Koppers Holdings Inc (KOP) 2015 Q3 法說會逐字稿

Good day and welcome to the Koppers Holdings Inc. third-quarter 2015 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Quynh McGuire, Director of Investor Relations. Please go ahead.

Thanks, and good morning. My name is Quynh McGuire and I just recently joined the Koppers team as the Company's Director of Investor Relations. Welcome to our third-quarter conference call. Each of you should have received a copy of our press release. If you have not, one is available on our website or you can call Rose Hilinski at 412-227-2444 and we can either fax or email you a copy.

I would also like to remind you that as indicated on our earnings release this morning, we have posted materials to our Investor Relations website that will be referenced in today's call.

Before we get started, I would like to remind all of you that certain comments made during this conference call may be characterized me as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by certain 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 could differ materially from such forward-looking statements.

The Company assumes no obligation to update any forward-looking statements made during this call. References may also be made today to certain non-GAAP financial measures. The Company has provided with its press release, which is available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.

I am joined on this morning's call by Leroy Ball, President and CEO of Koppers, and Mike Zugay, our Chief Financial Officer. At this time, I would like to turn the call over to Leroy Ball.

Thank you, Quynh. Welcome, everyone, to our 2015 third-quarter conference call. Before I get into the third quarter results, I would like to welcome Quynh McGuire as our new Director of Investor Relations. Prior to joining Koppers she has held various roles in corporate finance for approximately 25 years, including 15 years of experience in IR. We're happy to have Quynh with Koppers and look forward to her contributions to the Company.

Our previous Director of Investor Relations, Mike Snyder, is retiring from Koppers after 26 years with the Company. Mike has been our Investor Relations Director since our IPO in 2006 and also a good friend who I will miss. Mike will continue to be involved, however, with our Investor Relations function for the next several months as part of the transition. I would like to thank Mike for his years of service with Koppers and wish him the best in retirement.

To say that a lot has happened since our last call in August would be a massive understatement. Some of the news has been good and some has been bad.

However, the overriding message that I would like people to take away from our comments today is that we continue to remain on track to transform Koppers into a much stronger company that is creating shareholder value through our responsible management of our capital structure, while also driving significant improvement to the bottom line. I am happy to report that, as we sit here in early November, we remain confident in achieving the 2015 adjusted earnings and debt reduction guidance that we first delivered back in February, which will be a significant, given the relentless headwinds that we have been faced with throughout this year.

Further to that, we have made significant advances towards my promise to reduce our reliance and exposure to the rapidly changing carbon materials markets, thereby allowing us to highlight the superior performance of our more structurally sound railroad and utility products and services and performance chemicals businesses, while positioning us for a much brighter future.

So leading with the good news first. Our cash generation initiatives have allowed us to pay down debt by $87 million through the first three quarters. We are well on our way to achieving our goal of paying down $100 million to $125 million of debt for the year. Through the first nine months of this year we generated positive operating cash flow of $95 million compared to $11 million in the first nine months of last year. The $87 million of debt paydown doesn't even include the effect from the $30 million we received from C-Chem on June 30th in connection with the restructuring of our soft pitch agreement as we are still in the process of restructuring our KJCC loans.

We now expect about $12 million to $13 million of that $30 million payment will be used to reduce our Chinese loans.

Now, assuming we are able to complete the Chinese loan restructuring by the end of the year, we estimate that we will finish the year with total debt paydown of at least $115 million, which is approaching the higher end of our target. Now, if for some reason we are unable to close on the restructured China loans by the end of this year, then we would expect to finish 2015 with total debt reduction of just over $100 million.

The second piece of good news that I would like to convey is that the RUPS segment has had another record quarter for both sales and adjusted EBITDA. For the time being, our concerns about potential cutbacks in cross tie treating demand have not materialized while untreated cross tie production remains extremely strong as we continue to try to build dry inventory.

The third piece of good news, as we have now passed the one-year anniversary of the Osmose acquisition, is that our performance chemicals segment is continuing to pay dividends with strong performance, as we see year-over-year volume growth and conditions in the end markets continue to trend favorably.

The fourth positive development is actually on the CMC side of our business and relates to our phthalic anhydride business. As we have previously mentioned, we anticipated significant opportunities for new business in the phthalic market as a result of the US market shrinking to two domestic producers. Within the last two months we have officially secured some of that business and are close to filling out our available capacity for phthalic production.

While I am not ready just yet to talk about the details, we do hope to issue a press release in the near future that summarizes the advances we have made in this market.

