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

And paper and packaging sectors at Bank of America and have the pleasure of hosting a fireside chat with Koppers. And we have with us this morning is Jimmy Sue Smith, CFO; and Quynh McGuire, Vice President of Investor Relations. As a reminder, we are webcasting this event. Kopper reports in three segments: Performance Chemicals or what they call PC, which Kopper sells wood treatment protection chemicals, E.G. wood preservatives, mainly for residential applications like decking, the railroad and utility products services or RUPS, where Kopper sells treated and untreated wood products to railroads such as crossties and also sells utility poles. And the third segment is Carbon Materials and Chemicals or CMC, where Koppers is a leader in coal tar distillation, manufacturing a number of products, including carbon pitch used to make aluminum anodes, clear salt used in wood treatment and as carbon black feedstocks and naphthalene among other products. So with that introduction, again, if you have any questions, just raise your hand. In particular, since we're webcasting this, if you mind waiting for the microphone, so everyone on the line can hear as well. But with that, I'll start off. Again, thank you for coming this morning. Thank you for coming to the conference.

Great to be here.

So I just want to start off with what every analyst wants to know is cash flow items. So how should we -- what's your latest guidance? Or what can you tell us starting with sort of 2025 cash interest?

Cash interest for 2025. Yes, we are in the probably $65 million range, I think, if you sort of annualize where we were at the third quarter. And so that's we benefited a lot from some rate changes as well as some repricings that we were able to do on the Term Loan B. We'll get another full year of the one we did last year when we move into 2026. So we're looking at -- based on the curve now it being down even below that for '26. And overall, the cash flow goal -- free cash flow goal over the sort of our strategic plan period as we look out from 2026 to 2028 is going to be having $100 million of free cash flow annually over that period.

Got it. And I would sort of think about cash taxes as either a figure or an amount or a percent of, say, EBITDA or however you want to -- what kind of guidance can you tell us?

So I think about that as being -- as taking sort of where we expect to be this year, which is in that $15 million to $20 million range. And then as the business grows about incremental EBITDA, 25% to 30% on top of that as well is how we think about modeling it.

Incrementally [ good ].

Use the 15% to 20% as a base.

Great. I'm sorry, you say 15% to 20% or 25% to 30%?

15% to 20% is the base and the incremental piece.

And then working capital inflow or outflow, what are your expectations?

So working capital, we had some big recently. And some of that's growth in the business, but some of it's been a little bit of growth in inventories, quite frankly. So I don't think we're going to see it flip to a substantial inflow just because I think as the business grows, there will be natural growth in working capital, but we do have are some catalyst initiatives. And I know Leroy talked about that on the last call in terms of $40 million this year and $40 million by the end of 2027 in terms of EBITDA. But we do have some working capital initiatives as part of that, they're not included in there, but they are in that $40 million, $50 million range over that time period, mostly in inventories. And I think what that will do will be mitigate the cash flow draw from the growth of the business. So probably smallish usages, but not usage in the -- we've seen $50 million a year or recently, not.

Got it. And normalized CapEx, should we think of that in the $55 million range or some other number?

So I think this year, we're guiding to around $55 million. We've said in the past it's up to $75 million. I think shutting down [ methalic ] plant helps with that a lot. I think I think in that $50 million to $60 million is probably like a normalized maintenance level. And I wouldn't expect to see it go over $75 million for any growth projects or anything like that, that might come up.

Got it. I would have -- I thought the sticky, the line shut would have...

Going to be closer. It's going to be more in the $50 million range. You could see some years where it gets to be $70 million if we have some significant think it's...

And that plant was set up two lines. It has two -- or at least has two lines now and you're shutting down one line.

So we had 2 distillation pumps. So a couple of things. One, we shut down the -- so we stopped producing there early in the second quarter. That's been usage it had some rate. So that line has been shut down. We do have two distillation columns. And we -- there's some additional to coming out of the market in North America this year because there's been a conversion from a from blast furnace to electric arc and which doesn't move the needle coke. So there'll be more coal tar coming out of the market. So we are looking at shutting down one of those columns as well and continuing to streamline those operations, rightsize them for the market that we're in and get the cost to where we need it to be.

I'm not sure I thought you were definitely shutting down of cums. You're saying down Okay. And I guess the question I had is, since it was set up as a 2 line -- distillation columns for coal distillation 1 line instead of 2 line does -- presumably, you can't cut 50% of the fixed cost. What I'm saying is it costs more to presumably run just one line on a fixed cost basis that you have to absorb.

Things that we currently studying, but the way that the plant we saw significant improvement in our margins this year from shutting down the phthalic anhydride, eliminating some of those costs. We think based on how you -- which column you operate, how you set up the operations, we...

