Koppers Holdings Inc. (KOP) Q2 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Following the presentation, instructions will be given for the question-and-answer session. Please note that this event is being recorded. I would now like to turn the conference over to Ms. Quynh McGuire. Ms. McGuire, the floor is yours, ma'am.

Thanks and good morning. I am Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our second quarter 2019 earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our earnings release this morning, we have also posted materials to the Investor Relations page of our website. That will be referenced in today's call. Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our website and a recording of this call will be available on our site for replay through September 9, 2019. Before we get started, I would like to direct your attention to our forward-looking disclosure statement. Certain comments made on 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 and Treasurer. I'll now turn discussion over to Leroy.

Thank you, Quynh. Welcome everyone to our second quarter 2019 earnings call. Before getting into the details of our financial results, I'd like to start with the zero harm update as everything at Koppers begins with safety. I'm proud to report that in total 34 out of 47 operating locations had 0 recordable injuries in the second quarter. We remain steadfast in finding new ways to keep employees energized around the importance of proactive safety engagements, such as safety observations and hazard identification, which ultimately lead to a safer, stronger workplace for everyone. And as part of our ongoing integration process, we're continuing with zero harm training at our utility and industrial products and recovery resources businesses to ensure that all our locations are equipped with the same first rate standard of safety tools and education. Training has been well received so far and is expected to conclude at the end of 2019. And we've also gone live with our lifesaving rules at all of our legacy operating locations in order to provide clear expectations for our employees about the behaviors that we expect in order to ensure their safety. We'll continue to be relentless on safety and reinforce to our leaders that there is no responsibility that's more important than the safety of those within their care. Now, let's turn to our financial performance for the June quarter. After a healthy start earlier in the year, the second quarter results further proved that our overall business is on solid ground and we still have plenty of opportunity for upside. In the second quarter, we delivered record sales of any quarter in our company's history and a record second quarter adjusted EBITDA reflecting the positive impact of the investments that we've made to advance our strategy built around sustainable wood preservative solutions. Now back on our call in February. I laid out three main takeaways to illustrate where our focus would be for 2019. The first takeaway was that we would be focused on doing everything possible to make 2019 better than 2018. Well six months into this year. We're at about the halfway point of achieving that goal. And a lot still needs to happen to enable us to get to our fifth straight year of adjusted EBITDA improvement but we're exactly where we need to be at the mid point of the year in order for us to reach the high end of our range. We've had some key account wins in our PC business we battled historically bad weather conditions to improve the crosstie flow into our plants and we remain disciplined in our global CM&C business to find further opportunities to reduce cost. The second takeaway was that we would remain intensely focused on improving our balance sheet by reducing our leverage and while the first six months has seen a small increase in net debt compared to year-end 2018, it's not unexpected given the seasonality of our business model and cash flows. We still expect to reduce net debt by at least $80 million this year and bring our net leverage down to between 3.8 to 4.1 depending upon our adjusted EBITDA for the year. Further to that, it is still my goal to take another full turn off our leverage in 2020 and get back to three turns. My third and final takeaway was to remind everyone that we've done a pretty good job of shuffling our portfolio over the past few years to be more focused on being the global leader in wood protection and we'll look to capitalize on further smart opportunities to do more of the same. During this quarter and earlier this morning we announced two more actions to add to our lengthy list of portfolio realignment. In June we announced that we were moving forward with the final closure plan of our Follansbee West Virginia CM&C plant. We took a charge of approximately $3 million during the second quarter, which was approximately $1 million less than the low end of our expected range that we had communicated at that time. We still expect to fund the closure primarily through the cash savings generated from closing the facility and are targeting to be substantially complete with most of the work by the end of 2020. In this morning's press release, I also announced the sale of our Blackstone Virginia utility pole treating operation and we were able to transfer the property and fixed asset to the buyer in exchange for assuming any potential historical environmental liabilities at the site and an extension of our chemical supply agreement. We've begun working and will continue to work with all employees at the affected sites to help them successfully transition to new employment. Our employees at both locations are hardworking individuals who've given much to Koppers and our predecessor company. I thank them for their efforts and professionalism and I wish them the best of luck as they move forward. We'll continue to evaluate additional opportunities to add or subtract from our business, if we believe that it builds on our wood technology capabilities. I'll now turn it over to Mike to discuss some key highlights of the quarter before returning to review my outlook for our business segments.

