Koppers Holdings Inc. (KOP) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Koppers Holdings, Inc. Third Quarter 2012 Earnings Conference in 8th of November 2012. [Operator Instructions] After the presentation there’ll be an opportunity to ask questions. [Operator Instructions] I will now hand the conference over to Michael Snyder. Please go ahead, sir.

Thanks, Kev, and good morning, everyone. Welcome to our Third Quarter Earnings Conference Call. My name is Mike Snyder and I’m the Director of Investor Relations for Koppers. At this time each of you should have received a copy of our press release. If you haven’t, one is available on our website or you can call Rose Salinsky 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 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 a cautionary statement included in our press release and in the company’s filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company’s comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company’s actual results could differ materially from such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The company has provided with the 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 call by Walt Turner, President and CEO of Koppers and Leroy Ball our Chief Financial Officer who are calling in from Denmark today. At this time I’d like to turn the call over to Walt Turner. Walt?

Thank you, Mike, and good morning and welcome, everyone, to our 2012 Third Quarter Conference Call and I trust that you can hear us well. As Mike said, Leroy and I are sitting here in Denmark this evening. So hope things go well with the call. I’d like to start off by talking about our lower-than-expected performance for the quarter. The performance from our Carbon Materials and Chemical business overshadowed what was one of our best quarters for our Railroads and Utilities Products business. There were several reasons for the Carbon Materials and Chemicals lower-than-expected business performance that I will explain in more detail shortly. I will give you a fairly detailed account of how we ended up with the $0.82 of adjusted EPS for the quarter. After that I will give you several reasons why I believe that in the fourth quarter we will record the highest adjusted earnings per share that we have ever recorded in any fourth quarter of Kopper’s history as a public company. The end results should translate into a 10% to 15% full year increase in adjusted EPS over 2011 which is below our previously communicated expectations due to some of the items that affected our third quarter which I will talk about in a moment. In addition to reviewing the third quarter results and our fourth quarter expectation I also plan to update you on some of the growth projects including the recently announced agreement to acquire an Australian utility pole business, the progress we are making on our margin improvement initiatives and some early thoughts on what we are seeing for Koppers as we get close to the beginning of a new year. Now beginning with the third quarter. We entered the quarter knowing that our expectations were going to be lower when compared to 2011’s third quarter because of two specific issues that we were dealing with at the time. The first was a spike in our cold tar cost in North America due to a short-term shortage of supply that caused us to import cold tar at a significantly higher cost than our averages for the year. The second was the expected decline of profitability of our European businesses year-over-year. Due to several factors including the struggling European economy, plant operating issues at our Uithoorn Netherlands plant that caused us to be down for almost a month and then euro that was approximately 10% weaker than the third quarter of 2011. The combination of those two events was expected to have an approximate negative effect of $0.18 on EPS for the quarter compared to 2011. After allowing for the expectation of improved results for the railroad business partially offset by expected lower results from Carbon Materials and Chemicals as a result of lower pitch volumes and lower naphthalene pricing compared to last year’s third quarter, that would have put us at an adjusted EPS of about $0.90 to $0.95 for the quarter which is where I thought we would be when I communicated a range of $0.75 to $1.07 on our last quarterly call. The good news is that the short-term supply problem has been corrected and our Uithoorn plant is up and running with no lingering effects. So those two issues won’t carry into the fourth quarter. Unfortunately there were several other items that we knew are risk as we entered the quarter that did end up being realized and ultimately brought the $0.90 to $0.95 range down to the $0.82 adjusted EPS that was reported for the quarter. The first was that our European operating income ended up coming in at $900,000 worse than we had projected. While the market situation is still poor in the Europe there are some specific short-term opportunities that we believe we can act on that will make the fourth quarter better than the third but we will still see ongoing volatility in New York and it will remain a risk for us in the foreseeable future. Second, we incurred approximately $1.2 million of additional cost, net of insurance recoveries related to the February pitch leak at one of our Australian terminals. It was our thought coming into the quarter that our insurance recoveries would have offset any cost incurred during the quarter but unfortunately the claims process has been progressed at the pace that we thought it would. We do expect that in the fourth quarter we will record an insurance recovery an excess of cost incurred and that this issue will have little to no remaining impact on our income as we get into 2013. And third, a reduction in interest rates and increased medical costs caused us to record additional expenses of $600,000 for various benefit plans. As long as rates don’t go much lower by the end of the year then we would not expect to incur any significant additional expense in the fourth quarter. When you total the impact of the preceding three items it comes to a reduction in income of about $2.7 million before tax. The impact of those items on EPS was approximately $0.08 per share which explains the difference between where I expected us to be in our reported $0.82 per share. Leroy will now provide some additional detail on the quarter. After his review I will update you on some details of our growth projects and margin improvement issues before I tell you why I believe that the fourth quarter will be Koppers best ever and how things are looking for next year as we take a look at our first draft of our 2013 program. Leroy?

