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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' July 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 July 2020 business update, where we will provide commentary on our operations, customer 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 have also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice in prior 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 November 25, 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 or 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. Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn this discussion over to Leroy.

Thank you, Quynh. Welcome, everyone, to our monthly business review, where we'll update you on the current status of our response to the global pandemic and cover the current trends of our business in an effort to provide greater transparency to our various stakeholders. I hope that you and your families are staying safe and healthy as we all continue to adapt to our ever-changing environment. And before getting into the presentation, let's start with an update regarding our Zero Harm efforts. Over the past several months, our frontline employees completed their sixth Zero Harm module to help better facilitate dialogue among peers about observed behavioral and physical hazards in the workplace. We already have strong evidence to show that engagement in safely -- safety observations lead to fewer injuries. We believe that this peer-to-peer approach for our frontline team will lead us closer to our goal of zero. In addition, after taking a brief pause due to the COVID-19 situation, we've now resumed our voluntary external safety audits and comprehensive industrial hygiene surveys, which are being facilitated by outside organizations with expertise in these areas. As always, the safety and health of our employees remains our top priority. As you saw this morning, we issued a separate press release regarding our KJCC divestiture. Also another key component in our business update announcement is the decision to make investments over the next couple of years at our crosstie treating facility in North Little Rock, Arkansas, to boost efficiencies and reduce costs while also opening up opportunities to grow our market share. This facility, which we'll be transitioning to handle the production volumes when our Denver plant discontinues operations by the end of this month, I will talk more about these developments in detail later on this call. Moving now on to the presentation, as shown on Slide 4 and as talked about on prior calls, according to the guidelines from the U.S. Cybersecurity and Infrastructure Security Agency, or CISA, an agency of the Department of Homeland Security, Koppers was classified as an essential business at the outset of the pandemic. As a result, we've continued with our operations to help transport critical goods, provide power and connectivity to homes and businesses to keep our infrastructure running reliably. Our employees take this responsibility very seriously and are doing their part with great pride. In terms of the current status of our employees, you'll see on Slide 6 that as of the end of July, 45 employees or approximately 2% have tested positive for the coronavirus, and 3 of our locations have cases that were transmitted from inside the facility. Two of those instances were small, contained and quickly remedied. One was more serious in the number of individuals affected and resulted in a temporary closure of part of the facility as employees quarantined, recovered and came back to work. To date, 2 employees have required hospitalization. And fortunately, both have been released. One individual has returned to work. The other is currently recovering at home. On a cumulative basis, about 27% of employees have self-identified as having symptoms with about 1.3% of employees remaining in self-quarantine. Our facility management is on the front lines battling every day to maintain a safe and healthy workplace with the cooperation of our essential employees. As we recently experienced, the virus is not going away anytime soon, and we cannot afford to let our guard down lest we deal with an outbreak. We're maintaining our assistance on face coverings, social distancing and all hygiene protocols and have ramped up our efforts to enforce noncompliant behaviors, not our intent to make our people's jobs any tougher than they already are, but to protect them from what today is the single biggest threat to their health and well-being. The good news is that it can be controlled through simple but effective precautions and behaviors and the ongoing diligence to not let our guard down. In addition to continuing to communicate and connect with our employees worldwide via videos, virtual facility visits and virtual employee chats, I plan to, along with a few other members of senior management, make a few in-person facility visits over the next month or so to witness firsthand the challenges that certain operations face to operate in the COVID-19 world and to offer encouragement and stress firsthand the personal responsibility that we all must take on to ensure the health and well-being of our family and our coworkers. We're all in this together, and we will get through this together. On Slide 8, a review of operations and planning show that every Koppers' manufacturing facility worldwide remains in operation except for our KJCC plant in China, which remains off-line due an extended outage at a customer's plant. As mentioned previously, in recent weeks, we did have a brief shutdown at a portion of one of our facilities for sanitizing and disinfecting after some cases of COVID-19 arose among employees. That particular operation has since resumed. At our facility in Stickney, Illinois, a recent fire temporarily shut down its tar naphthalene units during part of July. Those operations have since resumed and have been running all of the month of August, and we do not have any employees currently on furlough or laid off due to the coronavirus. The strong emphasis on working from home remains in place. The voluntary plans to return to the office have been postponed. And for those who must come into the office, these employees are required to follow strict face covering and social distancing guidelines. Also, business travel continues to be limited and approved only when absolutely necessary. At this point, there are no plans to require a return to the office through the end of 2020. Our technology team continues their remarkable work in keeping our business functioning across all locations and through a host of technological platforms. Across our organization, we're successfully enabled to hold meetings virtually, conduct facility audits virtually and determine various solutions for COVID testing, temperature screening and contact tracing. Testing is the one area where we currently lack a rapid effective solution and continue our search to find a way to get more of our people tested with quicker results. Last week, we launched our Koppers' Kindness Fund, as described on Slide 10. This program was developed to take care of our own by providing cash grants to employees during unexpected financial hardships due to life events beyond our control, such as a natural disaster or a serious illness. Grants are intended to help employees with immediate basic needs if they don't have access to other resources so long as they meet the eligibility requirements. In my role as CEO, I've seen again and again how Koppers' people believe in taking care of one another, and this is one more tangible way we can do so. I personally provided the initial seed funding. However, the sustainability of this fund will rely on the generosity of donations from our employees all across the globe. It's an idea that sprang from a few of our employees, and it's designed as a program to have employees help employees. I'm honored to play my part in helping to get it off the ground and look forward to seeing the help that it will foster in the future. That's the update regarding our employees and our operations. Now I'll turn it over to Mike to provide an overview on July sales as well as to discuss our debt and liquidity position. Mike?

