Q4 2021 Koppers Holdings Inc Earnings Call

[music].

Good morning, ladies and gentlemen, thank you for standing by and welcome to Koppers fourth quarter 2021 earnings conference call and webcast.

At this time all participants are in 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 note that this event is being recorded.

I will now turn the call over to Quinn Mcguire. Please go ahead.

Thanks, and good morning, I'm, calling Mcguire, Vice President of Investor Relations welcome to our fourth quarter and full year 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 have also posted materials to the Investor Relations page of our website that will be referenced in today's call.

Consistent with our prior practice with our practice in prior quarterly conference calls this is being broadcasted live on our website and a recording of this call will be available on our web site for replay through may 23rd 2022.

At this time I would like to direct your attention to our 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 Companys comments, you should not regard the inclusion of such information as a representation that its objectives plans and projected results will be achieved.

The company's actual results performance or achievements may differ materially from those expressed in or implied by such forward looking statements.

The company assumes no obligation to update any forward looking statements made during this call.

References may also be made today to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.

Joining me for our call today are Leroy ball, President and CEO of Koppers, and Jimmi Sue Smith, Chief Financial Officer, I'll now turn the discussion over to Leroy. Thank you Quinn good morning, everyone.

I want to start by saying I'm pleased to report that we again delivered strong results for 2021 and finished the year slightly ahead of our revised projections, we provided last November move.

Moving into 2022, I and the rest of our team are excited to continue on the path of executing on our long range growth plan to deliver 300 million of EBITDA in 2025.

As always I'll begin my comments with an update on zero harm as seen on slide four.

2021 we achieved our lowest 12 month rate of serious safety incidents in the company with 16 of our 43 operating facilities working accident free for the entire year.

And what's more we stayed on track for our fifth consecutive record year of proactive leading activities, which are used to correct conditions or behaviors that proceed potentially life altering injuries.

We conducted more than 18500, leading activities across the company in 2021, and this is an encouraging sign that means that our efforts to prioritize training and education around identifying and mitigating the most potentially dangerous exposures are generating positive outcomes.

Our culture of zero harm continues to move deeper into the organization through training and workshops for our frontline employees as well as sharing practical applications among our plants.

Part of the training for frontline employees includes conducting peer to peer observations and as our worldwide team has come to understand the key to zero harm is engaging with employees and leaders at a personal level by working aggressively to anticipate identify and eliminate the risk of serious incidents.

Dish and we're making progress on improving our transportation fleet safety program to influence safe driving behaviors.

We've implemented measures to increase transparency improved tracking of key performance indicators and identify opportunities for synergies. We continue to conduct zero harm training for our commercial truck drivers and have begun to include defensive driving techniques later.

Later in 2022, we'll hold our second annual truck driving championship competition in recognition of the employees, who do the essential work to safely deliver products to our customer base.

And we will continue to develop enhanced tools for monitoring fleet compliance as well as for coaching our truck drivers.

Although we still have much work ahead of us on our journey to zero and I am proud of the progress we continue to make year over year when I send my sincere thanks to our zero harm team and our employees worldwide for staying relentlessly focused on safety.

Moving to slide six I'm pleased to announce that today, our board of directors reinstated a quarterly cash dividend of five cents per share of koppers common stock, which will be paid on April four 2022 to shareholders of record as of the close of trading on March 18th 2022.

Those who followed us for the past seven years, you know that we've worked hard to transform koppers into a stronger and more resilient organization and as a result, we've been able to withstand the many challenges thrown our way to produce consistent reliable profitability and cash flow.

And as we're moving into the next phase of our strategy, we feel it's important to bring more balance to our capital deployment strategy and begin returning cash to our shareholders through dividends and share repurchases.

In August of last year, our board approved a $100 million share repurchase plan and now we feel it is prudent to reinstitute, our long suspended dividend.

Our board's decision to reinstate a dividend demonstrates their confidence in the strength and resiliency of our business and our ongoing ability to drive growth.

Now I would like to welcome Jimmi Sue Smith to her first earnings call as Coppers, Chief Financial Officer since assuming the role on January 1st of this year welcome Jimmi Sue take it away. Thanks Leroy in.

In this morning's press release, we provided our results for the fourth quarter and full year 2021 and as seen on slide eight we achieved record performance in a number of categories. This year.

We had a new high in consolidated sales of $1 7 billion.

Operating profit finished the year at $157 million matching last year's record.

Adjusted EBITDA was a record 224 million up from $211 million in 2020, the seventh consecutive year of improvement and a record year for our performance chemicals segment.

Adjusted EBITDA margin was 13, 3%, marking six straight years in the 12% to 14% range.

We also set a new record for adjusted earnings per share of $4.21 and reported operating cash flow of $103 million, which brings us to six of the past seven years with more than $100 million in cash flow.

We also reduced our net leverage ratio to three three times at year end, while investing $125 million in the business.

And finally, the book value per share of Koppers equity has never been higher than year end 2020 one.

Now moving to our discussion of fourth quarter and full year 'twenty 'twenty. One results on slide 10 consolidated sales for the fourth quarter of 2021 were $405 million, an increase of $12 million or 3% compared with $393 million in the prior year.

By segment.

For reps decreased by $12 million or seven 5%.

For P C decreased by $11 million or eight 5%.

While sales for salmon and sea increased by $36 million or 38% compared to the prior year quarter.

