Koppers Holdings Inc. Q4 FY2021 Earnings Call

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers, Fourth Quarter 2021 earnings conference call and webcast. At this time, all participants are in listen-only mode. 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 Fourth Quarter and Full Year 2021 Earnings Conference Call. We issued our press release earlier today. You may access it via our website, at www.koppers.com. As indicated in our announcement, we have also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our website, and a recording of this call will be available on our website for replay through May 23, 2022. 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 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 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 Jimmy Sue Smith, Chief Financial Officer. I'll now turn the discussion over to Leroy.

Thank you, Quynh, and good morning, everyone. I'll start by saying I'm pleased to report that we again delivered strong results for 2021 and finished the year slightly ahead of our revised projections we provided last November. Moving into 2022, I and the rest of our team are excited to continue on the path of executing our long-range growth plan to deliver $300 million of EBITDA in 2025. As always, I'll begin my comments with an update on Zero Harm as seen on Slide 4. In 2021, we achieved our lowest 12-month rate of serious safety incidents in the company, with 16 of our 43 operating facilities working accident-free for the entire year. Furthermore, we stayed on track for our fifth consecutive record year of proactive leading activities, which are used to correct conditions or behaviors to prevent potentially life-altering injuries. We conducted more than 18,500 leading activities across the company in 2021, and this is an encouraging sign. It means that our efforts to prioritize training and education around identifying and mitigating the most potentially dangerous exposures are generating positive outcomes. Our culture of Zero Harm continues to move deeper into the organization through training and workshops for our frontline employees, as well as sharing practical applications among our plants. Part of the training for frontline employees includes conducting peer-to-peer observations. As our worldwide team understands, the key to Zero Harm is engaging with employees and leaders at a personal level by working aggressively to anticipate, identify, and eliminate the risk of serious incidents. In addition, we're making progress on improving our transportation fleet safety program to influence safe driving behaviors. We implemented measures to increase transparency, improve tracking of key performance indicators, and identify opportunities for synergies. We continue to conduct Zero Harm training for our commercial truck drivers and have begun to include defensive driving techniques. Later in 2022, we'll hold our second annual Truck Driving Championship competition in recognition of the employees who do the essential work to safely deliver products to our customer base. We'll continue to develop enhanced tools for monitoring fleet compliance, as well as coaching our truck drivers. Although we still have much work ahead of us on our journey to Zero Harm, I am proud of the progress we are making year-over-year. I send my sincere thanks to our Zero Harm team and our employees worldwide for staying relentlessly focused on safety. Moving to slide 6, I am pleased to announce that today our Board of Directors reinstated a quarterly cash dividend of $0.05 per share of Koppers common stock, which will be paid on April 4, 2022, to shareholders of record as of the close of trading on March 18, 2022. For those who have followed us over the past seven years, you know that we have worked hard to transform Koppers into a stronger and more resilient organization. As a result, we have been able to withstand many challenges thrown our way to produce consistent, reliable profitability and cash flow. As we continue into the next phase of our strategy, we feel it is important to bring more balance to our capital deployment strategy, and begin returning cash to our shareholders through dividends and share repurchases. Last year, our Board approved the $100 million share repurchase plan, and we feel it is prudent to re-institute our long-suspended dividend. Our Board's decision to reinstate a dividend demonstrates their confidence in the strength and resiliency of our business and our ongoing ability to drive growth. Now, I would like to welcome Jimmy Sue Smith to our first earnings call as Koppers Chief Financial Officer since assuming the role on January 1st of this year. Welcome, Jimmy Sue. Take it away.

