Good morning, ladies and gentlemen, thank you for standing by. Welcome to Koppers Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I will now turn the call over to Quynh McGuire. Please go ahead.

Thanks, and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our conference call, where we will provide a business update as well as highlight our third quarter 2020 preliminary results. We issued our press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our announcement, 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 website for replay through January 26, 2021. 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 Act -- Reform Act of 1995. These forward-looking statements involve a number of assumptions, risks and uncertainties, including risks described in the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures the company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn over discussions to Leroy.

Thank you, Quynh. Good morning, and welcome, everyone. We hope you and your families are continuing to remain healthy and safe during the ongoing pandemic. Before I get into our third quarter results, let me just say how impressed and grateful I am concerning our people, who have remained focused on doing their jobs safely, at the same time, enabling us to achieve so many new performance records in the third quarter while we all continue to deal with the worldwide pandemic. As always, we begin with a focus on our Zero Harm culture. I'm proud to report that on a trailing 12-month basis, our total OSHA recordable injury rate, not including COVID-19, were at their lowest point thus far in our Zero Harm journey, down 21% compared to the same point last year. It's truly a testament to the hard work of our plant management and our employees. I can't thank them enough for their commitment to remain focused despite an extremely challenging year on proactive safety engagements, such as safety observations and hazard identification. And our safety performance continues to be augmented by ongoing training and an emphasis on building a more empathetic leadership team. In November, we will be convening members of our management team from around the world, including plant managers and support staff leaders for a virtual Zero Harm forum. This is to replace the in-person forum that was scheduled to occur back in April that was unfortunately canceled like almost everything else this year. While we do not want to wait until we can safely reconvene at our site leadership group, so we're figuring out a way to adapt to the times. This online event will be live and interactive, scheduled for 2-hour sessions over 3 days, and will build on the progress we've…

Thanks, Leroy. In our press release this morning, we provided preliminary results for Q3, and our financial discussion is based on those preliminary results, excluding the sale of KJCC, which we will review shortly. On Slide 24, consolidated sales were $438 million, an increase from sales of $434 million. Sales for RUPS were $191 million, down from $199 million. PC sales rose to $148 million from $124 million. And CM&C sales came in at $99 million, down from $111 million. On Slide 25, preliminary adjusted EBITDA for Q3 was $67 million. It was a record quarter, up from $57 million in the prior year. Adjusted EBITDA for RUPS increased to $19 million, up from $17 million in the prior year. PC EBITDA rose to $32 million from $18 million, and CM&C EBITDA was $16 million compared with $22 million. On Slide 26, sales for RUPS were $191 million, slightly lower year-over-year. This was primarily due to lower crosstie volumes, particularly in the commercial market, along with pricing discounts for select customers. The utility pole business in the U.S. held steady with sales at a similar level as the prior year, and the demand was higher for utility poles in Australia and crosstie disposal services in the United States. On Slide 27, adjusted EBITDA for RUPS was $19 million compared with $17 million, and this was driven by higher profitability in Class I sales due to a favorable product and service mix. Also, we saw higher profitability in the crosstie disposal business as well as lower selling, general and administrative costs. Sales for the PC segment on Slide 28 were $148 million compared to sales of $124 million. This marked another record sales quarter, reflecting continued strong demand for copper-based preservatives in the U.S., driven by sustained strength in the home…

