Koppers Holdings Inc. (KOP) Q4 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' Fourth 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 Q&A session. Please note, that this event is being record. I will now turn the call over to Quynh McGuire. Please go ahead.

Thank you and good morning. I am Quynh McGuire, Vice President of Investor Relations. Welcome to our Fourth Quarter and Full Year 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've 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 March 31, 2020. 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 is 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. I'll now turn the call over to Leroy.

Thank you, Quynh. Welcome everyone to our fourth quarter 2019 earnings call. I'd like to start today's call with an explanation on last week's announcement regarding the sale of our last remaining tar distillation facility in China. In that same announcement, we also reported our preliminary results for the fourth quarter. Since we do not give quarterly guidance, only annual, we do not buy policy pre-release results whether favorable or unfavorable to the consensus estimate. This policy extends to the fourth quarter. I realize it's created a unique situation given that with one quarter left and update of annual guidance by default provides quarterly guidance, last week presented a special situation. We had reached agreement to sell our KJCC facility in China, which we expected to be viewed as a positive market event, given the volatility of that business and the fact that it is non-core to our wood technology-based strategy. And while the audit of our annual results is not yet final, we nonetheless knew they would fall short of our last communicated range of annual guidance and be received negatively. While it remains our practice to not pre-release, we were not comfortable releasing a perceived positive event, the KJCC sell, a week in advance of a likely negative events, our fourth quarter earnings miss. The pre-release last week is not intended in any way to represent a precedent or change in policy for how we handle perceived positive or negative financial information at the end of quarters on a go-forward basis. Before I get into more detail, I want to summarize some of the key messages I plan to emphasize today. Number one, while fourth quarter earnings were certainly a disappointment, our strategy to continue building around our leading position in wood technologies remained sound and is creating value. Number two, the reorganization that we announced at the beginning of the year is a critical component to aligning our resources to utilize our talented people in the best way possible. The reorganization also signals to more intentional effort to position Koppers as a leader in protecting what matters and preserving the future. We intend to do this by executing our business model in a more sustainable fashion. Stakeholder value has become an even more important topic of late, and at a Koppers we believe that everyone wins in an organization that's committed to doing business the right way. Number three, reaching agreement to sell our last remaining coal tar distillation business in China is a significant accomplishment on many levels, and I'll discuss that later on the call. Four, several other non-core components to our business are being evaluated to be placed with companies that represent a better fit. Doing so, we generate more cash to apply to reducing leverage while trading off very little EBITDA. Five, we plan to expand our business by adding production of the treatment preservative copper naphthenate to our product portfolio. This will enhance our product offerings as preservative pentachlorophenol continues to come under increased regulatory scrutiny. And six, pivoting back to cash. This morning we filed an updated shelf registration statement and entered into an At-the-Market Issuance Sales Agreement. To be clear, there is no immediate intent to act on this instrument. In the longer term, it could represent a very important tool in the next couple of years, and I'll explain this in further detail also later on today's call. But now let me provide an update on our Zero Harm efforts and out a few summary comments on the fourth quarter and prior year before handing the call over to Mike to review the financial results in more detail. For the fourth quarter, I'm proud to report we had 36 out of 46 operating locations with zero recordable injuries. And additionally, we had a record high year for leading activities, a great indicator that our people are actively looking to identify hazardous exposures, which will ultimately drive down serious incidents. We continue to deploy our core Zero Harm training modules throughout all of our business units, while also developing additional tools to help employees improve their safety-first skills. Coming up in late March, we will again be gathering our leaders from across the globe in Pittsburgh for our annual Zero Harm / Zero Waste Leadership Forum to discuss ongoing challenges and opportunities and take part in learning sessions. This year's agenda will focus heavily on the theme of inclusive leadership, ensuring that we're operating our business in a way that takes care of our people, communities and environment. We believe in fostering an inclusive and innovative workplace and contributing beneficial products to society, which creates long-term value for our shareholders. Thank you to our Koppers' employee across the world for doing their very best to live out our Zero Harm culture every day. We've made significant progress to-date and remain focused on further improvement as we strive to get to zero. Moving on, a few quick comments on the financial results. For 2019, Koppers delivered $1.8 billion in sales, our highest sales year ever, and a $63 million or 4% improvement over 2018. Excluding the impact of sales from the companies we acquired in 2018 and the negative impact of changes in foreign exchange rate, sales increased by $39 million or 2%. From a profitability viewpoint, 2019 marks the third straight year that we topped the $200 million adjusted EBITDA mark hitting $211 million this past year, after never previously reaching that milestone. It also represents the second best adjusted EBITDA performance for the company, the all-time best occurred in 2018 due to out-sized earnings from our CMC China business during the first quarter of that year. As mentioned, I plan to give more color on the announced sale KJCC, as well some perspective as to what it means for our numbers going forward. The transformation of our company over the last 5 years from a carbon product-focused business to a company focused on protecting what matters in preserving the future through technologies, to preserve or enhance wood, has led us through an extensive portfolio of restructuring of our business. As a result, that necessitated a focus on adjusted numbers in order to provide the investment community a better picture of what the future holds. The good news is we expect adjusted EPS and GAAP EPS to begin to converge as we get closer to the end of some of the most expensive aspects of our restructuring plan. GAAP EPS for 2019 of $3.16 is the second highest GAAP EPS in the company's history, behind only 2008 when we had a significant gain on the sale of our coke plant located in my Monessen, Pennsylvania. Adjusted EPS for 2019 of $3.31 represents our third best adjusted EPS performance over -- behind the last 2 years. In 2015, as I stepped into the CEO role, I made a commitment to Koppers' goal will be to achieve sustainable profitable growth averaging between 11% to 15% adjusted EBITDA margin through an economic cycle. Keep in mind that for the six prior years, our margin high had been 11.3% and we have seen essentially flat to declining margins over that time. In contrast, 2019 represents our fourth straight year of adjusted EBITDA in that target range of 11%-15%. Getting into the fourth quarter results. Our RUPs and PC businesses showed year-over-year improvement, as expected, but both are short of our more ambitious expectations for the fourth quarter. RUPs, our base crosstie business, had an impressive showing with strong untreated tie volumes in a steady treating pace. Our main away portfolio, particularly our recovery business and railroad structures businesses didn't measure up to prior year performance. The structures business actually had an overall better year in 2019 versus 2018. But results were more heavily weighted into the first third quarters. However, as customer sharply curtailed business in the latter part of the fourth quarter. The recovery business struggled for most of the year as a major customer adjusted its operating model for collecting which affected our volumes. That continued into the fourth quarter, as expected, and then a customer's operation had an unexpected outage, impacting the business already operating at lower rates. In combination, those two businesses had a $2 million negative impact on our RUP's EBITDA results for the fourth quarter when compared to prior year. Results for our PC segment in the fourth quarter were stronger than 2018, but unfortunately any further improvement was muted by a drop in EBITDA from our international businesses. Our European business suffered from a combination of softer overall demand and an increase in reserves and cost during the quarter related to product registrations, as the European Union has significantly been clamping down on product re-registrations of products in our space through its Biocidal Products Regulation. Our Australasian business benefited positively in 2018 due to certain reserve adjustment, while most such adjustments in 2019 went in a negative direction. For the fourth quarter, the combination of the year-over-year shortfall for those two businesses amounted to $2.4 million dollars of EBITDA. Finally, global CMC results were lower in the fourth quarter, but that was anticipated, and still finished generally in line with our expectations. KJCC results were off by about $2.3 million, which was a little more than expected. Also we dealt with the temporary unplanned outage at our Stickney plant during the fourth quarter. And our CM&C Europe and Australia businesses performance outpaced projections, enabling the overall CM&C segment to finish the year with EBITDA in the range of what we had anticipated. Before I provide our outlook for 2020, I'll turn it over to Mike to discuss some key highlights from the fourth quarter and the full year of 2019.

