# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_KOP_2019/NYSE_KOP_2019.mmd` · pages 2-8_

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Dear Fellow Shareholders:

As I write this letter, I am working from home, like so many of my colleagues, following the guidelines of local and national health organizations to minimize social contact in an effort to slow the spread of the COVID-19 coronavirus, which has now reached a global pandemic level. At the same time, more than 80 percent of Koppers employees are continuing to show up for work at 49 locations around the world to continue supplying products critical for global infrastructure and transportation.

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At Koppers, we manufacture products and provide services that help move the economy, transport goods, keep the lights on, and provide enjoyment for families around the world. We take seriously our role as a critical supplier to vital industries. Our aim remains to lead the industry by always doing what we do more safely and more responsibly than our peers through a business model that will survive far into the future. This provides the foundational element of our Zero Harm philosophy and is core to our purpose of Protecting What Matters and Preserving The Future.

## 2019: Highlighting Our Performance

Due to the sobering battle we are all currently facing, it is difficult to celebrate our achievements. However, in recognition of our nearly 2,200 employees and their hard work and dedication, I must mention the following milestones that were reached in 2019:

• $1.8 billion in net sales, a company record and third consecutive year of growth;

• $130.8 million in operating profit, our highest ever;

• $210.8 million adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), our second-best year behind 2018;

• GAAP earnings per share (EPS) of $3.16, our second-best year behind 2008;

• Total shareholder return in 2019 of 124 percent, making Koppers the top-performing member of the S&P SmallCap 600 Materials Index;

• Operating cash flow of \(115 million, the fourth time in the past five years that we exceeded \)100 million; and

• Net debt reduction of $82 million, the largest net debt reduction since 2015.

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## Sustainability: Building on Our Legacy

The concept of sustainability has received an increasing amount of attention over the past several years. The focus on this topic has only increased as stakeholders and society at large are holding corporations more accountable, both for their impact on the world and whether that impact is earned through the value and effectiveness of their products or services. Few people realize that Koppers was inspired by the idea now known as sustainability.

In the early 1900s, the namesake of our company, Heinrich Koppers, came to the United States from Germany with an innovative coke oven design to replace the inefficient beehive coke ovens used at the time. This Koppers coke oven technology began capturing the toxic byproducts emitted into the atmosphere, enabling Koppers and others to begin discovering useful solutions for that waste. The resulting process of distilling coal tar into various products supporting critical industries is relevant to this day, more than 100 years later.

Stakeholders and society at large are holding corporations more accountable, both for their impact on the world and whether that impact is earned through the value and effectiveness of their products or services. Few people realize that Koppers was inspired by the idea now known as sustainability.

## Carbon Materials and Chemicals: Right-Sizing to Improve Profitability

By the end of 2014, the future of our Carbon Materials and Chemicals (CMC) business appeared bleak and unsustainable. Five years, five plant sales, and two plant closures later, our global CMC business earned $83.2 million of adjusted EBITDA in 2019—14.1 percent on sales of $591.0 million—selling critical products derived from coal tar to the wood preserving, aluminum, steel, carbon black, chemicals, and plastics markets, among others. 2019 was the third straight year that CMC realized adjusted EBITDA margins in the mid-teens after not having reached that level since 2010.

During 2019, we completed the final pieces of our consolidation plan. In August, we began the process of closing our plant in Follansbee, West Virginia, and in December, we reached a tentative agreement (signed and announced in February 2020) to sell our KJCC plant in China. When completed, the KJCC sale will bring our global distillation assets to only three facilities.

The integral role we play cannot be understated as our industry is positioned between the steel and aluminum sectors. Without the service that Koppers performs, the economic and environmental cost of steel production would increase, as hazardous byproducts are disposed with no beneficial re-use. Likewise, primary aluminum production can only occur because of the carbon anode technology using carbon pitch like what is produced by Koppers in our distillation process.

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## Performance Chemicals: Growing Market Presence

The acquisition of our chemical business in 2014, Performance Chemicals (PC), brought the Koppers name back into the water-borne wood preservative business in a big way that has continued to pay large dividends. Acquired for $465 million, net of cash, PC and our Railroad Structures unit have returned much of the purchase price in adjusted EBITDA in little more than five years. Excluding corporate allocations, this acquisition's direct EBITDA has covered the net acquisition cost in five years. That is more than three years shorter than the multiple paid on current earnings in 2014.

While 2019 results did not exceed PC's best year (2017), it represented a nice improvement over the prior year with adjusted EBITDA of \(68.6 million on record sales of \)448.3 million, which equated to a margin of 15.3 percent. For 2019, sales growth was 7 percent and we reached a four-year compound annual sales growth rate of 6 percent, as our patented MicroPro \( ^{\circledR} \)  product gained even greater market penetration. In addition, our new interior flame-retardant product, FlamePRO \( ^{\circledR} \) , has been a success. In less than 18 months since its introduction, FlamePRO \( ^{\circledR} \)  has already achieved second place in total industry-based market share and expects to have the leading market share at the end of 2020. Also, from a sustainability perspective, it is important to note that the single most significant raw material required for our water-borne wood preservation products is another waste product—scrap copper—demonstrating again how our process contributes to society through the productive reuse of waste materials. Not content to rest on our laurels, we continue to work hard on developing new and better products to protect, enhance, and beautify wood.