The final positive item I would like to highlight is the fact that Nippon Steel's Chinese subsidiary, C-Chem, has begun taking soft pitch from our KJCC joint venture in China as of mid-August. If you remember, we finalized our revised agreement with C-Chem in June, which did not require did not require C-Chem to begin taking product until March of 2016.

I will get into why this is important later in my commentary, but suffice it to say, selling to C-Chem will accelerate KJCC's path to reaching profitability rather than continuing to sell to the traditional pitch market.

Now on to the one piece of bad news since our last call, the US aluminum industry. There has been a rash of announcements in the previous few months about closure or curtailment of significant smelting capacity in the US with some of those announcements as recent as this past Monday.

Of the nine smelters operating in the US, there are plans to curtail capacity of five of those facilities and close a sixth one permanently for anode production.

Altogether, approximately 85,000 metric tons or about 50% of the pre-curtailment demand will come out of the US market by the end of the first quarter of 2016 and much of that is pitch that we had supplied. I can understand why that might make some people who follow us worry because those are some big numbers.

Later in my commentary, however, I will tell you why the news is not necessarily bad for Koppers in the long run and how we plan to manage through the short-term implications.

For now, I will turn it over to Mike Zugay to provide an overview of the results in more detail and after he is finished I will give you a further update on the progress of our initiatives and the outlook for our business for the rest of this year.

Thanks, Leroy.

As you can see on slide 2 of our presentation, consolidated revenues for Q3 were $434 million, a decrease of $6 million or a small 1% compared to last year. This was due to a $64 million reduction in sales for CMC which was driven by lower product pricing as well as lower sales volumes in China.

This reduction more than offset $44 million of incremental revenue from acquisitions net of divestitures and a $13 million increase in our legacy RUPS business.

Moving to slide number 3, third-quarter adjusted EBITDA of $48.5 million was higher than last year's $39.9 million, due to a $7.9 million benefit from acquisitions, again, net of divestitures -- a $4.3 million increase for legacy RUPS, and a $4.4 million reduction in corporate expenses related to acquisition costs that we incurred in 2014.

These increases were partially offset by a reduction in profitability for CMC of $7.6 million, again driven by lower oil prices and losses in China.

Now I am going to discuss several items that are not referenced in our slides. Adjusted income was $13.8 million compared to $12.3 million in the third quarter of 2014. Third-quarter adjusted net income excludes $8.5 million of pretax charges related primarily to impairment and plant closure costs and non-cash LIFO expenses. Adjusted EPS for the third quarter was $0.67 per share compared to $0.60 per share last year.

The adjusted income tax rate, excluding discrete tax items for the third quarter, was lower when compared to last year and this decrease was due to the benefits from the legal entity restructuring project that the Company completed last December. Adjusted EPS for Q3 was negatively affected by an increase in our projected annual adjusted income tax rate and the catch-up effect on year to date earnings. Our adjusted EPS for the third quarter this year would have actually been $0.11 higher without this catch-up effect from the prior quarters in 2015.

Our US GAAP effective tax rate including discrete tax items was 36% for the quarter and is also estimated to be 36% for the full year.

Now let's turn to cash flow and liquidity. Cash provided by operations year to date was $95 million compared to $11 million last year. This very large increase was due mainly to higher net income, higher non-cash amortization expenses, lower working capital needs, and a $30 million cash payment from C-Chem that we receive in late June of 2015. Our capital expenditures year to date were $26 million, compared to a large $59 million in the prior year, which was unusually high due to construction expenditures for the new KJCC plant in China.

At quarter end, we had approximately $138 million borrowed on our $500 million revolver, $270 million on our term loan, $300 million in existing bonds, and $55 million in loans in China and all these sum to a total debt of $763 million.

Our leverage ratio for covenant purposes at quarter end was 4.61, which compares favorably to the required ratio of 5.25. Just as a reminder, our long-range goal continues to be a leverage ratio of somewhere around 3. Our fixed charge ratio was 1.43 as compared to our covenant of 1.1.

We monitor both these ratios weekly and we expect to remain in compliance with our existing bank agreement going forward. Now let's go back to the presentation.

Slide 4 shows that the first nine months of the year we reduced our total debt by $87 million from $850 million to $763 million. As mentioned previously this progress puts us on pace to finish near the high end of our stated goal of $100 million to $125 million of debt reduction this year.

On another front, we continue to monitor the high-yield bond market to look for an opportunity to refinance our $300 million of notes which are due in 2019. The call premium on these bonds drops from approximately 104 to 102.6 on this December 1, which represents a savings of about $4 million, if we do refinance.

