Koppers Holdings Inc.
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Ladies and gentlemen, welcome to the Koppers Holdings Inc. Third Quarter 2013 Conference Call held on the 7th of November, 2013. Throughout today's conference, all participants are in a listen-only mode. After the conference, there will be an opportunity to ask questions. (Operator instructions) I’d now like to turn the conference over to your host, Michael Snyder. Please go ahead, sir.

[Michael W. Snyder:]

Thanks, Mark 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 Helenski at 412-227-2444 and we can either fax or e-mail 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. 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 financials measures. I'm joined on this morning's call by Walt Turner, President and CEO of Koppers; and Leroy Ball, our Chief Financial Officer. At this time, I'd like to turn over the call to Walt Turner. Walt?

[Walter W. Turner:]

Thank you, Mike and welcome everyone to our 2013 third quarter conference call. I'd like to spend a few minutes providing a recap of our third quarter results before I turn the call over to Leroy, who will provide additional financial details for the quarter. Similar to our last quarter, our European business continues to struggle and will likely do so for at least the remainder of this year. As was the case in the last quarter, the impact of weak European economy again affected our North American Carbon Materials and Chemicals business in the form of increased levels of imports that negatively impacted our North American sales volumes and prices during the quarter. However the impact in the imports was less significant than it was last quarter as we were more aggressive in the marketplace. For the third quarter, our adjusted EPS came in at $0.90 a share compared to $0.82 a share in the third quarter last year due mainly to the continued weakness of some of the European operations, our effective tax rate including discrete items in the third quarter of this year was higher than last year’s third quarter, which on a quarter-over-quarter basis had a negative impact to our EPS of about $0.13 a share. You may recall that last year’s third quarter was negatively impacted by some unusual charges related to a pitch tank leak in Australia and an outage at our plant in the Netherlands and they charged the benefit expense related to lower interest rates. Additionally, we imported a cargo of more expense of coal tar into North America. In total, these items had a negative impact on adjusted EPS of about $0.19 a share. With that effect of these items on the quarter-over-quarter basis is that the third quarter of this year is $0.02 a share higher than last year’s third quarter which we view as a favorable result. Consolidated sales for the third quarter were up 2% as sales for the Railroads & Utility Products business were up 5%, mainly due to the addition of the Australian utility pole business that we had acquired at the end of last year and a continued strong North American railroad market while sales for Carbon Materials & Chemicals were flat compared to the third quarter of last year. Our adjusted operating profit for the third quarter was $39.2 million, up 20% from last year’s third quarter, adjusted operating profit of $32.7 million, as both business segments showed improvement over the prior year quarter. Leroy will now provide some additional financial detail on the quarter. After his review, I'll give you an update on the progress we are making with several of our strategic initiatives and provide more insight into the status of our end markets. Leroy?

[Leroy M. Ball:]