Thanks, Walt. On a consolidated basis sales for the third quarter increased by 2% or $6.7 million to $387.9 million compared to the prior-year quarter as higher railroad utility product sales driven by price increases more than offset lower sales for carbon materials and chemicals driven by lower sales volumes for pitch and creosote, lower naphthalene prices and a negative effect in foreign currency translation which more than offset higher selling prices for pitch and carbon black feed stock. Third quarter adjusted EBITDA was $40 million or $6.9 million lower than 2011 third quarter adjusted EBITDA of $46.9 million and adjusted EBITDA margins of 10.3% for the third quarter of 2012, trailed adjusted EBITDA margins of 12.3% for the third quarter of 2011 after restating for discontinued operations for both periods. The lower margins were driven by $1.9 million of charges from the plant outage in the Netherlands, $1.2 million of cost net of insurance recoveries for the pitch tank leak in Australia, higher raw material cost driven in part by tar imported into North America, lower sales volumes for pitch and creosote, and lower selling prices for naphthalene. Adjusted net income and adjusted earnings per share for the third quarter of 2012 were $17.2 million and $0.82 per share compared to $22.2 million and $1.07 per share for the third quarter of 2011. The impact on adjusted earnings per share for the third quarter of 2012 from the pitch tank leak and plant outage amounted to about $0.09 per share. Our tax expense as a percent of pre-tax earnings for the quarter was approximately 34% compared to 33% in the prior-year quarter with the increase due mainly to the mix impact of lower earnings in Europe. As mentioned in our last call, we continue to benefit from our European consolidation projects. But due to lower earnings from Europe for the year we expect the effective rate for the year to be in the 34% to 35% range consistent with our most recent expectations. Looking at Carbon Materials and Chemicals revenues fell by $4.5 million or 2% over the prior-year quarter as lower sales volumes for pitch and creosote and lower selling prices for naphthalene combined with approximately $9 million in negative foreign translation impact more than offset higher selling prices for pitch and carbon black feed stock. The volume reductions were driven mainly by lower demand for pitch in Australia and North America and lower third party creosote sales. Pitch products accounted for a 4% or $8.7 million decrease in sales over the prior-year quarter as lower sales volumes for pitch were partially offset by higher selling prices for pitch. Sales of distillate which include third party creosote sales and carbon black feed stock increased 2% or $3.9 million as carbon black feed stock volumes increased and selling prices increased 11% over the prior-year quarter reflecting higher average oil prices. The volume increase for carbon black feed stock was due mainly to our Australian operations in selling carbon black feed stock to outside customers instead of selling to our own carbon black plant which was closed during the fourth quarter of 2011. Sales of cold hard chemicals decreased by 1% as higher stock and hybrid volumes partially offset lower volume and prices for naphthalene compared to the prior-year quarter. Naphthalene sales volumes were down 10% and selling prices declined 16% compared to the prior-year quarter with the sales volume decline driven by the outage at our plant in the Netherlands. And the sales price decline was primarily in China due to reduced construction activity. Our stolic and high-drive business continues to provide increased profitability as stolic volumes increase by 8% over the prior-year quarter while prices were up 1%. The average price for orthoxylene was at $0.64 for the third quarter of 2012, the same as the third quarter of 2011 as oil prices increased slightly to $92 a barrel in the third quarter of 2012 from an average of $90 a barrel in third quarter of 2011. With orthoxylene prices at $0.67 a pound for October our expectations are that orthoxylene will average $0.62 or $0.65 a pound for the fourth quarter. Carbon Materials and Chemicals operating profits for the quarter of $18.4 million represented a decrease of $12.3 million or $30.7 million in the third quarter of 2011 which equates to operating profit margins of 7.6% and 12.5% respectively. Operating margins declined as $3.1 million of charges net of insurance recoveries from the tank leak in Australia and the plant outage in the Netherlands combined with higher material costs in North America and Europe, lower sales volumes for pitch and third party creosote and lower selling prices for naphthalene more than offset improved price in pitch