Excellent. And both Q4 '25 and 2026 again, guidance, are there any other cash items or pension capital or any other things we should be thinking about?

Yes. So the pension is substantially funded at this point. There's -- we do have -- that's the North American pension. We did almost all of it this year. There were two small pieces for union plants that were -- didn't opt into that. So we may have those to come off as the contracts roll up, but they're not significant. They're not significant. We also have been in the process of trying to close out the pension in Europe for several years. There was a court case in Europe that complicated that for everybody who had pension plans there. It looks like that's going to get resolved, but that's just a couple of million dollars. It's not significant.

Europe correct me if I'm wrong, the pension sort of pay-as-you-go kind of situation.

You can buy.

All right. Interesting. And then starting in on the three segments, Performance Chemicals, your guidance for '25 is down $41 million to $43 million versus 2024. Is most of this volume reduction to lose market share to one of your main competitors? And how much did unfavorable fixed cost absorptions impact this EBITDA reduction guidance?

Yes. The most significant piece of that decrease in EBITDA from PC business is related to the market share reductions that we had. We had a couple of major customers that were sole sourced to us who have elected to split their sourcing. And that did drive -- it was most -- there's some fixed cost impact to that, but a lot of it is just the EBITDA loss not the volume.

So you didn't lose any customers. What you did is they decided to dual source the supply. And only price, but what was their motivation to suddenly change the way they were doing it to dual sourcing and sole sourcing.

But a lot of companies, us included after what we experienced in the supply chain disruptions during COVID, have looked at their operations and said we can't afford to be sole-sourced for have some things that we just have no choice, but we -- it's kind of a policy, we don't sole source because you just -- there's too much risk.

Got it. And was it all to that -- like there's two other main players. Was it all to the one and Right. And why didn't the other one -- the other one has some -- the parent -- the parent of the other one has some administration issues. I don't know if that impacted.

The product that is used to treat residential lumber in the U.S. is the gold standard is called MicroPro. That's a product that we have on. And the reason it's the gold standard is it is rated for ground contact. So you can put it directly in your deck, you can put it directly in the ground. It will not, right? Our main competitor in this space licenses that technology from us. That was a -- that's a structure that we inherited when we purchased the PC business. So they are selling the same sort of formulation and they are able to sell ground contact. The third player in this space does not have ground contact.

Okay. That explains it. I realize that. All right. Kopper. How was that -- I would have thought that would be a big impact. But you're mainly saying it's fine has been the impact, not -- has Kopper impacted?

So we had some impact from Kopper this year, but that was because there was some dislocation in the market. So we generally hedge our copper costs at least a year out, if not more, and then reprice our customer contracts in line with where the Kopper is. What happened to us in 2025 is we have historically hedged our Kopper at LME because it's a more liquid market than which is actually like sort of the U.S. Kopper market. So we would hedge we purchased the PEMEX. Those like always moved in concert with each other, and that was fine. When we started -- when the U.S. started talking about putting tariffs on Kopper , those 2 indices dislocated COMEX went up, LME did not, which obviously impacted the effectiveness of our hedges. We were able to mitigate most of that because of some supply-demand dynamics that happened here where people sort of shipped a lot of copper into like to get rid of the potential tariffs. So there were bigger discounts off of COE, which brought those more in line with each other. It did have an impact on the year in the $5 million to $10 million range for the year, but we were able to mitigate a little bit. Moving forward, we're looking at ways to -- with new risk unlocked there that they may not move in concert with each other. So we've looked at hedging COMEX, which you can do in sort of like the short to medium term, right? It's not quite as liquid as LME is. actually purchasing in the U.S. from our scrap dealers like LME, and we've seen some who are willing to do that as well as just entering fixed price physical contracts. So instead of doing it with a financial doing it with a physical transaction. So we kind of executed on all of those. We're using kind of like a little menu approach there, but trying to mitigate that risk because there was a provision when they actually came out with the rule on the copper tariffs, which did exempt the product that we buy, but that it would be revisited next year. So there's a little bit of risk that we can see again in 2026. So we're sure that we are responding to that.

And for next year, copper prices have moved around. But will you be able to basically go to your customers and say, look, here's the price, but here's the Kopper. And so we're just passing that through to you. We're not taking risk.

Those contracts are generally 2-year contracts, and we have contracts from that were '25 and '26. '26 will be another big contracting year for. So we generally lock in those prices in concert with the copper. We are a little Kopper for 2026 compared to where we would normally be at this time of the year. We're 75-ish percent, but we would probably be done in a normal year. But given the dislocation in the market this year, there were some.

So when you say '26 contract year, do you mean that a lot of the contracts from '26 to 2027?

2027 and 2028.

