Koppers Holdings Inc. (KOP) CEO Leroy Ball on Q1 2019 Results - Earnings Call Transcript

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About: Koppers Holdings Inc. (KOP)
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Earning Call Audio

Koppers Holdings Inc. (NYSE:KOP) Q1 2019 Results Earnings Conference Call May 3, 2019 11:00 AM ET

Company Participants

Quynh McGuire - Director, Investor Relations and Corporate Communications

Leroy Ball - President, Chief Executive Officer

Mike Zugay - Chief Financial Officer, Treasurer

Conference Call Participants

Mike Harrison - Seaport Global Securities

Roger Spitz - Bank of America

Chris Howe - Barrington Research

Laurence Alexander - Jefferies

Liam Burke - B. Riley FBR

Scott Blumenthal - Emerald Advisers

Chris Shaw - Monness Crespi

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Koppers' first quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. [Operator Instructions]. Following the presentation, instructions will be given for question-and-answer session. Please note that this event is being recorded.

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

Quynh McGuire

Thanks and good morning. I am Quynh McGuire, Director of Investor Relations and Corporate Communications. Welcome to our first quarter 2019 earnings conference call. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.koppers.com. As indicated in our earnings release this morning, we have also posted materials to the Investor Relations page of our website that will be referenced in today's call. Consistent with our practice in our prior quarterly conference calls, this is being broadcast live on our website and a recording of this call will be available on our site for replay through June 3, 2019.

Before we get started, I would like to direct your attention to our forward-looking disclosure statement. Certain comments made during this conference call may be characterized as forward-looking statements as defined under the Private Securities Litigation 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 our 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 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 today for our call are Leroy Ball, President and CEO of Koppers and Mike Zugay, Chief Financial Officer and Treasurer.

I will now turn this call over to Leroy.

Leroy Ball

Thank you Quynh. Welcome everyone to our first quarter 2019 earnings call. I am pleased to report that for the March quarter we withstood several challenges and still posted results within the range of our expectations.

From January through March, the Eastern and Southern U.S. experienced below-average temperatures overall and the resulting weather wreaked havoc on both our supply chain and our end markets. That made for a challenging beginning to the construction season and the incessantly wet weather has made it difficult to build untreated crosstie inventories while also having some impact on utility pole demand.

In our railroad products and services business, a strong commercial crosstie market led to better pricing as well compensated for an ongoing lack of dry crossties to treat in order to meet Class I demand. Our performance chemicals segment saw slight softness in its industrial markets, a slower than expected start to the residential construction season and higher average raw material costs. However these factors were mitigated by certain pricing and market share gains, a further displacement of third-party raw material purchases with lower-cost intermediate raw material production and insurance recovery related to our New Zealand plant and operating and administrative cost savings.

The hard work and dedication of our 2,200-plus employees across the world enabled us to overcome those issues and remain on track for our 2019 guidance. As expected, our profit mix is shifting back toward our wood preservative and treatment businesses which lines up with our long-term strategy.

Let me spend a few minutes giving an update on Zero Harm. We capped off our best ever safety year in 2018 and have begun 2019 once again trending towards another improved year. In total, 37 out of 47 operating locations had zero recordable injuries in the first quarter. We are also seeking improvement in other metrics that indicate that our risk for serious incidents have significantly decreased. When it comes to safety, one can never claim victory and so we will remain relentless with a focus on identifying and eliminating exposure.

As part of our acquisition integration process, we have already started Zero Harm training with our utility and industrial products and recovery resources businesses and expect to conclude by the end of 2019. This targeted approach ensures that our employees are equipped with the same level of safety tools and education at all of our operating locations.

In April, I was honored to represent Koppers in receiving the Safety in Action ICON award for safety leadership at the national DEKRA Organizational Safety & Reliability conference held in Nashville, Tennessee. This award is a testament to the strides our company has made in advancing a culture that prioritizes the safety and well-being of our people. The recognition goes for our employees because it has been made possible through their hard work and willingness to fully embrace the Zero Harm mindset. Our Zero Harm culture goes beyond safety of our people and extends to the environment as well. As a world leading supplier of wood treatment solutions, Koppers is in the center of what is known as the circular economy, defined as one that emphasizes the reduce, reuse, recycle mentality to frame global conservation efforts.

We recently issued our 2018 Corporate Sustainability Report or CSR. In this report, you can learn more about how our employees are bringing the benefits of our circular business model to bear as they turn unusable byproducts into wood treatment solutions, utilize renewable resources, convert end of use products into sources of fuel and reduce carbon in the atmosphere. This year's CSR covers significant accomplishments and programs in place for 2018 and references the Global Reporting Initiative or GRI guidelines. I encourage you to visit the Sustainability section of our corporate website for our in-depth report.

Now before getting into the financials, I would like to reinforce our key priorities for 2019. First and foremost, we are absolutely focused on outperforming 2018. Our adjusted EBITDA guidance for 2019 has been slightly increased on the bottom end in the range to $212 million, while the upper end of the range remains the same at $225 million. We will continue to work on making 2019 a better year than last year and push the bar even higher. We have now done that for four straight years and are intensely focused on making it five.

Second priority, balance sheet. It remains our aspirational goal to get back to a three times leverage multiple by the end of 2020. As I have mentioned before, we have a number of levers and that includes reducing this year's capital investment to $30 million to offset spending that was poured pulled into 2018. At a minimum, we plan to reduce our net debt by $80 million in 2019.

