Koppers Holdings Inc (KOP) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the Koppers Holdings, Inc. first quarter 2016 earnings conference call. Today's conference is being recorded.

At this time all participants are in a listen-only mode. There will be a question and answer session following today's prepared remarks. Instructions will be given at that time.

At this time I would like to turn the conference to your host, Ms. Quynh McGuire. Please go ahead, ma'am.

Thanks and good morning. My name is Quynh McGuire and I am the Director of Investor Relations. Welcome to our first quarter earnings conference call.

Each of you should have received a copy of our press release. If you haven't, one is available on our website, or you can call Rose Hilinski at 412-227-2444, and we can either fax or e-mail you a copy.

I'd also like to remind you that, as indicated in 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'd like to remind all of you that certain comments made during this conference call may be characterized as forward-looking statements 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'm joined on this morning on the call by Leroy Ball, President and CEO of Koppers, and Mike Zugay, our Chief Financial Officer. At this time I'd like to turn the call over to Leroy Ball.

Thank you, Quynh. Welcome, everyone, to our first quarter earnings call. Now, before going into the details, I'd like to provide you with an update on events of the past quarter.

I believe the actions we are undertaking are moving us in the right direction, and are critical to executing our strategic plan. I'd like to begin with our zero harm initiative that we began rolling out last year.

Zero harm defines how we conduct business every day by creating a culture that places the safety and health of our employees, environment, and communities first in all thoughts, plans, and actions, an aspirational yet attainable goal. I invite you to view our 2015 corporate sustainability report and data now available on the Koppers' website to get a sense of some of the progress we have made concerning zero harm in our first year of this important initiative.

Just in this first quarter, we had 22 out of 33 operating locations work accident free. Those locations cover just over 50% of the hours worked across all of our operating footprint. This represented a nice improvement over the 18 locations that worked accident free in the first quarter of 2015 that cover 42% of all our operating hours worked.

Zero is possible. There is some facility proving it each and every day. Accomplishing major change like this requires belief, commitment, and focused effort. I'm pleased that early on in this process our employees have demonstrated a commitment to operating facilities that are not only profitable, but that also demonstrate a dedication to the safety and quality of life of our employees and neighbors; much more to come on this in the future.

In case you're wondering why I'm spending time on this call to talk about these efforts, it's because I believe that you will see a correlation to our success in the safety, health, and environmental arena of our business as we move forward with what we are able to achieve both operationally and financially.

Now let's move on to an overview of our March quarter results. I'm pleased that we are starting 2016 on the right note, but remain cautious as to how the remainder of the year will play out. The first quarter outperformance was primarily due to our Performance Chemicals business, which reported unseasonably robust profitability.

Year-over-year organic growth was extremely strong, supported by strong underlying metrics. The mild winter weather throughout most of the US also likely led to higher than typical construction activity during the quarter.

The results for the Railroad and Utility Products and Services business slightly declined due to a combination of lower demand in our rail joint business, softness in the utility pole business in Australia, and nonrecurring tolling revenues from the US utility business that was divested in January 2015.

Volumes in our core crosstie treating market were actually pretty strong, with untreated tie volumes for the first quarter at 114% of prior year, and treating volumes flat compared to prior year.

The profitability for our Carbon Materials and Chemicals segment on an adjusted basis was close to flat compared to the prior year quarter due to decreased carbon pitch volumes, driven primarily by the cutback in aluminum smelting in the US in the latter part of 2015 and lower selling prices of products such as carbon black feedstock and naphthalene that are affected by oil prices, almost entirely offset by lower average raw material prices and restructuring cost savings.

From a big picture perspective, progress has been made in the first quarter towards completing our overall goals. We are continuing to implement our CM&C consolidation strategy by reducing global capacity by approximately 50% for coal tar distillation.

We will have either shut down coal tar distillation capacity or sold seven of 11 facilities over a three year period by the end of 2016. To date, we have ceased distillation at five of those sites.

Our Uithoorn, Netherlands facility stopped producing coal tar products in April of 2014. At Follansbee, West Virginia, we ceased distillation in December 2015. At Port Clarence and Scunthorpe, our two UK CM&C facilities, we ceased production in February of 2016. And finally, at our KCCC facility in China, we ceased coal tar distillation effective the beginning of March 2016.

For the remaining two locations, we remain on track with our plans to exit those facilities later this year. We remain in active discussions to sell our 30% interest in the TKK joint venture in China, with the timing of the sale completion in the hands of the provincial government at this time.

As for our Clairton, Pennsylvania facility, we still plan to cease distillation activities at that location by mid July of this year.