Thanks, Leroy. In our press release earlier today, we provided preliminary sales results for July. As seen on Slide 12, consolidated sales for the month were $147 million, which was a slight decrease from sales of $151 million in the prior year. Sales for RUPS were $67 million, down slightly from $69 million. Performance Chemicals sales were at $51 million and continued to reflect strong demand compared with $43 million for the prior year. CM&C sales declined to $29 million from $39 million. Moving on to RUPS sales on Slide 13. We saw a 17% increase in crosstie procurement and a 9% increase in crosstie treatment. However, there was some slowdown in the commercial crosstie market. On the positive side, we saw higher year-over-year activity in our maintenance-of-way businesses, specifically in railroad structures and recovery resources, and increased demand in our Australian utility pole business as well. PC revenues, as seen on Slide 14, benefited from strong North American volumes driven by high customer demand. Sales in July were in line with May, but down from our record sales level in June. We continue prioritizing our top customers while, at the same time, providing continuing service to all of our customers. On the International front, PC is benefiting from significantly improved demand as restrictions are being lifted in Europe, Brazil, New Zealand and other overseas markets. In fact, we had a record sales level for the month in Europe, South America and Australia/Asia due to pent-up demand in those regions. CM&C consolidated sales on Slide 15 were lower overall even as Australia came in higher. Sales were adversely affected in North America due to the temporary outage at our Stickney facility. However, we expect to be able to make up much of the sales loss later in Q3. Although some end markets are stabilizing, many are still weaker when compared to prior year. Average global pricing for major product lines was 2% lower than in Q2 and 15% lower than July 2019. Average global coal tar costs in July 2020 were 5% lower than Q2 and 26% lower than July of 2019. Volumes for major product lines were 10% lower than compared with the prior year. Changing courses and looking at our debt and liquidity position as of the end of Q2. As shown on Slide 17, we had net debt of $874 million with $191 million in available liquidity. We were also in compliance with all our debt covenants. We continue to target a debt reduction of $120 million in 2020, contingent on the successful closing of the KJCC divestiture. We anticipate additional sources of cash from the following areas: reductions in working capital, which were $30 million lower at the end of June from the prior year; lower cash taxes and interest totaling approximately $16 million; capital expenditures lower by $10 million than originally planned; and year-to-date through the end of July, CapEx spending was actually $11 million lower than our 2020 program; and deferred payroll taxes of $7 million. In terms of debt maturities, we do not have any significant maturities until 2024. Slide 18 shows our net leverage ratio each quarter in 2019 and as projected through the end of 2020. As of Q2, our net leverage ratio was 4.5, and we are targeting between 3.7 and 4 by year-end. With that, I'll turn the call back over to Leroy.

