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Koppers Holdings Inc (NYSE:KOP)
Q3 2020 Earnings Call
Oct 26, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Koppers' Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this event is being recorded.

I will now turn the call over to Quynh McGuire. Please go ahead.

Quynh T. McGuire -- Vice President, Investor Relations

Thanks and good morning. I'm Quynh McGuire, Vice President of Investor Relations. Welcome to our conference call, where we will provide a business update, as well as highlight our third quarter 2020 preliminary results. We issued our press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our announcement, we've 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 website for replay through January 26, 2021.

Before we get started, I would like to direct your attention to our forward-looking disclosure statements. Certain comments made on this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation Act -- 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 the 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. I'll now turn over discussion to Leroy.

Leroy M. Ball -- President and Chief Executive Officer

Thank you, Quynh. Good morning and welcome everyone. We hope you and your families are continuing to remain healthy and safe during the ongoing pandemic. Before I get into our third quarter results, let me just say how impressed and grateful I am concerning our people who have remained focused on doing their job safely at the same time enabling us to achieve so many new performance records in the third quarter, while we all continue to deal with the worldwide pandemic.

As always, we'll begin with a focus on our Zero Harm culture. I'm proud to report that on a trailing 12-month basis, our total OSHA recordable injury rate, not including COVID-19, are at their lowest points thus far in our Zero Harm journey, down 21% compared to the same point last year. That's truly a testament to the hard work of our plant management and our employees. I can't thank them enough for their commitment to remain focused despite an extremely challenging year on proactive safety engagements such as safety observations and hazard identification.

Our safety performance continues to be augmented by ongoing training and an emphasis on building a more empathetic leadership team. In November, we will be convening members of our management team from around the world, including plant managers and support staff leaders for our virtual Zero Harm forum. This is to replace the in-person form that was scheduled to occur back in April that was unfortunately canceled like almost everything else this year. We do not want to wait until we can safely reconvene our site leadership group, so we're figuring out a way to adapt to the times. This online event will be live and interactive scheduled for two-hour sessions over three days and we'll build on the progress we've made in advancing our Zero Harm safety culture by sharing information and generating meaningful dialog about incorporating more inclusive and sustainable business practices across all parts of our organization. And although it will be virtual, I'm certain that the forum will be as valuable as ever.

Moving on to our presentation as shown on Slide 4, the U.S. Cybersecurity and Infrastructure Security Agency or CISA within the Department of Homeland Security maintains its classification of Koppers as an essential business, meaning that we can continue to operate during the pandemic, in order to help with transporting critical goods, providing power and connectivity to home and businesses, and keeping our infrastructure running reliably. Across our organization, the people of Koppers are proud to do our part to support the global economy.

Looking at employee health and well-being on Slide 6, to date, we have had 72 employees worldwide who have tested positive for COVID-19, which represents approximately 3% of our employee population. On a cumulative basis, four of our facilities have had cases that were the result of being transmitted on site, and while we continue to be diligent ensuring the proper safety measures and thoroughly cleaning and disinfecting any affected areas, currently 20 employees are self-quarantining, and cumulatively, approximately 37% have self-identified with symptoms at some point in time. Consistent with national worldwide trends, we've had an increase in cases most recently, and we continually look for ways to reinforce our messaging around the importance of not letting our guard down and continuing to practice safe behaviors. Our strict protocols governing personal protection and processes continue to be in place, including the introduction of self-administered saliva testing kits for field and office personnel, reducing the time needed to get results by -- at a minimum of full day. Also, we recently conducted a flu clinic for employees at our headquarters in Pittsburgh and are in the process of scheduling flu clinics at other locations in our site network in the upcoming weeks.

In the areas of communications, we're having our upcoming quarterly all employee meetings in three time zones for the first time. Each meeting will be held at the time of day that hopefully will better accommodate our employees in the U.S., in Europe, and in Australia and New Zealand combined. It will also allow for more dedicated discussion of additional topics that are more closely relevant to each geographic region. For ongoing interactions, I'm continuing to engage with our employees worldwide via videos at least once a week that can be viewed on Koppers' Facebook and LinkedIn accounts, virtual facility visits, and virtual employee chat to provide updates and encouragements on a continual basis.

Moving now to a discussion of operations continuity on Slide 8. Here we see that all worldwide Koppers' manufacturing facilities remain operational, which is great news, and we do not have any furloughs or layoffs. Now, we continue to remain restricted to a central business only, while limited number of in-person facility visits have been made to reinforce health, safety and performance goals or to monitor and review major in-process capital projects. For office personnel, we still strongly encourage employees to work remotely with the potential return to the office postponed until January 2021, although there is a strong likelihood the return to office state will actually move to later in 2021. Technology continues to serve us very well across multiple needs, for meetings to virtual facility visits to safeway tests for our trucks out on the road to virtual training programs and more.

Now despite 2020 being the year of cancellation, it hasn't stopped us or our people from being recognized for our accomplishments. On Slide 10, we congratulate our Chief Sustainability Officer, Leslie Hyde, on receiving the 2020 STEP Ahead award from the Manufacturing Institute for Excellence and leadership among women in manufacturing. She has made significant contributions to Koppers and continues to shape the industry. Leslie absolutely deserves this national honor and we are proud of her accomplishments. 2020 represents the third year in a row that we've had a team member recognized with a STEP award, which is a reflection of the female talent base that we currently have and continue to build at Koppers.

On Slide 11, Koppers recently received recognition from our Class 1 railroad partners, commending our role in safe rail shipping practices; the Chemical Safety Excellence Award from CSX and the Pinnacle Award from Union Pacific. These awards are well deserved acknowledgment of our employees' hard work to protect our people, environment, and communities, while reliably serving our customers. Congratulations, thank you to everyone who played a part in making this possible.

