Q1 2022 Koppers Holdings Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to Koppers Q1, 2022 earnings conference call and webcast.
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I will now turn the call over to Quintin Mcguire. Please go ahead.
Thanks, and good morning, I'm, Queen Mcguire, Vice President of Investor Relations welcome to our first quarter 2022 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 that will be referenced in today's call consistent with our practice in prior quarterly conference calls. This is being broadcast live on our website and a recording of this call will be available on our web site for replay through August six 2022.
At this time I would like to direct your attention to our forward looking disclosure statement as seen on slide two.
Certain comments 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 the non-GAAP financial measures to the most directly comparable GAAP financial measures.
Today, you will hear from the following.
Leroy ball, President and CEO of Koppers and.
And Jimmy Sue Smith, Chief Financial Officer.
In addition, Jim Sullivan, our Chief operating officer will be joining us for the question and answer portion of today's call and I'll now turn it over to Leroy.
Thank you Quinn.
Morning, everyone.
A pleasure to be able to share the positive news with you about our first quarter performance. Despite the geopolitical landscape that continues to be unpredictable soaring inflation workforce struggles and supply chain disruption, we were still able to produce record sales and solid results that exceeded our expectations. While also continuing to make progress on our plans to optimize and expand.
And our business, which you'll hear about soon.
No I'm actually on the road. This morning travelling to be with my daughter for her college graduation, So my remarks have been prerecorded.
Jim Sullivan, our CFO , who will be alongside Jimmi Sue Smith, our CFO to answer any follow up questions that you may have after our prepared remarks.
Now as always will begin with an update on zero harm as shown on slide four.
In the first quarter of 2022 'twenty nine of our 43 operating facilities worked accident free.
Zero harm continues its drive deeper into the organization through frontline training workshops, which should be completed by the end of the second quarter.
Additionally, we're glad to report the safety health and environmental auditing and management visits the sites are back to pre COVID-19 levels.
Tremendous progress continues on improving our transportation fleet safety program to reduce incidence on the road.
Retold commercial driver incentive programs focus on safe driving behaviors, resulting in a 50% reduction in speeding incidents across our commercial fleet.
Our drivers carry our mission on their shoulders traveling to and interacting with customers to make sure we meet their needs.
And this commitment means traveling through adverse conditions, while also being away from their homes and families for extended periods.
Our incentive compensation plan for driver rewards safe behavior above all else.
I think our top drivers for their dedication to helping koppers become the safest fleet on the road, we're hosting our zero harm truck driving championship on November eight here in Pittsburgh.
12, best drivers in the company will be invited to participate in our safety and skills competition on a truck obstacle course.
Our non commercial motor vehicle fleet faces safety risks as well. So we've identified additional measures to improve safety performance there such as installing front facing cameras and GPS units on all non commercial company vehicles.
This data will help us to identify trends and establish improvement targets going forward.
We take very seriously what our employees do on our behalf and want to do all we can to encourage them to do it as safely as possible.
We worked to retain and recruit truck drivers who believes strongly in operating safely. So that they can return home to their families. In the same condition. They started their trips.
Aspiring to have the safest drivers on the road as all apart of the copper zero harm culture.
So the journey to zero as a daily commitment and it remains a source of pride to see the progress our teams all around the world continue to achieve and the people of koppers have my admiration and my sincere appreciation.
Now even in the midst of rapid changes in economic uncertainties Koppers overall performance in the first quarter has been impressive.
Not only did we exceed our internal expectations boosted by a strong global economy that continues to demonstrate overall demand for our products, but sales in the first quarter represented an all time record for koppers in any quarter not just the first.
Our performance chemicals business generated a first quarter record in sales and solid results. Thanks to strong volumes and pricing. It is worth noting however that the top line gains seen in P. C were impacted by higher costs offsetting price increases in the quarter, which was expected.
The railroad and utility products and services business saw hardwood supply below comparable levels in the prior year unfavorably affecting its results, which also was expected.
And our car materials and chemicals segment, we benefited from a strong pricing environment that continues to be ahead of increased costs, resulting in profitability that exceeded our expectations.
Now our balance portfolio once again delivered value and looking ahead. It's also setting us on a course to improve our profitability significantly over the next several years.
