Koppers Holdings Inc. (KOP) Q4 2020 Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' Final Q4 2020 Earnings Conference Call and Webcast. 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 Quynh McGuire. Please go ahead.

Thanks, and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our conference call, where we'll provide highlights of our fourth quarter and full year 2020 performance as well as our 2021 outlook. We issued our press release earlier today. You may access this announcement via our website at www.koppers.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 May 24, 2021. Before we get started, I'd like to direct your attention to our forward-looking disclosure statement seen on Slide 2. 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 this press release, which is available on our website, reconciliations of these 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 Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn this discussion over to Leroy.

Thank you, Quynh. Good morning, everyone. So this morning, we're going to start, as we always do, with a discussion of our Zero Harm culture. As I mentioned when we reported our preliminary results, we finished the year with our best underlying safety performance ever. Now reaching this milestone amid the uncertainties of the pandemic proves once again that Zero Harm is the foundation of our culture, the way of thinking and behaving that has been adopted by Koppers' employees around the globe. It is the basis of everything we do. My sincere appreciation goes out to our worldwide team who are doing an admirable job of focusing relentlessly on our path to 0. Now as we've talked about often, Koppers has been fortunate to be classified as an essential business in every region that we operate, which has enabled us to continue to operate at full capacity throughout the pandemic. We provide essential products and services to keep our modern society functioning. Koppers helps to move products safely by rail. We help keep electricity and WiFi accessible. We keep manufacturing supplied with needed chemicals, and we provide treated wood for home and commercial construction and improvements. Essential to our ability to perform these essential functions is the health and well-being of our employee population. The responsibility that we place is our top priority at all times. Now if we move to Slide 6, we have approximately 1% of our employees currently in self-quarantine, with about 12% of the employee population, to date, that have tested positive for COVID-19. Now we continue to require face coverings as personal protective equipment at all North American facilities, and we've distributed company-provided masks to our employees. Additionally, N95 masks and respirators are being used for close-contact work. We continue to seek out new mask styles and other respiratory equipment that may provide more comfort and health benefits. We continue to have protocols in place, which require maintaining social distancing, screening practices, and virus-related hygiene standards. We're also using self-administered saliva test kits at all North American locations as well as pooled testing methods to periodically screen our U.S. plant employees to limit the spread. In the fourth quarter of 2020, we instituted a new Life-Saving Rule regarding COVID-19 to heighten the awareness and operational discipline while protecting employees working higher-risk jobs with the necessary equipment. Communications remain a core element of our COVID-19 strategy with our quarterly all-employee meetings in three time zones around the world, virtual chats with our plant remote-work employees, and regular video updates from me that can also be accessed on our Facebook page. So as the vaccine continues to get rolled out, I am strongly urging our employees to trust the vaccine as a means of returning to normal. In fact, we're doing everything we can to simplify receiving the vaccine in areas where we have a larger presence through vaccination clinics that are being coordinated at various facilities across the U.S. So far, five locations of vaccination plans have been approved through the use of federal and state Point of Dispensary programs, county health departments, and local clinics. And we're also actively working to set up vaccination for U.S. employees as Phase 1b, which includes essential infrastructure workers, as that gets closer to implementation. Vaccination programs for our employees outside the United States are being handled by the corresponding governmental programs. To repeat, as shown on Slide 7, I am strongly encouraging all Koppers employees to get the COVID-19 vaccine even though we are not making it a requirement. To help move those that might need a little extra nudge, we're offering an incentive of $250, which each employee will receive after he or she has received the full vaccination dose. I'm thankful to have several vulnerable family members that have received their first shot. I'm looking forward to receiving the vaccine as soon as it is available to my eligibility category. Now guidelines in Illinois began offering vaccines to Category 1b, which includes the essential infrastructure workers. So employees at our Galesburg, Illinois facility, 41 and all, so far, have received the first dose of their vaccines. We salute our Galesburg team for being the first Koppers facility to get vaccinated, which protects not only those individuals but their coworkers and families as well. Now on Slide 9, we provide an overview of our operations and planning activities throughout the pandemic as well as what we have been experiencing over the past couple of weeks with the wave of record cold temperatures and severe winter weather that have plagued sections of the country that typically don't face those challenges. A number of Koppers facilities in the Southern states, the Southern Midwest, and particularly Texas, have had to temporarily cease operations because of frozen pipes, loss of power, unsafe working conditions, and inability to travel to work. The impact has hit us across all of our business segments. Dealing with severe weather is something we are used to, but this latest blast was worse than normal and had an impact across more facilities than is typical. Overall, we had at least five facilities that have dealt with some level of