Koppers Holdings Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the COPIRS third quarter 2022 earnings conference call and webcast. At this time, all participants will be 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 third quarter 2022 earnings conference call. We issued our press release earlier today. You may access it via our website at coppers.com. As indicated in our announcement, we've also posted materials to the investor relations page of our website that will be referenced in today's call. Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our website, and a recording of this call will be available on our website for replay through February 4th, 2023. 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 objective, 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 to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website, reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures. Today you will hear from the following, Leroy Ball, President and CEO of Coppers, and Jimmy Sue Smith, Chief Financial Officer. I'll now turn it over to Leroy.

Thank you, Quinn. Good morning, everyone. Welcome to a review of our third quarter results. I'm excited to report that we finished the third quarter with record sales and record CMC 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 we'll do so later on in the call. As always, we'll begin with zero harm. As you've seen on slide four, next week is the busy one for our zero harm team as they're hosting two key events in Pittsburgh. Our Zero Harm Truck Driving Championship on November 7th and 8th recognizes our 10 safest and most skilled drivers who represent coppers while out on the road delivering essential products and serving as a critical connection to our customers. These finalists reported zero total accidents 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 in an inherently high-risk environment, logging nearly 12 million miles annually to deliver critical goods across the nation. Also next week is our annual Zero Harm Coordinator Conference, where we'll 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 5 shows that in the third quarter, 22 of our 43 operating facilities worked 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're approaching record lows in incidents. Also, we continue to pursue Zero Harm 2.0 as a comprehensive initiative to accelerate our progress to zero injuries and zero environmental harm throughout the organization. We are continuing to use proven strategies and tactics while also gaining more input from frontline employees as the basis for developing highly practical training tools. We're concentrating on peer-to-peer interactions as a key to greater and faster awareness, acceptance, and incorporation of Zero Harm procedures. Now, seen on slide six, the Zero Harm work streams include frontline training, supporting the SH&E coordinator role, maximizing the user experience in the Zero Harm information system, strengthening our governance oversight, and expanding communications and messaging. The work streams are being managed in a formal project environment to recatalyze Zero Harm and take it to the next level. The ongoing support and participation of our worldwide team for advancing this Zero Harm culture remains a great source of pride and admiration for our organization. This journey towards zero will never end, and we're 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. To say 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 to 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. This puts us on track to reach the $2 billion level in sales for the first time in company history. Those sales levels have been driven by historic price appreciation 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 a globally balanced supply and demand environment and continued operations improvements. Demand for our PC products remained 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 1st price increases take effect. ROPS improved sequentially and year-over-year as 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 US dollar had been at 2021 levels, we would have had adjusted EBITDA comfortably in the 70-plus million range this quarter. Our highest year-over-year tax rate is expected to take a $0.60 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 into opportunities for growth. Now I'd like to turn it over to our CFO, Jimmy 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 9, we had record consolidated sales of $536 million for the quarter, an increase of $111 million or 26% over the prior year, and our third consecutive quarter of record sales. By segment, Sales for RUPS increased by 21 million or 11%. Sales for PC increased by 38 million or 33%. And sales for CM&C 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 for RUPS were $208 million compared to $187 million in the prior year, with the increase being the result of higher pricing across all markets, especially cross-piles and utility poles, along with increased activity in our railroad bridge services business. 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 RUPS was $16 million compared with $11 million in the prior year as we saw improvements in our utility pole and maintenance-away 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 cross ties as market prices stabilize, albeit at higher levels. Cross-tie procurement in the third quarter was higher by 41% compared to the prior year, while cross-tie treatment decreased by 6%. Year-to-date through the third quarter, cross-tie procurement is up 15% and treatment up 2%. As shown on slide 12, PC 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 tempered customer demand last year, but is also indicative of the continued steady growth in this business, despite the current economic headwinds. 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 as we have worked through much of the higher cost inventory as of the end of August. And ultimately, as Leroy said, in 2023, as many customer contracts with limited ability to recoup price increases expire at year end, and are being replaced with new agreements that better reflect the current economic situation. Slide 13 shows third quarter sales for CM&C 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. CM&C 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 costs increased 46% over last year. Sequentially, the average pricing of major products 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. From year to date, we've allocated $14 million to repurchasing shares and have $77 million remaining under our authorization. And this morning, we announced we have declared our standard quarterly dividend of $0.05 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 3.5 times at quarter end compared with 3.3 times at the end of 2021 and 3.8 times as of June 30th. Our long-term target continues to be 2 to 3 times net leverage ratio. Slide 16 is our standard quarterly recap of capital expenditures. Year-to-date, in 2022, we've invested $80 million, with nearly $27 million of that in growth projects. Net of cash received from asset sales and insurance recoveries, capital expenditures year-to-date are $75 million. We've provided the breakdown of capital expenditures by business segment here as well. With regards to our recent acquisition of Gross & James, we expect to be able to offset future spending by utilizing capital equipment already owned by that business and, therefore, avoid future spending on certain projects that were previously contemplated. And with that, I will turn it back over to Leroy.

