Koppers Holdings Inc (KOP) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Koppers' Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I will now turn the call over to Quynh McGuire. Please go ahead.

Thanks, and good morning. I'm Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our second quarter 2018 earnings conference call. We issued our quarterly earnings press release earlier today, and you may access this announcement via our website at www.koppers.com.

As indicated in our earnings release this morning, we have also posted materials to the Investor Relations page of our website that will be referenced in today's call.

Consistent with our practice and prior 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 10, 2018. Before we get started, I would like to direct your attention to our forward-looking disclosure statement. Certain comments made during this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of assumptions, 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, performance or achievements may differ materially from those expressed in or implied by 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, and 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.

Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn the call over to Leroy.

Thank you, Quynh. Welcome, everyone to our second quarter 2018 earnings call. Let's start by reviewing the latest progress made on our journey to Zero Harm.

In early 2018, we introduced our lifesaving rules workshop, designed to help mitigate the most high-risk activities while giving our people greater peace of mind about their safety on the job. Since then, employees at all Koppers legacy facilities across the globe have completed this critical component of our ongoing safety education efforts. In addition, we're working hard to introduce the newest members of the Koppers team from M.A. Energy Resources and Utility and Industrial Product (sic) [Products] to our Zero Harm culture.

The training in the foundations of safety and lifesaving roles are currently being delivered to our employees at those locations, with more to come. To date, our Zero Harm training has been primarily focused on front-line employees who engage in our company's most inherently hazardous processes. We are now deploying the training to include our corporate staff as well. As we continue to advance our culture, it's important that everyone in our organization has a strong understanding of the effects our day-to-day words and actions can have on safety.

Additionally, coming up in September, we'll again be gathering our top global leaders in Pittsburgh for our third Annual Zero Harm Zero Waste Leadership Forum. This event is always energizing as it provides an opportunity to reaffirm our commitment to leading safe and responsible operations, discuss ongoing challenges and opportunities and take partner skill building activities and learning sessions related to safety, health and environmental topics. I'm pleased to share the Koppers' total recordable rate including our newly acquired locations has continued to decline through the first 6 months of the year, putting us on pace for another year of high performance.

As always, I appreciate the continuing dedication to safety that our employees have for both themselves and for their colleagues. We've made significant progress to date and remain focused on further improvement as we strive to get to Zero.

Now let's talk about our June quarter financial performance. On an adjusted basis, we delivered $0.93 for the second quarter compared with $1.18 in the prior year period. Our card, materials and chemicals, or CM&C business again delivered strong results compared with the prior year period due to positive market trends as well as a more streamlined and efficient cost structure. In fact, it was the seventh consecutive quarter of margin growth.

Unlike the first quarter where the outperformance was driven from our China business. In the second quarter, it was driven from our North American and European businesses. In fact, we delivered very little product to our major needle coke customer in China due to them performing a major repair and maintenance turnaround.

Higher global demand for carbon-based products and a tightened raw material supply put upwards pressure on pricing while we continue to take costs out of our infrastructure. The question remains as to how long the sort of environment can continue and what our sustainable profitability would look like in this segment when things normalize.

All indications that we're receiving is that we will continue to see the benefit from the various market tailwinds through at least a good portion of 2019 and maybe even longer.

Adjusted EBITDA margins were 16.1% in the second quarter for the CMC segment, while adjusted EBITDA was 28% higher than the prior year quarter.

Now our Performance Chemicals, or PC business reported lower year-over-year profitability to an unfavorable sales mix, higher raw material cost and increased overhead cost. Various production difficulties with the newly installed process for producing one of our intermediate raw materials caused us to have to purchase more of that product on the open market, and we would have liked and that drove our raw material cost even higher than we had anticipated. Now we had hoped that the extended winter would lead to pent-up demand in the second quarter, which never really materialized. So we're speculating that the record high lumber prices had changed some buying patterns, causing treaters to minimize inventories while waiting for white wood prices to fall.

