Koppers Holdings Inc. (KOP) Earnings Call Transcript & Summary

Good day, and good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Koppers May 2020 business update. [Operator Instructions] Please note that this event is being recorded. I will now turn the call over to Quynh McGuire. Please go ahead.

Thanks, and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our May 2020 business update where we'll provide commentary on our operations, customer and market trends and sales by business segment. 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 and prior conference calls with the investment community, this is being broadcast live on our website, and a recording of this call will be available on our website for replay through September 18, 2020. Before we get started, I would like to direct your attention to our forward-looking disclosure statement 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 the discussion over to Leroy.

Thank you, Quynh. Welcome, everyone, to our second monthly business update to provide additional transparency about our business during this COVID-19 pandemic. Before I jump into the presentation, I want to start by thanking our 26 Denver employees that were informed earlier this morning that we will begin closing the facility in September. These decisions are always extremely difficult, and this is no exception. We have 6 employees at Denver with 32 or more years of experience, with our most tenured employee, [ Nemesio Castillo ], recently celebrating his 50th year with Koppers. My gratitude goes out to this group, and we have leadership on-site right now talking to the employees to begin the process of helping them process this news and work on next steps. We will likely be able to keep some employees in different roles, while others can be helped to bridge to retirement. One thing can be certain is that we will treat all affected employees with the level of dignity and respect that they deserve, one that they have given to Koppers and our customer base over the years. So once again, a heartfelt thank you to the Denver team, and best of luck on your next endeavors either as part of Koppers or at your new employer. Now let me move to a discussion about Zero Harm, which remains the cornerstone of our culture. The strong foundation of skills that our people have established over the last several years is proving invaluable in current times. Our employees continue to put those skills into action every day to help ensure the well-being of themselves, their colleagues and their community members. To further advance our efforts, we'll be deploying 2 new Zero Harm workshops in the third quarter to better engage frontline employees and identifying and eliminating both behavioral and physical exposures that could result in injury. Additionally, 6 new Zero Harm trainers around the globe have been externally certified to deliver behavior-based safety training to all levels of our organization as we strive for continual improvement on our journey to Zero. Throughout this pandemic, I've been told by many employees that still have to trek to one of our sites on a daily basis that they believe that our Zero Harm culture has enabled us to transition to our current pandemic safety protocols easier than perhaps others. Because they've been trained to identify and eliminate or mitigate exposure as part of their regular routine, working in a COVID-19 world has just become an extension of their normal approach. If we take care of our people, our environment and the communities in which we operate, good things will follow for customers, suppliers, shareholders and all stakeholders. Now moving to our presentation. As shown on Slide 4, Koppers has continued to remain an essential business according to the guidelines set forth by the U.S. Cybersecurity and Infrastructure Security Agency, or CISA, and the agency of the Department of Homeland Security. As an essential business, we are able to continue running our operations so we can help transport critical goods, power and connect our homes and businesses and keep our infrastructure strong. Our workforce is proud to continue doing their part to support the global economy. In terms of the health and wellbeing of our employees, as featured on Slide 6, we recently had 2 employees test positive for COVID-19, bringing our company-wide total to 3 so far. These employees are at home recuperating, and we send them our best wishes for a full recovery. To date, approximately 10% of employees have self-identified as having symptoms, with less than 1% of employees remaining in self-quarantine. I'm pleased to say that our people have continued to strictly maintain all COVID-19 hygiene protocols and social distancing practices across our organization even as states and countries are beginning to lift their restrictions. In June, we kicked off our annual Wellness Program for U.S. employees. And as mentioned last month, our new OneKoppers Wellness Channel app has been launched for employees globally to communicate directly with each other and company leaders. Additionally, I'm continuing to issue a weekly update to our employees in both written and video formats as I strongly believe that open, ongoing and comprehensive communication is important for us to engage with each other throughout our company. Now moving on to a review of operations continuity on Slide 8. We see that all worldwide Koppers manufacturing facilities remain operational, except our KJCC plant in China, which is off-line due to scheduled outage at a customer's plant. Beginning last quarter, KJCC has been reclassified as a discontinued business due to its pending sale, which is scheduled to occur during this year's third quarter. During the time of the shutdown, our employees there continue working on maintenance projects until that plant restarts, which may not be until the sale is finalized. Currently, less than 1% of employees have been furloughed or laid off due to the virus but are continuing to be paid while off-work. Employees are now permitted to travel if essential for business. However, everyone is still required to take appropriate health and hygiene precautions. In terms of reentry to the office environment, Koppers continues to strongly encourage employees to work remotely. A return to the office may begin on July 1, however, it's on an entirely voluntary basis. Our employees have been assigned on 2 or more teams, and those wishing to return to the office will be permitted on an alternating basis. For visitors, the access will be restricted, and they must follow our company guidelines. We're adopting safety and distancing measures, providing personal protective equipment and hygiene products for office use and using technology to encourage virtual meetings and visits. Speaking of technology, we're experimenting with the opportunity to conduct our facility audits virtually. An option would be to use the virtual reality tool, Microsoft HoloLens, which would be incredibly helpful. And additionally, multiple solutions for testing, temperature screenings and contact tracing or alerting technology are still being evaluated. As we carefully begin to resume business practices interrupted by the pandemic, I had the opportunity to do one of my favorite activities last week with a virtual visit to our crosstie treating facility in Roanoke, Virginia. As highlighted on Slide 10, using a number of technology tools, I enjoyed a half day visiting with our team there, touring the plant and seeing a new crosstie end plater investment that we made earlier this year. It was a full morning of really constructive dialogue, and I was humbled to hear how much pride employees have in their work and to help keep our economy moving. By interacting one-to-one with managers and frontline employees in this way, my senior leadership team and I learn so much from them. The insightful observations and honest feedback from our employees very much helps to influence the ways in which we move the company forward. And that's a quick snapshot of how we've been moving ahead internally. Now let's take a look at the current business sentiment among customers and suppliers. So as outlined on Slide 12, our Utility and Industrial Products group reported that the major utilities are indicating that normal infrastructure maintenance will continue for their networks, meaning that we anticipate continuing demand. Our proven ability to respond rapidly to emergency situations like unplanned outages and natural disasters only enhances our status with utilities. UIP, in fact, is on track for its best year since being acquired by Koppers back in 2018. For our utility business, we expect somewhat steady demand as maintenance and replacement work continues. Utility co-ops have begun to return to offices while investor-owned utilities are still primarily working remotely. For pilings, some states have looked at restrictions, while others remain delayed due to funding availability. Outstanding recovery contracts are on hold due to office closures, and new pole projects have been impacted by construction shutdowns. In terms of our supply chain, we are seeing the wood supply for poles adjusting and stabilizing. However, some suppliers are reporting inconsistent demand from the mills. Next, in looking at our Railroad Products and Services business, as seen on Slide 13, overall crosstie demand remains solid, although we're starting to see some lower bidding activity in the commercial market. According to The Association of American Railroads, the most recent figures show that year-to-date through June 6, carloads for U.S. railroads are down by 15%, intermodal units are down 11% and total U.S. combined traffic decreased 13%. Even so, certain Class I customers are increasing their volumes to take advantage of the efficiencies brought on by maintaining their lines during reduced traffic, but only one has announced a reduction in its capital spending program by approximately 10% for the remainder of this year. Our rail structures team is seeing improving demand in the maintenance-of-way market with their crews resuming work. In general, they're working on projects with a more favorable margin mix, and we'll see better comparable numbers for this business beginning this quarter and continuing through the remainder of the year. Similarly, for recovery