Thanks, Leroy. Let's begin by referring to the slide presentation that was provided on our website. On slide four, revenues were $470 million which was an increase of $34 million or 8% from the $436 million in the prior year. As Leroy mentioned, this was a record sales quarter for our company. Excluding a negative foreign exchange translation effect of $7 million, revenues were higher by approximately $40 million or actually 9%. The increase was driven by continued demand for our wood preservation products which reflected higher volumes and higher pricing in our RUPS segment. On slide five, adjusted EBITDA was $65 million and this was a second quarter record or approximately 14% compared with $55 million in the prior year. The strong performance reported by RUPS can be attributed to higher procurement levels of untreated ties volume increases in both the Class I and commercial crosstie markets and overall improved operational efficiencies. Our PC business also reported higher profitability which was driven by increased volumes, new product sales, a favorable pricing mix, improved cost efficiencies and insurance proceeds received which collectively more than offset higher raw material pricing. The favorable results for CM&C were primarily due to permanent savings from a much more streamlined and efficient cost structure and that helped to counter the effect of pricing pressures in certain regions of the world. Now I'd like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $25 million compared with 24 -- I'm sorry compared with $21 million in the prior year. Adjusted earnings per share were $1.16 compared with $0.93 for the prior year. Both adjusted net income and adjusted earnings per share benefited from higher profitability generated by our wood preservation businesses, as well as lower overall selling general and administrative expenses. Our income tax expense for the second quarter was higher than the first quarter and was approximately 35% of pre-tax income. This was due to a change in the mix of where our expected future earnings for 2019 will be generated. By comparison our first quarter rate was 30% and our estimate for the full year is approximately 33%. For 2019, we are anticipating higher year-over-year interest expense and also higher depreciation and amortization costs. Due to a full year of borrowings related to our acquisitions from 2018, as well as higher interest rates on our variable debt borrowings, we estimate that our interest expense will be $64 million in 2019, an increase of $56 million from 2018. Also depreciation and amortization expenses due to assets placed in service in 2018 as well as the two acquisitions made in 2018 will be approximately $57 million in the current year which is an increase from $51 million in 2018. We continue to explore strategies to manage the effects of the U.S. tax reform on our GAAP effective tax rate. Specifically due to the limitations on interest expense deductions and the minimum tax on foreign earnings or what we call the GILTI tax. If we didn't have these provisions negatively impacting us, our effective GAAP tax rate would have been 24%. After considering projected tax reserves and valuation allowances, the estimated 2019 effective tax rate for our adjusted EPS calculation will be approximately 29%. With this revised tax rate and our adjusted EPS -- I'm sorry, EBITDA guidance of $214 million to $224 million, we are now projecting that adjusted EPS for 2019 will be in the range of $3.27 to $3.61. For the year-to-date period through June 30, cash provided by operating activities was only $1 million compared to $3 million in the prior year. Our cash flows from operation have historically been much better in the second half of each year and for the past three years, our actual cash generation has been in the range of $70 million to $85 million in our third and fourth quarters. We expect that trend to continue in 2019. And we are on track to use these cash flows to repay $80 million in debt in the current year. Capital expenditures were $19 million, compared with $54 million for the prior year and represents spending to maintain the safety and efficiency of our global operations. Net of insurance proceeds of $3 million, our capex was $16 million, through June 30. And on track for the expected $30 million run rate for 2019. Now referring back to our slide deck, on page 6, our net leverage ratio, as of June 30 was 4.6 times, which was a decrease from 4.8 times, at March 31. We continue to project that this ratio will be in the range of 3.8 times to 4.1 times, at December 31 2019. We remain committed. And we reaffirm that we will reduce our debt by approximately, $80 million this year. With that, now I'd like to turn the discussion back over to, Leroy.

