Koppers Holdings Inc. (KOP) Q4 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Koppers Holdings, Incorporated Fourth Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants are in a listen only mode. [Operator Instructions]. At this time I would like to turn the conference over to Quynh McGuire. Please go ahead.

Thanks, and good morning. My name is Quynh McGuire and I am the Director of Investor Relations and Corporate Communications. Welcome to our fourth quarter earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our Web site at www.koppers.com or call Rose Hilinski at 412-227-2444 and we can send a copy to you. As indicated in our earnings release this morning, we have also posted materials to our Investor Relations page of our Web site that will be referenced in today’s call. Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our Web site and a recording of this call will be available on our site for replay through march 24, 2017. Before we get started, I would like to remind all of you that certain comments made during this conference call maybe characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain risks and uncertainties including risks described in the cautionary statements 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 could differ materially from 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 Web site, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. I am joined on this morning’s call by Leroy Ball, President and CEO of Koppers and Louann Tronsberg-Deihle, Treasurer. Mike Zugay, our Chief Financial Officer who would normally be on the call is travelling internationally for business this week and not available today. At this time, I would like to turn the call over to Leroy Ball.

Thank you, Quynh. Welcome everyone to our fourth quarter 2016 earnings call. Before getting into the details of our financial results, I would like to recap some of our recent accomplishments. So let's start by reviving the progress made on journey to Zero Harm. We’re building on a momentum that followed our Koppers Zero Harm leadership forum held in September 2016, in the December quarter three of our facilities took part in the first in the series of safety leadership training workshop and the remaining locations are scheduled to participate throughout the first half of 2017. Now as I just mentioned, these comprehensive workshops for the first of many over the next several years and focus heavily on the empathetic leadership and behavior or reliability concepts, they are integral to the Zero Harm mindset. We will continue to invent additional resources for safety training and process improvement, this will help to ensure that all employees are well equipped to make Zero Harm possible. This safety-first culture is being embrace by our employees who proved Zero is indeed possible earnings every day. In fact, nine of our 31 operating facilities were accident free in 2016 and the numbers of recordable incidents were reduced by more than 15% year-over-year. Overall 2016 stands as our best safety performance year yet, and that's a direct result of the high level of engagement from our employees worldwide. Certainly, we still have a lot of work to do to get to Zero, but I'm encouraged by our progress and confident that we will see improved safety in operating performance as we strengthen our Zero Harm efforts. I'd now like to move on to highlighting several events that reinforced our strategy to improve profitability through a focus on wood treatment technologies. But recently we announced that we entered into a new 10-year coal tar supply agreement with Arcelor Mittal. The contracted volume represents a significant amount of our U.S. raw material needs. As a result of this contract, we will be able to provide long term stable supply of creosote in the North America rail industry, while also reducing some of our pricing exposure to the ancillary markets that we serve. We also announced recently closing on a new long term lease of our Follansbee, West Virginia coal tar distillation facility to ORB fuels, who is expected to convert the facility in the next 24 months to operate as a light crude oil distillation facility. We plan to cease our naphthalene refining activities at the Follansbee facility in early 2018 and at that time we will have only one fully integrated chemical processing plant in North America in Stickney, Illinois. However, we will continue to utilize the Follansbee site as a distribution terminal. Repurposing of our distillation assets at Follansbee will help to minimize asset demolition and disposal cost, retain jobs in the Follansbee area and recruit value overtime for our assets. In addition to having one fully integrated chemical facility at Stickney should greatly improve our safety metrics and environmental efforts and operating performance, which will allow us to catch up on the cost curve with our competition. That intern helps us to containing the cost escalation some of our markets have endured since the recession and provide a more competitive suite of products. Another development on raw material front for CM&C that we haven’t previously announced is that we now have a 5-year contract extension through 2025 with our long-time supplier Tata Steel for coal tar raw material. Similar to our U.S. based Arcelor Mittal contract, the contracted volume in this agreement will satisfy significant portion of the raw material needs of our facility in Nyborg, Denmark. We expect this to provide raw material stability to our European operations and is in line with our