Q1 2021 Koppers Holdings Inc Earnings Call
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Thank you and good morning, I'm, calling Mcguire Vice President of Investor Relations welcome to our first quarter 2021 earnings Conference call. We issued a press release earlier today you may access to sit on this announcement via our website at Www Dot Koppers 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.
Consistent with our practice in quarterly conference calls this is being broadcast live on our website and a recording of this call will be available on our web site for replay through August seven 2021.
At this time I would like to direct your attention to our forward looking disclosure statement as seen on slide two sort.
Comments made on this conference call may be characterized 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 risks described in the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission.
[noise] led to the significant uncertainties.
And in the forward looking statements included in the company's comments you should not regard the inclusion of such information as a representation that its objectives plans and projected results will be achieved.
The company's actual results 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 income.
He 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 on Leroy ball, President and CEO of Koppers, and Mike <unk>, Chief Financial Officer, I will now turn this discussion over to Leroy. Thank you Quinn. Good morning, welcome everyone. As you may have seen as shown on slide three we announced today the koppers will be hosting an investor day scheduled for Monday September 13 2021.
Beginning at nine a M eastern time.
I sincerely hope that you'll be able to join me and our senior management team for this event and it'll take place in Pittsburgh, Pennsylvania, the venue locations still to be determined.
We will of course closely monitor health and safety guidelines regarding the COVID-19 pandemic, but are looking forward to bringing back in person to tell our story.
So on the Investor Day will also be available virtually with a live webcast, which will include video audio and presentation slides for those who will be attending virtually we plan to also give you the opportunity to participate real time in the question and answer session. Following the presentation.
Finally for those who are not able to attend either in person of virtually we will provide a replay of the webcast on our website. Following the conclusion of the event.
Moving on to slide five I'm proud to report the koppers continues to fill fulfill its purpose of protecting what matters and preserving the future by transporting critical good providing power and connectivity the homes and businesses and keeping our infrastructure strong and reliable.
The koppers, we take on responsibility seriously knowing that the things we all take for granted every day do not occur without our products and services and we're incredibly proud to do our part.
Now I'd like to start with a zero harm update as always after many delays due to the pandemic. Our team is happy to get back to deploying our ongoing zero harm training sessions in person and then the safe manner and it couldn't happen to the more important time as our safety performance during the first quarter lagged our expectations.
We need to get our safety professionals back in front of our people and operations to train and reinforce positive behaviors and that is now happening as COVID-19 restrictions begin to get relaxed.
Throughout the year, we will be working to rollout of our foundations training, which emphasizes the importance of empathy for fellow colleagues on the criticality of communications as it relates to the presence of hazards or hazardous behavior.
Additionally, we recently presented our company's annual zero harm President's Award, which I'll describe in detail on a few moments for.
The 2021, we have of welcome challenge to meet or exceed the record setting safety performance that we work so diligently to achieve last year.
Moving to slide seven and it offers an update of the key aspects of our employee health and well being efforts regarding COVID-19. We currently have about 13% of 265 employees testing positive with rates dropping significantly over the past six weeks.
Sadly, we did have one employee recently passed away having contracted the virus outside of the workplace.
It's a terrible reminder of that is as close as we feel to being out of the woods. The virus is still out there wreaking havoc in the best way to protect yourself is to get vaccinated.
I say that not as of political statement not the trying to force my beliefs on others, but if someone who doesn't want to see any more people that are under my care unnecessarily dive of virus that is extremely unpredictable.
We implemented the lifesaving rule related to COVID-19, some months ago and it remains in effect demonstrating the importance of this issue and the fact that it remains our single biggest fatality risks.
The CDC guidelines are updated we'll adjust accordingly at our facilities in the U S as appropriate.
In addition, we've maintained COVID-19 pool testing at four key locations in North America.
Rescheduling vaccine clinics at our facilities when possible on offering of 250 dollar incentives to those who are fully vaccinated.
In addition, we're using point of dispensary occupational medical clinics and other commercial outlets to make vaccination is easy and convenient for employees as possible.
Despite my pleased to employees, we at this point only have about 40% of our U S employee base that's been vaccinated.
Don't really expect that rate of change all that much given that most everyone has been eligible for a while now.
Internationally the rate is much lower at this point, but that has more to do with vaccine availability than in difference.
On slide eight we see an overview of our operations and planning efforts.
At our facility in Stickney, Illinois, the Tar plant experienced approximately one month of unplanned downtime beginning of March 20th of.
Been back up and running for a few weeks now and while it was a major inconvenience operationally and commercially the impact on our consolidated results for the first and second quarter is expected at less than 5% and already baked into our full year guidance.
For employee travel we continue to limit those two of central only trips and example of that would be the recent deployment of our zero harm training modules for frontline employees as well as peer to peer workshops.
The COVID-19 vaccination rates increase we're resuming this training at selective locations and as always we closely follow social distancing measures of the masking protocols and also we're conducting hazard assessments for certain tasks in order to protect our employees from the highest job site risks.
Regarding office reentry, we're still urging employees, who were able to work from home to continue doing that of those who need to come into the office must use facial masks and observe all social distancing protocols when not located inside of an enclosed workspace.
We're postponing an official returned to the office until September seven just after the U S. Labor day holiday with limited office returns starting July 1st for those who would like to choose that option.
The pandemic has brought the work life balance issue to the forefront. So we have asked our employees for suggestions on how to improve that aspect of the lives.