disruption, with some of those having to shut down some or all operations for a brief period. We've begun working to dig ourselves out and are still assessing the overall damage while repairing broken water lines, fixing pumps, and trying to restore power to equipment. While this is an unfortunate setback and will cost us some money in repairs and lost production, we're thankful that our employees have weathered the storm and are all safe and accounted for. We've made donations to local agencies to help the communities that have been affected the most, and we've paid our employees throughout to provide them a level of security in their time of need. As I mentioned, while we're still assessing the total impact from the storms, at this point, we do not expect it to have a material impact on our results as we should be able to catch up on production and customer shipments. In terms of operating during the ongoing pandemic, we're still keeping business travel to essential only, and plant visits remain limited. Those employees working from home have been encouraged to continue doing so. The possible return to the office has been moved to July 1 at the earliest. Those who must come into the office must follow our company's PPE guidelines. Given the stresses that our workforce may be feeling, we're evaluating potential ways to enhance the work-life balance through our iShare challenge, which encourages employees to come up with creative solutions. Recently, we shared some good news as we completed the sale of our coal tar distillation facility in Follansbee, West Virginia, as you can see on Slide 11. This is the latest in our strategy to rightsize the operating footprint of our CMC segment. We discontinued our coal tar distillation processing at Follansbee in 2016. We ceased naphthalene refining activities there in late 2018 once the new unit at our Stickney plant came online. This transaction represents the latest action to increase our focus on those businesses that play a greater role in building our global infrastructure. While enabling us to direct resources to other value-added projects, this also frees up over $0.5 million in cash a month that we have been spending to wind down the plant. Special thanks go to Phil Hill and the entire Follansbee team in preparing the plant for sale. They did an outstanding job under a tough set of circumstances. I've heard good news overall that many have already landed other jobs, with a few actually remaining in Koppers in new roles. Slide 12 describes a new wood treatment solution for our utility poles that was developed to enhance our current product line and serve as an attractive replacement for penta-treated poles, which will begin getting phased out over the next couple of years. Our UIP and PC businesses teamed up to develop and introduce DuraClimb poles offering superior climbability, which utility linemen value when servicing poles during storm-related events. Our PC R&D team developed the climbing additive, preservative system used in the DuraClimb treatment process. Cabot Microelectronics, the only producer of penta, previously announced their plans to cease production of the preservative at their lone facility in Mexico by the end of this year. We move to Slide 13. Our Zero Harm mindset led the team at our Grafton, Australia facility to reduce heat-related dangers in the outdoor fabrication area by installing mobile mist cooling fans and a permanent mist cooling system in one of the fabrication sheds. Temperature has overall been reduced by up to 11 degrees Fahrenheit. This innovative idea is working so well, we're looking at doing the same at other plants as applicable. Koppers has been making news lately both here at home and overseas. The Port of Nyborg in Denmark, as you can see on Slide 15, is the central hub of our Koppers European CMC operations. Through a joint project, the pier length will be extended and water depth increased to enable us to receive and operate two vessels at the same time, reducing the time needed for loading and unloading products. This is a critical improvement since the capacity at our Nyborg plant has doubled over the past several years. With the updated port functionality, Koppers can expand its global coal tar business with the necessary shipping capacity and speed. As highlighted on Slide 16, Manufacturing Today Magazine recently featured Chief Operating Officer, Jim Sullivan, who did a great job discussing the vital importance of Koppers to the global infrastructure, current expansion projects, and the ongoing success of our Zero Harm efforts. He summed it up well by saying what matters to us is our people, the environment, and the communities that surround us. If we protect those, we will have a strong future. If we move to Slide 18. Our LINKwomen employee group sponsored its second Women's Empowerment Series session, featuring four dynamic women leaders from Koppers discussing their path to success, leadership styles, support networks, and work-life balance. The panel consisted of Ashley Everman, our Manager of Talent Development; Melissa Hadley, our Manager of Business Planning; Stacey McKinney, our Vice President of Technical Services; and Kim Nelson, our Logistics Manager. This LINKwomen event was well attended, demonstrating how our people actively engage with each other to foster personal and professional growth. My deepest thanks go out to this impressive cohort for leading by example and giving of themselves. As seen on Slide 20, I'm proud to have accepted the Chuck Cooper Foundation Leadership Award on behalf of Koppers employees worldwide. The late Chuck Cooper, a native of Pittsburgh and a barrier breaker in many ways, was the Jackie Robinson of the NBA, being the first African-American player drafted into the league and receiving their highest honor being inducted into the NBA Hall of Fame in 2019. Chuck's son, Chuck Cooper III, honors his father's legacy through a foundation that awards graduate-level scholarships and provides leadership development to underserved students. We view this honor as an endorsement that although we've taken a number of specific intangible steps, our work must and will continue to bring a truly inclusive and equitable society closer to reality. With that, I'll turn it over to Mike to discuss our financial results and then provide an overview of our debt and liquidity.