and carbon black feed stock and higher sale volumes for phthalic anhydride. Turning to Railroad and Utility Products higher sales prices for crossties more than offset lower sales volumes resulting in an increase in sales for the segment $11.2 million or 8% for the third quarter compared to last year’s third quarter. The increase in prices for crossties was due to higher contract pricing combined with a favorable sales mix; we sold higher sales volumes of value added products during the third quarter of 2012 compared to 2011. As of September 30 we had 6 million of untreated crossties on hand at our plant which was 120,000 less than we had on hand at the end of December even though on a year-to-date basis we had purchased 350,000 more ties than last year. However, the ties designated for commercial customers have increased by almost 300,000 ties since year end. These ties have been procured for our higher margin commercial tie and export business. We continue to see a very strong year for our North American Railroad business including continued strong demand for commercial crossties and our rail-join products. Even though our volumes for railroad products are down from the first nine months of last year, we’ve more than made up for that with higher pricing which has increased our adjusted operating profit and margins by $10 million and 180 basis points over the first nine months of last year. Adjusted operating profit for the quarter increased to $14.7 million from $9.9 million in the prior-year quarter with adjusted operating margins at 10% compared to 7.3% in the prior-year quarter. Higher prices for our railroad products in the third quarter of 2012 highlight the continued strength of the railroad business and we expect this business to remain strong into next year. In June we ceased treating activities at our Grenada, Mississippi wood treatment plant and have since been in the process of preparing a foreclosure. In the Gloria treatment plant services [indiscernible] utility poles and have been transferred to other Kopper facilities where we will be able to utilize excess capacity. The expected closure costs are $4 million. $1.4 million of that cost is accrued at the end of 2011, $500,000 of closure costs were incurred in the second quarter and $1.9 million of costs were incurred in the third quarter. As mentioned on our last call, we expected to see pre-tax benefits of $1.5 million to $2 million, over the second half of this year as a result of the closure and full-year benefits of $4 million to $5 million beginning in 2013. Cash provided by operations for the first nine months of 2012 amounted to $54.5 million compared to cash provided by operations of $44.5 million for the first nine months of 2011, with the difference due mainly to smaller increases in working capital in the current year. One difference in working capital this year is that inventories have increased more than in the prior year due in part to a change in the mix of crosstie sales with the higher proportion of ties being targeted for commercial customers that’s mentioned earlier. Our debt net of cash on hand at September 30, 2012 decreased $229 million and $248 million at December 31, 2011, as cash increased during the quarter by $18.6 million to a balance of $68.9 million at September 30, 2012. As of September 30 we had $1.4 million borrowed on our revolver and we had total estimated liquidity well in excess of $300 million. During the third quarter we used approximately $6.4 million in cash to repurchase 200,000 shares of an average share price of a little over $32 per share. The 200,000 shares approximately offset the dilution from the shares awarded and/or issued earlier this year under the company’s equity incentive program. We will continue to consider share repurchases as a component of overall capital deployment strategy taking into account the relative attractiveness of alternative deployment options and the market perception of our share value compared to the intrinsic value of our stock. During the fourth quarter we’ll also plan to deploy approximately $25 million of cash related to the agreement to purchase the Australian pole business and a required equity contribution to our new Chinese joint venture. While we have historically seen seasonal trends in our business that makes our first and fourth quarter significantly weaker than our second and third quarters we see less of that seasonal separation as we enter this year’s fourth quarter. Walt will give some further details in his upcoming commentary but in summary our expectations are that we should reach a fourth quarter EPS well above our all-time fourth quarter public company high of $0.44 that was achieved in 2007. At this time I’d like to turn it back over to Walt.

