Koppers Holdings Inc. (KOP) Q3 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' Third 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 will now turn the call over to Quynh McGuire. Please go ahead.

Thanks, Alyssa, and good morning. I'm Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our third 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 December 8, 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 the press release and 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 this discussion over to Leroy.

Thank you, Quynh. Welcome, everyone, to our third quarter 2019 earnings call.As we always do at Koppers, I would like to begin with an update on Zero Harm. So for the third quarter, I'm proud to say we had 34 out of 46 operating locations with zero recordable injuries. We're continuing to deploy our core Zero Harm training throughout all our business units with completion expected in 2020, and currently we're developing additional training and development modules that will help employees strengthen their safety-first mindset by building upon the strong foundation of skills that are already in place. In October we welcomed approximately 50 of our safety, health and environmental coordinators from across the globe to join us in Norfolk, Virginia, for a week of idea-sharing, learning and development. These employees spent their time discussing ways to help make safety personal to each and every one throughout our company. Our SH&E coordinators are important ambassadors of our Zero Harm culture, and their feedback on the progress made to date is invaluable. The group also focused on finding ways to reduce Koppers' environmental impact and improve our standing as responsible members of the communities in which we operate. Additionally, they participated in sessions geared toward using modern tools and technology to improve capabilities and build stronger connections across facilities. It was encouraging to see such great energy around these important topics. I appreciate the continuing dedication to safety that our employees have for themselves as well as their colleagues and community members. We remain focused on finding new and innovative ways to advance our journey to zero. Now I'll move on to financial performance. For the September quarter, our net results reflect improvement across all business units and point toward continued positive momentum for the remainder of 2019 and heading into 2020. For the third quarter, we again achieved record sales of $475 million, making the third consecutive quarter of record sales at Koppers, driven by continued demand in various end markets for wood preservation products and services. From a profitability perspective, we also set a record for third quarter adjusted EBITDA at $61 million, or 13%, achieving higher profitability in all business segments as well. RUPS and PC, our wood-based businesses, continued to demonstrate strong year-over-year gain through the favorable business conditions, market share growth and cost efficiencies. Additionally, our CMC business posted another strong quarter even though its market environment remains challenging. Our third quarter performance highlights the strength of our diversified business model and the success of our wood preservation strategy. Back on our call in February of this year, I laid out 3 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, 9 months into this year, we've put ourselves within reasonable striking distance of achieving that goal from an EBITDA standpoint, and while beating our 2018 adjusted EBITDA is still reasonably possible, we have tightened our guidance, and the high end of our range will fall just shy of our fifth straight year of adjusted EBITDA improvement. But from an adjusted EPS standpoint, we will still have a strong chance of beating our 2018 number of $3.50, which would still be quite an accomplishment. Further to that, because we are nearing the end of our lengthy restructuring of our CMC business, special charges for 2019 will be significantly less than 2018, which means that our reported or GAAP EPS should finish the year at its highest level since 2012. And we came into 2019 knowing that we had a major gap to fill, knowing that we would lose a significant chunk of earnings in our China business, and I'm proud of how our people have taken on the challenge of filling that gap. We've taken market share in Performance Chemicals, improved utilization in our Railroad and Utility Products and Services business, overcome difficult business conditions in our Carbon Material and Chemical business and reduced controllable costs across the board. The exciting thing is knowing that we still have what seems like a never-ending well of opportunities that should continue to drive future positive performance. The second takeaway from our February call was that we would remain intensely focused on improving our balance sheet by reducing our leverage. Through 9 months, I'm happy to say that we've made nice progress in reducing our net debt. In fact, in the third quarter alone, we reduced net debt by close to $50 million, and through September, our net leverage sits at 4.2x. Our goal is still to reduce net debt by at least $80 million this year and bring our net leverage down to between 3.8x and 4.1x, 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 3 turns. Now, my third and final takeaway from February 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 preservation, and we'll look to capitalize on further smart opportunities to do more of the same. Last quarter I announced the closure of our Follansbee, West Virginia, distillation plant and the sale of our Blackstone, Virginia, pole-treating operation, both actions that support a smarter portfolio. This quarter we're embarking upon making some interesting changes in Texas, which I'll talk about in more detail later in the call. Besides that, we remain engaged in multiple scenarios that we continue to evaluate, and I'll share any further developments as it becomes appropriate. In short, we're not afraid to add or subtract more business if we believe that it builds on our global leading wood technology capabilities. I'll now turn it over to Mike to discuss key quarterly highlights before returning to share my outlook regarding the business segments. Mike?

