Koppers Holdings Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to COPPR's fourth quarter 2021 earnings conference call and webcast. At this time, all participants are in listen-only mode. If you need assistance, please alert a conference specialist by pressing star followed by zero. Following the presentation, instructions will be given for the question and answer session. Please note that this event is being recorded. I will now turn the call over to Quinn McGuire. Please go ahead.

Thanks, and good morning. I'm Quinn McGuire, Vice President of Investor Relations. Welcome to our fourth quarter and full year 2021 earnings conference call. We issued our press release earlier today. You may access it via our website at www.coppers.com. As indicated in our announcement, we have also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice in prior quarterly conference calls, this is being broadcasted live on our website, and a recording of this call will be available on our website for replay through May 23rd, 2022. At this time, I would like to direct your attention to our forward-looking disclosure statement seen on slide two. Certain comments made on this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of assumptions, risks, and uncertainties, including risks described in the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans, and projected results will be achieved. The company's actual results, performance, or achievements may differ materially from those expressed in or implied by such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures the company has provided with its press release, which is available on our website, Reconciliations of Non-GAAP Financial Measures to the Most Directly Comparable GAAP Financial Measures. Joining me for our call today are Leroy Ball, President and CEO of Coppers, and Jimmy Sue Smith, Chief Financial Officer. I'll now turn this discussion over to Leroy.

Thank you, Quinn. Good morning, everyone. I want to start by saying I'm pleased to report that we again delivered strong results for 2021 and finished the year slightly ahead of our revised projections we provided last November. Moving into 2022, I and the rest of our team are excited to continue on the path of executing on our long-range growth plan to deliver $300 million of EBITDA in 2025. As always, I'll begin my comments with an update on zero harm as seen on slide four. In 2021, we achieved our lowest 12-month rate of serious safety incidents in the company, with 16 of our 43 operating facilities working accident-free for the entire year. And what's more, we stayed on track for our fifth consecutive record year of proactive leading activities, which are used to correct conditions or behaviors that precede potentially life-altering injuries. We conducted more than 18,500 leading activities across the company in 2021, and this is an encouraging sign that means that our efforts to prioritize training and education around identifying and mitigating the most potentially dangerous exposures are generating positive outcomes. Our culture of zero harm continues to move deeper into the organization through training and workshops for our frontline employees, as well as sharing practical applications among our plants. Part of the training for frontline employees includes conducting peer-to-peer observations. And as our worldwide team has come to understand, the key to zero harm is engaging with employees and leaders at a personal level by working aggressively to anticipate, identify, and eliminate the risk of serious incidents. In addition, we're making progress on improving our transportation fleet safety program to influence safe driving behaviors. We've implemented measures to increase transparency, improve tracking of key performance indicators, and identify opportunities for synergies. We continue to conduct zero harm training for our commercial truck drivers and have begun to include defensive driving techniques. Later in 2022, we'll hold our second annual truck driving championship competition in recognition of the employees who do the essential work to safely deliver products to our customer base. And we'll continue to develop enhanced tools for monitoring fleet compliance, as well as for coaching our truck drivers. And although we still have much work ahead of us on our journey to zero, I am proud of the progress we continue to make year over year. And I send my sincere thanks to our Zero Harm team and our employees worldwide for staying relentlessly focused on safety. Moving to slide six, I'm pleased to announce that today our Board of Directors reinstated a quarterly cash dividend of $0.05 per share of Copper's common stock, which will be paid on April 4, 2022, to shareholders of record as of the close of trading on March 18, 2022. Now, those who have followed us for the past seven years We know that we've worked hard to transform Coppers into a stronger and more resilient organization, and as a result, we've been able to withstand the many challenges thrown our way to produce consistent, reliable profitability and cash flow. And as we're moving into the next phase of our strategy, we feel it's important to bring more balance to our capital deployment strategy and begin returning cash to our shareholders through dividends and share repurchases. In August of last year, our board approved a $100 million share repurchase plan, and now we feel it is prudent to reinstitute our long-suspended dividends. Our board's decision to reinstate a dividend demonstrates their confidence in the strength and resiliency of our business and our ongoing ability to drive growth. Now, I would like to welcome Jimmy Sue Smith to our first earnings call as Copper's Chief Financial Officer since assuming the role on January 1st of this year. Welcome, Jimmy Sue. Take it away.

