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Text: I'm Quynh McGuire, Vice President of Investor Relations.
You may access it via our website at www.
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.
References may also be made today to certain non-GAAP financial measures.
Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer.
We'll start on Slide three 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.
Now let's move on to Slide five.
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 seven, 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 U.S. employers to adhere to the CDC's updated guidelines, and we've communicated these updates to our employees and have adopted them at each of our applicable locations.
The primary driver of mask requirements is now based on a county-by-county measurement of disease transmission rates.
A high rate, which is red or significant rate, which is orange, means masks must be worn by all individuals indoors, regardless of whether they've been vaccinated fully, partially or not at all, or whether they've already been infected by COVID-19.
Koppers has also updated our Zero Harm lifesaving role to reflect these new requirements as described on Slide eight.
In the counties with high or significant infection rates, vaccinated employees must wear a mask in public indoor environments and unvaccinated employees must mask and social distance from others.
These same guidelines are in effect for employees returning to the office.
However, vaccinated employees do not need to mask, if alone in their office.
Intentional violations of life-saving rules could lead to disciplinary actions up to and including termination of employment.
Unfortunately, COVID is not going away quietly and with vaccination rates at our locations ranging anywhere from 22% to 76%, we need to continue to practice good behaviors to keep our people safe.
Another Zero Harm news, as seen on Slide nine, following delays due to the pandemic, we've begun reaching frontline employees directly by rolling out a series of Zero Harm in-person training workshops.
One of the first examples came when our Zero Harm trainer spent time with our railroad structures frontline employees in the Chicago area, conducting workshops, both in a classroom setting and in the field.
Similar trainings have been conducted in Galesburg and Guthrie with more sessions scheduled for the third quarter and the remainder of 2021.
The idea, as always, is to illustrate and illuminate specific steps to prevent exposure to unsafe conditions and practices, but also to an instill an epithet mindset, where every employ actively and intuitively is always looking out for other team members and placing safety first.
We continue to strongly promote employee vaccinations, addressing misinformation with a special video produced in partnership with the Allegheny Health Network here in Pittsburgh.
two expert physicians, neither of whom are affiliated with Koppers in any way, are featured in the video speaking about how the vaccines were developed and their safety and effectiveness.
Our purpose in sharing this video is to help overcome any hesitation or concerns among our unvaccinated employee population.
In addition, our $250 vaccination incentive remains in place.
On another note, the wildfires on the West Coast of the U.S. and Canada have continued their devastation and recently came close to our Koppers Ashcroft facility, forcing employees to evacuate.
Our operation was down for a total of 11 days as Wildcat Fire Services arrive to fight the fires and keep our people and our facilities safe.
The men and women of Wildcat and other fire services like them are amazing, heroic and every other superlative adjective you want to apply to them.
On Slide 10 through 15, we have a number of notable happenings that have occurred in the past quarter.
And I won't go through them in any detail, you can do that on your personal time, if you'd like.
So in the meantime, I would like to turn the program over to Mike to discuss the second quarter results.
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 experienced strong -- continued strong international sales as well as price increases for copper-based preservatives in the Americas.
These positives were partially offset by lower treating levels in North America due to lumber treaters tightly managing their inventory as a result of high lumber prices.
On Slide 22, adjusted EBITDA for PC was $35 million compared with $29 million in the prior year.
The higher profitability can be attributed to higher sales volumes, lower raw material costs from our copper hedging programs and ongoing strong demand in the home repair and remodeling segments.
Slide 23 shows CM&C sales at $100 million for the quarter compared to sales of $90 million in the prior year.
The year-over-year increase was primarily due to higher pricing for carbon black feedstock in Europe and for phthalic anhydride in North America, partially offset by lower volumes of carbon pitch in North America, which was due to a temporary plant outage, lower pitch volumes in Europe and lower pitch pricing in Australia.
Moving on to Slide 24.
Adjusted EBITDA for CM&C was $19 million in the quarter compared to $7 million in the prior year.
This increased profitability was driven by higher product demand, favorable pricing in certain markets, strong operational efficiencies and the receipt of an insurance proceed.
As demand continues to recover, our efficient cost structure will continue to drive higher margins.
Now let's review our debt and liquidity.
As seen on Slide 26, at the end of June, we had $760 million of net debt with $330 million in available liquidity.
We continue to project $30 million of debt reduction for 2021 and expect to be at a 3.1 times to 3.2 times net leverage ratio by year-end.
