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Edited Transcript of KOP earnings conference call or presentation 3-May-19 3:00pm GMT

Q1 2019 Koppers Holdings Inc Earnings Call

PITTSBURGH May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Koppers Holdings Inc earnings conference call or presentation Friday, May 3, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leroy M. Ball

Koppers Holdings Inc. - President, CEO & Director

* Michael J. Zugay

Koppers Holdings Inc. - CFO & Treasurer

* Quynh T. McGuire

Koppers Holdings Inc. - Director of IR - Koppers Inc

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Conference Call Participants

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* Christopher Lawrence Shaw

Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst

* Huang Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Liam Dalton Burke

B. Riley FBR, Inc., Research Division - Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Roger Neil Spitz

BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst

* Scott Benjamin Blumenthal

Emerald Research - Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' First Quarter 2019 Earnings Conference Call. (Operator Instructions)

Please note that this event is being recorded. I would now like to turn the call over to Quynh McGuire. Please go ahead.

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Quynh T. McGuire, Koppers Holdings Inc. - Director of IR - Koppers Inc [2]

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Thanks, and good morning. I'm Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our first quarter 2019 earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our earnings release this morning, 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 site for replay through June 3, 2019.

Before we get started, I would like to direct your attention to our forward-looking disclosure statements. Certain comments made during 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 our 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 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.

Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer and Treasurer. I'll now turn this call over to Leroy.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [3]

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Thank you, Quynh. Welcome everyone to our first quarter 2019 earnings call. I'm pleased to report that for the March quarter we withstood several challenges and still posted results within the range of our expectations. From January through March, the Eastern and Southern U.S. experienced below-average temperatures overall, and the resulting weather wreaked havoc on both our supply chain and our end markets. That made for a challenging beginning to the construction season, and the incessantly wet weather has made it difficult to build untreated crosstie inventories, also having some impact on utility pole demand. In our railroad products and services business, the strong commercial crosstie market led to better pricing as well as compensated for an ongoing lack of dry crosstie to treat in order to meet Class 1 demand. Our Performance Chemicals segment saw slight softness in its industrial markets, a slower-than-expected start to the residential construction season and higher average raw material cost. However, these factors were mitigated by certain pricing and market share gains; a further displacement of third-party raw material purchases, with lower-cost intermediate raw material production; and insurance recovery related to our New Zealand plant; and operating and administrative cost savings. The hard work and dedication of our 2,200-plus employees around the world enabled us to overcome those issues and remain on track for our 2019 guidance. As expected, our profit mix is shifting back toward our wood preservative and treatment businesses, which lines up with our long-term strategy.

Let me spend a few minutes giving an update on Zero Harm. We capped off our best-ever safety year in 2018 and have begun 2019 once again trending towards another improved year. In total, 37 out of 47 operating locations had 0 recordable injuries in the first quarter. And we're also seeking improvement in other metrics that indicate that our risk for serious incidents have significantly decreased. When it comes to safety, one can never claim victory, and so we will remain relentless with a focus of identifying and eliminating exposure.

As part of our acquisition integration process, we've already started Zero Harm training with our Utility and Industrial Products and recovery resources businesses and expect to conclude by the end of 2019. This targeted approach ensures that our employees are equipped with the same level of safety tools and education at all of our operating locations.

In April, I was honored to represent Koppers in receiving the Safety in Action Icon Award for Safety Leadership at the National DEKRA Organizational Safety and Reliability conference held in Nashville, Tennessee. This award is a testament to the strides our company has made in advancing a culture that prioritizes the safety and well-being of our people. The recognition goes to our employees because it has been made possible through their hard work and willingness to fully embrace the Zero Harm mindset.

Our Zero Harm culture goes beyond the safety of our people and extend to the environment as well. As the world-leading supplier of wood treatment solutions, Koppers is the center of what is known as the circular economy, defined as one that emphasizes the reduce, reuse, recycle mentality to frame global conservation efforts. We recently issued our 2018 corporate sustainability report, or CSR. In this report, you can learn more about how our employees are bringing the benefits of our circular business model to bear as they turn unusable byproducts into wood treatment solutions, utilize renewable resources, convert end-of-use products into sources of fuel and reduce carbon in the atmosphere. This year's CSR covers significant accomplishments and programs in place for 2018 and references the global reporting initiative, or GRI guidelines. I encourage you to visit the sustainability section of our corporate website for our in-depth report.

Now before getting into the financials, I'd like to reinforce our key priorities for 2019. First and foremost, we are absolutely focused on outperforming 2018. Now our adjusted EBITDA guidance for 2019 has been slightly increased on the bottom end of the range to $212 million, while the upper end of the range remains the same at $225 million. We will continue to work on making 2019 a better year than last year and push the bar even higher. We've now done that for 4 straight years and are intensely focused on making it 5.

Second priority: balance sheet. It remains our aspirational goal to get back to a 3x leverage multiple by the end of 2020. As I've mentioned before, we have a number of levers, and that includes reducing this year's capital investment to $30 million to offset spending that was pulled into 2018. At a minimum, we plan to reduce our net debt by $80 million in 2019.

Third priority for this year is, once again, portfolio management. So we continuously evaluate how to best position our existing asset base, whether it be evaluating the long-term fit of those businesses that aren't driven by wood preservation or continuing to optimize our operating footprint. We will refine our focus on wood-based solutions, and at the same time implement sustainability measures applicable to our business.