Thanks, Leroy, and good morning, everybody. As recapped on Slide 22, we delivered record-setting performances in many areas in 2020. However, please note that any comparisons in our discussions between 2019 and 2020 exclude results from the KJCC business that we sold in September. With that in mind, we achieved a new high in sales of $1.7 billion, driving our fourth consecutive year of growth. Operating profit finished the year at $157 million, a 25% increase from the prior year and a new record. Adjusted EBITDA was a record $211 million, up from $201 million in the prior year. Adjusted EBITDA margin was 12.6%, the highest since 2017 and the fifth year in a row where we finished in the 12% to 14% range. We also set a new record for adjusted EPS of $4.12, which was a 30% increase from the prior year. Contributing to that EPS improvement were SG&A and interest expense savings achieved during 2020. From a balance sheet and cash flow perspective, as outlined on Slide 23, we had our second-highest-ever operating cash flow year. In 5 of the past 6 years, we've generated more than $100 million in cash flow, and we achieved $127 million in cash flow from operations in 2020. We also reduced our net debt by $131.5 million in 2020. This was our largest net debt reduction year in our public company history. The combination of higher EBITDA generation and strong debt reduction allowed us to reduce our net leverage ratio to 3.5x compared to 4.3x at the end of 2019. This is the first year-end since 2017 that we finished the year with net leverage below 4x. We spent $70 million in CapEx for the year, which was near the high end of our most recent guidance and was primarily due to the expansion at our North Little Rock facility. Now let's take a deeper look into some of the numbers. On Slide 25, consolidated sales for the fourth quarter were $393 million, an increase of $11 million or 3% compared with $382 million in the prior year quarter. Sales for RUPS of $168 million decreased by $1 million compared to sales of $169 million in the prior year. PC sales of $130 million increased by $25 million or 24% compared to sales of $105 million in the prior year. Sales for CMC were $95 million, a decrease of $13 million or 12% compared to sales of $108 million in the prior year. On Slide 26, you can see the consolidated sales for 2020 increased by 2%, fueled by our wood preservation businesses. Despite the pandemic, 2020 sales, excluding KJCC, represented the fourth consecutive year of growth as well as the highest level of revenues in the history of the company. Sales for RUPS increased by $25 million or 3% compared to the prior year. Sales for PC increased by $78 million or 17%. Sales for CMC decreased by $71 million or 16% compared to the prior year. On Slide 27, adjusted EBITDA for the fourth quarter was $47 million or 12% compared with $40 million or 10.4% in the prior year quarter. EBITDA margin for the fourth quarter of 2020 was driven by strong results from our PC business, with RUPS maintaining its profitability level, all this partially offset by year-over-year weakness in CMC. Slide 28 shows 2020 adjusted EBITDA of $211 million or 12.6% compared with $201 million or 12.3% in the prior year, again, due to the strong results generated by the PC segment. On Slide 29, we show the trend for adjusted EBITDA excluding contributions from our KJCC operations. Our core business focusing on wood preservation delivered increasingly higher levels of adjusted EBITDA every year from 2014 through 2020. Now let's review our debt and liquidity situation. As seen on Slide 31, at year-end, we had $737 million of net debt with $346 million in available liquidity. We reduced net debt by $131.5 million in 2020 including the proceeds received from the KJCC divestiture. We remain in compliance with all debt covenants, and we do not have any significant debt maturities until 2024. Slide 32 shows our disciplined focus on debt reduction. We plan to further reduce debt by $30 million in 2021, which translates to a net leverage ratio of somewhere between 3.2 to 3.4x at the end of this year. We remain committed to our long-term goal of 2 to 3x net leverage. With those highlights, I'll turn it back over to Leroy.