resources, we bottomed out in Q1 of this year, but things have stabilized with the new business brought on near the end of the first quarter. May represented the third straight month of solid profitability after a 10-month stretch of breakeven performance. We're still dealing, to some extent, with planned and unplanned customer outages and issues with railcar availability that, when cleared up, will enable this business to begin reaching new highs in profitability. Regarding the supply chain for crossties, availability is low for logs on hand and logs available for untreated crosstie production across the industry. At the same time, the demand outlook for logs generally also looks to be flat to down, although we expect our current trend of a 3% to 5% increase to continue throughout this year, so we'll need to keep a close eye on procurement. Despite my previous statement, we expect that our crosstie purchases on a year-over-year comparative basis will begin flattening out for the remainder of 2020 as our inventory levels get close to stabilizing. In addition, we anticipate an increase in the supply of dry ties coming in from third parties. As more crossties are being treated, that translates into benefits from higher capacity utilization. Now on Slide 14, we see that our Performance Chemicals business continues to perform really well. Despite the pandemic, North American markets remained strong so far in 2020, and we see that trend continuing in the second half. Our customers are currently dealing with tight lumber availability, but that's expected to be resolved in the near term as the lumber market is now ramping up production. That has now put the chemical suppliers, like Koppers, as the potential bottleneck to keeping up with the unprecedented treated lumber demand. According to the weekly COVID Impact Tracker by Home Improvement Research Institute, there is a steady increase in the percentage of DIYers doing projects, and the intent remains strong as many homeowners have disposable income that is being shifted to home improvement. For our PC business, that will mean increased volume levels through the summer months and increased demand for wood treatment chemicals in order for customers to replenish their pipeline. We're doing everything we can to keep up, but we've drawn down what little inventories we had on hand and are running our plants full out. The question people are asking now is how much of the current demand level is sustainable beyond the pandemic. And while it's hard to imagine it's becoming the new normal, some industry experts are betting that increased levels of individuals working from home will generate a sustained new interest for maintaining and beautifying homes since people will be spending more time there. It remains to be seen how this will ultimately play out, but there's no question that, for this year at least, demand in the U.S. will be at all-time highs. As seen on Slide 15, the picture internationally for PC is a bit more mixed. In Europe, U.K. sales continue to suffer due to closures and lower volumes, but that should improve as restrictions on cross-country movements are eased. Australia reports improvements across all product groupings, particularly structural products, landscaping, fencing and agricultural products. In anticipation of housing construction slowing by the end of the third quarter, the Australian government passed the stimulus package aimed at supporting the construction market that may not provide a net benefit but will allow current demand to at least remain steady. New Zealand has begun to reopen, but its borders remain closed while our business began ramping up in May. Similar to Europe, our South American business continues to deal with various countries' closures, but we're beginning to see slight areas of improvement. Sales for each of our international businesses showed some improvement over the April lows. Regarding our supply chain, we are being opportunistic with implementing copper hedges for the 2021 and '22 time frame, which are currently at lower average cost than 2020. For 2020, we will not see any additional benefits related to lower copper prices as we are already fully hedged. Currently, we have lower inventory on hand for certain intermediate raw materials given the strong demand environment and could see margin pressure as we try to fill demand outside of our current capacity. Our procurement team is doing an amazing job managing the situation to ensure we keep customers in supply with chemical. Our Carbon Materials and Chemicals business, as depicted on Slide 16, continues to deal with demand weaknesses as a result of significant declines in auto manufacturing capacity and across other industrial production markets. In North America, CM&C is negatively impacted by higher raw material costs due to backfilling shortfalls with European supply. At the same time, we're dealing with lower throughput as well as lower average pricing due primarily to phthalic anhydride and lower benchmark orthoxylene prices. In CM&C Europe, demand and pricing for carbon pitch are holding up, but the risk for a potential downturn remains. We're seeing significant pricing decreases for naphthalene and carbon black due to lower oil prices. In Australia, volumes remain at similar levels, but carbon pitch pricing is likely to continue trending lower as Asian benchmark prices continue to decline. In the supply chain picture, a decrease in steel production has led to lower availability of domestic coal tar. And as a result, we're seeing increases in raw material imports in North America at higher prices, as expected. In Europe and Australia, the supply chain remains steady, and the modest rebound in oil prices off of early April lows is causing the carbon black market to resume looking at coal tar as a competitive feedstock, which complicates our ability to drive down cost. Despite all that seems to be working against us in this business segment, we still believe we can finish the year with EBITDA margins slightly above the single-digit levels. Switching gears now back to a view of Koppers as an involved corporate citizen. As shown on Slide 18, Koppers people continue to demonstrate their willingness to reach out to help others in partnership with the Urban League of Greater Pittsburgh. Our All One Pittsburgh program campaign raised approximately $65,000 that has enabled volunteers to distribute, at this point, more than 45,000 essential, hard-to-find household cleaning and hygiene items to families in underserved neighborhoods in this region to help them get through this pandemic. As featured on Slide 19, our UIP team launched new Hometown Heroes Award to recognize employees of U.S. utility co-ops. This monthly award recognizes those who make a substantial difference in their business and/or community. And way up north, in the Upper Peninsula of Michigan, our employees at the Hubbell PC facility participated in a drive-by parade for nursing home residents to make sure they felt valued and not alone during the pandemic. The Hubbell team also volunteered to help residents in Midland Michigan recovering from damage caused by severe flooding and a reciprocal effort to repay assistance they received a few years ago when flooding impacted the Hubbell region. Moving on to discussing something that's even more serious, and that's the topic of racism and racially related injustices. We've all seen and felt the impact of demonstrations across the nation and around the world over the past few weeks protesting racism and the associated systemic bias throughout society at large. This cause affects me deeply, and our employees have told me they feel just as strongly. So to reflect the collective commitment of the Koppers family, as shown on Slide 20, our leadership team, our Board of Directors and, so far, hundreds of our employees have signed a virtual pledge to stand together against racial injustice. This pledge calls on each of us to not only stand against racism in all its forms but to act in ways that promote healing and understanding among people of all background and cultures. Meaningful change begins at the personal level, and we want to encourage that change across our company and our world. I invite everyone to please consider joining Koppers and signing the pledge by visiting our homepage at www.koppers.com. And beyond the pledge, I'll be leading the effort to reevaluate our policies and procedures within Koppers to promote more opportunity for those that have been historically denied and an inclusive environment for all employees to flourish and reach their full potential. A few years back, we implemented the Rooney Rule at Koppers, which requires a diverse slate of candidates to be interviewed for all positions with very few exceptions. Our recruiters have been trained in finding diverse talent. And presently, we hired our first Global Director of Inclusion and Diversity in early March while also establishing an inaugural I&D Committee at Koppers. With our 2020 Corporate Sustainability Report to be issued soon, we will, for the first time, publicly release disaggregated data on our employee demographics, including at the manager level. This is viewed as an important step in highlighting where organizations stand so that progress can be measured in the open for all to see. I strongly encourage other CEOs to begin this practice which, combined with other structural changes, can be part of the foundation for bringing about meaningful and measurable change. Also, in the spirit of respect and community, our leadership team intends to increase personal connections with our employees from across the company and will be reaching out to as many as possible on a weekly basis. I believe wholeheartedly that proximity builds empathy. The closer we get to another person, the better we can know, accept and care for each other. Every person in the Koppers family is valued. Every person here has wisdom and insight gained through his or her own distinct life experiences, and we intend to honor and learn from those insights to strengthen an empathetic and inclusive culture, using this dialogue as one of many tools. Before I provide additional closing comments, I'll turn it over to Mike to discuss May sales for each of our business segments as well as our current financial position. Mike?