The result was adjusted EBITDA of $17.9 million and an adjusted EBITDA margin of 15.6% compared to adjusted EBITDA of $24.3 million and an adjusted EBITDA margin of 21.7% last year. In terms of our RUPS or railroad utility products and services business, although sales were higher year-over-year as a result of the recent acquisitions of M.A. Energy and Cox Industrial or our Utility and Industrial Products business, the profitability was affected by reduced volumes as a result of transitioning a major customer to a treated tie program and reduced availability of hardwoods in the commercial market due to competing demand for the hardwood in other markets.

And for the quarter, adjusted EBITDA was $13.9 million, which was $0.4 million better than last year and driven by the profit contribution from the acquisitions, net of integration-related cost. Better times are on the way as I expect to see the back half of the year improve in a significant way due to the commercial market heating up again and now that we fully transitioned our major customer to the treated tie sales program. I'll now turn it over to Mike to discuss some key highlights from the second quarter of 2018.

Thanks, Leroy. Let's start with the slide presentation that we provided on our website.

On Slide 4, sales were $436 million, which was an increase of $58 million or 15% from the $378 million in the prior year quarter. CM&C reported higher sales prices across all regions for carbon pitch and carbon and black feedstock with Australasia and Europe experiencing favorable pricing trends due to tight supply.

PC recorded slightly higher sales, however, we have been seeing a recent trend of customers reducing or delaying their wood-treating activities due to their higher lumber cost. RUPS reported increased sales, which were primarily due to our 2 acquisitions as well as higher volumes of commercial crossties and rail joints, which was partially offset by reduced volumes from the Class I railroad customers.

As we move on to Slide 5, we will see that adjusted EBITDA was $55 million or 13% compared with $56 million or 15% in the prior year quarter.

While CM&C delivered significantly higher profitability, it was more than offset by the lower margins from both PC and RUPS.

For the quarter, on an adjusted EBITDA basis, CM&C again delivered substantial margin improvement due to favorable market and pricing trends and a more streamlined cost structure partially offset by higher raw material cost in Europe and Australasia. While the adjusted EBITDA for RUPS was relatively flat compared to the prior year quarter, the margin was slightly lower due to continued demand weakness in Class I sales as well as higher costs associated with limited availability of lumber for railroad crossties.

PC also reported lower year-over-year profitability driven by an unfavorable sales mix, higher raw material prices and higher selling general and administrative costs.

Now I'd like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $21 million compared with $26 million in the prior year. Adjustments to pretax income for the current quarter totaled $20 million consisting primarily of purchased accounting adjustments and closing costs related to the Cox acquisition, restructuring costs and LIFO expenses. Adjustments to pretax income in the prior year quarter were $6 million, primarily due to restructuring expenses.

And as Leroy mentioned, adjusted earnings per share for the quarter were $0.93 compared with $1.18 per share in the prior year quarter. The effects of the U.S. tax reform continue to have a significant impact on our results. Tax expense as a percentage of income was 93% in the second quarter, and we are projecting a full year effective tax rate in the mid-30%. This quarter, we incurred a $4.8 million additional charge related to the transition tax that we initially recorded in the fourth quarter of 2017. We recalculated this tax after the IRS released regulations of further interpreting the 2017 tax reform act. Compared to the prior year, our tax rate continues to be significantly influenced by the minimum tax on foreign earnings or the GILTI tax that was introduced this year as an element of tax reform. The incremental cost of the GILTI tax largely offsets the benefit we would otherwise be enjoying from the drop in the corporate tax rate from 35% to 21%.

While we are incurring significant tax expense related to this GILTI item, the cash tax effects are very minimal as we are able to utilize foreign tax credits and loss carry-forwards to reduce the cash taxes that are actually payable.

Some further highlights. Cash provided from operating activities was $3 million compared to $31 million in the prior year period. This net decrease was a result of higher inventory from holding additional untreated crossties, rising raw material costs and higher accounts receivable balances due to increased sales in Q2.

