Q3 2022 Koppers Holdings Inc Earnings Call

Good morning, ladies and gentlemen, thank you for standing by.

Welcome to the Koppers third quarter 2022 earnings conference call and webcast.

At this time, all participants will be in listen only mode. If.

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Following the presentation instructions will be given for the question and answer session. Please.

Please note that this event is being recorded.

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

Thanks, and good morning, I'll quit Mcguire, Vice President of Investor Relations welcome to our third quarter 2022 earnings Conference call.

We issued a press release earlier today.

You may access it via our web site at copper Dot com.

As indicated in our announcement, we've also posted materials to the Investor Relations page of our website and will be referenced in today's call consists.

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 February four 2023.

At this time I would like to direct your attention to our whole we're talking disclosure statement on slide two.

Comments made on this conference call may be characterized as forward looking statements.

Find under the private Securities Litigation Reform Act of 1995.

Forward looking statements involve a number of assumptions risks and uncertainties.

Putting with described in the cautionary statement included.

In our press release and in the company's filings with Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward looking statements included in the company's comments you should not regard the inclusion of such information as a representation that its objectives plans and protect the results will be achieved.

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 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.

My ball, President and CEO of Koppers.

And Jimmy Sue Smith, Chief Financial Officer.

I'll turn it over can be right.

Thank you Brent good morning, everyone and.

Welcome to a review of our third quarter results.

Besides the report that we finished the third quarter with record sales and record CMT adjusted EBITDA performance, which keeps us on track for delivering another record year.

We have much to share with you about the details of our financial performance and will do so later on in the call.

As always we'll begin with zero harm as seen on slide four next week is a busy one for our zero harm team as their hosting two key events in Pittsburgh.

Zero harm truck driving championship on November 7th and eighth recognizes our 10 safest and most skilled drivers represent koppers, while out on the road delivering a central products and serving as a critical connection to our customers.

Final reported zero total Atkins from September 2021 through August 2022.

Our team of professional truck drivers plays an important role in maintaining a high standard of overall safety performance and an inherently high risk environment logging nearly 12 million miles annually to deliver critical goods across the nation.

Also next week as our annual zero harm coordinator conference, where we will have 38 coordinators come together in Pittsburgh for a three day conference focused on leadership development and relevant safety health and environmental training.

It's an opportunity to share ideas and experiences and strengthen the network at the front end of protecting what matters and preserving the future.

Slide five shows in the third quarter 22 of our 43 operating facilities work accident free.

Year to date as of September 30th I'm proud to say that the total recordable rate of safety incidents was 23% lower than at the same time last year and we are approaching record lows in incidents.

Also we continue to pursue zero harm to point out with a comprehensive initiative to accelerate our progress is zero injuries and zero environmental harm throughout the organization.

We are continuing to use proven strategies and tactics. We're also gaining more input from unemployed as the basis for developing highly practical training tools.

Concentrating my peer to peer interactions are key to greater and faster awareness acceptance and incorporation of zero harm procedures.

As seen on slide six zero harm work streams include frontline training supporting the six and eight coordinator role maximizing the user experience and the zero harm information system strengthening.

Strengthening our governance oversight and expanding communications and messaging.

The work streams are being managed in a formal project environment to recapitalize zero harm and take it to the next level.

The ongoing support and participation of our worldwide team for advancing the zero harm culture remains a great source of pride and admiration for our organization.

Journey towards zero will never end and were up to the challenge to maintain that focus every day.

Now, let's shift gears and talk about our third quarter highlights on slide seven.

There's a lot going on will be a dramatic understatement as evidenced by the flurry of news releases, we've issued over the past few weeks.

Now I'll get into more details on those items in a bit but first let me summarize some of our recent financial achievements.

Third quarter saw our third straight quarterly historical high in consolidated sales and our second straight quarter of cracking the $500 million Mark.

Puts us on track to reach the $2 billion level of sales for the first time in company history.

Are those sales levels have been driven by historic price depreciation for our products and supported by solid demand dynamics in each of our three business segments.

Through nine months prices added an astounding $271 million to our top line, while adjusted EBITDA through nine months of 176 million is basically sitting right on the comparable prior year EBITDA number.

The silver lining is there is more price to come in 2023, while the cost increases have been decelerating for the most part.

Our CMC business generated record quarterly results driven by stronger pricing supported by globally balanced supply and demand environment and continued operations improvements.

And for our PC products remain high while we continued working down higher cost inventory that have had a negative impact on margins a situation that will continue to temper in the fourth quarter and should reverse in January 2023, as our January one price increases take effect.

