Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' Final Q4 2020 Earnings Conference Call and Webcast. [Operator Instructions] Following the presentation, instructions will be given for the question-and-answer session. 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 conference call, where we'll provide highlights of our fourth quarter and full year 2020 performance as well as our 2021 outlook. 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 quarterly conference calls, this is being broadcast live on our website, and a recording of this call will be available on our website for replay through May 24, 2021. Before we get started, I'd like to direct your attention to our forward-looking disclosure statement seen on Slide 2. Certain comments made on this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of assumptions, risks and uncertainties, including risks described in the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The company has provided with this press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn this discussion over to Leroy.

Thank you, Quynh. Good morning, everyone. So this morning, we're going to start, as we always do, with a discussion of our Zero Harm culture. As I mentioned when we reported our preliminary results, we finished the year with our best underlying safety performance ever. Now reaching this milestone amid the uncertainties of the pandemic proves once again that Zero Harm is the foundation of our culture, the way of thinking and behaving that has been adopted by Koppers' employees around the globe. It is the basis of everything we do. And my sincere appreciation goes out to our worldwide team who are doing an admirable job of focusing relentlessly on our path to 0. Now as we've talked about often, Koppers has been fortunate to be classified as an essential business in every region that we operate, which has enabled us to continue to operate at full capacity throughout the pandemic. We provide essential products and services to keep our modern society functioning. Koppers helps to move products safely by rail. We help keep electricity and WiFi accessible. We keep manufacturing supply with needed chemicals, and we provide treated wood for home and commercial construction and improvements. Essential to our ability to perform these essential functions is the health and well-being of our employee population. The responsibility that we place is our top priority at all times. Now if we move to Slide 6, we have approximately 1% of our employees currently in self quarantine, with about 12% of the employee population to date that have tested positive for COVID-19. Now we continue to require face coverings as personal protective equipment at all North American facilities, and we've distributed company-provided masks to our employees. Additionally, N95 masks and respirators are being used for close-contact work. We continue to seek…

Thanks, Leroy, and good morning, everybody. As recapped on Slide 22, we delivered record-setting performances in many areas in 2020. However, please note that any comparisons in our discussions between 2019 and 2020 exclude results from the KJCC business that we sold in September. With that in mind, we achieved a new high in sales of $1.7 billion, driving our fourth consecutive year of growth. Operating profit finished the year at $157 million, a 25% increase from the prior year and a new record. Adjusted EBITDA was a record $211 million, up from $201 million in the prior year. Adjusted EBITDA margin was 12.6%, the highest since 2017 and the fifth year in a row where we finished in the 12% to 14% range. We also set a new record for adjusted EPS of $4.12, which was a 30% increase from the prior year. Contributing to that EPS improvement were SG&A and interest expense savings achieved during 2020. From a balance sheet and cash flow perspective, as outlined on Slide 23, we had our second-highest-ever operating cash flow year. In 5 of the past 6 years, we've generated more than $100 million in cash flow, and we achieved $127 million in cash flow from operations in 2020. We also reduced our net debt by $131.5 million in 2020. This was our largest net debt reduction year in our public company history. The combination of higher EBITDA generation and strong debt reduction allowed us to reduce our net leverage ratio to 3.5x compared to 4.3x at the end of 2019. This is the first year-end since 2017 that we finished the year with net leverage below 4x. We spent $70 million in CapEx for the year, which was near the high end of our most recent guidance and was primarily due…

Thank you, Mike. I want to take a look right now at our business segments and where we see things headed into 2021, and I'll start with our Performance Chemicals group. So on Slide 34. The overall picture for Performance Chemicals for the upcoming year is a little bit uncertain, and this segment will likely be the biggest wildcard that will have the greatest level of potential variability. The key question that will need to be answered is what will happen if the COVID-19 virus is brought under control. Many have an opinion on it, and that opinion seems to change from month-to-month. It's difficult to forecast how the pandemic-driven demand and discretionary spending will fluctuate, but management of The Home Depot disclosed yesterday their trepidation and forecasting beyond the first half of this year with so much uncertainty in terms of how and when spending habits may change. Therefore, we are focusing on what we can control and doing what we do best, which is provide superior customer service, managing our costs and optimizing our capacity. We know the market can't continue to ride this wave into perpetuity, so we continue to grind away behind the scenes to fill in the gaps that will eventually come as the home construction market comes off with highs. On the good news front, the North American market for PC saw a strong start to the year in January, which has enabled us to get off on the right foot for the year. Now record lumber prices have slowed demand in February, however, as traders work to avoid getting caught with high-priced lumber when the market drops. Strange as it sounds, that's actually helped us as we've been feverishly trying to catch up with demand since the middle of last year, and we're…

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

Congratulations on a nice end to a challenging year.

