Preliminary Q2 2020 Koppers Holdings Inc Earnings Call
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Thanks, and good morning, I'm quite Mcgwire, Vice President Investor Relations welcome to our conference call well, we will provide a business update as well as highlight our second quarter 2020 preliminary results.
We issued a press released earlier today.
You may access it does this announcement via our website at Www Dot Koppers Dot com.
As indicated in our announcement, we've also posted material to the Investor Relations page of our website there will be reference 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 website for replay through October 27 2020.
Before we get started I would like to direct your attention to our forward looking disclosure statement.
Certain comments made on this conference call maybe characterize as forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
These forward looking statements involve a number of assumptions risks and uncertainties, including with describing the cautionary statement included in our press release and then the company's filings with the Securities and Exchange Commission.
In light of the significant uncertainties inherent in the forward looking statements, including the company's comment you should not regard the inclusion of such information other representations that its objectives plans are projected results will be achieved.
The company's actual results performance or achievements may differ materially from those expressed in or implied by such forward looking statements.
The company assumes no obligation to update any forward looking statements made during this call.
References may also be made today to certain non-GAAP financial measures.
The company has provided with its press release, which is available on our website reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.
Joining me for our call today are the whiteboard, president and CEO of Koppers.
And Mike You gave chief Financial Officer, I'll, now turn the discussion over to Leroy.
Actually quite welcome everyone.
Oh volume your fans are healthy and staying safe during these unusual times they were going through.
Health and safety continues to be at the forefront koppers is we've continued to use our culture to influence popping behaviors through this pans out.
The first half the 2020 I'm happy to report that despite all the anxiety distractions that been brought on by the fear in reality of coking 19.
This mid year at more favorable reportable injury run rate than last year.
That's been driven by increased engagement on observations of exposure.
I've heard which has been demonstrated to have an inverse relationship with injuries.
Focused more on identifying eliminating the happens that exists.
Injuries that occur.
Simple.
Moving on outdoor presentation as shown on slide four of the U.S. Cyber security infrastructure Security agency or seized an agency of the department of Homeland Security continues to classify copper in the central business According to with guidelines.
This designation, we can continue our operations that helped to transport critical goods provide power in connectivity to homes and businesses.
Keep our infrastructure running blogs.
Our employees take pride to doing their park to support the global economy.
Moving onto the health and wellbeing of our employees an update is provided on slide six.
We have seen <unk>, an increase over the past month, or so leading up to reinforce the importance of employees adhering to the guidelines we put in place.
So far 28 corporate employees have tested positive with only two locations, where it was expected to be from a spread out a copper facility.
At this point about 19% of employees of self identified as haven't been exposed to bars about 2% remain itself warranty.
Fortunate to know employees had behof was at this point.
In terms of communications I continue to communicate regularly with our employees worldwide via video virtual facility visits and virtual employee chassis keep everyone updated and to offer encouragement, we all do the situation together.
Let me on outdoor view of operations continuity on slide eight here, we see that nearly all worldwide corporate manufacturing facilities remain operational.
Except for KJ Tc plant in China, which is offline due to scheduled outage at a customer's plan.
During the time was shut down our employees there continue working on maintenance projects until that plant we start.
Due to recent fired or certainly facility, which thankfully no has entered the tar and definitely have been temporarily down and are expected to come back online. This week.
Also we have experienced free shut down to two facilities in July where we had multiple boys potentially exposed to the bars. So.
Several testing positive as we took the necessary precautions for sanitizing facility.
Both of those plants Hudson resumed operations.
Currently employees, who were furloughed are laid off due to the bars have returned to work.
We're converting employs a travel in a very limited basis, if it's essential for business reason and they must observe appropriate health and hygiene guidelines.
We're still continuing to strongly encourage and poised to work remotely that's part of everyone thought to caution we temporarily halted plans for employees to voluntarily return for the office.
It was very few office employees, who feel that they must come into the office. They are required to use they cover in practice social doesn't see.
Fortunately technology has emerged as a key driver and keeping our business operations moving from relying on Microsoft teams are zone for meeting to using Microsoft Hololens for virtual facility audits.
In a variety of solutions for cobot testing.
Richard screening and contact Tracy.
Moving to slide 10, I would like to take a moment to recognize our team and Ashcroft British Columbia with the annual Koppers 2019 zero harm presence award.
This award goes to the facility reported the highest level performance regarding leading activities like employee observation hazard I'd in their misreporting and I share ideas submission as well as lagging indicators like total recordable reportable spills and air emission Exceedances.
Both leading and lagging indicators, providing an accurate measure of living to zero harm safety culture on a consistent basis.
Along with our Chief operating Officer, Jim Sullivan, our zero RVP, Joe down and other members of the Rps and zero harm teams I was pleased to present. This award your Ashcroft plant manager Patrick sold him and his team during a recent virtual facility.