Now let's discuss the financial results. For the first quarter, we delivered a first quarter record in sales, driven by our Wood Preservation businesses. The Railroad and Utility Products and Services, or our RUPS business, benefited from acquisitions, favorable pricing in the commercial crosstie markets and higher volumes in all categories of railroad-related products and services in North America, while the utility portion of the segment also chipped in pretty nicely. The Performance Chemicals, or PC business, reported modestly higher sales from a combination of volumes and pricing despite being subjected to severe winter weather conditions in various parts of North America and a softening repair and remodeling -- and in a softening repair and remodeling market. The Carbon Materials and Chemicals, or CMC segment, reported lower sales, primarily due to lower pricing of soft pitch products in China and decreased volumes from Europe and Australia, partially offset by favorable pricing in Australia and North America.

And from a profitable to perspective, the performance recorded by RUPS included higher pricing and volumes in the commercial crosstie markets, the contribution from acquisitions, improved production utilization driven by higher volumes of untreated crossties and improve demand associated with class 1 customers. PC results benefited from slightly higher sales and cost efficiencies, partially offset by higher year-over-year raw material costs. CMC's profitability was negatively affected by lower sales pricing in China, partially offset by higher volumes for pitch products in China, North America and Europe. Now the only real negative in our results for the quarter was the unfavorable comparison to the anomaly of our unusually high Q1 2018 results, which were buoyed by the one extremely strong quarter from our China CMC business that was at higher contractual pricing. This year's first quarter adjusted EBITDA was actually the next best first quarter that we have had in our history, behind only last year, which I believe is a testament to the improvement we have made in our overall business model over the past 4-plus years.

I'll now turn it over to Mike to discuss some of the key highlights of the quarter.

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Michael J. Zugay, Koppers Holdings Inc. - CFO & Treasurer [4]

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Thanks, Leroy. Let's begin by referring to the slide presentation that's provided on our website.

On Slide 4. Revenues were $435 million, which was an increase of $29 million or 7% from the $406 million in the prior year. As Leroy already mentioned, this was a first quarter revenue record for our company. Excluding a negative impact from foreign currency of $11 million, sales were higher by approximately 10%. The increase was driven by acquisitions as well as growth in our wood treatment business segments.

On Slide 5. Adjusted EBITDA was $46 million or approximately 11% compared with $66 million or 16% in the prior year. RUPS' profitability increased considerably, primarily due to improve demand in the legacy railroad businesses as well as contributions from recent acquisitions. PC has slightly higher sales also improved cost efficiencies and an insurance reimbursement amount, which collectively more than offset higher raw material prices. Financial results for CM&C were more reflective of the normalized earnings as compared with the prior year, which had benefited significantly from favorable market pricing for pitch products in China.

Now I would like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $13 million compared to $26 million in the prior year. Adjusted earnings per share for the quarter was $0.62 per share compared with $1.18 per share also in the prior quarter. Both adjusted net income and adjusted earnings per share were lower due to the profitability decline in our CM&C China operations, which had achieved significantly higher earnings in the first quarter of 2018.

Income tax expense for the first quarter was favorably affected because we've recorded a net benefit upon the finalization of our IRS audits for the tax years of 2013, 2014 and 2015. Excluding this benefit, our tax rate would have been approximately 30% of pretax income.

For 2019, we are anticipating higher year-over-year interest and depreciation and amortization cost. We estimate that interest expense will increase from $56 million in 2018 to $62 million in 2019 due to a full year of borrowings related to our acquisitions as well as higher interest rates on our variable debt borrowings. Also our depreciation and amortization expenses are projected to increase from $51 million in 2018 to $58 million in 2019 due to assets placed in service in 2018 as well as depreciation and amortization related to the 2 acquisitions we made in 2018. We expect that the outcome of U.S. tax reform will continue to have an effect on our GAAP-effective tax rate due to limitations on interest expense deductions and the interactions with the minimum tax or foreign earnings, which we call the GILTI tax. However, in 2019, we expect this negative impact will be at a slightly lesser extent. The projected effective tax rate for adjusted EPS calculations for '19 will be approximately 27%. With this lower tax rate and the fact that we've increased the bottom range of our adjusted EBITDA guidance from $210 million to $212 million, we are now projecting that adjusted EPS for 2019 will be in the range of $3.16 to $3.61 per share.

Cash used in operating activities was $14 million compared to $29 million in the prior year. The net decrease in cash used in operations was due to primarily lower working capital usage and a reduction in net income.

Capital expenditures were $11 million compared with $23 million for the prior year. Our CapEx in the prior year included the capacity expansion at our Performance Chemicals facilities in the U.S. and a new naphthalene unit at our CM&C plant in Stickney, Illinois. Both of these projects were substantially completed in the latter part of 2018. We are still on track for 2019 capital expenditures to be approximately $30 million.

Now let's refer back to our slide deck and look at Page 6. Our net leverage ratio as of March 31 was 4.8x. Negatively impacting this ratio in the quarter was the lower earnings from China versus the prior-year quarter and typical usage of cash for working capital needs in the early part of every year. We're still projecting that this ratio will be in the range of 3.8x to 4.1x at the end of 2019.

As Leroy mentioned earlier, we are also committed to reducing our debt by a minimum of $80 million by the end of 2019.

And finally, even though Koppers was in compliance with all debt covenants under our credit facility as of March 31, 2019, and we are also projected to be in compliance throughout the remainder of 2019, we had an opportunity to amend our existing credit agreement, and we did so on May 1 of 2019. We extended the term for 1 additional year through April of 2024. We modified the definition of certain terms, and we also delayed the step-down of our leverage ratios by anywhere from 6 to 12 months, a very positive development for us and all in order for us to have more flexibility under the agreement going forward. Now I'd like to turn the discussion back over to Leroy.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [5]

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Thank you, Mike. Regarding the outlook for each of our businesses, let's start with our Railroad and Utility Products and Services segment.

