Koppers Holdings Inc. (KOP) Q1 2021 Earnings Report, Transcript and Summary

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 a more important time as our safety performance during the first quarter lagged our expectations. We need to get our safety professionals back in front of our people and operations to train and reinforce positive behaviors and that is now happening as COVID restrictions begin to get relaxed. Throughout the year, we will be working to roll out our Foundations training, which emphasizes the importance of empathy for fellow colleagues and the criticality of communications as it relates to the presence of hazards or hazardous behavior. Additionally, we recently presented our company's annual Zero Harm Presidents Award, which I'll describe in detail in a few moments. For 2021, we have a welcome challenge to meet or exceed the record-setting safety performance that we worked so diligently to achieve last year. Moving to slide 7. It offers an update of the key aspects of our employee health and well-being efforts. Regarding COVID-19, we currently have about 13% or 265 employees testing positive with rates dropping significantly over the past six weeks. Sadly, we did have one employee recently pass away having contracted the virus outside of the workplace. It's a terrible reminder that as close as we feel to being out of the woods, the virus is still out there wreaking havoc and the best way to protect yourself is to get vaccinated. Say that not as a political statement, not to try and enforce my beliefs on others, but as someone who doesn't want to see any more people that are under my care unnecessarily die of a virus that is extremely unpredictable. We implemented a lifesaving rule related to COVID some months ago and it remains in effect demonstrating the importance of this issue and the fact that it remains our single biggest fatality risk. As CDC guidelines are updated, we'll adjust accordingly at our facilities in the US as appropriate. In addition, we've maintained COVID pool testing at four key locations in North America. We're scheduling vaccine clinics at our facilities when possible and offering a $250 incentive to those who are fully vaccinated. In addition, we're using point-of-dispensary occupational medical clinics and other commercial outlets to make vaccination as easy and convenient for employees as possible. Now despite my pleas to employees, we at this point only have about 40% of our US employee base that's been vaccinated and I don't really expect that rate to change all that much given that most everyone has been eligible for a while now. Internationally, the rate is much lower at this point, but that has more to do with vaccine availability than indifference. On slide 8, we see an overview of our operations and planning efforts. At our facility in Stickney Illinois, the tar plant experienced approximately one month of unplanned downtime beginning March 20. Now it's been back up and running for a few weeks now. And while it was a major inconvenience operationally and commercially, the impact on our consolidated results for the first and second quarter is expected at less than 5% and already baked into our full-year guidance. For employee travel, we continue to limit those to essential-only trips. An example of that would be the recent deployment of our Zero Harm training modules for frontline employees as well as peer-to-peer workshops. Now as COVID vaccination rates increase, we're resuming this training at selective locations. As always we closely follow social distancing measures and masking protocols. And also we're conducting hazard assessments for certain tasks in order to protect our employees from the highest job site risks. Regarding office reentry, we're still urging employees who are able to work from home to continue doing that. Those who need to come into the office must use facial masks and observe all social distancing protocols when not located inside an enclosed workspace. We're postponing an official return to the office until September 7th just after the US Labor Day holiday, with limited office returns starting July 1st for those who would like to choose that option. Now the pandemic has brought the work-life balance issue to the forefront, so we have asked our employees for suggestions on how to improve that aspect of their lives. Now there were many interesting ideas to consider and ultimately we plan to implement certain measures over time. And while we haven't ironed out all the final details as of yet, it's fair to say that we realize that a one-size-fits-all approach is not fitting for an organization as spread out as we are in many smaller employee pockets. What fits for Pittsburgh is not necessarily what fits for Nyborg, Denmark or Sydney, Australia. One thing is for certain though and that is our approach to flexibility in the workplace will reach heights we wouldn't have ever imagined prior to the pandemic. We had some notable accomplishments during the quarter. In April, we presented the Koppers Zero Harm President's Award to our crosstie recovery facility in L'Anse, Michigan as shown on slide 10. The L'Anse Group led all Koppers' teams worldwide in practicing proactive leading activities related to safety and had zero lagging indicators. I want to congratulate the team at L'Anse for earning the President's award and to the 10 other impressive teams and locations listed in the finals category. Moving to slide 11 that recognizes our L'Anse facility going for three years without any serious