Q3 2020 Koppers Holdings Inc Earnings Call
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I will now turn the call over to Quinn Mcguire. Please go ahead.
Thanks, and good morning, I'm quite Maguire, Vice President of Investor Relations Welcome to our conference call, where we will provide a business update as well highlight our third quarter 2020 preliminary results.
We issued a press release earlier today you may access this announcement via our website at Www Dot copper is dot com.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website that will be referenced in today's call.
That was 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 January 26 2021.
Before we get started I would like to direct your attention to our forward looking disclosure statement certain comments made on this conference call may be characterized as forward looking statements as defined under the private Securities Litigation Act.
Reform Act of 1995.
These forward looking statements involve a number of assumptions risks and uncertainties, including risks described in the cautionary statement included in our press release and in the Companys filings with the Securities and Exchange Commission.
In light of the significant uncertainties inherent in the forward looking statement included in the company's comments you should not regard the inclusion of such information as a representation that its objectives plans and projected results will be achieved.
The company's actual results performance or achievements may differ materially from those expressed in or implied by such forward looking statements.
The company assumes no obligation to update any forward looking statements made during this call.
References may also be made today to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website.
Conciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.
Joining me for our call today, our Leroy ball, President and CEO of Koppers, and Mike do gay Chief Financial Officer, I'll now turn over discussion to leeway. Thank you Quinn good morning, and welcome everyone. We hope you and your family for continuing to remain healthy and saved on the ongoing pandemic.
Before I get into our third quarter results. Let me just say, how impressed and grateful I am concerning or people, who remain focused on doing their job safely.
Same time, enabling us to achieve so many new performance records in the third quarter, we all continue to deal with the worldwide Pandemics.
As always with again with a focus on zero harm culture.
I'm proud to report that on a trailing 12 month basis, our total ocean or total osha recordable injury rate not including Carbonite team are at their lowest point, thus far and are zero harm journey down 21% compared to the same point last year that's.
That's truly a testament to the hard work were plant management and our employees I can't thank them enough for their commitment drain focused despite an extremely challenging year on proactive safety engagement, such as safety observation and hazard identification.
Our safety performance continued to be augmented by ongoing training and an emphasis on building a more episodic leadership team.
Remember, we will be convening members of our management team from around the world, including plant managers and support staff leaders for a virtual zero harm for this.
This is to replace the in person form that was scheduled to occur back in April that was unfortunately canceled like almost everything else this year.
We did not want to wait until we can safely reconvene at our <unk> Our site leadership group. So we're figuring out a way to adapt to the times.
Its online that would be like an interactive scheduled for two hours sessions over three days and will build on the progress we've made in advancing our zero harm safety culture by sharing information and generating meaningful dialogue about incorporating more inclusive and sustainable business practices across all parts of our organization.
Although it will be a virtual I'm certain that the form will be as valuable as ever.
Moving onto our presentation as shown on slide four the U.S. cyber security and infrastructure security agencies within the department of Homeland Security maintains its classification of copper is an essential business, meaning that we can continue to operate during the pandemic in order to help with transporting critical goods, providing power and connectivity to own the businesses.
And keeping our infrastructure running reliably across the organization. The people koppers are proud to do our part to support the global economy.
Looking at employee health and well being on slide six to date, we have had 72 employees worldwide, who have tested positive for COVID-19, which represents approximately 3% of our employee population.
What a basis for of our facilities have had cases that were the result of being transmitted on site.
And while we continue to be diligent ensuring the proper safety measures and thoroughly cleaning and disinfecting any affected areas. Currently 20 employees are self quarantining accumulatively approximately 37%.
Ralph identified with symptoms at some point in time.
Consistent with National worldwide trends, we've had an increase in cases, most recently, we continually look for ways to reinforce our messaging around the importance of not letting our guard down and continuing to practice safe behaviors.
Our strict protocols governing personal protection and process has continued to be in place, including the introduction of self administered slava testing kits for field and office personnel, reducing the time needed to get results <unk> at a minimum a full day.
Also we recently conducted a flu clinic for employees our headquarters in Pittsburgh and are in the process of scheduling flu clinics at other locations in our site network in the upcoming weeks.
In the areas of communications were having or upcoming quarterly all employee meeting century time zones for the first time each meeting will be held at the time of day that hopefully will better accommodate our employees and the U.S. and Europe, and Australia, New Zealand combined.
We're also allow for more dedicated discussion of additional topics that are more closely relevant to each geographic region.
For ongoing interactions I'm continuing to engage with our employees worldwide be a videos at least once a week that can be viewed on copper Facebook and Linkedin accounts.
Virtual facility visits and virtual employed chats to provide updates and encouragement on a continual basis.
Moving now to a discussion of operations continuity on slide eight here, we see that all worldwide koppers manufacturing facilities remain operational which is great news and we do not have any furloughs or layoffs.
I will continue to remain restricted to a central business only well a limited number of in person facility visits have been made to reinforce health safety and performance goals were to monitor or view major in process capital projects.
For office personnel, we still strongly encourage employees to work remotely where the potential return to the office postponed until January 2021, although there is a strong likelihood to return to off the state will actually move to later in 2021.
Technology continues to serve us very well across multiple needs for meetings to virtual facility because it's the safe weight tests for our trucks out on the road to virtual training program and more.