Thank you, Mike. 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, the industry data remains lackluster, as rail traffic was slow again, in the second quarter. The Association of American Railroads or AAR, reported that total U.S. carload traffic for the first six months, of 2019 was down 2.9%, from the same period last year. With intermodal units defined, as containers and trailers down 3.2%. Total combined U.S. traffic for the first 26 weeks of 2019, was approximately 13.5 million carloads and intermodal units, which was a decrease of 3.1%, compared to last year. Now the decline in rail traffic was, likely due to a combination of lower manufacturing output, sluggish housing market and continuing tensions with overseas trading partners. The number of heavy-haul loads has declined, from historical levels, meaning lighter weight loads are being transported, yielding less wear on tracks and ties. At the same time, Class I railroads remain focused on precision railroading or finding ways to reduce spending and improve asset utilization, operating ratios and cash flows. As a result, crosstie replacement activities have remained relatively flat, having reverted to below or near historic levels, over recent years. According to the Railway tie Association or RTA, the current industry forecast maintains its projection for replacements of approximately 21.9 million to nearly 23 million crossties in 2019, contingent on having an adequate, supply of lumber. Based upon the first six months of this year, I'd estimate the industry is tracking closer to the low end of that range. As a whole, the industry continues to be challenged with less than ideal levels of inventory according to RTA surveys, of in the fuel buyers of untreated crossties. Now while we've seen improving demand for crossties, the challenge has been building sufficient dry crosstie, inventory available for treatment. I said coming into this year, the tie procurement would be one of the keys for us to have success in 2019. The good news is that, in the second quarter we saw tie procurement levels for Koppers up year-over-year, by close to 20%. That was coming off of first quarter, where we saw less than 5% year-over-year improvement. This helps both our fixed cost utilization, and improves the funnel for cost effective treatment. A, big shout out goes to John Heller and his crew, who have been doing an amazing job under extremely, challenging conditions. Thanks John. We expect 2019 to reflect year-over-year volume and demand improvements for untreated ties after the trough years of 2017 and 2018, while treated volumes will likely remain in line with last year due to dry tie availability. Just as importantly, we seem to be gaining some traction on our crosstie recovery business that enables the rail industry, to close the loop on crosstie replacement. The business has been challenged thus far this year, primarily due to car availability. But we are in several discussions that, we're hopeful it will lead us to being given the opportunity, to demonstrate our leading capabilities in this field, to the rail industry. Regarding our utility and industrial products, our UIP business, we saw strong performance in our U.S.-based business in the second quarter, partially offset by some softness in Australia. Demand remains solid, while we've uncovered innovative ways to reduce our cost of goods. Integration of the back office and support functions is mostly complete at this point, with most of the remaining work relating to safety systems, which will remain ongoing throughout this year. As each day passes, we find more opportunities to leverage synergies across our organization, due to the many and very touch points and expertise that we deploy in both the industrial and residential wood treating arena. For the RUPS business overall, we expect to maintain our current level of cross-tie procurement throughout 2019, which underpins our profit expectations for this year. Likewise, we expect continued strong performance from our UIP business, for the balance of this year with additional synergy identification and capture that will roll into subsequent years. As reflected on slide eight, we're slightly increasing adjusted EBITDA guidance for our RUPS segment, by increasing the lower end by $1 million to $63 million and keeping the higher end of the range at $66 million. We expect that the strength of our first half will continue, despite a difficult supply environment. And that would equate to an adjusted EBITDA margin of approximately 9%. And an increase of $22 million to $25 million compared with the prior year. In our Performance Chemicals business, economic trends continue to be mixed. According to the National Association of Realtors or NAR existing home sales fell slightly in June following an uptick in May. Total existing home sales in June fell 1.7% from May and were down 2.2% from a year ago. With the four major U.S. region saw an increase in sales while the south and the west regions experienced declines. According to the NAR, national housing shortage is largely to blame for the uneven sales performance, with demand outstripping supply and causing the prices of homes, to rise above the budgets of traditional first time homebuyers. As forecasted by the Leading Indicator of Remodeling Activity or LIRA at the Joint Center for Housing Studies of Harvard University year-over-year growth in homeowner remodeling expenditures is expected to slow considerably by the middle of 2020 from 6.3% currently to 0.4% by the second quarter of 2020. Spending is expected to grow to $320 billion nationally even considering the long-term decline projected related to home improvements and repairs. However it's possible that more favorable mortgage rates may help to soften this slowdown to some degree. The Conference Board Consumer Confidence Index rose in July to 135.7 its highest level in 2019. This compares with 124.5 in June and 131.3 in May. Near-term consumers are relatively optimistic about business and labor market conditions, but any escalation in trade and tariff tensions can result in a less favorable outlook and further volatility. Our PC business segment is the segment that's most at direct risk of tariff actions as we do source some of our raw material components out of China. To-date we have been minimally impacted, but if the situation continues to escalate, we could have $3 million to $5 million of annualized exposure that we will try but may not be able to recoup in the form of higher pricing. Another important factor to consider is the trend in lumber prices. When prices are volatile as they were in the first half of 2019, where treaters tend to be cautious in building their inventory and that could lead to a decrease in treating activities. The good news is that lumber prices have recently stabilized and as expected we've seen an increase in orders. On the cost side, our average hedge prices for copper and related raw materials in 2019 or higher than prior year and we have incurred higher costs due to supply chain volatility for material sourced from overseas. To partially offset the impact of higher input costs we began implementing some price increases this