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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers August 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 August 2020 Business Update, where we will provide commentary on our operations, sales by business segment and customer and market trends. We issued our press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our announcement, we've also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice in prior 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 December 22, 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. 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. Hello, everyone. I hope that you and your families are staying safe and healthy as this global pandemic continues to unfold. Now for today's discussion, as in past monthly updates, I'll talk about the latest developments regarding our response to the pandemic as well as provide an overview of current trends in our business. As always, we'll begin with an update on our Zero Harm efforts. We recently established a fleet safety council, made up of our top leaders of our business units that operate commercial motor vehicles. Now since acquiring our North American utility pole business, our fleet has grown quite a bit. This counsel offers a new way for our people to share best practices and implement strategic programs to better protect our drivers and the public. And also, we've begun to implement a global training initiative to ensure that our employees are well equipped to identify and address any signs of at-risk behaviors related to drug or alcohol use in the workplace. We've engaged a third-party expert, who is well versed in the field of substance misuse and mental health issues to provide our managers and supervisors with proven techniques to better recognize and more effectively help potentially impaired individuals get the support they need. I'm proud of the progress we continue to make in all aspects of our safety culture, and I thank our employees for their ongoing commitment, even as we continue to face unprecedented challenges. Now let's move on into the presentation. As a reminder, according to guidelines from the U.S. Cybersecurity and Infrastructure Security Agency or CISA, an agency of the Department of Homeland Security, Koppers was designated as an essential business at the start of the pandemic, and as shown on Slide 4, we've been able to continue transporting critical goods, providing power and connectivity to homes and businesses to keep our infrastructure running reliably. Our employees take this responsibility seriously, and have pride in doing their part. Moving to Slide 6. Looking at the current status of our employees affected by COVID-19, you'll see that cumulatively, 50 employees, or approximately 2%, have tested positive for the coronavirus. To date, 3 employees have required hospitalization. And fortunately, all have been released. One individual has return to work. The other 2 are currently recovering at home. We send them our best wishes for a full recovery. On a cumulative basis, about 31% of employees have self-identified as having symptoms, with 15 employees currently in self-quarantine. Our facility management staff continues to do a great job in maintaining a safe and healthy workplace with the cooperation of our essential employees. We remain diligent regarding face covering, social distancing and all hygiene protocols, and have ramped up our efforts to guard against noncompliance. In fact, new face coverings have been sent to all facilities just recently. And also, we have an upcoming flu clinic in October for employees at our headquarters in Pittsburgh to help guard against the spread of the flu, which could seriously complicate effectively dealing with the coronavirus. We recognize that it's a matter of striking a balance between accommodating the additional guidelines and allowing our people to do their jobs without undue pressure. Our ongoing communication efforts using videos, virtual facility visits and virtual employee chats have been augmented recently with a number of in-person facility visits, which I'll touch on in a moment. Moving on to Slide 8. I'm happy to report that every Koppers manufacturing facility worldwide remains in operation, except our KJCC plant in China. Currently, we're conducting trials of saliva-based COVID-19 testing kits at a number of our locations in the U.S. This should result in faster turnaround times on test results and reduce the likelihood of major business interruptions. And if the trial goes well, we plan to make an investment to ensure the tests are available at all of our major U.S. locations. As we've discussed on previously monthly updates, business travel continues to be limited and approved only when absolutely necessary in order to engage our employees or our customers. For example, I as well as some of my senior leaders recently visited our employees at several plants to thank them for continuing their hard work, and also to remind them of the importance of their personal responsibility to protect themselves and others from harm. Of course, we made sure to have the proper precautions in place to reinforce the importance of every employee taking seriously the health and hygiene protocols. Koppers continues to encourage our employees to keep working from home, with plans for employees returning to the office now postponed until at least January 4, 2021. For those who must come into the office, face covering requirements and social distancing guidelines are being enforced. Our technology team has done an amazing job keeping our business working smoothly across all locations using a variety of technological platforms. Virtual meetings and facility audits have become the norm, and we haven't missed a beat. Also we developed a contract tracing app now being used among our Pittsburgh-based employee population. This app uses employee data from the physical access security system to trace movement and potential interactions to assist in identifying employees who may need to be quarantine as part of our COVID-19 controls. Our Performance Chemicals truck drivers are now using a third-party app called Certified Automatic Truck or CAT to get electronic scale tickets. PC drivers have to weigh all loads on certified scales before and after delivery to our largest customers, which had meant drivers would drive on to the scale, wait for the green light, park their truck and go inside to get their tickets. This exposed our drivers to numerous people from across the country and put them at a high-risk of being exposed. The CAT scales app now allows our drivers to download by phone and receive their weight ticket via e-mail, eliminating the need go inside and risk exposure. We've had a very favorable response from our drivers who appreciate what Koppers is doing to keep them safe while away from home. Another technology solution involves Microsoft HoloLens software, which has helped us to conduct virtual global ISO 9000 audits and virtual site audits, demonstrating once more how our business has been able to continue operating and adapt and actually improve through innovative thinking and applied technology. Of course, the success of our business will always depend on the strength and unified efforts of our people. Earlier this month, I was able to travel to a number of our sites for in-person facility visits to meet with our teams and discuss the challenges that COVID-19 has presented, along with learning firsthand about their ideas and issues in operating the plants. Jim Sullivan, our Executive Vice President and Chief Operating Officer; as well as Joe Dowd, our Vice President of Zero Harm, also recently made trips to visit our employees at a number of plants as well. On Slide 10, you'll see photos that highlight some of our pole treatment facilities at Leland, North Carolina, Eutawville, South Carolina, Chauncey, Georgia and Vidalia, Georgia. On Slide 11, you'll see some of the interactions with our teams at our crosstie treatment facilities in North Little Rock, Arkansas and Florence, South Carolina. And on Slide 12, you can see highlights from visits to our wood preservative locations in Rock Hill, South Carolina and Millington, Tennessee. Also of note as Lance Hyde, our Director of Global Inclusion and Diversity, a company beyond my plant business to affirm with our employees the priority that Koppers places on every person's viewpoint and contribution to our long-term success. Because of COVID-related travel restrictions, this is actually the first time Lance had the opportunity to meet any of our employees working in the field, and we both made the most of the discussions that resulted. Now at each of these sites, it was important to offer encouragement and thank our people for accepting personal responsibility to ensure the health and well-being of our families and our coworkers. These visits only serve to reinforce something I've known for years that the people of Koppers work best when we work as a team. And we also shine when we reach out to support our communities, and never more so than during this pandemic. On Slide 14, we see 2 examples of providing support to local schools. Our team in Rock Hill, South Carolina led a drive to donate school supply to teachers in their local school district, and also our LINKwomen employee group Volunteer to help the United Way to assemble boxes of school supplies for more than 6,000 local students. Slide 15 offers more examples of community outreach. Following a series of wildfires in Australia, our team there worked together to fundraise and donate more than $26,000 to a local disaster relief organization that helps rebuild damaged or destroyed structures. We also donated $4,000 in support of a wildlife rescue organization. In Pittsburgh, our employees organized a month-long drive to provide toys, socks and other clothing items to local children in need. That's the update on our employees and operations. Now I'll turn it over to Mike for an overview of August sales, along with a review of our debt and liquidity positions. Mike?

