Koppers Holdings Inc. (KOP) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' Final Q4 2020 Earnings Conference Call and Webcast. [Operator Instructions] Following the presentation, instructions will be given for the question-and-answer session. Please note that this event is being recorded. I will now turn the call over to Quynh McGuire. Please go ahead.

Thanks, and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our conference call, where we'll provide highlights of our fourth quarter and full year 2020 performance as well as our 2021 outlook. 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'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 website for replay through May 24, 2021. Before we get started, I'd like to direct your attention to our forward-looking disclosure statement seen on Slide 2. Certain comments made on this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of assumptions, risks and uncertainties, including risks described in the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The company has provided with this 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 this discussion over to Leroy.

Thank you, Quynh. Good morning, everyone. So this morning, we're going to start, as we always do, with a discussion of our Zero Harm culture. As I mentioned when we reported our preliminary results, we finished the year with our best underlying safety performance ever. Now reaching this milestone amid the uncertainties of the pandemic proves once again that Zero Harm is the foundation of our culture, the way of thinking and behaving that has been adopted by Koppers' employees around the globe. It is the basis of everything we do. And my sincere appreciation goes out to our worldwide team who are doing an admirable job of focusing relentlessly on our path to 0. Now as we've talked about often, Koppers has been fortunate to be classified as an essential business in every region that we operate, which has enabled us to continue to operate at full capacity throughout the pandemic. We provide essential products and services to keep our modern society functioning. Koppers helps to move products safely by rail. We help keep electricity and WiFi accessible. We keep manufacturing supply with needed chemicals, and we provide treated wood for home and commercial construction and improvements. Essential to our ability to perform these essential functions is the health and well-being of our employee population. The responsibility that we place is our top priority at all times. Now if we move to Slide 6, we have approximately 1% of our employees currently in self quarantine, with about 12% of the employee population to date that have tested positive for COVID-19. Now we continue to require face coverings as personal protective equipment at all North American facilities, and we've distributed company-provided masks to our employees. Additionally, N95 masks and respirators are being used for close-contact work. We continue to seek out new mask styles and other respiratory equipment that may provide more comfort and health benefits. And we continue to have protocols in place, which require maintaining social distancing, screening practices and virus-related hygiene standards. We're also using self-administered saliva test kits at all North American locations as well as pooled testing methods to periodically screen our U.S. plant employees to limit the spread. In the fourth quarter of 2020, we instituted a new Life-Saving Rule regarding COVID-19 to heighten the awareness and operational discipline while protecting employees working higher-risk jobs with the necessary equipment. Communications remain a core element of our COVID-19 strategy with our quarterly all-employee meetings in 3 time zones around the world, virtual chats with our plant remote-work employees and regular video updates from me that also can be accessed on our Facebook page. So as the vaccine continues to get rolled out, I am strongly urging our employees to trust the vaccine as a means of returning to normal. In fact, we're doing everything we can to simplify receiving the vaccine in areas where we have a larger presence through vaccination clinics that are being coordinated at various facilities across the U.S. So far, 5 locations of vaccination plans is approved through the use of federal and state Point of Dispensary programs, county health departments and local clinics. And we're also actively working to set up vaccination for U.S. employees as Phase 1b, which includes essential infrastructure workers and -- as that gets closer to implementation. Vaccination programs for our employees outside the United States are being handled by the corresponding governmental programs. To repeat, as shown on Slide 7, I am strongly encouraging all Koppers employees to get the COVID-19 vaccine even though we are not making it a requirement. To help move those that might need a little extra nudge, we're offering an incentive of $250, which each employee will receive after he or she has received the full vaccination dose. I'm thankful to have several vulnerable family members that have received their first shot. And I'm looking forward to receiving the vaccine also as soon as it is available to my eligibility category. Now guidelines in Illinois began offering vaccines to Category 1b, which includes the essential infrastructure workers. And so employees at our Galesburg, Illinois facility, 41 and all, so far, have received the first dose of their vaccines. And we salute our Galesburg team for being the first Koppers facility to get vaccinated, which protects not only those individuals but their coworkers and families as well. Now on Slide 9, we provide an overview of our operations and planning activities throughout the pandemic as well as what we have been experiencing over the past couple of weeks with the wave of record cold temperatures and severe winter weather that have plagued sections of the country that typically don't face those challenges. A number of Koppers facilities in the Southern states, the Southern Midwest and particularly Texas, have had to temporarily cease operations because of frozen pipes, loss of power, unsafe working conditions and inability to travel to work. The impact has hit us across all of our business segments. Now but dealing with severe weather is something we are used to, but this latest blast was worse than normal and had an impact across more facilities than is typical. Overall, we had at least 5 facilities that have dealt with some level of disruption, with some of those having to shut down some or all operations for a brief period of time. Now we've begun working to dig ourselves out and are still assessing the overall damage while repairing broken waterlines, fixing pumps and trying to restore power to equipment. While this is an unfortunate setback and will cost us some money in repairs and lost production, we're thankful that our employees have weathered the storm and are all safe and accounted for. We've made donations to local agencies to help the communities that have been affected the most, and we've paid our employees throughout to provide them a level of security in their time of need. And as I mentioned, while we're still assessing the total impact from the storms, at this point, we do not expect it to have a material impact on our results as we should be able to catch up on production and customer shipments. In terms of operating during the ongoing pandemic, we're still keeping business travel to essential only, and plant visits remain limited. Those employees working from home have been encouraged to continue doing so. Possible return to the office has been moved to July 1 at the earliest. Those who must come into the office must follow our company's PPE guidelines. Given the stresses that our workforce may be feeling, we're evaluating potential ways to enhance the work-life balance through our iShare challenge, which encourages employees to come up with creative solutions. Now recently, we shared some good news as we completed the sale of our coal tar distillation facility in Follansbee, West Virginia, as you can see on Slide 11. Now this is the latest in our strategy to rightsize the operating footprint of our CMC segment. And we discontinued our coal tar distillation processing at Follansbee in 2016. And we ceased naphthalene refining activities there in late 2018 once the new unit at our Stickney plant came online. This transaction represents the latest action to increase our focus on those businesses that play a greater role in building our global infrastructure. And while enabling us to direct resources to other value-added projects, this also frees up over $0.5 million in cash a month that we have been spending to wind down the plant. Special thanks go to [Phil Hill] and the entire Follansbee team in preparing the plant for sale. They did an outstanding job under a tough set of circumstances. And I know the last day was an emotional one for our remaining employees, but I've heard good news overall and that many have already landed other jobs, with a few actually remaining in Koppers in new roles. Slide 12 describes a new wood treatment solution for our utility poles that was developed to enhance our current product line and serve as an attractive replacement for penta-treated poles, which will begin getting phased out over the next couple of years. Our UIP and PC businesses teamed up to develop and introduce DuraClimb poles offering superior climbability, which utility linemen value when servicing poles during storm-related events. That was our PC R&D team that developed the climbing additive, preservative system used in the DuraClimb treatment process. Cabot Microelectronics, the only producer of penta, previously announced their plans to cease production of the preservative at their lone facility in Mexico by the end of this year. We move to Slide 13. Our Zero Harm mindset led the team at our Grafton, Australia facility to reduce heat-related dangers in the outdoor fabrication area by installing mobile mist cooling fans and a permanent mist cooling system in one of the fabrication sheds. Temperature has overall been reduced by up to 11 degrees Fahrenheit. And this innovative idea is working so well, we're looking at doing the same at other plants as applicable. Koppers has been making news lately both here at home and overseas. The Port of Nyborg in Denmark, as you can see on Slide 15, is the central hub of our Koppers European CMC operations. And through a joint project, the pier length will be extended and water depth increased to enable us to receive and operate 2 vessels at the same time, reducing the time needed for loading and unloading products. This is a critical improvement since the capacity at our Nyborg plant has doubled over the past several years. With the updated port functionality, Koppers can expand its global coal tar business with the necessary shipping capacity and speed. As highlighted on Slide 16, Manufacturing Today Magazine recently featured Chief Operating Officer, Jim Sullivan, who did a great job discussing the vital importance of Koppers to the global infrastructure, current expansion projects and the ongoing success of our Zero Harm efforts. He summed it up well by saying what matters to us is our people, the environment and the communities that surround us. If we protect those, we will have a strong future. If we move to Slide 18. Our LINKwomen employee group sponsored its second Women's Empowerment Series session, featuring 4 dynamic women leaders from Koppers discussing their path to success, leadership styles, support networks and work-life balance. Panel consisted of Ashley Everman, our Manager of Talent Development; Melissa Hadley, our Manager of Business Planning; Stacey McKinney, our Vice President of Technical Services; and Kim Nelson, our Logistics Manager. Now this LINKwomen event was well attended, demonstrates how our people actively engage with each other to foster personal and professional growth. And my deepest thanks go out to this impressive cohort for leading by example and giving of themselves. Now as seen on Slide 20, I'm proud to have accepted the Chuck Cooper Foundation Leadership Award on behalf of Koppers employees worldwide. The late Chuck Cooper, a native of Pittsburgh and a barrier breaker in many ways, was the Jackie Robinson of the NBA, being the first African-American player drafted into the league and receiving their highest honor being inducted into the NBA Hall of Fame in 2019. Chuck's son, Chuck Cooper III, honors his father's legacy through a foundation that awards graduate-level scholarships and provides leadership development to underserved students. We view this honor as an endorsement that although we've taken a number of specific intangible steps, our work must and will continue to bring a truly inclusive and equitable society closer to reality. With that, I'll turn it over to Mike to discuss our financial results and then provide an overview of our debt and liquidity. Mike?