Graduation season argument Ashcroft for example, fine to talk to the copper zero harm culture especial. Thank you Richard Smith, one of our you aren't professionals, who was a driving force behind the development of the special recognition.
Oh shown on slide 12, we are pleased we were pleased to recently issue our 2019 Koppers corporate sustainability report.
The CSR detailed how guided by our purposes are protecting what matters and preserving the future, we're taking care of where people want communities fostering inclusive innovative workplace being a good steward of the environment contributing beneficial products to society for generations to come.
The first time or CSR include aggregated data on are employed demographics, including at the manager level.
View this as an important step in highlighting where our organization stands relative to diversity. So everyone can see progress being made as we move forward.
My hope that other organizations will do the same order transparently measure the progress and help bring about meaningful long lasting change.
Before I provide comments on our business segments moving forward and the related markets and then I'll turn it over to Mike to discuss results for the quarter and an overview of our debt liquidity.
Right.
Thanks Leroy.
And our press release, we provided preliminary results for the second quarter of 2020, and our financial discussion is based on these preliminary results.
If you go to slide 14, you'll see that our consolidated sales were 435 point 437 million a slight decrease from sales of 444 million in the prior year.
Self corrupt RUPS increased to 210 million up from 199 million for the prior year.
PC sales rose 237 million from 121 million and C. M. A C sales fell to 90 million from 124 million.
Moving onto slide 15, preliminary adjusted EBITDA was 60 million compared with 63 million in the prior year.
EBITDA for RUPS increased to 23 million up from 19 million in the prior year.
Pcs EBITDA rose to 29 million from 21 million and see him and see EBITDA fell to 7 million from 23 million.
Sales for RUPS as shown on slide 16 were a new year over year quarterly sales record. The sales increase was due to increased cross type volumes favorable pricing for commercial cross ties a record sales quarter for U.S. utility pole business as well was improved demand in Australia.
EBITDA for ups on slide 17 was the second quarter record driven by record quarterly EBITDA for are you IP business and record quarterly EBITDA for our maintenance of way businesses as well as increased cross type production and lower SGN a expenses.
They'll for PC on Slide 18 were a record sales quarter and was driven by sales to our top 10 customers.
Sales increase reflected strong demand in North America from increased home repair and remodeling activities. During this pandemic and they were partially offset by lower demand and all of our international markets.
EBITDA for PC on Slide 19 was also a quarterly record due to higher sales volume greater absorption on a higher production volumes and lower year over year raw material prices, which were partially offset by lower contributions from those international businesses.
Sales for C.M.C. on Slide 20 were lower in every region. However, they were in line with our expectations, both fill volumes and product pricing were negatively impacted by lower oil prices and a slow down and its end markets as a result of the pandemic.
EBITDA for see him and see on slide 21, So that's the Nick a significant year over year declined due to demand weaknesses and pricing pressures associated with the sudden end market contraction and lower oil prices.
Now I'd like to discuss several items that are not reference in our slide presentation.
Adjusted net income was 27 million compared with 24 million in the prior year quarter adjusted earnings per share where $1.27 compared with the dollar 14 for the prior year period.
The effective tax rate for adjusted net income in 2020 is projected to be approximately 25%.
Through June Thirtyth 2020 capital expenditures were 27 million compared with 19 million in the prior year.
Now, let's go back to the presentation.
As shown on slide 23 at the end of June we had net debt of 874 million with 191 million in available liquidity.
Also we were in compliance with all our debt covenants.
Looking at maturities, we do not have any significant debt maturities until 2024, when our revolver matures and we have a final balloon payment on our tone term loan, which becomes do then and 2025, our fifth 500 million in bonds will mature as well.
In 2020, we plan to reduce debt by a minimum of 120 million.
Contingent upon the successful closing of the K JCC divestiture as well as additional sources of cash from working capital reductions lower cash taxes, and lower interest lower than originally projected capital expenditures and some deferred payroll taxes as well.
Slide 24 shows our net leverage ratio each quarter in 2019 and as projected through the end of 2020.
At June Thirtyth, our net leverage ratio was 4.5 times and we are targeting between 3.7 times and four times by this year end.
Before I turn the discussion back over to Leroy I just want to mentioned that we expect to issue. Our final Q2 earnings press release and also follow our form 10-Q next Thursday August six.
We will not have an earnings conference call on that day, given that we are discussing the in depth details of the second quarter results today.
With that I'll turn it back over to Leroy.
Thank you, Mike I'd like to provide some insights related to our business segments as well as Scott.
Slide 26 of our presentation shows our utility and industrial Park.
This business experienced a strong first half producing the best second quarter half year itself and adjusted EBITDA in the brief time, we've owned the business.
And while we still anticipate a solid second half. The 2020, we are hearing to start utilities are having issues hardware and transformers, which could push some second half project back to layer on year or even out at the 2021.
