Document G6emK89qzagZaDGjzvzva0mBV

6 Looking Ahead: Factors in Planning For Growth Koppers Investment Criteria Capital Investments in diversified areas have been the key to Koppers growth. Through decentralization of the respon sibilities for investment planning and growth, Koppers has cultivated a broad expertise within management for the ini tiation and development of growth op portunities. The Company's many interfaces with a wide array of American and overseas industry provide a broad horizon of investment possibilities. Koppers growth program operates within the discipline of specific invest ment goals. Every appropriation for capi tal funds must be accompanied by sat isfactory answers to three questions: Why should we do this at all? Why should we do it this way? Why should we do It at this time? A potential against the following tests: Koppers has more than quadrupled its di verse operating base over me pasi decade by reinvesting me equivalent o( nearly all o( the cash (low it generates each year. The criteria that guioe KoDpers allocation of in vestment funds are set forth below. Decisions on such investments are noi made in a vacuum. They require that we study and understand the nature of change in the world m wnicn we will be operating. Between now and 1987. the number of U.S. citizens aged 25 through 44 will rise by 17.8 million, to make up 32% of me popula tion. We believe that national priorities will have to be formulated to encourage substan tial industry investments to provide jobs lor a flood of new entrants into the work force. Beyond that time, industry will need a high level of investment to raise productivity in the face of two developments: a snarp de cline in the number of new workers and an increase in the numoer of people over the age of 60. who will represent 17% of the population. Some further considerations: The U.S. and Canada have the only ad vanced economies in the world where war did not destroy the national infrastructure-- such things as railroads and highways; the networks that carry water, petroleum goods and electricity; and. of course, manufacturing facilities. Other countries have rebuilt from the ground up, while the U.S. limps along with an economic machine that shows many signs of wear and obsolescence. Tremen dous investments will be needed to keep our economy competitive. Is it related to a business that Koppers knows through experience in raw mate rial supply, market participation, or pro duction or technology expertise? Does it give Koppers the potential to be a low-cost supplier in the industry served? Does it position Koppers so that It can attain a leadership role In the primary market segment served? Is it capable of producing an average 25% return (before income taxes and in terest) on the tc :al net Investment dur ing the first five years of operations? Will It generate enough cash flow for Koppers to recapture its total Invest ment within five years? The growth program is carried out within an over-all Company strategy that ilimits.debt toi35% of Koppers total capi talization. The growth rate ol America's productivity nas lagged seriously behino that of other countries. This has been cited as an under lying cause of our inflationary spiral. The pnenomenon is sell-nounsnmg: inflation eats away at return on investment: failure io in vest aaeouately lowers proauctivity: reouced efficiency stimulates inflation. By the same tOKen. we believe, the pattern can be turned around, through adequate investment m moaern productive capacity. The fall-off in productivity can be traced to a number of factors--inadequate profits, in equitable tax laws and excessive regulations --that have encouraged current consumption of assets at the expense of the moaermzalion and expansion needed to strengthen the nation's economy. This cause-effect relationship has become unmistakably clear, and Koppers management believes that public attitudes and government policies have be gun to shift in ways that will motivate the ac tions necessary to rejuvenate the private in dustrial sector. These are the considerations that dictate the shape of Koppers investment program. Because they tell us that the time for a revi sion of priorities is at hand. Koppers nas po sitioned itself, through increasing capital expenditures for more than a decade, to serve as a supplier to a broad cross section of the nation's industrial base. Nearly 75% of the Company's sales now go to the capi tal equipment and nonresidential construc tion markets. Some specifics: Coke. Early m the 1970s. Koppers per ceived that aging U S. capacity was strained to meet domestic demand for foundry coxe. a fuel vital to the large metai-castmg indus try. There was. loo. a significant possibility that capacity would be cut further by the pressures of environmental regulation and by plant deterioration, since 60% of U.S. foundry coke is produced in ovens that are at least 30 years old. In 1976, the foundry industry indicated that, by t985, its demand for coke would exceed coking capacity by 30%. By the end of 1979. Koppers will have devoted nearly 15% ol its total capital ex penditures since 1974 to more than triple its foundry coke capacity and will have ac counted for about 55% of the U.S. capacity added in that period.