To date, capital expenditures were $54 million compared with $34 million in the prior year. The current year amount consists of production capacity expansion at our PC facilities in the U.S., spending on the new naphthalene unit at our CM&C plant in Stickney, Illinois and general spending to maintain the safety and the efficiency of our global operations. Now let's turn back to the slide presentation and look at Page 6. Our net leverage ratio as of June 30, on a pro forma basis, was 3.9x and that includes the pro forma earnings from our acquisitions. We expect this pro forma net leverage ratio to be at or below 3.5x by the end of 2018.

In addition to that, our liquidity under our bank agreement at the end of the second quarter, including the cash that we have on hand, was approximately $239 million.

Now I'd like to turn the discussion back over to Leroy.

Thanks, Mike. Regarding the outlook for each of our business segments, let's start with our Railroad and Utility Products and Service business. Revenues from the legacy RUPS business were showing improvements in the commercial crosstie and rail joint markets. However, demand from Class I railroads remain at relatively low levels. And with sales from the recent acquisitions, we expect that RUPS year-over-year profitability will be up by $15 million or 38%. According to the Association of American Railroads or AAR, 14 of the 20 primary commodity categories achieved carload gains in June, and that marks the third straight month in which at least 14 categories were up and the longest streak since late 2014.

The longer-term outlook remains solid for railroads and the economy, although we continue to watch for threats including potential trade disputes. Total U.S. carload traffic for the first 6 months of 2018 was up 1.3% from the same period last year while intermodal units saw a 6% increase.

Total combined U.S. traffic for the first half of 2018 increased 3.7% compared with last year.

Now let's move onto crossties, where rising raw material costs related to increased demand for hardwood has led to limited availability and higher pricing of wood for untreated rail crossties.

Now according to the hardwood market report, demand for 7-by-9 crossties is quite strong and much higher than the current supply. The most recent Railway Tie Association data shows that tie inventories have declined for 13 consecutive months, and tie purchases are expected to weaken further in the current year. And while the data certainly suggests challenges, on a positive front, there has been substantial interest from the rail industry and our commitment to providing a more sustainable solution for their used tie disposal to our M.A. Energy acquisition.

Today, we've had discussions with a number of railroads about how we could help them improve their sustainability profile in a dramatic way through the responsible disposal of their treated tie waste. It is proof of our commitment to living our mission of trying to solve our customers' most important challenges, and I believe that we'll start to realize great success as we get more opportunity to explain our end-to-end sustainable supply solution to our customer base.

Now as reflected on Slide 8, we're providing 2018 adjusted guidance for our RUPS segment of approximately $54 million, which reflects the contribution from the acquisitions as well as a net $3 million decline in a legacy business from prior year.

Now as you might guess, we have a number of integration teams working on the MAER and Utility and Industrial Products integration, and several exciting opportunities to leverage our larger treating and distribution network are currently being evaluated. I believe that we'll see significant network synergies emerge from our team's analysis, some of which could begin to have an effect as early as the fourth quarter of this year. We'll certainly share those developments as they occur.

Now in our Performance Chemicals business, market indicators are mixed. Essentially, a severe shortage in existing homes inventory means that fewer homes are being sold, yet those who are buyers continue to spend on remodeling and home improvement projects. The National Association of REALTORS, or NAR reports that existing home sales decreased for the third straight month in June, and total existing home sales decreased 0.6%. And with this most recent decline, sales are now 2.2% below a year ago.

Now growing level of homebuyer demand in most of the country is not being supported by the decline in home sales, which NAR attributes to a sustained housing shortage pricing -- which many are attributes to a sustained housing shortage pricing out would be buyers and which is also inhibiting sales.

Now that said, homeowners are expected to steadily increase spending on improvements and repairs over the coming year according to the Leading Indicator of Remodeling Activity or LIRA, part of the Joint Center for Housing Studies of Harvard University. Now LIRA projects that annual growth and homeowner remodeling expenditures will taper somewhat in the first half of 2019 but still remain around 7%.

Again, the low inventory of existing homes for sale is holding back even larger gains, but annual spending on residential improvements and repairs by homeowners is still expected to reach nearly $350 billion by the middle of next year.