Thanks, Leroy. Let's begin by referring to the slide presentation that's provided on our website. As you will see on Slide 4, revenues were $475 million, which was an increase of $32 million, or approximately 7%, from $443 million in the prior year. As Leroy mentioned, this was another record sales quarter for our company, and excluding a negative foreign exchange translation effect of $6 million, revenues were actually higher by approximately $38 million, or 9%. The increase was due to continued demand in our end markets for wood preservation products and services. Now, moving on to Slide 5, adjusted EBITDA was $61 million, a third quarter record, or 13%, compared with $53 million, or 12%, in the prior year quarter. The strong performance reflects higher profits in all of our business segments. RUPS delivered a significant improvement driven by higher utilization from increased customer demand as well as realizing synergies related to ongoing integration and restructuring actions. PC generated higher profitability; however, its margin was lower due to higher raw material costs. CM&C reported favorable results due to continuing operational efficiencies and cost savings, which were partially offset by increases in raw material costs. Now I would like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $26 million, compared with $16 million in the prior year. Adjusted earnings per share were $1.24, compared with $0.73 last year. Both adjusted net income and adjusted earnings per share benefited from higher year-over-year sales and profitability driven by the Company's wood preservation businesses, as well as lower income taxes due to our reduced estimated effective tax rate. Our income tax expense for the third quarter was 15%, 1-5, compared with 56% in the prior year. For the 3 months ending September 30, we had approximately $3 million in discrete tax benefits, primarily due to favorable adjustments related to our 2018 tax year, as well as various tax planning initiatives. The majority of the favorable adjustments were due to our estimated '18 tax provision as compared to our actual filing of our 2018 return. GAAP requires us to adjust the estimated accrual to the actual filed tax return in the quarter when the actual return was filed, and our 2018 federal return was filed on September 15. After considering the impact of all our tax planning initiatives, we estimate the effective tax rate for the 2019 full year to be approximately 25%. With the revised effective tax rate and our adjusted EBITDA guidance, which is between $215 million and $220 million, we are now projecting that adjusted EPS for 2019 will be in the range of $3.35 per share to $3.55 per share. Year-to-date through September 30, cash provided by operating activities was $57 million, compared to only $8 million in the prior year. The net increase was attributable to lower working capital usage, primarily due to higher receivable collections. In general, our cash flows from operation are historically higher in the second half of each year and we expect to be consistent with that trend, and we are on track to use these cash flows to continue paying down debt in the fourth quarter. Capital expenditures were $27 million, compared with $81 million for the prior year, and represent spending to maintain the safety and efficiency of all of our global operations. Net of insurance proceeds of $3 million, our CapEx was $24 million through September 30, and we're on track for the expected $30-million run rate for 2019. Now if we refer back to our slide deck on Page 6, our net leverage ratio at the end of September was 4.2x, reflecting a significant decrease from 4.6x at the end of the June quarter. At this quarter-end, our net debt was $918 million, a decrease of $47 million, compared with $965 million at the prior quarter-end. As Leroy mentioned, we continue to project that our net leverage ratio will be in the range of 3.8x to 4.1x this year-end and we do reaffirm that we will reduce our debt by approximately $80 million in this calendar year. Now I would like to turn the discussion back over to Leroy.