Thanks, Mike. At this time, I'd like to go over the business sentiment for each of our segments, starting with utility and industrial products on Slide 20. Overall, our major focus continues to be servicing customers, and that's especially critical during storm season. So far this year, severe storms have impacted Iowa, New Jersey, New York and the New England region. And as we speak, tropical storm Marco is hitting the Gulf Coast with Hurricane Laura expected to hit landfall later week. It's difficult to hear about and see the utter devastation that these major storms wreak, but we're proud to play our part to assist hard-hit areas get back on their feet as soon as humanly possible. Storm response is where our people absolutely shine and working days on end to prepare, produce and ship, and our drivers who brave the dangerous roads in getting material in where it is most needed, a job that is made even tougher as they navigate around the many restrictions brought on by the pandemic. As previously announced, we continue with our efforts to help utilities transition from using penta preservative to other alternatives, and we're continuing to see increased interest in moving towards using CCA and creosote for pole treatment. We currently are working with several customers who are evaluating sample CCA poles, working with lineman schools to get non-penta poles in place for training and scheduling webinars to help educate the industry on the benefits of others preservatives. Our UIP business continues to outperform, and we believe that 2020 will be the best year for this business since being acquired. And with solid fundamentals, this business has long-term upside opportunities. Now as I intimated earlier, we're seeing increased activity among utilities in pole replacements due to storm damage and expect that to continue as the hurricane season becomes more active during the next couple of months. Regarding our piling business, we're noticing increased quoting activity as restrictions on construction projects are lifted. And for our pole recovery services, we're evaluating opportunities to provide synergies with crosstie disposal and bridge deck removal projects. We continue to see nice year-over-year growth in our recovery business as it gained traction, although starting from a small base. In our supply chain, the outlook remains positive with pricing currently remaining steady despite the upheaval in the lumber markets. Wet weather is really our only current concern for supply, but that is fairly typical. Moving on to RPS, as seen on Slide 21. The overall crosstie business remains solid, although the commercial crosstie market is experiencing less bidding activity and more pricing pressure. At our Denver facility, we're focused on helping to transition employees and operations as we work toward the targeted closure date of August 31, 2020. According to the American Association of Railroads, the year-to-date industry data through August 15, 2020, shows U.S. railroads declining from the prior year period by 16% in cumulative volumes, intermodal units lower year-over-year by 8.4%, and total combined U.S. traffic decreased 12.2% from the prior year. Even so, the railroad industry has been offsetting lower volumes with increased productivity as some railroads are taking advantage of less track time to increase maintenance on their infrastructure, per the Railway Tie Association. In our maintenance-of-way businesses, we're seeing higher demand in rail structures and recovery resources with continued growth expected in the half of 2020. In the supply chain area, we expect to ramp down crosstie purchases as our inventories stabilize. Now the next few months will determine how strongly our rail business can finish this year. If customers that have been accelerating their demand continue those actions into the fourth quarter, we should finish strongly. If not, then we could see sales fall off in the fourth quarter. But even with that said, we expect strong comparative results for maintenance-of-way in the remainder of the year and a consolidation of Denver into our North Little Rock facility to also help profitability. As shown on Slide 22, our Performance Chemicals segment delivered strong sales growth in July amid the pandemic. We're seeing strong demand in North America and expect that it will continue through 2020. Currently, the treating market is short on chemical and that will likely continue through the third quarter of 2020. In the international markets, we've begun to see improved sales primarily in Europe, New Zealand, Australia and Brazil. In North America, we've seen record-level demand in the U.S. for residential treated wood as big-box retailers report strong demand for home improvement projects. That said, market forecasts continue to vary widely. The Leading Indicator of Remodeling Activity, known as LIRA, expects home remodeling expenditures to increase 1.5% in 2020 with the potential for a slowdown expected to moderate in a healthier housing market, leading to more home renovation and repair. The consumer confidence index decreased to 92.6 in July from 98.3 in June, with consumers expressing less optimism over the short-term economic outlook and labor market. Yet the National Association of Realtors report on existing-home sales showed a strong upward trend in July, marking 2 consecutive months of significant sales gains. The housing market is considered to be past the recovery phase with higher home sales compared to the pre-pandemic time frame. With the trend of more people working remotely than ever before, some buyers are looking to purchase homes for the first time and others wanting to upgrade to larger homes, both of which are projected to support demand into 2021. In the International markets for Performance Chemicals, as highlighted on Slide 23, we're experiencing strong volumes across the Nordic Region, Germany, Ireland and the U.K., Australia -- and the U.K. Australia and New Zealand are seeing high demand for treated timber. However, the Melbourne metropolitan area entered a strict 6-week shutdown due to high COVID-19 infection rates, which may dampen the short-term outlook. In Brazil, the demand is driven by agricultural, industrial and residential markets. Regarding our supply chain, the copper hedging programs for 2021 and 2022 continue to be at lower average costs than 2020, but we will not have any additional benefit in 2020 as copper prices are fully hedged for the current year. In the U.S., demand has been strong and outstripping our internal production capacity. We currently have several initiatives underway to help relieve the current bottleneck of intermediate raw material supply, and some will begin providing relief within a couple week time frame while others, which includes further capacity expansion, will take a little longer. Our