Thank you, Mike. Thank you.

My first question is on the 2021 outlook overall and whether the PC guidance in particular is maybe a little bit conservative. You called out that wide range between maybe a 10% decline in demand versus maybe a 15% increase in demand. So are you intentionally guiding that a little bit conservatively? And maybe walk through some of the areas that you feel like are within your control versus the areas where you have some uncertainty or you're subject to market forces.

Sure. Yes, Mike. I mean, look, on balance, we are taking a conservative view of that segment. I mean we think it's warranted given the fact that we are still dealing with the pandemic and while vaccinations continue to get rolled out, and there seems to be some positive momentum towards some reversion to normal. What we don't know is what's going to happen with that discretionary spending that has really been funneled into the home improvement markets. And as I mentioned in my prepared remarks, even Home Depot made that point yesterday as they exhibited some caution towards their views for this year. And so we just think it doesn't make a whole lot of sense for us to jump out and put out an expectation that we expect the outsized demand that we saw over the last 6 months to 7 months of last year to just continue throughout the entirety of 2021. So we are taking a little bit more of a conservative approach to it. And as I said, we think that's just the right approach as opposed to putting a guidance out there that could get upset as things continue to develop, right? We're in an uncertain situation, have been for some time. And at some point in time, this is going to start moving back the other way. The question is when. And so we're looking at it from a conservative standpoint. But look, I mean there's certainly people who think that this will -- that this has legs to continue to grow and remain in place for some time. I will say that there's a lot of things that we have going on, that actually will begin probably seeing the benefits of in the back year from a cost standpoint, that could help fill some of the gaps that we expect will fill some of the gaps of a potential reduced demand environment. And at the same time, if we have not been able to actually bring on any new customers in this environment because we are so strapped for capacity and we've been working hard to add capacity, that if we see any openings and there is any pullback in the pandemic demand, we think we have an opportunity to actually add new business that could backfill some of that. But that is a little bit speculative at this point in time, so we don't want to get too far out in front of ourselves.

All right. And you mentioned a couple of times that there could be some impacts from higher lumber prices here, where we're hitting some record levels. Can you walk through some of the effects that those higher lumber prices have on demand in both the RUPS business and the PC segment and maybe also help us understand how much of an impact you could see in your costs or your margin structure as those lumber prices move around?

So the good news is we don't have really much exposure to lumber prices. That's where the treaters on the PC side of the business, that's where a lot of their risk is at. And so we are a little -- we are basically at their mercy in terms of how they're working through and managing that disruption in the market. There have been businesses that have been lost on sudden changes in lumber pricing, and so they're always pretty wary about how they approach an environment where pricing is moving up and especially when it's up in the territory that it is at now. So they need to be very, very careful about ensuring that they are moving products through as quickly as possible and not keeping a lot of inventory on hand and just being very careful about their purchases. So we're seeing that in the short term have some impact on demand. And as -- again, as construction season begins to tick up, as there's more pressure coming from the retailers on needing products, I think, like I said, something is going to have to give here out over the next month or so. So I would expect that even with higher lumber prices, demand will pick back up in that piece of the business as we need to serve what has been, again, a pretty feverish market for wood treatment preservatives on the residential side. But like I said starting out, we really have no exposure to that dynamic on the PC side of the business. In RUPS, we -- through our contracts, we, again, have an ability to work with our customer base on the Class I side to manage through that process with the passing on of those costs into that market. The Commercial side is where you're basically putting inventory on the ground and you're buying untreated lumber for future treatment that provides some level of risk. But overall, we dealt with that situation time and time again. It will result in various impacts on the business throughout the years. But overall, unless it becomes significant and severe, we don't expect it to have an impact on our business that can't be overcome through other actions that we've been undertaking. So all in all, lumber variability in pricing is part of our business, but from a risk standpoint, we don't carry much of that risk in terms of our portfolio. So we feel, again, overall, pretty good about things, but any impact on us will really end up coming through as a result of its impact on the ultimate demand from customers and their willingness to take on the additional price increase. They tend to get there at some point in time, sometimes maybe not always at the beginning as they try to hold out for a correction or a move downward, but that's a short-term issue that we'll just have to monitor and work through.

Right. And then in the CMC business, it seems like some of the margin dynamics should be turning positive. We're seeing more steel production and, therefore, more coal tar availability. We're seeing more aluminum production. And we're seeing some recovery in oil prices, which can sometimes serve as an indicator of where your pricing is heading. To what extent are you maybe being a little bit conservative in your outlook for CMC margin given those dynamics at play this year?