Thank you, Mike. Now let's review the outlook for each of our business segments, starting with Railroad and Utility Products and Services. As we've mentioned before, we're seeing Class I railroads continue with instituting various forms of precision railroading, which involves evaluating their networks, capital spending and maintenance costs. While that philosophy will continue to put pressure on procurement in those organizations, ultimately we believe that Koppers, with our best-in-class products and services, remains well positioned to maintain or even gain share with Class I and commercial customers. According to the Association of American Railroads, Class I railroad activities are becoming more highly correlated to commodity prices, interest rates and trade relations, as opposed to the more traditional influences of oil and gas and coal mining. The challenges facing the industry include long-term structural changes as coal markets decline, the domestic intermodal and chemical sectors grow, consumer purchasing practices change and trade uncertainty provides even further volatility. The data reported by the AAR shows that rail traffic is trending down. Through September 30 of 2019, total U.S. carload traffic decreased 3.8% from last year, while intermodal units dropped by 4.1%. The combined U.S. traffic for carloads and intermodal units fell by 3.9%. According to the Railway Tie Association, the crosstie replacement market has also moved lower in recent years. The initial forecasts for 2019 were between 22 million to 23 million crossties, which I felt was too aggressive given what we were expecting with our own business. Due to lower than expected rail freight volumes, the projections have been revised lower and are now estimated to be at just under 21 million ties for both 2019 and '20, which is more in line with our own original forecasts. The key factors contributing to these trends including ongoing shifts from coal to gas, lower agricultural shipments and hesitancy among manufacturers due to a softer economic outlook and ongoing trade tensions. Our treating volumes are tracking relatively flat year-over-year while we have seen a substantial uptick in untreated crosstie procurement. The market for untreated product has been extremely tight for the past couple of years, which resulted in declines in inventory and less fixed cost absorption, which seriously hampered profitability. The main factors affecting supply, weather and competing demand for hardwood, have improved as the year has gone on, and we're on track to procure a more normalized level of untreated crossties, which has been the biggest driver to the rail segment's improvement. Regarding our utility and industrial products, or UIP, business, we saw strong performance in our U.S.-based business in the third quarter. Sales to our leading customers continued to drive organic growth, which is exceeding industry averages. Therefore, we expect that the positive demand trends will continue through the remainder of 2019 and year-over-year volumes will increase, driven by pole replacements that are planned, as well as from those that are necessitated by various weather events. Likewise, our pole business in Australia, where we are the largest supplier, is having another strong year as overall demand remains steady. For the total RUPS business, we expect to maintain our current, more normalized level of crosstie procurement through 2019, which underpins our profit expectations for this year. Also, we expect continued strong performance from our UIP and Australian wood businesses for the balance for this year. On the downside, our maintenance-of-way businesses have struggled this year with the rail industry's heavy near-term focus on cost reduction. We are expecting some improvement for those businesses next year, but they will remain challenged throughout the final quarter of this year. As reflected on Slide 8, we're tightening and slightly lowering our adjusted EBITDA guidance for our RUPS segment to be in the range of $62 million to $64 million, compared with $63 million to $66 million previously. This equates to an adjusted EBITDA margin of approximately 9% and an increase of $21 million to $23 million compared with the prior year. In our Performance Chemicals business, the outlook features some headwinds as well as some possible offsets. According to the Leading Indicator of Remodeling Activity, or LIRA, the annual national growth rate for home improvement and repair has been revised lower and now projected to decline 0.3% through the third quarter of 2020. Also, LIRA cites indications that the remodeling market may be reaching a turning point given the continued weakness in existing and new home sales. Spending on home improvements and repairs in 2020 is expected to be approximately $325 billion, or essentially flat. However, the current low interest rate environment may counter some of these challenges. The National Association of Realtors reports that existing home sales were down in September by 2.2% following 2 consecutive months of increases. Now, despite the recent decline, overall existing home sales are up 3.9% from a year ago. Nevertheless, a lack of inventory and higher prices are preventing potentially higher growth in existing home sales. The consumer confidence index decreased in October to 125.9, down from 126.3 in September and 134.2 in August. Given the continuing escalation in trade tensions, consumers are less positive on current conditions, reflecting a pattern of uncertainty and volatility that has persisted throughout 2019. In Performance Chemicals, sales growth has come from market share gains as well as some pricing actions that occurred in 2019 and will continue into 2020 as the general demand from our legacy customer base has been flat to slightly up. We're realizing more benefits due to higher internal production levels of intermediate raw