Q3 2021 Koppers Holdings Inc Earnings Call
[music].
Good morning, ladies and gentlemen, thank you for standing by welcome to Koppers Q3, 2021 earnings conference call and webcast. At this time all participants are in a listen only mode.
If you need assistance. Please alert a conference specialist by pressing star followed by zero.
Following the presentation instructions will be given for the question and answer session. Please.
Please note that this event is being recorded I will now turn the call over to <unk> Mcguire. Please go ahead.
Thanks, and good morning, I'm quit Mcguire, Vice President of Investor Relations welcome to our third quarter 2021 earnings Conference call. We issued a press release earlier today, you may access it via our web site at Www Dot Koppers Dot com.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website and will be referenced in today's call.
Distant with our practice in prior quarterly conference calls this is being broadcast live on our website and a recording of this call will be available on our web site for replay through February 13 2022.
At this time I would like to direct your attention to our forward looking disclosure forward looking disclosure statement on slide two.
Certain 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.
In light of the significant uncertainties inherent in the forward looking statements included in the company's comments you should not regard the inclusion of such information as a representation that its objectives plans and protective results will be achieved.
The company's actual results performance or achievements may differ materially from those expressed in or implied by such forward looking statements.
The company assumes no obligation to update any forward looking statements made during this call references may also be made today to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.
Joining me for the call today are Leroy ball, President and CEO of Koppers, and Mike <unk>, Chief Financial Officer, I'll now turn the discussion over to Leroy. Thank you Quintin and good morning, everyone.
Now for those of you who joined US in mid September for our Koppers Investor Day. We hope you enjoyed the event. Our team was very encouraged by the interest shown in to have the opportunity to provide some additional context on our long term business strategy.
While I'm disappointed to post lower than expected results in our first quarter. Following that day I'd also like to emphasize that we're playing the long game, which as we all know it can be difficult to do as a public company.
That's where our focus has been and that's where it remains and that's why we were excited to to take the opportunity to unveil our five year plan.
Our interest is is in attracting an investor base. That's also in it for the long game.
Those investors that are interested in owning an essential and underappreciated business model, which has a lot of upside should have a lot to like with the future we've laid out for koppers.
Play the full webcast from our Investor day on September 13th is still available on our website.
So now let's get started with a review of our zero harm safety performance for the third quarter with special attention on COVID-19 as seen on slide four.
So following guidelines set by the center for disease control and the occupational safety and Health Administration Koppers continues to require math for those working indoors with some flexibility as case numbers dictate in each region.
The vaccination rates for the company as a whole currently track at 64% globally with 61% in North America.
And 81% across our international locations.
<unk>, Denmark lifted as COVID-19 restrictions throughout the country now that more than 75% of its population is fully vaccinated and as a result, we relaxed protocols that are newborn facility.
And Australia Lockdowns are being lifted is vaccination rates there have exceeded 60%. However, we have elected to keep our COVID-19 protocols in place at our sites there for the time being.
And I saw this morning, as we we're making final preparations for this call that the details regarding president binds executive order had been released in over the coming days, we'll be reviewing it to determine exactly how it must be deployed and we'll put the necessary plans and protocols in place.
As described on slide five we're going through our annual open enrollment process in the U S for employees to select or health insurance for 2022, and after careful consideration we've decided to institute a monthly health care surcharge to employees that remain on vaccinated.
<unk> was made to help mitigate the additional cost of care for those that end up hospitalized as a result of contracting COVID-19.
The data supports that for those who do contract Covid, the health results and cost of care for unvaccinated individuals' far exceeds that for the vaccinated.
Cannot in good conscious NASCAR vaccinated employees to bear the additional cost that is brought on by others that are consciously choosing to not vaccinate for their own personal reasons.
And also we've adjusted our zero harm lifesaving rules to reflect current Covid safety requirements and were maintaining all safety and health protocols regarding masks and social distancing.
All Koppers office locations have been made available to employees and those who have been vaccinated must wear masks and common areas fallen vaccinated employees are encouraged to work remotely.
Vaccinated individuals who've come into the office month wear masks and maintain social distance at all times.
We're not planning a return to the office beginning on January <unk> of 2022, and our hybrid working arrangement between office and home will remain in effect and available to employees as appropriate.
At this time as shown on slide six and as announced back in August Mike <unk>, Our Chief Financial Officer, and a critical member of the Copper's leadership team in the past seven years has announced his retirement effective at the end of this year and that means that this will be Mike's last earnings call. So I want to recognize him for that and take a moment to thank him for everything that he has brought to our organization.
In his time here, we will miss him I will miss him and all of US at Koppers wish him all the best in retirement.
Next week, Mike will be recognized here in Pittsburgh with a career Achievement award as a CFO of the year for his tremendous contributions. He has made to the several organizations. He has worked at during his career.
Without any further Ado I'll hand over the podium to Mike for the final time Mike.
Thanks Leroy.