Thanks, Leroy, and good morning, everybody. As recapped on Slide 22, we delivered record-setting performances in many areas in 2020. However, please note that any comparisons in our discussions between 2019 and 2020 exclude results from the KJCC business that we sold in September. With that in mind, we achieved a new high in sales of $1.7 billion, driving our fourth consecutive year of growth. Operating profit finished the year at $157 million, a 25% increase from the prior year and a new record. Adjusted EBITDA was a record $211 million, up from $201 million in the prior year. Adjusted EBITDA margin was 12.6%, the highest since 2017 and the fifth year in a row where we finished in the 12% to 14% range. We also set a new record for adjusted EPS of $4.12, which was a 30% increase from the prior year. Contributing to that EPS improvement were SG&A and interest expense savings achieved during 2020. From a balance sheet and cash flow perspective, as outlined on Slide 23, we had our second-highest-ever operating cash flow year. In 5 of the past 6 years, we've generated more than $100 million in cash flow, and we achieved $127 million in cash flow from operations in 2020. We also reduced our net debt by $131.5 million in 2020. This was our largest net debt reduction year in our public company history. The combination of higher EBITDA generation and strong debt reduction allowed us to reduce our net leverage ratio to 3.5x compared to 4.3x at the end of 2019. This is the first year-end since 2017 that we finished the year with net leverage below 4x. We spent $70 million in CapEx for the year, which was near the high end of our most recent guidance and was primarily due to the expansion at our North Little Rock facility. Now let's take a deeper look into some of the numbers. On Slide 25. Consolidated sales for the fourth quarter were $393 million, an increase of $11 million or 3% compared with $382 million in the prior year quarter. Sales for RUPS of $168 million decreased by $1 million compared to sales of $169 million in the prior year. PC sales of $130 million increased by $25 million or 24% compared to sales of $105 million in the prior year. And sales for CMC were $95 million, a decrease of $13 million or 12% compared to sales of $108 million in the prior year. On Slide 26, you can see the consolidated sales for 2020 increased by 2%, fueled by our wood preservation businesses. Despite the pandemic, 2020 sales, excluding KJCC, represented the fourth consecutive year of growth as well as the highest level of revenues in the history of the company. Sales for RUPS increased by $25 million or 3% compared to the prior year. Sales for PC increased by $78 million or 17%. And sales for CMC decreased by $71 million or 16% compared to the prior year. On Slide 27. Adjusted EBITDA for the fourth quarter was $47 million or 12% compared with $40 million or 10.4% in the prior year quarter. EBITDA margin for the fourth quarter of 2020 was driven by strong results from our PC business, with RUPS maintaining its profitability level, all this partially offset by year-over-year weakness in CMC. Slide 28 shows 2020 adjusted EBITDA of $211 million or 12.6% compared with $201 million or 12.3% in the prior year, again, due to the strong results generated by the PC segment. On Slide 29, we show the trend for adjusted EBITDA excluding contributions from our KJCC operations. Our core business focusing on wood preservation delivered increasingly higher levels of adjusted EBITDA every year from 2014 through 2020. Now let's review our debt and liquidity situation. As seen on Slide 31, at year-end, we had $737 million of net debt with $346 million in available liquidity. We reduced net debt by $131.5 million in 2020 including the proceeds received from the KJCC divestiture. We remain in compliance with all debt covenants, and we do not have any significant debt maturities until 2024. Slide 32 shows our disciplined focus on debt reduction. We plan to further reduce debt by $30 million in 2021, which translates to a net leverage ratio of somewhere between 3.2 to 3.4x at the end of this year. We remain committed to our long-term goal of 2 to 3x net leverage. With those highlights, I'll turn it back over to Leroy.