materials and a reduction in controllable spending, but unfortunately, much of that has been wiped out by higher raw materials and customer service costs. Our expectations for PC continue to be for a healthy increase in profitability in 2019 due to abnormally higher volume growth related to market share gains throughout this year. We're currently tracking above the high end of the 5% to 8% growth rates in North America that we said we needed to achieve the significant profit improvement for this year, which is obviously a good thing. However, in order to ensure that we deliver on our commitments to our customer base, we have incurred higher supply chain costs that have offset some of the additional benefit. The good news is that should get alleviated as we move into 2020 and stabilize production at our new higher levels. On Page 9 of our slide presentation, we're also tightening and slightly lowering the estimated adjusted EBITDA for PC to $71 million to $72 million, compared with $72 million to $75 million previously. The net result of our expectations for PC equate to an adjusted EBITDA margin of approximately 16% and an increase of $9 million to $10 million compared with prior year. Looking at our Carbon Materials and Chemicals business, the markets in North America, Europe and Australia have benefited from favorable demand for carbon pitch. Aluminum production in the U.S. has increased somewhat due to tariffs imposed on certain imported steel and aluminum products. Longer-term demand trends will hinge on U.S. trade policy and any potential tariffs. In terms of headwinds, we're seeing a softening of demand for phthalic anhydride and other end markets, as well as pricing pressures from some competitors. On the whole, raw material markets are relatively stable in North America and Europe, but have the potential to be volatile in certain regions. Even in a challenging demand and pricing environment, CMC has continued to maintain margins at historically high levels, which serves as evidence of the operational efficiencies and permanent cost savings we've achieved through our restructuring efforts. That said, the current environment of weaker steel and aluminum prices will put pressure on our CMC business in 2020, but we still expect solid overall operating performance. As an update, our KJCC joint venture remains in dispute with its largest customer in China over the application of contractual pricing terms. Koppers has not recognized any incremental revenues associated with higher pricing in China and currently await the contractual resolution of our dispute, which has taken longer than expected but should hopefully occur by year-end. In the meantime, we've continued to supply our customer on a quarterly basis under temporary purchase orders, and once again have one in place for the fourth quarter. However, we don't expect much volume to be shipped during the quarter due to our customer taking their plant down for plant maintenance for most of the period. During the quarter, we made our final payment on the original debt used to finance the build of a plant in 2013 and '14 and are now debt-free in China. In 2019, assumptions for CM&C include the higher cost of raw materials and a significant reduction in contribution from our Chinese joint venture, almost 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 in the range of $82 million to $84 million, reflecting better-than-expected performance from the first 9 months. That represents an increase compared with $79 million to $83 million previously and equates to an adjusted EBITDA margin of approximately 13% at the midpoint and a decrease of $35 million to $37 million compared with the unusually high prior year. Slide 11 shows the various drivers in our guidance for consolidated sales in 2019, which we still 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 $215 million to $220 million. Regarding our integration and strategic initiatives, we are on track to realize approximately $20 million of benefits in 2019 with an additional $15 million to $30 million in prorated benefits from 2020 to 2023. Of that, $10 million in 2019 benefits is coming from savings related to the new naphthalene unit at our facility in Stickney, Illinois. Furthermore, as part of our network optimization program, we continue to evaluate opportunities to improve efficiencies in our operational processes, people and facilities. To that end, we recently began adding dry kilns at our Jasper, Texas, utility pole plant to alleviate a bottleneck of getting dry material to treat, which opens up opportunities to seek additional volume that we're unable to serve today. In addition, we also recently trialed treating utility poles at our underutilized Somerville, Texas, facility, which has historically been dedicated to treating crossties and runs at about half capacity. After much evaluation, we believe their operating footprint gives us an opportunity to consolidate a certain amount of production at Somerville, which will open up pole capacity at Jasper and allow us to go after other markets. Finally, we're exploring the idea of adding grinding capabilities at Somerville, which will essentially make it a superplant, as the only one in our entire network that would be treating ties, poles and potentially handling end-of-lifetime pole disposal. We have several other plans in the works that are still in various stages of development, and I'll communicate as they continue to develop. The opportunities available to us as one integrated Koppers has continued to excite me as we build upon our presence as the global leader in wood protection. In summary, 2019 is shaping up to be another pretty successful year and 2020 should be strong as well, as we continue laying the foundation for future growth and advancing several opportunities while we also focus on reducing leverage and risk. Now I'd like to open it up for questions.