Thanks, Walt. Starting with our consolidated results, sales for the third quarter increased by 2%, $7.2 million to $395.2 million compared to the prior year quarter. Driven mainly by higher sales and the acquisition of Western Poles business in Australia. Third quarter adjusted EBITDA was $47 million, $7 million higher than 2012 third quarter adjusted EBITDA of $40 million. Adjusted EBITDA margins of 11.9% for the third quarter of 2013 were above adjusted EBITDA margin of 10.3% for the third quarter of 2012. The higher margins were driven by improved profitability from both business segments combined with the non-recurrence of certain shares that impacted the third quarter of last year. Tax expense as a percent of pretax earnings for the quarter was 42% compared to 34% in the prior year quarter, with the increase due mainly to the unfavorable impact of lower European earnings in the third quarter of 2013. The negative impact of the higher tax rate on third quarter results amounted to about $0.13 per share. We anticipate an overall tax rate for the year including discrete items of around 39%. Adjusted net income and adjusted earnings per share for the third quarter of 2013 were $18.8 million and $0.90 a share compared to $17.2 million and $0.82 per share for the third quarter of 2012. Items we excluded from our adjusted results for the quarter included $1.2 million of free tax charges related to the closure of Grenada, $1.8 million of pretax income, related to the gain on sale and related environmental reserve reversal of our former utility pole facility in Hume, Australia. Turning to Carbon Materials and Chemicals, in our Global Carbon Materials and Chemicals business for the third quarter revenues were flat $241.6 million compared to $241.1 million in the prior year quarter, a slightly higher average pricing and the positive effective foreign currency translation were offset by lower sales volumes for phthalic anhydride. This product accounted for 1% or $2.2 million decrease in the sales compared to the prior year quarter, as sales prices for carbon pitch declined, but were partially offset by higher sales volumes of Carbon Materials. Sales volumes for our seasonally refined tar products were also higher compared to the prior year quarter, as some orders are moved from the second quarter of this year into the third quarter due to difficult weather conditions in the second quarter. Sales of distillates increased 3% to $6.1 million, carbon black feedstock sales volumes increased in China and in Europe compared to the prior year quarter. Sales of cold tar chemicals are relatively flat as higher sales prices for naphthalene were offset by lower sales volumes for phthalic anhydride compared to the prior year quarter. Phthalic anhydride sales volumes were negatively impacted by a customer plant closure, reduced demands from the plasticizer market and increased levels of European imports, although imports had lesser of an impact compared to the second quarter share. The average price for orthoxylene was at $0.64 for the third quarter of 2013, the same as the third quarter of 2012, as average oil prices were $106 a barrel on the third quarter compared to $93 barrel on the prior year quarters. Orthoxylene prices decreased from $0.67 a pound in September to $0.64 of pound in October, and now down to $0.60 a pound in November. Carbon Materials and Chemicals adjusted operating profit for the quarter of $21.8 million represented an increase of $3.4 million from $18.4 million in the third quarter of 2012, which equates to operating profit margins of 9% and 7.6% respectively. Operating profit and margins improved mainly as a result of lower compensation and pension expenses as well as the non recurrence of $3.1 million charges related to a pitch tank leak in Australia and a planned outage in the Netherlands that were incurred in the prior year quarter combined with a negative impact of higher price tars imported into North America in the third quarter of last year. For our global Railroad and Utility Products business, sales increased by $6.8 million or 5% for the third quarter compared to last year's third quarter. The sales increase was due to additional sales added from our November 2012 utility pole business acquisition in Australia. Adjusted operating profit for the quarter increased to $17.9 million from $14.7 million in the prior year quarter with adjusted operating margins at 11.7% compared to 10% in the prior year quarter. Profits from the Australian pole business acquisitions, favorable product mix for the U.S. railroad business and lower pension expense contribute to the improved results for the quarter. Cash provided by operations for the first nine months in 2013 amounted to $55.6 million compared to cash provided by operations of $54.5 million in the first nine months of 2012 as lower working capital increases in the first nine months of 2013 more than offset lower net income compared to the prior year . Our debt, net of cash on hand at September 30, 2013 decreased to $223 million from $229 million at December 31, 2012. As of September 30, we had nothing borrowed on our revolver and we had total estimated liquidity in excess of $350 million. Our capital expenditures through September are at $29 million, up from $16 million in the same period last year, mainly as a result of $9 million of expenditures related to our coal tar distillation facility that is being constructed in the Jiangsu Province in China. During the quarter, we also bought back 400,000 shares of stock for about $15.8 million which will more than offset dilution from shares issued as part of management competition plans this year. At this time I would like to turn it back over to Walt.

[Walter W. Turner:]