strategy to enhance our vertically integrated operations to supply creosote to our treated cross tie business. Another matter that we've been relatively quiet on over the past couple of quarters is the sale of our minority interest in our TKK joint venture in China. We now have good news to report in that we completed the sale of our 30% equity interest in November 2016 and agreed to a revised installment plan for them to repay their $9.5 million loan due to Koppers. Thus far in the first two months of 2017, we received the first two installment payments totaling $5.2 million inclusive of accrued interest. The remaining principal payments are expected to be received within the next 45 days. Exiting the TKK joint venture is consistent with our efforts to streamline our business and reduce our footprint in China. Now, one final piece of recent news that's being announced publicly for the first time on this call is the extension of a major U.S. Class 1 railroad contract for cross ties from 2017 to 2021. Due to contractual reasons, we cannot announce the name of the customer, but we are certainly pleased in our continued confidence in Koppers as a key cross tie supplier. I'd like to thank my senior management team for their leadership, as well as the Koppers team members, who were involved in these projects for their hard work in getting all of this accomplished. Moving on to financial results, our 2016 performance further validates our belief that our future prospects will continue to improve and our strategic shift to focus on more fundamentally stable and healthier end markets was the correct decision. On an adjusted basis, the $174 million in 2016 was our second-best EBITDA performance in Koppers' history. Also, our operating cash flow of $119 million in 2016 was only slightly lower than the prior year's record cash flow generation of $128 million. For our performance chemicals segment, the profit margin held relatively steady compared with prior years as it continues to benefit from strong underlying demand in it served end markets. The sales increase was due primarily to higher demand in North America for copper-based wood preservatives due to continued strength in the building material markets. We are at the point where industry demand is outstripping our ability to fulfill orders with 100% Koppers-produced product and, therefore, we are expanding capacity at select PC facilities as part of our 2017 CapEx plan. In the meantime, PC incurred certain costs during the quarter related to the purchase of certain intermediate products from third parties. Once capacity has been increased, it is anticipated that performance chemicals will be able to process raw materials in-house for most if not all of its production needs. In our railroad and utility products and services, or RUPS segment, the sales decline was due to a reduction in cross tie volumes related to Class 1 rail customers, competitive pricing in the commercial cross tie market, and reduced demand in the Australian utility pole market. The Class 1 railroads are spending less and deferring to growth projects. In addition, the inventory oversupply in the commercial cross tie market has further pressured margins. For our carbon materials and chemicals, or CM&C, business, the sales volumes were lower for carbon pitch and carbon black feedstock, which is consistent with the Company's strategy to reduce distillation capacity while directing production to the higher value wood preservers market as much as possible. CM&C operating profitability on an adjusted basis was substantially higher than the prior-year period, primarily due to the benefits from the consolidation strategy and lower average raw material costs. These were partially offset by decreased volumes and lower selling prices of certain products. At December 31, our net leverage ratio dropped below 4 for the first time since our acquisition of the performance chemicals business in August 2014, and put us in position to successfully execute on our recent bond refinancing. We are very pleased to have successfully completed our bond tender and subsequent bond offering of $500 million of senior unsecured notes at a fixed interest rate of 6%. We feel that it was prudent to lock in at a lower rate given the uncertain interest rate environment. We've lowered our overall cost of borrowing an extended our long-term debt repayment date to 2025 five with the new notes offering compared with 2019 previously. Also, we entered into a new five-year credit agreement with our lending group, providing for a $400 million revolving credit facility which will mature on February 17, 2022. As a result of these financing transactions, we have greater flexibility to pursue opportunities such as capital expenditures and acquisitions to invest in our business. Overall, I am pleased with the progress we've made in a short period of time and expect that 2017 will result in even better performance. Koppers is well on our way to being an enterprise centered on wood preservation and enhancement. And through the implementation of our strategy, we have been focusing heavily on the value of the vertical integration of our operations. We have effectively managed our coal tar distillation activities in North America and Europe to meet creosote needs in our RUPS segment. Additionally, we are leveraging our strong customer relationships and looking for ways to grow in the attractive railroad and residential wood treating industries. Now I'd like to turn it over to Louann to discuss some key highlights from the fourth quarter of 2016.