The Conference Board Consumer Confidence Index decreased in June to 126.4 down from 128.8 in May, and while expectations remain high by historical standards, the modest curtail in optimism suggests that consumers do not see the economy gaining much momentum in the months ahead, the conference board said.

Now as you can see on Page 9 of our slide presentation, we anticipate having approximately $17 million of increased cost as a result of higher average raw material cost in 2018. A large portion of that cost is higher average hedged copper positions that reflect the rising cost of scrap copper over the last 18 to 24 months, but as I mentioned earlier on the call, there's also an element contributing to the higher cost that comes from us having to purchase more intermediate copper-based raw material on the open market and what we are able to produce, which comes at higher prices.

Now we've been working over the past 18 months to add additional capacity and debottleneck existing capacity so that it would become self-sufficient, but we're not there yet and likely won't be until sometime in the first half of 2019.

In addition, with recent changes in accounting requirements, we'll no longer be recording the ineffectiveness of our hedges. In 2017, we realized the $6 million of hedging ineffectiveness benefit. Also, we expect higher SG&A cost of approximately $3 million. Therefore, we're expecting to generate 2018 adjusted EBITDA of approximately $68 million for PC, which is $20 million lower than our record prior year. So that's the bad news in PC, but we do have some good news to share as well on this segment. A major BOC store has recently made the decision to convert their ground contact-through-the-wood program from a soluble copper-based product to our patented technology, MicroPro. The transition is planned to occur late this fall, and while it will have little effect on the balance of 2018, it should provide a nice boost heading into 2019, whether it be through unit sales of our product or increased royalty payments.

In addition, by the next earnings call, we believe that we'll be able to talk about a sizable new international account that we've been working on landing. It all adds up to some great news on the commercial front for 2019, but the remainder of this year will still be a challenge compared to our record-setting 2017.

In our CM&C business, the end markets for coal tar products is strong, raw material supply is tight, and therefore, the pricing environment for our products has never been stronger in my 8 years with the company. I make no mistake, if we did not take the actions that we did 3 years ago to streamline our capacity, we would not be experiencing anything even remotely close to the success we're achieving right now.

The aluminum market was already beginning to heat up, and then the Section 232 tariffs were announced, and several companies announced the restarting of vital pot lines and smelters in the U.S. And while we're working on ways to serve the surge in U.S. aluminum market in a way that aligns with our longer-term strategy, at the very least, the current market dynamics support an extended period of higher value being realized for our carbon-based products.

Now, China has been the other big driver of our results in this segment thus far in 2018, and like most things emanating from China, it becomes tough to predict over longer time horizon. Our large contractual, soft-pitch customer ran their operation throughout the first quarter and due to elevated needle coke prices, which drive our pricing, we were able to realize outsized profitability in that quarter. That same customer took their operation down in the second quarter for a maintenance turnaround while our partner in main raw material supplier took their operation down to install additional environmental control equipment.

Therefore, we supply little product to them and therefore didn't realize anywhere close to the profitability that we did in the fourth quarter.

Now both the customer and supplier are in the process of starting back up and [will] be supplying product within the next 2 weeks and are expected to resume for the balance of the year.

Now pricing will ultimately determine our ultimate operability, but it will likely be somewhere between the first and second quarter numbers for each of the last 2 quarters of this year.

Now as mentioned on last quarter's earnings call, with respect to our largest customer in China, we believe that the pricing we received has been understated for a number of quarterly periods, and while we continue to engage in discussions with this customer and intent to resolve the disagreement in accordance with certain provisions in our contractual relationship, we've not recognized any incremental revenue associated with the higher price that we believe is more accurate. Now one other point to note is that the construction of the new naphthalene unit at our Stickney, Illinois facility has been completed, and we're currently in the commissioning phase.

The testing started in July, and the individual equipment walk downs have occurred, with final testing expected to be completed by the end of the third quarter. We should be fully functioning by early in the fourth quarter and working to our Follansbee transition plan at that time.

