Q2 2022 Koppers Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by welcome to Koppers Q2, 2022 earnings conference call and webcast at.
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I will now turn the call over to Quinn Mcguire. Please go ahead.
Thanks, and good morning, I'm quite Mcguire, Vice President of Investor Relations welcome to our second quarter 2022 earnings Conference call. We issued a press release earlier today, you may access it via our website at Www Dot Koppers Dot com.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website that will be referenced in today's call consistent with our practice in 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 November four 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.
Today, you will hear from the following Leroy ball, President and CEO of Koppers.
And Jimmy Sue Smith, Chief Financial Officer.
I'll now turn it over to Leroy.
Thank you Gwen good morning, everyone.
Were pleased that Youre, joining us today to review, our second quarter results and while we're still dealing with many of the headwinds that we talked about last quarter, such as inflation as well as pandemic and supply chain issues Koppers delivered record sales in the second quarter and we continue to make great progress in optimizing and expanding our business on a road to $300 million and adjusted EBITDA in 2025.
We have much to share with you regarding each of these topics and more but.
But first as we always do we like to update you on our zero harm efforts, which begin on slide four in July a number of senior leaders join me in traveling to our monthly crosstie treatment facility in central Pennsylvania to present plant manager, our rod and his team with the 2022 zero harm President's Award.
The team at the facility provides treated cross ties to class one in commercial railroads producing more than 900000 cross ties in 2021 alone.
The workforce must be achieved best in company performance in safety environmental responsibility and innovation metrics and ranked number one among all copper facilities worldwide and the effective use of leading indicators those activities that demonstrate their commitment to identifying and eliminating hazards and are proven to help prevent safety incidents on a daily basis.
In addition to the recognition they received the plant received funds to direct to the charity of their choice and their community. They selected the Ronald Mcdonald House, the Danville, Pennsylvania, who set their executive director, Michael Perilous to happily accept congratulations to plant manager I'll Ross and his team at Murphy for truly embody our zero harm culture.
Continuing to use the strategies and tactics that have been proven successful to date, while also gaining more input from frontline employees as the basis for developing highly practical training tools.
We're concentrating on peer to peer interactions as a key to greater and faster awareness acceptance and incorporation of zero harm procedures.
Currently we're featuring 12 work streams being managed in a formal project environment to recapitalize zero harm and take it to the next level.
In addition, we recently held a zero harm idea summit, which consisted of 10 frontline employees from 10 different wood treatment plant.
The participants took part in a two day idea summit in Pittsburgh discussing their daily experiences and brainstorming ways to advance zero harm.
They came up with more than 130 ideas with a top 10 ideas presented to the zero harm team for evaluation and potential implementation.
And as always I'm proud of the unwavering enthusiasm of our people around the world to continue making progress on our journey to zero.
Every team member is my ongoing admiration and appreciation this never ending effort.
No stated in our news release this morning and highlighted on slide six we achieved record sales in the second quarter, our first quarter in history, where we exceeded half a billion in sales.
That was fueled by $95 million of price increase is spread across all three business segments.
Those increases more than offset a $15 million negative impact from our foreign sales being translated into a stronger U S dollar and a $19 million negative impact from lower sales volumes, primarily in our performance chemicals and utility and industrial products businesses.
Now I'll provide more details later, but before it performance chemicals volumes were expected to fall short of prior year volumes as Q2 2021, we're still riding the wave of outsized pandemic demand.
In spite of that there were several bright spots on the sales front for PC and they were still able to overcome the lower volumes and some foreign currency impact with higher price and post a record sales quarter for.
For utility and industrial products. Their sales decrease was not demand related first of all we have exited our arrangement with Texas electric cooperative in the second quarter of last year, which accounted for half of the revenue decline and the other half is related to other challenges mostly on the supply chain side that affected our ability to keep off timely with orders and shipments.
That appears to be a widespread problem that the industry is facing so we don't feel that we're losing business as a result, because all business is being pushed out.
From a positive standpoint point, the underlying fundamentals of our business remains strong in the second quarter. The issue that we and everyone else has dealt with is the persistent inflationary cost increases in all areas. It still managed to outpace at 22% sales increase from price in the second quarter and a strengthening U S. Dollar that had an unfavorable impact of $7 million on our four.
In our results.
So coming into this year that the first half would not be as strong as the first half of 2021, but by the time, we got to mid year, we expected a much stronger second half and we would be exiting 2022 on a reasonable pace to reach our goal of 300 million EBITDA by 2025.
It is in fact, exactly where we find ourselves one month into the third quarter.
All the pieces are in place for each business unit to improve their second half profitability compared to the first half.
[noise] crosstie procurement and our railroad products and services business is now tracking at a pace well above last year.
And pricing in our utility and industrial products business have never been stronger.
Add in a favorable near term backdrop for pricing and demand in our car materials and chemicals segment and a solid backlog of projects that underpins performance chemicals demand in the back half of the year should represent record financial performance.
More about that when I return later in the call now I'd like to turn it over to our CFO Jimmi Sue Smith for a more detailed review of second quarter financial results Jimmi Sue.
Thanks, Lee Wright and good morning, everyone. My comments are based on information contained in this morning's press release, which provided our results for the second quarter of 2022.
