Koppers Holdings Inc.

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the COPPA's second quarter 2024 earnings conference call and webcast. At this time, all participants are in a listen-only mode. If you need assistance, please alert a conference specialist by pressing the star key followed by zero. Following the presentation, instructions will be given for the question and answer session. Please note this event is being recorded. I would now like to turn the conference over to Ms. Quinn McGuire. Please go ahead, ma

'am. Thanks, and good morning. I'm Quinn McGuire, Vice President of Investor Relations. Welcome to our second quarter 2024 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 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 broadcast live on our website, and a recording of this call will be available on our website for replay through November 8th, 2024. 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 press release, which is available on our website, also contains reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are Leroy Ball, Chief Executive Officer of COPERS, and Jimmy Sue Smith, Chief Financial Officer. I'll now turn the call over to Leroy.

Thank you, Quinn. Good morning, everyone, from beautiful Denmark. The COPERS team finds ourselves doing this call from the city of New Borg in Denmark, which is the site of one of our three strategically situated carbon material and chemicals plants and where we recently conducted our board meeting, which included visiting our plant and spending time with our employees at the site. We have a great team in Europe led by Christian Nielsen and Dr. Steve Crimp. Christian and his team were able to show our board the recently commissioned enhanced carbon products plant that will enable us to improve our throughput of higher value carbon products, while also opening up new and exciting market opportunities. In addition, Steve and his team were also able to show off the new European Performance Chemicals Lab and pilot plant and review our opportunities for growing the PC business in Europe. It was a very productive week, and my thanks go out to the entire team here in Europe for their hospitality and engagement. Now, as Quinn mentioned, joining me on this call today as usual is our CFO, Jimmy Sue Smith, but I also have our president and chief operating officer, Jim Sullivan, who will be joining Jimmy Sue and I for the question and answer session. I'm pleased to share the results of our very successful second quarter coming on the heels of our prior report that outlined some of the early challenges that we were facing in 2024. Now, while some of those market challenges still persist, we dove headfirst into focusing on the things that we could control with cost being the largest element. The result was a new high in quarterly EBITDA and hopefully renewed confidence from the market that we remain on track to meeting our near-term goals for 2024 and 2025. So as a start, let's begin on slide four by looking at some of our key metrics for the quarter. Consolidated sales were 563.2 million, which was off by 14 million compared with 577.2 in the prior year quarter. Now, we added a modest amount of sales during the quarter from our Brown Wood acquisition, some of which were offset by PC Chemical sales to Brown being classified now as inner company and also lower pricing and volume in the CM&C business, which drove the consolidated sales comparison lower. Now, even on lower sales, we were able to generate adjusted EBITDA of 77.5 million, a new high compared with 70.3 million in the prior year. Adjusted EBITDA margin was .8% versus .2% in the prior year. .8% represents our quarterly high margin marks since quarter two of 2021 and is a meaningful improvement over where we've been tracking. Second quarter diluted earnings per share was $1.25 compared with $1.15 in the prior year quarter, while adjusted earnings per share for the quarter were $1.36 compared with $1.26 in the prior year quarter. Q2 also represented a strong cashflow quarter as operating cashflow doubled our Q2 2023 number. The copper's team has done a nice job over the past 18 months of understanding the connection and power of turning earnings into cash and continues to make it a focus of their everyday work. All three business segments showed significant sequential improvement in the second quarter, pushing consolidated results to new heights. Performance chemicals deliver the most improvement as demand for our residential wood treatment preservatives continued to be resilient despite some unfavorable industry trends. In addition, cost reduction measures across the board helped offset current market conditions and keep us on track for a strong 2024. Now let's take a look at our continuing zero harm efforts on slide six. Zero harm 2.0 remains our primary focus, re-energizing engagement at the frontline of operations to accelerate our progress towards zero incidents. For the first half of 2024, 28 out of 47 facilities worldwide performed accident-free. We have two business units right here in Europe, our CM&C and performance chemicals businesses that had zero recordables year to date. Compared to the prior year, leading activities year to date through June 30th have experienced a 2% decline while our recordable injury rate was lowered by 6% and serious safety incidents improved by 22%. Now we're encouraged by these metrics and we give credit to our team members worldwide. As always, we'll continue to strengthen our zero harm culture through focusing on the health and safety of our people. Now with an overview of second quarter financials is our chief financial officer, Jimmy Sue Smith.

