KOP Q3 2026 earnings call transcript, November 6, 2026

I'm Quinn McGuire, Vice President of Investor Relations. Welcome to our third quarter. 2026 earnings conference call. We issued our press release earlier today. You can access it via our website at www.copers.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 and 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 December 6, 2026.

There are three financial takeaways from the third quarter. First, sales increase despite a mixed demand environment supported by strong volume growth and performance chemicals and higher class one crosstie volumes in our rail and utility business. Second, higher raw material and logistics costs. Along with lower crosstie pricing, pressured margins. We are addressing those headwinds through commercial actions, network optimization, and the broader catalyst transformation. Third, and importantly, we generated record year-to-date operating cash flow and record year-to-date free cash flow. That performance. Reinforces the structural improvement we are seeing in the cash generation profile of COMPERS. I will walk through each of those points, beginning with consolidated and segment performance. As shown on slide 11, net sales increased $14 million, or 2.8%, from the prior year quarter. The increase was primarily driven by higher volumes in performance chemicals and our cross-tie business. Those benefits were partly offset by unfavorable pricing for cross-ties in our RUPS segment, the sale of our railroad service business, as well as product rationalization. Also, current . . . currency conversion had a favorable effect of $6 million on sales as compared to the prior year quarter. Adjusted EBITDA for the third quarter was $58 million, a decrease of $13 million, or 18%, compared to the prior year quarter. Adjusted EBITDA margin was 11.6%, compared to the prior year quarter.

Compared to 14.6% in the prior year quarter. The quarter reflected real margin pressure, and we are not minimizing it. The earnings decline was driven primarily by higher raw material and logistics costs, lower CMC margins as we restructure our operating network, along with the impact of lower CMC margins. or cross-tie pricing. While favorable volumes in our PC and RUPS businesses partially offset the higher cost environment, we estimate the year-over-year impact of higher input costs to be $16 million in the third quarter, led by higher raw material costs in our CMC segment. Also, selling general and administrative, or SG&A, expenses were up $3.4 million year-over-year, mainly due to compensation costs as well as higher technology costs. These increases were partly offset by lower professional service fees. In earnings per share. We reported adjusted EPS of $0.77, compared with $1.21 in the prior year quarter. The year-over-year decline primarily consists of lower earnings and a higher tax rate, with the latter having a negative impact of $0.07 per share when compared to last year. Compared to the second quarter, the change in our estimated tax rate for the year had a negative impact of $0.12 per share. Free cash flow generated for the third quarter was $19 million, compared with $38 million in the prior year quarter. While lower for the quarter due to timing of working capital items, our trend of

higher year-over-year free cash flow continued, as will be discussed later. Turning to slide 12, our rough segment net sales were essentially unchanged from $233 million in the prior year quarter. Higher crossed high volumes and a 5% volume increase in our domestic utility pool. Business, which includes the contributions from the Douglas fir pole procurement business we acquired late last year, were offset by lower pricing across multiple markets, particularly class one cross ties. Sales were also affected by approximately $6 million related to the sale of our railroad service. business in the third quarter of 2025. As we have mentioned before, we have secured additional class one cross tie volume through selective pricing actions. The near term impact is visible in current margins. However, the strategic value is the additional volume and asset utilization those agreements are intended. As we complete the wind down of our Florence facility in Q4, we are expecting to realize greater efficiency across our network as we go into 2027. Adjusted EBITDA for RUPS was $22 million compared to $29 million in the prior year quarter. Decline was driven by lower cross-tie pricing, nearly $4 million of higher raw material on SG&A costs, and approximately $600,000 related to the sale of our railroad service business. These decreases were partly offset by an increase in sales volumes, primarily in the Class I cross-tie business.