year with additional pricing action plan for 2020. Also we have improved our cost position due to our capacity expansion and expect additional savings in the second half of 2019 from internally processing our key raw material feedstocks. As long as we can avoid further tariff action, the cost side of the equation for PC should be relatively locked in as we've also attacked other forms of spending to help ensure we achieve our profit goals for this year. Our expectations for PC continue to be dependent on a relatively healthy demand environment in 2019 that would have us achieve 5% to 8% volume growth and we're currently tracking below that as we got off to a slow start in the first quarter, but began to see some acceleration in the second quarter. Recent trends are indicating that we should at least get to the low end of the range as the overall market has picked up and we've now fully converted the major account wins that we secured earlier this year. On Page 9 of our slide presentation, we are increasing the estimated adjusted EBITDA for PC at the lower end of the range by $2 million to $72 million and keeping the higher end at $75 million. That's primarily due to the $3 million of insurance proceeds that we received about half in Q1 and half in Q2 related to the fire that damaged our facility in New Zealand at the end of 2017. Since that time we've been bearing the additional cost of securing supply through third-parties and as we continue to rebuild -- the rebuild of that plant and expect to have it up and running later this year. The net result of our expectations for PC equate to an adjusted EBITDA margin of approximately [Technical Difficulty] an increase of $10 million to $13 million compared with prior year. Next, let's look at our car Materials and Chemicals business. In North America Europe and Australia, we're benefiting from favorable demand levels for carbon pitch. Trade tariffs on imported steel and aluminum have helped increase aluminum production in the U.S. leading to increased carbon pitch demand domestically. We are seeing some pricing pressure in various regions as competitors work to increase their market share. Softer markets in Europe have offset gains in carbon pitch sales and globally coal tar raw material supply remains constrained due to reductions in blast furnace steel capacity. Phthalic anhydride markets have begun to soften somewhat as well. With all these factors in play, we consider our second quarter performance in this segment a true achievement and a testament to our relentless focus on streamlining CM&C cost structure to maximize its profitability. Regarding our China subsidiary KJCC, we've yet to reach a resolution on our customer dispute, but will continue to work towards the resolution that makes sense for both parties. While there continues to be much speculation as to the future of this business and whether it makes sense in our portfolio, I will only say that we constantly evaluate the various businesses that we're in test them against our strategic objectives and assess whether we could receive fair value in return for something we determined not to be quite a fit. And while this doesn't exactly serve the core markets outlined in our vision of safely and reliably delivering customer-focused solutions through the development and application of technologies to enhance wood. We will not divest any asset at a value that we believe is less than a fair return for our shareholders. We believe that our five year-old facility is a valuable asset as evidenced by our expectation of paying off the remaining debt used to finance the construction by the end of this year. In the meantime, we'll continue to work on resolving the dispute serving our customers with high quality products and generating cash and earnings to help reduce our leverage. Until that time, we cannot comment further or speculate on any outcomes due to the legal guidelines and requirements associated with this matter. In 2019, assumptions for CM&C include the higher cost of raw materials and a significant reduction in contribution from our Chinese joint venture all of which was realized during the first half of this year partially offset by cost savings primarily from our new naphthalene facility. As shown on Slide 10, we anticipate adjusted EBITDA for CM&C of approximately $79 million to $83 million reducing the forecast by $1 million at both ends of the range and reflecting some shifts in sentiment some to the good, some of the bad in each of the global regions where we operate. That still equates to an adjusted EBITDA margin in the range of 12% to 13% and a decrease of $36 million to $40 million compared with prior year. Slide 11 shows the various drivers in our guidance for consolidated sales in 2019 which we anticipate being around $1.8 billion. The forecast assumes, improved crosstie production, a full-year of contribution from acquisitions and solid growth in our PC business. Turning to slide 12, our guidance for 2019 consolidated EBITDA on an adjusted basis is now in the range of $214 million to $224 million. This compares with the previous range of $212 million to $225 million, reflecting a slight increase to the midpoint. Our strong first half performance keeps us well on track to meet or exceed our financial goals for 2019. The profitability from our wood preservative and treated wood product market should continue to drive performance in the second half of 2019. Also, we expect to have additional benefits generated from our various market penetration initiatives and cost reduction strategies. We remain on target to generate $20 million to $25 million of benefits in 2019, 10 to 15 from our new naphthalene unit in the U.S. and the balance from initiatives targeted at optimizing our network, further penetration in certain markets as a result of our uniquely integrated business model, raw material and other cost savings. Beyond 2019, we see another $15 million to $30 million of annualized benefits to be achieved ratably through 2023, due to further optimization of our operating network, commercial development opportunities and the development of new technologies to reduce cost or move product up the value chain. Additionally, we should see operating cash flows improved in the second half of the year as part of our typical annual pattern. This will allow us to focus on our near-term priority of reducing leverage and risk, which in turn should improve total shareholder return. In summary, we see a path to significantly improve profitability across all of our business units. In the short term, we will remain focused on trying to make 2019 better than 2018, reducing our leverage and evaluating further opportunities to optimize our business portfolio. Longer term, I believe that our technological strength, market breadth and focused efforts to serve diverse markets with our unique integrated business model built around wood protection technologies will continue to position us as the supplier of choice in the very markets that we serve. Now, I would like to open it up for questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question we have will come from Mike Harrison of Seaport Global Securities.