[Operator Instructions] The first question today comes from Chris Howe of Barrington Research.

So congratulations just on the profitability improvements that you're seeing for the Company. On that topic, with the CMC consolidation behind you, you again reiterated the savings that the naphthalene facility generated -- how would you characterize where the business is positioned today just to capitalize on these future cost savings? More specifically, what type of low-hanging fruit, operationally, is out there for the Company? And as we look to dissect that, where are you in the PC segment towards achieving your peak historical margins, and what types of tailwinds would have to work in your favor to expand more towards that 22% historical margin?

Okay. So, start with CM&C. So we've talked extensively over the last couple of years about the actions that we had undertaken to try and reduce some of the volatility in that business. And I'd say that from a relative standpoint. Essentially, stabilize that business so we didn't see sort of the drastic troughs in the business. And while we were structuring in that way, we also likely were taking out the drastic peaks. Last year, again, I think, was somewhat of an anomaly, as the favorable contract that we had in place in China really elevated earnings for the year, but overall, obviously, in even the other regions, we had very strong performance. So things have been humming along very nicely for the Carbon Material and Chemical business. That's -- it's not to say there's not further opportunity for improvement and further cost reduction. Low-hanging-fruit-wise, I'd like to think we've actually realized a lot of the low-hanging fruit and are now into the phase where there's opportunities to further reduce cost. And probably, that's going to come with some capital investment. We spend a bunch of money maintaining our plants, Stickney in particular. Our Nyborg and Mayfield plants are, I'd say, are overall in better shape, but there's probably some monies that, smartly deployed into the Stickney business, can reduce ongoing repair and maintenance costs and improve efficiency. So now that we're through that heavy lifting of the naphthalene plant, although we're still -- I say we're done with the CM&C restructuring; we're in the process of closing Follansbee, and that can't be minimized in terms of the manpower it takes. And so we don't have all our eyes 100% on opportunities at Stickney just yet, as we have to sort of finish off the Follansbee activities, but there's certainly potential for continued cost reduction, which will help offset various headwinds that we'll continue to face as the markets that we draw raw material from and the markets that we serve are volatile markets, right? The steel and the aluminum industry have a lot of volatility associated with it. So it's tough to do what we -- I think we've been able to do and maintain that. You're still going to have some ups and downs, but I think we have enough opportunities to continue to drive for cost reduction to help offset some of the potential headwinds coming and obviously benefit us even further when the markets happen to be moving in our favor. In addition, Chris, on the CM&C side, there's some really interesting things we're working on from a product standpoint that could help us, that could help move us potentially into some, move some product into higher-value market streams, and that certainly would be a nice insulation, additional insulation to that business against some of the risks that we face in, again, the industries that we serve. And I'm afraid I can't get any more specific into that at the moment, but there's some things that we're working on that within the next year to 2 years, hopefully, we'll have to the point where we're actually realizing, maybe, some benefits from it, and certainly able to talk about it in more detail. So that's CMC. And as for Performance Chemicals, and our ability to get back to the peak 22% margins, look, that business, there's no question that changes in copper pricing have a significant impact on that business. There's no getting around it, right? We hedge copper as a means to have, if you will, visibility into our near-term operating results, so we don't experience extreme volatility in any given quarter, so, or year, for that matter. So it allows us to at least foresee and manage and smooth out, if you will, the peaks and valleys of the copper market. And it also allows us over time to ensure that we can possibly get some of that back when needed through pricing actions. So we, when we were achieving the 22% peak margins, that's when we had copper pricing locked in at, for us, probably as low as levels as we've seen them in quite a long time. So as copper pricing's moved up over the past couple of years, we've had to absorb 20-plus, $20 million to $30 million of additional cost. And some of that's obviously been reflected in the pullback on profitability in the business, but quite frankly, we've been able to offset a good bit of that through some of the actions we've taken from an operations standpoint and improving our ability to produce a higher level of the intermediate products rather than having to go on the outside market, as well as market share gains, which this year has been really an incredible year in terms of the volume of business we've been able to bring in while we already hold the share that we hold. So I think any chance of us sort of getting back to those sorts of levels that you talk about will largely be driven by where copper prices move in the future.