Third priority for this year is, once again, portfolio management. So we continuously evaluate how to best position our existing asset base, whether it be evaluating the long-term fit of those businesses that aren't driven by wood preservation or continuing to optimize our operating footprint. We will refine our focus on wood-based solutions and at the same time implement sustainability measures applicable to our business.

Now let's discuss the financial results. So for the first quarter, we delivered a first quarter record in sales, driven by our wood preservation businesses. The railroad utility products and services or RUPS business benefited from acquisitions, favorable pricing on the commercial crosstie markets and higher volumes in all categories of railroad related products and services in North America, while the utility portion of the segment also chipped in pretty nicely. The performance chemicals or PC business reported modestly higher sales from a combination of volumes and pricing despite being subjected to severe winter weather conditions in various parts of North America in a softening repair and remodeling market. The car materials and chemicals or CMC segment reported lower sales, primarily due to lower pricing of soft pitch products in China and decreased volumes from Europe and Australia, partially offset by favorable pricing in Australia and North America.

Now from a profitability perspective, the performance reported by RUPS included higher pricing and volumes in the commercial crosstie markets, the contribution from acquisitions, improved production utilization driven by higher volumes of untreated crossties and improved demand associated with Class I customers. PC results benefit benefited from slightly higher sales and cost efficiencies, partially offset by higher year-over-year raw material costs. CMC's profitability was negatively affected by lower sales pricing in China, partially offset by higher volumes for pitch products in China, North America and Europe. Now the only real negative in our results for the quarter was the unfavorable comparison to the anomaly of our unusually high Q1 2018 results, which were buoyed by the one extremely strong quarter from our China CMC business that was at higher contractual pricing. This year's first quarter adjusted EBITDA was actually the next best first quarter that we have had in our history, behind only last year, which I believe is a testament to the improvement we have made in our overall business model over the past four-plus years.

I will now turn it over to Mike to discuss some of the key highlights of the quarter.

Mike Zugay

Thanks Leroy. Let's begin by referring to the slide presentation that's provided on our website. On slide four, revenues were $435 million which was an increase of $29 million, or 7%, from the $406 million in the prior year. As Leroy already mentioned, this was a first quarter revenue record for our company. Excluding a negative impact from foreign currency of $11 million, sales were higher by approximately 10%. The increase was driven by acquisitions as well as growth in our wood treatment business segments.

On slide five, adjusted EBITDA was $46 million or approximately 11%, compared with $66 million or 16% in the prior year. RUPS profitability increased considerably primarily due to improved demand in the legacy railroad businesses as well as contributions from recent acquisitions. PC had slightly higher sales, also improved cost efficiencies and an insurance reimbursement amount which, collectively, more than offset higher raw material prices. Financial results for CM&C were more reflective of the normalized earnings as compared with the prior year, which had benefited significantly from favorable market pricing for pitch products in China.

Now I would like to discuss several items that are not referenced in our slide presentation. Adjusted net income was $13 million, compared to $26 million in the prior year. Adjusted earnings per share for the quarter was $0.62 per share, compared with the $1.18 per share also in the prior quarter. Both adjusted net income and adjusted earnings per share were lower due to the profitability decline in our CM&C China operations, which has achieved significantly higher earnings in the first quarter of 2018.

Income tax expense for the first quarter was favorably affected because we recorded a net benefit upon the finalization of our IRS audits for the tax years of 2013, 2014 and 2015. Excluding this benefit, our tax rate would have been approximately 30% of pretax income.

For 2019, we are anticipating higher year-over-year interest and depreciation and amortization costs. We estimate that interest expense will increase from $56 million in 2018 to $62 million in 2019 due to a full year of borrowings related to our acquisitions as well as higher interest rates on our variable debt borrowings. Also our depreciation and amortization expenses are projected to increase from $51 million in 2018 to $58 million in 2019 due to assets placed in service in 2018 as well as depreciation and amortization related to the two acquisitions we made in 2018.

We expect that the outcome of U.S. tax reform will continue to have an effect on our GAAP effective tax rate due to limitations on interest expense deductions and the interactions with the minimum tax or foreign earnings, which we call the guilty tax. However in 2019, we expect this negative impact will be at a slightly lesser extent. The projected effective tax rate for adjusted EPS calculation for 2019 will be approximately 27%. With this lower tax rate and the fact that we have increased the bottom range of our adjusted EBITDA guidance from $210 million to $212 million, we are now projecting that adjusted EPS for 2019 will be in the range of $3.16 to $3.61 per share.

Cash used in operating activities was $14 million compared to $29 million in the prior year. The net decrease in cash used in operations was due to primarily lower working capital usage and a reduction in net income. Capital expenditures were $11 million compared with $23 million for the prior year. Our CapEx in the prior year included the capacity expansion at our performance chemicals facilities in the U.S. and the new naphthalene unit at our CM&C plant in Stickney, Illinois. Both of these projects were substantially completed in the latter part of 2018. We are still on track for 2019 capital expenditures to be approximately $30 million.

Now, let's refer back to our slide deck and look at page six. Our net leverage ratio as of March 31 was 4.8 times. Negatively impacting this ratio in the quarter was the lower earnings from China versus the prior year quarter and typical usage of cash for working capital needs in the early part of every year. We still projecting that this ratio will be in the range of 3.8 to 4.1 times at the end of 2019. As Leroy mentioned earlier, we are also committed to reducing our debt by a minimum of $80 million by the end of 2019.