As shown on slide 11 consolidated sales for full year 2021 of 167 9 billion increased by $10 million as compared to the prior year.

Despite the pandemic 2021 sales represented the highest level of revenues in the history of the company, excluding K J C C.

By segment sales for <unk> decreased $29 million or 4% for the year.

Sales for P C decreased by $23 million or 4%, while sales for salmon and sea increased by $61 million or 16% compared to the prior year.

On slide 12.

Fourth quarter adjusted EBITDA on a consolidated basis was a fourth quarter record of $49 million compared with $47 million in the prior year.

EBITDA margins in both periods were 12% with the fourth quarter of 2021 driven by record results from our CMC business.

EBITDA margin for our PC segment was lower than prior year, which reflects a more normalized level of profitability.

Our rubber business continued to experience a weak market environment.

Slide 13 shows record of adjusted EBITDA for the full year 2021 of 224 million or 13, 3% compared with 211 million or 12, 6% in the prior year.

The record EBITDA was driven by our PC business, which delivered a record adjusted EBITDA year and strong results from our CMC segment.

Offset by year over year decline in bulk.

Slide 14 illustrates the trend of our adjusted EBITDA over the years, excluding contributions from our sold K J C C operation.

This performance validates the success of our core strategy of leveraging our vertically integrated business model, which has delivered higher levels of adjusted EBITDA every year from 2014 through 2020 one.

On slide 15 sales for reps were down by 12 million for the quarter, primarily due to lower crosstie volumes as well as reduced utility pole demand in the U S and Australia, partly offset by pricing increases.

Market prices for untreated cross ties remain elevated due to strong demand in the construction market, resulting in lower purchases by railroad customers.

On slide 16, adjusted EBITDA for the reps was $6 million compared with $10 million in the prior year quarter.

Factors contributing to this decline include lower volumes for cross ties and utility Poles.

Fixed cost absorption from lower capacity utilization.

Cost associated with converting to new pole treatment preservative systems, and higher raw material and transportation costs.

Price increases partly offset these factors.

Sales for the PC segment on slide 17 for $119 million compared to sales of $130 million in the prior year quarter.

The decrease is attributed to a shift in consumer spending habits in the United States to pre pandemic levels.

Thus the lower volumes of preservatives in North America reflect a return to more normalized demand levels.

That said, we are seeing higher demand in international markets, such as Brazil, and New Zealand.

Adjusted EBITDA for performance chemicals on slide 18 was $19 million compared with $23 million in the prior year quarter as a result of lower volumes and higher input costs.

Partly offset by price increases we have implemented globally.

Slide 19 shows D M D sales at $131 million compared to sales of $95 million in the prior year quarter.

The increase is primarily the result of strong end market demand supported by higher sales prices for carbon pitch distillate and chemical which was partly offset by lower sales volumes of carbon black feedstock in certain regions.

On slide 27, So you had a record quarter for adjusted EBITDA at 25 million compared to $14 million in the fourth quarter of 2020.

The increase in profitability can be attributed to favorable demand and a positive pricing environment, partly offset by higher raw material costs.

The average pricing of major products in the fourth quarter increased 9% from the third quarter, while average coal tar costs were higher by 11%.

Compared with fourth quarter of 2020 average pricing of major products was 46% higher while average coal tar costs increased 49%.

Yeah.

On slide 22.

Total capital expenditures in 2021 were 125 million or $85 9 million net of cash proceeds from divestitures and insurance.

On a gross basis, we spent 51 million on maintenance 22 million on zero harm and $52 million on growth and productivity projects, primarily related to the capacity expansion of our railroad crosstie treatment facility in North Little rock, Arkansas.

As shown on slide 23 from an overall capital allocation standpoint.

We are committed to a balanced capital allocation plan that includes investment in the business as well as return of capital to shareholders through dividends and share repurchases.

Leroy just mentioned our board has reinstated our quarterly dividend, which we expect to grow overtime and.

In addition, we bought back $11 $5 million of shares in 2021, primarily in the fourth quarter.

This return of capital is a strong indicator of our confidence in our ability to grow and generate cash according to our strategic plan.

Finally, as seen on slide 24 at year end, we had $738 million net debt and $348 million in available liquidity. Our net leverage ratio was 3.3 times as of December 31, 2021 compared with $3 five times at the prior year.

We continue to be committed to our long term goal of two to three times net leverage note that our current debt balance is solidly in the middle of that range at our 2025 EBITDA goal of $300 million, meaning.

Meaning that we have a limited need to further reduce debt to hit our targeted leverage in 2025.

Given the progress that we have made to strengthen our balance sheet. We are changing the focus from paying down debt to growing EBITDA as a means of reducing leverage.

And with that I will turn it back over to Leroy. Thank you Jimmi Sue.

Before moving on to a discussion of the business sentiments impacting our various segments I'd like to offer a quick review of some notable happenings across the company since we were last together.

So slide 26 highlights some well earned recognition for Koppers. Our company was named as one of America's most responsible companies for 2022 by Newsweek magazine for the second consecutive year.

Newsweek partnered with statistics to identify the winners from 2000, plus U S companies across 14 different industries.

In honor to again be recognized by Newsweek for our company's performance in environmental social and governance areas and the credit along with my Thanks goes to our team members worldwide.

The Pittsburgh business times spotlight of two individuals from our leadership team Jimmi, Sue and our Chief Sustainability Officer Leslie Hyde in two separate feature stories in recent months.

