Business Overview and History

Koppers Holdings Inc. (KOP) is an integrated global provider of treated wood products, wood treatment chemicals, and carbon compounds. The company's diversified business model and unwavering commitment to operational excellence have enabled it to navigate the ever-changing market landscape and deliver consistent value to its shareholders.

Koppers was founded in 1988 as a spin-off from Beazer East, a leading manufacturer of construction materials. As part of the spinoff, Beazer East agreed to indemnify Koppers Inc. against certain environmental and other liabilities related to Koppers Inc.'s operations prior to the acquisition. Over the years, Koppers has faced various environmental challenges at its manufacturing sites, including one site that is listed on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). However, Beazer East has performed its obligations to address these environmental liabilities in all material respects.

In 2004, Koppers Inc. and Beazer East amended the environmental indemnification provisions to extend the indemnification period, subject to certain limitations. The indemnification period ended in 2019, but Beazer East continues to be required to pay the costs arising from certain third-party claims that were tendered by the deadline.

Since its inception, the company has established itself as a premier provider of innovative solutions across multiple industries, including railroad, utility, construction, and specialty chemical sectors. Koppers' three reportable segments - Railroad and Utility Products and Services (RUPS), Performance Chemicals (PC), and Carbon Materials and Chemicals (CMC) - have each played a vital role in the company's growth and success.

The RUPS segment is the largest provider of railroad crossties to Class I railroads in North America, while also offering a wide range of utility poles, rail joint bars, and engineering services. The PC segment is the global leader in developing, manufacturing, and marketing wood preservation chemicals and technologies, serving a diverse range of end-markets. The CMC segment processes coal tar into a variety of products, including creosote, carbon pitch, and phthalic anhydride, which are essential raw materials for various industries.

Navigating Challenges and Delivering Results

Despite the volatility and uncertainty that have characterized the past few years, Koppers has consistently demonstrated its ability to adapt and thrive. In 2024, the company reported record third-quarter sales of $554.3 million, a 0.7% increase from the prior year period. This strong performance was driven by a 6% increase in RUPS segment sales, which reached a new third-quarter record of $248.1 million.

Koppers' operational excellence was also evident in its profitability metrics. The company generated adjusted EBITDA of $77.4 million in the third quarter of 2024, a new third-quarter record and a 9.5% increase from the prior year. Adjusted EBITDA margin expanded to 14%, up from 12.8% in the same period last year, reflecting the company's ability to effectively manage costs and drive efficiency across its operations.

Financials

Koppers' financial performance has been strong, with record third-quarter sales of $554.3 million in 2024, representing a 0.7% increase from the prior year. The company's adjusted EBITDA reached $77.4 million, a 9.5% increase from the previous year, with an adjusted EBITDA margin of 14%, up from 12.8% in the same period last year.

For the most recent fiscal year (2023), Koppers reported revenue of $2.15 billion, net income of $89.20 million, operating cash flow of $146.10 million, and free cash flow of $25.60 million. In the most recent quarter (Q3 2024), the company achieved revenue of $554.30 million, net income of $22.80 million, operating cash flow of $29.80 million, and free cash flow of $14.40 million.

The Q3 2024 revenue growth of 0.7% year-over-year was driven by a 6% increase in the RUPS segment, offset by a 1.5% decrease in the PC segment and a 5.5% decrease in the CMC segment. The RUPS segment benefited from price increases and increased volumes, while the PC and CMC segments saw lower sales prices.

Liquidity

The company maintains a robust financial position, with a net leverage ratio of 3.6x as of the end of the third quarter of 2024. Koppers' strong cash flow generation has allowed it to fund growth initiatives, such as the $100 million acquisition of Brown Wood Preserving Company, while also returning capital to shareholders through dividends and share repurchases.

As of September 30, 2024, Koppers reported a debt-to-equity ratio of 1.84, cash balance of $44.50 million, and $287.40 million of unused availability on its $800 million revolving credit facility. The company's current ratio stood at 2.54, and its quick ratio was 1.13, indicating a healthy liquidity position.

Financial Strength and Capital Allocation

Koppers' financial position remains robust, with a net leverage ratio of 3.6x as of the end of the third quarter of 2024. The company's strong cash flow generation has enabled it to fund growth initiatives, including the $100 million acquisition of Brown Wood Preserving Company in April 2024, while also returning capital to shareholders through a $0.07 per share quarterly dividend and $42 million in share repurchases year-to-date.

Looking ahead, Koppers expects to maintain its financial discipline and continue investing in growth opportunities. The company has forecasted capital expenditures of $80 million for 2024, with a focus on maintenance, safety, and productivity-enhancing projects. Koppers has also outlined plans to reduce its workforce and optimize its cost structure, which are expected to generate annual savings and further strengthen its financial position.

Segment Performance

The RUPS segment reported net sales of $727.1 million for the first nine months of 2024, a 6.7% increase compared to the prior year period. This increase was driven by $28.8 million in price increases, primarily for crossties and utility poles, as well as higher volumes for crossties and utility poles and an increase in activity in the railroad bridge services business. Adjusted EBITDA for the RUPS segment increased 2.5% to $64.8 million.

The PC segment saw a slight decrease in net sales of 0.7% to $503.7 million for the first nine months of 2024. Despite the lower sales, PC segment adjusted EBITDA increased 21.6% to $114.1 million as a result of lower raw material costs.

The CMC segment experienced a 15.0% decline in net sales to $384.3 million for the first nine months of 2024, driven by lower sales prices across most products and lower volumes of carbon pitch and carbon black feedstock. CMC segment adjusted EBITDA declined 39.6% to $27.5 million.

Geographic Performance

Koppers operates primarily in the United States, with some international operations in Canada, Australia, and Europe. However, the majority of sales are within the US market.

Guidance and Outlook

For the full year 2024, Koppers has tightened its adjusted EBITDA forecast to be in the range of $270 million to $275 million. The company also expects adjusted earnings per share to be between $4.25 and $4.45, with the upper end representing a new high for the company. Capital spending is projected to be $80 million, or $73 million net of cash proceeds.

Looking ahead to 2025, Koppers expects consolidated sales to be flat year-over-year, with RUPS sales projected to increase by $50 million, PC sales forecasted to decrease slightly by $15 million, and CMC sales estimated to decrease by $75 million. The company anticipates adjusted EBITDA will exceed the current consensus estimate of $285 million, with a target of $300 million or better. Additionally, Koppers expects its net leverage to drop to below 3 times adjusted EBITDA in 2025.

Conclusion

Koppers' diversified business model, operational excellence, and prudent capital allocation have been the key drivers of its success. The company's ability to adapt to changing market conditions, while consistently delivering strong financial performance, positions it well for continued growth and value creation. As Koppers navigates the evolving business landscape, investors can take comfort in the company's proven track record and its commitment to driving long-term shareholder value.