Koppers Holdings Inc. Reports Preliminary Second Quarter 2020 Results; Provides 2020 Outlook
Koppers Holdings Inc. (“Koppers”), an integrated global provider of treated wood products, wood treatment chemicals and carbon compounds, today reported preliminary net income attributable to Koppers for the second quarter of $29.2 million, or $1.39 per diluted share, a second-quarter record, compared to net income of $14.7 million, or $0.70 per diluted share, in the prior year quarter. Beginning in 2020, results of Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”) are classified as held for sale and as discontinued operations for the current year as well as the comparable prior year period due to its pending divestiture.
The preliminary adjusted net income and adjusted earnings per share (“EPS”) from continuing operations for the second quarter of 2020 were $26.7 million and $1.27 per share, a second-quarter record, compared to $24.1 million and $1.14 per share in the prior year quarter, respectively.
Adjustments to pre-tax income excluded $3.7 million in earnings for the second quarter of 2020, compared with $13.0 million in charges for the prior year quarter. For both periods, the adjustments included restructuring expenses as well as non-cash effects related to LIFO and mark-to-market commodity hedging.
The preliminary operating profit was $49.7 million, a second-quarter record, or 11.4 percent, compared with $38.1 million, or 8.6 percent, in the prior year period. The operating profit margin is calculated as a percentage of sales.
For the second quarter of 2020, preliminary adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) was $59.6 million, or 13.7 percent, compared with $63.2 million, or 14.2 percent, in the prior year quarter. The adjusted EBITDA margin is calculated as a percentage of sales.
Additional items excluded from adjusted EBITDA in the second quarter of 2020 totaled $4.6 million of pre-tax benefits, compared with $11.8 million of pre-tax charges in the prior year quarter. For both periods, the adjustments included restructuring expenses as well as non-cash effects related to LIFO and mark-to-market commodity hedging.
Consolidated sales, on a preliminary basis, were $436.6 million for the second quarter of 2020, a decrease of $7.2 million, or 1.6 percent, from sales of $443.8 million in the prior year quarter. Excluding a negative impact from foreign currency translation of $3.7 million, sales were lower by $3.5 million, or 0.8 percent.
Sales for the Railroad and Utility Products and Services (“RUPS”) segment, a second-quarter record, were higher due to increased crosstie volumes, favorable pricing for commercial crossties, and higher volumes of utility poles, partially offset by weaker demand in its Railroad Structures and Recovery Resources businesses. The increased profitability for RUPS, also a second-quarter record, was primarily driven by a favorable margin mix from the utility pole and maintenance-of-way businesses. The Performance Chemicals (“PC”) segment reported record sales and record adjusted profitability, as demand for its copper-based wood preservatives benefited from increased home repair and remodeling activities during the pandemic. The Carbon Materials and Chemicals (“CMC”) segment sales and profitability were negatively affected by softening demand in its end markets and lower pricing due to the steep decline in oil prices.
President and CEO Leroy Ball said, “I couldn’t be happier with our performance during the second quarter. We successfully navigated through uncharted waters in an extremely volatile environment. Our Performance Chemicals business had a record quarter, as stay-at-home orders shifted consumer spending toward home improvement and related projects. Likewise, our RUPS business benefited from increased volumes in both crossties and utility poles during the quarter as needed maintenance of critical infrastructure for the rail and utility industries continued during the pandemic. Only our CMC segment results lagged, as temporary closures of auto manufacturers resulted in lower production in steel and aluminum markets, combined with lower oil prices driving down end-market pricing. Once again, the balance of our closely connected businesses, serving a variety of essential markets, demonstrated durability and value through what I hope has been the worst of this crisis.”
Second-Quarter Preliminary Financial Performance
– Sales for RUPS of $209.9 million, which was a second-quarter record, increased by $10.8 million, or 5.4 percent, compared to sales of $199.1 million in the prior year quarter. Excluding an unfavorable impact from foreign currency translation of $0.5 million, sales increased by $11.3 million, or 5.7 percent, from the prior year quarter. The sales increase was primarily due to higher crosstie volumes to Class I customers, favorable pricing in the commercial crosstie market, and improved demand for utility poles in the U.S. and Australia, partially offset by lower activity in maintenance-of-way businesses. Operating profit for the second quarter was $16.2 million, or 7.7 percent, compared with operating profit of $11.8 million, or 5.9 percent, in the prior year quarter. Adjusted EBITDA, a second-quarter record, was $23.2 million, or 11.1 percent, in the second quarter, compared with $18.9 million, or 9.5 percent, in the prior year quarter. The margin expansion was primarily driven by higher profitability in the domestic utility pole business and maintenance-of-way projects, increased crosstie production, and lower selling, general and administrative costs.
– Sales for PC of $137.1 million, which represented a record quarter, increased by $16.3 million, or 13.5 percent, compared to sales of $120.8 million in the prior year quarter. Excluding an unfavorable impact from foreign currency translation of $1.9 million, sales increased by $18.2 million, or 15.1 percent, from the prior year quarter. The sales increase was driven by strong demand for copper-based preservatives in North America as consumers continued with home improvement projects during the ongoing COVID-19 pandemic, partially offset by lower market demand in all international markets. Operating profit was $32.6 million, or 23.8 percent, for the second quarter, compared with $14.0 million, or 11.6 percent, in the prior year quarter. The year-over-year increase was due to higher sales and $10.1 million of mark-to-market copper hedging gains compared to the prior year period. Adjusted EBITDA, a quarterly record, was $29.2 million, or 21.3 percent, for the second quarter, compared with $21.0 million, or 17.4 percent, in the prior year quarter. The profitability increase was primarily due to higher sales volumes, higher absorption on higher production volumes and lower year-over-year raw material prices, partially offset by lower contributions from international businesses.