Now, while I'm wary of the risk of an economic slowdown I am confident that our strategy of serving the central infrastructure markets will continue to sustain us well into the future.
Now I'd like to turn it over to our CFO Jimmi Sue Smith for a more detailed review of first quarter financial results.
And Jimmy Sue it's all yours.
Thank you Leroy My comments are based on information contained in this morning's press release, which provided our results for the first quarter of 2022.
On slide six consolidated sales for the first quarter of 2022 were $459 million, an increase of nearly 52 million or 13% compared with $408 million in the prior year.
By segment sales for <unk> decreased by 9 million or 4% sales for performance chemicals increased by 13 million or 10%, while sales for Siemens <unk> increased by 48 million or 52% compared to the prior year quarter.
On slide seven we see that first quarter adjusted EBITDA on a consolidated basis totaled 53 million or 11, 5% compared with 55 million or 13, 5% in the prior year.
Results for our rubber segment are shown on slide eight.
Sales for Rob for 108, 3 million compared to sales of $192 million in the prior year quarter, primarily due to lower utility pole volume in the U S and Australia, along with lower sales volumes for cross ties for both class, one and commercial railroad, partly offset by pricing increases and higher maintenance of way demand.
Market prices for untreated cross ties remained high due to strong construction market demand, which means railroad customers are deferring their purchases in terms of our backlog the procurement of cross ties declined by 10%, even if crosstie treatment increased 4%.
Adjusted EBITDA for routes with $12 million compared with 16 million in the prior year quarter.
This decline can be attributed to higher costs for raw materials freight and fuel as well as labor issues in the domestic utility pole industry. In addition profitability was negatively affected by lower absorption of fixed costs due to lower tie throughput on the decreased purchases of untreated cross ties by our class one customers.
As shown on slide nine P. C had record first quarter sales at $136 million compared to sales of 124 million in the prior year quarter, driven by price increases and higher volumes for preservative.
Adjusted EBITDA for P. C decreased to 21 million from $28 million in the prior year quarter as a result of higher raw material costs.
Slide 10 shows results for our CMC business.
First quarter sales for C. N C totaled $140 million compared to sales of 92 million in the prior year quarter.
Higher pricing and volumes for carbon pitch phthalic anhydride and carbon black feedstock contributed to the increase.
As did higher sales prices for naphthalene.
Siemens D delivered adjusted EBITDA of $20 million compared to 10 million in the prior year as a result of a favorable demand and pricing environment, partly offset by higher selling general and administrative as well as raw material costs.
Sequentially the average pricing of major products was 11% higher than in the fourth quarter of 2021, while average coal tar cost increased by 13%.
On a year over year basis, the average pricing of major products was 42% higher while coal tar costs went up by 53%.
On slide 12, we outline the driving principles of our balanced approach to our priority uses of cash we will continue to invest in our businesses through capital expenditures, while returning capital to shareholders through dividends that were recently reinstated.
As well as repurchasing shares Opportunistically and Delevering as appropriate.
In the first quarter of 2022 we repurchased $6 $4 million of shares.
We remain confident that we can grow and generate cash to achieve our strategic growth plan and remain committed to a two to three times long term leverage ratio.
As shown on slide 13 capital expenditures in the first quarter totaled $26 million.
Net of $4 million in cash proceeds from asset sales were $22 million.
And lastly on slide 14, we had $780 million of debt and 305 million in available liquidity at March 31 2022.
Our net leverage ratio was three five times at the end of the first quarter compared with $3 three times at year end 2020 one.
This slight increase is consistent with the seasonal nature of cash flow for our business and reflects the increased prices and inventory levels as a result of inflation and supply chain challenges.
Net leverage of two to three times remains our goal and we continue to focus on growing EBITDA at one means of reducing leverage and note that our March 31, net debt balance is two six times, our 'twenty 'twenty five target EBITDA of 300 million.
And with that I will turn it back over to Leroy.
Thanks, Steve you Sue.
Like to begin by sharing the notable happenings across our company during the first quarter.
The conference is happy to introduce our new Vice President of culture engagement, Steven Lucas as seen on slide 16.
Stephen has nearly 30 years of experience developing innovative embowed employee programs at a number of leading manufacturing companies for.