Thanks, Leroy. Starting on Slide 17, consolidated sales for the month were $142 million, a decrease of 2.5% from the sales of $146 million in the prior year. Sales for Railroad and Utility Products and Services were $64 million in August, down 5% from $68 million in the prior year. Performance Chemicals sales for the month were at $47 million, an increase of 8% compared with $43 million for the prior year. Carbon Materials and Chemicals sales were $31 million, down 10% from $35 million in the prior year. In the RUPS segment, as seen on Slide 18, Crosstie Procurement increased 12% year-to-date and Crosstie Treatment was up 7% year-to-date. Crosstie volumes came in slightly lower than the prior year, primarily due to timing related to Class I activity shifting from one month into the next. Demand for utility poles in the U.S. held steady compared with the prior year as a slowdown in customer activity during the storm season was balanced by higher demand stemming from pole replacement restoration efforts. Utility poles in Australia and our crosstie disposal business reported year-over-year improvements. Moving on to Slide 19. In our PC business, most regions reported year-over-year increases, driven in a large part by the ongoing demand for residential treated lumber in the U.S. A continuing robust market for existing home sales, along with low interest rate environments, mostly correlates with home repair and remodeling projects, all of which helps our PC business. We've also seen our international markets continuing to benefit from pent-up demand following several months of restrictions associated with the COVID-19 pandemic. Regarding our CM&C business, as seen on Slide 20, industrial production markets continue to experience weakness, even as some end markets are stabilizing and improving from the first half of the year. With our Stickney, Illinois plant back to full operations after an outage in July, volumes in North America have recovered. Average global pricing for major product lines were similar to the second quarter and 17% lower than August of 2019. The average cost of coal tar globally is lower by 3% compared with the second quarter and 22% lower than the prior year month. Looking at our debt and liquidity position, as shown on Slide 22, we had net debt of $874 million, with $191 million in available liquidity at the end of our second quarter. Also we are 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 also anticipate additional sources of cash from the following areas: number one, reductions in working capital, which were $30 million lower at the end of Q2 from the prior year; number two, lower cash taxes and interest of $16 million; thirdly, capital expenditures lower by $10 million than originally planned, and year-to-date through the end of August, our CapEx spending was $10 million lower than our 2020 program; and finally, deferred payroll taxes of $7 million. In terms of debt maturities, we do not have any significant maturities until 2024. Slide 23 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 at 4.5x. Contingent on the sale of KJCC, which is scheduled for this September 30, we expect net leverage to be between 3.8x and 4x at the end of our third quarter and 3.7x to 3.8x by year-end 2020. With that, I'll turn it back over to Leroy.