Thank you, Leroy. Let's start by discussing May sales. As shown on Slide 22, consolidated sales from May were $144 million compared to $147 million in the prior year. Sales decreased $3 million or about 2% and was due to lower sales in CM&C, partially offset by higher sales from our Wood Preservation businesses. Sales were negatively affected by soft demand in markets served by CM&C brought on by the global economic shutdown as a result of the COVID-19 pandemic. Sales in CM&C were also negatively affected by lower average pricing of certain products, which are tied to oil pricing benchmarks, which were significantly lower than the prior year period. At the same time, residential wood treatment preservatives and industrial wood treating activities in the United States continue to see strong demand. As seen on Slide 23, sales for RUPS of $68 million were flat compared to the prior year. In general, demand levels held steady, and sales volumes were higher than the prior year for untreated crossties and railroad repair projects as well as utility poles, offset by weakness in the rail joints business. Crosstie procurement is up 22% year-to-date with a 5% increase in May, and crosstie treatment was higher by 6% year-to-date and 6% higher in May. Moving to Slide 24. Sales for PC of $47 million increased by $5 million or 12% compared to sales of $42 million in the prior year period. The year-over-year increase was primarily due to record sales volumes in North America driven by demand from home improvement retailers, partially offset by weakness in international markets, particularly in Europe. We anticipate those foreign markets will begin to recover as COVID-19 restrictions continue to be lifted in Europe, Brazil, New Zealand and some other nations. On Slide 25, sales for CM&C of $29 million decreased by $8 million or 20% compared to sales of $37 million in the prior year. The year-over-year decrease was driven by soft demand in the markets served due to the economic shutdown, again, associated with the COVID-19 pandemic. Sales were also negatively affected by lower average pricing of certain products, which are tied to oil pricing benchmarks, and these were significantly lower than the prior year period. Average global pricing for major product lines was down 19% from May 2019. Average global coal tar costs were also down by 20% from May of 2019. Moving on to debt and liquidity, as shown on Slide 27, we do not plan to amend the company's credit facility as our current operating and cash flow forecasts are expected to allow for an appropriate cushion in our financial covenant metrics. We also continue to anticipate $120 million in debt reduction in this current 2020 year. As stated previously, we stress test our bank covenants as well as liquidity as seen on Slides 28 and 29. We anticipate remaining in compliance with our covenants even at a potential 30% EBITDA reduction and expect to have ample liquidity even with a potential 25% EBITDA reduction. Now I would like to discuss several items that are not referenced in our slide presentation. Capital expenditures for May were $6.7 million compared with $2.7 million in May of 2019. CapEx spending year-to-date was $21 million compared with $16.8 million in the prior year period. Looking ahead to full June quarter results, sales are currently estimated to be in the range of $410 million to $420 million, and this compares with $444 million in the prior year quarter. And adjusted earnings per share for the quarter ending June 30, 2020, are now forecasted to be in the range of $0.70 to $0.85 per share as compared to $1.14 in the prior year quarter. With that information, I'll turn it back over to Leroy.