We're proud of these accomplish members of our koppers team, who demonstrate leadership in our community as well as in as well as within the Coppers organization.

Slide 27, let's two recent leadership appointments that will help propel us forward on our path of sustained growth trade.

Tracy Mccormick has been elected as treasurer transitioning from her post as assistant Treasurer. She has been with the company since 2011 and brings a depth of experience and knowledge of our businesses and finance organization.

And also dance Veronica has been named Vice President of growth and innovation, a new role at Koppers.

Transitioning from his position as vice president of purchase purchasing and strategic marketing, Dan will help us pursue ongoing growth opportunities in a variety of different areas by challenging the status quo and enabling our business leaders to execute the day to day in our strategic initiatives.

Well, Dan will have responsibility for M&A. This move should not be construed as us looking to go heavy on an M&A strategy.

Our approach to acquisitions has not changed we will continue to evaluate opportunities on their merits and based upon the value. We believe we can create for shareholders by adding to our portfolio.

There are many ways to grow and Dan and his team will be tasked with finding and driving those opportunities to a successful conclusion.

So next I'll be providing an overview of business sentiment, both short and long term.

There's a lot of information on each of the next several slides, which represent a culmination of feedback from employees industry contacts and independent sources.

Not going to reference every bullet point, but we'll stick to the high level themes, we're tracking the Walton really dictate our success or failure in each of the business lines.

So on slide 29, we see an overview of the important drivers for performance chemicals in this coming year.

Everything begins with demand and while we're getting a little bit of mixed signals. We believe that 2022 still continues to present, a healthy demand profile for the north American residential treated wood market, which drives the bulk of our business.

The existing home sales data consumer confidence and repair remodeling projections, all paint a rosy backdrop for home improvement spending.

Drilling down specifically into the product segment, we care most about treated wood with you a little bit more cautious outlook.

No question that volumes are in the process of normalizing from their pandemic fuel peaks.

We did see a more respectable year over year comp this past Q4 compared to the sizable volume drop off we saw in Q3.

The early part of 2022 is showing volumes in line with our expectations were about 10% to 15% better than 2019, which was our last normal year.

Lumber prices begin rising again in the latter part of the fourth quarter current levels or close to three times as high as where prices dropped to in Q3 and the early part of Q4 last year.

With the rise in lumber prices, we once again are seeing lumber treaters, keeping inventory levels low to ensure they don't get caught with a lot of high priced product when prices fall.

The overall market environment, maybe a little uncertain, but our business continues to be supported in the near term by strong customer base. One that continues to be aggressive and consolidating treating capacity, which will once again provide additional units in 2022.

As a result of treating consolidation that occurred in 2021, our PC group has now achieved a position as the number one preservative supplier for treated was sold by the top three U S home improvement Big box retailers.

While core industrial preservative demand should be strong in 2022, it is more likely to be driven by the phase out of pentachlorophenol and its replacement by our CCA enduro client product as opposed to significant volume increases in the broader industrial treated markets now.

Now I'll address that further when I cover our U IP business we.

We do however have opportunities to further grow our market share in industrial products and we plan to be more aggressive in this product category going forward as we're close to maxing out on the residential side of the business with a significant customer additions that we've made in the past few years.

In fact, we just recently brought on a 60 year industrial customer of one of our competitors.

I believe we can convert more business based upon our commitment to the industry and the capital that we've allocated a product development operations reliability and the strength of our customer and technical service.

Internationally, we expect continued strong demand in South America in 2022 after a record 2021.

We recently agreed to begin serving what will be the largest treater in South America. After its capacity expansion is completed.

And when we begin shipping later this year they will represent the largest customer for us in that region.

Now as regulatory pressures continue to impact our European products, we've implemented a restructuring plan to streamline our business footprint and product portfolio in that region.

On the cost side of the equation, we're seeing major inflationary cost increases in 2022 with the persistently high price of copper, leading the way with.

We're projecting approximately $50 million in higher cost and performance chemicals. This year with approximately $30 million $30 million in price increases offsetting some portion of that.

In addition, the situation with Russia, and Ukraine is causing logistical issues with raw materials for our fire retardant products and further driving up costs.

Now back filling most of the net cost increase in 2022 was the increased sales volume, we expect plus 8 million in benefits from various network optimization projects aimed at increasing capacity.

The net result of all those moving parts as we expect our PC EBITDA in 2022 to finish at approximately $96 million or about $6 million lower than our record 2021 results.

From a working capital standpoint, we expect inventory levels for PC to remain high throughout 2022, and this is due to the higher cost of materials as well as our desire to ensure that we avoid running short on product. If we encounter shipping delays as we did in Q3 and Q4 last year.

As you can see on slide 30 of the longer term picture for our PC business continues to look very promising.

Challenge, we will face heading into 2023 is realizing the additional price increases we will need in order to offset copper cost and other inflationary costs.

And copper in particular has averaged anywhere from 50% to 100% higher than pre pandemic levels.

So that could be as much as a $50 million in additional price that will need next year based upon next year being 2023 based upon where the copper markets currently are at.

From a market share standpoint, we had another recent positive development in landing, 100% of the supply requirements for a major west coast customer, we formerly shared with a competitor beginning.

Beginning in 2023, we expect to take on 100% of this customers business under a new five year agreement.

