Quynh T. McGuire - Director of IR Leroy M. Ball, Jr. - President and CEO Michael J. Zugay - CFO.

Liam Burke - B. Riley FBR, Inc. Chris Shaw - Moness, Crespi & Hardt.

Good day and welcome to the Koppers Holdings Inc. Third Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Quynh McGuire, Director of Investor Relations. Please go ahead, ma'am..

Thanks and good morning. I'm Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our third quarter earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our Web-site at www.koppers.com.

As indicated in our earnings release this morning, we have also posted materials to the Investor Relations page of our Web-site that will be referenced in today's call.

Consistent with our practice in prior quarterly conference calls, this is being broadcast live on our Web-site and a recording of this call will be available on our site for replay through December 8, 2017. Before we get started, I would like to direct your attention to our forward-looking disclosure statement.

Certain comments made during 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 Web-site, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. Joining me today for our call are Leroy Ball, President and CEO of Koppers, and Mike Zugay, Chief Financial Officer.

I'll now turn this discussion over to Leroy Ball..

Thanks, Quynh. Welcome everybody to our 2017 third quarter earnings call. As usual, I'll start by reviewing the latest progress made on our journey to zero harm.

In September, we held our second annual Zero Harm Zero Waste Leadership Forum in Pittsburgh, where we convened more than 70 leaders from across the world to reaffirm their commitment to leading states in responsible operations.

The forum's agenda included introducing the next phase of our safety development, which is centered on understanding and influencing behavior. In addition, we spent time sharing with each other the challenges, opportunities and lessons learned that we have experienced thus far on our journey to zero.

I'm incredibly proud that our team remains steadfast in the belief that if we put our people first, results will follow, and while we're still far from perfect at Koppers, we are demonstrating that safety and profitability can coexist, and when they do, the strength and sustainability of the company improves in a significant way.

Now let's talk about our September quarter financial performance, which is our best ever from an adjusted EPS and adjusted EBITDA standpoint, with those numbers finishing at $1.43 per share and $60.5 million respectively.

In fact, we shattered our previous high for adjusted EPS, which was $1.20 in the third quarter of 2008, and our previous high for adjusted EBITDA of $57.8 million was also in the third quarter of 2008.

Now at a high level, we continued to benefit during the quarter from some market tailwinds in most of our CMC end markets that combined with the benefits we continue to create from our restructuring plan resulted in significant outperformance from an overall Company standpoint.

Now the rail business has continued to be soft, which by extension translates to a softer creosote market. Our strategy to focus our production decisions in North America and Europe on our creosote requirements has created a situation of better balancing the supply/demand requirements of the other coal tar byproducts.

Clearly our strategy to shift the Company's focus to higher-value wood treatment technologies, while operating a leaner footprint, continues to pay off. It's exciting to know that 2017 will likely go down as one of the best years in Koppers' history, given our performance through the first nine months.

Now at this time, I'd like to get into the specifics about each of our business segments, starting with our Railroad and Utility Products and Services segment. Once again, our RUPS business was negatively affected by the continued demand weakness for treated crossties from Class I customers, particularly on the untreated side.

In the commercial market, we're still dealing with the challenge of pricing pressures related to an ongoing inventory oversupply, but to a lesser extent than what we saw the first half of the year.

On a year-over-year basis, segment sales declined by 10% and adjusted EBITDA was lower by 37%, as comps from the prior year quarter were still relatively strong for the month of July and August.

Now in general, demand from the Class I market for untreated crossties remains well below prior year and historical averages, as they attempt to reduce their working capital. In fact, our third quarter green ties volumes represent the second lowest volume of ties purchased in the last six years.

Now looking at things from a positive standpoint, I believe that the third quarter will represent our seasonally adjusted trough and things will level out before picking up a little bit at some point in 2018.

Our rail structures business is also experiencing the same demand weakness as our crossties business, due to railroad customers either deferring work or limiting the outsourcing of bridge repair projects. Although it was a modest impact overall, our utility poles and rail joints businesses are trending positively compared with the prior year period.

From a cost perspective, we continue to evaluate opportunities to right-size and have already taken action to reduce overhead expenses where applicable. Now for our Performance Chemicals segment, sales increased slightly due to higher volumes in North America for copper-based wood preservatives and additives.