On slide eight consolidated sales for the second quarter of 2022 were $502 5 million, an increase of $61 5 million or 14% compared with $441 million in the prior year.
This was our second consecutive quarter of record sale.
By segment sales for reps increased by $8 7 million or four 5%.
For PC increased by $4 million or two 7% and sales for CMC increased by $48 8 million or 48, 8% compared to the prior year quarter.
On slide nine second quarter adjusted EBITDA on a consolidated basis totaled $54 6 million or 10, 9% compared with $65 6 million or 14, 9% in the prior year quarter.
The decrease in year over year margin reflects the peak of pandemic fueled profitability experienced in our PC segment in the prior year quarter juxtaposed with timing impacts from the current inflationary environment as well as the impact of an insurance recovery and our CMC business last year.
Results for our rough segment are shown on slide 10 sales for <unk> for $204 2 million compared to sales of $195 5 million in the prior year quarter, primarily due to pricing increases across all market, especially cross childs and utility pole.
Additionally, we're seeing higher volumes in our railroad bridge services business, partly partly offset by volume decreases in our utility pole business, mostly due to capacity and transportation issues driven by the current labor shortage as well as the transfer of some production from a third party to our facility in Somerville, Texas the prior year quarter.
On the procurement Brent market prices for untreated cross ties have been stabilizing although at elevated level and we are seeing to start with the improvement we expected to see in this area.
Our cross tie procurement in the second quarter was higher by 17% and crosstie treatment increased by 8% compared to the prior year quarter.
Adjusted EBITDA for reps with $13 2 million compared with $12 million in the prior year quarter.
This improved profitability is attributed to improvements in our maintenance of way businesses as well as price increases, which offset higher cost for raw material freight and fuel and favorable absorption is procurement volumes improved.
As shown on slide 11 performance chemicals had record sales of $149 6 million compared to sales of $145 6 million in the prior year quarter, driven by global price increases for copper base cause artist, partly offset by year over year decreases in volume for her service primarily in Europe in.
In the Americas volumes were down only slightly compared to the record levels in the prior year.
Adjusted EBITDA for performance chemicals decreased to $20 4 million from $34 5 million in the prior year quarter as margins reflected higher raw material costs and higher cost inventory working through the system and a falling copper price environment and lower volume, partly offset by global price increases for preservative.
Okay.
Slide 12 features the results for our CMC business.
Quarter sales totaled $148 7 million compared to sales of $99 9 million in the prior year quarter.
Higher pricing across all product lines drove the strong sales results.
Yeah.
DMC saw adjusted EBITDA of $21 million compared to $18 6 million in the prior year quarter due to a favorable demand.
Pricing environment sequentially, the average pricing of major products was 18% higher than in the first quarter of 2022, while average coal tar costs increased by 14% year.
Year over year, the average pricing of major products was 60% higher while coal tar cost increased by 52%.
EBITDA margin was down quarter over quarter as a result of an insurance recovery in the prior year period.
On slide 14, we highlight our confidence in our ability to grow and generate cash.
We continue to invest in our business through capital expenditures, while returning capital to shareholders through dividends as well as Opportunistically repurchasing shares.
In the second quarter, we repurchased seven $3 million of shares bringing the year to date total to $13 8 million with $76 $9 million remaining under our authorization.
We had $793 million of net debt and $317 million of available borrowings under the credit agreement as of June 30th.
Net leverage ratio was three eight times at quarter end compared with three three times at year end 2021, reflecting in part our working capital usage of $54 million in the first half of the year.
We remain committed to our long term goal two to three times net leverage and expect to reduce this metric by year end through a combination of higher EBITDA and stable working capital.
Longer term our current net debt, it's two six times, our 2025 target EBITDA of $300 million.
Slide 15 provides an overview of our new 800 million senior secured revolving credit facility announced in the second quarter.
This replaces our prior 600 million senior secured revolving credit facility and 100 million senior secured term loan facility.
The new agreement includes lower pricing tiers, and additional financial flexibility to support our ongoing growth strategy as well as sustainability initiatives.
The new agreement will mature on June 17, 2027 subject to a springing maturity in the event that our 2025 notes are not repurchased redeemed or refinance prior to November 15th 2024.
It also contains customary covenants for credit facilities of this type.
Additionally, the agreement is pre wired to allow us to amend the agreement with the approval of the sustainability agents to incorporate key performance indicators tied to environmental social and governance targets or external ESG rating targets and corresponding price adjustments based on the company's performance against those metrics.
This new agreement further positions us to create long term value for our shareholders and also reflects a broader commitment to sustainability by moving towards integrating applicable ESG coal into our liquidity framework.
As shown on slide 16 capital expenditures for the first half of 2022 totaled $55 8 million.
Net of cash received from asset sales and insurance recovery capital expenditures in the current year were $51 1 million.
And with that I will turn it back over to Leroy.
Thanks, Jimmy Sue.
I'll begin by sharing the notable happenings across our company during the second quarter are female.
On Slide 18, we're happy to welcome Kevin Washington to Koppers as Vice President of external affairs. He is responsible for managing relationships with federal state and local government agencies, leading the companys legislative and regulatory public policy strategy engaging with local community and industry stakeholders and overseeing our corporate communications functions.