There are so many people to thank within Koppers for the outstanding work that they did to bring this project to fruition while maintaining our high standards for safety.

As shown on Slide 10, our anticipated 2018 adjusted EBITDA guidance for CM&C is approximately $118 million, which represents a $43 million improvement over prior year and reflects the superior performance in all of our region.

Now on Slide 11, you can see the various drivers in our sales guidance for 2018, the one major change from the prior quarter is our reduced expectations around growth for the PC segment, which now pushes our anticipated 2018 consolidated sales to around -- to round to $1.8 billion.

Turning to Slide 12, our guidance for 2018 consolidated EBITDA on an adjusted basis remains at approximately $240 million, which includes $18 million from acquisitions and represents a 20% increase compared to the prior year adjusted EBITDA of $200 million.

Accordingly, our 2018 adjusted EPS guidance is projected to be between $4.05 and $4.25 per share compared with $3.68 per share in 2018, which would represent a new record-high adjusted EPS for the company and a 12-plus percent increase using the midpoint of the range.

Now through the halfway mark, we are right around the halfway point of our guidance, which basically means that we expect the second half of the year to look similar to the first half. In the first half results, we had essentially only one quarter's worth of results from acquisitions, with over $4 million of diligence, integration and strategy-related expenses and virtually no benefit from synergies.

In our rail business, we're now through the conversion of our major customer to untreated tie program and are starting to experience more strength in our commercial markets. In Performance Chemicals, we'll be able to begin lowering our cost of intermediate raw materials purchased on the open market as we stabilize production of our own product with our new capacity. In CM&C, there's a ton of upside as we delivered [$70 million] of adjusted EBITDA in the first 6 months and are only projecting $48 million in the second half in what is roughly the same economic environment.

And our new naphthalene unit running for at least one quarter. Now we will face some headwinds in Europe and Australia from higher raw material prices as they catch up to elevated end market pricing, and there's a little bit of a wildcard as to needle coke pricing, but we believe that the $22 million differential between the first half and our estimate of the second half should adequately account for that risk.

In summary, I've actually never felt better about where we stand and the opportunities that we have in front of us. It's an exciting time at Koppers. Now I'd like to open it up for questions.

(Operator Instructions) The first question will come from Roger Spitz of Bank of America, Merrill Lynch.

Can you remind us how, with Class I crosstie volumes going lower, as customers -- or the customer moves from a fully treated crosstie from the treatment-only service model? It sounds like that would increase volume. But maybe I'm not understanding that correctly.

So the 2 are actually separate, right? So the industry has been moving now for some time to a treated tie model. And as you transition, you're basically taking untreated work -- untreated crosstie working capital that is on the railroad's books and essentially, over time, converting it into our working capital. And so rather than bifurcating the sales process into an untreated tie and then the treatment preservative and treatment process, you are now waiting until the end, carrying all the working capital and selling a fully treated tie. So you have to work through their inventory to get to the point where you are now selling a fully completed product as opposed to just the treatment process and the treatment preservative. So when we talk about the industry itself demonstrating lower demand, it doesn't have anything to do with that change in the business model, it's more just a relative demand dynamic as they have pulled back on their tie insertions over the past year or so. So we've seen a step back in demand from that, but that's unrelated to the tie program.

Okay. All right. I was planning to tie them together, but that was incorrect.

Yes.

Got it. And phthalic anhydride volumes, maybe you mentioned this in the prepared remarks, but why were those volumes down?

I -- it's a good question. We have a good portion of that market. Sometimes we -- again, we just see some shifts and changes in a given quarter. We -- I'd say, our volumes really, overall, have been down across, basically, all of our product categories as we've scaled back and essentially shrunk our operating footprint. So some of that could be due to just us contracting in the volume that we're actually producing, and some of it is likely market-related. But I don't have a specific answer to point to. I'd say, overall, the business is pretty healthy. So even the fact that volumes might be down, obviously, when you take everything into account, the markets in general have never really been better.

