Koppers Holdings Inc (NYSE:KOP ) Q1 2022 Earnings Conference Call May 6, 2022 11:00 AM ET

Quynh McGuire - Vice President of Investor Relations

Leroy Ball - President and Chief Executive Officer

Jimmi Sue Smith - Chief Financial Officer

James Sullivan - Executive Vice President, Chief Operating Officer

Chris Shaw - Moness, Crespi & Hardt

Liam Burke - B. Riley Securities

Chris Howe - Barrington Research

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

00:05 Good morning, ladies and gentlemen, thank you for standing by. Welcome to Koppers Q1 2022 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this event is being recorded.

00:32 I will now turn the call over to Quynh McGuire. Please go ahead.

00:36 Thanks. And good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our first quarter 2022 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 till August 6th, 2022.

01:13 At this time, I would like to direct your attention to our forward-looking disclosure statement as seen on Slide two. Certain comments 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.

01:43 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.

02:11 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 the non-GAAP financial measures to the most directly comparable GAAP financial measures.

02:26 Today you will hear from the following: Leroy Ball, President and CEO of Koppers, and Jimmy Sue Smith, Chief Financial Officer. In addition, Jim Sullivan, our Chief Operating Officer, will be joining us for the question-and-answer portion of today's call.

02:42 And I'll now turn it over to Leroy.

02:45 Thank you, Quynh. Good morning, everyone. It's a pleasure to be able to share the positive news with you about our first quarter performance. Despite a geopolitical landscape that continues to be unpredictable, soaring inflation, workforce struggles and supply chain disruption, we were still able to produce record sales and solid results that exceeded our expectations, while also continuing to make progress on our plans to optimize and expand our business, which you'll hear about soon.

03:11 Now I'm actually on the road this morning traveling to be with my daughter for her college graduation. So, my remarks have been prerecorded. Jim Sullivan, our COO, will be alongside Jimmy Sue Smith, our CFO, to answer any follow-up questions that you may have after our prepared remarks.

03:27 Now, as always, we'll begin with an update on zero harm as shown on Slide four. In the first quarter of 2022, 29 of our 43 operating facilities worked accident free. Zero harm continues its drive deeper into the organization through frontline training workshops, which should be completed by the end of the second quarter. Additionally, we are glad to report the safety, health and environmental auditing and management visits to sites are back to pre-COVID levels.

03:52 Tremendous progress continues on improving our transportation fleet safety program to reduce incidents on the road. Retooled commercial driver incentive programs focus on safe driving behaviors, resulting in a 50% reduction in speeding incidents across our commercial fleet. Our drivers carry our mission on their shoulders, traveling to and interacting with customers to make sure we meet their needs. And this commitment means traveling through adverse conditions while also being away from their homes and families for extended periods.

04:21 Our incentive compensation plan for driver rewards safe behavior above all else. To thank our top drivers for their dedication to helping Koppers become the safest fleet on the road, we're hosting our Zero Harm Truck Driving Championship on November 8th here in Pittsburgh. The 12 best drivers in the company will be invited to participate in a safety and skills competition on a truck obstacle course.

04:44 Our non-commercial motor vehicle fleet faces safety risks as well. So, we've identified additional measures to improve safety performance there, such as installing front facing cameras and GPS units on all non-commercial company vehicles. This data will help us to identify trends and establish improvement targets going forward. We take very seriously what our employees do on our behalf and want to do all that we can to encourage them to do it as safely as possible. We work to retain and recruit truck drivers who believe strongly in operating safely, so that they can return home to their families in the same condition they started their trips.

05:17 Aspiring to have the safest drivers on the road is all a part of the Koppers Zero Harm culture. The journey to zero is a daily commitment and it remains a source of pride to see the progress our teams all around the world continue to achieve and the people of Koppers have my admiration and my sincere appreciation.

05:34 Now, even in the midst of rapid changes and economic uncertainties, Koppers overall performance in the first quarter has been impressive. Not only did we exceed our internal expectations, boosted by a strong global economy that continues to demonstrate overall demand for our products, but sales in the first quarter represented an all-time record for Koppers in any quarter, not just the first.

05:54 Our Performance Chemicals business generated a first quarter record in sales and solid results, thanks to strong volumes and pricing. It is worth noting, however, that the top line gains seen in PC were impacted by higher costs offsetting price increases in the quarter, which was expected. The Railroad and Utility Products and Services business saw hardwood supply below comparable levels in the prior year, unfavorably affecting its results, which also was expected.