Thank you, Mike. I'll now move into discussing the business sentiment based upon what we're currently seeing in the marketplace as well as feedback from our customers and suppliers. Slide 39 provides a rundown of our Utility and Industrial Products group. We continue to pursue a strong focus on customer service, encouraged by ongoing broadband infrastructure investments necessary because remote working requires electrical and network connectivity. Koppers is working with utilities on testing and using CCA and creosotes treatment alternatives to penta preservative. Our UIP group remains on track for its best year since joining the company with solid long-term fundamentals in place. And with hurricane season still ongoing, we continue to provide storm response service to customers. And in the near term, we've experienced some slowing from postponed projects or lack of crews due to those hurricane response efforts. Now recently, we were successful in negotiating some multiyear contract extensions, and we continue to evaluate various opportunities for share gains. In pilings, our business is improving as restrictions have been eased on construction projects. But I do remain concerned about this segment of the business in the near-term as coronavirus cases rise, which puts commercial construction projects at risk of future shutdowns. In the pole recovery area, we're targeting investor-owned utilities as well as evaluating opportunities for synergies with projects with our rail structures business. Regarding our supply chain, the wet weather has slowed wood flow at some facilities, and we're also dealing with some transportation cost increases. But on balance, our wood supply chain remains in good stead. In our RUPS segment, seen on Slide 40, the crosstie business remains solid with improved Class I in margin mix, while there is some slowing and more price competition in the commercial market. We're hopeful that any ongoing demand weakness…

[Operator Instructions] And the first question will be from Mike Harrison with Seaport Global Securities.

I bet, as we were heading into this pandemic and you guys were seeing things start to shut down, you would never have expected you'd put up a record quarter in Q3, so congratulations for that. Wanted to ask about the RUPS business. It sounds like commercial volumes accounted for most of the decline there. We think your business is being predominantly Class I. So does that mean mix -- the commercial business was down something like 20% or 30% versus last year? And maybe can you talk about what you're hearing from your commercial customers about their maintenance plans heading into 2021?

Okay. So you're right. I mean, the commercial business is a smaller proportion of our business, making up anywhere from 20% to 25% of our crosstie business overall. It's also the most volatile. And we will see big swings in pricing as you go through different parts of the cycle, which also will be partly dependent upon the demand in that market as well. We have been riding away, I'd say, over the last probably 6 to 8 quarters of improving pricing and stronger demand. And so given what's going on with the pandemic and everybody looking for opportunities to reduce spending and cut costs, it's not surprising that we'd see some impact on demand in the commercial market, which would then also translate into lower pricing as well. So I can't say I'm terribly surprised given, again, the fundamentals of what we're dealing with in the current environment. However, I would say that, that's, again, what makes our business model good during these times is having that heavy Class I customer base where, through good times and bad, you know you have a strong foundation of demand to serve. And as we've seen during this period of time this year, we've only had, again, one Class I customer that has sought to reduce spending this year in this area. Others have continued to either execute their programs come -- as they were coming into the year or actually even doing a little bit more. So on balance, we're in pretty good shape. But long story short, Mike, I'm not shocked by what we're seeing in the commercial market right now. And I think we'll continue to see this softness until we get some clarity coming through the pandemic and where different stimulus spending might come from, right? So if there's anything that's directed, again, into infrastructure, and anything that the short lines can take advantage of, then I think you'll see a pickup back in demand here, which will ultimately generate into a stronger pricing environment as well.

All right. And maybe you mentioned pricing a couple of times. I believe you mentioned some discounting activity in the RUPS business. Was that primarily to commercial or were there some discounts given to Class I customers as well?

Well, I think the -- any of the stuff that we end up doing regarding a discounting basis typically comes as a result of volumes, right? So it's typically where customers meet certain volume thresholds and that those sorts of things come into play. And we have that across almost all of our different business segments. So that's where you'd see that.

All right. And then over on the PC side of the business, it sounds like you guys expect to catch up on getting some of these chemicals to the treaters during Q4. But maybe the outlook into 2021 is a little bit uncertain. Is it best guess right now that we're going to see strength through the first half of 2021 and then maybe some question marks on what the second half looks like?

