Koppers Holdings Inc. Q3 FY2021 Earnings Call

Good morning, ladies and gentlemen. Thank you for being here. Welcome to Koppers Q3 2021 Earnings Conference Call and Webcast. All participants are currently in listen-only mode. After the presentation, we will provide instructions for the question-and-answer session. Please note that today's event is being recorded. I will now hand the call over to Quynh McGuire. Please proceed.

Thanks and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our third quarter twenty twenty one earnings conference call. We issued our press release earlier today. You may access it 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 February third twenty twenty two. At this time, I would 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 nineteen ninety five. These forward-looking statements involve a number of assumptions, risks and uncertainties, including risks described in the cautionary statement, included in our press release and in the company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website, reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn the call over to Leroy.

Thank you, Quynh, and good morning, everyone. For those of you who joined us in mid-September for our Koppers’ Investor Day, we hope you enjoyed the event. Our team was very encouraged by the interest shown and the opportunity to provide some additional context on our long-term business strategy. While I'm disappointed to post lower than expected results in our first quarter following that day, I'd also like to emphasize that we're playing the long game, which, as we all know, can be difficult to see as a public company. That's where our focus has been and remains, which is why we are excited to take the opportunity to unveil our five-year plan. Our interest is in attracting an investor base that's also in it for the long game, and those investors that are interested in owning and appreciating a business model with a lot of upside should have a lot to like with the future we've laid out for Koppers. A replay of the full webcast from our Investment Day on September thirteenth is still available on our website. Now let us get started with a review of our Zero Harm safety performance for the third quarter with special attention to COVID-19, as seen on slide four. Following guidelines set by the Center for Disease Control and the Occupational Safety and Health Administration, Koppers continues to require masks for those working indoors with some flexibility as case numbers dictate in each region. The vaccination rates for the company as a whole currently track at sixty-four percent globally, with sixty-one percent in North America, and eighty-one percent across our international locations. Overseas, Denmark lifted its COVID restrictions throughout the country now that more than seventy-five percent of its population is fully vaccinated. As a result, we relaxed protocols at our Board facility. In Australia, lockdowns are being lifted as vaccination rates there have exceeded sixty percent. However, we have elected to keep our COVID protocols in place at our sites there for the time being. I saw this morning, as we were making final preparations for this call, that the details regarding President Biden's executive order have been released. We will, over the coming days, be reviewing it to determine exactly how it must be deployed, and we will put the necessary plans and protocols in place. As described on slide five, we are going through our annual open enrollment process in the U.S. for employees to select their health insurance for twenty twenty-two. After careful consideration, we've decided to institute a monthly healthcare surcharge for employees that remain unvaccinated. This decision was made to help mitigate the additional cost of care for those who end up hospitalized due to COVID. The data supports that for those who contract COVID, the health results and cost of care for unvaccinated individuals far exceeds that for the vaccinated. I cannot, in good conscience, ask our vaccinated employees to bear the additional cost brought on by others choosing not to vaccinate for their personal reasons. Additionally, we have adjusted our Zero Harm life-saving rules to reflect current COVID safety requirements, and we are maintaining all safety and health protocols regarding masks and social distancing. All Koppers office locations have been made available to employees, and those who have been vaccinated must wear masks in common areas. Unvaccinated employees are encouraged to work remotely, and unvaccinated individuals who come into the office must wear masks and maintain social distance at all times. We are now planning a return to the office beginning on January third, twenty twenty-two, with a hybrid work arrangement between office and home remaining in effect and available to employees as appropriate. At this time, as shown on slide six, and as announced back in August, Mike Zugay, our Chief Financial Officer and a critical member of the Koppers leadership team for the past seven years, has announced his retirement effective at the end of this year. This means that this will be Mike's last earnings call. I want to recognize him for that and take a moment to thank him for everything he has brought to our organization during his time here. We will miss him; I will miss him, and all of us at Koppers wish him all the best in retirement. Next week, Mike will be recognized in Pittsburgh with a career achievement award as the CFO of the year for his tremendous contributions to several organizations throughout his career. Without further ado, I'll hand over the podium to Mike for the final time. Mike? Thanks.