Thanks, Leroy. In this morning's press release, we provided our results for the fourth quarter and full-year 2021. As seen on Slide 8, we achieved record performance in several categories this year. We had a new high in consolidated sales of $1.7 billion. Operating profit finished the year at $157 million, matching last year's record. Adjusted EBITDA was a record $224 million, up from $211 million in 2020, marking the seventh consecutive year of improvement, and a record year for our Performance Chemicals segment. Adjusted EBITDA margin was 13.3%, marking six straight years in the 12% to 14% range. We also set a new record for adjusted earnings per share of $4.21 and reported operating cash flow of $103 million, bringing our total to six of the past seven years with more than $100 million in cash flow. We also reduced our net leverage ratio to 3.3 times at year-end while investing $125 million in the business. Finally, the book value per share of Koppers' equity has never been higher than at year-end 2021. Now, moving to our discussion of fourth-quarter and full-year 2021 results on Slide 10, consolidated sales for the fourth quarter of 2021 were $405 million, an increase of $12 million or 3% compared with $393 million in the prior year. By segment, sales for RUPS decreased by $12 million or 7.5%. Sales for PC decreased by $11 million or 8.5%, while sales for CM&C increased by $36 million or 38% compared to the prior-year quarter. As shown on Slide 11, consolidated sales for the full year 2021 of $1.679 billion increased by $10 million compared to the prior year. Despite the pandemic, 2021 sales represented the highest level of revenues in the history of the company, excluding KJCC. By segment, sales for RUPS decreased by $29 million or 4% for the year. Sales for PC decreased by $23 million or 4%, while sales for CM&C increased by $61 million or 16% compared to the prior year. On slide 12, fourth-quarter adjusted EBITDA on a consolidated basis was a fourth-quarter record of $49 million compared with $47 million in the prior year. EBITDA margins in both periods were 12%, with the fourth quarter of 2021 driven by record results from our CM&C business. EBITDA margin for our PC segment was lower than the prior year, reflecting a more normalized level of profitability. Our RUPS business continued to experience a weak market environment. Slide 13 shows recorded adjusted EBITDA for the full-year 2021 of $224 million or 13.3% compared with $211 million or 12.6% in the prior year. The record EBITDA was driven by our PC business, which delivered record adjusted EBITDA this year and strong results from our CM&C segments, partly offset by year-over-year decline in RUPS. Slide 14 illustrates the trend of our adjusted EBITDA over the years, excluding contributions from our sold KJCC operations. This performance validates the success of our core strategy of leveraging our vertically integrated business model, which has delivered higher levels of adjusted EBITDA every year from 2014 through 2021. On Slide 15, sales for RUPS were down by $12 million for the quarter, primarily due to lower Crosstie volumes, as well as reduced utility pole demand in the U.S. and Australia, partly offset by pricing increases. Market prices for untreated Crossties remain elevated due to strong demand in the construction markets, resulting in lower purchases by railroad customers. On Slide 16, adjusted EBITDA for RUPS was $6 million compared with $10 million in the prior-year quarter. Factors contributing to this decline include lower volumes for Crossties and utility poles, reduced fixed cost absorption from lower capacity utilization, costs associated with converting to new pole treatment preservative systems, and higher raw material and transportation costs. Price increases partly offset these factors. Sales for the PC segment on Slide 17 were $119 million compared to sales of $130 million in the prior-year quarter. The decrease is attributed to a shift in consumer spending habits in the United States to pre-pandemic levels. Lower volumes of preservatives in North America reflect a return to more normalized demand levels. That said, we are seeing higher demand in international markets, such as Brazil and New Zealand. Adjusted EBITDA for Performance Chemicals on Slide 18 was $19 million compared with $23 million in the prior-year quarter. As a result of lower volumes and higher input costs, partly offset by price increases we have implemented globally. Slide 19 shows CM&C sales at $131 million compared to sales of $95 million in the prior-year quarter. The increase is primarily the result of strong end market demand supported by higher sales pricing for carbon pitch distillates and chemicals, which was partly offset by lower sales volumes of carbon black feedstock in certain regions. On Slide 20, CM&C had a record quarter for adjusted EBITDA at $25 million compared to $14 million in the fourth quarter of 2020. The increase in profitability can be attributed to favorable demand and a positive pricing environment, partly offset by higher raw material costs. The average pricing of major products in the fourth quarter increased 9% from the third quarter, while average coal tar costs were higher by 11%. Compared with the fourth quarter of 2020, average pricing of major products was 46% higher, while average coal tar costs increased 49%. On slide 22, total capital expenditures in 2021 were $125 million, or $85.9 million net of cash proceeds from divestitures and insurance. On a gross basis, we spent $51 million on maintenance, $22 million on Zero Harm, and $52 million on growth and productivity projects, primarily related to the capacity expansion of our railroad Crosstie treatment facility in North Little Rock, Arkansas. As shown on Slide 23, from an overall capital allocation standpoint, we are committed to a balanced capital allocation plan that includes investment in the business, as well as return of capital to shareholders through dividends and share repurchases. As Leroy just mentioned, our board has reinstated a quarterly dividend, which we expect to grow over time. In addition, we bought back $11.5 million of shares in 2021, primarily in the fourth quarter. This return of capital is a strong indicator of our confidence in our ability to grow and generate cash according to our strategic plan. Finally, as seen on Slide 24, at year-end, we had $738 million in net debt and $348 million in available liquidity. Our net leverage ratio was 3.3 times as of December 31, 2021, compared with 3.5 times at the prior year. We continue to be committed to our long-term goal of 2 to 3 times net leverage. Note that our current debt balance is solidly in the middle of that range at our 2025 EBITDA goal of $300 million, meaning that we have a limited need to further reduce debt to hit our targeted leverage in 2025. Given the progress we have made to strengthen our balance sheet, we are changing the focus from paying down debt to growing EBITDA as a means of reducing leverage. And with that, I will turn it back over to Leroy.