Thank you, Mike. Let's move on to Slide 31. At Koppers, we're working to ensure a more sustainable path ahead guided by our clear and unifying purpose to protect what matters and preserve the future. Now as we manufacture essential products and provide critical services, our purpose drives our decision-making to ensure that we're serving the interest of all our stakeholders for generations to come. Now in terms of our strategy, the key elements are shown on Slide 31: portfolio enhancement, wood treatment expansion, cradle-to-cradle, realigning our business portfolio, network optimization and strengthening our balance sheet. And now I want to spend just a few moments on each. So our portfolio enhancement imperative consists of creating organic growth through new products like FlamePRO and copper naphthenate, new markets for new wood types or high-value carbon products or new processes that enable us to upgrade our lower-value product lines. Cradle-to-cradle is the work that we're doing to grow our market presence and creating a closed loop for our products that we maintain to provide value to our customers while also fulfilling our purpose of protecting what matters and preserving the future. This also includes work that we're doing to improve on the sustainability aspects of the current options while also creating value for our customers and shareholders. Wood treatment expansion is self-explanatory, and we've made a number of market share gains on the chemical side over the past several years while also setting ourselves up to increase share on the treating side as well. More work is in development and could be realized by the time we get into 2021. Business portfolio realignment has been something we've been actively working on for over the past 5 years or more and have continued with the current transaction we're working on to divest KJCC. Other options remain to both add and subtract from our portfolio to further strengthen our core. Strengthening our balance sheet is currently a high priority as we increased leverage in 2018 to make some key acquisitions. And while we're currently demonstrating the durability and resiliency of our business model by maintaining relative strength through this global pandemic, we also realize that the markets have significantly reduced their tolerance for leverage coming out of the Great Recession, and our share price has suffered for it. I recognize that our balance sheet has hurt our valuation, which is why we have a plan in place to reduce leverage to a more acceptable level. Finally, the network optimization imperative has been in full activation for several years now, and our announcement of the closure of our Denver facility today is just another step along that path. Our strategy in action is illustrated on Slide 32. The value chain related to our wood treating businesses, highlighted on Slide 33, show that some of the greatest opportunity for benefits are by optimizing our wood treating network through increasing plant utilization, achieving cost reductions and, of course, providing our customer base with superior service. Now specifically, let's focus on the outcomes of our network optimization process on Slide 34. The key opportunity and benefits include gaining market share, increasing our asset utilization and optimizing logistics while lowering our overall cost structure and improving working capital efficiencies. We'll move on to Slide 35. Recently, we signed a long-term contract amendment and extension with a Class I railroad customer that extends our market opportunities for some years to come. However, as part of our ongoing network optimization assessment, it resulted in a necessary but difficult decision to further consolidate our treating footprint by ceasing production activities at our facility in Denver, Colorado. As we transition production to another crosstie treatment facility, we plan to ramp down production at the Denver plant over the next 2 months and have targeted late August 2020 for discontinuing activities. Some of the other benefits that this provides is the ability to redirect dollars to reinvest in other facilities to upgrade, modernize and improve their cost profile. While we can absorb the Denver capacity in our current network, there is likely a need at one key facility to add capacity to handle an anticipated demand increase. We believe we can utilize the dollars generated through the disposition of Denver and other closed sites to fund the majority of the anticipated capital requirements. And while the employee impact is unfortunate, this is very good news for the overall business and will be nicely accretive to EBITDA and returns well above our weighted average cost of capital. As stated in our press release, and as I mentioned earlier on this call, I take seriously the decision to cease operations at any of our plants, and I deeply regret the impact that the closure of our Denver facility will have on our employees who have dedicated their careers to strengthening our reputation. I once again thank them for their service. We're doing our best to provide assistance to our employees in a way that helps position them for ongoing success, whether it be in retirement or as they transition their careers either within or outside of Koppers. And as always, our intent is to be as transparent with you as possible. At the same time, we call on your understanding of competitive pressures and market-sensitive information to appreciate that we cannot yet discuss all details and aspects of this ongoing transaction at this stage. As the process moves along and more detailed information becomes available, we will share it as soon as practical. In the meantime, every decision and action taken will be disciplined and consistent with our thresholds for margin, return and cost of capital. On Slide 37, accelerated by the need to mitigate the impact of COVID-19, we've identified $15 million to $20 million of selling, general and administrative cost savings. We've realized $7 million in savings year-to-date through May. And you can see the breakdown from the major components. I continue to remain confident that we will land well within our identified cost reduction range. Finally, on Slide 38, we list the factors that will drive Koppers to emerge a stronger company once we get through the pandemic. We have a number of initiatives that tie back to our strategy underway and continue to execute on delivering future value for all stakeholders that ultimately results in meaningful shareholder return. In summary, while CM&C continued its struggles due to weak steel, aluminum and auto markets and low oil prices, our wood-based businesses, RUPS and PC, both posted sales at or better than May 2019. Sales for PC in North America set a monthly record for Koppers as consumers continue to work on projects to beautify their home and outdoor spaces, while our treating business in the RUPS segment again generated solid sales despite the pandemic. Our classification as an essential business and our diversified end market centered around the common focus of wood protection continued to serve us well in the month of May as we continue to work on emerging from the COVID-19 situation as an even stronger company. So now I would like to open it up for any questions.