On our legacy RUPS business, while 2019 started with a decrease in rail traffic in the first quarter, the industry is forecasting higher crosstie replacement compared with prior year, and we're seeing demand levels pick up. The Association of American Railroads, or AAR, reported a total U.S. carload traffic for the first 3 months of 2019, was down 3.1% from the same period last year, with intermodal units, defined as containers and trailers, down to a lesser degree at 0.6%. Total combined U.S. traffic for the first 13 weeks of 2019 was approximately 6.7 million carloads in intermodal units, a decrease of 1.8% compared to last year. The decline in rail traffic is likely due to a combination of extremely cold weather at the beginning of the year, then flooding in the Midwest region in the U.S. during the month of March. Also it has been the case for the past several years the number of heavy haul loads have continued to decline from historical levels, which means lighter weight loads are being transported, yielding less wear on trucks and ties. At the same time, Class 1 railroads are still focusing on the general concept of precision railroading, which translates to finding ways to reduce spending and improve asset utilization, operating ratios and cash flows. As a result, crosstie replacement activities remain relatively flat, having reverted to below or near historical lows over recent years. According to the Railway Tie Association, or RTA, the current industry forecast calls for replacements of a little less -- of a range of a little less than 22 million to nearly 23 million crossties in 2019, contingent on having an adequate supply of lumber. In 2018, tie replacements were estimated to be approximately 22.7 million crossties. However, actual replacements were 21.2 million due to a number of factors, including lack of available dry inventory for treatment. As a whole, the industry has been challenge with very low inventory of untreated crossties. According to RTA surveys of in the field wood tie buyers who procure untreated crossties and sawmills, log availability and logs on hand at mill yards have been less than ideal due to weather issues. While we're seeing crosstie demand improve, the challenge has been building inventory levels in order to have dry crossties available for treatment.

In our Utility and Industrial Products business, it's estimated that there are roughly 160 million utility poles across the U.S. And most were installed in 1950s, according to the North American Wood Pole Council. In general, the average age of these poles is around 70 years, whereas the expected life span of a pole is actually much less than that, at approximately 40 years. Due to pole age and infrastructure changes, mostly road widening, the replacement rate of these installed poles has grown and currently equates to an industry demand of about 2 million to 3 million poles replaced annually. Therefore, we continue to anticipate that 2019 will be a solid year from a demand standpoint for replacement of utility poles.

In addition, our recycling and disposal program for out-of-service crossties and poles can solve a problem that's been troublesome for each industry. Our approach of recycling and reusing the ties and poles, including as a fuel source, can improve the environmental footprint of these end-of-life ties and poles as well as provide customers with an economically viable way to responsibly dispose of them. As an update on the projected benefits related to our integration synergies and strategic initiatives, we continue to make great strides on many different fronts. There are no less than 9 different important initiatives that are in progress that have the potential for multimillion-dollar impacts to our top and bottom line. For competitive reasons, we cannot give details on most of them at this point, but they will become readily apparent as we realize success in the different areas. One initiative that we don't need to be quite as secretive about is our plans to either add volumes to our 18 treating plants that are operating at less than full utilization or work on consolidating our footprint. Much work has been done in that regard, and we'll share more specifics as we are able to as the year goes on.

The overall results of all these initiatives and actions are expected to drive $25 million to $40 million of annualized benefits to be realized over the next 5 years. We're currently on track to realize $10 million of those savings in 2019.

For the RUPS business, we continue to anticipate an improved demand environment in 2019, which should lead to increased production volumes and higher utilization rates so long as we can get an adequate supply of untreated crossties. Also, the realization of cost and commercial synergies generated through the various integration and strategic initiatives should result in our first year-over-year improvement in this segment since 2015. As reflected on Slide 8, we are slightly increasing adjusted EBITDA guidance for our RUPS segment of $62 million to $66 million, primarily due to the strength of our first quarter in what was a difficult supply environment. That would equate to an adjusted EBITDA margin of nearly 9% and an increase of $21 million to $25 million compared with prior year.

In our Performance Chemicals business, economic trends are beginning to show some softness. According to the National Association of REALTORS, or NAR, existing home sales retreated in March following a surge of sales in February. Total existing home sales in March fell 4.9% from February and were down 5.4% from a year ago. Each of the 4 major U.S. regions saw a drop-off in sales, with the Midwest enduring the largest decline. In addition, any tax policy changes will likely add further complications to the housing sector as the expensive home market will be negatively affected by limitations on tax deductions of mortgage interest payments and property taxes. As forecasted by the Leading Indicator of Remodeling Activity, or LIRA, at the Joint Center for Housing Studies of Harvard University, year-over-year growth in homeowner remodeling expenditures is expected to slow from approximately 7% to 2.6% by the first quarter of 2020. However, more favorable mortgage rate could still give a boost to home sales and refinancing in the spring to summer time frame and could help to sustain remodeling activity. Home improvement and repair spending has been in above-trend growth for several years, and now remodeling growth is expected to fall below the market's historical average of 5% for the first time since 2013. The Conference Board Consumer Confidence Index partially rebounded in April to 129.2 compared with 124.2 in March but still remains below the levels seen last fall. Even so, the Conference Board indicates that consumers expect the economy to continue growing at a solid pace into the summer months, and these relatively strong confidence levels should continue to support consumer spending at least in the near term. In terms of the cost side, copper and related raw material costs are expected to increase for this year as our average hedge prices for 2019 are higher than prior year. Our efforts to increase pricing in certain areas to partially offset the impact of higher copper costs will continue. Also we're making progress related to our new capacity expansion as we're already processing more of our feedstock in-house and improving operational efficiencies even further. As mentioned last quarter, our expectations for PC are contingent on a relatively decent demand environment in 2019. The assumptions include approximately a 3% to 5% growth achieved through market share wins and 3% to 5% of organic growth to achieve an overall 5.8% volume growth, and we believe that we are on track at this point, primarily due to strong market share gains, although organic growth has begun the year at a lower-than-hoped-for pace.