Despite 2020 being the year of cancellation that hasn't stopped us or are people from being recognized for our accomplishments on slide 10, we congratulate our chief sustainability officer lots, we hide on receiving the 2020 step ahead award from the manufacturing Institute for Excellence.
And leadership among women in manufacturing.
She has made significant contributions to koppers and continues to shape the industry, but we absolutely deserves this national honor and we are proud of her accomplishments.
2020 represents the third year in a row that we've had a team member recognized with a step award, which is a reflection of the female talent base that we currently have and continue to build at koppers.
Seen on Slide 11, Koppers recently received recognition from our class One railroad partners commending, our role and safe real shipping practices.
The chemical safety Excellence award from CSX, and the Pinnacle Award from Union Pacific. These awards are well deserved acknowledgement of our employees hard work to protect our people environment and communities, while reliably serving our customers. Congratulations. Thank you to everyone who played a part in making this possible.
No as I mentioned earlier, we made several in person visits to our facilities. This past month on slide 13, you see a photo that shows the groundbreaking ceremony held at our North Little rock, Arkansas Wood treatment plant.
I was honored to be joined by the Governor of Arkansas, The mayor of North Little rock and various elected official to celebrate the start of our plant expansion and modernization project at this facility.
Slide 14 shows the visit to our performance chemicals facility and Hubbell, Michigan, but chief operating officer, Jim Sullivan, and Doug Samak, Our senior Vice President performance chemicals.
Where they were discussing the merits of adding additional copper carbonate capacity.
On slide 15, with the highlights of our coal Tar distillation facility and Stickney, Illinois that's.
As a result of a recent visit from Chief operating Officer, Jim Sullivan, where he was checking on the construction progress of a new tank as part of our ongoing tank maintenance and inspection program.
And we continue to make progress in raising the awareness and bought and visibility of inclusion and diversity efforts as shown on slide 17, Martin Luther King Jr. Day will be a paid holiday now across koppers U.S. operations beginning in January 2021.
This is Mike just one step in money that we've taken over the past six years to create a path towards a more equitable and inclusive organization and community.
As illustrated on slide 18, we're utilizing a new outreach platform crop talk these are structured video conversations to solicit input from our employees across the globe.
The first series of crop talk were led by me and Vice President of culture engagement Dan gross.
Already these sessions have generated some innovative ideas on improving communications and responsiveness between leadership and employees.
Another option for employees to connect we just introduced a virtual kasbar that has created an informal gathering space for college for colleagues worldwide to visit with one another.
The name is an onto or not more colleagues using the Danish work for coffee and a not so subtle message that we encourage interaction from all global employees on this platform.
Finally, we've also installed digital signage sports at our facilities globally currently in 84% of our locations so far to reinforce safety messages.
Long as sharing news at the corporate and local level.
Next on slide 19, we are focusing on not only the physical well being of our employees, but their emotional health as well, we know that working from home having to balance parental responsibilities has been a daunting challenge daunting challenge for many.
Now for our employees that are parents, who are juggling work, while meeting to keep their children to help their children with online learning for all or part of the day Koppers recently sponsored a parenting through the pandemic video chat and question and answer session with expert palace from the medical community, who offered some advice and encouragement.
Also working parents channel has been added to our one koppers up for employees to connect and share advice.
We're establishing a working parents employee resource group, where employees can also support each other and help the company better understand the challenges that they face.
Of course, there are also challenges in the community and our people continue to step up and respond in a variety of ways.
Slide 21 shows the sacrifice of employee Josh or from our plant Roanoke, Virginia, a longtime volunteer firefighter Josh traveled to Texas in August to help contain a massive wildfire there.
Working as a follower on the team. This father of two small children worked within feet of the blaze cutting brush that heavy equipment could not reach to contain the spread.
His efforts save lives in property, we cannot be more proud to call him a copper is employed.
Cross the World Newcastle Australia, our team there is making a positive impact by raising more than $25000 to help keep a local helicopter rescue service operating on behalf of area residents.
Slide 22 shows how the people of copper showed up to support the Pittsburgh chapter the leukemia lymphoma Society's annual late the night walk, which was held virtually this year and where I served as the walk chair for the third straight year.
This year Koppers was named the top fundraiser in our category, we're proud to be a longtime supporter this nonprofit group, which helps patients and families dealing with blood borne diseases as well as investing in leading edge research to help find a cure.
In addition, we again supported the American Diabetes Association toward a cure bicycle fund raiser. This year's event was held virtually and participants could fashion their own 30 mile course, along.
A longtime team captain of this event past years, Jeff Senchak from our CMC business and his wife, Susan raise just over $7000 for diabetes research Koppers was pleased to contribute to that total.
I will turn it over to Mike does to discuss results for the quarter and an overview of our debt and liquidity then I'll be back with comments on our business segments and related market sentiment Mike.
Thanks Leroy.
In our press release. This morning, we provided preliminary results for Q3, and our financial discussion is based on those preliminary preliminary results. Excluding the sale of K.J.C.C., which we will review review shortly.
On slide 24, consolidated sales were 438 million an increase from sales of 434 million.
Sell syrups were 191 million down from 199 million.
PC sales rose to 148 million from 124 million and see him and see sales came in at 99 million down from 111 million.
On slide 25 preliminary adjusted EBITDA for Q3 was 67 million it was a record quarter up from 57 million in the prior year.