And there were many of the interesting ideas to consider and ultimately we plan to implement certain measures over time.
And while we haven't ironed out all of the final details as of yet it's fair to say that we realize that a one size all fits all approach is not fitting for an organization of spread out as we are and many smaller employee pockets what fits for Pittsburgh is not necessarily what fits for newborn Denmark or Sydney, Australia.
One thing is for certain though and that is our approach the flexibility in the workplace will reach heights, we wouldn't have ever imagined prior to the pandemic.
We had some noticeable notable accomplishments during the quarter in April we presented the copper zero harm President's award to our Crosstie recovery facility and Lance, Michigan as shown on slide 10.
The launch group led all koppers teams worldwide and practicing proactive leading activities related to safety and had zero lagging indicators.
I want to congratulate the team at loss for earning the President's award into the 10 other impressive teams in locations listed in the filings category.
Moving to slide 11 that recognizes our la facility going for three years without any serious injuries in our plant in newborn Denmark recently, completing 365 days an entire year without any serious injuries, which includes keeping their employees and contractors safe, while managing a number of major projects.
Slide 12 illustrates the new mobile App introduced by our U U IP business to better connect directly with customers on products technical call reports and pull shipments.
The great reflection of the different ways, we're looking to serve our customers and bring them more value by making our people and the critical information that they need more accessible.
Slide 13, Chief Sustainability Officer, Leslie Hyde offered on an overview on our local publication Pittsburgh magazine of our sustainability strategy, while Tom Horvath performance chemicals director of global marketing spoke on the consumer appeal of treated wood products to building products Digest.
On slide 14 link women observed women's history month by launching of college scholarship and the name of our late Treasurer leeway on transport deal eligible participants.
<unk> of our female family members of Koppers employees.
I think women encourages professional development for all koppers employees and has been recently working on a project to look at ways to increase female interest and involvement in the stem fields.
Also in February February we honored black history month by highlighting Tracy Mccormick, our assistant Treasurer, and Mario Frank's of 23 year Koppers lift truck operator veteran in our Florence South Carolina facility.
Also we challenged employees to recommend ideas to further improve our work life balance and as a result, we launched linq parents of new employee resource group that gives parents and caregivers and outlet to share advice and appreciate the diverse perspectives.
On slide 15, you'll see highlighted one of the most interest interesting interactions we had in the community of this past quarter, which was the police Chief Town Hall that was organized the moderated by our own global director of inclusion and diversity of Atlanta tied.
Lance was able to gather six leaders in law enforcement from around the country to engage in the discussion on ways that we can all work better together to help bridge. The racial divide.
We opened up participation in the event to customers suppliers and the community and had approximately 200 people joined this virtual event to encourage positive change.
Finally during the past quarter on slide 16, our Ashcroft British Columbia team donated funds to the long term care facility, while employees from our Galesburg, Illinois plant assembled shoe boxes during the pandemic.
On a bigger picture scale copper celebrated Earth day on April 22nd by promoting tips on how to conserve energy and water and on how to reduce reuse and recycle materials in everyday life. So one more way, we demonstrate that we're living on our sustainability principles and practical actionable ways.
Now I'd like to turn it over to Mike Xu gay for an overview of our first quarter financials Mike.
Thanks Leroy.
As shown on slide 18, consolidated sales were $408 million, which was the first quarter record for Koppers and also an increase from sales of $402 million in the prior year.
Sales for ups were 192 million of slightly from 190, PC sales rose to $124 million up from 111, and Siemens <unk> sales came in at $92 million down from 101 on.
On slide 19, adjusted EBIT for the quarter was $55 million or 13 in the half percent and this is the first quarter record and also up from $38 million or nine 4% in the prior year.
Adjusted EBIT for ups increased to 16 million up from 13 million PC EBIT rose to 28 million up from $17 million and see them and see EBITDA was $10 million compared with $7 million.
On slide 20 sales for ups were 192 million slightly higher than the 190 in the prior year. This was primarily due to the class one volume increases higher demand in the railroad bridge services and cross tie disposal businesses, and partially offset by year over year declines in commercial cross ties.
In Q1, crosstie procurement decreased 27% from the prior year due to a continuing tight supply for untreated ties as well as unfavorable weather.
Crosstie treatment in the first quarter was higher than prior year by 6% driven by increased volumes from class one railroad customers.
Moving on to slide 21, adjusted EBIT for ups was $16 million in the quarter compared with $13 million in the prior year and this was driven by a favorable product mix and stabilization in our maintenance of way businesses.
All set in part by lower commercial crosstie volumes.
For 2021, we anticipate a favorable outlook for our maintenance of way businesses, which were severely impacted in the prior year due to the pandemic.
On slide 22 sales for PC were $124 million compared to sales of $111 million in the prior year. We experienced continued strong sales growth due to ongoing of high demand for copper based preservatives higher sales in the U S from continued home repair and remodeling projects and higher <unk>.
<unk> internationally from improved the industrial and agricultural demand.
On slide 23 of adjusted EBITDA for PC was $28 million compared with 17 in the prior year the higher profitability can be attributed to higher sales volumes and favorable product mix and better absorption on increased production.
Profitability also benefited from the demand generated by the strong home repair and remodeling trend.
Moving on to Slide 24, this shows Siemens sea sales at $92 million compared to sales of $101 million in the prior year. The year over year decrease was primarily primarily due to lower volumes of Falcon hydride in the in the U S lower carbon pitch pricing and volumes globally and lower volume.