<unk> improved sequentially and year over year, it's hardwood supply continued to increase and demand for utility infrastructure remained robust.

Additionally, we were successful in overcoming the dual headwinds of a stronger U S. Dollar on our foreign earnings and an effective tax rate increase.

Just for perspective, if the U S. Dollar had been at 2021 levels, we would've had adjusted EBITDA comfortably in the 70 plus million range. This quarter, our highest year over year tax rate is expected to take a <unk> 50 per share bite out of our adjusted EPS and keep us from otherwise easily topping last year's all time high.

The impressive results that we delivered speak to the ongoing strength of our diversified business model and the success of the various initiatives of our strategy to expand and optimize our business, which we debuted in September 2021.

We're on pace to finish 2022 with another year of record sales and profitability and make meaningful progress in 2023 on our path to reach our $300 million adjusted EBITDA goal in 2025.

My deepest appreciation goes out to our incredible team worldwide, who continues to find ways to convert challenging conditions and opportunities for growth now I'd like to turn it over to our CFO Jimmi Sue Smith for a more detailed review of third quarter financial results.

Thanks, Leroy and good morning, everyone. My comments are based on the information contained in this morning's press release, which provided our results for the third quarter of 2022.

On slide nine we had record consolidated sales of 536 million for the quarter and.

An increase of $111 million or 26% over the prior year.

Our third consecutive quarter of record sale.

By segment sales for <unk> increased by $21 million or 11%.

Sales for P. C increased by 38 million or <unk> 33 per cent and sales for CMC increased by 52 million or 43% compared to this quarter last year.

On slide 10 third quarter adjusted EBITDA on a consolidated basis totaled 69 million or 12, 8% compared with 54 million or 12, 7% in the prior year.

Moving to our segment results on slide 11 sales were up for $208 million compared to $187 million in the prior year with the increase being the result higher pricing across all market, especially cross ties in utility pole.

Along with increased activity in our railroad bridge services.

These increases were partly offset by volume decreases in our utility pole business, mostly due to capacity and transportation constraints in the current labor market.

Adjusted EBITDA for roughly $16 million compared with $11 million in the prior year as we saw improvement in our utility pole and maintenance of way businesses from price increases and favorable cost absorption.

Partly offset by higher raw materials and operating costs.

As we expected we are seeing improvement in the procurement of untreated crosstie, if market prices stabilized, albeit at higher level.

Crosstie procurement in the third quarter was higher by 41% compared to the prior year, while crosstie treatment decreased by 6%.

Year to date through the third quarter Crosstie procurement is up 15% and treatment up 2%.

As shown on slide 12 P. C had record sales of $153 million compared to sales of $115 million in the prior year quarter.

Thanks to volume increases of over 30% in the Americas, and higher pricing globally slightly offset by lower volumes in Europe , as we continue to restructure and optimize our product portfolio in this part of the world.

With respect to the significant quarterly volume growth in the Americas.

This is partly a result of higher lumber prices and a temporary change in consumer spending habits in the third quarter of 2021, the tempur customer demand last year, but it's also indicative of the continued steady growth in this business. Despite the current economic headwind.

Adjusted EBITDA for PC decreased to $17 million from $20 million in the prior year quarter as higher raw material prices and higher cost inventory in a lower copper price environment more than offset global price increases.

We do expect this trend to improve first in the fourth quarter and we have worked through much of the higher cost inventory as of the end of August .

And ultimately as we already said in 2023 as many customer contract with limited ability to recoup price increases what fire at year end and are being replaced with new agreements that better reflect the current economic situation.

Slide 13 shows third quarter sales for CMC business of 175 million compared to 123 million in the prior year on higher pricing across all product lines, partly offset by slightly lower volumes on non pitch products.

Human Z achieved record adjusted EBITDA and margin for the quarter of 37 million and 21% compared to 23 million and 18% in the prior year as a result of the higher sales prices, partly offset by raw material cost increases and an unfavorable impact from foreign currency.

Third quarter average pricing of major products was 64% higher than the prior year, while coal tar cost increased 46% over last year.

Sequentially. The average pricing of major products was that was 14% higher while coal tar costs increased by 2%.

On slide 15, I want to again reiterate our commitment to a balanced approach to capital allocation.

We will continue to invest in our business through capital expenditures that protect and grow our cash flow.

At the same time, we continually evaluate opportunities to return capital to shareholders through dividends and strategic share repurchases.

Year to date, we've allocated a $14 million to repurchase any shares and have $77 million remaining under our authorization.

