Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Koppers’ Third Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the call over to Quynh McGuire. Please go ahead..

Leroy Ball, President and CEO of Koppers; and Jimmi Sue Smith, Chief Financial Officer. I’ll now turn it over to Leroy..

Thank you, Quynh. Good morning everyone. Welcome to a review of our third quarter results. I’m excited to report that we finished the third quarter with record sales and record CMC adjusted EBITDA performance, which keeps us on track for delivering another record year.

We have much to share with you about the details of our financial performance and we’ll do so later on in the call. And as always, we’ll begin with Zero Harm. As seen on Slide 4, next week is the busy one for our Zero Harm team as they are hosting two key events in Pittsburgh.

Our Zero Harm Truck Driving Championship on November 7 and 8 recognizes our ten safest and most skilled drivers who represent Koppers while out on road delivering essential products and serving as a critical connection to our customers. These finalists reported zero total accidents from September, 2021 to August, 2022.

Our team of professional truck drivers play an important role in maintaining a high standard of overall safety performance in an inherently high-risk environment, logging nearly 12 million miles annually to deliver critical goods across the nation.

Also, next week is our annual Zero Harm Coordinator Conference where we’ll have 38 coordinators come together in Pittsburgh for a three-day conference focused on leadership development and relevant safety, health and environmental training.

It’s an opportunity to share ideas and experiences and strengthen the network at the front end of protecting what matters and preserving the future. Slide 5 shows that in the third quarter 22 of our 43 operating facilities worked accident-free.

Year-to-date as of September 30, I’m proud to say that the total recordable rate of safety incidents was 23% lower than at the same time last year and we are approaching record lows and incidents.

Also, we continue to pursue Zero Harm 2.0 as a comprehensive initiative to accelerate our progress to zero injuries and zero environmental harm throughout the organization. We are continuing to use proven strategies and tactics, while also gaining more input from frontline employees as the basis for developing highly practical training tools.

We’re concentrating on peer-to-peer interactions as the key to greater and faster awareness, acceptance and incorporation of Zero Harm procedures.

Now seen on Slide 6, the Zero Harm workstreams include frontline training, supporting the SH and E Coordinator role, maximizing the user experience in the Zero Harm information system, strengthening our governance oversight and expanding communications and messaging.

The workstreams are being managed in a formal project environment to re-catalyze Zero Harm and take it to the next level. The ongoing support and participation of our worldwide team for advancing this Zero Harm culture remains a great source of pride and admiration for our organization.

This journey towards zero will never end and we’re up to the challenge to maintain that focus every day. Now let’s shift gears and talk about our third quarter highlights on Slide 7. To say there is a lot going on will be a dramatic understatement as evidenced by the flurry of news releases we’ve issued over the past few weeks.

Now I’ll get to more details on those items in a bit, but first let me summarize some of our recent financial achievements. Third quarter saw our third straight quarterly historical high in consolidated sales and our second straight quarter of cracking the $500 million mark.

This puts us on track to reach the $2 billion level in sales for the first time in company history. Now those sales levels have been driven by historic price appreciation for our products and supported by solid demand dynamics in each of our three business segments.

Through nine months, prices added an astounding $271 million to our top line, while adjusted EBITDA through nine months of $176 million is basically sitting right on the comparable prior year EBITDA number. The silver lining is there as there is more price to come in 2023 while the cost increases have been decelerating for the most part.

Our CM&C business generated record quarterly results driven by stronger pricing supported by a globally balanced supply and demand environment and continued operations improvements.

Demand for our PC products remained high, while we continued working down higher cost inventory that have had a negative impact on margins, a situation that we’ll continue to temper in the fourth quarter and should reverse in January 2023, as our January 1 price increases take effect.

RUPS improved sequentially year-over-year as hardwood supply continued to increase and demand for utility infrastructure remained robust. Additionally, we were successful in overcoming the dual headwinds of a stronger U.S. dollar on our foreign earnings and effective tax rate increase. Just for perspective, if the U.S.

dollar had been at 2021 levels, we would have had adjusted EBITDA comfortably in the $70 million plus range this quarter. Our highest year-over-year tax rate is expected to take a $0.60 per share bite out of our adjusted EPS and keep us from otherwise easily topping last year’s all-time high.

The impressive results that we delivered speak to the ongoing strength of our diversified business model and the success of the various initiatives of our strategy to expand and optimize our business, which we debuted in September, 2021.