Thanks, Leroy. In this morning's press release, we provided our results for the fourth quarter and full year 2021. And as seen on slide eight, we achieved record performance in a number of categories this year. We had a new high in consolidated sales of $1.7 billion. Operating profit finished the year at $157 million, matching last year's record. Adjusted EBITDA was a record $224 million, up from $211 million in 2020, the seventh consecutive year of improvement and a record year for our performance chemical segments. adjusted EBITDA margin was 13.3%, marking six straight years in the 12% to 14% range. We also set a new record for adjusted earnings per share of $4.21 and reported operating cash flow of $103 million, which brings us to six of the past seven years with more than $100 million in cash flow. We also reduced our net leverage ratio to 3.3 times at year end, while investing $125 million in the business. And finally, the book value per share of Copper's equity has never been higher than year-end 2021. Now moving to our discussion of fourth quarter and full year 2021 results, on slide 10, consolidated sales for the fourth quarter of 2021 were 405 million, an increase of 12 million, or 3%, compared with 393 million in the prior year. By segment, sales for RUPS decreased by 12 million or 7.5%, sales for PC decreased by 11 million or 8.5%, while sales for CM&C increased by 36 million or 38% compared to the prior year quarter. As shown on slide 11, consolidated sales for full year 2021 of 1.679 billion increased by 10 million as compared to the prior year. Despite the pandemic, 2021 sales represented the highest level of revenues in the history of the company, excluding KJCC. By segment, sales for RUPS decreased $29 million or 4% for the year, sales for PC decreased by 23 million or 4%, while sales for CM&C increased by 61 million or 16% compared to the prior year. On slide 12, Fourth quarter adjusted EBITDA on a consolidated basis was a fourth quarter record of $49 million compared with $47 million in the prior year. EBITDA margins in both periods were 12%, with the fourth quarter of 2021 driven by record results from our CM&C business. EBITDA margin for our PC segment was lower than prior year, which reflects a more normalized level of profitability. Our RUPS business continued to experience a weak market environment. Slide 13 shows record-adjusted EBITDA for the full year 2021 of $224 million, or 13.3%, compared with $211 million, or 12.6%, in the prior year. The record EBITDA was driven by our PC business, which delivered a record-adjusted EBITDA year, and strong results from our CM&C segment, partly offset by year-over-year decline in Roth. Slide 14 illustrates the trend of our adjusted EBITDA over the years, excluding contributions from our sold KJCC operations. This performance validates the success of our core strategy of leveraging our vertically integrated business model, which has delivered higher levels of adjusted EBITDA every year from 2014 through 2021. On slide 15, sales for RUPS were down by 12 million for the quarter, primarily due to lower cross-tie volumes, as well as reduced utility pole demand in the U.S. and Australia, partly offset by pricing increases. Market prices for untreated cross-ties remain elevated due to strong demand in the construction market, resulting in lower purchases by railroad customers. On slide 16, adjusted EBITDA for the reps was $6 million compared with $10 million in the prior year quarter. Factors contributing to this decline include lower volumes for cross-tising utility poles, reduced fixed cost absorption from lower capacity utilization, costs associated with converting to new pole treatment preservative systems, and higher raw material and transportation costs. Price increases partly offset these factors. Sales for the PC segment on slide 17 were $119 million compared to sales of $130 million in the prior year quarter. The decrease is attributed to a shift in consumer spending habits in the United States to pre-pandemic levels. Thus, the lower volumes of preservatives in North America reflect a return to more normalized demand levels. That said, we are seeing higher demand in international markets such as Brazil and New Zealand. Adjusted EBITDA for performance chemicals on slide 18 was $19 million compared with $23 million in the prior year quarter as a result of lower volumes and higher input costs, partly offset by price increases we have implemented globally. Slide 19 shows CM&C sales at $131 million compared to sales of $95 million in the prior year quarter. The increase is primarily the result of strong end-market demand supported by higher sales pricing for carbon pitch, distillates, and chemicals which was partly offset by lower sales volumes of carbon black feedstock in certain regions. On slide 20, CM&C had a record quarter for adjusted EBITDA at $25 million compared to $14 million in the fourth quarter of 2020. The increase in profitability can be attributed to favorable demand and a positive pricing environment, partly offset by higher raw material costs. The average pricing of major products in the fourth quarter increased 9% from the third quarter, while average coal tar costs were higher by 11%. Compared with fourth quarter of 2020, average pricing of major products was 46% higher, while average coal tar costs increased 49%. On slide 22, total capital expenditures in 2021 were $125 million, or 85.9 million net of cash proceeds from divestitures and insurance. On a growth basis, we spent 51 million on maintenance, 22 million on zero harm, and 52 million on growth and productivity projects, primarily related to the capacity expansion of our railroad cross tie treatment facility in North Little Rock, Arkansas. As shown on slide 23, from an overall capital allocation standpoint, We are committed to a balanced capital allocation plan that includes investment in the business, as well as return of capital to shareholders through dividends and share repurchases. As Leroy just mentioned, our board has reinstated a quarterly dividend, which we expect to grow over time. In addition, we bought back $11.5 million of shares in 2021, primarily in the fourth quarter. This return of capital is a strong indicator of our confidence in our ability to grow and generate cash according to our strategic plan. Finally, as slain on slide 24, at year end, we had $738 million of net debt and $348 million in available liquidity. Our net leverage ratio was 3.3 times as of December 31st, 2021, compared with 3.5 times at the prior year. We continue to be committed to our long-term goal of two to three times net leverage. Note that our current debt balance is solidly in the middle of that range at our 2025 EBITDA goal of $300 million, meaning that we have a limited need to further reduce debt to hit our targeted leverage in 2025. Given the progress that we have made to strengthen our balance sheet, we are changing the focus from paying down debt to growing EBITDA as a means of reducing leverage. And with that, I will turn it back over to Leroy.