Well that said we're pleased to report.
I mean occasion are getting more asking about moving on to other treatment solutions as Cabot Microelectronics continues down the path to see that the core from all production at the end of this year.
While we continue to evaluate various options copper now they are preserved portfolio.
We're working with a number of utilities have shown interest in looking at RCC increase so for poultry.
An alternative to the penta preserved.
In terms of current activities were seeing utilities and northern states indicates that he demanded pandemic related restrictions of lesson.
Utilities on southern states are showing a slight pull back in their activities, partially due to fear is what the resurgence of the bars.
We're seeing increased quoting activity the power market. After a brief law with restrictions are lifted on construction projects, but we remain cautious on how much will get done cases continue to rise.
Well the poll recovery services interest appears to be increasing from larger utility customers requesting project proposals, which is an encouraging sign.
For now the availability of raw materials in the supply chain remain strong even with high lumber demand.
It's a consistent would flow.
Even if we shouldn't slow down in certain parts of our markets. We believe that the U.S.P. business remains on track for its best year since being acquired by copper.
Long term demand fundamentals remain solid.
Oh Railroad a product service business as highlighted on slide 27 across type business remain solid.
I seem to date has been relatively favorable to commercial market. Although we are starting to see pricing trend lower.
He is slow.
We expect this strong first half volumes, primarily supported by the class one should continue at least through third quarter, what the fourth quarter bit more uncertain at this point.
[noise] former employees that are Denver Cross talk treating facility that will be ceasing production at that plant by the end of August.
Good work to consolidate the treating volume not plans to another and our network those benefits should contribute towards offsetting any possible fourth quarter pullback in volumes.
According to the American Association of railroads, even though rail traffic a 2020 lack significantly from last year.
One railroad activities began improving in may.
Continued into July.
Great Colin automotive and support industry related loadings also either increases or stabilization.
Through June Thirtyth of 2020 total you up Carlo traffic decreased 15.9% for the same period last year, well intermodal units dropped by 10.6%.
The combined U.S. traffic for carloads in intermodal units fell by 13.2%.
Railway Type Association reported that in general the railroad industry is managing to offset lower volumes would increase productivity.
Certain railroads are taking advantage of reduced track time to increased maintenance on infrastructure.
We have seen that reflected.
And our main it's the way businesses were beginning to see demand pick up as we moved to the back half of the year and as a result improved profitability.
In fact, the second quarter represented an all time high makes its way profitability after three successive disappointing quarters.
We anticipate second half 2020 to continue the recent trend deposit to make its way performance.
Regarding supply, reducing cross talk purchased purchases to be more in line with prior year levels over the back half of the year in order to stabilize inventory level. We're also receiving more drive time from third parties for certain classes of customers, which should help feed similar treating level. That's the first half.
Moving to performance chemicals on slide 28.
There's nothing short of unbelievable the demand that we have seen or waterborne residential chemical business since the pandemic broke.
Volumes on average dropped by 26%, which is left the industry scrambling for chemicals.
We sold our stock it had been running hand to mouth since late June as we work to try to secure more intermediate raw material from alternate sources to help alleviate the production bottom.
We anticipate continuing strong demand in North America, primarily the U.S. for the remainder 2020 is treaters filled the backlog in demand.
Retailers restocked.
I want to command our performance chemicals team on the tremendous job they're doing in the most challenging at times to serve our customer base and fill orders, while dealing with the challenges of managing workplace behaviors and safe.
Our international markets.
Remain more challenging, but we are expecting improved demand in the second half a year.
As I mentioned in the U.S. The PC business is experiencing experiencing record level demand for residential trade was with big box retailers continuing to report strong demand for all improvement project.
Lover availability has improved after shortages being experienced in the early days as a pandemic, but unprecedented demand push lumber prices to record levels.
As such traders will be carefully managing the balancing act and maintaining inventory levels to fill demand also being careful to not be caught with high price lumber when the market turns down.
That phenomenon could slow demand at some point. However at this point, we're not seeing any indication of slowdown.
Market forecast for home improvements continue to vary widely according to the leading indicator remodeling activity or lira.
Expenditures for improvements and repairs to owner occupied homes are expected to slow by the middle of next year as the covert 19 pandemic continues to unfold.
Lira project annual declines and renovation or repair spending a 0.4% by mid 2021.
On the other half how brommer tracking residential renovation market shows the businesses have a more positive outlook for 2020 than they did the beginning of the pandemic.
Also principally a consulting is forecasting 4.2% growth rate production demand from 2022.
Owners are focusing on the importance of home work life environment with interest rates at historically low levels. We expect the pace to continue at least through the rest of this year.
On the international front for performance chemicals as outlined on slide 29, we expect demand in the Nordic region, Germany, Ireland, and the UK to improve from second quarter loves.