The market trends in the repair and remodeling markets and existing home sales have been favorable, but decelerating slightly. Higher cost, driven by spot copper and intermediate raw material purchases at higher prices, more than offset the profit contribution from the slight uptick in sales volumes.

Now despite the raw material headwind, adjusted EBITDA was 20.2% for the third quarter, which is still at the high end of probability for this business and was in line with our expectations.

Now our Carbon Materials and Chemicals or CMC business reported its fourth consecutive quarter of margin growth, driven by a sales increase of $25.6 million or 21.7% higher than the prior year quarter which far exceeded my expectations.

The sales increase was primarily from higher sales prices for carbon pitch and carbon black feedstock in Australasia and Europe because of tightened supply in those regions. Sales volumes were higher for carbon black feedstock and phthalic anhydride, partially offset by lower carbon pitch and creosote volumes.

CMC profitability was significantly higher than the prior year quarter, benefiting from favorable market conditions as well as realizing permanent savings benefits from restructuring initiatives and lower average raw materials and logistics costs in North America.

Adjusted EBITDA margin was 18.2% in the third quarter and $16.2 million higher than the prior year quarter. I'll now turn it over to Mike to discuss some key highlights from the third quarter of 2017..

Thanks, Leroy, and hello everyone. Let's begin by referring to the slide presentation that we provided on our Web-site. On Slide 4, sales were $385 million for the third quarter, which was an increase from $371 million in the prior year quarter.

Our CMC business reported higher sales prices for carbon pitch and carbon black feedstock in Australasia and Europe, and higher sales volumes for carbon black feedstock and phthalic anhydride. These were partially offset by lower carbon pitch and creosote volumes.

The PC business experienced higher sales volumes in North America for copper-based wood preservatives, as this trend continued to be favorable for repair and remodeling markets and existing home sales.

As forecasted, the RUPS business was negatively affected by reduced sales volumes of crossties and lower railroad bridge services, and these were partially offset by higher volumes for utility products in Australia. Moving to Slide 5, operating profit was $35 million, compared to $28 million last year.

On Slide 6, adjusted EBITDA was $61 million, compared with $51 million in the prior year, and this was due primarily to a higher profitability from the CMC segment partially offset by lower profitability in the RUPS segment.

For the quarter, CMC profitability improved significantly from the prior year period, primarily due to lower raw material and logistics costs in North America, higher sales prices in Europe and Australasia related to carbon pitch, and our restructuring savings.

PC's profit margins were unfavorably impacted by higher raw material costs and these were offset by benefits from higher sales. The profitability for RUPS was negatively affected by reduced sales volumes of crossties and railroad services, combined with reduced margins on commercial crossties as a result of an inventory oversupply in that market.

The negative impact from these factors was slightly offset by favorable volumes and sales mix of rail joint and utility products. Now I'd like to discuss several items that are not referenced in the slide presentation. Our adjusted net income was $32 million for the third quarter, compared with $21 million in the prior year.

Adjustments to pre-tax income totaled $13.8 million for the quarter and $11.5 million for the prior year period, and this primarily consisted of pension settlement charges of $8.8 million for the current year quarter and restructuring expenses for both of these periods.

Adjusted earnings per share were $1.43 for the third quarter, compared with $0.99 per share in the prior year. For our third quarter, the effective tax rate was 17% compared to 27% for the prior year. The year-to-date effective income tax rate for 2017 was approximately 21%, and this compared to 29% in the same period last year.

Our lower effective tax rates are primarily due to changes in geographical mix, with more earnings coming from our foreign subsidiaries where the tax rates are lower than in the U.S. We expect this trend to continue throughout the remainder of 2017 and we now estimate that our current year's annual effective tax rate will be in the low 20s.

Year-to-date, cash provided from operating activities was $48.5 million compared to $82.5 million in the prior year. This included a voluntary cash payment of $7 million that we made into our U.S. defined benefit pension plan in the third quarter. Year-to-date capital expenditures were $48.6 million, compared with $32.2 million for the prior year.

The current amount consists of spending on the new naphthalene unit construction at our CMC facility in Stickney, Illinois and expanding production capacity at our Performance Chemicals facilities in the United States. We do continue to expect our 2017 capital spending to be in the $70 million to $75 million range.