So, beginning in 2017, we will have four remaining CM&C facilities where we hold key competitive advantages. Those locations are Stickney, Illinois; Nyborg, Denmark; Mayfield, Australia; and in the Jiangsu Province of China.

On another front, in early April we amended our US credit facility with the following key points. First, we reduced our revolving credit facility by $200 million, from $500 million down to $300 million. We increased the leverage covenant ratio for compliance purposes for each remaining measurement period of the agreement.

We carved out capital expenditures related to our North American and European CM&C restructuring from counting against our fixed charge ratio. This change could conceivably allow us to advance the construction of naphthalene production at Stickney at a slightly quicker pace than what is currently anticipated.

We reset the $75 million basket of cash or non-cash nonrecurring charges related to the sale or discontinuation of businesses back to zero. And we also now have an additional pricing tier that increases our interest rate slightly compared to the old agreement until we get below 3.5 times leverage.

These changes give us the financial flexibility to pursue our restructuring actions as aggressively as we possible can while still incentivizing us to keep the balance sheet under control. Overall, we remain focused on the work we're doing to transform our Company from being significantly tied to the aluminum and steel industries to developing solutions for and applying our proprietary technologies to enhance wood products.

I strong believe that Koppers has started on the path to significantly improving our profitability to a sustainable level, which will in turn create value for our shareholders.

Now I'd like to turn it over to Mike to discuss some key highlights from the first quarter of 2016. Mike?

Thanks, Leroy. As you can see on slide two, revenues for Q1 were $347 million, a decrease of $51 million, or almost 13%, compared to $398 million last year.

The decline was primarily related to our CM&C business, driven by lower sales volumes from carbon pitch and carbon black feedstock combined with lower sales prices for carbon black feedstock and naphthalene. The sales volume reductions for CM&C were mainly in North America and were the result of recent aluminum smelter closures.

Moving to slide three, adjusted EBITDA was $33 million in the first quarter compared to $27 million in the prior year. This was due to increased profitability from the Performance Chemicals business, which more than offset reduced earnings in the RUPS segment.

Now I'd like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $5.9 million compared to $0.6 million in the first quarter of 2015. Adjustments to pre-taxed income for the first quarter amounted to $11.6 million, which were comprised primarily of restructuring expenses for our CM&C consolidation projects.

Adjusted EPS for the quarter was $0.28 per share compared to only $0.03 in the prior year quarter. The adjusted income tax rate, excluding discrete tax items for the quarter, was approximately 35%.

Cash provided by operations was $2.5 million compared to a relatively high $19.7 million in the prior year quarter. This decrease was due mainly to higher working capital usage as a result of increases in accounts receivable and inventories.

Capital expenditures for the quarter were $8.6 million compared to $7 million last year, and we continue to expect to spend approximately $40 million to $45 million in CapEx for 2016.

At quarter-end, we had approximately $138 million borrowed on our $500 million revolver. We reduced the revolver to $300 million with our recent bank amendment. We also had $255 million outstanding on our term loan, $298 million in existing bonds, and $47 million of loans in China, which result in a total gross debt at the end of the quarter of $738 million.

Our leverage ratio at year-end was 4.53, well below the amended covenant of 5.25 times. Our long range goal continues to be a leverage ratio of approximately 3 times.

Our fixed charge ratio was 1.54 compared with the required 1.1 times, which is well above the covenant minimum. And based on our 2016 projections, we're extremely confident that we will remain in compliance with our loan covenants throughout the upcoming year.

Now let's return to slide four in the presentation. Our debt increased very slightly in the quarter. And this was right in line with our estimate, as we generally have higher cash flows in our June, September, and December quarters.

We continue to anticipate paying down debt by $85 million, bringing it from $735 million to $650 million by year-end. When combined with our 2015 actual debt pay down, this would achieve the minimum of our two year pay down target of $200 million.

One item to note is that, at the low end of our 2016 EBITDA target of $160 million and at the high end of our projected capital expenditure amount of $45 million, we still expect to achieve an $85 million debt pay down in 2016. However, in order to achieve any higher debt reduction, we would have to sell non-core assets and generate some additional cash.

In summary, we are continuing to reposition Koppers for long term success by managing our capital structure sensibly with a very, very strong priority on lowering debt.

With that, I'd like to turn it back to Leroy for an update on our business.

Thank you, Mike. Let me now speak to the outlook for each of our business segments, starting with Performance Chemicals.

Underlying trends are still positive as it relates to existing home sales and home repair and remodeling, but the outlook is getting a little murky beyond the next four quarters.