In Australia, we're seeing steady demand, it's a new housing stimulus package.
For the construction market seems to be helping offset weaker demand.
Zima businesses are returning with the lifting of locked down in early June which is sooner than plan.
Also.
Chile, I forgot to generate higher volumes.
Overall, our international operations have been severely challenged the first half of this year, but we're beginning to see the signs of improvement.
We hope will lead to resolve more in line with historical performance by the end of this year.
Regarding our supply chain, we continue to evaluate copper hedges for the 2021, 2022 timeframe, which on average or lower average cost compared with one point.
For 2020, we do not expect to see any additional benefits related to lower copper prices since we're already fully hedged.
In fact, we will see slightly higher costs in the back half of this year as we need to source higher costs intermediate raw materials to fill the backlog of demand.
In addition, as we work to keep customer supply and their plants running we're shifting more partial loads, which will contribute to higher transportation costs.
Both of these factors will put pressure on margins during the second half, but we still have a realistic chance of finishing the year.
Adjusted EBITDA for this segment had a new all time high even better than Yang 8 million generated in 2017.
Well above the 78.
I thought we would do this year pre pandemic.
Moving onto our C. M. A C business as shown on slide 30, we continue to be impacted negatively by significant declines in auto manufacturing capacity and other industrial production markets, which are resolving a lower demand for our products.
Pricing also was under pressure due to lower oil prices in the general market slowdown from the pandemic.
The second half of the year, we expect to see some improvements relative to the first half.
In North America, we're seeing reduce plant throughput due to lower steel production, producing less coal tar and higher raw material costs due to imports.
Along with lower volumes and pricing across the board with some limited exception.
Even see in Europe is experiencing reduce part production lower volumes and prices for carbon pitch and carbon black feedstock and its export indefinitely, the China due to soft demand.
And your Australasia region, lower sales prices for carbon pitch and carbon black feedstock had been occurring.
While volume or made the similar levels.
Carbon pitch pricing is likely to continue trending lower and the second happens Asian benchmark prices continue to decline.
And our supply chain cost the coal tar is dropping in line with end markets, but lagging by approximately a quarter.
A pullback in steel production has led to lower domestic coal tar coal car availability and an increase in raw material imports in North America at higher price.
Well markets in Europe, Australia remain steady.
Despite the Doom and gloom, we still believe that the second quarter represents the worse than what we expect in this segment in 2020 at this stage, we still expect to recovery not during the second half of your finished with adjusted EBITDA margin around 10%.
On slide 32, we've outlined the specific actions we've taken so far to mitigate the impact of the covert 19 situation.
Identify between 15 and $20 million, an estimated savings and have already achieved $8 million through June year to date.
Hey to carefully monitor closely manage costs in areas like compensation basket travel entertainment legal consulting fees and office related expenses and they've been important factors to helping us achieve the success. We've enjoyed in the first half of this year thus far.
We have a number of measures under way to help properties emerged from the pandemic in an even stronger position as described on slide 33.
We're executing on initiatives to increase market share across our various business segment pursuing new product processes in markets, while working to optimize our network of facility.
Short these are all initiatives that you put us in a strong position to push 2021 beyond 20 Twond.
Also we continue to pursue additional opportunities to generate cash.
Non core businesses close properties and related.
Already begun marketing or Denver property, and I've been exploring the opportunity to sell our quality West, Virginia, Grenada, Mississippi property.
After much consideration, we decided to reinstitute guidance that we have temporarily suspended due to the sudden uncertainty brought on by Cobot 19.
The result of our strong first half an expectation that most of that solid performance will continue at least in the near term.
Forecasting 2020 full year adjusted earnings to be in a range of $3.10 to $3.40 per share, which is slightly above the pre pandemic.
We had forecasted in February this year.
[noise] summary, our wood treatment businesses, both rather than PC performed extremely well during the early period of this pandemic, while delivering record setting results.
The performance chemicals, the pandemic and the associated effective more people being present at home has created a stronger home improvement market in North America.
RUPS is benefiting from infrastructure maintenance activity being taken by Sir railroad customers efficiencies, resulting from our network optimization strategy and stronger and more profitable utility means away market.
And while CMC may have challenges related to slowdowns and its end markets. Our overall business profile remains attractive.
Formed admirably through the worst at times.
In the central business, serving a variety of end markets centered around what protection copper second quarter performance is impressive and demonstrates our resilient, especially considering the ongoing task of managing safely effectively.
Profitably through the Cobot 19 pandemic.
We continue to focus on improving our profit and cash generation, increasing our margin profile adjusting our business portfolio deploying capital was widely while also reducing leverage and risk.
Believed that our efforts will be recognized.
And shareholders rewarded.
Now I would like to open it up for questions.
