Welcome to Koppers Third Quarter 2018 Earnings Conference Call. [Operator Instructions] 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, Director of Investor Relations and Corporate Communications. Welcome to our third quarter 2018 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’ve also posted materials to the Investor Relations page of our website that will be referenced in today’s call. Consistent with our practice and 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 December 7, 2018. Before we get started, I would like to direct your attention to our forward-looking disclosure statement. Certain comments made during 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 its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I’ll now turn the call over to Leroy.

Thank you, Quynh. Welcome, everyone, to our third quarter 2018 earnings call. I’d like to open up with some comments on our Zero Harm culture before delving into our third quarter financial performance and other important happenings within the company. So for the past several years, we’ve put in a lot hard word into building up our safety systems and training our people on behavioral-based safety techniques. These efforts are continuing to show progress, as we’re gaining new ground each day. Now through the first nine months of 2018, we again find ourselves on pace for our best safety performance in the company’s history. Excluding our newly acquired locations, Koppers' total recordable rate, serious incident event rate and serious incident event precursor rate have all continued to show year-over-year declines. Our Zero Harm culture will continue to be the foundation for how we operate. In time you’ll be hearing additional details about copper successes to date and what more we plan to accomplish within the sustainability ecosystem. Our process sustainability includes sourcing in a responsible manner, reducing our manufacturing footprint as appropriate, enhancing the performance of our products, and where possible, managing the entire product life cycle to minimize the impact on our environment. We’re incorporating sustainability in our daily operations as well as our long-term strategy. It’s the right thing to do and it certainly makes good business sense. So now let’s discuss our September quarter financial results. On an adjusted basis, we delivered $0.73 for the third quarter compared with $1.43 in the prior year period. In our Railroad and Utility Products and Service, our RUPS business, sales increased due to current year acquisitions along with increased volumes and pricing in the commercial crosstie market, which were partially offset by lower profitability in our Australian utility business and…

Thanks, Leroy. We’re going to begin by referring to the slide presentation that was provided on our website. On Slide 4, sales were $443 million, which was an increase of $58 million or 15% from the $385 million in the prior year quarter. R-U-P-S, RUPS, increased due to our acquisitions in the current year as well as increased volumes in the commercial crosstie market, partially offset by lower Class 1 treating volumes due to the lack of dry crosstie inventory. CM&C reported higher sales prices for carbon pitch in Europe, North America and Australia, and this was partially offset by lower volumes of soft pitch in China and a softening of the phthalic anhydride market in North America. Our PC business recorded slightly lower sales, reflected – reflecting the continued trend of customers reducing or delaying wood treating activities due to volatility in lumber prices. Moving on to Slide 5. Adjusted EBITDA was $53 million or 12% compared with $61 million or 16% in the prior year quarter. For this quarter, adjusted EBITDA was lower for all three business segments as you can see. RUPS benefited from the contribution from recent acquisitions. However, the lack of dry crosstie inventory negatively impacted profitability. CM&C reported lower profitability due to a production curtailment at our major customer in China. PC also reported a margin decline due to higher raw material prices, transportation costs and short-term supply disruptions. What I’d like to do now is to discuss several items that are not referenced in this slide presentation. Adjusted net income was $16 million for the quarter compared to $32 million in the prior year. Adjustments to pretax income for the current year quarter totaled $10 million and reflected restructuring expenses, LIFO expenses, costs related to mark-to-market commodity hedging and a loss on the…

