Good day, and welcome to the Koppers Holdings Inc. second quarter 2014 earnings conference call. Today's presentation is being recorded. At this time, I would like to turn the call over to Michael Snyder. Please go ahead, sir.

Thanks, Liam. Good morning, everyone. Welcome to our second 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 Helenski 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 the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results could differ materially from such forward-looking statements. 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 new Chief Operating Officer and CFO. At this time, I'd like to turn over the call to Walt Turner. Walt?

Thank you, Mike, and welcome everyone to our 2014 second quarter conference call. First of all, I am pleased to announce today that we've hired Michael Zugay, as our new Chief Financial Officer, effective August 18. Mike was recently the Co-Chief Executive Officer and Chief Financial Officer for Michael Baker Corporation, here in Pittsburg. We are looking forward to Mike's arrival and his contributions to Koppers going forward. By now, you've probably seen our headline numbers. Our second quarter results reflect continued industry headwinds related to the availability of hardwood lumber for the railroad crossties, resulting in lower sales volumes for that business. Additionally, our Carbon Materials and Chemicals business was negatively impacted by lower sales prices for phthalic anhydride, and lower sales volumes and prices for carbon pitch, as a 15% drop in aluminum production in the U.S., resulted in lower sales volumes for pitch compared to the prior-year quarter. We also incurred approximately $5.8 million of incremental cost for consulting services related to the Osmose integration cost, operations improvement projects, employee benefits and the KJCC startup cost in China. Additionally, a plant outage during the quarter adversely affected net income by an estimated $2 million. Without these charges our adjusted EPS would have been $0.62 a share for the quarter instead of $0.39 a share of adjusted EPS that we've reported. I'd like to point out that we will continue to incur the integration, operational improvement and startup cost for the balance of 2014. These necessary and foundational investments will continue to have a negative impact on the earnings for the rest of the year. However, these charges as well as the restructuring cost we continue to incur are all related to projects that will benefit us in the near future and position us for sustainable long-term success.…

Thanks, Walt. Starting with the consolidated results, sales for the second quarter decreased by 4% or $14.1 million to $356.8 million compared to the prior-year quarter, driven mainly by lower sales volumes for railroad crossties due to lower raw material availability combined with lower sales volumes and prices for carbon pitch, more than offset the additional $8.2 million in revenue contribution from the company's recent Ashcraft acquisition. Second quarter adjusted EBITDA was $27.3 million or a decrease of $9.9 million compared to 2013 second quarter adjusted EBITDA of $37.2 million, with adjusted EBITDA margins of 7.7% compared to adjusted EBITDA margins of 10% in the second quarter of 2013. The reduced margins reflect a decrease in sales volumes for crossties, due to reduced raw material availability, lower sales prices for carbon pitch and phthalic anhydride, higher overhead related to consulting cost for acquisitions, operations improvement projects, employee benefit and KJCC startup costs, and higher cost in loss profit due to unplanned plant outages. Adjusted net income and adjusted earnings per share for the second quarter of 2014 were $8.1 million and $0.39 per share compared to $14.7 million and $0.70 per share for the second quarter of 2013. Items excluded from our adjusted results for the quarter include $6.7 million of pre-tax charges related to impairment and plant closure costs. This comprises $4.7 million related to the ceasing of distillation at our tar plant in the Netherlands; $1.4 million related to impairment charges and accelerated depreciation at our KCCC facility in Tangshan, China; $2.6 million related to closure of our wood treating plant in Grenada, Mississippi in 2012. As mentioned earlier, we also incurred $7.8 million of integration, plant outages, consulting, employee benefit and plant startup cost in the quarter. Without these charges, our adjusted EPS would have been around…