Thanks, Leroy. On slide eight, consolidated sales for the quarter were four hundred twenty-five million dollars, which was a decrease from sales of four hundred thirty-eight million dollars in the prior year quarter. Sales for RUPS were one hundred eighty-seven million dollars, down from one hundred ninety-one. PC sales fell to one hundred fifteen million dollars from one hundred forty-eight, and CM&C sales rose to one hundred twenty-three million dollars, up from ninety-nine million dollars. Moving on to slide nine, adjusted EBITDA for the quarter was fifty-four million dollars, or twelve-point-seven percent, down from sixty-seven million dollars or fifteen-point-two percent in the prior year. Also, compared to the prior year, adjusted EBITDA for RUPS was eleven million dollars, down from nineteen. PC EBITDA decreased to twenty million dollars, down from thirty-two, and CM&C EBITDA improved to twenty-three million dollars, up from seventeen. On slide ten, sales for RUPS were one hundred eighty-seven million dollars, a slight decrease from the prior year's results. We attribute this mostly to declining Class I crosstie treating volumes and the impact of exiting our contract with Texas Electric Cooperatives. We are now serving the Texas market by treating poles at our own facility in Summerville, Texas, creating opportunities for longer-term sales growth for the company. These declines were partially offset by increased activity in commercial crossties, and rail joints. Hardwoods for crossties remain a procurement challenge as there is continuing strong demand in the construction industry for alternative uses for that wood. In fact, crosstie procurement is down thirty-eight percent in the quarter compared to last year, while crosstie treatment has increased slightly by three percent. On slide eleven, adjusted EBITDA for RUPS was eleven million dollars compared with nineteen million dollars in the prior year. This was driven by lower cross purchases, which led to reduced capacity utilization and absorption at the plant level. We saw reduced track time due to increased levels of rail traffic along with inefficiencies caused by employee turnover, which led to an approximately two million dollars decrease in EBITDA for our maintenance of way business. Additionally, costs incurred by converting from Penta to our CCA preservatives had a negative two million dollars unfavorable impact. Moving on to slide twelve, PC achieved sales of one hundred fifteen million dollars compared to one hundred forty-eight in the prior year. Volumes of preservatives in North America were down, while wood treaters continued to closely manage inventory due to higher lumber prices as the economy reopened in various areas. Travel and other in-person goods and services have taken a higher share of discretionary consumer spending. However, we've implemented price increases for our copper-based preservatives, which somewhat offset these headwinds. On slide thirteen, adjusted EBITDA for PC was twenty million dollars compared with thirty-two million dollars in the prior year. This change can be attributed to lower sales volumes compared with pandemic-fueled demand in the prior year and higher raw material and logistics costs, partially offset by price increases. EBITDA from Europe and Australia was about three million dollars lower due to European regulatory impacts on our product portfolio and rolling lockdowns in Australia and New Zealand. Slide fourteen shows CM&C sales at one hundred twenty-three million dollars compared to sales of ninety-nine million dollars in the prior year. This increase can be attributed to higher pricing for carbon pitch, current black feedstock, and phthalic anhydride, partially offset by lower volumes of carbon pitch. Moving on to slide fifteen, adjusted EBITDA for CM&C was twenty-three million dollars compared to seventeen in the prior year. This increased profitability was driven by favorable pricing and strong operational efficiencies, partially offset somewhat by higher raw material costs. Compared with the second quarter, prices of the major products this quarter increased eleven percent, while average coal tar costs increased eight percent. Compared with the prior year quarter, average pricing of major products rose twenty-four percent while average coal tar costs went up by thirty-nine percent in that particular quarter. Now let us review our debt and liquidity. As seen on slide seventeen, at the end of September, we had seven hundred sixty-two million dollars of net debt with three hundred twenty-six million dollars in available liquidity, and we also remain in compliance with all of our debt covenants. Our net leverage ratio was three-point-four times at the end of September, down from three-point-five times at the end of December twenty twenty and three-point-eight times in the prior year quarter. Longer term, our net leverage goal continues to be between two times and three times. In connection with our ongoing efforts to evaluate potential financing options, we are reviewing various refinancing alternatives for both our five hundred million dollars senior notes due in twenty twenty-five as well as our existing bank credit facility. That said, we have not yet determined to move forward with any particular refinancing transaction at this time. With that, I'll turn the call back over to Leroy.

