Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers Q2 2021 Earnings Conference Call and Webcast. At this time all participants are in a listen-only mode. Following the presentation, instructions will be given for the question-and-answer session. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Quynh McGuire. Ma'am, please go ahead.

Thank you, and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our second quarter 2021 earnings conference call. We issued our press release earlier today. You may access it 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 November 6, 2021. At this time, I would 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 its press release, which is available on our website, reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer. I'll now turn the call over to Leroy.

Thank you, Quynh. Good morning, everyone. We'll start on Slide 3 where there's a save-the-date for our upcoming Investor Day scheduled to be in Pittsburgh on Monday, September 13, starting at 9:00 a.m. Eastern Time. Now while there will be an option to join the meeting remotely, we hope that the current developments regarding COVID tamp down enough so that you feel comfortable enough joining us in person for this event. Of course, we'll continue to closely monitor health and safety guidelines regarding the COVID-19 pandemic, and we'll have appropriate safety protocols in place. Invitation with specific details of the event will be distributed in the coming weeks. Now as mentioned, we're also providing remote option to attend. So the Investor Day event will also be accessible virtually through a live webcast to include video, audio and presentation slides. And for those attending virtually, there will be an opportunity to participate in real-time with the question-and-answer session following the formal presentation. We'll also provide a replay of the webcast on our website following the Investor Day event. Now let's move on to Slide 5. Koppers continues to serve in an essential role, such as keeping railroads safe so they can transport critical goods, helping to provide power and connectivity to homes and businesses and keeping our infrastructure strong and reliable, both home and away. Our team members take this responsibility seriously, and we are incredibly proud to do our part to keep the global economy moving and growing. Now let's take a look at our Zero Harm activities and results, as shown on Slide 7, which details the changes in guidance recently outlined by the Center for Disease Control due to the rise in COVID-19 cases from the Delta variant. The Occupational Safety and Health Administration followed suit, directing all…

Thanks, Leroy. Let's start on Slide 17, that shows consolidated sales were $441 million, an increase of sales from $437 million in the prior year. Sales for RUPS were $196 million, down from $210 million. PC sales rose to $146 million, up from $137 million, and CM&C sales came in at $100 million, up from $90 million. Moving on to Slide 18. Adjusted EBITDA for the first quarter was $66 million or approximately 15%, up from $60 million or 14% in the prior year. Compared to the prior year, adjusted EBITDA for RUPS was $12 million, down from $23 million. PC EBITDA rose to $35 million, up from $29 million, and CM&C EBITDA improved to $19 million, up from $7 million. On Slide 19, sales for RUPS were $196 million and declined from $210 million in the prior year. This was primarily due to lower Class I crossties treating volumes and customers deferring purchases because of price increases associated with a temporary shortage of untreated crossties. Some sawmills shifted their capacity to serve higher demand construction lumber. These decreases were partially offset by an increase in the crosstie disposal business. Moving on to Slide 20. Adjusted EBITDA for RUPS was $12 million in the quarter compared with $23 million in the prior year. This was driven by lower treating volumes, which resulted in reduced absorption of fixed cost. We experienced lower volumes in our Utility business caused by transitioning the production from our former facility in Jasper, Texas to our Summerville, Texas plant. Also higher raw material costs impacted profitability. A bright spot was our Australian Utility pole business, which achieved higher margins in Q2. On Slide 21, sales for PC were $146 million in the quarter compared to sales of $137 million in the prior year. In Q2, we…