[Operator Instructions] Our first question today will come from Mike Harrison with Seaport Global Securities.

In terms of the guidance for the June quarter, can you give us some sense of what gets you to the high end of that EPS range or the low end? It does seem like there's a little more variation at the EPS line than that $10 million revenue range would suggest. So just wondering, are there some question marks on what your costs are going to look like in June or maybe some question marks on below the line items? And in particular, I'm curious about the tax rate for that EPS number.

So Mike, I'll make a couple of comments first, and then I'll turn it over to Mike. But certainly, tax is always a big variable, right? And each quarter, we have to project out our tax rate for the entire year and then bring it back to adjust for where we stand on a year-to-date basis. And that could have a significant impact, as we have seen, in various years' quarter. So you have to leave room for that variability alone. And that, again, can sometimes move -- just a couple of percentage points can have a significant impact. So that's certainly one of the factors. I'd say that overall, while we feel pretty good about where things appear that they'll land on the sales line, also at the end of the quarter, you're needing to adjust accruals for public reporting purposes and things like that. So there's things that you don't take a look at necessarily on a monthly basis that get looked at, at the end of a quarter. And they could sometimes move the needle one way or another in that process. So it's more along those sorts of lines, typical things that we do at the end of every quarter as we prepare for our public reporting requirements that could have some variability one way or the other, not necessarily related to sales. And Mike, do you want to comment more on the tax piece?