On slide eight consolidated sales for the quarter were $425 million, which was a decrease from sales of $438 million in the prior year quarter.
Sales for ups were $187 million down from 191, PC sales fell to $115 million from 148, and Siemens <unk> sales rose to $123 million up from $99 million.
Moving on to slide nine adjusted EBITDA for the quarter was $54 million or 12, 7% down from $67 million or 15, 2% in the prior year.
Also compared to the prior year adjusted EBITDA for reps was $11 million down from 19 P. C. EBITDA decreased to $20 million down from 32, and see them and see EBITDA improved to $23 million up from 17.
On slide 10 sales for ups were 187 million a slight decrease from the prior year's results. We attribute this mostly to declining class one cross trading volumes and the impact of exiting our contract with Texas Electric cooperatives, we are now serving the Texas market by treating poles.
At our own facility in Somerville, Texas, and this creates opportunities for longer term sales growth for the company.
These declines were partially offset by increased activity in commercial cross ties and rail joints hardwoods for cross ties remain a procurement challenge is there is continuing strong demand in the construction industry for other uses for that would in fact crosstie procurement is down 38% in the quarter over last.
Year, while crosstie treatment has increased slightly by 3%.
On slide 11, adjusted EBITDA for reps was $11 million compared with $19 million in the prior year.
This was driven by lower Green crosstie purchases, which led to reduced capacity utilization and absorption at the plant level. We saw reduced track time due to increased levels of rail traffic along with the inefficiencies caused by employee turnover, which led to an approximately $2 million decrease in <unk>.
EBITDA for our maintenance of way business. Additionally, the costs incurred by converting from penta to our CCA preservatives had a negative $2 million unfavorable impact.
Moving onto slide 12 P. C achieved sales of $115 million compared to 148 in the prior year volumes of preservative in North America were down while wood Treaters continue continue to closely manage inventory due to higher lumber prices as the economy has re.
Opened in various areas travel and other in person goods and services have been taking a higher share of discretionary consumer spending. However, we've implemented price increases for our copper based preservative, which is somewhat offset these headwinds.
On slide 13, adjusted EBITDA for PC was $20 million compared with $32 million in the prior year. This change can be attributed to lower sales volumes compared with pandemic fueled demand in the prior year and higher raw material and logistics costs, partially offset by price increases.
EBITDA from Europe, and Australia was about $3 million lower due to European regulators regulatory impacts on our product portfolio and rolling Lockdowns in Australia, and New Zealand.
Slide 14 shows C. M N C cells at 200, and a $123 million compared to sales of 99 million in the prior year. The increase can be attributed to higher pricing for carbon pitch carbon black feedstock and say I like anhydride, partially offset by lower volumes of carbon pitch.
Moving on to slide 15, adjusted EBITDA for CMC was $23 million compared to 17 in the prior year. This increased profitability was driven by favorable pricing and strong operational efficiencies, partially offset somewhat by higher raw material costs.
Compared with the second quarter prices of major products. This quarter increased 11%, while average cold toss coal tar costs increased 8% compared with the prior year quarter average pricing of major products rose, 24%, while average coal tar costs went up by 39 per.
Sent in that particular quarter.
Now, let's review our debt and liquidity as seen on slide 17 at the end of September we had $762 million of net debt with $326 million and available liquidity and we also remain in compliance with all of our debt covenants.
Our net leverage ratio was three four times at the end of September down from three five times at the end of December 2020, and three eight times in the prior year quarter.
Longer term, our net leverage goal continues to be between two and three times.
In connection with our ongoing efforts to evaluate potential financing options. We are reviewing various refinancing alternatives.
For both our $500 million senior notes, which are due in 2025 as well as our existing bank credit facility.
With that said, we have not yet determined to move forward with any particular refinancing transaction at this time.
With that I'll turn the call back over to Leroy.
Mike.
Now before getting into a review of the business sentiments and our outlook for the remainder of this year I'd like to share. Some notable accomplishments of koppers and our people in the third quarter.
On slide 19, you can see the remarkable accomplishment achieved by our entire coffers wood products team at Longford, Australia, who have reached a 100% vaccination rate. Our first location of 20 or more employees to reach that milestone, which is an incredible feat and we're extremely appreciative of this achievement.
Our newborn Denmark team is dealing with the pandemic in outstanding fashion as well the 93 employees. There have achieved a 95% vaccination rates are passing even the national rate of 75%.
It's due to their willingness to take the COVID-19 virus. So seriously that we've had no infections at newborn.
Finally in our corporate headquarters in Pittsburgh, where we have 177 employees, we've crossed the 90% vaccination threshold.
I believe it's important for our headquarters personnel to set the right example of what we expect to see throughout the organization, so I'm, especially happy to see us get to that level.
Kudos all around to our teams at Longford Newberg in Pittsburgh are truly making copper zero harm culture to heart.
On slide 20, we wanted to congratulate our truck drivers the unsung heroes of coffers, who load transport and deliver our products all over the world safely and with special attention paid to limiting and eliminating negative environmental impacts.