Thanks Leroy. This morning we issued a press release detailing our second quarter 2024 results which include our recent acquisition of Brown Wood Preserving Company. My comments today are based on that information. On slide eight, as Leroy mentioned, second quarter sales were down 14 million or .4% from the prior year. By segment, RUP sales increased 20 million or 8.3%. TC sales decreased 4 million or .2% while CM&C sales decreased 30 million or .2% from the prior year quarter. On slide nine, adjusted EBITDA was a quarterly record 78 million resulting in a .8% margin. By segment, RUP generated adjusted EBITDA of 22 million with an .8% margin. PC delivered adjusted EBITDA of 44 million, a 25% margin. And CM&C reported adjusted EBITDA of 11 million with an .2% margin. On slide 10, our RUP's business achieved record sales for the quarter of 254 million compared to 234 million in the prior year. Price increases added 12.7 million mainly on cross ties and cross tie and utility poll volumes were higher by 9.4 million. We also saw lower activity during the quarter in our cross tie recovery business. From a market trend perspective, prices for untreated cross ties remain relatively stable and compared to the prior year quarter, cross tie procurement was down by 10% and cross tie treatment was lower by 2%. Adjusted EBITDA for RUP's was consistent with the prior year at 22 million. Profitability was flat despite realizing sales price increases a $4 million benefit from improved plant utilization and higher cross tie and utility poll volumes as these gains were offset by approximately 14 million of higher raw material operating and SG&A expenses along with lower activity in our cross tie recovery business. On slide 11, our performance chemicals business delivered second quarter sales of 177 million compared to 181 million in the prior year quarter. The sales decline was driven by a 3.5 million decrease in sales volumes in the Americas, primarily due to preservative sales to Brown Wood now being inter company sales along with pricing decreases globally. This was partly offset by higher volumes in Australasia. Adjusted EBITDA for PC was 44 million for the quarter compared with 32 million in the prior year quarter. Profitability was higher as a result of lower raw material costs offsetting lower sales prices and volumes. The reduced costs were favorably impacted by timing, including net gains realized from our copper hedging program. Net of the higher copper costs recognized in cost of goods sold to date. We see that some copper prices spike quickly as happened in the second quarter and we will see the impact of the cost of goods sold in a later period. We continue to believe our normalized margins are in the high teens as we have seen over the last 18 months. On slide 12, our carbon materials and chemicals business reported second quarter sales of 132 million compared to 162 million in the prior year quarter on reduced market demand, especially in Europe, where sales were down 22 million on equal parts, pricing and volumes, especially for carbon pitch. Globally, prices were down approximately 25 million for the quarter. These decreases were partly offset by higher volumes for phthalic and hydride and carbon black seed stock. Adjusted EBITDA for CM&C in the second quarter was 11 million compared with 16 million in the prior year quarter as a result of lower prices globally and lower volumes in Europe. These decreases were partly offset by 16 million in lower raw material costs, particularly in Europe and higher volumes of phthalic and hydride. Sequentially, the average pricing of major products was 3% lower and average coal tar costs were flat. Compared to the prior year quarter, the average pricing of major products declined by 17% while average coal tar costs decreased by 21%. Slide 14 details capital allocation for the quarter. For 2024, net capital expenditures were 42 million through June 30th with a full year forecast of 80 to 85 million. We allocated 32 million to share repurchases year to date all during the second quarter when our share price fell sharply. While we remain committed to a balanced capital allocation approach, this is an example of us being more aggressive with buybacks when we feel there's a dislocation in the share price. Further buybacks for the remainder of this year, if any, will depend on cash flows and stock performance during our open window periods. We have 22 million remaining on our existing authorization. We also returned capital to shareholders through quarterly dividend of seven cents per share this quarter and we continue to focus on reducing our net leverage. We ended the quarter with 943 million in net debt, up 100 million for the Brownwood acquisition and 325 million of available borrowings. As we had forecasted, our net leverage ratio increased as a result of Brownwood in our normal quarterly cycle to 3.7 times at June 30th, 2024. We continue to be confident in our ability to grow earnings and generate cash and anticipate exiting the year with a net leverage in the low threes. We remain committed to our long-term target at two to three times. Slide 15 shows we spent 42 million net or 43 million growth on capital expenditures through the second quarter. By category, 25 million was for maintenance, slightly under three million for zero harm and nearly 16 million for growth and productivity initiatives. Business segment, we spent 21 million on RUPS, six million on PC, 13 million on CM&C and three million on corporate projects. As seen on slide 17, we announced earlier today our board of directors declared a quarterly cash dividend of seven cents per share of Copper's common stock. This dividend will be payable on September 16th to shareholders of record as of the close of trading on August 30th. At this planned quarterly dividend, subject to review by the board of directors, the annual dividend will be 28 cents per share for 2024, a 17% increase over the 2023 dividend. And with that, I'll turn it back over to Leroy.

