Koppers Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers First Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. Following the presentation, instructions will be given for the question and answer session.

Operator

Please note that this event is being recorded. I will now turn the call over to Quinn McGuire. Please go ahead.

Speaker 1

Thanks, and good morning. I'm Quinn McGuire, Vice President of Investor Relations. Welcome to our Q1 2024 earnings conference call. We issued our press release earlier today. You may access it via our website at www.koppers.com.

Speaker 1

As indicated in our announcement, we have also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice in 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 August 3, 2024. 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.

Speaker 1

In light of the significant uncertainties inherent in the forward looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives, plans and projected results will be achieved. The company's actual results, performance or achievements may differ materially from those expressed in or implied by such forward looking statements. The company assumes no obligation to update any forward looking statements made during this call. References may also be made today to certain non GAAP financial measures. The press release, which is available on our website, also contains reconciliations of non GAAP financial measures to the most directly comparable GAAP financial measures.

Speaker 1

Joining me for our call today are Leroy Ball, Chief Executive Officer of Koppers and Jimmy Sue Smith, Chief Financial Officer. I will now turn over the discussion to Leroy.

Speaker 2

Thank you, Quinn. Good morning, everyone. I'll start by saying the obvious, which is that despite best efforts from the global coppers team, our Q1 financial results were a disappointment. While we expected adjusted EBITDA will be lower year over year and signaled that in February, we fell short of our forecast and the consensus estimate by about 5%. Now as expected, our Performance Chemicals business and our Railroad and Utility Products and Services business both showed strong year over year growth in sales and profitability.

Speaker 2

Those impressive gains, however, were more than negated by slumping CMHC markets, in particular in North America. An unplanned outage at our facility in Stickney, Illinois caused by weather related factors that contributed to higher costs early in the quarter was far from the only factor, but ultimately made the challenging market dynamics even more difficult to offset. Now in these sorts of situations, we typically get help elsewhere to mitigate difficulties that we're encountering in specific parts of our portfolio. And while some help did come in the form of slightly better than expected Q1 performance from our PC business that ended up getting washed away by a poorer than expected outcome from our railroad maintenance of way business. Now as I'll talk about later in my commentary, I believe that 2024 will still be a strong step forward for Koppers in our quest to reach our 2025 financial commitments and we are taking additional measures to improve our chances of finishing towards the high end of our revised guidance for this year.

Speaker 2

We will take this opportunity however where we seem to be facing more uncertainty than since the pandemic to temper our expectations slightly for the balance of this year. Now let's take a quick look at the headline numbers for the Q1 as seen on slide 4. Consolidated sales totaled $497,600,000 compared with $513,400,000 in the prior year quarter. We generated adjusted EBITDA of $51,500,000 compared with $61,500,000 in the prior year quarter. Now as I mentioned, most of that drop was expected and factored into our projections, but we did finish about 5% off our internal projections.

Speaker 2

Those numbers work out to an adjusted EBITDA margin of 10.3% compared with 12% in the prior year quarter. We had diluted earnings per share of $0.59 compared with $1.19 in the prior year quarter and adjusted earnings per share were 0.62 dollars compared with $1.12 in the prior year quarter. Moving to Slide 6. Now that shows some key results related to our 0 Harm 2.0 program to reenergize employee engagement at the front lines and accelerate our progress towards 0 incidents. First quarter saw a 16% increase in the number of leading activities over the prior year quarter.

Speaker 2

We've talked in the past about how injuries have a negative correlation to the leading activities and so that as leading activities go up, injuries and incidents typically go down. And for the most part, we continue to see that as our recordable injury rate continues to trend once again to an all time best mark. Now of our 45 facilities around the world, 34 operated accident free in the Q1 with the following operations having 0 recordable incidents: Australasia CMC, Australasia PC, Europe CMNC and Europe Performance Chemicals. These safety efforts helped to reduce our overall recordable injury rate by 7% currently at its lowest ever rate through Q1. Now I'd like to turn it over to Chief Financial Officer, Jimmi Sue Smith to talk with you about Q1 financials.