That's great. Thank you for all the color. Just 2 more questions here. In regard to RUPS, but more specifically UPS, you mentioned previously, and you continue to mention the aging utility pole environment. How should I think about and characterize that as we look for its potential contribution towards your longer-term outlook? And my last question is just in regard to your debt-reduction goals. How do you balance different opportunities that present itself to the business versus your priorities for debt reduction?

Okay. So utility products and services -- so I would say certainly we view the macro environment for pole replacement as a positive, and without anything else that would be something nice to talk about, our biggest opportunities in that business are clearly 2 things, and it's not the organic growth rate of pole replacement, it's -- for us, it is further integration and capitalization of our operating network with our tie- and pole-treating plants, and it's market share penetration, further market share penetration. So those are the 2 areas we're focused on. If we're successful in those 2 areas, it would far dwarf any positive tailwinds that might be out there as it relates to year-over-year growth rates in pole replacement, so that's where we're focused, and that's what you'll hear us talk about and focus on in upcoming calls. Moving on to the question of the debt and sort of how we balance opportunities that come forward versus debt reduction, we've -- so the unfortunate part of the large acquisitions we've made over the past couple of years is obviously the leverage that we've taken on and the perceived risk that comes along with that, which I think has been reflected in our stock price in both cases. When we bought Performance Chemical was back in 2014, and then the utility industrial products and recovery resources businesses last year. So we showed back in 2014 that we were pretty adept at buckling down and moving leverage back down. Was the timing of the UIP and KRR purchases perfect for us? No, probably would have liked that if it could have happened a year down the road. I think we would have been in a better position to absorb it. But you can't time those things, and so they were there, we opportunistically went after them, and then consciously raised our leverage back up to levels that we don't like to operate at, but with the right opportunity, we will. And now we're focused on trying to move the numbers back down. There's a number of opportunities out there that we're looking at, and look, every -- nothing comes for free, so there's a price tag to everything. We certainly, I'd say, are more weighted towards getting our debt to continue to move down. And so I'd say, overall, for us, we have to see continued debt reduction. I'm okay spending some money on some opportunities that make sense for us, but it can't be at the -- at this stage, it cannot be at the price of moving our debt levels up. So if we can do those things in concert, reduce leverage -- reduce leverage, not necessarily debt but reduce leverage, while we also take advantage of opportunities, I'm all for that. But if it's taking advantage of opportunities while also increasing leverage from where we're at today, that's just -- that's not in the cards for us.

The next question comes from Laurence Alexander of Jefferies. Please go ahead.

Hi, good morning. It's Dan Rizzo on for Laurence. How are your?

Hi, Dan.

Can you just provide color on how pricing works in both PC and the RUPS segments? It looks like you get nice pricing in PC and the RUPS segments? It looks like you get nice pricing in PC; I was just wondering, is that, like, introducing new products, or is that a negotiation? How should we think about it going forward?

Well, in PC, we have a sizeable customer base that's some of the largest treaters in the country. And long-term relationships, we typically put together multiyear deals with our largest customers, and pricing is always a negotiated aspect of that. So there's -- we don't have adders in our pricing that account for changes in copper pricing and things like that. We commit to pricing at certain rates for them and protect them, if you will, against movements in copper. And so that's why we go out and hedge the underlying commodity to ensure that we don't have the volatility. So we help take the risk of that part of the product mix out of the equation for our customer base, which I think they appreciate. And as prices of our major raw materials move over time and deals come up for renegotiation and renewal, we sit back down at the table and have discussions about that, just like we do with most of our products. So it's on, in most cases, if you will, a deal-by-deal basis, and they come up at various times. In RUPS, a lot of our business is long-term-contract-oriented because most of what we do is with the Class Is, so you're talking about 3- to 5-year contracts. And again, you're sitting down at the table and you're making your best case as to why you need the pricing you need to support an acceptable level of profitability for your business. Those are tough discussions. Obviously the rail industry over the past couple of years has been heavily focused at taking costs out of their business. The reduction in volume and therefore utilization for companies like ours makes it tough for us to maintain profitability without trying to get some level of price to help offset that, or something else, if you will. So again, we have those discussions as each particular contract happens to come up. And on the commercial side, we're out there bidding on business and competing for bids that are out there and trying to get a sense of the market, where things are at from a supply standpoint and being able to provide the product that they need when they need it, and we use all that market intelligence to inform us with what we think is the right price to take on a particular piece of business. And we win some, we lose some, and the pricing and margins tend to be driven by where the overall general market is at, at a given point in time. So that's about as specific as I can get on those businesses.