Kevin comes to <unk> with more than 20 years of experience in these areas. Most recently as head of government Affairs at Illinois tool works, a global manufacturer of industrial products and equipment.
Slide 19 features Jeff <unk> director of Transportation logistics accepting the 2021 CN Safe Hailing award on behalf of Koppers for outstanding work and safety related tasks surrounding rail equipment.
This recognition can be attributed to our dedication and continued efforts surrounding zero harm and responsible care.
Yeah, and a world class Transportation leader presented safe handling award of customers, who load freight cars with dangerous goods that meet strict standards for the safe handling and shipment of regulated products.
On Slide 20 is another example of how our teams worldwide continue to take the zero harm culture to heart very practical ways.
On a recent visit to our Ashcroft facility in British Columbia, I met the onsite team there, including David Sam a mill operator or.
Based on his years of experience David brought forth and idea of issuing different colored heart has to employees based on their experience and skill sets.
Simple yet effective idea has been accepted and implemented ashcroft.
Newer employees were yellow those with lifesaving skills certification where blue.
Immediately visible designation helps team members know which of their colleagues may need more guidance regarding safety procedures, and which ones can respond most effectively in an emergency.
Slide 21 showcases our 2021 corporate sustainability report, which published recently during 2021 copper has made important progress in further defining implementing in measuring our sustainability goals as part of creating ongoing value for the company and its stakeholders.
As we consistently emphasize our strategy to expand and optimize our business to significantly grow profitability is underpinned by our steadfast commitment to sustainability practices and zero harm safety principles sustain.
Sustainability touches every part of our company and requires our constant attention or.
Our global team continues to gain knowledge confidence and a shared commitment to our ongoing success is a profitable responsible and civic minded organization everywhere, we operate I.
I encourage you to visit us online and learn more about our commitment to sustainability.
Up next is a review of business sentiments impacting our operations, both near and long term. So let me start on slide 23, with the business that had the roughest go over this quarter performance chemicals.
While second quarter profitability and margins significantly lag 2021.
Jimmi Sue had mentioned the issue was not demand based which is good news yes.
Yes, most major product categories trailed last year's comparable period, but that was expected given pandemic fueled demand, which continued through mid June 2021, before roughly stalling as behaviors began returning to pre pandemic normalcy.
The good news is that our flagship residential product Micropro was only down by 1% in volume as further market share penetration offset a more normalized post pandemic market.
Sales volumes of our industrial products CCA were up by 25% representing the phase out of pentachlorophenol for industrial treatment and the industry's move to CCA and other preservative.
Costs were the culprit as we've continued to experience record cost increases across all materials. In addition to higher fuel shipping and labor costs will continue to push through price increases, where we're able and will continue following that course this year with significant price increase is expected to affect our contracted customers effective January one 2023.
And we're already well ahead of our expected pace for planned price increases for this year.
Helped fuel a record sales quarter for Pcs, we realized $18 million of price in the second quarter and $34 million year to date in this segment.
Half of the second quarter as higher prices came from our international businesses, which helped them come in slightly ahead of 2020 one's results. Despite the negative impact of the stronger dollar.
The other half came in North America, and only partially covered our cost increases.
Copper dropped more than 20% during the quarter.
Resulting in pulling forward some cost of goods sold.
Now this is the opposite of what happened in the second quarter of 2021 as copper pricing rose by 7% during that period.
While broader economic indicators present, a worrisome, but backdrop with higher mortgage rates, pushing new home build rates and existing home sales lower plus consumer confidence on the decline home renovation and repair expenditures are forecasted to continue to climb at healthy rates even into next year.
We continue to see strong demand in our business both on the residential and industrial side is the backlog of projects remains high.
The remainder of the year will continue to be hampered by the stronger U S dollar and some level of uncovered costs, but we expect to be in a strong position entering 2023 with pricing resets across the board that will enable us to combat any softness in demand.
Slide 24, it looks at the longer term outlook for our PC business.
In addition to what we expect to be at least GDP ish level of volume growth. We have several other initiatives in motion, we believe put us in a position to capture greater sales and profitability in the future.
First of course is the need to pass on the unprecedented cost increases we've experienced throughout 2022 to our contractual customers, whose price commitment from koppers and this year.
Now, while we don't expect those negotiations to be easy the cost issue is not a koppers issue, but an industry issue.
For the wood preservative industry to remain healthy we have to be able to adequately pass on a rising costs and on the whole I expect that we will as.
As the global leader in our industry, we have demonstrated our commitment by investing almost $75 million over the past five and a half years, adding and optimizing production and making our operation safer and more environmentally sound and.
In addition, we've invested millions more on our R&D efforts to continue advancing our preservation technology, while also deploying top notch support and service through our field Engineering group.
Now, while we're enduring some short term pain in 2022, I'm confident we will enter 2023 with the right price and volume mix to move us back over the $100 million EBITDA, Mark with more room to grow.
By the end of this year, our Cca's sales volumes will have increased 40% since 2019, reflecting us winning new business. In addition to CCA, taking a formidable share of the pent to market is that preservative continues to be phased out in North America.