Thank you, Mike. I want to take a look right now at our business segments and where we see things headed into 2021, and I'll start with our Performance Chemicals group. So on Slide 34, the overall picture for Performance Chemicals for the upcoming year is a little bit uncertain, and this segment will likely be the biggest wildcard that will have the greatest level of potential variability. The key question that will need to be answered is what will happen if the COVID-19 virus is brought under control. Many have an opinion on it, and that opinion seems to change from month to month. It's difficult to forecast how the pandemic-driven demand and discretionary spending will fluctuate, but management of The Home Depot disclosed yesterday their trepidation and forecasting beyond the first half of this year with so much uncertainty in terms of how and when spending habits may change. Therefore, we are focusing on what we can control and doing what we do best, which is providing superior customer service, managing our costs, and optimizing our capacity. We know the market can't continue to ride this wave into perpetuity, so we continue to grind away behind the scenes to fill in the gaps that will eventually come as the home construction market comes off of highs. On the good news front, the North American market for PC saw a strong start to the year in January, which has enabled us to get off on the right foot for the year. Now record lumber prices have slowed demand in February, however, as traders work to avoid getting caught with high-priced lumber when the market drops. Strange as it sounds, that's actually helped us as we've been feverishly trying to catch up with demand since the middle of last year, and we're now dealing with the recent weather impacts I referenced earlier. We believe that something is going to have to give in March as preparation for the summer construction season begins to kick in high gear and most retailers are clamoring for product. Market forecasts and indications from our customers have varied considerably for this year, and here are just a couple of examples. Three months ago, we were being told that 2021 demand was expected to drop by about 10% compared to 2020. Before the February slowdown, projections had wildly swung to 2021 being projected to be 15% higher than 2020. With that kind of variability, it makes it difficult to get our arms around where this year will ultimately end up in this segment, but our best guess at this point is somewhere conservatively between the original projection of 10% down to being flat year-over-year. I believe that disruptions from high lumber prices and the impact from the recent severe weather will need to get sorted out before we can reevaluate whether 2021 demand can actually exceed 2020. In addition, we expect 2021 will be a big year for preservative conversions with our CCA/DuraClimb utility poles poised to take market share as the production and supply of penta is being phased out. We're still currently evaluating the right entry point into copper naphthenate or other preservative systems. Slide 35 continues the Performance Chemicals story in North America, where we anticipate the capacity expansion at our Hubbell plant will be online by the third quarter, bringing cost relief to the back half of 2021. As customer consolidation continues, we also see openings for further volume growth with the replacement of current pandemic demand as our capacity expands. For 2021, copper has been hedged at slightly lower average cost than last year. However, skyrocketing copper prices will need to be addressed for the unhedged portion of 2022 and beyond. We've implemented several supply chain improvements over the past nine months to reduce supply risk and improve our overall cost position. Finally, our largest competitor in this space, Lonza, recently announced an agreement to sell their specialty ingredients business, which contains their wood preservation segment, to Bain Capital and Cinven. The transaction is estimated to close in the second half of this year. And we'll keep our eyes open as to what changes, if any, come about as a result of the change in ownership. On the international front, our South American Performance Chemicals business is strong, and we're considering adding manufacturing capabilities to further lower our cost footprint in that region. We expect that 2021 will be a better year for our Australasian business due to a positive backdrop consisting of the housing stimulus from the Australian government, opportunities for market share penetration, and full-year benefits from a new arsenic acid plant. We look for Europe to have a strong first half in 2021 followed by some difficulty as certain product registrations will expire due to a more restrictive regulatory environment. For our PC business overall, we're expecting strong comparative performance in the first half of the year, with the back half somewhat up in the air at this point in time due to just too many uncertainties. Slide 36 details our Utility and Industrial Products business. Overall, we see demand in the U.S. and Australia remaining strong in 2021, along with some sales decline as we move Texas production from Jasper to Somerville. Our focus for the year in this segment will be on margin improvement through cost reduction and network optimization. In addition, a stable wood supply will be essential in meeting global sales targets. U.S.-based activity will include the transfer of pole production volumes from Jasper to Somerville, Texas, by midyear as we work towards exiting our site management agreement with Texas Electric Cooperatives. Customers will need to begin selecting a new preservative system as production of penta ceases by year-end. We anticipate that our CCA/DuraClimb product will capture a good portion of the Eastern market. Koppers will be converting our first treating plant from penta to the CCA/DuraClimb preservative system in the first half of 2021. We're also in the process of adding drying capacity at two treating sites, which will reduce cost and supply risk as well. In Australia, we anticipate an aging network and infrastructure rebuild from wildfires that provide a solid demand base for 2021. The lack of hardwoods in that region is creating more acceptance of pine pole alternatives, so we're adding drying capacity to facilitate the increased pine pole adoption in that region. While sales in this segment are likely to decline slightly as we exit Jasper to build our Texas business out of Somerville, we actually expect a profit and margin bump as the businesses we're moving away from were low to no-margin businesses and we gain cost efficiencies from our network optimization projects. On Slide 37, customers are indicating an improved demand picture for all product lines of our RUPS business over the next couple of years. A combination of stronger demand and continued cost control is expected to drive improved margins. An important project that we're continuing this year is the integration of our Somerville, Texas plant for treating ties and poles and processing of end-of-life ties, representing our super plant model that we've referenced in the past. Regarding