Thanks Leroy. I will be referring to the slide presentation that Quynh mentioned earlier. Starting on Slide 2, consolidated sales were $313.2 million for the fourth quarter of 2016, which was a decrease of 13.9% or $50.5 million from sales of $363.7 million in the prior-year quarter. The sales decline was primarily related to lower sales volumes from the CM&C business. This reflects the Company's strategy to focus on the higher value wood preservative market, reduce distillation capacity and lower sales prices for certain products. The RUPS segment experienced a reduction in sales volume for treated cross ties due to lower spending in the rail industry as well as pricing pressures in the commercial railroad tie market. However, the PC business reported strong sales volumes driven primarily by favorable market trends in the repair and remodeling market and existing home sales. Additionally, treated wood dealers were stocking and selling treated wood with high preservative retention levels. On Slide 3, consolidated revenues for 2016 were $1.4 billion, reflecting sales declines as we had expected in both RUPS and CM&C segments. Moving to Slide 4, adjusted EBITDA was $37.6 million for the fourth quarter, compared with $28.7 million in the prior-year quarter. This was due to higher profitability for the CM&C business which was partially offset by lower profitability for the RUPS segment. Adjustments to EBITDA for the fourth quarter of 2016 consisted of $5.4 million of pretax charges primarily related to restructuring expenses. Moving to Slide 5, shows our EBITDA bridge of $174 million in 2016 compared to $150 million in the prior year. The strong profitability from our PC and CM&C segments more than offset the decrease in the RUPS business. Now I'd like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $8.5 million for the fourth quarter compared to $2.8 million in the prior-year quarter. Adjustments to pretax income for the fourth quarter totaled $7.1 million. The pretax charges related primarily to CM&C restructuring expenses. Adjusted EPS for the quarter was $0.40 per share, which was significantly higher than the $0.13 in the prior-year quarter. The adjusted income tax rate for 2016 was approximately 31.4%. Cash provided by operations for the 12 months ended December 31 was $119.5 million compared to $127.7 million in the prior year. The decrease was due mainly to higher working capital usage related to higher inventory levels in the current year, and a one-time receipt of a $30 million cash payment to our KJCC joint venture in the prior year. Capital expenditures for 2016 were $49.9 million compared to $40.7 million for the prior year. This reflects an acceleration of the construction of the new naphthalene unit at our Stickney, Illinois facility which we expect to be complete by the end of 2017. As Leroy previously mentioned, in early 2017, we recapitalized our balance sheet by issuing $500 million in new bonds at a very attractive interest rate of 6%. The new bonds mature in 2025 and are now unsecured instead of being secured ratably with our bank debt. In addition, we recently entered into a credit agreement with our bank syndication for a new $400 million revolving line of credit. With the combination of these two transactions, we were able to completely retire our $300 million of old bonds, which were at interest rate of 7 7/8, as well as repay our existing term loan, which had an interest rate that was 100 basis points higher than our new revolver rate. These transactions enable us to reduce our interest expense by approximately $5 million per year, which would equate to about $0.17 in higher earnings per share. It also locked in more fixed-rate debt at lower interest rates in a very uncertain interest rate environment and eliminates $30 million per year in cash flow needed to fund the schedule principal payments of the old term loan. Because of these transactions and since we have sufficient cushion with our new bank covenant, we're going to change the way we report and measure our debt going forward. We're going to use a net leverage ratio to monitor our debt status. This is a simple calculation. The numerator will be the sum of the current maturities of long-term debt, plus long-term debt, less cash on our balance sheet, divided by our trailing 12 months adjusted EBITDA. Using this new metric, our net leverage ratio at the end of 2017 was 3.7 times and we expect to reduce this to 3.5 times or lower by -- excuse me, 3.7 times at the end of 2026 [ph] and we expect to reduce this to 3.5 times or lower by the end of 2017. Our long-range goal continues to be a net leverage ratio of three times or lower. Now let's move to Slide 6 in the presentation. We reduced total debt during the year from $735 million to $673 million. We missed our $650 million year-end debt target by $23 million due to the $10 million TKK loan repayment not being received until early 2017, a buildup of cross tie inventories in our RUPS segment in Q4, and higher CapEx spending due to accelerating our plans for the new naphthalene unit. Now I'd like to turn the discussion back over to Leroy.