We've added another oil borne replacement for <unk> to our portfolio as we recently began shipping <unk> to a sizable new accounts, while also securing business with three other industrial treaters.
We recently restructured our sales organization to heightened focus on growing our industrial preservative business, which is already reaping rewards as evidenced by the Dci wins and several CCA account wins also.
We projected CCA volumes will continue to grow over the next several years at annual rates of 5% to 10% as it continues to be adopted as a pent up replacement. The U S. Utility pole market continues to increase at rates outpacing GDP and our South American business continues growing at a rapid clip at CCA is the predominant preservative used in that region.
Speaking of South America that region is on track to have its second straight year of record profits and is now firmly our most profitable region outside of North America.
As announced previously we've secured property in Brazil to Greenfield, a manufacturing facility to reduce our costs and grow with that expanding market.
In Europe , we're working through a wholesale restructuring to bring that business back to an acceptable level of profitability after losing a key product registration to the biocidal products registration process.
Currently working on a plan to seek regulatory approval to produce and sell micropro in Europe , which would be a shot in the arm for that business, but it's still a couple of years away.
In the meantime, we're slashing costs consolidating what we can and <unk> existing footprint and further pruning of our product and customer portfolio to fit our smaller more profitable and focused organization.
The overview for our <unk> business in 2022 as seen on slide 25.
I'll start by saying that after several tough quarters of performance due to industry disruption labor challenges and spiraling costs are you IP business appears to be trending in a good direction.
Fact, our second quarter adjusted EBITDA was its highest since our record second quarter 2020 results.
We remain on our most recent pace, both our third and fourth quarters. This year will represent new highs.
Infrastructure related funding has resulted in higher demand for pole volumes among utility customers, while shipments are constrained by heavier interest in larger class, one poles, which are in limited supply.
<unk> remain in getting product stage and shipped on schedule due to a bottleneck supply chain brought on by intermittent rail service and labor and trucking shortages as a result, most customer accounts are on an allocation basis.
Bottom line is that everything we were making is being sold and we have a perpetual backlog material waiting to ship as resources become available.
Attracting retaining truck drivers has been particularly difficult in this past year. So we're using more third party trucking providers than we have in the past to help us until things settle out.
We are beginning to catch up in some areas and recouping, our higher costs and are tracking well above our target of $10 million price increase for 2022, although much of that has gone to cover even higher costs than we anticipated coming into the year.
Through the first half of 2022, we've already realized $8 million of pricing increases.
Of our customers are now on a quarterly pricing and freight cost review so as to minimize further exposure exposure.
Now that we're catching up on the pricing front, we're beginning to see the benefits of the many projects that have been in process over the past year.
For a net cost of $10 million, we installed two new kilns converted two plants, the new preservative and disposed of a training facility in Sweetwater, Tennessee, consolidating that capacity into our plants in medallion and nuisance.
Those projects are expected to generate $5 million in annualized EBITDA.
So to support these six projects, we have converted approximately 70% of our penta volumes with CCA and in April we treated our last charge with penta.
Our treatment capabilities now include creosote produced by our CMC business segment CCA Enduro client produced by our PC business segment and copper Nathanael produced by a third party supplier.
We're considering the addition of Dci treatment now the PC has added that to its product portfolio.
From the supply side, we see the availability of wood remaining stable with pricing being impacted by higher freight cost, which have been passed on as part of our price increases.
Slide 26 offers a long term view for our <unk> business, given the increased reliance on electricity and connectivity due to more individuals working remotely there is an obvious need to properly maintain the nation's utility pole network.
In addition, we are hearing from most major utilities and cooperatives that the demand for coal volumes is expected to increase even more over the next two to five years, both supporting the strength of this business as well as industrial preservative business in PC and CMC.
The trend towards hardening the power grid includes pole replacements, which would make the network more resistant to extreme weather events.
Supply chain issues impacting most infrastructure components major investor owned utilities are looking to solidify their supply chains by locking up volumes under long term commitments as a result, we're exploring various sales models that can support potential investments by koppers to help stabilize and already stressed supply chain. This is an important undertaking is the federal infrastructure Bill.
<unk> has designated approximately 119 billion for utilities.
We're in the process of adding peeling and drawing capacity to serve our treating facility in Somerville, Texas and expect this initiative to begin contributing to profitability in early 2023.
As a reminder, Texas is to create a pull market and with market pricing for creosote moving up significantly this year plus the strain on the creosote supply chain due to reduction in coal tar markets, our value as an integrated treater, who can provide stability for the entire supply chain of treated products is a major differentiator for us and we believe separates us as the supplier.
Similarly, we continue our due diligence on a prospective location for industrial wood treatment and wood preservation chemical manufacturing capability to serve markets along the west coast of the United States and are getting closer to pulling the trigger on a potential site.
Australia is still experiencing high demand pulls in order to restore power lines out there various forms of natural disasters, including wildfires and cyclone.
Dry count installed last year. After core site is helping us to capture market share from the increased demand for softwood supply problems are hindering delivery of hardwood products.
On slide 27, we provide the 2022 outlet for our railroad products and services business.
Broadly speaking the first half of 2022 has been challenging in this business finished the second quarter behind the curve unexpected tie purchases, but similar to you IP, our rubs businesses exited the second quarter trending in the right direction by.
