.

Now I would like to take a minute or two to discuss several items that are not referenced in our slide presentation. Adjusted net income was $21 million in the quarter, compared to $14 million in the third quarter of 2015. Adjustments to pretax income for the third quarter of 2016 amounted to $12 million, which were primarily restructuring expenses related to our CM&C consolidation efforts.

Adjusted EPS for the quarter was $0.99 per share and compares very favorably to $0.67 per share in the prior-year quarter.

The adjusted income tax rate, excluding discrete tax items, for the third quarter was approximately 27% and 29% on a year-to-date basis. This decrease in our tax rate was due to a shift in earnings to lower foreign tax jurisdictions compared to what we had originally estimated. The lower effective tax rate had an approximate positive $0.06 per-share impact on the quarterly adjusted EPS.

Cash provided by operations for the nine months ended September 30 was $83 million, and this compared to $95 million in the prior-year period. The decrease was primarily due to an increase in accounts receivable balances in the current year and the receipt of a $30 million one-time cash payment to our KJCC joint venture in the prior year.

Capital expenses for the nine months in 2016 were $32 million, compared to $26 million for the same period last year. We continue to expect 2016 capital expenditures to be in a range of somewhere between $42 million and $47 million. This includes the construction of a 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 $110 million borrowed on our $300 million revolver. Also, we had $240 million outstanding on our term loan, $300 million outstanding in existing bonds, and approximately 45 -- I'm sorry, $41 million of loans in China. And this results in a total debt at the end of the quarter of $691 million.

Now this number isn't going to tie directly back to the balance sheet, due to the fact that we had to reclass $10 million of unamortized debt issuance cost from the category of other assets, and this was a GAAP requirement.

Our leverage ratio at quarter-end was 4.11 times, well below the covenant of 5.25 times. Our long-range goal in this area continues to be a leverage ratio of approximately 3 times. Our fixed charge ratio was 1.6 times, well above the required covenant of 1.1 times. And based on our 2016 projections and our preliminary 2017 forecast, we are very confident that we will remain in compliance with our loan covenants throughout the rest of 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 paying down our debt by $85 million this year, bringing it down from $735 million to $650 million by year-end. However, as noted on the chart, we now expect that the $10 million that we were going -- we anticipated to receive on the TKK loan repayment will now be received in 2017 and that will make achieving our goal of $650 million a little tougher.

However, when combined with our 2015 debt paydown, this would achieve our minimum two-year paydown target of $200 million. And on a quarter-over-quarter basis, our debt decreased from $721 million in total to $691 million in total, and this was directly in line with our expectations for the current quarter.

Now I would like to turn the conversation back over to Leroy.

Thanks, Mike.

I want to speak now about the outlook for each of our business segments, beginning with performance chemicals. As I mentioned earlier, the business continues to outperform, due to a number of reasons. From a market perspective, the National Association of Realtors, or the NAR, reported that existing home sales jumped 3.2% in September alone, propelled by the highest percentage of first-time buyers in more than four years. The NAR expressed optimism that this increase in sales among first-time homebuyers can be sustained for the remainder of 2016 and, at a minimum, into spring of 2017, citing consistent job gains and affordable mortgage rates as economic underpinnings that are helping consumers to gain additional confidence.

This paralleled a positive trend, according to The Conference Board, in which consumer confidence increased in September for a second consecutive month and now is at the highest level since the great recession at 104.1, up from 101.8 in August.

Additionally, we saw unseasonably high volumes early in the year, partly attributable to the milder than usual winter, resulting in home improvement projects starting sooner than anticipated, and a buildings product market that has outpaced expectations throughout 2016. Add to that the recent standard changes recommended by the American Wood Protection Association, or AWPA. The new standard change, which went into effect in July 2016, recommended that more ground contact treated wood be used in areas that simulate ground contact end-use applications. That affects wood preservative [assistance] primarily in residential and agricultural uses.

The AWPA standard change conversion started early to mid 2016 and is expected to continue into the first half of 2017 as both big-box and independent retailers are adopting the new standard and stocking more ground contact inventory at the retail stores.

As a result, we now expect to generate EBITDA of approximately $80 million in 2016, as reflected on page 6 of our slide presentation. This is an increase from our previously forecasted EBITDA of $71 million to $74 million and reflects a $19 million improvement from prior-year EBITDA of $61 million.

