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…

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…

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…

[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…

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.