Copper is to continue to succeed we must do all we can to attract world class talent develop our next generation of leaders and create an environment that inspires individuals to bring their best every day Stevens.
Stephen is the right leaders to strategically guide these critical culture and engagement efforts and we warmly welcome him to the koppers team.
Slide 17 features our first graduating class from Koppers College. This pilot program consisted of weekly sessions over a period of six months for qualifying hourly and non exempt salaried employees, who participated in these classes. In addition to work in their full time jobs.
These employees now have a koppers business degree, which can open doors to new perspectives, new ideas and new opportunities within our company congratulations to all our coffers College graduates.
Slide 18 shows the progress that has been made to upgrade our facility in north Little rock, Arkansas material handling system for the cylinders has been installed and will begin commissioning in may.
Upgrades to the Thai sort or also to be completed in may promise to significantly increase ties sorting capabilities at the plant.
We have two of the three cylinders onsite with the first cylinder scheduled to be operational in October 1st in the next two are expected to come online later in 2022 and November and December .
On April 22nd Koppers team members worldwide celebrated Earth day as seen on slide 19, a variety of activities were held at our facilities and in partnership with community organizations, where we work.
These efforts helped us shine a light on our core koppers value of protecting our planet.
Now, let's move on to an overview of the business sentiment, both near and long term.
I like the things that we think are meaningful to our businesses moving forward.
Slide 21 looks at important drivers for performance chemicals in 2022.
Existing home sales down 2.7% in March from the prior month and four 5% from the prior year and rising interest rates and inflation hampering the housing market the purchasing power of those hoping to become homeowners has weakened according to the National Association of Realtors.
At the same time existing homeowners are spending considerably more on home renovation and repairs to the tune of an 11, 5% year over year increase in the first quarter with an increase of nearly 20% projected later this year.
Now there may be some leveling out in early 'twenty 'twenty three with spending anticipated to reach 450 billion. According to the leading indicator of remodeling activity.
The consumer confidence index improved to 107.2 in March increasing from one O five seven in February as economic growth continued during the first quarter.
However, the conference board warrants or some potential weakening in consumers' long range outlook.
As the pandemic affects less than residential demand in North America is returning to more normalized levels, although demand for contractors shows no signs of slowing down this year.
Lumber prices also are normalizing from temporary highs as treating inventories remain thin and current orders are addressing the immediate demand is.
As the penta preservative phases out demand on the industrial side seems to be strong as we recently added a new utility customer and have additional prospects to further our market share expansion.
Thus far the only P C raw material affected by the Russia, Ukraine War is for our fire retardant products competitive.
Supply chain issues in other product categories of vote, when the window for us to potentially achieve higher preservative sales.
The short term, we're seeing margins being compressed by ongoing cost increases for materials, although we've been building inventory to combat potential supply chain bottlenecks, we expected by year end, we should be able to reduce working capital in our PC segment by at least $20 million.
Our longer term outlook for P. C as shown on slide 22.
Given the record high copper prices, we've been conducting price discussions with our customers sooner than we normally would.
In the U S. We're currently evaluating opportunities to implement changes to contract pricing, which would increase our ability to recoup higher input costs.
As mentioned on last quarter's call. We recently entered into a five year supply agreement, beginning 2023, with a west coast customer to provide 100% of their purchase requirements, which is up from 40%.
In Australia, we recently were successful in securing an exclusive three year supply agreement.
In north.
Erica we expect to see the continued growth of industrial volumes of chromate, copper arsenic or CCA as pent it gets phased out of the market.
In addition, we continue to consider producing other oil borne products as alternatives Penta. However are still not at a decision point.
In Brazil, we're working through the regulatory approval process regarding a greenfield manufacturing site and expect to have a plant in place and operational in 2026.
In terms of expanding our presence in Europe for Micropro, we're still in the process of obtaining regulatory approval for our next generation Micropro product.
We were recently issued a patent of U S for that next Gen product, which will remain in force through early 2038, and we're moving forward to bring it to market over the next few years.
The overview for our U I P business in 2022 as seen on slide 23, Utah.
Utility demand for Poles remains high as project work is continuing to catch up after pandemic driven delays.