## Railroad and Utility Products and Services: Capturing New Opportunities

Koppers Company diversified into industrial wood treatment in the 1930s as a means of consuming the creosote produced from our coal tar business. In the same way, Koppers Holdings remains vertically integrated today through our Railroad and Utility Products and Services (RUPS) business, which consumes both the creosote and the chromated copper arsenate (CCA) produced by our CMC and PC segments, respectively. Our business is concentrated primarily in North America for railroad crossties and utility poles and pilings, and to a lesser extent in Australia for utility poles. We extend the life of timber—a renewable resource—through pressure treatment primarily with our preservatives. In fact, to treat exclusively with Koppers-made preservatives, we plan to add a new oil-borne product, copper naphthenate (CuNap), to our portfolio. We believe that along with creosote and CCA, CuNap will supplant pentachlorophenol (penta) for use on hard-to-treat wood species and other applications. Penta was named a persistent organic pollutant under the Stockholm Convention, and its only current producer, Cabot Microelectronics Corporation, announced it will cease production of the preservative by the end of 2021.

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As the recognized leader in wood preservation technology, it is incumbent on Koppers to lead the industry to better approaches. In addition to the ecological benefits of sequestering carbon for 20 to 50 years in our treated wood products, we now help our customers solve their end-of-life disposal challenges. Our Recovery Resources group offers the right solutions for customers to dispose of their wood waste, always searching for the optimal environmental answer to differentiate Koppers from the competition. This is one more example of our team finding a more sustainable long-term solution that benefits our customers both environmentally and economically.

In 2019, we experienced a nice rebound in our RUPS business after three straight years of cyclical decline. We finished 2019 with adjusted EBITDA of \(60.2 million on record sales of \)733.5 million for a margin of 8.2 percent. While profitability is still well short of our best performance in 2015, I believe we are on track to bring this business back to double-digit margins by growing our share of the industrial treating market, while lowering the overall cost of our treating and distribution network.

## Debt Reduction: Making Meaningful Progress

Over the last six years, we have spent \(776 million on acquisitions integral to our strategy and another \)389 million on capital expenditures, including completion of our KJCC facility in China and a new naphthalene facility at our Stickney, Illinois, CMC site. That totals \(1.2 billion, plus another \)133 million (net) to restructure operations, retire assets, remediate environmental obligations, and fund our pension plans. Also, during that time, we generated \(578 million of operating cash flow to partially fund those expenditures and keep our net debt increase to \)647 million. With our net leverage hovering around 4 times our adjusted EBITDA, I remain intently focused on driving our debt and leverage down. In 2019, we reduced our net debt by \(82 million, our largest reduction since 2015. In 2020, we expect even greater progress as we will take an expected \)65 million of net proceeds from the KJCC sale and apply it, along with our operating cash flow, to reduce debt and risk even further.

In 2020, we expect even greater progress as we will take an expected $65 million of net proceeds from the KJCC sale and apply it, along with our operating cash flow, to reduce debt and risk even further.

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Leadership Council \( ^{*} \) 

Speaking of risk, it is inherently dangerous to make our products. Our employees work around intense heat, highly pressurized equipment, toxic chemicals, and unforgiving mechanical operations. That is exactly why we adopted the Zero Harm mindset five years ago to keep our people safe while minimizing our impact on the environment. We took things a step further in 2019 with the introduction of Life Saving Rules to raise awareness and formalize expectations related to the highest-risk activities our team members encounter daily. While our total recordable rate ticked up slightly in 2019, our serious incident rates declined dramatically, which I believe reflects our singular focus on eliminating or mitigating exposure.

We will continue to do all that we can to ensure our people's safety while also ramping up our efforts on the environmental front. I remain steadfast in my belief that we can reach zero and will not stop pushing until we have achieved and sustained that level of safety performance.

As our employees continue to work in the unprecedented COVID-19 virus environment we currently face, our focus on Zero Harm is paying off immensely as we immediately adopted the safety protocols recommended by the Centers for Disease Control, as well as added several of our own to ensure our business continuity as a key part of our global supply chain. We will continue to do all that we can to ensure our people's safety while also ramping up our efforts on the environmental front. I remain steadfast in my belief that we can reach zero and will not stop pushing until we have achieved and sustained that level of safety performance.

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## Looking Ahead: Managing with Purpose

While it was disappointing to fall short of our 2018 profit performance, we should not lose sight of the many accomplishments of 2019 and the tremendous progress we continue to make in improving and solidifying our business. None of that happens without the commitment of leadership across all of Koppers and the support and guidance of our Board of Directors. I am fortunate to have such a capable and caring group of people to work with, learn from, and serve.

As my management team and I work to retain your faith in our leadership through these trying times, please know that it will always be under the guidance of our company's purpose of Protecting What Matters and Preserving The Future.

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Sincerely,

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Leroy M. Ball

President and Chief Executive Officer

## *Leadership Council