Koppers Holdings Inc. (KOP) Q4 2018 Earnings Report, Transcript and Summary

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 renewable resources for another significant portion of our raw material requirements, we've been at the forefront of sustainability before it became fashionable. In 2018, we extended our sustainability business model even further with our acquisitions of M.A. Energy Resources, renamed Koppers Recovery Sources and Cox Industries renamed Koppers Utility and Industrial Products. Both businesses bring product life cycle management capabilities to Koppers in a way that hasn't existed before at our company. They're shining examples of our Zero Harm culture continues to be the foundation for how we operate. Now before going into the details of our financial performance, as shown on slide 3, I'd like to state that there are three takeaways from today's call that I hope to leave with everyone by the time we're finished. Number one: Our primary goal this year is to beat 2018. Now our adjusted EBITDA guidance for 2019 is $210 million to $225 million and that's where we want you to set your expectations. But make no mistake about the fact that we're working relentlessly to make 2019 a better year than the all-time high of $222 million of adjusted EBITDA achieved just this past year. Our goal at Koppers is to always push the bar higher and we've now done that for four straight years and are focused on making it 5. Number 2: We're intensely focused on the balance sheet. It also just happens that one of our core competencies is managing our leverage. From January of 2015 to December of 2017, we reduced leverage by two full turns to get down to 3.1 times. It's our goal to get back to at least 3 times by the end of 2020. Now to achieve that I believe we have a number of levers that will not involve the destruction of shareholder value. And we'll begin our journey by spending within our 2018/2019 two-year commitment of $140 million in capital spending, which means that this year's capital investment has been reduced to $30 million to offset spending that was pulled into 2018. This action will allow us to reduce our net debt by a minimum of $80 million in 2019. The third thing I'd like you to take away from today's call is, we will continue to play to our strengths, as master of portfolio managers, as we continue to look at shuffling the deck of our existing asset base. We will evaluate what should be added or subtracted to enhance the value of our overall brand. In the past five years, we've acquired five businesses, we've sold five, we've shut down six facilities, and built a new plant while transforming ourselves into the world leader in wood protection, while also drastically changing our financial profile in a positive way and reducing risk. You can expect more of the same as we not only will refine our focus on wood, but also be the kind of industrial company that's heavily committed to sustainability. So now let's discuss the financial results. For 2018, Koppers delivered $1.7 billion in sales, our highest sales year ever and a 16% improvement over 2017. Excluding the impact of the sales from our acquired companies, sales still increased by nearly 5%. For the second straight year, we achieved a record-high adjusted EBITDA. In 2018, we were able to improve upon our prior year record high by $21.2 million or 10.6% to finish the year at $221.6 million, which was in line with our revised guidance. Our adjusted EBITDA margin of 13% also represents the second straight year that we achieved 13% level or greater. The only other time has been 2007 and 2008 in our history as a public company. In fact, the last three years 2016, 2017 and 2018, represent our three highest adjusted EBITDA margin levels in the company's last 10 years. Now in 2015 when I stepped into the CEO role, I made a commitment that our goal would be to achieve sustainable profitable growth averaging between 11% to 15% adjusted EBITDA margin through an economic cycle. Keep in mind that for the six prior years, our margin high had been at 11.3% and we had essentially seen flat-to-declining margins over that time span. In contrast, 2018 represents our fourth straight year of adjusted EBITDA improvement also the longest such streak in the company's history. Now looking ahead, we believe it's appropriate to have a cautious approach as we'll once again be challenged by the low-growth markets in which we operate. That said, we do have a number of opportunities available to us top line and bottom line and depending upon how they each play out, we can potentially deliver that fifth straight year of profitability improvement in 2019. Before covering our expectations for this year, I'd like to do a quick review of our recent fourth quarter as highlighted on page 4. So getting into fourth quarter results, most notably, we saw year-over-year volume improvement in our RUPS business for the first time since mid-2016. And if weather conditions during the quarter were more favorable, we would have had even greater production of untreated ties and profitability would have been even higher due to greater fixed cost absorption. Results were lower for our PC segment compared to prior year, but that was in line with our expectations. Finally, CMC maintained its healthy margin, which is at a relatively similar profitability level as the prior year. Now in our RUPS business, sales of $164.2 million increased by $54.7 million or 50% compared to sales of $109.5 million in the prior year quarter. Excluding the sales impact from acquisitions, sales in RUPS were up 4% over the prior year fourth quarter. In addition to acquisitions, sales benefited from favorable pricing trends for crossties and higher demand for its railroad bridge services, partially offset by lower volumes related to utility products in Australia. For