Adjusted EBITDA for RUPS increased to 19 million up from 17 million in the prior year PC EBITDA rose to 32 million from 18 million and CMC EBITDA was 16 million compared with 22 million.
On slide 26 cell syrups were 191 million slightly lower year over year. This was primarily due to lower cross tie volumes, particularly in the commercial market along with pricing discounts for select customers.
Utility pole business in the U.S. held steady with sells at a seminal similar level as the prior year.
And the demand was higher for utility Poles in Australia, and cross tied disposal services in the United States.
On slide 27, adjusted EBITDA for RUPS was 19 million compared with 17 million and this was driven by higher profitability in class one sales due to a favorable product and service mix also we saw higher profitability in the cross tie disposal business as well as lower selling general.
And administrative costs.
Sales for the PC segment on Slide 28 were 148 million compared to sales of 124 million. This marked another record sales quarter, reflecting continued strong demand for copper based preservatives in the U.S. driven by sustained strength in the home repair and remodeling activities.
Adjusted EBITDA for PC on Slide 29 was 32 million compared with 18 million.
This also set a new quarterly record due to higher sales volumes lower average raw material costs, a favorable product mix and better absorption on higher production volumes.
Slide 30 shows Siemens see sales at 99 million compared to sales of 100, and the 11 million.
Sales were lower in every region, except Australia, but they were in line with overall expectations. The pandemics effect on lower average oil prices and a general market slowdown translated into lower pricing for carbon pitch and lower demand for carbon black feedstock.
These factors were partially partially offset by higher volumes of carbon pitch in Australia, and Pelican hydride in North America.
On slide 31, adjusted EBITDA for C. N C was 16 million compared to 22 million as expected. This reflects a year over year decline due to ongoing weak end market demand.
While the profitability was lower in the third quarter showed margin recovery compared with the prior year quarter. The average pricing of major products was down 14%, while average coal tar cost declined 21%.
We are also seeing sequential improvement in C. N C. When compared with the first half of 2020 as we previously anticipated.
Slide 33 shows the coppers generate a new quarterly records in the third quarter of 2020 in the following areas.
Diluted EPS from continuing ops of $1.83 adjusted EPS.
$1.64 operating profit of 58.6 million.
Adjusted EBITDA of 66.7 million here.
He see sales of 147.9 million and PC adjusted EBITDA of 31.5 million.
Now, let's review our debt and liquidity situation as seen on slide 35 at the end of September we had 770 million of net debt with 343 million in available liquidity. We are now forecasting a 125 million in total debt reduction for 2020, which includes the proceeds are.
Already received from the K JCC divestiture.
Also we ramped remain in compliance with all debt covenants and looking at our maturities. We do not have any significant maturities until 2024, when our revolver matures and a final balloon payment on our term loan becomes due.
On slide 36, the history of our net leverage ratio was shown beginning in 2019 and its projected out through the end of 2020 that's.
At September Thirtyth, our net leverage ratio was 3.8 times, which was a significant drop from 4.5 times at the end of the previous quarter. We are now on target to be between 3.5 times and 3.6 times at year end 2020.
And finally on slide 37, we outlined the preliminary financial details of the K.J.C.C. sale to summarize the net gain on the sale was approximately 36 million. The discontinued ops EPS impact was one dollar and 67 cents per share and the net cash to call.
Offers was 65 million with.
With that I'll turn the call back over to Leroy.
Thank you Mike.
Now moving to discussing the business sentiment based upon what we're currently seeing in the marketplace as well as feedback from our customers and suppliers.
Slide 39 provides a rundown of our utility and industrial products group.
We continue to pursue a strong focus on customer service encouraged by ongoing broadband infrastructure investments necessary, because remote working requires electrical and network connectivity.
Copper is working with utilities on testing and using C.C.A. increase sodas treatment alternatives to penta preservative.
Are you IP group remains on track for its best year since joining the company with solid long term fundamentals in place.
Now with Hurricane season is still ongoing we continue to provide storm response service to customers and the near term we have experienced some slowing from postponed projects or lack of crews due to those hurricane response efforts.
Now recently, we were successful in negotiating some multiyear contract extensions that we continue to evaluate various opportunities for share gains.
Pilings, our business is improving as restrictions have been eased on construction projects.
I do remain concerned about the segment of the business in the near term as Corona virus cases rise, which puts commercial construction projects at risk of future shutdown.
The poll recovery area, we're targeting investor owned utilities, as well as evaluating opportunities for synergies with projects with a real structures business.
Regarding our supply chain, the wet weather a slowed would flow some facilities and we're also dealing with some transportation cost increases, but on balance our wood supply chain remains in good stead.
And our RUPS segment seen on slide 40, the cross type business remains solid with improved class one margin mix, while there are some slowing and more price competition in the commercial market.
We're hopeful that any ongoing demand weakness that might occur can largely be offset with the savings from consolidating our denver treatment operations into the north little rock facility.
Therefore, we expect the trend of year over year improvement quarterly EBITDA to continue.
From an industry perspective, compared with prior year for the year to date period through October 17th U.S. railroads reported 15% lower cumulative volumes, 5% lower intermodal units and 9.8% lower total combined U.S. traffic. According to the American Association of railroads.
The American Association of railroads also reports that some class one railroads and transit agencies are using the downtime for maintenance programs, which resulted in earlier than usual purchases.