Thank you, Leroy. Now I would like to give you an update on the status of our key end markets and how we see these markets impacting our results for the rest of the year. First, I'd like to talk about our Railroad and Utility products business. Our third quarter sales volumes for cross ties were flat compared to the third quarter of last year as higher sales volumes for treated crossties offset lower sales volumes for untreated crossties due to the tight lumber markets. As you may recall, we mentioned in our last call that we expected a headwind in the second half of the year due to the increased competition for hardwood lumber from the flooring and crane net markets that would provide a challenge in obtaining adequate supply of the raw material. While we see continued challenges cross tie procurement, we expect to be able to manage through the temporary shortage and we believe we are in a stronger position than our competitors due to the size of our procurement by network. The shortage we are currently experiencing will likely result in fewer air seasoned crossties available for treatment next year, but fortunately, we have the option of using an accelerated drying process referred to as boltonizing that should help mitigate most if not all of the shortfall. The commercial cross tie business continues to be strong this year as the short line railroads continue to upgrade their rail lines to accommodate heavier carloads in the Class I railroads and also continuing to take advantage of the benefits of the Section 45 tax credits. Our rail joint bar business continues to perform well, and in addition to having a strong US presence, we have been focusing on expanding our exports sales for these products around the world. On the utility side, our Australian utility pole business continues to show improvement over a strong 2012 results due primarily to the acquisition of the utility pole business that was completed in last year's fourth quarter. In the third quarter, we discontinued operations at our co-gen facility in Muncy, Pennsylvania and I will talk more about that in our margin improvement discussion. Now, I'd like to talk about the outlook for our global carbon materials and chemical business. For the global aluminum industry, an estimated 5% increase in consumption for 2013 is projected to be followed by a 6% increase in consumption in 2014. Excluding China, which produces and consumes about 44% of the world’s aluminum, both consumption and production are projected to increase by 45% in 2014. While aluminum consumption ultimately is the driver for aluminum production, the production side more directly impacts pitch volumes for us. Aluminum prices continued to be hover around $1800 a ton and the LME inventory levels continuing around 5.5 million tons. This level of pricing and inventory is clearly a debt deterrent for any smelters considering whether to restart idle production in the mature regions. Aluminum prices are expected to increase based on expectations as several of the large aluminum producers are planning further capacity reductions in light of the current market conditions. With regard to capacity increases in the Middle East, Alcoa Ma'aden smelter in Saudi Arabia is expected to reach full capacity next year. The Emal expansion in the United Arab Emirates also continues to be on pace for startup in early 2014 as capacity continues to grow in this low energy cost region. We expect to increase our sales volumes of pitch into the Middle East in 2014, as production at these facilities ramps up to full capacity, which will ultimately result in a more favorable pricing environment for pitch. Passenger car production in the U.S. continues to be quite strong with light vehicle production forecast to reach 16.2 million units this year. This will be first time since 2007 that assembly numbers will exceed the 15 million mark. The strength of the U.S. housing market continues as housing starts for 2013 on a year-to-date basis are up more than 20% over 2012. However we have seen reduced sales volumes for phthalic anhydride this year compared to last year due to the closure of a customer facility, lower demand from the plasticizer markets and increased levels of imports from Europe. We have been actively pursuing various avenues in an effort to increase our volumes for this product line. Our carbon black feedstock product, which is largely driven by tire demand, has been and should continue to be reasonably strong with exception of Europe. Growth rates for global rubber demand are projected to average 4% annually through 2015. This growth is being driven mainly by higher demand from the emerging markets in Asia, which are the primary markets that are served by from our facilities in China and Australia. Additionally naphthalene demand, which is driven mainly by concrete used in infrastructure expansion and improvement deploys the benefit from the continued infrastructure expansions and stimulus programs of the emerging economies such as China and the Middle East. With new phthalic anhydride plants currently being built in China, demand for naphthalene as a feedstock for phthalic anhydride production is expected to increase by over 400,000 tons over the next few years. This increased level demand should tighten the market for naphthalene and result in improved pricing environment for the balance of the year. We did see a 23% increase in selling prices for naphthalene in China in the first nine months compared to a year ago. Regarding the outlook for our coal tar raw material, we have been able to buy additional tar in the U.S. from the new U.S. Steel coke battery and hopeful by mid-2014 the ArcelorMittal Coke Plant in Monessen, Pennsylvania will be back on and operating to provide additional source of tar for us. Outside of North America, we have experienced tightness in supply in the Europe, but we have been able to continue to bring in tar from Russia and the Ukraine to supplement our European supply base. Raw material availability in China has become tighter also due to higher demand from the naphthalene market, and as a result tar cost in this region did increase in the first-nine months of this year in comparison to the same period last year. As you may have heard, U.S. Steel recently announced some restructuring actions including the closure of two coke batteries at Gary, Indiana by year-end. So these closures will result in lower tar available for us. These batteries currently generate about 35,000 tons of tar annually, but fortunately with the additional tar we received from U.S. Steel’s new coke other than at Clairton we do not expect this reduction at Gary to have any significant