Yes. The current line of thinking and what we're being told by -- actually that we're hearing by certain retailers out there is they expect continued strength at these sorts of levels out into the -- basically through the first half of next year. So that's the word we continue to hear. We are current -- we continue to be behind in terms of being able to serve the industry, again, which is in line with where the overall chemical industry is at in this in this market right now. So it's not a Koppers issue so much as an industry issue. And so yes, we're still digging ourselves out of a hole from a supply standpoint. And which, again, will -- should allow us to see continued strength in benefits through the first half of the year. And you're right, beyond that, it's a little uncertain, right? Because demand this year was certainly not projected at this level coming in. We know that a big portion of the demand from this year is actually triggered by the pandemic. And people staying at home, people having some additional dollars to spend, not going on vacation, maybe not having to spend on their season tickets, looking to beautify and improve their work environment, seeing that they might be spending more time working at home than going into an office, all those things have contributed to demand at significantly higher levels than anybody expected. So how much of that is going to continue or when will it potentially drop off is still uncertain. But right now, everything that we're being told is -- expect that these sorts of volumes will continue to remain until we get out to the first half of next year.

All right. And then last question for now is on the CMC segment. Obviously, very strong margin improvement relative to the first half. Can you maybe help us put the sequential margin improvement into some buckets? My guess is that raw materials versus pricing is one area where you saw some improvement. But what were some of the other buckets of improvement? And how should we think about the sustainability of the margin in this mid-teens type of range?

Yes. I think the way to think of it, Mike, is we said several years ago that as we were going about restructuring this business that we were structuring it, for less volatility through a cycle that we were targeting somewhere between 9% to 15% EBITDA margins in this business. And basically, that's what we have seen since we have executed on some of the more significant projects in this area. In fact we've, over the last several years, have been at or at the high-end of that range, if not, even a little bit higher. So as we talked about often, right, you always have this phenomenon of our raw material cost chasing price. And so in a market where you got price declining, our margins are going to be down at the lower-end of that range because it's going to take a while for a raw material pricing to drop and catch up with that. And then when pricing stabilizes and starts to move back in the other direction a little bit, you'll start to see the benefit and margins move up into the upper-end of the range as well. So we knew second quarter was going to be weaker margins. The first quarter typically is weaker for us in general. But everything that we were seeing and that we sort of know with our business, we felt pretty confident that we would see some of that recovery as, again, raw material costs began to catch up with the pricing curve. And so we saw it in the third quarter. We expect that, that will continue into the fourth. And again, overall, for the year, that will put us solidly above the double-digit margin line. So on an ongoing basis, we continue to believe that, that business will be a 9% to 15% margin business. And the absolute dollars that we generate there will be more dependent upon the strength of the markets and how much volume we can push through. But the good news is that even in a softer demand environment, because the whole business at this point right now, with the way that we've designed it is basically an arbitrage on the raw material and selling price of our end-products. And we have that in place now and it's working pretty well, as I think, demonstrated through, again, the challenging times we're going through right now.

The next question is from Chris Howe with Barrington Research.

Congrats on these preliminary results. Following up just on some of the thoughts that Mike Harrison just shared, if we look, hypothetically speaking or on a qualitative basis that some of the benefits that we've seen in the PC segment, the potential for a longer tail into Q1 and Q2, benefiting from work-from-home employees and higher discretionary -- higher discretionary spending available for use for home remodeling projects as opposed to vacations. On the flip side or outside of the box, could we also see some sort of benefit in a recovery as workers return to work and they're able to put that budget to use for home remodeling, in the latter part of next fiscal year?

Yes. I mean, theoretically, yes. There's -- I mean, the repair/remodeling market has been strong for pretty -- it's been pretty much on a regular upswing since coming out of the housing crisis back in 2008 through '10. So we've seen ever-increasing spending in that area. The ironic thing was coming into this year, beginning in the mid part of last year, they were looking -- the experts were really looking and prognosticators were looking at the back half of 2020 as sort of the beginnings of a little bit of a slowdown in terms of that ramp-up in repair remodeling. And all that's been flipped on its head with what we're going through right now. So it's tough to predict what's ultimately going to drive these major market trends. But the point that you make in terms of people going back into the workforce, a healthier economy, will that contribute to sustaining the market moving out? There's no reason to believe that it couldn't. But hard to say for sure, Chris, but certainly, it could.