the quarter, adjusted EBITDA was $8.9 million or 5.4% compared with $1.3 million or 1.2% in the prior year quarter. The improvement in RUPS included the contribution from recent acquisitions, but was actually driven even more by improved production utilization driven by slightly higher volumes and year-over-year cost savings. In our Performance Chemicals segment, sales of $99.3 million increased by $6.3 million or 6.8% compared to sales of $93 million in the prior year quarter. The increase was due primarily to higher average pricing driven by a more favorable mix as well as improved demand in North America. Adjusted EBITDA for the quarter was $13.9 million or 14% for the fourth quarter compared with $18.5 million or 19.9% in the prior year quarter. PC's margin was lower year-over-year due to the acceleration of commodity hedge gains in the prior year that contributed to abnormally lower raw material costs compared with the current year quarter. Our CMC business reported sales of $161.9 million, which decreased by $1.7 million or 1% compared to sales of $163.6 million in the prior year quarter. Excluding an unfavorable impact from foreign currency translation of $5.6 million, sales actually increased by $3.9 million or 2.4% from the prior year quarter. And the increase was due to higher demand for carbon pitch in North America and Australia, partially offset by lower pitch sales in China and phthalic anhydride in North America. Adjusted EBITDA was $24.2 million or 14.9% in the fourth quarter compared with $23.8 million or 14.5% in the prior year quarter. CMC's profitability improved slightly from the prior year quarter reflecting an attractive margin level. This was due to pricing outpacing raw material increases and permanent cost savings realized from some prior restructuring initiatives, partially offset by lower profitability in China due to our facility operating for approximately only one month under a special purchase order at lower than contractual pricing. At our new naphthalene plant in Stickney, Illinois operations successfully and safely completed the first full quarter online and our Stickney facility is now handling all naphthalene production. As expected, we're beginning to realize the benefits from both process and cost efficiencies. So before I provide our outlook for 2019, I will turn it over to Mike to discuss some other key highlights from the fourth quarter and the full year 2018.

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 quarter was $0.60 per share compared with $0.40 per share in the prior year quarter. Our high book tax expense for the fourth quarter was primarily related to the write-down of a deferred tax asset as a result of forfeiting the majority of our performance stock units that were awarded in 2016. This had a negative effect of approximately $0.06 per share on a GAAP basis. However, it was excluded from our adjusted EPS calculation. Our adjusted EPS for 2018 was $3.50 per share. For 2019, we're anticipating a higher year-over-year interest expense as well as depreciation and amortization costs. We expect that interest expense will increase from approximately $56 million in 2018 to around $62 million in 2019. And this is due to a full year of borrowings related to our acquisitions as well as higher interest rates on our variable data borrowings. Also our depreciation and amortization expenses are projected to increase from $51 million in 2018 to $58 million in 2019. This is primarily due to our high level of CapEx spending in 2018 as well as the additional depreciation and amortization related to the two acquisitions made in 2018. With that we are projecting that adjusted EPS for 2019 will be in the range of $2.85 -- I'm sorry $2.87 to a high of $3.32. Looking forward to 2019 the effects of the U.S. tax reform will continue to have an effect on our GAAP effective tax rate due to the limitations on interest expense deductions as well as the minimum tax on foreign earnings also known as the GILTI tax. We expect this negative impact will be at a slightly lesser extent however in 2019. And the GAAP effective tax rate will drop from 47% in 2018 to approximately 33% in 2019. The projected effective tax rate for adjusted EPS calculation will remain at approximately 30% for 2019. For the year cash, provided by operating activities was $78 million compared to $102 million in the prior year. This net decrease was due primarily to increased working capital usage as a result of higher inventories from holding additional untreated crossties as well as rising raw material costs at year end. In 2018, capital expenditures were $110 million compared with $68 million in the prior year. The current year amount consists of spending on the new naphthalene unit construction at our CM&C facility in Stickney. Also we expanded the production capacities at our PC facilities within the U.S. We also made improvements of our facility in Mayfield, Australia. And we also maintained the overall safety and efficiency of all our global operations. For 2019, we estimate that capital expenditures will be approximately $30 million and we are expected to fund this through cash from operations. Now, returning back to our slide presentation and as shown on Page 10, our net leverage ratio as of December 31st on a pro forma basis was 4.2 times and this included our pro forma earnings from our acquisitions of MAER and Cox Industries. Now, we're projecting that this ratio will be in the range of somewhere between 3.8 times to 4.1 times at the end of December of 2019. As Leroy mentioned earlier, we expect to reduce our debt by a minimum of $80 million during the current year. Our liquidity under our bank agreements at the end of the fourth quarter including our cash on hand was approximately $220 million. Now, I'd like to turn the discussion back over to Leroy.