In a massive way segment, we're seeing ongoing demand and improve profitability in rail structures and recovery resources, but anticipate some fourth quarter weakness in rail joints, which has been our most impacted business as a result of pandemic.
And our supply chain, we're leveling out our cross type purchases as well as receiving dry ties from third party sources for certain customers to maintain optimum working capital levels.
I'll return cross ties supply and pricing could be affected unfavorably Assam sawmills are having to shut down due to challenges as a result of lower demand in other industries.
Now looking at performance chemicals on slide 41, the strong demand in North America for 2020 is expected to continue in international markets are expecting elevated demand in the fourth quarter.
Leading industry is low on chemical currently but should improve by the end of the year.
Our PC business is on track to deliver record full year EBITDA in 2020 with the previous record high of 88 million set in 2017.
In North America, the market forecasts vary but are increasingly more favorable.
Census Bureau reports that retail sales accelerated in September and building materials continued to show strength.
The leading indicator of remodeling activity anticipates growth of 4.1% and renovation and repair spending by the first quarter of 2021, then moderating to 1.7% by the third quarter of 2021 would do it yourself and small projects lifting the remodeling market.
Consumer confidence index increased in September to 101.8 after declining in August to 86.3 still below pre pandemic levels.
The National Association of Realtors reported the fourth consecutive month of growth with existing home sales higher by 9.4% in September compared to prior month.
And up 20.9% from prior year.
Each of the four major U.S. regions witness month over month and year over year growth with the northeast seeing the highest climb in both categories.
Performance chemicals internationally as seen on slide 42 shows increased demand in Germany, a favorable mix in the Nordic region, an uncertain future in the UK and Ireland due to Brexit questions and some nice gains in Australia as pandemic restrictions are reduced.
Hi volumes in New Zealand, and strong production volumes in Brazil, and Chile as well.
Now, while our international PC business is a nice complement to what we do in North America.
It is the North American region that continues to drive results and we'll continue to for the foreseeable future.
Supply chain picture for PC shows the copper hedges for 2021 and 2022 are currently at lower average cost in 2020, but no additional benefit as expected this year related to lower copper prices.
They are now fully hedged.
Unprecedented pandemic demand has outstripped internal production capacity. So we must source a greater proportion of our needs through external suppliers, leading to higher input costs. We.
We do expect some relief in this area in the fourth quarter as we made certain modifications to our supplier network to improve both quality and reliability.
Also we are making progress to expand capacity for intermediates and will likely launch a modest expansion project project near year end.
Lumber prices are declining with certain treaters waiting for market stabilization before exposing themselves to too much commodity risk over the remainder of this year.
Now we move towards seem at sea business on slide 43 demand overall is lower but beginning to recover.
This point, we think year over year demand and volumes will remain at similar levels for the remainder of the year.
Thus far we have been successful at placing a strong focus on cost containment to help mitigate the impact from the softer market conditions.
We anticipate the second half 2020, EBITDA will be nearly double that of the first half with double digit margins anticipated for the full year 2020.
The third quarter as a reflection of that is adjusted EBITDA came in at more than twice either the first or second quarter of CMC in total.
In North America, more important supplies, yielding higher tar costs, while softer demand is contributing to lower utilization rates.
Europe appears to be in the best shape of the three regions due to the roll and supplementing the U.S. current creosote supply.
And Europe is seeing slightly lower year over year demand and production levels lower coal tar prices and lower average pricing, while Australia is generating stronger sales volumes, while also benefiting from favorable raw materials and production costs.
Regarding supply chain, we're seeing continued overcapacity from Coke reasons steel producers. So we expect to our production to remain depressed through 2021.
With reduced coal tar availability in North America, any significant recovery in our North American business in 2021, we heavily dependent on recovery in the domestic steel industry.
Looking at slide 44, and taking into account where each of our businesses stand and the continued favorability we've seen in our effective tax rate. This year, we find ourselves once again in a position to raise guidance for 2020.
As of now we see adjusted EBITDA for this year, finishing somewhere between 204 and 210 million up from the 196 to 204 million, we guided to last month.
Even better than expected performance in our CMC segment, and greater confidence that PC will finish out the year on a strong note are the main reasons for the increased EBITDA guidance.
On an adjusted EPS basis, we now expect to finish this year somewhere between $3.65 and $3 or 90 cents per share up from our previous guidance of 325 to 350 per share.
Addition to my previous comments on drivers for the increase larger.
A larger than expected favorable return to provision adjustments on our recent tax filing already realized in the third quarter results also contributes to our higher EPS expectations for the year.
It is worth noting that at this point, we expect to finish the year at the top end of our February 2020, EBITDA guidance for the year and anywhere from 10% to 30% higher than our initial adjusted EPS guidance.
All of this represents quite a dramatic shift from the disaster scenario planning that we were going through in the early months of the pandemic.
No we've not taken our foot off the pedal as we continue to clamp down on cost for the year as shown on slide 46, which details actions meant to mitigate the impact of COVID-19.
We've identified between 12 and $14 million in EPS gene a savings and have reached 9 million of those savings through September of 2020 by managing costs and compensation of benefits travel entertainment and legal and consulting fees.
As discussed on prior calls to emerge stronger post pandemic.
On Slide 47, you can see we remain relentlessly focused on these few critical initiatives, which have already contributed importantly to our success in managing through these challenging times.