Thank you, Jimmy, Sue. Before moving on to a discussion of the business sentiments impacting our various segments, I'd like to offer a quick review of some notable happenings across the company since we were last together. Slide 26 highlights some well-earned recognition for Coppers. Our company was named as one of America's most responsible companies for 2022 by Newsweek magazine for the second consecutive year. Newsweek partnered with Statista to identify the winners from 2,000 plus U.S. companies across 14 different industries. It's an honor to again be recognized by Newsweek for our company's performance in environmental, social, and governance areas. And the credit, along with my thanks, goes to our team members worldwide. The Pittsburgh Business Times spotlighted two individuals from our leadership team, Jimmy Hsu and our Chief Sustainability Officer, Leslie Hyde, in two separate feature stories in recent months. And we're very proud of these accomplished members of our COPPRS team who demonstrate leadership in our community as well as within the COPPRS organization. Slide 27 lists two recent leadership appointments that will help propel us forward on our path to sustained growth. Tracy McCormick has been elected as treasurer, transitioning from her post as assistant treasurer. She's been with the company since 2011 and brings a depth of experience and knowledge of our businesses and finance organization. And also, Dan Skowronek has been named vice president of growth and innovation, a new role at Coppers. Transitioning from his position as vice president of purchasing and strategic marketing, Dan will help us pursue ongoing growth opportunities in a variety of different areas by challenging the status quo and enabling our business leaders to execute the day-to-day in our strategic initiatives. Now, while Dan will have responsibility for M&A, this move should not be construed as us looking to go heavy on an M&A strategy. Our approach to acquisitions has not changed. We'll continue to evaluate opportunities on their merit and based upon the value we believe we can create for shareholders by adding to our portfolio. There are many ways to grow, and Dan and his team will be tasked with finding and driving those opportunities to a successful conclusion. Next, I'll be providing an overview of business sentiment, both short and long term. There's a lot of information on each of the next several slides, which represent a culmination of feedback from employees, industry contacts, and independent sources. I'm not going to reference every bullet point, but we'll stick to the high-level themes we're tracking that will ultimately dictate our success or failure in each of the business lines. So on slide 29, we see an overview of the important drivers for performance chemicals in this coming year. Everything begins with demand, and while we're getting a little bit of mixed signals, we believe that 2022 still continues to present a healthy demand profile for the North American residential treated wood market, which drives the bulk of our business. Existing home sales data, consumer confidence, and repair and remodeling projections all paint a rosy backdrop for home improvement spending. Drilling down specifically into the product segment we care most about, treated wood, We see a little bit more cautious outlook. There's no question that volumes are in the process of normalizing from their pandemic fuel peaks. We did see a more respectable year-over-year comp this past Q4 compared to the sizable volume drop-off we saw in Q3. The early part of 2022 is showing volumes in line with our expectations. We're about 10% to 15% better than 2019, which was our last normal year. Lumber prices began rising again in the latter part of the fourth quarter, and current levels are close to three times as high as where prices dropped to in Q3 in the early part of Q4 last year. With the rise in lumber price, we once again are seeing lumber treaters keeping inventory levels low to ensure they don't get caught with a lot of high-priced product when prices fall. The overall market environment may be a little uncertain, but our business continues to be supported in the near term by a strong customer base, one that continues to be aggressive in consolidating treating capacity, which will once again provide additional units in 2022. As a result of treating consolidation that occurred in 2021, our PC group has now achieved a position as the number one preservative supplier for treated wood sold by the top three U.S. home improvement big box retailers. While core industrial preservative demand should be strong in 2022, it is more likely to be driven by the phase-out of pentachlorophenol and its replacement by our CCA Enduracline product, as opposed to significant volume increases in the broader industrial treated markets. I'll address that further when I cover our UIP business. We do, however, have opportunities to further grow our market share in industrial products, and we plan to be more aggressive in this product category going forward as we're close to maxing out on the residential side of the business with the significant customer additions that we've made in the past few years. In fact, we just recently brought on a 60-year industrial customer of one of our competitors and believe we can convert more business based upon our commitment to the industry and the capital that we've allocated to product development, operations reliability, and the strength of our customer and technical service. Internationally, we expect continued strong demand in South America in 2022 after a record 2021. We recently agreed to begin serving what will be the largest treater in South America after its capacity expansion is completed. And when we begin shipping later this year, they will represent the largest customer for us in that region. Now, as regulatory pressures continue to impact our European products, we've implemented a restructuring plan to streamline our business footprint and product portfolio in that region. On the cost side of the equation, we're seeing major inflationary cost increases in 2022 with the persistently high price of copper leading the way. We're projecting approximately $50 million in higher costs in performance chemicals this year with approximately $30 million in price increases offsetting some portion of that. In addition, the situation with Russia and the Ukraine is causing logistical issues with raw materials for our fire retardant products and further driving up costs. Now, backfilling most of the net cost increase in 2022 is the increased sales volume we expect, plus $8 million in benefits from various network optimization projects aimed at increasing capacity. The net result of all those moving parts is we expect our PC EBITDA in 2022 to finish at approximately $96 million or about $6 million lower than than our record 2021 results. From a working capital standpoint, we expect inventory levels for PC to remain high throughout 2022. And this is due to the higher cost of materials, as well as our desire to ensure that we avoid running short on product if we encounter shipping delays as we did in Q3 and Q4 last year. As you can see on slide 30, the longer term picture for our PC business continues to look very promising. The biggest challenge we will face heading into 2023 is realizing the additional price increases we will need in order to offset copper costs and other inflationary costs. And copper in particular has averaged anywhere from 50 to 100% higher than pre-pandemic levels. So that could be as much as a $50 million in additional price that we'll need next year, based upon next year being 2023, based upon where the copper markets currently are at. From a market share standpoint, we had another recent positive development in landing 100% of the supply requirements for a major West Coast customer we formerly shared with a competitor. Beginning in 2023, we expect to take on 100% of this customer's business under a new five-year agreement. North American industrial volumes of chromated copper arsenate, or CCA, will continue to grow as that preservative displaces Penta-treated product. Penta is being phased out of the North American market due to the last producer closing its capacity in Mexico. and the recent decision by the US EPA to not renew the Penta registration for wood treatment. Now, we also continue to look at whether we want to get into producing the other oil borne products that will displace the balance of the Penta business and have not made a final determination as of yet. In Brazil, we purchased