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 been delays in availability of railcars to transport and accept delivery of treated crossties. On the whole, we anticipate that these challenges are being addressed by the railroads and eventually service performance will improve. In summary, end-market demand will not be an issue in the rail business for 2019. Our success will depend upon getting more ties into our yards, to put up air drying so they can get to a cylinder for treatment. Untreated tie purchases in 2018 were approximately 30% lower than the 2015-2016 highs and need to improve by at least half that amount in 2019 to begin getting inventories back to where they need to be. If we get cars and the weather cooperates, that shouldn't be a problem. In the utility pole market, nearly half of the installed base is 40-plus years old. On an industry-wide basis, we believe that the rate at which utilities purchase utility poles will continue to grow as they continue with replacement programs within their service territories. Given that backdrop we anticipate that 2019 will be a solid year from a demand standpoint. In addition we'll have a full year's worth of our results from the Cox acquisition. Also we now offer disposal services for used crossties and utility poles to help solve a fast-growing concern for railroads and utilities due to potential exposure to environmental liabilities if done improperly. Our recycling and disposal program provides considerable benefits in risk management and long-term cost savings to rail and utility industries. Current industry practices include disposing of railroad ties that have been taken out of service either alongside tracks or in landfills. Along with the ever-increasing cost to access landfills that can also lead to some potential environmental concerns. Our approach of recycling and reusing the ties including as a fuel source can further improve the environmental footprint of end-of-life ties and poles. Customers that are using copper scrap tie recovery services are contributing to a more sustainable environment. Now, finally with the acquisition of Cox and the pullback in the rail industry, we now have 18 treating facilities that are operating at less than full utilization many of them significantly so. And that's a problem only solved by putting more volume through the existing facilities or operating less facilities. We're in the process of pursuing actions on both ends gaining additional market share as well as exploring consolidation opportunities. These actions constitute by far our biggest opportunities within the $25 million to $40 million of annualized integration and strategic initiative benefits that we've targeted. In 2019, we're anticipating an improved demand environment which should lead to increased production volumes and higher utilization rates. Also the realization of cost and commercial synergies generated through various integration and strategic initiatives should set us on the path towards our first year-over-year improvement in this segment since 2015. As reflected on Slide 13, we're providing adjusted EBITDA guidance for our RUPS segment of $60 million to $65 million. And that would equate to an adjusted EBITDA margin in the range of 8% to 9% and an increase of $19 million to $24 million compared with prior year. In our Performance Chemicals business, economic trends have become a little more muted. According to the National Association of REALTORS or NAR, existing homes sales declined in December after two consecutive months of increases. The NAR reported that total existing home sales decreased 6.4% from November and are down 10.3% from a year ago. The Leading Indicator of Remodeling Activity or LIRA at the Joint Center for Housing Studies of Harvard University reported that annual growth in the national market for home improvement and repair is now expected to increase by 5.1% revised downward from a previous forecast of 7.5%. Even with the lower projected growth rate, LIRA estimates that spending on these areas is still estimated to be more than $350 billion nationally. The Conference Board Consumer Confidence Index decreased in December to 128.1 down from 136.4 in the November. The assessment of current conditions by consumers has declined due to an increasing concern that the pace of economic growth will begin moderating in the first half of 2019. Now on the costs side our business our raw material costs primarily related to copper prices will take another step higher as our 2019 average hedge prices are higher than prior year. To partially offset this headwind related to input costs, we've implemented the necessary actions to increase pricing in certain areas. Now we're in the final stages of completing our capacity expansion with an expected completion date in the second quarter and at that time we'll be able to fully process our feedstock in-house and realize related cost savings to offset higher feedstocks -- feedstock costs. I have several good news items to report on regarding the sales side of the equation for Performance Chemicals. First, we did implement certain price increases where possible that took effect in Q1 and that should help to offset some of our continued raw material headwinds. Second, on the new products side