At the end of last year, we began using a net leverage ratio to monitor our debt status. Due to our higher profitability, our net leverage ratio improved to 3.3 on a trailing 12-month basis, which compares to 3.7 for a similar period ending December 31, 2016.

In spite of our higher CapEx expanding, we expect to be at a net leverage ratio at lower than 3.3x by the end of 2017 and our long range goal continues to be 3x or lower. In summary, just another very, very good quarter as Leroy mentioned earlier in the call, and now I'd like to turn the discussion back over to him..

Thanks Mike. Now taking a look at the outlook for each of our business segments, I'll start with the Railroad and Utility Products and Services business. In general, the railroad has scaled back and they have focused on cutting their operating costs and working capital.

Now, while our treating volumes are down only about 10% this year, untreated tie volumes were down around 20% with untreated tie purchases down about 25%, and 30% for untreated tie purchases in the third quarter alone down this year versus last year.

During 2017, the Class I railroads have slowed their infrastructure spending, but I believe we are starting to see signs that we are at or pretty well close to the bottom.

At the present time, I expect the first half of next year to look a lot like the first half of last year, but volume should start to slightly pick up the further into 2018 that we get. Now according to the Association of American Railroads or AAR, the total U.S.

railcar load traffic for the nine months ending September 30, 2017 was up 3.8% year-over-year and intermodal units were 3.5% higher than the prior year period. Now together, the total combined U.S.

traffic for the year-to-date period through September 30 increased 3.6% compared to last year and is expected to continue posting mid-single-digit year-over-year growth. Now, while there's been a decline in coal transportation, all other major categories of freight have exceeded expectations thus far this year.

Now, the signs of life are still limited and the data can vary by a month. For example, the AAR reported that in September, U.S. railroads originated 2.3% fewer carloads compared with the prior year period, but originated 3.8% more in intermodal traffic. Now in combination, U.S.

carload and intermodal originations in September were only up slightly at 0.7% year-over-year. Now looking at Slide 8, we're decreasing our 2017 adjusted EBITDA guidance for our RUPS segment by approximately $6 million from our August 2017 guidance.

That's partly due to the weaker than expected third quarter and partly as a buffer against some lingering weakness in Q4, although as I mentioned earlier I do think volumes will flatten out on a year-over-year basis in the last half of this quarter and extending into next year.

Now that would equate to $46 million of adjusted EBITDA, which is a $26 million decrease from prior year. In our Performance Chemicals business, trends have been affected and somewhat skewed by recent hurricanes in Texas and Florida.

The National Association of Realtors reported that total existing home sales increased by 0.7% in September after three straight monthly declines. On an annual basis, existing home sales declined for the first time in more than a year due to ongoing supply shortages and recent hurricanes.

Now total housing inventory has been declining and the lack of available housing has resulted in upward pressure on prices. The decrease in closings can also be attributed to hurricane related damages and existing home sales are likely to be negatively impacted for the remainder of this year.

Same time, accelerating growth is anticipated for repair and remodel activity beginning in 2018 for the first time in several quarters according to the Leading Indicator of Remodeling Activity or LIRA from the Joint Center for Housing Studies of Harvard University.

Now, the LIRA projects that spending will increase from 6.3% in the fourth quarter of 2017 to 7.7% by the third quarter of 2018. The center also reports that U.S. consumers are expected to spend in excess of $330 billion on home upgrades, replacements and routine maintenance, up from $296 billion in the prior year.

Additionally, the Consumer Confidence Index as reported by The Conference Board improved to 119.8 in September 2017, compared with 113.7 in December 2016, which should continue to provide a positive backdrop for housing related demand.

More recently, consumer confidence decreased slightly in September after a marginal improvement in August, driven in part by the hurricane-related damages sustained in Texas and Florida. Now in terms of our raw material costs, that's driven primarily by copper pricing which has worked against us most of this year.

Average COMEX pricing for copper in the third quarter was 34% higher than the third quarter of 2016, and year-to-date average COMEX pricing is up 29% year-over-year.

Now since our strategy is to hedge much of our copper requirements over a two to three year timeframe in order to soften the sudden shifts that can arise in commodity markets, we are only experiencing the impact of a portion of the increase on our 2017 results and Q4 results should only experience a slight negative effect as well.