CM&C business is summarized on Slide 24. And as mentioned in prior months, we continue to see lower year-over-year sales volumes due to demand weakness in industrial production markets. That said, we expect some sequential improvement in the second half of 2020 compared with the first half. We continue to have a strong focus on cost containment to help mitigate the impact from softer market conditions. In North America, we're experiencing reduced plant throughput, while raw material costs are higher due to having to import more. Also, our facility in Stickney, Illinois, was affected temporarily by an outage, and it's since resumed full operations and should make up most of the sales that were missed in July. In Europe, creosote sales are strong, and improved oil prices helped carbon black feedstock sales, with low tar prices and inventory contributing to improved performance. In Australia, we benefited from improved demand for pitch volumes, along with some upside from inventory valuation and favorable production and raw material costs. Related to our supply chain, due to overall end market weakness, coal tar costs are expected to be lower also but lagging by approximately 1 quarter. In North America, coal tar availability has been lower, resulting in increased imports and driving raw material prices higher. So now let's move on to Slide 26. Our strategy to achieve a more sustainable path guided by our purpose to protect what matters and preserve the future consists of the following: portfolio enhancement, which generates organic growth through new products, new markets or new processes; cradle-to-cradle, which expands our market presence, maintains a closed loop for our products, improves our sustainability profile and continues to provide our license to operate; network optimization, which evaluates opportunities to increase plant utilization, achieve cost efficiencies and, ultimately, provide our customers with superior service; wood treatment expansion, where we've gained market share on the chemical side and are working to increase our presence in the treatment market by 2021; realigning our business portfolio, which is a continual assessment of our core competencies and determines areas that may be noncore; and finally, strengthening our balance sheet, which remains a high priority and where we've demonstrated a track record of successfully reducing our debt. Slide 27 shows our strategy in action with progress to date, seen as shifting our portfolio from 39% wood protection sales in 2014 all the way up to 73% as of June 30, 2020. Regarding the KJCC divestiture on Slide 28. We announced an amendment to the definitive agreement, which provides for an extension of the closing deadline from August 18, 2020, to September 30, 2020, and importantly, a payment of $10 million in earnest money to Koppers. And we've already received this payment and will apply it to the acquisition price at closing. The amendment also applies to the previously disclosed contractual dispute, which will be resolved upon the successful closing of the transaction. If the transaction does not close by September 30, subject to certain conditions, the earnest money will be retained by Koppers and Yizhou. All parties are continuing to work diligently toward closing this transaction, which is expected to result in net cash proceeds of $65 million to Koppers, which will be applied to debt reduction. In other developments, Slide 29 provides details related to our continued network optimization initiative. We previously announced the closure of our Denver plant. And consequently, we're transitioning the crosstie treatment volumes to our facility in North Little Rock, Arkansas. Over the next 2 years, we're planning to invest approximately $23 million in our facility at North Little Rock to modernize equipment and processes that are near end of life. This will enable us to increase efficiencies and lower costs while also allowing us to expand our treating capacity, which positions our rail business to gain additional market share. The pro-business environment and support that we receive from state, regional and local entities were critical in helping us decide to make this investment. This project will be funded mostly through proceeds from the sale of our Denver facility, along with tax and economic incentives. The actions we're taking to mitigate impact of COVID-19 on our business are detailed on Slide 31. So far, we've identified $15 million to $20 million in SG&A savings. And year-to-date through July 2020, we've achieved $8 million of those savings. We'll continue to carefully manage costs related to compensation and benefits, travel and entertainment, legal and consulting fees and other office-related expenses. As outlined on Slide 32, the initiatives and opportunities that we're pursuing will help us to emerge stronger from the pandemic. These include increasing market share across our business segments, capitalizing on new products, new processes and new markets and optimizing our wood treating network. In addition, we have other opportunities to generate cash, which include the sale of noncore businesses, closed properties and related assets as well as nearing completion of closing costs for a major site. And although we're continuing to deal with the impact of COVID-19, based on what we know at this time as well as indications from our customers and supply chain, we're reaffirming our 2020 guidance for sales of approximately $1.6 billion compared with 2019 sales, excluding KJCC of $1.65 billion. Accordingly, we expect adjusted EBITDA will be approximately $190 million to $200 million in 2020 compared with $201 million in the prior year. We anticipate the effective tax rate in 2020 to be approximately 25% compared to the tax rate in 2019, excluding special items of 26%. Therefore, we're projecting adjusted EPS to be in the range of $3.10 to $3.40 compared with adjusted EPS of $3.18 in 2019. In summary, our PC residential chemical business has performed off the charts thus far this year, with our RUPS business also showing nice year-over-year improvement in profitability, albeit not quite at PC levels. Overall, our wood treatment-related businesses have generally mitigated the weakness we've experienced in our CM&C segment. Our diversified end markets and our classification as an essential business serving other critical industries continues to put us in a position to have one of our better years despite the global pandemic that has disrupted many other business models. The durability and resilience of our business and what it has displayed thus far as we've dealt with this current crisis only reinforces the strength of our business model and validates our strategy to focus on becoming the global leader in wood preservation technologies. Now I would like to open it up for any questions.