Thanks, Mike. Now let's take a look at each business segment and the sentiments for each. So first up, our Utility and Industrial Products business. On Slide 25, it shows that our customer service efforts are applied to an aging infrastructure that's put at greater risk by the many devastating storms and hurricanes found in different regions of the country. Now the greatly increased dependence on electronic and online communications during the pandemic only adds to the need to maintain connectivity. Our UIP teams continue to demonstrate great resilience in responding to these serious needs. Koppers continues to make progress in helping to transition utilities from using penta preservative for pole treatment to other alternatives, like CCA and creosote. And overall, our UIP business remains on its upward momentum to outperform, and continues to be on track for 2020 being its best year since joining Koppers. With such solid fundamentals, this business has long-term upside opportunities. While providing storm response to utilities, there may be some temporary slowdowns among those same utilities as they work to recover, and it's mostly applied to the Northern and Midwestern U.S. regions, along with Texas and Louisiana. We continue to search for additional share gains among our utility customers as this continues to progress. Now we see increased quoting activity regarding pilings as restrictions on construction projects are lifted. And in our pole recovery segment, Koppers is participating in a Sustainable Sourcing Virtual Conference being held with investor-owned utilities to explore opportunities there. Regarding our supply chain, timber availability is expected to increase in October, replenishing inventory across lumberyards and paving the way for higher production volumes and demand in the market. Slide 26 provides an overview of our RPS business, where we expect an improved margin mix as part of an overall solid crosstie business. This holds true even though lower bidding activity and higher pricing pressures are impacting the commercial crosstie market. Crosstie volume from our now closed Denver facility is being handled by our North Little Rock plant. Cost savings from that consolidation will help offset any softness in demand that we might experience over the remainder of the year. At this point, we expect a trend of year-over-year quarterly EBITDA improvement to continue. The American Association of Railroads reports U.S. railroads experience declines as of mid-September from the prior year of 16% in cumulative volumes, 7% intermodal units and 11% in total combined U.S. traffic. However, certain railroads are offsetting lower volumes with increased productivity by taking advantage of less track time to increase maintenance on their infrastructure according to the Railway Tie Association. And the way business is ongoing, demand in Rail Structures and Recovery Resources supports our expectation of continued growth through the second half of 2020. In the supply chain area, we've seen ample supply of crossties. And in the second half of 2020, we're reducing the number of tie purchases and stabilizing our inventory levels, which will help to improve our overall working capital efficiency. As shown on Slide 27, our Performance Chemicals segment anticipates continuing strong demand in North America for 2020, even with the pandemic as homeowners spend more time at home and want to update and reconfigure their indoor and outdoor spaces. The treating market, which is currently short on chemical, is expected to improve in the fourth quarter. And similarly, our international markets are showing improvement in the third quarter, and are expected to continue into the fourth quarter. Third quarter EBITDA for global PC is looking like it will be similar to Q2, and we are currently tracking to have our best year ever for our Performance Chemicals business, which prior to this, was in 2017 when we generated just under $88 million in EBITDA. And the outlook for PC in North America remains strong as record-level demand continues in the U.S. for residential treated wood. The big-box retailers report strong demand for home improvement projects, even with higher lumber prices. And all of these trends are being maintained amid varied market forecasts. The leading indicator of home remodeling activity, for example, projects a 0.4% decline in renovation and repair spending by mid-2021. The Consumer Confidence Index decreased in August for the second consecutive month from 91.7 in July to 84.8, suggesting that spending may be slowing based on economic concerns. Yet, the National Association of Realtors indicator of home sales based on contract signings increased 5.9% in July, marking 3 consecutive months of growth. For PC's international markets, as seen on Slide 28, Europe and Asia may lag a bit, but the declines were not significant. Australia reported strong sales with an added boost expected from government stimulus incentives to support building activity through early 2021. High COVID-19 infection rates are keeping the Melbourne metropolitan area in shutdown, however. And New Zealand is seeing strong ongoing demand for structural timber as housing starts have climbed to pre-pandemic levels. In addition, we anticipate continued strong demand in Brazil and Chile agricultural, industrial