On Page 9 of our slide presentation, we're estimating adjusted EBITDA for PC of approximately $70 million to $75 million. That would equate to an adjusted EBITDA margin in the range of 15% to 16% and an increase of $8 million to $13 million compared with prior year.

Moving now to our CMC business. We are seeing exactly what we had expected so far in 2019 as raw material prices have risen across the board, while pressures has been building on end-market pricing in certain regions as competitors attempt to gain market share. That said, it is important to remember that restructuring actions taken in CMC during the past several years have greatly streamlined its cost structure, which allow us to be much more competitive. Additionally, cost savings related to our new naphthalene unit at Stickney will be reflected in our 2019 results to help alleviate some of the other headwinds we're facing. And we are on track to realize the estimated $10 million of savings this year. Therefore, we expect CMC results in 2019 to be at the higher end of the range of normalized profitability for this segment.

Regarding our China subsidiary, KJCC, we're continuing to supply our customer under a temporary special purchase orders that runs through June 30, 2019. For a certain time frame during the June quarter, we're expecting to have a regularly scheduled maintenance shutdown, which will make our second quarter results in China less than our first but still profitable. We continue to work towards a resolution, and we'll share any new developments with you as soon as we're able. Until that time, we cannot comment further or speculate on any outcomes due to the legal guidelines and requirements associated with this matter. In 2019, assumptions for CMC include the higher cost of raw materials and a significant reduction in contribution from our Chinese joint venture, partially offset by cost savings primarily from our new naphthalene facility.

As shown on Slide 10, we anticipate adjusted EBITDA for CMC of approximately $80 million to $84 million. That equates to an adjusted EBITDA margin in the range of 12% to 13% and a decrease of $35 million to $39 million compared with the prior year.

Slide 11 shows the various drivers in our guidance for consolidated sales in 2019, which we still anticipate to be between $1.8 billion and $1.9 billion. The forecast assumes improved crosstie production, a full year contribution from acquisitions and more normalized organic growth patterns in our PC business.

Turning to Slide 12. Our guidance for 2019 consolidated EBITDA on an adjusted basis is slightly higher on the bottom end of the range, which is now $212 million, while the top end of the range remains at $225 million. We continue to expect that 2019 will reflect a meaningful shift in our earnings mix, with our primary wood-based businesses generating significant improvements in profitability.

Now I would like to open it up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [2]

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I was wondering if we can maybe start with RUPS, maybe get an update on what you're seeing in terms of your ability to procure additional untreated ties. Are you seeing that getting back to normal at this point? And kind of what steps are you taking to improve procurement?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [3]

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So a lot of what goes on in procurement is outside of our hands. I mean there's a lot of it that's weather dependent. And with the pretty wet fall that we've had and, again, the winter weather conditions, it's made it difficult in getting foresters in to basically get the product that we need. So it's been a struggle. While our -- I'd say, our untreated crosstie production volumes are up year-over-year, and that was one of the things that's certainly helped us in the first quarter. They are less than what we were -- what we're projecting them to be for this year. So we continue to, obviously, do everything we can to get as many ties in the door as we possibly can, and we have seen some improvement as we've moved into the second quarter. So we're moving in the right direction. We're trending in the right direction. And the fact that we've been able to see the overall profitability improvement from our business despite the fact that the untreated crossties coming in are less than what we were expecting gives me pretty strong confidence that if we see that trend continue in terms of production picking up we're going to have a pretty good year this year.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [4]

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All right. And then maybe an update on the potential for network optimization within the railroad and utility business. When could we expect to see some changes? And just curious, would it be maybe just some plant closures or consolidations? Or would there be asset sales that could come with that to help potentially reduce some of your debt?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [5]

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All of the above. There's -- so there could be some full plant shutdowns. There could be some partial plant shutdowns and consolidation. There could be some asset sales that provide some proceeds back to go towards debt. So we have been working internally through what we think is an optimal configuration. And there are certain preliminary decisions that have been made, and we're going through activities to go through an implementation process. We're not at a point yet where we're ready to announce that. And certainly, there are many employee considerations that go along with that as well. I would say my expectation is that certainly -- I would say in the second to third quarter time frame is when we would probably see at least a few of the early decisions being probably announced and implementation beginning on those. So -- but this is likely to be a multiyear process as we begin a process and evaluate certain moves and how they're reflected within the markets and whether there are other moves that can be made or not after the fact. So, yes, that's where we stand right now.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [6]

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All right. And then maybe last question for now just on the CMC business. You mentioned that the Q1 results were more normalized. If I annualize that EBITDA number, I get to $68 million. Just curious how do we get from that $68 million annual rate in Q1 to the $80 million to $84 million that you're guiding to? I know there's a little bit of seasonal pickup, but I believe that the Stickney improvement or the better cost structure from Stickney should already be in Q1.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [7]

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Yes. Right. But there is annualized -- there is -- I'm sorry, seasonality in that business that basically prevents you from doing a 1x4, especially for the first quarter, for that business. We will see stronger results in the second and third quarter, as we typically would expect in that business. So with where the first quarter, again, ended up given everything that was going on in the various markets, that's what gives me pretty strong confidence that we can get to the $80 million to $84 million number that we have projected. So you can't take Q1 and multiply it by 4. That doesn't work for that business. That doesn't work for any of our businesses.