Yes. So I'd say if the current situation is one that continues throughout 2021, then there's probably a little conservatism that's built into those projections. But the tough part with CMC, and we're hedging our best a little bit, is because things can move there or done, and they have in the past, and so what's going on in January and February is not necessarily an indication of what will be going on in July and August or October, November. So again, we're -- we need to hedge our bets somewhat in terms of not getting overly excited about where the markets might be at today and give it more time to develop and see if we, again, can lock in and realize some of the benefits from where things have trended so far early this year. But you're right, the indicators that you mentioned are all positive indicators for the most part for our business segment there, and we'll realize benefits as a result of that. If it's something that stays in effect and continues throughout 2021, then there probably is some additional upside on the CMC side.

Our next question comes from Liam Burke with B. Riley FBR.

Leroy or Mike, your growth in productivity and investments, if I look at the return that you'll get on an annualized basis, they're pretty high. I'm just assuming the high and low end of what you've been guiding to. But could you give us some detail of what some of those initiatives would be?

So yes, Liam, there's a few different categories we can point to. One is the North Little Rock expansion. So that expansion, which we expect to have completed near the end of the year, will lower our cost footprint while also giving us an opportunity to increase capacity there to take on additional volume. That's a big one. In fact, that's our biggest expenditure as part of that category for the year. We have some drying capacity that we're adding in our Utility business, so that will lower our cost footprint and actually give us some securities of supply in that business segment. We mentioned converting one of our facilities over from penta to the CCA/DuraClimb preservative system. That will provide some benefits for us as well as increase the volume of our CCA/DuraClimb product that our PC business produces. Even within the maintenance side of our capital program for the year, we have dollars in there that are geared towards maintenance and improvement of our safety footprint that also will have improved operational flexibility and bring about some returns to them. So those are a few of the buckets that I would point to, Liam. There's a number of good things going on from a capital standpoint that add $1 million here, a couple of million dollars there. And we have a nice backlog. Actually, it will carry out into 2022 as well.

Super great. And in terms of looking at assets for sale, I mean, you finished the -- you closed out on Follansbee. Is there anything else within the business segments you see as an opportunity to raise cash?

Sure. I mean we have -- probably the primary one that's sitting out there right now is our Denver facility which we closed as part of the consolidation in the North Little Rock. And so we're working through that process there. We have other sites that are on the smaller end of things that we've been holding on to, that we expect to monetize at some point this year, which will add to the numbers. But the biggest one that's sort of sitting out there remaining for this year is the Denver facility.

Our next question comes from Chris Shaw with Monness, Crespi.

I think Mike asked most of my questions. But one other question, what's sort of the net of your added -- so if we get back to the normal, everyone gets vaccinated, the world returns to somewhat normal, the net between your added costs from COVID and your reduced cost from COVID, say, the travel and stuff, when those all sort of come back to normal, is there a net effect at all? Or is it all just sort of balanced out?

Yes, this is a good question, Chris. Yes, I think there's some net, I think, increase in our costs as some of the costs that have been suppressed throughout the pandemic come back. Certainly, we've been taking costs on in terms of different investments we've made in employee protection and the disruption we've had to the efficiency and productivity of our operations. It's tough to say how much leakage we've had on that side of things, but we've mentioned about the fact that the $10 million or so in savings that we saw from a SG&A standpoint year-over-year, yes, there's a good portion of that, that is going to begin coming back this year, and it's built into our forecast. And in regards to probably an uptick in legal costs, an uptick in -- some uptick in probably travel as we get to the back half of this year, a little bit of an uptick probably on the compensation side as we begin to add some personnel that we've held off on throughout the pandemic, so we've talked about the fact that a lot of that $10 million is going to work its way back in over the next year or two. But like I said, that's built into our projections. The tougher part to get our arms around is the pure dollar impact that we've seen from the pandemic on our operations, which, again, as things do begin to normalize, we will see some benefit from that, that will serve to offset at least a portion of those costs. So net-net, the 2 things offset each other. It's possible. It's possible. I would imagine they're probably far off in terms of the impacts that go both ways.

Got it. And then can you just remind me what your thinking has been or is currently on the reestablishment of a dividend at some point in the future? Is there -- are you looking at maybe a debt level, a certain debt level to start considering it? Or is it all sort of independent and we'll find out when we find out?