And finally, even though Koppers was in compliance with all debt covenants under our credit facility as of March 31, 2019 and we are also projected to be in compliance throughout the remainder of 2019, we had an opportunity to amend our existing credit agreement and we did so on May 1, 2019. We extended the term for one additional year through April 2024. We modified the definition of certain terms and we also delayed the step down of our leverage ratios by anywhere from six to 12 months. A very positive development for us and all in order for us to have more flexibility under the agreement going forward.

Now I would like to turn the discussion back over to Leroy.

Leroy Ball

Thank you Mike. Regarding the outlook for each of our businesses, let's start with our railroad utility products and services segment. So in our legacy RUPS business, while 2019 started with a decrease in rail traffic in the first quarter, the industry is forecasting higher crosstie replacements compared with prior year and we are seeing demand levels tick up.

The Association of American Railroads or AAR reported that total U.S. carload traffic for the first three months of 2019 was down 3.1%, from the same period last year with intermodal units, defined as container and trailers, down to a lesser degree at 0.6%. Total combined U.S. traffic for the first 13 weeks of 2019 was approximately 6.7 million carloads and intermodal units, a decrease of 1.8% compared to last year. The decline in rail traffic was likely due to a combination of extremely cold weather at the beginning of the year, then flooding in the Midwest region of the U.S. during the month of March.

Also, as has been the case for the past several years, the number of heavy haul loads have continued to decline from historical levels, which means lighter weight loads are being transported yielding less wear on tracks and ties. Same time, Class I railroads are still focusing on the general concept of precision railroading, which translates to finding ways to reduce spending and improve asset utilization, operating ratios and cash flows. As a result, crosstie replacement activities remain relatively flat having reverted to below or near historic lows over recent years.

According to the Railway Tie Association or RTA, the current industry forecast calls for replacements of a range of a little less than 22 million to nearly 23 million crossties in 2019, contingent on having an adequate supply of lumber. In 2018, tie replacements were estimated be approximately 22.7 million crossties, however actual replacements were 21.2 million due a number of factors, including lack of available dry inventory for treatment.

Now, as a whole, the industry has been challenged with very low inventory of untreated crossties. According to RTA surveys of in the field wood tie buyers to procure untreated crossties from sawmills, log availability and logs on hand at mill-yards have been less than ideal due to weather issues. While we are seeing crosstie demand improve, the challenge ahs been building inventory levels in order to have dry crossties available for treatment.

In our utility industrial products business, it is estimated that there are roughly 160 million utility poles across the U.S. and most were installed in the 1950s according to the North American Wood Pole Council. In general, the average age of these poles is around 70 years whereas the expected lifespan of a pole is actually much less than that at approximately 40 years. Now due to pole age and infrastructure changes, mostly road widening, the replacement rate of these installed poles has grown and currently equates to an industry demand of about two to three million poles replaced annually. Therefore, we continue to anticipate that 2019 will be a solid year from a demand standpoint for replacement of utility poles.

In addition, our recycling and disposal program for out of service crossties and poles can solve a problem that's been troublesome for each industry. Our approach of recycling and reusing the ties and poles, including as a fuel source can improve the environmental footprint of these end-of-life ties and poles as well provide customers with an economically viable way to responsibly dispose of them.

As an update on the projected benefits related to our integration synergies and strategic initiatives, we continue to make great strides on many different fronts. There are no less than nine different important initiative that are in progress that have the potential for multimillion-dollar impacts to our top and bottom line. For competitive reasons, we cannot give details on most of them at this point, but they will become readily apparent as we realize success in the different areas.

One initiative that we don't need to be quite as secretive about is our plans to either add volumes to our 18 treating plants that are operating at less than full utilization or work on consolidating our footprint. Much work has been done in that regard and we will share more specifics as we are able to as the year goes on.

Now the overall results of all these initiatives and actions are expected to drive $25 million to $40 million of annualized benefits to be realized over the next five years. We are currently on track to realize $10 million of those savings in 2019.

For the RUPS business, we continue to anticipate an improved demand environment in 2019, which should lead to increased production volumes and higher utilization rates so long as we get an adequate supply of untreated crossties. Also, the realization of cost and commercial synergies generated through the various integration and strategic initiatives should result in our first year-over-year improvement in this segment since 2015.

As reflected on slide eight, we are slightly increasing adjusted EBITDA guidance for our RUPS segment of $62 million to $66 million, primarily due to the strength of our first quarter in what was a difficult supply environment. That would equate to an adjusted EBITDA margin of nearly 9% and an increase of $21 million to $25 million compared with prior year.

In our performance chemicals business, the economic trends are beginning to show some softness. According to the National Association of Realtors or NAR, existing home sales retreated in March following a surge of sales in February. Total existing home sales in March fell 4.9% from February and were down 5.4% from a year ago. Each of the four major U.S. regions saw a drop off in sales with the Midwest enduring the largest decline. In addition, any tax policy changes will likely add further complications to the housing sector as the expensive home market will be negatively affected by limitations on tax deductions or mortgage interest payments and property taxes.

As forecasted by the Leading Indicator of Remodeling Activity or LIRA at the Joint Center for Housing Studies of Harvard University, year-over-year growth in homeowner remodeling expenditures is expected to slow from approximately 7% to 2.6% by the first quarter of 2020. However, more favorable mortgage rates could still give a boost to home sales and refinancing in the spring to summer timeframe and could help to sustain remodeling activity. Home improvement and repair spending has been in above trend growth for several years and now remodeling growth is expected to fall below the market's historical average of 5% for the first time since 2013.

