Quynh McGuire - Director, IR & Corporate Communications Leroy Ball - President & CEO Mike Zugay - CFO.

Dan Rizzo - Jefferies Ivan Marcuse - KeyBanc Capital. Liam Burke - Wunderlich Securities Chris Shaw - Monness, Crespi.

Welcome to the Koppers Holdings, Inc. Third Quarter 2016 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Quynh McGuire. Please go ahead, ma'am..

Thanks and good morning. My name is Quynh McGuire and I am the Director of Investor Relations and Corporate Communications. Welcome to our third quarter earnings conference call. We issued our quarterly earnings press release earlier today.

You may access this announcement via our website at www.koppers.com or call Rose Hilinski at 412-227-2444 and we can send a copy to you. As indicated in our earnings release this morning, we have also posted materials to our Investor Relations website that will be referenced in 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 December 02, 2016.

Before we get started, I would like to remind all of you that certain comments made during this conference call maybe characterized as forward-looking under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements maybe affected by certain risks and uncertainties including risks described in the cautionary statements 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 financial measures. I am joined on this morning’s call by Leroy Ball, President and CEO of Koppers and Mike Zugay, our Chief Financial Officer.

At this time, I would like to turn the call over to Leroy Ball..

Thank you, Quynh. Welcome everyone to our third quarter 2016 earnings call. And before I get into the details of the third quarter financial results I'd like to highlight some of our recent milestones, but to give an update on our efforts to instill a zero harm culture which I firmly believe is vital to our success moving forward.

In September, we convened various leaders from across the globe who have direct leadership responsibilities for over 80% of our employees for the inaugural zero harm and zero waste leadership forum [ph] at Pittsburgh.

First the event served as a way to reinforce our commitment to zero harm as an overarching value that placed the care of our people our environment and our communities first at all times.

Second, it also enabled us to begin laying the groundwork for behavioral reliability and empathetic leadership training which underpins the transformative change we are making at the top level of the company. Also we were fortunate to have Dr.

Sharon Fang, a member of our Board of Directors and the Chairperson of our Safety Health and Environmental Committee attend part of the conference and speak to the participants about the board support of and commitment to zero harm.

And my goal to build Koppers into a company with a business model that supports sustainable growth starts with operational discipline with safety at the core.

A company that cares about people its effect on the environment and the communities it's a part of it is a company that has focused on always doing the right thing and will serve its customers and shareholders well.

As a result we will continue to invest in additional resources for safety training and process improvement to accelerate our progress over the next several years.

In recognition of our zero harm mindset, Koppers was recently honored for the second consecutive year by the American Association of railroad with the Grand Slam Award for excellent performance in railroad [indiscernible] shipping.

Our employees have work hard to significantly improve safety and environmental practices while our products are in transit to ensure that our communities are protected on an everyday basis while we reliably serve our customers.

I'm not wavered from I belief that zero harm is possible and together our leadership team from around the world will manage to that rigorous standard. Recently we announced the contract extension with Norfolk Southern Railway Company which is one of our four largest railroad customers.

In 2015 Norfolk Southern represented approximately 10% of all railroad related sales. This agreement extends the contract to 2021 from the previous 2016 expiration and includes commitments for Koppers to provide cross-ties as well as other related products in Norfolk Southern through the contract period.

We're proud of our longstanding relationship with Norfolk Southern as well as with the overall class one rail industry in North America. Kopper transforms to be the global leader in wood based technology serving a real industry with high quality products and services that will continue to be an emphasis for our company.

Moving on to our third quarter highlights, the third quarter saw impressive results generated primarily by our performance chemicals or PC business which again delivered high sales volumes and strong profitability.

The sales increase was driven primarily by favorable market trends in the repair remodeling markets and existing home sales as well as customers continuing to stock and sell treated wood with higher preservative retention levels.

Our PC business is well positioned as it continues to strengthen its market leading position and benefit from near peak consumer trends for high retention treated wood products.