North American industrial volumes of chromate, copper arsenic or CCA will continue to grow as that preservative displaces penta treated product.

Our penta is being phased out of the North American market due to the last producer closing its capacity in Mexico and the recent decision by the U S EPA to not renew the penta registration for wood treatment.

Now we also continue to look at whether we want to get into producing the other oil borne products that will displace the balance of the penta business and have not made a final determination as of yet.

In Brazil, we purchased property for a greenfield manufacturing site to support our growing business in that country.

We're still a couple of years from breaking ground as we work through the regulatory approval process, but expect to have the new capacity in place sometime in 2026 and.

In Europe part of our restructuring efforts involve getting micropro approved and commercialized, which we expect to happen within the next few years.

Already received interest from the market for this product and are developing our production plan.

The successful expansion of production capacity for basic copper carbonate or BCC at our plant in Hubbell, Michigan, along with the recent qualification of a new domestic BCC suppliers strengthens the supply chain for our flagship PC product micropro by eliminating the need for overseas supply.

As mentioned last quarter, we've been issued a patent for the next generation Micropro product, which improves upon the efficacy of our current product and will remain in force through early 2038.

In the process of commercializing this product and plan to bring it to market over the next several years.

Slide 31 provides an overview of 2022 for our <unk> business again, starting with demand first utilities or expecting to show increased demand for coal volumes in 2022 due to project work and upgrades deferred last year due to the pandemic.

This holds true even though omicron has slowed production levels at the end of Q4 and the beginning of this year.

The PC supply chain issues in Q3, Q4 that had a downstream impact on our <unk> business have created a backlog of demand that we're almost finished working through.

Inflationary cost increases and the threat of higher interest rates seems to have had a negative effect on palin quotes for the time being we're currently digesting this development to determine whether it is temporary or not.

As mentioned earlier market production of Penta ceased at year end 2021, most of our customers are electing to use our CCA enduro climb treatment solutions for southern yellow pine utility Poles.

We're estimating that approximately 65% of our legacy penta treated product will convert to CCA related products in our PC business actually have crews that benefit for increased CCA business. Although you IP can realize greater throughput at their plants treating with CCA, creating greater operational efficiencies.

Historic price increases now being introduced are expected at $8 million in sales this year.

We continue working to pass on higher raw material labor and transportation costs that werent covered by higher pricing in 2021. In addition to 2022 cost increases.

We have been and continue to be hampered by difficulty in attracting and retaining our workforce at certain of our plants and also maintaining a steady roster of truck drivers whether employed by koppers, where third parties.

Internal resources spent considerable amount of time trying to fill spots while operations and logistics works through the inefficiency brought on by the regular turnover. It's a significant issue, where we hope to see improvement in 2022.

On the project side, we have about $5 million of EBITDA benefits built into 2022 from various strategic projects. These include the conversion of our plants in vidalia GA to CCA in Vance, Alabama, and a copper naphtha, Nate which was completed during the last couple of quarters of last year.

And the new dry kilns that we installed in advance as well as nuisance Virginia.

Also expected to contribute to the improvement is the planned sale of our underutilized Sweetwater, Tennessee plant and the consolidation of that capacity into other treating facilities on our network with.

We scaled back operations at Sweetwater earlier, this year and have been winding down inventories as we worked through a sale of Atlanta and associated equipment.

Now I would supply remains relatively stable, we're aware of pricing pressures from high demand for small logs and pulp export as referenced earlier the costs associated with trucking logistics are expected to remain high due to fuel charges labor costs and availability of third party trucking assets.

On the international front pandemic related shutdowns have impacted Australia sales in the short term, while our current vaccine rollout in new South Wales is expected to ease COVID-19 related restrictions over the coming months.

Slide 32 provides the longer term outlook for the IP business due to ongoing remote work patterns and extreme weather events utilities need to ensure the maintenance of their infrastructure to avoid service interruptions in our hardening the grid.

To better prepare for the unexpected most major utilities are trending towards stocking storm inventories, which would add to sales volumes.

In addition, the infrastructure Bill passed in 2021 has a 119 billion earmarked for utility infrastructure improvements that should further support a strong demand cycle over the next several years.

Overseas, we're seeing continued underlying long range pull demand in Australia to restore power lines. After natural disasters, such as wildfires in cyclone and we also took steps to solidify our ability to shift volumes in Australia. The softwood hardwood availability becomes more difficult by adding a dry kiln at our <unk> location last year.

We're in the process of adding peeling of drying capacity in the Gulf coast to serve our Somerville, Texas plant and we're finalizing the terms of a lease in Louisiana or in the process of laying out the plant footprint in obtaining quotes for equipment.

Current plans are to be online by the end of this year.

And when that occurs we will significantly improve the raw material cost profile of our summerville plant, which will enable us to compete for more business.

Finally, we're conducting due diligence on property that would provide a potential base of operations in the western U S to serve the industrial treating a wood preservation chemical markets.

We're early in the process, but view this as an exciting opportunity to access an untapped market for koppers, while also providing us the ability to significantly lower our cost of goods for our PC business more to come as these plans develop.

On slide 33, we moved on.

To the 2022 outlooks for our railroad products and services business.

Where were expecting a minimum of $20 million of price increases to flow through this year to account for higher material costs.

And we're expecting overall crosstie demand in 2022 to increase 3% to 4%, while we were expecting.

4% to 5% increase in our volumes.