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Operator [8]

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Your next question comes from Roger Spitz with Bank of America.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [9]

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I understand you have some legal considerations on what you can say about the Chinese JV situation. But are there things you can say? Like can you just review the raw material supply agreement even if you perhaps cannot talk about the disagreement at all?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [10]

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No. Unfortunately, I can't. What I can say is just the general framework of that whole business over there is we operate a plant where we supply a significant amount of the raw material supply to a customer under a very long-term contract. And that's the model that was put in place. That was the model that was conceptualized that resulted in us building the plant. And there's been several sort of big market changes that occurred since the time we first signed our framework agreement back in the 2012, '13 time frame and today. And it's resulted in sort of some differences of opinion along the way. So -- but it's a business that was designed to essentially produce a significant amount of product for a single customer, with the balance of our products going out into the general open market. And so that's the overall sort of background on it, but if I could say more about it, I would, but I can't.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [11]

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I understand you can't say more about that. But perhaps you can say something about this, is do you have alternatives of what you can do with that product, not with that customer? Or is that your -- yes, okay.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [12]

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Yes. So, yes. So what we do there is not something that is -- can only be taken by that one particular customer. If, as an example, there was -- that agreement was not in place, it's not like that plant is useless and we can't use it for anything else. It produces product that can go into other markets, other industries and things like that. So if that's sort of what you're getting out, then, yes, that plant has other uses beyond sort of just serving that one particular customer if there will be an ultimate breakdown and the long-term contract no longer existed.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [13]

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Okay, understood. And then getting on to the self-production of the copper intermediates, say, BCC, cupric oxide, can you give us -- you said in your prepared remarks you're doing more yourself. Can you give us a sense of, however you'd like to frame it, is what percent you are now self-producing of those products and what percent you're now buying, which I understand is mainly if not all from China.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [14]

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Yes. So we now have our capacity addition in place. And in op rate, we're going through start-up -- typical sort of start-up issues, if you will, related to that. So we've been able to significantly increase our own production. And we're getting ever closer to being 100 -- in fact, in the second quarter, we absolutely will be 100% producing our own BCC. And from a cupric oxide standpoint, that's a little different situation. And we're not quite as -- we're not in quite as good a shape there, and I'm not sure that we ever will be, but we're less concerned about that because that one doesn't have -- that one is minimal. It's a minimal cost differential for that particular intermediate. BCC is the important one, and that's why we've been really focused on that. And the good news is the capacity is in place today. And as we continue to improve upon what's been put in place and get all the sort of, if you will, initial bugs worked out, we'll be at 100% level here very, very shortly.

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Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [15]

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Is there a big merchant -- global merchant market for BCC? I mean I'm a little bit surprised, perhaps -- the guys who are selling, perhaps the Chinese, wouldn't set the price to dissuade you to have further back integrated into BCC.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [16]

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Yes. Well, there's -- I can tell you there is -- quality is a big issue. That's certainly one of the things that we have -- we've noticed and experienced in terms of the stuff that we've had to bring in that was not our product. It's an inferior quality product. It takes longer for us to get it through our process. So not only is it more expensive, but it also is less efficient in terms of how we're able to operate our facilities. So that's why we absolutely want it under our control, under our quality control. And we get the cost benefits that come along with that as well, as well the downstream ones that go into the actual production of the finished products.

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Operator [17]

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The next question will be from Chris Howe with Barrington Research.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [18]

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This was a solid quarter. I wanted to focus on the PC segment. You had shared on this call and also previously the composition or the different components that lead you this 5% to 8% unit volume growth assuming a normalized environment. You're performing better than expectations as far as market share gains. Can you dig into that a little bit more? Where did you see the market share gains within this segment? Following up on that, how was the performance of the fire-retarded product this past quarter? And how is that going this quarter? And yes, how should we look at those 2 different components and their performance in the current quarter as well as we try to hit this unit volume target?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [19]

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Sure, sure. So from a market share standpoint we had a couple -- actually, 3 nice market wins, adding some very nice-sized customers that cut across a number of our different products. And we were, basically, in the first quarter sort of in conversion mode, moving them over to our systems. So from a volume standpoint, we were not ramped up on all 3 in the first quarter in terms of getting normalized annualized volumes. But that's why I say coming -- as we talked a few months ago, we were still trying to close at least one of those deals, and it wasn't a certainty, so we've gotten to the point now where we've been able to bring them home. We have 1 -- we have actually 2 decent-sized international opportunity -- so those are North American based. We have a couple of international opportunities that we're very close to closing. So we're close to a 100% hit rate on the ones that we thought we could add to our portfolio this year. So that's been a great success. Now we've lost a little bit of business from a particular customer that we also happen to compete with in another market. But the net result is we are much closer -- we're tracking much closer to the upper end of the range of what we needed on the market share gains side of things. And as it relates to organic growth, like I said, it started out a little softer than we had hoped. So things are starting to pick up, but typically, that's seasonal in nature around this time of year anyway. So we're still hopeful that things can move up a little bit. I'll say we will likely not see organic growth at the top end of the range that we were hoping for. We're hopeful to get to that bottom end. And again, with where we're at on the market share growth, everything will be fine. And we are getting some benefits on the cost side that are also helping to fill some of those gaps. Fire retardants, it's going very successful. I mean, we -- we're -- again hold the #2 market share. Volumes are up -- well, volumes are up really significantly. We only had a very small amount of product going out in the early parts of last year as we were still commercializing the product. But it's been a great success so far. We won several big accounts and, like I said, have moved into a strong #2 share in a very short period of time. So we're very happy with how the fire retardant products performing.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [20]