As I mentioned earlier, we made several in-person visits to our facilities this past month. On Slide 13, we see a photo that shows a groundbreaking ceremony held at our North Little Rock, Arkansas wood treatment plant. I was honored to be joined by the Governor of Arkansas, the mayor of North Little Rock, and various elected officials to celebrate the start of our plant expansion and modernization project at this facility.

Slide 14 shows a visit to our performance chemical facility in Hubbell, Michigan by Chief Operating Officer, Jim Sullivan and Doug Fenwick, our Senior Vice President, Performance Chemicals, where they were discussing the merits of adding additional copper carbonate capacity.

On Slide 15, we see highlights of our coal tar distillation facility in Stickney, Illinois as a result of a recent visit from Chief Operating Officer, Jim Sullivan, where he was checking on the construction progress of a new tank as part of our ongoing tank maintenance and inspection program. We continue to make progress on raising the awareness and visibility of inclusion and diversity efforts. As shown on Slide 17, Martin Luther King Jr. day will be a paid holiday now across Koppers U.S. operations beginning in January 2021. This is about just one step in many that we've taken over the past six years to create a path toward a more equitable and inclusive organization and community.

As illustrated on Slide 18, we're utilizing a new outreach platform, KopTalk. These are structured video conversations to solicit input from our employees across the globe for a series of KopTalk were led by me and Vice President of Culture and Engagement, Dan Groves. Already these sessions have generated some innovative ideas on improving communications and responsiveness between leadership and employees. Another option for employees to connect, we just introduced a virtual kaffe bar that has created an informal gathering space for colleagues worldwide to visit with one another. The name is in line to our Nyborg colleagues using the Danish word for coffee and a not so subtle message that we encourage interaction from all global employees on this platform. Finally, we've also installed digital signage boards at our facilities globally, currently in 84% of our locations so far to reinforce safety messages along with sharing news at the corporate and local level.

Next on Slide 19, we're focusing on not only the physical well-being of our employees, but their emotional health as well. We know that working from home having to balance parental responsibilities has been a daunting challenge for many. Now, for our employees that are parents who are juggling work while needing to keep their children -- to help their children with online learning for all or part of the day, Koppers recently sponsored a parenting through the pandemic video chat question-and-answer session with expert panelists from the medical community, who offered some advice and encouragement. Also, a working parents channel has been added to our One Koppers app for employees to connect and share advice. We're establishing working parents employee resource group, where employees can also support each other and help the Company better understand the challenges that they face.

Of course, there are also challenges in the community, and our people have continued to step up and respond in a variety of ways. Slide 21 shows the sacrifice of the employee, Josh Orr, from our plant, Roanoke, Virginia. A longtime volunteer firefighter Josh traveled to Texas in August to help contain a massive wildfire there. Working as a faller on the team, this father of two small children worked within feet of the blaze, cutting brush that heavy equipment could not reach to contain the spread. His efforts saved lives and property. We cannot be more proud to call him a Koppers employee. Across the world in New Castle, Australia, our team there is making a positive impact by raising more than $25,000 to help keep a local helicopter rescue service operating on behalf of area residents.

Slide 22 shows how the people of Kopper showed up to support the Pittsburgh chapter of the Leukemia & Lymphoma Society's annual Light the Night Walk, which was held virtually this year and where I served as the Walk Chair for the third straight year. This year, Koppers was named the top fundraiser in our category. We're proud to be a longtime supporter of this non-profit group, which helps patients and families dealing with blood-borne diseases as well as investing in leading-edge research to help find a cure. In addition, we again supported the American Diabetes Association Tour de Cure bicycle fundraiser. This year's event was held virtually and participants could fashion their own 30-mile course. Longtime team captain in this event, past years Jeff Senchak from our CMC business and his wife, Susan, raised just over $7,000 for diabetes research and Koppers was pleased to contribute to that total.

And with that, I'll turn it over to Mike to discuss results for the quarter and an overview of our debt and liquidity, and I'll be back with comments on our business segments and related market sentiments. Mike?

Michael J. Zugay -- Chief Financial Officer & Treasurer

Thanks, Leroy. In our press release this morning, we provided preliminary results for Q3 and our financial discussion is based on those preliminary results, excluding the sale of KJCC, which we will review shortly. On Slide 24, consolidated sales were $438 million, an increase from sales of $434 million. Sales for RUPS were $191 million, down from $199 million, PC sales rose to $148 million from $124 million, and CM&C sales came in at $99 million, down from $111 million.

On Slide 25, preliminary adjusted EBITDA for Q3 was $67 million. It was a record quarter, up from $57 million in the prior year. Adjusted EBITDA for RUPS increased to $19 million, up from $17 million in the prior year, PC EBITDA rose to $32 million from $18 million, and CM&C EBITDA was $16 million compared with $22 million.

On Slide 26, sales for RUPS were $191 million, slightly lower year-over-year. This was primarily due to lower crosstie volumes, particularly in the commercial market along with pricing discounts for select customers. The utility pole business in the U.S. held steady with sales at a similar level as the prior year and the demand was higher for utility poles in Australia and crosstie disposal services in the United States.

On Slide 27, adjusted EBITDA for RUPS was $19 million compared with $17 million, and this was driven by higher profitability in Class 1 sales due to a favorable product and service mix. Also, we saw higher profitability in the crosstie disposal business as well as lower selling, general and administrative costs.

Sales for the PC segment on Slide 28 were $148 million compared to sales of $124 million. This marked another record sales quarter, reflecting continued strong demand for copper-based preservatives in the U.S., driven by sustained strength in the home repair and remodeling activities. Adjusted EBITDA for PC on Slide 29 was $32 million compared with $18 million. This also set a new quarterly record due to higher sales volumes, lower average raw material costs, a favorable product mix, and better absorption on higher production volumes.