That's very helpful for discussion. And you had mentioned briefly about some expansion of capacity, following up on your comments related to the sourcing of external copper intermediate. Can you talk about this expansion of capacity, how much is being put into that? And, I guess, how different scenarios of strong demand within the PC segment may affect your decisions on capital spending for capacity?

At this stage, I'd say, we -- first of all, it would be a relatively high-return project, given where current demand is at and expected to be out over, again, the next 9 to 12 months. But even without that, right? We have seen a general uptick in demand in this business over the past -- well, ever since we've owned it, first of all, we -- even without the pandemic, expect that to continue to at least be some modest level of increase in this market moving forward. We have had significant market share gains over the past couple of years, which has already put us into a position where we don't have enough internal capacity to source our own requirements. Beyond that, it puts an enormous amount of stress on our operations in terms of minimizing our ability to take our facilities down and take it through preventative maintenance. So we needed to, at a minimum, prevent more slack in our operations to be able to continue to consistently and properly maintain it so that we can ensure the continuity of our operations, while also preparing us for additional market share gains that we believe we can generate, even if the pandemic levels of demand drop-off in a significant way. So we're not worried about the spending, which will be somewhere in the, I'll call it, the $10-ish million range of spending. We're not concerned about those dollars and the relatively limited or, I should say, rapid level of returns that we think we can get on those dollars. So it will set us up again to be much, much stronger on a go-forward basis. I'm not worried about creating overcapacity in this market for sure.

Great. And one last question. If we look at what we now know with another month in the books leading up to this call, is it unreasonable to assume, as EBITDA moves back to where it was prior to this fiscal year, in consideration of a longer tail in the PC, that there's enough there to maintain or make some slight improvement on where you saw -- where we expect adjusted EBITDA to approximately be on an absolute basis for this fiscal year?

So are you asking, do we expect that 2021 will be better than 2020?

Yes, directionally.

Yes. So just -- first of all, maybe to set the table, be clear, our -- because of all the ins and outs as we have dramatically restructured our business over the years. Now with this, again, removal of KJCC from our business, when you look at the business over the last 6 years, without KJCC, this year, we're on track to represent actually our 6th straight year of EBITDA improvement. So last year, with KJCC out of the numbers, we finished at $201 million of adjusted EBITDA. Right now, we're expecting to finish somewhere between $204 million and $210 million. I think that we're going through the process right now of trying to sort through everything to figure out where 2021 looks like. I can't tell you sitting here today, Chris, for certain, that 2021 will be better or and if so, how much. I do feel good that 2021 will be another on balance strong year. I think we have several things going for us. I think we're primed for CM&C to have a better year in 2021 as the markets that we serve begin to stabilize a little bit. So I think we'll get some benefits there. I think we'll continue to see some improvement in our RUPS business overall, both from a cost reduction standpoint in terms of consolidating Denver into North Little Rock as well as some of the other network optimization programs that we're working on. So I think we'll see improvement in that business segment. While demand in the second half of next year for PC remains a question mark, I still think overall, we're going to see a very strong year in that business that should allow for us to post strong results in 2021. I think the wildcard for us next year in terms of will 2021 be better and by how much than this year is how we -- is how strong will the second half of next year PC business be? I think the first half of next year for us overall, comparatively speaking, is going to be -- should be better. Can we maintain that over the second half of the year and match the sorts of record results that we're producing this year will be the question. We're trying to answer those questions right now and going through all the information.

I appreciate the color. And just congrats again and also the movement that you've made on the debt side and bringing that down.

I appreciate it.

The next question comes from Laurence Alexander of Jefferies.

I guess, 3 main things. First, with Performance Chemicals, can you give a sense for how much margin lift you should be able to book from lower copper prices in 2021? And how much of that segment is international?