Overall logistics labor shortage plant conversions, along with the trend for a sturdier classic polls put a strain on suppliers and resulted in longer lead times for product from the treatment industry.
Currently tracking higher than our targeted $8 million price increase for this year with 3 million occurring in the first quarter alone.
That said costs are rising across nearly all categories as well.
Currently we have been moving customers into more frequent price reviews, given the rapidly changing cost environment.
In early April we completed our transition away from treating with penta in most of our customers are adopting CCA or door climb.
In fact, 65% of former penta volumes for southern yellow pine utility Poles are now being treated with preservatives that are produced in house.
According to the U S chamber of Commerce, the manufacturing industry has lost approximately 1.4 million jobs since the onset of the pandemic and it has been a struggle to hire workers for.
For copper is attracting and retaining plant employees in truck drivers remains an ongoing challenge as do the related costs and inefficiency from employee turnover.
On the productivity front, our employees have worked hard to convert our facilities from treating poles with penta to treating with different preservative systems that medallion, Georgia in Vance, Alabama.
In addition, we added new dry count to improve our capacity at our facilities and Vance and nuisance Virginia.
On a combined basis. These projects are expected to bring an estimated $5 million of EBITDA benefits.
The sale of our plant in Sweetwater, Tennessee will also benefit our bottom line.
The supply of wood remains relatively stable, we are seeing pricing pressure due to the high demand for small logs stumpage increases, which is the price paid to harvest the timber.
And freight costs.
Therefore, we anticipate the costs will increase in the second quarter and will be addressed addressing these issues.
On slide 24 is a long term view for our <unk> business.
Given the more people are working remotely and there's an increasing frequency of extreme weather events utilities need to maintain their infrastructure to avoid service interruptions.
As a result, more utilities are trending towards stocking storm inventories of Poles, and therefore, increasing their purchasing volumes over time.
Anticipating that there will be continued shocks and disruption to the supply of materials, such as wood creosote and other preservative components.
Consequently, this will make it more difficult for smaller non integrated treaters to compete as customers place a high value on the security of their supply sources.
Being vertically integrated should provide coffers with a competitive advantage in light of the federal infrastructure, Bill, which allocated $119 billion for utility investments.
We're in the process of adding peeling and drying capacity to serve our treating plant in Somerville, Texas. We expect this to result in improved cost efficiencies, which will contribute to increased profitability beginning in 2023.
In addition, due diligence continues on a property to establish a base of operations in the Western U S to serve the industrial treating a wood preservation chemical markets, which had been untapped for us.
And Australia demand for Poles remains high as it recovers from multiple natural disasters.
We continue to shift volumes in Australia to softwood as hardwood availability becomes more difficult by adding a dry kiln at our ticker location last year.
On slide 25, we provide the 2022 outlook for our railroad products and services business.
Association of American railroads report some mixed data points for the first quarter of rail traffic compared with the prior year quarter as U S. Carload traffic increased two 6%.
Intermodal units were down six 9% and combined U S traffic dropped by 2.7%.
We're targeting more than $20 million of price increases in 2022 to account for higher material costs, we're tracking at a higher rate. So far was 7 million of that realized in the first quarter.
We're projecting the demand for crosstie sales will increase 2% to 4%, which is higher than the forecast from the rail tie association of approximately 2% growth.
Lower year over year Green tie purchases continued in the first quarter, but it looks like we're set for a rebound.
Costs have stabilized, although at higher levels up $10 per tire, 33% compared with prior year.
There is a very strong likelihood of creosote supply disruption among treaters, which when it happens we'll provide a greater opportunity for koppers due to our vertically integrated business model and our ability to provide surety of supply.
Similar to our utility business, we're still seeing trucking issues is lack of drivers and pent up demand or limiting access and driving higher transportation costs.
On our commercial business crosstie volumes are down, but our profitability was up since price increases are going into effect prior to seeing the full impact of higher costs.
Market dynamics in the commercial space continued to remain very competitive.
Overall, we expect higher sales volumes for cross ties and improve cost absorption to contribute an additional $4 million of EBITDA in 2022.
And our maintenance of way business, we're beginning to see benefits due to improvements in labor and customer specific challenges.
This business is expected to generate $6 million a year over year improvement as markets continue to recover with all of that benefit to be realized over the last three quarters of this year.