property for a greenfield manufacturing site to support our growing business in that country. We're still a couple of years from breaking ground as we work through the regulatory approval process, but expect to have the new capacity in place sometime in 2026. In Europe, part of our restructuring efforts involved getting MicroPro approved and commercialized, which we expect to happen within the next few years. We've already received interest from the market for this product and are developing our production plan. The successful expansion of production capacity for basic copper carbonate, or BCC, at our plant in Hubbell, Michigan, along with the recent qualification of a new domestic BCC supplier, strengthens the supply chain for our flagship PC product, MicroPro, by eliminating the need for overseas supply. As mentioned last quarter, we've been issued a patent for the next generation MicroPro product, which improves upon the efficacy of our current product and will remain enforced through early 2038. We're in the process of commercializing this product and plan to bring it to market over the next several years. Slide 31 provides an overview of 2022 for our UIP business. Again, starting with demand first, utilities are expecting to show increased demand for pole volumes in 2022 due to project work and upgrades deferred last year due to the pandemic. This holds true even though Omicron has slowed production levels at the end of Q4 and the beginning of this year. The PC supply chain issues in Q3 and Q4 that had a downstream impact on our UIP business have created a backlog of demand that we're almost finished working through. Inflationary cost increases and the threat of higher interest rates seems to have had a negative effect on piling quotes for the time being, and we're currently digesting this development to determine whether it is temporary or not. As mentioned earlier, market production of Penta ceased at year-end 2021. Most of our customers are electing to use our CCA Enduraclimb treatment solutions for Southern Yellow Pine utility poles. We're estimating that approximately 65% of our legacy Penta-treated product will convert to CCA-related products. And our PC business actually accrues that benefit for increased CCA business, although UIP can realize greater throughput at their plants, treating with CCA, creating greater operational efficiencies. Historic price increases now being introduced are expected to add $8 million in sales this year. We continue working to pass on higher raw material, labor, and transportation costs that weren't covered by higher pricing in 2021, in addition to 2022 cost increases. We have been and continue to be hampered by difficulty in attracting and retaining a workforce at certain of our plants and also maintaining a steady roster of truck drivers, whether employed by coppers or third parties. Internal resources spend considerable amounts of time trying to fill spots while operations and logistics work through the inefficiency brought on by the regular turnover. It's a significant issue where we hope to see improvement in 2022. On the project side, we have about $5 million of EBITDA benefits built into 2022 from various strategic projects. These include the conversion of our plants in Vidalia, Georgia, to CCA in Vance, Alabama, to copper naphthenate, which was completed during the last couple quarters of last year. And the new dry kilns that we installed in Vance, as well as Newsom's Virginia. Also expected to contribute to the improvement is the planned sale of our underutilized Sweetwater Tennessee plant and the consolidation of that capacity into other treating facilities in our network. We scaled back operations at Sweetwater earlier this year and have been winding down inventories as we work through a sale of the land and associated equipment. Now, while wood supply remains relatively stable, we're aware of pricing pressures from high demand for small logs and pulp and exports. As referenced earlier, the costs associated with trucking and logistics are expected to remain high due to fuel charges, labor costs, and availability of third-party trucking assets. On the international front, pandemic-related shutdowns have impacted Australian sales in the short term, while a current vaccine rollout in New South Wales is expected to ease COVID-related restrictions over the coming months. Slide 32 provides the longer-term outlook for the UIP business. Due to ongoing remote work patterns and extreme weather events, utilities need to ensure the maintenance of their infrastructure to avoid service interruptions that are hardening their grid. To better prepare for the unexpected, most major utilities are trending towards stocking storm inventories, which would add to sales volumes. In addition, the infrastructure bill passed in 2021 has $119 billion earmarked for utility infrastructure improvements that should further support a strong demand cycle over the next several years. Overseas, we're seeing continued underlying long-range pull demand in Australia to restore power lines after natural disasters such as wildfires and cyclones. We also took steps to solidify our ability to shift volumes in Australia to softwood as hardwood availability becomes more difficult by adding a dry kiln at our Takura location last year. We're in the process of adding peeling and drying capacity in the Gulf Coast to serve our Somerville, Texas plant, and we're finalizing the terms of a lease in Louisiana. We're in the process of laying out the plant footprint and obtaining quotes for equipment. Current plans are to be online by the end of this year. And when that occurs, we'll significantly improve the raw material cost profile of our Somerville plant, which will enable us to compete for more business. Finally, we're conducting due diligence on property that would provide a potential base of operations in the Western US to serve the industrial treating and wood preservation chemical markets. We're early in the process, but view this as an exciting opportunity to access an untapped market for coppers, while also providing us the ability to significantly lower our cost of goods for our PC business. More to come as these plans develop. On slide 33, we moved on to the 2022 outlook for our railroad products and services business, where we're expecting a minimum of $20 million of price increases to flow through this year to account for higher material costs. And we're expecting overall cross-tied demand in 2022 to increase 3% to 4%, while we are expecting a 4% to 5% increase in our volumes. The longer it takes for the untreated tie dynamics to change, however, the more our planned improvement for RPS this year is put in jeopardy. The 4.4 million ties purchased in 2021 represent a new low in the data I've seen that goes back to 2012 as customers resisted paying elevated prices to meet demand levels and sawmills have moved on to cut for other markets. We've not yet pulled out from the bottoming out and cross-tie purchases that occurred in Q4. which means we need to see a greater acceleration of increased purchases when things do begin to improve if we're going to reach our improvement expectations for this year. As with other business segments, trucking issues persist as the lack of drivers and pent-up demand limit access and drive-up transportation costs. On the commercial front, cross-type profits continue to be lower, even with easier comps, illustrating the highly competitive market dynamics currently in place. From an industry trend standpoint, rail traffic rose higher than 2020 for most categories, with total U.S. carload traffic 6.6% higher year over year, intermodal units up 4.9%, and combined U.S. traffic rising 5.7%, according to the Association of American Railroads. This is indicative of the hot economy we're in, and if we can procure over 6 million cross-ties this year and realize our sales volume targets, we can add $5 million in EBITDA to 2021's totals, Add on another $4 million from strategic initiatives aimed at network optimization and RPS should see $9 million in year-over-year EBITDA improvement in the cross-tie business alone. Labor and COVID-related issues impacted our maintenance-of-way business much more severely in 2021 than originally expected. Collectively, this business line hit a new low in EBITDA in 2021 as we dealt with significant inefficiencies in crewing due to frequent turnover. lack of track time due to higher traffic, and inflationary cost increases. The good news is there is nowhere to go but up from here, and as we pull out of the pandemic, our maintenance-of-way