Moving now to our railroad and utility products and services business, I am pleased that our RUPS operating profitability on an adjusted basis held at a relatively steady level for both the third quarter and the year-to-date period. However, both the procurement and treating volumes were lower year over year in the third quarter, with much of the decline occurring in September.

The pullback that we were expecting would happen at some point in time is in fact now occurring and is expected to continue through the fourth quarter and into 2017. Also, the combination of lower pricing due to the passthrough of lower raw material costs related to hardwood pricing in a more competitively priced commercial market will also continue to weigh on RUPS in the near term.

As reflected on slide 7, we are reducing EBITDA guidance for our RUPS segment to $71 million to $74 million in 2016, compared to our prior estimate range of $76 million to $80 million and $84 million that it earned in 2015. And we still expect to realize a net savings from cost-reduction initiatives, primarily the closure of the Green Spring plant, that should net about $4 million this year and serve to offset some of the lost profitability from volume reductions.

On a separate note, we closed on a long-term lease of our wood treatment facility in Houston, Texas, to a third-party on October 24. The facility is engaged in the manufacturing and sale of pressure-treated dimensional lumber, with sales of approximately $8 million for the year-to-date period through September 30 and $14 million for the full year 2015. Profitability for both periods was essentially breakeven at the EBITDA level.

As part of the agreement, the third party acquired our inventory and assumed operations of the facility. While this transaction isn't material, it is accretive to margin, provides the opportunity to convert our working capital into cash, and allows us to focus resources on running our core businesses.

Now let's review the outlook regarding our CM&C business. On slide 8, our 2016 anticipated EBITDA guidance for CM&C is in the range of $19 million to $20 million, which would represent a $10 million to $11 million improvement over 2015. In the third quarter, our CM&C segment began to see higher profitability on an adjusted basis, with further improvement anticipated in the fourth quarter. As expected, we are realizing meaningful benefits from the fixed-cost savings related to our restructuring actions, as well as lower average raw material costs.

For the fourth quarter, we believe that sales volumes will remain challenging, due to negative demand trends from North American aluminum producers and lower pricing related to carbon pitch and phthalic anhydride, partially offset by higher volumes for phthalic anhydride.

Now regarding our TKK joint venture in China, we seem to be close to completing the sale of our 30% interest, pending some final administrative matters that should be wrapped up soon. This has been a long and arduous process that would be good to put behind us as we continue to focus on streamlining our business, which includes shrinking our footprint in China.

We are maintaining our 2016 sales outlook of approximately $1.4 billion, as reflected on slide 9, with an expected decline in our CM&C segment sales of $180 million to $200 million from prior year, and sales for RUPS are estimated to decline by $80 million to $90 million from prior year to reflect general weakness in the rail industry and lower pricing as a result of lower hardwood costs.

Now, by contrast, 2016 sales for PC have also been revised, but they have been revised upward and are now expected to be $50 million to $60 million higher than prior year to account for stronger-than-expected sales volumes.

Turning to slide 10, we are increasing our guidance for consolidated EBITDA on an adjusted basis to be in the range of $168 million to $172 million, compared with our prior forecast of $162 million to $172 million. The stronger results from performance chemicals are expected to continue and should more than offset the expected softening in treated crosstie volumes.

Accordingly, adjusted EPS guidance is also being increased and is now projected to be between $2.40 and $2.54, compared with the previous range of $1.90 to $2.20. The main driver of the increased EPS guidance is a lower than previously estimated effective tax rate.

Regarding 2017, while it is still early in our planning process, we are going to give general guidance at this time and follow up with more detailed metrics when the fourth-quarter 2016 results are reported in February 2017. We currently expect the 2017 sales will be relatively flat year over year and remain at approximately $1.4 billion, with sales estimated to be higher for PC, offset by lower sales primarily from RUPS.

On an adjusted basis, EBITDA is projected to be approximately $180 million. From a high-level perspective, we expect that the year-over-year EBITDA increase will be generated from PC's favorable business trends and CM&C improvements due to restructuring benefits and raw material cost savings. This will be partially offset by a lower EBITDA contribution from the RUPS business due to continued forecasted weakness in the rail industry.