Thanks, Louann. Before I get into discussing the outlook on our business, I'd like to take some time to provide a high-level summary of all that's been done as part of transforming Koppers and strengthening our competitive edge in the marketplace over the past two years. Number one, as I alluded to in my opening, everything for us starts with safety for our people, the environment, and our communities. We tweaked our mission statement over the past year to reflect that. It now reads creating safe and environmentally responsible solutions that solve our customers' most important challenges and result in superior performance for shareholders. While safety performance tends to get defined as a metric, I prefer to think of it from a human perspective because I think it gives a better sense of what we've actually achieved while also putting into focus how far we still have to go to achieve Zero Harm. Over the past two years, we have reduced the number of our people that are injured on the job and had to seek medical attention by close to one-fourth and in 2016 had our best safety year ever. Imagine that. That equates to around 20 less people being injured on the job over the course of a year. Flip it around, however, and it shows that we still have 62 people that were injured during 2016, which is 62 too many. Zero will remain the goal and the focus, and I'm confident that, over time, we will get there. We plan to share our progress on the environmental and community front in our upcoming sustainability report for 2016 that should be issued sometime within the next couple of months. Number two, we believe Koppers is now the leading global producer of wood preservatives and number one in most major wood preservative markets across the globe. Through our vision adopted in late 2015 of striving to be recognized as the standard-bearer for safely delivering customer focused solutions primarily through the development and application of technologies to enhance wood, we've been able to realign our portfolio substantially. The result is that wood-related revenues now make up 60% of our topline at the end of 2016 compared to 47% at the end of 2014, and our consolidated adjusted EBITDA has gone from $116 million to $174 million in two short years. Number three, we've drastically improved the health of our balance sheet over the past two years. While I'm disappointed that we fell short of our $200 million debt reduction target, we did make a substantial dent in our debt by repaying $178 million over that time frame. As Louann mentioned, we have replaced higher cost secured bonds with lower cost unsecured debt while also eliminating the required amortization of our term loan. Those moves have improved our liquidity dramatically while also substantially reducing any worries about the possibility of tripping debt covenants if one unfavorable event would surprise us. In the process, pro forma net leverage has been reduced from 5.2 times as of 12-31-2014 to 3.7 times as of 12-31-2016. Number four, through our strategic decision to deemphasize CM&C, we've now refocused our efforts on serving end markets that seem to be inherently more stable through an economic cycle. With the primary driver of both RUPS and PC being repair and maintenance or replacement, our business is somewhat less subjected to large swings up or down based upon macroeconomic factors. Our RUPS and PC businesses collectively made up 69% of 2016 revenues compared to only 46% in 2017. Number five, we've leveraged our historically strong relationships in our RUPS and PC segments to extend sales commitments out several years, thus solidifying a critical baseload of business. In fact, as I mentioned earlier on the call, we have just come to terms on an extension with another major U.S. Class 1 railroad and now have a significant contractual volume with the four largest U.S. Class 1 railroads that take us into 2021. On the PC side of the business, we have commitments for micronized copper products in place for approximately 35% to 40% of our expected 2018 U.S. demand and close to 20% of our expected 2019 U.S. demand. Number six, as of year-end 2016, we've now ceased coal tar distillation as sold seven out of 11 CM&C global operating facilities, drastically cutting our fixed cost structure. Those moves, in combination with the recently negotiated long-term raw material supply agreements, enabled us to increase our adjusted EBITDA in CM&C from $9 million in 2015 to $23 million in 2016 in an environment that saw average crude oil prices 11% lower, our average global end market pricing 5% lower and our sales volumes 23% lower than prior year. Number seven, we significantly reduced our exposure in China by ceasing distillation at our majority held joint venture, KCCC, in February 2016 and closing on the sale of our minority held joint venture, TKK, in November 2016. During the year, we were also able to confirm Nippon Steel Sumikin's commitment to comply with our revised supply contract with their Chinese subsidiary that assures us a certain level of profitability even if they are not taking contracted volumes. As a result, sales from our CM&C China operations have declined from $199 million 2014 to $80 million in 2016 while adjusted EBITDA for that region has improved by $11 million. Over the past two years, we have divested six operating units or facilities that either were not core to our future business focus of wood preservation or were underperforming without a clear path forward for growth for improvement. In January 2015, we sold our U.S. utility business. In July 2015, we sold our concrete tie joint venture. In July of 2016, we sold our two UK coal tar distillation facilities. In October 2016, we sold our small residential wood treating business based in Houston, Texas. And finally, in November, we sold our minority interest in our TKK joint venture in China. What we gave up through those asset sales was less than $100 million of consolidated sales that were running at a collective operating loss. What we received from those asset sales were net cash proceeds of $11.1 million in 2015 and 2016, a $5.2 million repayment of principal and accrued interest on an overdue loan thus far in 2017 with $4.8 million to be paid in the next 45 days, and we reduced future environmental overhang by $8 million to $20 million. Finally, number nine, over the past two years, we've delivered impressive returns for our shareholders, recouping almost all of the value lost during the oil and aluminum drop in 2014 and 2015 and finished well ahead of most major market indices in that time frame. Our two-year total shareholder return equates to 55% while, in 2016 alone, we were up by 121%. Now, as impressive as that list is, it's far from exhaustive. There were actually many other significant accomplishments that occurred behind the scenes that have helped build a strong infrastructure and supportive culture to allow us to reach these more visible accomplishments. In the constant drive to push our people to do better, it's easy sometimes to lose appreciation for the enormity of their accomplishments. It almost becomes expected. I can't let that happen here at Koppers, so with that in mind, I want extend my sincerest gratitude for all our 1,800 plus employees from Ashcroft, British Columbia to Auckland, New Zealand and everywhere in between. None of what I just reviewed occurs without their faith in our vision, their ingenuity to think of new ways to solve old problems, and their commitment to make it all happen. Now let me speak for a few minutes about how I see the outlook for each of our business segments in 2017. Beginning with performance chemicals, this business continues to benefit from a building materials market