business lines should revert to a more normalized profitability level. We're expecting $5 million of EBITDA improvement to occur from maintenance-of-way in 2022, and this would still leave us several million short of where we think this business can be in the next few years. Now, slide 34 outlines the longer-term view for our UPS business. Most of our class one contracts that were set to expire in 2021 have now been extended beyond 2025 that lock in a substantial base of long-term business. Now, while 2022 volumes are expected to increase four to 5% for coppers, we anticipate volume growth of more than 10% in 2023. The expanded production capacity at our facility in North Little Rock will be completed later this year and will be a key driver of that volume increase moving forward. That volume increase will, of course, require working capital to increase accordingly as greater green tie purchases will be needed to support the volume growth. One of the key projects we're devoting resources to is figuring out how to smooth out the untreated tie cycles that seem to rear their head every few years and are the biggest key to making this business more stable. While we doubt there's a silver bullet to solve the issue completely, we do think there could be other strategies for helping to manage through the short-term shocks in the market. These will be strategies we haven't deployed as of yet, and that could provide a competitive advantage to coppers if we can help the railroads better manage through the competitive pressures for their cross-time material. I spoke earlier about the challenges we face in maintenance-of-way due to the pandemic. One of the benefits of the struggles to get work done is that we're enjoying a higher maintenance-of-way backlog than in recent memory and will be well-positioned as track time frees up and we maintain some consistent level of crew continuity. We're continuing to work on expanding our cross-tire recovery business and have some bright prospects, but this has turned out to be a long lead time sales process due to the complexity and specific nature of matching supply to demand. Our team continues to make slow progress, and it will take some time. Looking at 2022 for our CM&C business, on slide 35, we see strong demand from key markets along with increased production forecasted in the automotive, steel, aluminum, and carbon black industries, along with high oil prices. All these things are positive indicators for CM&C from both a demand and pricing standpoint. Now, balancing that out is an energy crisis in China combined with global shipping and logistics issues that are causing shortages in raw materials and long delivery times on the finished goods that support our business model outside of China. In Europe, certain aluminum producers have had to curtail production due to high energy prices, increasing the corresponding market pressure. As a result, competitors are seeing reduced demand from their traditional customer base and therefore seeking replacement business. Now, we talk often of how cost trails price in this business, and the last two years have illustrated that perfectly in two very different environments. We realized over $60 million of price increase in 2021, and as a result, we're able to translate that into a $31 million increase in EBITDA over 2020. Now, we're currently projecting to give close to $20 million of that back in 2022. As cost continues to catch up, our price curve begins to flatten out, but we can offset $8 million of that through upgrading distillate material to carbon pitch as part of our Enhanced Carbon Product Initiative. and we achieve cost savings from other operational efficiency projects. Now our projections for the CM&C business only account for the market dynamics supporting our business to maintain its current strength through the first half of this year, which is as far as we have visibility. The other wild card that we have to account for is the Russia-Ukraine situation as we source approximately 20% of our coal tar raw material for Europe out of those countries. And while we have contingency plans developed to keep supply flowing, The potential for an impact on our supply chain cannot be discounted if the situation does not deescalate. By-36 takes a look ahead for CM&C through 2025. The strong demand from the aluminum and steel markets should continue, particularly in the U.S., with the passage of the Federal Infrastructure Bill. As reliance on Chinese exports declines and worldwide shipping and logistical challenges start to alleviate, we expect that our CM&C businesses will stand to benefit. There have been additional announcements in 2021 on decarbonization projects to reduce or eliminate coke from steelmaking. And already this year, Cleveland Cliffs has closed their coke facilities in Fallinsview, West Virginia, and Middletown, Ohio, neither of which served coppers. The trend toward new direct reduced iron and electric arc furnace projects will only reduce coke production further in the future, resulting in less domestic coal tar and put significant pressure on the three remaining small distillers. Work continues on several projects to enhance the end products from our distillation process, positioning them for use in higher value markets and displacing lower value products from our product streams. Testing and third-party feedback continues to be positive, and success in this area still a few years down the road could change the profit dynamics in this business to make it the highest margin business in our entire portfolio. Now, on slide 38, our sales forecast for 2022 is approximately $1.8 billion compared with $1.68 billion at the prior year to reflect a projected top-line improvement in every business segment, largely driven by price. On slide 39, our 2022 EBITDA projection is at $230 million. On a comparable basis, this will be our eighth consecutive year of EBITDA growth. And once again, our diversified portfolio shows ups and downs across the three business segments. Our RUPS business hit a trough in 2021 due to a number of factors, but strong underlying market fundamentals has us primed to significantly improve. How much, so, will largely be dictated by how well cross-tie sourcing lines up with railroad's cost expectations. and their urgency to maintain infrastructure. In performance chemicals, we're showing a small decline, which is probably a fair take on where they're at right now, as PC probably over-earned a little bit in 2021, given the 8% year-over-year reduction in volumes we saw, and the fact that they were still able to slightly improve upon their record 2020 results. In 2021, price was a little in front of higher costs, and therefore costs are catching up in 2022. Overall, though, if demand holds up, PC will have a solid year, even if it doesn't reach a new high. And finally, we're expecting a decline in EBITDA of 10 million for CM&C at this point, which is largely driven by costs catching up to rapid price increases that occurred throughout 2021 and into 2022. And we expect the timing of our results in 2022 to be the inverse of 2021, which started with two record quarters driven by pandemic-fueled PC markets and erupts business that had yet to encounter the struggles of hardwood sourcing. The tougher first half comps will likely have us trailing a proportional run rate to 230 early on, but we expect considerable ground to be made up in the second half of the year. On slide 40, our adjusted EPS guidance for 2022 is approximately $4.25 compared with $4.21 in the prior year. Despite the negative impact of 23 cents per share from our higher estimated effective tax rate, the second straight year we've experienced tax erosion, and 11 cents per share from higher SG&A costs, our operations are expected to deliver year-over-year improvements of 37 cents per share. Finally, on slide 41, we expect that our gross capital expenditures will be approximately $95 million in 2022. Net of proceeds from property sales and insurance recoveries, we anticipate that our capital spending will be in the range of $80 to $90 million, with approximately $29 million dedicated to growth and productivity projects. In summary, we remain focused on executing through our strategy to expand and optimize our business with our goal continuing to be to deliver $300 million in EBITDA by 2025. by staying true to our purpose of protecting what matters and preserving the future. With that, I would like to open it up for any questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Mike Harrison with Seaport Research Partners. Please go ahead.

