Koppers Holdings Inc. (KOP) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Koppers Holding Second Quarter 2012 Earnings Conference Call held on the 9th of August, 2012. [Operator Instructions] I would now like to hand the conference over to Mr. Michael Snyder. Please go ahead, sir.

Thanks, Mark, and good morning, everyone. Welcome to our second quarter conference call. My name is Mike Snyder, and I’m the Director of Investor Relations for Koppers. At this time, each of you should have received a copy of our press release. If you haven’t, one is available on our website or you can call Rose Hilinski at (412) 227-2444 and we can either fax or email you a copy. Before we get started, I’d like to remind all of you that certain comments made during this conference call maybe 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 company’s filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company’s comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company’s actual results could differ materially from such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. I’m joined on this morning’s call by Walt Turner, President and CEO of Koppers; and Leroy Ball, our Chief Financial Officer. At this time, I’d like to turn over the call to Walt Turner. Walt?

Thank you, Mike. And welcome, everyone, to our 2012 second quarter conference call. Due to the accounting rules we’re reporting discontinued operations, the discussion of our second quarter results will reflect our GAAP financial statements and therefore, exclude the impact of the closure of our carbon black plants in Australia for both 2012 and 2011. In regard to our second quarter results, I’m pleased to report that our sales and adjusted EBITDA both increased by 10% over the prior year quarter, as selling prices of our major products continue to be more closely reflected on our increased raw material cost. While business was strong in North America and Asia, our results were negatively impacted by European operations, where sales and profitability were substantially lower in the second quarter of last year. In our global Carbon Materials and Chemicals business, revenues grew by $30 million or 12% over the prior year quarter, benefiting from higher prices for pitch, carbon black feedstock and phthalic anhydride, which more than offset the lower sales volumes from the European operations, lower prices for naphthalene and $11 million negative impact from foreign translation. The increases in product pricing were driven mainly by pricing adjustments, which allowed us to recover the increased raw material costs we experienced in the second half of last year and higher pricing for carbon black feedstock and phthalic anhydride due to higher oil prices. Global aluminum demand continues to be strong with projections of a 6% to 7% increase in global consumption in 2012, although, most of this increase is projected to be in China, a region where we currently do not sell pitch to the aluminum industry. Despite reduced pitch sales in North America, the Europe and Australia in the second quarter, compared to the second quarter of 2011, our global carbon pitch volumes were 11% higher than the second quarter of last year, as pitch volumes from Chinese operations going to Middle East increased. While we continue to see uncertainty in the European aluminum market, we expect our global pitch volumes for the year will be comparable to 2011 volumes. We continue to focus on expanding our pitch volumes in regions of the world where aluminum and steel production are growing in order to increase our global market share. We are very optimistic that the transaction contemplated by our previously announced Memorandum of Understanding with Nippon Steel Chemical to supply carbon pitch for the needle coke production will be finalized in the new term and the construction of our tar distillation plant will begin in the fourth quarter of 2012. We continue to see strong demand for our carbon black feedstock, which is sold to the rubber markets, as volumes increased due mainly to higher volumes in China and increase sales in Australia. Additionally, average prices increased in the second quarter compared to the prior year quarter, reflecting higher average oil prices. We do expect to see a drop in pricing for carbon black feedstock in the third quarter as pricing begins to reflect on lower oil prices. Naphthalene volumes were up 7% but prices declined by 19%, compared to the prior year quarter, with the price decline coming primarily from China due in part to slower construction activity. Our phthalic anhydride business continue to provide increased profitability as average selling prices were up by 10% over the prior year quarter, which was primarily driven by higher orthoxylene prices. Additionally, phthalic volumes increased by 8% over the prior year quarter. The average price for orthoxylene increased to $0.68 for the second quarter this year compared to $0.64 a pound for the second quarter of 2011. Despite oil prices decreasing on an average price of $103 a barrel in the second quarter of last year to an average of $93 a barrel in the second quarter of this year. After decreasing to $0.59 a pound in July orthoxylene prices were back up to $0.65 a pound for August. While we welcome the increase for August average orthoxylene prices for the third quarter will still be below the average prices we saw for the second quarter, which will have a negative impact on our third quarter profitability. For our Railroad and Utility Products and Services business, higher sales prices for crossties more than offset lower sales volumes, resulting in an increase in sales for the segment of $7 million or 5% for the second quarter, compared to last year second quarter. The increase in prices for crossties was partly due to favorable sales mix as we saw more volumes of creosote-borate crossties during the second quarter of 2012 compared to last year’s quarter. As of June 30, we have 6.2 million untreated crossties on hand at our plant, which was 140,000 ties more than we have on hand at the end of March. The increase is due mainly the building inventory for anticipated volume increases in our commercial tie business in the second half of this year. Tie insertions for 2012 are expected to be in the $20.5 million range, slightly above estimated insertions for 2011. We continued to see a very strong year for our North American Railroad business, including continued strong demand for commercial crossties and our rail joint products. Even though our volumes for Railroad Products were down from the first half of last year, we more than made of that with higher pricing which is increased our operating profit and margins by $4.9 million, and 1.3% over the first half of last year. After Leroy completes the financial review, I’ll give you a status update on our core end markets, as well as a few thoughts for 2012. Leroy?