Thanks, Mike. Regarding the outlook for each of our businesses, let’s start with our Railroad and Utility Products and Services segment, which has seen some tough times over the past couple of years. I’m encouraged to report that the year-over-year gains we have been making over the past several quarters have finally resulted in us achieving overall volumes that were in line with the previous year’s quarter for the first time since the second quarter of 2016. In fact, if we weren’t in the midst of converting one of our larger customers to a treated tie sales model over most of the first three quarters, we would have already definitively seen the profit improvement in our legacy RUPS business. Further compounding the issues in our rail business this year, was the tightness in Green Tie supply earlier in the year, which challenged our ability to get enough inventory on the ground, but that has been alleviated as demand out of China has softened, which has opened up supply. Now as our Green Tie inventory builds, we’ll be seeing more dry inventory become available to fulfill the order queue, which will help us from a fixed-cost absorption standpoint as well as from a sales standpoint. Pricing and volumes on the commercial side of the business remains strong going into third quarter, which we expect to continue into the immediate future. Now the macro trends for our rail business are encouraging, as the Association of American Railroads or AAR, reported total U.S. car load traffic for the first nine months of 2018 was up 2% from the same period last year. Intermodal units also increased year-to-date, up by 6%. Overall, total combined U.S. traffic for the first 39 weeks of 2018 increased 4% compared to last year. Now integration on the two…

[Operator Instructions] Our first question comes from Roger Spitz with Bank of America. Please go ahead.

Thank you and good morning. Regarding the major Chinese customer outage, can you describe the industry the customers in – what the operating issues were and the timing of fixing it. And I paused it, if you said it in your prepared remarks, I just did not catch it.

Yes. No. That’s fine. So it is our main contractual customer over there that basically serves the needle coke market for electro production. And it’s not an issue with their plant. It is a decision, I think that they’re holding off until we see a resolution of the contractual issue that we’re trying to work through.

Got it, okay. And in the PC, can you comment further about the issues? You talked about the issue of stabilizing the copper into intermediate production. Is this a particularly complicated production process as you’ve expanded the capacity?

Well, unfortunately, it’s turned out to be a little more complicated, I think, than we had anticipated. You – in any production process in the new capacity, there’s always hiccups and things that you typically intend to have to go through, some of them unfortunately are unforeseen. I’ll just say that this is certainly – there’s been more associated with getting this normalized than what we would normally see, and it certainly has had an impact, obviously, in terms of being able to bring more production in-house. We continue to work on it. We’ve made progress, so things have gotten better, but we’re still not up to the rates that we had expected when we had made the decision to move forward with this. Now all that being said, it’s still an overall net benefit because we are doing some product but it’s not at the levels that, certainly, we had expected and anticipated when we put this in place.

Thank you very much.

Yes, you’re welcome.

Our next question comes from Mike Harrison with Seaport Global Securities. Please go ahead.

Hi, good morning. Wondering if we can kind of walk through the timing of, really, the 3 issues that appear to be temporarily affecting your business right now. You mentioned the dry tie availability in RUPS, you mentioned the lumber price volatility impacting Performance Chemicals, and then, the China customer idling. Can you talk through each of those in terms of when you started to see the impact? And then, when you might expect to see some resolution?

Yes. So let me – we’re actually getting to the point where – on the tie side of things I think that things have loosened up. So we started seeing, I think, significant improvement in year-over-year crosstie procurement earlier in the year, but inventory levels at that point had already been drawn down fairly low. So we’ve been making strides to build that inventory over the past, I’d say, six months. And we’re – again, we’re already starting to see trends and actual results of more product coming up for treatment. In fourth quarter, I think we’ll start to see certainly a pretty sizable uptick from year-over-year standpoint in terms of ties treated. So I think we’re relatively at the end of that particular issue and in the clear. The issue around volatility and lumber prices and its effect on meeting demand in the PC business. That one, it’s tougher to call at this point. There was, I think, reservation in putting a lot of inventory in stock as prices were moving up at historically high levels. And because of the precipitous decline in lumber prices, I think people are still cautiously searching for the bottom in the market. And so until we see I think some normalized and stabilization in pricing that gives people confidence to get back into the market in a bigger way. We’re going to probably see, so I’ll call it, stagnant demand. I don’t expect that to continue for much longer but we’ll probably see – I think our expectations are, if we get out into the New Year out certainly in the back end of the first quarter that we would expect things to normalize and start to pick up from a demand standpoint there. And then the third one, in terms of the China customer, we’re going through our contractual process to be able to resolve this pricing issue that we have. The first steps in that are set for this – for actually this quarter, and we do expect – the process itself is designed to essentially see an ending point in the first quarter of next year. Now there is some chance that could possibly get extended or delayed, but I’d say that’s a relatively small possibility. I’m somewhat restricted from really talking any specifics about this due to a contract that we have. But as I mentioned within my prepared comments, essentially, this is all upside for us as we have not recognized anything related to this pricing, this agreement that we have within our financial statements, currently. So any resolution we get out of this would be a positive.