Sure. Mike, at the end of March, our effective tax rate that we assumed for the entire year was right around 30%. And we -- with this range that we've given, we increased that to 30% to 35%. And the reason for that is this look-see is only redone at the end of every quarter. And as Leroy mentioned, what we -- the way we do this is we have a forecast that comes in after the June -- month of June is closed and then forecast out the remaining 6 months of the year, and then we use that to project and calculate our effective tax rate. And as you know, we still have some unknown factors. We have the GILTI tax, which is very dependent upon international profitability versus domestic profitability. And we also have an interest tax exclusion -- interest expense exclusion, excuse me, that impacts us as well. So we're being very conservative. And that range goes from 30% to 35% on the effective tax rate.

Mike, one last point I'll make, too, is right there -- obviously, we have a number of different businesses that roll up into our consolidated numbers, and each of those businesses have different margin profiles. So while there's only a $10 million spread in terms of the revenue projection, we have to allow for potential ups and downs in each of those different business segments. And if we do -- if we come out with better sales in some of the lower margin segments, it could affect the mix in the overall business, which again has an impact on EPS. So we try and take into account all those factors, and it can be tough sometimes because there's a lot of moving parts, but that's our best guess at it.

From an EBITDA perspective for Q2, just using some back of the envelope assumptions, I came up with something like high 40s to mid-50s. Is that where you're thinking? Or could you help us refine that?

Yes. Well, I mean we didn't -- we haven't put it in the release. I mean you followed us long enough to probably be able to back into a reasonable range there. So I really can't comment on it. We didn't disclose any of that as a projection in our numbers.

Okay. And then in terms of the Denver situation and the amended Class I contract that you referred to, was wondering if you think that, that means that other Class I customers might consider making amendments to their contract. My assumption is that most Class Is need a primary site and a back-up site and that you need to convince them to go from a single site. Does this change give you confidence that you're going to be able to convince other Class Is to maybe step away from needing that redundant site?

I don't know that, that was necessarily our intent going in. I can't speak for each of the Class I. They all have their own motivations and things that are important to them, and some use more than just 2 suppliers as well. So without getting into the details with this particular contract, they take all that into account. I'll just say we had an opportunity here to be able to, I think, put together a pretty nice deal that, certainly, we believe, will provide an opportunity to serve this customer for years beyond the initial contract expiration date. And we can do it competitively as a result of being able to consolidate capacity. So we're always looking for those opportunities. To the extent customers are interested in that as an option, we're open to those discussions. But that's not necessarily going in position as we have these sorts of discussions. There's a lot that's put on the table when you're negotiating with your customer on how you can best supply them with what they need and at the level they'll need it over that time frame. And if we can do it, we can do it with less and they're okay with that, then fine, we'll look to do that. If not, and they want the redundancy, we're okay with that, too. We'll structure a deal that makes sense for us while, obviously, they're working on getting the pricing they feel they need.

And Mike, just to recap, I mean, 1.5 years ago, we had 18 treating facilities. And the first one we closed was Blackstone, Virginia about 1.5 years ago, and now we have the Denver facility. So this is part of our network optimization that we've been talking about for the last few quarters. And we have -- we're continuing to look at that network. And again, Denver was another -- step #2, I guess, in what we've accomplished so far.

And for us, Mike, Denver probably was the most likely suspect. It's our smallest plant in terms of volume going through. So you don't get the efficiencies there that you do at some of the other larger plants. So it was, if you will, the most likely suspect in terms of being an opportunity to consolidate.

All right. And are you in a position to help us quantify the annual savings associated with the Denver closure?

We are not, other than to say, again, we -- this will generate returns above our cost of capital. It is a smart investment. And that's as much as I can say right now just due to restrictions that we have within our contract.

The next question will come from Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. So with the Denver closure, and I'm sorry if I just missed this, but what is the capacity utilization within the system? And is there a target, like, range?

Well, without getting into specific numbers, Dan, I mean, there's plenty of capacity within the overall network. But like anything, the capacity isn't necessarily always where you might need it. So I'd say, today, we're in pretty good shape across the network, being able to absorb this capacity. But to the extent we have any additional growth in at least one particular facility, we will be constrained. And so I think as we're looking at our investments, we're looking at probably adding a little bit of capacity to at least one of the facilities to provide a little more buffer to be able to take on some additional business to the extent that we can bring it in. Outside of that, we have more than enough capacity to absorb any additional market share growth that we might see. So that's where things stand.

Okay. And then with CapEx, you've given the monthly numbers, which I think were running a little bit higher than last year. I mean you haven't given officially, I think, a 2020 number. But if we can just extrapolate this as the run rate or it's probably going to spike a little bit as Denver gets closed, I was just wondering how we should think about CapEx for the entire year.

Yes. We didn't -- I don't think we specifically mentioned maybe in this presentation or this release. But I think as of the last release, we had talked about our CapEx for this year being in the $50 million to $60 million range. And last year, we finished at 37% gross. And then net of the insurance proceeds we received for our arsenic acid plant rebuild, it was about $34 million. So we are running ahead of last year, which we expected to do. Last year was a -- we cut everything we could possibly cut, and we just can't -- you can't sustain that on a long-term basis. So we originally came into the year hoping to spend $60 million to $70 million. We've cut that back to $50 million to $60 million, and we're continuing to evaluate it. But right now, with $21 million or so spent through May, I'd say we're on target to be in that range.