Well, I mean, it's certainly one of the deployment measures that we evaluate, and it hasn't gotten serious consideration as we've been putting money into some of the larger acquisitions and then working to get our debt paid down. The fact that I don't necessarily see, if you will, a significant acquisition on the horizon, like Performance Chemicals or our UIP business, there's a much greater likelihood that we'll be getting down into a leverage category that will open up doors to potentially reinstituting a dividend. But at this stage, we haven't really had much of a serious conversation about it just given the other priorities we've had for cash. So like anything, we'll evaluate it in the context of what benefits we have from putting money back into the business, like we're doing this year, versus small tuck-in acquisitions, versus share repurchases. So I guess, yes, you have to stay tuned, and we'll see if at some point in time, it makes sense for that to be another element to the story. But at this point, I really don't have much of an update to give relative to a future dividend.

Our next question comes from Laurence Alexander with Jefferies.

I guess, first of all, you flagged a few different gives and takes for 2022, the full effect of the registrations of some of the products needing to catch up to the copper prices on the feedstock side. Can you give us a sense for what you see as kind of the net headwind that you need to offset and the levers that you'll be pulling besides just end-market growth to offset those? And secondly, could you update sort of your thinking on interest expense and the tax rate, if you found any room to maneuver on either of those?

Okay. Sure. So Laurence, I'll address the first part of your question before handing it over to Mike to talk about the interest in tax. On the PC side of the business, the issues we're facing in Europe around some of the reregistration of our products is -- I'll just say that business segment is not a significant contributor overall to that particular business segment. So while it's -- while the impact would be material to the European piece of the business, it's not necessarily material to the impact of the overall Performance Chemicals business. And we are working on different products for introduction into the markets over there that -- and looking at what we can do to, again, improve our efficiency and cost footprint over there to work through sort of this temporary short-term situation. So that one, not a significant worry overall in relation to our overall businesses. But the copper headwinds, so we won't deal with them this year. We -- next year, we have a good portion of our copper requirements already hedged fairly favorable prices. So there's a portion of it, I don't know if it's half or something in that range in terms of -- at this point, we would be subject to where the market is at. And then moving on into '23, we really don't have anything at this stage significant hedged. So you're talking about some sizable headwinds in that market that are going to have to get recouped. If you figure that we're, again, consuming anywhere to around 40 million plus pounds of copper in a given year and with where current prices are at, you're talking about something that's in that $40 million to $50 million range probably of impact that we're going to have to work through…

And this is Mike, Laurence. From an interest expense standpoint, we had our interest expense in 2019 was $62 million. The year we just ended, 2020, it dropped to $49 million, so we had a nice $13 million drop. And we're expecting in 2021 for that to drop further. And I think my best guess at this time is somewhere in the $42 million to $43 million range on an annual basis. First of all, in 2021, we're going to have a full year of lower interest expense, where we did not have a full year in 2020 because interest rates start dropping with the COVID pandemic environment. So that's in our favor. We have paid down a lot of debt in 2020, so we're going to have lower borrowings going forward in 2021, which will help. And in addition to that, most of our bank covenants are improving rather dramatically, and they're tied to our variable pricing as we have a grid over LIBOR. So as those covenants improve throughout 2021, we're going to see our pricing -- our variable pricing drop also. So from an interest -- that's kind of a recap of our interest expense. From a tax standpoint, the effective tax rate, it was low in 2020 at 20%. A lot of the onetime changes to the CARES Act and more clarity that we picked up and some onetime items that don't repeat themselves. And we forecasted for 2021 27%. We think that's probably a little conservative. That's on the high side of what I would call normal tax rates. We're always looking for ways to reduce our taxes. And again, that could be a little high. It wouldn't surprise me if our effective tax rate would come in 1 point or 2 below that in 2021. And again, using the 27% rate versus the 20% rate, I think Leroy mentioned it earlier, that gives us a $0.50 headwind on our EPS. And again, we will drive that effective tax rate down as low as we can. And that's kind of a monthly and a quarterly objective of ours.

Our last question comes from John Basler with Basler Capital Partners.

Congratulations on the great execution in the tough environment and continuing to move towards more of a wood treatment business. And then when I look at your revenue mix being more weighted to Performance Chemicals, which has a much more stable revenue and margin history, and then the reduced debt level, I can't wrap my head around your valuation. And if I apply an EBITDA multiple of your largest competitor in the PC and RUPS segment to the valuation, the valuation is higher than your current EV. So I'm wondering what levers you can pull to realize the value of the business transformation that you've already executed on. Could it make sense to separate the CMC business in that respect?

