Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] And please note that this event is being recorded. And I would now like to turn the conference 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 fourth 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 our 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 March 31, 2019. Before we get started, I would like to direct your attention to our forward-looking 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 our 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 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 today for our call are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer and Treasurer. I'll now turn the discussion over to Leroy.

Thank you, Quynh. Welcome, everyone, to our fourth quarter 2018 earnings call. I'm happy to report that we had a strong finish to our year, as we finished 2018 with our highest sales ever, our highest adjusted EBITDA ever, our second-best adjusted EPS ever and our best safety rate ever. At Koppers, we remain unwavering in our commitment to the safety and welfare of our people, an investment that we believe will lead to a stronger, more successful future for our company. We continue to believe that if we protect the health and well-being of our employees, success will follow in all else what we do. Now, as I just mentioned, I'm proud to announce we finished the year with our lowest total recordable rate in the history of our company, a 7% improvement over 2017. Moreover 19 out of 47 operating locations had no recordable injuries in 2018, proving that 0 is indeed possible. Our serious incident precursor has also continued to decline year-over-year, reaffirming our efforts to prioritize training around hazard identification. For 2018, our safety results worldwide showed that our team has achieved the best safety performance in company history. To date much of our Zero Harm training is in gear towards operational and executive leadership and we'll continue to expand the scope of our efforts to include all our people. Zero Harm training modules for frontline employees were successfully piloted in Australia during the past year, with plans to deploy globally beginning in 2019. Now our efforts at Koppers don't stop at safety as we also take environmental responsibility and sustainability very seriously. As our company's long-term strategy continues to evolve, so too, will our sustainability efforts. As a company that recycles waste streams generated from other industries and the key production feedstocks, while also utilizing…

Thanks, Leroy. Let's begin by referring to the slide presentation again that was provided on our website. On slide 6, revenues were for $425 million in the quarter, which was an increase of $59 million or 16% from the $366 million in the prior year quarter. The increase was driven by acquisitions as well as growth in our wood treatment business segments. Our RUPS business benefited from acquisitions as well as improvements in all categories of railroad-related products and services. On slide 7, consolidated sales for 2018 were $1.7 billion, an increase of $235 million or 16% compared to sales of $1.5 billion in the prior year. Excluding sales related to the acquired businesses, our consolidated revenues still increased year-over-year by $72 million or 5%. Moving on to slide 8, adjusted EBITDA was $47 million in the fourth quarter or 11% compared with $42 million or nearly 12% in the prior year quarter. This result was due primarily to higher profitability from our RUPS segment. CM&C delivered slightly higher profitability than the prior year despite the challenges related to its subsidiary in China. Performance Chemicals reported lower profitability than prior year as the prior year quarter benefited from reduced raw material costs due to a commodity hedging gain. Moving on to slide 9, this shows our EBITDA bridge of $222 million in 2018 compared with $200 million in the prior year. This increase as you can see was primarily driven by the strong profitability in our CM&C business. Now I'd like to discuss several items that are not referenced in this slide presentation. Adjusted net income was $12 million compared to $9 million in the prior year. Adjustments to pretax income totaled approximately $18 million for both the current year and prior year quarter. Adjusted earnings per share for the…

Thank you, Mike. Now, regarding the outlook for each of our businesses, I'd like to start with our Railroad and Utility Products and Services segment. In our legacy RUPS business, macro trends indicate a modestly positive demand environment overall. The Association of American Railroads or AAR reported that total U.S. carload traffic for the 12 months of 2018 was up 1.8% from prior year. Also intermodal units increased year-over-year by 5.5%. Overall, total combined U.S. traffic for 2018 increased 3.7% compared to prior year. And although year-over-year rail traffic has steadily increased during the past several years, the amount of heavy haul loads such as coal and fracking sands have declined significantly from historical levels. As a result, this translates into lighter-weight loads having less wear on tracks and ties. In addition the continued pressure to improve operating ratios and cash flow has the Class I railroads finding every way to reduce spending which has put pressure on capital. As a result, while North American demand for crossties peaked in the range of $22 million to $25 million annually during the 2013 to 2016 time period, the crosstie replacement market has reverted back to more historic levels the last couple of years. According to the Railway Tie Association or RTA the industry forecast calls for replacements of approximately 21 million to 22 million crossties in 2019 which is slightly higher than 2018 numbers. And while we see crosstie demand improve, our challenge has been building dry inventory to treat. Weather issues have plagued the forestry industry and being able to keep up with demand and it continues to be an issue in the early part of this year. Meanwhile, certain Class I railroads are having some service issues due to their own restructuring actions. And as a result there have…

[Operator Instructions] And the first questioner today will be Chris Howe with Barrington Research. Please go ahead.

