Koppers Holdings Inc. (KOP) Earnings

Management highlights

• Overall Strategic Transformation Execution - The company is in year 2 of its multi-year Catalyst strategic transformation program, which aims to improve margins, cash flow, and capital efficiency across the business. Through June 30, 2026, the program delivered $33 million in year-over-year net benefits, and a total pipeline of over $90 million in benefits is identified for 2026-2028. - The company announced the acceleration of the Stickney, Illinois distillation and chemical operations closure, with the end of production now targeted for September 30, 2026 (one quarter ahead of the original schedule). This restructuring is expected to deliver annual adjusted EBITDA benefits of $15-$20 million, improve annual adjusted EPS by $1-$1.20, and reduce ongoing capital spending requirements. - A leadership team realignment will take effect September 1, 2026 to strengthen the link between strategy and transformation execution, with dedicated oversight for CMC restructuring and Stickney asset disposition. • Financial and Operational Performance - Consolidated Q2 2026 net sales hit $520 million, up 3% year-over-year (5.1% after adjusting for acquisitions, divestitures and currency). Adjusted EBITDA came in at $71 million (13.7% margin), and adjusted EPS was $1.37. - Record year-to-date (H1 2026) operating cash flow of $96 million and free cash flow of $73 million, driven by working capital improvements from inventory alignment and network optimization. Capital allocation follows a balanced framework: 25% reinvested in the business, 50% returned to shareholders, 25% used for debt repayment. - 22 of 40 operating locations achieved injury-free operations in Q2, aligned with the company's zero-harm safety vision. The 2025 Corporate Sustainability Report was released with a refreshed 2030 sustainability strategy focused on people, climate/energy, products, and supply chain. • End Market Performance - Performance Chemicals: Residential treated wood demand is flat, but the segment delivered volume growth via market share gains. Copper prices remain at historic highs, with further pricing actions planned for 2027 as 2026 hedges roll off. - Utility and Industrial Products: Organic demand grew 12% quarter-over-quarter and 10.5% year-to-date, supported by increased electricity demand from AI infrastructure buildout. Fiber availability constraints and raw material inflation are being actively managed. - Railroad Products: Near-term Class I railroad demand is pressured by tightened capital budgets, but commercial backlog is solid for H2 2026. Recent hardwood sawmill closures have reduced industry capacity, creating long-term supply uncertainty. Plant consolidation is on track to deliver expected operating cost savings by the end of 2026. - CMC: Global carbon markets remain volatile, with the Middle East conflict driving higher oil and coal tar prices. The new U.S. terminal is operational, allowing supply of key products from Europe to the U.S. market, creating a competitive advantage.

Guidance

- Full year 2026 net sales guidance is maintained at $1.9 billion to $2 billion, with internal segment adjustments reflecting strong utility pole demand, increased penetration in PC, and continued pullback and volatility in RPS and CMC respectively. - Full year 2026 adjusted EBITDA guidance (excluding special charges) is revised to $240 million to $250 million, with $17 to $20 million in upside from PC offset by an $8 to $11 million decline from RUPS and a $19 to $23 million decline from CMC. - Full year 2026 adjusted EPS guidance (excluding special charges) is set at $3.80 to $4.20 per share, consistent with the company's long-term target of over 10% adjusted EPS CAGR from 2026 to 2028. - Full year 2026 capital expenditure guidance is maintained at $55 million, consisting of $34 million for maintenance, $12 million for safety/zero harm initiatives, and $9 million for growth and productivity. The baseline annual maintenance and safety capital run rate going forward is expected to be $35 to $40 million. - Full year 2026 operating cash flow is expected to hit an all-time high of $175 million, resulting in $120 million in free cash flow after capital expenditures, which will be split roughly evenly between debt reduction and shareholder returns. - Long-term 2028 targets are reaffirmed: adjusted EBITDA margins above 15%, net leverage of 2 to 3 times, average annual free cash flow of $100 million, and PC + RUPS representing over 85% of total company sales.