Thanks, Walt. Looking at the consolidated results, sales for the second quarter increased by 10%, $36.8 million to $411.3 million, compared to the prior year quarter price increases in both Carbon Materials and Chemicals and Railroad and Utility Products and Services drove sales increases in both business compared to prior year and offset volume declines in the North America Railroad business and the negative effect of foreign currency translation. Second quarter adjusted EBITDA was $49.2 million, the $4.4 million higher than 2011 second quarter adjusted EBITDA of $44.8 million. And adjusted EBITDA margins of 12% were consistent with the second quarter of 2011 after restating for discontinued operations for both periods. While we have seen some softening in demand in Europe and Australia, we continue to achieve price increases for the majority of our products in most regions of the world. In the second quarter, a refund of approximately $3.6 million resulting from the signings of supplier audit and material transport weight, almost entirely offset a $3.1 million increase in our allowance for doubtful accounts due to a customer collection issue in Europe, combined with $0.8 million of cost related to the fixed [tax structure] in resulting still in Australia that occurred in the first quarter of 2012. We still expect to see significant margin improvement over 2011 but our expectation at this point is probably to be closer to the low end of the previously communicated range of 100 to 140 basis points increase compared to our as disclosed full year 2011 EBITDA margin of 9.6%. Adjusted net income and adjusted earnings per share for the second quarter of 2012 were $22.1 million and $1.5 per share, compared to $20.3 million and $0.98 per share for the second quarter of 2011. Including the special charge of $0.8 million that I’ll talk about in a moment, our tax expense as a percent of pre-tax earnings for the quarter was approximately 36%, which is higher than our previously disclosed guidance of 33%. As a reminder in 2011, we undertook a project to restructure our European operation by centralizing our sales, supply chain and operations management in the Netherlands. By product of that restructuring was an expected ongoing reduction in our consolidated European effective tax rate, which in turn had to reduce our corporate consolidated effective tax rate to the previously mentioned 33%. That project was completed successfully at the end of last year and we are in fact enjoying the lower effective tax rate in addition to the various business benefits that we’re expecting when the project was initiated. The issue is that since our forecast for 2012 European earnings has declined the benefit we are receiving from the lower European tax rate is having less of an impact on our corporate consolidated tax rate. That change in the expected geographic mix of earnings for the year, had an approximate 300 basis point negative impact on our rate for the quarter, which will equate to the negative EPS impact approximately $0.05 a share on our second quarter result. For the year that negative impact is expected to be approximately 150 to 200 basis points and should result in a full year effective tax rate, excluding the 3 items and special charges of approximately 34% to 35%. With regards to special charges recorded during the period, it also related to the European restructuring projects and caused by some additional tax planning work completed during the second quarter, which caused us to change our estimate of the non-recurring potential tax liabilities associated with that project. The $0.8 million is an addition to the $3.5 million of income tax expense also related to that project that we recorded and classified with special charges in fourth quarter of 2011. To be clear, despite the increase in non-recurring potential tax liability and the lower realized benefit as a result of the year for operating performance to date, we still view the project as a success as we expect it will net approximately $1.3 million in tax benefit in just this year alone, plus provide an annual ongoing benefit of at least that amount with the potential to go even higher as Europe recovers and becomes more profitable. Looking at Carbon Materials and Chemicals, second quarter sales increased 12% or $29.6 million to $266.7 million compared to the prior year quarter. The increase consisted of $10.5 million increase from volumes due mainly to higher sales of carbon pitch, carbon black feedstock and phthalic anhydride, and a $29.6 million increase from pricing that was driven by pitch, carbon black feedstock and phthalic anhydride, on translation for the quarter reduced sales by 4% or $10.4 million. In the second quarter, we saw positive growth year-over-year in 3 main components of our Carbon Materials and Chemicals business. Pitch accounted for 6% or $15 million increase in sales over the prior year quarter, as higher sales volumes out of China and overall higher selling prices offset lower sales volumes from North America, Europe and Australia. Sales of distillates which include third-party creosote sales and carbon back feedstock increased 9% or $21 million due to higher volumes and prices for carbon black feedstock compared to the prior year quarter. Part of the volume increase was due to our Australian