injuries and our plant in Nyborg, Denmark recently completing 365 days, an entire year without any serious injuries, which includes keeping their employees and contractors safe while managing a number of major projects. Slide 12, illustrates a new mobile app introduced by our UIP business to better connect directly with customers on products technical reports and pole shipments. It's a great reflection of the different ways we're looking to serve our customers and bring them more value by making our people and the critical information that they need more accessible. Slide 13. Chief Sustainability Officer, Leslie Hyde offered an overview in a local publication Pittsburgh Magazine of our sustainability strategy; while Tom Horvat, Performance Chemicals Director of Global Marketing spoke on the consumer appeal of treated wood products to Building Products and Digest. On slide 14. LINKwomen observed Women's History Month by launching a college scholarship in the name of our late Treasurer, Louann Tronsberg-Deihle. Eligible participants are female family members of Koppers' employees. LINKwomen encourages professional development for all Koppers' employees and has been recently working on a project to look at ways to increase female interest and involvement in the STEM fields. Also in February we honored Black History Month by highlighting Tracy McCormick, our Assistant Treasurer; and Mario Frank a 23-year Koppers lift truck operator veteran in our Florence South Carolina facility. Also we challenged employees to recommend ideas to further improve our work-life balance. As a result we launched LINKparents, a new employee resource group that gives parents and caregivers an outlet to share advice and appreciate diverse perspectives. On slide 15, you'll see highlighting one of the most interesting interactions we had in the community this past quarter, which was the Police Chief Town Hall that was organized and moderated by our own Global Director of Inclusion and Diversity, Lance Hyde. Lance was able to gather six leaders in law enforcement from around the country to engage in a discussion on ways that we can all work better together to help bridge the racial divide. We opened up participation in the event to customers, suppliers and the community and had approximately 1,200 people join this virtual event to encourage positive change. And finally during the past quarter on slide 16, our Ashcroft British Columbia team donated funds to a long-term care facility, while employees from our Galesburg Illinois plant assembled food boxes during the pandemic. On a bigger picture scale Koppers celebrated Earth Day on April 22nd by promoting tips on how to conserve energy and water and on how to reduce, reuse and recycle materials in everyday life. So one more way we demonstrate that we're living out our sustainability principles in practical, actionable ways. Now I'd like to turn it over to Mike Zugay for an overview of our first quarter financials. Mike?

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 million compared to sales of $111 million in the prior year. We experienced continued strong sales growth due to ongoing high demand for copper-based preservatives, higher sales in the U.S. from continued home repair and remodeling projects and higher volumes internationally from improved industrial and agricultural demand. On slide 23. Adjusted EBITDA for PC was $28 million compared with $17 million in the prior year. The higher profitability can be attributed to higher sales volumes, a favorable product mix and better absorption on increased production. Profitability also benefited from the demand generated by the strong home repair and remodeling trend. Moving on to slide 24. This shows CMC sales at $92 million compared to sales of $101 million in the prior year. The year-over-year decrease was primarily due to lower volumes of phthalic anhydride in the U.S., lower carbon pitch pricing and volumes globally and lower volumes for carbon black feedstock in Australia. Also the prior year benefited from increased phthalic anhydride sales volumes due to one of our competitors experiencing supply disruption issues during that time period. On slide 25. Adjusted EBITDA for CMC was $10 million in the quarter compared to $7 million in the prior year. Despite the market challenges, CMC generated higher profitability and a double-digit margin. This was primarily driven by a lower cost structure and production efficiencies. In terms of carbon pricing and cost trends compared with the fourth quarter, the average pricing of major products were higher by 15%, while average coal tar costs went up by 11%. Compared with the prior year quarter, the average pricing of major products was lower by 2% while average coal tar cost decreased by 7%. Now let's review our debt and liquidity. As seen on slide 27, at the end of March, we had $766 million of net debt with $326 million in available liquidity. We continue to project $30 million of debt reduction for 2021. And we expect to be at 3.1 times to 3.2 times with our net leverage ratio at year-end. We remain in compliance with all debt covenants. And we do not have any significant debt maturities until 2024. The recent history of our net debt leverage ratio is also shown on this slide as well. As of March 31st or at March 31st, our net leverage ratio was 3.4 times which, was a significant decline from 4.5 times, just a year ago. Longer-term our goal continues to be between two times and three times. With that, I'll turn the call back over to Leroy.