Thanks, Leroy. Let's start by referring to the slide presentation provided on our website. On Slide 4, revenues were $393 million, which was a decrease of $32 million or 8% from $425 million in the prior year. Excluding a negative impact from foreign currency translation of $3 million, sales were lower by $29 million over 7%. The decrease was due to lower demand in the global CM&C segment, partially offset by increased volumes and favorable pricing in our wood preservation businesses. On Slide 5, consolidated sales for 2019 were $1.8 billion, an increase of $63 million over 4% as compared to $1.7 billion in the prior year. 2019 sales represented the third consecutive year of growth as well as the highest level of revenues in the history of the company. On Slide 6, adjusted EBITDA was $39 million or 10% compared with $47 million or 11% in the prior year quarter. The year-over-year decline was due to lower sales and profitability from CM&C. CM&C profitability declined from prior year due to weaker demand and pricing pressures. RUPs delivered improved profitability, driven by increased demand and higher capacity utilization related to wood treatment and sourcing. PC reported a year-over-year increase in profitability, primarily due to higher sales in North America Moving on to Slide 7, this shows our EBITDA bridge of $211 million in 2019, compared with $222 million in the prior year. This decrease was primarily driven by significant lower year-over-year profitability in our CM&C business and as you can see a lot of that primarily came from KJCC in China, are wood-based businesses were ups and PC delivered higher profitability. On slide 8, our adjusted EBITDA trend shows profitability excluding contributions from our KJCC operations and as shown our core businesses delivered increasing increasingly higher levels of adjusted EBITDA for the time period beginning in 2015 and every year thereafter through 2019. This represents a compound annual growth rate of 7%. Now, I'd like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $6 million compared with $12 million in the prior year quarter, adjusted earnings per share was $0.29 compared with $0.60 for the prior year period. Both adjusted net income and adjusted earnings per share reflected higher year-over-year profitability from our wood preservation businesses, but the gains were more than offset by significantly lower demand for our carbon-related products. Our GAAP tax provision in Q4 reflects a one-time deferred tax benefit of $15 million, reflecting the completion of a legal entity restructuring project in the Netherlands. This benefit will generate future cash tax savings, which we will receive over the next 11 years. The 2019 effective tax rate on adjusted earnings was approximately 20%; and looking forward to 2020, we're projecting an effective tax rate of 32%. The lower 2019 tax rate was primarily due to a favorable tax benefit as a result of the closure and finalization of a US tax audit. With our adjusted EBITDA guidance of $200 million to $210 million in 2020, we are forecasting adjusted EPS to be in the range of $3 to $3.30, and this compares with an adjusted EBITDA EPS number of $3.31 in 2019. For 2019, cash provided by operating activities was $115 million compared to $78 million in the prior year. Capital expenditures were [indiscernible] compared with $110 million in the prior year. The year-over-year decrease of $73 million reflects investments in the prior year for a new naphthalene unit at our CM&C plant and Stickney, Illinois, as well as production expansion facilities in the PC segment. Net of $3 million in insurance proceeds, cap expenditures were $34 million in 2019. Referring back to our slide deck on Page 9, our net leverage ratio at year end was 4.1x. Our net debt was $868 million, which was a decrease of $82 million, compared with $950 million at December 31 of the prior year. Generating cash and paying down debt remains a big priority for us. In 2020, we plan to reduce debt by a minimum of $100 million, contingent upon a successful closing of the KJCC divestiture. As a result, pro forma net debt to adjusted EBITDA ratio is projected to be in the range of 3.6 to 3.8 at the end of 2020. We continue to focus on strengthening the company's balance sheet, and accordingly further reductions in debt and leverage could occur to the extent that there are additional divestitures of non-core assets. Now I'd like to turn the discussion back over to Leroy.

