Good day and welcome to the Koppers Holdings Inc. Second Quarter 2017 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call 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 second quarter earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our earnings release this morning, 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 site for replay through September 1, 2017. Before we get started, I would like to remind all of you that certain comments made during this conference call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements maybe affected by certain 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 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 to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website, 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 Mike Zugay, Chief Financial Officer. At this time, I would like to turn the call over to Leroy.

Thank you, Quynh. Welcome everyone to our second quarter 2017 earnings call. Everything at Koppers begins with safety and zero harm and that’s where I will begin my comments. We are continuing to invest in our leaders by providing advanced behavioral safety training that enables them to lead with safety as their foundation. The first half of this year we have trained over 400 leaders on the foundations of safety and safety observations. The second half of the year we will be taking them through a program designed to help them better understand and influence behavior. In September, we will also be assembling over 70 of our top global leaders in Pittsburgh for our second annual Zero Harm Conference, where we will share the challenges and opportunities that we have experienced so far on our journey to zero. Thus far in 2017, I have had the opportunity to visit 10 different operating locations and I have been extremely pleased with what I have seen and heard from our people at the plants doing the really hard work at Koppers. I have seen firsthand how our employees across the company are embracing the zero harm leadership values, promoting more frequent and positive conversations, making an effort to be more observant and giving thought to how we can be – giving thought to how we can put better, safer processes in place. I know we are making a difference when I see that through the first 6 months of this year, we have had 10 less people hurt at one of our plants than at this point last year. In fact, we are running at an all-time best trailing 12-month OSHA recordable injury rate through June and 16 of our operating facilities have proven that zero is possible by not having any…

Thanks Leroy. Let’s begin by referring to the slide presentation that we provided on our website. Starting on Slide 4, sales were $378 million for the second quarter of 2017, which were slightly lower than $385 million in the prior year. Our CM&C business reported higher sales volumes for carbon pitch and carbon black feedstock, as well as higher pricing for phthalic anhydride. These were partially offset by lower demand and lower pricing for creosote. Sales for the Performance Chemicals segment increased slightly primarily due to higher North American sales volume for copper-based wood preservatives and additives. However, as we expected, sales for the RUPS segment decreased due to lower volumes of crossties and railroad bridge services. Moving to Slide 5, operating profit was $38 million in the second quarter compared with $32 million last year. On Slide 6, EBITDA was $56 million compared with $53 million in the prior year, due primarily to higher profitability from the CM&C segment, partially offset by lower profitability from the RUPS and the performance chemicals segment. CM&C operating profitability increased substantially from the prior year period, primarily due to restructuring savings, lower average raw material costs and higher sales volume and pricing in certain regions. PC’s profit margins were unfavorably impacted by higher raw material costs, partially offset by the benefits from slightly higher sales. The results for RUPS were negatively affected by the continued weakness in demand for crossties and pricing pressures related to an ongoing crosstie inventory oversupply in the commercial market. Now I would like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $25.8 million compared with $19.4 million in the prior year. Adjustments to pretax income totaled $6.1 million for the second quarter and $10 million for the prior year quarter…

Thanks Mike. Now I will get into the outlook for each of our business segments. Beginning with the railroad and utility products and services business, it’s been a difficult first half of 2017 and year-over-year comps will only slightly improve in the third quarter as weak market conditions occurred primarily in the fourth quarter of 2016. From a macroeconomic standpoint, the Association of American Railroads or AAR, reported that the total U.S. railcar load traffic for the six months ending June 30 was up 6.4% year-over-year and intermodal units were 2.7% higher than prior year period. Together, the total combined U.S. traffic for the year-to-date period through June 30 increased 4.5% compared to last year and is expected to post mid single-digit year-over-year growth. With the exception of a decline in coal transportation all other major categories of freight has exceeded expectations so far in 2017. However, the Class 1 railroads will certainly remain cautious with their investment spending for the near-term. And although we believe the industry’s spending is at or near bottom, it will likely take until at least mid-2018 to see any noticeable improvement in our business, given this conservative spending backdrop relative to the Class 1 railroads. As a result, we are working on continuing to reduce our operating costs, while also taking a hard look at how we allocate our resources. Therefore, on a net basis, we expect volumes to be down by around 10% for the year, most of which will be reflected in the first two-thirds of 2017. As reflected on Slide 8, we are decreasing our 2017 adjusted EBITDA guidance for our RUPS segment by approximately $4 million from our May 2017 guidance. That would equate to $52 million of adjusted EBITDA, which is a $20 million decrease from prior year. In…

Thank you. [Operator Instructions] We will take our first question from Chris Shaw with Moness, Crespi.