By continuing to focus on increasing market share across business segments, adding new products processes and markets to our portfolio and optimizing our facilities. We believe we can continue to build upon the strong foundation, we've built over the past six years.
In addition to sell noncore businesses, such as K.J.C.C. close properties, such as Follansbee, K Triple C and Denver and other related assets should generate additional cash as well.
In summary, 2020 has proved to be a key inflection point for our company.
Key milestone occurred with the completion of the sale of our K JCC joint venture as we announced on September Thirtyth.
By exiting this business and further streamlining our portfolio, we've taken one more giant step towards significantly improving the stability and quality of our earnings profile moving forward.
Additionally, we continue to validate the strength durability and resilience of our business model that benefits from being a major player in serving diversified niche end markets.
Being designated in the Central business supporting critical industries that must continue in almost any circumstance.
Even in an unprecedented environment due to the ongoing pandemic, we're achieving record levels of performance, which is a testament to our koppers team members around the globe I wish to thank for their extraordinary efforts to carry us through these challenging times.
At this point I would like to open it up for any questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone sub if you are using a speakerphone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, Good morning, I wanted my morning.
I bet as we were heading into this pandemic and you guys were seeing things start to shut down you would never have expected you put up a record quarter in Q3, so congratulations for that.
Wanted to ask about the RUPS business it sounds like commercial volumes accounted for most of the decline. There are we thinking your business is being predominantly class. One so does that mean that the commercial business was down something like 20 or 30% versus last year.
And maybe can you talk about what you're hearing from your commercial customers about their maintenance plans heading into 2021.
Okay. So you're right I mean, the commercial businesses, a smaller proportion of our business, making up anywhere from 20% to 25% of our cross type business. So overall.
You know it's also.
The most volatile and you know, we will see big swings and pricing as you go through different parts of the cycle, which also.
We'll be partly dependent upon the demand.
In that market as well.
We had been riding a wave I'd say over the last probably six to eight quarters of of improving pricing and stronger demand and so you know given what's going on with the pandemic and everybody looking for opportunities to reduce spending and cut costs, it's not surprising that we see.
Some impact on on demand in the commercial market, which which would then also translate into lower pricing as well so.
I can't say I'm I'm terribly surprised given again the fundamentals of what we're dealing with in the current environment.
However, I would say that that's again, what makes you know our business model. Good. During these times is having that heavy class one customer so customer base, where you know through through good times and bad you know you have a strong foundation of of demand to serve.
As we have seen during this period of time. This year, we've only had again one class one customer that has so.
Sought to reduce.
Spending this year in this area others have continued to either.
Either.
Execute their programs, it's come as they were coming into the year or actually even doing a little bit more so on balance we're in pretty good shape, but.
Long story short, Mike I I'm, not I'm not shocked by what we're seeing in the commercial market right now and I think we'll continue to see this softness until we get some clarity you know coming through the pandemic and where different they're different stimulus spending might might come from right. So if there's anything that's directed again.
Then into infrastructure.
And anything short lines can take advantage of that I think you'll you'll see a pickup back in demand here, which will ultimately generate into a stronger pricing environment as well.
Alright, and maybe a you mentioned pricing a couple of times I believe you mentioned some discounting activity in the RUPS business was was that primarily to a commercial or were there some discounts given to class one customers as well well I think there are any of the stuff.
That work that we end up doing regarding a discounted basis typically comes as a result of volumes right. So, it's typically where where customers meet certain volume thresholds and those sorts of things come into play we have that across almost all of our different business segments. So.
Yeah, that's that's that's where where you'd see that.
Okay, Alright, and then over the the PC side of the business.
It sounds like you guys expect to catch up on getting some of these kind of it goes to the treaters during Q4, but maybe the the outlook into 2021 is a little bit on certain is that it's a best guess right now that they were going to be seeing strength through the first outflows of 22.
21, and then maybe some question marks on what the second half looks like.
The current line of thinking and what we're being told you.
Bye bye.
By actually that were hearing by by certain retailers out there.
They expect a continued strength.
You know at these sorts of levels out into the basically through the first half of next year. So that's the word we continue to hear we are currently we continue to be behind in terms of being able to serve or the industry again, which is which is in line with where the overall.
Chemical industry is at a in this in this market.
Right now so it's not a koppers issue so much as an industry issue.
And so yeah, we were still digging ourselves out of a out of a hole from a supply standpoint.
And Ah, which which again will will should.
Allow us to see continued strength and benefits through the first half of the year and you're right beyond that you know there it's a little uncertain right. Because you know demand. This year, we're certainly not projected at this level coming in we know that a big portion of the demand from this year is actually triggered by the pandemic and people.
Staying at home people, having some additional dollars to spend not going on vacation, maybe not having to spend on their season tickets looking to beautify and improve their work environment are you seeing that they might be spending more time working at home than going into an office all those things have contributed to.
Demand at significantly higher levels than anybody expected. So how much of that is going to continue or or when will it potentially drop off is still uncertain, but right now everything that we're being told is expected be sorts of volumes will continue to.
To remain until we get out to the first half of next year.
All right and then last question for now is the.
The Si and C segment, obviously very strong margin improvement relative to the first half can you maybe help us put.
The sequential margin improvement into some buckets, my guess is that raw materials versus.
Versus pricing is it's a one area, where you saw some improvement, but what were some of the other buckets of improvement and how should we think about the sustainability of the margin in this mid teens type of range. Yeah, I think I think the way to think of it Mike is you know we.