operations selling carbon black feedstock to outside customers instead of selling to our own carbon black plant which closed during the fourth quarter of 2011. The third main component, coal tar chemicals increased by 1% or $3 million of higher phthalic anhydride volumes and prices more than offset lower prices for naphthalene compared to the prior year quarter. Carbon Materials and Chemicals adjusted operating profit for the quarter of $26.2 million represented a slight increase from $25.7 million in the second quarter of 2011, which equates the operating profit margins of 9.8% and 10.8%, respectively. Operating margins declined as higher raw material costs in North America and Europe and higher plant costs in all regions more than offset improve volumes and pricing for pitch, carbon black feedstock and phthalic anhydride. Geographic mix also accounted for approximately 30 basis points of the 100 basis point margin decline. Sales of Railroad and Utility Products and Services increased $7.2 million, or 5% to $144.6 million in the second quarter compared to the second quarter of 2011. The increase was the result of a 10% to $14.1 million increase in prices driven in part by higher volumes of creosote-borate treated crossties, partially offset by a reduction of 4% or $6.1 million from lower sales volume for railroad crossties, due in part to lower volumes commitments and new contracts. Adjusted operating profit for the quarter increased to $16.1 million from $12.8 million in the prior year quarter, with adjusted operating margins at 11.1%, compared to 9.3% in the prior year quarter. Higher prices for our railroad products in the second quarter of 2012, highlights the continued strength of the railroad business and we expect this business to remain strong for the second half of the year. In June, we see these treating activities at our Grenada, Mississippi wood treatment plant and have since been in the process of preparing a foreclosure. Majorities of plant treatments services were through utility poles, having transferred to other Koppers facilities where we will be able to utilize that excess capacity. The expected closure costs of $4 million, $1.4 million of that cost was accrued at the end of 2011, while $500,000 of closure cost were incurred in the second quarter of this year. Since we were able to stop operations for month and a half ahead of our originals target date of July 31st, most of the remaining closure costs will now be incurred in 2012. As for the benefit that I mentioned on our last call, the Grenada has been a break-even to a slight loss over the past couple of years, and a real benefit of closing the plant with increase in utilization rates than other facilities. At the time, we weren’t comfortable enough with our savings estimates to disclose or discuss the magnitude. Now that we are close to 2 full months into this change, I feel confident enough in saying that we expect to see pre-tax benefit between $1.5 million to $2 million over the second half of this year as a result of those closures and full year benefits of between $4 million and $5 million beginning in 2013. Second quarter, we also reported an impairment charge of $0.6 million related to our co-generation plant in Muncy, Pennsylvania which is part of our Railroad business. The impairment was due mainly to difficulties in obtaining treated wood waste and fuel cost effective prices, relative to the power rates we were able to receive from the local utility for selling electricity expense. Looking at cash flow and liquidity, cash provided by operations for the first half of 2012 amounted to $3.4 million compared to cash provided by operations of $25.8 million for the first half of 2011, with the difference due mainly to increases in trade receivables and inventories. Receivables increased -- due mainly to increased exports sales in Europe and China, and inventories increased due in part to a change in the mix of crosstie sales, with a higher proportion of ties being targeted to commercial customers. While, we sell the entry to crossties to most of our platforms customers shortly after they are procured, crosstie for commercial customers have carried at Koppers inventory until they are [indiscernible]. Our debt net of cash on hand at June 30, 2012 increased to $264 million from $248 million at December 31, 2011, primarily as a result of higher working capital. Our net debt-to-adjusted EBITDA ratio at June 30th was at 1.6 times, compared to 1.7 times at December 31st. As of June 30th, we had $5 million borrowed on our revolver and we had a total estimated liquidity in excess of $300 million. This was a part of my commentary where I usually remind everyone of the seasonality of our business. While that of course is still true in the second half of this year, we expect there to be less separation between the third and fourth quarter than what we have seen in the past. While we see things currently, the third quarter is expected to -- to come in comfortably between 2010 and 2011 third quarter as reported adjusted EPS of $0.75 and $1.08. While the fourth quarter is expected to finish significantly higher than 2010 and 2011 fourth quarter as reported adjusted EPS of $0.38 and $0.37. Walt will discuss some of the reasons behind this in his closing summary. At this time, I’ll turn it back to Walt.