Thank you, Mike. Now before getting into a review of business sentiments and our outlook for the remainder of this year, I'd like to share some notable accomplishments of Koppers and our people in the third quarter. On slide nineteen, you see the remarkable accomplishments achieved by our entire Koppers Wood Products team at Longford, Australia, who have reached a one hundred percent vaccination rate. This is our first location with twenty or more employees to reach that milestone, which is an incredible feat. We're extremely appreciative of this achievement. Our Nyborg, Denmark team is tackling the pandemic in an outstanding fashion as well. The ninety-three employees there have achieved a ninety-five percent vaccination rate, surpassing even the national rate of seventy-five percent, demonstrating their willingness to take the COVID-19 virus seriously, as we've had no infections at Nyborg. Finally, in our corporate headquarters in Pittsburgh, where we have one hundred seventy-seven employees, we've crossed the ninety percent vaccination threshold. I believe it’s important for our headquarters personnel to set the right example of what we expect to see throughout the organization, and I’m especially happy to see us reach this level. Kudos to our teams at Longford, Nyborg, and Pittsburgh for truly embodying Koppers' Zero Harm culture. On slide twenty, we wanted to congratulate our truck drivers, the unsung heroes of Koppers who load, transport, and deliver our products all over the world, safely and with special attention paid to limiting and eliminating negative environmental impacts. At our annual Zero Harm Truck Driving Championship, ten drivers were identified as finalists for their overall performance and were appropriately recognized. As seen on slide twenty-one, the Pittsburgh Post-Gazette named Koppers' headquarters location in Pittsburgh as one of the top workplaces for twenty twenty-one, with special recognition of our attention to health and wellness. This honor, determined by a third-party using survey results from employees across the Greater Pittsburgh region, noted our company for its alignment, coaching, engagement, leadership, work-life balance, and more. Now, as the competition for talent intensifies, it will be the flexible, adaptive culture we've created that focuses on the whole person that we expect to bring as a competitive advantage for Koppers. Now, I want to move on to the review of the current and forward-looking business segment, which includes third-party data and feedback we have received from individuals working within the industries in which we operate. We have seen some significant shifts impacting our businesses during the third quarter, many attributable to the aftereffects of the global pandemic, including various supply chain issues and rising costs. I want to stress that the headwinds we are facing are short-term and surmountable. They are not indicative of any underlying negative systemic changes to the foundations of our business model, which is important. The first up is a review of what we see in the fourth quarter for Performance Chemicals, as outlined on slide twenty-three. While we had a respectable third quarter, it fell a little bit short of our internal expectations. Residential preservative volumes took a little longer to recover from the deep trough that began the last couple of weeks of June, as lumber prices were in a steep and rapid free fall. The fourth quarter looks to generate a sales volume improvement of about eight percent over third quarter results, building on North American residential demand that began in the back half of October. Year-over-year sales volumes are expected to finish about four percent lower than the record volumes of the prior year, which were driven by the strong demand during the pandemic in twenty twenty. The trend of our largest customers leading the way in consolidating the residential treating market continues to work to our advantage. As a result of the consolidation that's occurred this past year, Koppers will now be the largest wood preservative supplier to the top three U.S. big-box retailers, which is a tremendous achievement and shows what can be accomplished with strong proprietary technology and strong partners. Industrial demand in the U.S. should remain strong with a five percent year-over-year increase through September, as the pent-up preservative is phased out for utility pole treatment. This is one area where we have dealt with some supply chain disruption and therefore haven't been able to fully keep up with demand. However, that situation has recently improved, and we appear to be on the path of restocking the inventory channel. The book of demand remains strong, and we have been challenged to keep up. The full potential of industrial sales will still be a bit limited somewhat by short-term supply chain challenges in Q4. We are seeing the costs of labor, energy, shipping, and materials all trending higher. As such, we will need to continue pushing for further price increases that started at the beginning of the year. Despite what some are saying, these inflationary cost pressures are not transitory. We will need to continue the acceleration of global price increases that began in early twenty twenty-one, totaling fifteen million dollars through September. Strong demand and a weaker dollar have South America on track for a record year while regulatory pressure on European products has led to a forecast of record low results there. Rising copper prices and a revalued inventory have helped our PC results despite the recent volume drop-off, which creates some short-term risk of earnings volatility for this segment. If prices of copper were to fall rapidly before our price increases take effect, it could pose a challenge. Looking at external data, some encouraging news came from a seven percent rise in the sale of existing homes, with all four U.S. regions