crossties, Class I and Commercial demand are expected to show slight upticks. However, we are entering a tighter supply cycle for untreated crossties with resulting higher raw material costs possibly impacting demand. On the plus side, we expect Commercial pricing to begin moving up as supply tightens. At the same time, we're continuing to work on contract renewals with some of our key Class I customers, which invariably involves tough negotiations and high expectations on their part. We expect to work through as we have throughout our history, knowing that we have the flexibility to pivot in different directions if we can't ultimately reach acceptable terms. Another key component of our network optimization and growth strategy is to successfully complete the upgrades and expansion at our North Little Rock facility by year-end, which will put us in a position for further EBITDA improvement in 2022. Slide 38 outlines how maintenance-of-way projects impact the RUPS segment. Despite being one of the most negatively affected businesses from the COVID-19 pandemic, aside from CMC, this market still was able to generate nice EBITDA and margin improvement in 2020. We begin 2021 with a backlog of projects that's 50% greater than where we began 2020 in our structures business. We also dealt with several project disruptions in 2020 due to COVID that impacted our efficiency. Now as vaccinations ramp up and the risk of infection is reduced, we expect to benefit through greater efficiency in 2021. Finally, we're continuing with efforts to expand our crosstie recovery business to potentially include another Class I account while also taking advantage of the synergies between our landscape crosstie business and the needs of our Performance Chemicals customers. Half of our expected EBITDA increase in 2021 is attributed to our maintenance-of-way business for this segment. On Slide 39, most indicators, such as steel restarts and oil prices, have been trending in a positive direction, which gives us cause for optimism in 2021 for the CMC segment as we expect EBITDA improvement as well as slight margin improvement. In North America, more tar production is expected in 2021, which will save on transportation costs to import. Carbon pitch and creosote demand are expected to be solid, and higher average oil prices should support higher profitability in our phthalic anhydride business. The sale of Follansbee is an important win for Koppers as it frees up resources to focus on other improvement projects and will save $500,000 to $700,000 each month in ongoing cash costs. Our capital spending plan for 2021 includes significant capital to replace tanks at Stickney that are nearing end of life. This will improve our safety and environmental controls, add operational flexibility, and increase profitability for CMC. Moving on to Slide 40, CMC operations in Europe represent the most challenging of the three regions right now as aluminum capacity reduction has disproportionately affected our competitors, which has, in turn, put increased pressure on pricing. Higher oil pricing is a net headwind in Europe as more tar moves to the carbon black feedstock market, reducing supply and driving up prices. However, higher oil prices will support higher carbon black feedstock pricing, partially offsetting some of the negative effects. We expect solid demand from U.S. railroad customers will provide some upside on creosote demand for the European business. We have been working on an exciting project that has the potential to increase the proportion of higher-value products that we produce, which will further solidify the earnings stream of this segment while possibly opening up doors to new markets for our products. Looking to Australia, higher China benchmark pricing will support a healthier carbon pitch pricing environment in that region. If this holds, Australia could show the greatest year-over-year improvement of the three regions. Also, in response to 2019 prevention notices from the New South Wales EPA, we have implemented multiple environmental control measures that lessen any potential impact from our operation on the community and plan to contribute funds to a local wildlife hospital. Let's move on to discussion of the 2021 guidance on Slide 42. Based on current global economic activity and the near-term economic uncertainty associated with the pandemic, we expect that 2021 sales will be approximately $1.7 billion to $1.8 billion compared with sales of $1.67 billion in 2020. The 2021 sales forecast is based on an expectation that the residential treated lumber markets will ultimately revert to normalized levels in the back half of the year, and demand levels for our other business segments improve modestly year-over-year, as seen in the estimated sales increases. On Slide 43, we expect adjusted EBITDA to be in the range of $215 million to $225 million for 2021, with contributions from RUPS and CMS, with PC showing the widest range of variability. At the midpoint of that range, this would represent a two-year increase of EBITDA through the pandemic of 9.5%, which we believe is an extraordinary accomplishment and better than many have fared. Additionally, we expect adjusted EPS to exceed $4 a share for the second straight year despite the fact that we are forecasting a $0.50 per share headwind from a higher effective tax rate. As outlined on Slide 44, we expect to invest $105 million to $115 million in capital expenditures in 2021. Approximately half of the planned net expenditures in this year are aimed at growth or cost reduction projects that are estimated to generate $8 million to $12 million of EBITDA in 2022. Net of cash received from the sale of closed properties, we are expecting a net investment in capital expenditures to be between $80 million to $90 million. In summary, 2020 was an extremely daunting year, but our global team persevered and rallied around our purpose of protecting what matters and preserving the future. We generated all-time best in underlying safety metrics and delivered Koppers' best all-around financial performance ever, as evidenced by new highs in revenue, operating income, adjusted EBITDA, adjusted EPS, net debt reduction and book value per share. We fell just short of our all-time highs in GAAP EPS and operating cash flow. Excluding KJCC, we delivered our sixth straight year of adjusted EBITDA improvement. Looking forward, we believe the durability that our business model exhibited throughout the pandemic thus far will carry us to new heights in 2021 as we're forecasting new records in safety, revenue, adjusted EBITDA, adjusted EPS, operating cash flow, and book value per share while also laying the groundwork for even stronger results in 2022. To future-date this year, we plan to lay out our strategy for how we continue to grow our business from where we are today to $300 million in EBITDA by the end of 2025. Our balanced mix of businesses centered on serving infrastructure markets primarily through our expertise in wood technologies will continue to serve as a strong foundation for growth and profitability as it has proven over the last six years of our evolution. With that, I would like to open it up for any questions.