Capital expenditures in 2017 are expected to be approximately $65 million to $75 million, consistent with our construction timeline for the new naphthalene unit at our Stickney, Illinois, facility. At the same time, our PC business will be adding production capacity to catch up with recent market trends that have driven higher preservative volumes.

Now overall, I am pleased to say that our performance to date in 2016 has been successful. Although we have had to manage through difficult conditions in our CMC business and slowing demand in our RUPS business, those factors were more than offset by strong demand in our performance chemicals business. We're also seeing the initial benefits of having a more efficient and effective cost structure, with more to come when our CMC consolidation strategy is fully implemented.

These achievements are possible because of the hard work of our people, and I would like to express my appreciation for their dedication and engagement at all levels. Thanks to our worldwide team of employees, we have made considerable progress on key initiatives that contribute positively to our results. And as Koppers transforms to be the global leader in wood-based technology, we will continue to evaluate how to best optimize our strategy as it relates to our product portfolio and capital structure. As always, we remain committed to delivering shareholder value.

With that, I would like to now open it up for questions.

(Operator Instructions). Laurence Alexander, Jefferies.

It's actually Dan Rizzo on for Laurence. Just with the railroad business, is there something that has changed? Because I thought it was a steadier business that it seems to be showing lately in terms of profit and even sales. It just seems a little bit more volatile these days that it has historically. Has there been a change in, I don't know, just the environment?

No, I think -- our railroad business is not unlike others. It is not immune to cycles. It is just that the cycles, the peaks and troughs of those cycles, tend to be smaller.

So, I don't see any difference in what is happening in our rail business than what has happened in previous times. You are dealing right now, obviously, with a very challenged rail industry, and as I have been saying really throughout each of the calls this year, we had some concern that they would be pulling back on spending at some point in time as they ran out of other options and alternatives.

And what we are actually now starting to see is that in fact happen. And there is an element that makes the sales number look, I think, a little worse than what it really is impacting the EBITDA, and that is just the business model that we have where a lot of our crosstie -- untreated crosstie business is more or less passthrough business is you have changes in hardwood prices up and down. You can see big moves in the sales numbers that don't always have as big of an effect on the EBITDA that ultimately comes through the financial statement.

So that tends to exacerbate how the numbers look when you look at it from a sales standpoint. But to me, there is no difference in what we are seeing today than what we have seen in this business in the past. It's just you don't see the dramatic drops and peaks that you see in our CMC business, as an example, over time.

All right, thank you for the clarity. And then with the change in standard and how that is helping with ground contact wood, I know that is being adopted, I think you said. But is that displacing above ground at this point? I think part of the forecast was that nobody really wanted to carry two inventories, so I was wondering if you are seeing it take the place of above ground.

Yes, I think each retailer probably -- I know they look at it a little bit differently. It comes down to how they want to market their products and stock their stores.

There are certain ones that certainly, I think, have gone along the lines of moving everything to ground contact to try and eliminate confusion, but there are others that I think continue to stock both, so you see a little bit of both. Overall, it has obviously been a net positive, but it's a mix.

Okay. All right, thank you.

Ivan Marcuse, KeyBanc Capital.

Thanks for taking my questions. In 2017, how much do you expect the decline in the RUPS EBITDA?

Ivan, we are only giving general guidance at this point in time at a high level. There are still some moving parts that need to get nailed down. I think we feel comfortable and confident enough in terms of the balance between the businesses to put the number that we have out there, but that's why we specifically didn't give segment guidance for 2017 at this point in time. We're still trying to nail some things down. But directionally, RUPS will be down in 2017, and the other two segments will be up and more than offset that.

Okay, and then I guess from what you have said, where are we in the cost savings for the total Company? I know the vast majority are in the CMC business, but where are we in the cost savings, and how much should that help, from what you have laid out so far and what you have achieved, 2017?

I still think that we still have a good ways to go in terms of cost savings to run through the financial statements. When you think about the fact that on prior calls I have talked about, and I will stick with CMC, because that is where the vast majority of this is coming from, we talked about and still feel good about $10 million of additional cost savings coming in 2017 and a similar number coming in 2018.