By year end, it should be generating meaningfully higher profitability on an annualized basis.
The Association of American railroads reports that rail traffic for the first half of 2022 was lower compared with last year.
Specifically U S carload traffic fell by 1% intermodal units were down six 2% and combined U S traffic declined by three 5%.
Amid these trends the railway tie association predicts a 0.8% decrease in demand for cross ties in 2022% to $18 6 million with lower class, one volumes and modest growth among commercial railroads.
That is likely due to demand being dampened because of the higher cost of hardwood that had saw mills divert that product in the higher value markets, which is now running treaters dry inventories dangerously low we've certainly seen that trend as the as the price of green ties have increased upwards of 30% in certain markets. While air tried inventories dropped almost 25% from its peak in the first.
Quarter of 2021.
That said, we're running at a slightly better pace on <unk> treated and sold through June compared to prior year and expect to finish the year up in volume by about 2%.
Now lets for green tie purchases, while we are still behind our desired pace for this year, which continues to affect our cost absorption a softening hardwood market due to recessionary fears and interest rate hikes began to improve crosstie availability in may.
To give you an indication of the improving trend our purchases were up by over up over 2021 in June by 21% for the second quarter by 17% for the year to date through June by 3%. We're still trailing 2000, twenty's run rate of $6 3 million ties, but expect to catch it in October and finished the year at $5.
5 million ties purchased.
As I mentioned when I was discussing the state of Texas creates a pull trading market continued last furnace steel closures in the Russia, Ukraine Wars put stress on the creosote supply market and raised the cost to produce the product significantly.
We're currently underwater in that category for our contractual class one business and are raising pricing to account for it in the commercial market.
Smaller treaters are struggling to get creosote and when they do they are paying significant premiums are vertically.
<unk> integrated business model is supporting stable supply to our customer base for which I believe we should be receiving more value.
If this situation continues for an extended period I believe koppers is in the best position to benefit as the only supplier in the industry that can guarantee supply due to our control of the entire supply chain for our products.
The commercial crosstie market dynamics remained very competitive however, even as commercial crosstie volumes have declined profits have increased because we implemented price increases before the full impact of higher costs were felt.
As projected the outlook for our maintenance of way businesses has improved and we're seeing that positively impact our profitability. We finished the first half of the year $1 million better than last year, and still anticipate a $4 million year over year EBITDA improvement for the full year 2022.
On slide 28, we provide a longer term view of reps now according to the railway tie Association 2023 should bring modest increases in class one in commercial crosstie demand totaling $18 8 million cross ties or one 1% increase.
We're expecting the market to increase by slightly more than that at 2% and we believe that our volumes will increase by 5% or greater next year as the market growth is skewed towards customers. So we have greater share with as well as share we are positioned to take with the north little rock facility upgrade coming online in early 2023.
Comprehensive network optimization program is expected to drive a number of EBITDA improvements in this business as mentioned expanding capacity at our facility in North Little Rock, Arkansas will drive efficiencies and enable increased volume growth in 2023 and beyond.
In similar fashion, adding pole treatment capabilities at our plant in Somerville, Texas will improve our cost absorption and lower overall unit costs.
Higher crosstie purchases, we plan to build up our untreated tie inventory for seasoning, which will of course increase working capital by anywhere from $40 million to $55 million with part of that increase offset by planned working capital reductions in our PC business.
Strong backlog and maintenance away projects should lead to improved profitability for this business as long as the railroads give us the track time needed and we achieve better crew continuity.
Longer term I would not be surprised to see the pendulum swing back in more of this maintenance of way work at contracted out as railroad realize trying to hire train and retain crews are better left to others to worry about.
My thoughts on our CMC business for 2022 as seen on slide 29, I'll begin by stating the obvious which is that CMC is on track to deliver one of its strongest years on record and its current formation of having just three distillation facilities globally.
It does not that long ago that we had three or more facilities in each of the regions of the United States, Europe , and Australasia and could not consistently generate the levels of profits and margins that we have over the last several years.
And we began the year by saying confidently that we have visibility for CMC to have a very strong first half, but we were apprehensive about extending that all the way out in 2022, because we were uncertain if business conditions would hold up and an expected that costs will continue to catch up the price.
Now here, we are in early August and we have pricing settled a major business for the third quarter and in some cases for the rest of this year. Accordingly, we're more bullish on seem to see for the remainder of the year.
Now according to IHS Markit, the global light vehicle production forecast that was updated in June 2022 reflects a near term increase in auto production in China is COVID-19 lockdowns expire in demand stimulus takes effect.
In Japan, Korea, and South Asia production estimates have been revised downwards.
Also North America, and Europe are continuing to feel the pressure from supply chain issues are CMC products serve the automotive market a variety of ways. So these trends provide important guidance for this business.
As such demand from the automotive and other CMC markets served remained strong overall, helping to offset the impact of rising raw material costs.
We remain alert for signs of a demand slowdown given the challenges of supply chain constraints across the globe elevated energy prices and inflationary pressures.
For example, higher energy costs, and even labor shortages have caused aluminum smelters in the U S and Europe to curtail production moving some demand from the market.