On the Labor relations front, we successfully extended contracts with two of our facilities.
In the coming months, we'll be working with the two remaining facilities to extend contracts or are scheduled to expire later this year.
On slide 26, we provide a longer term view of rubs and we're pleased to have completed extension for contracts with our class one customers moving most contract maturities to beyond 2025.
We're working with various network optimization plans, which are positioned to drive EBITDA improvements, including the current expansion at north Little rock to be completed in late 2022, which will strongly support volume growth in 2023 and beyond.
As mentioned previously we're also adding poultryman capability at Somerville to support expansion into the pool market in that region.
Due to our plans to purchase greater amounts of green ties to support volume growth working capital will naturally increase but would be supported by higher profitability.
At the same time, we are evaluating strategies to support a more consistent flow of green ties being processed in our facilities.
We know that achieving our goal of having a steady flow of cross ties will lessen the peaks and valleys that impact our business.
At this time, we have the highest backlog in years for projects in our maintenance of way business. We're positioned for continued improvement as long as the railroads provide track time and we have crew continuity.
To help with retention, we recently implemented a new compensation model for maintenance of way employees to better align our rewards with what that workforce values.
In addition, we continue to be focused on expanding our crosstie recovery business to other class one customers.
Our CMC business sentiments as shown on slide 27 notes that demand is as strong as it has ever been however, global supply chain and inflationary pressures provide cause for concern regarding an eventual slowdown.
The Russia, Ukraine conflict has caused European tar distillers to lose approximately 220000 metric tons of car on an annual basis.
So far we've been able to successfully mitigate supply constrained somewhat by accessing other sources for Europe .
Carbon pitch remain in limited supply, causing prices to skyrocket to record highs.
China pitch and tar prices are at high levels, which support higher product pricing in other regions as well as higher raw material costs.
And central Europe alumina producers have curtailed production due to high energy prices, which is increasing competitive pressure and a smaller market as those curtailments that primarily affected our competitors customer base.
And increasingly smaller coal car market is impacting creosote in North America with less product being made and significant price hikes likely for non contracted customers.
Due to reduced availability of coal tar in the market Koppers has reintroduced hybrid pitch in North America, and our customers have responded favorably accelerating its acceptance.
We estimate that we will see a benefit of $8 million in EBITDA from our ability to improve the mix of our higher value pitch production as well as the benefits from cost improvement projects.
In the second half of 2022, we see potential upside as long as market dynamics perform as expected.
According to IHS market projections regarding global light vehicle production in 2022 went down by $2 6 million units in March and were downgraded again in April projecting further reductions of 900000 units.
The reduced production was attributed to Europe , and China, while the forecast for North America remained flat.
Slide 28 looks ahead for C. M C through 2025, and we expect that high demand should continue in the U S driven by the aluminum and steel markets.
A federal infrastructure Bill should support long term demand, although some recessionary concerns have begun to appear.
On the other hand, we are poised to benefit as reliance on Chinese exports drops in worldwide shipping logistics improve.
Industry efforts continue to reduce or eliminate coke from steelmaking, including direct reduced iron in electric arc furnaces, all of which will reduce coke production further resulting in less domestic coal tar and increase in pressure on our remaining small distillers.
The announced closures by Cleveland cliffs regarding two of their coke facilities has added further limitations to the domestic coal to our market.
This is where our hybrid pitch for our products can fill a gap in the market created by lower production levels of our traditional raw materials.
And also while we're working on product development projects that are designed to increase sales and profitability, which include improving pitch yields from tar from 50% of production to nearly 70%, which I mentioned previously as a component of the $8 million benefits in 2022 and enhanced carbon products used as a coatings for battery anode.
Aerials.
Now while the benefits of enhanced carbon products for battery coatings are not included in our 2000 and twenty-five projections Siemens he could be our highest margin business by 2025, if we succeed in gaining market acceptance of our products.
On slide 30, our sales forecast for 2022 was approximately $1 9 billion compared with 1.68 billion in the prior year to reflect a projected topline improvement in every business segment, largely driven by higher prices.
On slide 31, our 2022 EBITDA projection remains at $230 million on a comparable basis. This will be our eighth consecutive year of EBITDA growth.