However, based on recent discussions with our investment bankers, we don't believe current market conditions are favorable for refinancing our notes. However, we will continue to monitor this and if market conditions improve, we will look to refinance the bonds in 2016.

Now I would like to turn the call over to Leroy for a further update on our businesses.

Thanks, Mike. As I mentioned at the beginning, there is a lot of material to cover so I will get right to it. And I will start with the railroad utility products and services business.

As expected, that business had another record quarter for sales and EBITDA here in the third quarter. If you turn to page 6 of the slide presentation, you will see that we are maintaining our 2015 guidance for this segment.

On our prior call, we mentioned the risk of the Class 1 railroads pulling back on treatment in the fourth quarter and how that could present some risk to achieving our estimates for the year.

We have some good news on that front. At this point, we do not expect to see much of an effect on the results of the remainder of this year due to a pullback in treating a demand.

Instead, we believe that currently the primary risk in this segment is with Australian pole volumes and the foreign-exchange translation of our Australian business. Between volumes and foreign currency, our EBITDA is tracking approximately 35% lower than last year. To date, the strength of our railroad business has offset those lower results by a wide margin, but some question exists as to whether it can continue at such an extreme pace over the prior year for another quarter.

Adjusted EBITDA for the RUPS segment for the third quarter was $24 million compared to $21 million in 2014, which equates to a $3 million increase. That increase was from the legacy railroad business as the profitability from acquisitions was offset by the loss of EBITDA from the sale of the North American utility business. Sales volumes for treated and untreated cross ties increased by 30% and 16%, respectively, compared to the third quarter of 2014, contributing to both top and bottom line organic growth in this business segment.

While volumes were up significantly for procurement, the increase in the Western US was more pronounced than other regions in the quarter as wet weather had held back procurement volumes earlier this year. We are still in the process of catching up.

Overall, we are expecting untreated cross tie procurement to continue to outpace the prior year by more than 25%, but the quarter over quarter improvement began to taper off since procurement volumes began increasing around the middle of the third quarter of 2014.

Treating volumes for the quarter were up by approximately 12% as compared to last year and are up by about 11% year to date. As mentioned in our last call, we have seen some modest volume reductions from the few Class I customers, but we don't expect an overall reduction in demand. We are anticipating lower earnings than previously estimated from Australia utility pole business, but at this point, we believe we can make up for it in other areas.

Our margin improvement activities in this segment continue to meet expectations as the combination of the shutdown and consolidation of our Green Spring, West Virginia plant, the incremental benefits from our operations excellence project completed in mid-2014, and synergies from the Osmose acquisition are tracking on a path to contribute approximately $7 million to EBITDA in 2015. Through three quarters, the railroad utility products and services EBITDA stands at a net improvement over 2014 of $16 million, which is close to the full year EBITDA improvement goal of $20 million. That increase actually masks a reduction in our Australian pole business EBITDA of $3 million for the first nine months compared to last year.

So if you look at our North American rail business by itself, it is actually up by almost $19 million year over year. Looking ahead to 2016 for this segment, while it is too soon to forecast actual numbers, based on what we know now, our expectations are that 2016 will look a lot like 2015 as any pullback on treatment from the Class I due to lower traffic should be offset by cost savings from the closure of Green Spring and higher untreated tie volumes as we continue to try to get inventory levels back to where they were before the tie shortage.

Any year-over-year change in our Australian utility pole results will be highly dependent upon the US Aussie dollar exchange rate.

Now moving on to slide 7 in performance chemicals, as we look at the global market in which we participate, 2015 continues to be a strong year for that business segment as existing home sales and home repair and remodeling have been strong, which tend to drive demand for our products.

In fact, September 2015 completed 12 consecutive months of year-over-year sales growth of existing home sales in the US, with September's annual increase at 9% compared to September 2014. Existing home sales traditionally make up approximately 90% of the housing market and have historically driven repair and remodel spending.

EBITDA for performance chemicals in the third quarter was $14.9 million, which corresponds to a 16% EBITDA margin on $93 million of sales in the quarter. Sales for the third quarter were down slightly from the second quarter due to normal seasonality as the business typically begins to slow in September.

Year to date, this segment has generated EBITDA of $47.1 million at a 17% margin. Lower copper pricing during the quarter provided a modest cost benefit and other raw material and operating costs were pretty much in line with our expectations. Offsetting some of the raw material benefit continues to be the negative translation effect on our international earnings, due to the stronger US dollar. Other than the effect from the stronger dollar, our international business in this segment is performed in line with our expectations. And we expect that to continue through the balance of the year.