that has consistently performed at an above average pace for most of 2016. From everything I hear and read, that pace is expected to continue into 2017. The National Association of Realtors estimates that existing home sales will increase by 2% in 2017, which has historically resulted in greater spending in the repair and remodeling sector. According to the Leading Indicator Remodeling Activity, or LIRA, which is the Joint Center for Housing Studies at Harvard University, strong gains in home renovation and repair spending are expected to continue into mid-2017 before moderating somewhat later in the year. The National Association of Homebuilders also appears to validate those projections due to aging in-place homes and rising home equity. In addition, Zillow estimates that there are 12% more fixer-upper homes on the market now than five years ago, and even more among high-priced homes in attractive real estate markets. The level of confidence in the home purchase renovation and repair market is supported by information provided by the Conference Board which reported consumer confidence of 107.1 in November. That represents the highest level seen since July 2007 and an increase from 100.8 in October. As a result of those bullish indicators, we are expecting to generate 2017 adjusted EBITDA of approximately $85 million for PC, which is a $5 million increase from prior year, as reflected on Page 8 of our slide presentation. Now, a few caveats that I would like to give to these projections is where copper prices and interest rates go in 2017. We are substantially protected through hedges we have in place for 2017 for copper, but a sudden and significant rise in pricing could be difficult to recoup in the near term for the portion of our business that's not hedged. As far as interest rates, it has been many years since we have been in a rising interest rate environment, and much has changed in this industry since that time. We will certainly be keeping a close eye on how rate increases might affect the positive repair and remodeling trends that we have been experiencing for some time now, and just want to alert our analysts and shareholders of that fact as well. Moving now to the outlook for our railroad and utility products and services business, the demand trends from the Class 1 and the commercial sector are lower than the past couple of years and the sluggishness that we saw in the back half of 2016 is expected to continue throughout 2017. According to the Association of American Railroads, overall levels of railroad investment are forecast to be $22 billion, a decline from $25 billion in 2016 and $29 billion in 2015. The decline is driven primarily by a reduction in coal transportation due to low natural gas prices and environmental concerns regarding the burning of coal. This has had a negative impact on Class 1 revenues and subsequently made it harder for the railroads to maintain the CapEx programs at the same levels as they have in previous years. Due to the conditions I just described, the typical spring kickoff for cross tie insertions will likely roll out slower than the past few years despite very mild winter weather. Longer-term, we still believe strongly in the need for sustained investment in infrastructure to keep the railways safe and running at optimal performance levels. As reflected on Slide 9, we are providing 2017 adjusted EBITDA guidance for our RUPS segment of approximately $64 million, which is an $8 million decrease from prior year. Now, that $8 million decrease more or less represents the annualization of what we experienced in our cross-tie business over the second half of 2016. While there's a lot of speculation about the new administration's commitment to infrastructure spending, any benefit to increased rail traffic as a result of increased spending would still not be expected to trickle down to our industry until 2018 as we typically lag the rail cycle. Now let's review the outlook regarding our CM&C business. On Slide 10, our anticipated 2017 adjusted EBITDA guidance for CM&C is approximately $32 million, which represents a $9 million improvement over prior year. I've already talked at length about the many changes we've made in this segment to both improve and stabilize profitability, so I won't repeat myself again on those matters. But I will say that there are still opportunities for taking more costs out of CM&C and we will be relentlessly focused on that in 2017 and 2018. A point that I'd like to make about this segment that's not obvious from the slide is that the forecasted downturn in railroad cross tie volumes and its follow-on effect on creosote volumes is essentially muting most of the benefit we are forecasting for $50 average crude oil prices. In general, we have reduced the impact from oil on this segment significantly with the changes we believe -- on the segment significantly, and with the changes, we believe that our sensitivity now runs closer to $4 million or less of EBITDA impact for every $10 change in crude oil prices. Despite the many moving parts, we are making tangible progress towards our goal of delivering 9% to 15% adjusted EBITDA over the cycle. I will tell you, as I sit here today, I actually have the highest level of confidence in this segment being able to meet and possibly beat our 2017 projections. A clear example of the improvements made by our CM&C segment is it delivered 5.3% adjusted EBITDA margins in 2016, which is an increase of 380 basis points from prior year. 2017 adjusted EBITDA margin is expected to be around 7.5% with one more big jump to make in 2018 when the new naphthalene unit is online at Stickney. Now, while CM&C volumes have stabilized and performance chemicals demand is expected to stay strong, softness in our RUPS business will likely keep consolidated sales for 2017 at approximately $1.4 billion, as reflected on Slide 11, while our focus will continue to be on maximizing our profitability. Turning to Slide 12, our guidance for 2017 consolidated EBITDA on an adjusted basis is targeted to be $180 million compared with $174 million in 2016. Once again, I will stress that while I believe there is the potential for some upside with CM&C, we need to exercise caution related to our RUPS and PC businesses. As always, we will provide updates each quarter and let you know if any assumptions or drivers may change. Our adjusted EPS guidance is projected to be between $2.75 and $2.85 compared with $2.60 in 2016. The increase in adjusted EPS is due to a combination of improved operating profit and lower interest expense, partially offset at the lower end of the EPS range by a potentially higher effective tax rate. Capital expenditures in 2017 are expected to be approximately $70 million to $75 million, consistent with our plans for the completion of a new naphthalene unit at our Stickney, Illinois facility, while also investing in capacity additions from our PC business. Overall, I'm pleased to say that our performance to date has shown significant improvement and we remain committed to continually assessing our operations for improvement opportunities. The extensive and ongoing efforts we've undertaken to reduce our fixed cost structure over the past two years have resulted in significantly lower earnings volatility. Also, in the past two years, we've aggressively reduce debt and strengthened our balance sheet while our recent bond financing transaction provides us with greater flexibility to pursue opportunities to invest in our business. These actions are part of advancing our Company's strategy to be the global leader in wood preservation-based technologies, expanding our profitability, and driving shareholder value. I would now like to open it up for questions.