Once again, our diversified portfolio of shows ups and downs across the three business segments, our ups business hit a trough in 2021 due to a high number of factors, but strong underlying market fundamentals have as prime to significantly improve albeit not as much as we had projected back in February .
The hardwood recovery is not yet at the run rate it needs to be to generate the level of improvement we expected at the beginning of the year. Although we still believe that 2022 will represent a giant step forward.
N P C. We're continuing to show a small decline from last year, which is consistent with what we expected back in February P.
P. C. Actually finished Q1 slightly ahead of where we thought they would and while we expect a strong Q2 from PC. They are facing another record quarter cock, which they will not be able to match. The second half of the year gets easier comparably, but the market dynamics need to hold up better than they did in 2021.
And we don't believe that they'll call all the way back to the last two years $100 million Mark of EBITDA.
The wildcard could be the significant price increases that will go into effect on January one 2023 that could impact Q4 purchases positively by pulling forward, some volume and profitability into 2022.
Finally, we're still expecting a year over year decline in Siemens Sea EBITDA, but not quite as much as we were earlier this year.
Despite the impact on supply from the Russia, Ukraine conflict, we believe that strong market dynamics can still support an environment that resulted in EBITDA that is relatively close to last year's performance. As we are currently projecting Siemens sea to finish at around $70 million or 6 million below last year.
Overall, we expect the timing of our results in 2022 to be the inverse of 2021 and the beginning of the year has started off with that pattern.
Q2 will be more of the same before we begin to make up ground in Q3, and Q4 before finishing at our projected EBITDA for the year of $230 million.
On slide 32, our adjusted EPS guidance for 2022 is now expected to be approximately $4 10, compared with 421 in the prior year.
While operations are additive the results a higher effective tax rate is expected to take a sizable bite out of our overall improvement.
All in we still expect to generate strong performance of over $4 per share on an adjusted basis in 2022, which belies the unexplainable price earnings multiple that we continue to trade at which is well below 10 times filing.
Finally on slide 33, we continue to expect our gross capital proceeds from asset sales, 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 across all of our business segments and generate continued consistent financial performance as measured by adjusted EBITDA, adjusted EPS and free cash flow I.
I do believe that our balanced and diversified portfolio makes us a great defensive investment option in most economies as we have demonstrated ever improving performance over the past seven years through various disruptive market conditions with a record that very few others can match, we will continue to control the things that are within our control, while telling our story and at some point it should resonate with those that appreciate resolve.
<unk> driven performance.
With that I would like to pass the program over to Jim Sullivan, Our COO and Jimmi Sue Smith, who will now take your questions. Thank you for all for dialing in and for your interest in Koppers.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre 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.
Okay.
And the first question is from Chris Shaw from <unk> Crespi. Please go ahead.
Good morning, everyone. How are you doing.
Good morning, Chris how are you.
You gave a lot of information on performance chemicals market trends.
It takes there but.
And some of them are very specific to your company, but you have a sense of the bigger customers. I mean are they are they are their order patterns looking like there.
The agreement with the sort of home renovation the expectations or are their order patterns more looking at maybe what are the new housing is doing instead I mean do you have any sense of that for the what kind of visibility you have I guess, maybe for the second half or second quarter.
Yeah, Hi, Chris This is Jim solvent so yeah.
Let me answer that a couple of different ways. So we see an as reported a pretty strong outlook for the renovation business, so that that tracks pretty well to how we're going to do for the treated treated lumber.
So that's a good sign and then also we know that the the treaters have been watching lumber prices over the last number of months and they've sort of started to trend down and stabilize.
What that has done is there there's relatively low inventories at the treating facility. So we're actually starting to see a little bit of a pick up there as we get into the spring in the southern and southern parts of the United States and that will continue to move up into the northeast into the Midwest as the weather improves so.
Right now the outlook looks it looks pretty good for the treated lumber market in 2022, and that's why we're sticking with guidance.
Got it and then.
Switching just think of it and see.
I think you said a coal tar costs were up 53 per subs.
There's been an impact in Europe from the Ukraine.
Ukraine conflict.
Okay.
How much more you know.
Currently.
Are you seeing the market and how much more will that 53% I'd have to go up in subsequent quarters now.