The Conference Board's Consumer Confidence Index partially rebounded in April to 129.2, compared with 124.2 in March, but still remains below the levels seen last fall. Even so The Conference Board indicates that consumers expect the economy to continue growing at solid pace into the summer months and these relatively strong confidence levels should continue to support consumer spending at least in the near-term.

In terms of the cost side, copper and related raw material costs are expected to increase for this year as our average hedge prices for 2019 are higher than prior year. Our efforts to increase pricing in certain areas to partially offset the impact of higher copper costs will continue. Also, we are making progress related to our new capacity expansions as we are already processing more of our feedstock in-house and improving operational efficiencies even further.

As mentioned last quarter, our expectations for PC are contingent on a relatively decent demand environment in 2019. The assumptions include approximately 3% to 5% growth achieved through market share wins and 3% to 5% of organic growth to achieve overall 5.8% volume growth and we believe that we are on track at this point, primarily due to strong market share gains although organic growth has begun the year at a lower than hoped for pace.

On page nine of our slide presentation, we are estimating adjusted EBITDA for PC of approximately $70 million to $75 million. That would equate to an adjusted EBITDA margin in the range of 15% to 16% and an increase of $8 million to $13 million compared with prior year.

Moving now to our CMC business. We are seeing exactly what we had expected so far in 2019 as raw material prices have risen across the board while pressures has been building on end market pricing in certain regions as competitors attempt to gain market share. Now that said, it is important to remember that restructuring actions taken in CMC during the past several years have greatly streamlined the cost structure which allow us to be much more competitive. Additionally, cost savings related to our new naphthalene unit at Stickney will be reflected in our 2019 results to help alleviate some of the other headwinds we are facing and we are on track to realize the estimated $10 million of savings this year. Therefore, we expect CMC results in 2019 to be at the higher end of the range of normalized profitability for this segment.

Regarding our China subsidiary, KJCC, we are continuing to supply our customer under a temporary special purchase order that runs through June 30, 2019. For certain timeframe during the June quarter, we are expecting to have a regularly scheduled maintenance shutdown, which will make our second quarter results in China less than our first but still profitable. We continue to work towards a resolution and we will share any new developments with you as soon as we are able. Until that time, we cannot comment further or speculate on any outcomes due to the legal guidelines and requirements associated with this matter. In 2019, assumptions for CMC include the higher cost of raw materials and a significant reduction in contribution from our Chinese joint venture, partially offset by cost savings primarily from our new naphthalene facility.

As shown on slide 10, we anticipate adjusted EBITDA CMC of approximately $80 million to $84 million. That equates to an adjusted EBITDA margin in the range of 12% to 13% and a decrease of $35 million to $39 million compared with prior year.

Slide 11 shows the various drivers in our guidance for consolidated sales in 2019, which we still anticipate to be between $1.8 billion and $1.9 billion. The forecast assumes improved crosstie production, a full year of contribution from acquisitions and more normalized organic growth patterns in our PC business.

Turning to slide 12. Our guidance for two 2019 consolidated EBITDA, on an adjusted basis, is slightly higher on the bottom end of the range, which is now $212 million while the top end of the range remains at $225 million. We continue to expect that 2019 will reflect a meaningful shift in our earnings mix with our primary wood-based businesses generating significant improvements in profitability.

Now I would like to open it up for any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. The first question will come from Mike Harrison with Seaport Global Securities. Please go ahead.

Mike Harrison

Hi. Good morning.

Leroy Ball

Good morning Mike.

Mike Zugay

Good morning Mike.

Mike Harrison

I was wondering if we could maybe start with RUPS. Maybe give an update on what you are seeing in terms of your ability to procure additional untreated ties? Are you seeing that getting back to normal at this point? And what steps are you taking to improve procurement?

Leroy Ball

So a lot of what goes on in procurement is outside of our hands. There is a lot of it that's weather dependent. And with the pretty wet fall that we have had and again the winter weather conditions, it's made it difficult in getting foresters into basically get the product that we need. So it's been a struggle. While I would say, our untreated crosstie production volumes are up year-over-year and that was one of things that certainly helped us in the first quarter, there were less than what we are projecting them to be for this year. So we continue to obviously do everything we can to get as many ties in the door as we possibly can and we have seen some improvement as we have moved into the second quarter. So we are moving in the right direction. We are trending in the right direction. And the fact that we have been able to see the overall profitability improvement from our business despite the fact that the untreated crossties coming in, they were less than what we were expecting, gives me pretty strong confidence that if we see that trend continue in terms of production picking up, we are going to have a pretty good year this year.

Mike Harrison

All right. And then maybe an update on the potential for network optimization within the railroad and utility business. When could we expect to see some changes? And just curious, would it be maybe just some plant closures or consolidations? Or would there be asset sales that could come with that to help potentially reduce some of your debt?

Leroy Ball

All of the above. So there could be some full plant shutdowns. There could be some partial plant shutdowns and consolidation. There could be some asset sales that provides some proceeds back to go towards debt. So we have been working internally through what we think is an optimal configuration and there are certain preliminary decisions that have been made and we are going through activities to go through in implementation process. We are not a point yet where we are ready to announce that and certainly there are many employee considerations that go along with that as well. I would say, my expectation is that certainly, I would say in the second the third quarter timeframe is when we would probably see at least a few of the early decisions being probably announced and implementation beginning on those. But this is likely to be a multi-year processes as we begin a process and evaluate certain moves and how they are reflected within the markets and whether there are other move that can be made or not after the fact. So yes, that's where we stand right now.