– Sales for CMC totaling $89.6 million decreased by $34.3 million, or 27.7 percent, compared to sales of $123.9 million in the prior year quarter. Excluding an unfavorable impact from foreign currency translation of $1.3 million, sales decreased by $33.0 million, or 26.7 percent, from the prior year quarter. The lower average oil prices as well as a slowdown of markets during the pandemic has resulted in lower volumes and prices for carbon pitch globally, reduced volumes and prices for phthalic anhydride in North America, and reduced prices for carbon black feedstock in Europe and Australia. Operating profit was $1.5 million, or 1.7 percent, in the second quarter, compared with $13.0 million, or 10.5 percent, in the prior year quarter. Adjusted EBITDA was $7.1 million, or 7.9 percent in the second quarter, compared with $23.7 million, or 19.1 percent, in the prior year quarter. The lower profitability was primarily from demand weakness and pricing pressures related to sudden end market contraction, as well as lower oil prices.
– Capital expenditures for the six months ended June 30, 2020, were $26.5 million compared with $18.5 million for the prior year period.
– At June 30, 2020, total debt was $907.1 million and, net of cash and cash equivalents, the net debt was $874.1 million, compared with total debt of $953.2 million and net debt of $899.0 million at March 31, 2020, and total debt of $901.2 million and net debt of $868.9 million at December 31, 2019. Compared to March 31, 2020, total debt was lower by $46.1 million and net debt was lower by $24.9 million. Compared to December 31, 2019, total debt was higher by $5.9 million and net debt was higher by $5.2 million. At June 30, 2020, the company’s net leverage ratio was 4.5, unchanged from March 31, 2020, and 4.3 at December 31, 2019.
Pending Divestiture of Koppers (Jiangsu) Carbon Chemical Company Limited
In February, Koppers announced that it entered into a definitive agreement to sell Koppers (Jiangsu) Carbon Chemical Company Limited (“KJCC”), a 75-percent owned China coal tar distillation business with the remaining 25 percent owned by Yizhou Group Company Limited.
On April 29, 2020, the State Administration for Market Regulation of China (“SAMR”) decided not to conduct further review and gave approval for the pending divestiture to proceed, which represents a significant step in the process. Koppers continues to work diligently toward the goal of closing the transaction in the third-quarter timeframe. Closing is subject to satisfaction of various closing conditions contained in the definitive agreement. The company expects to realize approximately $65 million of net cash, after taxes and expenses, and plans to apply the cash proceeds toward debt reduction.
Although the worldwide effects of the COVID-19 pandemic are continuing to unfold, based on current market and customer indications, Koppers expects that 2020 sales will be approximately $1.6 billion. By comparison, sales in 2019 (excluding KJCC) were $1.65 billion. Accordingly, Koppers expects adjusted EBITDA will be approximately $190 million to $200 million for 2020, compared with adjusted EBITDA of $201 million in the prior year.
The effective tax rate for adjusted net income in 2020 is projected to be approximately 25 percent, compared to the tax rate in 2019, excluding special tax items, of 26 percent and adjusted EPS is forecasted to be in the range of $3.10 to $3.40, compared with adjusted EPS of $3.31 in the prior year.
Koppers does not provide reconciliations of guidance for adjusted EBITDA and adjusted EPS to comparable GAAP measures, in reliance on the unreasonable efforts exception. Koppers is unable, without unreasonable efforts, to forecast certain items required to develop meaningful comparable GAAP financial measures. These items include restructuring, impairment, non-cash LIFO charges, acquisition-related costs, and non-cash mark-to-market commodity hedging that are difficult to predict in advance in order to include in a GAAP estimate and may be significant.
Koppers continues to anticipate investments of $50 million to $60 million in capital expenditures in 2020, which are primarily related to improving the safety and reliability of its existing infrastructure.
Additionally, Koppers plans to reduce debt by approximately $120 million in 2020, which includes and will be contingent on the successful closing of the KJCC divestiture.
Commenting on the 2020 outlook Mr. Ball said, “After suspending our annual guidance for one quarter while trying to figure out how the world was going to respond to the COVID-19 pandemic, we are reinstituting guidance for the remainder of the year with all the caveats that apply given the continually evolving situation. Despite of all the uncertainty that continues to exist in the global economy, I believe that company management remains in the best position to project where we believe our future is heading and will fulfill our responsibility to the marketplace by providing as much visibility and transparency as possible.”
Mr. Ball continued, “I am cautiously optimistic as I look at the balance of 2020 and into 2021. Based upon industry feedback, I expect the higher demand for consumer treated wood products to continue into the fourth quarter of this year as retailers work to keep up and restock. That will possibly result in a new high in adjusted EBITDA for our PC business and serve to offset much of the year-over-year expected decline in our CMC business, which we believe experienced the worst of the impact during the second quarter. Finally, our RUPS business should see an equally strong second half, driven by significantly better rail maintenance-of-way performance and a solid demand profile for crossties and utility poles. The resurgence of COVID-19 and its impact on our markets, customers, suppliers, or production sites remains my biggest concern about achieving a strong finish to the year.”
Koppers, with corporate headquarters in Pittsburgh, Pennsylvania, is an integrated global provider of treated wood products, wood treatment chemicals and carbon compounds. Our products and services are used in a variety of niche applications in a diverse range of end-markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber, and construction industries. Including our joint ventures, we serve our customers through a comprehensive global manufacturing and distribution network, with facilities located in North America, South America, Australasia, China and Europe. The stock of Koppers Holdings Inc. is publicly traded on the New York Stock Exchange under the symbol “KOP.” For more information, visit us on the Web: www.koppers.com.
Michael Zugay – Investor Relations – (412) 227-2231
Source: Koppers Holdings, Inc.