And this morning, we announced we have declared our standard quarterly dividend of five five cents per share.

We ended the quarter with 776 million of net debt and $409 million of available borrowings under the credit facility.

Our net leverage ratio was three five times at quarter end compared with 3.3 times at the end of 2021 and three eight times as of June 30.

Our long term target continues to be two to three times net leverage ratio.

Slide 16 is our standard quarterly recap of capital expenditure.

Year to date in 2022, we've invested $80 million with nearly 27 million of that and growth project.

Net of cash received from asset sales and insurance recoveries capital expenditures year to date, our $75 million.

We provided the breakdown of capital expenditures by business segment here as well.

With regards to our recent acquisition of <unk>, we expect to be able to offset future spending by utilizing capital equipment already owned by that business and therefore award avoid future spending on certain projects that were previously contemplated.

And with that I'll turn it back over to Leroy.

Thanks Jimmi Sue.

Before we get into an examination of the business sentiments impacting koppers I'd like to introduce you to an exciting new feature that we just rolled out a newly designed <unk> corporate web site, we believe will become a vital tool to further our brand presence among key audiences.

So slide 18 features a look at our new Koppers homepage that went live just a few days ago. The new copper site reflects the cleaner visually attractive and intuitive navigation. It makes it easier for visitors to locate information and for us to tell our story built around our purpose of protecting what matters and preserving the future to our various stakeholders.

As seen on slide 19, the new website offers a look into Congress people processes and products that represent our culture based on zero harm sustainability essential services and generating benefits to all of our stakeholders.

The visit Www Dot copper is dot com to learn more about our approach to doing well by doing good.

Now earlier I referenced our truck drivers they are the face of the company in many respects as they enter our customer sites. Following the emergencies, such as hurricane in with critical infrastructure to help get communities back on their feet.

As seen on slide 20, copper teams delivered more than 13000, Poles, and 4000 cross arms to utilities across Florida, and the Carolinas in the aftermath of the yen.

Our effort of all four plants with our team at medallion, Georgia, providing the bulk of the supply.

Fortunately koppers professionals have extensive experience planning for such events coordinating in advance with those who are impacted moving material material efficiently working safely within hazardous areas. After a natural disaster disposing of damaged poles and completing restoration in the timely manner.

We truly appreciate the dedication of our teams to bring our customers back online. After this hurricane as they have so many others doing so at a high level, while always adhering to our zero harm values.

Now, let's dive in a little bit deeper into the various drivers of our business now and through our 2025 planning period.

So first for performance chemicals in general on Slide 22, the market data that supports the demand profile for this business is mixed.

Listing home sales continue to decline, which is not a great pack, but home renovation and repair expenditures are still expected to increase in 2023, albeit at lower rates.

In October 20th Wall Street Journal article titled the home improvement boom isn't over yet points out some of the market data that I just mentioned, while also referencing an aging housing stock in need of greater repairs and aging population that aims to age in place, which could trigger remodeling and homeowners with the capacity to spend as wages increase and many homeowners avoid the <unk>.

The rising mortgage rates due to being locked into lower fixed rates.

So thus far from a doom and gloom scenario gives us optimism that our PC business is on the precipice of new record breaking performance.

So what about the terrible numbers in Q3.

Well, there's no getting around the fact that the bottomline numbers for PC in the third quarter were in fact awful.

The $17 million and adjusted EBITDA was the second lowest full third quarter for this business since we bought it in 2014 and the lowest quarterly number we posted since the fourth quarter of 2019.

Placed against a record sales quarter that also resulted in our second lowest quarterly EBITDA margin behind the fourth quarter of 2014, the first full quarter of the PC with under Koppers ownership.

The reasons behind that were threefold, what the two issues that are under our control moving in the opposite direction next year.

First and foremost where the significant cost increases we've experienced this year that have only been partly offset to date through the $46 million of price decreases realized year to date.

The second issue is the higher inventories we carried into 2022 that were valued at near the all time peak of copper pricing and the timing for how that higher cost inventories move through the financial statements as copper prices have fallen.

Third item is the significant strengthening of the U S dollar and the negative impact it's had on our foreign earnings.

Those factors combined to produce a near all time low performance, we just experience.

But the plants, we've been working on behind the scenes have is trying to slingshot to new record performance in 2023.

Now, let's move on to slide 23 to explain why.

While base demand is expected to be met differentiated by the big box retailers versus the independents are reset results is not dependent on big market growth.

Beginning in Q1 of next year, we should be fully caught up with our price increases and finally at the point, where we've recaptured all cost plus an applicable margin.