We’re on pace to finish 2022 with another year of record sales and profitability and make meaningful progress in 2023 on our path to reach our $300 million adjusted EBITDA goal in 2025. My deepest appreciation goes out to our incredible team worldwide who continue to find ways to convert challenging conditions into opportunities for growth.

Now I would like to turn it over to our CFO Jimmi Sue Smith, for a more detailed review of third quarter financial results..

Thanks, Leroy. And good morning everyone. My comments are based on the information contained in this morning’s press release, which provided our results for the third quarter of 2022.

On Slide 9, we had record consolidated sales of $536 million for the quarter, an increase of $111 million or 26% over the prior year and our third consecutive quarter of record sales.

By segment, sales for RUPS increased by $21 million or 11%; sales for PC increased by $38 million or 33%; and sales for CM&C increased by $52 million or 43% compared to this quarter last year. On Slide 10, third quarter, adjusted EBITDA on a consolidated basis totaled $69 million or 12.8% compare with $54 million or 12.7% in the prior year.

Moving to our segment results. On Slide 11, sales for RUPS were $208 million compared to $187 million in the prior year with the increase being the result of higher pricing across all markets, especially crossties and utility poles, along with increased activity in our railroad bridge services business.

These increases were partly offset by volume decreases in our utility pole business, mostly due to capacity and transportation constraints in the current labor market.

Adjusted EBITDA for RUPS was $16 million compared with $11 million in the prior year as we saw improvements in our utility pole and maintenance-of-way businesses from price increases and favorable cost absorption, partly offset by higher raw materials and operating cost.

As we expected, we are seeing improvement in the procurement of untreated crossties as market price has stabilized albeit at higher level. Crossties procurement in the third quarter was higher by 41% compared to the prior year while crossties treatment decreased by 6%.

Year-to-date through the third quarter crosstie procurement is up 15% and treatment up 2%. As shown on Slide 12, PC had record sales of $153 million compared to sales of $115 million in the prior year quarter.

Thanks to volume increases of over 30% in the Americas and higher pricing globally, slightly offset by lower volumes in Europe as we continue to restructure and optimize our product portfolio in this part of the world.

With respect to the significant quarterly volume growth in the Americas, this is partly a result of higher lumber prices and a temporary change in consumer spending habits in the third quarter of 2021, the tempered customer demand last year.

But it’s also indicative of the continued steady growth in this business despite the current economic headwinds. Adjusted EBITDA for PC decreased to $17 million from $20 million in the prior year quarter as higher raw material prices and higher cost inventory in a lower copper price environment more than offset global price increases.

We do expect this trend to improve first in the fourth quarter as we have worked through much of the higher cost inventory as of the end of August.

And ultimately, as Leroy said, in 2023, as many customer contracts with limited ability to recoup price increases will expire at year end and are being replaced with new agreements that better reflect the current economic situation.

Slide 13 shows third quarter sales for CM&C business of $175 million compared to $123 million in the prior year, on higher pricing across all product lines, partly offset by slightly lower volumes on non-pitch products.

CM&C achieved record adjusted EBITDA and margin for the quarter of $37 million 21% compared to $23 million and 18% in the prior year as a result of the higher sales prices partly offset by raw material cost increases and an unfavorable impact from foreign currency.

Third quarter average pricing of major products was 64% higher than the prior year, while coal tar cost increased 46% over last year. Sequentially, the average pricing of major products was 14% higher while coal tar costs increased by 2%. On Slide 15, I want to again reiterate our commitment to a balanced approach to capital allocation.

We will continue to invest in our business through capital expenditures that protect and grow our cash flow. At the same time we continually evaluate opportunities to return capital to shareholders through dividends and strategic share repurchases.

Year-to-date, we’ve allocated $14 million to repurchasing shares and have $77 million remaining under our authorization. And this morning we announced we have declared our standard quarterly dividend of $0.05 per share. We ended the quarter with $776 million of net debt and $409 million of available borrowings under the credit facility.

Our net leverage ratio was 3.5 times at quarter end compared with 3.3 times at the end of 2021 and 3.8 times as of June 30. Our long-term target continues to be 2 to 3 times net leverage ratio. Slide 16 is our standard quarterly recap of capital expenditures.

Year-to-date in 2022, we’ve invested $80 million with nearly $27 million of that in growth projects. Net of cash receive from asset sales and insurance recovery, capital expenditures year-to-date are $75 million. We’ve provided the breakdown of capital expenditures by business segment here as well.