That is balanced somewhat by blast furnace steel, which continues to see shrinking capacity in developed countries, reducing the levels of coal tar raw material produced in raising the price of the product.
China remains in partial Covid lockdown, while the Russia, Ukraine conflict has caused European distillers to lose 220000 metric tons of tar on an annual basis.
Our share of that Russia, Ukraine losses, approximately 60000 metric tons.
And with Tar pitch in short supply prices have soared to record highs on both the supply and demand side.
In China pitch and Tar prices also remained at a high level, thereby driving raw material costs up globally.
As Jimmi Sue mentioned in her commentary raw material costs is 53% higher year over year, while average pricing for major products is 60% higher.
Over the years the production of coal Tar in developed countries is decreasing while the aluminum industry has experienced a similar phenomenon, reducing its need for pitching those geographies. The same cannot be said or at least not to the same degree from the North American creosote market yes.
<unk> crosstie insertions have pulled back modestly over the past five years for a host of reasons, but now for the first time in 2022, we've reached a tipping point, where creosote is becoming short at least at price levels that the railroads have become accustomed to.
And we're contractually locked in on our class one contracts, although we do have annual opportunities to trigger very modest increases however, anything above the contractual minimums or any open market purchases, we will see significant increases.
I foresee this dynamic putting tremendous economic pressure on anyone that's not an integrated treater, especially the smaller players both in coal tar distillation as well as in treating which could present different opportunities for koppers.
The confluence of market factors, we have seen a rise through the pandemic and up to the present justifies the strategy we implemented back in 2016.
Now that strategy call for Koppers becomes the largest global player in wood preservation technologies, using an integrated supply chain to competitively differentiate ourselves in the market and to be more resilient to market shocks.
Since the coal car market is continuing to shrink we reintroduced hybrid pitch in North America, supplementing coal tar with petroleum byproducts customer.
Customer acceptance has been positive thus far and our initiatives to improve our yields of higher value products is reaping the benefits, we expected, especially so in this market.
Along with various cost improvement projects were on track to achieve the approximately $8 million in EBITDA contribution we outlined earlier this year.
Slide 30 looks ahead for <unk> through 2025 as industries worldwide work to reduce the reliance on Chinese exports and to address the unpredictability of shipping logistics would seem reasonable CMC stands to benefit.
In the steel industry de carbonization projects to reduce or eliminate coke from the steelmaking process. We're continuing we expect the trend to move toward direct reduced iron in electric arc furnace projects, which means further reductions of coal production and coal tar availability.
As access to coal tar becomes more difficult or product development and related capital investments will continue to yield great benefits and set us up for even more success.
I already spoke of the benefits we are beginning to see from our yield optimization project, which is enabling us to produce more carbon pitch and a short market than we could under normal conditions and.
And we're still in the early stages of this and expect our yields to improve further as we refine the process.
And our hybrid pitch product. We're also looking to introduce variations of our creosote products to get qualified for rail and utility applications to help ensure stability of supply to those industries for the foreseeable future.
Finally, we continue to further our work on our enhanced current products to be used as a coating for battery anode materials in North America, Europe and Australia.
Part of our 2022 capital spend relates to a project that will further enhance our pitch yields while also setting the stage for entry into the electric vehicle battery market acceptance and qualification of our product continues at the current positive trajectory.
If we find success in entering the EV battery market CMC will firmly move into the specialty chemical space.
At that point this business will be much more than the business of the past before the transformation that we began in 2015.
And as we deliver on the various milestones we believe that the investment community will factor in the potential upside appropriately and desire and assign a higher valuation for koppers.
On slide 32, we are increasing our 'twenty two sales forecast of what would represent a new high for copper as a $2 billion compared with $1 $6 8 billion in the prior year.
This reflects a projected topline improvement in every business segment, largely driven by price.
On slide 33, we are reaffirming our 2022 EBITDA at $230 million, which would represent our eighth consecutive year of EBITDA growth on a comparable basis.
<unk> from our diversified portfolio of very across the three business segments and defer from the mix of results we presented in May.
While our ups business may have had a challenging 2021 and underwhelmed first half both the rail and utility businesses are trending positive, which sets them up for a strong second half of 2022 and in a great position to improve further in 2023.
However, since reps is behind where we had expected them to be heading into the third quarter, we're reducing our expected level of adjusted EBITDA improvement in 2000 $22 million to $12 million compared to the $18 million, we were projecting back in may.
MPC, we're showing an expected $16 million adjusted EBITDA declined from their record prior year, partly due to their softer Q2 results and partly due to the projection of some of the some of the same moving forward.
Current estimate for PC is $10 million lower than what we projected in may volumes.
Volumes are currently remaining solid and costs seem to be peaking with the exception of copper, which has actually declined in the past few months.
Price increases should finally catch up in our non contracted business in the industrial markets should remain strong which should enable us to have a better back half of the year compared to the first half.
At the time, the remainder of our price increases take effect in January of 'twenty, three we will be in a good position to have a much improved 2023.
And finally for CMC, we're now expecting a significant year over year increase in EBITDA driven by strong overall market dynamics, which have enabled us to maximize the value of what has been a short commodity.