of things in late 2018, we introduced our new fire retardant product FlamePRO and it has quickly become a strong player in the field. In approximately six months since we launched the product we've moved into a strong number two market share position in the U.S., which is a testament to both our product development and our standing within the industry. Now for the third piece of good news. In the time that Koppers has owned the Performance Chemicals business, we've demonstrated our firm commitment to our customers in the industry through our continued investment in R&D, our facilities and our people that serve our valued customer base. It's because of that commitment that we have recently won three new sizable U.S. accounts and further increased our leading market share. Now the real key to achieving our 2019 expectations for Performance Chemicals, hinges upon a more normalized demand environment. Pricing cost increases are expected to be mostly awash and we have 3% to 5% growth achieved through known market share wins in our new fire retardant product. However, we do need another 3% to 5% of organic growth to get to the 5% to 8% overall volume growth that will be required to meet our targets for Performance Chemicals in 2019. The good news is that through the early part of this year thus far we seem to be on track. As you can see on page 14 of our slide presentation we're estimating adjusted EBITDA for Performance Chemicals of approximately $70 million to $75 million. And that would equate to an adjusted EBITDA range -- margin in the range of 15% to 16% and an increase of $8 million to $13 million compared with prior year. In our CM&C business, we clearly got ahead of ourselves in a good way in 2018 and out-earned our expectations by a wide margin. 2019 represents a return to more normalized profitability in this segment. In a strong demand environment where coal tar was fixed at lower prices and carbon pitch was tight, we were able to get more value for our products in 2018 than in years past. That situation has moved back against us already as we enter into 2019 as raw material prices have moved up pretty much across the board while end market pricing is coming under pressure in certain regions as competitors are trying to take market share. In addition, the year has started off with oil prices behind where they were in the early stages of 2018 and while it's a lesser impact than historically that hurts our chemical and carbon black feedstock pricing and margins. Collectively that has served to disguise the remaining cost savings gains from our new naphthalene unit in Stickney that is in our 2019 results. The important point to take away is that our 2019 expected CMC results are still at the higher end of the range of where thought this segment could be, once we completed our restructuring. So I consider that massive undertaking a huge success. Now the last piece to our CM&C puzzle, our China subsidiary KJCC is projecting to post significantly lower results in 2019 due to our ongoing customer dispute. I'm very limited in how I can comment on this subject. So I'll just say that we continue to work towards coming to some resolution on this business in the second quarter of this year. In the meantime, we're supplying our customer under a temporary special purchase order that runs through March 31, 2019. In 2019, assumptions include the higher cost of raw materials and a significant reduction in contribution from our Chinese joint venture, partially offset by cost savings primarily from our new naphthalene facility. As shown on slide 15, we anticipate adjusted EBITDA for CM&C of approximately $80 million to $85 million and that equates to an adjusted EBITDA margin in the range of 12% to 13% and a decrease of $34 million to $39 million compared with prior year. On slide 16 you can see the various drivers in our guidance for consolidated sales in 2019, which is anticipated to be between $1.8 billion and $1.9 billion. The forecast assumes improved crosstie production, a full year of contribution from acquisitions, more normalized organic growth patterns in our PC business and growing the addressable market for new product introductions. Turning to slide 17, our guidance for 2019 consolidated EBITDA on an adjusted basis is in the range of $210 million to $225 million. And we expect to have a meaningful shift in our earnings mix with our primary wood-based businesses generating significant improvements in profitability. The relative strength of served end markets will ultimately determine whether those businesses can generate enough improvement to offset the lower contribution from CM&C as it settles back into a more normalized profit range. So as I close and before opening it up for questions, I will remind you the three takeaways that I mentioned at the front end of this call: number one, while our guidance is cautious, we are highly focused on making 2019 more profitable than 2018; number two, we are focused on reducing our leverage to three times or lower by the end of 2020; and number three, we're looking at everything in our asset base and outside of it to extract as much value as possible, while aspiring to push the limits as the global leader in wood treatment technologies. Now I'd like to open it up for questions.