[Operator Instructions] And we will go first to Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. So when you are talking about performance chemicals, just so I can think about this correctly, you were talking about Zillow and fixer-upper home sales. But really what drives growth here is consumer confidence because, when dealing with decks, it's really about just putting a deck on your home, not really something that a lot of people do before or after they sell. Am I looking at that the right way -- [Multiple Speakers].

That's certainly a way to look at it. I think, as we look at it, when a person is looking to sell their home, they are in a process of maybe spending some money to improve upon it to drive a quicker sale or a higher sale price, trying to recoup some investment there, whereas you say people who are buying homes, they're looking to make some changes to the homes -- that the biggest purchase to have it be in line with their own personal taste. So we do see it on both sides in terms of how -- what is driving potential purchases in that particular segment.

And would I look at a company like Home Depot, demand trends that are coming to like Home Depot and Lowe's and see if, if that's doing well, that should be a pretty good indicator as well?

We talked for some time about using them as a pretty decent proxy for getting an understanding of how our business should be expected to perform as it relates to treated lumber sales.

We will go next to Scott Blumenthal with Emerald Advisers.

Leroy, you gave a couple of figures. I was wondering if you might be able to run through those again. Your anticipated EBITDA margin for the CM&C segment, that was in the 7.-something percent range?

Yes, around 7.5%.

Okay. And also you gave a number for what you think you're going to need to spend on Stickney again in 2017. Could you give me that number again? I'm sorry.

Yes. I think we talked overall between $70 million and $75 million in total CapEx. And for Stickney, it's in the $30 million ballpark range.

Okay, thank you. And did you give an approximate time, obviously sometime later this year or early next year, when you expect to be completely done there and have everything online?

We are shooting for 1-1-2018. That's what we are shooting for.

Okay. And you did mention a build-up in cross tie inventories.

Yes.

Can you maybe go into that in a little bit more detail, what happened there, and how are things looking right now?

Yes, I think it's mostly on the commercial end of things. I think I might've even mention on the last call that what goes on the Class 1 side tends to drive pricing in the markets on the commercial side because, if you have a healthy Class 1 market, then you have a lot of ties being driven there and it creates a little bit of a shortage or a tighter market on the commercial side which helps to support pricing. When Class 1s pull back and you end up putting more product on the ground for the commercial segment, higher inventory levels can create a situation where people have to move product and you see more pressure on pricing. So that's what we have seen going on here probably over the last quarter to quarter and a half is I think the expectation for a healthy market to continue has resulted in probably some over-buying on the commercial end of things. That has resulted in higher inventories and then the follow-on effect of putting pressure on pricing.

Okay. Can you remind us how much of your business -- I don't know if you've ever disclosed this?

It specifically runs anywhere from -- commercial for us, it runs anywhere from 20% to 30% in a given year. It's probably, over the last year or two, probably closer to the 20% range than the 30%. So I'd say, right now, we are probably in between 20%, 25%, something like that.

Okay. That's really helpful. And one last one if I may. Can you talk a little bit about the demand for pitch from some of your aluminum customers? Obviously, there's, a lot less now in the market. And it would appear to us that your steel suppliers are doing a little bit better, and so you've got a little bit more on the supply side, and if you can get a little bit more demand from the aluminum guys, it seems like the market is setting up pretty well for you.

Certainly, I would say our strategy of taking capacity out and tightening markets up, and just in general what's been going on globally, we have seen, I think, a trend, certainly outside of the US, for pitch pricing to move up. We've seen that happen certainly in China where we have much less exposure today. But we are seeing some of that spill over into other geographic markets. I'd say it is a healthier time for us certainly in terms of pricing. There is still a challenge out there. But overall, it is in a better spot today than it's been in some time for us, yes. That's probably the best that I can say at this point.

Okay, I appreciate it. Congratulations on everything that you've done. It's been a terrific two years, and your whole team deserves a lot of credit there.

Thanks for pointing out the team, because you are right about that. We have a great group of people who -- they are the ones who make it happen. So, thank you.

We will go next to David Deterding with Wells Fargo.

Just a quick question, just going back to the CM&C business, it sounds like you've kind of characterized it as in a pretty good place than it's been in a while. But if I look at your bridge on Page 10 for the business, I mean 23% to 32% is pretty modest, and $13 million of restructuring savings coming on top of that. Wouldn't you expect the business to be better just structurally in 2017 than 2016 from a pricing perspective?

It is, but I'd say that our view of that business is pretty consistent with what we've talked about over the past two years in terms of how we are restructuring it and resizing it. And it's consistent from actually a performance standpoint with I think the projections that we put out there. Things are getting healthier and that's why I think there is still some upside there. I'm not ready to go there yet in terms of making those sorts of commitments publicly. But yes, the sentiment -- and I even mentioned it in my prepared comments, I feel most confident in 2017 in our CM&C business' ability to meet or beat their projections based on some of the comments that you just made.

And then in terms of going back to your aluminum customers, [indiscernible] the WTO case it looks like. And can you just characterize some of the conversations that you are potentially having with guys that are left producing aluminum here in North America?