We remain comfortably in compliance with all debt covenants and have no significant debt maturities until 2024.
Our net leverage ratio dropped to 3.2 times at June 30, down from 3.5 times at December 31, 2020, and it also showed a significant decline from 4.5 times in the prior year quarter.
Long term, our net leverage goal continues to be between two times and three times.
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 we're seeing in North America currently.
In terms of gaining market share, we're seeing customer consolidations in 2021.
It should present new volume growth in the fourth quarter of this year and into 2022, supported by our continued investments in capacity expansion.
From an overall macro standpoint, we're seeing favorable trends that continue to benefit our PC business overall.
Existing home sales in June increased 1.4% from May, marking sales higher than prior year by 22.9%, with all four major U.S. regions experiencing double-digit year-over-year gains according to the National Association of Realtors.
The leading indicator of remodeling activity states that spending on home renovation repairs will reach 8.6% annual growth and surpass $380 billion by mid-2022.
And in July, the Consumer Confidence Index stands at 129.1, the highest level since February of 2020, with consumer spending expected to support robust economic growth in the second half of this year.
Looking at the international markets on Slide 29.
We're working to expand PC sales in overseas markets like Chile, Brazil and others, even as Europe continues to deal with regulatory and supply chain issues.
We do expect copper costs to be higher year-over-year for mid-2022 and beyond, but we remain relatively protected with current hedges in place.
Now if the price of copper does not decline to pre-pandemic levels over the next year, then significant pricing adjustments will need to be put into effect to account for the increase in cost.
Slide 30 highlights our UIP business, where there's a lot of transition happening.
We've been working hard to bring our Summerville, Texas treating plant up on pole production as we exited our operating agreement for the TEC Jasper, Texas plant.
We shipped our first poles out of Summerville during the second quarter and are beginning to build our business organically in the Texas market, which has a lot of upside.
We expect demand to remain strong in the U.S. and Australia throughout the balance of this year, but we will likely experience some limited sales decline due to our Texas transition.
The good news is the sales that are being displaced, were low-margin business.
So therefore, EBITDA should improve as we begin building a bigger book of business for Summerville.
We benefit from the fact that utilities need to maintain their infrastructure to avoid service interruptions, a need brought into sharper focus as more people choose to work remotely.
And as such, infrastructure is spending for improving broadband availability and the utility grid is projected to increase.
Demand is also expected to increase for poles among U.S. utilities for project work and upgrades that were delayed by the pandemic.
Piling business also is opening up with new construction in the Mid-Atlantic region, which will provide additional opportunities.
Wood supply remains strong and pricing steady even as transportation costs increased due to rising diesel fuel costs and lack of third-party trucking.
We're working to pass our inflationary cost increases on, but are currently behind the curve and look to catch up as the year progresses.
And with production of Penta ceasing by year-end, we're capturing market share among customers transitioning to new preservatives by converting our facilities from penta treating to CCA and other wood preservatives.
We're currently in the middle of a conversion at our Vidalia, Georgia plant, and should have it back online by the end of this quarter with the conversion of our advanced Alabama plant lined up next.
In Australia, wildfires have provided a solid demand for poles as utilities need to update an aging network and infrastructure, plus the lack of availability of hardwoods has opened opportunities up for us to market our pine pole alternatives.
There are a number of contributing factors to this year shaping up to be one of the better years our Australian pole business has ever experienced.
Moving on to our railroad products and services business on Slide 31.
I would say I'm generally more pessimistic about the year compared to where I was last quarter.
The pandemic has had an effect on every market it seems, and the effect for this portion of our business has moved from a positive in 2020 as more track work is getting done online with less traffic to a negative in 2021 as pandemic fuel demand for other products produced by sawmillers has pushed up the pricing to get adequate levels of untreated material for crossties to a point where it's affected their buying patterns.
We've experienced this phenomenon a couple of times over the past seven to 10 years, and we'll need to ride it out as supply demand either normalizes, crosstie pricing moves up or some combination of the 2.
Now on the plus side, this is temporary, and we believe will correct itself, but we'll probably not see that until we get out into 2022.
We're continuing to work on securing Class I contract renewals in 2021 with a focus on improving utilization at our facilities.
Feeding into those plants is the ongoing expansion at our North Little Rock, Arkansas plant, which is seeing some delays due to COVID, but we have still made tremendous progress and should be substantially complete in early 2022.
For now, the data from various industry experts are supporting various growth projections longer term.