Segment performance

Coppers operates three core reporting segments, with the following Q2 2026 financial performance: 1. Railroad and Utility Products and Services (RUPS): Net sales of $246 million, representing 47.3% of total company revenue. This is a 1.6% decrease from the prior year quarter; after adjusting for 2025 divestitures, acquisitions and foreign currency, sales grew 2% year-over-year, driven by 16% volume growth in the North American utility pole business and 2% higher crosstie volume, which offset the $12 million drag from the 2025 railroad services business sale and net price decreases. Adjusted EBITDA for the segment was $26 million, down 18.8% from $32 million in Q2 2025, with the decline driven by higher raw material costs, lower activity from the divested railroad service business, and unfavorable pricing and sales mix. 2. Performance Chemicals (PC): Net sales of $168 million, representing 32.3% of total company revenue. This is an 11.3% increase from $151 million in the prior year quarter; after adjusting for favorable foreign currency impacts, sales grew 10% year-over-year, with 11% volume growth in the Americas (driven by market share gains in a flat demand environment) and 26% sales growth in Australasia, partially offset by lower pricing in Europe. Adjusted EBITDA for the segment increased 31% to $38 million from $29 million in Q2 2025, driven by higher sales volumes, lower material costs, and a copper hedging program that offset most copper price increases, partially offset by higher logistics expenses. 3. Carbon Materials and Chemicals (CMC): Net sales of $106 million, representing 20.4% of total company revenue. This is a 1.9% increase from $104 million in the prior year quarter; after adjusting for the phthalic shutdown and foreign currency, sales grew 4% year-over-year, driven by higher volumes in Australasia for carbon black feedstock and carbon pitch, offset by a 2% decline in global carbon pitch prices and a 3% overall average product price decrease year-over-year. Adjusted EBITDA for the segment fell 52.9% to $8 million from $17 million in Q2 2025, as 12% year-over-year higher coal tar costs and increased operating and SG&A expenses more than offset cost savings from the discontinued orthallic production.

Risks & headwinds

- Raw material cost volatility: Coal tar costs increased 12% year-over-year and 15% sequentially in Q2, driven by the Middle East conflict, with a $2.3 million negative impact on CMC in Q2 and an expected $4.6 million negative impact in H2 2026. Copper prices remain at historic highs, and fiber, hardwood, and freight/logistics costs are also elevated due to supply constraints and market volatility. - Input cost recovery lag: There is a timing lag between incurring cost increases and fully recovering them via contractual price resets, pricing actions, and product mix changes, which near-term profitability across multiple segments. - End market headwinds: Housing market demand remains weak due to high mortgage rates, with remodeling spending growth expected to slow. Class I railroad capital budget tightening has reduced near-term treated tie demand, and recent hardwood sawmill closures have created long-term supply and pricing uncertainty. Global carbon markets are experiencing ongoing volatility from geopolitical conflict. - Supply constraints: Fiber availability remains a constraint for utility pole production, as forest harvesting has slowed and pulp and paper mill closures have reduced supply. - Geopolitical risk: The ongoing Middle East and Iran conflicts have created added volatility for energy, freight, and raw material input costs across all business segments, and the impacts are not expected to abate in the near term.

Analyst Q&A

• Q: Catalyst transformation benefits have already hit $33 million in H1 2026, against the prior full-year target range of $30-$40 million. Will full-year benefits exceed the high end of this range, and will elevated input costs persist into Q3?

  A: Management expects full-year 2026 Catalyst benefits to exceed the $40 million high end of the prior range, but all incremental benefits will be offset by ongoing macro and cost headwinds across the portfolio. Elevated input costs driven by the Middle East conflict are not expected to abate in the near term, with impacts across CMC, freight/logistics, and PC raw materials. Pricing will reset for most contract-based business in late 2026 and 2027, which will improve the company's ability to recover higher costs.

• Q: What is the impact of Class I railroad relationships on RUPS near-term profitability, and what is driving PC market share gains?

  A: Near-term RUPS profitability is pressured because the company made price concessions on expired contracts to secure larger long-term business shares and enable an orderly exit from the Florence facility. Full cost savings from Florence plant closure will not be realized until 2027, after all production is wound down in Q4 2026. PC market share gains come from recovered volume lost in 2025, plus new volume from a competitor's customer that moved chemical production to Coppers after an acquisition. This inventory rebuilding demand will taper off in H2 2026 after customer stock levels normalize.

• Q: PC margins increased significantly in Q2 2026 — will 20+% margins become the new normal, and what is the expected customer retention for CMC after the Stickney closure?

  A: The Q2 margin increase was driven by improved customer and product mix from market share gains, with higher-margin industrial demand lifting results relative to the prior year. After the Stickney closure, Coppers will exit a small number of non-core product lines, and expects only minimal customer erosion for its main product lines, with nearly all core volumes retained and sourced from the Nyborg, Denmark facility instead.

• Q: Does the rising interest rate environment change the company's priority for free cash flow allocation between debt reduction and share buybacks?

  A: The company will maintain a balanced approach, with credit facility covenants already limiting maximum share repurchase volumes. Management expects at least half of all ongoing free cash flow will go toward debt reduction to reach the long-term 2-3x net leverage target, while still allowing for opportunistic share repurchases alongside continued dividend payments.