So last year is -- I think it was $37 million or $40 million, that's just strictly just maintenance with no growth whatsoever, and then growth is on top of that.

Well, no, that was you. So $37 million was our total number, and that did include actually some capital for some discretionary projects. So it wasn't all just maintenance.

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

I guess Mike mentioned it or maybe it was Leroy. It looks like coal tar pricing or availability is going to be limited based on lower domestic steel production. How does that factor into creosote input costs when you're looking at RUP? Or have you factored that in already?

Well, I mean -- so we have to -- all it means is we need to backfill with more European supply, and it costs money to get over here, right? So net-net, we're going to be increasing our raw material costs here in North America. Now part of our -- a good portion of our creosote supply actually is produced in Europe and imported into the U.S. So from that standpoint, nothing changes. And to the extent we see some cost relief over there, we may be able to actually get product in at a little better pricing, but that will be likely offset by the domestic production utilizing higher raw material feedstock. So tough to say sort of when and if that actually balances out, but overall, I think, within that particular market, I don't expect to see a big impact. Where we're seeing the largest impact by far, right, is in our phthalic anhydride business where benchmark orthoxylene pricing dropped through the floor with oil, and so pricing in that market is down. The market, in general, is fairly soft. The aluminum markets have -- they've held in there, but they're not exactly on solid ground either. So -- and then when you get outside of the U.S., despite the creosote that gets imported out of -- from Europe into the U.S., they still have some excess distillate that goes into carbon black feedstock. In Australia, they really don't have much of a creosote market there. So all that's going into carbon black feedstock, and that's another product that's just getting hammered through lower oil prices. So that's where we're getting hit. The softer demand is hurting us. So it hurt us last month in volumes; this month, actually not so much. We're pretty much flat year-over-year, but that softness in demand has put pressure on pricing, and then you have the lower oil that's also affecting pricing in some of those markets. Now all that being said, and what I just said sounds like awful, awful news, which I realize it is, but at the same time, right, we're still maintaining a level of positive EBITDA in our global CM&C business. We did in April. We did in May. And we expect, for the year, that our EBITDA margins will actually still be in the double-digit territory. And I think that says a lot for a business that is getting hit right and left by just about every bad market dynamic that could possibly be hitting it. So despite all the worry and concern and everything that's going on there, for that business to be -- maybe to finish the year at that level, I think it shows again the durability and resiliency of that business and what we've been able to do through the actions we've taken over the last 5 years.

Sure. And I know this is a high-class problem, but you mentioned you're running at capacity at PC. You may have to go outside to meet customer needs, which have the priority. Again, high-class problem, but do you anticipate having to put more CapEx into the business in order to maintain current levels?

Well, if -- I'd say to the extent that we expect volume levels like this to continue for a period of time and/or any other significant market share gains that we might be able to bring home, it could result in the need for some additional increase in capacity. I mean we're trying to evaluate that. Obviously, we don't want to put money to work for something that's only going to be around temporary. But we do have market opportunities that could allow for volume growth at some point in time, which is the general expected increase over time. We did expect it. At some point, we probably would be putting some additional capacity in, but we will probably still look a couple of years down the line. This may result in us looking at -- doing something a little bit earlier than that, but we're trying to take a good look at it. We don't want to overreact.

The next question will come from Chris Shaw with Monness, Crespi.

It looks like things are going well. I had a question on the specialty segments. I mean you gave some sort of update on the margins on CM&C. I'm not looking for numbers necessarily, but just directionally, are you more pessimistic or more optimistic? Is there any change in sort of outlook on the margins for both Performance Chemicals or RUPS at this point?

Yes. Well, I'd say that both are tracking at levels that are probably at or close to where we were talking about at the beginning of the year. Now -- and if that is, in fact, the case, we will see a resulting increase in margins. Now there's still a long time between now and the end of the year, and it's one of the reasons we've been doing these calls here is because -- I know it seems like things have settled down, but obviously, there's different news that comes out every day that you're reacting to. So I have not come anywhere close to declaring victory here as we sit on June 17. We still have a lot left to the year, and a lot can happen. But with where we're at right now and given the different scenarios that could have played out, I actually feel really good. And those 2 businesses are performing extremely well and, from a margin standpoint, should see nice year-over-year improvement. The only thing on Performance Chemicals is, again, the international piece of it, and it is a smaller piece of it, is still somewhat in flux right now. It's really disguising some of the positive benefits that we're seeing in North America. So if we can see some stabilization and recovery in the international side then, absolutely, PC will have a very good year. And like I say, RUPS is on track to have a pretty good year overall as we stand through the first half. So I feel good about where both those businesses are at this point.

Can you give a sense in PC about how much of your business sort of correlates to existing home turnover? Just thinking that if that starts picking back up, that could be an additional tailwind, at least a takeover for the sort of strength you've been getting from the remodeling of people who's at home.

