Koppers Holdings Inc (KOP) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Koppers Third Quarter 2022 Earnings Conference Call and Webcast. (Operator Instructions) Please note that this event is being recorded.

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

Thanks and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our third quarter 2022 earnings conference call. We issued our press release earlier today. You may access it via our website at koppers.com. As indicated in our announcement, we've also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice and prior quarterly conference calls, this is being broadcast live on our website, and a recording of this call will be available on our website for replay through February 4, 2023.

At this time, I would like to direct your attention to our forward-looking disclosure statements seen on Slide 2. Certain comments made on this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of assumptions, risks and uncertainties, including risks described in the cautionary statement included in our press release and in the company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. The company assumes no obligation to update any forward-looking statements made during this call.

References may also be made to certain non-GAAP financial measures. The company has provided with its press release, which is available on our website, reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.

Today, you will hear from the following: 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 a busy one for our Zero Harm team as they're hosting 2 key events in Pittsburgh. Our Zero Harm Truck Driving Championship on November 7 and 8 recognizes our 10 safest and most skilled drivers who represent Koppers while out on the road, delivering essential products and serving as a critical connection to our customers. These finalists reported 0 total accidents from September 2021 through August 2022. Our team of professional truck drivers plays 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 3-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're approaching record lows in incidents. Also we continue to pursue Zero Harm 2.0 as a comprehensive initiative to accelerate our progress to 0 and 0 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 is a key to greater and faster awareness, acceptance and incorporation of Zero Harm procedures.

Now seen on Slide 6, the Zero Harm work streams include frontline training, supporting the SH&E coordinator role, maximizing the user experience in the Zero Harm information system, strengthening our governance oversight and expanding communications and messaging. The work streams are being managed in a formal project environment to recatalyze 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 0 would 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's 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 highs 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. And those sales levels have been driven by historic price appreciation for our products and supported by solid demand dynamics in each of our 3 business segments. Through 9 months, prices added an astounding $271 million to our top line, while adjusted EBITDA through 9 months of $176 million is basically sitting right on the comparable prior year EBITDA number. The silver lining is there is more price to come in 2023, while the cost increases have been decelerating for the most part.

Our CMC 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 remaining high, while we continued working down higher cost inventory that have had a negative impact on margins, a situation that will continue to temper in the fourth quarter and should reverse in January 2023, as our January 1 price increases take effect.

RUPS improved sequentially and 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-plus million 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, speaks 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 continues to find ways to convert challenging conditions into opportunities for growth.

Now I'd 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% compared 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 away businesses from price increases and favorable cost absorption, partly offset by higher raw materials and operating costs. As we expected, we are seeing improvement in the procurement of entry to crossties as market prices stabilize, albeit at a higher level. Crosstie procurement in the third quarter was higher by 41% compared to the prior year, while crosstie 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, that tempered customer demand last year, but is 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 and 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 and 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 in major products was 64% higher than the prior year, while coal tar costs increased 46% over last year. Sequentially, the average pricing in 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 3.5x at quarter end compared with 3.3x at the end of 2021 and 3.8x as of June 30. Our long-term target continues to be 2x to 3x 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 received from asset sales and insurance recoveries, capital expenditures year-to-date are $75 million. We 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. The Slide 18 features a look at our new Koppers home page that went live just a few days ago. The new Kopper 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 represent 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 good.

Now earlier, I referenced our truck drivers. They are 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, the utilities across Florida and the Carolinas in the aftermath of the Ian. Our effort involved 4 plants with our team at Vidalia, Georgia are 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 a 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 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, and 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 effect of 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 the precipice of new record-breaking performance.