[noise], ladies and gentlemen at this time will begin the tend to answer session.
Ask your question you May press Star and then one using a touchtone telephone.
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At this time, we'll pause momentarily to assemble the roster.
And our first question today comes from.
Chris how from Barrington Research. Please go ahead with your question.
Good morning, everyone and congrats on these preliminary results there quite outstanding.
Especially given the uncertain environment that we're still in.
Just going through some of the comments I'm definitely encouraged by the continuing positive signs in RUPS.
You mentioned the CMC.
I've been is near at the bottom.
You see segment, continuing its strong demand levels and have the positive signs for debt reduction to 3.7 to 4.0 times, but digging in more to the PC segments.
Perhaps you can share a little bit more detailed belt international markets I know what remains weak down 15% year over year.
But you mentioned also that you do expect to see some improvement as we move through the back half a year.
Perhaps some insight as to what type of drag this put on margins and profitability.
In the second quarter in other words.
In a more normal environment within the international space.
Could margins for the segment be as a whole.
So Chris it's a okay. Good question I.
I'll start by saying that.
We reflected in a couple different places both in the release as well as in the presentation.
The fact that that's the international operations were down significantly.
Year over year in the second quarter thing, 15% on the top line and even more significant than that as it relates to with profit generation.
You know just without getting into too many specifics there's no question that the U.S. pieces of business carried the day.
In the second quarter, we and produce pretty impressive margins overall as a result, I think if we would have seen.
Resolved it would've been more in line with typical profits on the international side of things would have helped us a slightly and I thought I'd say slightly because even even in the best at times.
What piece of our business.
Dominates the.
It is too.
She was little more than 70%.
Of the overall topline and bottom line.
So.
I think with what we've seen.
In the second quarter.
And you know these fees other countries it's been.
Certainly much more I'd say cautious approach to.
Managing through the pandemic and we obviously had an operations shutdown for a period of time.
We did not experience anywhere else.
Certainly Saul.
The decline.
Despite the fact that we were considered essential businesses and all other the operating locations that absolutely had an impact on operations, but all those areas have been slower to if you will actively reopen their economies and even even as they have I think people have been a slower too.
Oh go back to resuming if you will activity so.
Meanwhile.
We're off to see what's going on.
As it relates to the spread in the virus.
By the same token yeah. Some of those behaviors have also contributed a little bit to a more normalized.
Operations.
In the United States as well so back half of the year, we do expect a that business to return to a closer to normalized sales and profit generation and we expected that will help to offset some of the cost impact that we'll see in the U.S. relative to I think.
By some of the intermediate Rals on on open market higher costs as well as some of the higher shipping costs that will occur in terms of of again shifting more partial loves to keep customers.
So all in all we're hoping that we can we can offset the piece of that in the second half.
Margins will probably still.
Bill I'd say declined slightly in the second half.
Just as a result of what we're experiencing on the cost side.
But overall, it's still extremely strong year show, a very strong possibility to actually be the best year at MPC and all that with a.
By the end of year, you know maybe.
May finish it half too.
Two thirds of what it.
Yes.
That's great.
Very helpful color and if I may just one follow up on that you mentioned, the 26% increase in volume that selling residential Greg.
And that you sold down the stock.
You are working to secure more raw material to meet beach influx in demand how should we think that demand versus supply.
Currently and.
How that should impact as we look further out into Q3 in Q4.
But we're still we're still playing catch up so we're running full out and sell and everything that we have.
We'll see.
We because we've been able to draw inventories down I think we solve the a boost from that you know in the latter part of the second quarter.
Yeah, we won't see that as we move out into the third quarter. So I don't affected the third quarter sales numbers.
Quite as strong as we don't have inventory draw upon but.
We are producing full out and selling everything were where I think we'll start we'll see.
Maybe a little more benefit will be heading into the fourth quarter.
Again, where we typically see a little more of a slow down again relatively speaking, we're going to probably see I'm sure, we'll see a seasonal decline in fourth quarter, but it won't be as sharp as it typically would be just as we're continuing to fuel the back end of the demand and ER and help.
Retailers we saw.
Okay, great. Thanks for taking my questions.
Thank you.
Our next question comes from Laurence Alexander from Jefferies. Please go ahead with your question.
Good morning, and congrats on a good quarter in this environment.
Because I guess first can you help us with the cost cutting that you've done your how much of it you see is structurally lowering your breakevens and how much do you expect to further back in.
As demand conditions normalize in 2021 in 2022.
So Laurence I'd say.
You know if I kind of just a walk down through through the categories that were talking about you know on the compensation of benefits side.
Weve.
We've put a hiring freeze on so we've not had to let people go.
But we put a hiring freeze on for some positions that we were hoping to add does that.
To some of the things that we.
Or looking to do in terms of improving various.
Processes as the business continues to grow.