As for carbon black feedstock in Australia.
So the prior year benefited from increased phthalic anhydride sales volumes due to one of our competitors experiencing supply disruption issues during that time period.
On slide 25 of adjusted EBIT for CMC was 10 million in the quarter compared to $7 million in the prior year.
The market challenges CMC generated the higher profitability and a double digit margin. This was primarily driven by a lower cost structure and production efficiencies.
In terms of carbon pricing and cost trends compared with the fourth quarter. The average pricing of major products were higher by 15%, while average coal tar costs went up by 11% compared with the prior year quarter. The average pricing of major products was lower by 2% while average coal tar cost.
A decrease by 7%.
Now, let's review our debt and liquidity as seen on slide 27 at the end of March we had $766 million of net debt with $326 million and available liquidity. We continue to project $30 million of debt reduction for 2021, and we expect to be of three one times to $3 two tie.
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With our net leverage ratio at year end.
We remain in compliance with all debt covenants and we do not have any significant debt maturities until 'twenty 'twenty four.
The recent history of our net debt leverage ratio was also shown on this slide as well as of March 31.
At March 31, our net leverage ratio was three four times, which was a significant decline from four five times, just a year ago longer term. Our goal continues to be between two and three times.
With that I'll turn the call back over to Leroy.
Thanks, Mike.
So let's review our business segments, and how <unk> 2021 looks to be taking shape, starting with our performance chemicals group.
On slide 29, the overall outlook for performance chemicals has improved from the more cautious approach we were taking as we entered the year and.
And we've seen strong year over year demand in North America through April which is not a surprise as prior year comps did not reflect the stay at home pandemic effect of home improvement projects.
We did see of mid quarter minor law in volumes relative to what we had seen the previous eight months, which we attributed to record lumber prices that we believe we're holding treaters back to a certain degree as they were looking to avoid getting caught possibly with high priced inventory if the market took the sudden sharp downturn.
Consumer demand for the product to satisfy the backlog of projects has the industry pushing through the inventory of hesitancy and volumes have reverted back to what we had been seeing.
Overseas the international picture looks to exceed 2020 results due to prior year being severely impacted by the pandemic.
Such we're cautiously optimistic about PC the ability to generate EBITDA in 2021 that will actually meet or potentially even surpassed the prior year. After initially thinking that we could see some drop off from prior year demand as the year went on.
I'm still a little concerned about where things go on the back third of the year from a demand standpoint, but feel comfortable enough raising our guidance in this business due to the lead we have built in Q1 of.
Better comfort level on Q2, and the rebound in our international segments.
Copper has continued its rise to record highs and as a result, the industry will need to build that cost increase into materials. If this trend continues into 2022.
Now across the North American market residential and commercial treating outlook remained strong with the ongoing pent up home improvement demand driving lumber prices to record levels.
The big box retailers of mostly built up their inventory during the first quarter and independent dealers have now decided to jump into the market. Despite the higher lumber prices to get ready for the anticipated spring rush.
Now our projections of 2021 being a big year for preservative conversions also remain in place as our CCA door climb utility Poles are expected to increase market share over the next year or so as a result of the phase out of penta.
Both of the U S EPA and health, Canada are proposing canceling penta registrations in the respective countries, which would be the final nail on the call from for the product was only manufacturer of previously announced that they were discontinuing production of the product as of the end of this year.
We continue to consider the proper entry point into copper nathanael or other oil borne systems for wood species that cannot take door climb, but overall, we feel satisfied in the interest of our waterborne product is of great substitute for the southern yellow pine wood species region.
And we're pleased to note that plans for the capacity expansion at our facility located in novel, Michigan remain on target for the third quarter, which should provide some cost relief in the back half of the year should volumes dropped below prior year levels.
Also we've derisked our supply chain by locking in long term domestic supplies for intermediates over the second half of the year, which will also cut down on lead times.
Continuing on regarding North America on Slide 30, we show that friendly customer consolidations that are happening currently could mean, new volume growth by the fourth quarter and into 2022 is our capacity has expanded of.
Of the data that we track to determine the health of our PC business seems to be pointing in a good direction.
According to the National Association of Realtors existing home sales Rose 12, 3% year over year on March 'twenty, 'twenty, one, but fell three 7% from prior month because of nearly historic lows and housing inventory.
The sales prices of median existing home sort of record levels and would've been higher had more inventory been available.
The NAR forecast at buyer confidence is on the rise.
The leading indicator of remodeling activity says home repair on improvement expenditures are expected to increase four 8% reached 370 billion by the first quarter of next year as homeowners take on larger discretionary renovation the deferred during the pandemic.
These indicators strongly suggest that people are feeling more positive about the economy as validated by the consumer confidence index, which saw another strong increase for the second straight month the.
The index in April came in at $121 seven up from 109 in March which marked a significant rise from the 90.4 index in February.
Internationally, our PC activity in South America remains on a positive path and it looks to be of growing market.
After several failed attempts to acquire manufacturing capacity in Brazil, We're now looking hard at Greenfield Ing of site, which would put us on a much stronger market position in a growing region, where we already hold significant market share through an important tolling model.
Australasia business had a strong first quarter on looks to reap the benefits of an anticipated post pandemic housing boom.
In Europe as certain of our product registrations are set to expire we pulled demand forward to satisfy longer term customer needs and therefore, it will be challenged in this region as the year progresses.