experiencing increases in sales and housing demand according to the National Association of Realtors. Additionally, notes suggest that homebuyers are expected to continue fueling a strong market, securing mortgages before potential interest rate increases. In October, the Consumer Confidence Index was one hundred fourteen, an increase from September and reversing a three-month decline as concerns lessened regarding the spread of the Delta variant of the coronavirus. Spending intentions have risen for homes, cars, major appliances, and travel, all of which are projected to drive economic growth for the rest of this year. Slide twenty-four provides a look at the longer-term PC picture from twenty twenty-two through twenty-five. Currently, our early take on MicroPro volumes in North America next year is that we expect them to be between twenty twenty and twenty twenty-one volumes. This is based on an industry consensus view that volumes will revert to normal after the pandemic, and we see market share growth through the treated consolidation mentioned earlier. We expect North American industrial volumes to rise as Penta preservatives continue to be phased out of the utility pole market on customer transitions to other preservatives, including our CCA and DuraClimb products. I mentioned earlier that we're on track for our best year ever in South America, which is a rapidly growing market for wood preservation. To support that growth, we are looking to expand our footprint in that geography. Earlier this year, we purchased property for a greenfield manufacturing operation in Brazil and are currently going through the detailed design engineering phase of that project. This capital is already in our strategic plan to support our preservative growth strategy. The expansion of production capacity for Basic Copper Carbonate at our Hubbell, Michigan facility was completed this past quarter. That development, along with regulatory approval of a new domestic BCC supplier, promises to significantly reduce our dependence on overseas suppliers for that critical material, thereby strengthening our MicroPro supply chain. As we continue to address rising costs, we are implementing price increases that should add more than twenty million dollars in twenty twenty-two and more than sixty million dollars in twenty twenty-three based on current copper prices. We also anticipate higher working capital values moving forward due to the higher cost of raw materials and increased inventory levels that will likely carry for some period until we are comfortable that our concerns surrounding the supply chain have been alleviated. From an R&D standpoint, we are pleased to report that we've received a patent for our next-generation MicroPro product, which will remain in force through early two thousand thirty-eight, and we plan to begin commercializing it in twenty twenty-three. This is significant as it improves upon our current product line while extending our technology's protection. Support for next year's volume projection includes estimates that spending on home renovations and repairs will reach nine percent annual growth, surpassing four hundred billion dollars by the third quarter of twenty twenty-two. The expansion in homeowners’ equity opens the door to increased numbers and scopes of home improvement projects in the coming year, even as labor and material costs are projected to rise. All in all, the future looks very bright for our performance chemicals business. Slide twenty-five offers insight into our UIP Business for the fourth quarter. Near-term sales have been affected by the downstream effects of PC-related supply chain issues, but that situation is already improving and should be much better by the end of the year. Similar to our PC business, inflationary cost pressures will remain, requiring continued U.S. price increases that began in the second quarter and have continued at an accelerated pace into the third quarter. Year-to-date through September, those increases have totaled eight million dollars and will need to continue to cover the rising costs of labor, chemicals, fuel, and transportation. As mentioned previously, the market reduction of Penta will cease at the end of this year, and most of our customers are choosing to transition to our PC-produced CCA and DuraClimb treatment solutions for Southern Yellow Pine utility poles. Our Fidelity Georgia Plant completed its conversion from Penta to CCA in the third quarter, which negatively impacted third quarter results, as Mike indicated earlier. Similar conversions at our Advanced Alabama facility will occur in the fourth quarter, which will similarly impact fourth quarter results. A new dry kiln located at our Advanced plant came online in the third quarter, while a similar installation in Newsom, Virginia, will be completed in the fourth quarter. Although these projects are disruptive in the short term, they are part of our network optimization strategy to reduce costs by becoming more efficient and taking closer control of our supply chain. Wood supply remains relatively stable, although we are experiencing price pressures stemming from increased demand for small logs, pulp, and export. Trucking and logistics costs remain high due to increased diesel costs, limited availability of third-party trucking assets, and labor costs. All this emphasizes our need to pass through increased costs. Sales of poles in Australia have been affected by pandemic-related shutdowns, although a vaccine rollout in New South Wales is expected to ease restrictions over the next few months. Turning to slide twenty-six, we offer a peak at next year and beyond for our UIP Business. As mentioned earlier, sales of CCA-treated poles will increase as sixty-five percent of our UIP customers have selected CCA as a preservative of choice, with ten percent still undecided. In twenty twenty-two, we will continue to build on our Texas creosote pole business