[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 that essentially the base maintenance CapEx number for -- from now on? A - Leroy Ball Well, Scott what we had it was a program of $140 million over a two-year period and we spent $110 million in 2018. Therefore, the difference is $30 million. I would say on a normalized basis it's a little bit light. But we were in a position where we could speed up some of the spending on the fixed asset side. And we did move some things from 2019 into 2018 because we had the ability to do that. So I would say it specifically to answer your question, $30 million is a little light on the maintenance side. That number is probably on average somewhere north of $40 million. A - Mike Zugay And I would say Scott just to be on a conservative end of things, I'd say it's even higher than that. I mean, we now operate over 40 facilities worldwide. You can't starve -- this company has starved itself in capital for too long and we're not going to do that. So 2019 is not a -- should not be viewed in any indication as the trend moving forward. It is a reset to ensure that we don't get out ahead of ourselves and we manage our capital appropriately. So this is something we can get through for a year to sort of reset the bar if you will but on a go-forward basis. I mean, we're going to have to put money into our facilities. That's just the way it is. And to the extent we have less facilities and there's less capital that needs to go around. Q - Scott Benjamin Duly noted. Thank you. And just a theoretical one, Leroy on the guide to be at/or below three times levered by the end of 2020. If I try to do a back of the envelope here, it looks like you need to pay down somewhere in the vicinity of $250 million over the next couple of years, maybe even a little bit more. Free cash flow looks like it's maybe 40% of that, which would indicate that you're either going to have some really nice growth in 2020 that you're anticipating, or it is going to be some other sources of cash. Can you maybe comment on that? A - Leroy Ball Yeah. So -- and I think all those, Scott all those are absolutely in play. So when I refer to the fact that we were able to bring leverage down by two turns in that three-year period of 2015 through 2017 well happened on both sides of the equation right? We increased our EBITDA, we reduced our debt. And the expectation is there will be some combination of the same thing happening here as well. And there may be some cash that comes in from some other areas as we continue to evaluate our asset base and see what fits, what doesn't fit. What makes sense to sort of move into or out of. And so again I really can't get more specific than that. But it's all things you'd expect. Q - Scott Benjamin That's the portfolio management aspect at play. A - Leroy Ball Yes sir. Yes. Q - Scott Benjamin Okay. Thank you. Appreciate it. A - Leroy Ball You're welcome. Operator And our questioner today will be Laurence Alexander with Jefferies. Please go ahead. Q - Daniel Rizzo Hi, guys. This is Dan Rizzo on for Laurence How are you? A - Leroy Ball Good, Dan. A - Mike Zugay Hi, Dan. Q - Daniel Rizzo With mentioning the facilities in RUPS and given the number you have, can we expect a restructuring program similar to what we saw in CM&C from a couple of years ago? A - Leroy Ball So Dan it's a little different in CM&C in terms of how those facilities are tied to certain contracts and stuff like that. So it's not necessarily an apples-to-apples comparison. But theoretically it's the same problem, right, it's the same issue that we faced back then. The issues we face was we had a lot of plants running that were running at much less than full utilization. So we had a lot of fixed costs. And so it was about trying to figure out what was the best overall end solution and we were willing to sacrifice top line to drive bottom line improvement. And like I said that whole process has shown itself to be highly successful, we think there's opportunity here on the RUPS side to look at that. It's just -- it's not going to be the exact same or necessarily as straightforward as what it was over on the CM&C side. But the other part of the equation, which may come into play here, which we really didn't have available to us over on CM&C is as I mentioned in my prepared remarks there's two way to go at this. You can either put more through your facilities, right to improve your utilization, or you look at bringing your facilities down, so what remains is doing more. Well, we're intently focused on trying to get more through our facilities and look at how we can strategically go at improving market share. So we're focused on that side of it too. And if we're successful on that end then there might be less need for consolidation. And -- but if we're not then you might see a little bit more aggressive actions on the other end of things. And so that will play out as we continue to move forward. And we'll update everybody certainly each quarter if there's things that come up that are worth mentioning regarding that. Q - Daniel Rizzo All right. Thank you. That's actually very helpful. And just one more question. With the special purchase agreement in -- with the JV, does that mean that JV is operating at like full rates to March 31st and then take it from there? Or is it just kind of partial spill? I was wondering just any -- what the dynamic is there? A - Mike Zugay Yeah. It's -- no there -- it's running more or less at full rates. But again it's a different pricing structure. So… Q - Daniel Rizzo Okay, I got it. Thank you. Operator And our next questioner today will be Jeff Menapace with FTN Financial. Please go ahead.

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.