Thank you, Jimmy Sue. Now let's take a look at some notable happenings from the second quarter. So as I mentioned earlier, we're broadcasting from our CM&C facility in Newborg, Denmark as seen on slide 19. And the reason we brought our board to Newborg was to show off the $27 million enhanced carbon products production facility that we completed late last year. This is the unit of operation that upgrades distillate that would otherwise go into the carbon black feedstock market and instead turns it into a high quality anode or impregnation pitch for which we're able to sell at higher prices than the alternative product I mentioned earlier, carbon black feedstock. This is also the facility that can produce a high quality coating for the lithium ion battery market, which we remain cautiously optimistic about and could hold the key to reducing the volatility we see in this segment from time to time. And we also build a lab for our European performance chemicals business here at Newborg and are looking for other ways to take advantage of the synergy of having a concentration of very talented people here at this site on a -to-day basis. Speaking of -to-day, our base business at Newborg is distilling coal tar into critical products that serve many important product and geographic markets where we utilize the competitive advantage of our strategically situated harbor to move products to our customer base. Slide 20 features our recently issued Corporate Sustainability Report for 2023, which outlines our achievements as they relate to our values of people, planet and performance. Highlights from the 2023 CSR include achieving our goal of a 50% reduction in scope one and scope two emissions against our 2007 baseline, seven years ahead of schedule. Improved safety performance by achieving total recordable injury rate of 2.73, which is our lowest rate since 2018. We introduced the new patented wood treatment product, MicroPro XPS, representing a breakthrough application for this key market. Newsweek named coppers to its listing of America's most responsible companies for the four straight year. And USA Today named coppers to its listing of America's climate leaders for the second straight year. As always, my deepest gratitude goes to our team members across the globe for their commitment to operating sustainably, and this dedication will help us to continually improve our overall performance going forward. Slide 21 shows our team members' volunteering and support of Coppers Preserving the Earth campaign. From Earth Day on April 22nd through World Environment Day on June 5th, employees from our locations across the world pursued activities supporting the environment in ways that demonstrate protecting the planet, which is one of our core values. Our appreciation goes out to all of our eco ambassadors for keeping our world beautiful today and for future generations. So now on to a review of each of the businesses. And I'll start with performance chemicals on page 23. The second quarter played out almost as the first, as volumes finished flat compared to Q2, 2023, while a focus on costs carried the day. After years of steady growth, repair and remodeling expenditures have seen their unsustainable pace slow over the past couple of years. Repair remodeling expenditures moved into negative territory in Q1 of this year, and while that trend is expected to continue for the next several quarters, it appears that the -over-year decline will hit a trough by the end of this year before beginning to improve in 2025. Now, despite that, and with existing home sales remaining in a slump, our residential chemical volumes continue to hang in at levels similar to prior year. And we don't see that subsiding in the back half of this year. On top of that, we should get a little boost from some friendly treater consolidation that will add some incremental volumes, while industrial volumes also are expected to contribute slightly. The new grinding capacity that came online in Q2 is already contributing to cost savings through faster cycle times, and we've pulled back on spending in all, but the most necessary areas in order to help pick up the slack for our struggling CM&C segment. As a result, we're upping our estimate of full-year EBITDA improvement for our PC segment to a range of $12 to $16 million. Moving on to our utility and industrial products business shown on page 24, we closed on the Brown acquisition in April and are well into the integration process. Operationally, things are going good, and we're already beginning to realize some of our identified synergies. Sales are starting to build some momentum after working through some early transition challenges, and we're happy to have the additional capacity and operational flexibility that the Brown acquisition brings. As for our Texas market entry, just six months in, we're already tracking towards 40% achievement of our long-term market penetration goal, so we are making good progress on that front. As projected on our Q1 call, our legacy business experienced a little pullback from last year's Q2, as certain of our customers work through de-stocking and project laser deferrals, but outside of a handful of customers, the rest of the market remains solid and growing. During the quarter, we also gained a little bit of price, while also improving our cost profile by bringing more drying capacity online and pulling back on operating costs to align with lower Q2 volumes. On another bright note, our Australian pull business had its most profitable quarter since 2014, as that business continues to perform well, and we remain extremely pleased with our growing footprint in the UIP space and believe the future continues to look very bright. Our railroad products and services business is summarized on page 25. While we still haven't resolved all of our issues on the customer front, as mentioned on our May call, we have taken various steps to change our approach, which is already paying some dividends. Through June, we've increased price by $17 million, which has helped to offset some, but not all cost increases. Sales volumes for the quarter were up ever so slightly at 1%, and now we expect to finish the year flat from a volume standpoint, as we did have a customer pullback after some initial projections earlier this year had us in an overall 5% growth rate. Our commercial