impact on our overall business here in North America. Our North American Carbon Materials and Chemicals business continues to be challenged by European imports of carbon pitch and phthalic anhydride. Additionally, LME pricing of aluminum continues hover around $1,800 a mark, which is obviously hurting the aluminum industry and makes for a difficult pricing environment for pitch. In addition, reduced electrode production for the electric arc furnaces in North America has also put some pressure on pitch volumes this year and a meaningful rebound of the European economy next year will certainly be welcomed and there have been some positive signs recently that this maybe starting to occur. In October, we curtailed operations on our tar distillation facility located in Follansbee, West Virginia to lower our overall cost structure and I’ll talk more about that shortly as a part of our margin improvement discussion. For Australia, we expect the year to be moderately higher than 2012, as lower pitch sales volumes from a smelter closure earlier in the year have been largely offset by the non-reoccurrence of the pitch tank leak cost that we incurred during last year. China’s results for the third quarter were better than last year’s third quarter as sales volumes for all major products were higher than last year’s quarter despite the continuation of the difficult pricing environment in the Middle East that resulted in lower export pitch sales prices. As mentioned in our last call, we continue to see our China results for the year coming in fairly flat with 2012. Tangshan Iron and Steel Company, or TISCO, our partner in our 60% owned joint venture in the Hebei Province in China, has recently received notice from the Chinese government requesting TISCO to cease operations with our coke plant as a part of the government’s overall air quality improvement efforts. Although we have not bee notified in regard to our adjacent tar distillation plant there none as KCCC, previously most of our utilities and raw materials from the two coke batteries there. Due to the potential events of the coke oven plant closures by TISCO we are looking at various alternatives including relocation as well as alternative power and raw material sources. We are currently in discussions with our joint venture partner, as well as the local Chinese government authorities requesting financial and other assistance, but it’s too soon to know what the ultimate outcome will be. KCCC contributed about $3.5 million to our operating profit after minority interest in 2012 and the book value of the fixed assets is approximately $15 million. In the event that we decide to close this facility, we expect to fully meet our customer commitments, both in the domestic and export markets. By utilizing our tar distillation facility in Hebei Province that we have know as the TKK joint venture as well as our new facility that is being built in Jiangsu Province that will begin operations in mid-2014. We also have excess capacity in New York to supply product to Middle East if needed. Europe continues to be the most challenging part of our Carbon Materials and Chemicals operations due to the recession in the European economy. As we indicated in our last call, the Europe’s depressed market conditions are having a negative impact on our North American Carbon Materials and Chemicals business as well. Regarding our progress towards our strategic growth goals, which was supported by our three strategic priorities of growth, margin improvement and capital deployment I'd like to start by giving you a growth update. Construction is on time and on budget for our new coal tar distillation plant in Jiangsu, which is expected to be in operation by mid-2014. As you may recall, the majority of our production at this facility will be sold to Nippon Steel & Sumikin Chemical, the owner of the adjacent needle coke and carbon black plant when the carbon complex is completed. At this point, we are anticipating the completion of construction for the needle coke and carbon black facilities will occur in the fourth quarter 2014. In the interim we plan to operate our tar distillation facility at capacity levels and sell the products into the domestic Chinese markets. However, it is likely that the delay in the construction of the needle coke and carbon black plant will extend the timing for maximum sales and profitability for this project. The Australian utility pole business that we acquired in late 2012 is exceeding expectations and is now projected to add over $30 million in sales this year while generating strong margins. We continue to see more M&A opportunities that fit within our targeted growth areas and we’ve been extremely active in this area. We are currently engaged in various stages of due diligence for several potential transactions and hope to be successful in bringing one or two of these opportunities to completion by the end of this year. In recognition of these potential M&A opportunities, we have received approval from our Board or Directors to exercise an accordion option to our current credit agreement that provides for an additional $50 million of revolving credit availability under the same terms and conditions as our current $300 million facility. We have communicated our intentions to our bank group and they are now in the process of requesting the approval of this additional capacity. Moving on to our second strategic priority of margin improvement, there are several areas I can point to that are currently contributing towards reaching our 12% EBITDA margin target by 2015. So our railroad and utility products and services business, EBITDA margins have increased by 150 basis points on a year-to-date basis compared to the first nine months of 2012 and also by 440 basis points compared to the year 2011. So this business has already exceeded its margin improvement targets. Sales for our value-added creosote borate treating process continue to grow and we maybe adding borate treating capacity to at least one if not two more plants by the end of 2014. There are also several capital projects underway including two recently completed upgrades to our tie unloading and sorting equipment that will result in efficiency improvements and lower our current labor and repair our maintenance cost resulting in expected annual savings of over $1 million. In the third quarter, we discontinued operations at our co-gen facility in Muncy, Pennsylvania which has been written down with an impairment charge last year. The plant was designed to burn treated wood but has struggled to be profitable in the last few years due to difficulties in pending use, of treated wood and combined