Said several years ago that as we were going about restructuring. This business that we were we were structuring it for less volatility for less volatility through a cycle that we were targeting somewhere between 9% to 15% EBITDA margins in this business.
And you know baked in and basically that's what we have seen since we have.
Executed on some of the more significant projects in this area in fact weve over the last several years have been at or at the high end of that range, if not even a little bit higher so as we talked about often right. You you always have this.
This phenomenon of our.
Raw material costs chasing price and so in a market where you got price declining you know our margins are going to be down at the lower end of that range because.
It's going to take a while for raw material pricing to drop and catch up with that and then you know when pricing stabilizes and starts to move back in the other directional little bit.
You will start to see the benefit in margins move up into that upper end of the range as well so.
No. We we knew second quarter was going to be weaker margins or the first quarter typically is weaker for us in general.
But everything that we were seeing and that we sort of know with our business. We felt pretty confident that we would see some of that recovery.
As again raw material cost began to catch up with the pricing curve and so we saw it in the third quarter. We expect that that will continue into the fourth and again overall for the year that will put US you know saw solidly above the double digit.
Margin line. So you know on an ongoing basis, we continue to believe that that business will will be a 9% to 15% margin business and you know the the absolute dollars that we generate there will be more dependent upon the strength of the markets seen on how much volume, we can push through but.
But the good news is that you know you know even in a softer demand environment because the the whole business at this point right now with the way that we've designed it is basically an arbitrage on the raw material in the selling price of our end products and we have that we have that in place now and it's working pretty well is I think demonstrated.
Again, the the challenging times, we're going through right now.
All right. Thanks, very much you are welcome.
The next question is from Chris how with Barrington Research. Please go ahead.
Good morning, everyone and congratulations preliminary results.
Following up just on some of the thoughts that Mike Harrison just shared.
If we look.
Hypothetically speaking on a qualitative basis, that's some of the benefits that we've seen in the PC segment the potential for a longer tail into Q1 Q2 benefiting from.
Work from home.
The reason.
Higher discretionary hi, higher.
Higher discretionary spending available for use for home remodeling projects as opposed to vacations.
On the flip side or outside of the box could we also see some sort of benefit in a row.
Recovery as workers returned to work and they are able to put.
That budget to use for home remodeling.
In the latter part of.
Next fiscal year I mean, you are.
Correctly, yes, you know there there's I mean, the repair remodeling markets been strong.
For a pretty it's been it's been you know pretty much on a regular upswing since coming out of the housing crisis back in 2008 through 10, so so weve seen ever increasing spending in that in that area. The the ironic thing.
It was coming into this year you know beginning in the mid part of last year. You know they were looking the experts we're really looking at it and Prognosticators. We're looking at the back half of 2020 is sort of the beginnings of a little bit of a slow down in terms of that ramp up in repair remodeling and all that's been flipped on its head with with what we're going through right now.
So you know.
It's tough to predict what's ultimately going to going to drive these major.
ER market trends, but you know the point that you make in terms of.
People going back into the workforce a.
A healthier economy will that contribute to sustaining the market moving out there.
Theres no reason to believe that it couldn't but.
Hard to say for sure.
Chris, but but certainly it could.
Thanks, that's very helpful for discussion.
And you had mentioned briefly about some expansion of capacity.
Following up on your comments related to the sourcing of external copper intermediate.
You talked about this expansion of capacity, how much is being put into that and.
I guess, how different scenarios of strong demand in the PC segment.
May affect your decisions on capital spending for capacity.
At this stage I'd say you know we first of all what it would be a relatively high return project.
Given where current demand is expected to be out over again the next.
The next nine to 12 months.
But even even without that right we've seen a general uptick.
And in demand in this business over the past well ever since we've owned it first of all.
We we even without the pandemic expect that to continue to too.
To at least be some modest level of increase in this market moving forward. We have had a significant market share gains over the past couple of years, which has already put us into a position where you know we don't have enough internal capacity to source our own requirements.
Beyond that puts an enormous amount of stress on our operations.
In terms of minimizing our ability to take our facilities down and take it through preventative maintenance. So we need to we needed to at a minimum prevent more slack in our in our operations to be able to.
Continue to consistently and properly maintain it so that we can ensure the continuity of our operations.
While also preparing us for additional market share gains that we believe we can generate even if.
You know the pandemic levels of demand drop off in a significant way. So we're not we're not worried about the spending which will be somewhere in the I'll call. It the.
No 10 ish million range of Oh spending we're.
We're not we're not concerned about those dollars and a relatively limited or or I should say a rapid level of returns that we think we can get on those dollars. So I.
I don't it will set us up again to be much much stronger on a go forward basis I'm not worried about creating overcapacity in this market for sure.
That's great and one last question.
If we look at what we now know.
With another.
Another month in the books, leading up to this call.
Is it unreasonable to assume.
As EBITDA moves back to where it was prior to this fiscal year.
And in consideration of a longer tail in the PC.
But theres enough.
Enough there to.
To maintain or make some slight improvement.
Where you saw where we expect adjusted EBITDA to approximately be on an absolute basis through this fiscal year. So you're are.
Are you asking is do we expect the 2021 will be better than 2020.
Yes, Directionally, yes. So so just let's first of all maybe to set the table will be be clear.
No.