[Operator Instructions] The first question is from Mike Harrison of Seaport Global Securities.

Leroy, you mentioned the busy storm season, obviously, another busy fire forest season out in California as well. How much of an impact do you think that could have on pole demand during Q3? And also, maybe can you talk about what that means for profitability? I know the storm response is kind of a critical service that you guys provide, and you don't do it out of the goodness of your heart.

Yes, Mike. So first of all, let me separate the 2, right, because our business is really a business on the utility side of things, that is, if you will, east of the Mississippi, right, so other than our business that we have down in Texas. But -- so we're really not involved in the market out West. So the dynamics that are going on with the wildfires out there don't really impact our business as it currently stands. The hurricanes and the tropical storms are an entirely different story, however. And the way we've always -- the way we've looked at that business, and I think the way that the Cox business looked at it prior to our ownership, is our ability to perform and assist these utilities during storm season is an important element to maintaining the trust of those businesses and maintaining the relationships longer term with those businesses. So while you say we don't do it out of the goodness of our heart, of course, we're selling poles. We're not giving poles away, but we're going beyond sort of the normal day-to-day to -- and, in some cases, working through dangerous conditions to enable these areas to get back up and running as quickly as possible. And in doing so, in demonstrating the ability to be there for our customer base during these most difficult times, it solidifies the relationships and enables us to continue them on an ongoing basis. So that's the importance of what we do in terms of our storm response. I think from a demand standpoint and profitability standpoint, we've always maintained that there -- it doesn't do a tremendous amount in terms of necessarily boosting sales or even profitability. Certainly, there are poles that are getting replaced that weren't in the queue to probably get replaced as a result of the storms coming through, but it just redirects the utility's efforts in a different area, right? So maybe stuff that they may have had budgeted to do in this current year gets pushed out as they're focusing on storm recovery efforts and things like that. So we look at it as a concentrated effort of maybe sales getting pushed into certain time frames that otherwise might have been a little more steadily played out through the course of the year. So we could see a small boost as a result of that. Certainly, we'll see a boost in the third quarter, but I don't expect it to be something that meaningfully impacts either our sales or our profitability throughout the course of the year.