The Railway Tie Association, for example, forecast 2021 demand for crossties at $18.9 million or four percent -- 4.7% growth and $19.5 million in 2022 or 3.2% growth, driven by the commercial market.
The American Association of Railroads reports total year-over-year U.S. carload traffic increased 9.4%.
Intermodal units increased 17.5% and combined carloads and intermodal units increased by 13.7%.
The AAR added that significant investments have made the industry more adaptable and better able to adjust operational and market conditions.
Koppers wood preservative technologies are central to those network improvements.
Slide 32 outlines our maintenance-of-way segment, where we've accumulated a 50% higher backlog than prior year projects and railroad structures in 2021.
This is expected to provide further improvement to profitability as our pipeline of opportunities remain strong.
This is another area where the labor shortage and turnover has hurt performance and efficiency.
We're working to address a lack of personnel and a relatively new workforce with more crew members anticipated in the second half of the year, but this continues to be a significant challenge.
We're continuing our efforts to expand our crosstie recovery business to additional Class I accounts, introduce other value-added services, lower costs and increased efficiency for our railroad customers.
With all these strategies in place, we expect EBITDA improvement in the second half of 2021 for the maintenance-of-way business this year.
Light vehicle production worldwide is expected to grow 50% in the second quarter according to IHS Markit, but supply issues around semiconductors have not been resolved.
Natural disasters and a factory fire in Japan, along with spread of COVID-19 and a lack of vaccine in certain world areas have combined to delay semiconductor capacity, catching up with demand until early 2022.
In North America, a strong steel market as tar production in line with pre-COVID levels.
However, due to an overall short call to our market and healthy end market demand, North America will continue importing tar from Europe to meet our customer demand.
Also pitch demand is strong and pricing is favorable.
Phthalic anhydride demand is recovering and expected to return to normal in 2021, while naphthalene and orthoxylene availability is relatively back to normal now.
These factors, combined with our streamlined global CM&C footprint support ongoing reinvestment in our Stickney facility to improve reliability and reduce costs.
Slide 34 describes conditions in our European markets where tar prices are up due to higher oil pricing as well as competition from the carbon black industry.
Pitch demand is down in Central and Southern Europe, while demand and prices for naphthalene and CBF are high.
In Australia, tar and pitch supplies and prices are relatively normal levels, and we are benefiting from higher export pricing for pitch from China and oil price increases, along with high demand and favorable pricing for naphthalene and CBF.
On Slide 36, our sales forecast for 2021 remains in the range of $1.7 billion to $1.8 billion compared with $1.67 billion in the prior year.
Due to improved end market dynamics, CM&C is expected to see a seven percent to 15% top line increase this year, while both RUPS and PC could be anywhere from two percent to three percent positive or negative.
On Slide 37, we're holding our EBITDA projections for 2021 to a range of $220 million to $230 million compared with $211 million in the prior year.
The biggest change from last quarter is a reduction in RUPS guidance due to lower untreated tie purchases and its impact on sales and absorption and a corresponding increase in CM&C due to strong macroeconomic drivers supporting healthy demand of our product portfolio over the remainder of the year.
On Slide 38, the EBITDA estimate to adjusted earnings per share guidance of $4.35 to $4.60 per share is unchanged from prior year's quarter -- from prior quarter's guidance and compares favorably to the prior year adjusted earnings per share of $4.12.
Finally, on Slide 39, our capital expenditures were $60.9 million year-to-date through June 30 or $55.8 million, net of the $5.1 million in cash proceeds.
We remain on-track to spend a net amount of $80 million to $90 million on capital expenditures, with half of that dedicated to growth and productivity projects that are expected to generate $8 million to $12 million of annualized benefits.
In summary, I continue to have confidence in our ability to deliver significantly better financial performance this year, now that we're through the first six months of 2021, but the effects of the pandemic continue to impact markets in ways that we're still trying to digest and make sense of for the longer term.
Beyond this year, I remain excited about the many opportunities we have to further build upon our integrated business model, focused on wooden infrastructure and looking forward to sharing the details of how we believe we can continue to take Koppers to over $300 million of EBITDA generation by the end of 2025 at our upcoming September 13 Investor Day.

user
q2 sales $441 million versus refinitiv ibes estimate of $461.7 million.
sees fy 2021 sales $1.7 billion to $1.8 billion.
sees fy 2021 adjusted earnings per share $4.35 to $4.60.

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