Thanks, Jimmy Sue. Before we get into an examination of the business sentiments impacting Copper's, I'd like to introduce you to an exciting new feature that we just rolled out, a newly designed Copper's corporate website we believe will become a vital tool to further our brand presence among key audiences. Slide 18 features a look at our new Copper's homepage that went live just a few days ago. The new Copper's site reflects the cleaner, visually attractive, and intuitive navigation that 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 Copper's people, processes, and products that represents our culture based on zero harm, sustainability, essential services, and generating benefits to all of our stakeholders. We invite you to visit www.coppers.com to learn more about our approach to doing well by doing good. Earlier I referenced our truck drivers. They're the face of the company in many respects as they enter customer sites following emergencies such as Hurricane Ian with critical infrastructure to help get communities back on their feet. As seen on slide 20, Copper's teams delivered more than 13,000 poles and 4,000 cross arms to utilities across Florida and the Carolinas in the aftermath of Ian. Our effort involved four plants with our team at Vidalia, Georgia providing the bulk of the supply. Fortunately, Copper's professionals have extensive experience planning for such events, coordinating in advance with those who are impacted, moving material efficiently, working safely within hazardous areas after a natural disaster, disposing of damaged poles, and completing restoration in a 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 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. Existing home sales continue to decline, which is not a great fact, but home renovation and repair expenditures are still expected to increase in 2023, albeit at lower rates. An October 28th 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, an 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 effect of rising mortgage rates due to being locked into lower fixed rates. So that's far from a doom and gloom scenario and 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 bottom line numbers for PC in the third quarter were, in fact, awful. The $17 million in adjusted EBITDA was the second lowest full third quarter for this business since we bought it in 2014, and the lowest quarterly number we've posted since the fourth quarter of 2019. Placed against the record sales quarter, that also resulted in our second lowest quarterly EBITDA margin behind the fourth quarter of 2014. That first full quarter, the PC was under Copper's ownership. Now, the reasons behind that were threefold, with the two issues that are under our control moving in the opposite direction next year. First and foremost were the significant cost increases we've experienced this year that have only been partly offset to date through the $46 million in price increases 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 inventory has moved 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 combine to produce the near all-time low performance we just experienced. But the plans we've been working on behind the scenes have us primed 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 and differentiated by the big box retailers versus the independents, Our reset in 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 costs plus an applicable margin. That results issue number one. Second, we steadily brought our inventory levels down to a normalized level throughout 2022, and we'll head into next year at a stabilized cost level befitting current copper costs, thereby eliminating the high-cost inventory drag we've experienced throughout this year. That takes care of problem number two. Since we don't control foreign exchange rates, there's little we can do to mitigate the third issue we've experienced, 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. It was announced on October 17th, we've made significant inroads to capturing industrial market share, currently transitioning from a non-copper produced 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 alternative, CCA, or our new oilborne alternative, DCOI. 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 as the Russia-Ukraine war escalated the cost of our materials to produce, but we have been feverishly putting price increases throughout this year, and have finally got ourselves caught up as we entered Q4. Now, the second significant opportunity is the $60 million in 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 sizable account in this 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. While we might be taking it on a chin this year, the future continues to look really bright for Performance Chemicals. Turning to slide 24 in our utility and industrial products or UIP business, I'm confident in saying that I believe we've turned a corner towards a step change in profitability with even greater potential ahead. Now, 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. And over the past five months, find ourselves on an annualized rate to exceed our highest profit year in this business by more than 50%. That's not an anomaly, but the first important jump in turning this business into what we thought it could be when we bought it back in 2018. Don't forget that this business consumes all of its chemicals now from