Thanks, Mike. As I get into the outlook for our various business segments, I will also take time to provide more information and context for the six main points I had mentioned in the front end of my comments. Number one, our wood preservation strategy is working; number two, reorganization is important to the long-term sustainability of Koppers; three, the importance of the KJCC sales; four, our continued hard look is the value of our non-core assets; five, how adding new product to our portfolio importantly fits our company's purpose of protecting what matters and preserving the future; and six, our plans to utilize the at-the-market stock issuance instrument. So if you refer to slide 11, it provides a great visual representation of the work that has been done since 2014 to transform Koppers from a primarily carbon product-based company focused on more volatile end markets to being a global leader in wood technologies. Over that time period, we've essentially flipped the script going from a company that had a little more than 1/3 of its portfolio in wood to a company that today has over 2/3 of its portfolio in wood, and after the recently announced sale of KJCC is completed, our wood-based portfolio will exceed 70% with the potential to go even higher. And as we've restructured our business around that philosophy, our profitability has gone up, our margins have gone up and remained at levels only temporarily reached more than 10 years ago, and our operating cash flow has exceeded $100 million four out of the last five years. If we achieve the numbers we're projecting on our wood-based businesses in 2020 than those businesses for 2019 and 2020 will have added approximately $50 million in EBITDA over that two-year period. That is real improvement and does not include impact from 2018 acquisitions. So all signs continue to point a positive direction supporting our strategy built around wood. Next, I'll talk about some of the recent organizational changes and how they fall into our long-term strategy in an important way. First, I'll mention the promotion of Jim Sullivan at the beginning of the year into the Chief Operating Officer role. Jim has progressively taken on more responsibility since joining Koppers in 2013. Having him take the lead role overseeing all of our interconnected businesses was an important and much needed step. Jim is charge with pulling resources together in a more productive fashion to unlock the opportunities we have to create more value for all stakeholders. One early example is optimizing our North American treating network, which didn't gain near as much traction in 2019 as I had hoped or expected. As our teams under Jim have been refreshed and realigned, we're already seeing greater energy to drive results for Koppers and much more collaboration. There are many possibilities and scenarios we can eventually deploy to deliver significant benefits. At this point, it is about lowering our cost structure while still providing opportunities to increase market share, while maintaining operational flexibility. The other major organizational change that was made at the beginning of 2020 was elevating Leslie Hyde from her role as the company's Vice President of Strategy and Risk to the role of Chief Sustainability Officer. Why now? Why that role? And why Leslie? First, let me state the obvious. The concept of corporate sustainability is here to stay and has gained momentum over the years that will only continue as company seek to balance the demands of many different competing stakeholder groups. The bottom line, it's incumbent upon me to lead efforts to figure out how the Koppers business model remains relevant or evolves to continue rewarding our owners, solving our customers' most important challenges, supporting employees and their families and serving as a responsible steward to the communities that we impact every day. At Koppers, we do so much already to help ensure our future, but we also fall short of our standards on occasion, and we need to be better. It's good business and a responsible thing to do. Leslie has a passion for sustainability. We need more discipline and focus on challenging ourselves to think longer term, and if not now, [indiscernible] is littered with companies that lost their license to exist because they relate to the game on corporate sustainability and social responsibility. Leslie is tasked with helping me to make sure that that will never be the case here at Koppers. The final item I want to mention on the organization front is that we announced the retirement last week of Steve Lacy, our long time General Counsel and Secretary, who 3 years ago added Chief Administrative Officer duties to his responsibility. Steve will step back beginning March 1 into a role allowing him the transition to retirement while still working into advanced several higher-profile matters for Koppers until his official retirement date on December 31 of 2020. While Steve has worked tirelessly on the KJCC sales agreement, making three trips to China in December and January alone, it's purely coincidental from a timing standpoint that our required disclosures on both his retirement and the KJCC sales. Agreement happen to fall on the same day. These contributions to Koppers have been invaluable through the years, and he will be sorely missed by many. Moving forward, we're fortunate to have a talented attorney, Stephanie Apostolou, who has worked under Steve's privilege for nearly a decade and he's now ready to step into the role as our new General Counsel and Secretary. Steve is leaving the company in good hands. Want to move on to the importance of the KJCC sale while the market has given us zero credit yet for the signing of the agreement to sell KJCC. I'm confident that the value of the disposition will be realized by the time that we officially close the transaction in the next 4 to 6 months. It seems that some of the hesitancy has to do with the general concern as to whether we'll be able to close the transaction within the expected window that we announced due to the continued threat of the coronavirus and other factors. I understand the concern, and while I can't obviously provide any guarantees, I can at least tell you that both sides have deployed a full-court press over the past three months to get to a signed agreements. In fact, during the final month, before the signing an announcement last week, all dealings were handled by teleconference due to travel restrictions and we still managed to get that done. Both sides are highly motivated to see this through to completion. It's a valuable vertical integration opportunity for the buyer, and it's a business that's non-core to Koppers. Based upon the challenges we've worked through thus far I'm confident we will reach a successful conclusion. As for value, as disclosed the business average 10.5 million of EBITDA over the past five years, if you exclude the best and worst years about five-year period, the average was $8.7 million. If you just look at 2019, it was $9.7 million. The acquisition multiple range of those three numbers of 10.2x to 12.2x. As a company Koppers is currently trading at somewhere closer to six and our highest levels we've approach to nine times trading multiple. Also, the sale does resolve the outstanding pricing dispute that we have with the buyer. Virtually any way you do the math, we're recouping a considerable amount of the value we believe we are owed. Additionally, the cash proceeds are a good story. When you consider that we're 75% shareholder of KJCC and therefore our gross proceeds from the total transaction approximately $80 million, which we expect to realize net proceeds from that of at least $65 million, which is over 80% of the share of our proceeds. This business has been a major distraction both internally and externally over the past 5 years, and it's required an inordinate amount of management's attention. The lift we will get from a productivity standpoint alone in this business is no longer officially our will be tremendous. Turning to the balance sheet. It's been clear for some time that the investment community has concerns about our leverage, although just about every other measure of performance and risk has improved from where we started five years ago. That's not been consistently reflected in our stock price. I understand the concern, and while I believe that we can navigate through a higher debt profile as we have in the past, I remain committed to working our leverage down in order to further reduce our risk profile and recapture shareholder value. The disposition of KJCC is another important step in that direction as we can continue to look at our portfolio of assets, we have some veteran areas not core to our strategy that is built around wood protection and enhancement. We also have some businesses in our core that aren't generating an acceptable level return and need to improve. As we have over the past 5 years, we will continue to look hard at what businesses have earned the right to remain in our portfolio. Several options still exist to put a couple of our non-core businesses in the hands of what we would call better owners and realize cash to go into reducing debt. New owners will be highly committed to investing in growing those businesses, the key element of their strategy. However, we will not give valued assets away. I'm not talking about conducting a fire sell. I'm talking about fair value for fair value just as we were able to reach with the sale of KJCC. Buyers have been and we'll continue to get kicked as we explore all options to strengthen our portfolio and our balance sheet. As also announced earlier today, we made the decision of Koppers that to our wood preservative portfolio by entering the copper naphthenate market. There has been a lot of noise in the utility pole treating market over the past several months, since Cabot Microelectronics announcement in November to exit the production of pentachlorophenol at its Mexico facility in 2021. Abit [ph] is the only producer of penta today, and while penta is one of 3 predominant preservative systems along with chromated copper arsenic, or CCA, and creosote used to treat utility poles for decades it's continued to come under regulatory scrutiny over the years. This is culminated with penta classified as a persistent organic pollutants by the Stockholm conventions POP review committee