Mike Harrison

All right. And then maybe a last question for now, just on the CMC business. You mentioned that the Q1 results were more normalized. If I annualized that EBITDA number, I get to $68 million. Just curious, how do we get from that $68 million annual rate in Q1 to the $80 million to $84 million that you are guiding to? I know there is a little bit of seasonal pickup, but I believe that the Stickney improvement or the better cost structure from Stickney should already be in Q1.

Leroy Ball

Yes, right. But there is seasonality in that business that basically prevents you from doing a one times four, especially for the first quarter for that business. We will see stronger results in the second and third quarter as we typically would expect in that business. So with where the first quarter again ended up, given everything that was going on in the various markets, that's what gives me pretty strong confidence that we can get to the $80 million to $84 million number that we have projected. So you can't take Q1 and multiply it by four. That doesn't work for that business. That doesn't work for any of our businesses.

Mike Harrison

Got it. All alright. I will turn it back. Thanks.

Leroy Ball

Okay. Thank you.

Operator

The next question comes from Roger Spitz with Bank of America. Please go ahead.

Roger Spitz

Thank you and good morning.

Leroy Ball

Good morning.

Mike Zugay

Good morning.

Roger Spitz

Yes. I understand you have some legal considerations on what you can say about the Chinese JV situation. But are there things you can say, like can you just review the raw material supply agreement even if you perhaps cannot talk about the disagreement at all?

Leroy Ball

No, unfortunately I can't. What I can say is, just the general framework of that whole business model over there is, we operate a plant where we supply a significant amount of the raw material supply to a customer under a very long term contract. And that's the model that was put in place. That was a model that was conceptualized that resulted in us building the plant. And there has been several sort of big market changes that occurred since the time we first signed our framework agreement back in the 2012, 2013 timeframe and today. And it's resulted in sort of differences of opinion along the way. But it's a businesses that we have designed to essentially produce a significant amount of product for a single customer with the balance of our products going out into the general open market. And so that's the overall sort of background on it. But if I could say more about it, I would, but I can't.

Roger Spitz

I understand you can't say more about that. But perhaps you can say something about, do you have alternatives on what you can do with that product, not with that customer?

Leroy Ball

Yes. So what we do there is not something that can only be taken by that one particular customer. If, as an example, that agreement was not in place, it's not like that plant is useless and we can't use it for anything else. It produces product that can go into other markets, other industries and things like that. So if that's sort of what you are getting at, then yes, that plant has other uses beyond sort of just serving that one particular customer, if there will be an ultimate breakdown and the long-term contract no longer existed.

Roger Spitz

Okay. Understood. And then getting onto the self production of the copper intermediates, say BCC, cuprous oxide. Can you give us, you said in your prepared remarks, you doing more yourself. Can you give us a sense of however you like to frame it, is what percent you are now self producing of those products and what percent you are now buying in, which I understand is mainly if not all from China?

Leroy Ball

Yes. So we now have our capacity additions in place and operating. We are going through startup, typical sort of startup issues, if you will, related to that. So we have been able to significantly increase our own production and we are getting ever closer to being 100%. In fact, in the second quarter, we absolutely will be 100% producing our own BCC. And from a cupric oxide standpoint, that's a little different situation and we are in quite as good a shape there. And I am not sure that we ever will be. But we are less concerned about that because that one is minimal. So it's a minimal cost differential for that particular intermediate. BCC the important one and that's why we have been really focused on that. And the good news is, the capacity in place today and as we continue to improve upon what's been put in place and get all the, if you will, initial bugs worked out, we will be at a 100% level here very, very shortly.

Roger Spitz

Is there a big merchant, global merchant market for BCC? I am a little bit surprised perhaps the high guys who are selling, perhaps Chinese wouldn't know set the price to dissuade you to further back integrated into BCC?

Leroy Ball

Well, I can tell you, there the cleanup quality is a big issue. That's certainly one of the things that we have noticed and experienced in terms of the stuff that we had to bring in that was not our product. It's an inferior quality product. It takes longer for us to get it through our process. So not only is it more expensive, but it also is less efficient in terms of how we are able to operate our facilities. So that's why we absolutely want it under our control, under our quality control and we get the cost benefits that come along with that as well as well with the downstream ones that go into the actual production of the finished products.

Roger Spitz

Got it. Thank you very much.

Leroy Ball

Yes. You are welcome.

Operator

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

Chris Howe

Good morning everyone. This was a solid quarter.

Leroy Ball

Thanks Chris.

Mike Zugay

Thanks Chris.

Chris Howe

And I wanted to focus on the PC segment. You had shared on this call and also previously the composition or the different components that lead you to this 5% to 8% unit volume growth, assuming a normalized environment, right. You are performing better than expectations as far as market share gains. Can you dig into that a little bit more? Where did you see the market share gains within this segment? Following up on that, how was the performance of the fire retardant product this past quarter? And how's that going this quarter? And how should we look at those two different components and their performance in the current quarter as well as we try to hit this unit volume target?

Leroy Ball

Sure. So from market share standpoint, we had a couple, actually three nice market wins, adding some very nice size customers that cut across a number of our different products. And we were basically, in the first quarter, is sort of in the conversion mode moving them over to our systems. So from a volume standpoint, we were not ramped up on all three in the first quarter in terms of getting normalized annualized volumes. But that's why I say you coming, as we talked a few months ago, we were still trying to close at least one of those deals and it wasn't a certainty. So we have gotten to the point now where we have been able to bring them home.

