Good morning and welcome to Koppers' Second Quarter 2021 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I'd like to turn the conference over to Ms. Quynh McGuire, Vice President Investor Relations. Please go ahead.

Thank you and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our first quarter 2021 earnings conference call. We've 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 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 August 7th, 2021. At this time, I would like to direct your attention to our forward-looking disclosure statement as 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 and 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 the discussion over to Leroy.

Thank you, Quynh. Good morning. Welcome everyone. As you may have seen as shown on slide 3, we announced today that Koppers will be hosting an Investor Day scheduled for Monday, September 13th, 2021 beginning at 9:00 a.m. Eastern Time. I sincerely hope that you'll be able to join me and our senior management team for this event and it'll take place in Pittsburgh, Pennsylvania at a venue location still to be determined. We will of course closely monitor health and safety guidelines regarding the COVID-19 pandemic, but are looking forward to bringing back in person to tell our story. Now the Investor Day will also be available virtually with a live webcast, which will include video audio and presentation slides. And for those who will be attending virtually, we plan to also give you the opportunity to participate real-time in the question-and-answer session following the presentation. Finally for those who are not able to attend either in person virtually we will provide a replay of the webcast on our website following the conclusion of the event. Moving on to slide 5. I'm proud to report that Koppers continues to fulfill its purpose of protecting what matters and preserving the future by transporting critical goods, providing power and connectivity to homes and businesses and keeping our infrastructure strong and reliable. At Koppers, we take our responsibility seriously knowing that the things we all take for granted every day do not occur without our products and services and we're incredibly proud to do our part. Now I'd like to start with the Zero Harm update as always. After many delays due to the pandemic, our team is happy to get back to deploying our ongoing Zero Harm training sessions in person and in a safe manner and it couldn't happen at…

Thanks Leroy. As shown on slide 18, consolidated sales were $408 million, which was a first-quarter record for Koppers and also an increase from sales of $402 million in the prior year. Sales for RUPS were $192 million, up slightly from $190 million. PC sales rose to $124 million, up from $111 million and CMC sales came in at $92 million, down from $101 million. On slide 9, adjusted EBITDA for the quarter was $55 million or 13.5% and this is a first quarter record and also up from $38 million or 9.4% in the prior year. Adjusted EBITDA for RUPS increased to $16 million, up from $13 million. PC EBITDA rose to $28 million, up from $17 million. And CMC EBITDA was $10 million compared with $7 million. On slide 20 sales for RUPS were $192 million slightly higher than the $190 million in the prior year. This was primarily due to Class I volume increases, higher demand in the railroad bridge services and crosstie disposal businesses and partially offset by year-over-year declines in commercial crossties. In Q1 crosstie procurement decreased 27% from the prior year due to a continuing tight supply for untreated ties as well as unfavorable weather. Crosstie treatment in the first quarter was higher than prior year by 6% driven by increased volumes from Class I railroad customers. Moving on to slide 21. Adjusted EBITDA for RUPS was $16 million in the quarter compared with $13 million in the prior year and this was driven by a favorable product mix and stabilization in our maintenance-of-way businesses, offset in part by lower commercial crosstie volumes. For 2021, we anticipate a favorable outlook for our maintenance-of-way businesses, which were severely impacted in the prior year due to the pandemic. On slide 22. Sales for PC were $124…