Speaker 3

Thanks, Leroy. Earlier today, we issued a press release detailing our Q1 2024 results. My comments this morning are based on that information. On Slide 8, we had consolidated 1st quarter sales of $498,000,000 down $16,000,000 or 3.1 percent from the prior year quarter. By segment, RUPS sales increased $12,000,000 or 5.6 percent.

Speaker 3

PC sales increased $3,000,000 or 2.2 percent, while Centimeters and C sales decreased $31,000,000 or 20.2 percent from the prior year quarter. On Slide 9, adjusted EBITDA for the Q1 was $52,000,000 resulting in a 10.3% margin. By segment, RUPS generated adjusted EBITDA of $18,000,000 with a 7.9% margin. PC delivered adjusted EBITDA of 30,000,000 dollars 19.9 percent margin and Centimeters and C reported adjusted EBITDA of $4,000,000 with a 3.3% margin. On Slide 10, the RUPS business achieved record 1st quarter sales of $225,000,000 compared to $213,000,000 in the prior year quarter.

Speaker 3

This increase in sales can be attributed to $9,600,000 of volume increases for crossties and a net $8,100,000 of pricing increases across multiple markets, particularly for crossties and domestic utility pulp. These increases were partly offset by lower activity in our maintenance away businesses and a 4.2% volume decrease in our domestic utility pulp business stemming from temporary customer overstock and budget realignment. Market prices for untreated crossties are stable, but remain relatively high. 1st quarter crosstie procurement was up 2% from the prior year quarter and crosstie treatment was 7% higher. Adjusted EBITDA for RUPS was $18,000,000 compared with $16,000,000 in the prior year quarter.

Speaker 3

Profitability increased due primarily to net sales price increases and $3,700,000 from improved plant utilization. These gains were partly offset by $10,600,000 of higher costs related to operating expenses, raw materials and SG and A expenses. Margins for our tie business increased slightly this quarter reflecting some price increases, continue to significantly underperform our pole business. On Slide 11, our Performance Chemicals business delivered strong first quarter sales of 100 and $50,000,000 compared to $147,000,000 in the prior year quarter. This increase came as a result of volume increases of $6,800,000 in the current year period, including a 6.1% volume increase in the Americas, primarily for our copper based preservatives.

Speaker 3

These increases were partly offset by $3,300,000 of lower prices in the Americas and Australasia driven by lower raw material costs. Adjusted EBITDA for PC was $30,000,000 for the quarter compared with $26,000,000 in the prior year quarter. Profitability in this business benefited from volume increases, while the lower sales prices were offset by a decrease in raw material costs. On Slide 12, you see our 1st quarter sales in Centimeters and C of $122,000,000 compared with $153,000,000 in the prior year quarter. This decline was caused by $28,600,000 of lower sales prices across most products.

Speaker 3

This includes carbon pitch where prices were down 24.6 percent globally, along with $11,500,000 of lower volume of carbon pitch and carbon black feedstock. The decreases in carbon pitch prices and volumes were driven by reduced market demand in the current year period, partly offset by volume increases for phthalic anhydride. Adjusted EBITDA for Centimeters and C in the Q1 was $4,000,000 compared with $19,000,000 in the prior year quarter as a result of lower prices and volumes combined with the weather related January outage at our North American plant. These negatives were partly offset by $18,600,000 in lower raw material costs in North America and Europe. Sequentially, the average pricing in major products is 2% lower and the average coal tar costs are 8% lower.

Speaker 3

Compared to the prior year quarter, the average pricing of major products is down 18%, while average coal tar costs are down 16 percent. Slide 14 illustrates our continued balanced approach to capital allocation with 25,800,000 of capital invested back into our business in the Q1. Net capital expenditures for the year are forecast to be $80,000,000 to $90,000,000 We continue to return capital to shareholders through a quarterly dividend of $0.07 per share and to focus on our net leverage with $820,000,000 in net debt and approximately $340,000,000 in available borrowings at March 31, 2024. This is a net leverage ratio of 3.3 times as of March 31 and is indicative of where we expect to exit the year in the low 3s. However, we do anticipate leverage to increase to the high 3s in the second and third quarters as a result of borrowings to complete the acquisition of Brownwood.