Thank you, Mike. I want to take a look right now at our business segments and where we see things headed into 2021, and I'll start with our Performance Chemicals group. So on Slide 34. The overall picture for Performance Chemicals for the upcoming year is a little bit uncertain, and this segment will likely be the biggest wildcard that will have the greatest level of potential variability. The key question that will need to be answered is what will happen if the COVID-19 virus is brought under control. Many have an opinion on it, and that opinion seems to change from month-to-month. It's difficult to forecast how the pandemic-driven demand and discretionary spending will fluctuate, but management of The Home Depot disclosed yesterday their trepidation and forecasting beyond the first half of this year with so much uncertainty in terms of how and when spending habits may change. Therefore, we are focusing on what we can control and doing what we do best, which is provide superior customer service, managing our costs and optimizing our capacity. We know the market can't continue to ride this wave into perpetuity, so we continue to grind away behind the scenes to fill in the gaps that will eventually come as the home construction market comes off with highs. On the good news front, the North American market for PC saw a strong start to the year in January, which has enabled us to get off on the right foot for the year. Now record lumber prices have slowed demand in February, however, as traders work to avoid getting caught with high-priced lumber when the market drops. Strange as it sounds, that's actually helped us as we've been feverishly trying to catch up with demand since the middle of last year, and we're now dealing with the recent weather impacts I referenced earlier. We believe that something is going to have to give in March as preparation for the summer construction season begins to kick in high gear and most retailers are clamoring for product. Market forecasts and indications from our customers have varied considerably for this year, and here are just a couple of examples. 3 months ago, we were being told that 2021 demand was expected to drop by about 10% compared to 2020. And before the February slowdown, projections have wildly swung to 2021 being projected to be 15% higher than 2020. So with that kind of variability, it makes it difficult to get our arms around where this year will ultimately end up in this segment, but our best guess at this point is somewhere conservatively between the original projection of 10% down to being flat year-over-year. Now I believe that disruptions from high lumber prices and the impact from the recent severe weather will need to get sorted out before we can reevaluate whether 2021 demand actually can exceed 2020. Now in addition, we expect 2021 will be a big year for preservative conversions with our CCA/DuraClimb utility poles poised to take market share as the production and supply of penta is being phased out. We're still currently evaluating the right entry point into copper naphthenate or other preservative systems. Slide 35 continues the Performance Chemicals story in North America, where we anticipate the capacity expansion at our Hubbell plant will be online by the third quarter, bringing cost relief to the back half of 2021. As customer consolidation continues, we also see openings for further volume growth with the replacement of current pandemic demand as our capacity expands. For 2021, copper has hedged at slightly lower average cost than last year. However, skyrocketing copper prices will need to be addressed for the unhedged portion of 2022 and beyond. And we've implemented several supply chain improvements over the past 9 months to reduce supply risk and improve our overall cost position. Finally, our largest competitor in this space, Lonza, recently announced an agreement to sell their specialty ingredients business, which contains their wood preservation segment, to Bain capital and Cinven. The transaction is estimated to close in the second half of this year. And we'll keep our eyes open as to what changes, if any, come about as a result of the change in ownership. On the international front, our South American Performance Chemicals business is strong, and we're considering adding manufacturing capabilities to further lower our cost footprint in that region. We expect that 2021 will be a better year for our Australasian business due to a positive backdrop consisting of the housing stimulus from the Australian government, opportunities for market share penetration and full year benefits from a new arsenic acid plant. We look for Europe to have a strong first half in 2021 followed by some difficulty as certain product registrations will expire due to a more restrictive regulatory environment. For our PC business overall, we're expecting strong comparative performance in the first half of the year, with the back half somewhat up in the air at this point in time due to just too many uncertainties. Slide 36 details our Utility and Industrial Products business. Overall, we see demand in the U.S. and Australia remaining strong in 2021, along with some sales decline as we move Texas production from Jasper to Somerville. Our focus for the year in this segment will be on margin improvement through cost reduction and network optimization. In addition, a stable wood supply will be essential in meeting global sales targets. U.S.-based activity will include the transfer of pole production volumes from Jasper to Somerville, Texas by midyear as we work towards exiting our site management agreement with Texas Electric Cooperatives. Also, customers will need to begin selecting a new preservative system as production of penta ceases by year-end. We anticipate that our CCA/DuraClimb product will capture a good portion of the Eastern market. Therefore, Koppers will be converting our first treating plant from penta to the CCA/DuraClimb preservative system in the first half of 2021. And we're also in the process of adding drying capacity at 2 treating sites, which will reduce cost and supply risk as well. In Australia, we anticipate that an aging network and infrastructure rebuild from wildfires provide a solid demand base for 2021. The lack of hardwoods in that region is creating more acceptance of pine pole alternatives, so we're adding drying capacity to facilitate the increased pine pole adoption in that region. While sales in this segment are likely to decline slightly as we exit Jasper to build our Texas business out of Somerville, we actually expect the profit and margin bump as the businesses we're moving away from was low to no-margin business and we gained cost efficiencies from our network optimization projects. On Slide 37. Customers are indicating an improved demand picture for all product lines of our RUPS business over the next couple of years. A combination of stronger demand and continued cost control is expected to drive improved margins. An important project that we're continuing this year is the integration of our Somerville, Texas plant for treating ties and poles and processing of end-of-life ties, representing our super plant model that we've referenced in the past. Regarding