Our first question comes from Mike Harrison with Seaport Global Securities.

Congratulations on a nice end to a challenging year.

Thank you, Mike. Thank you.

My first question is on the 2021 outlook overall and whether the PC guidance in particular is maybe a little bit conservative. You called out that wide range between maybe a 10% decline in demand versus maybe a 15% increase in demand. So are you intentionally guiding that a little bit conservatively? And maybe walk through some of the areas that you feel like are within your control versus the areas where you have some uncertainty or you're subject to market forces.

Sure. Yes, Mike. I mean, look, on balance, we are taking a conservative view of that segment. I mean we think it's warranted given the fact that we are still dealing with the pandemic and while vaccinations continue to get rolled out, and there seems to be some positive momentum towards some reversion to normal. What we don't know is what's going to happen with that discretionary spending that has really been funneled into the home improvement markets. As I mentioned in my prepared remarks, even Home Depot made that point yesterday as they exhibited some caution towards their views for this year. We just think it doesn't make a whole lot of sense for us to jump out and put out an expectation that we expect the outsized demand that we saw over the last six months to seven months of last year to continue throughout the entirety of 2021. So we are taking a more conservative approach to it. We think that's just the right approach as opposed to putting guidance out there that could get upset as things continue to develop, right? We're in an uncertain situation, and have been for some time. At some point in time, this is going to start moving back the other way. The question is when. We're looking at it from a conservative standpoint. There are certainly people who think that this will continue to grow and remain in place for some time. I will say that there are a lot of things that we have going on that will begin to help fill some of the gaps that we expect in a potential reduced demand environment.

All right. And you mentioned a couple of times that there could be some impacts from higher lumber prices here, where we're hitting some record levels. Can you walk through some of the effects that those higher lumber prices have on demand in both the RUPS business and the PC segment and maybe also help us understand how much of an impact you could see in your costs or your margin structure as those lumber prices move around?

The good news is we don't really have much exposure to lumber prices. That's where the treaters on the PC side of the business, that's where a lot of their risk is at. We are basically at their mercy in terms of how they're working through and managing that disruption in the market. There have been businesses that have been lost on sudden changes in lumber pricing, and so they're always pretty wary about how they approach an environment where pricing is moving up, especially when it's up in the territory that it is now. So they need to be very careful about ensuring that they are moving products through as quickly as possible and not keeping a lot of inventory on hand and being very careful about their purchases. We're seeing that in the short term have some impact on demand. And as construction season begins to kick up, and there's more pressure from retailers on needing products, something is going to have to give here over the next month or so. I would expect that even with higher lumber prices, demand will pick back up in that piece of the business as we need to serve what has been a pretty feverish market for wood treatment preservatives on the residential side. Starting out, we don't carry much of that risk in terms of our portfolio. So we feel, again, overall, pretty good about things, but any impact on us will really come through with its influence on the ultimate demand from customers and their willingness to take the additional price increase. They tend to get there at some point, sometimes maybe not always at the beginning as they try to hold out for a correction.

Right. And then in the CMC business, it seems like some of the margin dynamics should be turning positive. We're seeing more steel production and, therefore, more coal tar availability. We're seeing more aluminum production. And we're seeing some recovery in oil prices, which can sometimes serve as an indicator of where your pricing is heading. To what extent are you maybe being a little conservative in your outlook for CMC margin given those dynamics at play this year?

Yes. If the current situation stays that way throughout 2021, then there's probably a little conservatism that's built into those projections. The tough part with CMC, and we're hedging our best a little bit, is because things can move up and down, and they have in the past. What's happening in January and February is not necessarily an indication of what's going on in July and August or October and November. We need to be careful not to get overly excited about where the markets might be today and give time to see if we can lock in some benefits from where things have trended so far early in this year. The indicators mentioned are positive for the most part for our business segment, so we will realize benefits as a result of that. If it's something that stays effective and continues throughout 2021, there may be some additional upside on the CMC side.

Leroy or Mike, your growth in productivity and investments, if I look at the return that you'll get on an annualized basis, they're pretty high. I'm just assuming the high and low end of what you've been guiding to. But could you give us some detail of what some of those initiatives would be?