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 materials, if this trend continues into 2022. Now across the North American market, residential and commercial treating outlook remains strong with ongoing pent-up home improvement demand driving lumber prices to record levels. Big-box retailers have mostly built-up their inventory during first quarter and independent dealers have now decided to jump into the market despite the higher lumber prices to get ready for the anticipated spring rush. Now our projections of 2021 being a big year for preservative conversions also remain in place, as our CCA DuraClimb utility poles are expected to increase market share over the next year or so as a result of the phase-out of Penta. Both the U.S. EPA and Health Canada are proposing canceling Penta registrations in their respective countries, which would be the final nail in the coffin for the product who only manufactured previously, announced that they were discontinuing production of the product as of the end of this year. We continue to consider the proper entry point into copper naphthenate or other oil-borne systems for wood species that cannot take DuraClimb. But overall, we feel satisfied in the interest of our waterborne product is a great substitute for the Southern Yellow Pine wood species region. And we're pleased to note, that plans for the capacity expansion at our facility located in Hubbell Michigan remain on target for the third quarter, which should provide some cost relief in the back half of the year should volumes drop below prior year levels. Also, we've de-risked our supply chain by locking in long-term domestic supplies for intermediates over the second half of the year, which will also cut down on lead times. Continuing on, regarding North America on slide 30, we show that friendly customer consolidations that are happening, currently could mean new volume growth by the fourth quarter and into 2022 as our capacity is expanded. Now the data that we track to determine the health of our PC business seems to be pointing in a good direction. According to the National Association of Realtors existing home sales rose 12.3% year-over-year in March 2021, but fell 3.7% from prior month because of nearly historic lows in housing inventory. The sales prices of median existing homes soared to record levels, and would have been higher had more, inventory been available. The NAR forecast that buyer confidence is on the rise. The leading indicator of remodeling activity says, home repair and improvement expenditures are expected to increase 4.8% and reach $370 billion by the first quarter of next year, as homeowners take on larger discretionary renovations deferred during the pandemic. These indicators strong, we suggest that people are feeling more positive about the economy as validated by the Consumer Confidence Index, which saw another strong increase for the second straight month. The index in April came in at 121.7, up from 109 in March, which marked a significant rise from the 90.4 index in February. Internationally, our PC activity in South America remains on a positive path and looks to be a growing market. After several failed attempts to acquire manufacturing capacity in Brazil we're now looking hard at green fielding a site, which would put us in a much stronger market position in a growing region where we already hold significant market share through an important tolling model. Our Australasian business had a strong first quarter and looks to reap the benefits of an anticipated post-pandemic housing boom. In Europe, as certain of our product registrations are set to expire, we pulled demand forward to satisfy longer-term customer needs. And therefore we will be challenged in this region as the year progresses. Now given that this is a small piece of our global PC portfolio, we don't anticipate any issue in offsetting the expected weakness in the remainder of 2021. We have been sorting through the long-term alternatives for this business for a while now. And we'll be moving forward soon, with a plan to bolster our aging product portfolio, through the introduction of new products with the acquisition of existing technology that has a longer regulatory timeline. Slide 31 brings us to an overview of our Utility and Industrial Products business. Demand in the U.S. and Australia appears to remain strong in 2021. And we may see a bit of sales decline as a result of our recent exit from our operating agreement with TEC in Texas, but we expect that that will translate into improvement in EBITDA, as production moves from TEC's Jasper Texas location to our Summerville Texas treating facility. The TEC arrangement that we inherited with the acquisition of the UIP business was unprofitable and deemed unfixable without some meaningful contractual changes which we just could not seem to reach agreement on with TEC. As a result, we'll now be going it alone in Texas, which is probably best in the long run anyway. Texas is a creosote pole market and is a burgeoning market, for pole disposal, all elements that speak to the strength of our integrated business model. Now even as we put the pandemic behind us, it will remain an imperative for utilities to limit or avoid service interruptions. And it's likely that some portion of the workforce will continue to work remotely and as a result, the workforce is expected to be more dispersed geographically, compared with the pre-pandemic environment. An emerging trend shows that more Americans are moving South and West. And to the extent that migration and home construction trends are occurring in the Southern U.S. our business could benefit due to having strong market share in the region. At the same time, energy and telecommunications needs are expected to continue to increase, which should