With regards to our recent acquisition of Gross & Janes, we expect to be able to offset future spending by utilizing capital equipment already owned by that business and therefore avoid future spending on certain projects that were previously contemplated. And with that, I will turn it back over to Leroy..

Thanks, Jimmi Sue. Before we get into an examination of the business sentiments impacting Koppers, I’d like to introduce you to an exciting new feature that we just rolled out. A newly designed Koppers corporate website we believe will become a vital tool to further our brand presence among key audiences.

Slide 18 features a look at our new Koppers home page that went live just a few days ago.

The new Koppers site reflects the cleaner, visually attractive and intuitive navigation that makes it easier for visitors to locate information and for us to tell our story built around our purpose of protecting what matters and preserving the future to our various stakeholders.

As seen on Slide 19, the new website offers a look into Koppers people, processes and products that represents our culture based on zero harm, sustainability, essential services, and generating benefits to all of our stakeholders. We invite you to visit www.koppers.com to learn more about our approach to doing well by doing goods.

Now, earlier our referenced our truck drivers, they’re the face of the company in many respects as they enter customer sites following emergencies such as Hurricane Ian with critical infrastructure to help get communities back on their feet.

As seen on Slide 20, Koppers teams delivered more than 13,000 poles and 4,000 cross arms to utilities across Florida and the Carolinas in the aftermath of Ian. Our effort involved four plants with our team at Vidalia, Georgia providing the bulk of the supply.

Fortunately, Koppers professionals have extensive experience planning for such events coordinating in advance with those who are impacted, moving material efficiently, working safely within hazardous areas after our natural disaster, disposing of damaged poles and completing restoration in a timely manner.

We truly appreciate the dedication of our teams to bring our customers back online after this hurricane as they have so many others doing so at a high level while always adhering to our zero harm values. Now let’s dive it a little bit deeper into the various drivers of our business now and through our 2025 planning period.

So first, for performance chemicals in general on Slide 22, the market data that supports the demand profile for this business is mixed. Existing home sales continue to decline, which is not a great fact, but home renovation and repair expenditures are still expected to increase in 2023, albeit at lower rates.

In October 28, Wall Street Journal article titled The Home-Improvement Boom Isn’t Over Yet.

Points out some of the market data that I just mentioned while also referencing an aging housing stock in need of greater repairs, an aging population that aims to age in place, which could trigger remodeling and homeowners with the capacity to spend as wages increase and many homeowners avoid the effective rising mortgage rates due to being locked into lower fixed rates.

So that’s far from a doom and gloom scenario and gives us optimism that our PC business is on a precipice of new record breaking performance. So what about the terrible numbers in Q3? Well, there’s no getting around the fact that the bottom line numbers for PC in the third quarter were in fact awful.

$17 million in adjusted EBITDA was the second lowest full third quarter for this business since we bought it in 2014 and the lowest quarterly number we’ve posted since the fourth quarter of 2019.

Placed against the record sales quarter that also resulted in our second lowest quarterly EBITDA margin behind the fourth quarter of 2014, the first full quarter of the PC was under Koppers ownership. Now the reasons behind that were threefold with the two issues that are under our control moving in the opposite direction next year.

First and foremost, where the significant cost increases we’ve experienced this year that have only been partly offset to date through the $46 million in price increases realized year-to-date. The second issue is the higher inventories we carried into 2022 that were valued at near the all time peak of copper pricing.

And the timing for how that higher cost inventory has moved through the financial statements as copper prices have fallen. Third items, the significant strengthening of the U.S. dollar and the negative impact it’s had on our foreign earnings.

Those factors combined to produce the near all time low performance we just experienced, but the plans we’ve been working on behind the scenes have us primed to slingshot to new record performance in 2023. Now, let’s move on to Slide 23 to explain why.

While base demand is expected to be mixed and differentiated by the big box retailers versus the independence, our reset and results is not dependent on big market growth.

Beginning in Q1 of next year, we should be fully caught up with our price increases and finally at the point where we’ve recaptured all costs plus an applicable margin that resolves issue number one.

Second, we steadily brought our inventory levels down to a normalized level throughout 2022 and we’ll head into next year at a stabilize cost level, be fitting current copper costs, thereby eliminating the high cost inventory drag, we’ve experienced throughout this year that takes care of problem number two.

Now, since we don’t control foreign exchange rate, there’s little we can do to mitigate the third issue we’ve experienced, but there are plenty of other steps at our disposal that should more than offset any further strengthening of the dollar or general market pullback.