Thank you, Jimmy Sue. Now before moving on to discuss business sentiments and performance across our various segments, I'd like to offer a quick review of some notable happenings across the company since we were last together. Slide 26 highlights some well-earned recognition for Koppers. Our company was named as one of America's most responsible companies for 2022 by Newsweek Magazine for the second consecutive year. Newsweek partnered with Statista to identify the winners from over 2,000 U.S. companies across 14 different industries. It is an honor to again be recognized by Newsweek for our company's performance in environmental, social, and governance areas. The Pittsburgh Business Times spotlighted two individuals from our leadership team, Jimmy Sue and our Chief Sustainability Officer, Leslie Hyde, in two separate feature stories in recent months, and we're very proud of these accomplished members of our Koppers team who demonstrate leadership in our community, as well as within the Koppers organization. Slide 27 lists two recent leadership appointments that will help propel us forward on our path to sustained growth. Tracy McCormick has been elected as Treasurer, transitioning from her post as Assistant Treasurer. She's been with the company since 2011 and brings a depth of experience and knowledge of our businesses and finance organization. Also, Dan Skrovanek has been named Vice President of Growth and Innovation, a new role at Koppers, transitioning from his position as Vice President of Purchasing and Strategic Marketing. Dan will help us pursue ongoing growth opportunities in various areas by challenging the status quo and enabling our business leaders to execute the day-to-day in our strategic initiatives. While Dan will have responsibility for M&A, this move should not be construed as us seeking a heavy M&A strategy. Our approach to acquisitions has not changed; we'll continue to evaluate opportunities based on their merit and the value we believe we can create for shareholders by adding to our portfolio. There are many ways to grow, and Dan and his team will be tasked with finding and driving those opportunities to a successful conclusion. I will now be providing an overview of business sentiment, both short and long term. There's a lot of information on each of the next several slides representing feedback from employees, industry contacts, and independent sources. I won't reference every bullet point, but I will focus on the high-level aspects we're tracking that will ultimately dictate our success or failure in each of the business lines. On Slide 29, we see an overview of the important drivers for Performance Chemicals in this coming year. Everything begins with demand. While we are receiving mixed signals, we believe that 2022 still presents a healthy demand profile for the North American residential treated wood market, which drives the bulk of our business. Existing home sales data and consumer confidence in repair and remodeling projections paint a promising backdrop for home improvement spending. Drilling down specifically into the product segment we care most about, treated wood, we see a more cautious outlook. There’s no question demand volumes are normalizing from their pandemic fuel peaks. We observed a more respectable year-over-year comparison this past Q4 compared to the sizable volume drop-off we saw in Q3. Early 2022 is showing volumes in line with our expectations, about 10% to 15% better than 2019, which was our last normal year. Lumber prices began rising again in the latter part of Q4, with current levels close to three times as high as prices dropped in Q3 and the early part of Q4 last year. With lumber prices rising, we again see lumber treaters keeping inventory levels low to avoid being caught with high-priced products when prices fall. The overall market environment may be a little uncertain, but our business remains supported in the near-term by a strong customer base aggressively consolidating treating capacity, which will provide additional units in 2022. Due to establishing this position as the number one preservative supplier for treated wood sold by the top three U.S. home improvement big-box retailers, we have opportunities to grow market share in industrial products, and we plan to be more aggressive in this category moving forward as we near maxing out on the residential side with the significant customer additions made over the past few years. Recently, we've brought on a 60-year industrial customer from one of our competitors and believe we can drive more business based on our commitment to the industry and the capital we've allocated to product development, operational reliability, and the strength of our customer service. Internationally, we expect continued strong demand in South America in 2022, following a record 2021. We agreed to serve what will be the largest treater in South America after its capacity expansion is completed. When we begin shipping later this year, they will become our largest customer in that region. As regulatory pressures continue to impact our European products, we have implemented a restructuring plan to streamline our business footprint and product portfolio in that region. On the cost side, we face major inflationary increases in 2022, with persistently high copper prices leading the way. We're projecting approximately $50 million in higher costs in Performance Chemicals this year, with approximately $30 million in price increases offsetting some portion of that. Additionally, the situation with Russia and Ukraine has caused logistical