Yes, I was going to ask the same on the carbon pitch volumes. And I don't think this has to do with your past shutdowns because I think that's been fully anniversaried. So -- or maybe that -- is that incorrect? It's not been -- part of the reason the volumes are down across the segment is partly due to the prior shutdowns.

Well -- so we operate around the globe, and again, different regions are going to be in different spots at different times. I did mention the fact that our China business essentially did very little activity in the second quarter as our large customer was working through their maintenance turnaround. So we -- big part of the volume decline on the pit side would've come certainly out of China in the second quarter. Overall, we only -- there's only so much raw material to go around, and we are more or less confined to only being able to supply what we have the ability to produce, and that's a limiting factor as well. So again, a combination of different things. The markets are strong, pricing is obviously pretty high, which creates some sensitivity, I think, also in volumes. So it's a play back-and-forth between trying to get as much price as you can without affecting volume, but the market -- again, the market temperature, market dynamics, overall, are in a pretty strong position. We like where we're at. The limiting factor for us is going to be -- and really the industry is going to be how you supply it because there's only so much coal tar to go around.

Last for me. In PC, was the intermediate chemical that you are referring to, is that basic copper carbonate?

It's a copper -- it's a -- without getting into specifics, it's a copper-based intermediate raw material, yes.

The next question will come from Chris Howe of Barrington Research.

I had a few questions here. The first is, just in regard to some of the recent acquisitions that you've done, how the pricing environment is looking, and are you looking to be more opportunistic rather than looking at -- to acquire companies? And with the leverage ratio going to 3.5x by the end of the year, is that kind of where we should expect it to be moving forward, or is there room to expand that, given the right opportunity?

So when you talk about the pricing environment, just want to make sure I understand your question correctly. You're talking about the pricing environment in the M&A Market or you talking the pricing environment in the markets of the businesses we bought?

M&A market.

In the M&A market. So we continue to, obviously, look at opportunities. I think it all -- it obviously always comes down to the buyer's expectations. I think the overall M&A market is expecting and seeing higher valuations. The companies for the most part that we're looking at are smaller businesses. They tend to be more closely held, in many cases, family-owned businesses. And so you're dealing with emotional aspect of it as well. We want to be smart about any acquisition that we make. So I don't expect us to really deviate much from our methodology. If we see an opportunity to bring a business in, and it has great synergistic benefits, we could be willing to pay a higher price. But it really comes down to -- each acquisition is a little bit different. Some we're seeing, again, in the, I'd say, some we're seeing in the 6 to 8 multiple range, and others we're seeing, they're higher than that, double digits and higher. So it fits the mix.

And just within the different buckets as far as the trends that you provided a lot of color on, is there anything else there? Or is there an internal expectation that some of these trends may begin to shift as we look a little bit further out than this year?

Well, I think that -- so we give annual guidance, right? We don't give quarterly guidance, and we give annual guidance because we know that there's a lot of things that move around within our businesses. And so -- and we always know that there's -- we know we're going to be wrong with everything we choose, some we're going to be wrong to the upside, some we're going to be wrong to the downside. We try to provide ourselves enough buffer for things to move against us.

So as I looked, coming out of the first quarter, certainly, there was an expectation on our part that we would see some pent-up demand coming through the Performance Chemicals business. In fact, when we were doing our call in early May, we had seen some of that develop in the early part of the quarter, but it quickly flattened out. And so it didn't really materialize in the way that we thought. That was, quite frankly, a reason for sort of the gap in what we saw in the second quarter because we had no China operations really operating at a level that we would expect over the back half of the year to sort of backfill that.

So we had buffer built into our numbers to account for certain things that might go against us somehow. So it's reduced our margin for error, but overall, the trends on the carbon material and chemical side, we don't see changing really anytime soon, when aluminum smelters start talking about restarting vital pot lines and things like that, those are long-term decisions. The market is tight from a raw material supply, and so we're working creatively to figure out how we can participate in a very, very bullish market for our products. And we have several good ideas that we're working on. So I don't see those trends really shifting or changing anytime soon. But going to the third products business segment on the rail side. Again, ties -- the tie market is a fairly soft market on the Class I side. While there -- we're expecting some improvement, we don't expect that to -- we really don't expect that to go back to the historically high levels that we saw 3 years ago. So that's a trend that we, again, also continue to expect is going to continue for some time with maybe some modest uptick. So that's more or less the color around the different business segments. Is that what you're looking for?