our PC and CM&C business, but does not get credit for that as that income is captured in those two business units results. If we weren't constricted 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 and we're seeing interest and demand increase, placing our base business on solid ground. We have additional opportunity to reduce our costs through plant automation and improve logistics network and adding drying capacity over the next couple of years. The first place we plan to add drying capacity is 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 we'll be able to move pretty quickly. This will add lower cost whitewood to our Somerville, Texas, treaty plan, enabling us to better compete in the Texas creosote pole market. Longer term, we're looking at property on the West Coast to enter 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've been waiting for in hardwood cross-tie supplies shown on slide 26. That's obviously good news as it puts us on pace to finish this year at about 5.5 million ties purchased, but recent activity has us trending above 6 million ties 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 asset deal, which covered their working capital and fixed assets, plus a control premium. The business has 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 ties 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 fuel our path to $300 billion could be displaced by certain strategic M&A. This is an example of just such a transaction as it will reduce our capital needs at two of our facilities that the growth and change locations will serve. We're very happy to have them join the COPPERS team and enthusiastically welcome them aboard. Now 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 reach 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 efficiency 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 at the Summerhill, Texas plant as it begins to be greater utilized for pole production. Second are the benefits to be derived from the Gross and James acquisition. This will enable us to bring more ties into our facilities while realizing the chemical pull-through. It also should lessen the labor scarcity and turnover issues we've seen at a few facilities by displacing jobs filled or unfilled at copper sites by Gross and Jane's 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 cutbacks. 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 1 railroad in early October to take back and dispose of end-of-life crossties. 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 incentive to grow it by offering an efficient circular solution for our customers who are taking back product as we turn shipments of new product back. It's a true win-win scenario. Now, moving to carbon materials and chemicals, or CMC, as seen on slide 28, this business has defied the odds this year by overcoming a reduction in raw material supply due to the Russia-Ukraine war and the pullback in traditional steel production, high energy costs that have curtailed production in key aluminum markets, and a stronger dollar that has eroded our strong foreign profitability as it gets translated to U.S. dollars. In fact, CMC 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 pullbacks due to higher energy costs have taken aluminum capacity offline. roughly at rates not far from the steel pole back 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 feedstock to the 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're receiving from our enhanced carbon products project, which has displaced a portion of our lower value distally yield in favor of producing more higher value carbon 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, as 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, increase of volume increases through RPS production increases, so price increases due to current pricing that's well below market, and enhanced carbon 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 carbon products heading into 2024. When it coppers, there continues to be a lot of excitement around CM&C. 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 in Copper's history. This would represent an almost 20% astounding increase over 2021. Slide 32 shows our expectation to reach a new all-time high in adjusted EBITDA of $230 million, the eighth straight annual improvement without KJCC. $230 million is the number we targeted when we first released guidance for this year back in February. And with all the twists and turns of this past year, I'm happy that this still remains firmly in our grasp 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 have 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 as our significant foreign earnings generation this year and 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 increases coming from our U.S.-based PC and REPS 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 in 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 and $90 million after applying cash proceeds from asset sales and insurance recoveries. Of the $95 million in expected gross spending, over a third of it, or $33 million, is going towards projects that are producing future growth and earnings. I continue to be excited about what the future holds for COPRS 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 1 on your telephone keypad. If you're 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. Reilly FBR. Please go ahead.