Thanks Mike. So let's review our business segments and how 2021 looks to be taking shape, starting with our Performance Chemicals group. On slide 29, the overall outlook for Performance Chemicals has improved from the more cautious approach we were taking, as we entered the year. And we've seen strong year-over-year demand in North America through April, which is not a surprise as prior year comps did not reflect the, stay-at-home pandemic effect of home improvement projects. We did see a mid-quarter minor lull in volumes relative to what we had seen in previous eight months, which we attributed to record lumber prices that we believe were holding treaters back to a certain degree as they were looking to avoid, getting caught possibly with high-priced inventory if the market took a sudden sharp downturn. Consumer demand for the product to satisfy the backlog of projects has the industry pushing through the inventory hesitancy and volumes have reverted back to what we had been seeing. Overseas, the international picture looks to exceed 2020 results, due to prior year being severely impacted by the pandemic. As such, we're cautiously optimistic about PC's ability to generate EBITDA in 2021 that will actually meet or potentially even surpass the prior year, after initially thinking that we could see some drop off from prior year demand as the year went on. I'm still a little concerned about where things go in the back third of the year, from a demand standpoint, but feel comfortable enough raising our guidance in this business, due to the lead we have built in Q1, a better comfort level on Q2 and the rebound in our international segments. Koppers has continued its rise to record highs. And as a result the industry will need to build that cost increase into…

We’ll now begin the question-and-answer session. [Operator Instructions] First question comes from Chris Howe, Barrington Research. Please go ahead.

Good morning everyone. And…

Good morning. Good morning.

…fantastic results and definitely encouraged by the increase in guidance and looking forward to your Investor Day in September. I guess, starting off with the PC segment and the housing environment as we all know the demand continues to exceed the supply in the market. It should continue at least for the next few months. As we look at the market overall and we look further out down the road, I've heard different opinions on what this could mean long-term for the housing market as far as pressure on the housing market as we look maybe three to five years out. What's your opinion on that? And obviously, from a profitability standpoint, the company as a whole and on a segment level basis is doing well. So despite some top-line pressure in the long-term, the benefits that you're seeing underneath the top line could help offset that and still continue your EBITDA cadence.

Yes. Thanks, Chris. Just thinking about your first comment or question about the housing market and sort of its impact on PC and things like that sort of longer-term coming out of pandemic, actually we were just talking about this yesterday in regards to the strength of the market in general and the steady upward climb in that whole industry coming out of the Great Recession. We bought this business in 2014. It had seen a few years of improvement coming out of that 2008, 2009 downturn. And we've seen nothing obviously but continued improvement in volumes and demand and the time that we've owned it. And all that has been in an environment of low interest rates in a relatively healthy economic environment except for the period last year, which then got juiced up by government stimulus and just the whole change in social habits. So I think that the market overall has certainly a solid foundation, but if there's any one thing that sort of remains as that variable out there that could change matters, it could be an inflationary environment where the rates begin to move up, put pressure on home equity borrowing, put pressure on existing home sales and those sorts of things. We haven't seen that. We haven't experienced that environment since we've owned this business. And so that's the big sort of wildcard for me that I look at as could have an impact. By the same token, I have people that work for us and that work in the industry that would say that that sort of an environment that maybe doesn't result in as much activity on the existing home sales side. Maybe pours more money back into home remodeling projects since people aren't looking to move. But all that is unknown…

Okay. And yes, I think, my math is right and it's about $15 million of additional EBITDA per year through that time period. You had mentioned in the past some non-core assets that are whether up for sale or available. As we look at that in conjunction with product adjacencies those in combination or separately could be accretive as we get to further out.

Yes. I mean, all our businesses have some inter-relationship today. We don't really have anything anymore that's kind of standalone out there by itself. There's some dependency within the organization on just about on everything that we're doing today. That being said, there are pieces of the business that maybe aren't as obvious in terms of fitting within the core of what we do, and in a healthy M&A environment where dollars are being tossed around, I think, we would certainly have to listen to and be willing to listen to any offers that might come in for any of those types of businesses. But in the grand scheme of things it's small overall because the core of what we do is really within the three business segments at large and that does represent 90% or more of our business.

Sure. And then just my last question here. Leverage is at 3.4 times. You're headed back as what I expected given your history of debt reduction. Can you talk a little bit about the pipeline of opportunity? I know, it seems like multiples on a general sense are high. But once we get to that sweet spot for leverage is there really anything in the market that would push that leverage above that comfort range, or is that kind of the way we should think about leverage going forward as roughly 2 times to 3 times?