Speaker 3

We remain committed to our long term target of 2 to 3 times net leverage ratio and confident in our ability to grow and generate cash. Slide 15 details the recent repricing and upsize of our 7 year 3 $97,000,000 senior secured term loan B due April 10, 2030. This transaction reduced the interest rate margin TLB pricing structure. In addition, the TLB was upsized at par by $100,000,000 increasing the principal balance to $497,000,000 as of April 12, 2024. Proceeds from the Term Loan B will be used for general corporate purposes and to reduce borrowings under our revolving credit facility, including the recent borrowings to fund the acquisition of Brownwood.

Speaker 3

We experienced strong market demand for our TLB and are pleased with the enhanced liquidity and financial flexibility this transaction provides the company. We spent $25,800,000 net on capital expenditures in the Q1 as seen on slide 16. Excluding cash proceeds, the total was $26,300,000 Of that, we spent $14,300,000 on maintenance, $1,100,000 on 0 Harm and $10,900,000 on growth and productivity initiatives. By business segment, we spent $13,500,000 on RUF, $3,200,000 on PC and $7,900,000 on Centimeters and C along with $1,700,000 on corporate projects. On Slide 18, as announced on May 2, our Board of Directors declared a quarterly cash dividend of $0.07 per share of Koppers common stock.

Speaker 3

This dividend will be paid on June 10 to shareholders of record as of the close of trading on May 24. At this planned quarterly dividend rate, subject to review by the Board of Directors, the annual dividend will be $0.28 per share for 2024, a 17% increase over the 2023 dividend. And with that, I'll turn it back over to Leroy.

Speaker 2

Thanks, Jimmi Sue. Let's take a quick look at some notable happenings. As seen on Slide 20, we issued our 2023 annual report and proxy statement, which are available on our Koppers website. You can also access these materials using the QR codes as shown. As seen on Slide 21, we recently completed the acquisition of Brownwood Preserving Company bringing its assets into our UIP portfolio.

Speaker 2

This transaction enables us to increase our presence in existing markets and offers an attractive entry point to new geographic markets for our utility pole business, which we believe continues to have strong macro trends supporting growth potential for the foreseeable future. The integration of the Brownwood team and related capabilities is well underway. We're very pleased to welcome them into the Koppers family. Slide 22 shows the added capacity at our facility in Leesville, Louisiana. We now have a new pole peeler and kiln in place increasing our peeling and drying capacity to cost effectively serve an underserved geographic market where we have historically lacked a presence.

Speaker 2

The Leesville site is close to sources of raw material and once poles are peeled and dried, they're sent to our underutilized treatment facility in Summerville, Texas. Having this operation in place will improve our production efficiencies as well as expand our presence in new utility markets such as Texas. Now on to review of each of the businesses. I'll start with Performance Chemicals on Page 24. Q1 for our PC business played out almost exactly as we had planned it heading into the year.

Speaker 2

We projected flat residential volumes for the year and in Q1 they finished off by about 1%. As anticipated, we realized the annualization of new residential and industrial business in Q1 that will temper as the year progresses. Adding Brownwood as an internal customer will have some negative impacts on our year over year sales dollars and volume comparisons, but we still expect better year over year industrial business due to some customer additions in 2023. Even though the poll market seems to be taking a temporary breather from the frantic pace in 2023, which I'll touch upon when I cover UIP, the overall backdrop for the industrial markets markets remains strong and should underpin our expected continued growth in this market segment in 2024 and beyond. From an operation standpoint, our new micronizing capacity has been completed and should begin its 1st production in May, which will help reduce operating costs in the back half of the year.