Thanks, Mike. Now I'd like to give a little bit more color on each of our business segments, which includes some feedback from our customers and our suppliers. So starting with Performance Chemicals on Slide 28. The moment we knew was coming at some point in time, began actually occurring in the midpoint of Q2 as the U.S. lumber market finally peaked and then began a precipitous descent. Lumber futures are currently trading at 1/3 of their peak from mid-May, and everyone is still a little skittish as to where things are going in the near term. This has led to treaters and retailers trying to push their high-cost inventory through the system while working hand to mouth on replenishment, so a not to find themselves heavy on inventory on the wrong side of a dropping market. And while you can never quite be entirely certain, according to our industry contacts, we're at or near the bottom of this curve. And it's correct and the treaters are expected to gradually increase their buying and treating activity within the next month. To provide some perspective, while our Q2 was a record sales and adjusted EBITDA quarter for PC, we did see a 17% drop in sales from May to June and even more pronounced drop in EBITDA for that period as business pulled back. Q3 thus far has been more of the same, but what we are being told is that as lumber pricing moderates, and people get back from their vacations, demand is expected to pick back up as DIYers and contractors push forward on their backlog of projects. Also, we're generally seeing favorable demand in 2021 from our international markets, and they will exceed their pandemic effective 2020 results, which will help offset some of the reduced demand that…

[Operator Instructions] Our first question today comes from Mike Harrison from Seaport Global. Please go ahead with your questions.

Hi. Good morning.

Hi, Mike. Good morning.

I was wondering if we could revisit some themes in the Performance Chemicals business. It seems like there's really a lot going on there between you guys talking about the kind of the peaking of North American demand or U.S. demand and the negative impact of lumber price volatility leading to some destocking. It sounded like you are expecting your volumes at least to maybe pick up as we get into the fall and people come back from summer vacations or whatnot, even though you saw this decline from May into June. So maybe if you could give us a little bit more color there, and I guess, talk about how you're feeling about underlying remodeling activity and demand levels into North – into next year in North America right now?

Sure, Mike. Yes, I'd say that everything that you basically described is how we're seeing things. And that's how we described them, I guess, in the prepared comments, right? It was – we knew that this could not be a continual ride to the top, right, and that it would have to moderate and drop at some point in time, not knowing how far the drop would be, nor how fast. But we knew it was coming at some point, right? And I think what – just reached a point where pricing got so out of whack, and things started opening up in North America, which provided people opportunities to do things they haven't been able to do in a little over a year. So it's a lot easier to have projects done when you're sitting at home with nothing else to do and nowhere else to spend your money. This year, the combination of higher prices and other options, I think, is what ultimately led to pricing starting its drop there as we started to head into the summer season. So when that happens, and we've talked about this really over the last four quarters. And we did see this to a much lesser degree, I think, a couple of years back. When you see a rapid increase in the lumber markets like we've seen, whenever it begins to drop, your traders and your retailers tend to stand on the sidelines until they can see that bottom out a little bit or reach some level of stability where they feel more comfortable, again, going back and building a little more inventory. So you can't afford to get caught with too much treated product in a market that is falling significantly. We've already seen where there's several companies in the…

And at this point, is it still too early to say what remodeling activity is going to look like and demand could look like in the next year?

Yes. I mean, the forecasts are all strong. I mean, again, there is a back – there is still a big backlog of projects. And I think the fact that pricing has moved down is only going to, I think, provide greater assurance that those projects are going to get done and maybe even more getting additive, some people were standing on the sidelines as pricing moved up in the way it did. So I think there's still some general optimism as you move into next year that the market is going to remain pretty healthy.

Okay. And in the RUPS business, you mentioned higher raw material costs. And I think you explicitly mentioned transportation costs, but you guys have a lot of materials that you back integrated into in your other segments. Can you just remind us how that transfer pricing works for creosote and the CCA that you sell internally? And I guess, outside of the transportation, what other material costs were you seeing impacting your RUPS business?

