Koppers Holdings Inc. Reports Third Quarter 2020 Results; Reaffirms 2020 Outlook
Koppers Holdings, Inc. (“Koppers”), an integrated global provider of treated wood products, wood treatment chemicals and carbon compounds, reported net income attributable to Koppers for the third quarter of $75.6 million, or $3.53 per diluted share, compared to net income of $19.9 million, or $0.94 per diluted share, in the prior year quarter. Income from continuing operations attributable to Koppers for the third quarter was $39.1 million, or $1.83 per diluted share, a record quarter, compared to income from continuing operations of $18.3 million, or $0.86 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. As previously announced, the divestiture of KJCC was completed on September 30, 2020, which resulted in a gain on sale of $35.8 million in the quarter.
The adjusted net income and adjusted earnings per share (“EPS”) for the third quarter of 2020 were $35.1 million and $1.64 per share, a record quarter, compared to $24.4 million and $1.16 per share in the prior year quarter, respectively.
Adjustments to pre-tax income excluded $5.3 million in earnings for the third quarter of 2020, compared with $8.2 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. Adjusted net income also excluded contributions from discontinued operations of $36.4 million in the third quarter of 2020, compared with $2.2 million in the prior year quarter.
The operating profit was $58.6 million, a quarterly record, or 13.4 percent, compared with $36.6 million, or 8.4 percent, in the prior year period. The operating profit margin is calculated as a percentage of sales. For the third quarter of 2020, the income from continuing operations attributable to Koppers and the adjusted net income benefited from a tax rate as a percentage of pretax income of 18 percent, primarily due to approximately $3 million of favorable tax adjustments.
For the third quarter of 2020, adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) was $66.7 million, a quarterly record, or 15.2 percent, compared with $57.1 million, or 13.2 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 third quarter of 2020 totaled $7.0 million of pre-tax benefits, compared with $5.9 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 for the third quarter of 2020 were $437.5 million, an increase of $3.3 million, or 0.8 percent, compared with $434.2 million in the prior year quarter, driven by a $3.5 million favorable impact from foreign currency translation.
Sales for the Railroad and Utility Products and Services (“RUPS”) segment were lower than prior year due to decreased crosstie volumes and certain customer discounts, partially offset by higher demand in its Australian utility pole business and Recovery Resources crosstie disposal business. Nevertheless, RUPS reported improved profitability primarily driven by favorable margin mix as well as effective cost containment measures. The Performance Chemicals (“PC”) segment reported record sales and record adjusted profitability, as it continued to benefit from strong demand in the U.S. home repair and remodeling markets as well as in international housing and related markets during the ongoing COVID-19 pandemic. While sales and profitability for the Carbon Materials and Chemicals (“CMC”) segment declined from the prior year due to ongoing demand weakness in its end markets, the margin has stabilized and is beginning to show sequential improvement compared with the first half of 2020.
President and CEO Leroy Ball said, “Our performance through the pandemic has only further reinforced the benefits of our strategy to strengthen Koppers by shrinking our CMC footprint, reducing our operating exposure to China, and strategically adding to our integrated business model centered around technologies to preserve and enhance wood. With less than a quarter left in 2020, we are on pace to set several all-time company earnings records while also having our balance sheet leverage under control, all of which were made possible by the extraordinary efforts of our valued Koppers team members around the globe.”
Third-Quarter Financial Performance
Sales for RUPS of $191.0 million decreased by $7.8 million, or 3.9 percent, compared to sales of $198.8 million in the prior year quarter. Excluding a favorable impact from foreign currency translation of $0.6 million, sales decreased by $8.4 million, or 4.2 percent, from the prior year quarter. The sales decrease was primarily due to lower volumes in the commercial crosstie market along with customer discounts, partly offset by increased demand for utility poles in Australia and crosstie disposal services in the U.S. Operating profit for the third quarter was $15.0 million, or 7.9 percent, compared with operating profit of $11.3 million, or 5.7 percent, in the prior year quarter. Adjusted EBITDA was $18.5 million, or 9.7 percent, in the third quarter, compared with $16.9 million, or 8.5 percent, in the prior year quarter. The improved margin was primarily driven by higher profitability in Class I and crosstie disposal businesses, as well as lower selling, general and administrative costs.