In our railroad utility products and services, a rough segment, sales were lower year over year but profitability held relatively steady on an adjusted basis due to a favorable sales mix related to crosstie treatment and bridge services as well as cost efficiencies related to wood treating plant closure.

Overall up the RUPS business delivered solid margin performance despite the softening market conditions that we previously forecasted as a result of the North American rail industry spending cut back in response to lower car loadings and rail traffic.

For our car materials and chemicals or CMC business sales declined in the prior year period as a result of our streamlining efforts which is reduced distillation capacity and therefore lead to lower sales volumes as planned.

However CMC adjusted operating profitability increased from the prior year period as a result of cost savings related to our consolidation strategy and lower average raw material costs partially offset by decreased volumes and lower selling prices of certain products.

Regarding debt, our outstanding balance of September 30, with 691 million reflecting a $42 million debt paid out from year-end to 2015. The fourth quarter is anticipated to be another strong cash flow quarter due to favorable operating results in the third quarter.

We are on track to achieve our goal of reducing our debt to 650 million by the end of 2016 due to improve profitability and lower working capital needs as a result of rebalancing and refocusing our business mix. As part of transforming Koppers' profile we continue to advance our strategy to significantly reduce our coal tar distillation capacity.

We've already started to see positive outcomes in terms of increased profitability and a shrinking environmental footprint. As our CMC restructuring plan reaches full implementation during 2018 we expect to have effectively decoupled our wood preservation business from the significant volatility that has affected CMC throughout our history.

At the same time we have ensured that our RUPS business has reliable access to the supply of creosote since creosote plays such an important role in serving the North American rail industry.

What that means is that from peak to trough and what seems to be the new normal for oil markets this segment is being restructured to have less EBITDA variability than any of our segments. While also providing for an acceptable return on capital for the business.

There's no question in my mind our strategy continues to build momentum as evidenced by the continued improvement in our CMC segment results on a year over year basis. Now I'd like to turn over to Mike to discuss some key highlights from the third quarter of 2016..

Mike Zugay :.

Also CM&C was affected by lower sales prices for carbon pitch and phthalic anhydride and this was partially offset by higher phthalic anhydride volumes. Another driver was that our RUPS segment experienced a lower year over yourselves volumes of treated crossties and utility products.

Moving on to slide 3, adjusted EBITDA was 51 million in the third quarter compared to 48 million in the prior year quarter.

This was mainly due to higher profitability from the PC business partially offset by lower profitability for the RUPS segments Adjustments to EBITDA for the third quarter of 2016 consisted of approximately 9 million of pretax charges and these were related primarily to restructuring expenses and I would like to take a minute or two to discuss several items that are not referenced in our slide presentation.

Adjusted net income was 21 million in the quarter compared to 14 million in the third quarter of 2015. Adjustments to pretax income for the third quarter of '16 amounted to 12 million which were primarily restructuring expenses related to our CM&C consolidation efforts.

Adjusted EPS for the quarter was $0.99 per share and compares very favorably to $0.67 per share in the prior year quarter. The adjusted income tax rate excluding discrete tax items for the third quarter was approximately 27% and 29% on a year-to-date basis.

This decrease in our tax rate was due to a shift in earnings to lower foreign tax jurisdictions compared to what we had originally estimated. The lower effective tax rate had an approximate positive $0.06 per share impact on the quarterly adjusted EPS.

Cash provided by operations for the nine months end of September 30 was 83 million and this compared to 95 million in the prior year period. The decrease was primarily due to an increase in accounts receivable balances in the current year and the receipt of a $30 million onetime cash payment to our KJCC joint venture In the prior year.

Capital expenses for the nine months in 2016 were 32 million compared to 26 million for the same period last year. We continue to expect 2016 capital expenditures to be in the range of somewhere between 42 million and 47 million.