issues with raw materials for our fire-retardant products, further driving up costs. However, most of the net cost increase in 2022 is off set by increased sales volumes we expect, plus $8 million in benefits from various network optimization projects aimed at increasing capacity. The net result from all these moving parts leads us to expect our PC EBITDA in 2022 to finish at approximately $96 million, or about $6 million lower than our record 2021 results. From a working capital standpoint, we expect inventory levels for PC to remain high throughout 2022 due to higher material costs and our desire to avoid running short on product should we encounter shipping delays like those in Q3 and Q4 last year. As you can see on slide 30, the longer-term picture for our PC business continues to look very promising. The biggest challenge entering 2023 will be realizing additional price increases to offset copper and other inflationary costs. Copper prices have averaged anywhere from 50% to 100% higher than pre-pandemic levels. This could mean as much as an additional $50 million in pricing needed next year to maintain balance. From a market share standpoint, we had another positive recent development in securing 100% of the supply requirements of a major West Coast customer we previously shared with a competitor. Beginning in 2023, we expect to take on all of this customer's business under a new five-year agreement. North America industrial volumes of chromated copper arsenate (CCA) will grow as that preservative replaces the phasing-out Penta treated product. We are still considering whether to venture into producing other oil-borne products to displace the remaining Penta business and have not finalized a decision yet. In Brazil, we have purchased a property for a Greenfield manufacturing site to support our growing business in that country. We're still a couple of years away from breaking ground as we work through the regulatory approval process, but expect the new capacity to be in place by 2026. In Europe, part of our restructuring involves getting MicroPro approved and commercialized, which we expect to arrive in the next few years. We have already received market interest in this product and are developing our production plan. The successful expansion of our Basic Copper Carbonate or BCC production at our plant in Hubbell, Michigan, along with the recent qualification of a new domestic BCC supplier strengthens the supply chain for our flagship PC product, MicroPro, by reducing the dependency on overseas suppliers. We've also been issued a patent for the next generation MicroPro product, which improves upon the efficacy of our existing products and will remain in effect through early 2038. We're in the process of commercializing this product and plan to bring it to market over the next several years. Slide 31 provides an overview of 2022 for our UIP business. Starting with demand first, utilities are expecting increased pole volume demands in 2022 due to project work and upgrades deferred last year because of the pandemic. This remains true despite Omicron affecting production levels at the end of Q4 and the beginning of this year. The PC supply chain issues in Q3 and Q4 have created a backlog of demand that we are almost finished working through. Inflationary cost increases and the threat of higher interest rates have had a negative impact on piling quotes for now, and we are currently analyzing this development to determine if it will be a temporary issue. As mentioned earlier, market production of Penta ceased at year-end 2021. Most of our customers are opting to use our CCA and DuraClimb treatment solutions for Southern Yellow Pine utility poles. We estimate that approximately 65% of our legacy Penta treated product will transition to CCA related products. Our PC business will benefit from increased CCA business, even though UIP can realize greater throughput at their plants treating with CCA, yielding operational efficiencies. Historic price increases are set to add $8 million in sales this year. We continue to work on passing higher raw material, labor, and transportation costs that were not covered by pricing increases in 2021, alongside additional 2022 cost increases. We have been and continue to face challenges attracting and retaining a workforce at certain plants, and maintaining a steady driver roster, whether employed by Koppers or third parties. Internal resources spend considerable time trying to fill open positions while operations and logistics navigate inefficiencies caused by frequent turnover. This is a significant issue, and in 2022, we hope to see improvement. On the project side, we expect EBITDA benefits of approximately $5 million in 2022 from various strategic projects. This includes converting our plants in Vidalia, Georgia to CCA, and Vance, Alabama to Copper Naphthenate, which were completed in the last couple of quarters of last year. We also want to highlight planned sales from our underutilized Sweet Water, Tennessee plant, consolidating that capacity into other treating facilities in our network. We scaled back operations at Sweet Water earlier this year and have been winding down inventories as we work to resell the land and associated equipment. While wood supply remains relatively stable, we remain alert to pricing pressures from high demand for small logs and pulp exports. As referenced earlier, trucking and logistics costs are expected to remain high due to labor charges, fuel prices, and the availability of third-party trucking assets. Internationally, pandemic-related shutdowns