We are adjusting performance chemicals EBITDA guidance down slightly by $2 million as our organic growth from market share expansion looks to be tapering off a bit and margin improvement looks like it might finish the year off just slightly from expectations. The good news is that the quality of earnings is still there because at the EBIT level, performance chemicals is actually exceeding our expectations through the first three quarters of the year.

So to summarize, we are adjusting our performance chemicals EBITDA projection for this year to $62 million from our previous expectations of $64 million.

Now, looking ahead to 2016, at a very high level, we see both top and bottom line improvement in this segment over 2015 results, due to continued strong volumes driven by strength in existing home sales, lower raw material costs, and the annualized benefit of our acquisition synergies.

Performance chemicals should continue to be a very positive story for us and contribute nicely towards our expected 2016 improvement.

Now on to CMC. As outlined on slide 8, we have lowered our expectations of finishing the year somewhere between $17 million and $27 million of EBITDA for CMC to now between $9 million and $14 million, due to changes in a few categories that I will explain.

First, we had expected a benefit of $3 million for additional phthalic anhydride sales volumes in the back half of 2015, which actually will not materialize until 2016. Phthalic continues to be a very positive story for us overall and I will talk more about that later, but the benefit we are expecting from higher volumes for this year unfortunately are going to be pushed out by a couple of quarters into next year.

We have also continued to experience negative effects from lower naphthalene prices, as I talked about on last quarter's call, as reduced commercial construction activity in China has resulted in a 24% reduction in selling prices in the third quarter compared to the second quarter, which is over and above what we would normally see due to the drop in oil. We don't see this phenomenon changing any time soon so we anticipate that these depressed pricing levels will continue at least through the fourth quarter and have accounted for that in our projections.

The other item affecting our EBITDA expectations for CMC won't come as a surprise and that is the anticipated reductions in North America carbon pitch sales volumes as a result of the smelter curtailments that have been announced and enacted since our last call in August.

The combination of lower selling prices for naphthalene overseas and lower pitch volumes in North America is expected to lower our adjusted EBITDA by approximately $7 million compared to our previous guidance. Adjusted EBITDA for the third quarter was $9 million, which was $7 million lower than the third quarter of 2014.

Breaking down our third- quarter shortfall by region, North America made up almost $6 million of the difference while Australia was down by more than $2 million. Our operations in China actually did slightly better than the third quarter of last year due to C-Chem beginning to take product from KJCC which offset some of the effect from lower naphthalene prices. Europe was up modestly compared to the prior year due mainly to moving product out from carbon black feedstock market in Europe and into the creosote market in North America, which was part of our strategy for the [K&G] creosote market in North America which was part of our strategy for the KMG creosote business acquisition back in January.

North America's results were negatively affected by approximately $6 million, due to overall lower pricing driven primarily by phthalic anhydride pricing as orthoxylene, the benchmark for phthalic pricing, averaged $0.47 in the third quarter compared to $.60 in the third quarter of 2014. Additionally, lower pitch demand reduced utilization rates at our facilities as we distilled 12% less tar than the third quarter of last year.

This reduction was driven in part by imports of the Chinese aluminum steel, which has affected tar supply as well as pitch demand for us.

I would like to take a few moments now to elaborate on a few of the positive developments that I mentioned in my opening remarks. First of all, as mentioned at the beginning, of this call, one of the three suppliers in the phthalic anhydride phthalic market has exited the business and we continue to believe this will have a positive effect on our volumes as we compete for a higher market share. That scenario continues to progress as we have already picked up several new long-term customer commitments.

Now, through the first six months, our phthalic volumes were actually down slightly compared to last year, but third quarter sales volumes were up 6% compared to 2014 and the increase in sales volumes should accelerate into the fourth quarter and also next year. We estimate that 2016 phthalic sales volumes could increase by more than 20% over 2015 volumes. Additionally, market tightness has caused an increase of approximately 30% market spread over the orthoxylene index.

Now, second, I mentioned earlier that C-Chem began taking product from KJCC for their needle coke and carbon black operations in August, which is a very good outcome for us. Per the revised agreement once they begin taking product, the clock starts ticking on a window of time that they must take a minimal volume that they prepare to move from the approval phase to start-up phase to full production. That period of starting to take products to full production is 15 months. Had they waited until the end of March 2016 to begin taking product, that 15-month period would not have ended until the middle of 2017.

Since they began in August, they will now be scheduled to reach full production by mid-November 2016 or a full 7.5 months earlier than what they were contractually required.

While their volumes for next year will still only represent a third to one half of 2017 expected volumes, this still represents a significant improvement in profitability for this business in 2016 over 2015.