This includes the construction of the new naphthalene unit at our Stickney, Illinois facility which is expected to be completed by the end of 2017. At quarter end we had approximately $110 million borrowed on our $300 million dollars revolver.

Also we had $240 million outstanding on our term loan, $300 million in existing bonds and approximately 41 million of loans in China and this results in a total debt at the end of the quarter of 691 million.

Now this number isn't going to tie directly back to the balance sheet due to the fact that we have reclass $10 million on unamortized debt issuance cost from the category of other assets and this was the GAAP requirement.

Our leverage ratio at quarter end was 4.11 times well below the covenant of 5.25 times, our long range goal in this area continues to be a leverage ratio of approximately three times.

Our fixed charge ratio was 1.6 times well above the required covenant of 1.1 times and based on our 2016 projections and our preliminary 2017 forecast we're very confident that we will remain in compliance with our loan covenants throughout the rest of this year and next year as well.

Now let's go back to the slide presentation and look at slide 4, we continue to anticipate paying down our debt by 85 million this year bringing it down from 735 million to 650 million by year-end.

However as noted on the chart we now expect that the 10 million that we anticipated to receive on the TKK loan repayment will now be received in 2017 and that will make it achieving our goal of 650 million little tougher.

However when combined with our 2015 debt pay down this would achieve our minimum two year pay down target of 200 million and on a quarter over quarter basis our debt decrease from 721 million in total to 691 million in total and this was directly in line with our expectations for the current quarter.

Now I'd like to turn the conversation back over to the Leroy..

Thanks, Mike. I want to speak now about the outlook for each of our business segments and beginning with Performance Chemicals as I mentioned earlier that the business continues to outperform due to a number of reasons.

From a market perspective the National Association of Realtors or the NAR reported that existing home sales jumped 3.2% in September alone propelled by the highest percentage of first time buyers in more than four years.

The NAR expressed optimism that this increase in sales among first time home buyers can be sustained for the remainder of 2016 and at a minimum into spring of 2017 citing consistent job gains in affordable mortgage rates as economic underpinnings that are helping consumers to gain additional confidence.

This paralleled a positive trend according to the Conference Board in which consumer confidence increased in September for a second consecutive month and now is at the highest level since the Great Recession at 104.1 up from 101.8 in August.

Additionally we saw unseasonably high volumes early in the year partly attributable to the moderate than usual winter resulting in home improvement projects starting sooner than we anticipated and a buildings product market that has outpaced expectations throughout 2016.

Add to that the recent standard changes recommended by the American Wood Protection Association or a AWPA.

The new standard change which went into effect in July 2016 recommended that more ground contact treated would be used in areas that simulate ground contact and use applications, that effect would preserve systems primarily in residential and agricultural uses.

The AWPA standard change conversion started early to mid-2016 and is expected to continue in the first half of 2017 as both big box and independent retailers are adopting the new standards and stocking more ground contact inventory at the retail stores.

As a result we now expect to generate EBITDA of approximately $80 million in 2016 as reflected on page six of our slide presentation. This is an increase from our previously forecasted EBITDA of 71 million to 74 million and reflects a $19 million improvement from prior year EBITDA of $61 million.

Moving now to our Railroad and Utility Products and Services business, I am pleased that our RUPS operating profitability on an adjusted basis held at a relatively steady level for both the third quarter and the year-to-date period.

However both the procurement and treating volumes were lower year over year in the third quarter with much of the decline occurring in September. The pullback that we were expecting would happen at some point in time is in fact now occurring and is expected to continue through the fourth quarter and into 2017.

Also the combination of lower pricing due to the pass through of lower raw material costs related to hardwood pricing in a more competitively priced commercial market will also continue to weigh on RUPS in the near term.

As reflected on slide 7 we are reducing EBITDA guidance for RUPS segment to $71 million to $74 million in 2016 compared to our prior estimate range of $76 million to $80 million and $84 million that it earned in 2015 and we still expect to realize a net savings from cost reduction initiatives primarily the closure of the Greens Spring plant that should net about $4 million this year and serve to offset some of the lost profitability from volume reduction.