I'll just -- the first thing I would like to say is we -- and remind people -- is we have restructured our business to serve the North American railroad industry for creosote. Carbon pitch for us is a byproduct. And that carbon pitch, obviously, the major market for that is the aluminum industry, and we will continue to serve that aluminum industry and serve it well, but we are not pinning future hopes, pinning future profitability, projections or anything on an improved aluminum industry. The whole rationale for everything that we've done is to move away from that as being the big driver in moving our numbers from year-to-year. Overall, with where things are at, like I said, we are an in improved -- we are in a much-improved position with where those end markets are at in terms of being able to have -- to be in a better spot from a pricing standpoint than we've been in a long time. But that's not where we rely upon to provide the basis for the profitability in that business anymore.

Okay. And then just the last one. You mentioned on not hitting the debt target. One of the reasons was higher inventory that you guys built up in the quarter on the rail side. Can you quantify how much that is and when you expect that to potentially reverse itself out of working capital?

It was probably in the neighborhood I'd say -- so our inventories I believe in the quarter for that business segment on the cost side went up somewhere in the neighborhood of $15 million to $20 million. So it's somewhere in that $15 million to $20 million that we probably could have pulled back on and not put as much on the ground.

Can you expect that to reverse itself out sometime in 2017?

Well, if the markets don't -- if the markets basically go the way that we expect, yes. We would expect -- I don't know about a full reversal, but we would expect for that to move its way down a little bit.

We will go next to Rudy Hokanson with Barrington.

Thank you, Leroy. Very nice quarter. I just wanted to clarify a few things from the comment regarding interest expense that's expected in 2017, the $5 million less. Does that mean it should be somewhere around $46 million?

Probably in that targeted range, somewhere between $44 million to $46 million would be accurate.

Okay, thank you. And then dovetailing a little bit on the question about not bringing the debt down to the level you had hoped to by the end of the year, do you have any kind of target for further debt reduction, either in 2017 or over the next couple of years, as you get down to the 3.5 net leverage ratio, or is most of that due to increases in EBITDA?

That's a good question, Rudy. What I would say is -- and that's one of the reasons we are sort of trying to change the way we are looking and speaking about our debt, because, for us, debt needs to be a function of our current profitability and confidence in future profitability. And so that's why we've moved to really focusing on that leverage. And as you point out, there's two things that drive that. There's the debt side of the equation and there's the EBITDA side of the equation. We expect that getting down to a 3.5 or lower net leverage in 2017 will come as a result of a combination of improved EBITDA and lower debt. But the debt -- we hesitate at this point moving forward in putting strict debt reduction targets out because I think that's going to be somewhat dependent upon how we perform and where we might want to make key investments at a given time. So, 3 is still the target, kind of on average, and so 3.5 to a little bit lower than that, that still doesn't get us there, so we are still going to be focused on some combination of driving the EBITDA up and the debt down to get us there -- to keep us comfortable moving forward.

And then, again, one of the moving parts in that formula and also the longer-term strategy for the Company -- are you open to having that ratio move up if you found the appropriate acquisition or acquisitions during the year or, right now, are acquisitions more on hold and you are more focused on current operations and the balance sheet?

I think, Rudy, it's, again, another good question. I think we have to have our eyes on all of those balls. So acquisitions are in play. And while I say the goal is to move that net leverage down to an average of 3 times, it is an average of 3 times. So, if the right opportunity comes along and we need to be above 3 to get there, that's fine with us. We are comfortable in that range. In fact, we are comfortable, we talked about, in a range of 2 to 4 times really. What we don't want to do is we don't want to get really back up above that 4 times level and live in the world that we've lived the last couple of years. It puts a lot of pressure on the organization. It certainly puts a -- it gives I think the investment community a different view of the Company and it puts us in a situation where one bad surprise comes up and all of a sudden now you are really having some issues. So, we don't want to go back there. But we are -- we do think that, given where we are at, we can go look for some small tuck-in acquisitions, and we think there's some potential upside this year that, again, allows us to be in a position where we can take advantage of an opportunity, an attractive opportunity, if it's there, and still keep our leverage under 4, which is really where we want to make sure that we are at moving forward, with the ultimate goal to continue to push down towards 3.

Okay. And then, finally, can you give us an idea as to what we should look at for an effective tax rate given what you can see right now, since you said that you anticipated an increase in your effective tax rate from previous expectations?

So, I'm going to respond and maybe I shouldn't, but I'm going to respond and then I'm going to let Louann correct me if I say something incorrectly. But I think that our guidance on the EPS side of things factors in an effective tax rate range of around 31%-ish to 33% or 34%, something like that. And so 31%, if we hit 31%, that would be basically where we ended up this year. But we think that most likely is the lowest that we might get at in 2017, so we are trying to give some room for that number to be a little bit higher, and I'm looking at Louann to see -- is that pretty accurate?