Yes. So it's interesting because we twice in the last six years to seven years have taken on more leverage to make what we thought were and still believe were key acquisitions. And it's really helped us transform and realign our business portfolio and we think that's reflected in the numbers. So we couldn't be more happier with the acquisitions we made. And the way we did them was the cheapest way of financing it. And we were banking on building up a confidence level within the markets that we again have that disciplined history of being able to lever up and pay down debt and add accretively to the business. I'll be honest with you, I'm disappointed in terms of the market's confidence in our ability to do that is demonstrated by the way the stock has traded over the past couple of years. So from that standpoint I think we will be more cautious about moving back up into the 3.5-plus times to 4.5 times range just based upon the punishment that we've been seeing to have been dealt out for going that route in the past. So we'll take that as data points to -- that will inform our decisions in terms of how we capitalize the overall organization and approach acquisitions moving forward. Can't help with color just based upon what we've experienced.

That’s very helpful and great quarter again. And thanks for taking the question.

Yes. Thanks, Chris.

Thank you. The next question is from Mike Harrison of Seaport Global. Please go ahead.

Hi. Good morning. Can you hear me, okay?

Yes.

Yes, we can.

Great. Wanted to ask a couple of questions on the RUPS business. First of all, you mentioned that Class I volumes are pretty steady or maybe improved a little bit year-on-year. What is the outlook for the rest of the year around Class I? And would you expect to see any improvement within the commercial crosstie business in RUPS?

So Mike, I think, it all comes down to available -- crosstie availability untreated crosstie availability and that really comes down to the market's willingness to pay up for increasing cost of hardwood crossties. So as anything right there's product there if you're willing to pay for it. And what we have tended to experience here over the last two to three cycles of this is this general lagging or reluctance to move pricing up to get the level of supply that is wanted in the market. And so there's this, sort of, tension that exists until it gets to a point where people realize that they're now putting at risk the ability to get the volumes that they want and need. And then you see pricing move up. You see the supply move up. But because of the fact that it's a process that requires product to sit for a long time before it can be air-seasoned to treat that creates issues within the supply chain. So what we're trying to do is to get the customer base to understand where the markets are at and agree to do what needs to be done to get the supply of untreated ties in so that we can keep that part of the process moving along so that we can supply later in the year when they're going to need the additional crossties. So that's the challenge we currently face. It's a challenge we've faced at least -- this would probably be the third time we've faced it in the six years I've been doing this job. So it seems to be like an every other year, sort of, thing every two years to three years that we run into this. The demand is there, but we're dealing with a constrained supply chain at this point in time that is going to have to change.

All right. And then it sounds like the tie disposal business is maybe hitting its stride or accelerating a little bit. And I know that you've had some initiatives to get customers on board with that service. But as you're starting to see some acceleration there are you seeing the leverage and the types of returns that you would have expected when you acquired that business? Maybe talk a little bit about the opportunity going forward.

Yes. I'd say we're still actually early on. I mean again we bought that business -- number one, we bought the business in that space that was the best operator. So they fit within our business model very, very nicely because they're not the cheapest which we've often been told. We are not the Walmart of suppliers, but there's a reason for that. And so the business we bought was, sort of, similar in line high-quality dependable, reliable business do what they say and deliver on their promises and there's a cost to that. And so the challenge has been working through a market that in the past has not really had to pay much to get that service. And as a result the service has been spotty and maybe not always as the highest quality and maybe not always reliable. And it's getting the customer base to understand the value of what they're paying for. And when you deal with different issues that's when the opportunities arise and our ability to deliver on what we say gains the confidence that people then become willing to pay the right price to get the service. And so, we added a key Class I account that we did not have last year and we're still in the early parts of that. All things seem to be going well. We're working on another one that will be important. And that was the whole process of getting into that market was to use our relationships in the Class I markets to take a reliable operator and help expand their business, while also helping to secure our underlying crosstie business because the two go hand-in-hand. So it's still got good ways to go in terms of I think the opportunities there. But so far, I like what I've seen in the couple of years that we've had it.