Yes. For RUPS, it's really in the untreated crosstie market. That's where it's at, right? We're at levels of purchases that are anywhere from 25% to 30% down year-over-year, on the untreated side, because the market for other uses of hardwood have pushed saw millers to producing other product, which, again, they'll produce what you want if you're willing to pay the price to have that done. And so it's pushed the market to have crossties up a good bit. And the industry, in general, the rail industry in general has been reluctant to really aggressively move up in line with that. So we're only able to get a certain proportion of what they really would want or need to be putting on the ground to get air seasoned. Trucking, in general, right, and labor, both trucking and labor, and I'm not talking about just labor for truck drivers, but labor in general is an issue that we are seeing. And again, you're probably hearing it from a lot of the companies that you follow that is an issue. We're fortunate in some respects that we do have our own trucking fleet for Performance Chemicals and for UIP and in our maintenance-of-way business. We do not operate our own fleet in RPS. Much of what we do there gets moved by rail, but there is pieces that – in terms of product that's getting moved by truck, and we all have to rely upon third-party carriers and pricing is moving up. There's no question about it. We're seeing it across the board. So it's worked its way in to that business and affected it. But the lion's share of our issues that we're dealing with right now is just getting untreated product and on the ground.

All right. And then last question for now is on the repurchase authorization. Can you talk a little bit more about your expectations for timing with your debt level currently still above that two times to three times target? And then I think the press release mentioned a signal from the Board about consistent free cash flow generation and the confidence level there. I was curious how the Board viewed a repurchase authorization against the establishment of a regular dividend going forward?

Yes. I think the way that the Board view this is – there's a lot more flexibility in a repurchase program. And as we've continued to make solid progress on generating cash flow to reduce our debt, it's opened up the door for more opportunities for us to deploy capital in different ways. So we've established this program to essentially give us the option to the extent that our shares remain undervalued, and we continue to make the progress that we're making in our cash flow generation and overall debt reduction. Dividend, we continue to look at dividend as an option, but dividend is one of those things where when you make the decision, when we make the decision to reinstitute that, that's something that is going to be recurring, and I think to a large extent, expected to continue to grow. So we want to be – we are very thoughtful about how we approach this, but this one seems a little easier to take on at this point given that we're not obligated to repurchase shares if we don't feel – if we feel that we have better opportunities to deploy that capital, but this gives us the option to be able to do it, and it opens up a bigger window for us as our old share repurchase program didn't have a whole lot left on it at this point. So that's my comments on sort of our Board's view of it.

All right. Thanks very much.

Very well.

Our next question comes from Chris Howe from Barrington Research. Please go ahead with your questions.

Good morning, Leroy and Mike Congrats over to Jimmy on the announcement this morning. And some of my questions have been answered, but I kind of picked up something here on Slide 30. You mentioned the projected infrastructure spending for improving broadband availability; we kind of have a sense of the investment that's being made in broadband with the rural digital opportunity fund and other things out there. And as we consider infrastructure spending also in the context of some of your other businesses, some of your non-core assets that you've talked about before having done well, perhaps there's some benefit as funding goes toward things like bridge repair, et cetera?

Yes. There's no question, I think, that with the focus on spending and strengthening the global infrastructure and especially with what's going on here in the U.S. around that, that will absolutely have a benefit on our business model, right, which serves many, many of those markets. So the efforts to expand broadband, to harden the infrastructure, strengthen the infrastructure there, I think we'll absolutely see benefits from that in our UIP business. We certainly expect we'll see benefits from those bills and really each of our business segments; they all touch on that in certain ways. The Devil is always in the details. So getting the bill passed and seeing where the money is going to be flowing is going to be key. But we like where we're positioned in terms of how our businesses are involved in many of those markets that should see some money flowing to it.

Okay. That's helpful. And then moving to the PC segment. You mentioned the challenges right now with lumber pricing and the sell-through of inventory as these prices have declined. But you also mentioned some other markets like Chile and Brazil. Perhaps, can you talk about some of the external opportunities outside of what we know in the market today?