And and we're seeing a little less if you will incentive compensation accruals as a result.
At least at numbers are tracking slightly lower than where we.
We're expecting to be coming into the beginning of the year from an EBITDA standpoint. So.
I think that wants that once the situation stabilizes and and we gained some comfort coming out yeah, we'll look to add some of these positions that we were.
Hoping to fill some of them being replacement some of them being new.
And again, depending upon how the business performs we could see those numbers move back up to the levels that they were out before so I would say that one at some point in time will likely <unk> back in line with where we were at Pryor.
Travel Entertainment is an interesting one right obviously.
On a whole lot you can do [laughter], either travel wise or in terms of congregating.
And ER and are being with customers and things like that so.
That one we'll certainly last through.
Through the pandemic and even coming out I think that we'll see opportunities too.
To.
Get together differently.
And there will absolutely be longer lasting benefits that come through on the travel and entertainment side of things won't be we won't end up retaining all of it because they're there I still believe we still believe there's a benefit to being out.
In front of customers face to face.
And how it sites and things like that but there are certainly instances, where we will be able to and be much more comfortable.
Doing things by video moving forward, rather than having to hop on a plane and get somewhere.
Same thing from an entertainment standpoint, I think we'll see some changes and behaviors as a result.
Through now so so there's a portion of the travel and entertainment expenses that will absolutely be able to I think retain moving forward a legal and consulting you know again the court shut down for certainly a period of time, which helped to resolve and and legal costs moving down part of that are things that we can't control as it were.
Two cases that are in process.
And well ultimately end up.
Going through some sort of settlement negotiations and or potentially litigation at some point so.
So some of that will will absolutely return on the consulting side of things again, there there are things that we're not doing today, just as a result of trying to purposely pull back on costs.
Will always looked hard as to whether we need to spend dollars in terms of getting help on different projects, but some of that that could possibly end up being retained.
And on the office related side of things certainly we're evaluating our office footprint on a go forward basis, and seeing what makes sense in terms of being able to.
Smartly reduce it while providing workplace flexibility to our employees moving forward. So in summary compensation benefits I think that's ultimately going to end up moving back to.
Pre pandemic levels.
As we work our way through Visteon travel entertainment will be able to.
I think recoup on an ongoing basis some of the savings that weve generated in that area. Even after the pandemic consulting small amount, possibly their legal probably not in office related small amount. There. So you know up to 15 to 20 million you know I'd say, probably we could probably.
Let's stick, we'd be able to to hold on to maybe a third of those once we get out path.
The you know again the situation where now we see some normalization if you will to life moving forward.
And then there's a lot of moving parts and mix effects across the portfolio.
How do you think about margins.
Sequentially or just comparing first half the second half your gross profit EBITDA whichever you prefer.
Well I think that Oh I would expect.
Second half that we should probably see margins that are.
In line, if not slightly better than first half margin not will primarily be driven by the poor first.
Order there.
So I think we're going to see relative.
Our second third quarters are typically our strong first and fourth weekend.
And they in a second and third can always slipped back and forth the term, which once all of her first and fourth and always flip back and forth in terms of which one.
Okay.
Yeah, I think that our third quarter.
One that will be certainly strong could rival or could could rival our second quarter performance, whereas our fourth quarter performance.
This stage, although there's still a lot of question Mark marks I feel better about where the fourth quarter should end up compared to.
First quarter this year so.
On balance I think that margin wise, we should be able to match is not a slightly exceed a first half.
Great and then just last one just on the <unk>.
On the railroad business, what's the current mix between maintenance of way and a historical cross type business.
Oh good question.
I'd say that our maintenance of way business.
At this stage is probably somewhere just south of 20%.
Paul.
Okay great.
Thank you.
Our next question comes from Liam Burke from B. Riley FBR. Please go ahead with your question.
Thank you good morning were good morning, Mike.
Hi Lam.
You're right Mark in his prepared statements mentioned that the utility U.S. utility coal business set a record.
A year or had a record quarter.
What has been driving that I understand that the utilities are investing but a was there any share gain or was it just straight.
Increased demand from your end markets.
It's a tough.
I am I I'd say.
There's always some customers and move back and forth and things like that I'd say for the most part it's just been it's been higher demand levels.
Yeah the market in general.
We had expected to see pretty decent demand out of one of the reasons.
We elected to get back into the market and.
There's some.
Slot indoor or possible.
If you will that again, some demand might have been pulled forward into the first half and that it's one of the one of the reason why were sort of take a little bit more cautious approach or look at the second half of the year, but all in all we still expect to see overall.
Sales numbers and EBITDA numbers.
At their highest levels that we've seen since we've owned the business. So the except the overall fundamentals of the markets remained strong and our position.
Securing that business.
The strong.
And Mike do you anticipate any additional they are increasing capex this year or a senior manager sales growth, what's the current budget.
