Koppers Holdings Inc. (KOP) Q1 2018 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Koppers First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this event is being recorded. I will now turn the conference over to Quynh McGuire. Please go ahead.

Thanks and good morning. I’m Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our first quarter 2018 earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our earnings release this morning, we have also posted materials to the Investor Relations page of our website that will be referenced on today’s call. Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our website and a recording of this call will be available on our site for replay through June 4, 2018. Before we get started, I would like to direct your attention to the forward-looking disclosure statement. Certain comments made during this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of assumptions, risks and uncertainties, including risks described in the cautionary statement including in our press release and in the Company’s filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the Company’s comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The Company’s actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. The Company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The Company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are, Leroy Ball, President and CEO of Koppers, and Mike Zugay, Chief Financial Officer. I’ll now turn the call over to Leroy.

Thank you, Quynh. Welcome everyone to our first quarter 2018 earnings call. As always, let’s begin with an update on Zero Harm, which continues to remain a top priority here at Koppers. This quarter as part of our efforts to ensure an ongoing focus on protective measures, we introduce the next training workshop called life saving rules. Life saving rules workshop to design to help mitigate our most high-risk activities while giving our people greater peace of mind about their safety on the job. To date 15 of our sites across the globe have completed the training with 11 more sessions scheduled for the second quarter of this year. Now, our people continue to show their active engagement and applying what they’ve learned from our continuing education efforts. And during the first quarter, employees conducted more than 3,800 leading activities such as observations and hazard identification help identify, and mitigate potentially dangerous exposures. As a result, I’m pleased to report thanks to the dedication of our employees, 23 of our 31 operating facilities worked accident free making our total recordable rate for the first quarter of 2018, the lowest has been in the last five years. So recently, we issued our 2017 corporate sustainability report highlighting the achievements that we made to protect our employees, the environment and the communities that we serve. While we printed sustainability summary brochures available upon request, I would encourage you to visit the sustainability section of our corporate website for our in-depth report, which highlights areas, where we have improved our safety and environmental performance. Overall, I’m pleased with the progress that we made to-date to strengthen our Zero Harm culture and we’ll continue to update you as we reach new milestones. Now, let’s talk about our March quarter financial performance. Our RUPS business or Railroad Utility Products and Services is continuing to manage through a tough demand environment that’s now also becoming a tough supply environment, and our performance chemicals business or PC business is getting off to a slow start due to the extended and sometimes severe weather that we’ve had this past winter season. Even so, we delivered record high in a – record highs in earnings per share, $0.81 on a reported basis and a $1.18 on an adjusted basis due to strong performance from our car materials and chemicals or CMC business. So at this time, I’d like to get into some specifics about each of the business segments starting with RUPS. So the sales decrease that occurred in that segment, it was experienced primarily due to lower sales volumes of crossties, brought on by a number of factors. Certainly, we’re continuing to see some softer demand, particularly from the Class I. We’re also starting to see a trend of more Class I railroads wanting to move away from the more traditional TSO or treatment service only model and have their suppliers hold their untreated inventory and build them one time for a treated tie delivery. That is extending our sales and cash flow cycle a couple of quarters as we work through certain untreated customer inventory that has already been bought and pay for. On the supply side, demand for hardwood imports in China is constraining our ability to get all of the untreated supply we would like and as a result is pushing up untreated tie prices as we compete for that resource. Also railroad bridge services or railroad bridge services business was affected by unfavorable weather in various regions throughout the United States that caused project delays. From a positive standpoint, things are looking up in the commercial market as tightened raw material supplies having a positive impact on pricing while demand has remained steady. For the quarter, our position in the commercial market had little to no negative impact for the first time in approximately two years. However, on a year-over-year basis, segment sales declined by 20% and adjusted EBITDA was lowered by 55%. Moving to our PC segment. Sales were relatively flat as extended winter weather had a negative effect on volume growth while historically high lumber prices in the United States has led treated to draw inventories down waiting for some cost of science in the market. PC reported lower profitability compared to prior year with adjusted EBITDA of 14.2% for the first quarter, which was lower than anticipated, but probably closer to a normalized first quarter PC margin. This was due in combination to higher average raw material costs, unfavorable sales mix as well as increased overhead costs. Now, on the plus side, our CM&C business reported its sixth consecutive quarter of margin growth. Excluding a foreign currency translation benefit of $12.9 million due to a weaker dollar, sales increased by $73 million or 63.8%. The sales increase was due mainly to higher sales prices for carbon pitch, carbon black feedstock and naphthalene with higher sales volumes for carbon pitch and coal tar chemicals. Higher sales prices for carbon pitch, carbon black feedstock in Australasia and Europe, were driven primarily by tightened supply in those regions. CMC profitability was significantly higher than the prior year quarter primarily due to a tight needle coke market in China, which has driven up pricing for that key electrode raw material, which is what the pricing in our supply agreement with our main customer in China is based upon. In addition, continued benefits from the restructuring of our North American and European businesses has allowed us to capture full value with stronger carbon pitch market in those regions has a aluminum market dynamics have continued to improve. Adjusted EBITDA margin for this segment was 23.6% in the first quarter and adjusted EBITDA was $39.9 million higher than the prior year quarter. On February 28, we made what we consider to be a small tuck-in acquisition in order to enhance our service offerings to the railroad customers. We acquired M.A. Energy Resources for cash consideration of approximately $66 million. We funded this purchase by borrowing on our revolving credit facility. MAER had nicely to our vertically integrated crosstie model by providing material recovery services for wooden railroad crossties that have been taken out of service. One month of MAER results were included in our RUPS segment for the first quarter and they were immaterial to the overall RUPS results. Our diversified business model recognizes that all our segments have different profitability drivers and therefore, provides the opportunity for each to excel under various market conditions. For the March quarter, our CMC business is again at the forefront due to a strong global demand environment as well as benefiting from the hard work that has been done over the past several years to now have a more streamline and efficient cost structure. In combination with market tailwinds, we have been effective in managing the factors that are within our control, and we now have much leaner footprint at the same time significantly increasing our profitability. We believe our strategy to ship the company’s focus to higher value wood treatment technologies continue to be proven out. I’ll now turn it over to Mike to discuss some key highlights from the first quarter of 2018. Mike?