Given that this is a small piece of our global PC portfolio, we don't anticipate any issue in offsetting the expected weakness in the remainder of 2021.
We had been sorting through the long term alternatives for this business for a while now and will be moving forward soon with the plan to bolster our aging product portfolio through the introduction of new products were the acquisition of existing technology that has a longer regulatory time line.
Slide 31 brings us to an overview of our utility utility and industrial products business.
Demand in the U S and Australia appears to remain strong in 2021.
So we may see a bit of sales decline as a result of our recent exit from our operating agreement with TTC in Texas, but we expect that that will translate into improvement in EBITDA as production moves from TTC as Jasper, Texas location to our Somerville, Texas treating facility.
The T C arrangement that we inherited with the acquisition of the <unk> business was unprofitable and deemed on fixable without some meaningful contractual changes, which we just could not seem to reach agreement on with T. C. L.
The result will now be going it alone in Texas, which is probably best in the long run anyway, Texas.
Texas is of creosote pull market and as the burgeoning market for pole disposal, all elements that speak to the strength of our integrated business model.
Now, even if we put the pandemic behind us it will remain an imperative for utilities to limit or avoid service interruptions.
Likely that some portion of the work force will continue to work remotely and as a result, the work force is expected to be more dispersed geographically compared with the pre pandemic environment.
An emerging trend shows that more Americans are moving south and west and to the extent that migration and home construction trends are occurring on the southern U S. Our business could benefit due to having strong market share on the region.
The same time energy and telecommunications needs are expected to continue to increase which should result in the need for upgrades and expansions of the transmission network.
I've mentioned earlier the production of pent of preservative will cease at the end of 2021 of the registration for use of Penta is on the road being canceled in the U S and Canada.
And we're converting our first plant from pent the the CCA of Koppers produced preservative, while evaluating copper naphtha Nate D. C. O I has additional oil borne alternatives.
We expect our CCA door client product to lead the way in the Eastern U S market for a combination of cost and performance reasons.
Part of our capital program. This year is also allocated to adding drying capacity of two treating sites further reducing cost and supply risk.
First count is expected to come on line in Q2 with the second in Q3.
In Australia, and aging network on the need to rebuild infrastructure following last year's wildfires appear to create a solid demand base from 2021.
Pine Poles of gain greater acceptance due to the lack of hardwoods. So we're also adding drying capacity in Australia to facilitate increased pull production.
Moving on to the rubber business on slide 32 demand for all product lines looks to be strong for this year and next as margins are expected to improve with continued cost control.
Integrating tie on pole treatment of Somerville, along with processing of end of life ties illustrates the Super plant model referenced in the past is a key goal for koppers in the coming years in the core tenant of our network optimization strategy.
The biggest risk we face currently the 2021 results from our.
Uh huh.
The biggest risk we face currently to 2021 results for our crosstie business as the tightened hardwood supply.
This has been an every couple of year issue within the industry, where the supply of hardwoods for untreated cross ties tightens, either due to weather issues competing demands for hardwood or both.
And we'll work through it as we have in the past, but if we're on treated numbers don't start increasing soon we could see an impact on treating in shipments by the end of the year.
Despite the challenges the industry is currently dealing with on the supply side, we do remain focused in the cross tie market on increasing our market share and we continue to drive efforts to renew key class one contracts by the end of 2021 on the ex.
Spansion of of our North Little rock facility to be completed by the end of this year of further puts us in position for EBITDA improvement in 2020 two as it will lower our cost footprint enable and enable us to compete for a greater share of the market.
Larger market indicators paint and overall encouraging picture for the rug business. The railway tie association forecast to 7% growth in 2021, and three 6% in 2022 for cross ties primarily driven by the commercial market while class one volume, they're seeing holding at similar year over year levels.
Current raw material availability of slightly constricted accordingly, the RTA, but the review for the next six to 12 months is ideal which is probably a little more optimistic than our view at this moment and as mentioned earlier.
Remains our biggest near term risk.
The rebounding national economy, and government stimulus payments are expected to spur increased consumer spending our ta reported the retailers' inventory to sales ratios are at their lowest levels in the decade, meaning freight activity should benefit from suppliers needs to replenish inventory.
Rail traffic continues to recover from 2020 levels as of March 31st year to date. According to the American Association of railroads.
The total U S carload traffic decreased two 6% year over year, while intermodal units increased three 2%.
Combined year over year to U S traffic was up by five 6%.
The AAR ads that railroad volumes correlate strongly with manufacturing output. So recent signs of strength point to positive indicators for the railroad industry.
Yeah.
Slide 33 shows the impact of maintenance of way projects on the on the rubber segment and even though COVID-19 negatively affected this business tremendously maintenance of way still generated EBITDA and margin improvement in 2020.
And the backlog of railroad structures projects. This year is 50% higher than a year ago pointing to increases in profitability from a full pipeline of incoming work.
In 2021, we don't anticipate as much disruption from COVID-19, as compared with the prior year, which should improve project efficiency.
Actively working to expand the crosstie recovery business, including the addition of class one accounts.
We also see more growth potential by leveraging the synergy between landscape cross ties and the needs of our PC customers.
The combination of new value added services lowering costs and increasing efficiency for rail customers point to a growing revenue model and the maintenance of way business is emerging as a bigger proportion of our rubber business, having transformed from one of our most negatively impacted businesses during the pandemic and to now representing roughly half of all of the EBITDA increase.
For reps in 2021.