and residential markets. In terms of our supply chain, Koppers hedges for 2021 and '22 were at lower average cost in 2020 at this point. We don't expect any additional benefit in '20 related to the lower copper prices that we saw earlier this year due to being fully hedged. Strong U.S. demand is outpacing our internal production capacity. And as a result, our input costs are higher due to external purchases of certain intermediate materials. And we may see some relief in the fourth quarter in this area, and at the same time, we're pursuing ways to relieve bottlenecks related to our intermediate suppliers. Moving on to our CM&C business, on Slide 29, volumes have recovered somewhat from early pandemic lows, and we now expect second half volumes for our major product categories to be similar to the second half of 2019. We continue to focus on cost containment measures in order to mitigate the impact from softer market conditions. The combination of demand stabilizing cost declines catching up with lower pricing in some markets and overall cost reduction measures should enable us to generate up to twice the level of EBITDA in the second half of 2020 as we generated in the first half for global CM&C. In North America, we've seen lower sales volumes for pitch, lower phthalic pricing, lower utilization and higher input costs due to lower availability for domestic coal tar. In Europe, creosote sales remained strong, while improvement in oil prices have helped carbon black feedstock sales. It has also put upward pressure on tar prices. We foresee an increase in tar prices in the fourth quarter in certain European regions as oil prices have improved. Australia, however, looks to benefit from solid pricing and strong sales volumes, including exports, along with lower tar and raw material costs. Coal tar costs had decreased consistent with end markets, but have been stabilizing, and now are beginning to move slightly higher. But overall, we've been benefiting as the cost decrease has caught up with pricing declines. We are seeing reduced coal tar availability in North America due to weakness in steel. And until the North American steel industry picks up, we will experience higher raw material costs as we import more tar. And onto some final thoughts on actions and opportunities, beginning on Slide 31. As the pandemic was enfolding back in March and early April, we were uncertain as to the near-term performance of each of our businesses. Because of that, we crafted an aggressive plan to cut costs in the anticipation of the challenges ahead. Our original range of $15 million to $20 million was achievable if our results would track to a 25% or worse shortfall than our expectations. Now that we're a little more than 3 months from year-end, it appears that we will be about 2% to 6% lower than our EBITDA expectations originally, but actually exceed our EPS expectations that we gave in late February. As a result, we're anticipating more incentive compensation being paid out than what was included in the $20 million high-end of our original spending cuts, and have adjusted our estimates accordingly. In addition, because our business is performing better than expected and we believe we can sustain our overall performance, we've given our frontline salary workers the raises that we had deferred earlier this year, and are working to fill a few positions that we had originally held back on. We recently made the decision to defer the 2020 salary increases to non-frontline salaried workers to April 2021, essentially foregoing this year's increase in lieu of the challenges we continue to face, and the fact that those workers are enjoying different perks that only a work-from-home environment can provide. Bottom line is that we now anticipate SG&A cost savings of around $13 million to $15 million for 2020 compared to 2019 SG&A expenses. Year-to-date, as of the end of August, $9 million of those savings have been realized by carefully managing costs related to compensation and benefits, travel and entertainment, legal and consulting fees and other office-related expenses. On Slide 32, I want to spend a little more time than past calls to provide more color on the various initiatives and cash opportunities that should help us emerge from 2020 with an even brighter future. First, relative to market share gains, we've made significant inroads in each of our core wood-based businesses. Performance Chemicals, we added 3 sizable accounts at various points in 2019 that we are realizing the benefits of in 2020. Through the accounts of our current top 10 customers based upon volume, and the current supply constraints the industry is facing, has us focusing entirely on servicing our existing customer base. But the investments we're making into capacity and building out an even more robust supply chain put us in a strong position to possibly add further to our customer base as we come out of the other side of this current wave. The investments we're making in North Little Rock will not only modernize that facility and wipe out a lot of deferred maintenance costs, but will also set us up to capture even greater market share through the lower cost process we are creating. By the beginning of 2022, we will be able to do 25% to 50% more business out of that location and what should be the lowest