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Great. That's very helpful. And my next question is you mentioned the utility pole market, the 160 million of utility poles that are out there and expectation for 2 million to 3 million replacements. If you haven't mentioned before, perhaps I'm not recalling, if these replacements as they fluctuate up and down, let's say, they go to 4 million to 5 million, I guess, how would you quantify the available potential market opportunity that lies in front of Koppers?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [21]

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It's a good question. It's tough to get your -- it's tough to get the arms around. I mean it's a pretty disparate market. It's a much different market than sort of our crosstie market in terms of just hundreds and hundreds of customers. It's not concentrated like it is on the tie side of things, so it makes it tougher to get your arms around those sorts of things. I'd say from our standpoint we're trying to really focus on getting our operations as efficient and as lean as possible. That'll help to make us even more competitive as we go out and try and win more jobs. We service our customers. We take great pride in how we service our customers, and our storm recovery piece of our business is a critical important piece of that as well. For -- as these extreme weather-related events continue to occur, demonstrating performance in those times to this customer base helps to forge alliances that will I think continue to strengthen that business as we move forward and only give us more opportunities to grow our business and grow our market share. So that's what we're focused on. And we're also focused on, obviously, additional opportunities if we can add to the utility pole business and continue to grow our share. It's the one area where we really have a significant opportunity as opposed to the other markets where we're already close to half or more of market share in most of the markets that we operate in.

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Operator [22]

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Our next question comes from Laurence Alexander with Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [23]

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Could you help with a couple of things? First of all, can you talk about the CM&C business through the prism of sustainability and what kind of measures you think you can do there or what kind of pressures you see on that business longer term? Secondly, with the utility pole order patterns, are you seeing any -- or hearing from customers any structural changes in order patterns apart from the one that you mentioned about the wider road, which I guess is sort of a long-term trend? And I guess related to that, if utility pole replacement were to pick up, in terms of securing enough raw materials is it a function of price or time for you to make sure you have the right -- adequate raw material supply for that? Or does it become similar to the crosstie market in terms of you having the lag effect to secure adequate inventory?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [24]

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So let's go back to number one, CM&C. And I might ask you to repeat this as we go through, Laurence. But CM&C, overall, that business -- the pressures that, that business deals with, obviously, are mostly on the raw material side, right, as it relates to coal tar that comes from the blast furnace steel production, which we know has been trending down for a number of years. There is still more than enough coal tar supply to essentially fill the market for the products that we're producing for the end markets and we think will continue to be the case for some time moving forward. However, we are cognizant of the fact that, that has been a trend that's been going on for years. And actually, we are intently focused on how we can -- without getting into really to any specifics, again, for competitive reasons, we're looking at how we can, if you will, help that situation so that if it does continue to trend down in that direction that we're at a point where we can continue to serve the industry at the levels that we've been able to in the past. So there's some interesting stuff going on there, and within the next couple of years, we hope to be able to handle that. So overall, besides that, I mean from a sustainability standpoint, we're focused on trying to make sure that we continue to invest in our operations so that environmentally we don't run into any issues with them as regulations continue to get more stringent, and we'll continue -- so what we did in Stickney is a perfect example of that with the new naphthalene unit. And so we will continue to focus on our efforts in terms of reinvesting into our facilities. That won't stop. Our Nyborg facility in Denmark is in great shape. Our KJCC facility in China is basically brand new. And our Mayfield facility is in pretty decent shape as well. We got a new naphthalene unit at Stickney. We probably have some work to do in terms of the tar plants and stuff like that. But overall, we're in pretty good shape from a CM&C standpoint. So we feel like we are primed to be able to supply the industry for many years to come, and we continue to focus on the supply side of things, knowing that that's a trend that continues to move in the wrong direction from a long-term standpoint. So does that help address your first question?

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [25]

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Yes. Yes.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [26]

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Okay. So your second question --

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [27]

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My second question is just in terms of any structural shifts in utility order patterns.

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Michael J. Zugay, Koppers Holdings Inc. - CFO & Treasurer [28]

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So from a utility standpoint, I'd say that overall that what we're hearing and seeing is the utilities are actually requiring larger poles, which we believe is actually a procurement strength of ours. So from that standpoint, that's maybe one sort of trend that we're seeing. In terms of the market in general and sort of how it compares to the crosstie market, it is different, right, because southern yellow pine is the species that's essentially used for utility poles. It is an extremely renewable species. We are -- we don't have the same sorts of issues necessarily in terms of sourcing that product as we do on the hardwood side of things. So we have, again, a strong procurement network that has continued to develop relationships out in the field that makes us feel pretty good about any expansion that we would see coming along in that particular sector that we'd be prepared to handle. So it's a different market than the tie market, and that's why we actually had different buyers out there in the field that are handling it as well.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [29]

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Okay. And then lastly, if there is a demand shift, just what -- do you have any inventory management issues? Or is it resolved by price or time?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [30]

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Yes, it's more, I'd say, price. I mean, again, unlike the crosstie industry, although you can [boltonize] ties and essentially speed up the drying process on the coal side of things, those raw materials are coming in, they're getting debarked and they're getting dried before they're treated, right? So they're not sitting in the yard air drying for a long period of time. You're essentially moving them through the process. So it's just getting more in the door treated and on the ground. And we're in pretty good shape right now. Again, we would welcome an opportunity to see the market grow and us be able to I think demonstrate our procurement network and operating network. So that's more a function of price than time. Time won't be an issue.