Now, what offsets that somewhat or disguises some of that is if the RUPS business volumes are going down, that is going to have a follow-on effect, obviously, with the creosote volumes. So that will help -- that will mute some of that savings, but we still expect another $20 million or so of savings coming out of CM&C over the next couple of years.

In terms of what we have seen for this year, we had it in the bridge of somewhere in the neighborhood of $15 million to $16 million, so all told we would be talking about $35 million over a three-year period.

Got it, okay. And then moving on to the performance chemicals real quick, based on your guidance for sales, it looks like sequentially in the fourth quarter, if I did the math right, sales should be roughly flat from the third quarter of what I have expected some seasonality. So why will sales be up, I guess just taking a midpoint, 30% or so on a year-over-year basis in the fourth quarter year over year, but while your EBITDA will be, based on your guidance again, call it $7 million, $7 million to $8 million lower?

Okay, I don't have those numbers in front of me. My expectation is that EBITDA for the fourth quarter for performance chemicals would actually be up compared to the fourth quarter of last year.

No, I understand that, but if you look at the third quarter, your sales are flat sequentially, essentially, so then why wouldn't your EBITDA be flat sequentially?

We are talking specifically performance chemicals? I apologize, I am just trying to --

Just taking your performance chemicals, so year to date you have done what you have done in EBITDA, so to get to $80 million you would have to do, call it, $14 million to $15 million in EBITDA, right, and then to get to your sales guidance, you would have to do a similar type of level of sales in the fourth quarter than you did in third quarter, which would be a 30% increase on a year-over-year basis.

So I am just curious of why you are seeing that acceleration versus some seasonality, and why isn't that flowing down to the bottom line?

Mike, I am going to (multiple speakers)

I think obviously seasonality enters into it, but in addition to that from a standpoint of profitability, because we are out of capacity, what we are having to do is buy material that we normally produce out of our Hubbell facility at a much lower cost, and we're bringing that type of raw material in from places like China and India at a much higher cost.

Did you have to do that in the third quarter?

A little bit, but the problem is it is exasperating itself.

So you should have the same level of sales, but your profitability is going to drop by 33%?

Yes.

Because of that?

Yes. The material we're bringing in that, again, is because we're out of capacity to produce it ourselves is somewhere in the neighborhood of 30% or 40% more than we can produce it ourselves. So it is a hit. It is an impact.

And as Leroy has mentioned before, even in his script, right now we are in the process of spending money from a capital standpoint in a couple of our performance chemicals facilities to make sure that in early to mid 2017 that we are able to go ahead and produce what's needed internally at that much lower cost.

But right now, we are caught in a little quandary that we can't produce enough of, again, the basic raw materials, specifically basic copper carbonate and cupric oxide. And we're having to bring that in from foreign countries, and when you take a look at the pricing and add into the transportation cost, it is substantially higher (multiple speakers)

(multiple speakers) in terms of dollars, how much of that -- is that a cost increase on a year-over-year basis?

I don't have that information in dollars.

We are not going to get into that specifics anyway, Ivan.

The other thing, to follow on from what Mike was talking about, and I think I mentioned it last quarter as well, with the volumes that we are seeing, we cannot continue to run the facilities the way that we were and with the personnel involved. We have to add people. We have to add some infrastructure there to continue to maintain an increasing volumes that we are expecting to carry us through into 2017 as well.

So, we literally have been working hand to mouth in that business most of the year and we can't continue to operate safely that way or expect to continue to operate safely that way, and we have to continue to invest in that business.

(multiple speakers) okay, and then, I guess, a quick follow-up.

(multiple speakers) costs associated with hiring people and we also have costs associated with those new people from a training perspective, before they become productive.

Okay, and then last question, I will jump back in the queue. Just back in the performance chemicals, if the sales stay flat sequentially, so you're not seeing the same sort of seasonality that you typically see? Is this a result of the increased volumes from the standards that you mentioned or is there something else going on? Just talking about topline, ignoring your higher costs.

From a topline standpoint, again, without looking at the details in each of the different regions, it is tough to answer that question right now, to be honest.

There's just a big jump year over year, so I was just curious. It is like a huge acceleration.

Understand.

Got it. All right, thanks.

Liam Burke, Wunderlich.