The longer it takes for the untreated tie dynamics to change however, the more our plant improvement for Rps. This year has put in jeopardy.

The $4 4 million ties purchased in 2021 represent a new low in the data I've seen that goes back to 2012 as customers resisted paying elevated prices to meet demand levels and saw mills have moved on to cut for other markets.

You have pulled out from the bottoming out in crosstie purchases that occurred in Q4, which means we need to see a greater acceleration of increased purchases when things do begin to improve we're going to reach our improvement expectations for this year.

As with other business segments trucking issues persist as a lack of drivers and pent up demand limit access and drive up transportation costs on.

On the commercial front crosstie profits continue to be lower even with easier comps illustrating the highly competitive market dynamics currently in place.

From an industry trend standpoint rail traffic rose higher than 2020 for most categories with total U S. Carload traffic six 6% higher year over year intermodal units up four 9% and combined U S traffic rising five 7%. According to the association of American railroads.

This is indicative of the hot economy, we're in and if we can procure over 6 million across times this year and realize ourselves volume targets. We can add 5 million in EBITDA to 2020 one's totals.

Add on another 4 million from strategic initiatives aimed at network optimization, and Rps should see $9 million year over year EBITDA improvement in the crosstie business alone.

Labor and Covid related issues impacting our maintenance of way business much more impacted our maintenance of way business much more severely in 2021 than originally expected.

Collectively this business line hit a new low in EBITDA in 2021, as we dealt with significant inefficiency inefficiencies and crewing due to frequent turnover lack of track time due to higher traffic and inflationary cost increases.

The good news is there is nowhere to go but up from here and as we pull out of the pandemic, our maintenance of way business lines should revert to a more normalized profitability level.

We're expecting 5 million of EBITDA improvement to occur for maintenance of way in 2022, and this would still leave US several million short of where we think this business can be in the next few years.

Now slide 34 outlines the longer term view for Rps are our U S business.

Most of our class one contracts that were set to expire in 2021 have now been extended beyond 2025.

<unk> locked in a substantial base of long term business now.

While 2022 volumes are expected to increase four to five per cent for koppers, we anticipate volume growth of more than 10% in 2023.

<unk> production capacity at our facility in North Little rock will be completed later this year and will be a key driver of that volume increase moving forward.

Increase will of course require working capital to increase accordingly, as greater green tie purchases will be needed to support the volume growth.

One of the key projects, we're devoting resources to is figuring out how to smooth out the untreated tie cycles that seem to rear their head every few years and are the biggest key to making this business more stable.

While we doubt there is a silver bullet to solve the issue completely we do think there could be other strategies for helping to manage through the short term shocks in the market.

And these will be strategies, we haven't deployed and that as of yet and that could provide a competitive advantage to koppers. If we can help the railroads better manage through the competitive pressures for their cross time material.

I spoke earlier about the challenges we face in maintenance of way due to the pandemic one of the benefits of the struggles to get work done is that we are enjoying a higher maintenance of way backlog than in recent memory and we'll be well positioned as track time frees up and we maintained some consistent level of crew continuity, we're continuing to work on expanding our crosstie recovery business and has some bright prospects, but this has turned out.

To be a long lead time sales process due to the complexity and specific nature of matching supply to demand on.

<unk> continued our team continues to make slow progress and it will take some time.

Looking at 2022 for our CMC business on Slide 35, we see strong demand from key markets along with increased production forecasted in the automotive steel aluminum and carbon black industries, along with high oil prices. All of these things are positive indicators for <unk> from both a demand and pricing standpoint.

Now balancing that out as an energy crisis in China, combined with global shipping and logistics issues that are causing shortages in raw materials and long delivery times on the finished goods that support our business model outside of China.

And Europe certain aluminum producers have had to curtail protect production due to high energy prices, increasing the corresponding market pressure.

As a result competitors are seeing reduced demand from their traditional customer base and therefore seeking replacement business.

Now, we talk often of how cost trails pricing. This business in the last two years illustrated that perfectly in two very different environments.

We realized over $60 million of price increase in 2021, and as a result, we're able to translate that into a $31 million increase in EBITDA over 2020 and.

And we're currently projecting to get close to 20 million of that back in 2022 as cost continues to catch up.

Our price curve begins to flatten out, but we can offset $8 million of that through upgrading distillate material to carbon pitch as part of our enhanced carbon product initiative, and we achieved cost savings from other operational efficiency projects.

Now our projections for the CNC business only account for the market dynamics supporting our business to maintain its current strength through the first half of this year, which is as far as we have visibility.

The other wildcard that we have to account for is the Russia, Ukraine situation as we sourced approximately 20% of our coal tar raw material for Europe out of those countries.

And while we have contingency plans developed to keep supply flowing the potential for an impact on our supply chain cannot be discounted if the situation does not to escalate.

Slide 36 takes a look ahead for CMC through 2025, the strong demand from the aluminum and steel markets should continue particularly in the U S with the passage of the federal infrastructure Bill.

And its reliance on Chinese exports declines in worldwide shipping and logistical challenges start to alleviate we expect that our CMC businesses will stand to benefit.

There have been additional announcements in 2021 on de carbonization projects to reduce or eliminate coke from steelmaking and already this year Cleveland cliffs has closed their coke facilities and falls be West, Virginia, and Middletown, Ohio, neither of which served koppers.

The trend toward new direct reduced iron in electric arc furnace projects will only reduce co production further in the future, resulting in less domestic coal tar and put significant pressure on the three remaining small distillers.