cost structure operation that we have. Sticking with Railroad, our recovery resource business added an important account earlier this year that we're hoping will provide a template for how we can add this important capability at other treating locations to improve both ours and the railroad sustainability footprint. And finally, we're currently moving forward with plant to grow our UIP business in underserved markets, and should be in a position to talk more specifics in 2021. On the new product front, we continue to work with our Utility customers to come up with the best replacement product for pentachlorophenol as that product goes out of production. This will also result in share gains on the Chemical side as we are not a producer of penta, but plan to be or already are a producer for the alternatives that will likely replace that product. As for new processes, we've been investing some modest capital into our CM&C business that will provide us an opportunity to alter our productions output to higher-value markets, thereby lifting up the profit margins in that business. We expect for that process to be online at the first of our CM&C locations during the first quarter of 2021. On the new market front, we're in the process of organically starting up a service business adjacent to one of our wood treatment markets that could provide a nice opportunity for growth. We plan to trial with a select customer base over the latter part of 2020, and begin building it out in 2021. If the trials are successful, expect to hear more as we close the year out. Finally, from a network optimization standpoint, besides the Denver and North Little Rock consolidation, we're in the process of adding dry kiln capacity at 2 UIP locations that will alleviate a legacy production bottleneck and lower our cost structure. Beyond that, we're looking to better align our peeling, drying and treating assets to get the most bang for our buck at our various locations. That means that we'll likely have smaller more focused operations that handle certain aspects of our process that will save us millions in supply chain costs. On the cash front, things are looking good as we get set to head into the final quarter of 2020. We've had varied interest in a few of our noncore businesses over the past year, but the pandemic has put a halt to any serious discussions. At this stage, it doesn't appear that anything will resume until we return to some sense of normal. But given our improved outlook, we can afford to be patient. As it relates to monetizing closed properties, I think that we'll be in a position to announce the sale of possibly 2 properties that will not only bring in some cash, but also claws off spending to maintain them, and expect to be in a position to announce that by the end of this year. Finally, in conjunction with the property sales, we can potentially limit any major additional spending at our closed properties that will allow us to further direct cash flow into debt reduction. As we're narrowly through our September quarter, we are on track to deliver our highest third quarter adjusted EBITDA, which in turn drives our net leverage in a positive direction. Therefore, we're cautiously increasing our full year 2020 estimates. And we'll be reviewing our expectations for the fourth quarter here shortly to determine whether any further changes are warranted for our 2020 outlook, and we'll communicate our conclusion when we give our next monthly business update on October 26. For the September quarter, we estimate that our sales will be in the range of $420 million to $430 million compared with $434.1 million for the prior year period. We expect adjusted EBITDA for the third quarter to be in the range of $63 million to $66 million compared with $57.1 million in the prior year. Adjusted EPS for the third quarter is currently forecasted to be in the range of $1.25 to $1.35 compared with $1.16 in the prior year. Even if COVID-19 remains an ongoing concern, we continue to expect 2020 sales to be approximately $1.6 billion compared with sales of $1.65 billion, which excludes KJCC. Adjusted EBITDA in 2020 is anticipated to be in the range of $196 million to $204 million, which is higher than our previous forecast of $190 million to $200 million, and compares with $201.1 million that we earned in the prior year. Adjusted EPS is projected to be in the range of $3.25 to $3.50 in 2020, which is higher than our previous estimate of $3.10 to $3.40 and compares with $3.18 in the prior year. So to wrap things up, our PC business continues to carry the day for Koppers while our Railroad segment remains steady, and our Chemicals segment is affected by weak industrial production markets. That said, Koppers benefits from a portfolio of diversified end markets and the designation of being an essential business serving other critical industries. For these reasons, we're poised to finish the year strong despite the global pandemic that has disrupted many other business models. In addition, while the mix of earnings might look different, I feel good about how 2021 might shape up as this year winds down. Overall, I believe our solid performance amid a global pandemic to date validates our strategy of being a global leader in wood preservation technologies. Now I would like to open it up for any questions.