Right now, KJCC is on pace to lose over $3 million at the EBITDA level in 2015. Next year, we expect that the business should at least be operating at a breakeven level while 2017 would represent a significant leap in forward profitability as C-Chem reaches full production.

Now, earlier on the call, I stated that I don't think that the continued deterioration of the US aluminum industry is necessarily bad for Koppers in the long run, which probably had several people scratching their heads. The reason I said that and the reason that I believe that goes back to one of the first things I announced my first earnings call back in February of this year, which is that we will be working hard to deemphasize our CMC business segment as part of our identity moving forward. There were several reasons behind that statement.

Well, one of the primary reasons was to reduce our dependence upon what we saw is a very vulnerable US aluminum market that has the largest concentration of the highest cost smelters in the world. It has been our plan since the beginning of the year to work towards shrinking our CMC business to essentially reconfigure it around the value end markets and that is the goal we have been quietly and, in some cases, not so quietly working towards.

Smelter closure and curtailments have happened at a more rapid pace than what we expected, but it certainly doesn't impede us from our plan of reconfiguring our business model through the restructuring of our operating full footprint.

So will this pullback in aluminum production affect us? Well, the answer in the short term is yes. And as I mentioned previously, the expected reduced volumes in Q4 will make up a piece of the $7 million of EBITDA reduction for the year, due both to lower pitch volumes as well as lower naphthalene pricing. But with naphthalene pricing making up a significant piece of that $7 million reduction.

But our longer-term plan had always factored in significantly reduced US pitch volumes at some point so it was a scenario that we have been working towards anyway. I mentioned in February that CMC could make up less than a third of our sales by the end of 2017. We may actually get there now a year quicker than we thought. Through nine months of 2015 CMC is approximately 38% of our sales revenue and next year it will likely finish at less than the one third mark.

I cannot reiterate enough that that is not a bad thing. And, in fact, while our sales will be dropping over this period, our normalized profitability will be rapidly improving while the business stabilizes. As an immediate short-term action to offset the expected reduction in pitch volumes, we have idled one of our two distillation units at our Stickney, Illinois plant effective as of the end of October and reduced our hourly and salaried staff by 14 people.

Additionally, operations at our Follansbee plant be will be permanently curtailed for tar distillation effective December 31, 2015 and 10 hourly positions will be eliminated at that facility. The reason we have elected to continue running Follansbee until year-end is our desire to build enough inventory of certain products to ensure no supply disruption for our customers. When Follansbee tar goes down at year-end, in combination with the Stickney idling, that will represent almost 50% of our North American tar distillation capacity.

This is the first natural step in the process of bringing our US distillation capacity to be more in line with where raw material supply and end market demand is heading.

Unfortunately, the real casualties in this scenario are our hard-working employees who have given everything they have for our Company, in some cases, for many years and will now unfortunately find themselves out of a job.

It always pains me to have to take these sorts of actions and I don't do it lightly. Nevertheless, I also realize that I have a responsibility to our other employees around the globe and to our shareholders to make sure that we remain a competitive and sustainable company for many years to come. The estimated near-term cost of these actions are fairly nominal and the benefit from the Stickney idling over the remaining two months is netted into the $7 million of EBITDA production I referenced earlier.

The annualized benefit of the Stickney and Follansbee actions approximate $8 million, which will serve to offset some of the lost profitability through the lower sales volumes. There will obviously be more significant charges when we cease naphthalene production at Follansbee and convert the site to a terminal status. We are probably still at least one year away from being able to commit the capital needed for that project.

In addition to these actions, we are also in the process to evaluating our options to reduce raw material costs. There is obviously going to be less demand for product. We are going to be distilling less in the US to accommodate that lower demand. Once again, the move we made earlier this year that to acquire the terminal and distribution assets for creosote and coal tar have set us up nicely to accommodate as much US demand as needed from our European operations and move us considerably closer to operating our US and European regions as one.

One way or the other, we will lower our cost of goods in 2016.

Now, if you turn to slide 9, we made a $60 million revision to our CMC sales guidance to reflect the negative effect we are experiencing on our topline for CMC as a result of lower pitch and carbon black feedstock sales volumes and lower naphthalene sales prices.

Some of that sales reduction has already flowed through our nine-month sales for CMC while the remainder will flow through the fourth quarter. While there are still quite a few open questions remaining, I do overall feel pretty positive about our CMC segment in 2016 and actually expect this segment to make the biggest contribution to our expected earnings improvement over 2015, due primarily to the following.