Hey, good morning everyone. Hi, how are you doing?

Good. How are you?

Good, good. Starting with RUPS, I mean that was I guess obviously a little bit – is it playing relative to where – as you commented. Looking at the new guidance, I know it’s lower, but it would seem – I would have thought that guidance would have gone even lower based on quarter end. But to be fair, I guess, my forecast is probably less than yours. So, just seemed like it missed by a lot more this quarter. Is there something specific in – you are not really suggesting a recovery in the second half, so I am just trying to figure out where maybe the discrepancy in sort of this forecasting and what you guys are seeing for the rest of the year?

No. I mean, our business in that segment is – it’s fairly balanced when you look at first half of the year versus second half of the year typically. As we look out over the second half, we don’t expect to really see much improvement. We think there are a few things that we can do on the cost end that will help us put ourselves maybe a little bit above our first half run-rate and enable us to get to the $52 million. But from a volume standpoint, I think we expect the second half to probably be pretty similar to the first half. Any additional amounts over where we ended up in the first half, I think is probably due more to some cost savings that we expect to generate out of that business.

Okay, that makes sense. And then just the strength in CM&C this quarter, specifically in China, how – excuse me, how would that have impacted or would it evolve in your decision to sort of get out of the JVs there. I mean, would they have been benefiting similarly in this environment or would that just made it a good, better time just to sell out of them if you had to wait a bit longer. And this is not something like – this is a temporary thing, it’s not a complete shift in the market there, is it?

Yes. So, we had two other JVs over there. One, we were a majority shareholder and one we were a minority shareholder. And I will say as it relates to the majority-held JV that actually was really a victim of what’s going on right now to an extent, right, because that ended up being shut – we were forced to essentially shut that down before we had even kind of come to the conclusion that we were going to really restructure and consolidate that entire business segment, right. The Chinese government came in and ordered our partner to shutdown their coking operation, which fed our plants. So, we were more or less – yes, we were more or less put in that position early on. So, there wasn’t even a decision to make there. And the other one where we were a minority held, where we held a minority share. I will just say over the history of that joint venture, which goes back to 2008, we have made little to no money, that’s in good times and in bad. Most of that product is product that gets exported to the Middle East or it was that was what that was designed to do. Would we be benefiting in that joint venture given current conditions? Certainly we would, but it would be very modest at best just given our small share in the business and the historic track record of what that business has been able to do even in better times. So, there is no regrets on this end in terms of what we did and the timing of when we did it.

Alright, good to know. And then just was the buyback – the share buyback, was it the first you have done in a while. And if so does that sort of protend any future for the dividend?

Yes. So, we haven’t done any buybacks, I think probably going back to maybe 2014. And this is – obviously is a pretty modest number. It was more to the point that we saw an unexplained, in our opinion, pullback in our stock after our first quarter strong results and raising of guidance. I think we had issued approximately 100,000 of shares in the quarter as part of our incentive programs here and felt like – and we did that at basically mid-40s values. We felt that more or less taking those shares back in at the levels that they were trading at the time just made sense. It was a small enough number that it wouldn’t move anything or prohibit us from doing some of the other stuff that we are hoping to do from an M&A standpoint. The dividend continues to be a discussion point with our board on a quarterly basis. I would say there is certainly gaining – we are gaining some momentum for that, but I don’t see certainly anything happening on the dividend front this year. Next year would probably be the first real possibility depending upon the balance of this year and how it turns out.

Great. Thanks for the help.

Yes.

And we will take our final question from Liam Burke with FBR Capital.

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

Hi, Liam.

Hi, Liam.