Now, I’ll touch on just two of the more significant opportunities that have us excited about the future of our PC business.

So as announced on October 17, we’ve made significant inroads to capturing industrial market share currently transitioning from the non-coppers produced treatment preservative pentachlorophenol, which was denied re-registration by both the U.S. and Canada.

Now to date, we’ve won $40 million of annualized business for the utility industry to supply either our legacy waterborne alternative CCA or our new oil borne alternative DCOI. We’ve also continued to grow our fire-retardant business from almost nothing in 2018 to a leading market share today.

This is a product category that struggled in 2022 as the Russia-Ukraine war escalated the cost of our materials to produce. But we have been feverously putting price increases throughout this year and have finally got ourselves caught up as we enter Q4.

Now, the second significant opportunity is the $60 million in potential incremental revenue to displace our competition at a big box retailer with a new patented micro pro product called MicroPro XPS. We recently want a sizeable count in this space, which gets our foot in the door and gives us an opportunity to win more business in the future.

Beyond 2023, we see serious opportunity to grow our foreign income through restructuring our European business on a simplified product portfolio built around MicroPro and adding manufacturing capabilities to our South American operations.

While we might be taking it on a chin this year, the future continues to look really bright for performance chemicals. Turning to Slide 24 and our utility and industrial products, our UIP business, I’m confident in saying that I believe we’ve turned a corner towards a step change in profitability with even greater potential ahead.

Now, through a combination of investments to take out costs and a series of price increases in the U.S., we were able to reach an all time high and quarterly profitability while also reaching double digits and quarterly margin for the first time and over the past five months, find ourselves on an annualized rate to exceed our highest profit year in this business by more than 50%.

Now, that’s not an anomaly, but the first important jump in turning this business into what we thought it could be when we bought it back in 2018. Don’t forget that this business consumes all its chemicals now from our PC and CMC business, but does not get credit for that as that income is capturing those two business units results.

If we weren’t constricted due to labor and trucking shortages, our result in this business would be even better. Now, as I mentioned, the potential for this business is even greater as we look beyond this year.

On Slide 25, federal dollars that were earmarked for infrastructure are beginning to get spent, we’re seeing interest and demand increase placing our base business on solid round. We have additional opportunity to reduce our cost through plant automation and improve logistics network and adding drying capacity over the next couple of years.

The first place we plan to add drying capacity is that our new location in Louisiana, which should become operational in the back half of 2023. We signed a purchase agreement to acquire the property in the third quarter or – and/or in the processor completing due diligence with a plan to close by year end this year.

Equipment has been on order and anticipation of having the property, so we’ll be able to move pretty quickly. Now, this will add lower cost whitewood to our Summerville, Texas treating plant, enabling us to better compete in the Texas creosote pole market.

Longer-term we’re looking at property on the West Coast Center that currently underserved market and our Australian pole business continues to hum along nicely adjusting to the market as it shifts over time, but continuing to grind out consistent profits on a year-by-year basis.

In our railroad products and services business or RPS, we’ve seen the turn we’ve been waiting for in hardware cross high supplies shown on Slide 26. That’s obviously good news is it puts us on pace to finish this year at about 5.5 million ties purchased, but recent activity has us trending above 6 million ties on an annualized basis.

As we announced earlier this week, we closed on the acquisition of Gross & Janes, the largest independent supplier of untreated cross tiesin North America. This was a $15 million asset deal, which covered their working capital and fixed assets plus a control premium.

The businesses averaged approximately $15 million sales over the past few years and should add at least 1.4 million ties to our network. This will help us stir our customer base even better by providing us greater control over where these ties go, while also providing us flexibility in asset deployment.

We mentioned that our Investor Day last year that the growth and productivity capital needed to fewer bid our path at $300 million could be displaced by certain strategic M&A. This is an example of just such a transaction as it will reduce our capital needs at two of our facilities that the Gross & Janes locations will serve.

We’re very happy to have them join the Koppers team enthusiastically, welcome them aboard. Now on Slide 27, if we look to the future for RPS, we believe we will be able to continue to drive improvement in this category and ultimately reach the double-digit margins now experienced on the utility side of our business.

There are a few important contributing factors in play here.

First is the cost efficiencies that should come from the new modernized North Little Rock plant when it comes online in the first half of next year, along with the improved absorption we should experience at the Summerville, Texas plant as it begins to be greater utilized for pole production.