Slide 30 shows CM&C sales at $99 million compared to sales of $111 million. Sales were lower in every region except Australia, but they were in line with overall expectations. The pandemic's effect on lower average oil prices and a general market slowdown translated into lower pricing for carbon pitch and lower demand for carbon black feedstock. These factors were partially offset by higher volumes of carbon pitch in Australia and phthalic anhydride in North America.

On Slide 31, adjusted EBITDA for CM&C was $16 million compared to $22 million. As expected, this reflects a year-over-year decline due to ongoing weak end-market demand. While the profitability was lower, the third quarter showed margin recovery. Compared with the prior year quarter, the average pricing of major products was down 14%, while average coal tar costs declined 21%. We are also seeing sequential improvement in CM&C when compared with the first half of 2020 as we previously anticipated.

Slide 33 shows that Koppers generated new quarterly records in the third quarter of 2020 in the following areas: Diluted EPS from continuing ops of $1.83; adjusted EPS of $1.64; operating profit of $58.6 million; adjusted EBITDA of $66.7 million; PC sales of $147.9 million; and PC-adjusted EBITDA of $31.5 million.

Now, let's review our debt and liquidity situation. As seen on Slide 35, at the end of September, we had $770 million of net debt, with $343 million in available liquidity. We are now forecasting a $125 million in total debt reduction for 2020, which includes the proceeds already received from the KJCC divestiture. Also, we remain in compliance with all debt covenants, and looking at our maturities, we do not have any significant maturities until 2024 when our revolver matures and a final balloon payment on our term loan becomes due.

On Slide 36, the history of our net leverage ratio is shown beginning in 2019 and as projected out through the end of 2020. At September 30, our net leverage ratio was 3.8 times, which was a significant drop from 4.5 times at the end of the previous quarter. We are now on target to be between 3.5 times and 3.6 times at year-end 2020.

And finally on Slide 37, we outlined the preliminary financial details of the KJCC Sale. To summarize, the net gain on the sale was approximately $36 million, the discontinued ops EPS impact was $1.67 per share, and the net cash to Koppers was $65 million.

With that, I'll turn the call back over to Leroy.

Leroy M. Ball -- President and Chief Executive Officer

Thank you, Mike. I'll now move into discussing the business sentiment based upon what we're currently seeing in the marketplace as well as feedback from our customers and suppliers. Slide 39 provides a rundown of our Utility and Industrial Products Group. We continue to pursue a strong focus on customer service encouraged by ongoing broadband infrastructure investments necessary because remote working requires electrical and network connectivity. Koppers is working with utilities on testing and using CCA and creosote as treatment alternatives to penta preservative. Our UIP group remains on track for its best year since joining the Company, with solid long-term fundamentals in place. Now with hurricane season still ongoing, we continue to provide storm response service to customers, and in the near term, we've experienced some slowing from postponed projects or lack of crews due to those hurricane response efforts.

Now, recently, we were successful in negotiating some multi-year contract extensions and we continue to evaluate various opportunities for share gains. In pilings, our business is improving as restrictions have been eased on construction projects, but do remain concerned about this segment of the business in the near term as coronavirus cases rise, which puts commercial construction projects at risk of future shut down. In the pole recovery area, we're targeting investor-owned utilities as well as evaluating opportunities for synergies with projects with our rail structures business. Regarding our supply chain, the wet weather has slowed wood flow at some facilities, and we're also dealing with some transportation cost increases. But on balance, our wood supply chain remains in good stead.

In our RUPS segment seen on Slide 40, the crosstie business remained solid with improved Class 1 margin mix, while there were some slowing and more price competition in the commercial market. We're hopeful that any ongoing demand weakness that might occur can largely be offset with the savings from consolidating our Denver treatment operations into the North Little Rock facility. Therefore, we expect the trend of year-over-year improvement quarterly EBITDA to continue. From an industry perspective, compared with prior year for the year-to-date period through October 17, U.S. railroads reported 15% lower cumulative volumes, 5% lower intermodal units, and 9.8% lower total combined U.S. traffic, according to the American Association of Railroads. Now, the American Association of Railroads also reports that some Class 1 railroads and transit agencies are using the downtime for maintenance programs, which resulted in earlier-than-usual purchases.

In the Maintenance-of-Way segment, we're seeing ongoing demand and improved profitability in Rail Structures and Recovery Resources, but anticipate some fourth quarter weakness in Rail Joints, which has been our most impacted business as a result of the pandemic.

In our supply chain, we're leveling out our crosstie purchases as well as receiving dry ties from third-party sources for certain customers to maintain optimum working capital levels. Longer-term, crosstie supply and pricing could be affected unfavorably as some sawmills are having to shut down due to challenges as a result of lower demand in other industries.

Now, looking at Performance Chemicals on Slide 41, the strong demand in North America for 2020 is expected to continue and international markets are expecting elevated demand in the fourth quarter. [Indecipherable] industry is low on chemical currently, but should improve by the end of the year. Our PC business is on track to deliver record full year EBITDA in 2020 with the previous record high of $88 million set in 2017.

In North America, the market forecasts vary, but are increasingly more favorable. The Census Bureau reports that retail sales accelerated in September, and building materials continued to show strength. The Leading Indicator of Remodeling Activity anticipates growth of 4.1% in renovation and repair spending by the first quarter of 2021, then moderating to 1.7% by the third quarter of 2021 with do-it-yourself and small projects lifting the remodeling market. Consumer confidence index increased in September to 101.8 after declining in August to 86.3, still below pre-pandemic levels. The National Association of Realtors reported the fourth consecutive month of growth with existing home sales higher by 9.4% in September, compared to prior month, and up 20.9% from prior year. Each of the four major U.S. regions witnessed month-over-month and year-over-year growth with the Northeast seeing the highest climb in both categories.