have negatively impacted Australian sales in the short term; however, current vaccine rollouts in New South Wales are expected to ease COVID-related restrictions over the coming months. Slide 32 offers a long-term outlook for our UIP business. Due to ongoing remote work patterns and extreme weather events, utilities need to ensure the maintenance of their infrastructure to avoid service interruptions. Most major utilities are trending toward stocking storm inventories, which contributes to sales volumes. Additionally, the infrastructure bill passed in 2021 earmarks $119 billion for utility infrastructure improvements, which should further support a strong demand cycle over the next several years. Overseas, we see underlying demand trends in Australia to restore power lines after natural disasters such as wildfires and cyclones. We took steps to ensure we can shift volumes in Australia to softwood as hardwood availability becomes more challenging by adding a dry kiln at our Takura location last year. We are in the process of adding peeling and drying capacity in the Gulf Coast to serve our Summerville, Texas plant and are finalizing lease terms in Louisiana while laying out plant footprint and obtaining equipment quotes. Current plans suggest online readiness by the end of this year, which will significantly enhance the raw material cost profile of our Summerville plant, allowing us to compete for more business. We are also conducting due diligence on property that would support a potential base of operations in the Western U.S. to serve the industrial treating and wood preservation chemical markets. We are early in the process, but we view this as an exciting opportunity to access an untapped market for Koppers while significantly lowering our cost of goods for the PC business. More updates as these plans develop. On Slide 33, we delve into our 2022 outlook for the railroad products and services business. We expect at least $20 million of price increases to flow through this year to account for higher material costs, anticipating overall Crosstie demand in 2022 will increase by 4%, as well as a 4% to 5% increase in our volumes. The longer it takes for entry tie dynamics to improve, the more threatened our plant improvements for RPS this year become. The $4.4 million ties purchased in 2021 represent a new low based on data I’ve seen dating back to 2012, as customers resisted elevated prices to meet demand levels while sawmills shifted to other markets. We've yet to rebound from the bottoming-out in Crosstie purchases experienced in Q4, which means we need significant acceleration in purchases when improvements begin to manifest, if we hope to reach our improvement expectations for this year. Like other business segments, trucking challenges persist due to a lack of drivers and pent-up demand limiting access and driving up transportation costs. In terms of commercial performance, Crosstie profits remain low even with easier comparisons, highlighting competitive market dynamics currently at play. From an industry trend standpoint, rail traffic rose from 2020 in most categories, with total U.S. carload traffic increasing by 6.6% year-over-year, intermodal units up 4.9%, and combined U.S. traffic rising 5.7% according to the Association of American Railroads. This indicates the vibrant economy we're in. If we can procure over 6 million Crossties this year and meet our sales volume targets, we anticipate adding $5 million in EBITDA to 2021 totals. Additionally, with another $4 million from strategic initiatives focusing on network optimization, RPS should see $9 million in year-over-year EBITDA improvement just from the Crosstie business alone. Labor and COVID-related challenges have severely impacted our maintenance of way business more than initially expected in 2021. Selectively, this business line experienced record low EBITDA last year due to significant inefficiencies in crewing caused by frequent turnover, lack of track time due to higher traffic, and inflationary cost increases. The silver lining is that there's nowhere to go but up from here. As we emerge from the pandemic, our maintenance of way businesses should settle back into more normalized profitability levels, with an expected $5 million EBITDA improvement for maintenance of way in 2022. However, this would still leave us several million short of what we believe this business can achieve in the coming years. Slide 34 outlines the long-term perspective for our RUPS business. Most of our Class I contracts, previously set to expire in 2021, are now extended beyond 2025, establishing a stable base of long-term business. While 2022 volume growth is expected to be around 4% to 5% for Koppers, we forecast over 10% growth in 2023. The expanded production capacity at our facility in North Little Rock, expected to finish later this year, will be a key driver of that volume growth moving forward. It is important to recognize that this volume increase will necessitate an increase in working capital due to greater Green Tie purchases being needed to support that growth. One key project we are focusing on is figuring out how to smooth out the untreated tie cycles that appear every few years, which are the biggest challenge to achieving business stability. We believe there are strategies that we have yet to deploy that could provide a competitive advantage for Koppers by assisting railroads in managing competitive pressures for their Crosstie materials. Turning to 2022 for our CM&C business on Slide 35, we see strong demand from key markets along with production forecasts