crossties, Class I and Commercial demand are expected to show slight upticks. However, we are entering a tighter supply cycle for untreated crossties with resulting higher raw material costs possibly impacting demand. On the plus side, we expect Commercial pricing to begin moving up as supply tightens. At the same time, we're continuing to work on contract renewals with some of our key Class I customers, which invariably involves tough negotiations and high expectations on their part. We expect to work through as we have throughout our history, knowing that we have the flexibility to pivot in different directions if we can't ultimately reach acceptable terms. Another key component of our network optimization and growth strategy is to successfully complete the upgrades and expansion at our North Little Rock facility by year-end, which will put us in position for further EBITDA improvement in 2022. Slide 38 outlines how maintenance-of-way projects impact the RUPS segment. Despite being one of the most negatively affected businesses from the COVID-19 pandemic, aside from CMC, this market still was able to generate nice EBITDA and margin improvement in 2020. We begin 2021 with a backlog of projects that's 50% greater than where we began 2020 in our structures business. We also dealt with several project disruptions in 2020 due to COVID that killed our efficiency. Now as vaccinations ramp up and the risk of infection is reduced, we expect to benefit through greater efficiency in 2021. Finally, we're continuing with efforts to expand our crosstie recovery business to potentially include another Class I account while also taking advantage of the synergies between our landscape crosstie business and the needs of our Performance Chemicals customers. Half of our expected EBITDA increase in 2021 is attributed to our maintenance-of-way business for this segment. On Slide 39. Most indicators, such as steel restarts and oil prices, have been trending in a positive direction, which gives us cause for optimism in 2021 for the CMC segment as we expect EBITDA improvement as well as slight margin improvement. In North America, more tar production is expected in 2021, which will save on transportation cost to import. Carbon pitch and creosote demand are expected to be solid, and higher average oil prices should support higher profitability in our phthalic anhydride business. The sale of Follansbee is an important win for Koppers as it frees up resources to focus on other improvement projects and will save $500,000 to $700,000 each month in ongoing cash costs. Our capital spending plan for 2021 includes significant capital to replace tanks at Stickney that are nearing end of life. Now this will improve our safety and environmental controls, add operational flexibility and increased profitability for CMC. Moving on to Slide 40. CMC operations in Europe represent the most challenging of the 3 regions right now as aluminum capacity reduction has disproportionately affected our competitors, which has, in turn, put increased pressure on pricing. Higher oil pricing is a net headwind in Europe as more tar moves to the carbon black feedstock market, reducing supply and driving up prices. However, higher oil prices will support higher carbon black feedstock pricing, partially offsetting some of the negative effects. And we expect a solid demand from U.S. railroad customers will provide some upside on creosote demand for the European business. And also, we've been working on an exciting project that has the potential to increase the proportion of higher-value products that we produce that will further solidify the earnings stream of this segment while also possibly opening up doors to new markets for our products. Looking to Australia, higher China benchmark pricing will support a healthier carbon pitch pricing environment in that region. And if this holds, Australia could show the greatest year-over-year improvement of the 3 regions. Also, in response to 2019 prevention notices from the New South Wales EPA, we have implemented multiple environmental control measures that lessen any potential impact from our operation on the community and plan to contribute funds to a local wildlife hospital. Let's move on to discussion of the 2021 guidance on Slide 42. Based on current global economic activity and the near-term economic uncertainty associated with the pandemic, we expect that 2021 sales will be approximately $1.7 billion to $1.8 billion compared with sales of $1.67 billion in 2020. The 2021 sales forecast is based upon an expectation that the residential treated lumber markets will ultimately revert to normalized levels in the back half of the year, and demand levels for our other business segments improved modestly year-over-year, as seen in the estimated sales increases. On Slide 43. We expect adjusted EBITDA to be in the range of $215 million to $225 million for 2021, with contributions from RUPS and CMS, with PC showing the widest range of variability. Now at the midpoint of that range, this would represent a 2-year increase of EBITDA through the pandemic of 9.5%, which we believe is an extraordinary accomplishment and better than many have fared. In addition, we expect adjusted EPS to exceed $4 a share for the second straight year despite the fact that we are forecasting a $0.50 per share headwind from a higher effective tax rate. As outlined on Slide 44, we expect to invest $105 million to $115 million in capital expenditures in 2021. Now approximately half of the planned net expenditures in this year, they're aimed at growth or cost reduction projects that are estimated to generate $8 million to $12 million of EBITDA in 2022. Net of cash received from the sale of closed properties, we are expecting a net investment in capital expenditures to be between $80 million to $90 million. And in summary, 2020 was an extremely daunting year, but our global team persevered and rallied around our purpose of protecting what matters and preserving the future. We generated all-time best in underlying safety metrics and delivered Koppers' best all-around financial performance ever, as evidenced by new highs in revenue, operating income, adjusted EBITDA, adjusted EPS, net debt reduction and book value per share. We fell just short of our all-time highs in GAAP EPS and operating cash flow. And excluding KJCC, we delivered our sixth straight year of adjusted EBITDA improvement. Looking forward, we believe the durability that our business model exhibited throughout the pandemic thus far will carry us to new heights in 2021 as we're forecasting new records in safety, revenue, adjusted EBITDA, adjusted EPS, operating cash flow and book value per share while also laying the groundwork for even stronger results in 2022. Now to future date this year, we plan to lay out our strategy for how we continue to grow our business from where we are today to $300 million in EBITDA by the end of 2025. Our balanced mix of businesses centered on serving infrastructure markets primarily through our expertise in wood technologies will continue to serve as a strong foundation for growth and profitability as it has proven over the last 6 years of our evolution. With that, I would like to open it up for any questions.