Hi, good morning.

Hi Mike.

Good morning, Mike.

I would like to start in the RUPS segment, you mentioned the stronger pricing related to commercial demand, is that something that you're seeing in terms of your own commercial sales, or is this more related to maybe some pricing actions that competitors are taking in response to higher commercial volumes?

Well, I don't know. That's a kind of a difficult question to answer. I just -- I can speak to our business, right. I mean We've seen a trend beginning really in the let's say the middle part of last year where we saw commercial demand sort of pick up for us which allowed for I think some opportunities to get price and we've -- because of the lead time in that business, we were able to basically win some business that we're still supplying out into this year that is a favorable pricing. I think, the overall the market's in a pretty healthy position. And I think probably everybody is benefiting from that, but certainly it's been a key component of some of the success we've seen in the last year in the overall RUPS business segment.

All right. And just wondering on the overall Class I demand that you're seeing, sounds like you're expecting that may that could end up toward the lower end of the range. Just wondering if you can talk about maybe that outlook into the second half and into 2020.

Yes, so you have the sort of the two pieces to the business right in terms of having to get untreated product into the facilities and dried and prepare it for treatment before you can ultimately treat it and ship it. I'd say the demand levels have been healthy. We continue to be affected by having enough dry ties to put through our cylinders to ship to customers that's so -- so volumes on the treating side have been relatively muted or flat, but I'd say if we had the -- and we are doing some optimization of ties to help alleviate some of that pressure, but all in all, we might be able to sell a little more volume, if we had greater dry tie availability, but it's -- I don't know that there is a tremendous amount of sort of pent-up demand waiting to be released. I'd say that, right now, it's a sort of a restocking, realignment of inventory and in steady demand.

All right. And then over on the PC side, I was wondering if you can talk a little bit more about what you're seeing in the copper intermediates facilities? Are those running where you want them to be or is there still some improvement to come in terms of costs in the second half?

Yes so, they are not -- let's put it this way. They are within sort of an acceptable range of where we were expecting them to be at this point. There is still some potential further improvement, we could get out of them and we're continuing to work on that. But I'd say, any further improvement in the second half from that is probably going to be minimal at best. We've extracted a good bit of the benefit at this point in time. So it's just a small incremental piece that might be left on the table.