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

Question on the guidance. You increased your EBITDA guidance for 2020, but you didn't change the revenue outlook. So that kind of implies that profitability is better than what you had previously been anticipating. Can you point to some of the areas where you're benefiting from better profitability? And do you think these are areas that we should see sustained improvement in margin performance as we get into 2021?

Sure, Mike. We're actually seeing a little bit across the board, and Performance Chemicals is one example with the constraints that we've had on the intermediate raw material side of things, we are incurring higher costs as we endeavor to keep our customers in current supply. So there's a lot of half loads that are being shipped to try and keep operations running. We're obviously having to spend more in terms of bringing in some outside production. But the overall cost that we had expected to incur aren't quite as high as what we were expecting coming into this quarter, which is allowing us to achieve a little bit better margin than we expected in that particular area. On the RPS side, on the wood treating piece of it, the business has been hanging in there this year and benefiting from actually increased untreated crosstie volumes that we're bringing into the plants. Some of our biggest and highest fixed costs are in the whole tie sorting operation, and when we're bringing ties in when our volumes move up a little bit, we can absorb more fixed cost, which helps that piece of the business out. In CM&C, it's just -- I'd say, overall cost containment has really helped to improve margins in that piece of the business. So it's been a little bit of this and a little bit of that, that has helped us in each of the particular areas. In terms of the sustainability of some of that, I mean, again, we don't think that the volumes that we're seeing this year in PC will continue for the full year 2021. We think they'll be up to this level, certainly for the first part of the year. But then again, we're realizing a little bit better costs on the raw material side for that business. So maybe we can maintain it, but just through some different cost savings than what we're realizing here today. RPS overall should be pretty solid as we gain a full year of cost savings relative to the Denver and North Little Rock consolidation. So I would expect that we'd be able to maintain a good bit of that. Our maintenance-of-way business, which is a higher-margin business, should see a better year, I would expect, in 2021 as well as we've been ramping up our improvement in that area, so that should help. In CM&C, with some of the things I mentioned relative to some of the new process changes that we're making there, should help us from a margin standpoint. So I think margin-wise, what we're seeing here in this quarter is sustainable moving forward. But there's always puts and takes. So we'll have some improvements that will come from certain areas where we might backslide in a few others. But on balance, we should be able to maintain, if not, even actually improve on the margins that we're generating in this quarter.