06:21 In our Carbon Materials and Chemicals segment, we benefited from a strong pricing environment that continues to be ahead of increased costs, resulting in profitability that exceeded our expectations. And our balanced portfolio once again delivered value. And looking ahead, it's also setting us on a course to improve our profitability significantly over the next several years. And while I am wary of the risk of an economic slowdown, I'm confident that our strategy of serving essential infrastructure markets will continue to sustain us well into the future.

06:50 Now, I'd like to turn it over to our CFO, Jimmy Sue Smith, for a more detailed review of first quarter financial results. Thanks. And Jimmy Sue, it's all yours.

07:00 Thank you, Leroy. My comments are based on information contained in this morning's press release, which provided our results for the first quarter of 2022.

07:08 On Slide six, consolidated sales for the first quarter of 2022 were $459 million, an increase of nearly $52 million or 13%, compared with $408 million in the prior year. By segment, sales for RUPS decreased by $9 million or 4%. Sales for Performance Chemicals increased by $13 million or 10%, while sales for CM&C increased by $48 million or 52% compared to the prior-year quarter.

07:37 On Slide seven, we see that first quarter adjusted EBITDA on a consolidated basis totaled $53 million or 11.5%, compared with $55 million or 13.5% in the prior year.

07:50 Results for our RUPS segment are shown on Slide eight. Sales for RUPS were $183 million, compared to sales of $192 million in the prior-year quarter, primarily due to lower utility pole volume in the U.S. and Australia, along with lower sales volumes for crossties for both Class 1 and commercial railroads, partly offset by pricing increases and higher maintenance of way demand.

08:15 Market prices for untreated crossties remain high due to strong construction market demand, which means railroad customers are deferring their purchases. In terms of our backlog, the procurement of crossties declined by 10% even if crosstie treatment increased 4%.

08:32 Adjusted EBITDA for RUPS of $12 million, compared with $16 million in the prior-year quarter. This decline can be attributed to higher cost for raw materials, freight and fuel, as well as labor issues in the domestic utility pole industry. In addition, profitability was negatively affected by lower absorption of fixed costs, due to lower tie throughput on the decreased purchases of untreated crossties by our Class 1 customers.

08:58 As shown on Slide nine, PC had record first quarter sales at $136 million, compared to sales of $124 million in the prior-year quarter, driven by price increases and higher volumes for preservatives. Adjusted EBITDA for PC decreased to $21 million from $28 million in the prior-year quarter as a result of higher raw material costs.

09:22 Slide 10 shows results for our CM&C business. First quarter sales for CM&C totaled $140 million compared to sales of $92 million in the prior-year quarter. Higher pricing and volumes for carbon pitch, phthalic anhydride and carbon black feedstock contributed to the increase as did higher sales prices for naphthalene. CM&C delivered adjusted EBITDA of $20 million, compared to $10 million in the prior year as a result of a favorable demand and pricing environment, partly offset by higher selling, general and administrative, as well as raw material costs.

09:57 Sequentially, the average pricing on major products was 11% higher than in the fourth quarter of 2021, while average coal tar costs increased by 13%. On a year-over-year basis, the average pricing of major products was 42% higher, while coal tar costs went up by 53%.

10:18 On Slide 12, we outline the driving principles of our balanced approach to our priority uses of cash. We will continue to invest in our businesses through capital expenditures, while returning capital to shareholders through dividends that were recently reinstated as well as repurchasing shares opportunistically and delivering as appropriate.

10:38 In the first quarter of 2022, we repurchased $6.4 million of shares. We remain confident that we can grow and generate cash to achieve our strategic growth plan and remain committed to a 2 times to 3 times long-term leverage ratio.

10:53 As shown on Slide 13, capital expenditures in the first quarter totaled $26 million, and net of $4 million in cash proceeds from asset sales, were $22 million.

11:05 And lastly, on Slide 14, we had $780 million of debt and $305 million in available liquidity at March 31st, 2022. Our net leverage ratio was 3.5 times at the end of the first quarter, compared with 3.3 times at year-end 2021. This slight increase is consistent with the seasonal nature of cash flow for our business and reflects the increased prices and inventory levels as a result of inflation and supply chain challenges.