Performance Chemicals internationally as seen on Slide 42 shows increased demand in Germany, a favorable mix in the Nordic region, and uncertain future in the U.K. and Ireland due to Brexit questions, and some nice gains in Australia as pandemic restrictions are reduced, high volumes in New Zealand and strong production volumes in Brazil and Chile as well. Now, our international PC business is a nice complement to what we do in North America. It is the North American region that continues to drive results and will continue to for the foreseeable future.

Supply chain picture for PC shows that copper hedges for 2021 and 2022 are currently at lower average costs in 2020, but no additional benefit is expected this year related to lower copper prices as they are now fully hedged. The unprecedented pandemic demand has outstripped internal production capacity, so we must source a greater proportion of our needs through external suppliers, leading to higher input costs. We do expect some relief in this area in the fourth quarter as we made certain modifications to our supplier network to improve both quality and reliability. Also, we are making progress to expand capacity for intermediates and will likely launch a modest expansion project near year-end. Lumber prices are declining with certain treaters waiting for market stabilization before exposing themselves to too much commodity risk over the remainder of this year.

Now, we move to our CM&C business on Slide 43. Demand overall is lower but beginning to recover. At this point, we think year-over-year demand and volumes will remain at similar levels for the remainder of the year. Thus far, we have been successful placing a strong focus on cost containment to help mitigate the impact from these softer market conditions. We anticipate that second half 2020 EBITDA will be nearly double that of the first half, with double-digit margins anticipated for the full year 2020. Third quarter is a reflection of that as adjusted EBITDA came in at more than twice either the first or second quarter of CM&C in total.

In North America, more important supply is yielding higher tar costs, while softer demand is contributing to lower utilization rates. Europe appears to be in the best shape of the three regions due to the role in supplementing the U.S. tar and creosote supply, and Europe is seeing slightly lower year-over-year demand and production levels, lower coal tar prices, and lower average pricing, while Australia is generating stronger sales volumes, while also benefiting from favorable raw materials and production costs.

Regarding supply chain, we're seeing continued overcapacity from cokeries and steel producers, so we expect tar production to remain depressed through 2021. With reduced coal tar availability in North America, any significant recovery in our North American business in 2021 will be heavily dependent on recovery in the domestic steel industry.

Looking at Slide 44 and taking into account where each of our businesses stand and the continued favorability we've seen in our effective tax rate this year, we find ourselves once again in a position to raise guidance for 2020. As of now, we see adjusted EBITDA for this year finishing somewhere between $204 million and $210 million, up from the $196 million to $204 million we guided to last month. Even better than expected performance in our CM&C segment and greater confidence that PC will finish out the year on a strong note are the main reasons for the increased EBITDA guidance. On an adjusted EPS basis, we now expect to finish this year somewhere between $3.65 per share and $3.90 per share, up from our previous guidance of $3.25 per share to $3.50 per share. In addition to my previous comments on drivers for the increase, larger-than-expected favorable return to provision adjustments on our recent tax filing already realized in the third quarter results also contributes to our higher EPS expectations for the year.

It is worth noting that at this point, we expect to finish the year at the top-end of our February 2020 EBITDA guidance for the year in anywhere from 10% to 30% higher than our initial adjusted EPS guidance. All of this represents quite a dramatic shift from the disaster scenario planning that we were going through in the early months of the pandemic.

Now, we've not taking our foot off the pedal as we continue to clamp down on cost for the year as shown on Slide 46, which details actions meant to mitigate the impact of COVID-19. We've identified between $12 million and $14 million in SG&A savings and have reached $9 million of those savings through September of 2020 by managing costs in compensation and benefits, travel and entertainment, and legal and consulting fees.

Now, as discussed on prior calls to emerge stronger post pandemic, on Slide 47, you can see we remain relentlessly focused on these few critical initiatives, which have already contributed importantly to our success in managing through these challenging times. By continuing to focus on increasing market share across business segments, adding new products, processes and markets to our portfolio, and optimizing our facilities, we believe we can continue to build upon the strong foundation we've built over the past six years. In addition, the sale of non-core businesses such as KJCC, closed properties such as Follansbee, KCCC, and Denver and other related assets should generate additional cash as well.

In summary, 2020 has proved to be a key inflection point for our Company. Key milestone occurred with the completion of the sale of our KJCC joint venture as we announced on September 30. By exiting this business and further streamlining our portfolio, we've taken one more giant step toward significantly improving the stability and quality of our earnings profile moving forward. Additionally, we continue to validate the strength, durability, and resilience of our business model that benefits from being a major player in serving diversified niche end markets and being designated in the central business supporting critical industries that must continue in almost any circumstance. Even in an unprecedented environment due to the ongoing pandemic, we're achieving record levels of performance, which is a testament to our Koppers' team members around the globe who I wish to thank for their extraordinary efforts to carry us through these challenging times.

At this point, I would like to open it up for any questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Mike Harrison with Seaport Global Securities. Please go ahead.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi, good morning.

Michael J. Zugay -- Chief Financial Officer & Treasurer

Good morning, Mike.

Leroy M. Ball -- President and Chief Executive Officer

Good morning.

Mike Harrison -- Seaport Global Securities -- Analyst

I bet as we were heading into this pandemic and you guys were seeing things start to shut down, you would never have expected you'd put up a record quarter in Q3. So, congratulations for that. Wanted to ask about the RUPS business. It sounds like commercial volumes accounted for most of the decline there. We think your business is being predominantly Class 1. So, does that mean that the commercial business was down something like 20% or 30% versus last year? And maybe can you talk about what you're hearing from your commercial customers about their maintenance plans heading into 2021?

