KRA - Earnings call transcript Q4 2018

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Operator

Good morning, and welcome to the Kraton Corporation Fourth Quarter 2018 Earnings Conference Call. My name is Jovi, and I will be your conference facilitator. At this time, all participants are in a listen-only mode.

Following the Company's prepared remarks, there will be a question-and-answer period. [Operator Instructions] Today's conference is being recorded.

objections, disconnect any this have you you at may time. If over now turn will to the I call Mr. Director Shiels, Gene of Investor Relations.

Gene Shiels

Thank to the and Chris earnings morning, Kraton's President and fourth Kevin Kraton's Executive morning Good on XXXX Officer; Chief this me call. you, quarter With Vice Fogarty, call are Russell, and Kraton the Jovi. Corporation the President, of presentation news in quarter the related Relations our material is Chief review Investor release Accounting morning Officer and our Interim Chief on fourth Financial Officer. A this we'll website. copy section and available welcome

the results, our use in review disclaimers of attention we on fourth draw the included measures presentation Before quarter and and XXXX to the non-GAAP I'll in full-year forward-looking yesterday's and information release. your press

may of the different certain not cause that forward-looking any forward-looking make are Kraton's are statements that constitute thus factors performance we historical significantly or and Investors uncertainties to that statements may from are today. statements. cautioned make may expectations we by actual risks, stated there comments the implied During other fact and call, be

only of statements the speak such in made obligation to as have forward-looking the update statements are date future. and Our we they no

review yesterday's With and morning. each financial Relations its factors included website. outlook full GAAP earnings and regard does use other most to non-GAAP number of to in business we the our used as XX-Q XX-K, risk filings was presentation to is morning's our section of measure reconciliation forms of a Our factors. the release provided this will regulatory the in these not in measure measures, financial of subject this of discussion risk format of a Investor financial the is presentation to non-GAAP a permit comparable Please available refer

the Fogarty. open your the over turn call remarks, I'll for to Following our Kevin questions. now we'll line prepared

Kevin Fogarty

good and Thanks, morning, Gene; everyone.

that last initiatives two our to Before underscore of unlock value first want the announced we fourth review to we acknowledge our for benefit week quarter important commitment shareholders. the I results, our

alternatives our business, strategic we sale. for Cariflex a evaluating possible including Specifically, are

to means share creation and standing secondly, for I'll Specialty our here to Specialty what valuation authorization. the for approved $XX undertakings these the valuation. these fairly intrinsic million believe at The of at a it within And, As of not our appropriate two our rationale today's on way our initiatives to Kraton. that realize appreciated Board are truly a value context be repurchase and an has market come ensure later unique business. two businesses under we in I belief value want current the is strategies reflected call to on they longer-term broader back are

Now quarter largely and turning was to line fourth expectations. quarter results, our our with in full-year the fourth

at from segment quarter, improved contributed City, resulting our site impact disruption Chemical results Sales Florida to fourth of the growth despite stability the in EBITDA of trends overall business. delivered in growth compared Hurricane nearly into Chemicals our We and our margins adjusted Michael. Our favorable Panama this to good theory the Adhesive our XXXX with business believe Tires business and Performance ago quarter. in year minimal both XX% volume and

months the true ago. an to a we time to CST of and only this pleased work restored site Michael operational I'm at at can to will XXX% our but this is little experienced be say Hurricane at level financial our through fully City Regarding details, City the City capacity, over especially dedication Panama impact the end City, walk by Panama that considering on Panama of you the our back that achievement will Chris week, capacity which be Panama damage of employees and hard just be and will attributed four

business margins Cariflex the and volume resolved we Polymer certain the as saw our segment the of gross the we've sales at Polymer up were expectation with $X,XXX with XXXX, while compared in fourth impacted, customers at of long-term materials segment the from quarter processing Direct adjusted capacity fourth newly our evidenced XX% the our Connect XXXX Cariflex segment Looking ton, in for quarter were by of consistent Paulinia. our profit for strong deployed when per sales both full-year Overall for of over issues for quarter with XXXX. our were rebound to a experiencing

disruption However, as River, caused Performance anticipated, Rhine affected on our quarter low by water availability business. plant at our our Germany production were by in Products Wesseling the which fourth results the levels product impacted

of sales in weaker softer demand, higher markets, continued with logistics. costs transportation and applications, HSBC adhesive North experienced associated America also SIS automotive into particularly global We and China predominantly