also with reductions in rates that we have received from the utility market. This closure is expected to reduce cost by approximately $2 million on an annual basis. For our Carbon Materials and Chemicals, EBITDA margins have decreased by 150 basis points from both the year-to-date basis compared to 2012 and also as compared to the year 2011. While the majority of this decline has been due to lower results from our European business, we have been and are continuing to take actions that will improve margins in this business. In October of this year, we curtailed operations at our tar distillation facility located in Follansbee, West Virginia to improve utilization at our other plants lower our overall cost structure. This reduction in operating and labor costs as a result of the curtailment of production at the facility is expected to result in cost savings of approximately $4 million annually. We do expect to incur a charge of approximately $1.2 million in the fourth quarter related to this curtailment. We continue to look for additional opportunities to rationalize capacity across our global operations to further optimize our utilization and cost structure. We are also in the process of idling our facility in Portland Oregon which is expected to result in an impairment charge of approximately $300,000 in the fourth quarter. The estimated annual savings from the idling of this facility is $600,000 annually. Also in the Carbon Materials and Chemicals side of business, we are in a process of implementing a new transportation management system in the U.S. that will effectively consolidate the work that is currently being conducted in three separate systems and get us real-time access to buy more inventory and transport information for our operations here. This system is expected to be in place in the fourth quarter and will allow us to focus on lowering our logistics cost here in the U.S. We also have several other cost reduction initiatives including plant cost reductions and improved production yields. These initiatives have resulted in savings of approximately $6 million from the first nine months of the year, but others that are in the various stages of implementation, we have targeted a total of savings of $8 million for this year and these savings are expected to continue going forward. In addition to these cost savings initiatives, our efforts to further reduce our pension expense continue to gain momentum. In the third quarter, we negotiated a hard freeze of the divine benefit pension plan for the only remaining hourly contract that did not already have this hard freeze. Our efforts to fund these plans by increasing our contributions beyond requirements continue to yield benefits, as our pension expense in 2013 is expected to be approximately $3 million lower than 2012 and we estimate an additional reduction in pension expense of about $3 million for the year 2014. When it comes to our third stage of strategic priorities of capital deployment, much of what we have already have done this far are in the process of doing as already been mentioned, so I will just give you a quick rundown of our progress towards meeting our 2015 capital deployment targets. First, we have committed to funding our share of the $70 million to $80 million that will be required for construction and working capital for our new tar distillation facility in China. We made our first equity contribution of $10 million in the fourth quarter of last year and made our second contribution of $7 million in the second quarter of this year. The project will be financed with 65% debt and we expect to finalize the local project financing later this month. Thus far, approximately $9 million has been spent towards the construction of facilities through the first nine months of this year. Our expenditures should be done to ramp up and we could spend up to an initial $26 million on the project in the fourth quarter, which will be financed locally by The Bank of Tokyo-Mitsubishi, a bank that we recently added to our U.S. funding group. If you include the 2012 Australian utility pole business acquisition, we have already either paid or committed approximately $80 million of the $250 million to $335 million we had targeted for growth initiatives. And as I previously mentioned, I would expect that we will be announcing further commitments for acquisitions later this year. Regarding the capital committed to our margin improvement initiatives, I expect that by the end of this year, we will expand approximately $50 million of the $135 million to $165 million that we have targeted between additional pension contributions, productivity capital, and investments in new products. In the area of returning capital to shareholders with our dividend increase and stock repurchases this year, we would have spent $50 million to $60 million in the first half of our strategic planning period, towards the $80 million to $135 million that we have targeted for this area of capital deployment. Looking at the fourth quarter of 2013, the continued deterioration we're seeing in the Europe and the overflow of low priced products in the North America will continue to match the improvements we're making in other parts of the business. While the issues we have confronted so far this year will result in 2013 producing lower results than in 2012. As mentioned in the last call I do anticipate the second half of 2013 will be moderately better than the first half. However due to the anticipated Follansbee and Portland charges of $1.5 million mentioned previously combined with a significantly higher tax rate this year that will result in an estimated negative impact of about $0.12. Our fourth quarter adjusted EPS is likely to be lower than our record fourth quarter adjusted EPS last year. To summarize, 2013 has been a challenging year with a few ongoing issues, but there are also several positive things that we can point to. These include various cost reduction initiatives including current as well as potential additional rationalizations of operating capacities that will significantly improve our cost structure and utilization rates. Additionally, we have several acquisition opportunities that are in various stages in progress that we believe have the potential to meaningfully grow the profitability of our business and move us closer to our longer-term sales and profit growth. On our next call I will provide an update on our M&A activities and will also give you a more detailed view on the outlook we have for next year. And I certainly look forward to talking to you again in February. At this time, I would like to open up the call to any questions if you may have.