Speaker 2

On the raw material side, copper prices have taken a significant uptick in April and are up 17% thus far this year. This should not generally have extensions as these higher costs will need to be passed on through the supply chain if they don't revert back to the price band in which they have fluctuated during 2023. And while we remain cautious on the demand outlook for the remainder of 2024, we're not adjusting our original expectations. If demand continues to be in line with our original expectations, we think we can generate at least a few million more in profitability above our original expectation for the year of $7,000,000 and instead finished with EBITDA improvement of somewhere between $9,000,000 to $11,000,000 Now moving on to our Utility and Industrial Products business shown on Page 25. Both in the U.

Speaker 2

S. As well as globally, Q1 produced record 1st quarter profitability, although only nominally higher than the record Q1 in 2023. Excluding our entry into the Texas market, lower volumes had an approximate 7% impact on sales for the Q1. Now we were able to make that up with $2,600,000 in price, some of our first real sales into Texas and better cost management at the plants to bring results in for the quarter slightly ahead of last year. Contributing to the better cost was the new drying capacity that came online in December, which enabled us to take more capacity in house.

Speaker 2

The second half of the 2,500,000 cubic feet of drying capacity is scheduled to come online in Q2 and will help our cost position further. The volume drop we experienced in the Q1 was not broad based, but isolated among a segment of our customer base that panic bought in 2023 as the hot infrastructure market and its various funding mechanisms set the industry off on a buying spree. Now for those that exhibited more patients, they're sitting on a normal inventory level and we're seeing regular order patterns. But those that are worried about treating industry bottlenecks affecting their projects widened their net of supply to ensure they got everything they wanted and a little bit more. Now these customers are now sitting on higher inventories they need to work through.

Speaker 2

Now that situation has been made a little harder by projects that have been slower to get off the ground due in some cases to delays in grant funding and higher interest rates. Now whether it's a quarter or 2, demand levels will pick back up to where they were and I believe that those with a strong network of assets like copper's will be in the best position to benefit. I want to continue to stress that the long term fundamentals of this business remain strong due to macro trends of aging infrastructure, grid hardening, broadband expansion, electrification and the expansion of renewable energy that will continue to drive a healthy demand for utility poles. Finally, on the UIP front, as I previously mentioned, we closed on Brownwood on April 1 and have familiarizing ourselves with their operations and customer base. This quarter will be spent finishing some of their in process projects and sorting out opportunities to redirect sales resources and open doors with new accounts.

Speaker 2

And while we expect this acquisition to contribute $15,000,000 in EBITDA from a base business standpoint in 2025, meaning pre synergies, we're conservatively modeling only $8,000,000 into our 2024 results as we work to get that business fully integrated. Now our Railroad Products and Services business is summarized on page 26. Despite the rail business contributing to our year over year increase in profitability in RUPS, operating costs and a worse than expected Q1 from our maintenance of way business prevented them from having an even more positive impact on results. Part of the operating cost increase resulted from weather related impacts, while other increases came from higher labor costs in the form of headcount, rates and overtime. The increased labor costs were driven by the need to rebuild inventories up from historically low levels brought on by the railroad's decisions to defer purchasing during the hot hardwood market of 2021 2022.

Speaker 2

Now we're still continuing to pay literally for the decisions made by certain customers that despite our best efforts we could not influence. One of the fundamental flaws of the current contract model that needs to change, As a critical supplier, we need to provide ourselves better protections against the whims of railroad purchasing groups, which we will do through the next contract cycle or else we'll have fundamentally different relationships. At Koppers, we go to great pains to ensure that our customers receive top quality ties that will last for their expected life and provide a safe base for them to transport their goods. That comes at a cost. Certain railroads have understood the value of quality over price and have been willing to pay for it as demonstrated by their agreement to price increases while also under contract to help us cover the historic inflationary cost increases all companies have seen over the past several years.

Speaker 2

Others have elected not to do so. As a result, we've revisited our business model to align it with our customers' true priorities. For some, that's quality and service. For others, it's pure price. To be clear, Koppers will not compromise safety or product quality, but we've probably been going too far to satisfy what priorities to producing a product that's in line with what certain customers' behaviors say about what they really value, which is price.