Thanks, Leroy. Let’s begin by referring to the slide presentation that was provided on our website. On Slide 4, sales were $406 million for the quarter, which was an increase of $60 million or 17% from $346 million in the prior year quarter. Our CM&C business reported higher sales prices and volumes for carbon pitch, higher sales volumes for coal tar chemicals, and higher prices for carbon black feedstock and naphthalene. In Australia – in Australasia and Europe, higher sales prices for carbon pitch and carbon black feedstock were driven by reduced supply in those regions. PC had a slight sales increase; however, sales activity in the North American markets was delayed by severe winter weather in various regions throughout the U.S. The RUPS business again reported lower sales volumes of crossties and railroad bridge services. Moving on to Slide 5, adjusted EBTIDA was $66 million or 16% compared with $42 million or 12% in the prior year. This was due to higher profitability from our CM&C business partially offset by lower profitability in the PC and RUPS segments. For the quarter, CM&C’s performance continued to show a significant improvement over the prior year quarter benefiting from favorable market conditions as well as realizing permanent cost savings from the restructuring initiatives that we have undertaken. PC reported lower profitability due to a higher raw material costs and SG&A expenses. The results for RUPS were negatively affected by the continued demand weakness for treated crossties as well as deferred projects related to railroad bridge services Now, I’d like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $26 million for the first quarter and compared with $15 million in the prior year. Adjustments to pretax income for current year – for the current year quarter totaled a $11 million consisting primarily of restructuring expenses, mark-to-market commodity hedging costs and non-cash LIFO inventory adjustments. The prior year adjustments to pretax income were $14 million primarily due to bond refinancing costs and restructuring expenses. Adjusted earnings per share were $1.18 for the first quarter compared with $0.68 for share in the prior year. The effects of U.S. tax reform has significant impact on our first quarter results. Tax expense as a percentage of income was 28% in the first quarter, and we are projecting a full-year effective tax rate of approximately 32%. These tax rates were significantly higher than what we experienced in the prior year before the tax reform charges were recorded on our books in late 2017. Our rate has significantly influenced by the minimum tax on foreign earnings that was introduced this year as an element of this tax reform bill. The minimum tax on foreign earnings is also commonly referred to as the guilty tax. Our profile of current and prior year domestic tax losses with significant foreign taxable income, results in coppers being exposed to this guilty provision of tax reform. Of our 32% estimated effective tax rate for 2018, the minimum tax on foreign earnings makes up 13% of this rate, while we are incurring a significant tax expense related to this item, the cash tax effects are minimal as we are able to utilize foreign tax credits and loss carry forwards to reduce the cash taxes that are actually payable in the U.S. Now I would like to discuss the activities related to our sources and uses of cash during the first quarter. Cash used in operating activities was $30 million, compared to $24 million in the prior year period. The net increase was primarily due to higher working capital and accounts receivable partially by a decrease in accounts payable. Our cash used in investing activities increased due to the $63 million of net cash that we used to acquire M.A. Energy Resources. To date capital expenditures were $23 million compared with $15 million for the prior year. The current year amount consists of spending on the new naphthalene unit at our CMC facility in Stickney, Illinois and expanding production capacity at our PC facilities within the United States. Now, let’s return back to our slide presentation and review page 6. On page 6, our net leverage ratio as of March 31 on a pro forma basis was 3.2 times and this assumes the annual adjusted EBITDA from our acquisition of M.A. energy resources. By comparison, our net leverage ratio was 3.1 times at the end of 2017. We expect that our pro forma net leverage ratio to be at or below three times by the end of this year, and of course, this includes the cash used to fund both recent acquisitions. Our liquidity under our bank agreements at the end of the first quarter was approximately $270 million and after the Cox acquisition in early Q2, it currently stands at approximately $170 million. Now, I’d like to turn the discussion back over to Leroy.