All right. And then a couple of questions on Performance Chemicals. First of all, you mentioned these additional efficiencies around the copper intermediates, it sounds like you're pretty confident that you're going to be successful in debottlenecking those. Can you maybe give us a little bit more color on exactly what you're doing and what gives you the confidence that you're going to get better production there?

Well, it's a couple of things. So we are planning to, again, add to capacity. So we're planning to put some additional capacity in place that will give us the ability to serve a higher volume, even though we don't expect this pandemic-related volume to, again, continue beyond the early part of next year, there's still a good bit of market share that we think is still available to us. And so we want to be in a position to capitalize on that. So looking at adding some capacity. But the other important piece is, we're looking at diversifying our supply chain, which will do a couple of things. It will provide more reliability in terms of providing other options for us. And it should also help lower our cost structure as is some of the options that are available to us that we've been able to work with are looking like they will be lower-cost options than what we currently have in place. So the combination of those 2 things should put us in a good position for reliability of supply moving forward as well as either containing or maybe even lowering our cost structures.

Okay. And the last time you guys expanded capacity in copper intermediates, there were some hiccups, there were some process changes. At this point, is the -- any capacity addition pretty straightforward or are there some potential issues there?

Well, I think any time you're doing that, you're always going to run into start -- various start-up issues, rarely does -- rarely do things work perfectly. It's nothing that I believe is of any big concern. Obviously, we've done it. So we at least have some experience in having put some of this capacity in place before. And I don't want to say anything other than sort of normal start-up issues that you might incur and just about any addition that you put in place. So from our standpoint, I can't see a big impact as it relates to cost. It will be a net benefit for us moving forward, no question.

Okay. And then in the CMC business, obviously, a lot of moving pieces there. I was hoping you could provide some color on how volume and pricing and coal tar costs are trending as we get into September and into Q4. Do you expect some pricing and volume improvement from August levels?

We -- I expect some as it relates to, again, the products that are tied to oil. I expect some pricing opportunities there. We've talked throughout, really at the beginning of the pandemic in terms of how our costs lag our pricing. And so as pricing in those markets was moving down, right, it took a few months for costs to essentially -- cost declines to catch up with that. And that will more or less have the same effect as we see as things move a little bit more on the upside. So that whole business is literally -- it's a coal tar arbitrage business. And I'd say, our folks do it about as well as anybody in terms of managing that process. So I do see a little bit of upside as it relates to those markets tied to oil in the back half of the year. But we'll also see some probably upward move in coal tar costs as a result. But we'll capture some of the benefit again, as prices moving up, that we got hurt on as price was moving down here in the second quarter.

All right. And then the last one for me is on the KJCC joint venture. It sounds like there's still at least one approval that you're waiting for. Is that the last thing that needs to fall into place? Any other color you can provide on that process?

Yes. I mean, we are moving forward with what we believe is going to be a closing at some point next week. So everything looks to be lined up and just need to basically finish it off at this point. So I feel pretty good about where things stand. We're in a better position -- we're in a much better position here as we sit on this call talking about this than we were a month ago. So I'm confident that we can finally bring it over the finish line.

Our next question will come from Chris Howe with Barrington Research.

In thinking of the -- so $120 million, you continue to expect for debt reduction, and I appreciate the breakdown. With KJCC expected to close, I think that will get through in the interim, how should we look at future debt reduction opportunities once the $120 million is behind us? I know you had previously talked about some noncore assets that may not be long-term for the portfolio. And perhaps you could share some other buckets for further improvements in free cash flow and as it relates to perhaps capital expenditures going forward?