11:36 Net leverage of 2 times to 3 times remains our goal and we continue to focus on growing EBITDA as one means of reducing leverage. And note that our March 31st net debt balance is 2.6 times our 2025 target EBITDA of $300 million.

11:51 And with that, I will turn it back over to Leroy.

11:55 Thanks, Jimmi Sue. I'd like to begin by sharing the notable happenings across our company during the first quarter. Koppers is happy to introduce our new Vice President of Culture and Engagement, Stephen Lucas, as seen on Slide 16. Stephen has nearly 30-years of experience developing innovative and bold employee programs at a number of leading manufacturing companies.

12:16 For Koppers to continue to succeed, we must do all we can to attract world-class talent, develop our next generation of leaders and create an environment that inspires individuals to bring their best every day. Stephen is the right leader to strategically guide these critical culture and engagement efforts and we warmly welcome him to the Koppers team.

12:36 Slide 17 features our first graduating class from Koppers college. This pilot program consisted of weekly sessions over a period of six months for qualifying hourly and non-exempt salaried employees who participate in these classes in addition to working their full-time jobs. These employees now have a Koppers business degree, which can open doors to new perspectives, new ideas and new opportunities within our company. Congratulations to all our Koppers college graduates.

13:02 Slide 18 shows the progress that has been made to upgrade our facility in North Little Rock, Arkansas. The material handling system for the cylinders has been installed and will begin commissioning in May. Upgrades to the tie sorter, also to be completed in May, promise to significantly increase tie sorting capabilities at the plant. We have two of the three cylinders on site with the first cylinder scheduled to be in operation on October 1st and the next two are expected to come online later in 2022 in November and December.

13:29 On April 22nd, Koppers team members worldwide celebrated Earth Day, as seen on Slide 19. A variety of activities were held at our facilities and in partnership with community organizations where we work. These efforts help to shine a light on the core Koppers value of protecting our planet.

13:45 Now let's move on to an overview of the business sentiments, both near and long-term. I'll highlight the themes that we think are meaningful to our businesses moving forward. Slide 21 looks at important drivers for Performance Chemicals in 2022. With existing home sales down 2.7% in March from the prior month and 4.5% from the prior year and rising interest rates and inflation hampering the housing market, the purchasing power of those hoping to become homeowners has weakened, according to the National Association of Realtors.

14:15 At the same time, existing homeowners are spending considerably more on home renovation and repairs to the tune of an 11.5% year-over-year increase in the first quarter, with an increase of nearly 20% projected later this year. There may be some leveling out in early 2023, with spending anticipated to reach $450 billion, according to the Leading Indicator of Remodeling Activity.

14:38 The consumer confidence index improved to 107.2 in March, increasing from 105.7 in February as economic growth continued during the first quarter. However, The Conference Board warms us some potential weakening in consumers long-range outlook. As the pandemics effect lessen, residential demand in North America is returning to more normalized levels, although demand for contractors shows no signs of slowing down this year.

15:03 Lumber prices also are normalizing from temporary highs as treating inventories remain thin and current orders are addressing the immediate demand. As the penta preservative phases out, demand on the industrial side seems to be strong as we recently added a new utility customer and have additional prospects to further our market share expansion. Thus far, the only PC raw material affected by the Russia-Ukraine war is for our fire retardant products. Competitive supply chain issues in other product categories have opened a window for us to potentially achieve higher preservative sales.

15:35 In the short-term, we're seeing margins being compressed by ongoing cost increases for materials. And although we've been building inventory to combat potential supply chain bottlenecks, we expect that by year-end we should be able to reduce working capital in our PC segment by at least $20 million.

15:50 The longer-term outlook for PC is shown on Slide 22. Given the record high copper prices, we've been conducting price discussions with our customers sooner than we normally would. In the U.S., we're currently evaluating opportunities to implement changes to contract pricing, which would increase our ability to recoup higher input costs. As mentioned on last quarter's call, we recently entered into a five-year supply agreement beginning 2023 with the West Coast customer to provide 100% of their purchase requirements, which is up from 40%.

16:20 In Australia, we recently were successful in securing an exclusive three-year supply agreement with a new customer. In North America, we expect to see the continued growth of industrial volumes of chromated copper arsenate or CCA as penta gets phased out of the market. In addition, we continue to consider producing other oil borne products as alternatives to penta, however, are still not at a decision point.