Leroy, could you give us some color on the KPC side of the business in terms of capacity? You are seeing steadily increasing growth the demand seems to be there. Do you need to do anything to address this increased demand?

Well, we do have some projects in place, Liam that will alleviate some of the bottlenecks that we are currently having and producing some of the intermediate raw materials that we need to produce our products. We will have those – some of those online by the end of this year. We have some additional that will occur, I think in 2018. So it will probably take us to at least the middle to the back half of ‘18 before we have all those bottlenecks, I think alleviated to our satisfaction. So, we still are subject to having to go out and buy some intermediate product on the market at higher prices. So we are trying to address that situation and we are making progress, but we won’t get to where I think we really want to be from that until we get to the back half of next year.

Great. Thank you, Leroy. And Mike on the cash flows, there seemed to be a step up in the receivables year-to-date vis-à-vis the increase in sales. Could you give us some color on that?

Yes, that was anticipated. We have higher international sales, Liam, more so than domestic sales with the decline in the railroad volumes. So, the international customers historically are slower payers. The railroad customers in the U.S. are very, very fast payers. So, that’s part of that issue as well, but we did expect that it’s a bump up, basically because of the seasonality of our business.

Great. Thank you, Mike.

You are welcome.

Thanks, Liam

We will go next to Laurence Alexander with Jefferies.

Hi, guys. It’s Dan Rizzo on for Laurence. How are you?

Good, Dan. How are you doing?

Hi. So, if we think about the RUPS segment, you kind of alluded to this, but is there going to be a restructuring necessary, I mean smaller, but along the lines what you did with CM&C just to kind of get things more right-sized potentially towards the newer environment?

It’s a fair question, Dan. That’s a tougher nut to crack with that segment, right, because you are dealing with – really across our network facilities that are dedicated to specific Class 1 railroads and they sit on those Class 1 lines. So, this isn’t a case of we have 9 facilities and we can do the same amount of work in 4 and serve the same customer base. So, it’s a much different situation and a different business model, I think there is things we can do within our facilities to restructure, if you will, to maybe modernize and take cost out and things like that and that’s an area that we are absolutely going to be focusing on. But in terms of plant consolidation, I mean, we closed our Green Spring facility, which was one of our CSX treating plants and went from 3 that served the CSX down to 2. And basically, our model for the most part of our bigger Class 1 customers, as we have more or less two facilities that serve them, which is the way that they wanted. So this isn’t even really a situation in some cases where we have control. The best I can say is there are certainly things we can do within our facilities to make changes that can take I think cost out longer term to restructure if you will, but it will be a different – it will be a different form than what the CM&C restructuring that took place was.

As I recall, back in, I mean over a decade ago, there was pent up demand because CapEx was kind of a less priority for the railroads, as they did a wave of consolidation and looked elsewhere, I mean potentially could something like that be developing again, I mean for different reasons, whereas they are just not spending on core sites, but ultimately it’s going to come back like a spring almost, is that possible?

Yes. Well, I mean I think there is some possibility there. This obviously, the business is a repair and replacement business. So you know you have a steady built-in demand and there is – you still see some obviously cyclicality within a range, where you will see a pullback and then it’s too far to one extreme and then all of a sudden as you say you have pent up demand and it goes back the other way. And you have that pendulum that shifts back and forth. And I think certainly our hope is that we will see a springing pent up of demand at some point in time as they have kind of pulled back in such force here over this period of time. You can never necessarily predict that that in fact will happen, only time will tell. But certainly we have absolutely seen that in the past. So we are going to continue to monitor the situation and obviously we will inform you and others as we see things changing. But for right now, I think ‘17 is expected to continue in the way that we thought and certainly I think the first half ‘18. So I think our first view of some potential improvement is in the back half of next year.

Thank you very much.

You’re welcome.

We’ll take our last question from Scott Blumenthal with Emerald Advisers.

Good morning everybody.

Hi Scott.

Hi Scott.

Leroy, the follow-up on Dan’s questions about RUPS, other than personnel actions, can you maybe get a little bit more specific about some of the – maybe the capital intensity of those facilities, do you have levers that you can pull with regard to chemicals purchasing with maybe upgrading some of the capital, how capital intensive are they or are you really just talking about process here?