Leroy M. Ball -- President and Chief Executive Officer

Okay. So, you're right, I mean, the commercial business is a smaller proportion of our business, making up anywhere from 20% to 25% of our crosstie business overall. It's also the most volatile, and we will see big swings and pricing as you go through different parts of the cycle, which also will be partly dependent upon the demand in that market as well. We have been riding a wave I'd say over the last probably six to eight quarters of improving pricing and stronger demand. And so, given what's going on with the pandemic and everybody looking for opportunities to reduce spending and cut costs, not surprising that we'd see some impact on demand in the commercial market, which would then also translate into lower pricing as well.

So, I can't say I'm terribly surprised given again the fundamentals of what we're dealing with in the current environment. However, I would say that that's again what makes our business model good during these times is having that heavy Class 1 customer base where through good times and bad, you know you have a strong foundation of demand to serve, and as we've seen during this period of time this year, we've only had again one Class 1 customer that has sought to reduce spending this year in this area. Others have continued to either execute their programs as come -- as they were coming into the year or actually even doing a little bit more. So on balance, we're in pretty good shape.

But long story short, Mike, I'm not shocked by what we're seeing in the commercial market right now and I think we'll continue to see the softness until we get some clarity coming through the pandemic, and where different stimulus spending might come from, right? So, if there is anything that's directed again into infrastructure and anything short lines can take advantage of, then, I think you'll see a pickup back in demand here, which will ultimately generate into a stronger pricing environment as well.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And maybe you mentioned pricing a couple of times, I believe you mentioned some discounting activity in the RUPS business. Was that primarily to commercial or were there some discounts given to Class 1 customers as well?

Leroy M. Ball -- President and Chief Executive Officer

Well, I think there -- any of the stuff that we're -- that we end up doing regarding a discounting basis typically comes as a result of volumes, right? So, it's typically where customers meet certain volume thresholds and that those sorts of things come into play, and we have that across almost all of our different business segments. So, that's where you'd see that.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then over on the PC side of the business, it sounds like you guys expect to catch up on getting some of these chemicals to the treaters during Q4, but maybe the outlook into 2021 is a little bit uncertain. Is it best guess right now that we're going to see strength through the first half of 2021 and then maybe some question marks on what the second half looks like?

Leroy M. Ball -- President and Chief Executive Officer

Yeah. The current line of thinking and what we're being told by -- actually that we're hearing by certain retailers out there is they expect continued strength at these sorts of levels out into the -- basically through the first half of next year. So, that's the word we continue to hear. We are -- we continue to be behind in terms of being able to serve the industry again, which is in line with where the overall chemical industry is at in this market right now. So, it's not a Koppers' issue so much as an industry issue. And so, yeah, we're still digging ourselves out of a whole from a supply standpoint, and -- which again will -- should allow us to see continued strength and benefits through the first half of the year. And you're right, beyond that, there -- it's a little uncertain, right, because demand this year was certainly not projected at this level coming in. We know that a big portion of the demand from this year is actually triggered by the pandemic and people staying at home, people having some additional dollars to spend, not going on vacation, maybe not having to spend on their season tickets, looking to beautify and improve their work environment seeing that they might be spending more time working at home than going into an office, all those things have contributed to demand at significantly higher levels than anybody expected.

So, how much of that is going to continue or when will it potentially drop off is still uncertain. But right now, everything that we're being told is expect that these sorts of volumes will continue to remain until we get out to the first half of next year.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. And then last question for now is on the CMC segment. Obviously, very strong margin improvement relative to the first half. Can you maybe help us put the sequential margin improvement into some buckets? My guess is that raw materials versus pricing is one area where you saw some improvement. But what were some of the other buckets of improvement and how should we think about the sustainability of the margin in this mid-teens type of range?

Leroy M. Ball -- President and Chief Executive Officer

Yeah. I think the way to think of it Mike is, we said several years ago that as we were going about restructuring this business that we were structuring it for less volatility through a cycle that we were targeting somewhere between 9% to 15% EBITDA margins in this business, and basically that's what we have seen since we have executed on some of the more significant projects in this year. In fact, we, over the last several years, have been at or at the high-end of that range, if not even a little bit higher. So, as we talked about often, right, you always have this phenomenon of our raw material cost chasing price. And so, in a market where you got price declining, our margins are going to be down at the lower-end of that range, because it's going to take a while for raw material pricing to drop and catch up with that. And then when pricing stabilizes and starts to move back in the other direction a little bit, you'll start to see the benefit and margins move up into that upper-end of the range as well.

So, we knew second quarter was going to be weaker margins. The first quarter typically is weaker for us in general. But everything that we were seeing and that we sort of know with our business, we felt pretty confident that we would see some of that recovery as again raw material costs began to catch up with the pricing curve. And so, we saw it in the third quarter, we expect that that will continue into the fourth, and again, overall for the year that will put us solidly above the double-digit margin line.

So, on an ongoing basis, we continue to believe that that business will be a 9% to 15% margin business and the absolute dollars that we generate there will be more dependent upon the strength of the markets and how much volume we can push through. But the good news is that even in a softer demand environment, because the whole business at this point right now with the way that we've designed it is basically an arbitrage on the raw material and the selling price of our end products and we have that in place now and it's working pretty well as I think demonstrated through again the challenging times we're going through right now.

Mike Harrison -- Seaport Global Securities -- Analyst

All right. Thanks very much.

Leroy M. Ball -- President and Chief Executive Officer

You're welcome.

Operator

The next question is from Chris Howe with Barrington Research. Please go ahead.

Chris Howe -- Barrington Research -- Analyst

Good morning, everyone, and congrats on these preliminary results.