On slide 34, we see that the outlook for Siemens Sea has become somewhat brighter thanks to anticipated growth in manufacturing in the steel aluminum and carbon black industries.
According to IHS Markit automotive group light vehicle production is projected to grow about 14% in 2021 globally with the U S production expected to increase 24%.
As such we expect growth in overall, EBITDA and margins as demand improves and cost management continues.
The performance of the CMC through the pandemic has proven that the model. We have built can consistently deliver EBITDA in the low to mid teens, regardless of the economic cycles.
In North America, we see more tar production in 2021 regaining normal levels in the second half of the year, we expect transportation cost savings as imports from Europe of reduced or eliminated.
Pitch increase of demand look to be solid while higher average oil prices should maintain higher profitability in our salary and hydride business.
Our CMC footprint worldwide has been streamlined to the degree that we can now support reinvestment of our Stickney, Illinois facility.
And these improvements underway since last year are designed to provide long term reliability by minimizing the risk of operational disruptions like what recently occurred.
Higher profitability of anticipated through increased efficiency upgrade of technology.
Costs improved environmental performance and most importantly, an enhanced safety record.
Slide 35 details CMC operations in Europe, and Australia, Europe remains the region with the most commercial challenges is the slowdown on an aluminum capacity has affected our competitors customer base disproportionately and increased pricing pressure for the remaining base of business.
While higher oil prices represent the net positive for our overall CMC business. The one area, where it presented challenges in Europe, where it makes the call to our more competitive raw material for the car black feedstock market, thereby pushing down supply and putting pressure on pricing. This is where our commercial and supply chain chain group has proven to excel over the years and managing these ever changing dynamics.
And I'm confident the there'll be successful managing at this time as well.
In the Australia market, we see that higher China of benchmark pricing will support of healthier carbon pitch pricing environment should this pricing remain in place, we anticipate that Australia will generate the largest year over year improvement of the three see it with the regions.
Pulling everything together on slide 37 of our sales forecast for 2020. One remains on the range of $1 7 billion to $1 8 billion compared with $1 six $3 7 billion in the prior year.
The Robson the CMC businesses are expected to generate a similar range of increase with PC estimated to be somewhere close to prior year sales numbers.
On slide 38, we're increasing our EBITDA projections for 2021 to a range of 220 millions of $230 million compared with two of 11 in the prior year the.
The biggest driver in our increased guidance as our increased confidence that PC will see elevated levels of demand at least through the third quarter.
The EBITDA estimate estimate translates to an increase in our adjusted EPS guidance, which is seen on slide 39, and is now $4 35 to $4 60 per share compared to the prior guidance of $4 to 425 per share in prior year adjusted EPS of $4 12.
Finally on slide 40 of our capital expenditures were $24 2 million in the first quarter or $19 5 million net of $4 7 million of cash proceeds from asset sales.
The cash proceeds came from the February sale of our fallen to the facility and the final release from escrow of dollars held from our 2018 sell of clairton.
B cell is an important milestone for koppers as it will save us considerable ongoing costs and cash flow and allow us to refocus efforts on cash towards the growth and improvement opportunities in our other than our other businesses.
We remain on track to spend the net amount of 80 to 90 million on capital expenditures. This year with half of that dedicated the growth and productivity projects that are expected to generate $8 million to $12 million of annualized benefits.
A summary of greater confidence in our ability to deliver significantly better financial performance. This year now that we're through the first four months of 2021 and have better visibility on the second and third quarters.
On 2021, I remain excited about the many opportunities that we have to further build upon our integrated business model focused on wooden infrastructure.
And look forward to sharing the details of how we believe we can take koppers to over $300 million of EBITDA generation by the end of 2025 at our upcoming September 13th Investor Day.
With that I would like to open it up to any questions.
Well now begin the question.
That's a good question so on.
The one on the best home phone.
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The.
For the West Coast come from Chris Howe Barrington Research. Please go ahead.
Good morning, everyone in the fantastic results and that's the only encouraged by the increase in guidance and are looking forward to your Investor day.
In September.
Just starting off with the PC segment and the housing environment.
As you all know the demand continues to exceed the supply in the market.
You know it should continue at least for the next few months.
As we look at the market overall, and we look further out down the road of her.
The different opinions on.
You know what this could mean long term for the housing market as far as.
Pressure on the housing market as we look.
Maybe three to five years out what's your opinion on that.
And.
Obviously from a profitability standpoint, the company as a whole and on the segment level basis is doing well.
So despite.
Some top line pressure in the long term.
The benefits that you're seeing underneath the top line.
Could help offset that and still continue your EBITDA cadence.
Thanks, Chris and the.
Just thinking about your first comment or question about the housing market and sort of its impact on PC and the.
On things like that sort of longer term coming out of the pandemic.
Actually we were just talking about this yesterday in regards to the strength of the market in general in the you know the steady upward climb in that hole in that whole industry coming out of the great recession.
We bought this business in 2014 it had it had seen a few years of of improvement coming out of.
You know that 2008 2009 downturn of we've seen nothing obviously, but a continued improvement in volumes in demand and the time the we've owned it.
All of that has been in.
In an environment of low interest rates.
And in a relatively healthy economic environment ex.
Except for the period last year, which then got juiced up by by government stimulus and just the whole change in and social habits. So you know I think that the market overall.
As a certainly a solid foundation.
But the you know if there's any one thing that sort of remains.
Is that.