So it’s upright for you guys from a pricing standpoint, but if the customer is not taking volume then that’s a negative?

That’s correct. So they are not taking product as we try to resolve this issue. And I think that once we come to a conclusion, as to the resolution of the issue and where pricing should be, then I think at that point, I would expect that they would be comfortable moving forward with a supply arrangement that would be in line with whatever resolution comes about as a result of this process. So in short, we get through this process in the first quarter as we expect. I would expect them to begin taking product again. And it could be at the contracted levels. It could be something that is a little different than that based upon however this ultimately gets resolved.

And in the meantime, you do have capability to serve other customers. Are you replacing a portion out of that volume?

Yes, yes. We do. And – we do. It’s just, it’s at less than – certainly at less than the values that we would be guaranteed within the current contract, yes.

All right. And then the last one for me, as you mentioned within Performance Chemicals the big box retailer opportunity is playing out to be a little bit smaller than you had initially expected. Can you just maybe help quantify what kind of revenue opportunity we’re talking about, and maybe what happened to lead that to be smaller? Thanks.

So I won’t quantify the revenue opportunity. What I will say is, one of the issues we faced as being the largest supplier in this industry is market share, right? And so the – it’s great having the market share that we have, but it also, in some cases, restricts us from being able to get more as some of our competitors, I think, are willing to be more aggressive to try and get whatever they can. This was a great opportunity, certainly, for one of our competitors, as business came loose. And I think that they were pretty aggressive in going after it. And we were able – we were fortunate to win a sizable piece of the business, just not up to the expectations of what we were hoping and expecting as we were entering into this.

Our next question comes from Chris Howe with Barrington Research. Please go ahead.

Good morning everyone thanks for taking my questions.

Hi Chris.

In relation to this idle facility in China. If we were to exclude this from guidance, where would you have fallen this quarter?

Well, so we’ve – so let me try and put this way. We’ve adjusted downward our guidance that includes $12 million related to this particular issue. I will say, the $12 million that was in our overall numbers for the back half of the year, right? So in it fourth quarter included. Really only included them taking about half of a quarter’s worth of product, okay? And half a quarter’s of product spread through those last two quarters. So we felt we were being somewhat conservative figuring that they would at least take a quarter’s worth of product through that period of time. Their decision to now take nothing is – only had an impact on what was built into our forecast, but also, took away the buffer that we had – that we thought we had, as they decided to now take nothing. And so the $12 million would have been – the $12 million that we had in there would have been pieced probably evenly or so between the two quarters.

Okay. And few more questions here, as it relates to your 2019 outlook and also the next five years, the improvement in profitability. The $25 million to $40 million, you added some color a little bit on the – what leads you to that confidence. Could you perhaps highlight the cadence or what we should expect over these next five years in terms of the ramp up towards that goal? And then, for 2019 outlook, perhaps you can shine some additional lights on the new commercial opportunities in the Performance Chemicals. I guess, how would you quantify the potential of that, and perhaps, what the pipeline is like for these opportunities in comparison to where they were before?