In May we forecasted adjusted EBITDA for CMC to finish the year down $6 million compared to prior year, we're now expecting it to finish the year up by $10 million of racing the pullback and forecasts for our for reps MPC.
Now our forecast is still hedging some pullback in the fourth quarter. So to the extent current marketing conditions persist there still remains upside in CMC results for this year.
While it will be difficult to maintain our current levels of profitability for CMC throughout 2023, we won't know better until we get closer to year end.
We still have other projects in process that can improve profitability and offset partially any softening of our markets.
And while I always prefer to get off to a strong start like we did last year, what I'm always most focused on is where we finished the year knowing that our results can shift from quarter to quarter and that's why we do not provide quarterly guidance and instead focus on annual guidance, which for this year remains $230 million, which will be a new record will be our eighth straight year of improvement excluding cage ACC.
And we still believe we are on track to achieve our 2025 target of $300 million in EBITDA.
On slide four our adjusted EPS guidance for 2022 remains unchanged from last quarter at $4 10, compared with $4 21 in the prior year and while operations are additive to result in a higher effective tax rate is expected to directly impact our bottom line.
Finally on slide 35, we continue to expect our capital spending net of cash proceeds from asset sales will be in the range of $80 million to $90 million with approximately $35 million dedicated to growth and productivity projects.
As a final thought our focus remains on executing 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.
Our balanced and diversified portfolio continues to position koppers as a great defensive investment option in most economies as we've demonstrated consistently improving performance over the past seven years, despite disruptive market conditions, posting a record that not many competitors can match, we will continue to control what we can with a firm belief that our story will resonate among those who appreciate the copper.
Branded results driven performance.
With that I'd like to open the floor to your questions. Thank you all for dialing in and for your interest in Koppers.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question please.
Sure Ben.
At this time, we will pause momentarily to assemble our roster.
And the first question is from Chris Howe from Barrington Research. Please go ahead.
Good morning, everyone. Thanks for taking my question.
Hey, Chris.
I wanted to start on slide where you mentioned the third party truck assets.
As we consider this versus having your own drivers.
Finally can you start here and just talk about the labor challenges.
Moving beyond the labor challenges that youre experiencing in the other segments.
Once the labor environment.
Does show some level of improvement.
How you expect that benefit.
The overall profitability of the company.
Yeah.
Sure.
I'll just start by saying labor as you pointed out and as we pointed out in our prepared remarks has been a significant challenge. It's been a challenge I think that all companies have been have been faced with.
Trucking has.
Has been a challenge certainly for the past couple of years and I think we will continue to moving out as again as that industry again, it faces a shortage of drivers. So we're we're trying to do some things to where we can.
Even incentivize some of our our folks within our businesses working out at the sites to potentially move into that profession.
And we're seeing a little bit of early success in that but obviously that creates issues within the plants as well so.
It's going to take a little while I think until things settle out and certainly.
A strong economy is.
Is not helping in that regard in terms of individuals having a lot of choices and making different decisions coming out of the pandemic. So we're doing everything we can to to increase our recruiting efforts.
And we've made some headway in that regards as well so we're starting to see a little bit of improvement out at the sites, but it is a challenge that is going to continue to persist throughout this year and certainly into next.
It's one of those things were.
There is certainly a cost to us in terms of of having high turnover is of course from a safety standpoint, theres a cost from a training standpoint.
Costs from a productivity and efficiency standpoint, it's hard to put your fingers on exactly what that is but I can guarantee you once we have greater stability within our operations.
There will be meaningful.
Improvement as a result.
Okay.
And then I'll ask one more even though I have quite.
Quite a few others questions here.
And when you think about.
Existing home sales decreased in June five consecutive months of declines.
We're in this environment of rising interest rates, although some of them have pulled back.
But it would seem to me.
But.
The <unk> segment as a whole is more resilient.
Through an environments and that on the other side of this.
As inventory returns interest rates taper.
And.
Some of the <unk>.
<unk>, perhaps left the home market come back in.
To a much more favorable housing market price.
That your repair and remodeling.
To get going and we could see more decks being built and so forth similar to what we saw in the pandemic.
Maybe slightly lower than that but.
It would seem like levels could return once we look beyond the valley.
Yes.
Certainly all all I think true Chris I mean, we're actually very pleased with with where our volumes are at as.
We sit here today are our volumes right now are not the issue and we don't expect that they are really going to be moving forward I mean, theres been nice growth in these markets over the past couple of years certainly we've we've taken some some share which has helped as well.
But just as I again, I pointed out in the prepared remarks.
Last year was a record second quarter, and we were still feeling pandemic fueled demand up through really the middle of June so comparatively speaking our micropro volumes were down by about 1%.
From a volume standpoint in the second quarter. So they held up pretty nicely in our CCA volumes were significantly stronger just because of the.
Displacement of Penta Thats moving out of the market.
So I think that volume has held up well and we will continue to hold up well moving forward, yes, obviously interest rates rising existing home sales slowing of typically are markers that indicate potential slowdown in this business, but you are right to repair.
Remodeling market is a pretty resilient market.
And I would just say at this point in time, we haven't seen any pullback to date.
And if there is we don't expect it to be meaningful in the Grand in the Grand scheme of things are bigger are bigger near term issue.