Yes, Liam, there are a few different categories we can point to. One is the North Little Rock expansion. That expansion, which we expect to complete near the end of the year, will lower our cost footprint while also giving us an opportunity to increase capacity there to take on additional volume. That's a big one. In fact, that's our biggest expenditure as part of that category for the year. We have some drying capacity that we're adding in our Utility business, which will lower our cost footprint and also give us some securities of supply in that business segment. We mentioned converting one of our facilities over from penta to the CCA/DuraClimb preservative system. That will provide some benefits for us as well as increase the volume of our CCA/DuraClimb product that our PC business produces. Even within the maintenance side of our capital program for the year, we have dollars in there geared toward maintenance and improvement of our safety footprint that will improve operational flexibility and bring about some returns to them. Those are a few of the buckets that I would point to, Liam. There are a number of good things from a capital standpoint that add $1 million here, a couple of million dollars there. We have a nice backlog that will carry into 2022 as well. Sure. The main item we have right now is our Denver facility, which we closed as part of the consolidation in North Little Rock. We are working through that process. There are other smaller sites that we have been holding onto, which we expect to monetize sometime this year, adding to our numbers. However, the most significant item remaining for this year is the Denver facility.

I think Mike covered most of my questions. However, I have one more inquiry. What is the overall impact of your additional costs related to COVID compared to the savings you've seen, such as from reduced travel, once everything returns to normal after vaccinations? Will there be a net effect or will it just balance out?

Yes, this is a good question, Chris. I think there's some net increase in our costs as some of the costs that have been suppressed throughout the pandemic come back. Certainly, we've been taking costs on in terms of different investments we made in employee protection and the disruption we've had to the efficiency and productivity of our operations. It's tough to say how much leakage we've had on that side of things, but we've mentioned the $10 million or so in savings that we saw from an SG&A standpoint year-over-year. Yes, a good portion of that is going to begin coming back this year, and it's built into our forecast. In regards to probably an uptick in legal costs, an uptick in some travel as we get to the back half of this year, a little bit of uptick probably in compensation as we begin to add personnel that we've held off on throughout the pandemic. We've talked about the fact that a lot of that $10 million is going to work its way back in over the next year or two. Like I said, that's built into our projections. The tougher part is the pure dollar impact we've seen from the pandemic on our operations, which, again, as things do begin normalizing, we will see some benefit from that that will offset some of those costs. Net-net, the two things offset each other. It's possible. Well, I mean, it's certainly one of the deployment measures that we evaluate. It hasn't gotten serious consideration as we've put money into some of the larger acquisitions and working to get our debt paid down. If you don't see, if you will, a significant acquisition on the horizon, like Performance Chemicals or our UIP business, there's a much greater likelihood that we'll be getting down into a leverage category that will open up doors to potentially reinstituting a dividend. At this stage, we haven't had much of a serious conversation about it just given the other priorities we've had for cash. So like anything, we'll evaluate it in the context of what benefits we have from putting money back into the business, like we're doing this year versus small tuck-in acquisitions versus share repurchases. You have to stay tuned, and we'll see if at some point it makes sense for that to be another element to the story. But at this point, I don't have much of an update to give relative to a future dividend.

I guess, first of all, you flagged a few different gives and takes for 2022, the full effect of the registrations of some of the products needing to catch up to the copper prices on the feedstock side. Can you give us a sense for what you see as kind of the net headwind that you need to offset and the levers that you'll be pulling besides just end-market growth to offset those? Secondly, could you update sort of your thinking on interest expense and the tax rate if you've found any room to maneuver on either of those?

On the PC side of the business, we are encountering challenges in Europe related to the reregistration of our products, which means that this segment is not a major contributor to our overall business. While the impact is significant for our European operations, it does not materially affect the entire Performance Chemicals division. We are exploring new products for market introduction and looking for ways to enhance our efficiency and cost structure to navigate this temporary situation. Regarding copper challenges, we are not expecting to face them this year. Next year, a substantial portion of our copper needs is already hedged at favorable prices, although some will depend on market conditions. Moving into 2023, we currently have limited hedging in place, which presents notable challenges that we will have to manage with our customers and retailers while extending our agreements. The encouraging aspect is that this is an industry-wide issue rather than a specific problem for Koppers. The industry experiences greater fluctuations in lumber prices compared to preservative prices. I am confident that we will find a way to manage this issue effectively over the next couple of years, as we are not alone in this situation. From a competitive perspective, we are well-positioned to handle any impacts. Although the numbers appear significant, I am not overly concerned since the industry will have to absorb these changes due to the movements in commodity markets, assuming conditions do not improve over the next 12 to 24 months.