At our annual zero harm truck driving championships 10 drivers were identified as finalist for their overall performance and we are appropriately recognized.
As seen on slide 21, the Pittsburgh Post Gazette named Koppers headquarters location in Pittsburgh is one of the top workplaces for 2020, one with a special recognition of our attention to health and wellness.
This honor determined by a third party and using survey results of employees across the greater Pittsburgh region noted our company for its alignment coaching engagement leadership work life balance and more now is the competition for talent intensifies. It will be the flexible adaptive culture. We've created that focuses on the whole person that we expect to bring is a competitive.
Vantage for Koppers.
So and I want to move on to the review of the current and forward looking business sentiment, which includes third party data and feedback we've received from individuals working within the industries in which we operate.
And we've seen some significant shifts impacting our businesses during the third quarter. Many attributable to the after effects of the global pandemic, including various supply chain issues and rising costs I want to stress. The headwinds. We're facing are short term and surmountable, they're not indicative of any underlying negative systemic changes to the foundations of our business model, which.
As important.
So first stop is a review of what we see in the fourth quarter for performance chemicals as outlined on slide 23.
Now, while we had a respectable third quarter it fell a little bit short of our internal expectations.
Residential preservative volumes took a little longer to recover from the deep trough that began in the last couple of weeks of June as lumber prices were in a steep and rapid freefall.
In the fourth quarter looks to generate a sales volume improvement of about 8% over third quarter results building on North American residential demand that began in the back half of October.
Year over year sales volumes are expected to finish about 14% lower than the record volumes in the prior year, which were driven by the strong demand during the pandemic in 2020.
Now the trend of our largest customers leading the way in consolidating the residential treaty market continues to work to our advantage and as a result of consolidation Thats occurred. This past year Copper's will now be the largest wood preservative supplier to the top three U S. Big box retailers, which is a tremendous achievement and shows what can be achieved with strong proprietary technology and strong partner.
<unk>.
Industrial demand in the U S should remain strong at a 5% year over year increase through September as the Penta preservative is phased out for utility pole treatment.
This is one of the areas that we've dealt with some supply chain disruption and therefore haven't been able to fully keep up with demand.
However that situation has recently improved and we appear to be on a path to restocking of the inventory channel.
The book of demand remains strong and we've been challenged to keep up so the full potential of industrial sales will still be a little bit limited somewhat by short term supply chain challenges in Q4.
We are seeing the cost of labor energy shifting in materials, all trending higher and as such we'll need to continue pushing further price increases that started at the beginning of the year.
Despite what some are saying these inflationary cost pressures are not transitory. So we will need to continue the acceleration of global price increases that began in early 2021 and that of totaled $15 million, thus far through September.
And foreign markets strong demand and a weaker dollar have South America on track for a record year, while regulatory pressures on European products have led to a forecast of record low results there.
Rising copper prices and are re valued inventory have helped our PC results. Despite the recent volume drop off.
It does create some short term risk of earnings volatility for this segment at the price of copper were to fall rapidly before our price increases step in to fill the gap.
Looking at the external data some encouraging news came from a 7% rise in the sale of existing homes with all four U S regions experiencing increases in sales and housing demand. According to the National Association of real estate Realtors DNA.
<unk> also noted that it expects homebuyers to continue fueling a strong market security mortgages before potential interest rate increases.
In October the consumer confidence index was 114 and increase from September and reversing a three month decline as concerns began to lessen regarding the spread of the delta variant of the coronavirus.
Spending intentions have risen for homes cars major appliances, and travel all of which are projected to drive economic growth for the rest of this year.
Slide 24 provides a look at the longer term PC picture from 2022 through 25 <unk>.
Currently our early take on Micropro volumes in North America next year that we expect them to be between 'twenty, and 'twenty and 2021 volumes, but.
This is based upon an industry consensus view that volumes returned to normal after the pandemic and we see market share growth through the friendly treater consolidation mentioned earlier.
We also expect North American industrial volumes will rise as the pent to preserve the continues to get phased out of the utility pole market and customers moved to other preservatives, including our CCA indoor client products.
I mentioned earlier that we're on track for our best year ever in South America, which is a rapidly growing market for wood preservation.
Support that growth, we will be looking to expand our footprint in that geography earlier. This year, we purchased property for a greenfield manufacturing operation in Brazil and are currently going through the detailed design engineering phase of that project.
Capital that's already in our strategic plan and supports our preservative growth strategy.
The expansion of production capacity for basic copper carbonated our Hubbell, Michigan facility was completed this past quarter that development, along with regulatory approval of a new domestic BCC supplier promises to significantly reduce our dependents on overseas suppliers for that critical material.
Thereby strengthening our micro post pro supply chain.
Now to keep up with rising costs, we are continuing to implement price increases that should add more than $20 million in 2022 and more than $60 million in 2023 based on current copper prices.