We have one, we have actually two decent size international opportunities. So those are North America based. We have a couple of international opportunities that we are very close to closing. So we are close to 100% hit rate on the ones that we thought we could add to our portfolio this year. So that's been a great success. Now we have lost a little bit of business from a particular customer that we also happen to compete with in another market. But the net result is, we are much closer, we are tracking much closer to the upper end of the range of what we needed on the market share gains side of things.

And as it relates to organic growth, like I said, it started out a little softer than we had hoped. So things starting to pick up, typically that's seasonal nature around this time of the year anyway. So we are still hopeful that things can move up little up. I will say, we will likely not see organic growth at the top end of the range that we were hoping for. We were hopeful to get to that bottom end. And again with where we are at on the market share growth, everything will be fine and we are getting some benefits on the cost side that are also helping to fill some of those gaps.

Fire retardants. It's going very successful. We again hold a number two market share. Volumes are up. Well, volumes are up really significantly. We only had a very small amount of product going out in the early parts of last year as we were still commercializing the product. But it's been a great success so far. We have won several big accounts. And like I said, have moved into a strong number two share in a very short period of time. So we are very happy with how the fire retardant product is performing.

Chris Howe

Great. That's very helpful. And my next question is, you mentioned the utility pole market, the 160 million of utility poles that are out there and expectation for two to three million replacements. If you haven't mentioned before, perhaps I am not recalling, if these replacements as they fluctuate up and down, let's say go to four to five million, I guess how do you quantify the available potential market opportunity that lies in front of Koppers?

Leroy Ball

Well, it's a good question. It's tough to get the arms around. It's a pretty desperate market. It's a much different market than sort of our crosstie market in terms of just hundreds and hundreds of customers. It's not concentrated like it on the tie side of things. So it makes it tougher to get your arms around those sorts of things. I would say, from our standpoint we are trying to really focus on getting our operations as efficient and as lean as possible. That will help to make us even more competitive as we go out and try and win more jobs. We service our customers. We take great pride in how we service our customers. And our storm recovery piece of our business is a critical important piece that as well.

As these extreme weather-related events continue to occur, demonstrating performance in those times to this customer base helps to forge alliances that will, I think, continue to strengthen that business as we move forward and only give us more opportunities to grow our business grow and grow our market share. So that's what we are focused on and we are also focused on, obviously, additional opportunities if we can add to the utility pole business and continue to grow our share. That's the one area where we really have a significant opportunity as opposed to the other markets where we are already close to half or more of market share in most of the markets that we operate in.

Operator

Our next question comes from Laurence Alexander with Jefferies. Please go ahead.

Laurence Alexander

Good morning. Could you help with a couple of things? First of all, can you talk about the CM&C business through the prism of sustainability and what kind of measures you think you can do there or what kind of pressures you see on that business longer term? Secondly, with the utility pole order patterns, are you seeing any or hearing from customers any structural changes in order patterns apart from the one that you mentioned about the wider roads which, I guess, is sort of a long-term trend? And I guess related to that, if utility pole replacement were to pick up, in terms of securing enough raw materials, is it a function of price or time for you to make sure you have the right, adequate raw material supply for that? Or does it become similar to the crosstie market in terms of having the lag effect to secure adequate inventory?

Leroy Ball

So let's go back to number one, CM&C. And I might ask to repeat this as we go through, Laurence. But CM&C, overall that business, the pressures that that business deals with obviously are mostly on the raw material side, right as it relates to coal tar that comes from the blast furnace steel production and which we know has been trending down for a number of years. There is still more than enough coal tar supply to essentially fill the market for the products that we are producing for the end markets and we think it will continue to be the case for some time moving forward.

However, we are cognizant of the fact that has been a trend that's been going on for years and actually we are intently focused on how we can without getting into really any specifics again for competitive reasons, we are looking at how we can, if you will, help that situation so that if it does continue to trend down in that direction that we are at a point where we can continue to serve the industry at the levels that we have been able to in the past. So there is some interesting stuff going on there. And within the next couple of years, we hope to be able to handle that.

So overall and then beside, I mean, from a sustainability standpoint, we were focused on trying to make sure that we continue to invest in our operations so that environmentally we don't run into any issues with them as regulations continue to get more stringent and w will continue. So what we did in Stickney is a perfect example of that with the new naphthalene unit. And so we will continue to focus on our efforts in terms of reinvesting into our facilities. That won't not stop. Our Nyborg facility in Denmark is in great shape. Our KJCC facility in China is basically brand new. And our Mayfield facility is in pretty decent shape as well. We have got a new naphthalene unit at Stickney. We probably have some work to do in terms of the tar plants and stuff like that. But overall, we are in pretty good shape from the CM&C standpoint. So we feel like we are prime to be able to supply the industry for many years to come and we continue to focus on the supply side of things, knowing that that's a trend that continues to move in the wrong direction from a long term standpoint.

So does that help address your first question?

Laurence Alexander

Yes.

Leroy Ball

Okay. So your second question?

Laurence Alexander

Is just in terms of any structural shift in the utility order patterns?

Leroy Ball

So from a utility standpoint, I would say that overall that what we are hearing and seeing is the utilities are actually requiring larger poles, which we believe is actually procurement strength of ours. So from that standpoint, that's may be one to sort a trend that we are seeing. In terms of the market in general and sort of how it compares to the crosstie market, it is different, right, because southern yellow pine is the species that's essentially used for utility poles. It is an extremely renewable species. We don't have the same sorts of the issues necessarily in terms of sourcing that product as we do on the hardwood side of things. So we have again a strong procurement network that has continued to develop relationships out in the field that makes us feel pretty good about any expansion that we would see coming along in that particular sector that we would be prepared to handle. So it's a different market than the tie market and that is why we actually have different buyers out there in the field that are handling it as well.