Good morning, Leroy. Good morning, Jimmy Sue.

Hey, Liam.

I guess, Jimmy, Sue, we had a sequential step-up in depreciation amortization as well as a year-over-year step-up. Is that a function of the amortization built in and the acquisitions during the quarter, or is there something else in there?

No, it was a retirement asset obligation in our European operations. So it's a fully retired asset and went through our depreciation expenses quarter.

So would that be viewed as one time and getting back to somewhat of a historical rate?

Exactly. It was about $3, $3.5 million, and we would not expect that to recur.

Great. Thank you. And then on the cash flow, if I looked at you for the first three quarters, you're roughly cash flow break-even. If I took cash from operations, less your capex. Understanding you've got an $85 million, $90 million annual capex, do you look at fourth quarter as being a strong operating cash flow quarter for you?

We do, Liam, and one of the reasons is we traditionally see a working capital sort of recapture in the fourth quarter. And so while 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 have in prior years in the fourth quarter. I wouldn't expect it to increase. So, you know, even if it just holds steady, I think that we'll see a strong fourth quarter there.

Great. Thank you, Jimmy.

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

Hi, it's Dan Rizwan for Lawrence, and thank you for taking my questions.

Great, Dan.

How are you doing? Good. If we think about pricing in 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 consensus in a different environment, frankly?

Well, so good question. I mean, each of the businesses are different, right? So RPS, you know, on the raw materials side, We don't really take much risk on that as it relates to the Class 1s. We do on the black tie business that goes into commercial. But we have mechanisms within our contracts to be able to increase prices based upon increases in some of our input costs. I'd say it's fairly sticky on the RPS side, but you see movements up and down as it relates to what, you know, the biggest raw material input being hardwood supply, right? So we've seen significant price increases to recoup the cost increases there, you know, in the past 12 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 you'll see fluctuation there. A lot of that's just passed through when we see price increases coming through, but we don't carry a lot of that risk. UIP, 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. It's a very strong market. And I'd say with where the demand dynamics are right now, The prices are pretty sticky. I'd say we'll see how sticky they are when we hit a soft spot at some point in the future, but we're not expecting that for quite a while now. That business is running really, really strong. We continue to be somewhat supply-constrained. 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, again, similar to the hardwoods side of the market for RPS. You have the copper as the major input there, and we go through hedging there. to protect us and our customers from major fluctuations in that cost input. But as that moves up and down, there could be some movements on price up or down that's reflective of where the market might be at whenever we enter into those agreements. As it relates to the other raw materials, I'd say 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, you know, fair pricing for value. But with all these businesses, you know, a lot of it comes back to the competitive environment that you're working in and, you know, how aggressive the competition 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 on to pricing except for the fact that, again, with major commodities that make up some of the raw material base, 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 you're seeing probably others react in the competitive markets.

Thank you. That was very, very helpful. So then if we look at your 2025 goals, And forgive me if I miss 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, you know, those goals, you know, reflected that. what we felt we could do with the projects that we had available to us that would either lower cost or maybe open up doors into different markets or different geographies. It was not predicated on outside market growth. It was not predicated on M&A and things of that nature. By the same token, it wasn't predicated on a recession either, right? So it was business as usual. You know, we have a lot of good projects in the queue that we think can absorb some pullback in demand. But look, it really depends upon 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, you know, counter-cyclically towards each other. So, We think we'll make it through a pullback if one occurs and be in a pretty strong position. And we'll still be able to execute and get value for the projects we're doing. But, look, 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 good with where we're at right now. The projects are starting to pay off. You're starting to see that here, you know, beginning 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.

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

Yeah, good morning, everyone. How you doing? Good, Chris. How are you? Good. To clarify, I thought near the end there, did you endorse record EPS for next year?

Well, you know, we're still finalizing our plan for next year and have not 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 geographic earnings mix to move towards our favor from a tax standpoint. The one thing that will work against us a little bit is the interest limitation that has an impact on our tax rate. But 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 next year, yes.

Great. And speaking of the tax rate, I don't understand what the interest – the lack of the interest deductions. What happened there? And then also just how much of a shift next year could the tax rate see positively?

Yeah. So, hi, this is Jimmy Sue. There was a change in the tax law this year. There's a deduction, 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, 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 expense is primarily in the U.S. And combined with the fact that much of our income this year has shifted to 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 will be offset a little bit probably by higher interest expense just given what's happening in the overall sort of market dynamics. I'm 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 process or presented some of those things to the board yet.

Got it. And then switching to CM&C, are you – where is the coal tar cost right now? Have they sort of – what would you consider caught up to pricing at this point, or is there still more coal tar inflation you expect sequentially going forward?

It's a good question. We're seeing costs at record highs. We're seeing continued pressure there, and I expect we'll continue to see continued pressure there. I think we're going to see higher costs still moving into the fourth quarter. So I don't think that we have caught up just yet, and 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'll see higher costs in that business. And 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 as we'll close out this quarter. But we're not there yet in terms of reaching the peak of growth. coal tar costs.