Good morning everyone.

Hi Chris.

Hi Chris.

Hi. Had a few questions, listed off here. Just in regard to the PC segment, you mentioned briefly about how the stabilization within your capacity continues. Assuming this is complete in the second quarter what type of impact we expect to see on second half margins?

To be honest with you, I think that so year-over-year, Mike, you can help me with this, because I'm not sure, I just want to make sure I have the number correctly. So you can comment on the year-over-year improvement from that standpoint. The only point I want to make before you get into that is the real I think wild card or area of focus for us in terms of whether we get our numbers this year in Performance Chemicals is going to rely squarely on getting organic volume improvement. That was the thing that ultimately ended up really hurting us last year because we had expectations that that would be in place to offset some of the cost increases that we had and it just didn't materialize. We had basically flat year-over-year volumes. And so, we do need some organic growth this year. And that is the thing that I probably would -- personally am a little -- I'd say most worried about in that segment. But with that I'll turn it over to Mike on the cost piece of it.

Yes, Chris in addition to that we have a headwind of higher raw material costs specifically copper. And that's -- if you go back and look at one of the pages in our presentation it was about an $8 million headwind. So we through these improvements in our production capacity are going to be in the second quarter back to where we were back in 2015 where we were able to produce two raw material feedstocks, 100% internally within our own group and not have to buy BCC and some cupric oxide outside through -- from third parties. So there -- in the second half of the year there is going to be a tick-up of margin. But again, it's being offset a little bit by the raw material cost. So I would say to answer your question, we're probably looking at 1% or 2% gross margin improvement in the second half of the year.

Okay, perfect. And then my next one is just on the fire retardant product line. You had mentioned initially in your press release, the total available market that's out there you're number two in the market. For perspective, the number one leader in the market where are you in taking that position? And how should we -- you mentioned its contribution to 2019 of that total available market what is realistic versus aspirational? And how would you characterize the runway there?

So the number one player in that field is still a good bit ahead of us. And I would say because of the nature of their business model they're uniquely positioned to retain that lead. There's still some opportunity for us to continue to make inroads. But I would say certainly in the near-term, that's -- us being a solid number two is probably the most realistic outcome. And in terms of its contribution this year, I'd say certainly it's going to be meaningful for that particular product segment. I think we have opportunities to improve profitability some opportunities to continue to work on driving the cost side of that equation as we move out over the next couple of years. So as we bring those volumes online, I think we'll be able to expand the profit margins in that business over the next couple of years even without any real significant necessarily market share penetration beyond maybe where we're currently sitting at, at the moment.

That's helpful. And then my last question is just in regard -- as much as you can share as possible I know its sensitive information in regard to the production delay in China. Assuming that it's not completed in the second quarter and it moves forward is it expected that more special purchase orders would flow through into Q3 and Q4 to supplement?

Yes. So I mean we're -- we've continued to work throughout with our partner on trying to manage through this situation. And so the result of that was the special purchase order we did in the fourth quarter -- late in the fourth quarter and then ultimately the special purchase order we did in the first. So we're continuing to have discussions with our partner about how -- again we managed through this situation in a way that, that is helpful to both parties and we'll continue to do that. So don't know where that ultimately ends up but at least we're talking.

Thanks for taking my questions. I will hop back in queue.

And our next questioner today will be Mike Harrison with Seaport Global Securities. Please go ahead.

Hi good morning.

Hi, Mike.

In terms of your goal to exceed 2018 earnings relative to the guidance that you've put out which is a little more conservative than that, what levers do you have to perhaps drive your earnings a little bit higher? You mentioned the wild card in PC is around organic volume growth. But what are the wildcards in the other two segments?