Okay. And then last question for now is just regarding the $80 million of planned debt pay down, you also said that you expected to end the year debt free in China. I believe you said that was $56 million worth of debt pay down. So the question is, is that Chinese JV debt consolidated on your balance sheet and is that pay down part of the broader plan to reduce debt by $80 million or should we think of that as being incremental or additive to the $80 million.

Okay. It's a good question. I don't - want to make sure that people aren't confused because the $56 million that we referenced in the release, was $56 million of debt that we had on the books back when we finished that facility at the end of 2014. Okay. So in the course of the last five years, we've gotten to the point now, where we will eliminate that debt by the end of this year. Okay. So we came into this year not with $56 million of debt on the books for that business, something much less than that. Mike do you remember off hand what that was?

I think it was $20 million.

It was $20 million at the beginning of this year.

And we paid a substantial amount of that debt.

And yes it is consolidated. Yes it is part of the $80 million. So but it's -- but $56 million isn't in the $80 million right? It's $20 million that's in the $80 million.

All right, thanks for that clarification.

You're very welcome.

Next is Chris Howe with Barrington Research.

Good morning, everyone.

Hi, Chris.

Hi. Just following up on the PC segments, it's encouraging to see that you're still on target to the 5% to 8% overall volume growth for the year, assuming normal demand conditions and the increase in the lower end of your adjusted EBITDA guidance. As we look at the demand environment, how would you characterize or add additional color to where it is now and what it would take to reach a positive or normalized demand environment and perhaps drive your unit volume closer to that 8% or beyond it as we look to the remainder of this year and even beyond this year?

Yes. So, just to remind everyone, right, the 5% to 8% there that wasn't all organic. That was some market share wins that we expected to be able to deliver, it's sort of a mix of half and half if you will. And we have been actually successful on the market share win. So that piece of it we've got. On the organic side, the year sort of started off slower than what we expected in terms or what we were certainly hoping for in terms of the range -- the normal range that we would expect for organic growth in that business. But we have seen a nice uptick in the second quarter and actually heading into the third quarter. So I think there are different things at different points in time that will affect these volumes for at least a short period of time. We're at a little bit of volatility. And certainly, we've talked about lumber prices both on this call and in the past as being one of those things that kind of impact it. Our customer base is heavily at risk to changes -- sudden changes in the lumbar markets and as they move, they’ll make decisions on where they’ll keep inventory levels or push inventory levels to based upon that. Volatility is difficult for them to take on a whole bunch of risk in terms of building a bunch of inventory, not knowing which way the market may turn on them. So we like a stabilized market because then it tends to lead to more stabilized procurement and inventory levels. And so, we saw some of that volatility in the first half which we believe help to contribute to maybe some of the volume being a little shorter than what we thought. Of course, we all -- every one of our businesses continues to deal with the crazy weather conditions that have impacted many businesses across the economy and you can imagine with us so heavily dependent on things that touch the forestry industry that sort of stuff has had a big impact. And so we think that also is had some impact in the first half. That seems to again have been alleviated somewhat here as we sort of finished the second quarter off and have headed into the third quarter. So we expect pretty good demand. Like I said, at least to be at the bottom end of the range, we may not get to the top end, because of the slow start to the year that we had. And then next year, I'd just say, look is -- for us as much -- as big as we are in these markets, the expectation for us to continue to be able to win share is probably not realistic. And so I know I just don't count on any sort of further share penetration from our business here in North America. We would hope for a continued organic growth in 3% to 4% range. The one I guess leading indicator that worries me a little bit as to how 2020 and beyond might play out is this remodeling index that we keep our eyes on that's been at a pretty healthy year-over-year growth rate for the past gosh five years, at least six years. And we now see some deceleration in that. Now that covers a lot of different things obviously in the building and construction markets. But it's something that we keep our eye on and would have me -- have a little bit of a cautious outlook for 2020 from an overall demand standpoint. Now again, they are still expecting -- they're not expecting sort of that activity to go down. So I would think that again, if nothing else we should see solid demand levels for next year. But I'm a little hesitant at this point until we get further into this year and get a better idea for how 2020 might be shaping up.