Yes, that is. And then just one last question, if I may sneak it in. Just in regard to margins on a go-forward basis, you mentioned the efficiencies that you're extracting within the cost structure. How should we assess margin levels moving forward this year and beyond that?

So I think that our target has been, as we've been working through our planning processes, has been to deliver low to mid-teen average EBITDA margin, that's where we want to be. We want to be somewhere certainly as high as we can drive it, but we certainly want to be at 12% to 15%, which is our, really, I think, target and realistic sweet spot. We were there -- certainly, well within there for the first 6 months of this year. We'll likely drop back a little bit in the back half but still be comfortably within that range. And I think on a go-forward basis, depending upon where different market stands at different times, we'll fluctuate somewhere within that range. But that's where I would see it, somewhere in that 12% to 15% range.

The next question will come from Liam Burke of B. Riley FBR.

Leroy, you mentioned that Stickney is testing on schedule, and you'd expect it to be up and running fourth quarter this year. In terms of Follansbee, when would you anticipate Follansbee sort of essentially being taken off-line, and the benefits of the transportation cost savings, what would be the timing, when would you realize that -- what's the timing of that realization?

Yes, so we'd expect to realize some of that in the fourth quarter. But we also need to make sure that, that unit stabilized out in Stickney as well. So I'd say, we expect some of it to come in, in the fourth quarter of this year, but we won't have all of it in the fourth quarter of this year, is that accurate?

Yes, the majority will come in 2019, Liam.

Okay. And on the copper side or the input cost on KPC, is there any pricing flexibility you have with your customers?

Most of our larger customers, I'd say, no. Because we more or less lock in, on many cases, multiyear agreements with them except pricing. That's when we hedge the underlying copper price, right? So it's for the stuff that -- so there might be some pricing flexibility in some of the smaller customers, but it tends to run into quite a bit of competition, as you might guess, out in the market to more market share that we've been able to earn. And we have an industry that is pretty competitive, and the more market share that we've been able to gain, it causes different reactions that can have an effect on pricing in the market. So you always had to be sensitive to that, and certainly our customers remind us of it. There's no question about that. So I think -- our pricing ability for, certainly, the near term is somewhat limited.

Okay. And then on the operational front, you did work on expanding capacity because of increased demand to avoid purchasing outside, that ramp has not been as fast as anticipated. When do you expect a steady state? I mean, it's going to be -- is the steady state going to be a '19 event or any kind of benefit this year?

Well, I think -- no, I think there is going to be some benefit in the second half as we stabilize operations. But in terms of sort of putting the remaining capacity in place and essentially supplying all of our own intermediates, that's a '19 event. That's a '19 event. But I think we'll -- the need to buy, the need to -- or let's just say, we will, I think, need to buy less on the open market in the second half as we stabilize the new capacity that has come online that we've had some issues with here in the first half of the year.

The next question will come from Scott Blumenthal of Emerald Advisors.

Leroy, just following up on Liam's question. Can you remind us how much additional capacity that you're going to be -- that's going to be available once you're done with your PC expansion?

Yes. From a standpoint of where we are today, I believe we are about 38 million pounds of copper that we -- scrap copper that we buy based on our current production levels. And that is supplemented by what we buy outside, and I believe, I'm not sure of this number, but I believe when we're all said and done, that 38 million pound level goes up to about 45 million pounds on an annual basis, so we're going to be able to produce internally, which at that point in time is 100% of what we need.

Okay. And you did mention that you have a portion or the majority, I guess, the overwhelming portion of your sales to end customers are contracted. Have you ever given anybody -- or have you ever given us an idea as to how much of that is not?

No.