as we leverage our pole recovery business to add new customers and improve our cost structure. Sticking with the network optimization team, we expect a much improved cost footprint to contribute meaningfully to EBITDA in twenty twenty-two through the capital spent this year on plant conversions and drying capacity. Furthermore, we continue to evaluate our treating footprint and could proceed with the consolidation of another treating plant in twenty twenty-two, pooling that volume into the remaining plants in our network and saving on fixed costs. Basic demand for poles should remain high at least over the first half of twenty twenty-two due to project work and upgrades that were deferred during, the pandemic. The longer-term demand profile should also remain positive as utilities continue to need to maintain infrastructure to avoid service interruptions, especially as remote work persists and extreme weather events continue to increase. Ample supply of softwood should keep white wood prices stable for the foreseeable future. In terms of preservation, we've been granted registration to produce Copper Naphthenate, adding another oil volume preservative to our portfolio. At this point, we are assessing the most effective path forward, whether to procure it externally or produce it independently. In twenty twenty-two, we expect to implement fifteen million dollars to twenty million dollars in annualized price increases to cover the increased costs we've experienced thus far this year. Next year in Australia, we see strong underlying pole demand to replace those damaged from recent natural disasters, while a new dry kiln has been installed at our Takura location to meet the growing demand for softwood due to hardwood supply constraints. Moving on to our Railroad Products and Services business on slide twenty-seven. The year-over-year trend of greentime purchases seems to have bottomed out and should comparatively improve beginning in the fourth quarter. Our current pace of four-point-four million tie purchases would represent a new low driven by customer reluctance to pay higher prices to meet their demand levels. Treated and sold ties are flat year-over-year, suggesting that crosstie insertions are not an issue. Railroad customers are using high greentie prices to defer purchases, pushing demand towards mid twenty twenty-two with hopes that costs will abate. Trucking problems persist due to a lack of drivers, and pent-up demand limits access, pushing transportation rates higher. Commercial cost profit should improve as comps ease, but the market remains highly competitive. As announced earlier in October, we closed on the property sale where our former Denver facility was located, providing net proceeds of twenty-four million dollars in the fourth quarter. The American Association of Railroads reports that total year-over-year U.S. carload traffic increased eight percent. Intermodal units increased ten percent, and combined carloads and intermodal units increased nine percent as of September 30th. The AAR added that the limited availability of downstream trucking and warehouse capacity due to supply chain challenges is impacting intermodal volumes for now. The association noted that significant network investments have made the rail industry more adaptable, enabling it to adjust to ongoing changes in operational market conditions, which is promising for long-term rail traffic. The fourth quarter view of our maintenance-of-way business calls for it to sequentially improve and be slightly better than last year's fourth quarter. However, EBITDA is on pace for an all-time low due to a collection of direct and indirect COVID-related factors such as labor shortages, lockdowns, and reduced track time due to increased rail traffic previously mentioned. On slide twenty-eight, we discuss our outlook for our RUPS business in twenty twenty-two and beyond. Our current projections suggest supply issues with Green Ties beginning to subside, with a rebound anticipated in the second half of twenty twenty-two. In the meantime, we've been developing a long-term strategy to smooth the peaks and valleys of our procurement process, planning to use the experiences gained addressing similar factors that created volatility in both our CM&C and PC businesses. We expect a minimum of twenty million dollars in price increases to flow through our top line next year due to higher material costs experienced thus far this year. We’re finalizing contracts that are set to expire this year for Class I track, and once completed, most of our Class I volume will be secured beyond twenty twenty-five. While overall volumes are set to increase three to four percent in twenty twenty-two with share remaining flat, volumes are expected to grow by more than ten percent in twenty twenty-three. Completing the expansion at our North raw facility will support a large portion of that projected volume growth. As a result, working capital will increase due to higher Green Tie purchases and volume growth. Although I previously mentioned disappointing results for our maintenance-of-way business this year, on a positive note, we're carrying the highest backlog we've had in that business in years into twenty twenty-two. Our results should significantly improve as we gain cooperation from the railroad for track time and see better crew continuity. We are addressing our turnover issue through a newly redesigned compensation model for portions of our maintenance-of-way group that focuses on what that workforce values. Finally, we are actively working to expand our crosstie recovery business and add more Class I customers to our portfolio. While there's no denying that twenty twenty-one has been a disappointment for our RUPS business, the investments we are making now will set us up for a major jump in profitability in the next two years. Looking ahead to the fourth quarter for our CM&C business on slide twenty-nine, we