So yes, absolutely you got it right. In terms of the PC side of things, its volumes. In the railroad side look -- if we can again get cooperation from the weather to be able to get more ties into the facilities that's going to be the key bottleneck there. And the more we're able to get in and dried and the more volume we're able to push through there this year that has a compounding effect because it also impacts our creosote usage. So that's the key piece on that side of the business. In CM&C it's really just about trying to manage as best we can, the raw material end-market pricing dynamic. And like I said, we were really out on the front end of that in 2018 and enjoyed the benefits of it. We probably for good -- the last half of last year we were forecasting the fact that we saw in the future raw material costs would be cutting into that. And then since then we've had some again pricing pressure in some different areas of the market. So depending upon how that all flushes out, we'll determine ultimately where CM&C falls out in the whole equation, but then overlaying all of that is the cost end of things. And so, we're focusing hard on really keeping any discretionary costs to a minimum. We're focused on the operating cost side of the equation. And there is a list as long as my arm in terms of different projects that we have going on that are in different stages of development that take time and could hit at any given point in time and have meaningful impact. So there is a whole host of different things that play into it. But what we've put out there really, I think from our standpoint tries to get us back to a little closer to the approach that we had taken in years past of trying to make sure that while we -- while the guidance may not necessarily be overly exciting and may be a little bit cautious we've put ourselves in the best position to be able to meet and beat expectations and that what we're trying to do.

All right. I appreciate that. And then on the RUPS side, just wondering if you can give a little bit more color on the margin performance there. I think we were expecting it to be a little bit higher. Was it just utilization factors that really played in there? Or can you give us some more color please?

No, that -- you're exactly right. It was basically utilization, right? Again, it's getting crossties in the plant and getting dry crossties to treat. So we saw significant year-over-year improvement. There was a fairly low bar that we were working against. But if we had more volume coming into the plants the numbers certainly would have been even higher and the margin profile would have shown better as well.

All right. And then, I wanted to ask a couple of questions on CM&C. First of all, what was the EBITDA contribution from the China joint venture in the fourth quarter? And what does your guidance assume for EBITDA contribution from that JV in 2019?

Well, we don't give that level of detail, Mike. But I'd say that -- let's just say, we would have still been at $220 million or better without China's contribution in the fourth quarter. And as it relates to this year, 2019, again, we show that it's going to be down -- we're expecting it to be down, I don't have the page in front of me, but I think $13 million to $18 million is what we project from this past year.

Yes. Somewhere between the $13 million and $18 million is where we're projecting Mike. That's 2019 over 2018 contribution.

All right. And then can you also comment on what those purchase orders look like in terms of profitability?

Mike, I can't do that. I can't do that. I can't really talk -- I mean, I've already said more than I probably should say about China.

Understood. I'll turn it back then. Thanks very much.

Yeah, sorry. Thank you.

Thanks, Mike.

And our next questioner today will be Liam Burke with B. Riley FBR. Please go ahead.

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

Hi, Liam.

Hi, Liam.

Leroy, you've had to step-up inventory purchases just on the change in the business model of your relationships with the Class Is. Have you completed that step-up in inventory investment or do you anticipate more of that in 2019?

So, we have in terms of black-tie conversion, yes. But there will be -- so we're looking to try and essentially -- so naturally there would be a step-up in inventory due to bringing more untreated ties into the facility for air drying, right? And if we're building an untreated tie inventory, that's going to impact our working capital. We are working on plans to essentially try and reduce our overall inventory throughout all the businesses in hopes to mitigate that. So we have inventory management programs that are in place to try and offset what would naturally be a, I think, working capital increase from untreated tie inventory builds that needs to happen, right? Just to be able to set the cycle up to have enough to push through the cylinders.

Okay. And sticking with the RUPS business, you made the acquisition of the tie disposal as a complete life cycle management for the -- for your client. Have you gotten any traction in rolling out that service at any particular customers? And does it look like you could step-up as a competitive advantage to any competitors?

Well, it's certainly one of the main things that interested us in that business, because it's a key service for the Class I and really the rail industry at large. So we wanted to be able to have that as part of our service model in helping to find an environmentally responsible solution for end-of-life for the products that we're selling into them. So from that standpoint we think it makes perfect sense. We've had conversations with a multitude of different customers that all have expressed interest in looking at this and looking at our services. So we're working that end of things hard. And if there's anything that becomes meaningful to announce or discuss we'll do that at the appropriate time. But that was one where we bought that business with the hopes of using it to use as a competitive advantage and we continue to try and do that.