Leroy, could you give us a little more detail on RUPS in regards to both the bridge engineering business and then the non-crosstie infrastructure, like the bonded, insulated joints, how those businesses fared? You touched on it in your prepared statements on the bridging, but not on the insulated joints.

Without getting into too much specifics, Liam, we have had a pretty strong year on the railroad structure side. That bridge business has been pretty strong throughout the year, consistently strong as well, so we -- it has been one of the few bright spots in that whole business segment.

Joint have continued to be down quite a bit from a volume standpoint, and that's been also consistent throughout most of the year. As we talked about earlier, it was one of the main drivers for some of the differential between 2015 and 2016 as it related to the first and second quarters. That has not changed.

It certainly had contributed again to the differential in the third quarter also, but railroad structures has actually been up I would say within a 5% range for the overall year. It slowed down a little bit here as of the end of the third quarter, but overall it has been up. It has been one of the only areas that has been up in that segment.

Okay, got it. And getting back to the AWPA standards on KPC, are they being adopted fairly quickly by the treatment -- the lumber treatment folks, and did you see any measurable change as a result of this regulation here in the quarter?

I would say they're probably being adopted quicker than what we had expected and that's -- so when you see the change in our guidance this quarter for the year versus last quarter for the year, and that has gone up quite a bit, we were pretty cautious in our optimism at how quickly it would be adopted, and that's been the main driver for our change in estimates.

I think stronger organic volumes also played into it, but I would say the bigger piece of it has been the surprise around how quickly that standard is getting adopted.

Great, thank you, Leroy. And, Mike, real quickly on the tax rate for fourth quarter, you're presuming a similar mix of geographic revenue distribution or -- I know there is something embedded in the guidance there?

Yes, I would say from a guidance perspective in the upper 20%s is probably where to be.

For the quarter or the year?

Basically for the quarter, it is going to be in that 27% to 29% range, just like -- or very close to Q3. On a year-to-date basis, obviously it is going to be slightly higher, because we had a higher tax rate in the first and second quarter. So, upper 20%s for the quarter and maybe right around 30% or slightly over 30% for the full year.

Great. Thanks, Mike. Thank you, Leroy.

Rudy Hokanson, Barrington.

A question on the PC facility expansion, can you give us an idea as to what the increase is in capacity in terms of a percent of sales, and also if it is all going to be in one location or where you plan to do it?

Yes, it will be -- Rudy, it will be in multiple locations, and I won't get into the percentage as it relates to the increase in capacity, because it doesn't necessarily translate to the final product. It is for pieces in the process. But it will be at multiple locations; it won't be just at one location.

Okay, and then just as a clarification. If I heard it correctly, before when you were talking about -- and understanding that it doesn't directly relate to sales, but before when you were talking about your internal production of materials for the process that you now have to import, did I hear you correctly saying that you were running short by 30% or 40% in the third quarter or at this current time?

No, that 30% or 40% is the price differential.

Okay, okay, that wasn't a volume issue?

No, no, Rudy, that was the price differential for two basic products. It is what we called BCC and then cupric oxide, and it is over and above the cost to get it here, to buy it internationally and to transport it here. That percentage is the greater percentage than we can produce it and have historically produced it internally for our own use.

Okay, thank you for that clarification. Then, also, on the -- assumptions on the price of oil, which you didn't mention at all, but going into the quarter, you were saying that you were presuming in your guidance a $40 a barrel oil. And in the third quarter, it has been more like the $45 to $50 level, which is the range we are settling into right now. And I was wondering if you could talk a little bit about your current assumptions and price sensitivity, what you are noticing in terms of the carbon black feedstock and other products?

Sure, so third quarter by our estimates, you are right. I think we saw average oil prices around, call it, $45 a barrel for the quarter, which were in line, maybe a little bit lower than where I think they settled at in 2015 for the third quarter.

As we look out over the rest of the year, we are basically forecasting -- our forecast includes oil that will be somewhere in that same range, in the mid $40-ish range, and the benefits that we would be expecting to receive from that are basically getting more or less offset in a couple of different areas. One is through lower creosote volumes with some of the rail decline that we are seeing, and the other is despite that oil change and its effect on carbon black feedstock, which you are correct, but again one of the changes that we made this year was to reduce our exposure to carbon black feedstock through the shutdown of these various plants, which would push more of that part of the process into creosote, which doesn't get priced according to oil and helps to insulate ourselves from those movements.