Second are the benefits to be derived from the Gross & Janes acquisition. This will enable us to bring more ties into our facilities while realizing the chemical pull through.

It also should lessen the labor scarcity and turnover issues we’ve seen at a few facilities by displacing jobs filled or unfilled at Koppers sites by Gross & Janes production capacity. Third is pushing to capture the current unrealized value of our cresol preservative now scarce in the market due to blast furnace steel cutbacks.

And finally, the fourth area is supporting further growth and profitability is in our maintenance away business where we announced a nice contract win with another class one railroad in early October to take back and dispose end-of-life cross ties.

The growth in this business reflects our commitment to providing a responsible operation that they can rely upon to solve a critical need.

We believe that having this capability creates a stickiness to our cross tie business, while also adding incentive to grow it by offering an efficient circular solution for our customers are taking back product is we turn shipments of new product back. It’s a true win-win scenario.

Now, moving to Carbon Materials and Chemicals or CMC as seen on Slide 28, this business has defied the odds this year by over becoming a reduction in raw material supply due to the Russian-Ukraine war and the pullback in traditional steel production, high energy costs that have curtail production in key aluminum markets and the stronger dollar that has eroded our strong foreign profitability as it gets translated to U.S.

dollars. In fact, CMC had record quarter profitability in Q3 and record quarterly margin, which finished it close to 21%. So what’s happening? Well, the best place to be in this business is along or even raw material market because it gives us the best opportunity to keep costs low and capture the maximum price spread on our finished products.

This is actually what has occurred this year is smelter pullbacks due to higher energy costs have taken aluminum capacity offline roughly at rates not far from the steel pullback that have kept the global markets outside of China pretty much in check.

Additional positives include the work we’ve done to enhance our production through adding petroleum feedstocks to mix, helping to make up for some of the coal tar shortfall, increased reliability we’ve experienced at our Stickney plant due to capital improvements and the benefits we’re receiving from our enhanced carbon products project, which has displaced the portion of our lower value distillate yield in favor of producing more higher value carbon pitch.

We should finish this year close to $100 million in EBITDA, which is a testament to the hard work and ingenuity of the individuals who keep coming up with new ways to create value in an old line mature business.

Turning to Slide 29, while we don’t expect profitability like we’re seeing this year in 2023, as some of these current market dynamics are bound to change, we also have other opportunities to drive profit improvement through our continued focus on petroleum enhanced products, create a volume increases through our PS production increases, create – so price increases due to current pricing that’s well below market and enhanced carbon products increase our carbon pitch yields and eventually for electric vehicle battery coatings.

We’ve been spending capital money on a project that should come online in late 2023 that will give us full scale capability to produce various enhanced carbon products heading into 2024. Within Koppers, there continues to be a lot of excitement around CMC.

Now let’s move to Slide 31, where you can see that we are expecting to reach to $2 billion in sales mark for the first time in Koppers history. This would represent an almost 20% astounding increase over 2021. Slide 32 shows our expectation to reach a new all-time high adjusted EBITDA of $230 million, the A straight annual improvement without KJCC.

$230 million is the number we targeted when we first released guide for this year back in February. And with all the twists and turns of this past year, I’m happy that this still remains firmly in our grass after we made a considerable ground in the third quarter.

Reaching $230 million would require us to reach a new record fourth quarter, which we believe is realistic for all the reasons that I’ve articulated previously. On Slide 33, you can see that we now expect to finish the year with adjusted EPS of around $4 a share, which is slightly below our previous guide to $4.10.

Tax is continue to be the biggest issue as our significant foreign earnings generation this year and tax code limitation on and interest expense deductions are unfortunately having material impact on our rate. Our U.S. income profile should improve considerably in 2023 with the expected increases coming from our U.S.

based PC and RUPS businesses, while the international pieces of our CMC business are not expected to perform at 2022 levels coupled with a ninth straight expected increase in EBITDA next year, that should enable us to easily generate a new all time high in adjusted earnings per share.

Finally, on Slide 34, you can see that we expect to finish the year with net capital expenditures are between $85 million and $90 million after applying cash proceeds from asset sales and insurance recoveries.

Of the $95 million in expected growth spending over a third of it or $33 million is going towards projects that are producing future growth and earnings. Now continue to be excited about what the future holds for Koppers and look forward to sharing our expectations for 2023 and more detail than next time we get together early next year.