Okay. And then just lastly, just touching on guidance again. Your caution should be around raw materials, uncertainty in China and looking at the availability of overall inventory. Is that pretty much how the caution -- I mean, how -- what's driving your caution for 2019?

Yes. I would say -- and I'll reiterate it, Liam, because tried to hit on them throughout the prepared comments. But it's -- can we get enough ties into the plant, okay? So on the RUPS side of the business, it's that. And if we're able to do that and anything we do sort of over and above is really meaningful. Number two, are we going to see just organic -- regular sort of organic growth in the PC business, which we did not see last year, but are we going to see that this year? And then on CM&C, at this stage it's a little less China-related, because I think we're pretty -- I think, we're fairly conservative in terms of our guidance relative -- on the impact of China in our numbers. It's more about sort of that raw material, end-market pricing dynamic and where that ultimately shakes out for us, as you deal with it in real time. So those are the three pieces that we look at in each of the three businesses that, I think, will ultimately drive each particular business to get to where it needs to be or better or not.

Great. Thank you, Leroy. Thanks, Michael.

Thank you. Okay, Liam.

And our next questioner today will be Scott Blumenthal with Emerald Advisers. Please go ahead.

Good morning Leroy and Mike and most importantly Quynh. How are you guys doing today?

Doing okay. Very good.

Great. Hey, Leroy, you mentioned some new accounts in PC and I guess you described them as sizable. You announced to be where lumber by press via press release and I was wondering if you might be able to size those up and maybe comparison to what you've already announced?

Well, it's -- so we have guidance in our -- I guess, I sort of mentioned it in my comments as well. I think we said -- and it may, again, not have been picked up. But we have about 3% to 5% of our expected growth, revenue growth for this year wrapped up in these market share gains that we have achieved through these accounts -- these three accounts picked up, plus our additional fire retardant business. So, that's half of what we talked about needing to get to our overall growth numbers for the year that will support the EBITDA improvement that we've projected. A - Mike Zugay And Scott that estimated annual revenue is around $400 million. So I think you can do the math on that. A - Leroy Ball $420 million. I think the numbers -- this past year we finished at $420 million. What we have in our numbers for improvement on the sales side of things is $40 million. Q - Scott Benjamin Okay, got it. That's really helpful. And I know this is something that you absolutely don't want to talk about Leroy, but I have to try and ask a question about it any way. Is there an expectation in the China situation that you will have an arbitration ruling or we've passed -- or something happened that we shouldn't expect that in your -- to the point now where you have to just -- you're just working with your customer and trying to work something out? A - Leroy Ball Yeah. I appreciate you asking the question. But I can't really answer the question. Q - Scott Benjamin Okay. That's all right. Mike, the $30 million of CapEx that's, obviously, a lot lower than what we've been seeing recently, is…

Good morning, guys. Just -- I know you don't want to talk detail about the China customer. But I just want to understand timing. My understanding is you've been operating on these purchase orders with different pricing structures in the contract 2Q, 3Q 4Q now 1Q. So, whenever it's resolved when -- first quarter -- this current quarter should be the last tough comparison in terms of when you're operating contractual rate, is that accurate?

So, first is to clarify. So the special purchase orders that we've been operating under have only been for the back half of the fourth quarter of last year and then the first quarter of this year.

Okay.

So, we were under a contract in second and third quarter last year. It's just that they did not take any product. Okay. So …

That's even better than in terms of comparison.

Yeah, so you're correct that the -- look we basically made all our money out of that business in the first quarter of last year, okay?

Okay.

So, once we get past the first quarter this year, yes, you're right, comparisons move much more in our favor.

Okay. So, there's nothing, but really upside except for these purchase orders going forward?

Correct.

Okay. And then with respect to the railroad guys pushing the untreated inventory to you, you've talked about that increased working capital requirements. Assuming everybody in the industry does that and I don't know why they wouldn't at this point, like what ending ROE in terms of that change in business model, I think you've previously asked -- on the third quarter Q -- 10-Q you talked about potential for additional $50 million working capital.

That’s correct.

Is that still a good number? And like again, where kind of we are in this kind of industry conversion?