We also anticipate higher working capital values moving forward due to the higher cost of raw materials and increased inventory levels that will likely carry for some period until we're comfortable that our concerns around supply chain have been alleviated.
From an R&D standpoint, we are pleased to report that we've been issued a patent for our next generation Micropro product, which will remain in force through early 2038, and we will begin commercializing. It in 2023. This is a big deal as it improves upon our current product line, while extending the protection of our technology.
Our support for next year's volume projections as a leading indicator of remodeling activity estimates that spending on home renovation and repairs will reach 9% annual growth and surpassed $400 billion by the third quarter of 2022.
Also the expansion in homeowners equity opens the door to increase numbers and scope of home improvement projects in the coming year, even as labor and material costs are projected to rise.
All in all the future continues to look very bright for our performance chemicals business.
On slide 25 offer some insight into our <unk> business for the fourth quarter.
Near term sales have been affected by the downstream effect of PC related supply chain issues, but that situation is already improving and should be much improved by the time, we get to the end of the year now.
Similar to our PC business inflationary cost pressures will mean continued U S price increases that began in the second quarter and have continued through the third quarter on an accelerated pace.
Year to date through September those increases have totaled $8 million and will need to continue to cover the rising cost of labor chemical fuel and transportation.
As mentioned previously market production of Penta will cease at the end of this year and most of our customer are choosing the transition to our PC produce CCA enduro climb treatment solutions for southern yellow pine utility Poles.
Our Vedalia, Georgia plant completed its conversion from penta CCA in the third quarter, which did have a negative impact on Q3 results as Mike had earlier indicated.
At our Vance, Alabama facility, a similar similar conversion will occur in the fourth quarter, which will similarly impact Q4 results.
A new dry Killen also like located our advanced plant came online in the third quarter, while similar Kona <unk>, Virginia will be completed in the fourth quarter. Although these projects are disruptive in the short term. They are part of our network optimization strategy to reduce costs by becoming more efficient and taking closer control of our supply chain.
With supply seem relatively stable, although we're seeing pricing pressure stemming from increased demand for small logs and pulp and export.
The logistics costs are remaining high due to increased diesel cost availability of third party trucking assets and labor costs.
All of this goes back to our need to pass through our increased costs.
Sales of pulls in Australia have been affected by pandemic related shutdowns, although a vaccine rollout in new South Wales is expected to ease restrictions over the next few months.
Turning to slide 26, we offer a peek ahead to next year and beyond for our <unk> business now as mentioned earlier sales of CCA treated polls will increase as 65% of our U IP customers have selected CCA as a preservative of choice with 10% still undecided.
In 2022, we'll continue to build on our Texas creosote pull business as we leverage our poll recovery business to add new customers and improve our cost structure sticking.
Sticking with the network optimization theme, we expect a much improved cost footprint to add meaningfully to EBITDA in 2022 through the capital spent this year for plant conversions and drawing capacity.
Furthermore, we continue to evaluate our training footprint and could pull the trigger on the consolidation of another screening plant in 2022 pulling that volume into the remaining plants in our network and saving even further on fixed costs.
Basic demand for Poles should remain high at least over the first half of 2022 due to project work and upgrades that were deferred during the pandemic.
Longer term demand profile should also remain positive as utilities need to continue to maintain their infrastructure to avoid service interruptions as remote work continues and extreme weather events continue to increase.
So an ample supply of softwood should keep whitewood prices stable for the foreseeable future.
On the preservative side, we've been granted a registration to produce copper naphtha, Nate which would add another oil borne preservative to our portfolio at this point, we're in the process of assessing the most effective path forward and whether it is two externally procure or independently produce.
In 2022, we expect to implement $15 million to $20 million in annualized price increases to cover the increased costs, we're experiencing and that I had outlined earlier.
Now for next year in Australia, we see strong underlying pull demand to replace poles damage from recent natural disasters, while a new dry Kona has been installed at our <unk> location to meet the growing demand for softwood due to hardwood supply constraints.
Under our railroad products and services business on slide 27, the year over year trend of Green time purchases looks to have bottomed out and should comparatively improve beginning in the fourth quarter.
At our current pace of $4 4 million ties purchased this would represent a new low driven by customer reluctance to pay higher prices to meet their demand levels.
Treated and sold ties are flat year over year, suggesting the crosstie insertions are not an issue.
Railroad customers are using high green tie prices to defer purchases with demand being pushed out to mid 2022 and hopes that costs will abate.
Trucking problems persist from a lack of drivers and pent up demand limiting access all of which are driving transportation rates higher.
Commercial crosstie profits should improve as comps get easier, but the market overall is still very competitive.
As announced in early October we closed on the sale of the property, where our former Denver facility was located providing net proceeds of $24 million in the fourth quarter.
The American Association of railroads reports total year over year U S. Carload traffic increased 8% intermodal units increased 10% and combined carloads and intermodal units increased by 9% as of September 30th.
<unk> added that limited availability of downstream trucking warehouse capacity because of the supply chain logjams are impacting intermodal volumes for the time being.