In the meantime, I’m happy to take any questions you might have related to our most recent quarterly results or future actions that I’ve outlined..

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Liam Burke with B. Riley FBR. Please go ahead..

Good morning, Leroy. Good morning, Jimmi Sue..

Hey, Liam..

Good morning..

I guess, Jimmi Sue, we had a sequential step up in depreciation and amortization as well as a year-over-year step up.

Is that a function of the amortization built in and the acquisitions during the quarter or is this something else in there?.

No, it’s a – it was a retirement asset obligation in our European operations. So it’s a fully retired asset and went through our depreciation expense this quarter..

So would that be viewed as one time and getting back to somewhat of a historical rate?.

Exactly. It was about $3 million to $3.5 million and it is a – we would not expect that to recur..

Great, thank you. And then on the cash flow, if I looked at you for the first three quarters you roughly cash flow break even if I took cash from operations lesser CapEx.

Understanding you’ve got a $85 million to $90 million annual CapEx, do you look at fourth quarter as being a strong operating cash flow quarter for you?.

We do. Liam, and one of the reasons is we traditionally see a working capital sort of recapture in the fourth quarter. And so while we are with the increased cross tie procurement that we’re seeing, we may not see as much of a working capital decrease as we have in prior years in the fourth quarter. I wouldn’t expect it to increase.

So even if it just holds steady, I think that we’ll see a strong fourth quarter there..

Great. Thank you, Jimmi Sue..

Thanks..

The next question comes from Laurence Alexander with Jefferies. Please go ahead..

Hi. It’s Dan Rizzo on for Laurence, and thank you for taking my questions..

Hey, Dan..

How you doing?.

Good..

If we think about pricing in railroad and utility products and in performance chemicals.

I guess, how sticky is it? So once you institute price increases, does it generally stay? I mean, how much is pricing sessions in a different environment, frankly?.

Well, it’s – so good question. I mean, each of the businesses are different, right? So RPS, on the raw material side, we don’t really take much risk on that as it relates to the class ones. We do on the black tie business that goes into commercial.

But we have mechanisms within our contracts to be able to increase prices based upon increases in some of our input costs.

I’d say it’s fairly sticky on the RPS side, but you see movements up and down as it relates to what the biggest raw material input being hardwood supply, right? So we’ve seen significant cost – price increases to recoup the cost increases there in the past 12 to 18 months on RPS.

As wood prices go down, those prices will also go down for the railroads as well. We don’t keep that. So you’ll see fluctuation there. A lot of that’s just pass through when we see price increases coming through, but we don’t carry a lot of that risk.

UIP different, and what we’re really doing is catching up on a lot of the cost increases that we’ve incurred over the past 12 months or so. It’s a very strong market. And I’d say with where the demand dynamics are right now, the prices are pretty sticky.

I’d say, we’ll see how sticky they are, when we hit a soft spot at some point in the future, but we’re not expecting that for quite a while now. That business is running really, really strong. We continue to be somewhat supply constrained.

And so we see the next several years as being incredibly strong from a demand standpoint and will certainly contribute to the stickiness in our pricing there.

PC, it’s again, similar to the hardwood side of the market for RPS, you have the copper is the major input there, and we go through hedging to protect us and our customers from major fluctuations and that cost input.

But as that moves up and down, there could be some movements on price up or down that’s reflective of where the market might be at whenever we enter into those agreements. As it relates to the other raw materials, I’d say, it’s fairly sticky in that, we’re not experiencing anything different than our competition is.

So we all need to make sure that we’re getting fair pricing for value. But with all these businesses, a lot of it comes back to the competitive environment that you’re working in, and how aggressive the competition might be in terms of trying to take share and things of that nature.

So I’d say in general, we like where we’re at in all of our businesses in terms of being able to hold on to price except for the fact that, again, with major commodities that make up some of the raw material base.

If they move in the opposite direction, there’s going to be pressure in terms of bringing price down to reflect that as well, just in terms of how you’re seeing probably others react in the competitive markets..

Thank you. That was very, very helpful. So then if we look at your 2025 goals, and forgive me, if I miss this, but does that assume that the macro environment stays the same.

Or I guess, can you reach it if we were to hit a significant recession in the next year or so?.

Well, so when we unveiled those goals last year, we talked about the fact that they – those goals reflected what we felt we could do with the projects that we had available to us that would either lower cost or maybe open up doors into different markets or different geographies. It was not predicated on outsized market growth.