Well, hi. Good morning.

Hi, Mike.

A lot to digest there. I guess my first question is just on the overall guidance. You provide a point estimate, $230 million for EBITDA. My question is, if you had to provide a range around that number, would that be, do you think that would be a narrower range or a wider range? It seems like you are feeling pretty good about what you can see for the first half, but maybe give us a little bit of a sense of how confident you are in that $230 million number, and what are some of the key variables that may not be within your control, especially as you look out to the second half?

Okay, Mike, sure. So, yeah, like with our businesses, we often talk about a lot of moving parts, and they all seem to sort of find themselves at different points each year. So, you know, we obviously feel confident in the 230 target that we put out there, which is why that's our target. We did elect to move away from a range this year. It is, you know, gosh, you know, that range, depending upon, you know, how you look at things, could be quite wide, right? And a lot of that comes back to, again, the significant price increases that we're pushing through for this year. Talked about 80 to 100 million in price. And, you know, there's a lot of that that's based upon cost increases that we know are, you know, basically have already been passed through and are in place. And a good bit of that is also related to cost increases that we expect will be coming. And we're trying to, again, make sure that we account for. So depending upon how that sort of plays out, if it plays to our favor, again, you know, the number, you know, could be certainly higher than 230, no question about it. If it's not, then we could struggle to get there. But we have a number of other projects that we have in place that are backfilling part of that as well. And that's what I tried to outline in each of the different business segments. But the key things for us is for this year as we look at it, certainly getting price and being able to maintain volume, not lose any major volume as a result of pushing price in 2020. 22 is going to be an important factor. The hardwood sourcing for the rail business is going to be an important factor for us. And, you know, outside of those two things, really the CM&C business, I'd say there's some upside there. It's just the limited visibility that we have that prevents us from, you know, providing a stronger show of confidence to in terms of the estimates that we put out for that particular segment. So, yeah, I mean, I realize a lot of moving parts. It's certainly not simple, but this is the balancing act that we play every single year. And so we know that these markets are going to be at different places at different points in time. And so we continue to put money back into the business to take costs out to make improvements that will allow us to continue moving forward as each of these businesses go through their normal ups and downs of the cycles that they deal with.

All right. In terms of the RUPS business, you mentioned the Class 1 contract extensions, and you also mentioned your longer-term expectation of higher green tie purchases. that would impact working capital. Did any of those contract extensions change the business model? I know a few years back you had a model switch that led to you guys taking on more working capital. Is that part of what we're talking about here?