Moving on to slide 13. Performance chemicals net sales increased $18 million compared to the prior year quarter. The sales increase was due to a 10% volume growth, primarily in the Americas. We remain focused on recapturing share in the muted domestic residential. market while also leveraging strong industrial demand. The pricing impact in the quarter was insignificant as lower prices in Europe were mostly offset by higher prices in the Americas and Australasia. Foreign currency changes had a favorable impact of nearly $3 million on sales. Adjusted EBITDA for performance chemicals increased $4 million to $30 million. The increase was due primarily to higher sales volume and favorable utilization, partly offset by higher raw materials, which increased by approximately $5 million. Raw material costs were improved. Impacted by increased scrap copper cost net of our hedging program benefits. In addition, higher oil and energy prices are driving cost inflation in the oil-based raw materials compounded by increased freight costs, which lowered our margins compared to our peak performance we saw in Q2. Turning to the CMC business, as shown on slide 14, this remains the area in which the largest current cost and market pressures are concentrated. CMC sales were $3 million lower than the prior year quarter. The impact of lower volumes was partly offset by higher carbon pitch. And carbon black feedstock prices and a favorable foreign currency impact of nearly $3 million. Sales declined 8% on lower sales volumes, mainly due to lower pitch sales in Australia and Europe and lower sales volumes in North America, including lower margin byproduct sales.

associated with the wind-down of Stickney. Carbon pitch prices increased approximately 4% globally from the prior year period, driven by market dynamics in North America and Europe, but continue to lag the increase in input cost. Adjusted EBITDA for CMC. was $6 million, down $10 million, or 61%, compared to the $16 million EBITDA recorded in the prior year quarter. This decrease was due to higher raw material costs, which had a $9 million impact over the prior year quarter. The carbon market. It's remained volatile as conflict in the Middle East and safety-related coal mine closures in China in late Q3 continue to push coal tar and pitch prices higher. In addition, adjusted EBITDA was impacted by a $1.7 million reduction from lower utilization, primarily in North Korea. due to the receipt of poor quality tar and the accelerated closure of our Stickney facility. We are also incurring transition and logistics costs as we reposition our supply network while continuing to provide reliable service to our critical North American customers. this year Stickney closure and transition therefore create near-term costs, but they are intended to reduce fixed costs, capital requirements, and earnings volatility over time. And our closure activities continue at pace and are in line with our accelerated timeline. As shown on the current report is the location of a small, small and large-scale number of units.

This is the location of a small, small and large-scale number of units. Slide 16, we implemented structural improvements regarding cash flow, which supported meaningful shareholder returns. Our year-to-date operating cash flow through September 30th was a record $127 million, compared to $77 million in the prior year period. Slide 16, the increase in cash flow. These primarily reflected improved working capital performance and approximately $14 million of lower pension funding in the current period, partially offset by lower underlying earnings. The improvement in working capital reflected the timing of customer receipts and vendor payments, as well as lower inventory. This also reflects the liquidation of byproduct inventory at Stickney as we complete the remaining closure activities. The deliberate working capital improvement reflects actions to reduce inventory to match customer demand. Free cash flow on a year-to-date basis through September 30th was $92 million. Also a record. Our 2026 year-to-date free cash flow run rate is above target. The drivers of improved cash flow generation include lower capital requirements going forward as we have completed our major growth investment cycle. Our catalyst initiatives are driving improved earnings and cash. Conversion and cash taxes are projected to be significantly below our current adjusted tax rate of approximately 31% for the 2026 to 28 time period. In the near term, we will have cash usages related to closure and transition costs for our Stickney.

These actions create a pathway to generate average annual free cash flow of greater than $100 million. We continue to take a balanced approach to capital allocation as detailed on slide 17. Through September 30th, we've spent $35 million. For the full year, we anticipate total gross capital expenditures of $50 million compared to our prior estimate of $55 million, primarily driven by lower maintenance spend in our RUP segment. Year-to-date share repurchases have totaled $51 million. We have approximately $20 million. remaining under our $100 million repurchase authorization. We also continue to return capital to shareholders through our quarterly dividend of $0.09 per share, reflecting four consecutive years of annual dividend growth. At September 30th, we had $360 million. in available liquidity and $845 million of net debt, representing a net leverage ratio of 3.7 times. We remain focused on our long-term goal of reducing net leverage to two to three times. As highlighted on slide 18, our board of directors declared a quarterly cash dividend on November 4th of $0.09 per share, payable on December 14th. This reflects a 12.5% increase from the prior year. While future dividends remain subject to ongoing board approval, maintaining a quarterly dividend at this rate would result in annual dividend of $0.36. per share for 2026. In summary, our sales grew in the third quarter, but higher raw material and freight costs pressured margins and earnings. Year-to-date, we generated record operating cash flow and free cash flow while maintaining disciplined capital allocation.