Work continues on several projects to enhance the end products from our distillation process positioning them for use in higher value markets and displacing lower value products from our product stream tell.

Testing a third party feedback continues to be positive and success. In this area is still a few years down the road could change the profit dynamics in this business to make it the highest margin business in our entire portfolio.

Now on slide 38, our sales forecast for 2022 was approximately $1 8 billion compared with $1 six 8 billion in the prior year to reflect a projected topline improvement in every business segment largely driven by price.

On slide 39, our 2022 EBITDA projections is at $230 million on a comparable basis. This will be our eighth consecutive year of EBITDA growth.

Once again, our diversified portfolio shows ups and downs across the three business segments, our ups business hit a trough in 2021 due to a number of factors, but strong underlying market fundamentals has us prime to significantly improve.

How much so we will largely be dictated by how well crosstie sourcing lines up with railroads cost expectations.

And their urgency to maintain infrastructure and.

In performance chemicals, we're showing a small decline, which is probably a fair take on where they're at right now as PC probably over earned a little bit in 2021, given the 8% year over year reduction in volumes. We saw in the fact that they were still able to slightly improve upon their record 2020 results.

In 2021 price was a little in front of higher costs, and therefore costs are catching up in 2022 overall, though if demand holds up PC will have a solid year, even if it doesn't reach a new high.

Finally, we're expecting a decline in EBITDA of 10 million for <unk> at this point, which is largely driven by cost catching up to rapid price increases that occurred throughout 2021 and into 2022.

And we expect the timing of our results in 2022 to be the inverse of <unk> 2021 which started with two record quarters driven by pandemic fueled PC markets in our <unk> business that had yet to encounter the struggles of hardwood sourcing.

The tougher first half comps will likely have is trailing our proportional run rate through 230 early on but we expect considerable ground. We made up in the second half of the year.

On slide 40, our adjusted EPS guidance for 2022 is approximately $4 25, compared with $4 21 in the prior year. Despite.

Despite the negative impact of <unk> 23 per share from our higher estimated effective tax rate. The second straight year, we've experienced tax erosion and <unk> 11 per share from higher SG&A costs. Our operations are expected to deliver year over year improvements of 37 per share.

Finally on slide 41, we expected our gross capital expenditures will be approximately $95 million in 2022 net of proceeds from property sales and insurance recoveries, we anticipate that our capital spending will be in the range of $80 million to $90 million with approximately $29 million dedicated to growth and productivity projects.

In summary, we remain focused on executing to our strategy to expand and optimize our business with our goal of continuing to be to deliver 300 million in EBITDA by 2025 by staying true to our purpose of protecting what matters and preserving the future.

With that I would like to open it up for 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.

If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question is from Mike Harrison with Seaport Research partners. Please go ahead.

Oh, hi, good morning.

Right.

A lot to digest there I guess my first question is just on the overall guidance you provide a point estimate.

$230 million for EBITDA. My question is if you had to provide a range around that number what would that be do you think that would be a narrower range or a wider range. It seems like you are feeling pretty good about what you can see for the first half, but maybe maybe give us a little bit of a sense of how comp.

You are in that $230 million number and what are some of the key variables.

That may not be within your control, especially as you look out to the second half Okay, Mike sure.

So yes.

Yes.

Hum like with our businesses, we often talk very lot of moving parts.

And they all seem to sort of find themselves in different at different points.

No each each year. So you know, we obviously feel confident in the $2 30 target that we've put out there which is which is why that is our target. We did elect to move away from a range. This year. It is.

Gosh.

That range.

Pending upon how you look at things could be quite wide right and a lot of that it comes back to again the significant price increases that we're pushing through for this year talked about 80 to 100 million in price.

And you know.

There's a there's a lot of that that's based upon cost increases that we know are basically have already been pass through and are in place and a good bit of that is also related to cost increases that we expect will be coming and we're trying to again make sure that we account for so.

<unk>.

Depending upon how that sort of plays out if it plays to our favor again.

Number.

Could be certainly higher than $2 30, no question about it if it's not then we could struggle to get there, but we have a number of other projects that we have in place that are back filling part of that as well and that's what I tried to outline in each of the different business segments, but the key things for us is.

For this year as we look at it certainly getting price and being able to maintain volume not lose any any major volume as a result of pushing price in 'twenty.

'twenty two is going to be an important factor.

Hardwood sourcing for the rail business is going to be an important factor for us.

And.

Outside of those two things really the Siemens <unk> business I'd say, there's some upside there is just a limited visibility that we have.

That prevents us from.

Providing a stronger show of confidence in terms of the estimates that we put out for that.

That particular segment, so yeah, I mean, I realize a lot of moving parts.

Certainly not simple, but this is the balancing act that we play every single year and so we know that these markets are going to be different different places.

Places at different points in time, and so we continue to put money back into the business to take cost out to make improvements that will allow.

Allow us to continue moving forward as we just as each of these businesses go through their normal ups and downs of the cycles that they deal with.

Alright.

In terms of the <unk> business, you mentioned the class one contract extensions.

And you also mentioned you are.

Your longer term expectation of higher green tie purchases that would impact working capital did any of those contract extensions change the business model I know a few years back you had.

Our model switch that led to you guys for taking on more working capital is that part of what we're talking about here.

No it's not I mean.