So in PC, in North America, that's really what we keep tabs on. It's existing home sales. It's not new home construction. I mean new home construction doesn't really drive our business. It's the repair and remodeling, which gets driven by existing home sales. In some of the international markets, like in New Zealand, Australia where our products are used in new home construction because of the climates there, then you tend to see more -- a bigger share of the market in those geographies being driven by new home construction. But here in North America where we do the lion's share of the business, it is driven by existing home sales.

And then just curiously, like the beginning of March, say, I mean what's been either a negative or a positive? What's been the sort of biggest surprise for your business in the subsequent months? I mean something that, I don't know, that just -- you anticipated given the typical downturns or something.

It's easily the performance of PC. I mean you had -- so one of the reasons they ran into -- the markets run into the whole lumber availability issue is because the market thought that the whole building improvement markets were going to decline, right? It's a discretionary spend category. You got a lot of people getting put out of work. You got a lot of people fearful for being put out of work. And you got a lot of people taking pay reductions and things like that. So it didn't seem like it was an environment that was ripe to see people spending their discretionary dollars on items that go into home improvement projects. And so you had sawmills that were either closing to do repair and maintenance or, in some cases, closing because they were anticipating -- or they were seeing an initial drop in business. And it has gone exactly as opposite as you could possibly find. And so treaters have drawn down their untreated inventory. They've been working furiously to get sawmills back up and running so they can get their hands on more. And the comp, the year-over-year comp, for the big-box retailers is just crazy incredible. And I would have never expected that, would have never expected it. And we're seeing it on a sustained basis. And like I mentioned in my comments, there are some who believe that while it might not stay at this level, that a lot of this will remain in the future demand profiles because people are going to be spending more time at home as they telework more, and they're going to want an environment that's enjoyable to be around. And they're going to have more time there to do it because they're not spending their time commuting. So that's been, by far, the biggest surprise. I would have never thought we'd be seeing numbers out of our North American PC business the way we have in this environment.

And our final question will be a follow-up from Mike Harrison with Seaport Global Securities.

Just a couple more on the Performance Chemicals business. You, coming into this year, anticipated that you would get some share gains and maybe some benefits from new product introductions. Can you, at this point, disaggregate how much of the improvement that you've seen is related to those underlying share gains versus some of the pandemic-driven unusual and unexpected dynamics that you just referenced in the U.S.?

Yes. So it's a little hard to do. So we were seeing year-over-year -- nice year-over-year increases in our volumes right out of the gate this year, right, before the pandemic really took hold. And that was driven by the market share gains that we picked up in the second and beginning of third quarters last year, right? So as we were essentially lapping that year and coming into this year without having that volume, we were seeing nice gains in the early months from the sales line as a result of that. And then like I say, now it's dramatically picked up with the pandemic buying occurring. All in all, I'd say that there's, in my opinion, more at this stage that is coming as a result of the pandemic buying. But we still would have expected, as you noted, to see some pretty nice year-over-year volume increases just as a result of the business we picked up last year basically coming full circle in this year. But I'd say, on balance, probably more is coming at this stage from the pandemic buying than from the market share gains.

All right. And then you mentioned in Performance Chemicals that the bottleneck is at the intermediate level. I feel like that copper intermediates is where, in the past, we were talking about higher cost when you have to source those from third parties. We had just spent most of 2019 getting our internal production of copper intermediates back up. So are there opportunities to expand internal production and continue to get that lower-cost internal production? Or are we at a point where we're definitely going to need to tap into some third-party sourcing and the margin gets a little bit less attractive?

Yes, there is that opportunity. And I, in response to one of the earlier questions, had kind of alluded to that. We didn't think we'd be in the position for a couple of years yet before we have to look at that. And with this, it's causing us to look at it, obviously, earlier than that. I mean it's going -- any capacity improvement that we make there, you're talking about -- starting from ground zero, it's going to take us basically a year's time to get through and get something in place if we elect to do that. Again, it's trying to sort out what does this look like beyond the next couple of months and how much of it's sustainable. While, yes, we have to go outside and get some product -- some intermediate product at higher prices, it is incremental business and, therefore, will certainly be accretive to the bottom line although maybe at lesser margins than what it would otherwise have been. So all in all, it's a positive. It's just, for us, trying to make sure we don't put more -- we got a number of places to put dollars to work, and we want to make sure we're putting it to work in ways that will be most beneficial. So we haven't come to a conclusion on whether we want to begin to add capacity -- any additional capacity at this point, Mike. We're continuing to look at it.

But at this point, you're running 3 shifts. There's no incremental possibility that you can expand with what you have.

With what we have, no. Okay. I see that's the last question. So I want to thank everybody for taking the time to participate on today's call. I'll remind everybody that we're actually planning to release our quarterly earnings and do our next business update on July 27, and so look forward to talking to everybody at that point in time. Appreciate your continued interest in Koppers, and stay safe. Thank you. Bye.

Thanks, everybody.

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