Sales for PC of $147.9 million, a record quarter, increased by $24.0 million, or 19.4 percent, compared to sales of $123.9 million in the prior year quarter. Excluding an unfavorable impact from foreign currency translation of $0.5 million, sales increased by $24.5 million, or 19.8 percent, from the prior year quarter. The sales increase reflects continued demand for copper-based preservatives in the U.S. driven by strength in the home repair and remodeling markets during the pandemic, along with international markets benefiting from pent-up demand following several months of restrictions associated with the pandemic. Operating profit was $30.4 million, or 20.6 percent, for the third quarter, compared with $11.7 million, or 9.4 percent, in the prior year quarter. Adjusted EBITDA for the third quarter was $31.5 million, a record quarter, or 21.3 percent, compared with $17.8 million, or 14.4 percent, in the prior year quarter. The increased profitability was primarily due to higher sales volumes, a favorable product mix, and better absorption on higher production volumes.
Sales for CMC totaling $98.6 million decreased by $12.9 million, or 11.6 percent, compared to sales of $111.5 million in the prior year quarter. Excluding a favorable impact from foreign currency translation of $3.4 million, sales decreased by $16.3 million, or 14.6 percent, from the prior year quarter. Lower average oil prices, as well as a slowdown of markets during the pandemic, has resulted in lower pricing for carbon pitch and phthalic anhydride and lower demand for carbon black feedstock globally, partly offset by higher volumes of carbon pitch in Australia and phthalic anhydride in North America. Operating profit was $13.7 million, or 13.9 percent, in the third quarter, compared with $14.0 million, or 12.6 percent, in the prior year quarter. Adjusted EBITDA was $16.5 million, or 16.7 percent, in the third quarter, compared with $22.6 million, or 20.3 percent, in the prior year quarter. The year-over-year profitability is lower as expected; however, the third-quarter performance reflects a margin recovery in the second half of 2020.
Capital expenditures for the nine months ended September 30, 2020, were $43.8 million compared with $26.8 million for the prior year period.
At September 30, 2020, total debt was $809.8 million and, net of cash and cash equivalents, the net debt was $770.3 million, compared with total debt of $901.2 million and net debt of $868.9 million at December 31, 2019. Compared to December 31, 2019, total debt was lower by $91.4 million and net debt was lower by $98.6 million. At September 30, 2020, the company’s net leverage ratio was 3.8, compared with 4.3 at December 31, 2019.
Although the worldwide effects of the COVID-19 pandemic are continuing to unfold, Koppers expects 2020 sales to be approximately $1.6 billion, compared with sales of $1.65 billion (excluding KJCC) in 2019. The company anticipates that adjusted EBITDA in 2020 will be in the range of $204 million to $210 million, which is higher than its previous forecast of $196 million to $204 million, and compares with $201.1 million in the prior year. Adjusted earnings per share (“EPS”) is projected to be in the range of $3.65 to $3.90 in 2020, which is higher than its previous estimate of $3.25 to $3.50, and compares with $3.18 in the prior year.
Koppers anticipates investments of $55 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 $125 million in 2020, which includes proceeds that were received from the KJCC divestiture. Based upon current adjusted EBITDA and debt reduction estimates, net leverage at December 31, 2020, is projected to be between 3.5 and 3.6.
Koppers does not provide reconciliations of guidance for adjusted EBITDA, adjusted EPS, net debt or net leverage ratio 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.
Monthly Business Update
For the remainder of 2020, Koppers will report monthly sales by business segment via a press release without an accompanying conference call. The company plans to provide details of its October 2020 sales and related commentary on November 19, 2020.
For the full third quarter results, click here.
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. We serve our customers through a comprehensive global manufacturing and distribution network, with facilities located in North America, South America, Australasia 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 J. Zugay – Chief Financial Officer – firstname.lastname@example.org – (412) 227-2231
Source: Koppers Holdings, Inc.