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

I'd like to move now to a discussion of what we're seeing across our major end markets, how those views have evolved through the year, and how they are informing our outlook for the remainder of 2026. The macro environment is still somewhat uneven, but we continue to focus on areas of resilience. These can generally be found in markets served by performance chemicals and utility and industrial products, the two businesses driving coppers to a higher margin, stronger cash flow portfolio. So let's begin with performance chemicals on page 20. Macro drivers of existing home sales, new home builds, and repair and remodeling. We continue to skew negative, keeping organic demand subdued in our largest market. Even so, we delivered 10% year-over-year volume growth, primarily in the Americas, as we selectively regained market share following our setback in 2025, and we benefited from strength in the industrial market. The near-term challenge is on the card. driven by higher crude oil and commodity prices related to the Middle East conflict. We also saw freight costs increase further in the third quarter, while tariff uncertainty continues to create volatility in raw material pricing. We have high confidence that we will address those pressures when the calendar turns to 2027, as about 80% of our current book of... ...business is already agreed to for next year at prices that address the increases we are seeing across the board. Overall, our key takeaway for PC is that our business remains resilient amid flat organic demand and persistent cost inflation, and we expect our top line to take another step up in 2027 after our commercial actions...

...take effect in January. Moving to utility and industrial products on page 21, UIP remains a constructive part of our portfolio with our U.S. utility pole business posting another solid quarter with year-over-year sales growth of 5% for the third quarter and 11% year-to-date. While we expect a typical seasonal slowdown in the... fourth quarter, our sales pipeline remains healthy and the underlying demand outlook remains strong. Profitability improved, supported by higher volumes in pricing, including modest price increases implemented during the quarter. We are seeing some pressure from inflation and higher diesel costs, but we are actively managing those impacts. Looking more broadly, market sentiment remains bullish. Utility infrastructure investment is being driven by higher electricity rates and growing power requirements associated with AI infrastructure, crypto mining, EV development, and increased manufacturing activity. The demand outlook from investor-owned utilities remains strong through 2027, providing longer- to- return visibility, even as pricing is expected to be relatively flat in the fourth quarter. On the supply side, fiber availability remains an area of focus as poll demand is concentrated within a relatively narrow range of sizes, creating a competitive procurement dynamic. Overall, we remain encouraged by the strength of the market and the healthy demand.

And we are focused on capturing that growth while managing inflationary and supply side pressures. We expect UIP to finish the year strong despite the typical fourth quarter seasonal slowdown, and we expect more of the same next year. Turning to page 22 in railroad products and services, sales volumes were up 3% year-to-date compared with the prior year, with both Class I and commercial volumes rebounding in September despite overall softer demand. That said, price concessions that we made to secure future volumes have pressured margins in the near term, and we are responding by continuing to take costs out of the system. Employee count that our treating plant is down 7% so far this year. and down 22% from our high water mark in April 2024. By the time the wind down of our Florence facility is complete, that reduction will be over 25%. There are some encouraging indicators of future demand. North American railroad traffic was up 3.1% year-over-year through early October, including a 3.5% increase in U.S. traffic, with intermodal up 4.2% and carloads up 2.7%. Higher rail traffic bodes well for long-term cross-tide demand, but it can slow tie purchases in the short term as railroads focus on moving freight while demand for their services remains strong. Our commercial cross-tide background also remain robust heading into the fourth quarter which puts us into a good position as we enter the new year. We're seeing the softer demand ripple through the cross-tide supply chain, putting pressure on sawmills and contributing to mill closures and reduced hardwood production. From a working capital standpoint, Idling Florence is helping us take inventory out of the system.