in the automotive, steel, aluminum, and carbon black industries, along with higher oil prices. All of these are positive indicators for CM&C from both a demand and pricing standpoint. However, we must balance that against an energy crisis in China, combined with global shipping and logistics challenges causing shortages in raw materials and longer delivery times on finished goods supporting our business model beyond China. In Europe, some aluminum producers have curtailed coal tar production due to high energy prices, increasing market pressure correspondingly. As we often mention, cost trails price in this business, and the last two years exemplified this dynamic in two different environments. We realized over $60 million in price increases in 2021, which enabled us to translate that into a $31 million EBITDA increase over 2020. Currently, we're projecting to give back close to $20 million of that in 2022 as costs continue to align with prices, and our pricing curve flattens. However, we anticipate offsetting $8 million of that by upgrading distillate materials to carbon pitch as part of our enhanced carbon product initiatives, along with achieving cost savings from operational efficiency projects. Our CM&C projections account solely for the market dynamics supporting sustained strength through the first half of this year, which is as far as our visibility extends. The uncertain factor we must consider is the Russia-Ukraine situation, as we source approximately 20% of our coal tar raw materials for Europe from those regions. While we have contingency plans in place to keep supplies flowing, the potential for supply chain impact cannot be disregarded if the situation remains unresolved. Slide 36 looks ahead for CM&C through 2025. Strong demand from the aluminum and steel markets should persist, particularly in the U.S. following the Federal Infrastructure bill's passage. As reliance on Chinese exports diminishes and global shipping logistics challenges subside, we expect our CM&C businesses to benefit. There have been additional announcements in 2021 related to decarbonization projects aimed at reducing or eliminating coal utilization in steelmaking. Already this year, Cleveland-Cliffs has closed coal facilities in Follansbee, West Virginia, and Middletown, Ohio, neither of which served Koppers. Trends towards new direct reduced iron and electric arc furnace projects may further reduce domestic coal tar production in the future, applying significant pressure on the three remaining small distillers. We continue working on multiple projects to enhance the end products from our distillation process, positioning them for use in higher-value markets and displacing lower-value products from our product stream. Feedback from third-party testing continues to be positive, and success in this area within the coming years could dramatically shift the profit dynamics in this business to potentially make it the highest-margin segment in our entire portfolio. On Slide 38, our sales forecast for 2022 is approximately $1.8 billion compared with $1.678 billion in the prior year, reflecting projected top-line improvements in every business segment, largely driven by price. On slide 39, we project our 2022 EBITDA to be approximately $230 million. This would mark our eighth consecutive year of EBITDA growth, and once again illustrate that our diversified portfolio will have both ups and downs across the three business segments. Our RUPS business hit a low in 2021 due to several factors, but strong underlying market fundamentals position us for significant improvement. How much will depend upon how well Crosstie sourcing aligns with demand, cost expectations, and our need to maintain infrastructure. We anticipate a small decline in EBITDA for Performance Chemicals, reasonably reflective of its current standing. In 2021, the segment likely out-earned slightly, considering the 8% year-over-year drop in volumes coupled with its ability to slightly improve upon record 2020 results. Overall, should demand hold, PC should have a solid year, even if it doesn't set new highs. Ultimately, we expect a $10 million decline in EBITDA for CM&C primarily due to costs catching up to rapid price increases that soared throughout 2021 and extending into 2022. We forecast a reversal in the timing of our results for 2022 compared to 2021, beginning with two record quarters driven by pandemic-fueled PC markets and a RUPS business that had yet to face hardwood sourcing challenges. The tougher first-half comparisons will likely weigh on overall performance, but we expect substantial ground to be reclaimed in the year's second half. On slide 40, our adjusted EPS guidance for 2022 is about $4.25 compared with $4.21 in the previous year. Despite negative impacts of $0.23 per share from our higher estimated effective tax rate and $0.11 per share from increased SG&A costs, our operations are expected to yield year-over-year improvements of $0.37 per share. Finally, on Slide 41, we project our growth capital expenditures to be around $95 million in 2022. Net of proceeds from property sales and insurance recoveries, we expect capital spending in the range of $80 million to $90 million, with about $29 million dedicated to growth and productivity projects. In summary, we remain focused on executing our strategy to expand and optimize our business, with our goal continuing to be delivering $300 million in EBITDA by 2025, while remaining true to our purpose of protecting what matters and preserving the future. With that, I would like to open it up for any questions.