No, it's not. I mean, so, you know, the working capital increases that we talk about expecting from RUFs just come back from just come from a normalization of cross-type purchases. As our cross-type purchases have declined over the past year, you know, that's less inventory that we end up carrying as a result. And as they go back to more normalized levels, right, we're going to have inventory levels that will rise accordingly. If we grow our business as we anticipate doing moving on into 2023 after the Little Rock expansion, again, we're going to need even more more ties, which will require working capital for some part of that. So there's nothing that changed in our contract extensions that changed the business model as it relates to each of our customers.

All right, and then on the PC business, you mentioned the kind of $20 million worth of net price versus cost headwind. It sounded like $30 million of pricing this year and about $50 million of higher cost. I guess help us understand, the way the contracts work there, do you just need to play a longer game and – you're going to need to get additional pricing in 2023 to offset things. I guess I'm just thinking with your strong position, kind of number one in North America, it would seem like you should be in a better position to get more pricing to offset costs.

Well, so there's a certain element of that in terms of, you know, being limited in passing certain costs through related to agreements that are in place, you know, and covered through, you know, hedging agreements and things like that. The point that I tried to make in my prepared comments, which I probably didn't make maybe that well, were, you know, we actually got some price in 2021. In fact, we got close to $25 million in price in performance chemicals in 2021. And as a result, I think we out-earned in 2021 when you look at the fact that we had an 8% volume decline year over year as well. And so we were able to get out in front of some of the costs. And now some of that is going to come back through in terms of the higher cost that we can't, if you will, double dip in terms of passing on additional price for some of that. So there's that element of it. And then the other element that you point to, which is, yes, there is some cost increases that we are incurring this year that have not yet been passed on to certain parts of our customer base, but will be as we move out into 2023.

Okay, that makes sense. Maybe just a couple of housekeeping questions and then I'll turn it back. First of all, the insurance recoveries for 2021, it looked like a little over $6 million in the cash flow statement. Was there some Q4 recovery in the CMC business? I know you had a fire at Stickney earlier in the year. I'm just wondering if insurance contributed to some of the strength you saw in Q4.

Hi, Mike. It's Jimmy Sue. You're exactly right. There was about $2.5 million of that insurance recovery was fourth quarter. And the majority of that was in the CM&C business related to the fire.

All right. Thank you. And then my last question is actually on your debt structure. The 2025 notes that you have look like they're callable here in early 2022. They have a coupon of 6%. Is there any chance that you might look to refinance? those notes to a lower rate, I guess, before interest rates start to move significantly higher.

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

All right, thanks very much.

Thank you.

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

Good morning, Leroy. Good morning, Jimmy.

Hi, Chris. Good morning.

Good morning. I wanted to dig into some of Leroy's comments here within the PC segment. I believe you mentioned a customer acquisition of note, as well as the puts and takes behind that large supply arrangement, the five-year arrangements. Can you talk about anything going on within the market dynamics underneath the PC segments that we should make note of here?

Well, so, Chris, you know, the market continues to be strong, right? And, you know, we've demonstrated certainly over the last, you know, five years, you know, the strength of our team in serving our, you know, customer base that, you know, has been continued to consolidate, you know, treating capacity. And so, you know, we have no doubt benefited from that from a volume standpoint. We've also done, I think, an amazing job of picking up additional business from, you know, longstanding customers of some of our competitors. I think, again, due to our commitment to this industry in this market and And again, just the great job that our team does of serving our customers, as well as the R&D leadership that I think we've demonstrated over the years. So, look, we are the number one player in this market. There's a reason we are. And as a result, we've been able to not just maintain a solid book of business, but continue to grow it. And so... We're thankful for that. We certainly appreciate our customer base that's been an important part of that growth over the years. We are getting to the point where I think we're pretty saturated in terms of our market share in the residential side, which has us turning our attention to see what we can do to grow on the industrial product side. We think there are opportunities there, and I mentioned the conversion of one customer Again, a longstanding customer, a nice addition to our account portfolio just, you know, in the past six months or so. And, you know, we're going to continue to look for those sorts of opportunities and, you know, sell what we do and our commitment to the industry. We think that, you know, for the most part, that will end up carrying the day.

Great.

And then I wanted to get an update just on – something you've been mentioning recently, the sustainable battery projects. How is your participation in that going? Any update here?

Yeah, so no substantive update. I mean, we continue to provide product for testing, continue to work with various partners. I'd say everything continues to trend positive in that area. We continue to still be excited, as do the folks that we're working with in terms of our product and and its performance. So nothing, again, nothing substantive to report at this point. It is a longer range project, but all signs are still pointing in a positive direction.

Okay. And then lastly, probably immaterial, but the bullet point on Russia, Ukraine, just for topic of mind, how meaningful is that? Is that anything to make note of other than it will have an impact?