16:43 In Brazil, we're working through the regulatory approval process regarding a greenfield manufacturing site and expect to have a plant in place and operational in 2026. In terms of expanding our presence in Europe for MicroPro, we're still in the process of obtaining regulatory approval for our next generation MicroPro product. We were recently issued a patent in US for that next gen product, which will remain in force through early 2038 and we're moving forward to bring it to market over the next few years.

17:11 The overview for our UIP business in 2022 is seen on Slide 23. Utility demand for poles remains high as project work is continuing to catch up after pandemic driven delays. Overall, logistics, labor shortage, plant conversions, along with the trend for a sturdier class of poles have put a strain on suppliers and resulted in longer lead times for product from the treatment industry.

17:35 We're currently tracking higher than our targeted $8 million price increase for this year with $3 million occurring in the first quarter alone. That said, costs are rising across nearly all categories as well. Accordingly, we have been moving customers into more frequent price reviews given the rapidly changing cost environment. In early April, we completed our transition away from treating with penta and most of our customers are adopting CCA or DuraPine. In fact, 65% of former penta volumes for Southern Yellow Pine utility poles are now being treated with preservatives that are produced in-house.

18:07 According to the U.S. Chamber of Commerce, the manufacturing industry has lost approximately 1.4 million jobs since the onset of the pandemic, and it has been a struggle to hire workers. For Koppers, attracting and retaining plant employees and truck drivers remains an ongoing challenge as do the related costs and inefficiency from employee turnover.

18:26 On the productivity front, our employees have worked hard to convert our facility from treating poles with penta to treating with different preservative systems at Vidalia, Georgia and Vance, Alabama. In addition, we added new dry kiln to improve our capacity at our facilities in Vance and Newsoms, Virginia.

18:41 On a combined basis, these projects are expected to bring an estimated $5 million of EBITDA benefits. The sale of our plant in Sweet Water, Tennessee will also benefit our bottom line. And while supply of wood remains relatively stable, we are seeing pricing pressure due to the high demand for small logs, stumpage increases, which is the price paid to harvest the timber, and freight costs. Therefore, we anticipate the cost will increase in the second quarter and we'll be addressing these issues.

19:08 On Slide 24 is a long-term view for our UIP business. Given that more people are working remotely and there is an increasing frequency of extreme weather events, utilities need to maintain their infrastructure to avoid service interruptions. As a result, more utilities are trending towards stocking storm inventories of poles and, therefore, increasing their purchasing volumes over time. We anticipate that there will be continued shocks and disruptions to the supply of materials, such as wood, creosote and other preservative components.

19:37 Consequently, this will make it more difficult for smaller and non-integrated treaters to compete as customers place a high value on the security of their supply sources. Being vertically integrated should provide Koppers with a competitive advantage in light of the Federal Infrastructure bill which allocated $119 billion for utility investments.

19:54 We're in the process of adding peeling and drying capacity to serve our treating plant in Summerville, Texas. We expect this to result in improved cost efficiencies, which will contribute to increased profitability beginning in 2023. In addition, due diligence continues on a property to establish a base of operations in the Western US to serve the industrial treating and wood preservation chemical markets, which have been untapped for us.

20:17 In Australia, demand for poles remains high as it recovers from multiple natural disasters. We continue to shift volumes in Australia to softwood as hardwood availability becomes more difficult by adding a dry kiln at our Takura location last year.

20:32 On Slide 25, we provide the 2022 outlook for our Railroad Products and Services business. The Association of American Railroads reports mixed data points for the first quarter of rail traffic compared with the prior-year quarter as U.S. carload traffic increased 2.6%, intermodal units were down 6.9%, and combined U.S. traffic dropped by 2.7%.

20:53 We're targeting more than $20 million of price increases in 2022 to account for higher material costs and we're tracking at a higher rate so far with $7 million of that realized in the first quarter. We're projecting that demand for crosstie sales will increase 3% to 4%, which is higher than the forecast from the Rail Tie Association of approximately 2% growth. Lower year-over-year green tie purchases continued in the first quarter, but it looks like we're set for a rebound.

21:19 Currently costs have stabilized, although at higher levels of $10 per tie or 33%, compared with prior year. There is a very strong likelihood of creosote supply disruption among treaters, which when it happens will provide a greater opportunity for Koppers, due to our vertically integrated business model and our ability to provide surety of supply. Similar to our utility business, we're still seeing trucking issues as lack of drivers and pent-up demand are limiting access and driving higher transportation costs.