We're working to resolve is in getting those ever increasing cost increases pushed through.
That's what we're working on here that.
That we expect will will be in place in terms of our bigger customers by the end of this year heading into next year and good news is in most of our major cost components, we're starting to see things crest and so.
There is still some work to do on our non contracted customers will see some of that come through and benefit us in the second half but.
I like where the PC business is overall.
Markets are still pretty strong and inventories are low.
So it's still a decent a decent spot here as we enter the second half of the year and 23. So we certainly expect will be much stronger.
And as you put through the January price increase.
Do you anticipate keeping some of those price and some of the cost pressures alleviate in the PC segment.
Well yeah.
Yeah.
It's a good question.
Unfortunately, we haven't seen anything alleviate thus far other than copper or pulling back a little bit and we.
We've had a certain approach with our with our customers as it relates to copper anyways, it's gone up and down over the years and we will continue to work with them on on a model that helps them be successful, which helps us be successful so for us, it's about balancing balancing getting being able to get price and retain our volumes as well.
Obviously, we don't we don't we.
We don't exist out in the market without any competition and so we realize that.
Our customers have choices and.
We do everything we can to make sure that we're in the best position to win the business and to and to get fair value for our products.
So we'll continue that approach them and again I'm confident in our team and I'm confident in our in our business model that will that will result in success as we head into 'twenty three.
I think I think a good bit of the price increase will stick longer term because I don't think some of these costs are necessarily going away.
From that standpoint, I think we should be able to hold on to most of it.
Yeah.
Great. Thanks for taking my questions.
Thank you.
And the next question will come from Chris Shaw from <unk>.
Yes, Chris <unk>. Please go ahead.
Hey, good morning, everybody.
I was just trying to could you help me just figure out what so if copper prices falling and you have high cost inventory.
Price increases I believe for <unk>, what's the all the moving parts there like what how this is going to impact the second half profitability in that segment or even going more forward and I know you have hedges for copper to how does that all sort of shake out over the next six to 12 months.
Yeah, Hi, Chris It's Jimmi Sue.
We do think that the.
We hedge copper, but we do have some timing differences here is the higher cost inventory moves through the system, while comprehensive and down.
I would expect that.
That's a couple of month phenomenon not not a six month phenomenon.
So we expect that business to be back realizing the kind of margins.
That we're used to.
In the third quarter, when we see it as in third quarter results I'm sure I think we will see it more in the fourth quarter at third quarter Mike.
Be a little bit of a bridge quarter between the two.
So are you guys hedged out on copper for 2023.
We are fully hedged for 2022 and we have started layering in some hedges for 2023.
And how does your I guess hedge strategy change based on just the volatility recently in copper in anything or you try to stick to the same sort of policy.
Yes, so Chris we.
We work with our customers to try and basically be able to lock in our business and lock locked in a significant piece of our cost structure. So so a big part of what we end up hedging is with committed business now theres hedging, we do outside of that as well.
But it's a smaller piece of the overall hedging strategy. So our hedging strategy to date has not changed.
Got it and then Rob on the rail business.
Are your forecast or.
Or the industry forecast for.
Cross tie to that.
I'm actually talking to the customers or is that based on sort of like.
Certain level you expect a replacement every year.
And different than.
What they've been doing in the more recent past.
It seems like they've been under replacing tires. So how I would think maybe <unk> to get better at some point, but is that too far off in the future and this is just based on real real data from our customers itself.
Yeah. So we quote I think data from the rail tie Association for.
For for that particular.
Index, and and we certainly have a view on it based upon our hour.
No.
Discussions with customers and like I said, we.
We see it a little more aggressive.
Although again, there's still small rates overall.
And for US in terms of the discussions we've had with our customers. We do see some of our customers that are planning to to increase their insertion at a higher rate at least next year, then again, what that data would suggest so.
We are slightly more more bullish on where thats going but in terms of the overall crosstie replacement market we have to.
Take into account the fact that.
Yes.
Go back 10 years or so ago.
And the introduction of borate creosote treated ties, which extend the life of ties the improvement of technology to to detect.
Ty wear and failure and things like that have all improved and at the same time that the railroads.
Have.
<unk> essentially.
Slim down their lines as well, which is all sort of contributed to a lower base I don't think were getting back to $23 to $25 million in cross tie replacements in a year.
I don't think thats realistic given given the state of where things are at right now, but I think the overall.
We're still going to see pretty decent demand and it will increase and sometimes move up and down depending upon when railroads decide that they want to go heavier in terms of their repair replacement cycle over a given two or three year period. So we've seen a lull in that over the last few years.
At least with one of our customers, we're going to see a pickup in that over the next couple of years and as for the others again something could happen in the next year or two that might have them do the same but.
But the data is the data that's come in from an industry Association and we have our view on it which is slightly better than what I think they're coming out with.
Great. That's helpful. Thank you.
Yes sure.
Okay.
At this time there are no further questions I would like to turn the conference back over to CEO Leroy ball for any closing remarks.
Okay. Thank you and I just want to thank again, everyone for participating on today's call and again for your continued interest in koppers, everyone stay safe. Please. Thank you bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].
Yeah.