Okay, okay. So I’ll start with the $25 million to $40 million. So there’s – that’s spread out. I’d say, the biggest chunk of that is in optimization of our network. So we now are a much bigger player in terms of treated products, adding a number of locations from the pole side of things to the nine treatment – treating operations that we have in place in our railroad business. We believe there are significant opportunities to leverage that network and actually utilize facilities on both sides to pick up some product and demand in certain regions that were not able to take advantage of today – that weren’t able to take advantage before this integration. So with the number of yards out there, some of which can be consolidated. There’s a number of benefits we can get in terms of having an overall larger network and taking advantage of economies of scale to reduce costs. So there’s a big piece of this is really network optimization. And that’s the piece that I would say I probably feel most confident about because those are things that are well within our control in terms of managing. Logistics is a piece of that. There is a sizable piece related to raw material reduction, cost reduction, and some projects that are actually in process right now. Again, going through trial stages and things like that to get to a point where we can prove them out on a commercial basis to allow us to take significant costs out of our raw materials budget. And this is – this does not have anything to do with the additional capacity that we’ve added with in Performance Chemicals or anything like that, it’s entirely different sorts of projects. And there are some certain – and…

Very helpful.

Okay. On the commercial opportunities in the Performance Chemicals end of things. So there’s been a lot of work around land a significant account that we believe we’re very close to bringing home, but, of course, you don’t have it until you have it. There’s been some delays in sort of finishing that of, which has, again, pushed it out now to what we believe is may be later in this year. But we remain pretty positive in terms of where we think we stand on that based upon the communications we’ve had with that particular customer. We think there are some potential opportunities still in 2019 on this big box retailer moving to the ground contact treated wood that – we still think there’s some opportunities there to shake loose. As we get out into 2019, that we think we can move in and take advantage of. And then, there’s some opportunities in our European business to add some additional sales and earnings related to some of the expansion of products that we’ve made into Africa. And then finally, with our new interior fire retardant product, we continue to build a nice base of business and there’s a couple, again, nice accounts that we think we have strong leads on that we might be able to convert out into the 2019 timeframe.

Great, thank you so much, that’s very helpful.

You’re welcome.

Our next question comes from Laurence Alexander with Jefferies.

This is Daniel Rizzo on for Laurence. So in – with the Chinese customer and the delays, how long can they delay for? I mean – and still – I mean how long can this last? I’m not sure if I heard you say that.

So they – so we think that there’s basically a quarter left on getting to a resolution here. And so we think that essentially in the first quarter, contractually, this will be resolved, and as that gets resolved, we believe they will begin taking product again. So they’re – right now they’re handling their supply of product in a different way. And they’ve made that decision. I can’t speak for them, but I believe – we believe that this gets resolved sometime in the first quarter.

And what kind of affect is this delay having on working capital and inventory for you guys?

Well – so right now we are holding a little higher levels of inventory as we were anticipating them taking product. But again, we have opportunities to move that. And all in all, I’d say, not necessarily very sizable because as they have elected to not take product. We have certainly not been running at full capacity.

Okay. And then finally, with – just the difference with what the wood availability in RUPS versus PC. I was just wondering what the difference is I guess in terms of lumber for crossties versus decks and why they kind of move it different ways. How do we differ in terms of products?

So they don’t really necessarily. I mean, lumber in the Performance Chemicals side, we saw – again, we did see historical runups in the costs of lumber in the first half of this year. We also saw runups in our hardwood pricing, in our hardwood costs, I should say, related to – not to that extent. And we have seen a subsidence in both markets as well here over the last quarter. So they’ve moved up and down actually pretty much together just not in the same proportion in terms of 1 percentage increase or decline.

Okay thank you very much.

Our next question comes from Liam Burke with B. Riley FPR.

Leroy, can you give a sense of how the utility pole business has been going in terms of how it’s being integrated in the operation, and how the progress was made since you’ve closed the acquisition?

Sure, sure. So I mean overall, there’s a lot that gets done that not a lot of people care about other than the people who have to get things done on a day-to-day basis. So it does cause some stress in the organization, it does cause a little bit of disruption. I think overall it’s been managed pretty well. We are about halfway through, sort of all the related integration activities that would kind of get them in and operating as basically as is. There are a number of things that we believe create great opportunities for Koppers as a whole, in terms of bringing that business into the fold. So those are – there are certain pieces of those projects that are again part of that $25 million to $40 million, and they are ongoing right now as we speak. And some of the benefit that – I mentioned, that we think will be achievable next year, will be related to the integration of that business as well as the mayor business. So far, so good. And I think next year, as some of the stuff gets finished off, we’ll really start to see benefits across the entire organization.