How far are we how far is that realized inflation, that's actually out there just.
Yes.
Yes.
The situation with the coal Tar pricing is Oh, there theres a number of things going on is the big thing. The disruptive thing is is the war in the Ukraine right. So that's that's taken out a significant amount of coal tar and in the end products that are made with the coal tar raw material those markets are still strong so there's a.
There's a fair bit of demand. So it's really demand driven on the on the price, but you I'll.
Right that is are you that that's.
Our normal.
Way, we do business only sort of at a heightened level, we're constantly watching the raw material costs of the critical raw material coal tar and what sort of matching that up against what we're going to be able to get for and our end products and you have you seen in the first quarter, we've been able to stay ahead of that but we're watching that we're watching that very.
Mostly and you'll the outlook. There is is still a relatively strong for 2022, that's once again, while we're we're sticking with the guidance.
I guess, maybe another way to ask that it is Kurt.
And what about the to the to the second quarter as the coal tar costs, how they've gone up even more so than that sort of 53% for the once you reflects.
Well you know it's sort of there there are certainly some ask yo for for higher prices, but they haven't got the higher prices yet for the for the raw material. We're watching it real closely you I think there's some smaller suppliers that are testing the high see if theres a high end market there, but overall.
<unk> like the you know the price of coal cars is very high right. Now so we have to be able to pass it on with our end products and we've been able to do that and we think we're gonna be able to continue to do that.
Got it thank you.
The next question is from Liam Burke from B Riley Securities. Please go ahead.
Yes. Thank you good morning, Jim Good morning, Jimmy.
Good morning.
Jim.
A persistent problem for Rob because then the deferral of capital expenditures by the class one customers of yours.
Even though we're looking at overall traffic declining heavy haul with the rebound in coal demand must be putting more wear and tear on the track pad.
Do you see any kind of.
Relief from these deferrals on on Capex here.
Well, we do well.
What we see right now the problem is the competition for the you know the critical raw material, which is the hardwood in that competition from pallets from cabinets from hardwood flooring and we're seeing that are stabilized and youre right. There you know the the amount of ties into the market has been lower than normal we.
See that eventually correcting and it's going to start by the way we're going to see it is we're going to be able to get a more ties into our facilities, which were predicting is going to happen in the second half of the year.
Great. Thank you and you did say you're comfortable on.
Being able to continue to raise prices to offset your input costs.
As we go further into the year.
Tangible demand soften do you think there'll be a problem, where you would raise prices to block your own demand or how do you see.
Playing that tradeoff.
The issue is really for you, which we're well aware of and working on is the contracts that are coming up for our major customers in N. P. C. At the end of this year. So we've already started.
Negotiating those prices with them with the major customers, but yeah. We we have a very very long term relationships with these people. They they know exactly what's driving the costs. We can we can point them to exactly where they need to look so they they know that's coming and that's something that we're working on so in that.
It's gonna be addressed throughout the year and then certainly before the end of this year.
Thank you Jim.
And the next question will come from Chris Howe with Barrington Research. Please go ahead.
Good morning, Jimmy.
Good morning, Jim and.
Good morning, Leroy virtually.
Okay.
Wanted to follow up on one of liam's questions as we think about the pricing dynamics, whether it's specific to D. C.
For the other segments.
When things normalize how should we anticipate a lag on pricing do you think some of the pricing.
It stays around.
For a little bit until it comes back to normal or what's your take on.
We're pricing eventually settles.
Yeah. So I think it's a good it's a.
Good question, it's hard to answer with like some of the Escalations that we have seen like in some of this.
Inflation and some of the other supply chain.
Chain Hum restrictions that are related to our products, but not our products.
You'll wear our plan right now is we've got to keep pushing price right, because we're seeing where we're continuing to see cost increases whether it's labor, whether it's whether it's diesel fuel whether it's trucking rates. So we're in the mode of pushing price and then once we get it.
Yeah, we really like to hang onto it so.
There'll be some pressure those would be some pressure, but there you go down the road, but theyre going to we're gonna be looking at the same metrics that we pointed out that has caused that increase in the first place.
Okay.
Certainly a great quarter and encouraged by the guidance.
But as we shift to other topics of constraints.
Flavor.
You just mentioned trucking.