in 2015. As a result, it is being targeted for elimination of restriction by the conventions the 183 member countries. The US is currently not a party to the Stockholm Convention, but penta that does not appear to be a long-term viable treating solution for the industry. As a result, we're recommending utilities begin considering their options to ensure a smooth transition. Creosote and CCA, both chemicals that we produce, will be able to fill part of the markets served by penta today. A third preservative will be needed to at a minimum treat certain wood species requiring an oil-borne solutions to provide an alternative to creosote. As part of our strategic decision to only use chemicals that we manufacture, we looked at possibly producing Penta. After our analysis though, we decided that the risks far outweighed the benefits. Copper naphthenate by all accounts appears to be the appropriate third option, and we are working on the economics and logistics of a model that we expect to be in place sometime in 2021 in advance of Cabot ceasing their production of penta. We will update you on further calls as the situation continues to develop. This morning, we filed a universal shelf registration statement, giving us any number of alternatives to raise capital when the need arises. This shelf registration replaces our prior shelf that expired in 2019. And in conjunction with the shelf, we also entered into an At the Market Issuance agreement and filed a prospectus supplement as part of the shelf. During the term of the ATM, we can issue up to $100 million of shares at prevailing market prices and issue equity in an effective manner. To be perfectly clear though, we have no intention of issuing any shares under the ATM at current depressed share prices for copper stock, and we are not obligated to issue any shares under the ATM at any point of the agreement. This ATM is purely another tool for us to have at our disposal for general corporate uses. At this time, I would only consider issuing shares under the ATM, once our share price at a minimum makes its way back up above the $40 share mark. Continuing on with a quick review of our business segments, I want to start with Railroad and Utility Products and Services. 2019 was a tough year for the railroad industry, but we managed to more than hold our own and actually bounce back quite nicely from a 3-year downturn in volumes and results. According to the American Association of Railroads, Class 1 railroad activities continue to be affected by the extended decline of coal markets, trade disputes in the subsequent economic uncertainty, they create also have had a sustained negative impact on rail activity. The ARR has stated that these factors have had more of a dampening effect on rail-served industries and the overall economy. ARR data shows a continued decline in rail. Traffic through December 31st of '19, total US carload traffic decreased 4% from last year while intermodal units dropped by 5.1%. The combined US traffic for carloads and intermodal units fell by 5%. According to the Railway Tie Association Annual North American demand for crosstie replacement has moved significantly lower in recent years. Total crosstie installations for 2019 initially estimated of $22 million to $23 million crossties had been revised to $20.7 million crossties for 2019 and are anticipated to be at similar levels for 2020. The key drivers include reduced heavy-haul loads such as coal and fracking sand due to a continuing shift from coal to natural gas, lower agricultural, shipment due to lower crop yields, manufacturing constraints related to a less optimistic economic outlook and uncertainties from ongoing trade tensions. In terms of raw material supply of untreated crossties varies nationwide, lumber prices remained relatively stable in 2019 and that's continued into 2020. And although we are still early in the year and factoring in typical seasonality, there seems to be somewhat improved availability of timber. Koppers is managing our untreated tie inventory in anticipation of having higher levels of dry crosstie inventory ready for future treatment. Looking at our Utility and Industrial Products, our UIP business, we expect demand trends will continue to be relatively favorable driven by planned pole replacements along with those generated by various weather events. On the treating side for both ties and poles, our 2019 and '20 story has been about positioning us for market share growth and chemical pull through. We already over earned a couple of nice wins as we head into 2020 and we look for further smart opportunities to push the advantages of our vertically integrated supply model that begins at untreated wood and goes right through end of life recovery. We also expect to begin generating further benefits from network optimization this year. In fact, as of yesterday, we are now processing end-of-life ties that are Somerville, Texas facility, which is new business for us, while we also continue to test run utility pole treatment that location. For the RUPs business, we expect modest market share growth in benefits from network optimization efforts such as Somerville to carry us to a year-over-year EBITDA increase for this segment of $12 million to $15 million. As reflected on Slide 12, we are forecasting adjusted EBITDA to be in the range of $72 million to $75 million. This equates to an adjusted EBITDA margin of about 9.5%. Moving on to our Performance Chemicals business. The market outlook calls for continued growth, although with some very data points. According to the Leading Indicator of Remodeling Activity, or LIRA, the annual national growth rate for home improvement repair is expected to rise only modestly in 2021 at 1.5% versus annual gains of between 5% and 7% in recent year. Also, LIRA sites indications that despite a lack-luster growth projection, growth in the re-modeling market is still anticipated at more than $300 billion in 2020. The backdrop of continuing low interest borrowing rates may help stem some of the challenges this market faces as well. The National Association of Realtors states that the market for existing homes continues to show mixed signals. Total existing home sales in December climbed 3.6% from November, but even with historically low mortgage rates, sales have not increased by corresponding rate. NAR attribute that in part to a low level of housing options, meaning pricing prices are rising too quickly, leading to existing home sales unable to achieve higher growth rates. The Consumer Confidence Index improved slightly in February, following an increase in January. The index now stands at 130.7. up from 130.4 in January. Consumers continue to view current conditions favorably and short-term expectations have improved. There's optimism concerning the labor market and job prospects, which should support spending and economic growth. In Performance Chemicals, we expect sales growth to come from market share gains as well as some pricing actions. We also expect to realize more benefits due to higher internal production levels of intermediate raw materials and a better cost position are copper in 2020. On Page 13 of our slide presentation, we are forecasting adjusted EBITDA for PC of $78 million to $80 million that equates to an adjusted EBITDA margin of approximately 17% and an increase of $9 million to $11 million compared with prior year. Turning attention to our car materials and chemicals business, we see benefits in the US aluminum market attributable to tariffs imposed on certain steel and aluminum products, creating demand for carbon pitch in the United States. Blast furnace production steel production is lower. However, contributing to a tightening of raw material supply in the US pricing in Europe and Australia for our carbon products remains under pressure, and we will see a decline in our sales and EBITDA as a result. Lower oil prices are also serving to keep pricing of certain products, like carbon black feed-stock and phthalic hydride at lower levels. Now while we do expect profitability to be negatively affected in our CM&C 2020, we still expect to generate segment margins in our success range of 11% to 15% as the sale of our lower-margin KJCC business will help to boost margins slightly. In 2020, assumptions for CM&C include the higher cost of raw materials and no contribution from KJCC. As shown on Slide 14, we anticipate adjusted EBITDA for CM&C in the range of $50 million to $55 million. That represents an adjusted EBITDA margin of approximately 12% at the midpoint. Including any contributions from our KJCC operations, adjusted EBITDA is expected to decrease by $17 million to $22 million compared to prior year, which represents more normalized levels. Slide 15 shows the various drivers in our guidance for consolidated sales. Excluding any sales generated from our China business, we expect to generate approximately $1.7 billion sales in 2020. By comparison, sales in 2019 excluding China were $1.65 billion. The 2020 sales forecast is based upon market share growth anticipated in the RUPs and PC segment, partially offset by pricing and demand pressures for certain parts of the global CM&C segment. Turning to Slide 16. Excluding the contribution from the China businesses, we expect adjusted EBITDA to be approximately $200 million to $210 million for 2020. As part of our strategic plan, we've identified additional actions that are expected to further improve profitability by $5 million to $10 million in 2020 and $25 million to $40 million on an annualized basis through 2024. The benefits are expected to be achieved through network optimization, commercial development, raw materials and other cost savings. On a comparable basis, adjusted EBITDA excluding China was $201 million in the prior year. In summary, we have many more plans and development to be shared publicly as more details become available. We continue to be driven by a clear strategy for driving growth and profitability while at the same time focusing on opportunities to aggressively reduce our leverage and risk. Our coordinated approach to build a single integrated Koppers continues to generate excitement as we pursue our goal of remaining the global leader in wood protection. At this time, I would like to open it up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Mike Harrison of Seaport Global Securities. Please go ahead.