That resolved issue number one.

Second we steadily brought our inventory levels down to a normalized level throughout 2022, and we'll head into next year to stabilize cost level be fitting current copper costs, thereby eliminating the high cost inventory drag was experienced throughout this year.

That takes care problem number two.

Now since we don't control foreign exchange rates, there's little we can do to mitigate the third issue we have experience, but there are plenty of other steps at our disposal that should more than offset any further strengthening of the dollar or general market pullback.

Now I'll touch on just two of the more significant opportunities that have us excited about the future of our PC business.

So as announced on October 17th we made significant inroads to capturing industrial market share currently transitioning from our nonconference reduce treatment preservative pentachlorophenol, which was denied re registration by both the U S and Canada.

To date, we've won $40 million of annualized business for the utility industry to supply either our legacy waterborne alternatives CCA.

Or our new oil borne alternative D C a lot.

We've also continued to grow our fire retardant business from almost nothing in 2018 to a leading market share today.

Now this is a product category that struggled in 2022 is the Russia, Ukraine War escalated at the cost of our materials to produce but we havent feverishly, putting price increases throughout this year and it finally got ourselves caught up as we enter Q4.

The second significant opportunity is the $60 million and potential incremental revenue to displace our competition at a big box retailer with a new patented micropro product called Micropro Xps.

We recently won a sizeable countless space, which gets our foot in the door and gives us an opportunity to win more business in the future.

Beyond 2023, we see serious opportunity to grow our foreign income through restructuring our European business on a simplified product portfolio built around micropro and adding manufacturing capabilities to our South American operations.

We might be taking it on a churn this year the future continues to look really bright for performance chemicals.

Turning to slide 24 in our utility and industrial products are you IP business.

Confident in saying that I believe we've turned the corner towards a step change in profitability with even greater potential ahead.

Through a combination of investments to take out costs and a series of price increases in the U S. We were able to reach an all time high in quarterly profitability, while also reaching double digits in quarterly margin for the first time in over the past five months find ourselves on an annualized rate to exceed our highest profit year in this business by more than 50%.

It's not an anomaly, but the first important job in turning this business into what we thought it could be when we bought it back in 2018.

Don't forget that this business consumer resolve its chemicals now from our PC AD CMC business, but does not get credit for that is that income is capture on those two business units results.

If we werent restricted due to labor and trucking shortages our results in this business would be even better.

Now as I mentioned the potential for this business is even greater as we look beyond this year on slide 25.

Federal dollars that were earmarked for infrastructure are beginning to get spent were seeing interest in demand increase placing our base business on solid ground.

We have additional opportunity to reduce our cost through plant automation and improved logistics network and adding drying capacity over the next couple of years.

The first place we plan to add dry capacities at our new location in Louisiana, which should become operational in the back half of 2023.

We signed a purchase agreement to acquire the property in the third quarter and are in the process of completing due diligence with a plan to close by year end this year.

Equipment has been on order in anticipation of having the property. So it will be able to move pretty quickly.

This will add lower cost whitewood through our Somerville, Texas treating plant, enabling us to better compete in the Texas creates a pull market.

Longer term, we're looking at property on the West coast that currently underserved market.

And our Australian pole business continues to Hum along nicely adjusting to the market as it shifts over time, but continuing to grind out consistent profits on a year by year basis.

In our railroad products and services business or Rps, we've seen the turn we have been waiting for and horrible cross tie supply as shown on slide 26.

It's obviously good news as it puts us on pace to finish this year at about $5 5 million type purchased the recent activity has is trending above 6 million tonnes on an annualized basis.

As we announced earlier this week, we closed on the acquisition of gross James the largest independent supplier of untreated cross ties in North America.

This was a 15 million dollar asset deal, which covered their working capital and fixed assets plus a control premium.

<unk> averaged approximately 50 million sales over the past few years and should add at least $1 4 million ties to our network.

This will help us serve our customer base, even better by providing us greater control over where these guys go while also providing us flexibility in asset deployment.

We mentioned at our Investor day last year that the growth and productivity capital needed to fewer bids are past the $300 billion could be displaced by certain strategic M&A.

This is an example of just such transaction as it will reduce our capital needs at two of our facilities that the gross change locations will serve we're.

We're very happy to have joined the koppers team enthusiastic we welcome him aboard.

On slide 27, if we look to the future for Rps, We believe we will be able to continue to drive improvement in this category and ultimately reached the double digit margins now experienced on the utility side of our business.