Okay. I mean, we often – we spend most of our time in that business, talking about the North American business because it is the lion's share of the business, both from a sales and an earnings standpoint. But the other markets internationally are – they're nice markets. They're just smaller at scale. We're pretty strong in South America as it is, but we can do a lot to strengthen our cost position down there. And so we're looking hard at adding capacity, adding our own capacity on the ground down in Brazil. And so we're hopeful that over the next, say, 12 to 24 months that we'll be in the business of actually producing product down there into what has been a rapidly expanding market. So there's a lot of benefits there. On the European side of things, we – that's the one market where we're a second-tier player and have opportunities to grow. So there's been a lot of change over in the European market in terms of transition from – out of certain products, and we've seen certain of our products not get registration – not get their registrations extended, and it's caused us to look at and move into other product categories. What we're hopeful for is that we will be able to introduce our MicroPro product in a big way, a bigger way over in Europe. And if that's successful, we think we can make inroads in capturing market share there as well. Australia and New Zealand is a very mature market. We hold strong positions as it stands there today. Over in that area of the world, it's really all about managing our cost profile and looking at selective opportunities to possibly pick up additional business, but it's not necessarily a growth market, certainly, we've seen it here in North America and really South America as well.

Okay, Thanks. The approach that you're taking in Latin America, I'm just referencing some comments that have made – have been made in the past, just about the different competitive dynamics, perhaps some competitors treating the business as more of a noncore part of their business. Is that a response to kind of what you're seeing in the market there that there's some low-hanging fruit for Koppers?

Potentially. I mean, and some of that, I think we may have already been able to pluck in terms of the low-hanging fruit. But there's some strong local competitors down there as well. But for us to really improve our overall position, we have good products, good technology, but we don't have a solid operating base that's really under our own control in that space. And so that's an area where we think we can really move the needle in terms of improving our market footprint and cost position. And again, when you think of the overall PC picture, the improvements there are still going to be dwarfed overall by North America, because North America is just such a huge market, but it will be meaningful for that business line.

Okay. Just one last question, if I may, and then I'll get back in the queue. Just with the dynamics that we're seeing across all types of companies. You mentioned the labor shortage and other things in the environment. Is there a way to kind of size the push and pull dynamics of orders in the quarter? And kind of what you're seeing there in terms of how that may impact how backlog is realized coming – soon in the quarters to come?

Which particular market or business are you referring to?

Just across the business, if there's a way to size kind of what impact the current environment may have on orders that were deferred?

Yes. I'd say for us, we're not really dealing with deferral of orders as a result of the issues that we're seeing in the labor markets. We're managing that in really our core businesses. Where we're getting really impacted by labor, I mean – I'll just say, in some cases, our plant managers are magicians in terms of being able to manage through some of the shortages in labor that they have been experiencing. But where it really hits us is on our maintenance-of-way side of business where we have crews out. And when you're experiencing a tremendous amount of turnover and you're having difficulty getting others to come in and take roles, it makes it incredibly difficult to gain any momentum and efficiency in operations because you got to spend a lot of time on-boarding and training, and those are inherently dangerous roles to begin with. And so you can't just take somebody, hire them on day one and throw them out there on a bridge. So that's where we've seen probably the biggest impact in terms of our impact on efficiency and profitability. And the other areas, it hurts. And if you talk to any one of our plant managers, they'll tell you they wish they had a certain amount of more positions filled, but they're working around it.

Okay. Thanks for taking my questions.

Thank you.

Our next question comes from Liam Burke from B. Riley FBR. Please go ahead with your questions.

Good morning, Leroy. Good morning, Mike. Leroy, you broke out the – or you have been the productivity-enhancing CapEx that will generate future EBITDA. Could you give us a sense of the timing? You put out a $25 million for the first half? How quickly does that investment follow through?

A second there, Liam, I'm catching up with you. So – okay. So yes, so a good portion of the $25 million that you see that we've outlined in the first half, a good portion of that has gone into the North Little Rock expansion, as well as some dry kilns that we've put in to our UIP locations. So from the dry kiln standpoint, we'll start to see some benefits from that in the second half of the year. In terms of the North Little Rock expansion, we're not going to see anything on that until we get out into 2022. So – and that's what we try to outline in terms of the EBITDA expectation from those investments that we're making this year. The lion's share of that is stuff that's going to be realized heading out into next year.