Hi, good morning. I have a number of questions here. I'll ask a few and then jump back in queue. In terms of the Performance Chemicals business, can you help us understand what is going on in the international markets there? Is this more weather-related or inventory destocking? Or is there maybe some share loss or something else that might be more permanent in nature, more concerning as we look forward?

Okay. So as it relates to the international performance chemicals businesses, I can tell you we're not dealing with share loss. That is not an issue. The business is overall -- they are a smaller component of our overall performance chemicals business. It's unfortunate that -- again, in this particular quarter that two of those businesses had some difficult performance. In PC, there is a lot -- in Europe, there's a lot that's going on around product re-registrations and the cost of getting products re-registered into our new products in place. That has certainly had an impact on our cost structure and there is some of that that impacted us in the fourth quarter. I'd just say seasonally they tend to have lower results in both of those regions. In the fourth quarter, they tend to take off more time and have customers take facilities down for longer periods over the holidays. That happened obviously every year. I'd just say, this year demand was softer for us in those areas. And as it relates to our Australasian region, like I say, last year we -- every year as you get to the end, you have to true up reserves and accruals and it just so happened I'd say over this 2-year period. Last year we had more going in the right direction, whereas this year more going in the wrong. We had a couple of small -- we had a couple of customers that we had to deal with from a bad debt reserve standpoint. So it's just -- it was a -- that was basically a bunch of cats and dogs. The good part about those, again, the business overall is we had no share loss out of either of those businesses and would expect that we'd see improved performance in 2020.