Yeah, we're projecting the capex Liam could be a on an annual basis somewhere between 50, and 60 million and when we first gave guidance for 2020, we anticipated that to be 60 to 70 million. So we've talked about $10 million off of that and we think.
There's there's a little bit of a possibility.
Additional expenditures and one of our plants because of the closure of the Denver facility, but as it stands right now halfway through the year, we're pretty confident that we're going to be in that 50 to 60 million dollar Capex range.
Great. Thank you we were thank you Mike.
You're welcome.
Our next question comes from Mike Harrison from Seaport Global Securities.
Hi, good morning.
Hi, Mike.
Congratulations on the strong results here I'm. Just wondering is we're looking at the performance chemicals business, you mentioned the higher costs associated with freight.
Thank you also mentioned the higher copper intermediates and maybe some third party spend can you give us a little bit more color on how much of copper intermediates, a you're able to meet internally versus how much you have to purchase externally and then can you pass or any of that through to your customers.
Obviously in a situation where.
Supply and demand dynamics are what they are a one would think said that there are some ways to get pricing a little bit higher even though there are a contracts in place.
Yeah. So so you know touching on the last question first Yeah. I think were were Rob you are always sensitive as it relates to.
You know our cost structure and the ability to pass that on to customers.
Obviously this is a strange an unusual time.
But we do have agreements in place with our customers that and that have been.
Extremely dedicated long serving customers debt that have been leaders in the industry in terms of growing in consolidating and has helped actually.
To build our business out as well. So you know we not only view them as customers in many ways, we view them as partners and so.
We're very sensitive to you know to how we handle those sorts of instances, let's just say we.
We continue to do very well, even without having to go out on the market and a pay an increased price for intermediate raw materials to meet their demand levels.
We tend to look at things on more of a go forward basis in terms of.
Structurally you know how are things changing and and what if anything does that necessitate in terms of having to pass.
Any any cost increases on longer term so in the short term.
And these sorts of situations a you know we eat that cost now in situations, where we've seen higher costs as a result of tariffs and things like that we had been successful and working with our customers to pass those sorts of cost increases on because it relates to just general market dynamics, and especially one where everybody.
If you will everybody is winning.
We we're we're pretty happy with what we have and want to maintain our relationships for the long term.
And so that's how we manage that by five more or less eating the cost of of those cost increases.
In terms of percentage as it relates to our overall usage requirement I you know, it's moved around quite a bit and obviously with the numbers changing so dramatically this year.
I can't even.
Mike might have in response to that but I off hand off top my head I can't give you a number Mike do you know yeah.
And capex in the PC group.
To get us back to a very close to producing 100%.
I love the two main feedstocks that that we use BCC and kupek oxide and I believe we got it.
So the point, where we were 90% to 95%.
Producing those two raw material freedom feed stocks on our own.
This increase in volume that would that we've mentioned in this call and Q2 has dropped that back slightly to the point now where we're out and the markets going ahead and buying both of those as well so maybe from 90% to 95% to maybe 80% to 85% as well.
We're producing currently.
And it and have plans standpoint, the rest for the rest of the 2020, so a we anticipated.
An increase and we spent the capex money.
And we got pretty close to producing 100% internally, but again given the current influx of the additional volumes in North America, we're dropping back slightly from those percentages I hope that helps a little bit.
Yeah. That's helpful. And then maybe a a related question is are you able to see if that's the main bottlenecks in other words as long as you're able to access third party copper intermediates supply are you able to get customers everything they need or are there other places where you're.
Your otherwise capacity constrained and maybe have some of your customers on allocation.
Mike, Italy right now that's it that's the main constrained so.
We can make more we we just need more intermediate.
Alright, and then switching over to ups you mentioned bad twice thing to commercial railroad customers was up in the quarter or has there been some demand recovery there.
Because I believe that in your previous updates you had said that commercial customers had pulled back on type purchases.
Yes, [laughter] even in this even in this I think it commentary we've talked about the fact that we've seen.
Bidding levels beginning to decline. So you know volumes I think ever have of have tapered off a little bit we still still seem pretty good year over year pricing you know in second quarter in first half of this year, but as we're seeing bidding activity.
Softened, we're also seeing pricing soften as well so that's that's going to be that's going to be a little bit of a headwind in the second half a year for RUPS.
Alright, and then over on the C.M.C. side of the business two quick questions. One on the key J.C.C. divestiture. You had said July to mid August we're at the end of July any updated.
So I'm, sorry, I'm wasn't that divest strictly close.
I I wish I could tell you more what what we have in the press releases really all that I'm able to say, which I think it is it says you know it's expected to close in the third quarter, where unfortunately bound by some really strict confidentiality requirements related to the agreements and as a result.
Yielded the language that is used is very carefully put together abide by the attorneys here and I'm really not allowed to expound on it.