result in a need for upgrades and expansions of the transmission network. Mentioned earlier, the production of Penta Preservative will cease at the end of 2021 and the registration for use of Penta, is on the road to being canceled in the U.S. and Canada. Now we're converting our first plant from Penta to CCA, a Koppers-produced preservative while evaluating copper naphthenate and DCOI as additional oil-borne alternatives. We expect our CCA DuraClimb product to lead the way the Eastern U.S. market for a combination of cost and performance reasons. Part of our capital program this year is also allocated to adding drying capacity at two treating sites, further reducing cost and supply risk. First kiln is expected to come online in Q2 with the second in Q3. In Australia an aging network and the need to rebuild infrastructure following last year's wildfires appear to create a solid demand base for 2021. Pine poles have gained greater acceptance due to the lack of hardwoods, so we're also adding drying capacity in Australia to facilitate increased pine pole production. Moving on to the RUPS business on Slide 32, demand for all product lines looks to be strong for this year and next as margins are expected to improve with continued cost control. Integrating tie and pole treatment in Summerville, along with processing of end-of-life ties, illustrates the super-plant model referenced in the past as a key goal for Koppers in the coming years and a core tenet of our network optimization strategy. The biggest risk we face currently to 2021 results for our crosstie business is the tightened hardwood supply. Now this has been an every couple-of-year issue within the industry where the supply of hardwoods for untreated crossties tightens either due to weather issues competing demands for hardwood or both. Now, we'll work through it as we have in the past but if our untreated numbers don't start increasing soon, we could see an impact on treating and shipments by the end of the year. Now despite the challenges the industry is currently dealing with on the supply side, we do remain focused in the crosstie market on increasing our market share and we continue to drive efforts to renew key Class I contracts by the end of 2021. Now the expansion of our North Little Rock facility to be completed by the end of this year further puts us in position for EBITDA improvement in 2022, as it will lower our cost footprint and enable us to compete for a greater share of the market. Larger market indicators paint an overall encouraging picture for the RUPS business. The Railway Tie Association forecasts 2.7% growth in 2021 and 3.6% in 2022 for crossties, primarily driven by the commercial market while Class I volumes are seen holding at similar year-over-year levels. Current raw material availability is slightly constricted according to the RTA but their view for the next six to 12 months is ideal, which is probably a little more optimistic than our view at this moment and as mentioned earlier remains our biggest near-term risk. A rebounding national economy and government stimulus payments are expected to spur increased consumer spending. RTA reports that retailer's inventory-to-sales ratios are at their lowest levels in a decade, meaning freight activity should benefit from suppliers' needs to replenish inventory. Rail traffic continues to recover from 2020 levels as of March 31 year-to-date, according to the American Association of Railroads. Total US carload traffic decreased 2.6% year-over-year, while intermodal units increased 3.2%. Combined, year-over-year US traffic was up by 5.6%. The AAR adds that railroad volumes correlate strongly with manufacturing output, so recent signs of strength point to positive indicators for the railroad industry. Slide 33 shows the impact of maintenance-of-way projects on the RUPS segment. And even though COVID-19 negatively affected this business tremendously, maintenance-of-way still generated EBITDA and margin improvement in 2020. And the backlog of railroad structures projects this year is 50% higher than a year ago, pointing to increases in profitability from a full pipeline of incoming work. In 2021, we don't anticipate as much disruption from COVID-19, as compared with the prior year, which should improve project efficiency. We're actively working to expand the crosstie recovery business including the addition of Class I accounts. We also see more growth potential by leveraging the synergy between landscape crossties and the needs of our PC customers. A combination of new value-added services, lowering costs and increasing efficiency for rail customers point to a growing revenue model. And the maintenance-of-way business is emerging as a bigger proportion of our RUPS business, having transformed from one of our most negatively impacted businesses during the pandemic into now representing roughly half of all the EBITDA increase for RUPS in 2021. On Slide 34, we see that the outlook for CMC has become somewhat brighter, thanks to anticipated growth in manufacturing in the steel aluminum and carb black industries. According to IHS Market Automotive Group, light vehicle production is projected to grow about 14% in 2021 globally with US production expected to increase 24%. As such, we expect growth in overall EBITDA and margins as demand improves and cost management continues. Performance of CMC through the pandemic has proven that the model we have built, can consistently deliver EBITDA in the low- to mid-teens, regardless of the economic cycles. In North America, we see more tar production in 2021, regaining normal levels in the second half of the year and we expect transportation cost savings as imports from Europe are reduced or eliminated. Carbon pitch and creosote demand look to be solid, while higher average oil