Number one, improvement in phthalic anhydride sales volume and pricing spreads. Number two, cost savings realized from the continued evolution of our North America and European CMC businesses as they move closer to being restructured into one operating region. Number three, China moving from losses to at least a breakeven status as we exit the TKK and KCCC joint ventures and KJCC quotes profitability and, finally, number four, raw material costs are either reduced in the US or more product gets displaced from the lower value European markets to the higher value US markets.

On a consolidated basis, our guidance for adjusted EBITDA for 2015 is shown on slide 10 has been revised outward to between $155 million to $160 million compared to prior adjusted EBITDA expectations of $165 million to $175 million. The revision is due primarily to the small reductions in performance chemicals, the effect of lower naphthalene pricing and pitch volumes, and the delay of improved phthalic volumes into 2016.

While the EBITDA may end up lower than what we originally projected, we're still realizing quality earnings as depreciation and amortization is tracking much lower than anticipated at the beginning of the year. This is offsetting most of the other differences and enabling us to hold our EPS projections as previously communicated.

In fact, our adjusted EPS guidance had been tightened to $1.65 to $1.75 per share from the previous guidance of $1.60 to $1.90 per share.

As mentioned earlier, there is still a number of moving parts to our business that we need to flesh out over the remainder of this year or so it is still a little too early to provide specific expectations for 2016, but similar to this year, we do expect to provide that more specific guidance on our February 2016 call.

So to conclude, we continue to make improvements to our cost structure to provide for a more stable and profitable business in the future that is less subject to variables beyond our control. We also continue to be diligent with respect to our safety, health, and environmental issues at all areas within Koppers and continue to strive to build a better future for all our stakeholders.

With that, I would now like to open it up for questions.

(Operator Instructions) Lawrence Alexander, Jefferies.

This is Dan Rizzo on for Lawrence. Just a clarification. On the RUPS guidance that you gave for 2016, you said it will look a lot like 2015. Do you mean the growth or just the overall performance?

I would say both, probably top and bottom lines. I think we see a stronger untreated tie demand still moving into next year. As strong as that performance has been this year, we have essentially been treating just about everything we can get in. So our inventory levels are still down quite a bit from what they were before the downturn in untreated ties.

So there is still a lot of catching up to do. So again, as long as weather cooperates and the markets don't change, we expect untreated tie demand to be very strong. In fact, maybe even a little stronger than this year.

We're hedging our bets a little bit on the untreated -- or on the treated demand. While I mentioned we haven't really seen any impact here in the fourth quarter there is still always that chance that, next year, there could be some pullback. And so we are being a little bit careful about that in terms of setting expectations.

So from our standpoint, I think the safest bet is to expect that next year, top and bottom line will look pretty similar to this year.

Okay. Thank you. And then how should we think about free cash flow and uses of cash in 2016 now that you are well underway to hitting the targets you said, both aggressive management and working capital, but now that you are where you wanted to be, what is the outlook going forward?

Well, I think that while we have made great progress in our debt reduction targets, as Mike indicated on the call, we haven't been able to move the leverage ratio much because we are still catching up to the downturn in CMC earnings.

I believe that we are now hitting that trough so the expectation would be that, moving forward, we would start to see an uptick in our trailing 12 months EBITDA for covenant purposes, while we are continuing to move that debt down. Our leverage ratio does move down. The leverage covenant does move down from 5.25 down to 5 at the end of this year. We still have a lot of things that we would love to do and really need to do in terms of restructuring our footprint, which is going to take some cash. And we need to create a little more headroom before we can fully commit to spending some of that money.

So we're still focused on debt reduction and we will look for opportunities to strategically target capital and if we get ahead of our debt reduction targets and we feel like we are making enough headroom and the opportunities are there, we will look to deploy that capital in other spots.

I would say, at this point, and I don't know if this is kind of where you are driving at, you should not expect that we will reinstitute the dividend in 2016. We will continue to be aggressive in paying down debt and, if there are opportunities to deploy cash to acquire a business that fits within our strategy, we will look to do that. But we will be very selective about that and the focus will be primarily on debt reduction and restructuring of our CMC business.

I wasn't really -- thinking of the dividend. I know that debt reduction was the first step before you did some more aggressive restructuring. And you answered that question. But I was wondering, given everything that has happened, is there an anticipated timeframe when how you think you will have enough headroom (multiple speakers).

Yes. I actually -- and you may not because I know it was a long prepared commentary so -- but in there I did mention that we think we are probably a year out from being able to move forward on the naphthalene project. And so I would say sometime end of the third quarter, beginning of fourth quarter is when I -- when we are targeting to be able to more aggressively move forward on that restructuring.

Liam Burke, Wunderlich Securities.