Yeah. Um, yeah, so, so it ha you know, it, it's had an impact on our fire retardant business. Um, and you know, we're, we're working through that. Um, that's a, you know, that's a smaller part of our portfolio. Um, uh, you know, but, but we're, we're working through those issues. Um, on a seam at seaside, we have yet to have any impact from it. Um, but, uh, but could. And, you know, if we do, again, it's less than a quarter of our supply that we use to fill our Newborg Denmark plant. And so, you know, if we aren't able to get product from there or if, you know, the costs, it costs us a lot more to get product from there and we're not able to pass it on, it could have, you know, some level of impact. Or if we're not able to get product and we can't get other product from other suppliers, then it could certainly have an impact. Overall, it's hard to say what that could possibly be in the grand scheme of things. It would be a hit, but not something that would blow a tremendous hole in our business.

Okay. Thanks for taking my questions.

Yeah.

The next question is from Liam Burke with B. Reilly. Please go ahead. Yes. Good morning, Leroy. Good morning, Jimmy Hsu.

Good morning.

Leroy or Jimmy Hsu, during the margin discussion on RUP, you talked about the obvious conversion to new treatment coatings on the chemicals. Was that expense hit a one-time conversion cost, or was that an ongoing increase in cost of goods?

Liam, that was one time.

Okay. And is there any meaningful change on that conversion in terms of how that would affect your margins?

Well, I mean, we're through, you know, those two conversions at this point, which are important. So, you know, we're now able to, you know, to treat normally there. We're treating different products. Again, one of the products are are a internally produced and sourced product from our performance chemicals business. We do get greater throughput as a result of that. So it helps in terms of our operational efficiency. And obviously, we get to sell more CCA Enduracline products. So from that standpoint, they're positives as well.

Great. And then on the recovery, on the tie recovery business, you said it was slow going. You're still working with your customers. Is that part of the entire TIE lifecycle management business, or are you working that service as a separate offering?

Yes. No, it's – well, so I'll say it is a separate offering. You know, although we continue to try and, you know, present a lifecycle management, you know – value proposition to our customer base. But it is, you know, it is a service that is offered today separate and apart from, you know, the cross-tie supply that we provide.

Okay, great. Thank you, Leroy.

You're welcome.

The next question is from Chris Shaw with Monis Crespi. Please go ahead. Yeah, good morning, everyone. How are you doing?

Hey, Chris. Good. There were a lot of puts and takes in the PC segment on the outlook for 2022. I got a little lost in there. Are you projecting higher volumes in PC for 2022?

We are. We are over 21, yes. What we've attempted to do is kind of go back and look at it sort of in the view of our last normal year, right, because it's just been a lot of volatility the last two years.

Right. So is it based on market conditions, or I guess it may be a combination of market conditions and new customer wins?

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

Got it. You talked about the lack of visibility in the second half for CM&C. So what are you sort of projecting in that estimate you have there for the guidance for CM&C business this year for the second half? I mean, what's in that guidance that you're in expectation for the second half? I mean, lower costs, lower prices.

I'm just curious what you sort of... Yeah, so our guidance for the second half is essentially a flattening out of our pricing, right? So we're going to see price increases... you know, flowing through in 2022, much of that being put through in the first part of this year. And then we see a flattening out of that with, you know, costs continuing to, particularly raw material costs continuing to increase throughout the year, right? So it's the catch-up on, you know, the cost that we've been out in front of from a pricing standpoint. That's what we have in sort of that back half of the year. But, you know, we're That market is, from a pricing standpoint, you're constantly adjusting. From a cost standpoint, raw material cost standpoint, you're constantly adjusting. We're always trying to maintain a certain level of margin in that business or spread over our costs. It becomes tougher as markets get more competitive when You have customers that are closing capacity, and it's impacting competitors who are trying to backfill business. And so now they're becoming more competitive in business that we might already retain. There's, again, Koch facilities that are closing down, which is causing competitors to evaluate whether they're if they're going to bypass that volume or whether they're going to try and compete to backfill that volume and potentially drive up raw material costs and things of that nature. So we're just being cautious in terms of our outlook with a lot of balls in the air at this point. So we have pretty decent visibility for the first half, and we think it will be strong. But we're holding off on the second half until we get a little further out into this year and see how things develop.

Like a bunch of years ago, oil prices used to be a decent proxy for some of the pricing you could get in the CM&C business. Is that still the case or is that sort of dislocated?

Certainly as it relates to carbon black feedstock and phthalic anhydride and, you know, in some ways maybe even naphthalene. But, yes, it still is, you know, as oil prices move up, pricing in those product lines moves up as well. In some cases, it also then drives up raw material costs, right? So, again, there's that piece of the equation.

And then just to ask about the coal tar availability going forward, I mean, is that a – I hadn't read about the Cleveland Cliffs shutdown, but, I mean, is that an existential threat for, like, you know, the Stickney plant going – I mean, could you just fill it – you know, things got so bad in America, could you end up just filling it with impurities? or is that just prohibitively expensive?

Well, so again, the facilities that close or facilities that don't serve our facility, we can import tar if and when we need to, and we have in the past. I'd say there's more of an existential threat to some of the smaller distillers that that impacts because it has an outsized impact for them I think is one of the two largest players in this market domestically. We're in a stronger position to be able to maintain the production that's still going to be out there to a large degree moving forward. And the trend in that market certainly has been towards you know, moving away from blast furnace steel, it's also, despite those two recent announcements, I think is starting to, we believe, level out. And, you know, could there be some more? There could. But we feel pretty comfortable and confident with what's remaining out there in our position for supply moving forward.

That's helpful. Thanks so much.

This concludes our question and answer session. I would like to turn the conference back over to President and CEO Leroy Ball for any closing remarks.

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

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