21:48 On our commercial business, crosstie volumes are down, but our profitability is up since price increases are going into effect prior to seeing the full impact of higher costs. Market dynamics in the commercial space continue to remain very competitive. Overall, we expect higher sales volumes for crossties and improved cost absorption to contribute an additional $4 million of EBITDA in 2022.

22:09 In our maintenance of way business, we're beginning to see benefits due to improvements in labor and customer-specific challenges. This business is expected to generate $6 million of year-over-year improvement as markets continue to recover with all of that benefit to be realized over the last three quarters of this year. On the labor relations front, we successfully extended contracts at two of our facilities. In the coming months, we'll be working with the two remaining facilities to extend contracts that are scheduled to expire later this year.

22:36 On Slide 26, we provide a longer-term view of RUPS. And we're pleased to have completed extensions for contracts with our Class 1 customers, moving most contract maturities to beyond 2025. We're working on various network optimization plans, which are positioned to drive EBITDA improvements, including the current expansion in North Little Rock to be completed in late 2022, which will strongly support volume growth in 2023 and beyond.

23:01 As mentioned previously, we are also adding pole treatment capability at Summerville to support expansion into the pole market in that region. Due to our plan to purchase greater amounts of green ties to support volume growth, working capital will naturally increase, but be supported by higher profitability. At the same time, we're evaluating strategies to support a more consistent flow of green ties being processed in our facilities. We know that achieving our goal of having a steady flow of crossties will lessen the peaks and valleys that impact our business.

23:30 At this time, we have the highest backlog in years for projects in our maintenance of way business. We're positioned for continued improvement as long as the railroads provide track time and we have crew continuity. To help with retention, we recently implemented a new compensation model for maintenance of way employees to better align our rewards with what that workforce values. In addition, we continue to be focused on expanding our crosstie recovery business to other Class 1 customers.

23:56 Our CMC business sentiment, as shown on Slide 27, notes that demand is as strong as it has ever been. However, global supply chain and inflationary pressures provide cause for concern regarding an eventual slow down. The Russia-Ukraine conflict has caused European tar distillers to lose approximately 220,000 metric tons of tar on an annual basis. So far, we've been able to successfully mitigate supply constraints somewhat by accessing other sources for Europe.

24:21 Tar and pitch remain a limited supply, causing prices to skyrocket to record highs. In China, pitch and tar prices are at high levels, which support higher product pricing in other regions as well as higher raw material costs. In Central Europe, aluminum producers have a curtailed production due to high energy prices, which is increasing competitive pressure in a smaller market, it's those curtailments that primarily affected our competitors' customer base.

24:46 An increasingly smaller coal tar market is impacting creosote in North America, with less product being made and significant price hikes likely for non-contracted customers. Due to reduced availability of coal tar in the market, Koppers has reintroduced hybrid pitch in North America and our customers have responded favorably, accelerating its acceptance. We estimate that we will see a benefit of $8 million in EBITDA from our ability to improve the mix of our higher value pitch production, as well as the benefits from cost improvement projects.

25:16 In the second half of 2022, we see potential upside as long as market dynamics perform as expected. According to IHS Markit projections, regarding global light vehicle, production in 2022 went down by 2.6 million units in March and were downgraded again in April, projecting further reductions of 900,000 units. The reduced production was attributed to Europe and China, while the forecast for North America remained flat.

25:42 Slide 28 looks ahead for CM&C through 2025. And we expect that high demand should continue in the US, driven by the aluminum and steel markets. The federal infrastructure bill should support long-term demand, although some recessionary concerns have begun to appear. On the other hand, we are poised to benefit as reliance on Chinese exports drops and worldwide shipping logistics improve.

26:03 Industry efforts continue to reduce or eliminate coke from steel making, including direct reduced iron and electric arc furnaces, all of which will reduce coke production further, resulting in less domestic coal tar and increasing pressure on remaining small distillers. The announced closures by Cleveland Cliffs regarding two other coke facilities has added further limitations to the domestic coal tar market. This is where our hybrid pitch products can fill a gap in the market created by lower production levels of our traditional raw materials.