[Operator Instructions] Our first question comes from Mike Harrison with Seaport Global Securities.

Congratulations on a nice end to a challenging year.

Thank you, Mike. Thank you.

My first question is on the 2021 outlook overall and whether the PC guidance in particular is maybe a little bit conservative. You called out that wide range between maybe a 10% decline in demand versus maybe a 15% increase in demand. So are you intentionally guiding that a little bit conservatively? And maybe walk through some of the areas that you feel like are within your control versus the areas where you have some uncertainty or you're subject to market forces.

Sure. Yes, Mike. I mean, look, on balance, we are taking a conservative view of that segment. I mean we think it's warranted given the fact that we are still dealing with the pandemic and while vaccinations continue to get rolled out, and there seems to be some positive momentum towards some reversion to normal. What we don't know is what's going to happen with that discretionary spending that has really been funneled into the home improvement markets. And as I mentioned in my prepared remarks, even Home Depot made that point yesterday as they exhibited some caution towards their views for this year. And so we just think it doesn't make a whole lot of sense for us to jump out and put out an expectation that we expect the outsized demand that we saw over the last 6 months to 7 months of last year to just continue throughout the entirety of 2021. So we are taking a little bit more of a conservative approach to it. And as I said, we think that's just the right approach as opposed to putting a guidance out there that could get upset as things continue to develop, right? We're in an uncertain situation, have been for some time. And at some point in time, this is going to start moving back the other way. The question is when. And so we're looking at it from a conservative standpoint. But look, I mean there's certainly people who think that this will -- that this has legs to continue to grow and remain in place for some time. I will say that there's a lot of things that we have going on, that actually will begin probably seeing the benefits of in the back year from a cost standpoint, that could help fill some of the gaps that we expect will fill some of the gaps of a potential reduced demand environment. And at the same time, if we have not been able to actually bring on any new customers in this environment because we are so strapped for capacity and we've been working hard to add capacity, that if we see any openings and there is any pullback in the pandemic demand, we think we have an opportunity to actually add new business that could backfill some of that. But that is a little bit speculative at this point in time, so we don't want to get too far out in front of ourselves.

All right. And you mentioned a couple of times that there could be some impacts from higher lumber prices here, where we're hitting some record levels. Can you walk through some of the effects that those higher lumber prices have on demand in both the RUPS business and the PC segment and maybe also help us understand how much of an impact you could see in your costs or your margin structure as those lumber prices move around?

So the good news is we don't have really much exposure to lumber prices. That's where the treaters on the PC side of the business, that's where a lot of their risk is at. And so we are a little -- we are basically at their mercy in terms of how they're working through and managing that disruption in the market. There have been businesses that have been lost on sudden changes in lumber pricing, and so they're always pretty wary about how they approach an environment where pricing is moving up and especially when it's up in the territory that it is at now. So they need to be very, very careful about ensuring that they are moving products through as quickly as possible and not keeping a lot of inventory on hand and just being very careful about their purchases. So we're seeing that in the short term have some impact on demand. And as -- again, as construction season begins to tick up, as there's more pressure coming from the retailers on needing products, I think, like I said, something is going to have to give here out over the next month or so. So I would expect that even with higher lumber prices, demand will pick back up in that piece of the business as we need to serve what has been, again, a pretty feverish market for wood treatment preservatives on the residential side. But like I said starting out, we really have no exposure to that dynamic on the PC side of the business. In RUPS, we -- through our contracts, we, again, have an ability to work with our customer base on the Class I side to manage through that process with the passing on of those costs into that market. The Commercial side is where you're basically putting inventory on the ground and you're buying untreated lumber for future treatment that provides some level of risk. But overall, we dealt with that situation time and time again. It will result in various impacts on the business throughout the years. But overall, unless it becomes significant and severe, we don't expect it to have an impact on our business that can't be overcome through other actions that we've been undertaking. So all in all, lumber variability in pricing is part of our business, but from a risk standpoint, we don't carry much of that risk in terms of our portfolio. So we feel, again, overall, pretty good about things, but any impact on us will really end up coming through as a result of its impact on the ultimate demand from customers and their willingness to take on the additional price increase. They tend to get there at some point in time, sometimes maybe not always at the beginning as they try to hold out for a correction or a move downward, but that's a short-term issue that we'll just have to monitor and work through.