Our because of all the ins and outs as we have dramatically restructured our business over the years you know now with this again removal of K.J.C.C. from our business.
When you look at the business over the last six years without KJ C.C. You know this will this year, we're on track to represent actually our sixth straight year of EBITDA improvement.
So last year when cage with KJ see see out of the numbers. We finished at $201 million of adjusted EBITDA right now expecting to finish somewhere between 204 and 210.
I think that Oh.
Worse, we're going through the process right now of trying to sort through everything to figure out where 20 2021 looks like.
I can't tell you sitting here today, Chris for certain that 2021.
We'll be better or and if so how much I do feel good that 2021 will be a another on balanced strong year I think we have several things going for us I think we're primed for seem and seem to have a better year in 2021 as the markets that we serve begin to stabilize a little bit. So I think we'll get some benefits there.
I think we'll continue to see some improvement in our RUPS business overall, both from a cost reduction standpoint in terms of consolidating Denver and in north little rock as well as some of the other network optimization.
Programs that we're working on but.
I think we'll see improvement in that business segment.
While while demand in the second half of next year for PC remains a question Mark I still think overall, we're going to see a very strong year in that in that business.
That should you know that should allow for us to to post strong results in 2021, I think the wildcard for US next year in terms of will 2021 be better.
Oh and by how much then this year is is that how we as how strong will the second half of next year PC business be and I think the first half of next year for us overall.
Eric We speaking is gonna be should be better can we maintain that over the second half of the year and matched the sorts of record results that were producing this year will be will be the question. We're trying to answer those questions right now and going through all the information.
Thanks I appreciate it I appreciate the color and congrats again on also the Moon Bank.
That you made on the debt side.
Bringing bringing that down.
And that's all I had that.
All right take care.
The next question comes from Laurence Alexander of Jefferies. Please go ahead.
Good morning, Alan I guess three main things. So first with performance chemicals can you give a sense for how much margin lift you should appear to book from lower copper prices in 2021, and how much of that cycle.
Plant is on international.
Oh in terms of the international piece of that business you know its a.
It's anywhere, but we just caught about 30% to 30% or a third of the business is international about two thirds is is.
North American.
You know in terms of margin lift from from lower copper prices.
No I mean with where our margins are already at in terms of topping into the low Twentys I I just.
Don't see much more coming even with even with the additional benefit we may receive from raw material from raw material price reductions next year and partly part of that is due to again some of the concerns that we have in the back half from a demand standpoint.
So it's you know I'd say overall Laurence Theres not a lot there's not a lot there from an overall margin standpoint, just given where we're tracking and the current volumes that were continuing to post.
And what's your current thinking around a normalized tax rates.
2021, 2022, with a 25% or so be fair.
Yes for the full year of 2020, I think we're looking at probably around 22% and that's a that's a lower because we have higher domestic income and thus reducing the negative impact on our effective tax rate due to the guilty provisions of the cures Act and its off.
While enabling us to use more of our interest expenses option as less as being excluded from our tax calculations. So 2020, I I would use.
The low twentys, 22%.
Laurence 22, and 23, we're probably going to tick back up to pretty close to that 25% level.
And as you look at the divestiture the restructuring EPS as older outlays.
Loud.
If you don't do any additional M&A.
What do you see as a reasonable normalized free cash flow for these assets I guess I'm ending up at around 90 to 110 billion a year kind of bogey is that sort of roughly the way you think about it yeah that is very very close I think historically over the last five years, we've averaged about one has.
Third and 10 million a year and I don't see anything different for 2021, so you're in the ballpark with that.
Thank you.
<unk>.
The next question will be from Liam Burke with B. Riley FBR. Please go ahead.
Yeah. Thank you good morning, Leroy good morning, Mike.
Okay.
Oh, we really you mentioned one of the slides.
Domestic utility pole business has had its best year since the acquisition.
Could you sort of.
Give us an update on how well that's performed since you brought it into the conference calls.
Surely am I mean, you know that.
When we talk about it being the best year now granted Weve. You know this is our second full year of Onea, we haven't had it for for that long we closed on that business in early April 2018.
I'd say it.
For us he got off to a little bit of a slow start its picked up momentum the longer that we have owned it.
When we bought the business. We saw you know opportunities in several different areas for being able to.
Generate additional profitability.
One was through chemical pull through in a in the business right through through the creosote and Cc a that we produce that is used in those sure.
We saw it through network optimization opportunities in terms of being able to leverage treating facilities across our network to be able to do more than just one activity and or concentrate certain activities in certain locations to maximize efficiency. We're still early in that.
Process, we saw opportunities to you know to save in a in cost, which we've been able to do so.
You know each each year.
Basically each year, we've owned it has been successively better we expect a 2021 to actually be a continuation of that.
So you know it's been it's been a nice addition for us that is picking up some steam the longer that we have been an owner just due to the many different opportunities that we have within our integrated business model too.
Continue to improve different aspects of the overall business. So the big thing for us that remains an opportunity is expanding market share beyond you know the areas that we currently operate in today. So that's those are the things that we're looking at longer term.
Right.
It shouldn't creosote, obviously as us.
Directionally is that.
Maintaining a consistent contribution to coating or the utility the two utilities using a less or the same creosote in lieu of other types of coatings, Yeah, I'd say I'd say, it's you know it's stable to potentially increasing slightly and I'd say so stay.