Leroy, you had sequential revenue and margin decline in PC. Housing -- existing home sales were pretty much pretty similar and you mentioned seasonality as one of the reasons why you had the sequential revenue decline. Was it volume only that affected the sequential EBITDA margin reduction?

Pretty much, Liam. The way that there seasonality works is second quarter is typically the strongest quarter. Third quarter is the second strongest quarter. And then, from there it's kind of first and fourth or a little bit of a tossup. But the second quarter there is a lot of product moving as you are kind of early into the outside repair and remodeling season and deck building season and stuff like that. That tends to peak around the middle of the year and then drop off a little bit in the third quarter or a little bit more in the fourth quarter than the first.

So not unexpected. I think we actually bought them smack dab in the middle of last year's third quarter and I think if you would just double their 2014 numbers that we had in our presentation, for this year and last, you will see that our overall sales were up slightly in this year's third quarter compared to last year's. And so we did see a volume tick up, actually this year's third quarter versus last, but, sequentially, it is down and I think you would expect to see that pattern in future years as well.

Okay. So there wasn't any pricing. It was entirely volume that affected margins there?

Pretty much.

Okay. You talked a bit about the restructuring in North America. How are the facilities utilization levels in Europe? Could you touch on that a bit?

In our tar distillation?

Yes. I'm sorry.

Well, that is fine. So our Nyborg facility continues to operate at pretty high rates of utilization. Anywhere from 90% to 100%. Our Port Clarence facility is operating at much lower utilization than that. And our Nyborg facility is our -- that is our kind of our crown jewel facility. It is the best facility that we have from an operating standpoint.

And as we continue to look to further consolidate capacity and bring North America and Europe into one region, you can expect Nyborg will be certainly a prime focus for us in terms of concentrating capacity.

Eugene Fedotoff, KeyBanc Capital Markets.

I just wanted to follow up on Performance Chemicals. I saw that you reduced guidance year-over-year, in EBITDA for the segment, if my math is correct, that shows about $15 million in EBITDA in fourth quarter for that segment. Given the seasonality, you just mentioned that usually fourth quarter is a seasonally lower quarter. What are your expectations? What is going to help EBITDA in the segment?

Well, we are not actually -- it will be a seasonally lower quarter, but we are actually seeing some stronger demand in product, certainly at the beginning of this quarter. We expect to see some pickup from some of the lower raw material costs that have been flowing through. Those are probably two of the biggest, I would say, components to the expectations in the stronger fourth quarter.

And revenues?

They should be coming down a little bit. They will be better than, I think, where we would have expected originally.

I see. Thanks. And on pricing in that segment, you mentioned lower raw material originally going forward. Are you seeing any change in competitive pricing, compare as to reduced pricing, or any of that nature?

Well, I think that is always an area, again, that you have to manage. It is a tough -- I would say we have strong competitors out there who are trying to take advantage of everything that they can in the market. That is not unexpected. Continue to try and sell our strong service capabilities and try to demonstrate the value for our product. But I would say that is kind of just a normal activity that you would normally see. We are seeing that as probably as expected. Is it any more than it would have normally is? It is hard to say. It's really hard to say.

But certainly, the competition is out there. Trying to defend positions, trying to take positions. I think we, for the most part, have done a pretty good job of defending our market share and have actually done a pretty decent job of actually taking a little bit. But we continue to be focused on trying to maintain our margins. Invariably, when copper does get down to where it is at, sometimes you do find yourself in a position where it becomes -- begins to get tougher in terms of holding price.

And I am not going to get into specific discussions on accounts and things like that. I would just say, overall, we have been able to maintain our pricing pretty much as we had planned coming into the year. So it always remains a risk as copper continues to be down at these levels. But I think we do a pretty good job of defending it.

Thanks. And on the last question on the debt to pay down, you seem to be on target for $100 million, $125 million. This year, and I believe at the end of last year or this year, you said that the goal is more reduction. For next year and it just wondering if there is any update on that $100 million, $125 million number for next year.

Yes. So I think I actually did a little bit of an update last quarter on that because the $100 million to $125 million for each of the two years, that $50 million difference was predicated on essentially three events occurring. So it was $100 million under normal operations and working capital management. And then the additional $50 million, if we were to get from that $200 million to $250 million would come from three different areas. It would come from this -- the negotiation with Nippon Steel and C-Chem on that revised soft pitch agreement that would result in that payment that they made to us that we are going to apply, as we mentioned, I think, $12 million to $13 million of that to debt. So that was a piece of it. That has occurred. Okay?