Right. And then in the CMC business, it seems like some of the margin dynamics should be turning positive. We're seeing more steel production and, therefore, more coal tar availability. We're seeing more aluminum production. And we're seeing some recovery in oil prices, which can sometimes serve as an indicator of where your pricing is heading. To what extent are you maybe being a little bit conservative in your outlook for CMC margin given those dynamics at play this year?

Yes. So I'd say if the current situation is one that continues throughout 2021, then there's probably a little conservatism that's built into those projections. But the tough part with CMC, and we're hedging our best a little bit, is because things can move there or done, and they have in the past, and so what's going on in January and February is not necessarily an indication of what will be going on in July and August or October, November. So again, we're -- we need to hedge our bets somewhat in terms of not getting overly excited about where the markets might be at today and give it more time to develop and see if we, again, can lock in and realize some of the benefits from where things have trended so far early this year. But you're right, the indicators that you mentioned are all positive indicators for the most part for our business segment there, and we'll realize benefits as a result of that. If it's something that stays in effect and continues throughout 2021, then there probably is some additional upside on the CMC side.

Our next question comes from Liam Burke with B. Riley FBR.

Leroy or Mike, your growth in productivity and investments, if I look at the return that you'll get on an annualized basis, they're pretty high. I'm just assuming the high and low end of what you've been guiding to. But could you give us some detail of what some of those initiatives would be?

So yes, Liam, there's a few different categories we can point to. One is the North Little Rock expansion. So that expansion, which we expect to have completed near the end of the year, will lower our cost footprint while also giving us an opportunity to increase capacity there to take on additional volume. That's a big one. In fact, that's our biggest expenditure as part of that category for the year. We have some drying capacity that we're adding in our Utility business, so that will lower our cost footprint and actually give us some securities of supply in that business segment. We mentioned converting one of our facilities over from penta to the CCA/DuraClimb preservative system. That will provide some benefits for us as well as increase the volume of our CCA/DuraClimb product that our PC business produces. Even within the maintenance side of our capital program for the year, we have dollars in there that are geared towards maintenance and improvement of our safety footprint that also will have improved operational flexibility and bring about some returns to them. So those are a few of the buckets that I would point to, Liam. There's a number of good things going on from a capital standpoint that add $1 million here, a couple of million dollars there. And we have a nice backlog. Actually, it will carry out into 2022 as well.

Super great. And in terms of looking at assets for sale, I mean, you finished the -- you closed out on Follansbee. Is there anything else within the business segments you see as an opportunity to raise cash?

Sure. I mean we have -- probably the primary one that's sitting out there right now is our Denver facility which we closed as part of the consolidation in the North Little Rock. And so we're working through that process there. We have other sites that are on the smaller end of things that we've been holding on to, that we expect to monetize at some point this year, which will add to the numbers. But the biggest one that's sort of sitting out there remaining for this year is the Denver facility.

Our next question comes from Chris Shaw with Monness, Crespi.

I think Mike asked most of my questions. But one other question, what's sort of the net of your added -- so if we get back to the normal, everyone gets vaccinated, the world returns to somewhat normal, the net between your added costs from COVID and your reduced cost from COVID, say, the travel and stuff, when those all sort of come back to normal, is there a net effect at all? Or is it all just sort of balanced out?

Yes, this is a good question, Chris. Yes, I think there's some net, I think, increase in our costs as some of the costs that have been suppressed throughout the pandemic come back. Certainly, we've been taking costs on in terms of different investments we've made in employee protection and the disruption we've had to the efficiency and productivity of our operations. It's tough to say how much leakage we've had on that side of things, but we've mentioned about the fact that the $10 million or so in savings that we saw from a SG&A standpoint year-over-year, yes, there's a good portion of that, that is going to begin coming back this year, and it's built into our forecast. And in regards to probably an uptick in legal costs, an uptick in -- some uptick in probably travel as we get to the back half of this year, a little bit of an uptick probably on the compensation side as we begin to add some personnel that we've held off on throughout the pandemic, so we've talked about the fact that a lot of that $10 million is going to work its way back in over the next year or two. But like I said, that's built into our projections. The tougher part to get our arms around is the pure dollar impact that we've seen from the pandemic on our operations, which, again, as things do begin to normalize, we will see some benefit from that, that will serve to offset at least a portion of those costs. So net-net, the 2 things offset each other. It's possible. It's possible. I would imagine they're probably far off in terms of the impacts that go both ways.

Got it. And then can you just remind me what your thinking has been or is currently on the reestablishment of a dividend at some point in the future? Is there -- are you looking at maybe a debt level, a certain debt level to start considering it? Or is it all sort of independent and we'll find out when we find out?