Leroy M. Ball -- President and Chief Executive Officer

Thank you.

Chris Howe -- Barrington Research -- Analyst

Following-up just on some of the thoughts that Mike Harrison just shared, if we look hypothetically speaking or on a qualitative basis that some of the benefits that we've seen in the PC segment, the potential for a longer tail into Q1 and Q2 benefiting from work-from-home employees in higher discretionary spending available for use for home remodeling projects as opposed to vacations. On the flip side or outside of the box, could we also see some sort of benefit in a recovery as workers return to work and they're able to put that budget to use for home remodeling in the latter part of next fiscal year?

Leroy M. Ball -- President and Chief Executive Officer

Yeah, I mean, theoretically, yes, there is -- I mean, the repair and remodeling market has been strong for pretty -- it's been pretty much on a regular upswing since coming out of the housing crisis back in 2008 through '10. So, we've seen ever-increasing spending in that area. The ironic thing was coming into this year, beginning in the mid part of last year, they were looking -- the experts were really looking and prognosticators were looking at the back half of 2020 is sort of the beginnings of a little bit of a slowdown in terms of that ramp up in repair remodeling, and all that's been flipped on its head with what we're going through right now.

So, it's tough to predict what's ultimately going to drive these major market trends, but the point that you make in terms of people going back into the workforce, a healthier economy, will that contribute to sustaining the market moving out, there is no reason to believe that it couldn't, but hard to say for sure, Chris, but certainly it could.

Chris Howe -- Barrington Research -- Analyst

Thanks. That's very helpful for discussion. And you had mentioned briefly about some expansion of capacity following up on your comments related to the sourcing of external copper intermediate. Can you talk about this expansion of capacity? How much is being put into that? And I guess how different scenarios of strong demand within the PC segment may affect your decisions on capital spending for capacity?

Leroy M. Ball -- President and Chief Executive Officer

At this stage, I'd say, we -- first of all, it would be a relatively high return project, given where current demand is at and expected to be out over again the next nine to 12 months. Even without that, right, we have seen a general uptick in demand in this business over the past -- well, ever since we've owned it first of all. We -- even without the pandemic expect that to continue to at least be some modest level of increase in this market moving forward. We have had significant market share gains over the past couple of years, which is already put us into a position where we don't have enough internal capacity to source our own requirements. Beyond that, it puts an enormous amount of stress on our operations in terms of minimizing our ability to take our facilities down and take it through preventative maintenance.

So, we need to -- we needed to at a minimum prevent more slack in our operations to be able to continue to consistently and properly maintain it so that we can ensure the continuity of our operations, while also preparing us for additional market share gains that we believe we can generate even if the pandemic levels of demand drop off in a significant way.

So we're not worried about the spending, which will be somewhere in the, I'll call it, the $10 million-ish [Phonetic] range of spending. We're not concerned about those dollars and the relatively limited -- or I should say rapid level of returns that we think we can get on those dollars. So, it will set us up again to be much, much stronger on a go-forward basis. I'm not worried about creating overcapacity in this market for sure.

Chris Howe -- Barrington Research -- Analyst

Great. And one last question. If we look at what we now know with another month in the books leading up to this call, is it unreasonable to assume as EBITDA moves back to where it was prior to this fiscal year in consideration of a longer tail in the PC that there is enough there to maintain or make some slight improvement on where you saw -- where we expect adjusted EBITDA to approximately be on an absolute basis for this fiscal year?

Leroy M. Ball -- President and Chief Executive Officer

So, are you asking that do we expect that 2021 will be better than 2020?

Chris Howe -- Barrington Research -- Analyst

Yes, directionally.

Leroy M. Ball -- President and Chief Executive Officer

Yeah. So, just -- first of all, maybe to set the table be clear our -- because of all the ins and outs as we have dramatically restructured our business over the years, now with this again removal of KJCC from our business, when you look at the business over the last six years, without KJCC, this will -- this year we're on track to represent actually our sixth straight year of EBITDA improvement. So, last year when -- with KJCC out of the numbers, we finished at $201 million of adjusted EBITDA. Right now, we're expecting to finish somewhere between $204 million and $210 million.

I think that we're going through the process right now of trying to sort through everything to figure out where -- what 2021 looks like. I can't tell you sitting here today, Chris, for certain that 2021 will be better or -- and if so, how much. I do feel good that 2021 will be another on-balance strong year. I think we have several things going for us. I think we're primed for CM&C to have a better year in 2021 as the markets that we serve begin to stabilize a little bit. So I think we'll get some benefits there. I think we'll continue to see some improvement in our RUPS business overall, both from a cost reduction standpoint in terms of consolidating Denver into North Little Rock, as well as some of the other network optimization programs that we're working on, but I think we'll see improvement in that business segment. While demand in the second half of next year for PC remains a question mark, I still think overall we're going to see a very strong year in that business. That should allow for us to post strong results in 2021.

I think the wildcard for us next year in terms of will 2021 be better and by how much than this year is how we -- is how strong will the second half of next year PC business be. I think the first half of next year for us overall [Technical Issues] speaking is going to be -- should be better. Can we maintain that over the second half of the year and match the sorts of record results that we're producing this year will be the question. We're trying to answer those questions right now and going through all the information.

Chris Howe -- Barrington Research -- Analyst

Thanks. I appreciate the color and just congrats again on also the blueprint [Phonetic] that you made on the debt side in bringing that down.

Leroy M. Ball -- President and Chief Executive Officer

I appreciate it.

Chris Howe -- Barrington Research -- Analyst

And that's all I have. Thanks.

Leroy M. Ball -- President and Chief Executive Officer

All right. Take care.

Operator

The next question comes from Laurence Alexander of Jefferies. Please go ahead.