On a separate note we closed on a long term lease of our wood treatment facility in Houston, Texas to a third party on October 24.

The facility is engaged in the manufacturing and selling pressure treated dimensional lumber with sales of approximately $8 million for the year to date period through September 30 and $14 million before the full year 2015. Profitability for both periods was essentially breakeven at the EBITDA level.

As part of the agreement the third party acquired our inventory and assumed operations of the facility, while this transaction is immaterial it is accretive to margin provides the opportunity to convert our working capital into cash and allows us to focus resources on running our core businesses.

Now let's review the outlook regarding our CMC business. On slide 8, our 2016 anticipated EBITDA guidance for CMC is in the range of 19 million to 20 million which would represent $10 million to $11 million improvement over 2015.

In the third quarter our CMC segment began to see higher profitability on an adjusted basis with further improvement anticipated in the fourth quarter. As expected we are realizing meaningful benefits from the fixed cost savings related to our restructuring actions as well as lower average raw material costs.

For the fourth quarter we believe the sales volumes will remain challenging due to negative demand trends from North American aluminum producers and lower pricing related to carbon pitch phthalic anhydride and partially offset by higher volumes phthalic anhydride.

Now regarding our TKK joint venture in China we seem to be close to completing the sale of our 30% interest pending some final administrative matters that should be wrapped up soon.

This has been a long and arduous process but would be good to put behind us as we continue to focus on streamlining our business which includes shrinking our footprint in China.

We are maintaining our 2016 sales outlook of approximately 1.4 billion as reflected on slide 9 with an expected decline in our CMC segment sales of 180 million to 200 million from prior year and sales for RUPS are estimated to decline by 80 million to 90 million from prior year to reflect general weakness in the rail industry and lower pricing as a result of lower hardware costs.

Now by contrast 2016 sales for PC have also been revised but they have been revised upward and are now expected to be $50 million to $60 million higher than prior year to account for stronger than expected sales volumes.

Turning to slide 10, we are increasing our guidance for consolidated EBITDA on an adjusted basis to be in the range of $168 million to $172 million compared with our prior forecast of $162 million to $172 mi.

The stronger results from Performance Chemicals are expected to continue and should more than offset the expected softening in treated crosstie volumes. Accordingly adjusted EPS guidance is also being increased and is now projected to be between $2.40 and $2.54 compared with the previous range of a $1.90 to $2.20.

The main driver of the increase EPS guidance is a lower than previously estimated effective tax rate. Regarding 2017 while it's still early in our planning process we are going to give general guidance at this time and follow up with more detailed metrics when the fourth quarter 2016 results reported in February 2017.

We currently expected 2017 sales will be relatively flat year over year and remain at approximately $1.4 billion with sales estimated to be higher for PC offset by lower sales primarily from RUPS.

On an adjusted basis adjusted basis EBITDA is projected to be approximately $180 million from a high level perspective we expected the year over year EBITDA increase will be generated from PCs favorable business trends and CM&C improvements due to restructuring benefits and raw material cost savings.

This will be partially offset by a lower EBITDA contribution from the RUPS business due to continued forecasted weakness in the rail industry. Capital expenditures in 2017 are expected to be approximately $65 million to $75 million consistent with our construction timeline for the new naphthalene unit at our Stickney, Illinois facility.

At the same time our PC business will be adding production capacity to catch up with the recent market trends that have driven higher preservative volumes and overall I'm pleased to say that our performance to date in 2016 has been successful although we've had to manage through difficult conditions in our CMC and slowing demand in our RUPS business.

Those factors are more than offset by strong demand in our performance chemicals business. We're also seeing the initial benefits of having a more efficient and effective cost structure with more to come when our CMC consolidation strategy is fully implemented.