All right. Thanks, Leroy. The primary major end market for the Carbon Materials and Chemicals segment is aluminum. Although, pricing for aluminum has fallen during the first half of 2012 and resulted in capacity reductions in certain regions, projections continue to indicate that global aluminum production will increase by 5% this year, with most of the increase expected to be in China and India. Regarding the reduction of our pitch volumes in North America, Europe and Australia for the first half of the year, we still expect our global pitch sales volumes for the year to be similar as they were in 2011. According to the recent projections, Middle East expects primary aluminum production to increase by 1.3 million tons by the end of 2014. This growth includes the Ma’aden facility in Saudi Arabia, which will have a capacity of 740,000 tons with the first metal being produced in December of this year and expansion of the EMAL’s smelter in the United Emirates which is expected to increase its capacity from 750,000 tons to 1.4 million tons starting in the fourth quarter of 2013. As announced previously, we have entered into a Memorandum of Understanding with Nippon Steel Chemical, JECT, Pizhou City Government and the Yizhou Group to build a 300,000 ton tar plant in China in the Jiangsu Province area. This includes also 2 downstream plants producing needle coke and carbon black. We continue to work through the final details of the joint venture agreements and we anticipate that the tar distillation plant will break ground before the end of this year. This project is estimated to generate a $150 million to $200 million of annualized sales beginning in the second quarter of 2014. Regarding the outlook for our coal tar raw material, we have seen reduced availability of coal tar in North America, Europe and Australia, due to the idling and lowering production rates of certain coke batteries due to the lower steel production, as well as some alternative technologies that reduce coking requirements. As mentioned in our last call, this reduced availability, coupled with the increased demand for carbon pitch has resulted in higher tar cost in these regions in 2012. That will ultimately be passed through to our customers. On a positive note in regarding to coal tar, U.S. Steel, one of our largest tar suppliers is expected to start up their new coke battery in Clairton, Pennsylvania by the end of this year. The coke production for this new battery is expected to generate about 50,000 tons of coal tar on an annualized basis and we expect it to receive majority for this -- of this tar for the use of our adjacent Clairton tar distillation plant. To summarize where we are for the year, our second quarter results included several negatives, including the downturn of our European business due to the overall weak European economy, lower tar availability with increased raw material costs, lower operating rates in Europe and Australia and a higher than expected effective tax rate. However, our company’s geographic and product diversity continues to offset several of these second quarter negatives that we’ve experienced. We continue to see strong end market demand for our global railroad utility products, our carbon black feedstocks for the rubber industry and continued growth in Middle East with carbon pitch demand increasing. As I look out for the remainder of this year, we will continue to have a few of these headwinds with our raw material availability and cost and the weak European economy and as Leroy mentioned earlier, our effective tax rate is expected to remain higher than our previously indicated guidance. Despite these continued headwinds, we are anticipating that we will continue to believe that we will finish the year with an adjusted EPS level of 20% higher than last year’s adjusted EPS of $2.86. Stronger pricing in both business segments, increased volumes of carbon pitch from our China operation, continued strong railroad product demand, the benefits of closing the Grenada, Mississippi wood treating plant and the progress we are achieving with our margin improvement initiatives, will all continued to have a positive impact on our financial results. Our third and fourth quarters will look a little different than our past historical results. We do expect our third quarter results to be lower than last year’s third quarter as we carryover some of the second quarter issues but we do expect our fourth quarter to be stronger than last year. While this year’s results have been progressing a little differently than I thought back in the first quarter. I’m still confident that we will achieve an earnings level that is consistent with a guidance that we have been communicating to you throughout the year. At this time, I would like to open up the meeting for any questions that you may have.