Existing home sales bounced back in March to a seasonally adjusted annual rate of 5.3 million homes, after dropping significantly in February. There is some worry that the housing market is beginning to lose a little momentum after several years of steady increases. The relative choppiness in the numbers over the last five months only help to support that concern.

On the other hand, the leading indicator of remodeling activity, or LIRA, is showing a market that is moving full steam ahead, as their numbers have been revised upward from what I had reported on our last call.

On the February call, I referenced the LIRA projection showing over 6% growth year-over-year for the first three quarters of 2016. The updated projections are now showing full year growth of 8.6%, with annualized growth accelerating even further in the first quarter of 2017 to 9.7%.

There's no question we experienced strong growth in the first quarter compared to prior year, as reflected by our performance, and we do expect that to carry forward for the most part for the rest of the year.

I do have some concerns, as I mentioned earlier, that some business may have been pulled forward due to the unseasonably warm winter through most of the US, so we need to keep our eye on that as the year progresses.

Another positive development for the Performance Chemicals business is the recent standard change enacted by the American Wood Protection Association, or AWPA, to apply a heavier preservative retention requirement to certain treated wood products. The standard is expected to go into effect by the middle of this year.

Now, this move to higher retention ground contact treating requirements will help consumers to make better decisions about the right products to use for the right applications. Because we anticipate an increase in demand as treaters begin adopting this standard, we will be spending approximately $4 million for additional production capacity, which is incorporated into the total $40 million to $45 million of capital spending expectations for 2016 that Mike communicated earlier.

Copper prices have continued to move in a relatively stable band. Since we have most of our copper hedged for 2016, any benefits we receive from lower average copper prices in this year will be relatively modest.

Due to all of the factors that I just reviewed, and taking into account their strong first quarter, we now expect to generate EBITDA of approximately $65 million to $67 million in the Performance Chemicals business in 2016, as reflected on page six of our slide presentation. This is a net change on both ends of the range of $2 million from our previously forecasted adjusted EBITDA of $63 million to $65 million.

Now moving on to Railroad and Utilities Products and Services business, US rail carloads and intermodal units declined 6.5% in the first quarter of 2016 compared to 2015. This is coming off of 2015 volumes that were down 2.5% year-over-year, and has resulted in significant capital spending and operating cuts by the railroad industry.

Now, thankfully we haven't seen that impact on our crosstie volumes yet, but we are forecasting a modest drop in demand in the remainder of the year, as Class I railroads have tightened their 2016 spending programs. The lower spending has definitely had an impact on our rail joint business already, which I expect to also continue throughout the remainder of this year.

As a result, we are narrowing our range of projected adjusted EBITDA generation for this segment, as reflected on slide seven, to $79 million to $82 million in 2016 compared to our prior estimate range of $79 million to $84 million.

Now, we still expect to realize a net savings from cost reduction initiatives, primarily the closure of the Green Spring plant, that should net $3 million this year and serve to offset some of the lost profitability from volume reductions.

Sales volumes in our Australian pole business continue to be down compared with a year ago as predicted, since utilities there continue to pull back on capital spending. The approximate $200 million negative impact built into our plan to accommodate foreign currency remains, although the dollar has appeared to moderate as of late.

Next up, I would like to provide an updated outlook regarding our CM&C business. As you can see from the adjusted EBITDA bridge on slide eight, we are maintaining our anticipated EBITDA guidance in 2016 in the range of $18 million to $21 million, which would represent a $9 million to $12 million improvement over 2015.

I'm confident that we will still get to our range, because CM&C was able to remain relatively flat in the first quarter year-over-year adjusted EBITDA comparison. This occurred despite global pricing of carbon black feedstock and naphthalene being down by 33% and 39% respectively compared to last year, while carbon pitch volumes also lagged prior year by 24% on a global basis, 43% in North America alone. Carbon pitch pricing was also down globally by 11% due to the overall softness in demand.

On the positive front, phthalic anhydride pricing only averaged a 2% decline in pricing despite an 11% decline in benchmark orthoxylene pricing compared to last year's first quarter. This reflects higher pricing spreads that we were able to realize compared to last year.

Now, raw material pricing was also down 21% globally, as expected. That percentage decline will only increase as the year moves forward as we restructure or walk away from various agreements that aren't reflective of the new market environment.

The bottom line is that we are not adjusting any of our projections for the CM&C adjusted EBITDA bridge at this point, as we feel pretty confident with what we have seen through one quarter.

Now, in our press release this morning we announced the signing of a definitive agreement to sell all of our tar distillation properties and assets in the United Kingdom to UK-based Industrial Chemicals Group Limited. The terms of the agreement provide for the transfer of essentially all of the assets at our Port Clarence and Scunthorpe sites to ICGL in exchange for ICGL assuming all historical environmental related liabilities at both sites.