That's great. And what's your take on you mentioned the environment with home sales in the South and West experiencing declines. What's your take on there being a pent-up demand or a pent-up backlog of home buyers in the existing market who are being priced out of these homes and whether in 2020 or beyond those buyers can start to funnel through and start to remodel homes and purchase new construction homes. And then a little outside of the box with the South and West experiencing pressure, is this the right or wrong way to think of it. Is there a way to realign the sales distribution strategy to capitalize on the markets that are showing slight growth?

So first question, Chris I just I'll profess to not being smart enough to answer that question. That's why we rely upon the experts out there to provide the information and we certainly use it to help inform us and help inform you as to the things that will lead us to either some optimism or pessimism within our businesses for us. I'd say overall, because of the choppy activity there, it's provided -- it's had us be a little more cautious, right. So I'll rely upon the people who are immersed in that stuff every day to provide their thoughts and we'll rely upon that. Also I'll say, I'll remain a little more pessimistic than optimistic in terms of the overall environment over the next couple of years and more in a sort of show me attitude towards the existing home sales and what could potentially happen as things develop, because there are so many factors that go into it. In terms of sort of realigning our sales and distribution strategy to focus more on sort of pockets of the geography that are showing more signs of growth, I'll say we -- overall, we are certainly heavily invested both from an infrastructure standpoint as well as from a human resource standpoint East of the Rockies and there is opportunity for us to do more West. We know that we understand that, we have been looking at that and have or it's for us it's all around developing plans that we think would enable us to get into those markets where we have less exposure to then we do currently and whether we think we can get an adequate economic return to do that. In the meantime, we're pretty strong obviously in the Southeast, in the Northeast, in the Midwest. And we'll just look for continued opportunities to build on our capabilities there streamline our cost structure, provide for optimize channels to market, we'll continue to focus on all those things to strengthen our business in the areas where we are strong as well looking for opportunities to grow in some markets that we have less exposure to that could be nice entry points. The best way I can answer the question. So…

No that was interesting. Thank you for the color. And the $15 million to $30 million in savings that we're looking at.

Yes.

Is there anything in the buckets or the funnel that could potentially accelerate those savings, or is it best to consider it ratably?

Yes. No. So there is. All right. We're looking at it from a -- we're looking at those savings ratably across that time period, but the reality is it will probably be lumpy, because there are things that are more project oriented. That will develop based upon the ultimate execution of particular projects, right. Some of those are well within our control to be able to deliver on a certain timeframe; others, there's other parties involved. Right? And so, whenever you have other parties involved. You can't operate necessarily to your own timeline. So if some of those things happen to occur earlier then you might see some lumpiness where some of that's pulled forward and you have less in the -- maybe, in the outer years, or it could work the opposite direction as well. We have a funnel that has a bunch of different things in it that we're pretty confident in our ability to deliver on those numbers, but how they ultimately get reflected out over those years will most likely be in a lumpier fashion, but we have no better way to project it other than to sort of ratably project it right now until we have better information.

Okay. Thank you so much for taking my question.

Very welcome.

Next we have Liam Burke of B. Riley FBR.

Good morning, Leroy. Good morning, Mike.

Hi, Liam.

Leroy, you talked about -- well, you have successfully taking share on the KPC front with your proprietary technology. Is that route of revenue growth gone or do you see other opportunities to take further share?

Yes. On the PC side.

Yes.

I consider it a huge accomplishment, what we've been able to do this year, to be quite honest with you. So, yes, I just -- I think, that it's unrealistic to believe that we can continue to penetrate further into the markets that we're already serving, therefore, our flagship product for sure. I'll not say that there is -- it can't -- it won't happen. There's still some opportunity out there, but the bigger you are that's great, but that also creates more risk that you've got -- you have more to lose too. And what we don't want to be in is a business of just trading customers. So, I'd say, I don't count on there to be further major share wins for us in that business and I would probably guide you and others to also think that way. If it happens, fantastic. But I certainly wouldn't count on that, as being a driver of ours.

Okay. And you laid out growth opportunities that you're always exploring. Cost side, you've been pretty clear across all three business segments. Are acquisition still in the mix? I know debt reduction is a priority, but you do have capital to allocate and how does that fit in?