Speaker 2

As you might be able to infer by my comments, even though we realized some pricing benefit in Q1 from adjustments that went into effect throughout last year, we still haven't been able to reach an agreement with all of our contracted customer base. So we're going to begin approaching things from the other side of the income statement and go hard at costs, which means that we won't be doing anything that isn't explicitly called for under our contracts. In the meantime, we continue to explore other uses for our treating assets so that we can get back to earning our cost of capital on our investments if we can't figure out a way to make it work with certain rail customers. As for tie volumes, demand met expectations in Q1 and will still be better than 2023, although slightly less than original projections. Commercial demand remains as robust as it's been in many years and is still expected to be a strong contributor to 2024 results.

Speaker 2

Finally, our maintenance and weight business detracted from our Q1 improvement by over $1,000,000 in EBITDA and will be a net negative to our year over year results the remainder of the year, but to a lesser extent than what was seen in the Q1. In February, we projected $12,000,000 of year over year improvement for our rail plus utility or RUPS business. Our current projections are being modified to a range of $10,000,000 to $18,000,000 of improvement in EBITDA from 2023. Now that range includes $8,000,000 of net contribution from the Brownwood acquisition, which would imply a $2,000,000 to $10,000,000 reduction of our base estimate, driven by lower projected sales volumes in the rail business combined with the localized excess inventory in the utility business. Finally, on to the CMC business, which is summarized on page 27.

Speaker 2

Despite what looks like a poor Q1 compared to last year's Q1, we actually only finished $3,000,000 in EBITDA off of our expectations for Global Centimeters and C. And while Europe and Australia came in slightly better than expected in Q1, North America drove the negative variance. Even with higher phthalic anhydride volumes, which received a boost due to backfilling for another producer's outage, we endured higher plant costs due to weather related unplanned downtime early in the year, higher raw material costs working their way through inventory and lower pitch volumes and plant throughput. Pitch volumes and throughput will likely be an issue throughout the year, so we need to reduce cost to offset that headwind, which we're in the process of doing. We're projecting some raw material cost relief beginning in Q2, which will work its way through cost of goods over the remainder of the year and we're working hard to see if we can reduce our raw material costs further.

Speaker 2

We also expect a continued benefit from elevated phthalic anhydride volumes to last into the Q2, which will provide at least a short term benefit. For the remainder of 2024, given the Q1 shortfall and lack of end market visibility beyond the next quarter or 2, we're bringing our full year EBITDA expectations for Global Centimeters and C down to $5,000,000 to $10,000,000 below 2023 compared to our original projection earlier this year of EBITDA remaining flat for this segment. We believe that the aluminum markets in the U. S. Have hit their trough and we will see improved demand sometime in the not too distant future.

Speaker 2

We just can't say exactly when. The recent momentum around tariffs on steel and aluminum will have a positive impact on our business as it helps drive more U. S. Production of those materials. Longer term, Century Aluminum's announcement of their intention to build a new aluminum smelter in the U.

Speaker 2

S. Is great news for U. S. Manufacturing and a positive sign that there will always be a critical need for primary aluminum production in the U. S.

Speaker 2

And therefore a need for copper's carbon based products. Moving to our 2024 guidance on Slide 29, we're maintaining consolidated sales growth of 4% to 5%. RUPS sales overall are projected to see $160,000,000 in top line increase with contributions from Brownwood and higher sales in RPS, partially offset by short term pullback in utility volumes. PC sales are forecasted to be flat year over year and CM and C sales are estimated to decrease by $60,000,000 due primarily to price and volume declines in carbon pitch, partially offset by volume increases in phthalic anhydride. Overall, our sales forecast for 2024 is approximately $2,250,000,000 compared with $2,150,000,000 in 2023.