Thanks, Leroy. Moving now to the subject of growth issues. You may have seen our press release earlier this week announcing an agreement to acquire a utility pole business in Western Australia which will complement our existing utility pole business there. This business accounts for 3% of our consolidated sales but it has generated about 7% of our consolidated operating income through September of this year and generates the highest EBITDA margins in the company. This agreement to enter this acquisition is expected to generate over $10 million of annual revenue. We also recently attended a signing ceremony in China related to our new 300,000 ton tar installation plant in Jiangsu Province which represented another milestone to advance this project. The plant is expected to be fully operational by middle of 2014 and it is expected to generate $150 million to $200 million of sales on an annualized basis. The joint venture will be a net contributor in earnings in 2014 and will generate above average segment margins beginning in 2015. In addition to the positive sales and profit this project represents what we hope is just a first step in an effort to penetrate a new end market that has the potential to achieve significant growth rates as China continues to generate large quantities of scrap steel as a result of the economy’s growth over this last decade. Adding another end market for our pitch will further enhance the diversity in our business that has served us well over the past 24 years. And one of our largest end markets, the global aluminum industry, recent projections indicate a 4% increase in consumption for 2012. And an additional increase of 7% in consumption for 2013 which are positive indications for our global Carbon Pitch business moving forward. Do we continue to focus on maintaining our strong market shares in North American and Europe and Australia while expanding our presence in the developing markets of the Middle East, China, India and Brazil? And as a result you should expect to see those emerging markets continue to grow each year as a proportion of our overall business. Now I’d like to talk about where we stand on the progress towards meeting our margin improvement goal of achieving a sustainable 12% EBITDA margin by the year end 2015. There’s no question that we have been very successful thus far on the Railroad Utility Product side of the business in generating margin expansion. Through the first nine months of 2012 this business is showing adjusted operating margins that are already 180 basis points higher than the similar period of 2011. Pricing has by far played the biggest role in capturing that improvement. But there have been other significant contributors as well such as the closure of the Grenada, Mississippi facility, the development of the export market for railroad products and the further development of new higher value products such as the borate-treated crossties and new joint rail products. How high can we possibly go in the Railroad Utility Products business? It’s hard to tell at this point because some of the margin improvement is being generated as a result of the overall strength of the North American railroad industry. So there is a portion of the current increase margin that could be vulnerable to a decline in a softer market. However, most of the near term results have come on the commercial side of the business and we are early in the process of evaluating the possibilities that we have on the cost side to help insulate us during a potential market downturn. The Carbon Materials and Chemicals progress has been more difficult to gauge at a high level because of all the unusual items that have affected their margins this year. Between the Australian fish tank leak, the large reserve for the European bad debt and the plant outage at the Uithoorn, Netherlands plant, the Carbon Materials and Chemicals business has incurred an additional $8.8 million of expense through the first nine months of this year. Their adjusted operating margins through September 2012 are 8.6% compared to 9.9% through September 2011. I need to remind everyone, however, that the 9.9% margin through September 2011 is based upon operating income that is restated to show the Australian Carbon Black business as a discontinued operation. If you compare the adjusted operating margins with the $8.8 million of unusual costs, added back to the as-reported adjusted operating margins, those September 2011 -- through 2011, the picture looks quite different. The margins through September 2012 and 2011 in that case are 9.8% and 9.0% respectively, an 80 basis point increase. So that indicates that we are making progress but it is unfortunately being masked by several large non-recurring items. The specific areas that account for the pro forma margin increase are improved pricing, the shutdown of the Australian Carbon Black facility and the increased use of lower cost substitute D stocks in our chemical production process. We have a lot more work to do in this business and we are actively working on several cost reduction initiatives that are in various stages of implementation. And I will continue to update you on our progress with these initiatives as we move forward. As I look out of the remainder of this year, we will continue to have a few headwinds with our raw material availability and cost, as well as the weak European economy. Despite these headwinds we believe that we will finish the year with an adjusted EPS level of 10% to 15% higher than last year’s restated adjusted EPS of $2.86. I think we will for the following reasons. The first is pricing. One constant throughout the year is our ability to achieve stronger year-over-year pricing that will not change and this will not change in the fourth quarter. The second is demand. While railroad products will see a seasonal drop-off, demand is still expected to be relatively strong in the fourth quarter. In the Utilities business we are already seeing an increase in sales due to the damage caused by Hurricane Sandy. Additionally in Carbon Materials and Chemicals, carbon pitch demand is expected to be considerably stronger than the fourth quarter of last year due to a change in timing of production, campaign of one of our larger customers combined with higher export sales. The third, there’s a benefit generated from the shutdown of the Grenada, Mississippi utility pole treatment plant which should provide approximately $1 million of pre-tax benefit. A fourth is a combination of the contribution from the other margin improvement initiatives that should have a positive impact on the quarter. And finally fifth is not only avoiding the $1.5 million of unusual charges that we incurred in the last year’s fourth quarter but also adding net insurance recoveries an excess of charges incurred during the quarter of approximately $1.6 million. So as a result of these items I just outlined our fourth quarter, adjusted results should be the highest ever recorded as a public company. Potential risk to achieving this level of earnings from the fourth quarter including worsening European economic conditions that result in lower than expected sales volume and the delay of expected insurance recoveries related to the pitch tank leak in Australia. So now I’d like to give you a few thoughts on the outlook for 2013. For Carbon Materials and Chemicals, we see growth in all of our key end markets in 2013. As mentioned previously global aluminum consumption is expected to grow 7% in 2013 which is a positive indicator for our carbon pitch sales. The automotive industry has seen significant growth in North America as well as globally in 2012 and we see additional strong growth projections for 2013 which should benefit our carbon black feedstock and phthalic anhydride sales. Additionally, the U.S. housing market which is also a key end market for phthalic anhydride has recently been showing signs of improvement as housing starts in September were up 15% to the highest level in four years. There are indications that this momentum will continue into 2013 and hopefully accelerate even further. With the relatively weak steel and coal production this year, we’ve experienced tightness in tar supplies in certain regions, particularly North America and Europe. That has resulted in higher tar costs. However, through our global supply base and logistics network we have been able to procure adequate amounts of coal tar to meet our customers’ requirements, although at higher costs. As mentioned in our last call, we expect to have access to additional tar in the U.S. in early 2013 from the new U.S. steel coal battery and are hopeful that by the end of 2013 the coal plant in Western Pennsylvania will be back up and running to provide additional sources of power for us. The additional production should lead to stabilization of raw material pricing in North America and combined with growing end markets should lead to a stronger year-end 2013 for the global Carbon Materials and Chemicals business. In regard to our Railroad Utility Products business we should have another strong year in 2013 as continued strong demand and improved pricing for railroad crossties, increased sales of value added products, the agreement to acquire the utility pole business in Australia, and trying to expand our export crosstie businesses should result in a stronger year-end 2012. When you put this all together for 2013 early indications are that we should see moderate growth in sales for both businesses. But more importantly double digit earnings growth has once again the diversity of our global markets and geographic footprint provide us with stability in our overall business which allows us to continue to generate attractive earnings growth in an overall challenging economic environment. So at this time I would like to open the lines for any questions that you may have.