Yes, I think we would look at that number being a little bit higher depending upon where some of our expectations may turn out with respect to depreciation and amortization as well as interest expense. With the construction project in Stickney as well as some other things we have planned for the PC business this year, that number may vary slightly from what we have in our forecast. And then similarly with interest rates, depending on what the Fed decides to do, there could be some slight variations there. Although $500 million is fixed, we still have the revolver, which is a floating-rate.

Okay. Thank you. Those are my questions.

And our next question comes from Chris Shaw with Monness, Crespi.

The new coal tar contracts, is there anything -- any changes in there that are sort of advantageous, whether the lower costs or some sort of more frequent pricing changes on that?

I can't really -- for a number of reasons, I can't really get into specifics on that sort of stuff. But certainly, the costs are significantly lower than what we've experienced, and that's just given where the markets are at. And I think we were able to lock in the pricing at a pretty good time in the market. There are escalation provisions, as you would expect, in that contract, and I would say there are different escalation provisions that what we've had in the past, and I think it helps to reduce some of the reliance or some of the tide we've had to changes in oil pricing over the past. And that's about as much as I can say about it. But we are happy with the partnership with Arcelor. They're great to work with. They are a great partner. And as evidenced by the 10-year agreement, we are both in it for the long term.

Okay, thanks. And then you mentioned, in CM&C, the impact from selling less creosote or using less creosote in the rail business. How does that work? Just curiously. Is that just the covering of fixed cost or is there margin embedded in what you smell the creosote to sort of rail business?

There is a margin. But as you point out, if there is less demand over there -- well, so it can go one of two ways. If there's less demand over there, then you need to distill less tar, so you aren't going to be able to cover your fixed costs to the same extent. Or if you choose to continue to distill the same volume, you're taking the product that was going into the higher value creosote market instead of pushing it to the lower value carbon feedstock market. And that's really not what we want to do. So it doesn't create a great scenario no matter what way you choose to handle it. Either way, it's a net negative.

What's the sort of seasonality? Has it changed much? I remember before you said some sort of summer tar that you would sell, but I guess now you have the seasonality around the performance chemicals business, right?

Actually, seasonality is pretty similar in all three of our segments. It's the second and third quarters that tend to be the strongest and, in any given year, could be one or the other. It's not always fixed to always being the second or always being the third, but it's in those two middle quarters. And then the first and the fourth tend to be the toughest as you enter into the colder part of the season. So, that's not really changed much and it's pretty similar across each of the three business segments.

And we'll go next to Curt Siegmeyer with KeyBank Capital Markets.

Congrats on the strong finish to the year. I'm just wondering if you could talk about just what we should expect in terms of the cadence of the cost savings that's baked into your outlook for CM&C, maybe by quarter, if you could, in 2017.

Okay. Again, without getting into specifics, I'll say that you will see most of those savings occur over the first six months of the year. Because a good portion of those savings come through the closure of the Clairton facility that occurred in late July. So, there's some that will spill over into the third quarter, but, for the most part, a lot of that is going to -- should hit in the first two quarters of the year.

Okay. Very helpful. And then just in terms of your EBITDA margins that you talked about for that business going to 7.5%, pretty nice improvement next year. I guess I'm just wondering how we should think about the margin potential in that business longer-term as kind of that double-digit range is sort of more normalized once volumes kind of recover again?

And it's not so much the volumes really as it is just the finalization of the whole restructuring, just keeping in mind -- just keeping in mind that what we tried to put together here is a business that can, at the bottom end of that range, in that 9%-ish range, be able to sustain those sorts of margins in a I'll call it modest crude oil environment, in a modest demand for the product market. I think we are on that path. Even though we -- as you would expect, we've had a lot go our way in the past couple of years. We've had some other stuff come back the other way as well. So it hasn't all been perfect, but we've still been able to maintain the targets that we set. We said, coming to last year that, we thought we could get close to $20 million in EBITDA performance from that business. We ended at $23 million. All through last year, we were talking about next are being $30 million or more. Our target right now is $32 million. We talked over the past two years of 2018 being $40 million or greater, and we still feel very comfortable with that. So I think we are on target to absolutely hit well within that range even at, again, with where the end markets and the supply markets are at the present time. So that's a pretty good fact pattern.

At this time, there are no further questions. Mr. Ball, I'll turn the call back over to you for closing remarks.

Okay, thank you. So, in summary, Koppers now has an improved portfolio of businesses and a more streamlined manufacturing footprint which has served us well over an economic cycle. We will stay the course and remain focused on finishing our restructuring efforts while we look for opportunities to expand our profitability through a combination of topline growth and realization of cost efficiencies. At the same time, we will also keep investing in R&D and promote innovation throughout our organization, particularly in our wood treating markets. Our business model today demonstrates sustainable improvements in earnings, coupled with lower overall volatility and cash flow, which I believe will drive increased shareholder value. Thank you all for joining us today.

That concludes today's teleconference. Thank you for joining us. You may now disconnect.