business remains a bright spot as the backlog and profitability remain very strong. One positive on the sales front is that we've had a few customers indicate that in Q4 of this year, they will discontinue purchases of dual treated creosote boreate cross ties and revert back to a higher retention creosote product. While our rail business is agnostic to the change, this is a positive for our CMC business, as we will treat with more creosote for the railroads making that switch. On the cost side of the ledger, we reduced our boltonizing in Q2 to the lowest level since Q1 of 2022, which increases our asset efficiency. And we also began implementing $4 to $7 million of cost reductions to address the fact that we were continuing to incur millions of dollars of cost to serve certain customers in ways that they wanted, but were reluctant to pay for. Now, some of those savings began being realized during Q2, with the lion's share expected to occur over the back half of the year. Looking at our entire RUPS segment, we've trimmed the top end of our EBITDA guidance slightly and are now expecting $10 to $15 million of improvement for the year. Finally, onto the CMC business, which is summarized on page 26. While second quarter results for CMC were much improved over the first quarter, we still saw significantly lower pitch pricing in volumes compared to Q2 of 2023. Q3 of last year is when this business took its first step down, so our comps improve in the back half of this year, which will help as we're still unable to see an improvement in the pitch markets through the balance of this year. Our phthalic anhydride business had a second consecutive strong quarter as we continued to catch a windfall from other production struggles in the industry. While we originally thought we could see that benefit subside by the end of Q2, it looks like we might be able to enjoy it for at least another quarter. Our Stickney plant operating performance was better in Q2 when we began realizing some of our raw material cost reductions, which has also helped. And like the other businesses, we're taking a hard line on costs to help cover for the gaps brought on by some turbulent market conditions in the near term. Somewhat specific to CMC, we've also cut back planned capital expenditures for this year by $10 million as we evaluate our long-term operating strategy to see what we can do to not only boost profitability, but get back to a positive free cashflow position for this business. With all the noise that remains in this business, we're reducing our guidance for this segment to a year over year decline of seven to $13 million. Now bringing it all together with the usual puts and takes, I feel confident in reaffirming our full year guidance now that the first half of the year is in the books. Although 2024 has been challenging from a market perspective across most of our businesses, our global team has done a great job of managing the controllables, and we've been able to deliver favorable results despite some tough near term dynamics. The fact that we're performing at the level we are in the current environment gives me confidence that as markets turn in our favor, which they will, the upside for us is significant. On slide 28, we're adjusting consolidated sales growth to now be flat year over year. Rup sales overall are now projected to see $60 million in top line increase. PC sales are forecasted to be flat year over year, and CMC sales are estimated to decrease by $60 million, due primarily to price and volume declines in carbon pitch, much of which we've already experienced, partially offset by volume increases in thalic and hydride. And overall, our sales forecast for 2024 is approximately 2.15 billion, which would be similar to 2023. On slide 29, we're maintaining our forecast for adjusted EBITDA, which is expected to still be in a range of 265 million to 280 million, with some modest shifts in how we see the magnitude of change year over year. On slide 30, you see our adjusted earnings per share bridge where we continue to expect a strong contribution from operations offset somewhat by depreciation and amortization and interest expense. For 2024, we're maintaining our previously communicated guidance of $4.10 to $4.60, with the upper end representing a new high for coppers. On slide 31, we're further tightening our capital spending estimate to a range of 80 to $85 million in 2024, compared with 116 million in 2023 on a net basis. Spending on maintenance and zero harm is estimated to be at $58 million, with approximately $22 million to $27 million dedicated to our growth and productivity projects. Jimmy Sue referred to reallocating capital to share repurchases when we saw the overreaction to our first quarter results. And we'll continue to do that as our belief in our long-term earnings potential has not wavered, even in the face of the short-term blips we may see in results from time to time. We're continuing to target operating cash flow of $150 million for this year. Priority uses of cash also include our dividend, share repurchases, growth capital, and terminating our defined benefit pension plans. We're still preparing for the termination of our U.S. pension plan, which would result in a top-up contribution of approximately $25 million, with the majority of that now expected to occur in the first quarter of 2025. Slide 32 shows the path to our goal of $315 million to $325 million in adjusted EBITDA by 2025, which I believe is still very achievable. There's a material portion of the projected improvement over this year that's in our own hands relative to cost reductions and incremental business that we know we have coming online in 2025 that give me confidence in getting to our initial goal of $300 million. And general recovery in the CM&C business and where we end up on PC contract renewals remain the biggest risk to making up the remaining difference in getting us to the $315 million to $325 million range. We may have more to share when we report out our Q3 results in November, but as I sit here today, I feel great about the progress we've made and where we are overall as a company and the promise the future holds for coppers. So at this point, Jimmy Sue, Jim, and I would be happy to take any questions you have.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Liam Burke with B. Riley FBR. Please go ahead.