Thank you, Mike. Regarding the outlook for each of our business segment, let's start with our Railroad Utility Products and Services business. Legacy RUPS revenue will likely show a year-over-year while profitability will now likely be flat to slightly up taking into account a worse than expected first quarter driven by softer demanding constraints on untreated tie supply. Now according to the Association of American Railroads or AAR, the level business activity for the Class I railroads were at one time highly dependent on the oil and gas, and coal mining industries. However, there were currently more correlated to trade relations commodity prices and interest rates. At this time, the AAR believes the economic signal seems to be mostly positive overall. Rail traffic to the March quarter was largely positive particularly in terms of traffic segment that are most sensitive to the economic trends. The full March quarter totaled U.S. carload traffic was down 0.3% in the same period last year, meanwhile in remote units were up 5.5% from the prior year quarter. For the year-to-date period through March 31, 2018 combined U.S. traffic for carloads and intermodal units, is 2.6% higher than prior year. Overall, the demand for crossties is expected to be relatively flat to slightly up over prior year. in terms of raw material, we are seeing less available inventory of untreated crossties from the sawmills and lumber prices have increased dramatically due to a wet winter affecting production combined with higher demand from other industries in overseas markets. That production constraint will test our ability to meet demand although it will have a continued positive impact on commercial pricing, which has already moved up nicely over the past four to six months. Our two new acquisitions; M.A. Energy Resources or MAER, and Cox Industries, which has been renamed Utility and Industrial Products or UIP are expected to add $20 million of EBITDA for the remainder of this year, net of any due diligence and integration cost. Chemical sales synergies for our UIP business are built into the PC and CMC segments respectively. Other markets and operation benefits that make up the minimum 5 million in annualized synergies that we expect to result from the UIP acquisition are not expected until 2019. Now volume in the pole market has been healthy in the early part of 2018 and nothing has changed from our view on overall market demand since we closed on the acquisition almost one month ago. We remain excited to be back in this market in such a big way and are anxious to find as many ways possible to bring both our rail and utility customers, the combined benefit accounts from serving both industries in a vertically integrated fashion that we do. Speaking of vertical integration, the MAER business is a perfect natural extension to our crosstie product line, they were with the railroad to dispose of their used crossties as they’re being replaced and convert that waste energy. Not only do they help the railroads economically solve a major headache across tie disposal, but they also provide a great sustainability story to the industry. By the way, our UIP business has been dabbling in full recovery as well, which aligns very nicely with where we are taking our crosstie business and provides even further potential synergy as we become experts in the field or treated with disposal and are able to provide our customer base in both of these critical markets, a cradle-to-grave solution and peace of mind for a key component of their infrastructure. And we’re still too early in the process of this discussing too much detail. So as mentioned on our April call, I’ll defer any further discussion on our work in this area to a future period. So, as reflected on Slide 8, we’re providing 2018 adjusted EBITDA guidance for our rough segment of approximately $61 million, which reflects the contribution from the acquisition as well as a modest $2 million increase in the legacy business. In our performance chemicals business, product demand has historically been influenced by existing home sales, which is a leading indicator of consumer spending on remodeling projects. Overall, the market for existing home sales continues to show mixed signals. According to the National Association of Realtors or NAR, existing home sales rose 1.1% in March and grew for the second consecutive month, the lagging inventory levels and affordability constraints kept sales activity below prior year levels despite the increase existing home sales are 1.2% below last year. According to the leading indicator of remodeling activity or lira reported by the Joint Center for Housing Studies of Harvard University spending on value-added home improvement repairs in the U.S. is expected to grow 7.2% over the 12 months through March of 2019 to total $341 billion. The upward trends in retail sales of building materials and the growing number remodeling permits indicate that homeowners are doing more home improvement projects. The Conference Board Consumer Confidence Index now stands at 128.7 up from 127 in March. the assessment from consumers of current conditions has improved somewhat with consumers rating both businesses and labor market conditions quite favorably. overall, confidence levels remain strong and suggest with the economy will continue expanding at a solid pace. From the cost perspective, our raw material costs have been increasing primarily due to copper pricing, which trended higher in 2017 and its continued into 2018. And we continue to hedge a majority of our requirements over one to three-year timeframe in order to provide short-term certainty of our cost structure by