So the working capital increases that we talk about expecting from from Rob just come back fruit from just come from a normalization of cross tie purchases as is our cross type purchases have declined over the past year.

It's less inventory that we ended up carrying as a result, and as they go back to more normalized levels right. We're going to have inventory levels that will rise accordingly, if we grow our business as we anticipate doing moving on into 2023 after the little rock expansion again, we're in need even.

More ties, which will require working capital for some part of that so theres nothing that changed in our.

The contract extensions that change the business model as it relates to each of our customers.

Alright, and then on the.

PC business, you mentioned, the that kind of $20 million worth of met twice versus cost headwind it sounded like.

$30 million of pricing this year and about $50 million of higher cost.

I guess help us understand.

The way the contracts work there do you just need to play a longer game and.

You're going to need to get additional pricing in 2023.

To offset things.

I guess I'm, just thinking with your strong position.

Kind of number one in North America. It would seem like you should be in a better position to get more pricing.

To offset cost well, so there's a certain element of that in terms of being.

Being limited in passing.

Certain costs through.

Related to agreements that are in place and covered through hedging agreements and things like that.

The point that I tried to make in my prepared comments, which which I probably didn't make maybe that that well, where we actually got some price in 'twenty 'twenty. One in fact, we got.

Close to 25 million of price and performance chemicals in 2021.

And and we and as a result, I think we out earned in 2021.

When you look at the fact that we had an 8% volume decline year over year as well and so we were able to get out in front of some other costs.

And now some of that is going to come back through in terms of the higher costs that we.

Can't if you will double dip in terms of.

Passing on additional price for some of that so.

So there's that element of it and then and then the other element that you point to which is yes. There is some cost increases that we are incurring this year that have not yet been passed on to certain parts of our customer base, but will be as.

As we move out into 2023.

Okay that makes sense.

Maybe just a couple of housekeeping questions and then I'll turn it back first of all the insurance recoveries for 2021, it looked like a little over $6 million and the cash flow statement was there. Some Q4 recovery in the CMC business I know you had a fire.

Stickney earlier in the year I'm just wondering your insurance contributed to some of the strength you saw in Q4.

Hi, Mike its Jimmi Sue.

You're exactly right there was about two and a half million dollars of that insurance recovery was fourth quarter and the majority of that was in the CMC business related to the fire.

All right. Thank you and then my last question's on the actually on your debt structure. The 2025 notes that you have looked like third callable here in early 2022, they have a coupon of 6% is there any chance that you might look to refinance those notes to <unk>.

Lower rates I guess before before interest rates start to move significantly higher.

We are actively monitoring that that market, Mike and and considering our options.

Alright, thanks very much.

<unk>.

The next question is from Chris Howe with Barrington Research. Please go ahead.

Good morning, Leroy good morning, Jimmy.

<unk>.

Good morning.

I wanted to dig into some of Leroy comments here.

Within the PC segment.

I believe you mentioned customer acquisition of note.

As well as the puts and takes.

Behind that large supply arrangements with five year arrangement can you talk about.

Anything going on within the market dynamics underneath the PC segments.

Oh that we should make note of here.

Well so.

<unk>.

Chris.

The market continues to be strong right and we've demonstrated.

Certainly over the last five years.

Our the strength of our team and serving our customer base that.

You know has has continued to consolidate treating capacity and so we have no doubt benefited from that from a volume standpoint. We've also done I think an amazing job of picking up additional business.

From.

Long standing customers of some of our competitors.

Think again due to our commitment to this industry and this in this market and and again just the great job that our team does of <unk> of <unk>.

Serving our customers as well as the R&D leadership that I think we've demonstrated over the years. So look we are the number one player in this market. There's a reason we are in as a result, we've been we've been able to not just maintain a solid book of business, but continue to grow it and and so.

No.

We're thankful for that we certainly appreciate our you know our customer base. That's been important part of that growth over the years, we are getting to the point, where I think we're pretty saturated in terms of our market share in the residential side, which.

It has us turning our attention to see what we can do to grow on the industrial.

Product side, and so we think there are opportunities there and I've mentioned the conversion of one customer again, a long standing customer a nice addition to our account portfolio.

And in the past six months or so and we're going to continue to look for those sorts of opportunities and sell.

So what we do and our commitment to the industry. We think that you know for the most part that'll end up carrying the day.

Great and then.

I wanted to get an update.

Just.

Something you've been mentioning a recently the sustainable battery projects how is your participation in that going any update here.

So no substantive update I mean, we continue to provide product for testing continue to work with various partners I'd say everything everything continues to trend positive in that area.

We continue to still be excited as do the the folks that you know that.

We're working with in terms of our product in and its performance. So nothing again nothing substantive to report at this point that is a longer range project, but.

All signs are still pointing in a positive direction.

Okay, and then lastly, a prop.

Probably immaterial, but.

The bullet point on Russia, Ukraine.

The topic of mine.

How meaningful is that that.

That anything too.

Make note of other than it will have an impact yes.

Yeah. So so it has.

It had an impact on our fire retardant business.

And we're working to do that that's a you know that's a smaller part of our portfolio.

But we're working through those issues.

On the <unk> side, we have yet to have any impact from it.

But but could and if we do again, it's a it's it's.

Less than a quarter of our of our supply that we use to fill our newborn Denmark plant and.

And so if we arent able to get product from there or.

Or if you know the costs at <unk>.