Laurence Alexander

Okay. And then lastly, if there is a demand shift, do you have any inventory management issues or is it solved by price or time?

Leroy Ball

Yes. It's more, I would say, price. I mean again, unlike the crosstie industry, although you can balkanize ties and essentially speed up the drying process. On the pole side of things, those raw materials are coming in, they are getting debarked and they are getting dried before the are treated, right. So they are not sitting in the yard air drying for a long period of time. You are essentially moving them through the process which is getting more in the door, treated in on the ground and we are in pretty good shape right now. Again, we would welcome an opportunity to see the market grow and us be able to, I think, demonstrate our procurement network and operating network. So that's more a function of price and than time. Time won't be an issue.

Laurence Alexander

Wonderful. Thanks.

Operator

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

Liam Burke

Thank you. Good morning Leroy. Good morning Mike.

Leroy Ball

Hi Liam.

Mike Zugay

Hi Liam.

Liam Burke

Leroy, the last acquisition you made in the RUP space was to create a time management platform and stepping out a competitive advantage against other players that were just treating the ties. Have you made any progress acquiring customers? Or where do you stand in the progress of that effort?

Leroy Ball

Where we stand is, we continue to have dialogue with a number of different customers from that standpoint. And I think that's going to become recognized as an important piece of our overall supply offering. We certainly believe it's an overall important piece. We think as again things continue to get ramped up from an environmental perspective, that the railroad and utility industries are going to want to partner with a company that with our sort of reputation where they know that when a contract with us to essentially take care of the entire process for them, that it's getting done. It's getting done in the way that they would expect it to get done. So we continue to push that hard. It's not a situation where you just come in and walk in their office and all of a sudden, they award you the business. You have got to earn it. You have got to win it. But again, with where we sit in that whole supply chain network, we think we are in a good spot from a number of perspectives. And we expected that we will see benefits as time moves on. Not only that, but many of these railroads, most of these railroads already have certain contractual relationships in place, right. So you have to let some of that play out as well. So we are basically just doing our best to make our case. So as business comes up that we are in a position to be able to win that business and again demonstrate our capabilities across the entire supply chain.

Liam Burke

And on CMC with Stickney, the consolidation is completed. It's up and running. Are there any drags or anything? Or is that project is completed behind you?

Leroy Ball

Yes. So it depends. So the engineers and the operating folks, they will always tell you, they got different things that they are working on and bugs to work and stuff like that. I would say, big picture, Liam, yes. It's in place. It's running. We are seeing great success with it. We are very happy with it. our people are very happy with it. So yes, it's nice to have that behind us and looking forward on other things. So yes, everything's good.

Liam Burke

Great. Thanks Leroy.

Leroy Ball

You are welcome.

Operator

The next question comes from Scott Blumenthal with Emerald Advisers. Please go ahead.

Scott Blumenthal

Good morning. Congratulations on the quarter.

Leroy Ball

Thank you.

Mike Zugay

Thank you.

Scott Blumenthal

Leroy, in terms of the life cycle management for the ties, you mentioned that this is something that railroads have not traditionally done a very good job of. So I guess I have two questions about the whole life cycle management. The first one is, there must be a lot of legacy ties, legacy dumped product out there that's in need of cleanup. I want to know if you see that as a meaningful opportunity? And then I guess on just kind of the whole lifecycle management, how much of that becomes meaningful portion of the RUPS business yet? And if not, when do you expect, how long do you expect that to take?

Leroy Ball

Okay. So let me start off by, Scott, just wanting to clarify. I don't mean to imply that our railroad customers or the railroad industry has not done a good job with this. It's more to the point that it hasn't really necessarily been a focus of theirs. So we are hoping to come along and help them to understand that it should become a bigger focus. I think they are coming around to that. And so again, we wanted to be and felt we should be just given where we sit in this whole picture that we would be a prime partner to provide a solution for them in that regard.

So certainly, you can drive along most railways and see ties at various points stacked along the right-of-ways. I don't know how many are out there overall across the network. Again, to the extent that that's an issue for any particular railroad, certainly we can be helpful. We want to be helpful. And if it provides us an opportunity again to demonstrate our capabilities, then all the better.

In terms of that business and where and how it impacts the overall profitability in the RUPS today. It's a small piece. It was a small piece when we bought it. And the expectation was that we could grow it. And again, just provide another linchpin with our overall business model of trying to do everything we can to help our customers solve their biggest challenges. And so when we talk about the $25 million to $40 million of integration and strategic initiative benefits over the next five years, there is certainly a component of that that comes through growing this business.

So we have not identified the number that's in there for that. But certainly over the next three, four years, again as certain contracts come up, we would hope to be able to retain some of that business or win some of that business and build that as part of our overall business model. For us, it's probably even less about sort of the dollars that flow through on that. But I think the stickiness that it provides the remainder of our business. I think that's probably the real long term benefit for us from that piece of the business model.

Scott Blumenthal

Yes. That certainly seems to be the whole part of the process that's really not been fully addressed until now. In the same segment there, are untreated ties, getting them in an issue in all of your locations? Or is that just concentrated in a few?

Leroy Ball

In most, but it's really concentrated in our Western plants for sure. That's where we had to pull where we have been hit the hardest. That's where we have seen the biggest impact.

Scott Blumenthal

Okay. And there is no opportunity to kind of move things around or that just wouldn't be economically feasible?