lessening the impact that may arise and rapidly fluctuating commodity markets. We’re currently experiencing a more unfavorable impact of higher prices on the smaller unhedged portion of our copper requirements. We’re also dealing with the higher average hedge cost for copper in 2018. So for this year, we anticipate having approximately $13 million of increased costs as a result of higher average raw material cost. In addition with recent changes in accounting requirements, we will no longer be reporting the ineffective myth of our hedges. So in 2017, we actually reported a $6 million hedging and effectiveness benefit, which we know will not recur in 2018 passed [ph] in higher expected SG&A costs in the PC business has approximately $24 million of headwinds to offset this year. now, we believe that $12 million of that will be offset through the release of pent-up demand as traders restock and the weather improves, and cost benefits realized from continued capacity improvement projects. So, as you can see on page 9 of our Slide presentation, we’re expecting to generate 2018 adjusted EBITDA of approximately $76 million for performance chemicals, which is $12 million lower than prior year. Moving now to the outlook regarding our CM&C business. In CM&C, we’re continuing to achieve a significant increase in profitability driven by stronger overall pricing environment, particularly in China. now the shutdown of orders, steel and coking capacity in that region that does not mean environmental in emissions standards, has driven increased demand for products requiring coal tar pitch, including needle coke, which is used for producing electrodes that go into electric or steel production. that happens to be the market the most of our China supply is actually used in. The pricing for coal tar products in the region is seemed to level out in early 2018, but still remains relatively strong compared to prior year and is expected to stay at current levels at least in the near-term. Now, we remain cautious in building too much optimism into our guidance related to activity in China, because of our past experience of rapid market swings and a general disagreement with our key customer over the contractual value of our product. As such we continue to only look one quarter out on the contribution coming from our China joint venture, which means the probability generated from our CM&C business in 2018, still could have further upside in the back half of this year if we’re able to maintain what is the current status quo. In Australia, the market has also been favorable since pricing is correlated to the trend seen in China, but we expect to see a catch up in raw material prices throughout the remainder of the year that will pull results in that region back from its strong early start. aluminum and steel tariffs have received a lot of attention in the U.S. and many people are trying to sort out what it will mean for a number of different businesses and industries, and we are no different in that regard. aluminum prices globally are significantly higher and stronger demand that’s had a positive impact on pricing for the key raw material that we provide. there is discussion about to restart in the U.S. which if they occur should also provide additional upside to our CM&C business. Similar to Australia, pricing in North America and Europe has been outpacing raw material cost increases, but these cost increases will catch up as pricey moderates and will limit our ability to maintain the current pace of profitability in the segment throughout the remainder of the year. therefore, as shown on Slide 10, our anticipated 2018 adjusted EBITDA guidance for CM&C is approximately $103 million, which represents a $28 million improvement over prior year. Now on Slide 11, you can see the various drivers in our sales guidance for 2018. We are projecting that CM&C will benefit from both higher pricing and higher volumes with China providing most of the benefit and PC demand despite having a slow start this year, will remain a favorable levels for our rough legacy business we’ll likely finish the year slightly up with a – from the sales level, we likely finished the year down with almost all of that being attributed to the first quarter. Adding a $200 million, we expect from our two most recent acquisitions that we anticipate our 2018 consolidated sales will be approximately $1.9 billion. So turning to Slide 12, our guidance for 2018 consolidated EBITDA on an adjusted basis is approximately $240 million, which includes $20 million from the acquisitions and represented 20% increase compared to the prior year adjusted EBITDA of $200 million. Accordingly, our 2018 adjusted EPS guidance is projected to be between $4.05 and $4.25 per share, compared with $3.68 per share in 2018, which would represent a new record high adjusted EPS for the company and a 12% plus increase using the midpoint of the range. Capital expenditures as Mike had said earlier for this year, are expected to be approximately $65 million to $75 million, which includes approximately $7.5 million as a carryover from 2018. the completion of our new naphthalene unit in Stickney, Illinois, around midyear, high return capacity expansion projects and PC, the integration of our newly acquired UIP and MAER businesses and improvements in the safety and reliability of our existing infrastructures. In summary, I feel good about where we are in the guidance provided, which would propel us once again, reach new highs in adjusted EBITDA and adjusted EPS in 2018 while we also begin mapping out our exciting new future with new key additions to the company. I would now like to open it up for any questions.