It was not predicated on M&A and things of that nature. By the same token, it wasn’t predicated on a recession either, right? So it was sort of – it was business as usual. So we have a lot of good projects in the queue that we think can absorb some pull back in demand. But look, it really depends upon how deep and how long a recession might be.

We are not recession proof, but we believe we are very resilient through a recession, because we have these businesses that do sort of work counter-cyclically towards each other. So we think we’ll make it through a pullback if one occurs and be in pretty strong position. And we’ll still be able to execute and get value for the projects we’re doing.

But look, any pullback in demand is going to have an impact on our ability to get to 300, and that’s no different than any other business that be facing those sorts of headwinds. But we feel good with where we’re at right now. The projects are starting to pay off.

You’re starting to see that here – beginning here in this third quarter, just as we sort of expected, and we feel really good about next year in terms of what we have in front of us too. So we’re pretty bullish about where our business is at..

Thank you. That’s very helpful. Thank you..

The next question comes from Chris Shaw with Moness, Crespi. Please go ahead..

Good morning, everyone.

How you doing?.

Good, Chris.

How are you?.

Just to clarify, I thought near the end there.

Did you endorse record EPS for next year?.

Well, we’re still finalizing our plan for next year and have not formalized it and taken it to our board for approval next year. We do expect EBITDA to be higher next year. We do expect our geographic earnings mix to move towards our favor from a tax standpoint.

The one thing that’ll work against us a little bit is the interest limitation that has an impact on our tax rate. But all things being considered, I fully expect that when you sort of roll all that together that we would expect to be at a record EPS next year. Yes..

Yes. Great. And speaking of the tax rate, could you – I don’t understand what the interest – the lack of the interest deductions.

What happened there? And then also just how much of a ship next year could the tax rates see positively?.

Yes. So, hi, this is Jimmi Sue. The – there was a change in the tax law this year. There’s a deduction, limit on how much of your interest expense you can deduct, and it’s limited to a percentage of what before 2022 was a percentage of your EBITDA and U.S. earnings, and in 2022 shifted to EBIT, so you lost the ad-back for depreciation.

And so that’s caused us to be limited in our ability to deduct our full interest expense because our interest expense is primarily in the U.S. and combined with the fact that much of our income this year has shifted to foreign earnings outside of the U.S. that’s been sort of a double whammy on us.

We expect the migration of income disorder at reverse and for us to have higher U.S. income in 2023 compared to this year that that will be offset a little bit probably by higher interest expense just given what’s happening in the overall sort of market dynamics.

I’m not going to speculate at this point on where the tax rate may come in for 2023 as we have not completed our planning process or presented sort of those things to the board yet..

Got it.

And then switching to CM&C, what – are you – where’s the coal tar cost right now? Have they sort of – what would you consider get caught up the pricing at this point? Or is there still more coal tar inflation you expect the – sequentially going forward?.

That’s a good question. They’re at – we’re seeing costs at record highs. We’re seeing continued pressure there and I expect we’ll continue to see continued pressure there. I think we’re going to see higher costs still moving into the fourth quarter.

So I don’t think that we have caught up just yet and I think you’re – I think our earnings are reflective of that. We’re capturing still a pretty significant price spread, and so there is still some more catching up to do.

Fourth quarter for sure we’ll see higher costs in that business, and where we stand as we go into next year is a little bit still up in the air. We’re trying to settle on some of that stuff here as we’ll close out this quarter, but we’re not there yet in terms of reaching the peak of coal tar costs..

Got it. Just a quick question on CapEx. I believe it’s elevated this year.

Is there – is it going to come down, you project maybe in 2023 and what do you guys consider, I forget what maintenance CapEx might be?.

Yes. So it’s good to be able to kind of walk through this year because at Investor Day last year we talked about sort of this path at 300 was a series of a number of different projects, many of them which require capital. And I think we laid out up to $275 million of capital that would go into return type of projects.

That’s on – that would be on top of the $65 million or so of repair, maintenance and safety capital that we deploy in a given year. So we – I think we finished last year to around 125, this year we’re going to finish in that 95 net or 85 to 90 net range.

Next year we still have projects that are in process that that are – will contribute earnings next year and the years after that are still in process, right? So you got your normal 65, and we have at least I’d say $35 million-ish that is still in process as it relates to finishing off our project in North Little Rock, finishing off our project in Louisiana, finishing off our project in Newburgh for enhanced carbon products.