And does that go for the international piece as well? Or is that improvement primarily going in North America?

Well, certainly the North American piece will make up the lion's share of the year-over-year improvement. The international piece of it, we do expect to see year-over-year improvement. But it will be a smaller component of the overall improvement in performance chemicals. North America, in the businesses in North America drive what goes on in PC. And again, you might have quarters here And there were where we have something like happened here in this particular quarter. The unfortunate part was, in our North American business, where we had seen extremely strong volumes all year, we also literally probably from mid-November on started this -- we saw a real pullback in volumes in North America. So, and again as things were moving, we were on target to probably offset a good bit of the impact that we saw on the two international pieces and then things dropped off in North America and we weren't able to essentially offset it through those stronger volumes. Again, on a positive note, volumes have started out very, very strongly in the early part of the year for PC. So it wasn't -- I don't want to give any indication that the weaker volumes over the last 1.5 month of last year where the start of a trend that's heading into 2020. Our volumes so far in the first quarter for Performance Chemicals in North America have been extremely strong.

All right. And then over on the RUPS business, I understand that the railroad structures piece is viewed as non-core, but on the tie disposal side that's a business that you acquired fairly recently. It appears to be an important part of your ongoing offering and kind of this vertical offering within railroad ties. So can you help us understand really what's been going on there and how do you fix it and maybe the timing around fixing it.

Well, I'd say -- so the way I look at the recovery business, it's not that there is anything to fix. We made a conscious effort to get into a piece of business that we feel is important for our customer base and therefore important for us, because it's important for our customer base that they are able to have a responsible means of disposing of their end-of-life products that we sell to them, and so we want to be part of that solution making sure that we can continue to and that they will continue to want to buy our products moving into the future. So, for us it was key to help solve an issue that they were running into problems with in terms of finding end-of-life disposal solutions for those products. So we made a strategic play to get into that business, knowing that it was a small business that didn't have a large foundation to at this point, but we could use it as a foundation in a mechanism for taking that capability to the rest of our customer base. And we have been working on that in the short time that we've owned that business. There is -- other customers have other agreements in place with other suppliers that they are continuing to honor, which we certainly understand. I will say that our customer base overall still remains highly interested in working with us in having a single integrated supplier, and what we have going on down in Somerville right now I think is a great representation of that where we just began processing ties here in the past day or two. And so that is new business for us. It did not come with the business that we bought, and we believe that we have other opportunities to continue to expand our business model across our customer base, and that's what we continue to work on. But it is -- it's not something where you walk in, you buy business in overnight, everybody changes over to us. We're working hard at convincing them of the benefits of working with one supplier and our network, right, where we're treating ties, and again Somerville's perfect example. We're treating ties there. It makes logical sense that we would take ties back and be able to process them through our facility. So, I -- that business is a business that is a work in progress in terms of building out and also building into our core RUPS business as a key part of our overall integrated product offering.

All right. And then, last question for now is on the CMC business. You have a North American competitor the recently declared forced mature on phthalic anhydride for approximately 30 days. Are you guys picking up any additional volume or pricing as a result of that announcement or that outage?

Yes, that's -- I can't get into really any specifics other than to say it's a limited universe in terms suppliers. We have -- both of us have been cooperative with each other as it relates to helping during periods of operational difficulties. So you would expect and should expect that we would see some benefit as a result of what's going on in the phthalic markets, so while they work to get their plant back up and running.

All right, thanks very much.

You're very well.

As a reminder to all participants, we ask that you please mute your line to minimize any background noise. The next question today comes from Chris Howe of Barrington Research. Please go ahead.

Good morning, everyone. As we look at the $25 million to $40 million of annualized savings through 2024 and sort of the different pockets around this, whether it'd be network optimization portfolio [indiscernible] how should we think about a potential upside around these opportunities? You have mentioned the KJCC having then in the rear view mirror four to six months from now will provide some opportunities for productivity enhancements. I assume as you move towards 2024, there is going to be other saving opportunities for the business. And my follow-up question is on the leverage ratio. Assuming there is no divestiture of non-core assets and your goal eventually to get to below three times, how should we look at debt reduction excluding and including divestitures of non-core assets?