Okay. Great. And you mentioned on the Summerville plant consolidation that there was a – affected the sales of utility poles. But you also mentioned that those sales lost were lower margin. If I'm looking at the combined full capacity activity, is that – are you expecting to see better margin out of the product?

Yes, no question about it. So the business model that we were operating in Texas was one where we were operating a site location for the Texas electric co-ops, and that was in Jasper, Texas. So we had limited ability to really move our profit levels up on the sales that were running through that facility. There were – and so for us, it made all the sense in the world to be doing production at our own plant, right? And we treat crossties in Summerville; we already have assets on the ground there. We have extra cylinder space, and we can gain some economies of scale there. So that's why we ultimately ended up getting out of that particular arrangement and moving to try and build our own book of business at Summerville using assets that we already have in place and deployed. So as we continue to build that book of business and gain some volume there, we'll benefit from the economies of scale and operating our own location, Liam, and we'll see better margins as a result.

Great. Thank you, Leroy.

Yes. Thank you.

Our next question comes from Chris Shaw from Monness, Crespi. Please go ahead with your question.

Good morning, Leroy. How you doing?

Hi Chris.

Ask a little bit about that RUPS, specifically railroad ties side of the business. A couple of things, you said that this has happened before in terms of high lumber prices causing, I guess, a quick dip in demand for untreated ties and all. Were you not seeing that like last – I guess, on the first quarter call around that time or this happened really suddenly? I mean I thought lumber prices were pretty elevated there. Was it not expected back then at that point?

Well, so you can't confuse the softwood market with the hardwood market, because they don't always run in sync with each other. In fact, what's going on in the hardwood market has really been caused by what's going on in the softwood market, because it's created a greater – a greater demand for softwood at those elevated prices has really pushed saw millers to be more incentivized to cut more of that product. And so again, to get them to cut the hardwood product, you're going to end up having to compete with that and pay more. We did see that in the first quarter. We talked about it in the first quarter, actually, that our – we were seeing our volumes starting to come down from prior year as a result of that impact. I'd say the change from one quarter ago to now is that was sort of in the early parts of it. And what we weren't sure, again, with all the rapid ups and downs and changes as a result of the pandemic was whether that was going to be a short-term blip or something that might extend to be a little bit longer. And so certainly, we've experienced it through here this second quarter and into the third. So it's going to take a little while to shake out, but we do think that by the time we head into 2022, maybe even by the time we get into the fourth quarter, we'll start seeing things pick up for us as, again, things start to normalize a little bit. But nowadays, the difficult part is trying to figure out what is normal, right, because so much has changed and continues to change. And the short-term market shocks from what we've experienced this last year have been hard to predict. And what we're trying to do is just remain agile so we can adapt to them. And so our folks are working on ways that we can try and secure our market for untreated product that we know we're going to have moving forward and to be – to do it at a competitive price that we can be compensated for. So in this market, it's all about trying to balance the risk with the opportunity. And we like it as the fact that we're protected for the most part, from a cost standpoint, but the downside is, is we don't always control – we don't always control the decision to go out and get the product.

And does – the RTA forecast for growth this year, as you said is mostly, I think you said before, mostly, should be the growth coming from the commercial side of the business. A couple of things there; are those, the RTAs in the beginning here, did they update those at all for what's happening during the year? And then secondly, has your – has the drop in sort of demand for the untreated ties, has it been any different between the commercials and the Class I, or is it pretty much across the board?