Thank you, Leroy. I would like to close by summarizing what we are expecting for the second half of 2014. In our last earnings call, we indicted that we were expecting a minimum revenue increase of 5% over 2013, excluding the impact of the Osmose acquisition. At this point, we estimate that the incremental revenues from the new China joint venture and Ashcroft will be offset by reductions in sales volumes for both pitch and crossties for the year. And as a result we expect revenues to be slightly higher than last year. We do expect that sales and operating profit will be stronger in the second half of the year with crossties procurement improving, the new China joint venture ramping up, profit accretion from the Ashcroft acquisition, continuing benefits from capacity rationalization in Europe and operational improvements in the railroad business. As noted earlier, we will continue to incur cost related to the integration, plants startup and operational improvements that will have a negative impact on our earnings for the rest of this year. However, we view these cost as foundational investments, which will position us for a higher sustainable earnings and operating margins beginning in 2015. 2014 continues to be a very active year for Koppers, as we work to adjust our asset footprint to match our current and future expected businesses for the capacity rationalizations in these mature geographies that we're involved. We continue to tune about resources towards driving margin improvement, to identify projects while looking for more ways to reduce cost The acquisition of the Osmose businesses should also add meaningfully to our sales and profitability and help us achieve our long-term goals. When I look at the various actions we have already taken this year and the continuation of cost savings initiatives that are in place for the balance of the year, for restructuring and expanding our businesses, in order to grow the top and bottomlines in a sustainable fashion. I am confident that 2015 is shaping up to be a very strong year for Koppers. And Liam, I'd like to now turn the call over for questions that maybe out there.

(Operator Instructions) And first we'll hear from Ian Zaffino of Oppenheimer.

The question would be on sourcing the rail ties. Could you improve your ability to source the rail ties releases, sourcing the rail ties with Osmose. Is there any angle there, or this -- so are you going to face the same situation whether or not you have Osmose?

No. It's sort of two different areas. The procurement of ties has been going on now for the last nine to 12 months I would think, and so all that based off of pricing of ties. And we had competition coming from, both the crane mats which are going basically into the oil and gas construction projects, as well as flooring hardwoods for the flooring industry. Now, that the pricing has been increased substantially, I'll say, by the railroads these last five or six moths, that has opened the doors for sawmills to cut more ties. And as Leroy pointed out earlier, we're definitely seeing an uptick in tie availability starting about mid-July. So it is improving. And with, sort of the pricing in line with the other end-markets of these hardwood ties, it's starting to improve very nicely for us finally.

And then on the carbon pitch side, are there any areas or regions where you're seeing particular pressure on the pricing or are there other areas where you're seeing more favorable pricing?

Not really favorable pricing, but for the most part --

Or less spend?

I'm sorry?

I said, or less spend?

No. The pricing pressure is primarily in the least. That pitch market today is about 450,000 to 470,000 tons of pitch. And we continue to share about a-third of that market, however, based on surplus of pitch, both in China and elsewhere on the world that the pricing has been fairly different there.

Ivan Marcuse of KeyBanc Capital Markets has our next question.

So you talked about the elevated cost with the consulting, et cetera, and restructuring and startup cost continuing for the remainder of the year. Will it stay sort of at the same level or will it decrease as you move through the year?

Ivan, I guess the way probably to look at that is, if you think about the second half of the year, I guess from a consulting standpoint related to Osmose, once we close that transaction, the consulting cost associated with that would kind of be offset or absorbed within the operation to that business. If I think about the existing [indiscernible] forward, I kind of put that one aside. Consulting cost related to the operations excellence with that project, so we're finished on the railroad side of the business. So July was the last month of that project. We've done a similar project on the CMSC side. So we'll continue to see consulting process at that level continue throughout the remainder of the year, but we will also start to see some of the benefits on the railroad side. I think some to partially offset some of those costs. And KJCC startup cost, I think we probably expected to continue to see here out into certainly the third quarter, starting little bit into the fourth quarter. So those were the main elements I think of the additional cost that we incurred during the quarter and how we see them going out over the second half.

So I guess to sum it up and just to make sure we're on the same page, if you say the second half is going to be better than first half, is this more of a function of perhaps better sales in the railroad business, and a little bit less in cost with a little bit of benefit from restructuring?

That's correct.

And then if you look at, you talked about how the aluminum industry, as the fundamentals are improving, you see with the pricing hover. Historically the smelters that have been shut down, it takes a lot longer to even bring them back up. And a lot of the capacity has shifted to China. And historically you've never really sold into China. So with sort of this changing dynamics in the industry, it looks like its probably not going change for a long time. Are you going to change your strategy and start selling more pitch into China? Or how do you sort of see that longer-term?