[Operator Instructions] Our first question comes from Laurence Alexander with Jefferies.

Hi guys. This is Dan on for Laurence. How are you?

Good, Dan. how are you?

Hey Dan.

Doing well. Just going through the EBITDA bridge for CM&C. So I guess what you're saying though is that you expect a pretty rapid deceleration for the rest of the year given the strength in the first quarter versus what you're expecting for 2018. I mean is that…

Sort of what we're not noting in is further upside in China through the remainder of the year. Although that could in fact occur. And we are also building in anticipated catch up increases in raw material costs, right because we've been outpacing that as the price has outpaced the pace of the raw material cost increases. So we’ve been out ahead of the curve from a pricing standpoint and that will be catching up as we continue to move out through the remainder of the year.

Will it be like a sequential thing where we’ll catch up slowly but surely by the end of the year is when it should be kind of…

That is correct, yes.

And then with the new segment, I mean so with the new – through the Cox acquisition that's going to be in segments right. I mean I think you said that but I would just make…

Well we actually did not say that right. So today we have a railroad and utility products. So it will run independently and the gentleman running that business will report into me. So it will run independently. As far as our reporting, today it will report into from a financial standpoint the railroad and utility products segment. We’ll continue to evaluate sort of how our segments get pulled together throughout this year. And any changes that we believe need to be made to comply with SEC requirements, we will certainly make. So it could be broken out as we go through that analysis moving forward. But right now it is a part of our existing railroad and utility products business segment.

And Dan just to follow-up on that any of those changes in segment reporting to the SEC will be effective of 1/1/2019.

Okay. Thank you that's helpful. And then last question and I think I know the earliest one, but – so the benefit what's happening in CM&C that has nothing to do with oil anymore. I mean that that's not really a factor in the profitability and Performance Chemicals segment as it has been in the past, correct?

Not any near the magnitude it has in the past.

But it's still somewhat of a tailwind then.

It does have some impact in certain markets, yes.

Okay, right thank you very much guys.

Okay.

The next question comes from Chris Shaw with Moness, Crespi.

Hey good morning everybody how are you doing?

Good.

Hi Chris.

I guess first question, I guess I wasn’t really completely following in the slide decks the outlooks for the individual segment’s EBITDA. They also have a measurement of I guess a negative measurement for most SG&A year-over-year.

Yes.

Did you just point that out is there an accounting treatment that’s different?

So we’re calling it out because it is a little higher, I think, than what it had been. We have due diligence and integration costs that are certainly mixed in there. A good bit of it maybe in the rough part of the segment but there's other general cost that we are incurring as we have been ramping up to be more acquisitive and that’s getting spread out across the business units. With the recent success, I think, in the probability of the business we also have some higher costs related to long-term incentives and things like that for the company. And so those are probably the things that make up the biggest component of that SG&A cost increase to get spread out across three business segments.

Impressive. In PC where you don’t have the acquisition there, that’s sort of a broader expansion of sort of corporate cost that sort of I guess an investment almost into sort of future growth.

Some of that is. Absolutely some of that is, some of it is some one time things or I shouldn’t say one time things, but certainly less recurring or higher maybe than usual in terms of costs that we don't expect to recur, this maybe a $1 million to a $1.5 million of those sorts of costs buried in the SG&A piece of PC. It's a mixture of cats and dogs I’d say. So some of the stuff we would expect there are more of a nonrecurring type nature but that's a smaller piece of it. There's other pieces that certainly are related to continuing to try and grow that business and adding to infrastructure.

Got it. And then the Chinese business the Needle Coke that’d been doing well. Given your sort of, I guess disagreement with the customer over pricing or contractual obligations, is there any chance for you to exit that business? Maybe you can sell to the customer, I mean if things are doing well they might be – they took it internally, they would be more happy with their costs. And you could get – I mean is that still a strategy for you to lower your exposure to that business in that region?