There are a few important contributing factors in play here.

First is the cost efficiencies that should come from the new modernized north little rock plant when it comes online in the first half of next year, along with the improved absorption we should experience a Somerville, Texas plant as it begins to be greater utilized for pulp production.

Second are the benefits to be derived from a gross and James acquisition.

This will enable us to bring more ties into our facilities, while realizing the chemical pull through it.

It also should lessen the labor scarcity of turnover issues, we've seen at a few facilities by displacing jobs filled or unfilled at copper sites by gross James production capacity.

Third is pushing to capture the current unrealized value of our creosote preservative now scarce in the market due to blast furnace steel cut backs.

And finally, the fourth area supporting further growth and profitability is in our maintenance of way business, where we announced a nice contract win with another class one railroad in early October to take back and dispose of end of life Cross ties.

The growth in this business reflects our commitment to providing a responsible operation that they can rely upon to solve a critical need.

We believe that having this capability creates a stickiness to our crosstie business, while also adding incentives to grow it by offering an efficient circular solutions for our customers are taking back product as we turn shipments of new product back it's a true win win scenario.

Now moving to car materials, and chemicals or CMC as seen on slide 28. This business has defied the odds this year by over becoming a reduction in raw material supply due to the Russia, Ukraine War and the pullback in traditional steel production.

Energy costs that have curtailed production of key aluminum markets and a stronger dollar that has eroded our strong foreign profitability as it gets translated to U S dollars.

In fact, it seems he had record quarter profitability in Q3 and record quarterly margin, which finished at close to 21%.

So what's happening.

Well the best place to be in this business is a long or even raw material market because it gives us the best opportunity to keep costs low and capture the maximum price spread on our finished products.

This is actually what has occurred this year smelter pull back due to higher energy costs are taken aluminum capacity offline roughly at rates not far from the steel pull backs that have kept the global markets outside of China pretty much in check.

Additional positives include the work we've done to enhance our production through adding petroleum feedstocks to mix, helping to make up for some of the coal tar shortfall increased reliability, we've experienced at our stickney plant due to capital improvements and the benefits. We are receiving from our enhanced carbon products project, which has displaced a portion of our lower valued distillate yield in favor of producing more.

More higher value car pitch.

We should finish this year at close to $100 million in EBITDA, which is a testament to the hard work and ingenuity of the individuals who keep coming up with new ways to create value in an old line mature business.

Turning to slide 29, while we don't expect profitability like we're seeing this year in 2023.

Some of these current market dynamics are bound to change. We also have other opportunities to drive profit improvement through our continued focus on petroleum enhanced products creosote volume increases through Rps production increases.

Price increases due to current pricing is well below market and enhanced current products to increase our carbon pitch yields and eventually for electric vehicle battery coatings.

We've been spending capital money on a project that should come online in late 2023 that will give us full scale capability to produce various enhanced car products heading into 2024.

When a copper as there continues to be a lot of excitement around CMC.

Now, let's move to slide 31, where you can see that we are expecting to reach the $2 billion sales Mark for the first time, our Koppers' history. This would represent an almost 20% astounding increase over 2021.

Slide 32 shows our expectation to reach a new all time high adjusted EBITDA of $230 million for the eighth straight annual improvement without cage ACC.

$230 million is the number we targeted when we first released guidance for this year back in February and with all of the twists and turns of this past year I'm happy that this still remains firmly in our graph. After we made up considerable ground in the third quarter.

Reaching $230 million would require us to reach a new record fourth quarter, which we believe is realistic for all the reasons that of our articulated previously.

On Slide 33, you can see that we now expect to finish the year with adjusted EPS of around $4, a share which is slightly below our previous guidance of $4 10.

Taxes continue to be the biggest issue is our significant foreign earnings generation. This year in tax code limitation on interest expense deductions are unfortunately, having material impact on our rate.

Our U S income profile should improve considerably in 2023 with the expected increase is coming from our U S based PC and rubber businesses, while the international pieces of our CMC business are not expected to perform at 2022 levels.

Coupled with a ninth straight expected increase in EBITDA next year that should enable us to easily generate a new all time high and adjusted earnings per share.

Finally on slide 34, you can see that we expect to finish the year with net capital expenditures of between $85 million to $90 million after applying cash proceeds from asset sales and insurance recoveries of.

Of the $95 million unexpected gross spending over a third of it or $33 million going towards projects that are producing future growth in earnings.

I continue to be excited about what the future holds for koppers and look forward to sharing our expectations for 2023 in more detail. The next time, we get together early next year in the meantime, I'm happy to take any questions you might have related to our most recent quarterly results or future actions that I've outlined.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if 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.