Asked us a lot more to get product from there and we're not able to pass it on it could have some level of impact or if we're not able to get product and we can't.

Get other products from other suppliers and then it could certainly have an impact.

For all.

It's so hard to say what that could possibly be.

In the Grand scheme of things it would be it would be a hit but not something that would blow a tremendous hole in our business.

Okay. Thanks for taking my questions.

The next question is from Liam Burke with B Riley. Please go ahead, yes. Good morning, Leroy Good morning, Jimmi Sue good morning morning.

Leroy Jimmi Sue.

During the margin discussion on our U P. You talked about the obvious conversion to a new treatment coatings on the chemicals.

Was that expense hit a one time conversion cost or was that an ongoing increase in cost of goods.

Liam that was that was one time okay.

And is there any meaningful change on that conversion in terms of how that affects your margin.

Well I mean, we're we're through.

Those two conversions at this point, which are important so we're now able to you know to treat normally there we're treating different products again, one of the products are our internally produced in source product from our performance chemicals business, we do get greater throughput as a result of that so it helps in terms of our.

Operational efficiency.

And obviously, we get to sell more CCA indoor client products. So from that standpoint, the positives as well great and then on the.

Recovery on the tie recovery business, you said it was slow going Youre still working with your customers is that part of the entire lifestyle lifecycle management business or are you working that service as a separate offering yes, no as well.

So.

I'll say it is a separate offering.

Although we continue to try and present a lifecycle management.

Value proposition to our customer base, but but is.

It is a service that is offered today separate and apart from the crosstie supply that we provide.

Great. Thank you Leroy.

The next question is from Chris Shaw with modest Crespi. Please go ahead.

Yeah. Good morning, everyone. How are you doing Chris.

There were a lot of puts and takes in the PC segment.

The outlook for 2022, I got a little lost in there are you projecting higher volumes.

'twenty two we are.

We are over over 'twenty one yes.

Well, what we're trying what we what we've attempted to do is kind of go back and look at it sort of in the view of our last normal year right. Because it's just been a lot of volatility of the last two years.

Right.

So is it based on market conditions, or I guess, it maybe a combination of market conditions, and new a new customer wins or a combination.

You got it exactly right, it's a combination of both.

Got it.

And then just the what.

What have you you talked about the lack of visibility in the second half for our team and see.

So what are you sort of projecting in that the estimate that you have there for the guidance for CMC business. This year for the second half I mean, what do you what's your record.

In that guidance that you have an expectation for the second half I mean.

Cause lower prices I was just curious what you're sort of.

So our guidance for the second half is is essentially a flattening out of our of our pricing right. So we were gonna see price increases.

Flowing through in 2022 much of that being put through in the first part of this year.

And then and then we see a flattening out of that with cost continuing to cotton, particularly raw material costs continuing to increase throughout the year right. So it's the catch up on on the cost that we've been out in front of them from a pricing standpoint, that's what we have in.

Towards that back half of the year, but it's.

Sure.

You know that that market.

Is.

It's from a pricing standpoint, you're constantly address adjusting from a cost standpoint raw material cost and what you are constantly adjusting and so we're always trying to maintain a certain level of margin in that business or spread over over our costs.

It becomes tougher in.

And as markets get more competitive when you have customers that are closing capacity and it's impacting competitors, who were trying to backfill business and so now they're becoming more competitive in business that we might already retain.

You know, there's there's again a coke facilities that are closing down which is causing competitors to evaluate whether there theyre going to bypass.

That volume or whether they're going to try and compete to get to backfill that volume and potentially drive up raw material costs and things of that nature. So we're just being cautious in terms of our outlook with a lot of.

With a lot of balls in the air at this point, so we have pretty decent visibility for the first half and we think it will be strong.

And but.

But we're holding off on the second half until we get a little further out into this year and see how things develop.

That's a bunch of years ago oil prices used to be a decent proxy for sort of the pricing you could get.

That's the case or is that sort of dislocated certainly as it relates to carbon black feedstock and Falcon hydride and in some ways, maybe even naphthalene, but.

Yes, it still is.

As oil prices move up pricing in those product lines moves up as well.

And some in some cases. It also then drives up raw material costs right. So again.

That piece of the equation so.

And then just to ask you about the cold car availability is going forward I mean is it.

It hadn't really hadn't read about the Cleveland cliffs shut down, but I mean is that a.

Central to that for like saying, another stickney plant going.

Could you just let you know.

Things got so bad.

It's filling it with them.

Or is that just prohibited prohibitively expensive well so.

Again, the facilities that close or facilities that don't serve our facility we.

We can import tar.

If and when we need to and we have in the past.

I'd say there is more of an existential threat to some of the smaller distillers of debt the debt impacts because it has an outsized impact for them.

I think as one of the two largest players in this market domestically.

We're in a.

We're just we're in a stronger position to be able to maintain.

The.

The production. That's you know that's still going to be out there to a large degree moving forward.

In.

The trend in this in that market certainly has been towards.

Moving away from blast furnace steel. It's also despite those two recent announcements I think is starting to we believe level out and you know could there be some more there could.

But we feel pretty comfortable and confident with what's remaining out there and our position for supply moving forward.

Got it that's helpful. Thanks, so much.

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.

Yeah.

I just want to finish off by thanking everybody for participating on today's call and also for your continued interest in koppers. So please continue to stay safe and we'll talk to you again next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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