Koppers Holdings Inc. (NYSE:KOP) is an integrated global provider of essential treated wood products, wood preservation technologies, and carbon compounds. The company operates three principal businesses: Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC).

In the fiscal year 2023, Koppers generated annual revenue of $2,154.2 million and net income of $89.2 million. The company's annual operating cash flow was $146.1 million, while its annual free cash flow stood at $25.6 million.

For the first quarter of 2024, Koppers reported consolidated sales of $497.6 million, down 3.1% from the prior year period. Adjusted EBITDA for the quarter was $51.5 million, resulting in a 10.3% margin. The RUPS segment achieved record first quarter sales of $225.1 million, up 5.6% year-over-year, driven by volume and pricing increases. The PC segment delivered strong first quarter sales of $150.1 million, up 2.2% year-over-year, benefiting from volume growth. However, the CMC segment experienced a 20.2% decline in sales to $122.4 million due to lower prices and volumes, particularly in carbon pitch.

Despite the mixed performance across its segments, Koppers remains committed to its long-term financial goals. The company is maintaining its guidance for consolidated sales growth of 4% to 5% in 2024, with a revised adjusted EBITDA target range of $265 million to $280 million, including $8 million from the recent acquisition of Brown Wood Preserving Company.

Business Overview

Koppers' RUPS segment is the largest supplier of railroad crossties to the Class I railroads in North America. The segment also provides utility poles, untreated wood products, rail joint bars, and inspection services. The PC segment is the global leader in developing, manufacturing, and marketing wood preservation chemicals and wood treatment technologies. The CMC segment processes coal tar into products such as creosote, carbon pitch, carbon black feedstock, naphthalene, and phthalic anhydride.

Geographical Breakdown

Koppers operates globally, with manufacturing capabilities in North America, South America, Australasia, and Europe. In 2023, the company generated approximately 70% of its revenue from North America, 15% from Australasia, and 15% from Europe and other regions.

Segment Performance

In the first quarter of 2024, the RUPS segment's sales increased by 5.6% year-over-year, driven by a $9.6 million volume increase for crossties and $8.1 million in net pricing increases across multiple markets. However, the segment's profitability was impacted by $10.6 million in higher operating, raw material, and SG&A expenses.

The PC segment's sales increased by 2.2% year-over-year, with volume growth of $6.8 million, primarily in the Americas. This was partially offset by $3.3 million in lower prices in the Americas and Australasia. The segment's profitability benefited from the volume increases, while the lower sales prices were offset by a decrease in raw material costs.

The CMC segment's sales declined by 20.2% year-over-year, driven by $28.6 million in lower sales prices across most products, including a 24.6% decrease in global carbon pitch prices, as well as $11.5 million in lower volumes of carbon pitch and carbon black feedstock. The segment's adjusted EBITDA decreased from $19.4 million in the prior year quarter to $4.0 million, primarily due to the price and volume declines, combined with a weather-related outage at the company's North American plant.

Liquidity

As of March 31, 2024, Koppers had approximately $340 million in available liquidity, with $820 million in net debt and a net leverage ratio of 3.3x. The company plans to maintain its balanced approach to capital allocation, with $80 million to $90 million in capital expenditures expected for 2024, including $23 million to $33 million for growth and productivity initiatives.

Koppers also remains committed to returning capital to shareholders, with a quarterly dividend of $0.07 per share, representing a 17% increase over the 2023 dividend.

Risks and Challenges

Koppers faces several risks and challenges, including volatility in raw material pricing and availability, particularly for hardwood lumber, scrap copper, and coal tar. The company is also exposed to competitive pressures, changes in foreign exchange rates, and the impact of global economic conditions on demand for its products.

The company's CMC segment has been particularly impacted by reduced demand in the aluminum and steel industries, leading to lower volumes and pricing for its products. Koppers is working to mitigate these challenges through cost-reduction initiatives and efforts to gain market acceptance for its petroleum-blended products.

Outlook

For the full year 2024, Koppers is maintaining its guidance for consolidated sales growth of 4% to 5%, with an adjusted EBITDA target range of $265 million to $280 million. This includes an $8 million contribution from the recently acquired Brown Wood Preserving Company.

The company expects its PC segment to sustain its first quarter outperformance and potentially add to it, while the CMC segment is projected to show improvement for the remainder of the year, though making up the first quarter shortfall will be challenging.

Koppers' RUPS segment is now expected to deliver $10 million to $18 million in EBITDA improvement from 2023, including $8 million from the Brown Wood acquisition, implying a $2 million to $10 million reduction in the base estimate due to lower projected sales volumes in the rail business and temporary excess inventory in the utility business.

Conclusion

Koppers Holdings Inc. is a diversified provider of essential treated wood products, wood preservation technologies, and carbon compounds, operating in a challenging market environment. While the company's first quarter results were disappointing, Koppers remains committed to its long-term financial goals and is taking measures to improve its performance, including cost-reduction initiatives and strategic acquisitions. With a focus on operational excellence, capital discipline, and strategic investments, Koppers is well-positioned to navigate the current market conditions and deliver value for its shareholders.