26:31 And then also, while we're working on product development projects that are designed to increase sales and profitability, which include: improving pitch yields from tar from 50% of production to nearly 70%, which I mentioned previously as a component of the $8 million benefits in 2022, and enhanced carbon products used as a coatings for battery anode materials. And while the benefits of enhanced carbon products for battery coatings are not included in our 2025 projections, CM&C could be our highest margin business by 2025, if we succeed in gaining market acceptance of our products.

27:06 On Slide 30, our sales forecast for 2022 is approximately $1.9 billion, compared with $1.68 billion in the prior year to reflect a projected topline improvement in every business segment, largely driven by higher prices.

27:20 On Slide 31, our 2022 EBITDA projection remained at $230 million. On a comparable basis, this will be our eighth consecutive year of EBITDA growth. Once again, our diversified portfolio shows ups and downs across the three business segments. Our RUPS business hit a trough in 2021 due to a high number of factors, but strong underlying market fundamentals have us primed to significantly improve, albeit not as much as we had projected back in February.

27:45 The hardwood recovery is not yet at the run rate it needs to be to generate the level of improvement we expected at the beginning of the year, although we still believe that 2022 will represent a giant step forward. In PC, we're continuing to show a small decline from last year, which is consistent with what we expected back in February. PC actually finished Q1 slightly ahead of where we thought they would. And while we expect a strong Q2 from PC, they are facing another record quarter comp which they will not be able to match.

28:12 The second half of the year gets easier comparably, but the market dynamics need to hold up better than they did in 2021 and we don't believe that they'll claw all the way back to the last two years' $100 million mark of EBITDA. The wildcard could be the significant price increases that will go into effect on January 1st, 2023 that could impact Q4 purchases positively by pulling forward some volume and profitability into 2022.

28:37 Finally, we're still expecting a year-over-year decline in CM&C EBITDA, but not quite as much as we were earlier this year. Despite the impact on supply from the Russia-Ukraine conflict, we believe its strong market dynamics can still support an environment that results in EBITDA that is relatively close to last year's performance as we are currently projecting CM&C to finish at around $70 million or $6 million below last year.

29:00 Overall, we expect the timing of our results in 2022 to be the inverse of 2021 and the beginning of the year has started off with that pattern. Q2 will be more of the same before we begin to make up ground in Q3 and Q4, before finishing at our projected EBITDA for the year of $230 million.

29:18 On Slide 32, our adjusted EPS guidance for 2022 is now expected to be approximately $4.10 compared with $421 in the prior year. While operations are additive to results, a higher effective tax rate is expected to take a sizable bite out of our overall improvement. All in, we still expect to generate strong performance of over $4 per share on an adjusted basis in 2022, which belies the explainable price earnings multiple that we continue to trade at, which is well below 10 times.

29:47 Finally, on Slide 33, we continue to expect our growth capital proceeds from asset sales. We anticipate that our capital spending will be in the range of $80 million to $90 million, with approximately $29 million dedicated to growth and productivity projects.

30:00 In summary, we remain focused on executing through our strategy to expand and optimize across all of our business segments and generate continued consistent financial performance as measured by adjusted EBITDA, adjusted EPS and free cash flow.

30:14 I do believe that our balanced and diversified portfolio makes us a great defensive investment option in most economies as we have demonstrated ever improving performance over the past seven years through various disruptive market conditions, with a record that very few others can match. We will continue to control the things that are within our control, while telling our story and, at some point, it should resonate with those that appreciate results-driven performance.

30:36 With that, I would like to pass the program over to Jim Sullivan, our COO and Jimmy Sue Smith, who will now take your questions. Thank you for all for dialing in and for your interest in Koppers.

30:49 Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Chris Shaw from Moness, Crespi. Please go ahead.

31:20 Hey, good morning, everyone. How are you doing?

31:22 Good morning, Chris. How are you?

31:24 Good. You gave a lot of information on Performance Chemicals and market trends and a lot of puts and takes there. But do you have a sense -- and some of them very specific to your company. But do you have a sense of your bigger customers? Are their order patterns looking like there is an agreement with the sort of home renovation expectation? Are their order pattern more looking at maybe what new housing is doing instead? Do you have any sense of that? What kind of visibility you have, I guess, for the second half or even second quarter?

32:02 Yes. Hi, Chris. This is Jim Sullivan. So, let me answer it a couple of different ways. So, we see as reported a pretty strong outlook for the renovation business. So, that tracks pretty well to how we're going to do for the treated lumber. So, that's a good sign. And then also, we know that the treaters have been watching lumber prices over the last number of months and they've sort of started to trend down and stabilize. And what that has done is there is relatively low inventories at treating facilities.