John, first of all, thank you for the compliment. And yes, I mean so the points you bring up around valuation is one that is personally frustrating because, like you've articulated, I think we have executed on what we have laid out to investors over the past 6 years. I think we've done what we said we were going to do, and we've hit on most every milestone and the goal that we've laid out, yet we -- for some reason, we can't seem to generate -- have that generate into a recognition of greater value of the overall organization. The points you bring up in terms of potential separation of the business, the ironic thing is, right, when you look at the business, and I understand some of the historical perception around the CMC business, which certainly was accurate when you look at that business and what it was 2015 and prior, but that business is an entirely different business today in terms of operations and the footprint and the stability of that business. And even throughout the pandemic, we were -- while revenues came down, we were able to maintain margins for the most part. And there's actually pretty good upside moving forward with some of the things that we have going on in that business. So it is part of the overall integration of our wood treatment technology portfolio. And I would hate to have to separate the business to try and unlock value because I think it is an integral part of the overall business model, and it does add to the enduring nature of our business model. So that is, for me, a sort of a last-resort option. And at this stage, we're obviously trying to do everything we can to get the story out…

That's very helpful. And then I wonder if we could look at the copper price increase from another angle. So in the petrochemical industry, rising oil prices tend to lift all boats. And is there a potential for higher earnings on a dollar basis even if the margins are slightly lower, thanks to higher copper prices, as you say, driving higher treating pricing across the industry? I mean I see your base -- you as a base materials business, that should benefit from inflation.

Yes.

And we have oil prices starting to creep up, which I know helps you. So tell me if I'm wrong there.

No, no, it's a fair point. That's a fair point. It's getting through the sort of the ingrained culture within the treatment business in terms of how these swings have been handled in the past. And again, we're laying that groundwork now and having -- beginning some of those tough discussions today and not leaving it until we get to the day when, all of a sudden, the hedges run out and you're in a current pricing environment. So that will just continue to develop as we continue to have those discussions. But the point you -- again, you bring up is a good one in that, yes, to the extent we're successful in sort of the industry accepting the cost of where this commodity has gone, that we could raise -- see some increase in revenues and profitability with a slight contraction of margins as a result but overall be in a better spot.

Got it. And then could you talk about how your segments might benefit from an infrastructure spending bill? I'm assuming there's nothing like that in your guidance, but there could be some grid hardening or otherwise.

Yes, there's not anything in our guidance for that. And you're right, there's -- we touch on and there are at least on the fringes, if not in the core of many pieces of the infrastructure market. So certainly, if there is a lot of money that is going into infrastructure and federal subsidies and things like that, obviously, it's going to lift a lot of different industries. It's going to have benefits within the freight rail markets, which will, in turn, have benefits within that piece of our business. Certainly in terms of hardening of the grid, it will have a positive impact on our UIP business. In terms of the impacts within steel and aluminum and pushing demand in that area, that also obviously spill back over, I think, into benefits for our products. So yes, there's -- I don't see any way in a large investment in infrastructure wouldn't have a nice -- create a nice tailwind for us. So we're rooting for it and supportive of it and looking forward to, hopefully, something getting ultimately pushed through there.

That makes a lot of sense. The last one for me is I wonder if you could touch -- explain the conservative debt pay-down target. Is that just a function of the growth opportunities for your capital? And then how quickly would you expect to achieve your longer-term leverage target? Obviously, if you're going to be 2.5x levered by 2025 based on your $300 million EBITDA target, but trying to get a sense of if you get there faster through free cash flow being directed towards debt pay-down.

Yes, John, this is Mike. I think the $30 million that we're projecting is a function of the higher CapEx spend in '21 versus '20. When you take a look at what we generated in 2020, and the debt pay-down was about $130 million. And $65 million of that or half of that came from the sale of our China operation, and the other half came from operations. And our CapEx spending for that other -- the $65 million that we generated was slightly under $70 million. And even with the net CapEx that we're projecting of between $80 million and $90 million, that's where the difference is coming from. I think it's a little conservative, but we also, for the first time, have a fairly substantial projected increase in sales, which is going to impact our working capital a little bit, and it's going to require some working capital monies. We're projecting -- we came in at about $1.67 billion in revenues, and we're forecasting somewhere be -- a wide range, but somewhere between $1.7 billion and $1.8 billion in revenues in 2021. And with that is going to come some cash needs from a working capital standpoint. Our inventories, our receivables, they're going to rise a little bit or at least we're projecting them to rise. So when you wish all that through, we came up with the $30 million debt pay-down. If we, for instance, have higher EBITDA in 2021, that will increase that debt pay-down as well. But that's our best guess at the moment. And I would say quite frankly that, that's fairly on the conservative side as well.

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

Yes, I just want to thank everyone again for participating on today's call. We really appreciate your interest in Koppers, and hope you continue to stay safe throughout the pandemic. Thank you.

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