Variable out there that could change matters. It could be you know an inflationary environment, where the rates begin to move up put you know puts pressure on you know.
On the whole home equity borrowing puts pressure on.
Existing home sales and those sorts of things.
We haven't seen that and we havent experienced on environment. Since we've owned this business and so on that.
The big sort of wildcard for me that I look at it.
It could have an impact.
By the same token I have people that work for us and that work in the industry that would say that you know that sort of in the environment. You know debt that maybe doesn't result in as many.
As much activity on the existing home sales side may be pouring more money back into the home remodeling projects since people aren't looking.
All of that is.
Unknown really at this point and we'll continue to obviously keep a close eye on it for US the focus remains on just trying to continue to.
<unk> be the leader in this market to continue to look for ways that we can continue to serve what has been a strong market for consolidation on the treater side of things and we're fortunate that our biggest customers are some of the biggest consolidators. So as they consolidate the market you know there's benefits to them.
Benefits to us as of as a supply partner and that's all worked in our favor and we expect it to continue moving forward.
So that's you know that's my my view on sort of where things are on.
On on the housing and sort of its potential impact beyond the next couple of years for us.
Of the overall business and the all.
All of that we put into trying to eke out more and more profit on maybe not a significantly growing top line other than what you see is done over the past couple of years I'll. Just say, we have a pretty resourceful group of employees that debt pride themselves on trying to figure out a way.
As to do things better and save money and so we have we have a we have a long long laundry list of projects that are in the queue. You know that we're working on to to continue to optimize our business make our operations more efficient drive down costs.
And also grow it in areas, where we don't have a lot of presence today and.
And that's some of the stuff that we will be talking about win when we have the investor day in September.
In more detail behind each of the different initiatives that we've been working hard on if you will behind the scenes, but haven't really been vocal about in terms of you know.
Putting out there into.
Into the end of the investment community. So we're excited to tell that story, we think it's a good story.
Thank that we we have a pretty good runway over the next couple of years and yet the business overall is in pretty good health.
Okay.
I think my math is right and it's about 50.
15 million of additional EBITDA per year.
Through the time period, you had mentioned in the past some non core assets that are.
Weather up for sale or available.
As we look at that in conjunction with product Adjacencies.
Those in combination of separately could be accretive.
We get to.
Further out.
Yeah, I mean, we.
All of our businesses have some interrelationship today, we don't really have anything.
Any more of that as kind of stand alone out there.
By itself.
There's there's some dependency within the organization on just about every not on just about on everything that we're doing today that being said there are other there are pieces of the business of that maybe arent.
It's obvious in terms of of fitting within the core of what we do.
And.
You know in a healthy M&A environment, where where the.
<unk> are being tossed around I think we would certainly.
Have to listen to.
And be willing to listen to any offers that might come in for for any of those types of businesses, but you know it.
On the Grand scheme of things, it's small overall because of the core of what we do is really is really.
Within the three business segments at large and debt that is debt does represent 90% or more of our business.
Okay and then just.
My last question here.
Leverage is at three four times a year.
Headed back as what I expected the given your history of debt reduction.
Can you talk a little bit about the pipeline of opportunity I know it seems like multiples on a general sense of our high but once we get to that sweet spot for leverage.
Is there.
Really anything in the market that would.
Push that leverage above the comfort range or is that kind of the.
Way, we should think about leverage going forward as you know roughly two to three times.
Yeah.
So it's interesting because we've twice in the last six to seven years have have have taken on more leverage to make what we thought were and still believe were key acquisitions.
And it's really helped us transform and realign our business portfolio and we think that's reflected in the numbers. So we couldn't be more happier with the acquisitions we made.
And you know the.
The the way we did them was the the cheapest way of financing it and and that's.
We were banking on a building up a confidence level within the markets debt that we again have that discipline history of being able to lever up and pay down debt.
And add accretively to the business.
I'll be honest with you I'm disappointed in terms of the market's confidence on our ability to do that as demonstrated by the <unk>.
The stock has traded over the past couple of years so.
From that standpoint, I think we will be more cautious about about moving back up into the three and a half plus the four of half times range just based upon the punishment that we'd been seem to have been dealt out of four.
For four of going that route in the past so.
Well, we'll take that as data points to that will inform our decisions in terms of how we capitalize the the overall organization and the approach.
The acquisition acquisitions moving forward it can't help of color of just based upon what we've experienced.
That's very helpful and great quarter again.
Thanks for taking the questions yeah. Thanks, Chris.
Thank you. The next question is from Mike Harrison of Seaport Global. Please go ahead.
Hi, Good morning can you hear me Okay, Yes, yes, we can.
Great.
Wanted to ask a couple of questions on the <unk> business first of all of you mentioned that the class one volumes are pretty steady or maybe improved a little bit year on year on what is the outlook for the rest of the year around class one and would you expect to see any improvement within the commercial.
Crosstie business and reps.
So Mike I think I think it all comes down to two.
Available crosstie availability on untreated crosstie availability and that really comes down to.
Of the market's willingness to pay up for for increasing cost of hardwood.
Hardwood crosstie so.
Yes.
Is anything right Theres product there if you're if you're willing to pay for it and what we what we have tended to experience here over the last two to three cycles of this.
As you know this this general lagging or reluctance to.
The two move pricing up to get the level of of supply that is wanted in the market and so.
There's this this sort of tension that exists until it gets to a point, where we're where people realize that they are now.
Putting at risk.