Laurence Alexander -- Jefferies & Company -- Analyst

Good morning. I guess three main things. First, with Performance Chemicals, can you give us sense for how much margin lift you should be able to book from lower copper prices in 2021 and how much of that segment is international?

Leroy M. Ball -- President and Chief Executive Officer

In terms of the international piece of that business, it's anywhere -- we just caught about 30% to -- 30% or a third of the business is international, about two-thirds is North American. In terms of margin lift from lower copper prices, I mean, with where our margins are already at in terms of topping into the low-20s, I just don't see much more coming even with the additional benefit we may receive from raw material price reductions next year, and part of that is due to again some of the concerns that we have in the back half from a demand standpoint. So it's -- I'd say, overall, Laurence, there's not a lot there from an overall margin standpoint just given where we're tracking and the current volumes that we're continuing to post.

Laurence Alexander -- Jefferies & Company -- Analyst

And what's your current thinking around a normalized tax rate in 2021/2022? Would 25% or so be fair?

Michael J. Zugay -- Chief Financial Officer & Treasurer

Yeah. For the full year of 2020, I think we're looking at probably around 22%, and that's lower because we have higher domestic income and it's reducing the negative impact on our effective tax rate due to the GILTI provisions of the Cares Act and it's also enabling us to use more of our interest expense deduction as less is being excluded from our tax calculations. So, 2020, I would use to the low-20s, 22%. Laurence, '22 and '23, we're probably going to tick back up to -- pretty close to that 25% level.

Laurence Alexander -- Jefferies & Company -- Analyst

And as you look at the divestiture, the restructuring, as all the outlays thus allowed, if you don't do any additional M&A, what do you see as a reasonable normalized free cash flow for these assets? I guess I'm ending up at around a $90 million to $110 million a year kind of bogey [Phonetic]? Is that sort of roughly the way you think about it?

Michael J. Zugay -- Chief Financial Officer & Treasurer

Yeah, that is very, very close. I think historically, over the last five years, we've averaged about $110 million a year, and I don't see anything different for 2021. So, you're in the ballpark with that.

Laurence Alexander -- Jefferies & Company -- Analyst

Thank you.

Operator

The next question will be from Liam Burke with B. Riley FBR. Please go ahead.

Liam Burke -- B. Riley FBR -- Analyst

Yeah. Thank you. Good morning, Leroy. Good morning, Mike.

Michael J. Zugay -- Chief Financial Officer & Treasurer

Hi, Liam.

Liam Burke -- B. Riley FBR -- Analyst

Leroy, you mentioned one of the slides that the domestic utility pole business has had its best year since the acquisition. Could you sort of give us an update on how well that's performed since you bought it into the Koppers' vault?

Leroy M. Ball -- President and Chief Executive Officer

Sure, Liam. I mean, we talk about it being the best year, now granted, we've -- this is our second full year of owning it. We haven't had it for that long. We closed on that business in early April 2018. I'd say, it -- for us, it got off to a little bit of a slow start, it's picked up momentum the longer that we have owned it. When we bought the business, we saw opportunities in several different areas for being able to generate additional profitability. One was through chemical pull-through in the business, right, through the creosote and CCA that we produce that is used in those [Speech Overlap].

Liam Burke -- B. Riley FBR -- Analyst

Sure.

Leroy M. Ball -- President and Chief Executive Officer

Sure, Liam. I mean, we talk about it being the best year, now granted, we've -- this is our second full year of owning it. We haven't had it for that long. We closed on that business in early April 2018. I'd say, it -- for us, it got off to a little bit of a slow start, it's picked up momentum the longer that we have owned it. When we bought the business, we saw opportunities in several different areas for being able to generate additional profitability. One was through chemical pull-through in the business, right, through the creosote and CCA that we produce that is used in those [Speech Overlap].

We saw it through network optimization opportunities in terms of being able to leverage treating facilities across our network to be able to do more than just one activity and/or concentrate certain activities in certain locations to maximize efficiency. We're still early in that process. We saw opportunities to save in cost, which we've been able to do. So, each year or basically each year, we've owned it has been successively better. We expect 2021 to actually be a continuation of that.

So, it's been a nice addition for us that is picking up some steam the longer that we have been an owner just due to the many different opportunities that we have within our integrated business model to continue to improve different aspects of the overall business. So, the big thing for us that remains an opportunity is expanding market share beyond the areas that we currently operate in today. So, those are the things that we're looking at longer term.

Liam Burke -- B. Riley FBR -- Analyst

Great. You mentioned creosote, obviously, directionally, is that maintaining a consistent contribution to coating or the utilities using less or more or the same creosote in lieu of other types of coatings?

Leroy M. Ball -- President and Chief Executive Officer

Yeah, I'd say, it's stable to potentially increasing slightly, and I say stable in that the whole Texas region continues to be the biggest area that utilizes creosote in full production, and that really hasn't changed much over time. So that piece of it is stable. With the oil borne preservative, pentachlorophenol, getting phased out, there is other options that have to be considered, and certainly, again creosote is one of them to the extent you can substitute a waterborne preservative, then CCA comes in as a strong contender to the extent that oil borne preservative is still needed, creosote is getting looked at in certain instances as our other preservatives that we look at in terms of adding to our portfolio, including copper naphthenate. So, overall, I'd say, stable to slightly increasing, but it won't be much more beyond that on a go-forward basis.

Liam Burke -- B. Riley FBR -- Analyst

Great, thank you. Leroy.

Leroy M. Ball -- President and Chief Executive Officer

You're welcome. Thank you.

Operator

The next question will be from Chris Shaw with Moness, Crespi. Please go ahead.

Chris Shaw -- Moness, Crespi & Hardt -- Analyst

Yeah. Hi, good morning, everybody.