Now the association added that significant network investments have made the rail industry more adaptable and able to adjust the ongoing changes in operational and market conditions, which bodes well for rail traffic long term.
Fourth quarter view of our maintenance of way business calls for it to sequentially improve and come in slightly better than last year's fourth quarter.
Full year EBITDA. However is on pace for an all time low due to a collection of direct and indirect COVID-19 related factors, such as labor shortages Lockdowns and reduce track time due to increased rail traffic mentioned previously.
On slide 28 discusses our view for our <unk> business in 2022 and beyond our current projections have supply issues around green ties beginning to subside with a rebound beginning in the second half of 2022.
In the meantime, we have been working on the development of a long term strategy to smooth out the peaks and valleys of the procurement side of the business and we're planning to use the experience we've had addressing the factors that created volatility in both our CMC and PC businesses in.
And applying those same factors to address this challenge.
We expect a minimum of 20, a minimum of $20 million in price increases to flow through our topline next year to account for higher material cost that we've been experiencing thus far this year.
We're close to finalizing the last of our contract extensions on the class one contracts that were set to expire this year and when complete most of our class one volume will be secured beyond 2025.
While overall volumes are set to increase 3% to 4% in 2022 with share remaining flat volumes are expected to grow by more than 10% in 2023. The planned completion of expansion at our North Little rock facility will support a large portion of that projected volume growth as a result, working capital will increase due to higher green type purchases and volte.
<unk> growth.
While I mentioned the disappointing results for maintenance of way business. This year on a bright note we're carrying the highest backlog we've had in that business and years into 2022.
It should improve meaningfully as we gain cooperation from the railroad for track time and see better crew continuity.
We're addressing our turnover issue through a newly designed compensation model for portions of our maintenance of way group that focuses on what that workforce values.
Finally, we are actively working to expand our crosstie recovery business and add more class one customers to our portfolio.
While there is no getting around the fact that 2021 has been a disappointment for Rps business. The investments, we're making now will set us up to make a major jump in profitability over the next two years.
Looking at the fourth quarter for our CMC business on Slide 29, we see strong demand continuing in key markets like steel and aluminum with production increasing in auto and other manufacturing industries.
Energy crisis in China, along with global supply chain issues have caused raw material shortages and longer lead times for finished goods, which has supported our business model outside of China.
One example is the high pitch export pricing out of China, that's partially partially caused by the previous factors that supports stronger pricing of our Australia and produce products that are tied to that benchmark.
Now our European business continues to experience and market pressure as a result of aluminum production cutbacks cutting into our customers.
Cutting into our competitors' demand, which has caused them to compete for business to replace what was lost.
In North America tire production is even with or maybe even surpassed what it was pre COVID-19, meaning we can reduce our higher cost tar imports from Europe, and shorten our supply chain.
Price increases on coal tar expected to continue globally, which will begin to compress margins somewhat in the fourth quarter pricing.
Pricing of products tied to oil like carbon black feedstock and phthalic anhydride should remain high and boost profitability.
On the downside, we're expecting volumes in our salad business to be lower due to customer supply chain issues impacting their demand. We're considering dissolving the previously closed K Triple C facility in China during the fourth quarter or early next year to substantially complete our China exit plan.
Slide 30 offers I look forward for CMC strong demand in aluminum and steel markets should continue into 2022 or longer with passage of an infrastructure bill in the U S and.
And as reliance on Chinese exports goes down and global logistics challenges continue our CMC business is poised to benefit.
A global review by IHS, Markit says that after making adjustments for production trends during the pandemic production of light vehicles worldwide is expected to see double digit growth in 2022.
And also it reports to the semiconductor supply chain is stabilizing which represents another positive step in the recovery of the automobile and other manufacturing segments.
More de carbonization projects to eliminate coke from the steelmaking process are occurring and we will further impact future coal tar availability.
But despite external pressures are focused footprint puts us in a solid competitive position to maintain our low to mid teens EBITDA margins in this business.
Ongoing improvements, we are making at our stickney facility will improve safety boost reliability and generate additional profitability.
Higher future crosstie volumes in creosote treated utility Poles will also have a positive effect on the <unk> business in the form of more distillate being upgraded from carbon black feedstock to creosote.
Our yield optimization project would further improve pitch yields that we get from tar from 50% of production to up to 70%, meaning higher sales and profitability in.
In a similar vein work on enhanced carbon products for use in battery anode materials continues in North America, Europe, and Australia and.
And those projects are not yet included in our 2025 projections, but could provide significant potential upside.
So on slide 32, our sales forecast for 2021 has been revised to be approximately $1 7 billion compared with $1 six 7 billion in the prior year to reflect the lower than previously expected PC volumes on our third and fourth quarter.
On slide 33, we are adjusting our 2021 EBITDA projections to now be approximately $220 million, which is at the low end of our previously communicated range.
Paris, Favourably with the 211 million generated in the prior year and will be our seventh consecutive year of EBITDA growth looking at the company in its current formation.