Okay, all right. So let me start with your first question around the $25 million to $40 million. When we first announced that back at the end of 2018, I think the way we characterized it is more or less than -- the low end of that range was with more cost-related driven type of benefits, so it will come more through network and the network optimization improvement in logistics and things of that nature. General cost savings activities whereas the balance of it was more market share-related type of growth. And we have had certainly puts and takes, just in the early part of this -- In general, I'd say, I still actually feel pretty good related to the benefits probably being closer towards the top end of that range than the bottom end and I think part of that speaks again to what we have seen in 2019 and what we expect in 2020. So I only made the comment once in my prepared comments, but if you, go back through the slide deck and just do the math, right, our PC and our RUBS businesses in '19 and with what we think we're going to do in '20, will have generated $50 million of EBITDA improvement over that two-year period. Okay, $50 million. I can tell you there is very little, if any of that, that is coming as a result of any change in copper pricing over that period. Right? So, a lot of those benefits are coming from market share growth already. They're coming from cost reduction activities, and we haven't really even tapped into probably some of the better opportunities that we have from a network optimization standpoint. So I think. I think we're -- I think that we're going to capture probably upper -- near that higher end if not more than that over this timeframe, and the what happens is, as it does in many businesses, is not everything goes in the upwards direction always at the same time. And we have had some pullbacks on the CM&C side that have offset a good bit of these opportunities. That's also another reason why we have been actively working on these things as well. Two years ago when we saw -- or one year ago when we saw the KJCC operation have the significant results in the first quarter and we were tracking towards $220-plus million in EBITDA, everybody was worried that was unsustainable, and yes, we have had a pullback and we've lost a good bit of those earnings. They were more one-time in nature. But we've come up with these other savings and our market share gains that have served to significantly offset a good portion of that loss.

And I think there is a slide in the deck that shows when you -- just when you pull out the KJCC China piece of it and you look at our results over the last 5 years, we have seen steady improvement year-over-year and a lot of that has come as a result of these sorts of improvement opportunities and market share gains that we've been focused on. So, Chris, I know long-winded answer, but we are absolutely making significant progress on that $25 million to $40 million. In fact, like you said, I believe we're probably tracking higher than that, but it's being offset in camouflage by some of the other parts of the business that are coming back the other way. So, secondly -- your second question resulted around how we plan to deal with leverage and if we are able to or not able to do invest the non-core assets. I'm going to toss that over to Mike to handle.

Yes. Yes, Chris. Our net leverage ratio at the end of the year closed at 4.1x and our net debt was $868 million. So we're looking to knock that $868 million down by $100 million to get it to $768 million. And that's comprised of two pieces. We have the $65 million from the divestiture of KJCC in China, and through apples and apples normal operations in 2020, we expect to generate another $35 million of excess cash and use that to pay down our debt as well. So when you take the $200 million to $210 million range and you use $768 million as the numerator in that particular instance, you get that 3.6 to 3.8x that we're talking about. And as Leroy mentioned, that does not include maybe some other non-core businesses that could generate cash for us going forward in '20. And in addition to that we're embarking on an inventory reduction program that we're going to put in place in 2020 as well to drive down our inventories and generate more working capital. So in a nutshell, that's kind of where we stand and where we're headed from the net leverage ratio perspective.

That's great, and thank you for the color. And one last quick question if I may squeeze it in just because I'll be asked this question. In regard to the coronavirus, I know you said there hasn't been any material impact, but how should we think about the puts and takes behind that virus, if there were to be some kind of an impact down the road.

Yes. So it's a fair question. It's a good question, I think. I think that's what we're seeing obviously hit the markets right? It's hard for anybody really can't to answer that question because if there is a thousand different scenarios we can dream up and the numbers would be all over the map. I'd say directly. We have obviously the business that's over there that's under agreement for sale, that is really the only thing that we have seen an impact on to-date. But obviously we're an international company and we have -- and despite the fact that the majority of what we do is sourced locally and sold locally or within the regions, we do have some stuff that we import out of out of other regions. And you know if -- depending upon what impact this has again on overall shipping and in the logistics networks. There could eventually be some sort of spillover impact at some point in time, but I mean I had to give you a tremendously wide range as to what that could possibly be. And I'm certain, it would not just be us to be dealing with that and that's why, again, I think what we're seeing. What we're seeing in the markets, nobody can put their finger on exactly how bad things could possibly get if it just really spread into this global pandemic that just world supply chains. Right now we're fortunate that all -- and we keep up with this daily in terms of impacts. There is nothing that is nothing that has had any direct-related impact on us outside of our that in China today. Outside of that, everything else seems to be running pretty much according to plan.

Thank you, Leroy. And thank you, Mike. I'll hop back in the queue.

[Operator Instructions] The next question today comes from Liam Burke of B. Riley FBR.

Yes, thank you. Good morning, Leroy. Good morning, Mike. Leroy, you mentioned in your prepared comments that there was an outage at Stickney, was that a function of just turning up a new plant and working it through, or was it just some exogenous event that set you back?

We deal sometimes with some power issues that are unrelated to us, unrelated to things that are in our control, and we had an outage that brought us down and then we had to deal with going down like that and having to get do the work necessary to get brought back up. So any time that happens it, it has any wide-ranging impact on us. In this particular instance, we ended up having to be down a little longer than we would have wanted to be but that we're back up in operating and things are things are going well there now. But it does, we have had different issues there from time to time around power

Okay. And you touched on an earlier question on the margins on PC in North America, they were typically pretty healthy. I understand, with the European businesses, it tends to cloud the EBITDA margin. But is that still plugging along or do you anticipate being able to provide historical level support on the margin front?