Right. And then, finally over on the CMC business, maybe walk through the margin dynamics and how you think that could play out during the rest of the year. I guess my view is that, we should see some volume recovery and probably pricing pickup as demand is coming up as well, even as you're seeing your coal tar costs improving, but maybe talk about those different dynamics?

Yes. So it's different from region to region. I think we mentioned in the prepared comments, Australia is on track to have a really strong year and that's due to the recovery of the industries in China, which are supporting higher pricing there, which allows us, enables us to support higher pricing in that region of the world. So that business is going to have a nice 2021 compared to 2020. North America, the supply-demand dynamics appear to be all moving in the right direction. We get a decent benefit from oil moving up here in North America. That will be helpful. An improved steel market here in the US will support a raw material supply that enables us to get what we need domestically, instead of having to pay higher costs to import that raw material. So all that's pointing in a positive direction for North America. Europe is probably the most challenged, because rising oil in Europe puts different pressures on them. As I mentioned, again, in the commentary, they're really good and really experienced at being able to handle that, but it does put pressure on them in the short-term in terms of trying to balance that difference between change in pricing and change in raw material costs. But, overall, we feel pretty good about the CM&C environment in 2021. And the one thing I want to make clear, because it often somehow gets lost, is the changes we made in that business to restructure it and to right-size it, have put that business in, as demonstrated in 2020 when demand was really, really hurt, that we could still actually produce above 10% EBITDA margins. And that just would not have been the case five, six years ago in the former environment. And that was also in an environment where oil prices were down significantly as well. So we've really changed the dynamics of that business model to get respectable margins through just about any environment. Again, the dollars will move up and down based upon demand and pricing, but our ability to maintain a profit margin has shown to be pretty consistent over the past several years in a couple different crazy environments.

All right, Thanks very much.

Yes. Thanks, Mike.

Thank you. And our next question comes from Liam Burke of B. Riley. Please go ahead.

Good morning, Leroy and Mike.

Hi.

Leroy you mentioned, thinking or considering a greenfield plant construction in Brazil. Does that meaningfully hit you on the CapEx line?

Well, it [Indiscernible] meaningfully. So for us, I would view it in the grand context of things, Liam, as not being necessarily meaningful in terms of our overall CapEx. I will tell you that, and we'll talk about this in again greater detail in September, the ability to hit $300 million or better in 2025, right, that doesn't come without some cost, right? There's capital that we're going to have to put into play to grow our business. And that's that part of what we'll be talking about then. We're still going through the numbers in terms of what size we would need and just the dynamics there, down in Brazil, in terms of what makes sense. Obviously, we won't move forward with anything that we don't think has the right returns associated with it. But I think, overall, in the grand context and grand scheme of things, it's going to be a relatively modest investment compared to some of the bigger investments we've made here in the past couple of years.

Okay. And the Rail Tie Association numbers of expected demand for rail ties, typically, I mean, you'd think about demand plus or minus 1% a year, based on traffic volumes. Those numbers are high. Are those just a reset or a correction, or is that a more favorable market dynamic you're looking at?

Yes. It’s a good question. To be honest with you, Liam, I'm not sure what to make of it at this point. I think that the market, overall, while it's seen some declines in the past couple of years, some of that pull-back probably was a little too much, which is going to result in maybe an uptick above the typical 1% to 2% that you might see in a given year to catch up a little bit. But I don't view it as meaningfully different over the next two to three years to be honest with you. If it's above that couple percentage mark, certainly, on the Class I side of things, it will be just 1% or 2% there for maybe a couple of year period as sort of things rebalance, and sort of correct themselves from the sharper pullback that we saw in the past few years.

So, that could be -- I mean that business could improve pretty nicely then, I mean, if we're looking at more consistent growth, which you haven't seen in quite a while. Dating myself in the old days, when it was flat 1% but consistent.