[Operator Instructions] The first question comes from Ian Zaffino from Oppenheimer & Co.

Question would be on the earnings that you had put out before and the move related to how you get there. What types of steps are in place already? Would this structure be capable [indiscernible]?

On the Carbon Materials and Chemicals side in talking about the cold tar costs we’ve been telling you about lately, yes. We’re taking; I would say a stronger approach. We have contract formulas; we’re also negotiating different ways of buying the cold tar, which for a time there, there were some tars that were being priced off of oil related indices which just is not working in today’s world. So we’re doing on both sides, Ian, both on the raw material purchasing as well as moving closer to having a more success with the negotiations on the fixed pricing as well as the contract terms and conditions.

And are you also [indiscernible] lag time?

As much as we possibly can and in Europe it’s taken us a while but we have gotten that to a quarterly basis which has certainly helped out when you compare to where we were two years ago, three years ago. And yes, around the world I think it’s becoming more and more of a quarterly, not price negotiation but quarterly evaluating the tar cost and the different components which make up the cost.

Okay. And the other question would be on the other dynamics. What have you seen with one of your competitors [indiscernible]. How do you look at it?

Ian, are you referring to the recent acquisition of the Ruckers business or?

Yes. Yes.

Right. It was just announced about maybe 10 days ago or so. An Indian company by the name of Rain Commodities who primarily owns the former Calciner Industries business which is calcine petroleum cokes producer in the U.S. primarily. So Rain has purchased the Ruckers business so it has been taken off the market, it has been sold. Not quite sure what to expect just yet but from what we’re read the purchase price included a fairly high multiple and just based on that alone I think we’ll have maybe even a more disciplined competitor out there because of the higher price that was paid for the business. So this company, Rain Commodities, knows the aluminum industry very well because as you may recall, the anodes that they’re producing and consuming consists of about 85% petroleum coke and 15% pitch. So he does know the aluminum industry based on the coke-supply side. Now as a cold tar distillation business that we’ll be supplying pitch but I really don’t see much of a change in the marketplace just because of a new owner. It doesn’t happen that simply but I think I do see a more disciplined competitor coming down from it.