In addition, we are making a modest cash contribution toward the environment remediation that will be ratably released from escrow over the next three years. Closing of the sale is still subject to certain closing conditions, which include the transfer of environmental permits to ICGL, and is expected to occur during the second quarter of 2016.

As I mentioned in the release, this is a transaction that makes perfect sense for Koppers. We are in the midst of a massive restructuring, and this allows us to remove a potential overhang of somewhat uncertain liabilities for a limited cost. The fewer properties we retain and have to clean up, the more we can focus our attention on the remaining business moving forward.

Therefore, when adding all our segments together, we are reaffirming our outlook. We expect to generate sales of approximately $1.5 billion for 2016, as reflected on slide nine.

Sales for Performance Chemicals have been revised upward by $10 million to account for somewhat stronger expected sales volumes, and the low end of RUPS has been adjusted down from prior expectations of relatively flat year-over-year sales, to current projections of a $15 million decline from 2015 to reflect general weakness -- general overall weakness in the rail industry.

Turning to slide 10, adjusted EBITDA is anticipated to be in the range of $160 million to $168 million, compared with the prior forecast of $158 million to $168 million. As a result, adjusted EPS is projected to now be between $1.85 and $2.10, compared with our previous range of $1.80 to $2.10.

Now I'd like to open it up for questions.

Thank you. (Operator instructions.) Chris Shaw, Moness, Crespi & Hardt.

Yes, good morning, everyone. How you doing?

Good, thank you.

Good morning, Chris.

I guess first I wanted to ask -- I think I asked something similarly last quarter on the rail business. You're a little cautious on the demand from the Class I. It was better, I guess, than you maybe thought in 1Q. And I think your competitor is a little more optimistic. I mean, exactly -- are you seeing that in the order volume now or, again, are you just sort of looking at their sort of projected budgets and assuming that the volumes would have to fall?

Yes, I think it's just more looking at the trends, and they only continue to get worse. I mentioned a 6.5% decline year-over-year for the first quarter. Literally as I was walking into this call, I received notification, I think, that April's numbers are down over 11% compared to last year.

So, it's ugly out there. And we've been fortunate we have not seen an impact on our crosstie volumes actually through the current period. So, it hasn't hit us yet, and it may not. But, when you look at the numbers, I just have a hard time sitting here and having an optimistic view that there won't at some point be an impact reaching down into the crosstie volumes.

But, like I say, we haven't seen it yet, but I want to be realistic about it. And we're doing everything we can to certainly make sure that we can manage through that situation and not have it have as much of an impact on us. But, I just think that the numbers would indicate that at some point in time it's going to have an impact on crossties.

I'm sorry. The 11% down in April, what number are you exactly quoting? Is that traffic or industry rail tie?

No, that is traffic.

Okay. I'm looking to ask also in the carbon materials. Will -- the fact that Alcoa said they'd keep open the Intalco smelter in Washington for another three years, or two years or so, is that going to have any meaningful impact on the carbon pitch market? I mean, it's a fairly big smelter. Or is it at this point --?

I mean, it's helpful. It's helpful. I would tend to kind of bring everybody back to the bigger picture, which is certainly aluminum is going to continue to be an important market for us moving forward just by the nature of the process for how we produce products. But, our focus will be on wood treatment preservatives moving forward, and more specifically in that market if it's on the creosote.

So, yes, Intalco remaining open is a positive, and ultimately we're going to need some sort of stabilized aluminum demand for us to be able to produce enough product here domestically to fulfill our other requirements. But, bigger picture, again, our focus is really on the creosote and on the wood treating preservatives side in terms of where our business is heading.

Right. And then just finally on the acquirer, the ICGL, do you understand that they're going to continue to operate those plants and distill coal tar, or is it they're going to use it for anything else?

No. No, they will not be distilling coal tar there. They have other chemical operations. That property could still be used as a terminal, but they will not be using it to distill coal tar.

Great. Thanks.

Eugene Fedotoff, KeyBanc Capital Markets.

Good morning, guys. Great quarter.

Hey, good morning.

Good morning.

Sorry if I missed that, but I just wanted to ask a couple question about your guidance. Given that you're assuming $35.00 oil now versus $30.00 before, I was kind of surprised that CM&C guidance was maintained, first, and just wanted to see if maybe something is offsetting that.

And then second, compared to the guidance, again, provided on the fourth quarter conference call, the working capital requirements for this year, I think you actually reduced them slightly despite the higher oil prices. So, I just wanted to see if you can provide some color on that as well.