[Operator:]

Thank you. (Operator Instructions) Thank you. The first question comes from Laurence Alexander from the company Jefferies. Please go ahead.

[Jeffrey Schnell:]

Hi, this is Jeff Schnell on for Laurence. Can you talk about the inventory levels that you're seeing at Class I railroads in terms of cross ties and any indications that you have for volumes in 2014?

[Walter W. Turner:]

Well, first of all as we’re talking here the equivalent of the right size that we’re buying out there, it’s still a difficult market. I guess one reference I can give you is that when we monitor our tie inventories that we have air stacked at our plants that are going through the air drying process, we’re probably looking at year-end compared to last year’s year-end of a reduction of about somewhere between 8% and 9%. So as I also mentioned, it continues to be a little bit of a struggle from the procurement side, but it is improving little bit and we think over the next six to nine months, it will be in much better shape. However, during this interim time we have this process boltonizing that we can keep up with the demand from our Class I customers as well as commercial railroads.

[Jeffrey Schnell:]

Great. And then I guess on CMC, is it possible to quantify the headwinds that you anticipate in 2014 from aluminum smelters that are anticipating a close or have closed?

[Walter W. Turner:]

Well, there continues to be discussion out there on further idling of the higher cost of smelters, especially in Europe and also some here of the U.S., but none more recently, but there continues to be talk about that. So it’s a high energy cost and as I mentioned earlier you’ve got the Ma'aden smelter in Saudi Arabia and Emal is expanding there, 740,000 tons smelter by doubling the volume and they’re ramping up and full be at full production by the end of 2014. So we see this again this shifting of where aluminum is being produced, but it’s just a matter of how we’re shipping and how we’re producing products for this shipping of where aluminum is being produced.

[Jeffrey Schnell:]

Great, thank you.

[Operator:]

Thank you. And the next question comes from Mike Harrison from First Analysis. Please go ahead.

[Mike J. Harrison:]

Hi. Good morning.

[Walter W. Turner:]

Good morning, Mike.

[Mike J. Harrison:]

I was hoping to get a feel for the restructuring you're doing in North America and how that ties into your growth or decline outlook for the carbon materials business in North America. Does this kind of catch you up to where you need to be or do you think that there are going to be other actions necessary over time?

[Walter W. Turner:]

Currently we’re curtailing about 60%, 65% of the Follansbee, West Virginia distillation capacity by moving product production to other facilities here in the U.S. So it’s certainly going to improve our cost structure and as I mentioned we are looking at an annual savings from about $4 million a year. Is that going to be enough going forward, I mean we’ll continue to look at product demand as time goes on, but that’s really I can say at this point, Mike is that. We’ll make adjustments based on product in hand.

[Mike J. Harrison:]

And in terms maybe related question, in terms of the Portland terminal being idled, our understanding is that you had been using that facility for the import of Chinese tar. Is that the case and, if so, is idling that facility, does that speak to demand being down significantly in North America or has your sourcing simply improved?.