So what about the terrible numbers in Q3? Well, there's no getting around the fact, it's a bottom line numbers for PC in the third quarter were in fact awful. The $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 posted since the fourth quarter of 2019. Placed against a 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 2 issues that are under our control, moving in the opposite direction next year. First and foremost were 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 item is the significant strengthening of the U.S. dollar and the negative impact it's had on our foreign earnings. Those factors combined to produce a near all-time low performance we just experienced. But the plans we've been working on behind the scenes have us prime 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 missed and differentiated by the big-box retailers versus the independents, our reset in 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 #1. Second, we steadily brought our inventory levels down to a normalized level throughout 2022 and will head into next year at a stabilized cost level be fitting current copper costs, thereby eliminating the high-cost inventory drag we've experienced out this year. That takes care of problem #2. And since we don't control foreign exchange rates, 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 2 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 reregistration by both the U.S. and Canada. To date, we've won $40 million of annualized business for the utility industry to supply either our legacy water-borne alternative CCA or a 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. Now this is a product category that struggled in 2022 as the Russian-Ukraine war escalated the cost of raw materials to produce, but we have been feverishly 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 patent in MicroPro product called MicroPro XPS. We recently won a sizable account 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 (inaudible) this year, the future continues to look really bright for Performance Chemicals.

Turning to Slide 24 in 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 in quarterly profitability while also reaching double digits in quarterly margin for the first time. And over the past 5 months, find ourselves on an annualized rate to exceed our highest profit year in this business by more than 50%. And 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 of its chemicals now from our PC and CM&C business but does not get credit for that as that income is captured in those 2 business units results. If we weren't constricted due to labor and trucking shortages, our results 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, and we're seeing interest and demand increase, placing our base business on solid ground. We have additional opportunity to reduce our cost through plant automation and improved logistics network and adding drying capacity over the next couple of years. The first place we plan to add drying capacity is at 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 and are in the process of completing due diligence with a plan to close by year-end this year. Equipment has been on order in anticipation of having the property, so we'll be able to move pretty quickly. This will add lower cost whitewood to our Somerville, Texas treaty plant, enabling us to better compete in the Texas creosote core market. Longer term, we're looking at property on the West Coast enter 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 crosstie supply as 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 crossties in North America. This was a $50 million asset deal, which covered their working capital and fixed assets plus a control premium. The business has averaged approximately $50 million in sales over the past few years and should add at least 1.4 million ties to our network. This will help us serve our customer base even better by providing us greater control over where these times go, while also providing us flexibility in asset deployment.

We mentioned at our Investor Day last year that the growth and productivity capital needed to fuel our path to $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 2 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 Somerville, 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. And it also should lessen the labor scarcity and turnover issues we've seen in a few facilities by displacing jobs filled or unfilled at copper site by Gross & Janes production capacity. Third is pushing to capture the current unrealized value of our creosote preservative, now scarce in the market due to blast furnace steel cutbacks.

And finally, the fourth area is supporting further growth in profitability is in our maintenance away business, where we announced a nice contract win with another Class 1 railroad in early October to take back and disposed of end of life crossties. 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 stickiness to our crosstie business, while also adding incentive to grow it by offering an efficient circular solution for our customers for taking back product as we turn shipments of new product back. It's a true win-win scenario.

Now moving to Carbon Materials and Chemicals or CM&C, as seen on Slide 28, this business has defined the odd this year by over becoming a reduction in raw material supply due to the Russia-Ukraine war and the pullback in traditional steel production, high energy costs that have curtailed 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 a record quarterly margin, which finished at close to 21%. So what's happening?

Well, the best place to be in this business is a long 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 as smelter pullbacks due to higher energy costs of taking aluminum capacity offline, roughly at rates not far from the steel pullbacks 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 feedstock to the mix, helping to make up for some of the coal tar shortfall, increased reliability we've experienced at our Sydney plant due to capital improvements and the benefits we're receiving from our enhanced carbon products project, which has displaced a 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, creative volume increases through RPS production increases, creates price increases due to current pricing that's well below market and enhanced carbon products to 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 the $2 billion 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 in adjusted EBITDA of $230 million, the eighth straight annual improvement without KJCC. $230 million is the number we targeted when we first released guidance 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 grasp after we made up 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 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 guidance of $4.10. Taxes continue to be the biggest issue as our significant foreign earnings generation this year and tax code limitation on interest expense deductions are unfortunately having a 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 the 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 of between 85 and $90 million after applying cash proceeds from asset sales and insurance recoveries. Of the $95 million in expected gross spending, over 1/3 of it or $33 million is going towards projects that are producing future growth in earnings. I continue to be excited about what the future holds for Koppers and look forward to sharing our expectations for 2023 in more detail the 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.