In terms of the international piece of that business, it's anywhere -- we'll just call it, about 30% or 1/3 of the business is international, about 2/3 is North American. In terms of margin lift from lower copper prices, I mean, with where our margins are already at in terms of topping into the low 20s, I just -- I don't see much more coming, even with the additional benefit we may receive from raw material -- from raw material price reductions next year. And partly -- part of that is due to, again, some of the concerns that we have in the back half from a demand standpoint. So it's -- I'd say, overall, Laurence, there's not a lot there from an overall margin standpoint, just given where we're tracking and the current volumes that we're continuing to post.

And what's your current thinking around a normalized tax rate in 2021, 2022? Would the 25% or so be fair?

Yes. For the full year of 2020, I think we're looking at probably around 22%. And that's lower because we have higher domestic income and it's reducing the negative impact on our effective tax rate due to the GILTI provisions of the CARES Act. And it's also enabling us to use more of our interest expense deduction as less is being excluded from our tax calculations. So 2020, I would use the low 20s, 22%. Laurence, '22 and '23, we're probably going to tick back up to pretty close to that 25% level.

And as you look at the divestiture, the restructuring, as all the outlays vessel out, if you don't do any additional M&A, what do you see as a reasonable normalized free cash flow for these assets? I guess, I'm ending up at around $90 million to $110 million a year kind of bogey. Is that sort of roughly the way you think about it?

Yes, that is very, very close. I think historically, over the last 5 years, we've averaged about $110 million a year. And I don't see anything different for 2021. So you're in the ballpark with that.

The next question will be from Liam Burke with B. Riley FBR.

Leroy, you mentioned in one of the slides that the domestic utility pole business has had its best year since the acquisition. Could you sort of give us an update on how well that's performed since you bought it into the Koppers fold?

Sure, Liam. I mean, we talk about it being the best year. Now granted, we -- this is our second full year of owning it. We haven't had it for that long. We closed on that business in early April 2018. I'd say, it -- for us, it got off to a little bit of a slow start. It's picked up momentum, the longer that we have owned it. When we bought the business, we saw opportunities in several different areas for being able to generate additional profitability. One was through chemical pull-through in the business, right, through the creosote and CCA that we produce that is used in those markets. We saw it through network optimization opportunities in terms of being able to leverage treating facilities across our network to be able to do more than just one activity and/or concentrate certain activities in certain locations to maximize efficiency. We're still early in that process. We saw opportunities to save in cost, which we've been able to do. So each year or basically each year we've owned it has been successively better. We expect 2021 to actually be a continuation of that. So it's been a nice addition for us that is picking up some steam, the longer that we have been an owner just due to the many different opportunities that we have within our integrated business model to continue to improve different aspects of the overall business. So the big thing for us that remains an opportunity is expanding market share beyond the areas that we currently operate in today. So that's -- those are the things that we're looking at longer term.

Great. Now you mentioned creosote, obviously. Directionally, is that maintaining a consistent contribution to coating, or the utilities using less or more or the same creosote in lieu of other types of coatings?

Yes. I'd say it's stable to potentially increasing slightly. And I say -- so stable in that the whole Texas region continues to be the biggest area that utilizes creosote in full production, and that really hasn't changed much over time. So that piece of it is stable. With the oil-borne preservative pentachlorophenol getting phased out, there's other options that have to be considered. And certainly, again, creosote is one of them. To the extent you can substitute a waterborne preservative, then CCA comes in as a strong contender. To the extent that oil-borne preservative is still needed, creosote is getting looked at in certain instances, as are other preservatives that we look at in terms of adding to our portfolio, including copper naphthenate. So overall, I'd say, stable to slightly increasing, but it won't be much more beyond that on a go-forward basis.

Next question will be from Chris Shaw with Monness, Crespi.

Outside of the -- what you called out the second half of '21, I guess, concerns about what the demand in PC will be. I was wondering about rail itself going forward and what kind of visibility you have there. That would be a concern for me maybe into 2021. Just because I remember the last time, traffic was down. I guess it was the last time that oil broke -- the demand for rail tieing to fall off with that. So I mean what do you -- what kind of visibility you have on your, I guess, your Class I maybe into 2021 at this point?