Well, I mean, it's certainly one of the deployment measures that we evaluate, and it hasn't gotten serious consideration as we've been putting money into some of the larger acquisitions and then working to get our debt paid down. The fact that I don't necessarily see, if you will, a significant acquisition on the horizon, like Performance Chemicals or our UIP business, there's a much greater likelihood that we'll be getting down into a leverage category that will open up doors to potentially reinstituting a dividend. But at this stage, we haven't really had much of a serious conversation about it just given the other priorities we've had for cash. So like anything, we'll evaluate it in the context of what benefits we have from putting money back into the business, like we're doing this year, versus small tuck-in acquisitions, versus share repurchases. So I guess, yes, you have to stay tuned, and we'll see if at some point in time, it makes sense for that to be another element to the story. But at this point, I really don't have much of an update to give relative to a future dividend.

Our next question comes from Laurence Alexander with Jefferies.

I guess, first of all, you flagged a few different gives and takes for 2022, the full effect of the registrations of some of the products needing to catch up to the copper prices on the feedstock side. Can you give us a sense for what you see as kind of the net headwind that you need to offset and the levers that you'll be pulling besides just end-market growth to offset those? And secondly, could you update sort of your thinking on interest expense and the tax rate, if you found any room to maneuver on either of those?

Okay. Sure. So Laurence, I'll address the first part of your question before handing it over to Mike to talk about the interest in tax. On the PC side of the business, the issues we're facing in Europe around some of the reregistration of our products is -- I'll just say that business segment is not a significant contributor overall to that particular business segment. So while it's -- while the impact would be material to the European piece of the business, it's not necessarily material to the impact of the overall Performance Chemicals business. And we are working on different products for introduction into the markets over there that -- and looking at what we can do to, again, improve our efficiency and cost footprint over there to work through sort of this temporary short-term situation. So that one, not a significant worry overall in relation to our overall businesses. But the copper headwinds, so we won't deal with them this year. We -- next year, we have a good portion of our copper requirements already hedged fairly favorable prices. So there's a portion of it, I don't know if it's half or something in that range in terms of -- at this point, we would be subject to where the market is at. And then moving on into '23, we really don't have anything at this stage significant hedged. So you're talking about some sizable headwinds in that market that are going to have to get recouped. If you figure that we're, again, consuming anywhere to around 40 million plus pounds of copper in a given year and with where current prices are at, you're talking about something that's in that $40 million to $50 million range probably of impact that we're going to have to work through with our customer base and with the retailers and things like that as we move forward with extensions of our agreements. The positive side of that equation is this is not a Koppers issue, right? It is an industry issue. And the industry itself deals with much higher variations in, again, lumber price movements than they ever have in preservative movements. So I'm confident that it is something that will get worked out and will get worked out with a manageable impact over the next couple of years just again due to the fact that we are not the only ones in this situation. And I can tell you from a competitive standpoint, we're in the best position to weather any impacts here, where the main competitors in this space cannot afford to really take it on the chin for a sizable move in copper prices. And they may be as exposed, if not more exposed than what we are. So while the number sounds big, overall, I don't -- truthfully, I don't worry so much about that because I think that the industry will have to absorb it as part of just where the commodity markets have moved if things don't move back in the other direction out over the next 12 to 24 months.

And this is Mike, Laurence. From an interest expense standpoint, we had our interest expense in 2019 was $62 million. The year we just ended, 2020, it dropped to $49 million, so we had a nice $13 million drop. And we're expecting in 2021 for that to drop further. And I think my best guess at this time is somewhere in the $42 million to $43 million range on an annual basis. First of all, in 2021, we're going to have a full year of lower interest expense, where we did not have a full year in 2020 because interest rates start dropping with the COVID pandemic environment. So that's in our favor. We have paid down a lot of debt in 2020, so we're going to have lower borrowings going forward in 2021, which will help. And in addition to that, most of our bank covenants are improving rather dramatically, and they're tied to our variable pricing as we have a grid over LIBOR. So as those covenants improve throughout 2021, we're going to see our pricing -- our variable pricing drop also. So from an interest -- that's kind of a recap of our interest expense. From a tax standpoint, the effective tax rate, it was low in 2020 at 20%. A lot of the onetime changes to the CARES Act and more clarity that we picked up and some onetime items that don't repeat themselves. And we forecasted for 2021 27%. We think that's probably a little conservative. That's on the high side of what I would call normal tax rates. We're always looking for ways to reduce our taxes. And again, that could be a little high. It wouldn't surprise me if our effective tax rate would come in 1 point or 2 below that in 2021. And again, using the 27% rate versus the 20% rate, I think Leroy mentioned it earlier, that gives us a $0.50 headwind on our EPS. And again, we will drive that effective tax rate down as low as we can. And that's kind of a monthly and a quarterly objective of ours.

Our last question comes from John Basler with Basler Capital Partners.

Congratulations on the great execution in the tough environment and continuing to move towards more of a wood treatment business. And then when I look at your revenue mix being more weighted to Performance Chemicals, which has a much more stable revenue and margin history, and then the reduced debt level, I can't wrap my head around your valuation. And if I apply an EBITDA multiple of your largest competitor in the PC and RUPS segment to the valuation, the valuation is higher than your current EV. So I'm wondering what levers you can pull to realize the value of the business transformation that you've already executed on. Could it make sense to separate the CMC business in that respect?