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Operator [31]

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Our next question comes from Liam Burke with B. Riley FBR.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [32]

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Leroy, the last acquisition you made in the RUP space was to create a time management platform create -- stepping up a competitive advantage against other players that were just treating the ties. Have you made any progress acquiring customers? Or where do you stand in the progress of that effort?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [33]

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Where we stand is we continue to have dialogue with a number of different customers from that standpoint. And I think that's going to become recognized as an important piece of the overall -- our overall supply offering. We certainly believe it's an overall important piece. We think as, again, things continue to get ramped up from an environmental perspective that the railroad utility industries are going to want to partner with a company that -- with our sort of reputation where they know that when they contract with us to essentially take care of the entire process for them, that it's getting done. It's getting done in the way that they would expect it to get done. So we continue to push that hard. It's not a situation where you just come in and walk in their office, and all of a sudden, they're awarding you the business. You got to earn it, you got to win it. And -- but again, with where we sit in that whole supply chain network, we think we're in a good spot from a number of perspectives. And we expect that we will see benefits as time moves on. Not only that, but many of these railroads -- most of these railroads already have certain contractual relationships in place, right? So you have to let some of that play out as well. So we're basically just doing our best to make our case so as business comes up that we're in a position to be able to win that business and, again, demonstrate our capabilities across the entire supply chain.

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Liam Dalton Burke, B. Riley FBR, Inc., Research Division - Analyst [34]

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And on CMC, with Stickney, it's -- consolidation is complete. It's up and running. Are there any drags or anything? Or is it completely -- has that project been -- is it completely behind -- is that project completely behind you?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [35]

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Yes. So it depends. Yes. So the engineers and the operating folks, they'll always tell you they got different things that they're working on and bugs to work on and stuff like that. I'd say big picture, Liam, yes, it's in place. It's running. We're seeing great success with it. We're very happy with it. Our people are very happy with it. So, yes. It's nice to have that behind us and looking forward on other things. So yes, everything is good.

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Operator [36]

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Your next question comes from Scott Blumenthal with Emerald Advisers.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [37]

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Congratulations on the quarter.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [38]

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Thank you, Scott.

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Michael J. Zugay, Koppers Holdings Inc. - CFO & Treasurer [39]

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Thank you.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [40]

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Leroy, in terms of the life cycle management for the ties, you mentioned that this is something that railroads have not traditionally done a very good job of. So I guess I have 2 questions about the whole life cycle management. The first one is there must be a lot of legacy ties, legacy dumped product out there that's in need of cleanup. I want to know if you see that as a meaningful opportunity. And then I guess on just kind of the whole life cycle management, how much of that -- has that become a meaningful portion of the RUPS business yet? And if not, when do you expect -- how long do you expect that to take?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [41]

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Okay. So let me start off by, Scott, just wanting to clarify. I don't mean to imply that our railroad customers or the railroad industry has not done a good job with this. It's more to the point that it hasn't really necessarily been a focus of theirs. So we're hoping to come along and help them to understand that it should become a bigger focus. I think they are coming around to that. And so again, we wanted to be, and felt we should be just given where we sit in this whole picture, that we would be a prime partner to provide a solution for them in that regard. So certainly, you can drive along most railways and see ties at various points stacked along the right-of-ways. I don't know how many are out there overall across the network. Again, to the extent that's an issue for any particular railroad, certainly, we can be helpful. We want to be helpful. And if it provides us an opportunity, again, to demonstrate our capabilities, then all the better. In terms of that business and where -- and how it impacts the overall profitability in the RUPS business today, it's a small piece. It's a small piece. It was a small piece when we bought it. And the expectation was that we could grow it and, again, just provide another linchpin with our overall business model of trying to do everything we can to help our customers solve their biggest challenges. And so when we talk about the $25 million to $40 million of integration and strategic initiative benefits over the next 5 years, there is certainly a component of that, that comes through growing this business. So we've not identified the number that's in there for that, but certainly, over the next 3, 4 years, again, as certain contracts come up, we would hope to be able to retain some of that business or win some of that business and build that as part of our overall business model. For us, it's probably even less about sort of the dollars that flow through on that but I think the stickiness that it provides the remainder of our business. I think that's probably the real long-term benefit for us from that piece of the business model.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [42]

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Yes. That certainly seems to be the whole part of the process that's really not been fully addressed until now. On the same -- in the same segment there, are untreated ties getting them in an issue in all of your locations? Or is that just concentrated in a few?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [43]

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In most. But it's really concentrated in our Western plants, for sure. That's where we've -- that's where we've been hit the hardest. That's where we've seen the biggest impact.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [44]

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Okay. And there's no opportunity to kind of move things around? Or that just wouldn't be economically feasible?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [45]

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Wouldn't be economically feasible. And you'd be trading amongst railroad, which they're all looking for ties. So that -- it just wouldn't -- it wouldn't work out.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [46]

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Understood. Okay. And I guess the last question, if I may, since I know we're coming up on an hour here. The self-supply in the PC segment, can you kind of characterize where we were at this time last year maybe from a percentage perspective or maybe some other way and compare that to where we are right now?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [47]

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Mike might have -- do you have a better recollection?