The first question today comes from Liam Burke with B Riley FBR. Please go ahead.

Good morning, Leroy good morning, Jimmi Sue.

<unk>.

Yes.

Jimmi Sue we had a sequential step up in depreciation and amortization as well as a year over year Stubhub is that a function of the amortization built in any acquisitions during the quarter or is there something else in there.

It's a it was a retirement asset obligation in our European operations. So that is a fully retired asset and went through our depreciation expense this quarter.

So would that be viewed as one time.

Getting back to somewhat of a norm.

The historical rate.

Exactly it was it was about three three and a half million dollars and it is a non it we would not expect that to recur great. Thank you and then on the cash flow if I looked at your for the first three quarters, you roughly cash flow breakeven if I took the cash from operations less capex.

Understanding you got $85 $90 million of annual Capex do you look at fourth quarter as being a strong operating cash flow quarter for you.

We do one of the reasons as we traditionally see.

I mean, working capital sort of recapture in the in the fourth quarter.

And so while we.

We are.

With the increased cross tie procurement that we're seeing we may not see as much of a working capital decrease as we had in prior years in the fourth quarter I wouldn't expect it to increase so you know even if it just hold steady I think that will be a strong fourth quarter. There great. Thank you Jimmi Sue.

The next question comes from Laurence Alexander with Jefferies. Please go ahead.

It's Dan Rizzo on for Laurence and thank you for taking my questions Hey, Dan.

How are you doing if.

If we think about pricing, maybe railroad and utility products and in performance chemicals.

I guess, how sticky is it so once you Institute price increases does it generally stay I mean, how much is price concessions.

Different environment.

Frankly.

So good question I mean, each of the businesses are different right. So rps for the raw materials side.

We.

We don't really take much risk on that as it relates to the class ones.

We do on the black tie business that goes into commercial but.

We are we have mechanisms within our contracts to be able to increase prices based upon increases in some of our input costs I would say, it's fairly sticky on the Rps side, but you see movements up and down as it relates to what the biggest raw material input being hardwood supply right. So we've seen significant cost price increase.

As to recoup the cost increases there you know in the past 12 months to 18 months on Rps.

As wood prices go down those prices will also go down for the railroads as well we don't keep that.

So youll see fluctuation there are a lot of that is just pass through when we see price increases coming through but we don't carry a lot of that risk you IP different.

And what we're really doing is catching up on a lot of the cost increases that we've incurred over the past 12 months or so.

Strong market and I'd say with where the demand dynamics are right now.

Prices are pretty sticky I'd say.

We will see how sticky they are when we hit a soft spot at some point in the future, but we're not expecting that for for quite a while now we that business is running.

Really really strong.

We continue to be somewhat a supply constrained.

And and.

So we see the next several years as being incredibly strong from a demand standpoint, and will certainly contribute to the stickiness in our pricing there.

PC.

It's.

Similar to the hardwood side of the market for Rps you have the copper is the major input there and we go through hedging.

To protect us and our customers from major fluctuations in that cost input, but as that moves up and down there there could be some movements.

Movements on price up or down that that's reflective of where the market might be at whenever we enter into those agreements as it relates to the other raw materials.

Say, it's you know it's fairly sticky in that we're not experiencing anything different than our competition is so you know we all need to make sure that we're getting fair fair pricing for value, but with all of these businesses a lot of it comes back to the to the competitive environment that you're that you're working in and how aggressive the comps.

Tissue might be in terms of trying to take share and things of that nature. So I'd say in general we like where we're at in all of our businesses in terms of being able to hold onto price.

Except for the fact that again with major commodities that make up some of the raw material base. If they move if they move in the opposite direction, there's going to be pressure in terms of bringing price down to reflect that as well just in terms of how youre seeing probably others reacting.

The competitive markets.

Thank you that was that that was actually that was very very helpful.

So then if we look at your 2025 goals and forgive me if I missed this but does that assume that the macro environment stays the same or I guess can you reach it if we were to hit a significant recession in the next year or so.

Well you know so when we unveiled those goals last year, we talked about the fact that the.

Those goals are you know reflected what we felt we could do.

With the with the projects that we had available to us that would either lower cost or or maybe open up doors into different markets or different geographies. It was not predicated on outsized market growth. It was not predicated on M&A and things of that nature by the same token wasn't predicated on AR.

On a recession either right. So it was sort of business it was business as usual so.