On slide 34, our adjusted EBIT EPS guidance is now expected to be approximately $4 12, which is comparable to our all time high 2020, adjusted EPS. Despite the negative impact of <unk> 40 per share from our higher estimated effective tax rate.
Now our 412 estimate for 2021 is lower than our prior estimate range, primarily due to our effective tax rate increasing from prior projections.
Finally on slide 35, our capital expenditures were $87 6 million year to date through September 30th or $78 7 million net of the $8 $9 million in cash proceeds.
We are on track to spend a net amount of 80 $80 million to $85 million on capital expenditures with approximately $45 million dedicated to growth and productivity projects.
So in summary.
While we always strive to do better I actually think it's pretty remarkable that we're on track to be in our most recently communicated range of guidance.
And actually right in the middle of the original guidance, we gave for the year back in February of.
Of course, how we're getting there is quite a bit different than what we thought but once again I believe that just highlights the strength and the diversity of our business segments, which tend to operate opposite of each other.
In a dynamic environment, we find ourselves in its tremendously helpful to not be reliant upon a single business or market to carry the day year in and year out.
It's been a difficult and draining couple of years, but I'm proud of how our team has weathered the storm and put us in a position to capitalize on the many opportunities in front of us and through a combination of significant price actions and continued execution on our high return internal projects I'm confident that we will take the next important step forward in 2022 towards meeting our 2025 goal of reach.
<unk> $300 million in EBITDA.
I would like to open it up to any questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
We're using a speakerphone please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Our first question is from Mike Harrison with Seaport Research partners. Please go ahead.
Hi, good morning wanted.
I wanted to say, congrats and best wishes to Mike It's been a pleasure working with you.
Thank you.
Hum.
There's a lot of term pack here.
I'll start with the <unk> business.
Just in terms of the untreated tie availability are there signs that that is improving near term it kind of sounds like you would expect.
The weaker utilization to start to improve by mid next year is that kind of the way we should think about things trending for now yeah, Mike I think what we're what we're seeing now is things that appear to be bottoming out.
And so we're expecting.
I think we're expecting.
Certainly the comps improve beginning in the fourth quarter and so I think we're going to see.
Year over year thing bottoming out in with with really the recovery happening I think beginning mid year of next year.
That's the current intelligence, we're receiving from our folks out in the field with what they are with what Theyre seeing.
And you mentioned the higher activity in commercial crosstie as presumably.
They're actually paying some relatively high prices. There can you talk about what is driving that higher commercial activity and do you expect that to continue into next year.
I think.
Again, theres a lot of disruption, obviously through the pandemic and it affected industries in different ways.
Certainly the class ones took the opportunity to do a lot of repair and maintenance they have bigger balance sheets and ability to do that I think some of the smaller.
Railroads, we're probably a little more cautious in terms of where they were deploying capital.
So.
I would say.
From that standpoint.
With the recovery beginning to occur and things opening up a little bit people getting a better sense of maybe what the future would hold will hold has as.
As provided some optimism to be to be.
No pushing more projects forward you had a lot of delays in terms of just how you could operate and certainly we've seen that in the construction side of our businesses as well, it's really it's where we've seen the biggest impact on productivity and efficiency, just just being able to get people working and working safely around the Kobe guidelines and protocols as well you had.
Different.
Different restrictions in different parts of the country and it is just a mess and so I think as things have started to open up more.
It gives the confidence for the short lines, probably to move forward with more projects and we're seeing that on the utility side as well.
Alright, and then within the performance chemicals business.
You walked through the European regulatory issue that you're that you have.
Seeing currently and I believe your one slide there said that you were planning on executing a restructuring of your European.
Business within performance chemicals can you talk about what that.
Is going to entail yes. So.
So we fall under the Biocide product registration act over in Europe for the products that we sell.
Sell into those markets and there's been a lot of review for re registration of a of a number of different products and raw materials over there that.
We've been going through as well as many others and there are certain things that have been getting.
Regulated out which are impacting.
Our product portfolio.
And so we're having to adjust with a different product line and figuring out how we move forward.
Again in and rebuild our profitability there.
We have a pretty strong foothold up in the Nordic regions and so we're looking at how we play to our strengths.
And actually utilize the technology that we've developed here and thats become a staple for residential treatment in the U S. Our micropro technology and introducing that product line over there so.
I'd say there is there is a lot of potential for improvement in that business.
And especially if we end up getting micropro qualified and in.
All out into the market over there we already have a extreme interest from.
A couple of large customers over there in supporting it so we're off to a good start.
Alright, and then within the CMC business.
It looks like volumes were kind of flattish or maybe even a little bit lower this quarter.
Yet you're kind of talking about.
Strong underlying demand dynamics, so maybe a little bit of color on what was going on with volumes.
In the third quarter.
So for that business, there can be a tendency again.
There is large.
Volumes of products, they get shipped and things can move from period to period, as well, which can have an impact but overall I'd say the the.