These achievements are profitable because of the hard work of our people and I'd like to express my appreciation for their dedication and engagement all levels. Thanks to our worldwide team of employees we have made considerable progress on key initiatives that contribute positively to our results.

As Koppers transforms to be the global leader in a wood based technology we will continue to evaluate how to best optimize our strategy as it relates to our product portfolio and capital structure. As always we remain committed to delivering shareholder value. With that I'd like to now open it up for questions..

[Operator Instructions]. And we will take our first question from Laurence Alexander with Jefferies. Please go ahead. Your line is open..

It's actually Dan Rizzo on for Laurence. Just with the railroad business, is there something that’s changed because I thought there was kind of steadier business than it seems to be showing lately in terms of profit and even sales.

I mean is it -- it just seems a little more volatile these days than it has historically, has there been a change in I don't know just the environment?.

No I think our railroad business is not unlike others, I mean it's not immune to cycles. It's just that the cycles -- the peaks and troughs of the cycles tend to be kind to be smaller.

So I don't see any difference in what's happening in our rail business and what has happened in previous times you are dealing right now obviously with a very challenged rail industry and as I’ve kind of been saying really throughout each of the calls this year we had some concern that they would be pulling back on spending at some point in time as they ran out of other options and alternatives and what we're actually now starting to see is that in fact happen and there's an element that makes the sales number.

Look I think a little worse than what it really is impacting the EBITDA and that is just the business model that we have where a lot of our crosstie on traded crosstie business is more or less passthrough business.

As you’ve changes in hardwood prices up and down you can see you know big moves in the sales numbers that don't always have as big of an effect on the EBITDA that ultimately comes through the financial statements.

So that tends to exacerbate kind of how the numbers look when you look at it from a sales standpoint but I don't -- to me there's no difference in what we're seeing today than what we have seen in the business in the past, it's just you don't see the dramatic drops and peaks that you see in our CMC business as an example over time..

And then with the change in standard and how it's just kind of helping with ground contact wood, I know that’s being adopted I think you said but is that displacing above ground at this point. I mean I think part of the thought process was that it would nobody wanted to carry two inventories.

So I was wondering if you're seeing a kind of take place above ground?.

Yes I think each retailer -- probably I know they look at it a little bit differently and it come down to how they want to market their products and stock their stores there's certain ones that certainly.

I think I have gone along the lines of moving everything to the ground contact trying to eliminate confusion but there are others that I think continue to stock both so you see a little bit of both. Overall it's obviously been a net positive but it's a mix..

And we will take our next question from Ivan Marcuse with KeyBanc Capital. Please go ahead. Your line is open..

In 2017, how much do you expect the decline in the RUPS EBITDA?.

Ivan, we’re only giving general guidance at this point in time at a high level, there's still the moving parts that need to get nailed down.

I think we feel comfortable and confident enough in terms of the balance between the businesses to put the number that we have out there but that's why we didn't we didn't give segment guidance for '17 at this point we're still trying to nail some things down but directionally RUPS will be down in '17 and the other two segments will be up more than offset..

Okay.

And I guess from what you have said where are we in the cost savings for I guess the total company and I know the vast majority are in the CMC business but where are we in the cost savings and then how much of that help from what you've laid out so far what you've achieved in 2017?.

I still think that -- we still have a good ways to go in terms of cost savings to run through the financial statements when you think about the fact that you know in prior calls I've talked about it and I'll stick with CMC because that is where the vast majority of this is coming from.

We talked about and still feel good about $10 million of additional cost saving coming in 2017 and similar number coming in 2018.

Now what offsets that somewhat or disguises some of that is when the RUPS business volumes are going down that's going to have a follow on effect obviously with the creosote volumes, so that will help, that will mute some of that savings but we still expect another $20 million or so of savings coming out of CMC over the next couple of years.