32:38 So, we're actually starting to see a little bit of a pickup there as we get into the spring in the Southern parts of the United States and that will continue to move up into the Northeast, into the Midwest as the weather improves. So, right now, the outlook looks pretty good for the treated lumber market in 2022 and that's why we're sticking with guidance.

33:02 Got it. And then, switching to CM&C, I think you said coal tar costs were up 53%. And obviously, there's been impact in Europe from the Ukraine conflict. How much more currently -- that you're seeing in the market, how much more will that 53% have to go up in subsequent quarters now? How far is that realizing the inflation that's actually out there in coal tar targets yet?

33:31 Yes. So, the situation with the coal tar pricing is there is a number of things going on. The big thing, the disruptive thing is the war in the Ukraine, right? So that's taken out a significant amount of coal tar. And the end products that are made with the coal tar raw material, those markets are still strong. So, there is a fair bit of demand. So, it's really demand driven on the price. But you all describe that's our normal, the way we do business only sort of at a heightened level. We're constantly watching the raw material costs of the critical raw material coal tar and we're sort of matching that up against what we're going to be able to get for our end products. And as you've seen in the first quarter, we've been able to stay ahead of that, but we're watching that, but we're watching that very closely. And the outlook there is still relatively strong for 2022. That's once again why we're sticking with the guidance.

34:35 I guess another way to ask that is current -- one month into the second quarter, is the coal tar costs, have they gone up even more so than that sort of 53% from 1Q reflects?

34:48 Well, sort of -- there are certainly some ask for higher prices, but they haven't got the higher prices yet for the raw material. We're watching it real closely. I think there is some smaller suppliers that are testing the -- see if there is a high-end market there. But overall, like the price of coal tar is very high right now. So we have to be able to pass it on with our end products, and we've been able to do that and we think we're going to be able to continue to do that.

35:24 The next question is from Liam Burke from B. Riley Securities. Please go ahead.

35:29 Yes. Thank you. Good morning, Jim. Good morning, Jimmi.

35:35 Jim, the persistent problem for RUPS has been the deferral of capital expenditures by the Class 1 customers of yours. Even though we're looking at overall traffic declining, heavy-haul, with the rebound in coal demand, must be putting more wear and tear on the track bed. Do you see any kind of relief from these deferrals on CapEx here?

36:05 We do. What we see right now, the problem is the competition for the critical raw material, which is the hardwood, and that's competition from pallets, from cabinets, from hardwood flooring and we're seeing that stabilize. And you're right, the amount of ties into the market has been lower than normal. We see that eventually correcting. And it's going to start by -- the way we're going to see it is we're going to be able to get more ties into our facilities, which we're predicting is going to happen in the second half of the year.

36:40 Great, thank you. And you did say you're comfortable on PC being able to continue to raise prices to offset your input costs. As we go further into the year and potential demand would soften, do you think there'll be a problem where you would raise prices to blunt your own demand or how do you see playing that trade-off?

37:06 Well, if the issue is really -- which we're well aware of and working on is the contracts that are coming up for our major customers in PC at the end of this year. So we've already started negotiating those prices with them -- with the major customers. But we have very, very long-term relationships with these people. They know exactly what's driving the costs. We can point them to exactly where they need to look. So, they know that's coming and that's something that we're working on. So -- and that's going to be addressed throughout the year and then certainly before the end of this year.

37:49 And the next question will come from Chris Howe with Barrington Research. Please go ahead.

37:56 Good morning, Jimmi. And good morning, Jim. And good morning to Leroy virtually. Wanted to follow up on one of Liam's questions. As we think about the pricing dynamics, whether it's specific to PC or the other segments, when things normalize, how should we anticipate a lag on pricing? Do you think some of the pricing stays around for a little bit until it comes back to normal or what's your take on where pricing eventually settles?

38:31 Yes. So, it is a good question. It's hard to answer it with, like, some of the escalations that we've seen and some -- just inflations and some of the other supply chain restrictions that are related to our products, but not our products. Our path right now is we've got to keep pushing price, right, because we're continuing to see cost increases, whether it's labor, whether it's diesel fuel, whether it's trucking rates. So, we're in the mode of pushing price.