Yes. I mean certainly, anything for us that we're able to improve on utilization in our facilities is a plus, right? We do get nice leverage out of that. So, it's one of the reasons why we're attempting to be more aggressive at taking greater share of what has been a smaller market. So, yes, just a 1% to 2% change in volumes can be meaningful for our business.

Great. Thank you, Leroy.

Yes, sure. Thank you.

[Operator Instructions] Our next question comes from Chris Shaw of Monness Crespi. Please go ahead.

Yes. Good morning, everyone. How are you doing?

Hey, Chris.

Hi, Chris.

Think starting with CM&C, obviously, down revenue, you had up EBITDA, and you attributed some of that to cost savings and better efficiency. Are those things permanent, or would the volumes come back? Are you going to see a creep-up in cost? And so, basically asking, if when things get normalized, is that business at a higher profit level going forward?

Yes. I think Chris the stuff that we're doing will eventually support a higher level of profitability, all things being equal. There is that constant sort of back and forth between the movement of raw material costs and pricing and the adjustments that are made that will have some impact plus or minus in any given period. But on a all things being equal basis, yes. I mean the improvements that we're making would support a generally higher level of margins on a go-forward basis, basically in a stable environment. But that business is one that does move up and down on the sales line and so, you always are dealing with the impact that that has. But as I mentioned, we've targeted to be between 10% and 15%. We've been more or less squarely in the middle if not to the upper end of that again outside of the pandemic and we think coming out of the pandemic that we can certainly be back in that probably closer more to the 13% to 15%-ish range.

Can you just remind me how cold tar for you is priced again? I mean I remember going back. It was annually, but I know it's not that way anymore. How quickly does it move? And what are the factors there?

It's different based upon regions.

Right.

In some cases, it's done quarterly. In other cases semiannually other cases annually. But one of the big changes that we made when we were sort of restructuring and reorganizing that whole business was trying to put ourselves in a better position to be able to either push through or give us the ability to manage changes, quick changes in that raw material cost. And I think you see that. That's what you see probably most of all reflected in the stability of our margin profile in the last several years is, we've been pretty successful at realigning our contractual terms to enable us to do that. So we don't find ourselves in an upside-down position for a significantly long period of time, like we would have in the past.

But that cuts both ways too, right? If you're doing better then…?

Correct. Yes.

And then again, I think people are kind of asking it, but the outlook for flat Class I tie growth. Is that's just because you think the lumber issue is going to be a difficult one, or they really just don't have the demand right now that they just don't want to put more ties in than last year?

Well, I think with improved rail traffic, I think it's going to be a little tougher for them to maybe find the track time that was a little more available to them just last year going through this. I think overall they're in pretty decent shape. And it's a little bit different for each Class one customer as well. So, some we're absolutely seeing higher volumes. Others that were pretty healthy and robust last year, they got themselves a little bit ahead of the game. They're pulling back a little bit. So, it's kind of balancing itself out across the entire network. The supply side of things -- I think the supply side of things gives us more downside risk, to be honest with you, than it does for things to remain flat. For us to even be able to supply them in a flat volume environment, we're going to need to see an uptick in untreated crosstie supply.

Interesting. And just quickly, I know Kansas Southern was -- or Kansas Southern side was up.

Yes.

You to do their, own rail ties, and then I always assume you weren't. Canadian Pacific was not a customer of yours. But does that merger mean anything for you, the business do you think?

It depends. So we are a supplier to them on the untreated crosstie side of things. And I guess, if it comes down to a change in philosophy with a new owner that doesn't want to be in that business then yes, it could.

Great, thanks a lot.

Yes. Thank you.

This concludes our question-and-answer session. Now, I'd like to turn the call back over to Mr. Leroy Ball for closing remarks. Please go ahead.

Yes. I just want to thank everyone for participating on today's call, and thank you for your continued interest in Koppers, and hope that I'll be able to see you at the Investor Day upcoming on September 13. Stay safe everyone. Thank you.

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