2018 on the other hand is going to be a little more of a challenge as we are estimating a minimum $10 million increase in our raw material costs based upon our current hedging program and current elevated prices.

We're still working on a plan to offset that increase, and certainly the continued healthy market for building products that most leading indicators are predicting will be helpful in that regard.

Now as you can see on Page 9 of our slide presentation, we're maintaining our 2017 EBITDA guidance for Performance Chemicals at $87 million, which is a $7 million increase from prior year.

For the full-year 2017, we continue to expect adjusted EBITDA margins to be approximately 21%, which is down slightly compared to our year-to-date performance and slightly improved from prior year. Moving now to the outlook regarding our CMC business, the adjusted EBITDA for the trailing 12-month period through September was $63 million.

This run rate reflects considerable margin improvement driven by various factors. First, we're currently benefiting from sudden strength in certain international markets that we serve that really began back in the second quarter.

In China, there has been an overall tightened market supply of coal tar and carbon pitch that has put upward pressure on both raw materials and finished product pricing. This is due to an ongoing shutdown of older steel and coking capacity that does not meet environmental and emissions requirements.

In Australia, the market has also been favorable since pricing is correlated to the trends seen in China. We anticipate that these conditions are relatively temporary and pricing for coal tar products will likely moderate at some point next year, but still be well above recent years' averages.

In addition, through our restructuring actions as well as putting in place several new long-term supply agreements, we've lowered our overall cost structure in a meaningful way.

Therefore, as shown on Slide 10, we're increasing our EBITDA guidance to $63 million from the $46 million communicated in August, which represents a $40 million improvement over last year. On Slide 11, you can see the various drivers in our sales line in 2017.

While CMC will benefit from higher pricing and the stabilization of volumes and PC demand is expected to stay strong, the softness in our RUPS business is expected to keep consolidated sales for 2017 at approximately $1.4 billion.

Turning to Slide 12, our guidance for 2017 consolidated EBITDA on an adjusted basis has been meaningfully increased and we're now targeting $195 million compared with our prior guidance that was provided in August of $185 million, and $174 million in the prior year.

Therefore, our adjusted EPS guidance is now projected to be between $3.70 and $3.80 per share versus our previous guidance provided in August of $3.10 to $3.30 per share, and compared with $2.60 per share in 2016.

The increase in adjusted EPS is primarily due to the improvements in CMC, a continued strong market in Performance Chemicals, as well as a lower than previously expected effective tax rate.

Capital expenditures are still expected to be approximately $70 million to $75 million in 2017, while next year's capital budget will probably be in the $50 million to $60 million range as we have several nice productivity projects that we would like to deploy as we finish the new naphthalene unit in Stickney, Illinois.

Now before taking questions, I'd like to say that I couldn't be more pleased with the performance and attitude of our close to 2,000 global employees. They've continued to embrace change without fear while bringing forward new and powerful ideas that will only make us a better company going forward.

Based on current projections, we will likely finish 2017 at least one year ahead of where people expected us to be. Now while we have had some help along the way, I believe it's the grit and determination of our people that have brought us here. So how do we keep it going? It's a great question and it's one that we ask ourselves on a daily basis.

2018 will bring a fresh set of challenges, some of which I've already mentioned, like higher average raw material pricing in Performance Chemicals and parts of CMC, and the eventual moderation of product pricing in our international coal tar product markets.

Now, as we all know, there are other things that will pop up that are presently unforeseen, as they invariably do.

Now, while any proclamations that I will make about our overall expectations for 2018 will have to wait until February of next year, I do feel good about the countermeasures that we have in our funnel, including interesting acquisition opportunities to help offset whatever headwinds we may face. I'd now like to open it up to questions..

[Operator Instructions] We have a question from Liam Burke of B. Riley FBR..

Leroy, could you give us a sense on the KPC side of the business, how your capacity is matching your current demand or forecasted demand?.

Liam, we're still tight from a capacity standpoint. In fact, I had mentioned about some additional productivity projects for next year. Some of them are designed around continuing to debottleneck and improve our capacity at our existing locations.

So, we are hopeful that by the time we get through 2018 that we will be pretty much in balance from a capacity and demand standpoint.