see strong demand continuing in key markets like steel and aluminum with production increasing in auto and other manufacturing industries. The energy crisis in China, along with global supply chain issues, has caused raw material shortages and longer lead times for finished goods, strengthening our business model outside of China. One example is the high pitch export pricing out of China, which partially supports stronger pricing of our Australian-produced products that are tied to that benchmark. Our European business continues to experience end market pressure due to aluminum production cutbacks affecting our competitors' demand, causing them to compete for business to replace what was lost. In North America, tar production is in line with or may even surpass pre-COVID levels, allowing us to reduce our higher-cost tar imports from Europe, thus shortening our supply chain. Global price increases for coal tar are expected to continue, which will compress margins somewhat in the fourth quarter. Pricing for products tied to oil, such as carbon black feedstock and phthalic anhydride, should remain high and enhance profitability. On the downside, we anticipate lower volumes in our phthalic business due to customer supply chain issues impacting their demand. We are considering the dissolution of the previously closed KCCC facility in China during the fourth quarter or early next year to substantially complete our exit plan from China. Slide thirty offers a forward-looking view for CM&C. Strong demand in aluminum and steel markets should continue into twenty twenty-two or longer with the passage of an infrastructure bill in the U.S. As reliance on Chinese exports decreases and global logistics challenges persist, our CM&C business is well-positioned to benefit. A global review by IHS Markit reports that, after making adjustments for production trends during the pandemic, production of light vehicles worldwide is expected to see double-digit growth in twenty twenty-two. Additionally, it reports that the semiconductor supply chain is stabilizing, representing another positive step in the recovery of the automotive and other manufacturing segments. More decarbonization projects aimed at eliminating coke from the steel-making process are being implemented, further impacting future coal tar availability. Despite external pressures, our focused footprint positions us competitively to maintain our low to mid-teens EBITDA margins in this business. Ongoing improvements we are making at our Stickney facility will enhance safety, boost reliability, and generate additional profitability. Higher future crosstie volumes and creosote-treated utility poles will also positively affect the CM&C business through increased distillate being upgraded from carbon black feedstock to creosote. Our yield optimization project aims to improve pitch yields from fifty percent of production up to seventy percent, ensuring higher sales and profitability. Work on enhanced carbon products utilizing battery anode materials continues across North America, Europe, and Australia. While these projects are not yet included in our twenty twenty-five projections, they could provide significant potential upside. As we close out slide thirty-two, our sales forecast for twenty twenty-one has been revised to approximately one point seven billion dollars compared with one point six seven billion dollars in the prior year, reflecting the lower than previously expected PC volumes in our third and fourth quarters. On slide thirty-three, we are adjusting our twenty twenty-one EBITDA projections to now be approximately two hundred twenty million dollars, which is at the low end of our previously communicated range. This compares favorably with the two hundred eleven million dollars generated in the prior year and marks our seventh consecutive year of EBITDA growth in the current formation of the company. On slide thirty-four, our adjusted EBIT EPS guidance is now expected to be approximately four point one two dollars, comparable to our all-time high twenty twenty adjusted EPS despite a negative impact of zero point four zero dollars per share from our higher estimated effective tax rate. The four twelve for twenty twenty-one is lower than our prior estimate range, primarily due to our effective tax rate increasing from previous projections. Finally, on slide thirty-five, our capital expenditures were eighty-seven point six million dollars year-to-date through September thirtieth, or seventy-eight point seven million dollars net of the eight point nine million dollars in cash proceeds. We are on track to spend a net amount of eighty million to eighty-five million dollars on capital expenditures, with approximately forty-five million dollars dedicated to growth and productivity projects. In summary, while we always strive to do better, I think it’s remarkable that we are on track to be within our most recently communicated range of guidance, actually right in the middle of our original guidance provided in February. Of course, how we are getting there is quite different than we initially thought, but once again, I believe this highlights the strength and diversity of our business segments, which tend to operate oppositely from one another. In the dynamic environment we find ourselves in, it’s tremendously helpful to not rely upon a single business or market to carry the day, year in and year out. It’s been a difficult and draining couple of years, but I am proud of how our team has weathered the storm and positioned us to capitalize on the many opportunities ahead. Through a combination of significant price actions and continued execution on our high-return internal projects, I am confident that we will take the next important step forward in twenty twenty-two toward meeting our twenty twenty-five goal of reaching three hundred million dollars in EBITDA. With that, I would like to open the floor to questions.