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Michael J. Zugay, Koppers Holdings Inc. - CFO & Treasurer [48]

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Yes. I think -- where we are from a standpoint right now, Scott, is much further ahead. I would say roughly that a year ago at this time we were probably a little over 50% producing ourselves. And we're much, much closer to -- as Leroy talked earlier in the discussion much, much closer to where we want to be, especially on the BCC side. So dramatic improvement, and quite frankly when you dollarize it, it's hundreds of thousands of dollars.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [49]

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I think, Scott, that was somewhat reflected in the results when you consider the fact that our overall average raw material prices, right, in terms of what we have hedged on the market are a good bit higher this year. So we have probably over close to $2.5 million impact just from higher raw material cost, excluding what goes on in terms of having to buy outside of the market and things like that. So the fact that we're able to have the quarter we had despite those sorts of headwinds, I think, is reflective of that change that Mike just talked about.

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Operator [50]

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The next question will be from Chris Shaw from Monness, Crespi.

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Christopher Lawrence Shaw, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [51]

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Just quickly on the utility pole business again. About $8 million in year-over-year EBITDA that your guide suggests, is that -- how much of that is organic growth from the -- just more demand? And how much of that is from the acquisition or integration and synergies?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [52]

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I want to make sure that I'm addressing the comment here, Chris. You're talking about -- oh, I see. Okay. Yes. So going back to the adjusted EBITDA slide, okay. So there's an element there that is having the business for the entire year. There's an element there that is price related. There's an element there that is cost related. It is -- it probably touches on just about every lever that you can hit on through the overall business, right? So we're getting it on the price side. We're getting it on having the business for the entire year. We're getting it on the cost side, both operating as well as on the SG&A side as well. So it's coming from all different avenues. Part of it's through synergy benefits that we're getting as a result of integrating into the organization. I don't want to get into specifics of each of the different components, but it comes from all those different categories.

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Christopher Lawrence Shaw, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [53]

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And on the growth side, I mean, I guess I'm just trying to think how it could grow in the future. But you said you have all these old utility poles out there that are, I guess, past their useful life. But it sounds like the real demand is coming from the projects, maybe highway widening, what have you. But what will push, I guess, utility companies, whatever, to actually start replacing old poles without, I guess, having to because there's some other project going on?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [54]

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Yes. I don't know if there's anything that would. Because just like we see in just about any of those sorts of businesses, there's nobody out there that's really looking to replace anything that they don't feel they have to at that particular moment. Everybody typically hoards their cash as much as they can, and I don't think we see really anything different there. I think it's more hopeful than anything else. I think you'd have to see some real infrastructure failures and stuff like that before you'd see some sort of widespread trend in replacement beyond sort of the normalized levels at this point.

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Christopher Lawrence Shaw, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [55]

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And there's nothing regulatory at all about utility poles in terms of replacement or...

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [56]

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Not that I'm aware of. Obviously, they're worried about safety and reliability and all those sorts of things. And all that, obviously, has become a bigger issue too as you've seen some of the stuff that's come up related to California and the wildfires out there and stuff like that. So I think it's safety and reliability driven.

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Christopher Lawrence Shaw, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [57]

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And you said -- you mentioned how it's one area or segment that's your smallest market shares, so you have opportunity there. But do you see that more in coming from just stealing market share? Or do you think you could do some further consolidation in that business?

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [58]

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Yes. I think it's mostly consolidation. And certainly, we're working on, obviously, improving our ability to compete. So we would hope to be able to win some market share as well. But the majority of our growth will come through most likely consolidation of some form.

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Operator [59]

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Ladies and gentlemen, and our last question is a follow-up question, and that will be from Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [60]

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Hey, just a quick one for me. In the Performance Chemicals business, you guys mentioned some insurance proceeds that helped in the quarter. Can you quantify that for us? And is that just one time? Or is there more to come?

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Michael J. Zugay, Koppers Holdings Inc. - CFO & Treasurer [61]

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Yes. It was about 1.4 million in U.S. dollars, and it was a one-timer. We're still incurring higher cost for having to go out and buy raw materials due to the New Zealand fire. And in addition to that, the losses that we had in -- beginning in late '17, early '18 will run through operations. So the $1.4 million is kind of a refund of things that have already run through the P&L on a negative basis. But it is one time, and I believe we're finished with it.

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [62]

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And just to clarify little bit, Mike, because we did have some insurance recovery last year related to this. We had a fire at one of our plants that destroyed our -- one of our plants in New Zealand. And as a result, we've had to source product at higher cost to serve our customers through that time. We've gotten some insurance recovery. First quarter, we got what we believe is the last of the insurance recovery. But we've been bearing the additional cost and everything else related to that business through operations since that incident occurred in late '17 throughout '18 and still today until that new plant comes up and is operable sometime mid-2019.

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Operator [63]

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

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Leroy M. Ball, Koppers Holdings Inc. - President, CEO & Director [64]

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Thank you, everyone, for taking the time to participate on today's call. I really thank you for interest in Koppers and your continued support. Have a nice day, everybody.

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Operator [65]

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The conference is not concluded. Thank you for attending today's presentation. You may now disconnect.