Okay. And then when you go from '26 to '27, the plan is [indiscernible] Great. to RUPS EBITDA guidance for '25 is up 28% to 30% versus '24. So what was the -- when you step back, what is the key driver of this improvement? Was it price cost spread? Was it volume plus acquisition a little bit?

Yes. So it's primarily on the rail side of the business. And there's been a big -- we've been talking for a couple of years that, that business did not have a margin where we thought it should be. We thought it should be a low double-digit 12% margin business and it was not there. And we from like the cost structure had gotten out with where the pricing structure was from our customers. So we did a lot of work in 2024 and 2025, a lot of it being part of the catalyst to get the cost structure right. So we've taken a tremendous amount of really operating that business, operating SG&A to get that where we want to see. And now we're seeing that be a 12% margin business, which we're really excited about. We think think the rate change there is going to become challenging because we've done a lot already, and it's harder and harder to make those improvements, but I still think there are opportunities there. I think that's the biggest piece. I think there's also been some improvement in our kind of the smaller maintenance away business on the rail side. Our rail tire recovery business has moved to just only doing a piece of that business, and that's become much more profitable. And we have some pricing increases this year...

Great. And then was the -- so was maintenance away. Main thing was you took cost out for your Class 1 route crossties, it sounds like -- and then did utility poles, any change there that helped out?

So utility poles have been interesting. a little closer in terms of demand over the last few years and saw some significant destocking that was we are finally seeing some green shoots in that business where we're seeing some -- that's sort of the one area. I would say, in general, across all of our markets, it's just very much a cautionary tone, like everybody is a little -- like there's a lot of on the sidelines. And everybody is waiting for the signal that things are going to take off. I think utility poles is the one area where we started to see a little bit of that in terms of like volume of quoting activity and some cases getting approved and just positive signs there that, that market may be picking up a little bit. And we're seeing it both in the rep segment where we sell utility poles, but also in the PC segment where 1/3 of that segment is industrial and to service that market as well. So that's been the good news story there. But I don't think we've seen a tremendous amount of pickup there yet, but if we do kind of like that's the one where we see. And then obviously, we think the even bigger opportunity in that business is the opportunity to move because we've historically only competed in east of Mississippi. We started building the infrastructure to -- like in terms of sales force staffing to go west in terms of the -- also in terms of the supply chain, procuring [indiscernible] for poles, which you need to go out West. The Brown acquisition that we did in April of 2024 and the plant that we got in Alabama really enable us to reach the margins. So that for us is a growth opportunity in that area in excess of whatever happens organically in that space, right? Like that's a GDP plus market growth area or a little bit better than that, we think it's better than that for us because we can market penetration in a new geographic area.

And do you keep for the inventory on the Chewy poles, do you keep -- which most of your inventory? Is it untreated poles treated poles? Is it some of both and you're just waiting for demand to come?

So some of those, although I think in normal times, it's more untreated than treated. But the bigger inventory that we hold is on the rail because rail is to drive for 6 months generally. So there's a bit of inventory there. And quite frankly, we have more inventory than we probably need in the PC business right now. Given the step down in volumes there, the inventory there. It's all part of catalyst, all part of what we're kind of doing everybody.

Got it. And then the CMC business, guidance up $8 million to $9 million versus 2 Again, what was the main sort of driver there? Was it price cost? Was it volumes, cost reductions?

So I think it's been a lot of cost reductions. We've seen a little bit of pricing improvement, but not much. Honestly, that market continues to just languish and be -- it's driven by industrial demand. And so it's just very -- everything is very cautious there right now. But we -- again, a lot of focus on improving the cost structure there, taking out the phthalic anhydride unit and sticky and has really been done without those operating costs. So it's just -- overall, the company as a whole recognizes where we are in the business cycle. We recognize what happened in our PC business and the challenge of losing the market share, and we are very focused on controlling what we can control, which is the cost structure. And where these businesses sit in terms of that cost structure, which we think enables us to kind of weather this cycle, but also sets us up for when demand turns. -- turn. And when it does, we're going to be sitting here with a really improved cost structure and the business that functions better and ready to take off with that -- with the demand. And so we're excited about that. Waiting for it.

How would you describe the aluminum anode demand right now? I mean, aluminum prices, you would think anode demand would be strong.

Yes. But that entire business is just -- it feels like everybody is sitting on the sidelines.

All right. I guess, just thinking about shutting down that state full distillation still, but what would be the likely timing? Is this a 2026 event?

Yes, we can look at that.

Okay. Were the 2 stills identically sized?

Yes, there's about 300,000 metric tons of capacity between 2, much 300,000.

300 total?

Yes. So that was like 150-inch.

Got it. Perfect. Are there any questions? So I've gone through. If not, maybe we'll just call it there.

Thank you.