Yeah, so that is still a good number. And essentially -- really is all, but two Class 1s that are more or less there at this point in time. So -- and one of those runs at a little bit different model. So, it doesn't really lend itself to this black-tie. So, I'd say practically there's one more that's sort of out there and we -- as you pointed out we noted that we think if that happened at some point in time that's the potential $50 million working capital build.

And is there -- could -- beyond the Class 1s did the smaller railroad's some potential for those?

So, that's essentially the model already for them, right?

I see.

That's all good business. So if you worry about further risk in terms of balance sheet risk related to taking ties on that -- what we've put in our Q that you referenced is all you need to worry about.

Okay. Terrific. And then just two really quick ones. You mentioned the utility pole business that you've gotten back into and half the industry is 40-plus year old. What's an expected life for those poles to put the 40 in the context?

Well, I mean, so, it depends, right? It depends on again where it's at and things like that. But it's in the 40 to 60-year timeframe is more or less where -- so it's a wide range. And some have last -- and they've come up with different ways to try and do in-place treatment and different things like that. So it varies. But once you get beyond the 40, the time starts ticking, if you will.

Sure. And then lastly -- thank you for that. And lastly, my understanding is during this trade dispute Trump versus China, the exports -- hardwood exports to China are down significantly. Have you seen any kind of -- you said that cross-tie availability is still an issue I think with weather. Is that China dynamic helping that? Or is it just being masked by weather? Like how much, go ahead.

Yeah, no, I would say -- yeah. So I think it would be more helpful, right, if we didn't have the weather. So, it's great to not have the China pressure on that market. But the weather is really serving to offset any additional product we can try and get in the door. Q – Jeff Menapace: Okay. Terrific. Thank you very much guys. A – Leroy Ball: You’re very welcome.

And our next questioner today will be Mike Harrison with Seaport Global Securities. Please go ahead. A – Leroy Ball: Hey Mike. Q – Mike Harrison: Just a couple of follow-ups. One on the Performance Chemicals business, you mentioned on the third quarter call that you had seen some inventory destocking from your customers related to lumber price declines. It looks like some of those prices have maybe started to pick up. So I was just wondering can you talk about whether either in Q4 or so far in Q1, you've seen signs of some of those customers are restocking? A – Leroy Ball: Yes I'd say certainly the early indicators are actually pretty positive for the first two months of volume data that I've seen. So again, I think -- I mentioned it in my prepared comments, so far for the first two months of the year, things are looking pretty good from a volume standpoint. So yes, we're happy with where things sit at least through the first two months of the year. Q – Mike Harrison: And then on the CM&C business, I was wondering if you've solidified a plan for the Follansbee facility? And if the new Stickney plant fully ramped? A – Leroy Ball: So the new Stickney plant is fully ramped. We're doing some product testing at Follansbee. So there's some work that's going on there that actually could if it turns out if we're able to get through it and get through it successfully that could have some nice meaningful for upside to CM&C from a profitability standpoint moving forward. So before we take that facility down, we're utilizing it to do some testing. And I'd say probably, when we get to the mid part of this year or so is more or less what we're targeting to be through that process. Q – Mike Harrison: All right. Thanks very much. A – Leroy Ball: You’re very welcome.

And our last questioner today will be Jim Stahl with Vontobel. Please go ahead. Q – Jim Stahl: Yes hi, thanks for taking my question. Just to clarify, I know you said a number of different times. But on your RUPS business, are you saying that if you can get the untreated ties and the weather cooperates and you get the ties from the railroads that can deliver it that you have sales opportunities? So it's just the matter of getting that working inventory there? A – Leroy Ball: Yes. Q – Jim Stahl: Okay. And so that's what limited you last year. So it's not a function of the railroad thing I want to -- new ties or replacement ties, it's just your inability to get the untreated ties? A – Leroy Ball: At this point it's not a demand issue. No. Q – Jim Stahl: Okay. That was just all I wanted to ask. Thank you so much. A – Leroy Ball: Thank you. A – Mike Zugay: Thank you.

And this will conclude our question-and-answer session. I would now like to turn the conference back over to President and CEO, Leroy Ball for any closing remarks.

Thank you everyone for taking the time to participate on today's call. And thank you for interest in Koppers and your continued support.

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