In terms of what we've seen for this year, I mean we had in the bridge of somewhere in the neighborhood of $15 million to $16 million. So all told we'd be talking about $35 million over a three year period. .

Okay. And then moving on the performance chemicals real quick. Based on your guidance for sales it looks like sequentially in the fourth quarter if I did the math right sales would be roughly flat where from the third quarter and what I've expected some seasonality.

So why would sales be up I guess just taking a midpoint 30% or so on a year over year basis in the fourth quarter, year-over-year but while your EBITDA will be based on your guidance you got call it $7 million, $8 million lower?.

Okay. I don't have those numbers in front of me. My expectation is that for the fourth quarter for Performance Chemicals would actually be up compared to the fourth quarter of last year..

I understand that but if you look at the third quarter your sales are flat sequentially essentially so then why wouldn’t be sure EBITDA be flat sequentially?.

Are we talking specifically Performance Chemicals, I apologize I'm just trying to--.

No, I'm just Performance Chemical, so year-to-date you've done what you've done in EBITDA so to get $80 million you have to you call it $14 million to $15 million in EBITDA right and then to get to your sales guidance you'd have to do a similar type of levels of sales in the fourth quarter than you did in third quarter which would be 30% increase on a year over year basis.

So I'm just curious of why you're not -- why you're seeing an acceleration versus some seasonality and why is that down to the bottom line?.

I think obviously seasonality enters into it but in addition to that from a standpoint of profitability because we're out of capacity what we're having to do is buy material that we normally produce out of our [indiscernible] facility at a much lower cost and we're bringing that type of raw material in from places like China and India at a much higher cost..

Did you had to do that in third quarter?.

A little bit but the problem is the exasperating itself..

So you should have similar sales but your profitability is going to drop by 33% because of that?.

Yes. The material we’re bringing in that again is because we're out of capacity produce it ourselves, it's somewhere in the neighborhood of 30% or 40% more than we can produce it ourselves.

So it's a hit, it's an impact and as Leroy mentioned before even in his script right now we're in the process of spending money from a capital standpoint in a couple of all our Performance Chemical facilities to make sure that in early to mid-2017 that we're able to go ahead and produce what's needed internally at that much lower cost.

But right now we're caught in a little quandary that we can't produce enough, again the basic raw materials specifically basic Koppers carbonate and Kopper cost side and we're having to bring that in from foreign countries and when you take a look at the pricing and add into the transportation cost, it's substantially higher..

In terms of dollars how much of much of that is that a cost increase on a year-over-year basis?.

I don't have that information in dollars..

We’re not going to get into that to specifics anyway Ivan.

The other thing to follow on from what Mike was talking about and I think I mentioned in the last quarter as well, with the volumes that we are seeing we cannot continue to run the facilities the way that we were and with the personnel involved, we have to add people we have add some infrastructure there to continue to maintain an increasing volumes that we are expecting to carry us through into 2017 as well.

So we're literally have been working hand to mouth in that business most of the year and we can't continue to operate safely that way or expect to continue to operate safely that way and we have to continue to invest in that..

And I guess cost associated with hiring people and we also have costs associated with those new people from a training perspective before they become productive. .

Okay.

And then last question and then I will jump back in the queue just back in the Performance Chemicals if the sales stayed flat sequentially so you're not seeing the same store seasonality that you typically see? Is this a result of the increased volumes from the standards that you mentioned or is there something else going on? Just talking about top line, ignoring your higher cost.

.

From a top line standpoint, without looking at the details in each of the different regions it's tough to answer that question right now..

That’s just a big jump year over year. So just curious it's like a huge acceleration..

Understand it..

And we will take our next question from Liam Burke with Wunderlich Securities. Please go ahead. Your line is open..

Leroy could you give us a little more detail on RUPS in both the bridge engineering business and then the non-crosstie infrastructure like the bonded insulated joints how those businesses fair? You touched on it in your prepared statements on the bridge but not on the insulated joints..