[Operator Instructions] And the first question comes from Ian Zaffino from Oppenhiemer & Company.

The HARMAN surrounding the higher coal tar costs and the lack of availability, I know your contracts have provisions where you could get the pricing through. Can you just walk us through the timing of that and when you will see that happening? Thanks.

Sure. As we have been saying in the last several quarters actually, coal tar availability from sort of our normalized power suppliers has been declining primarily in Europe. Obviously here little bit in North America, but primarily Europe and we have been reaching out to Eastern Europe, Russia and other countries for additional tar to meet the distillation requirements we have with our customers. And we do have a very good supply chain system set up through our port and lastly, yes, that, we bring that tar and it is a higher task. And regarding your question, it typically takes us, has been in the past anyway taking us about 6 months or so to pass through these additional raw material costs. We also -- I think remember too that we are pushing more and more towards quarterly pricing, especially in the Europe where we have had more volatility there on costs and thus so far, we are trying to push even further to go to the quarterly pricing versus the annual pricing on the raw material increases.

What is the -- I guess you sort of answer this, but when you talk about the 6 months to recoup it and I guess you are making this effort to now switch to some quarterly contracts. I mean, is there any way you can almost go to monthly contracts and I know you’ve mentioned Europe accelerating there. But can you accelerate in the U.S. as well and other markets and really, what’s the push back you get when you try to do that? Thanks.

Well. The push back I would say is more on the competitive basis than anything else mean we love to go to monthly pricing to the extent, it would be possible. But I think they would be a little more difficult to do. Somewhere there’s got to be some stabilization, some normalizations but I think that’s not going to happen until we see the overall global steel demand getting back to some normalize level as well. So during this period of time, I think we’re basically working with customers, trying to do what we can to accelerate these increases and I think it’s -- I don’t think it’s going to get to monthly basis. I think, if we can get to a quarterly basis that would be much, much better than we have in over the last few years.

And the next question comes from Laurence Alexander from Jefferies & Company.

Just a couple of questions. First, on the 2012 outlook, roughly 28% above 2011, you may have a lot of moving parts. Which 2 or 3 do you see as being the most volatile or having the least visibility going into the last 5 months of the year?

For sure, it’s the uncertainties with the European -- the overall European economy and how we’re playing apart in the end market that we’re supplying there. That’s the most volatile area of looking at 2012. The others, I think we’ve given no catastrophes or surprises. We feel fairly confident about the worst place of the world, especially Asia and the Middle East, and fixed demand continues to increase quarter-over-quarter. We continue to do a good job of actually growing our market share in Middle East out of China. There is a strong demand for carbon black feedstocks. And I think that’s going to continue in that part of the world. But I would have to say Europe is the number one concern. Second, I have to think a little bit about what the second one is, but typically I think we’re looking out the next 5 months, we’ve got a fairly good handle in the third and fourth quarters.

And I guess if that’s concerned really about carbon pitch demand in Europe or is it really more about coal product phthalic anhydride?

No. Europe would be more or so, on the aluminum market as well as the carbon black demand in the Europe. As you may have seen it has been 3 smelters close in the Europe the last probably 9 months. So we’re in the process of sort of shifting our pitch production to other places in the world such as South America, South Africa. The carbon black, I think is having an impact, negative impact because of the automotive industry primarily in Italy, Spain and a little bit in Germany. That phthalic anhydride as I mentioned we saw a bump up in OX pricing of $0.65 in August. The volumes are still looking pretty good, looking out the few months on the demand [indiscernible] but obviously all those lining is somewhat driven for the most part by oil pricing.

And then lastly as you look out towards 2013, 2014 is the change of availability for the coal tars -- for the feedstock going to be enough to materially change margins year-over-year, or is it just sort of helpful swing factor?

Looking at the 2013, 2014 Laurence, I’m sorry. You’re talking about the coal tar availability versus cost versus demand is that?

It’s -- well, thinking with the new supply that you arranging on the coal tar side, is that going to be enough to make a difference, or is it within the normal volatility where we get to see how the economy plays out?

Well, I think you’re going to see over 2013, 2014 increase coal tar supplies for us in China. We talked about this potential project in China, which is going to be in Jiangsu Province. There is a nice volume of coal tar available there. In fact, our potential joint venture for that project will also be a supplier of coal tar for that project as well. We are doing okay, at the moment on availability, because we’re reaching out further and further. It’s just a matter of increased logistics cost. But I think to your point, will we have enough raw material as we go forward over the next 2 or 3 years the answer is, yes.

The next question comes from Kevin Hocevar from North Capital Research.