We have a lot of good projects in the queue that we think can absorb some pullback in demand, but look at it really depends upon how how deep and how long a recession might be we are not recession proof, but we believe we are very resilient.

Through a recession, because we have these businesses that do.

Sort of work counter cyclically towards each other so we think we'll make it through you know a pullback if one occurs.

Being pretty strong position.

And we will still be able to execute and get value for the projects, we're doing but looking any pullback in demand is going to have an impact on our ability to get to 300, and that's no different than any other business that would be facing those sorts of headwinds, but we feel we feel good with where we're at right now the projects are starting to pay off you're starting to see that here bigger.

Here in this third quarter, just as we sort of expected and we feel really good about next year in terms of what we have in front of us too so.

We're pretty bullish about where our business is at.

Thank you that's very helpful. Thank you.

Yeah.

The next question comes from Chris Shaw with My next Crespi. Please go ahead.

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

Hey, Chris how are you.

Just.

Verify I thought it near the end there did you endorse.

A record EPS for next year.

Uh huh.

Well you know, we we were still finalizing our plan for for next year and have not a formalized it and taken it to our board for approval next year, we do expect EBITDA to be higher next year, we do expect our our geographic earnings mix to move towards our favor from a tax standpoint.

The one thing that will work against us a little bit is is the interest the limitation that that has an impact on our tax rate, but you know all things being considered I fully expect that when you sort of roll all that together that we would expect to be at a record EPS, Yes next year, yes.

Great and just speaking of the tax rate.

Well I don't understand what the Oh.

Oh interest Oh, the lack of interest deductions, but what what happened there and then also just how how how much of a shift next year could be attach rates see positively.

Yeah. So hi, this is jimmi sue them.

The there was a change in the tax law. This year Theres, a theres a deduction and a limit on how much of your interest expense you can deduct.

And it's limited to a percentage of what before 2022 was a percentage of your EBITDA and U S earnings and in 2022 shifted to EBIT. So you lost the add back for depreciation.

And so that's caused us to be limited in our ability to deduct our full interest expense because our interest expenses primarily in the U S.

And combined with the fact that much of our income this year has shifted to.

Foreign earnings outside of the U S. That's been sort of a double whammy on us we expect the migration of income to sort of reverse and for us to have higher U S income in 2023 compared to this year that that will be offset a little bit probably by higher interest expense just given what's happening in the.

The overall sort of market dynamics.

I am not going to speculate at this point on where the tax rate may come in for 2023 as you know we have not completed our planning processor or presented.

Yeah.

Got it and then switching to the C. M C.

Our U whereas the.

Coal tar costs right now are they sort of.

What would you consider get caught up the pricing at this point or is there still more coal tar inflation do you expect the sequentially going forward.

It's a good question, they're there they're at we're seeing costs at record highs.

We're seeing continued pressure there.

And I expect we will continue to see continued pressure there I think we're going to see higher costs are still moving into the fourth quarter. So I don't think that we have caught up just yet and I think yeah. I think our earnings are reflective of that.

We're capturing still a pretty significant.

Price spread and so there is still some more catching up to do.

Fourth quarter for sure we will see higher a higher cost in that business.

And you know where we stand as we go into next year is a little bit still up in the air.

We're trying to settle on some of that stuff here is we will close out this quarter, but but we're not we're not there yet in terms of reaching the peak of our coal tar costs.

Got it and just a quick question on Capex.

I believe it's elevated this year as there is it going to come down do you project, maybe in 2023, and what would you guys consider I forget what the maintenance capex might be.

So so.

It's good to be able to kind of walk through this year, because you know at Investor Day last year, we talked about sort of this path to 300 with a series of a number of different projects many of them which require capital.

And and I think we laid out up to $275 million of.

Of capital that would go into return type of projects.

That's on that would be on top of the.

65 million or so of repair maintenance and safety capital that we are that we deploy in a given year. So.

You know, we we I think we finished last year about around 125. This year, we're going to finish in that in that 95 net.

Our 85 to 90 net range.

Next year, we still have projects that are in process that that are.

We will contribute our earnings next year and in the years after that are still in process right. So you've got your normal 65.

And we have at least a I'd say 35 million ish that is still in process as it relates to finishing off our project in north Little rock, finishing off our project in Louisiana, finishing off our project in a in newborn for enhanced carbon products. So no I'd say the next the next few years are still.

Going to be in that 100 million range, but a third of that is is you know the capital that's getting spent to actually get us and move us from where we were at $211 million at the end of 2020 to this 300 million Mark by.