Yes. I mean, I know everybody would love to see us get back to 20%-plus margins and Performance Chemicals. I think those sorts of margins are only driven with copper prices that are down in the 220 to 230 range, which were not there. We have absorbed quite a big carbon or copper hit over the past couple of years through a number of different actions. Some of it's in market share gain related. Some of it's been additional production efficiencies. Some of it has been passing some of that on is price increase. So we've worked hard to offset a lot of that impact, but if that's tough. I mean, back when we were at 20% greater, I tried to caution folks that looked at is not that is not a long range long standing sort of regular margin that we would expect in that business, we're probably on a little bit on the lower end of where I'd like to be at this point in time. Do you think that that 17% to 18% range is probably the more normalized range for us and we're moving back in that direction? So I don't think we're going to get there this year, but there is an opportunity to I think and get back in that ballpark, all things being equal, in the 2021 timeframe.

Great. And Mike, real quick. On the capital expenditures that was lower than normal this year and then you had laid that out already, but what kind of step up are you looking at 2020?

Yes, on a go-forward basis past 2020, I think a more normalized annual CapEx rate for us is somewhere in the $60 million to $70 million per year range.

Great. Thank you, Mike. And thank you, Leroy.

The next question comes from Chris Shaw of Monness Crespi. Please go ahead.

Yes, hi. Good morning. Impact of the CMC guidance a little bit more. I mean, I think you talked about some higher cost but also lower product pricing, I think, tied to oil. How much of that I guess it's the range is maybe down $17 million to $22 million in EBITDA. How much of that sort of related to the sort of oil-based pricing on products like carbon black feedstock and things like that and how much is that some of his other stuff? And is there any the volumes though?

So I'd say our volumes are down in certain pockets. It is more of a balance on the pricing and cost side of the equation certainly, Europe and Australia, they're dealing with cost some cost catch-up, if you will. If you went back I think in 20 -- I believe 2017 was probably one of the best years that our Australian CM&C business has ever had. 2018 was probably the next best year that that business has. Pricing, we were able to get pricing sort of out-front of some cost increases. The costs are come through here in '19 and heading into ' 20 and so it's head back to a little bit more normalized margin and in Europe, they do -- it's always a balancing act over there, but they do a fantastic job of work on both sides of the equation and trying to make sure that they are matching as best they can. Cost increases with price increases, but that you're out there dealing in a competitive environment and you're you got customers that are trying to balance that same equation. So it looks CM&C is a more volatile business. We've known that.

In the beginning. It's one of the reasons why we have I think done a pretty great job of really boiling it down to the central facilities that we need to be in that can serve a critical customer base that we have and we have to deal with the ups and downs of oil and its impact on carbon black feedstock and phthalic anhydride, some of those things, while also dealing with the demand side of the equation that can move from year to year as we've seen it over the past several years. The good news is, that business again overall finished at around 14% margin. I think in 2019 and with the exit out of KJCC, the remaining business despite the downturn in sales and margin is expected to be at 12%. That business I can tell you, Chris, for a number of years coming out of 2008 struggled to be in double digits, let alone, if at that level. So, yes, it's a smaller business that we intentionally made it a smaller business to take out some of that impact on volatility. It's still actually a pretty good business. And so we feel good about where it that in 2020, given all the headwinds that we're facing, and it's nowhere near what we had 5 years ago. Nowhere near what we had 5 years ago and we're happy for that. So that's the best I can tell you. That is a complicated. It is a complicated market that we deal within different regions, different, different end markets, different products and different drivers for each of those. So it gets to be a pretty complex balancing act, but I think our guys who run who run those businesses do a pretty good job of managing it all.

As a follow-up on the PC segment from some of the comments you had made earlier. Just the slowdown at the end of the year, did you just interpret that as sort of maybe inventory re balancing at the customer level now that volumes in this big right back up to start the year?

Could have been. I think there may have also been -- if I'm recalling correctly, there might have been a slight uptick in lumber pricing at that point in time, which again tends to drive behavior -- buying behavior on the chemical side. Like I said it was different than what we have seen throughout the year up until that point in time, a little concerning at the time that it was going on, but like I said we step into January and things got out of the gate, not pretty quickly, pretty nicely. So we feel good about how the year started off in that business.

Just a quick one on the interest for the quarter $14 million. Is that sort of where we are now with what we've done so far with the debt paydown, I mean, at least a run rate for the next quarter or two, you do more significant pay down?

Yes, that's correct. We're pretty close to take that normalize it for 2020 and that's a pretty good estimate of where we're going to be in 2020

Great, thanks so much for the help.

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

Hi. This is Adam [ph] on for Laurence today, Hey, how is it going. My understanding is that Coronavirus isn't going to have any immediate impact on product availability. But I want to understand if your outlook also assume it's going to have no impact on the demand side as well?

Yes, yes. To be clear, right, 2 to 2.10 [ph] and does not really include any impact from Corona. So if it's something were to occur to have an impact on our business, It would -- unless we do better in certain other areas to be able to offset it, it would have an impact on those results.

Okay, got it. And then my last question is, I was just wondering if you could give us some color on the ramp of the $25 million to $40 million in annualized cost savings? How should we think about this? Is it going to be a steady ramp until 2024? Or what would that cadence kind of look like.

Yes, I think I think it has been. Actually, I'd say we -- in '19 we're probably in that in that $10-ish million mark range and I think our range for this year is in that $5 million to $10 million mark. Again. So I think the way things are mapped out and balanced out you, you should expect that it to be a relatively steady stream that would occur over that period of time.

Okay, thank you very much.

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

Thank everyone for taking time to participate on today's call. I appreciate your interest in Koppers and your continued support.

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