Yes. So they do update that throughout the year. Where the commercial business differs is that's the commercial business for the most part is a black tie model where we are going out and making the decision to buy the product and put it on the ground at whatever price with an expectation that we can obviously recoup that plus our margin on the sales side of things. And you have that period of time of six to nine months while those ties are on the ground and air drying. So we do have an opportunity to be more aggressive in moving price up in that market to the extent we think that we can get that in pricing. We haven't yet seen that come through in terms of where the bidding process has been. We're thinking that as things move forward here in the back half of the year, we'll start to see commercial pricing move back up, which will help support the justification of the higher pricing on the untreated side. But as it relates to Class I, even in a black tie model state, they're still giving a signal as to sort of what they want. We're still somewhat protected on the untreated side of that business in terms of getting the signal from them as to where they want to be or where they're willing to be from an untreated standpoint. And so we use that as our basis to go out and ultimately buy the ties. So it's a different dynamic, and once we see commercial pricing move up in a healthy enough way, I think we'll see some of that. We'll see some of the supply on the untreated side also pick up.

Got it. And then can you just remind me on maintenance CapEx, what you guys think that is –assuming I have $50 million in my head and the core, do you – I forgot, have you talked about any bigger growth investment capital projects for next year at all for 2022?

Chris, this is Mike. From a maintenance CapEx perspective, I think on a normalized basis, after we get away from some of these productivity improvements that we have in 2021 and 2022 from a capital perspective, they were in that $60 million to $65 million range per year for maintenance CapEx.

Okay. Great. Thank you so much.

You're welcome.

Our next question is a follow-up from Mike Harrison from Seaport Global. Please go ahead with your follow-up.

Yes, just a couple of extra ones for me. First of all, you noted an insurance recovery in the CM&C business. Can you quantify how much that was?

Yes. Mike, this is Mike. That was about $3.6 million in the quarter. What transpired in the quarter was we had a loss of production in – beginning in late March and extended into most of April and a little bit of May. So we have the negative losses in Q2, and we had that insurance reimbursement that helped us. It's about a 50% insurance reimbursement. In total, what we had in – again, the latter part of Q1 and Q2 was basically a loss of about $9.5 million in profitability. We have a $2 million deductible on our insurance program, which dropped that down right around 7, a little over 7. And the $3.6 million was about half of what we expect. We expect the other half of the insurance proceeds to be either in late this year 2021, although it may go over into January or February, that reimbursement in 2022.

And Mike, just to be clear, because we – that recovery is essentially replacing part of the profits that we lost as that plant was down for about a month or so. So there was business that was lost during that period of time. There are certainly costs that were incurred as a result of the plant being down during that period of time. So I don't want you to think of that as sort of – I don't want you to think – we'd have pulled it out if it was a one-time item. It is a – we view that as a replacement of profits lost as a result of that plant being down.

So it's covering a loss that you had, but if you recover some more later in the year, it's definitely going to be out of period. Okay. That makes sense.

It will be out the period. But again, we were – our quarter, if we were running normally and did not have the event take place, there would have been some additional profit that would have been in the first quarter as well as in the second quarter.

Understood. Got it. And then last question I wanted to ask about, you mentioned in the Performance Chemicals business, the copper costs would be expected to be higher starting in mid-2022. I guess, maybe just an update on your copper hedging activity for next year and maybe how we should think about the margin impact of those higher copper costs, maybe offset by some pricing that you expect to put in place?

Yes. Mike, let me take a crack at this. The hedge price that ran through our P&L in 2020 averaged about $2.75 a pound. We have been all throughout the year, 100% hedged for 2021. And that P&L price running through the income statement dropped to $2.62. So we had a tailwind from $2.75 a pound to $2.62 a pound. Again, 100% hedged for 2021. In 2022, we're about 70% to 75% hedged. And the price that we have hedged is actually creating a little tailwind for us as well in 2022 because that average price is $2.50 a pound. But again, we're exposed for 25% to 30% of our needs in 2022 that are currently not hedged. I hope that helps.

That's helpful. Yes, thank you.

You're welcome.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to President and CEO, Leroy Ball, for any closing remarks.

I just want to thank everyone for taking the time to participate on today's call. I really appreciate your continued interest in Koppers. Stay safe. Hope to see you at the Investor Day in September.

Ladies and gentlemen, the conference has not concluded. We thank you for attending today's presentation. You may now disconnect.