Thank you. Hi, Leroy, Jimmy Sue, Jim, how are you? I'm good, Liam. How are you doing? Good, thank you. Could we talk a little bit more about the residential piece of performance chemical? You prepared comments. You said there was resilience there, but then you said that sales were declining but looked like they were troughing. Was that on a pricing or a volume basis or both?

Yeah, sorry, Liam. I think maybe my comments got confused. When I was talking about reduction in troughing, I was really referring to the repair and modeling expenditure. So we look at the leading indicator remodeling activity and we track that. And that has shown a decline year over year in repair remodeling spending at large that's been occurring really since the beginning of this year. And they're projecting that year over year decline to continue through the middle of next year but to really trough out at the end of this year. From our business standpoint, we actually have seen flat volumes this year despite that overall, if you will, headwind that the repair remodeling market has seen overall. And so that's what I was really referring to. Our business has hung in there through some macro indicators that might indicate that we wouldn't be doing as well as we are.

Great. Okay, that helps a great deal. Thank you.

And if we're looking at RUP, you had nice sequential step up in EBITDA margins. Can we expect that to continue? You laid out a number of initiatives plus when you add in the integration of Brownwood and some operational efficiencies. Can we expect that sequential step up to in the second half of the year?

I do expect that our margins in that segment will continue to improve. Now, we deal with some seasonality, right? So I would certainly expect some improvement in the third quarter as we realize some of the savings from the cost reduction projects that we have. As we have some additional business that comes online, I would expect to see some margin improvement there as well. Fourth quarter, I think overall, comparably to Q4 of 23, we'll absolutely see margin improvement. And again, our overall objective is to get that segment up into the double-digit margin territory. And we believe we have a plan in place to get there. So you should expect to see continued improvement in margins in that business.

Great. Thank you, Leroy.

You're

welcome,

Liam. And our last question for today will come from Gary Prestapino with Barrington Research. Please go ahead.

Hey, good morning, all. Hi, Gary. Leo, the RUP segment where you're starting to go back to your customers and say, we're not doing what we used to do for you gratis. What's been the reaction there? And has this led to any of them coming back to the table and wanting to negotiate further?

So this is Jim. So the reaction's been, when we first told them that, obviously they weren't too happy because we were doing stuff for them for free. But we explained the status of the business. We explained that a lot of these smaller things that we're not getting paid for, they understood. And that's something that they were, for the most part, willing to help us out on. So I wouldn't say there's been any real negative pushback. We have sort of a little bit of a bigger issue with one particular customer. But other than that, it's been pretty good. And that's the area, of course, that we've had to look for cost savings in the R part of the RUP's business.

Was there any impact from this, from what you're doing in Q2? Obviously, the adjusted EBITDA was flat. Or could we expect that to start trending better going forward?

Yeah. So we just got this going in Q2. I didn't really think there was much of an impact in Q2. So we're going to start seeing some benefits in Q3 and Q4.

Okay. Thank you very much. You're welcome.

This concludes our question and answer session. I would like to turn the conference back over to the CEO, Mr. Leroy Brown, excuse me, Leroy Ball, for any closing remarks. Please go ahead, Mr. Ball.

Okay. I want to thank everyone for participating in today's call and for your continued interest and confidence in COPPAs.

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