Okay. So -- but is there a small portion that could benefit from -- I mean, we've seen, certainly, in the last quarter, a 20% or so decline in the price of copper, so is there any benefit at all that you could get from that, or is it just to the amount that's just so de minimis that it wouldn't be impactful?

It would be a benefit, but it would be not very material. But it would be a benefit, no question about it.

Okay. And can you go through the China coal tar pitch-pricing situation? You did mention that you expect for the rest of the year pricing to be somewhere between where we were in Q1 and Q2. Obviously, there's some negotiations going on there. I guess, since you don't really have a set price, or you've mentioned that you expect pricing to be higher, obviously, and your customers would like it to be lower...

Yes, and Scott, I have to be careful, I really have to be careful. I mean, I've been advised to really keep my comments around that whole situation to a minimum as we go through the process. Because really the process we're going through is to try to gain agreement on how that pricing gets set. And so I just think it'd be best for me to really not -- the less said for me, the better. We described it in the call. We expect pricing in the second half of the year to be net average somewhere between first quarter, second quarter and therefore, results will be somewhere between first and second quarter.

Okay, fair enough. And just, I guess, with regard to that situation, is there -- I understand that you have contractual volumes with that customer, but if you don't reach a agreement, is there any possibility that you could move that volume somewhere else?

Yes.

The next question will come from Chris Shaw of Monness, Crespi.

I want to ask -- I thought, Leroy, you mentioned that the commercial market was heating up, I think was the term you might have used, what's -- can you give a little more color there? And why is that translating more to the class 1's, and will we ever -- I mean, so we are never going to get back to that level from 3 years ago? Why is that? Why was that such a high watermark?

Well, I think, again -- so you -- as -- I know coal shipments have been up a little bit here within the last 12 months or so. But still, if you look at the longer-term trends, coal has become a much lower piece of their overall business. And so a lot of the heavy haul that basically takes the [wearer] on the track is -- has been replaced by intermodal shipments in -- or at least replaced in some regard by intermodal shipments, and as they've worked hard to try and get their operating ratios driven down, they've taken a tougher and more critical view of their network. I think some of the tie inspection technology has improved, which has allowed them to maybe, with a little more confidence, to decide what they're going to replace and what they're not going to replace. And I think it's all had an impact on bringing some of the numbers down. And so I -- certainly, the technology is not going to get worse, right? It's only going to continue to get better. And with this intense focus on trying to keep their cost levels down, I think they're going to continue to put pressure on the infrastructure. And on the commercial side, a lot of what you end up seeing, as we talk about, is they get more or less, in many cases, the leftovers. And even though demand in the Class 1 markets has come down, it's tougher and tougher to get your hands on hardwoods at decent pricing. And so it's moving pricing up in that market, and there is some pent-up demand because, basically, it's just tough to get your hands on enough untreated crossties to be able to supply the market as is.

Got it. That's helpful. And then, just what is the expected cost benefit on a sort of annual basis? What -- for the new naphthalene plant at Stickney, what's shut down the other one?

Well, we've realized a lot of that at this point because that plant is basically already gone through a process of taking their tar operations down significantly. So they more or less only run the naphthalene unit today. So we have some people costs, some logistics costs. Mike, you want to comment on what you have on that?

Yes, from a logistics cost standpoint because we will have one fully integrated CM&C plant in the U.S., and we can stop moving product around from a couple of different facilities. Our initial estimates were, just the logistic savings only, somewhere in the $12 million to $15 million annual range. And again, as Leroy mentioned, we're not going to see a lot of that if any of that in the latter part of 2018, but on an annualized basis, and for the most part, 2019, going forward, we should be in that $12 million to $15 million cost savings range. Again, specifically with logistics of moving product around versus having one fully integrated plant, where that -- where those products stay within that facility alone.

This concludes our question-and-answer session. I would now like to turn the conference back over to President and CEO, Leroy Ball, for any closing remarks.

Thanks, everybody, for taking the time to participate on today's call. I want everybody to understand, we remain committed to delivering strong performance, and we thank you for your interest in Koppers and your continued support. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.