The ability to get the volumes that they want the need and then and then then you see you see pricing move up you see the supply move up but because of the fact that this is the this is a it's a process that requires.
The product to sit for a long time before it can be a season to treat that creates issues within within the supply chain. So what what we're trying to do is to you know to get the customer base to understand where the markets are at and and and agreed to.
To.
Do what needs to be done to get the supply of untreated ties in sort of the weekend. We can keep that we can keep that that part of the process of moving along so that we can supply later in the year when you know.
They're going to need the the additional crosstie. So so that's the that's the challenge we currently face the challenge we faced.
At least you know this would probably be the third time, we faced it in the the six years I've been doing this job. So it seems to be like in every other year.
Sort of thing every two to three years that we run into this the.
The demand is there.
But what we're dealing with a constrained the supply chain at this point in time that is going to have to change.
Alright, and then it sounds like the tie disposal business is maybe hitting its stride are accelerating a little bit and I know that you've had some.
Initiatives to get customers on board with that service.
But as you're starting to see some acceleration there you seem the the leverage and the types of returns.
That you would have expected when you acquired that business, maybe talk a little bit about the opportunity going forward.
We're still actually early on you know what I mean again, we bought that business number one we bought we bought.
The business in that space.
It was the you know the best operator so.
They fit within our business model very very nicely because.
They are not the cheapest, which we've often been told you know we are not the Walmart of suppliers, but but there's there's a reason for that and and so the business, we bought with sort of similar on the line and the high quality.
The dependable reliable business, you know do what they say.
And deliver on their promises.
There was a cost of that and so the challenge has been.
Working through a market that in the past.
Is has not really had to pay.
Much too to get that service and and as a result of the service has been spotty.
And maybe not always of the highest quality and not maybe not always reliable.
And it's getting the customer base to understand the value of what they're paying for and and you know when you deal with with different issues.
When that's when the opportunities arise.
Our ability to deliver on what we say you know gains the confidence that the people then become willing to pay the right price to get the service and so we've added we added a key class one account that we did not have last year and we're still on the early parts of that.
All things seem to be going well, we're working on another one of debt.
Debt will be important and that was the whole the whole process of getting into that market was to use our relationships in the class one market to take a reliable operator in the help expand their business, while also helping to secure our underlying crosstie business because you know the to go.
Hand in hand, so you know, it's it's still got a good ways to go in terms of I think the opportunities there.
But so far.
Like what I've seen in the couple of years that we've had it.
Alright, and then finally over on the CMC business, maybe walk through.
The margin dynamics and how you think that could play out during the rest of the year I guess my view is that we.
We should see some volume recovery.
And probably pricing.
The pick up as demand is coming up as well.
Even as you're seeing.
Coal tar costs are improving.
But maybe talk about those different dynamics, yeah. So it's different from region to region. I think we mentioned in the prepared comments, Australia is on track to have a really strong year.
And thats due to the recovery of of the industries in China, which are supporting higher pricing, there, which allows us enables us to support higher pricing in that region of the world So that the.
Business is going to have a nice 2021 compared to 2020.
North America, the the supply demand dynamics appear to be all moving in the right direction.
We get a.
We get a decent benefit from oil moving up here in North America that will be helpful.
Improved steel market here in the U S will support a.
The raw material supply that enables us to get what we need domestically instead of having to pay higher cost of import that raw materials. So all of that pointing in a positive direction for North America.
Europe as you know.
It's probably the most challenged because of rising oil in Europe whats different pressures on them.
As I mentioned again in the commentary there, they're really they're really good and really experience of being able to handle that but it does put pressure on them in the short term in terms of trying to balance that difference between change in pricing and change in raw material.
Of course, but.
Overall, we feel pretty pretty good about the Siemens the environment in 2021.
On the one thing I want to make clear because they often somehow gets lost is the.
The changes we made in that business to restructure it and to to rightsize. It have put that business and as demonstrated in 2020 when demand was really really hurt that we could still actually produce.
Above 10%.
EBITDA margins and that is that just would not have been the case five years six years ago in the in the form of environment and that's and that was also in an environment, where oil prices were down significantly as well. So we've we've really changed the dynamics of that business model.
The two to get respect to of margins through through just about any environment again, the dollars of move up and down based upon demand and pricing, but our ability to maintain of profit margin.
Is has shown to be pretty consistent over the past several years in a couple of different crazy environments.
Alright, thanks, very much thanks, Mike.
Thank you and the next question comes from Liam Burke of B Riley. Please go ahead.
Good morning Leroy.
Hi.
Leroy you mentioned.
Thinking or considering a greenfield plant construction in Brazil does that meaningfully hit you on the Capex line.
Well you know.
It meaningfully so.
For us.
I would view it in the Grand context of things Liam as not being necessarily meaningful in terms of our overall Capex I will tell you that you know and we will talk about this and gain greater detail on September you know the ability to hit 300 million or better in 2025 right that doesn't.
Come without some cost right there there's capital that we're gonna have to put into play to grow our business.
And that's part of that's part of what we'll be talking about then.
We're still going through the numbers in terms of you know what what size, we would need an <unk>.
Just the the dynamics there down in Brazil in terms of of you.
You know what makes sense, obviously, we won't move forward with anything that we don't think has the right returns associated with it but the.
But I think of overall in the in the Grand context on Grand scheme, the Grand scheme of things.
It's going to be a relatively modest.
The investment compared to some of the bigger investments we've made here in the past couple of years.