[Walter W. Turner:]

The Portland terminal out in Oregon has been a great asset for us and you’re absolutely right. We bring Asian pitch for the most part Chinese pitch into that Portland terminal when needed. So it continues to be a great way for us to balance in our tar production based on coal tar availability versus producing pitch here or the market demand increases we’ve got that option of bringing additional pitch into the terminal, so it’s a great asset unfortunately as we look here at the moment, 2014 we really do not need that facility as the part of our program for 2014. But it’s been a good asset for us.

[Mike J. Harrison:]

All right. Last question I had is you were a little bit unclear if you were going to see growth in export tie orders this year. Have we seen we seen any orders from Vale come through and what are your thoughts on the outlook for export tie orders?

[Walter W. Turner:]

Today this year, no we’ve not received an order to export ties to Brazil, but I can tell you we got a full pressed effort to do that. because there is a large need for ties in Brazil. In fact just a report I got yesterday with our representatives there it’s not just Raleigh, it’s all three of the major railroads there are seriously looking at ties, the [indiscernible] they are treating with CCA just are not lasting and so the hardwoods are very much in demand and so unfortunately Brazil and I think this may apply to other South American countries takes a long time to decision making. But that’s definitely a part of our long-term program going forward.

[Mike J. Harrison:]

All right. Thanks very much.

[Walter W. Turner:]

Sure.

[Operator:]

Thank you. And the next question comes from Liam Burke from Janney Capital Markets. Please go ahead.

[Liam D. Burke:]

Thank you. Good morning, Walt, good morning Leroy.

[Walter W. Turner:]

Hi, Liam.

[Leroy M. Ball:]

Good morning.

[Liam D. Burke:]

Walt, you’ve talked about acquisitions as you moved in obviously it’s there is a component on the rail side of the business. Are you seeing acquisition potential there large enough to move the needle or it’s relatively fragmented market of these smaller types of potential targets.

[Walter W. Turner:]

We can’t say too much Liam but I can tell you that the M&A activity is very strong on both the railroad business as well as the Carbon Materials and Chemicals business. And to your point, we're looking at both sort of the tuck-in type acquisition versus even some larger ones, but hopefully we can get a little more detail to you here in a few months.

[Liam D. Burke:]

Great. And you mentioned that there is increased demand for borate in the product line. How does that look – I mean, it extends the life of the tie. Do you anticipate any significant over time change in volume demand as the life of the tie is extended?

[Walter W. Turner:]

When this whole movement by the Class I railroads started about 2.5, 3 years ago, it was really focused on these creosote-borate ties being installed in sort of the high decay zones. But I wish I give you a very good reason, but I can't, but the trend is really moving not just high decay zones, but it is moving to other areas of the country that the railroads are wanting. And so I really think this process is going to continue to grow and that’s why I mentioned that they were looking at least one, perhaps two more borate facilities in 2014. Now it does increase the life of the tie, absolutely and what I think we’re probably 10 years, 15 years out before we can actually see anything, but we’ve had questions in the past – is this going to eventually decrease the number of tie insertions by the Class Is. And the answer is no, because as you recall the railroads are replacing ties maybe 2.5% to 3% of the total ties that are in service out there. So I really don't see that happening, I think you are going to see maybe a tad more tie insertions just to keep up with their maintenance. And also with these higher, heavier load cars, like you’re going to see some more mechanical destruction, which will even cause more high maintenance, if you will.

[Liam D. Burke:]

Great.

[Leroy M. Ball:]

I think our view on it is, we are not that worried about the railroad moving to increase borate treatments outside of the high decay areas, just because of what Walt had mentioned there. We think that although it will again extend the life that a lot of those ties will reach the point of mechanical wear before they ever decay. So they need to be replaced.

[Liam D. Burke:]

Great. Thank you, Walt. Thank you, Leroy

[Walter W. Turner:]

Okay.

[Operator:]

Thank you. (Operator Instructions) The last question comes from Kevin Hocevar from the company, Northcoast Research. Please go ahead.

[Kevin W. Hocevar:]

Hi, everybody.

[Walter W. Turner:]

Good morning Kevin.