We will now begin the question-and-answer session. Our first question is from Mike Harrison with Seaport Research Partners. Please go ahead.

Hi. Good morning. I wanted to say congrats and some best wishes to Mike. It's been a pleasure working with you.

Thank you.

There's a lot to unpack here. I'll start with the RUPS business. Just in terms of the untreated tie availability, are there signs that that is improving near term? It kind of sounds like you expect the weaker utilization to start to improve by mid next year. Is that kind of the way we should think about things trending for now?

Yes, Mike. I think what we are seeing now is that things are appearing to bottom out. We are expecting, certainly, the comps to improve beginning in the fourth quarter. I think we will see year-over-year things bottoming out, with the recovery happening likely to start by midyear of next year. That's the current information we are receiving from our folks out in the field and what they are observing.

And you mentioned the higher activity in commercial crossties. Presumably, they are paying some relatively high prices there. Can you talk about what is driving that higher commercial activity, and do you expect that to continue into next year?

Yes. I think, again, there is considerable disruption, obviously, due to the pandemic, which affected industries in different ways. The Class 1s took the opportunity to perform extensive repair and maintenance, given their stronger balance sheets and ability to do so. Conversely, smaller railroads were more cautious about where they deployed capital. With the recovery beginning and things opening up a bit, there is optimism about moving more projects forward. We have seen substantial delays in terms of operations, which has greatly impacted productivity and efficiency, especially concerning getting people out in the field while adhering to COVID guidelines and protocols, where restrictions vary across regions.

All right. And then within the Performance Chemicals business, can you walk through the European regulatory issue that you are seeing currently? And I believe one of your slides mentioned you were planning to restructure your European business. Can you talk about what that will entail?

Yes. We fall under the biocide product registration act over in Europe for the products we sell into those markets. There has been a lot of scrutiny regarding the registration of our products and raw materials, and there are certain formulas being phased out, impacting our product portfolio. We are adjusting our product line and strategizing on how to rebuild our profitability there. We have a strong foothold in the Nordic regions and are looking to play to our strengths by introducing our MicroPro technology there, which has gained significant traction in the residential market in the U.S. We have received a lot of interest from major customers about supporting our product line.

All right. And then within the CM&C business, it seems like volumes were relatively flat or maybe even a little lower this quarter, yet you mentioned strong underlying demand dynamics. Could you provide some insight into what was going on with volumes in the third quarter?

Yes. For that business, there can be a tendency for significant products to change hands and for shipments to shift between periods, which can impact our volumes. However, I would say that demand has remained strong due to market conditions, particularly in steel and aluminum. Europe presents our biggest challenge as some of our competitors' customers have not performed as well, leading to lost business. Overall, we are competing for volume and price, facing a highly competitive environment.

All right. My last question is for Mike. I’m not letting him escape without a balance sheet-related question. You mentioned in your prepared remarks some potential opportunities for refinancing. Can you remind us what the rate on the senior notes and your current facilities look like? What kind of potential interest rate savings could you be looking at?