Okay, but this is that a different situation then what you were in when when there were a lot of moving pieces around negotiations before you announced a scale.
As I recall that those deadline seem to keep slipping and they were slipping by full months at a time.
But you feel pretty good about the third quarter.
We as we sit here today, we feel good about a third quarter.
Okay and then last question is on the Stickney plants I believe there's some Illinois River lock meat.
Going on during the third quarter do you expect to see any impact on your shipping cost you move a lot of stuff by barge using the Illinois River launch system, we do we do move some stuff by barge.
We you know the impacts that that we would expect to see our contemplated in our numbers and you know well well, we likely will see something again materially speaking as it relates to that business. It is you know it shouldn't be a it shouldn't be that does that huge and.
And again as reflected in what we've.
Put forth in the guidance in commentary we've issued today.
Yeah, Mike we from a from a raw materials standpoint, we barge up the revert to stickney, a lot of ortho xylene and of course, we had to make arrangements with the river closure.
Happening we had to make arrangements. So what we did is we pre purchased a lot of that ortho xylene before the river closure and if everything goes according to plan a with a with the river and it reopens on time, we're not going to Miss a beat on auto fourth those Eileen feedstock of ours.
Alright, thanks very much.
You're welcome.
[laughter] and our next question comes from Chris Shaw from Monness Crespi Company. Please go with your question.
Yeah. Good morning, everyone, a great job on the those numbers I actually disconnect it for a while by mistake, but so I apologize. If this is the math, but.
I guess my Big surprise was RUPS I mean, I could have the PC a surprise I can understand more but RUPS I guess within just a function of a lot of little thing maintenance away commercial pricing in class one at the commercials to be weaker I thought that was the suggested but I know you that might have been more of that second half issue. So you can get round up but if there was.
One particular thing that surprised you as well or just sort of talking to all the things that sort of built up at the.
Yeah. It you know as it tends to be.
It it was a number of Oh factors certainly we we saw maintenance of way strengthening coming into the quarter. We knew it was going to be a better quarter in many ways than a drag.
For three successive quarters on that business. So.
The improvement there which was expected.
Oh, certainly contributed I would say that that the contribution was actually better than what we thought I'm as I mentioned I think as we mentioned a couple different times. It was a record level EBITDA generation for maintenance away in the quarter.
Which which we did not expected to be that high when we did expect it to be significantly improved over over the first quarter a utility business again also record level EBITDA. So that that was a strong contributor.
Yes, commercial pricing was ER was up a little bit and we had started to see some of the softness.
In the middle of Oh, the or the second quarter and like I said, we'll probably see that as a headwind as we get to the back half of the year, but but year over year. You know again it was maintenance of way was utility even Australian utility business was strong a little bit better commercial pricing and then volumes on class ones.
We're we're we're pretty strong during the second quarter as well so a bunch of little pieces that added up to a city overall improvement.
I think you mentioned that you were some concern in the man's aware that there were some pull forward is there any concerns on the class one volumes are well I forgot was a class one volume strength sort of was there are some.
Just kind of know that coming in because there were some I thought was their issues around the wouldn't what billability was coming but that's the issue well. So so on on on the class ones. The you know, though the we early on we started to see strong volumes from certain of our class one customers and.
And as we got further into it you know realized it again.
As as you know certain class ones tend to do during times of less lesser traffic they stay amp up their maintenance activities and a in so.
We have absolutely seen that from a couple of our class one customers. So in terms of pull forward you know it remains to be seen if if at some point you know they they complete their program, which are scheduled to complete their program you know with us.
Couple of the customers sometime here in the third quarter, you know do they do they how much do they pull back if at all at that point in time or do they are they try and get ahead of 2021 by by putting as much work in 2020 as possible that's a little bit of the wildcard as we head into the back year.
For RUPS now on the other hand, we also have a few customers that.
We did have some some wood availability issues with earlier in the year and they weren't able to do as much as a they had wanted and we're starting to see some of that free up. So what we're hoping is that is that some of that improvement helps to balance out any potential pulled back on the CLO.
Last one to have really taken advantage of of the the greater track time to ramp up their maintenance effort. So.
There are some uncertainty in the back half I'd say more as we get to the end of third quarter heading into the fourth quarter on the RUPS business, although more obviously as things move forward.
Okay. That's helpful again, congrats on the results. Thank you. Thank you.
And ladies and gentlemen, with that we will conclude today's question and answer session.
I'd like to turn the conference call back over to President and CEO, the ROI ball for closing remarks.
Well, thank everybody for taking the time to participate on todays call I really appreciate your interest in the company.
And thank you for your continued support looking forward to talking to you sometime again in August.
Thank you.
Ladies and gentlemen, a conference has now concluded we do thank you for attending today's presentation. You may now disconnect.
Yeah.