Speaker 2

On Slide 30, we're now targeting a range of $265,000,000 to $280,000,000 in adjusted EBITDA for 2024, which includes $8,000,000 from the Brownwood acquisition. While we expect Centimeters and C to show definite improvement for the remainder of this year, making up the Q1 shortfall will be difficult unless there's an uptick in our end markets before year end. We're pursuing several initiatives for long term improvement in Centimeters and C, but most will not materialize until 2025. All options improving the Centimeters and C business are on the table and decisions will be made in short order. On the positive side, we're projecting that our PC business will sustain its 1st quarter outperformance through the rest of the year and likely add to it.

Speaker 2

On slide 31, a strong contribution from operations including the Brownwood acquisition to adjusted EPS will be offset somewhat by depreciation and amortization and interest which are both coming in a little higher than originally forecast. For the year, we expect to finish 2024 with a range of $4.10 to 4 point $6.0 per share with the upper end of that range representing a new high for Koppers. On slide 32, we're reducing our capital spending estimate to a range of $80,000,000 to $90,000,000 in 2024 compared with $116,000,000 in 2023 on a net basis. Required spending on maintenance and 0 Harm has been cut by $14,000,000 from our beginning of year estimate and is now estimated to be $57,000,000 with approximately $23,000,000 to $33,000,000 dedicated to our growth and productivity projects. We're continuing to target operating cash flows of 150,000,000 and uses of cash will also include our dividend and some share repurchases that we may do to offset share dilution.

Speaker 2

We're still preparing for the termination of our U. S. Pension plan, which would result in a top up contribution of approximately $25,000,000 but the majority of that is now expected to occur in the Q1 of 2025. Slide 33 shows the path to our goal of $315,000,000 to 3 $25,000,000 in adjusted EBITDA by 2025, which reflect the contributions from the Brownwood acquisition. I recognize that there are many moving parts to our business that sometimes make it difficult to fully understand our short term prospects at any given moment, but I truly believe that our diversity is one of our most underappreciated strengths that we will continue to realize the benefits of as time goes on and that our 2025 goals remain squarely within our sights.

Speaker 2

Now I would like to open it up to questions.

Operator

Our first question is from Liam Burke with B. Riley FBR. Please go ahead.

Speaker 4

Yes. Thank you. Good morning, Leroy. Good morning, Jimmy and Sue.

Speaker 5

Good morning, Liam.

Speaker 4

Leroy, CMC, after you had resized the EBITDA margin generator. And then, EBITDA margin generator. And then I guess over the last 3 or 4 quarters, that EBITDA generation has fallen into mid to low single digits. Has something changed in the business? Or is just the pricing on pitch just been so onerous that it's affected the margins here?

Speaker 5

Yes. So it's a good question. We operate now out of 3 regions, right, with 3 facilities. And so, I'd say as it relates to and this business in general, right, goes through its cycles. We talk about that.

Speaker 5

20 22 was a situation that we knew was at the top end of the cycle and we had foreshadowed that that was not going to repeat in 2023 and of course it didn't. Australia and Europe are in solid places, right? They still go through their cycles, but they're in solid places. Now with that, they're not at the peaks of where they were at, but they're still generating good margins, good profitability, and there's not a lot of capital that has to go back into those businesses. So they're in good spots.

Speaker 5

North America is a different situation and it's really not a pricing issue actually. We get some of the best pricing globally on our products coming out of the Centimeters and C business in North America. The North American situation is a it's a volume issue and a cost issue. So when we restructured and went down to one facility in the U. S.

Speaker 5

And took down the 2 remaining, we also which we talked about, but we don't give a lot of play to since we went through a situation where we restructured our supply contracts as well. And if you will reset pricing and how we were going to price the raw material that we were buying on a go forward basis. And what has happened over the course of time is the aluminum markets have contracted and run into a tougher situation from an overall demand standpoint here in the U. S, meaning that there's less demand today than there was. So, while coal tar availability has also shrunk, it's put us in a situation where there's much less throughput coming through the plant today than there was 8 years ago and even 2, 3 years ago.