Well, I guess a couple of comments. We are seeing sort of the end-market uses of aluminum improving, automotive, aerospace, what have you, consumption is now outpacing production globally. So there are some good signs out there, especially the ingot pricing, which is around $2,000 a ton there about, which really puts a lot of smelters back into sort of a positive cost position. And also the premiums that are getting in certain areas like the Midwest and so forth, which is around $400 a ton. So we're seeing definitely improvement from the demand for aluminum. And we're seeing the inventories reducing. As you pointed out very, very much so when you announced restarts, that is very expensive, so I really think that before an aluminum company restarts, and I don't line, and I don't smelter that we're going to have to see a few more positive indications before that happens. But it does look positive. It's been a while going back a few years, but yes, aluminum demand is increasing. And to your point on getting involved in China with our new joint venture, for sure, we will be looking at that a lot closer, that that the plant is in the Jiangsu province, which is very closed to Shandong and Henan provinces where we do see a lot of aluminum smelting going on there. So we will have that opportunity. And as you remember our two plants from the north were really designed for exporting of products, but as Leroy pointed out, we are, because of the depressed pitch markets on pricing, we are looking more and more going into the carbon black feedstock, which has more profitability and less pitch production as we did in the last six months. So we've got that option to play out until we see how the increased pitch demand will evolve going forward with increased aluminum demand.

And then, my last question, this is more for Leroy. If you look at your EBITDA has obviously taking a step down this year thus far and it probably continues to be a bit depressed. So as you put the debt on for Osmose, it looks like your debt-to-EBITDA ratios are probably be a little bit higher than maybe would have thought through four months ago? Well, is that going to impact your borrowing cost?

We don't expect it to. I guess the short answer arriving is, is we don't expect it. We expected originally to be somewhere above the 4x of leverage multiple. We still expect to be there maybe a couple bit higher, but overall that shouldn't impact the borrowing rates.

And we'll move onto Liam Burke of Janney Capital Markets.

Leroy, you mentioned higher working capital needs for the first six months of the year, affecting your cash flows, revenues were down year-over-year.

Yes.

Was there anything unique in there regarding working capital needs?

No. I mean the funny thing is that even though crossties volumes were down, because pricing of them have gone up by so much, we didn't really get a benefit from that we might expect in terms of procuring a lower amount of tie. I think our inventories are over in Europe, and we had to build as we were taking down production in the European, in the Uithoorn business, so that also contributed to some of the working capital, as did us preparing to bring up KJCC, some of the payments reduction, payments on the operating cost or the startup cost related to KJCC.

So if you've itemized some of the things that have, your needs, so to speak. I'm presuming the second half of the year some of these things will reverse itself and your cash flow position would be better?

Well, second half of the year some of these things will reverse itself and your cash flow position will be better?

Well, second half of the year cash position, I guess free cash flow, we do expect to be better. We haven't spent a lot of the money related to the Uithoorn shutdown at this point in time. We've taken certainly some charges associated with that that have closed into financial savings, but there has not been a lot of cash incentive on that to date. And that will occur more in the second half. Overall, we do expect stronger cash generation in the second half. I think historically we have shown a much stronger second half cash generation than we have in the first half. We don't expect that any different. But we will have cash needs to basically payout some of the severance cost related to the Uithoorn shutdown. We'll continue to deal with some cash need related to inventory build for the railroad business, things like that, but still overall net-net we expect to have that strong.

And Steve Schwartz of First Analysis has our next question.

If you could just give us a little more color on these special items that you did not back out in your non-GAAP bridge. The plant outage, if you could give us just some details about that?

Plant outage I think we mentioned on the call that we're looking at a $2 million negative impact on that. And that had to do with an operational issue that we had to actually take about eight to nine day shutdown for. And that obviously backed up production, which we had to move to a couple of plants to keep the product flowing to our customers and go-forward. So it's something that was process related, and it's now taken care of and moving forward. That's what we are talking about, about the plant outage.

And is that carbon materials?

Yes.

Steve, outside of that item, we've incurred some cost related to preparing for day one and integration related to the Osmose acquisition. We're very keen to the fact that this is a much larger acquisition than we've ever done. And we want to mitigate any potential integration risk that would be there. So we have gone out and got help to kind of put a full and very detailed integration plant together. And we believe we're very prepared to hit the ground running and begin realizing the synergies that we've identified related to this transaction. So we're bearing the expense now, but we think the benefit will come back in terms of being able to realize those synergies much quicker than we otherwise would have.

So Leroy, how would you split that $5.8 million, and some is obviously in railroad, but there is also some in carbon materials too, right?

Well, the stuff related to the Osmose integration, we've actually kept that out separate. So it's no in either. It is in other category. And then you have the operations excellence cost related to the project that we undertook in the Railroad Utility Products earlier that year that ended in July. We have cost associated with that that are in their numbers, somewhere in the quarter, somewhere a little over $1 million maybe $1 million a quarter. And again, that cost will end in July for Railroad Utility Products, but it would pick up on the CMC side during the second half of the year.