The next question comes from Laurence Alexander from Jefferies.

This is Rob Walker out for Laurence. I guess first question would be what’s your thought [indiscernible] demand in margin trends for phthalic anhydride and the other co-products [indiscernible] softening oil prices in the quarter?

As we just said the average price [indiscernible] in the third quarter was $0.65. It increased to $0.67 in October and we’re not quite sure what’s going to settle out yet for November but that’s why we’re sort of forecasting a range of $0.60 through $0.65. I really haven’t seen what happened yesterday or today on crude oil pricing but I think it has started to decline a little bit and as you might recall orthoxylene does track that fairly closely with the mixed xylene pricing product. Phthalic has been a very good business for us. As you know we have a little bit of a competitive edge in that we’re using naphthalene from cold tar as a mixture of our feed stock and less orthoxylene which does help our cost structure but we’ve seen ortho fairly strong the last two years. We also see our phthalic demand up this year primarily in the plasticizes areas which a lot of it goes into housing and automotive. We’ll just have to see where it goes but as I mentioned having naphthalene from cold tar is our sort of our majority of our feed stock that goes a long way versus competitors using 100% orthoxylene.

Can you update what are your utilizations right now for carbon pitch?

It varies a little bit around the globe. For instance we’re probably -- the three plants we operated the year were probably in the mid 70s range and the U.S. we’re in the high 70s range. Australia with the one plant there we’re again probably mid to high 70s. China is well over its capacity with our two plants there. We’ll be operating at 110% or so. Then basically if you add those all up we’re probably mid 70s.

Okay. [indiscernible] clarification of the kind of puts and takes for the FX this year were helpful. I don’t know if I missed it or if it was just too small to quantify or the headwind from the higher coal tar costs this year if they normalize what that benefit could be next year for you guys?

Could you please repeat that again? We’ve just got a little bit of static going on this end. You were talking about FX?

Oh no, sorry. Curious what you quantify the headwinds from higher coal tar costs this year?

I think we feel a little bit better going into 2013 specifically in North America where there will be additional coal tar available to us because of the U.S. steel coke and new battery coming on stream. Again Europe is a tough one because when you look at the steel industry operating in at least Western Europe I think you’re talking mid to low 60s. But we are reaching further into Russia, Ukraine where we do have a very good supply network set up. But again you’re paying a little additional freight costs there. The headwinds I think are going to be there but on the flip side there’s less demand for pitch with the aluminum industry, with the exception of China and the exception of the Middle East. We’re still seeing the aluminum industry probably operating in the 16% range capacity when you exclude those two parts of the world. But as far as headwinds go, they continue to be there, Leroy?

I agree. And it does vary based upon the region. We talked about some of the things that we think will lead to a stabilization of pricing in North America. China as we’ve seen over the past couple of years can be volatile. We’ve seen the reduction in coal tar costs this year compared to last. When we go back to 2010 when we were seeing coal tar costs in China at the highest in the world. I think our view for next year on China is that coal tar costs will probably trend upwards. I think that we would expect that in Europe that we would see higher coal tar costs as well. In Australia maybe flat while in North America I think we mentioned it would probably stabilize based upon the additional capacity coming on line. So how that all pulls together in terms of numbers, we haven’t quantified it to communicate it on the call but all in all we think that we’ll be in a good enough position to be able to offset that with any additional cost increases with price increases.

Our next question comes from Steve Schwartz from First Analysis.

Just to switch gears and talk about railroad a little bit if you could.

Sure.

What is your typical volume of exported ties these days and I guess on a quarterly or annual basis? I’m just trying to get a feel for how that plays out over the next several quarters and I do acknowledge you guys stated a 300,000 tie inventory for export if I’m correct?

Not for export. I mean that was a commercial total but export is a part of that commercial. I guess I’d like not to get too detailed on the volumes, Steve, but I guess as we’ve mentioned before we’re probably going to be in the $11 million to $13 million range this year and expect that to increase next year. I can’t believe very much at this particular point but in terms of dollars, probably $11 million to $13 million this year.

Okay. For 2012 and even up next year?

Yes.

And it’s just plus or minus in the low hundreds of thousands of ties, right, that you’re exporting or is it a high five digit number? Can you, Walt, at least get us on that ball park?