Second piece of it was negotiating a sale of our 30% interest in our TKK joint venture and getting the $9.5 million loan we have outstanding paid back. So that two of those more or less made up one year about $25 million. And we are in the process of continuing to negotiate that TKK sale. We are just not quite there yet.

And then the second piece of that was our ability to realize an adequate value for a couple of businesses that we are looking to divest And what we had announced, I think, on the last call was that in going to a process for the one business that we expected could bring the most value, the numbers that were coming in were lower than where we felt we needed to be. And we did not want to destroy value so we did not want to sell the business at any price. And we elected to hold onto the business.

So, with that business not being targeted for sell at this point, we backed off of the $250 million and instead changed it to $200 million to $225 million based on the other two items that I mentioned that I think we will be successful on, but this third one, at this point, it doesn't look like we will make a sale of that business and therefore that other additional $25 million will likely not occur. So the current target is $200 million to $225 million over this two-year period. We think we will be well on our way through this first year and we're just trying to finalize our plans for next year to make sure that we will be on target to be able to meet the guidance that we had given at the beginning of this year for the second year as well. Does that help?

Chris Shaw, Monness, Crespi.

(Operator Instructions)

You are actually surprisingly upbeat around the aluminum smelter curtailment and pitch, obviously, you have been working on lessening your exposure to that business. But it made me think about what is -- where has pricing gone in pitch this year. Is that -- is pitch still profitable or is that maybe why you are not so excited for not or not going to miss having the business because it is not so profitable?

Well, it is one of the reasons why. Yes. When I said we wanted to structure -- try and structure our business around our more value product lines, that one I would say with where things have evolved, doesn't really fit into that category. Now, again, we can't -- we are still in coal tar. We cannot get out of making carbon pitch. And so we will continue to be in that business and -- but, yes, pricing actually for us this year has in the US market been pretty good.

But, by the same token, when obviously the aluminum producers are taking other costs into account, we are trying to -- they're in a bad situation. They are trying to drive down costs as much as they can. So it is one piece of their overall decision-making process. I think what you would have seen if they would have kept some of that capacity open, as you probably would have seen, more pressure on pricing moving forward, but as it has been so far for this year, actually our pricing has been -- has held up pretty well. In 2015 timeframe.

That leads me sort of to the next question about your coal tar cost. I think you said that some of them are on annual contracts. Have you guys any impression of where those prices or those costs will end up for 2016 or are you seeking some relief but do you think you're going to get it?

Yes. So they vary. They do vary. I want to be careful about really talking about any specific tactics. I would just say that we do have options in this area. Certainly acquiring the creosote distribution business and getting the terminal, getting those assets to move product pretty freely between Europe and North America has opened up a window to move product into the US. It has opened up an opportunity to bring in coal tar into the US. That was a key move for us.

And as it is turning out and as we thought it would at some point, it is a move we may end up having to rely upon, but it will be to our benefit. So I said, one way or another, we will reduce our cost of goods in 2015. It will come as a result of either lower raw material pricing or us moving more products, either and the product or coal tar in from Europe. So it is just a fact of life with us needing to have a viable business model here.

So the good thing is, we have options. And so we are going to look at those options that we are going to approach it aggressively and make what we think is ultimately the best long-term decision for the Company. But, from that standpoint, we think we will be in a better spot in 2016 one way or the other. I can't sit here and forecast to you which way it will go.

Okay. And just further clarification on -- you were talking about potentially doing that asset sale. You have not identified what that asset is, right?

No.

Let me just -- a separate question. I just -- the pole business in Australia, why does that still makes sense -- I know you said sold the other utility pole business, but why is the Australian pole business still -- why do you still have that in your portfolio?

It's a business that we talked about a few different times. They kind of just print money. While volumes are down this year, which is affecting it a little bit, it has been actually more of the translation effect on the Aussie dollar and a stronger US dollar that has more of an impact on the results. But, we hold a significant market share in that market over there. We now have a tax structure in place that allows us to bring them back cash from Australia into the US at much lower effective rates. So when you are looking to generate cash to deploy in other areas, that is a great cash cow. I mean, it is not a great growth business, but it is a great cash cow and so that is why it continues to remain a part of our portfolio.

(Operator Instructions) We have no further questions at this time.

Okay. Well, I hope that our shareholders were able to see the progress we have made in the first three quarters of 2015. And while 2015 results promise to be much improved from 2014, I believe we will actually see a business in 2016 that has been significantly transformed to generate higher margins and lower volatility with significant opportunities for growth moving forward. We thank everyone for your participation in today's call and appreciate your continued interest in Koppers. Thank you.

That will conclude today's conference call. Thank you, ladies and gentlemen. You may now disconnect.