You touched on the Ma’aden smelter a little earlier and I believe in one of the earlier calls you said that product would start to get shipped in the July, August timeframe. So, I was just wondering if you could update us on if you’d won any of this business. And if so has that started to get shipped here in the third quarter?

I think as we mentioned in the past Kevin, we are indirectly -- indirectly at the moment supplying materials because I say it that way. I don’t think that the Carbon [indiscernible] plant for the Ma’aden smelter is completely finished yet. It’s in a process of being finished. And I believe the Ma’aden project will be buying in as well as buying their coal tar pitch requirements in the fourth quarter from their local aluminum smelter competitors if you will. So, you won’t see that really truly happening until the first quarter of 2013 as far as ongoing direct shipments will pitch into Ma’aden smelter.

Okay. And with the railroad margins, nice expansion here in the second quarter compared to what we saw in the first quarter, a nice healthy margin expansion. So, also I know Leroy you were talking about this a little earlier, I might have missed it. But could you kind of put in perspective, how much of this from borate, how much was from -- I know you’ve been a little more aggressive on your pricing. And are we -- should we expect to see kind of this type of margin expansion in railroad in the back half of the year?

Yes. Sure. The railroad segment, I’d say probably benefited the most from improved pricing. The increased volumes of the creosote-borate treated crossties, which certainly had an impact, as did some of the other initiatives that we’ve been working on, including the export sales that we have talked about earlier in the year as well. But significant margin improvement would have come out pricing to them. Do we expect to see again, significant margin expansion from the railroad business in the second half of the year, I’d say, yes. I mean you have Grenada closure coming, the benefits from the Grenada closure coming into the second half. And again, just I think the improvement from some of the other stuff that they have going on there. We really expect the full year railroad results to be much, much improved over 2011. You’ll continue to see that trend as you move out [indiscernible].

And then also we don’t talk about this too much, Kevin. But we also have a very strong utility pole business in Australia that continue to have a nice profit margin as well, which is smaller scale, but obviously helps to improve margins on this Railroad and Utility group.

Okay. And finally, with carbon pitch would the outlook that it will be flat for the year. In the first quarter, I think it was down 6% to 8% somewhere in that range and maybe up 11% in the second quarter. So, would that imply third and fourth quarter maybe flattish, maybe slightly down?

Yes. As I mentioned our pitch volumes will be at the same level, perhaps a bit higher, but basically same level as we were in 2011. And that obviously includes some downturn in Australia and Europe, but more than those increases out of China for the increased markets really we’re getting in Middle East.

The next question comes from Ivan Marcuse from KeyBanc Capital Markets.

Europe is gotten, I guess from the first quarter is now a little worse than you are looking for, the tax rates now higher and the negative that you -- the other negatives you pointed out. But what are the offsets, which are really a lot stronger than you expected just from a -- looking from the first quarter to second quarter that’s offsetting that? And as a one -- is there a specific product group that is -- I guess a lot stronger than you anticipated 3 months ago?

Well, I guess Leroy touched on. We have some very serious margin improvement initiatives going forward. Those are doing well. The carbon black feedstock product continues to be very strong. We’re seeing quarter-over-quarter at 7% increase on volume on the, I am sorry, 40% -- actually 45% increase on volume which includes the sales that we typically have internally out of Australia. But more importantly we’ve seen a 27% improvement on pricing. So, its carbon black feedstock demand. It’s the margin initiatives as well as this very strong Railroad Utility products. The North America including the exports we are going through South America as well as the utility pole business in Australia, and also when you look at compare that the China results we are doing much, much better on margins this year versus last year.

Got you. So you gauge it that profitable improvement that you’ve been putting in place are ahead of schedule or just going lot more maybe more smoothly…

We need more than 1 or 2 quarters to say yes, but it’s definitely headed in the right direction.

Let’s say on the railroad side of the business is definitely ahead of schedule and you can see that there involved.

Yes.

In CMC, there are some of the improvements that they have already made unfortunately the map by some other negative that occurred in the second quarter, but that stuff is going to happen it will more normalize overtime.

Got you. One thing, I was little bit, I guess surprised how this following down construction in China and I know that’s naphthalene will go into that. And prices were falling so I’m assuming demands downward. But it seem like volumes are up, is that how to think about it for naphthalene in those regions and why would that be?

I mean volumes are up by 7% quarter-over-quarter, but pricing is down about 19%. But it’s increased production out of Australia a little bit just bring little more color there with Bluestoke [ph] increasing its tar supply to us in Australia. The other increases I’m trying to remember on the naphthalene volume. Probably to do with Europe as well because we have some issues around the naphthalene production back in January, February.