Yes, without getting into too much specifics Liam, we've had a pretty strong year on the railroad structure side the bridge business has been pretty strong throughout the year consistently strong as well.

So we it's been one of the few bright spots in that whole business segment, joints have continued to be down quite a bit from a volume standpoint and that's been also consistent throughout most of the year as we talked about earlier that was one of the main drivers for some of the differential between '15 and '16 as it related to the first and second quarters that has not changed.

It certainly has contributed again to the differential in the third quarter also but railroad structures has actually been up I'd say within 5% range for the overall year it's slowed down a little bit here as of the end of the third quarter overall it's been up -- it's been one of the only areas it's been up in that segment..

And getting back to the AWPA standards on KPC, are they being adopted fairly quickly by the treatment the lumber treatment folks and did you see any measurable change as a result of this regulation during the quarter?.

I would say they're probably being adopted quicker than what we had expected and so when you see the change in our guidance this quarter for the year versus last quarter for the year and it has gone up quite a bit, we were pretty cautious in our optimism, how quickly it would be adopted and that’s been the main driver for our change in estimates.

Stronger organic volumes also played into it but I'd say the bigger piece of it has been the surprise around how quickly that standard is getting adopted..

And Mike real quickly only tax rates for the fourth quarter. Are you presuming a similar mix of geographic revenue distribution or I know there's something embedded in the guidance there..

Yes I would say from a guidance perspective. In the upper 20s it's probably where to be..

For the quarter or the year?.

Basically for the quarter it's going to be in that 27% to 29% range just like - we’re very close to Q3 on a year-to-date basis, obviously it's going to be slightly higher because we had a higher tax rate in the first and second quarter so upper 20s for the quarter maybe right around 30, slightly over 30 for the full year..

And we will take our next question from [indiscernible]. Please go ahead. Your line is open. .

A question on the PC facility expansion, can you give us an idea as to what the increase is in capacity in terms of a percent of sales and also if it's all going to be in one location or where you plan to do it?.

Rudy, it'll be in multiple locations and I won't get into the percentage as it relates to increase in capacity because it doesn't necessarily translate to the final product. It's for pieces in the process, but what it will be at multiple locations it won't be just at one location..

Okay.

Just as a clarification if I heard it correctly before when you were talking about and understanding that it doesn't directly relate to sales but before when you were talking about your internal production of materials for the process that you now have to import, did I hear you correctly saying that you were running short by 30% or 40% in the third quarter or at this current time?.

No that 30% or 40% is the price differential..

Okay. That wasn't a volume issue..

No, Rudy, that was the price differential for two basic products, it's what we call BCC and then Kopper [indiscernible] and it's over and above the cost to get it here to buy it internationally and to transport it here that percentage is the greater percentage than we can produce it and has historically produced internally for our own use..

Then also assumptions on the price of oil which you didn't mention at all but going into the quarter you were saying that you were presuming in your guidance a $40 a barrel oil and in the third quarter it's been more like the $45 to $50 which is sort of the range where we're settling into right now and I was wondering if you could talk a little bit about your current assumptions and price sensitivity what you're noticing in terms of the carbon black feed stock and other products?.

Sure. So third quarter by our estimate you're right I think we saw average prices $45 for the quarter which were in line, maybe a little bit lower than where I think they settled that in '15 for the third quarter.

As we look out over the rest of the year you know we're basically forecasting our forecasts include oil that would be somewhere in that sort of same range in the mid 40ish range and the benefits that we would be expecting to receive from that are basically getting more or less offsetting couple driven areas one is through lower [indiscernible] of volumes with some of the rail decline that we're seeing and the other is despite that that oil change and its effect on carbon black feedstock which you're correct but again one of the changes that we made this year was to reduce our exposure to carbon black feedstock through the shutdown of these various plants which would push more of that part of the process into creosote which doesn't get priced according to oil and helps to insulate ourselves from those movements, but the piece that hasn't reacted as quickly to the changes in oil is the orthoxylene pricing which is what our phthalic anhydride is pricing is based off of, so when I look at the numbers here for 2015 as an example and I look at the third quarter oil as an example was down 4% compared to 2015 last year and four orthoxylene and it's effect on our results in the quarter the cost of that were 24% lower in the third quarter.