Right. No, that's very helpful. And then just one other question. I mean, forgive me if missed this, but you talked a lot about the productivity efforts and restructuring. How should we think about the cash spend over the next couple years on -- as you kind of go for just reducing costs and doing the footprint optimization and the different moves?

Well, certainly as we move through the, if you will, the final phases of the CM&C restructuring, we should see our cash, our resulting cash flow improve. I mean, we've spent -- I think we've spent somewhere in the neighborhood of $80 million to $100 million over the last 5, 6 years. So again, that's cash that we would have loved to have had to deploy into other opportunities or paying down debt. The good news is we're -- again, we're nearing -- we're winding down to where that sort of annual run rate of $15 million to $20 million of cash devoted to shuttering facilities should be going away, and I'd say the -- we'll have some that'll continue after 2020, but at that point we should see a nice drop and see that ultimately reflected in our cash flow as well.

The next question comes from Mike Harrison of Seaport Global.

In the PC segment, you had a competitor say yesterday that they had lost an application, so clearly -- you mentioned the share gain opportunity, but just wondering kind of how that plays out in terms of a competitive environment. There's really only three players there, and if one leaves, how much additional volume could you see? And did you start to see that already in Q3, or is that yet to be seen?

You're referring to our PC business?

Yes.

Yes. So we've seen nice volume gains this year, and like I say, the vast majority of that related to market share. One of the things we -- that's been tough for us is, truthfully, it's somewhat surprising, as much share as we have been able to gain, it typically doesn't happen in this market. And so we've ramped up our capacity at our facilities to handle a level, as well as providing some additional buffer for all the volumes that came as a result of the move to ground contact. I don't think any of us saw that we would see this sort of volume gain as a result of some market share wins. So it's put stress on our systems, and I think probably increased some of our supply chain costs and things like that, that should be somewhat temporary as we sort of get our feet under us and recalibrate sort of what the ongoing run rate will be. But it's -- we'll be happy to take on additional volume from either of the other two competitors out there, and we'll figure out a way to do it, but we've been running to stay -- try to catch up and stay ahead of the gains in the market that we've seen over the past couple of years, and it's been challenging, but I give a lot of credit to our folks out there in the plants. They've done a fantastic job of figuring things out and making sure we're not missing orders and we're taking care of our customers every day. So there's -- while I'd say it's a challenge, Mike, we'd be happy to take on any additional new business that's out there.

Okay. And then in terms of the contribution from the China joint venture in CMC, it sounded like what you were saying is that there's going to be some sort of downtime in the fourth quarter, but just trying to get a sense of how much lower that contribution could be in Q4 versus Q3 on an EBITDA basis?

Yes. It's -- they've not been a tremendous contributor to our results this year, so it could be anywhere from, I'd say probably anywhere from, we'll call it $2 million. $2 million, $2.5 million of contribution is probably what we'd be missing for the quarter if they end up being down for the entire quarter.

All right. And then in terms of the tie procurement situation and in RUPS, obviously that was a much bigger issue earlier in the year, but can you just comment, I guess, or maybe give a little bit more color on whether we're completely back to normal, and where you are in terms of your white-tie inventories relative to normal?