Yes. Yes, obviously there's a bunch of moving parts in the CM&C restructuring, a bunch of moving parts. And so, changing our forecast or our assumptions of oil from $30.00 to $35.00 to me is not a big enough move to warrant us increasing our guidance with so many other parts that move in this massive restructuring that we're going through.

Could we see some net benefit? Yes, it's dependent upon everything else going according to plan. And we're only through one quarter of the year. So, for me, I need to see a little bit more results as we move out through this year to get more comfortable as to bumping up any guidance on the CM&C side of things.

In terms of the change in the working capital of a couple million dollars, we're not ready to move off of our $85 million minimum target. With the lower end of the adjusted EBITDA range moving up, for us to get to that $85 million reduction, that allows us to not have to get as much of a benefit from working capital.

So, what we were trying to really reflect in that bridge was, again, hey, if you were worried that the $22 million of working capital reduction was aggressive, it is now less to get to our target because of the higher adjusted EBITDA. So, that's really what it was more about reflecting, not trying to give you an estimate of an exact reduction for the year, but what it would take for us to get to the minimum end of the target range.

Got it. Thanks for that color. Also, actually just to follow up on that, so at current prices, at close to $45.00 a barrel, do you think there is upside potential to the guidance, maybe closer to the higher end?

Well, certainly if it stays at $45.00 through the rest of the year there's no question that'll have a nice positive impact on us. But, it tends to be easy to get lulled into thinking of oil at whatever it happens to be trading at today.

And so, we built our assumptions around $35.00 oil, knowing that the number has moved all around so far this year. It was obviously in the mid $20.00's in January, and everybody thought the world was falling apart.

So, I'm heartened by the fact that it's up in the mid $40.00's and it's holding there for now. But, by the same token, we can be sitting here a quarter from now and see it drop back into the $30.00's.

So, I can't sit here and give you any great prediction as to where oil is going to go. For right now, we want to be on the conservative end of that projection. And again, let's see how the year plays out, get through the second quarter, and then we can adjust if it makes sense.

Got it. Thanks. And then a couple questions on Performance Chemicals; great results in the first quarter.

Yes.

I guess do you have an estimate for a potential increase in volumes, given the EPA changes, the requirements, changes there?

Yes. Well, it's one particular product segment within that group. So, we could expect to see volume increases certainly at a level greater than a 10% increase. It could be even more than that.

But, it depends upon the rate of adoption and things like that. So, it really remains to be seen how this moves forward. We're still really early in this whole process. So, again, once we get out a couple quarters and see who's adopting it and how rapidly they're adopting it, we'll get a much better sense as to what the impact would be on a go-forward basis.

Got it. And as far as the impact from mild weather in the quarter and some pull forward demand, do you have an estimate approximately on what the impact might be as far as the profitability increase in the quarter? And sort of what would be normalized margins for this business going forward?

Yes. Truthfully, I mean, I don't have any idea. We made the statement because obviously we know the weather conditions that were experienced through much of the US. We did see much higher volumes than what we typically do see in the first quarter, so we only have to -- we can only presume that that played some role in it, but there's no way of telling how much.

Last year's first quarter was actually a decent first quarter, probably more typical of what that business has seen year-over-year. So, obviously there was some organic growth that was projected originally in our business that we would have expected to see. And again, the underlying metrics of existing home sales and repair and remodeling I think support that.

But, we would not have expected the type of quarter that we saw in this year's first quarter under normal circumstances. So, we can only assume that some of that had to do with the unseasonably warm weather. But, I can't place a number on it. I really can't.

I understand. And the last question then, can you provide a little bit -- some more details on the tolling agreement, how much of a headwind that agreement will be for the rest of the year?

The vast majority of the profitability associated with that was in the first quarter of last year. That was an arrangement where -- truthfully we did as an accommodation for the acquirer. It wasn't something that we were really interested in continuing on a long term basis.

So, we'd encouraged the acquirer to move as fast as they could to move the treating to their own operations, and they've complied with that. And so, we probably experienced the biggest piece of the benefit in the first quarter of last year. So, it would have much less of an impact as the year moves forward.

Great. Thank you.

You're welcome.

We have no other questions at this time. I'd like to turn it back to your presenters for any additional or closing remarks.

Thank you. I'm pleased with where we stand after one quarter of the year. Many of our initiatives are on track and the transformation of our Company is in full swing.

There remains much more work to be done, but the future of Koppers looks brighter every day. Thank you for your interest and support.

That does conclude today's conference. Thank you all for your participation.