Okay.
The rail tie association numbers of expected demand for rail ties.
Typically I mean, you would think about demand plus or minus 1% of year based on traffic volumes.
The numbers are high or are those just a reset or a correction or is that a more favorable market dynamics Yo accounts, yes.
It's.
The good question.
To be honest with you Liam I'm not sure of what to make of it at this point.
No I think that the.
The market overall, while it's seen some declines in the past couple of years.
Some of that some of that pullback probably was a little too much which is going to result in maybe.
An uptick above the typical 1% to two percentage you might see in a given year to catch up a little bit.
But you know I don't I don't view it as meaningfully different you know over the next two to three years to be honest with you. If it's above that couple of percentage Mark certainly on the class one side of things.
It'll be it won't it will be just a percent or two there for maybe a couple of year period is the sort of things rebalancing sort of correct themselves from the the sharper pull back that we saw.
In the past few years.
So that could be a much more.
That business could improve pretty nicely then I mean, if we're looking at more consistent growth, which you havent seen in quite a while.
The daily myself on the old days, when it was one 1% but consistent.
Yes, I mean, it will certainly of anything for us that we're able to improve on utilization in our in our facilities.
As of plus right, we do get nice leverage out of that so you know.
It's one of the reasons why we're we're attempting to.
The more aggressive at taking greater share of what has been a smaller smaller market. So so yeah.
Just the 1% to 2% change in volumes can be meaningful for our business.
Alright, Thank you Leroy yes, Sir thank you.
Yeah I hope you have a question. Please press Star then one.
Our next question comes from Chris Shaw on those credits.
Go ahead.
Hey, good morning, everyone. How are you doing good correct Chris.
Thank you started the team and see.
Obviously, you know down revenue yet up EBITDA and you know you attributed some of that to cost savings and better efficiency on.
Are those are those things.
Permanent or would the volumes come back or are you going to see the Cree.
Creep up on costs and so basically the asking if when things get normalized is that business at a higher profit level going forward.
Yeah, I think Chris you know the stuff that we're doing will eventually support a higher a higher level of profitability all things being equal.
There is the.
There is a constant sort of back and forth between you know the movement of raw material costs and pricing and the adjustments that we that are made that debt will have some impact plus or minus in any given period, but on of all things being equal basis, Yes, I mean.
The the improvements that we're making with support.
A generally higher level of margins on a go forward basis in a in a bay.
Basically on a stable environment, but you know that that business is one that does move up and down on the sales line.
And so you're always dealing with the impacts of that has been as I mentioned.
We've targeted to be between 10, and 15% we've been more or less squarely in the middle of if not to the upper end of that again.
Outside of the pandemic and we think coming out of the pandemic that we can certainly be back in net in net probably closer more to the 13 to 15 ish percent range.
And can you just remind me the.
How cold car for you is priced again, I mean, I remember going back it was annually, but I know, it's not that way anymore. How quickly does the move and what are the sort of the factors that I forget you know it's different it's different based upon regions.
And in some cases, it's done quarterly in other cases semiannually other cases annually, but.
We one of the things that the big changes that we made when we were sort of restructuring and reorganizing that whole business was trying to put ourselves in a better position to be able to.
Either pushed through or give us the ability to manage.
<unk> quick.
Quick changes in that raw material cost in that and I think you see that that's what you see probably most of all reflected in the stability of our margin profile on the last several years as you know we've been pretty successful with it realigning our contractual terms to enable us to do that so we don't find ourselves in an upside down.
The position for a for a significantly long period of time like we would have in the past.
But as of that cuts both ways on theoretically if youre doing better the attractive yep.
And then again I think people are kind of asking it but just the.
The outlook for flat class one the Thai growth and that's just because you think the the lumber issue is gonna be a difficult one of our they really just don't they just don't have the the demand right now that they they just don't want to put more ties and debt.
Well I think I think that I think with an <unk>.
Proved a rail traffic I think it's you know there it's going to be a little tougher for them to maybe find.
The track time that was a little more available to them.
Just last year going through this I think overall there are in pretty decent shape and it's you know, it's a little bit different for each class one customer as well. So so some were absolutely seeing higher.
Higher volumes others.
Hum, we're we're pretty healthy and robust last year, they got themselves a little bit ahead of the game, they're pulling back a little bit so.
See it's kind of balancing itself out across the entire our entire network.
The the supply side of things.
I don't I think the supply side of things gives us more downside risk to be honest with you than it does for things to remain flat for us to even be able to supply them in a flat <unk>.
Volume environment, we're going to need to see an uptick in untreated crosstie supply.
Interesting of just quickly I know of Kansas City, Southern Kansas Southern sorry, It was the yep.
You have to do their own rail ties and then I don't I always assumed you werent.
Canadian Pacific was not a customer of yours, but does that that merger mean anything for you. The business do you think.
It depends I mean.
So we are of supplier to them from on the untreated crosstie side of things and.
I guess, if it comes down to a change in philosophy.
With the with a new owner of that doesn't want to be in that business then yes. It could.
Great. Thanks, a lot. Thank you.
Okay.
This concludes our question and answer session I would like to turn the call back over to Mr. Li on for closing remarks. Please go ahead.
Yeah, I just want to thank everyone for participating on today's call and thank you for your interest continued interest in koppers and hope that we'll be able to see you at the Investor day upcoming on September 13th they say if everyone. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now.
Disconnect.
Okay.