Yes. So I mean we're -- this is the time of year when the railroads are going through their 2021 budgeting process. And so typically, the meetings are going to be going on here over the next month or so, where they'll be giving us their expected programs for 2021. Now we've been in contact. Obviously, we're in regular contact with them, and they directionally give us indications as to how they see not just next year, but out over the next 3 years or so. And I'd say, again, on balance, all right, on balance, we're expecting that our volumes '21 should be slightly better than 2020. So that hasn't yet been confirmed through their budgeting process and communication to us. But all the signals and discussions that have occurred over the past 3 to 6 months leading up to now, have indicated that they expect a continued, fairly robust replacement cycle into next year. So we'll have more information here the next -- by the next time that we report out. But that's the indications we've been giving thus far.

And the last question for today will be from Ken Heffner with Loomis, Sayles. Kenneth Heffner;Loomis, Sayles & Company;VP,Credit Research Analyst: So when you look at the -- 2 questions. First of all, can you provide any update as far as the process with the Denver facility? I think you guys had highlighted that on the last call, and where that might stand as far as the potential move here to closing that transaction. And then second of all, if you look at the earnings improvement in the PC business year-over-year, I know a lot of us have been hyped on -- talking about this and harping on it. But is there any benefit there from the way that input costs took on the copper side really fell to lows here for a few months? And they've now normalized and come back to where they are, but words to understand if any of this $20 million or so improvement year-over-year, is anything to do with costs? I know you had some -- a few years back, you had to outsource some production things or whatever. So just trying to see if I understand, is this all volume, price and mix? Or might there be some cost benefit in there that helps us further understand the real strength of the earnings year-over-year. That's it.

Okay. So let me think, maybe start with the last question first. My take on PC is, we did have a short period of time whereas most markets reacted significantly unfavorably early on in the pandemic, and we were able to lock in some hedging for 2021 and '22 to take advantage of that negative reaction early on. Obviously, we were buying copper during that period at those prices, but we were also settling hedges that were in place at much higher levels, right? So we talked about coming into the year that we were more or less hedged on our production for the year, which didn't give us much opportunity for any benefits from a lower overall average cost. It didn't take long for copper to move back up to levels that are higher than our current average hedge cost for this year, which, again, given the demand levels, I'd say, overall, has probably put us in a more unfavorable cost position for this year than favorable. So on balance, I'd say, for this year, we're probably getting a little bit more hurt by where things are at on a copper cost curve, just given the fact that I think for the majority of the year, at this point, copper costs have been higher than our average price. And our demand levels have been much higher than what we thought coming into the year, therefore, our hedged amounts were at lower levels. So I don't think we're getting the benefit that you are speculating that we're getting on the cost side. If anything, we're probably getting a little bit hurt. And that could help us out next year as well to help insulate against some downturn on demand in the second half of the year. Kenneth Heffner;Loomis, Sayles & Company;VP,Credit Research Analyst: That's great help.

Yes. In regards to -- remind me the first question, I apologize.

Denver.

Denver. Where things stand on Denver, right? Kenneth Heffner;Loomis, Sayles & Company;VP,Credit Research Analyst: Yes, please.

Okay. So I can't comment on any ongoing activity as it relates to Denver, other than to say, we're in the process of closing the site. So we are done in terms of treating there. We have transferred essentially all treating activities to our North Little Rock facility and are in the process of closing it and looking to sell it. And we're hopeful that some time by the time we have our next conference call, which will be sometime early next year that, we'll be able to announce something. But right now, the focus is on closing the facility. And at the very least, we think we should be on track to finish and finalize that sometime, hopefully, in the first half of next year.

Ladies and gentlemen, 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 just want to wrap things up by thanking, again, everybody, for participating on today's call. I really appreciate your continued interest in Koppers, and urge everyone continue to stay safe and stay strong. Thank you.

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