And then you touched on the export, I guess on the railroad. You touched on the export business in South America. How is that going? Is that above expectations or is that continued to move along or how would you -- could you just give a update to how that opportunity is moving along?

Well, I mean it was I think about $10 million order that we signed with Vale in South America and as far as its going well and that we’re meeting the shipping dates that we had established back in December, January and the volume is going well. And so the overall yes, it’s a good export business for us. And we are hoping that that’s going to continue lead to other opportunities down there too, Ivan.

Okay. And then just so I understand is the agreement with Nippon Chemical, that’s moved along and you would expect something that positive to happen in the next month -- couple of months. So -- and then you start building the plant in the fourth quarter, so what do you see CapEx rising during the fourth quarter, and then what sort of their CapEx expectation for this project?

Well, I mean it’s fairly weak. We break ground in the fourth quarter, you are not going to see a lot of CapEx spending very minimal this year with mostly all be in the year 2013. And as we talked before, this is going to be using equity upfront for a portion of it. But through the financing, we would hope to obtain loans locally to assist in that project.

From an overall cash standpoint, I’d say, price somewhere between $50 million and $60 million for the construction of the facility and you will see as well as that you can see probably a majority of that cost coming…

And next question comes from Steven Schwartz from First Analysis.

Can you breakout -- I don’t know if this is possible or not, but I would imagine in passing through so much pricing, it’s dollar for dollar on your cost and that hurts your margin, right?

It would over time sure. Yes.

Yes. So what was the impact to that versus the lower plant utilization, in terms of gross margin?

[indiscernible] linked under calculate…

Okay.

That is a -- but obviously when you passing on raw material increases. You do your best to maintain the margins that you will have established with the specific contract or purchase order or what have you. And we do what we can, for sure, to protect that margin that we established day one of the contract. And so it is difficult at times but we do our best to keep up with the margin that was established for a specific customer.

Okay, okay. Looking at the railroad business, in the press release, you just note lower volumes for railroad crossties, Leroy, I think in your commentary about working capital or liquidity you noted that commercial sales were up, does that mean the lower volumes were to the Class 1?

I think in regards to the particular things you noted in my commentary where I was talking about our inventories have gone up, increasing our working capital as a result of anticipated stronger commercial demand. Reminding you that for the Class 1, we’re procuring those ties and essentially selling it to them as we procure it and then putting it on our site for [indiscernible] evening with commercial we’re buying those ties, putting them up. They are our inventories at that point in time. And that’s why our working capital went up. That was the context of the comments I made in the cash flow session.

And Steve, you sort of look back what happened last year’s second quarter or whatever you are looking at the last year’s first half versus this first half, but again we purposely lost maybe a 1%, 2% market share in the Class 1, but I think we’ve made up a lot of that for the stronger commercial sales. And through the first half, we were -- our volume on cost size was probably off by 8% or so, but when you see us in the year, we’ll be pretty much in balance with what we’re looking at on the volume versus last year’s total year volume.

Okay. So it is the class -- so it is the Class 1 volumes that are down, that’s what you are referring to in the release?

A little bit, little bit.

And then there is -- okay and then the second half of this year, commercials offset that and what do you think will drive the commercial volumes and without tax credit this year?

Again its -- I am hearing this almost every week where all the straight lines -- much older systems. They weren’t really maintaining sort of a higher weight that the Class 1’s are now moving. When you go from gross weight of a car from 265,000 to 286,000 pounds and you take -- I guess a good example of being Wisconsin where they are moving 1,000s of tons of sand out of Wisconsin to all over the place from Texas to Pennsylvania, what have you. Some of the short lines just aren’t capable of hauling these heavy loads consistently and there is a lot of volume that goes over these rails. So, in situations like that they have to continue to upgrade their lines or they are going to have derailments or what have you -- so the real driver is on for them to be up with the class one, minimum or maximum weight business they are now achieving.

Okay. And then if I could ask one last one and I think this will be a quick answer for your guys but with respect to the Nippon deal, well you did say you’re still in negotiations but you mentioned the construction of a needle coke and a carbon black plan.

Right.