And next we'll go to Chris Shaw of Monness, Crespi.

The tax benefit or savings that I think Leroy mentioned on Osmose, is that the same tax benefit that you're talking about at the time of acquisition, the 338 tax election or is there something different?

No. Separate in differently. The 338(h)(10) tax election is a cash benefit. There is no effective rate in tax on that. It's just a cash tax benefit that we realized over a 15-year period. This other benefit that I talked about comes as a result of an overall reorganization of our legal entity structure, which through our further investigation looks like it is something that would work, would allow us to essentially push that into our foreign jurisdiction, and then use cash generated from those foreign entities to repay into North America. And so that will provide a nice cash tax benefit for us. That cash, it will come back to repay the loan, but not the tax. And then we would get an effective rate benefit by basically unshutting the box on our Australian business right now that essentially is tax [indiscernible] tax in Australia, the earnings and our tax in the U.S. And as a result, we have an effective rate, just on our Australian operation is about 54%, which is what ultimately drives our overall effective rate up to the 41% that we've been generating here from the past several quarters.

And then thinking about Australia then, did you guys -- Port Henry, that smelter is closed already, so has that impacted your volumes or have you been able to find other outlets for it?

Actually, I guess, the Port Henry smelter that Alcoa has in Australia closed by the end of July. And of course, we were impacted maybe two weeks before that. But it will impact us a little, but I would say majority of that, the last pitch sales will be moved to other customers in that region of the world.

And then, did you mention what the plant outage of the carbon materials, that which plant it was?

No. We didn't know.

And then just in the sort of reorganizational restructuring in the United in carbon materials, are you going to be -- is Follansbee and the Oregon, are those facilities going to be completely closed, as you go through with the relocation of naphthalene unit? Will you be just down to two plants?

As Leroy mentioned earlier, we're going to the evaluation of how we will proceed forward with couple of different options there. But no, they're not closed.

And then, just want to make sure with the higher wood cost, I know you guys wouldn't bear any of that, I don't see any of that even run through your P&L, it's all incurred by the rail customer, right?

From the most part, I would say, probably 80% plus of the ties that we're procuring are on behalf of the railroads. So majority of that, yes, would be on their inventory side, and not on our balance sheet.

Can I ask one more? I was just curious that, all the news we see around the rail derailments recently, a lot of around the oil tankers. Do you guys have any idea what's the main cause of that? I mean, obviously, there is I guess the weight issue, but has railroad ties have ever been sort of part of that reason for the derailment?

Well, I don't know. Over the last, I guess, what nine months or so, there has been two, that I can think of. The one in Canada and the one down in South Carolina, I think, but I really don't know the route cause of the derailments, but it's not been because of ties, but no, I really don't know.

I was just trying to see if there is an opportunity, so people replace a lot of the ties.

To sort of turn your question around, Chris, I think these increased rail traffic and a lot of other things going on, for not only the class ones, but also the short lines, mechanical layer continues to increase and it's certainly going to strengthen the maintenance programs out there, which will benefit Koppers for sure.

And Kevin Hocevar of Northcoast Research has our next question.

Wondered if so with the China JV, kind of up and running here, I think the expectations were at some point, it will reach $150 million to $200 million in sales, and have margins in excess of your 12% EBITDA margin target. And I think the initial expectations were kind of a ramp up in the back half for this year and then kind of hit that in 2015, so kind of how it's going? And I think your customers on this side are maybe taking a little longer than expected. How should we think of that contribution in 2015 compared to those kind of initial expectations?

Well, I can just start off, and Leroy can finish it up. But you're right, in the very beginning, when we announced this project, the Nippon Steel Chemical, we signed a very long-term sales agreement with margin that, that there was going to be at least at or higher than our 2015 EBITDA goal. And so the issue now is that they were about six months delayed in getting started with their construction. So here we are. And our plant is now up and running as of July. And as we mentioned, they should complete their carbon black plant and their needle coke plant, which would primarily use the pitch that we're producing, staring in the first quarter of 2015. So it will take them approximately six to nine months to really ramp up, get their product approved and so forth. So it's going to have a delay in what we announced at the very beginning.