The demand level is strong due to the underlying markets and strength of the underlying markets in steel and aluminum.
Europe is probably where we faced the biggest challenge because again some of some of.
Our competitors.
Customers have not fared as well and so they've they've lost some business there as a result of curtailment of capacity and it just made for a more competitive environment. Overall, so we're fighting for volume, we're fighting for for price and margin and it just made for an over.
We're all extremely competitive dynamic there, but we'll work through it I think we're we're positioned.
Geographically better to compete.
And we also have the the balance of having our European business strongly linked to our North American business as well so that provides us some ability to again <unk>.
Flex back and forth between the two regions depending upon.
Who might be in a stronger position to supply at a particular point in time. So it's always a balancing act in that business and again, our our folks in that business to an incredibly great incredible job of of again managing that arbitrage between the raw material in the end market pricing, which can fluctuate.
Significantly in any given quarter.
Alright, My last one is for Mike I'm, not going to let him escape without a balance sheet related question you mentioned in your prepared remarks, some potential opportunities for refinancing can.
Can you just remind us what the rate on the senior notes in your current facilities.
Look like and maybe what's what kind of potential interest rate savings you could be looking for.
Yeah, Mike on our bonds, we have a 500 million outstanding which are due in 2025 at a flat interest rate of 6%.
And given what we're hearing from.
Our banks.
That we use both in our syndication.
Syndication of banks on the bank credit side as well as some investment banking firms that we use.
It looks like we could possibly refinance somewhere in the 475% to 5% range.
Which would knock.
A point or 1.25 points off our interest rate on those bonds. In addition to that.
Our bank agreement.
We believe theres been a lot of changes in the marketplace.
And the high end of our pricing, which currently is a formula but its about two 6% on the outstanding balance of our credit agreement.
We believe.
Which is at the high range of our current pricing grid, we believe that that would become the low range of our current grid would become the high range and a new particular.
<unk>. So there is interest rate savings as well as covenant relief.
And they're getting rid of some other things that have been a nuisance to us for the last five years, we believe that the market is poised for that we've been getting getting feedback along those lines.
And we're going to seriously take a look at that.
Alright, thanks for the details there.
Youre welcome.
The next question is from Alex Paris with Barrington Research. Please go ahead.
This is Chris Hall with research.
I'm not sure how they got that.
Hi, Chris.
Hi.
Had a few questions here.
The first surrounding the price increases.
<unk>.
No it's not surprising to hear given the current challenges of the environments.
We think about.
The PC segment for this question the price increases that our plan you mentioned the greater than $20 million.
In the greater than $60 million.
How should we think about these price increases in the context of catching up to what's been happening in the environment. While also taking into consideration what's still happening in this environment and when do you think you'll be.
At a comfortable price to cost coverage ratio in the PC segment.
Okay.
Chris I think I think in that segment, it's more it's more keeping up I mean.
<unk>.
I indicated we've been increasing price throughout this year.
And I think we've been pretty much in alignment with with what we've had.
And our cost increases so I think we've matched up pretty well and.
That's that's really the intent as we move out so I'd say, it's it's more keeping up and catching up on that side of the business. You know there is other parts of the business, where it will be it is more of a more of a catch up.
I'll use <unk> as an example, there and atmel business line, it's more catching up.
In PC, it's more keeping.
Okay.
Okay.
And then another question on the PC segment.
You mentioned the different remodeling trends still predicted to come in at.
Really relatively healthy comparable levels.
Once we get past the winter season.
I would think it would be fair to assume there should be some some level of pickup in remodeling activity as we head into the summer of next calendar year.
Yeah, Tommy typically that's what that's what we see so we're working off of a little bit about.
A strange.
Obviously, the pandemic spiked followed by the steep decline when lumber prices fell through the floor and truthfully.
People people, we had that pent up demand for people to do other things rather than stay home. So you had everybody had not on vacation renewing their season tickets doing all that stuff. They haven't been able to do for a long time and so their focus was not on building outdoor structures like it was in 2020 and and we felt that throughout the summer.
We thought that that.
That is people came back from vacation is they've got the kids back in school sort of post labor day, we'd see we'd see things sort of pick up to normalized demand because theres still a lot of.
Backlog I think in the project queue as well, we did not see the jump after labor day that we thought and we're expecting.
I will say the back half of October we have we have seen more of a pickup so I'd say, where we sit today.
We're starting to move in line with where we thought we would be we just thought it was going to happen a little bit earlier so.
Get through the winter months, and obviously, there's a there's a preparation in the early parts of the year to start to make sure that you all.
All of these big box retailers are fully stocked for the construction season. So we definitely would expect to see to see that Theres no question about it but right now theres still was actually a recovery in volumes from from the third quarter, because there was such a lull right following that huge surge in demand so fourth quarter volumes actually.
We're going to be better than third quarter, which is which is unusual and not typical.
Okay.
Okay.
And my last question you mentioned Youre reviewing.