Yeah. On our bonds, we have five hundred million dollars outstanding, due in twenty twenty-five at a flat interest rate of six percent. Given what we're hearing from banks, we could possibly refinance somewhere in the four point seven-five percent to five percent range, which would cut a point or point two-five off our interest rate on those bonds. Our bank agreement pricing is currently about two point six percent on the outstanding balance, positioned at the high end of our current pricing grid. We believe this would become the low range of our grid in a new agreement, offering possible interest rate savings and covenant relief.

All right. Thanks for the details there.

You're welcome.

Thank you. This is Chris Howe from Barrington Research. Not sure how that happened.

Hi, Chris.

I had a few questions here. Firstly, surrounding the price increases – it’s not surprising to hear given the current challenges in the environments. Specifically, regarding the Performance Chemicals segment, how should we view the planned price increases, totaling greater than twenty million dollars and then greater than sixty million dollars, in the context of catching up to current market conditions and the timing for achieving a satisfactory price-to-cost coverage ratio in that segment?

In that segment, it's more about keeping pace. I mean, we've been increasing prices throughout this year. We've aligned closely with cost increases, which is our intent moving forward. It’s more about maintaining pace and catching up compared to other segments where it’s more about catching up entirely.

Okay. On the PC segment, you mentioned the remodeling trends, predicting relatively healthy comparable levels. After the winter season, should we expect a level of pickup in remodeling activity as we head into the summer of next calendar year?

Yes. Typically, we see that pattern. We're working off a unique situation with the pandemic spike followed by a steep decline when lumber prices fell. We anticipated a surge in demand post-Labor Day; however, we did not see that jump initially. We are seeing some recovery in the back half of October, which positions us more in line with expectations. After the winter months, we definitely expect to see greater demand as big-box retailers prepare for the construction season, meaning the fourth quarter volumes should surpass those of the third quarter, which is unusual.

Lastly, regarding your communication strategy, as you explore opportunities in the infrastructure bill, how do you plan to update investors on potential impacts for the business, both in the near and long term?

We have always aimed for transparency with investors, providing detailed information regarding our businesses, industry drivers, and their impacts. As things progress and we identify elements within the bill, we will share relevant information. Our roadmap for transitioning from current conditions to future goals is largely within our control, focusing on successful execution that generates returns. However, outside factors also contribute, including general demand changes, such as the awaited infrastructure bill.

Okay. And if I may squeeze in one more? This relates to the Investor Day you mentioned about wood treatment expansion into new geographic areas like the Midwest, Texas, and the West Coast. Could you provide insights into your strategy for those regions in the next twelve months?

There are many discussions happening, and planning work is ongoing for generating the best returns. While commercial development in Texas is progressing well, we are still in the early stages regarding the Midwest and West Coast. However, successful developments in Texas could lead to upstream effects expanding throughout our business.

Thank you. Good morning, Leroy. Good morning, Mike.

Hi, Liam.

Leroy, regarding the RUP business and procurement, you mentioned tie procurement was bottoming. What would drive that recovery? Is it just that maintenance has been deferred and class 1 will need to step in and buy, or are they waiting for prices to ease?

Yes, it’s a matter of pricing leveling out. Nobody in this market jumps onto a rising market, as they prefer a conservative approach. They will hold off until they feel prices have peaked before ramping up purchases. Seeing some price levels stabilize recently gives us hope that we may have reached that peak and are moving in a favorable direction.

Any easing in prices would allow catch-up on deferred maintenance, correct?

Absolutely, Liam. We’re optimistic about the future of the RUPS business over the coming years due to the dynamics we've observed. With the drop in recent performance, a snapback is likely as we experience higher volumes supported by our ongoing investments that will enhance our efficiencies and lower our cost structure.

Great. And Mike, presuming CapEx stands at approximately one hundred fifteen to one hundred twenty million dollars for the full year, would you anticipate being free cash flow positive for twenty twenty-one?

Yes, we still do, Liam—though not by much, but yes.

Great. Thank you, Leroy. Thank you, Mike.

Thank you, Liam.

Thanks, Liam.

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

I would like to thank everyone for participating in today's call and for your continued interest in Koppers. Thanks for sticking with us today. I look forward to talking again next quarter. Stay safe, everyone.

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