All right. Understood. And then can you give some color on what drove the need to amend the KJCC sales for a later close? Are there any concerns there? Or are things just taking longer than anticipated?

Yes. So I mean, we got off to a quick start in terms of getting approvals that were -- necessary approvals that were needed. I'd just reiterate the fact that being in business in China is complicated enough. Operating a business in China is complicated enough. Selling a business -- selling a joint venture to a Chinese and Japanese joint venture is even more incredibly complicated. And so there's a lot of things at play in that. I would say that the fact that they were willing to put forth a serious payment to us indicates their seriousness in wanting to get the deal done. So I think that is a very positive factor. And I'm pretty confident that we can get this thing done here by the end of September. They now have capital at risk. And so I think there's even more of an incentive to work to get things done. But it's just an incredibly complicated process. I wish it could be easier, and I wish we could be done right now. But it's an encouraging sign that they were willing to make a deposit, if you will, that they're not guaranteed to get back. I think that's a positive sign that we're working towards an amicable solution in closing this deal.

Right. Right. Okay. And then a couple of questions on the Performance Chemicals business. You talked about some of the cost headwinds associated with the third-party sourcing of copper intermediates. But also now it sounds like we're seeing some improvement in international markets, which I know have been a little bit of a drag on the business. So how should we think about those moving pieces for the PC segment in terms of margin? Could we, in fact, see the third quarter EBITDA margin be pretty close to where you were in Q2?

I think that there's some potential for that, but I think what we're going to end up really seeing is more of a pushing out or a flattening out of our sales and resulting profitability as a result of where things stand from a supply standpoint. So we had the run-up in the latter part of the second quarter, sort of heading into the third quarter that resulted in big spikes in sales. And the only reason we can't sustain those spikes is due to lack of some of this intermediate raw material supply. So I think what you're seeing -- what you're going to see is the demand pushed out over a longer period of time because, again, it's not us, it's the market and the industry that -- at large that is in this situation. So I think that the third quarter -- it will be hard for the third quarter to match up to the second quarter overall from a PC standpoint, but I don't expect it to be terribly off from that, and again, still running well above expected levels for the year. I expect the fourth quarter to be particularly strong compared to prior fourth quarters for PC as we continue to fulfill demand that for right now, we see, and from what we hear from customers, we see no near-term end to.

Okay. So it sounds like there's probably still some restocking that's going to go on into Q4. Okay. That kind of gets to my...

Yes, Mike, just one more -- I mean what we're hearing is the expectation is now that this will probably go out, again, as far as they're able to tell, at least until the early part of 2021.

Right. Okay. And I guess kind of a related question. I mean you say you expect that these customers that are -- where you're trying to catch up on supplying them with chemicals for treatment, you expect that those customers should see relief before the end of Q3. So is that when you expect to see the benefits from some of the debottlenecking you're doing? Or is that when just kind of, based on your ability to supply and where you expect demand to track, that you expect you could take customers off whatever allocation they're on right now?

Yes. So it'll -- I don't know that we'll be at that point yet, Mike, but the situation will be improved in that we should be able to get more product into our customer base. So I don't know that by the end of the third quarter, we'll necessarily be, if you will, off the allocation and off the partial shipments and things like that, but we will be in a position to get more product into our customer base.

The next question is from Laurence Alexander of Jefferies.