Yes. I would say that from a capital standpoint, we spend somewhere I would say, call it $1 million to $1.5 million per plant a year. So we are in the $12 million to $14 million range in terms of capital we put into those facilities to keep them running. But those facilities, they are all old, old facilities that have relatively antiquated mechanical design and things like that. There has not been a lot of – I would say there has not been a lot of thought put into how we can upgrade and modernize those facilities. That’s probably not fair to say. I think it probably has been thought, but there has probably been a reluctance to put capital maybe into that in the past and just continue to sort of milk the same business model that we have for years. I think it’s time for us to step back and probably think bigger from that standpoint. So Scott in short, I would say it’s a combination of process and just also a modernization probably in some cases of how we do things and the equipment associated with it.

Okay. So keeping with the context of what’s been going on, obviously I don’t know that from a corporate perspective Mike, that we are really ready to undertake anything really big on that side of the business, but I suspect that maybe by this time of the year, we could actually be considering something like that?

As far as what, expand?

Maybe a meaningful investment and capital improvements on that side of the business?

On the RUPS side?

Yes.

Yes. I think what we do is we do a program every year for the upcoming year. That starts in late August, runs through September, we finalize it in October and at that point in time we sit down with all three segments and we prioritize what we believe are the best projects that will get us the best return at that point in time. So every year is different and we will sit down again in the next, I would say, six weeks to eight weeks and we will make that rationalization between the segments. No question about it.

Anything we do here is a multi-year effort, right. It’s – again, you got nine treating facilities. The things that we would be potentially doing would happen in stages over years of time. And I couldn’t even give you a ballpark guess of what we would be talking about from a spending standpoint at this point. Anyway, my only point that I wanted to make is, I think there are some opportunities here. We are going to spend some time exploring those opportunities to see if they make sense economically and obviously if we do and it’s the right thing to do, we will move forward with that and obviously we will communicate that at that time, but we are not close to that at this point.

Sure, I understand that Leroy, so then back to my original premise here, well, I suspect that if you do at some point undertake those type of capital improvements, you have a situation where if you figure it out for one, you can figure it out for all nine, or at least to a large portion of them, so without capital and personnel, are we looking at purchasing, are we looking at process and how meaningful can those things be over the next few…?

In terms of what we can do in the interim?

Yes.

I would say from a purchasing standpoint, it’s pretty simplistic. You are talking about wood and you are talking about chemicals. And the chemicals are chemicals that we produce. So there is – and on the purchasing end a lot of that in terms of our margin it’s fairly fixed, given the nature of the contracts that we have with most of our customers. So there is really not a lot of opportunity on the purchasing side of things, it’s going to be on the process end. And I would say at this point, I am not prepared to really talk about what impact or what the value of that could be over the interim periods and that’s something that we are looking hard at and I just don’t – I am not comfortable giving a number at this point.

Okay, fair enough. And if I may just one more, can you maybe – maybe this is a better one for Mike, Mike, would you be able to quantify and you don’t have to give me an exact number but maybe kind of a percentage ballpark here, the lower year-over-year raw materials cost that you are experiencing in CMC compared to where we were maybe last year or even the year before, I think this is kind of playing out exactly the way that you guys anticipated it, but I just wanted to like to know if you could give us kind of a degree here?

Yes. I think from a percentage standpoint we are probably on average buying our coal tar at about 50% of what we have paid for it in 2016, roughly. And that’s in certain regions, because the dynamic is different region-by-region. So there is other regions where we have actually seen increases. And I will just use China as an example right, because of the tightening in coal tar costs, costs have gone up there significantly. We have gotten pricing increases significant as well, but it’s a mixture depending upon the region that we were referring to.

Got it. Thank you. I appreciate it.

You’re welcome.

And with no further questions in the queue, I would like to turn the call back over to Leroy Ball for any additional or closing remarks.

Thank you. In summary I would jut like to say I am proud of our accomplishments to-date, but I feel like we are only getting started. For those that remain patient, I promise we will do everything within our power to ensure that you are rewarded. Thank you for joining this morning’s call.

This does conclude today’s conference. We thank you for your participation. You may now disconnect.