I think we remain open to that possibility without getting into any specific strategies. I think that is something that we remain open to. To provide the most value for our shareholders and so we continue look at that. The one thing I'll say about this because I want to be clear about it is the sort of the disagreement that we currently have, there's nothing reflected in our financial statements that would get clawed back through any resolution of this just everybody understands right. We don't have any – so we believe that we're not getting paid the right price for our product, that it should be higher. None of that is recognized in our financial statements. And if we can come to some positive financial resolution on that it could be a nice upside to the numbers. But none of that is built in.

Got it. And then on the MAER business so they reclaim ties and then they burn them. So I know if you could, someone add, could you give us little more detail on what they do?

They reclaim ties and then they move them into a market to basically be used as a fuel. So it is a logistics business that has relationships on the supply and demand side for the entry to cross-ties. And we like it because it certainly is a nice extension of our business serving the same customer base that we do. We think we know that that issue in terms of cross-tie disposal has been a growing issue for railroads and is a major supplier in that market and a major part of the railroad. We felt that we should be part of working on in helping to provide the solution to them, making things easier for them. And so this business it is we think the best in that market and we're happy to have them and look forward to trying to use that to continue to grow it across our existing network of customers.

Who is the typical customer there? Who they are selling those ties?

They sell, or they take our product primarily from a few of the class ones, but can take product basically from any railroad that is looking to dispose of cross ties in a sustainable fashion.

How they have been selling them to?

I apologize, I really don't want to get into that right now. I think again as we further define our strategy something the we would consider being maybe more open about, but right now I'd rather keep that to ourselves.

I mean, did I get burned like an industrial furnace, or is that kind of used, I don’t understand.

It’s actually multiple outlets that they use.

Okay. Alright, thank you.

You’re welcome.

Our last question comes from Liam Burke with FBR Capital Markets.

Thank you. Good morning Leroy. Good morning Mike.

Hi Liam.

Hi Liam.

Leroy, looks like stick me the consolidation will be almost complete some time next quarter or two. You’re adding capacity on KPC. Are you sized right both on the capacity front how you see your multiple end markets?

I think we are Liam so when we get through this year and basically get to early 2019 we should be fully operational in terms of supplying all of our intermediate raw materials for Performance Chemicals, which is big because we've had to go out and buy certain segment of that on the open market and pay higher prices for that too. So that will help to deflect some of the future cost increases that we expect to incur from copper. But will put us in pretty decent position from an overall standpoint. Now how much further can the market grow, how much more market share can we conceivably get. I’d say we could find ourselves still constrained going out a couple years if the markets continues to grow at a healthy rate and we don't do anything further from a capacity standpoint. We'd rather not get too far out in front of things because we've been in a very healthy environment now for awhile. So best to sort of see how things play out these aren't large dollar outlays that we've been doing in that. In that area it's couple of million dollars here, a couple million dollars there that have all collectively come together and added some nice capacity there. On the CM&C side we’ll be down to one facility here in the U.S., one in Europe. It is those two facilities that more or less supply in combined those two markets. We have more than enough capacity here in the U.S. if certain markets continue to rebound and strength to where we could if we have the raw material, the coal tar on material we could certainly do more. But I'd say overall yes we're in pretty decent shape, there is more than enough capacity for us to provide the Carbon materials and Chemicals business. PC again we will be at full capacity in terms of supplying our needs within the next year or so. And depending upon how the market grows, we might find ourselves a little underwater there out over the next couple of years, but nothing significant.

Great. And on the Cox acquisition you have a history in the utility pole business. Do you feel with the access to creosote that you have a competitive advantage now to Cox’s part of copper.

Look it's not just creosote it is CCA as well. So there's three main preservatives used in that market. You have the CCA which we produce in our performance chemicals business, you have creosote which we produce in our CM&C business and then you have pentachlorophenol which we do not supply, which we do not produce. And so certainly being able to produce two of the three which makes up a fairly significant part of the market, we think does provided some competitive advantage. Certainly we like that model as it relates to what we do on the railroad side. We think being able to provide again a full service solution from beginning to end and now even including disposal services as well in both those businesses, is a key differentiator between us and anybody else in those industries. So we like where we stand.

Great. Thank you Leroy.

You are welcome Liam.

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

Thank you to everyone that took the time to participate on the call today. We do remain energized to deliver another great year of performance. And we thank you for your interest in our company and the support you provided. We continue to make positive change. Have a great day, everybody. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.