So, if not right on, then pretty close, but we still have some more work to do, there's still product that we have to go out and buy on the open market in terms of our intermediates, and we think that with the projects for next year we can get most of that taken care of and head into 2019 I think in pretty good shape..

So if I looked at your capacity increase to address your current demand levels, you wouldn't get any benefit in 2018, any offset from the anticipated increase in raw materials costs?.

Actually that's not so, Liam, and I'm sorry if I led you to believe that, I mean because we've had capacity increases that we've been putting in place this year which we've not received a full year's benefit. So we will have benefits in 2018 to help offset some of our raw material cost increases.

But there will be further capacity increases in 2018 that should help out in 2019. The capacity increases for this year that will help us next year are not going to fully offset what we expect in terms of our raw material cost increases, but they will meaningfully I think offset a good part of that number..

Great. Thanks Leroy. And Mike, on the cash flow statement, you had a pension pay or outflow. You also have increased capital expenditures. There was also a step-up in accounts receivable.

Was there something unusual in the quarter or during the year that created that accounts spike?.

Liam, actually no. That comparison, it goes back to the December year-end and that's Q4 sales, and our Q4 sales are always the lowest in our four seasonal quarters. So Q3 is normally the highest sales month.

So, what we're seeing at the end of September in receivables compared to the end of December of last year is a step-up, a lot of that related to the seasonality. In addition to that, we do have more international sales, and the international customers are slower payers, so that's impacted a little bit as well.

And we have had a pickup in CMC sales, and on that side of the business we have a little bit longer payment terms. So when you add all those things together, you see that relatively large increase in accounts receivable from the end of September compared to the end of December of last year..

Okay.

So, there should be some trend, a reversal trend in the fourth quarter?.

Correct..

Great. Thank you, Leroy. Thank you, Mike..

We'll move next to Chris Shaw of Moness, Crespi..

Wanted to ask about the CMC, the pricing for pitch and carbon black feedstock in Asia and Australia, I'm curious why you expect the pricing to come back down.

I would think that the coking capacity is going to come back online in China and all, or was it just really a really big temporary spike and it's just going to moderate, I'm unclear with why that would….

I mean things have moved up quite quickly here over the past couple of quarters, and I think it just – I think there's naturally going to be some market catch-up that will bring pricing back a little bit. I think I mentioned in my prepared comments that we still expect next year to be well above our recent years' average pricing.

So, I think we're just trying to be a little bit cautious in terms of our outlook of the sustainability of such a sudden sharp spike upwards.

Obviously, none of us can sit here and predict with great accuracy as to where it's going to end up, but with as fast as it's gone up and as strongly as it's gone up, I think we're just figuring that at some point here out over the next 6 to 12 months that we're likely to see some pullback, but still have pricing average, like I said, pretty well above recent historical averages..

Okay, that makes some sense.

And then, in rail, I just went through the article just before I got on, but I thought I had seen something from the RTA relative to sort of this disruption from the hurricanes or maybe just wet weather in general, something about lumber causing some disruptions in the rail tie markets, and that was both I think maybe a short-term negative but a longer-term positive.

Do you have any idea of what they were suggesting there [indiscernible]?.

So, as it relates to tie procurement, you are always dealing with I think the weather in terms of helping you or hurting you in terms of being able to get what you need from a raw material standpoint.

When you're dealing with unusually cold winters, wet springs, hurricanes, things like that, they could have temporary disruptions which affect supply, and I'm sure there's some of that going on with the hurricanes.

The fact that the hurricanes came through in a timeframe where quite frankly tie procurement has been pretty lackluster anyway, I don't think it's going to have as big of an effect as it would have had in periods where there was stronger demand.

So, from that standpoint I don't see it having any real measurable effect in terms of pricing, but sometimes it takes a couple of quarters for that stuff to work through..

Okay, great. Appreciate it..

[Operator Instructions] It appears that we have no further questions at this time. I'd be happy to return the call to Mr. Leroy Ball, President and Chief Executive Officer, for any concluding remarks..

Okay, thank you, Leo. Thanks once again everybody who joined this morning's call. I hope that we were able to give you a good sense about where the Company is at, at the current point in time, and the opportunities that lie ahead for us. So, thanks everyone again. Have a great day..

This does conclude today's Koppers Holdings Inc. Third Quarter 2017 Conference Call. You may now disconnect your lines and everyone have a great day..