I guess, the only thing I would add to that is just to I guess reinforce, we said I think earlier in our prepared comments, we don't expect to really much of any contribution from that plant in 2014. It will certainly pick up in 2015, but not reach its annualized expectation of margins until probably near the end of the 2015 period. So we would probably be hitting the run rate some time in the fourth quarter of 2015.

And then I don't think I caught any commentary about phthalic anhydride imports into the U.S. on this call. So is that something that is still occurring or is that mitigating as the Europe economy picks up, wondering if that's still a headwind for you guys at this time?

I don't think as much as it was going back in the fourth quarter or first quarter of this year. Unfortunately, these numbers that we monitor on imports are typically two or three months late. But I think we've got a pretty good indication that some imports have been reduced, but I really can't tell you about how much at this point.

And I'm curious to, in terms of the carbon black feedstock, it seems like particularly in China you called out that pricing was softer. And my understanding is entire production is in pretty sold up 8% or 9% or something in the first half of this year. So just wondering what's driving stronger volumes I would assume in China, but softer pricing?

The pricing of carbon black feedstock is based off of some sort of petroleum index. And so that's why you see a fluctuation up and down quarter-to-quarter, and that's the biggest reason. But again, with demand increasing on a 4% sort of annualized basis, it still is a very strong for us, but you will continue to see some fluctuations up and down based on the indexes that they use out of Singapore.

The pass-through price changes, but the profitability doesn't really change.

Well, not to any large degree. I don't think, no. But it does definitely on the pricing obviously.

And now we'll take a follow-up from Ivan Marcuse of KeyBanc.

A couple of quick questions. What's sort of your CapEx expectations for the full year of 2014?

For the full year of 2014.

Yes or the back half, and I could add together.

I'd say, for the back half, we're probably looking at something in the $35 million to $40 million range.

Per quarter or total?

Total.

And then if you end up going forward building a plant, how much would that cost you?

You're talking about the naphthalene plant.

Yes.

The answer is, Ivan, we really don't want to get into that at the moment. It's just a little bit premature, because there is a lot of work going on related to quantifying the cost and benefits. And there is other things associated with a potential plant build that would go forward just kind of adding some value-added components to it. And so we just don't want throw a number out right now, and then come out with something different a couple of months from now.

And then the tax charge that you're thinking about taking the $25 million, is that cash or is that a non-cash charge?

It is both. It's a cash and earnings charge.

And then did you mention it, I may have missed it. Do you expect your cash from operations to improve, as we go through the year or would you sort of remain at this level?

We do expect an improvement in our cash from operations.

And that is a function of higher earnings or do you expect working capital start to become an income source?

Mostly from higher earnings.

And Richard O'Reilly of Revere Associates has our next question.

I am still a little concerned about the sourcing for the rail ties. And I guess my thinking is, if housing and the energy production continue to remain strong, supplies is just going to continue to be a headwind for you with periodic belief. Is that true? Will it take ramp up of sawmills to relieve the supplies, to relive the pressure. I mean how should I be thinking about that?

Well, I guess, it really boils down to the pricing of the ties. And you're exactly right. I think the increased pricing has enticed more sawmills to cut more ties. I mean typically most of these sawmillers for years and years and years, sawmill-owned operations rely on the railroad industry. And as long as they can be somewhat profitable on tie, they would just assume to continue their long-term end-markets of their ties with the railroads versus how long this is going to last for the oil and gas industry, I don't know, but they can last a long time. But the main point here is getting a price for the tie that's at least stoppable to the other competitor. And it has opened a few sawmillers to cut more ties with the railroads.

Remind me, the price of the ties, is that what the railroads are willing to pay or what they are telling?

What they are willing to pay for is based off of their maintenance programs, yes.

And ladies and gentlemen, that does conclude today's question-and-answer session at this time. I'll turn the call back over to Mr. Turner for any additional or closing remarks.

Well, thank you, Liam. And again, we thank all of you for your participation in today's call. And I appreciate your continued interest in Koppers. So despite facing challenges in 2014, we truly believe the diversity of our business along with our margin improvement and growth initiatives, will continue to provide us with growth and stability in both strong and weak economic climates. But we will continue to pursue growth opportunities that make strategic sense for us and as well as focusing on areas to improve profitability within our existing businesses. And we remain firmly committed to enhancing shareholder value by maintaining our strategy, and providing our customers with the highest quality products and services, while continuing to focus on safety, health and environmental initiatives. Thank you.