I would imagine this is going to be like the TKK deal where it's your partner who will deal with that side of the business or are you in fact going to get into some of these downstream products in the carbon black…

No. Just to make sure everyone understands, we are working with Nippon Steel Chemical and where we would sign a very long term supply agreement to supply Nippon Steel Chemical with a raw material for them to produce to needle coke. And they, in turn, will also build a small carbon black plant in conjunction with this needle coke operation. Koppers in turn would build a tar distillation plant with a minority merchant coke company in China where they will bring forth a certain volume of coal tar to be a minority partner in this project. So Koppers/joint venture partner would be responsible for construction and operating the 300,000 ton tar distillation plant supplying on a very long-term basis for raw material for the needle coke operation as well as the small carbon black plants that would be of both the size of Needle Coke plant.

And our next question comes from Liam Burke from Janney Capital Markets.

Leroy, you highlighted on the cash flows, the step-up in accounts receivable and you explained that but how do you look at DSOs at the end of the year. Do you expect them getting back to more normal levels?

That’s a tough thing to answer, Liam. I don’t think that I don’t -- at this point anticipate that. Our DSO will change much between where we are at now and the end of the year. Lot of our increase in receivables is due just to the fact of our higher sales, but I don’t see a whole lot of change in day sales outstanding as we move forward here.

Sure. And Walt you’ve mentioned a lot of initiatives here on the plant consolidation new project in China where -- acquisitions still important and how do you see the market right now?

Sure. We are continuing to look at acquisitions, small, medium large in both business segments. This opportunity we have to grow the Carbon Materials and Chemicals business in China is a unique opportunity for us. We continue to look at consolidation opportunities especially Europe and other places around the world. On the railroad utility products business; we are continuing to look at various opportunities what we have out there and there are opportunities not just in North America, but also areas like Australia. And so I can tell you that we were going full speed ahead on looking at areas that we can grow through the M&A activities.

And next question comes from Chris Shaw from Monness, Crespi.

I just heard your response to last question, matching consolidation in Europe. I mean, as you I mean, from that something you have been changed but I mean, with smelter shutdown there and just general weakness in that economy, have your thoughts on trying to consolidate that market shifted at all or....?

I mean, even more or so today, Chris with some of the smelters -- actually 2 of these smelters are closed permanently. So even more so with the distillation capacity that still exists versus the carbon and pitch demand what have you, that’s even more so important for consolidation and we’re obviously ready to get involved in any opportunity that would help that consolidation.

And carbon black, you split carbon by feedstock in Europe than in Australia plus Asia, right?

Right.

Right. What’s the sort of split between those 2?

I am sorry, what?

You sell more in Asia, than versus Europe. I am just trying to figure out what the split is in carbon black businesses?

I would think more in Asia, only because of the tar distillation volumes that were distilling in both the 2 plants in China and now with the Australian tar distillation plant selling to the outside world versus internal. So the most definitely Asia would be that the major market for us. And I don’t recall what the projections are for tire manufacturing will increase, but it’s in 2 digit, both numbers growth for the tire and rubber manufacturing.

That business is strong is Asia, but not so much in Europe, right?

Yes. At the moment there is a little bit of a lull in the Europe and I think its again -- this is the slowdown of the automotive industry and specifically Italy and Spain, maybe a little bit in Germany. I’ve not kept with that.

Okay. And then the third, were you guys already railties suppliers to Tennessee and Wyoming and Rail America. I am just trying to figure is there anything that changes now with those 2 combining?

No. We actually do a good volume of business with now the one company. But Rail America, Tennessee, Wyoming, I think it’s a parrot leader. See what’s going to happen with their consolidation or how they will combine these 2 entities, but they are both very good customers accomplished.

Thank you. And there seems to be no further questions at this present time, handing the line back to Walter Turner for any closing remarks.

Thanks Marc. We do thank you all for your participation in today’s call and appreciate your continued interest in our company. Our acquisitions over the last several years have helped us capitalize on global growth and demand for our end products. And we will continue to pursue our strategy of expanding presence in the key end markets and geographic regions where we do make and sell our core products. We believe the diversity of our products, diversity of our end markets and diversity of our geographic locations has historically provided us with a significant amount of stability for our business. And both strong and weak economy climates and this diversity will continue to benefit us going forward into the future. In closing, we remain firmly committed to enhancing our shareholder value by executing our strategy of providing our customers with the highest quality products and services while continuing to focus on our safety health and environmental initiatives. Thank you all again very much for participating. Thank you, Marc.

Thank you. This concludes the conference call for Koppers Holding. Thank you for your participation. You may now disconnect.