It's Dan Rizzo on for Laurence. So just a clarification for me. So you said that crosstie procurement is up and treatment is up, but overall sales was down in the month, and you say commercial activity was down. Can you just kind of provide color on how that, like, differs? What am I missing? What -- why those would be up but the other would be down?

Right. So they don't necessarily always correlate with shipments, right? So you're going to, from time to time, run into a situation where you could have the 2 going in opposite directions. I think overall, it bodes well for our business. If we look over the back half of the year, part of what we were doing is trying to build inventory down from a base where it was at a point that was certainly lower than where it needed to be from a sustainable basis. And now that we're close to getting it back to where it needs to be, I think you'll see probably the year-over-year changes in both procurement and treatment start to constrict as it compares to 2019 numbers over the back half of the year.

But those inventories, as you said, would be used for potential demand in the fourth quarter and in 2021, correct?

Of course, yes.

Okay. And then you mentioned the closing of the Denver facility and the expansion in Arkansas. I was wondering what capacity utilization will be for your system and what is optimal, if you've ever disclosed that.

Yes. So I think as we move to North Little Rock, with the consolidation of Denver, we're probably getting up to, I'd say, in that 80% to 90% territory of just consolidating current production into North Little Rock. And with what we'll be doing, it will comfortably allow us to increase beyond that as we believe that we have some opportunities to gain some share at, if you will, a pretty newly optimized facility. So the current consolidation will take us to above the 80% level, closer into the 90% level. And then the expansion will add a good bit beyond that. That will enable us to go out and actively, we think, add additional share.

Okay. And finally, you mentioned, I think, $15 million to $20 million in SG&A savings, I think $8 million already realized. How much is permanent versus temporary? Did you say that before?

No. Well, we talked about it a little bit on the last call, Dan. That one's a little tougher. I mean I certainly think that there's a portion of that, that can be retained, but there's also an element of that, that I think is probably more temporary. I'd say -- I don't know what the number would be. Maybe 1/3 of it, I think, we could possibly hang on to longer term, but 2/3 of it will probably be still back into the business at the appropriate time as things really begin to stabilize and show longer-term improvement.

The next question is from Liam Burke of B. Riley FBR.

Leroy, the volumes and pricing were down on CMC. Understanding there's a lot of volatility on a quarter-to-quarter basis, but are you comfortable with the trends there and how you're sketching out the CMC longer-term plan?

We are. I mean with that business, it goes hand-in-hand. It really is a business that's an arbitrage of coal tar. And so you can withstand the pricing drops if you're able to get yourself in alignment and you don't get yourself upside down on the raw material supply. And we've worked very hard to put a model in place that gives us the ability to be able to manage that. Again, it has its lag, which hurts you in a market where pricing is going down, but it helps you in a market where pricing is going up. And so I think, overall, we're more or less in alignment with where we thought we would be for that business at this point in time from a pricing standpoint. The one area that is probably lagging a little more than what we had hoped is with some of the recovery that we've seen on oil. We haven't quite seen the recovery on orthoxylene pricing, which affects our -- ultimately affects our phthalic pricing. So hopefully, we'll see some of that continue to recover here as oil prices stabilize. But that's the only area where I'd say we've been a little disappointed in what we've seen from an overall cost and pricing standpoint. Other than that, it's more or less been in alignment with what we thought.

Okay. And then you did mention sale of noncore assets. Is that just a continuing process? Or is it being held up by COVID-related issues?

Yes. No, not being held up, Liam. It's -- I think you've described it pretty accurately, it's a continuing process. Whenever you're in the process of selling properties, industrial properties that have been used in our processes over the course of many, many years, there's a lot of diligence that goes into play and things like that. It's just a time-consuming process, but we continue to make progress and are hopeful that we can get to an end point on a few of these here relatively shortly.

This concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Leroy Ball, for closing remarks.

I want to thank everyone for taking the time to participate on today's call. And again, thank you for your interest in Koppers and your continued support. I look forward to providing our next monthly update on September 22. In the meantime, please stay safe and be well.

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