prices should maintain higher profitability in our phthalic anhydride business. Our CMC footprint worldwide has been streamlined to the degree that we can now support reinvestment in our Stickney Illinois facility and these improvements underway since last year are designed to provide long-term reliability by minimizing the risk of operational disruptions like what recently occurred. Higher profitability is anticipated through increased efficiency, upgraded technology, lower costs, improved environmental performance and most importantly, in enhanced safety record. Slide 35 details CMC operations in Europe and Australia. Europe remains the region with the most commercial challenges as the slowdown in aluminum capacity has affected our competitors' customer base disproportionately and increased pricing pressure for the remaining base of that business. Now, while higher oil prices represent a net positive for our overall CMC business, the one area where it presents a challenge in Europe, where it makes coal tar more competitive raw material for the carbon black feedstock market, thereby pushing down supply and putting pressure on pricing. This is where our commercial and supply chain group has proven to excel over the years in managing these ever-changing dynamics and I'm confident they'll be successful managing at this time as well. The Australian market, we see that higher China benchmark pricing will support a healthier carbon pitch pricing environment. And should this pricing remain in place, we anticipate that Australia will generate the largest year-over-year improvement of the three CMC regions. Pulling everything together on Slide 37, our sales forecast for 2021 remains in the range of $1.7 to $1.8 billion, compared with $1.637 billion in the prior year. Our RUPS and CMC businesses are expected to generate a similar range of increase with PC estimated to be somewhere close to prior-year sales numbers. On Slide 38, we're increasing our EBITDA projections for 2021 to a range of $220 million to $230 million, compared with $211 million in the prior year. The biggest driver in our increased guidance is our increased confidence that PC will see elevated levels of demand at least through the third quarter. The EBITDA estimate translates to an increase in our adjusted EPS guidance, which is seen on Slide 39 and is now $4.35 to $4.60 per share compared to the prior guidance of $4.00 to $4.25 per share and prior-year adjusted EPS of $4.12. Now finally, on Slide 40, our capital expenditures were $24.2 million in the first quarter or $19.5 million net of $4.7 million in cash proceeds from asset sales. The cash proceeds came from the February sale of our Follansbee facility and the final release from escrow of dollars held from our 2018 sale of Clairton. The Follansbee sale is an important milestone for Koppers, as it will save us considerable ongoing costs and cash flow, and allow us to refocus efforts in cash towards the growth and improvement opportunities in our other businesses. We remain on track to spend a net amount of $80 million to $90 million on capital expenditures this year, with half of that dedicated to growth and productivity projects that are expected to generate $8 million to $12 million of annualized benefits. In summary, I have greater confidence in our ability to deliver significantly better financial performance this year, now that we're through the first four months of 2021 and have better visibility on the second and third quarters. Beyond 2021 I remain excited about the many opportunities that we have to further build upon our integrated business model focused on wooden infrastructure and look forward to sharing the details of how we believe we can take Koppers to over $300 million of EBITDA generation by the end of 2025 at our upcoming September 13 Investor Day. With that, I would like to open it up to any questions.

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 really at this point, and we'll continue to obviously keep a close eye on it. For us the focus remains on just trying to continue to be the leader in this market, to continue to look for ways that we can continue to serve what has been a strong market for consolidation on the treater side of things, and we're fortunate that our biggest customers are some of the biggest consolidators. So as they consolidate the market there's benefits to them benefits to us as a supply partner. And that's all worked in our favor and we expect it to continue moving forward. So that's my view on sort of where things are on the housing and sort of its potential impact beyond the next couple of years for us. In terms of the overall business and all that we put into trying to eke out more and more profit on maybe not a significantly growing top line other than what PC has done over the past couple of years, I'll just say, we have a pretty resourceful group of employees that pride themselves on trying to figure out ways to do things better and save money. And so we have a long, long laundry list of projects that are in the queue that we're working on to continue to optimize our business, make our operations more efficient, drive down costs and also grow it in areas where we don't have a lot of presence today. And that's some of the stuff that we'll be talking about when we have the Investor Day in September putting more detail behind each of the different initiatives that we've been working hard on if you will behind the scenes, but haven't really been vocal about in terms of putting out there into the investment community. So we're excited to tell that story. We think it's a good story. We think that we have a pretty good runway over the next couple of years, and yes, the business overall is in pretty good health.

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.