A lot of these ties, a majority of them are going into South America, specifically into Brazil and because of the moisture and wet lands area and so forth then they’re getting tie life of anywhere from -- I’ve heard anywhere from five to ten years. So I can tell you. In fact we actually have one of our guys there this week on a quarterly -- visit quarterly. If not, maybe more often but there is a major need for a much better quality treated hardwood tie and each year that’s going to continue to increase. I just wish I could tell you how much whether it’s 10% or 15% or whatever it is. It’s just difficult at this point. It really depends upon how quickly as the railroads want to increase their ties and improve their railroad [indiscernible] away.

Okay. And then just as a follow-up between railroad again, I think based on comments from some of your competitors in the North American market it sounds like you guys are definitely taking share with your creosote treated tie. And I’m just wondering how long those share gains continue?

Well I mean I hope they continue for a long time. I will say this we have the best process out there to ensure that the bore rates are contained within the ties with the creosote overlay treatment. And we’ve been working on this for a long time. We’ve got four plants that we can use and [indiscernible] service and we’re looking at increasing that. So as we go forward, we’ll have more facilities that have that process capability. It really depends on the railroads and how many ties they want to insert. And we’ve got all the class ones looking at them. Four of them are actually taking borate ties. I think that the process and the quality that we have that goes with that process to ensure that the material stays in there. I think that we’ve got a great shot at maintaining our markets here and growing them as we go forward.

The next question comes from Liam Burke from Janney Capital Markets.

Can I just go back to the Rail Tie business? You’ve mentioned that pricing was more favorable in the quarter. You mentioned though that corporate business was up. Are you seeing favorable pricing in the Class One segment of the business as well?

No, we’re seeing -- compare third quarter compared to last year’s third quarter, yes. We’ve definitely seen pricing improvements as you heard us talk in the past. Every time we -- typically these contracts are anywhere from three to five years. Some are actually longer than five years. But each time you negotiate a contract you’ve got to realign the pricing that goes with those specific railroads. So we have. Last year I think we completed two of those contracts and completing one shortly this year. And, yes, the pricing is with the Class Ones. But also the demand for the commercial ties continue to be very strong and with the strong market, basically the pricing has been good for us.

And on the rail acquisition front you did mention the bonded insulated joint business. Do you see any more opportunity there to pick up some of those types of rail infrastructure products?

Well, I tell you what. We’re looking everywhere we can. I think the world knows that we’re very much interested in acquiring businesses that could be complementary to what we’re wanting to do. We have nine wood treating plants out there. We’ve got the joint bar business we acquired two years ago from the Foster deal. We’ve shown the railroad industry that when we buy something, like the joint bars we do a great job at it and we’d love to look for some more, and we’re turning over a lot of stones looking for them, Liam.

The next question comes from Andrew Dunn from KeyBanc Capital Markets.

I apologize in advance. Some of the calls have been fuzzy so if I missed anything and I ask it again, I apologize. Anyway, I was hoping you guys could maybe just explain a little bit more why you didn’t take out those charges associated with Netherlands facility, either that or the pitch tank leak. It looked like you only took out $1.2 million after tax charges associated with the plant closure in the quarter. Could you maybe explain that a little bit more?

Yes, well I’ll explain that. I guess certainly we called it out and, quite frankly, we’ll leave that up to you and your colleagues as to whether that’s something that you would adjust for. I mean we incurred the cost during the quarter. That’s one of the things that certainly has resulted in us moving our expectations down for the year a little bit. Obviously if you add those back, that gets us back to where we thought we were going to be coming into the year. So certainly, they affected the numbers, but quite frankly, we’d rather you decide whether that should be added back or not. We just want to draw it out so that you understand what it is.

Okay, and then moving on. It looks like that U.S. Steel Coke Battery is ramping up through 4Q into 1Q. Do you guys benefit from that at all in fourth quarter, or is that really only starting in the first quarter of 2013?

No, no. We’ll definitely, we will gain a fair amount of that tar. They actually applied heat on those ovens about six weeks ago. In fact, they might be charging coal here within the next few weeks, but we will definitely start getting coal tar perhaps maybe even in December starting up. And I can’t tell you how long it takes to ramp up all of the coke ovens, but I think they’ll be pretty impressively charging the ovens as quickly as they can. So we will benefit from that increased tar.