Okay. And on sale of RUPS, you’ve invested in additional working capital to support the dark tank program for some of your Class 1 customers. How quickly do you anticipate being able to get some of the return on that investment as you increase prices for the – for that service?

Well, I mean, we’re now through, essentially, the conversion of this one sizable customer. So basically, we’re adding normalized – I would call it, normalized sales and earnings rates. So we’re going to start to see that – we started seeing it reflected in the back half of the third quarter. We’ll certainly see that through the fourth quarter and into next year. And the RUPS segment overall, we really, really feel strongly about the performance improvement that we’re going to see starting here in the fourth quarter and heading on into 2019. So we’re not talking about next year, obviously, getting back to levels that we saw in the 2015, 2016 timeframe. But certainly, making a lot of headway towards moving back up in that right direction. And so that’s why I say, next year really we’ll see an earnings mix that’s much more reflective of, I think, what the expectations have been. Certainly, the expectations we’ve set. We just happened this year to truthfully and thankfully have seen real resurgence in the CM&C business that has allowed us to weather some of the downturn that we’ve seen in PC and some of that continued downturn that we’re seen in RUPS. And next year, we see really, a reversal of that occurring with CM&C pulling back to more normalized levels, while those other two business units sort of move more back to the forefront of where we expected them to be.

Great thank you very much.

You’re welcome.

The last question comes from John Choi with Medina Singh Partners.

On the reduction in the CMC guidance, I just wanted to ensure that we’ve essentially got 0 volumes for that Chinese customer for the second, third and fourth quarter, is that correct?

For – essentially, the third and fourth quarter, there was a small amount in the second quarter.

Okay. And as we look to 2019, assuming we come to resolution with this customer in Q1, we’ll get at least 3 quarters of incremental volume with this customer next year, plus we’ll get the benefits of Stickney and some other profit improvement actions. I know there’ll be some offsets, but in this scenario, can we expect 2019 profitability to at least meet that of our original guidance?

So I’m not sure what original guidance you are referring to for 2019.

For 2018.

Well – for 2018, I’m sorry. So I would say the answer to that question would be, no, and the reason it would be no is because of the increased – we have been able to outpace – we’ve been able to be ahead of the raw material – rising raw material costs in that segment this year, right? So our pricing has outpaced our raw material cost. That is not sustainable. And so next year, we are going to see less price, little more cost. And that’s going to pull back on that segment in the North American, European, Australian regions, which have been really strong and bullish this year. So yes, we will have the $15 million of benefits from Stickney and that will be helpful, and serve to offset a – certainly a good piece of that raw material cost increases. But then, when you talk about China, the three quarters that we would have, I would say, if this is resolved in entirely in our favor, and we go back to the contractual pricing and they actually take product. Well, yes, no question, we would actually far exceed the 2018 original guidance. The issue that we would run into is if they have already, essentially, made a statement that they don’t believe that this contract works for them or we would not be in the situation that we’re in. So we’re going to have to come to some resolution that is going to put them in position where they’re going to want to take product and that we can make an acceptable return. That’s probably somewhere in the middle of where – what we saw in the first quarter and what we might see on a go-forward basis. And that still remains to be determined. So I – it all sounds confusing, but I guess, the bottom line is, under your scenario next year, I would say that we would still be probably less than this year’s guidance, just due to – I don’t see even as a resolution of this that we go back to them taking a full year’s of production at the current contracted pricing levels.

Okay alright thank you.

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.

Okay. Thank you, everyone, for taking the time to participate on today’s call. I appreciate your interest in Koppers and your continued support. Have a great rest of your day. Thank you.

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