The government Bill.
As we think about.
These potential benefits as you outlined in your Investor day.
What's your communication strategy to investors and to the street once you get a.
A better handle on how these bills.
Benefits come to fruition and what May mean for the business, both near term and long term.
Well I think we've always strive to be transparent.
With investors and.
We obviously give a bunch of information in regards to whats going on in our businesses and the industries. We operate in the the drivers that impacted so to certainly to the extent that there are things that we can pick and pull out of the ultimate Bill gets passed we will absolutely share that.
We tried to stress and really convey in a strong way back in September.
The roadmap to take us from where were at to where we're going is largely in our control right at their projects and things that we.
No through just simple successful execution should generate.
The returns that are attached to them.
Things that we.
That will impact us outside of that or just general.
Changes in <unk>.
In economic.
Demands for particular businesses, where each one of them might be able to sit in the cycle at a time, certainly the ability or inability to pass on cost increases through price, but the whole thing around sort of that additional demand above and beyond.
What we would typically see in our business isn't that might happen through again, an infrastructure bill that is absolutely on top of anything that we have put into our projections and numbers that we put out before so so yeah.
We're hoping that there's going to be things in there that we can.
See that will have positive impacts that we'll be able to add on to what we've talked about and if we do see that we will absolutely communicate it but it's a little early to tell at this point.
Okay, and if I may squeeze one more in.
This is the last one.
I wanted to tie it back to the Investor day.
You mentioned one of the key points is wood treatment expansion in some new geographic regions or territories like.
Like the Midwest, Texas, and the West Coast I know, it's only been.
Two additional months, but perhaps you can talk about those regions.
And how you're thinking about those over the next 12 months.
Yeah.
Although there's a lot of conversations that are going on a lot of a lot of work.
Planning work as to exactly how we would go about and what the best and a way in terms of.
Of of generating the best return so a lot of conversations both internally and externally.
That haven't developed to a point really where I have much news to share I mean.
The commercial development in the Texas region is ongoing and continues and.
And I think as time goes on.
We'll see more and more success, there again, which has which has upstream effects throughout our business as a result of the integration of our of our.
Production of of creosote into that into that creosote pull market.
And beyond that for Midwest, and West and West Coast, It's still a little early to get into many details there, but but there is a lot of work that's going on behind the scenes.
Okay. Thank you and.
Thanks, Mike, It's certainly been a pleasure working with you and best wishes on your retirement.
Thank you, Chris you as well.
The next question is from Liam Burke with B Riley FBR. Please go ahead. Thank you good morning, Leroy Good morning, Mike.
I am.
Leroy.
Of the <unk> business.
Procurement, you said tie procurement was bottoming.
What gets that recovering is it just the fact that the maintenance is so far deferred that the class ones are going to have to step in and buy or are they still waiting for prices to ease up yes. It's I think it's a it's a leveling out of <unk>.
Pricing, which is sort of the beginning of it right.
And so.
Nobody.
In this market as we've seen sort of historically really likes jumping in.
In a rising market they don't want to they don't want to add fuel to that fire and propel it even further upwards.
So they tend to be pretty conservative as prices moving up and pretty measured in terms of what they're willing to offer is increases to try and get their demand.
And what it takes is four four.
Our pricing to ultimately level out where they get comfortable that it's reached a peak.
And then.
And then you start to see some more jump jump in.
And typically what we obviously see afterwards as some.
Reversion back towards.
Towards the prior levels so.
With US right now seeing some leveling out here over the past three four weeks gives us hope.
I hope that we have reached at that peak and now we're gonna start moving in the other direction.
So any kind of using in prices you get the benefit of also.
The catch up on any kind of deferred maintenance.
Yes, that's right Liam I think that we like.
We feel.
Really excited about about the Rps business over the next couple of years because.
When you see the drop that we've seen due to the dynamics that we've talked about you do tend to see the snapback.
Occur two to catch up as you point out and then what we have going on now that's different than sort of where we've been in the past during these times as you know the.
The expansion in the work that we've been doing again.
Behind the scenes that will ultimately result in greater efficiency and lower cost structure.
While moving into a period of likely higher volumes all of that should.
Conspire to really propel the Rps business forward in a big way over the next couple of years. So.
If we would show the last five years each year, the ups and downs of each of the businesses right youre going to see all of them, having up years and down years Rps has had.
Think more down years and up years over that period of time.
The next couple of years for sure. We expect we expect Rps to be in the green and be one of the ones that are really moving the ball forward for the overall organization great.
And Mike.
Presuming the Capex is $115 million to $120 million for the full year would you anticipate being free cash flow positive for 2021.
Yes, we still do.
Not by much but we still do yes, great.
Thank you Leroy Thank you Mike.
Thank you thanks Sam.
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.
Hi, I just want to thank everyone for participating on today's call and also for your continued interest in koppers, thanks for sticking with us throughout today and.
Look forward to talking again next quarter stay safe everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.
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Okay.
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