Got it. Just a quick question on CapEx. I believe it's elevated this year. Is it going to come down, you project, maybe in 2023? And what do you guys consider? I forget what maintenance CapEx might be. Yeah.

So, you know, it's good to be able to kind of walk through this here because, you know, at Investor Day last year, we talked about sort of this path to 300 and was a series of a number of different projects, many of them which require capital. And I think we laid out up to $275 million of capital that would go into return type of projects. That would be on top of the $65 million or so of repair, maintenance, and safety capital that we deploy in a given year. I think we finished last year at around $125 million. This year we're going to finish in that $85 million to $90 million net range. You know, next year we still have, you know, projects that are in process that are, you know, will contribute earnings next year and in the years after that are still, you know, in process, right? So you've got your normal 65, and we have at least, 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 Newport for enhanced carbon products. So I'd say the next few years are still going to be in that $100 million range, but a third of that is 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 the end of 2025. But at the same time, as that number is moving up, our cash flow should also be moving up as well. So we'll be having more cash to deploy to not only absorb that, but to also deploy in other ways. Great. Those are helpful. Thanks.

Yep. The next question comes from Brian DeRubio with Baird. Please go ahead.

Good morning. Just a few questions for you. You know, one of the questions I get about coppers is, 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 went into single-family homes versus the repair and remodel market?

Well, 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 is is in the U.S. we pay very close attention to the repair remodeling market. That is the market that we believe drives the volume in our product mix there. It's not new home builds. It's repair and remodel, which, again, we tend to look at existing home turnover and things like that. But there's some other things that are at play that are keeping those markets continued to be strong, even with a slowdown in existing home sales. It's when you move outside the U.S. that our business tends to rely a little more on new home construction. But those markets are much, much smaller in terms of their revenue and profitability contributions. So in the U.S., which is what drives our results, we pay attention to repair remodeling and existing home sales.

Great. That helps and makes a heck of a lot of sense. Just on price costs, given some of volatility we're seeing right now in commodities just over the last six, seven months, you know, 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 constant discussions going on in terms of, you know, what we're able to procure the the untreated, uh, hardwood for, for them, um, and sort of agreement on, on what we'll go out for in the market from a pricing standpoint. So that's pretty fluid and is happening, uh, you know, pretty, pretty much regularly and in real time, you know, the, the coal tar markets, uh, those, um, those are, you know, getting set depending upon the region, either quarterly or semi-annually. And, um, And again, from a demand standpoint, right, we're out there in the market trying to ensure that as we see prices moving in any particular direction, we can hold on to 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 result in lower end market pricing. 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 CM&C, you know, while those markers are important and they do give us a little bit of visibility into what we can expect in our results there, but there's so many factors at play, it can be hard to, you know, pin it down on any particular one. I say it probably every call, you know, our team is, I put our team up against anybody in terms of their ability to, to work the spread on the value of the end market pricing 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 markets. and where the demand is at on both sides of the equation, supply and end products. And so I know that's not, you know, 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, you know, one of only a few in that business, you know, and with the people that we have with a long, long line of experience in being in those markets, you know, you know, we're 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 just directionally. And final question, Jimmy, Sue, just obviously capital markets are in a little bit of, you know, a bit of state of flux right now. But as you think about capital allocation and, you know, You still have a couple years on the senior notes. You know, how do you think about, you know, sort of, you know, buying back shares or, you know, or making M&A, you know, buying back some of the bonds in the open market? And how do you – are you thinking – even thinking about sort of looking to refinance those senior notes any time, or are you waiting closer before they become current?

You know, 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, and we'll step in 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 between investing in our business to maintain and grow our cash flows and returning capital to shareholders through dividends and or repurchases. And with M&A, we continually say that anything can happen at any time, but for us right now, the focus is really on executing on the projects, the stable of projects that we have available to us. And M&A, just as you see with the growth in Jane's, 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 have in the queue. So it has to be better return than what we have today.

That is helpful. Thank you for all the color. Appreciate it.

Thank you. 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.

I just want to just close by thanking everyone for your continued support 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.