Speaker 5

And so as that has fallen and we have pricing of raw materials that are elevated because our end market pricing is in a good spot, It's put the plant in a situation where it's having a tough time covering its fixed costs. And so, we have been going through an assessment of what we can do to take fixed costs out. And we're trying to work on the supply side to see what we can do around pricing and contracts as well going forward. But the situation in Centimeters and C, it is North American based, it is U. S.

Speaker 5

Based and it is a cost situation or issue and demand to some extent. But that's the situation we're facing and it's kind of accelerated here over the past probably 6 to 9 months. We had a raw material supplier that was down for a period of time last year, which caused us late in the year to bring over some higher cost material from overseas, which elevated our costs that we're still working through the system. And then we had a customer, a good customer of ours on the aluminum side who took capacity down at the end of last year. And so there was just more aluminum capacity that was coming out of the market.

Speaker 5

And so all that has kind of worked its way into where the aluminum in North America currently sits.

Speaker 4

Great. Thank you. And then on PC, it looked like the industrial business was up well, it was up 15% for the quarter, but you talked about moderation through the balance of the year. That business looked like it was on a steady upward trajectory.

Speaker 5

Yes. So what I mean by that is, I think in my initial comments at the beginning of the year and I still stand by them,

Speaker 2

I think we were

Speaker 5

thinking throughout the entire year, we'd see about an overall 5% to 6% uptick, I think, in industrial, which would include some of the annualization of new business that we took on last year. And so, we brought business on throughout the year last year. So certainly in the early part of the year, you're going to have higher variances, if you will, from new customers that might have been added a little later in the year and that's going to pop the numbers up in the early going to levels like that 15%. As the year goes on and we get we basically lap the origination of our supply agreements with them, those variances will be much smaller, which will bring the number down as the year goes on. But we still expect that we'll be in that 5% to 6% overall increase range.

Speaker 4

Great. Thank you, Leroy.

Speaker 5

You're welcome.

Operator

The next question is from Gary Prestopino with Barrington Research. Please go ahead.

Speaker 6

Hi. Good morning, everyone. Leroy, you're talking about what you're doing on the railroad side, which you're pretty adamant about that if you didn't get these price increases, you're going to take some kind of drastic action. You're now attacking it from the cost side, which I guess I'd like to know what are you going to do differently now versus what you had done? And then with the entities that have

Speaker 5

Yes. Yes. So I think there's always that risk. And what you look, we've had customers who have been great about understanding and working with us on this. All of these relationships ebb and flow.

Speaker 5

And to be honest, a lot of them ebb and flow based upon where the pressure is coming, if you will, from an investor stand point, right? So we all know going back 6, 7, 8 years ago, the heavy push towards precision schedule railroading, which really had a heavy emphasis on cost as well. And so I can tell you the relationships during those periods of time, in most cases for the railroads who were going hard at that were not great. Some of those have turned around and are in better spots now. I guess really what I'm trying to say is, as we sit here today, there's a certain portion of our customer base that I think has recognized the value of who produces high quality products and services them well.

Speaker 5

And for those, they've been willing step up and say, we understand, we've all gone through unprecedented times and we understand that you might be contractually constricted in terms of what you can pass on to us, but we're willing to help you through this. And so for them, we're going to take a consistent approach as we probably have in the past. For those who have drawn a hard line, just more or less say, yeah, you know what, that's your problem. Then in terms of what are we going to do differently? Well, that's going back looking hard at what we're doing today that falls outside of the contract that costs us money, real money.

Speaker 5

And that's and those are the things that we're going to quit doing, which will enable us to cut out a large swath of overtime that we're incurring. It will enable us to likely go down to less people in the plant, because as we won't always be having to juggle things around those particular customers' priorities. And there's things that we do for those customers that end up being in front of commercial business that we end up sacrificing. And I think the approach we're going to take there is different, in which case, we're going to prioritize again the business that we need to be able to make the acceptable profit. So we're going to be able to take out, we think, a good portion of cost.