Sure, Chris. I'll make a few comments, and Mike can chime in if I miss anything. I think we're starting to emerge out of the back end of what has been a, quite frankly, a long restructuring process, right? We began this process back and in really 2014. And the reality is costs a lot of money to close these facilities that we've been in the process of closing over the past many years. And a lot of that gets sucked up in cash costs to remediate sites and wind them down. We're -- as we get to the end of this year or at a point where we can be out of 95% of that and have it behind us. So all that is cash that was going to close those properties and remediate them and can now move in to other deployment opportunities. So I expect this year, we could have our best operating cash flow year ever. And I would expect I would expect next year to be extremely strong as well. From a capital -- ongoing capital standpoint, we have opportunities to invest back in our business that are pretty attractive. And so it's hard to say we're not ready to talk about what our next year capital plans are at this point, but I do expect us to generate free cash flow that we can put towards debt next year. And if not get our overall net leverage down to the 3x range that we've been focusing on, come pretty darn close to it. So there's -- for me, there's a lot of just organic opportunities as we put the restructuring behind us. In terms of some of these other noncore assets or noncore businesses, again, we've always taken the position that if the price was right, we would sell them. But they're not bad businesses. We've gotten rid of the bad businesses that we've had. These businesses are all businesses that pretty much make good margins. And if someone wants to pay for those businesses, then great. If they don't, then we'll just continue to generate cash from them to push back into our other operations. So that's more or less the approach that we're planning to take.

This is Mike. Just to add to that, we are definitely in the beginning stages of planning for 2021. And it's a balancing act depending on what we think the cash flow from operations is going to be. And as like Leroy mentioned, what our CapEx is going to be. But again, I think from an overall perspective, with the $120 million of debt reduction in 2020 and $65 million of that coming from the sale of KJCC that less the $55 million from the rest of the business and, again, from a modeling standpoint, I think I agree with Leroy. I think 2021 could be a little bit better. And I think, without a doubt, we could hopefully repay $55 million, $60 million of debt in 2021 as well. And our goal and objective, by the end of next year, is to get to that 3x leverage ratio. And as it stands here right now, I think we're going to be very close to that. But again, we're still planning for 2021, and there's a lot of pieces that have to come together before we can give you a good fix on that. We might be able to give you a little bit better fix in -- on the October call.

Great. That's very helpful. Appreciate the color. And as look to 2021, I know this year has seen a strong demand in the PC segments, much of which may continue to the first part of the calendar year. Previously, you had stated a potential or roughly right range of 18% to 22% of adjusted EBITDA margin for the PC business. Do you think with what you've seen this year in the current markets that there are potential opportunities to perhaps expand that range a little bit?

Yes. So my recollection is just a few years ago when we put these targets out that we had talked about PC as being maybe a 15% to 21% type of a business on an ongoing basis, and we've been fortunate, we've had years have actually exceeded that top end of that range, whereas the last few have kind of been squarely in the middle. This year is, again, a year where we're not realizing top end of the range is that we were at a couple of years ago, but we're back in that 20% to 20-plus percent EBITDA range. Again, for us in that business, the volumes have certainly helped out this year and helped to carry the day. But as we talk about at length, the raw material cost in that business in the swings in that commodity are going to be what ultimately really determines where we end up in that range on a go-forward basis. We do not -- we hedge our raw material requirements to provide cost certainty for our customer base. So as costs are moving, we're not out there actively increasing prices on our customers. At the same time, we're not having to give that back when things move back in the other direction. So we're trying to stay consistent with our customer base so that they have a visibility in that market. They already deal with enough volatility. As it relates to lumber pricing, they don't need to be worrying about copper as well. So I would just say with where we're currently hedged at over the next couple of years that, that certainly will help us be maintain probably levels that are at the upper end of that range. But for us to get consistently above that on a go-forward basis, that will be tough. I mean I just think that's tough. I think that 15% to 21% range, maybe it's a 15% to 22% or 16% to 22% is probably the right range. And where we've been in the last couple of years in that 18-ish range is probably more of a typical year.