Can you talk about how we should think of labor as.
As a challenge across the segments and perhaps.
If you get the right labor.
Sure you retain enough labor.
What that could mean for profitability upset.
Yes.
It is different in different industries, so a different sort of business segments. So if you look at you'll CMC at sort of the high end with respect to your fixed costs. So we have a lot of fixed costs. What we have as you know large plants. So the relative the relative number of employees, we have as compared to the fixed cost is low.
In in something like CMC and then the next step down is would be K P. C. Also you'll these are factories that are producing chemicals, where where the labor issues are are in that we really see the most of our new IP and in Rps and we're looking at a number of things there we're competing against you.
Just about everybody for those people. So we have two youll rethink automation, what can we automate and our plants and then once we have good employees, how do we retain them so where we're spending a lot of time on that and we're actually very glad to have Steven Lucas on board to help us with that as well.
Sure.
Okay.
Alright, perfect. Thank you for answering my questions I'll hop back in the queue.
And our final question today will come from Laurence Alexander from Jefferies. Please go ahead.
Oh good morning.
I guess a couple of questions. One is on team and see the given the tightness in the coal tar supply.
How much of a margin lift if if the yield if you rolled out the yield gains across the your all of your assets that could be upgraded.
Much of our.
Margin lift would you expect to see from your position on the cost curve improving.
Yeah.
Well, okay. So there's a lot of stuff in there too right because a it depends a little bit on obviously you know the coal tar pricing, but also the petroleum we talk in the in the call or in the in the recording we talk about the sort of the transition to a blended pledge would has petroleum product in it right now petroleum product.
<unk> is actually relatively high price because it tracks with fuel, but what that all so we don't know if that's going to stay that way right now we're getting the price for it but what that does it also extends our supply.
With using the same assets is.
The same assets are used to distill the petroleum products as are used for the coal tar products.
So theres a lot of moving parts in there but in general it's.
It's a good thing that we have our customers wanting to buy that product in North America, where the where the biggest issue is in North America and they're adopting it we've already have one customer that's I'm, taking 100% of the blended product and we have the other customers are well on their way.
And then with respect to the sort of where the utilities are thinking about their safety.
Safety stock or reserves.
With respect to the kind of the amount of maintenance they need.
How do you say.
Run rates.
Of demand from that market compare with say 10 years ago.
Oh 10 years ago, I actually don't I don't know the answer to that I'll tell you right now the demand is strong for those products and we really even haven't you haven't seen any.
We can point our finger at that is attributed to the infrastructure Bill.
We see Youll just demand some of that pent up some of that has to do with the other supply chain issues, but demand for our utility pools in North America is relatively strong right now.
And with respect to the <unk>.
So doing the pricing negotiation for the copper path through a sort of earlier than expected do you think this is a one time event or is this a cultural shift.
In the industry with that Youre trying to get the customers used to more frequent negotiations.
So you know that.
That's a that's a good question you were going to we have long term relationships with our customers and we're gonna give them, you'll we'll give them a number of different options and theyre going to that.
We can implement you know part of it is going to be used their desire to have some surety over a longer period of time versus having some flexibility, but we're going to we're going to give them. Some I'm going to give them. Some options you know the.
The underlying issue is you know the basic raw materials for the products have gone up <unk> gone up significantly.
And then just the last thing is just on the culture side you.
Congress has gone through.
Overall rounds of upgrades of its productivity culture.
How what do you see as kind of the key issues to focus on for the next few years and how material a difference do you think they'll make.
In terms of the external what we see on the outside on the financial metrics.
Yeah I'm not.
Oh sure I understand the question Jimmi Sue do you know I think that's really embedded in our you know our culture has been to optimize our business and figure out how to drive down our cost structure and we've really shown the ability to do that and see them and see them and I think the plan that we have.
The strategic plan that we've rolled out which is a shift to continuing to optimize the structure across the other business units, especially rep, but also to expand the business for growth. That's really that's the cultural shift that where we're bringing in and we are very much plugged in.
To the process.
And actively managing that and remain very confident in our strategic plan.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to CFO Jimmi Sue Smith for any closing remarks.
Thank you everyone for participating in today's call and for your continued interest in koppers stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
[music].
Yeah.
Yes.