(Operator Instructions) The first question today comes from Liam Burke with B. Riley FBR.

I guess, Jimmi Sue, we had a sequential step-up in depreciation amortization as well as a year-over-year step up. Is that a function of the amortization built-in in the acquisitions during the quarter? Or is there 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 onetime and getting back to somewhat of a historical rate?

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

Great. And then on the cash flow, if I looked at you for the first 3 quarters, you're roughly cash flow breakeven, if I took cash from operations less your CapEx. Understanding, you've got $85 million, $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 crosstie procurement that we're seeing, we may not see as much of a working capital decreases 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.

The next question comes from Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. If we -- how are you doing? 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 price consistence in a different environment frankly?

Well. So good question. I mean each of the businesses are different, right? So our RPS, on the raw material side, we don't really take much risk on that as it relates to the Class 1s. 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. We -- 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 in 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.

That was very, very helpful. So then if we look at your 2025 goals and forgive me if I missed 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 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 time, 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 pullback 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 million. And that's no different than any other business that'd 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.

The next question comes from Chris Shaw with Monness, Crespi.

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 will 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.

Great. And speaking of the tax rate could you just -- I don't understand what the interest -- the lack of the interest deduction, what happened there? And then also just how much of a shift next year could the tax rate stay positively?

Yes. So this is Jimmi Sue. The -- there was a change in the tax law this year. There's a deduction -- a 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 U.S. earnings and in 2022, shifted to EBIT. So you lost the add-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 to sort of reverse and for us to have higher U.S. income in 2023 compared to this year.

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 present to other things to the board yet.

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

It'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 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 will 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 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 to $300 million 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 around $125 million. This year, we're going to finish in that $95 million net -- or $85 million to $90 million net range.

Next year, we still have projects that are in process that are -- will contribute earnings next year and the years after that are still in process, right? So you got your normal $65 million -- 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 Newborough for enhanced carbon products. So I'd say, the next few years are still going to be in that $100 million range, but 1/3 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 '25. But at the same time, as that number is 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.

The next question comes from Brian DiRubbio with Baird.

Just a few questions for you. One of the questions I get about copper is the exposure to single-family homes in the Performance Chemicals business. Is there any way you could tell or you 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, it's repair and remodel, which again, we tend to look at existing home turnover and things like that, but there are some other things that are at play that are keeping those markets continue to be strong even with a slowdown in existing home sales. It's when you move outside the U.S. 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 it makes a heck of a lot of sense. Just on price cost, given some of the volatility we're seeing right now in commodities just over the last 6, 7 months, as some of your commodity costs are coming down, how quickly before you have this reset prices with some of your customers?

Well, on the RPS side, there's constant discussion going on in terms of what we're able to procure the untreated hardwood for them and sort of agreement on what we'll go out for in the market from a pricing standpoint. So that's pretty fluid and is happening pretty much regularly and in real time. The coal tar markets, those are getting set depending upon the region, either quarterly or semiannually. 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 on to 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 -- 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 the 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 a flux right now. But as you think about capital allocation and you still have a couple of years on senior notes, how do you think about sort of buying 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 any time? 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 of projects that we have available to us. And M&A, just as you see with the Gross & Janes, as we tend to think about that in terms of being tuck-in adjacent type things that will really offset and replace other projects that we have in the queue. So it has to be better return than what we have today.

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.

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 is now concluded. Thank you for attending today's presentation. You may now disconnect.