Speaker 5

Is it going to be able to get us back to where we want entirely? No. But it will certainly, I think, if nothing else, send the message that if what you value truly is price and that's what you care about most, then we're going to do everything we can to put our cost structure in line to give you the lowest cost crossties possible. And it's up to them to decide whether the service that they're getting, the lesser service than what they're used to getting is worth that price or not. And we'll see where it goes.

Speaker 5

But it's going to be more of a pay as you go in terms of what you want. And then as we get to the end of, again, these contracts, we'll work on trying to get something in place that puts us in a much better position to work through the ups and downs of some of these markets.

Speaker 2

One other example, Gary, I'll give

Speaker 5

you just and this is one that has hurt us pretty badly in different periods, which is the green type procurement, right? And when we have to take the direction of our customer base in terms of sort of where we can be at and what they're willing to pay for the untreated crossties that go into our plants, They ultimately feed the cylinders when they air dry. And in a stronger environment for hardwood when pricing is going up and they're reluctant to pay the price to get the ties that we need to keep a consistent flow through our plants. That doesn't have an impact on the front end of things so much. But when you draw inventories down to a certain level, you've got to get them built back up and all of a sudden you're killing your plants by just flooding them with ties everywhere.

Speaker 5

It increases the labor costs significantly. And there's no mechanism within the contracts to be able to charge any of that back. We eat it all. We eat it all. And that just can't happen.

Speaker 2

Okay. Thank you. Appreciate

Speaker 5

it. The

Operator

last question today comes from Michael Matheson with Singular Research. Please go ahead.

Speaker 7

Good morning, you guys, and thanks for taking my question. Good morning. I'd like to start with thank you. I'd like to start with the Brown acquisition. Just some quick arithmetic, it looks to me like your utility pole volumes will increase by about a third.

Speaker 7

When the integration is complete, what do you foresee as the impact on RUPS margins overall?

Speaker 5

So it's a good question. It's a good question. And, you know, Jenny Sue, I'm going to defer to you to sort of take a first crack at this and then I'll provide some of these supporting comments.

Speaker 3

Sure. So, in terms of the utility business margins, I think the I would characterize it as the Brown acquisition margins were similar to the margins that we are experiencing in the utility space. So, I don't think it will significantly impact the margins there. I'm not your comment on volumes, I think did you say you thought they were going to go down by a third?

Speaker 7

No, up by a third.

Speaker 5

Up by

Speaker 3

a third. Okay, all right. Thank you. So, yes, I think the margins will once we sort through sort of integration and supply channels, I think the margins will be in the ballpark of where they have been for the last year or so.

Speaker 7

Okay. Thank you. Looking at Performance Chemicals, in your release you noted a little bit of pricing weakness despite a volume increase. How do you see pricing for the balance of the year?

Speaker 5

Well, pricing, we're more or less locked in for our most of our pricing other than spot stuff. And so I don't expect much of an impact at all. And the dollars that we saw in the much of an impact at all. And the dollars that we saw in the Q1 really nothing compared to some of the movements we've seen over the past few years. So, it will have little to no effect, I think in this year.

Speaker 5

And then, of course, we'll be coming up on renewals at the end of the year and we'll see where that goes. But we're pretty much locked into pricing for all of our largest customers. And so you're not going to see much anything you see on the pricing thing is going to probably more mix related than anything else.

Speaker 7

Great. Well, thank you for the information and the background and congratulations. Thank

Speaker 5

you, Michael.

Operator

This concludes our question and answer session. I would like to turn the conference back over to CEO, Leroy Ball for any closing remarks.

Speaker 5

Thank you. I just again want to thank everybody for the support. As I mentioned at the top of the call, The Q1 financial results were not where we wanted them to be or expected them to be. We still think we have the opportunity to finish the year strong and actually finish the year hopefully towards the higher end of the range that we put out there right now. A lot of work is going on within the various businesses to improve them going forward.

Speaker 5

And we remain committed to our 2025 goals, while we also shape the plan beyond that. So appreciate everybody's interest in Koppers and your support and thank you for that and look forward to catching up with you again next quarter. Thank you.

Operator

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

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Earnings Conference Call
Koppers Q1 2024
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