Leroy Ball

It wouldn't be economically feasible. And you would be trading amongst railroads which they are all looking for ties. So it just wouldn't work out.

Scott Blumenthal

Understood. Okay. And I guess my last question, if I may, since I know we are coming up on an hour here. The self supply and the PC segment?

Leroy Ball

Yes.

Scott Blumenthal

Can you kind of characterize where we were at this time last year, maybe from a percentage perspective or maybe some other way and compare that to where we are right now?

Leroy Ball

Mike might have an idea or a better recollection?

Mike Zugay

Yes. I think we where we are, from a standpoint right now, Scott, is much further ahead. I would say roughly that a year ago at this time we were probably a little over 50% producing ourselves and we are much, much closer to, as Leroy talked earlier in the discussion, much, much closer to where we want to be, especially on the BCC side. So dramatic improvement and quite frankly, when you dollarize it, it's hundreds of thousands of dollars.

Leroy Ball

I think Scott, you know that was somewhat reflected in the results when you consider the fact that our overall average raw material prices, right, in terms of what we have hedged on the market are a good bit higher this year. So we have probably over close to $2.5 million impact just from higher raw material costs, excluding what goes on in terms of having to buy outside in the market and things like that. So the fact that we were able to have the quarter we had despite those sorts of headwind, I think, is reflective of that change that Mike just talked about it.

Scott Blumenthal

Yes. Very good. Thank you. Really appreciate it.

Leroy Ball

Yes. Thank you. Welcome.

Operator

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

Chris Shaw

Yes. Good morning everyone.

Leroy Ball

Good morning.

Chris Shaw

Just quickly on the utility pole business again. That $8 million in year-over-year EBITDA that you are guidance suggests, how much of that is organic growth from just more demand? And how much of that is from the acquisition or integration type synergies?

Leroy Ball

I want to make sure that I am addressing the comment here, Chris. So you are talking about. I see, okay. So going back to the adjusted EBITDA slide, okay. So there is an element there that is having the business for the entire year. There is an element there that is price related. There is an element there that is costs related. It probably touches on just about every lever that you can hit on through the overall business, right. So we are getting it on the price side. We are getting it on having the business for the entire year. We are getting in on the cost side, both operating as well as on the SG&A side as well. So it's coming from all different avenues. Part of it's through synergy benefits that we are getting as a result of integrating into the organization. So I don't want to get into specifics of each of the different components, but it comes from all those different categories.

Chris Shaw

And on the growth side, I guess I am just trying to think how it could grow in the future. But you said, you have all these old utility poles out there that are, I guess, past their useful life. But it sounds like the real demand is coming from the projects, maybe highway widening, what have you. But what will push those utility company, whatever to actually start replacing the old poles without having to because there are some other projects going on?

Leroy Ball

Yes. I don't know if there is anything that would because just like we see in just about any of those sorts of businesses, there is nobody out there that's really looking to replace anything that they don't feel have to. At a particular moment, everybody typically hoards their cash as much as they can. And I don't think we see really anything different there. I think it's more helpful than anything else. I think you would have to see some real infrastructure failures and stuff like that before you can see some sort of widespread trend in replacement beyond sort of the normalized levels at this point.

Chris Shaw

So there is nothing regulatory at all with the utility poles in terms of replacement?

Leroy Ball

Not that I am aware of. Obviously, they are worried about safety and reliability and all those sorts of things. And all that obviously becomes a bigger issue too as you have seen some of the stuff that's come up related to California and the wildfires out there and stuff like that. So I think it's safety and reliability driven.

Chris Shaw

And you mentioned how it's one area or segment that's your smallest market share, so you have opportunities there. But do you see that more coming from stealing market share or do you think that you could do some further consolidation in that business?

Leroy Ball

Yes. I think it's mostly consolidation and certainly we are working on, obviously, improving our ability to compete. So we would hope to be able to win some market share as well. But the majority of our growth will come through most likely consolidation of some form.

Chris Shaw

Great. Thank you.

Leroy Ball

You are welcome.

Operator

Ladies and gentlemen, our last question is a follow-up question and that will be from Mike Harrison with Seaport Global Securities. Please go ahead.

Mike Harrison

Hi. Just a quick one for me. In the performance chemicals business, you guys mentioned some insurance proceeds that helped in the quarters. Can you quantify that for us? And is that just one-time? Or is there more to come?

Mike Zugay

Yes. It was about $1.4 million and it was a one-timer. We are still incurring a higher cost for having to go out and buy raw materials due to the New Zealand fire. And in addition to that, the losses that we had in a beginning in late 2017, early 2018 will run through operations. So the $1.4 million is kind of a refund of things that have already run through the P&L on a negative basis. But it is one time. And then I believe we are finished with it.

Leroy Ball

And just to clarify a little bit, Mike, because we did have some insurance recovery last year related to this. So we had a fire at one of our plants that destroyed one of our plants in New Zealand. And as a result, we have had to source product at higher costs to serve our customers through that time. We have gotten some insurance recovery. First quarter, we got what we believe is the last of the insurance recovery. But we have been bearing the additional cost and everything else related to that business through operations since that incident occurred in late 2017 throughout 2018 and still today until that new plant comes up and is operable sometime mid-2019.

Mike Harrison

All right. Thanks very much.

Leroy Ball

You are very welcome.

Mike Zugay

You are welcome.

Operator

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 Ball

Thank you everyone for taking the time to participate on today's call. I really thank you for your interest in Koppers and your continued support. Have a nice day, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.