But the piece that hasn't reacted as quickly to the changes in oil is the orthoxylene pricing, which is what our phthalic anhydride pricing is based off of. So, when I look at the numbers here for 2015, as an example, and I look at the third quarter, oil as an example was down 4% compared to 2015 last year, and for orthoxylene and its effect on our results in the quarter, the costs of that were 24% lower in the third quarter. So you can see quite a difference.

Now, we think in the fourth quarter that difference is going to be somewhere between 4% and 5% compared to last year, so last year's -- or this year's fourth quarter orthoxylene costs we expect to be a lot closer and more in line with last year, from a comps standpoint. But in the third quarter, we did not get the benefit of orthoxylene being anywhere close to what it was in the third quarter of last year, despite the fact that oil was within a 5% range of last year's oil.

Okay, so everything -- to say it maybe in a little more simpler way is that the various pricing mechanisms seem to be tightening or becoming more in line where year-over-year comparisons, at least right now, really aren't material?

That's correct.

Okay, thank you. Those were my questions.

Chris Shaw, Monness, Crespi.

Starting in RUPS again, you guys have a breakout what the -- you said some of the lower sales were due to lower hardwood prices. Do you know how much of the sales decline was volume versus the price?

I don't have that handy. I would say that overall from a volume versus pricing standpoint -- you know what, Chris, I would hesitate to speak without that information in front of me. We can try and follow up on that for you.

Sure. And then continuing on RUPS, very impressed with the profit performance, given the sales decline. Was there a lot of cost cutting this quarter or was there -- were you substituting some higher-margin product that you sold? How did you do that well?

It is a little bit of this, a little bit of that. We have one less facility that we have taken out of the system with Green Spring going down, and that certainly has contributed. I think we have attributed about $4 million of cost savings associated with that.

We have had some other cost reductions that we've been able to pull out of the system. We have had a little bit of a change in mix in terms of the products, as well, that allows us to maintain margins that are somewhat in line with what we saw, despite the change on the topline.

If you think for a minute about the -- again, the untreated crosstie piece of it, that is a lower-margin piece of that business. It is not a direct passthrough; there is a markup on that, but the markup is much smaller than the value that is created through the conversion of that untreated tie to a treated tie. And when you have that effect being such an integral component to the decline here over this first nine months of the year, and particularly this quarter, it is not -- despite the sales drop, you are not going to see as much of an impact from a margin standpoint.

Right, that makes sense. And then if I could switch to some of your comments on performance chem headwinds from sourcing product -- sourcing raw materials instead of making it yourself, when does that headwind -- when do you get the capacity online? When do those this new people start becoming productive at your plants? When will that headwind evaporate?

I think it is going to be into the middle of next year before we are able to get to the point where we can offset the increased costs that we are seeing as a result of having to go outside for part of our raw materials process, so it's another nine months or so, three quarters.

And if I could just finish with a question about coal tar, didn't the coal tar contracts typically re-up or reprice at the end of the year? So do you have any outlook onto where coal tar pricing or your coal tar costs might be for next year relative to this year?

Our coal tar costs for next -- that's one of the things that we are still actually going through. We don't have pricing finalized yet.

But we have seen a meaningful reduction this year, and next year we expect to see an additional reduction. So that trend will continue, but we don't have the pricing fixed or locked in for 2017 at this point.

That's all my questions. Thanks.

Thank you. This does conclude today's question-and-answer session. I would now like to turn the conference back over to Chief Executive Officer Leroy Ball for closing remarks.

Thank you. In summary, we are really pleased about our strong operating performance in the third quarter, which demonstrates that our strategy continues to build momentum.

However, there is still work to be done. We continue to take a systematic approach to reducing our dependence on highly cyclical industries tied to oil and aluminum. As we proceed on our journey towards zero harm and becoming an enterprise focused on wood preservation and protection, we will continue to be intensely focused on delivering shareholder value. Thank you for joining us today.

Thank you. This does conclude today's program. Thank you for your participation. Have a wonderful day and you may disconnect your line at any time.