So you can see quite a difference.

Now we think in the fourth quarter that difference is going to be somewhere between 4% and 5% compared to last year so last year's or this year's fourth orthoxylene cost we expect to be a lot closer and more in line with last year from a from a comp standpoint but in a third quarter we did not get the benefit of those orthoxylene being anywhere close to what it was in the third quarter of last year despite the fact that oil was within a 5% range of last year's oil..

Okay so everything to say it maybe in a little more simpler way is that there are various pricing mechanisms seem to be tightening or becoming more in-line or year-over-year comparison at least right now really aren't material?.

That’s correct..

Thank you. And we will go ahead and take our last question from Chris Shaw with Monness, Crespi. Please go ahead. Your line is open..

Starting with RUPS again do you guys have any breakout what you said some of the lower sales was due to lower hardwood prices.

You know how much that of the sales decline was volumes versus the price?.

I don't have that handy I would say that overall from a volume versus pricing standpoint you know what Chris I'd hesitate to I hesitate to speak without that information in front of me. We can try and follow up on that for you..

And then continuing on RUPS, very impressed with the profit performance given the sales decline, was there a lot of cost cutting this quarter or was there -- you substituted some higher margin product that you sold, how did you do that well?.

It's a little bit of this a little bit of that I mean we have one less facility that we've taken out of the system with Green Spring going down and that certainly has contributed. I think we've we attribute about $4 million of cost savings associated with that, we've had some other cost reductions that we've been able to pull out of the system.

We've had a little bit of a change in mix in terms of the products as well that allows us to maintain margins that are somewhat in line with what we saw despite the change on the top line, if you think for a minute about -- again the untreated crosstie piece of it -- that is a lower margin piece of that business that, you know it's not a direct pass through there is a markup on that but the markup is much smaller than the value that's created through the conversion of that untreated tied to a treated tie and when you have that effect being such an integral component to the decline here over this first nine months of the year and particularly this quarter it's not -- despite the sales drop you not going to see as much of an impact from a margin standpoint..

And then if I could switch to your comments on Performance Chemicals headwinds from sourcing product -- sourcing raw material instead of making yourself -- when does that sort of headwind when you get the capacity online, when of those new people start becoming productive at your plan, when will that sort of headwind--.

I think it's going to be into the middle of next year before we are able to get to the point where we can offset the increased cost that we're seeing as a result of having to go outside for part of our raw material process, so it's another nine months or so three quarters..

And if I can just finish with a question about coal tar, [indiscernible] contracts typically that repriced at the end of the year, so can you give me an outlook onto where coal tar pricing or coal tar cost might be for next year relative to this year?.

Our coal tar cost for next -- it's one of the things that we're still actually going through, we don't have pricing finalized yet but we have seen a meaningful reduction this year and next year we expect to see an additional reduction. So that trend will continue but we don't have the pricing fixed or locked in for '17 at this point..

Thank you. And this does conclude today's question and answer session. I would now like to turn the conference back over to Chief Executive Officer, Leroy Ball for closing remarks..

Thank you. In summary we're really pleased about our strong operating performance in the third quarter which demonstrates that our strategy continues to build momentum. However there is still work to be done. We continue to take a systematic approach to reducing our dependence on highly cyclical industries tied to oil and aluminum.

As we proceed on our journey toward zero harm and becoming an enterprise focused on wood preservation and protection. We will continue to be intensely focused on delivering shareholder value. Thank you for joining us today..

Thank you. This does conclude today's program. Thank you for your participation. Have a wonderful day And you may disconnect your lines at any time..