And we're also aligning cross-tide purchases more closely with railroad programs and bringing overall inventory levels down. Overall, despite a pullback in Class 1 spending heading into 2027 and some price erosion, we stand to improve profitability on a go-forward basis as we complete our cost and network optimization actions. Moving now to carbon materials and chemicals on page 23, we are seeing weaker carbon pitch sales in both Europe and North America, while higher tar and freight costs are also affecting near-term performance. Tar costs increase 30% year-over-year in the third quarter and 13% year-to-date and sequentially. From an industry perspective, carbon markets remain volatile. The Middle East conflict, along with safety-related coal mine closures in China, continues to drive higher prices across oil, tar, naphthalene, and pitch. Aluminum prices followed a different pattern, rising steadily during the first half of the year before easing to approximately $3,200. per metric ton during the third quarter. On the operational front, we reached an important milestone at Stickney ceasing tar distillation at that location in September. We've also secured the feedstock needed to support the production transfer and successfully shipped tar cargo from North America to Europe. Our U.S. logistics network is also progressing as planned with carbon pitch and creosote now being supplied through our U.S. terminals. The Europe to U.S. distribution model is operating effectively and we see additional opportunities to optimize the network through the first half of 2027. We're already seeing the benefits of a more streamlined network. New Borg Denmark supplied approximately seven

percent of the creosote delivered to our railroad business during August and September and achieved record pitch shipments in September. And with the transition ahead of our original schedule, we remain focused on successfully completing the shift to the new operating model and positioning CM&C for more consistent performance going forward. On page 24. You can see how our catalyst transformation program is translating the actions we're taking across the portfolio into tangible results. There are three key drivers that underpin our catalyst program. First, footprint consolidation to improve operational efficiencies. Second, supply chain improvements to drive cost reductions. Third, operating leverage from market share gains and higher volumes in select businesses. We continue to make meaningful progress with $42 million in year-over-year benefits achieved through September 30, 2026. And by segment, that is $8 million in PC, $13 million in RUPS, $11 million in CM&C, and $10 million in... We're capturing those benefits through commercial excellence, network optimization, supply chain improvements, and disciplined cost management. Our 2026 initiatives represent $136 million of transformation program benefits. And building on $46 million of program benefits in 2025, we raised our target an additional $90 million by 2020. Reflecting the additional opportunities we see to drive value across the business.

We're also seeing the benefit in cash as we reduced working capital by $12 million through September 30th, compared with December 31st, 2025. We're seeing the powerful impact of Catalyst across the business. It's strengthening our performance. today while creating a more efficient operating model that supports higher margins, stronger cash generation, and more consistent earnings as we execute our strategy and experience recovery in our end markets. Let's now take a look at our updated 2026 guidance summarized on page 26. We revised our forecast lower to reflect higher impact. Put costs which are having a direct impact on profitability, but we are taking pricing actions to address these higher costs, although the benefits won't begin to be realized until January 2027. Page 27 shows the bridge for our 2026 sales of $1.9 billion, with PC contributing meaningful growth for market share gain. and stronger industrial demand. Page 28 outlines our 2026 adjusted EBITDA forecast, which is now in the range of $220 to $225 million. This reflects the higher input costs already realized in our Q3 results and our expectation that they will continue throughout Q4. Page 29 provides... ...our adjusted earnings per share forecast of $3.10 to $3.25 per share, reflecting the pullback on our earnings from operations, while all other categories show year-over-year improvement. Page 30 shows our free cash flow forecast of $115 to $135 million, which has improved due to a five...

...million dollar reduction in expected capital expenditures for this year. On page 31, we show the details of our 2026 capital expenditure forecast by business segment. We now expect total capital expenditures of approximately $50 million, which is $5 million lower than our previous forecast. So to summarize... While 2026 has presented unexpected challenges, we continue to execute on what we control. We grew sales, delivered $42 million of catalyst benefits through September, ended production at Stickney, and generated record year-to-date operating and free cash flow. Higher raw material freight costs more than offset that progress in the near term. but the pricing actions taking effect in January, combined with the structural cost improvements already underway, position us for significant earnings improvement in 2027. We remain focused on strengthening earnings, cash generation, and capital efficiency as we work toward our 2028 objectives. With that, we would be happy to take your attention.

At this time, we will pause momentarily to assemble our roster.

Our first question today is from Gary Prestepino with Barrington Research. Please go ahead.

Thank you for attending today's presentation. You may now disconnect.