Table in that you know the whole, Texas region continues to be the biggest area that that utilizes creosote in pole production and ER and that really hasn't changed much over time, so that piece of it is stable.
With a with the oil born preservative Penta core fund all getting phased out there's other.
Options that have to be considered and.
Certainly again creosote is one of them to the extent you can substitute a waterborne preservative than C.C.A. comes in as a as a strong contender to the extent that oil born a preservative is still needed creosote is getting looked at in certain instances.
This is a you know as as our other preservatives that we look at in terms of adding to our portfolio, including carbon ethanol. So so overall, I'd say stable to slightly increasing but but it won't be much more beyond that on a go forward basis.
Great. Thank you live right you're welcome. Thank you.
The next question will be from Chris Shaw with Monness Crespi. Please go ahead.
Hi, Good morning, everybody I'm good morning, Chris outside of the <unk> when you called out the second half 21 I guess.
Concerns about what the demand and PC will be I was wondering about rail itself going forward and what kind of visibility you have there say yeah that'd be a concern for me maybe 2021, just because remember the last time you know traffic was down I guess it was the last time sort of oil broke.
No there that the demand for railcars to fall off with that so I mean, what do you have visibility you have on your I guess your class 1 million to 2021 at this point.
Yes. So I mean, you know we're we're this is the time of year when.
The railroads are going through their 2021 budgeting process and so typically you know the meetings are going to be going on here over the next month, or so where they'll be giving us their expected programs for 2021 now we've been in contact obviously we're in.
Regular contact with them and they directionally give us indications as to how they see not just next year, but you know out over the next three.
Three years, or so and I'd say again on balance all right I'm on balance.
We're expecting that our volumes in 20 or 21 should.
Should be slightly better than than 2020, so that hasn't yet been confirmed through through their budgeting process and communication to us, but all the signals and discussions that have occurred over the past three to six months, leading up to now have indicated that they are.
Perfect you know a again continued fairly robust.
Replacement cycle into next year. So you know have more information here. The next by the next time that a that we report out but but that's the indications we have been given thus far.
Right. So I got great job on the quarter. Thanks, guys. Thanks.
Thank you.
And the last question for today will be from 10 Hefner with Loomis Sayles. Please go ahead.
Good morning, Thanks for fitting me in here. So when you look at the 42 questions.
First of all can you provide any update as far as the process with the Denver facility. I think you guys have highlighted that on the last call and.
Where that might stand as far as the.
[noise] potential move here to close on that transaction and second of all if you look at the earnings improvement in the PC business year over year and a lot of it has been quite good on that talking about this and harping on it but.
Is there any benefit there from like the way the input.
Input excuse.
Excuse me input cost took on the copper side really young adults who to lows here for a few months and they have now normalized and come back to where they are but it works to understand any of those 20 million or so improvement year over year as anything to do with costs and then you had some a few years back you would have the ex that out.
Outsourced some production things or whatever so.
Just trying to think I understand this all volume price and mix or might there be some cost benefit in there that helps us further understand the real [noise].
Strength of the earnings year over year, that's it thanks very much. Thank you.
[music].
Okay. So let me think of maybe maybe.
Start with the last question first.
My take on PC is you know we did have a nice a short period of time, where as you know most markets you know.
Reacted.
Significantly.
Unfavorably early on in the pandemic and we were able to.
You know lock in some hedging.
Hedging for a 2021 and 22 to take advantage of that a negative reaction early on obviously, we were buying copper during that period at those at those prices, but we were also settling hedges.
That were in place at at much higher levels right. So.
We talked about coming into the year that we were more or less hedged.
On our production for the year.
Which didn't give us much opportunity for.
For any any benefits from a lower overall average cost.
It didn't take long for copper to move back up to levels that are higher than.
Our current average hedge you hedge costs for this year, which you know again, given the demand levels I'd say overall, it's probably put us in a in a in a more unfavorable cost position for this year then favorable so on.
On balance I'd say for this year, we're probably getting a little bit more hurt by where things are at on the copper cost curve I'm. Just just given the fact that I think for the majority of the year at this point copper costs have been higher than our average price and our demand levels.
Have been much higher than what we thought coming into the year. Therefore, you know our hedged amounts we're at a.
At lower levels. So so I don't think we're getting the benefit that you are speculating that we're getting on the cost side, if anything I would probably getting a little bit hurt and that could help us out next year as well to help insulate against some some downturn on demand in the second half of the year.
That's great heart, Yeah in regards to remind me. The first question I apologize and then the unknowns right where things stand on Denver right.
Yes. Please okay. Thank you so I can't I can't comment on any ongoing.
Activity as it relates to Denver other than to say you know we're in the process of of closing the site. So we are are done in terms of treating their we have transferred essentially all treating activities to our north little rock facility and are in the process.
As of closing it and ER and looking to to.
To sell it and you know we're hopeful that.
Sometime you know by the time, we Uh huh.
Have our next conference call, which.
Which will be sometime early next year that we'll be able to announce something but right.
Right now the focus is on closing the facility and at the very least we think we should be on track to to finish and finalize that sometime hopefully in the first half of next year.
Thank you very much thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to President and CEO Leroy ball for any closing remarks.
Okay, I just want to wrap things up by thanking again, everybody for participating on today's call I really appreciate your continued interest in koppers and urge everyone continue to stay safe and stay strong. Thank you.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].