Great. And last question. You mentioned the impact of Hurricane Sandy might benefit your utility business. Just kind of... under your current arrangement with your supplier of wood and products for that business, would you be able to meet a significant volume increase currently? Or do you think it won’t be that significant of an increase perhaps?

We’re doing everything we can. We’re a major supplier of utility poles to FirstEnergy, PHI, Con Ed, and I can tell you those three as well as probably three other utilities are calling us and asking us for assistance, and we’re doing everything we can. In addition to newly treated poles coming out of our Florence, South Carolina plant, we’re working with our customers, pulling poles out of distribution yards, out of inventory, wherever we’ve got it. In fact it looks like we’ve got requests in excess of 10,000 poles that are headed to New Jersey, New York area. And as far as working with it, it’s primarily inventory right now, but we’re producing as much as we can. For the white poles that we procure are readily available and so we’re helping out these utility companies as much as we possibly can.

The next question comes from Chris Shaw from Monness, Crespi, Hardt & Co.

I have one question on the Monesdon ethylene plant. That’s the one you sold, right?

Yes. Back in 2008.

And when did it stop producing?

It was towards the end of 2008. So that’s been sitting idle for gosh, unfortunately four years.

I’m curious, would you, if you still owned it would you be running it at this point? Would you have shut it down as well.

That’s tough. When we owned the plant, we were selling coke into the merchant market, the buyer is an internal user, so had we kept it we'd be selling 100% of it into the merchant market, but it has been closed. And based on the announcement that has come out, they have to I think to run $50 million of capital expenditure that they have to meet. I think it’s primarily in the Lifeswap area, but I’m not sure where all. And last I heard if the game plan continues onward as they announced, that it could start up as early as fourth quarter 2013.

Okay. And then about Rain, the company that, are they integrated to tar at all in either -- I know Rucker into that -- in India? Do they have any facilities in India that do cold tar?

No. They do not have cold tar at all. This is a very new business for them. As I mentioned, they’re supplying calcine petroleum cokes around to the aluminum industry globally. I believe they have a small calcine in India, but most of their calcine assets are sitting in the U.S.

Right. Right. And then final one, I just wanted to clarify; you said that the Australian utility coal business was your highest EBITDA margin. Was that for the company or for the segment?

No, that’s the highest in our company.

Oh, okay. That’s very interesting. You guys produce, I think it’s mostly seasonal, but don’t you guys produce [indiscernible] tar at some point.

No. No, we do not. Years ago, we used to, Chris.

The next question comes from Bill Hoffmann from RBC Capital Markets.

Just a quick question about capital expenditures for 2013 and other sort of cash uses, i.e., the JV investment et cetera, if you could help us get a sense of that?

Net of the Australian potential acquisition as well as putting money into our China project and that amounts to...

About $25 million that we’re expecting in the fourth quarter related to those two items. The expectation next year for the JV is that we will be, that we’ll be spending about I think $32 million or so for the JV. Again, our share being 75%. Part of -- most of that will be in the form of borrowings and then we’ll have another equity contribution that will be made at some point next year. It won’t be large. I’m not sure at this point exactly where it will end up, if it will be in the $5 million to $6 million range, but from that standpoint, it won’t be that big. From an overall CapEx standpoint, we’re probably looking in the $32 million to $35 million range. Right now we’re actually going through looking at what discretionary projects that we have that have returns associated with them that we want to put in our programs. So depending upon ultimately what we have there, we’ll ultimately get to the number -- to the range I just gave you; $32 million to $35 million.

Okay. And the Grenada spending is all done at this point?

Grenada spending is not all done, but we have some -- we do have some additional -- we have some offset there that we would expect that would ultimately come close to netting out whatever additional costs that we have remaining.

There seem to be no further questions.

Well, thank you and obviously thank all of you for participating in today’s call, and appreciate very much your continued interest in the company. We will continue to do the right thing for our businesses by pursuing prudent growth opportunities and looking for ways to enhance profitability within our existing businesses. We believe the diversity of our business along with our margin improvement initiatives will continue to provide us with a very stable company with strong and -- during strong and also during weak economic climates. And finally, we do remain firmly committed to enhancing shareholder value by maintaining our strategy of providing our customers with the highest quality products and services, all while we continue to focus on our Safety, Health and Environmental initiatives. Thank you.

Thank you. This concludes the Koppers Holdings, Inc. Third Quarter 2012 Conference Call. Thank you for participating. You may now disconnect.