Well, the situation has improved, and I'd say our inventory situation has improved. It's sort of, it's different in different areas, different regions, different plants. We find ourselves in a little different situation. Some are in better shape than others. Others, we continue to be in a position where, if we can get our hands on the material, we can sell it. So it's a mixed bag. I'd say overall the run rate for untreated tie procurement this year is at what I would probably call a somewhat normalized level, so I don't think we're ahead of ourselves to where we're building to a point where you see a crash or pullback in another year or 2. I think this is more of a normalized rate that we're seeing this year. And it's the same sort of rate that we expect to see next year as well. So we had, heck, we had probably a, let me think here. We had a $2.5-million, probably, tie differential year-over-year from, I think, '17 to '18, or '16 to '18, maybe, over that 2-year period, which is a huge swing in that side of the business. And we really don't want to see those sorts of swings. We want to operate somewhere consistently in the middle. The problem is, is again, the market doesn't always cooperate with that. But where we're at right now, we're sort of right in the middle of that number.

All right, thanks for that color. And then the last one I had is just about the RUPS business. I feel like all your commentary around operating efficiency, utilization and network optimization, it seems like everything is going well, but I was a little bit surprised to see that margin declined sequentially. So why aren't we seeing those operating improvements or utilization improvements show up at the margin line?

Yes. I think we are. I think there's a couple things that mask that. One is, crossties, while they're the majority of that segment, we have a smaller maintenance-of-way piece that has suffered this year due to some of the cutbacks and pullbacks on spending in the rail industry. And so the poorer performance in those businesses has contributed to that margin pullback quarter-over-quarter or quarter-to-quarter. And the other piece is, I think there's a mix element to this that sometimes gets lost. And when we, so second quarter, so in different parts of the cycle, you'll have your commercial piece of the business that will either be your better margin business or it'll be your worst margin business. And it'll be dependent upon sort of where the overall demand for ties are at, right? When you can get your hands on ties pretty freely, competition in the commercial market heats up as people try to move that product. And so pricing goes down, margins go down. When crossties tighten up, obviously, there's less to go in that market, and so pricing naturally goes up. We've been in that environment over the last year or so. And so whenever we see more commercial volume as a percentage of our business in a particular quarter, it's going to affect our margins. And what we saw, certainly second quarter, third quarter, is a higher percentage in the third quarter of Class I volume, which is more consistent margin-based business because again, that's contractual, and so you're not really changing anything from quarter to quarter. We saw a heavier concentration of Class I business in our third quarter numbers than we did in our second quarter numbers where commercial was a greater proportion, and I think with where we're at in the cycle, the commercial margins are stronger margins. So with that change in mix, you saw a resulting drop in margin.

Make sense. Thank you very much.

The next question comes from Liam Burke of B. Riley FBR. Please go ahead.

Good morning, Leroy, good morning Mike. Leroy, you talked gm about the potential market share gain, the ability to gain share on the RUPS business. Where would you see that, and how would you anticipate understanding that your contracts are in longer-term and it's a fairly tight market?

Yes. Liam, I'd say that there's the Class I market, which we have historically put most of our focus on, and so again, therefore it makes up the majority of our business. And then you have the commercial market, which truthfully, we've kind of used that to backfill and haven't put as much effort into. I think there's opportunity on the commercial side to grow market share. Class I side, as you point out, is going to be more difficult, right? We hold leading shares with basically almost every Class I railroad, and they want multiple suppliers, and so your share might move around here, a little bit up, a little bit down in any given contractual period, but for the most part you're not going to move that needle a whole lot. There's some potential opportunity there, I think, as some contracts mature, but most likely it's probably more on the commercial end of things where we have some opportunities that we haven't really gone after in the past.

Okay. And also, on the -- on PC, have you scaled your capacity more in line with demand now to avoid having to go outside for raw -- intermediate raw materials purchasing?

Well, so, Liam, with the influx of volume, that additional volume that we've had this year, we -- I would say without the additional volume that we've taken on this year we would probably be in that situation. With the additional volume and the winds that we've had this year, we're still in a position where we're having to go out and get some of that intermediate raw material. Which, I guess, the driver for that is good, right? And the fact that we got a lot of business that wasn't necessarily foreseen, and we'll continue to adjust to that. We have plans in place for improving and moving around some capacity to allow us to, if you will, optimize that situation. But no, we're not 100% producing our own intermediate raw material.

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

Okay, I'd like to thank everyone for listening in today and taking the time to participate on today's call, and I really appreciate your interest in Koppers and your continued support. We'll talk to you next quarter. Thank you.

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