Leroy M. Ball -- President and Chief Executive Officer

Good morning, Chris.

Chris Shaw -- Moness, Crespi & Hardt -- Analyst

Outside of the, what you called out the second half of '21, I guess, concerns about what the demand in PC will be, I was wondering about rail itself going forward and what kind of visibility you have there. That will be a concern for me, maybe into 2021, just because I remember the last time, traffic was down, I guess, it was the last time sort of oil broke, the demand for rail ties into fall-off with that. So, I mean, what do you -- what kind of visibility you have on your, I guess, your Class 1 maybe into 2021 at this point?

Leroy M. Ball -- President and Chief Executive Officer

Yeah. So, I mean, we're -- this is the time of year when the railroads are going through their 2021 budgeting process, and so, typically, the meetings are going to be going on here over the next month or so, where they will be giving us their expected programs for 2021. Now, we've been in contact, obviously, we're in regular contact with them and they directionally give us indications as to how they see not just next year but out over the next three years or so. And I'd say again on balance, all right, on balance, we're expecting that our volumes in 2021 should be slightly better than 2020.

So, that hasn't yet been confirmed through their budgeting process and communication to us, but all the signals and discussions that have occurred over the past three to six months leading up to now have indicated that they expect continued fairly robust replacement cycle into next year. So, we'll have more information here the next -- by the next time that we report out, but that's the indications we've been given thus far.

Chris Shaw -- Moness, Crespi & Hardt -- Analyst

All right. So, I got it. Great job in the quarter. Thanks, guys.

Leroy M. Ball -- President and Chief Executive Officer

Thank you.

Michael J. Zugay -- Chief Financial Officer & Treasurer

Thank you.

Operator

And the last question for today will be from Ken Heffner with Loomis, Sayles. Please go ahead.

Ken Heffner -- Loomis, Sayles & Company -- Analyst

Good morning, thanks for [Indecipherable] here. So, when you look at the -- two questions. First of all, can you provide any update as far as the process with the Denver facility. I think you guys have highlighted that on the last call, and where that might stand as far as the potential move here to close on that transaction. And second of all, if you look at the earnings improvement in the PC business year-over-year and a lot of us have been talking about this and harping on it, but is there any benefit there with the way that input -- excuse me, input cost took on the copper side really fell to lows here for a few months and they've now normalized and come back to where they are, but we're just trying to understand any of those $20 million or so improvement year-over-year is anything to do with costs? And then you had some -- a few years back, you had to outsource some production things or whatever. So just trying to see if I understand, is this all volume, price and mix or might there be some cost benefit in there that helps us further understand the real strength of the earnings year-over-year? That's it. Thanks very much.

Leroy M. Ball -- President and Chief Executive Officer

Thank you. Okay. So, let me think, maybe start with the last question first. My take on PC is, we did have a short period of time where, as most markets reacted significantly unfavorably early on in the pandemic and we were able to lock in some hedging for 2021 and '22 to take advantage of that negative reaction early on. Obviously, we were buying copper during that period at those prices, but we were also settling hedges that were in place at much higher levels, right?

So, we talked about coming into the year that we were more or less hedged on our production for the year, which didn't give us much opportunity for any benefits from a lower overall average cost. It didn't take long for copper to move back up to levels that are higher than our current average hedge cost for this year, which again, given the demand levels, I'd say overall has probably put us in a more unfavorable cost position for this year than favorable.

So, on balance, I'd say for this year, we're probably getting little bit more hurt by where things are at on the copper cost curve, just given the fact that I think for the majority of the year at this point copper costs have been higher than our average price and our demand levels have been much higher than what we thought coming into the year, therefore our hedged amounts were at lower levels.

So, I don't think we're getting the benefit that you are speculating that we're getting on the cost side. If anything, I would probably getting a little bit hurt and that could help us out next year as well to help insulate again some downturn on demand in the second half of the year.

Ken Heffner -- Loomis, Sayles & Company -- Analyst

That's great to hear [Phonetic].

Leroy M. Ball -- President and Chief Executive Officer

Yeah. And regards to -- remind me the first question, I apologize. Denver...

Ken Heffner -- Loomis, Sayles & Company -- Analyst

[Indecipherable].

Leroy M. Ball -- President and Chief Executive Officer

Where things stand on Denver, right?

Ken Heffner -- Loomis, Sayles & Company -- Analyst

Yes, please. Thank you.

Leroy M. Ball -- President and Chief Executive Officer

Okay. So, I can't comment on any ongoing activity as it relates to Denver other than to say we're in the process of closing the site. So we are done in terms of treating there, we have transferred essentially all treating activities to our North Little Rock facility, and are in the process of closing it and looking to sell it, and we're hopeful that some time -- by the time we have our next conference call, which will be sometime early next year that we'll be able to announce something, but right now, the focus is on closing the facility, and at the very least, we think we should be on track to finish and finalize that some time hopefully in the first half of next year.

Ken Heffner -- Loomis, Sayles & Company -- Analyst

Thank you very much.

Leroy M. Ball -- President and Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, 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.

Leroy M. Ball -- President and Chief Executive Officer

Yeah. I just want to wrap things up by thanking again everybody for participating on today's call. I really appreciate your continued interest in Koppers and urge everyone continue to stay safe and stay strong. Thank you.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Quynh T. McGuire -- Vice President, Investor Relations

Leroy M. Ball -- President and Chief Executive Officer

Michael J. Zugay -- Chief Financial Officer & Treasurer

Mike Harrison -- Seaport Global Securities -- Analyst

Chris Howe -- Barrington Research -- Analyst

Laurence Alexander -- Jefferies & Company -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

Chris Shaw -- Moness, Crespi & Hardt -- Analyst

Ken Heffner -- Loomis, Sayles & Company -- Analyst

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