From an interest expense standpoint, we had our interest expense in 2019 at $62 million. The year we just ended, 2020, it dropped to $49 million, so we had a nice $13 million drop. We're expecting in 2021 for that to drop further. My best guess at this time is somewhere in the $42 million to $43 million range on an annual basis. We're going to have a full year of lower interest expense. We did not have a full year in 2020 because interest rates started dropping with the COVID pandemic environment. That's in our favor. We've paid down a lot of debt in 2020, so we're going to have lower borrowings in 2021, which will help. Most of our bank covenants are improving dramatically, and they're tied to our variable pricing as we have a grid over LIBOR. As those covenants improve throughout 2021, we're going to see our variable pricing drop. From a tax standpoint, the effective tax rate was low in 2020 at 20%. A lot of the one-time changes to the CARES Act and more clarity that we picked up and some one-time items that don't repeat themselves. We're forecasting for 2021 at 27%. This is probably a little conservative on the high side of what I would call normal tax rates. We're always looking for ways to reduce our taxes. That could be a little high. Wouldn't surprise me if our effective tax rate came in one point or two below that in 2021. Using the 27% rate versus the 20% rate, gives us a $0.50 headwind on our EPS. We will drive that effective tax rate down as low as we can. That's a monthly and quarterly objective of ours.

Congratulations on the great execution in the tough environment and continuing to move towards more of a wood treatment business. Your revenue mix is now more weighted to Performance Chemicals, which has a much more stable revenue and margin history, and then your reduced debt level. I can't wrap my head around your valuation. If I apply an EBITDA multiple of your largest competitor in the PC and RUPS segment to the valuation, the valuation is higher than your current EV. I'm wondering what levers you can pull to realize the value of the business transformation you've already executed on. Could it make sense to separate the CMC business in that respect?

First of all, thank you for the compliment. The points you bring up around valuation are frustrating because, as you're articulating, I think we have executed on what we laid out to investors over the past six years. We’ve done what we said we were going to do, and we've hit on most every milestone and goal. Yet for some reason, we can't generate that recognition into a greater value of the overall organization. Regarding the potential separation of the business, the ironic thing is, when you look at the business, I understand some of the historical perceptions around the CMC business, which was accurate when you look at that business prior to 2015. This business is entirely different now in terms of operations and stability. Even throughout the pandemic, while revenues came down, we maintained margins for the most part. There’s actually pretty good upside moving forward with some of the things that we have going on in that business. I hate to separate the business to try and unlock value because I think it is an integral part of the overall business model and adds to the enduring nature of our business model. This is, for me, a last-resort option. At this stage, we're obviously trying to do everything to get the story out in front of more people and see what we can do in terms of improving the message around the enduring nature of the business. Part of it is providing more clarity on how we see the future of our business, which we haven't fully articulated. We have a lot of good things going on, and we’re working hard to present a clearer picture of what the future holds for Koppers.

That's very helpful. I wonder if we could consider the copper price increase from a different perspective. In the petrochemical industry, rising oil prices generally benefit everyone. Is it possible to achieve higher earnings in dollar terms even if margins are slightly lower due to increased copper prices, which are driving up treating prices across the industry? I see you as a base materials business that should gain from inflation.

It's a valid point. Navigating the established culture within the treatment sector regarding how these fluctuations have been managed in the past is important. We are starting to lay the foundation now and initiate some of those difficult conversations today, rather than delaying until the hedges expire and we find ourselves in the current pricing landscape. Your observation is valid; if we succeed in getting the industry to accept the current cost of this commodity, we could see an increase in revenue and profitability, even with a small squeeze on margins. Overall, this could place us in a better situation. Yes, there's nothing in our guidance for that. We touch on, and there are at least on the fringes, if not in the core of many pieces of the infrastructure market. Certain if there is a lot of money that's going into infrastructure and federal subsidies, things like that will lift a lot of different industries. It will have benefits within the freight rail markets, which will, in turn, benefit that piece of our business. Certainly in terms of hardening the grid, it will have a positive impact on our UIP business. In terms of steel and aluminum, pushing demand in that area will also spill back over into benefits for our products. I don't see how a large investment in infrastructure wouldn't create a nice tailwind for us, so we're rooting for it and looking forward to hopefully seeing something passed.

The $30 million projected is a function of the higher CapEx spend in '21 versus '20. The $130 million of debt pay-down in 2020, $65 million of that came from the sale of our China operation, and the other half came from operations. Our CapEx spending for that other half was slightly under $70 million. Even with the net CapEx we're projecting of between $80 million and $90 million, that's where the difference is coming from. We also have a higher EBITDA in 2021 that will increase that debt pay-down. That's our best guess at the moment, and it's a little conservative.

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.

Yes, I just want to thank everyone again for participating on today's call. We really appreciate your interest in Koppers and hope you continue to stay safe throughout the pandemic. Thank you.

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