John, first of all, thank you for the compliment. And yes, I mean so the points you bring up around valuation is one that is personally frustrating because, like you've articulated, I think we have executed on what we have laid out to investors over the past 6 years. I think we've done what we said we were going to do, and we've hit on most every milestone and the goal that we've laid out, yet we -- for some reason, we can't seem to generate -- have that generate into a recognition of greater value of the overall organization. The points you bring up in terms of potential separation of the business, the ironic thing is, right, when you look at the business, and I understand some of the historical perception around the CMC business, which certainly was accurate when you look at that business and what it was 2015 and prior, but that business is an entirely different business today in terms of operations and the footprint and the stability of that business. And even throughout the pandemic, we were -- while revenues came down, we were able to maintain margins for the most part. And there's actually pretty good upside moving forward with some of the things that we have going on in that business. So it is part of the overall integration of our wood treatment technology portfolio. And I would hate to have to separate the business to try and unlock value because I think it is an integral part of the overall business model, and it does add to the enduring nature of our business model. So that is, for me, a sort of a last-resort option. And at this stage, we're obviously trying to do everything we can to get the story out in front of more people to really do -- see what we can do in terms of improving the message around the enduring nature of the business, the durability of the business, the importance of the integration and how it's allowed us to continue to perform even through unprecedented times. But valuation and the low valuation that we continue to get in the market is -- has been a frustrating point for both Mike and I now over the last couple of years and one that we are working on from a couple -- a few different perspectives and hope to generate some headway on that this year. Part of it is, I think, providing more clarity on how we see the future of our business, which we haven't been entirely transparent on that. We have a lot of good things going on. I've teased a little bit on this call in terms of the ability to move this business up to a $300 million EBITDA business by the end of '25, and that's in markets that aren't exactly high-growth markets. So our -- we're going to do everything we can to present a clearer picture of what the future holds for Koppers and then see how the market judges what they believe our ability to hit on those objectives will be. So that's the best way I can answer your question right now, but you certainly bring up a point that is one that's been on our minds as well.

That's very helpful. And then I wonder if we could look at the copper price increase from another angle. So in the petrochemical industry, rising oil prices tend to lift all boats. And is there a potential for higher earnings on a dollar basis even if the margins are slightly lower, thanks to higher copper prices, as you say, driving higher treating pricing across the industry? I mean I see your base -- you as a base materials business, that should benefit from inflation.

Yes.

And we have oil prices starting to creep up, which I know helps you. So tell me if I'm wrong there.

No, no, it's a fair point. That's a fair point. It's getting through the sort of the ingrained culture within the treatment business in terms of how these swings have been handled in the past. And again, we're laying that groundwork now and having -- beginning some of those tough discussions today and not leaving it until we get to the day when, all of a sudden, the hedges run out and you're in a current pricing environment. So that will just continue to develop as we continue to have those discussions. But the point you -- again, you bring up is a good one in that, yes, to the extent we're successful in sort of the industry accepting the cost of where this commodity has gone, that we could raise -- see some increase in revenues and profitability with a slight contraction of margins as a result but overall be in a better spot.

Got it. And then could you talk about how your segments might benefit from an infrastructure spending bill? I'm assuming there's nothing like that in your guidance, but there could be some grid hardening or otherwise.

Yes, there's not anything in our guidance for that. And you're right, there's -- we touch on and there are at least on the fringes, if not in the core of many pieces of the infrastructure market. So certainly, if there is a lot of money that is going into infrastructure and federal subsidies and things like that, obviously, it's going to lift a lot of different industries. It's going to have benefits within the freight rail markets, which will, in turn, have benefits within that piece of our business. Certainly in terms of hardening of the grid, it will have a positive impact on our UIP business. In terms of the impacts within steel and aluminum and pushing demand in that area, that also obviously spill back over, I think, into benefits for our products. So yes, there's -- I don't see any way in a large investment in infrastructure wouldn't have a nice -- create a nice tailwind for us. So we're rooting for it and supportive of it and looking forward to, hopefully, something getting ultimately pushed through there.

That makes a lot of sense. The last one for me is I wonder if you could touch -- explain the conservative debt pay-down target. Is that just a function of the growth opportunities for your capital? And then how quickly would you expect to achieve your longer-term leverage target? Obviously, if you're going to be 2.5x levered by 2025 based on your $300 million EBITDA target, but trying to get a sense of if you get there faster through free cash flow being directed towards debt pay-down.

Yes, John, this is Mike. I think the $30 million that we're projecting is a function of the higher CapEx spend in '21 versus '20. When you take a look at what we generated in 2020, and the debt pay-down was about $130 million. And $65 million of that or half of that came from the sale of our China operation, and the other half came from operations. And our CapEx spending for that other -- the $65 million that we generated was slightly under $70 million. And even with the net CapEx that we're projecting of between $80 million and $90 million, that's where the difference is coming from. I think it's a little conservative, but we also, for the first time, have a fairly substantial projected increase in sales, which is going to impact our working capital a little bit, and it's going to require some working capital monies. We're projecting -- we came in at about $1.67 billion in revenues, and we're forecasting somewhere be -- a wide range, but somewhere between $1.7 billion and $1.8 billion in revenues in 2021. And with that is going to come some cash needs from a working capital standpoint. Our inventories, our receivables, they're going to rise a little bit or at least we're projecting them to rise. So when you wish all that through, we came up with the $30 million debt pay-down. If we, for instance, have higher EBITDA in 2021, that will increase that debt pay-down as well. But that's our best guess at the moment. And I would say quite frankly that, that's fairly on the conservative side as well.

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.

Yes, I just want to thank everyone again for participating on today's call. We really appreciate your interest in Koppers, and hope you continue to stay safe throughout the pandemic. Thank you.

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