We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble our roster. Our first question is from Mike Harrison with Seaport Research Partners. Please go ahead.

Hi. Good morning.

Hi, Mike.

I have a lot to process from that. My first question is about the overall guidance. You provided a point estimate of $230 million for EBITDA. If you were to give a range around that figure, would you say it would be a narrower or wider range? It seems like you're feeling quite optimistic about the first half, but could you share your level of confidence in that $230 million estimate and highlight some key variables that might be beyond your control, especially as we look toward the second half?

Okay, Mike. Sure. There are a lot of moving parts as with our businesses, and they find themselves in different positions each year. We obviously feel confident in the $230 target that we have provided, which is why that's our target. We've moved away from a range this year. That range, depending on how you look at things, could be quite wide. A lot of that comes back to the significant price increases we expect for this year; we're talking about $80 million to $100 million in price. A significant portion of that relates to cost increases we already know exist, while a good amount stems from anticipated costs still to come. Depending on how that plays out, if it works to our advantage, the number could certainly exceed $230 million. Conversely, if it doesn't, we could struggle to reach it. However, we do have several projects in place that will help compensate, as I outlined across different business segments. Key factors this year include securing pricing while maintaining volume—avoiding significant volume losses as a result of pricing in 2022—and hardwood sourcing for the rail business, which is critical. Aside from these, the CM&C business has some upside; it's just the limited visibility we have that prevents us from projecting with stronger confidence for that particular segment. So I recognize there are many moving parts here, and it's not simple, but this year presents a balancing act we play each year. We understand these markets have varying dynamics at different points in time, so we continue to reinvest into the business to cut costs and make improvements to keep advancing.

All right. In terms of the RUPS business, you mentioned the Class I contract extensions, and you also mentioned your longer-term expectation of higher Green Ties purchases impacting working capital. Did any of those contract extensions change the business model? A few years back, you had a model switch that led to you all taking on more working capital. Is that the situation here?

No, it is not. The working capital increases we anticipate from RUPS are simply due to a normalization of Crosstie purchases. As our purchases have decreased over the past year, that translates into less inventory we end up carrying. As they return to more normalized levels, our inventory will rise correspondingly. If we grow as we anticipate moving into 2023 after the Little Rock expansion, we'll need even more ties, necessitating additional working capital. However, there’s been no change in our contract extensions affecting the core business model with our customers.

All right. And then, onto the PC business, you mentioned the $20 million net price versus cost headwind. It sounded like $30 million of pricing this year and about $50 million of higher costs. Help us understand: with how your contracts work, do you just need to take a longer-term approach to pricing? Given your strong market position, it would appear you should be in a favorable position to secure pricing increases to balance out costs.

Yes, there's an element of being limited in the ability to pass through certain costs concerning existing agreements and hedging arrangements. I tried to highlight a point in my prepared comments that we actually secured price increases in 2021, nearly $25 million in Performance Chemicals. As a result, we likely over-earned in 2021 when accounting for an 8% drop in year-over-year volumes as well. This success to some degree means some costs will return some of that gain since we can't effectively pass on this cost twice. Further, while some cost increases have not yet been passed to parts of our customer base, we will be doing so as we transition into 2023.

Okay, that makes sense. Maybe just a couple of housekeeping questions and then I'll turn it back. First, the insurance recoveries for 2021; over $6 million appeared in the cash flow statement. Was there some Q4 recovery in the CM&C business? I know you had a fire at Stickney earlier in the year. Just wondering if insurance contributed to some of the strength you observed in Q4?

Hi, Mike. It's Jimmy Sue. You're exactly right. About $2.5 million of the insurance recovery was in Q4, primarily stemming from the CM&C business related to the fire.

All right. Thank you. And then my last question is actually on your debt structure. The 2025 notes you have looked callable earlier in 2022. They have a coupon of 6%. Is there any chance you might look to refinance those notes to a lower rate, before interest rates begin to rise significantly?

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

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

Good morning, Leroy. Good morning, Jimmy.

Hi, Chris.

Good morning.

I wanted to dig into some of Leroy's comments here within the PC segment. I believe you mentioned a noteworthy customer acquisition, as well as the associated dynamics of that significant supply arrangement, the five-year arrangement. Can you provide insights into market dynamics beneath the PC segments that we should take note of?