So now I’d say the next – the next few years are still going to be in that $100 million range, but a third of that is the capital that’s getting spent to actually get us and move us from where we were at $211 million at the end of 2020 to this $300 million mark by the end of 2025.

But at the same time as that number’s moving up, right, our cash flow should also be moving up as well. So we’ll be having more cash to deploy to not only absorb that but to also deploy in other ways..

Great. That was very helpful. Thanks..

Yes..

The next question comes from Brian DiRubbio with Baird. Please go ahead..

Good morning. Just a few questions for you. One of the questions I get about coppers is the exposure to single-family homes in the Performance Chemicals business.

Is there any way you could tell or know how much of that business went into single family homes versus the repair remodel market?.

Well, I can’t quote you numbers or percentages. All I can tell you is the way that sort of the markets work for us in those businesses is in the U.S. we pay very close attention to the repair remodeling market. That is the market that we believe drives the volume in our product mix there.

It’s not new home builds, its repair and remodel, which again we tend to look at existing home turnover and things like that. But there’s some other things that are at play that are keeping those markets continued to be strong even with a slowdown in existing home sales. It’s when you move outside the U.S.

that they’re – that our business tends to rely a little more on new home construction. But those markets are much, much smaller in terms of the revenue and profitability contribution. So in the U.S., which is what drives our results we pay attention to repair remodeling and existing home sales..

Great. That helps, and that makes a heck of a lot of sense. Just on price costs given some of volatility we’re seeing right now in commodities just over the last six, seven months.

As some of your commodity costs are coming down, how quickly before you have to reset prices with some of your customers?.

Well on the RPS side there’s constant discussions going on in terms of what we’re able to procure the untreated hardwood for them and sort of agreement on what will go out for in the market from a pricing standpoint. So that’s pretty fluid and is happening pretty much regularly in real time.

The coal tar markets, those are getting set depending upon the region either quarterly or semi-annually. And again from a demand standpoint, right, we’re out there in the market trying to ensure that as we see prices moving in any particular direction we can hold onto as much of a spread as possible.

So if there’s pressure on pricing going down on the raw material markets, then there might be some expectation that that might result in lower end market pricing, but that’s not always the case. Obviously, it depends upon just how much supply is out there in those end markets.

That’s why CM&C while those markers are important, and they do tell us a – give us a little bit of visibility into what we can expect in our results there, but there’s so many factors at play. It can be hard to pin it down on any particular one.

I say it probably every call, our team is – I put our team up against anybody in terms of their ability to work the spread on the value of that end market pricing versus what they’re able to pay on the raw material side.

And we’ve seen it time and time again, the year they’re having this year is amazing and so much of it is due to their understanding of the markets and where the demand is at on both sides of the equation supply and end products.

And so I know that’s not – it doesn’t give you a lot of visibility, and I realize that business is a little bit of a black box, but I can tell you as being one of only a few in that business, it – and with the people that we have with a long, long line of experience in being in those markets, we’re able to use that market intelligence and capture pretty much maximum value for our product portfolio on a pretty consistent basis..

Got it. That is helpful just directionally. And final question Jimmi Sue, just obviously capital markets are in a little bit of – in a bit of state of flux right now, but as you think about capital allocation and, you still have a couple years on the senior notes.

How do you think about sort of buy back shares or making M&A versus buying back some of the bonds in the open market, and how do you – are you thinking – even thinking about sort of looking to refinance those senior notes anytime? Or are you waiting closer before they become current?.

We – you correctly pointed out that the capital markets are not extremely welcoming right now for us. But we are continually monitoring those markets and the maturity on those bonds and we’ll step in when we think the markets are conducive to it.

And with respect to capital allocation, we’ve been very clear about having a very balanced approach and between investing in our business to maintain and grow our cash flows and returning capital to shareholders through dividends and/or repurchases.

And with M&A we continually say that anything can happen at any time, but for us right now the focus is really on executing on the projects.

The stable projects that we have available to us and M&A just as you see with Gross & Janes, we tend to think about that in terms of being tuck-in adjacent type things that we really offset and replace other projects that we haven’t in the queue. So it has to be better return than what we have today..

That is helpful. Thank you for all the color. Appreciate it..

Thank you..

Thank you..

At this time, there are no further questions in the queue, and this concludes our question-and-answer session. I would like to turn the conference back over to CEO, Leroy Ball for any closing remarks..

No, I just want to just close by thanking everyone for your continued support and your continued interest in Koppers. So please continue to stay safe. Thank you..

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