By the end of 'twenty five but at the same time is that numbers moving up right our cash flow.

It should also be moving up as well. So we will have be having more cash to deploy to not only absorb that but to also deploy in other ways.

Great that's very helpful. Thanks Yep.

The next question comes from Brian <unk>.

With Baird. Please go ahead.

Good morning, just a few questions for you one of the questions I get about koppers as you know the exposure to single family homes.

In the performance chemicals business is there any way you can tell or you know how much of that business wanted to single family homes versus the repair and remodel market.

Well I can't I can't quote you numbers or percentages all I can tell you is the way that sort of the markets work for us in those businesses.

As in the U S. We pay very close attention to to the repair remodeling market that is the market that we believe drives.

The volume in our product mix there, it's not it's not new home builds its repair and remodel, which again, we tend to look at it our existing home turnover and things like that but there's some other things that are at play that are keeping those markets continue continued to be strong even with the slowdown in existing home sales. It's when you move.

Outside the U S that there you know that our business tends to rely a little more on new home construction.

But those those markets are much much smaller in terms of their revenue and profitability contribution. So so in the U S, which is what drives our results we pay attention to to repair remodeling an existing home sales.

Great that helps and it makes a heck of a lot of sense.

Just on price cost given some of the volatility we're seeing right now in commodities just over the last six seven months.

As some of your commodity costs are coming down you know how quickly.

Before you have to reset prices with some of your customers.

Well you know on the Rps side, you know, there's there's constant discussions going on in terms of of you know.

What we're able to procure the the untreated hardwood for for them and.

And sort of agreement on on what will go out for in the market from a pricing standpoint, so that's pretty fluid and is happening.

<unk> pretty much regularly and in real time.

The coal tar markets are those.

Those.

Those are you know getting.

Getting set depending upon the region, either quarterly or semi annually and and again from a from a from a demand standpoint, right, where we're out there in the market trying to ensure that as we see prices moving in any particular direction, we can hold onto as much of a spread as possible. So if there's pressure on pricing.

Going down on the raw material markets, then there might be some expectation that that might.

As a result in lower end market pricing, but but that's not always the case, obviously it depends upon.

Just how much supply is out there in those end markets, that's why I see them and see.

While those markers are important and they they do tell us or give us a little bit of visibility into what we can expect in our results there, but but theres. So many factors at play it can it can be hard to pin it down on any particular, one or are I say it probably every call you know our team is I put off.

Our team up against anybody in terms of their ability to to work the spread on on the value of their end market pricing versus versus what they're able to pay on the raw material side and we've seen it time and time again the year, they're having this year is amazing and so much of it is due to their understanding of the market.

And and where the demand is that on both sides of the equation supply and end to end products and so I know I know that's not it doesn't give you a lot of visibility and I realize that business is a little bit of a black box, but I can tell you as being one of only a few in.

That in that business.

It it in with the people that we have with a long long line of experience in being in those markets.

We were able to use that market intelligence and capture you know pretty much maximum value for our product portfolio on a pretty consistent basis.

Got it that is helpful.

Directionally.

Final question Jimmi Sue.

Obviously capital markets are in a little bit of Oh.

Did it looks right now.

You think about capital allocation and you still have a couple of years on the senior notes.

How do you think about sort of.

Buying back shares or you know, we're making M&A.

You're buying.

Buying back some of the bonds in the open market in <unk>.

How do you are.

Or you think even thinking about sort of looking to refinance the senior notes anytime where you're waiting closer before they become current.

You know, we you correctly pointed out that the capital markets are not extremely welcoming right now for us, but we are continually monitoring those markets and the maturity on those bonds in anvil will step in when when we think the markets are conducive to it.

And with respect to capital allocation you know, we've been very clear about having a very balanced approach and.

Between investing in our in our business to maintain and grow our cash flows and returning capital to shareholders through dividends and repurchases.

And with M&A, we you know we continually say that.

You know you know.

And it can happen at any time, but for US right now the focus is really on executing on the projects. The stable of project that we had available to us and M&A just as you see with the growth in game and we tend to think about that in terms of being tuck in adjacent type things that will really offset and replace other projects that we.

Haven't in the queue.

It has to be better return than what we have today.

That is helpful. Thank you for all the color I appreciate it thank.

Thank you.

At this time there are no further questions in the queue and this concludes our question and answer session I would like to turn the conference back over to CEO Leroy ball for any closing remarks.

So I just wanted to just close by thanking everyone for your continued support and <unk> and your continued interest in copper. So please continue to stay safe. Thank you.

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

Yeah.

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