39:08 And then, once we get it, we really like to hang on to it. So, there'll be some pressure. There'll always be some pressure down the road. But we're going to be looking at the same metrics that we pointed out that have caused an increase in the first place.

39:29 Certainly a great quarter and encouraged by the guidance. But as we shift to other topics of constraints -- labor, you just mentioned trucking, can you talk about how we should think of labor as a challenge across the segments? And perhaps, if you get the right labor or you retain enough labor, what that could mean for profitability upside?

39:59 Yes. It is different in different industries. So -- different sort of business segments. So, if you look at CMC, that's sort of the high-end with respect to fixed costs. So, we have a lot of fixed costs. What we have is a large plant. So, the relative number of employees we have as it, compared to the fixed cost is low in something like CMC and then the next step-down is -- would be KPC also. These are factories that are producing chemicals. Where the labor issues are, are in -- that we really see the most of are in UIP and RPS.

40:38 And we're looking at a number of things there. We're competing against just about everybody for those people. So, we have to rethink automation, what can we automate in our plants. And then, once we have good employees, how do we retain them? So we're spending a lot of time on that and we're actually very glad to have Stephen Lucas on board to help us with that as well.

41:02 All right, perfect. Thank you for answering my questions. I'll hop back in the queue.

41:08 And our final question today will come from Laurence Alexander from Jefferies. Please go ahead.

41:15 Good morning. I guess a couple of questions. One is on CM&C, given the tightness in the coal tar supply, how much of a margin lift -- if you rolled out the yield gains across all of your assets that could be upgraded, how much of a margin lift would you expect to see from your position on the cost curve improving?

41:47 Well, okay. So, there's a lot of stuff in there too, right, because it depends a little bit on, obviously, the coal tar pricing, but also the petroleum. We talk in the call or in the recording, we talk about the sort of the transition to a blended pitch, which has petroleum product in it. Right now, petroleum product is actually relatively high price, because it tracks with fuel. So, we don't know if that's going to stay that way. Right now, we're getting the price for it. But what that does, it also extends our supply with using the same assets. The same assets are used to distill petroleum products as are used for the coal tar products.

42:28 So, there's a lot of moving parts in there. But in general, it's a good thing that we have our customers wanting to buy that product in North America where the biggest issue is, is in North America. And they're adopting it. We already have one customer that's taking 100% of the blended product and we have other customers well on their way.

42:53 And then, with respect to the sort of the way the utilities are thinking about their safety stock or reserves with respect to the kind of the amount of maintenance they need, how does the run rate of demand from that market compare with, say, 10-years ago?

43:17 10-years ago, actually, I don't know the answer to that. I'll tell you right now that the demand is strong for those products and we really even -- we haven't seen anything we can point our finger at that is attributed to the infrastructure bill. We see just demand. Some of that's pent up, some of that has to do with other supply chain issues, but demand for our utility poles in North America is relatively strong right now.

43:51 And with respect to the shift between the pricing negotiation for the copper pass-through sort of earlier than expected, do you think this is a one-time event or is this a cultural shift in the industry that you're trying to get the customers used to more frequent negotiation?

44:09 So that's a good question, we have long-time relationships with our customers and we're going to give them -- we'll give them a number of different options. And they're going to -- that we can implement. Part of it is going to be their desire to have some surety over a longer period of time versus having some flexibility. But we're going to give them some options. The underlying issue is the basic raw materials for the products have gone up significantly.

44:43 And then just the last thing is just on the culture side. Koppers has gone through several rounds of upgrades of its productivity culture. What do you see as kind of the key issues to focus on for the next few years and how material a difference do you think they'll make in terms of the external -- what we see on the outside on the financial metrics?

45:11 Yes, I'm not sure I understand the question. Jimmi Sue, do you know?

45:16 I think that's really embedded in -- our culture has been to optimize our business and figure out how to drive down our cost structure and we've really shown the ability to do that in CM&C. And I think the plan that we -- strategic plan that we rolled out, which is a shift to continuing to optimize the structure across the other business units, especially RUPS, but also to expand the business for growth, that's really -- that's the cultural shift that we're bringing in and we are very much plugged in to the process and actively managing it and remain very confident in our strategic plan.

46:03 Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to CFO, Jimmi Sue Smith, for any closing remarks.

46:12 Thank you, everyone, for participating in today's call and for your continued interest in Koppers. Stay safe.

46:19 The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.