Yes. We -- so it's one of those things, Liam, where I feel like we -- if it is an opportunity that fits within our stated strategy, that will help to drive our strategy forward and the economics look right for us and we think we can take that on without adding further risk to the company. We will absolutely look at that. I'll tell you, we are regularly in conversation around a handful of different potential transactions. So we continue to explore opportunities, but we're balancing the risk side of the equation with that as well. So I certainly won't sit here and tell you that acquisitions are absolutely 100% off the table, but you can be sure that if we end up doing something in that space, it will be well thought out and we will have taken fully into account what that means from an overall leverage and risk standpoint.

Great. Thank you, Leroy.

You're welcome.

Next we have Chris Shaw of Monness Crespi.

Good morning, everyone. How are you doing?

Hi, Chris.

Just a point of clarity on the KJCC, have you received the determination from the arbitrator yet, or are we still waiting on that?

Well, so, we can't really comment on that. Other than to say, obviously -- I think, it's -- one should believe that if that was to occur that we would have to make a public announcement about that. So…

Okay. Thank you. And then, in CM&C it was a good quarter, a bit better than we had anticipated. You mentioned, the demand for carbon pitch. Now is that a significant part of year-over-year growth? And I wonder, do you believe if the trade war end somehow or the tariffs are lifted that, that business would then sort of recede a bit?

I don't think so. I mean, certainly I don't think the business will recede and for us, because of how we've resized our operations, right. It's a little different for us. We don't chase that business the way we used to chase that business. So it's important to us. Don't get me wrong. And certainly, we do everything we can to be the most value supplier to that customer base. And I think we've done a lot actually through the actions we've taken in the last four-and-a-half years to further demonstrate our value to that industry. I'm not worried about an impact from any de-escalation of tariffs in that market, having a material impact on our business. It's the best way, I guess, I can say it.

And was that meaningful for the quarter? I mean, like, the growth in the quarter mostly due from the pitch growth, because I know I think some of the other stuff should be, I think, falling year-over-year?

Well, that's certainly the biggest component in that space. So it would have the majority probably of the -- it would have the majority of the impact within our operations in any given quarter. Now, last year actually we had -- believe it or not we actually had in the second quarter better earnings out of our China segment on that side. This year we had a planned outage in the second quarter and so that was really the driver for why our numbers were down second quarter this year versus last year of that segment, but across the other geography - across the other geographies, we were able to -- if you will balance that out and still able to ultimately deliver improved results year-over-year which again, I think has a lot to do with the whole streamlining that we've done in that overall organization. I'm just going through the numbers here. Certainly, I mean, there's no question that our carbon pitch products tend to drive that business in and made the biggest impact, but we did see some higher demand from our phthalic products as well. And while I did say, we've seen softness in that market, which we have so it might sound contradictory to us seeing a little better volumes. I'd just say, we had expectations for that market to be stronger than what it's ultimately turned out to be for us this year.

Okay. And then just to go back to the debt pay down goals, as you get down -- as your goals get to down another turn by the end of 2020?

Yeah.

That's how do you get there? I mean is that would be bigger than sort of an $80 million that you're going to pay down this year.

Yeah.

And even if you sort of include some sort of EBITDA growth. How do you imagine is it going to be more debt pay down next year or more EBITDA growth that we're thinking right now or so it's going to toggle depending on what happens and certain things going to toggle between the two?

Yeah. That I think you're going to see some combination of both of those. You're going to see. We expect EBITDA growth, we expect further debt reduction. And we still have some levers to generate some cash outside of that that are, let's say, transaction based and so that is in the mix as well.

Great. Thanks a lot.

You're very welcome.

This concludes our question-and-answer session. I would now like to turn the conference call back over to President and CEO, Leroy Ball for any closing remarks.

Okay. Thank you. Yeah, I'd just like to thank everybody for your continued interest in Koppers. We'll continue to do everything we can to deliver on the commitments that we've made and happy with the first half of the year we've had so far, but we have a lot of work to do in the second half. Look forward to continuing to execute on the important projects that we have in front of us and look forward to having that discussion with you again next quarter. Thank you.

All right. Thank you, sir. The conference is now concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines. Thank you again.