[Kevin W. Hocevar:]

Good morning. I was wondering, you mentioned being a little more aggressive encountering the phthalic anhydride imports in the U.S. I was wondering if you could elaborate on kind of what actions you're taking there. And you also mentioned potential avenues to increase volume. I'm wondering if you could elaborate on that as well?

[Walter W. Turner:]

I think through August Kevin, there has been about 25 million, 26 million pounds of phthalic imported in the North America – it’s imported at the U.S. rather from Mexico, Brazil, but several countries like Italy and Russia and a few other European countries, and there is a fair amount of very small customers out there and what we’re inferring here is that we’re truly looking at how do we best take better advantage of that particular market going through a distribution center that they could be a little more active on the sale side and really put that company’s name and product out there to these small customers that are buying phthalic anhydride, so that’s where we’re moving to and I think that really improves our overall market size if you will.

[Kevin W. Hocevar:]

Okay. And I think last quarter I think you touched on here that there’s been some pricing pressure in the Middle East in carbon pitch, that cause you to keep product in China as opposed to exporting out. I’m wondering if you could elaborate on that. Has kind of these new smelters come online in Middle East, do you expect that to reverse or with other smelters expecting to come offline, is that remaining issue or how do you view that as kind of that’s been one of the faster growing region for the pitch business?

[Walter W. Turner:]

Yes, I mean with more so in 2014 with the expansions continuing to increase and carbon pitch demand continuing, the weak pricing in Middle East has really been for the abundance of tar and pitch in Asia for instance. There’s been more activity in that area and at the moment, if you sort of dissect this a little bit further, there is at the moment a little more supply of product than the demand and that’s why we’ve seen little bit of a weaker price, but you had another 85,000 tons to 120,000 tons of carbon pitch going into 2014 and 2015, for sure hoping that that would help strengthen the pricing of the pitch and I would also over time here and I say over the next 12 or 15 months, inventories are going to start declining on the LME and we are going to see a little stronger production side especially with consumption growing 5% or 6%. One of the issues here has been as I mentioned that, China is producing and consuming over 40% of the world’s aluminum and I think there’s going to be some changes in that area going forward as well and you’re going to see more aluminum production outside of China.

[Kevin W. Hocevar:]

And then just final question on the crosstie and lumber availability. Could you comment on where you expect this to go from here? My understanding is it's been partially due to the wet weather – caused supply to be less but at the same time demand increasing from other applications. So do you think as weather maybe normalizes heading into next year this won't necessarily spill into 2014, this availability, or do you think it would start to improve as kind of weather normalizes, I guess?

[Walter W. Turner:]

The weather, for the last eight months the weather really hasn’t been a major part. It was a little bit back in, I guess April-May timeframe, but the real issue is the increased market demand from the lumber and from these crane mats that are being used by the oil and gas industry, which are paying top dollar for these hardwood species. So that’s been the real difficulty and over the last I’d say probably six, eight weeks we have been able to get the railroads to pay more, but we’re closing the gap on the difference between the pricing that’s been paid for us in the lumber and crane mat applications versus what the railroads are willing to play for the ties. And so that’s what’s helping. We have seen some improvements for the last two months and it will take time, but the issue is with the saw miller is looking at where I can get the most value from these logs that’s I’m selling and that’s sort of where we’re at. So we’ll see that is improving as we go forward, so this has been little bit of a difficulty at least last six or eight months.

[Kevin W. Hocevar:]

Great, thank you very much.

[Walter W. Turner:]

Sure.

[Operator:]

Thank you (Operator Instructions) There seems to be no further questions at present time. I’d like to turn the line back to Walter Turner for any concluding remarks.

[Walter W. Turner:]

Thank you, and we thank you all very much for participating in today’s call and also appreciate your continued interest in our company. We will continue to do the right things for our business by pursuing prudent growth opportunities and looking for ways to enhance our profitability within our existing businesses. Despite some of the current challenges due to the European economy, we believe that the diversity of our business and our company, along with our margin improvement and growth initiatives will continue to provide us with relative stability in both strong and weak economic climates. And finally we remain firmly committed to enhancing shareholder value by maintaining our strategy of providing our customers with the highest quality products and services, while continuing to focus on our safety, health and environmental initiatives. Thank you.

[Operator:]

Thank you ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation and you may now disconnect.