The market continues to be strong. We've demonstrated over the last five years the strength of our team in serving a customer base that has been consolidating treating capacity. Consequently, we have benefited from that from a volume perspective. Additionally, we have efficiently captured additional business from customers of our competitors due to our commitment to the industry and the extensive efforts made by our team to serve our customers, coupled with ongoing R&D leadership. Thus, we are the number one player in this market, and that status allows us to retain and grow our solid customer base, and we appreciate that. While we are nearing saturation on residential sales, we are shifting focus to grow in industrial products. We have opportunities here, as evidenced by a recent conversion with a long-standing customer of a competitor coming on board, which we consider a notable addition to our portfolio.

I wanted an update on your participation in the sustainable battery projects. How is that progressing? Any developments to share?

There is no significant update to share. We continue supplying products for testing and engage various partners. All trends are positive in that area, and we remain excited about our products' performance. However, nothing major to report at this point as this is a long-range project.

Lastly, perhaps immaterial, but I wanted to ask about the implications of the Russia-Ukraine situation. How impactful is that for you? Is that something to monitor?

Yes, it has impacted our fire-retardant business, and we are navigating those challenges. That segment is smaller in our portfolio. So, while we have yet to see impact on the CM&C side, should we, it would represent less than a quarter of the supply used at our Nyborg, Denmark plant. If we face difficulties sourcing from that region or face heightened costs reflected in that sourcing, it could certainly pose challenges, but it's not in my view a situation that would cause significant disruption to our overall business.

Thanks for your responses. I appreciate it.

You're welcome.

The next question is from Liam Burke with B Riley. Please go ahead.

Good morning, Leroy. Good morning, Jimmy.

Morning.

Morning.

Leroy or Jimmy Sue, during the margin discussion on RUPS, you mentioned the conversion to new treatment coatings on the chemicals. Was that an expense hit a one-time conversion cost or an ongoing cost increase?

Liam, that was a one-time cost. We've completed those conversions and can now treat products effectively. We're handling different products now—some of which are internally produced and sourced from our Performance Chemicals business. The result is greater throughput, which helps with our operational efficiency, and we can sell more CCA and DuraClimb products, providing further benefits.

Understood. On the topic of the tie recovery business, you noted progress is slow but ongoing. Are you working this as part of the entire lifecycle management business, or is it a distinct offering?

Yes. It's a separate offering, although we strive to present a lifecycle management value proposition to our customers. It is offered independently from the Crosstie supply we provide.

Thanks, Leroy.

You're welcome.

The next question is from Chris Shaw with Monness Crespi. Please go ahead.

Good morning, everyone. How are you doing?

Morning.

Good.

There were numerous factors at play in the PC segment, a lot of dynamics in your outlook for 2022. I got a little lost there—are you forecasting higher volumes in 2022?

Yes, we are projecting higher volumes in 2022 than in 2021. We've tried to revisit it from a perspective of our last normal year due to substantial volatility these past years.

So are those projections based on market conditions, or a mix of market conditions and new customer acquisitions?

Spot on. It's a combination of both factors.

Got it. You've mentioned limited visibility into the second half for CM&C. What are your expectations in that estimate on topics such as lower costs and lower prices?

Our guidance for the second half reflects a pricing curve flattening out. Price increases will take effect throughout 2022, especially in the first half, but we expect to see rising raw material costs continue through the year. We have a lot of market pressures ongoing, so that combined with a highly competitive backdrop makes it tough to offer accurate guidance right now, especially for the second half.

Historically, oil prices served as a decent proxy for pricing within the CM&C business. Is that still an accurate correlation or has that shifted?

Yes, it remains linked, especially in relation to carbon black feedstock and certain other materials. When oil prices rise, so do prices in those product lines. However, rising costs can influence raw materials costs too, complicating the pricing equation.

I wanted to revisit the recent events regarding coal tar availability. Is this a topic of concern for Stickney or is this more of a pressure for smaller distillers?

Yes, the closures affect smaller distillers disproportionately, but we're in a comparatively stronger position. Should the wider trend lead to the loss of coal supplies, we can source tar when necessary. Our market position allows us to manage production levels successfully moving forward.

That’s very informative. Thank you for your responses.

Yes.

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 want to finish by thanking everyone for participating in today's call and for your ongoing interest in Koppers. Please continue to stay safe, and we hope to talk to you again next quarter. Thank you.

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