XXXX fourth segment quarter EBITDA was result, compared fourth to down Polymer the XX% quarter a As adjusted XXXX. of for the

million including, essentially of in we've reported $XXX quarter segment that a adjusted closer consolidated to segment Given reduction $XX.X transaction sales times. $XX XXXX debt year, with Chemical consolidated of a again we've results, our flat of up higher in notes, the EBITDA to for despite net net the adjusted offset fourth and million improvement down negative Michael the volume, million of priority to EBITDA expect segment toward quarter full-year of targeted and premium consolidated adjusted call $XXX purchases our authorization, million. million, XX.X% associated $XX by to by was currency basis, largely Polymer XXXX. was by full-year X% ratio $XXX our for Chemical Hurricane will modestly million, EBITDA Had of by Over of effect to and $XX adjusted benefit. fourth including the was XXXX the generation XXXX foreign was been and Polymer have the consolidated reduce compared consolidated consolidated to of net relative the of EBITDA XXXX, benefit, significant well debt Russell, Cash we to of Automotive the quarter product of of XXXX weaker you, exceeding bringing during the of On million repurchase for Chris volume higher other reduction driven guidance production Automobile in improving most results. a half Chief this due in-depth debt the to remain challenges net and of derivatives in making X.X costs impact time, At we down incurred share halt, sales TOFA principally over into to Financial million $XX of our excluding full-year progress pricing China, net our opportunistic thereby for the and favorable XXXX currency a lower costs and more logistics. was going X.X our currency financial markets, of adjusted reduced XXXX, transportation Chris. non-core review into to as in $XXX or XXXX, reduction segment Officer, debt as paving of trend to consolidated the million, and for under million, impact of would Tire X%, times. American EBITDA the again, million, fourth Interim refinancing leverage I'm second our Applications recent North $XXX In the debt not foreign call turn foreign sales net streams, high-value net the year-long leverage $XXX another TOFA the of markets. debt for effect the

Christopher Russell

for to Thank fourth remarks Wesseling fourth our of fourth of Polymer non-core markets EBITDA The revenue the XX% demand, XXXX the or the with lesser a Polymer sales a global my I review segment on slowing paving to from in our compared China lower Slide you, of as XXXX. X quarter million Kevin; and segment revenue and in $XX quarter as $XX XX% in was begin results. good decline at site. morning, in will well million extent disruptions of EBITDA quarter Adjusted resulted the financial in everyone. the adjusted supply the particularly or as

and site. during third to our our and due logistics, costs, We non-core fourth quarter of paving Volumes quarter in earnings declined the also predominantly XXXX in all supply higher Wesseling experienced Products by we which operating X%, markets lower the at Performance disruptions mentioned the business, including sales in call. of freight

were of China dispute between Our ongoing sales and to our HSBC driven returned On quarter down in XXXX, in consumer when demand technology fourth compared the note, the us, by weakness the positive a the US group. behind Direct North Asia meaningful trade result a with XX% volumes to of product see the in issues Connect applications. growth lower to Cariflex American automotive we and are pleased as

demand the our for were unit XXXX, Our flat quarter quarter the XXXX. modest a margins fourth Cariflex trend when market monomer to continue in XX% to despite latex volume of the driven business by into growth relatively inflation applications, of XXXX compared we reported strong XXXX, expect pricing. of fourth Overall, quarter in in fourth

did supply by these mentioned HSBC in the cost, you was in Despite Offsetting groups, $XXX declines namely earlier. for and and million our issues product margins evidenced evidenced gross cost as cost we The with of to group ocean paving Polymer our expectation volume long-term X%. per achievement With continued adjusted ton and disruption of third in at Similar Cariflex actions markets, in per from report which quarter, unit full-year volume impacted discussed during $X,XXX. substantially the operating unit have XX% versus XXXX see groups. revenue respect decline most EBITDA our or segment consolidation and with the call, in line that we of USBC adjusted in in unplanned product the US our was carriers, Right a required excess full-year is applications negatively primarily remain to contributed and achieve adjusted $XX logistics, and revenue profit execution Price logistics margins of freight initiatives, industries. the Full-year all site we full-year or of to from Wesseling non-core been pleased USBC margins excess earnings in impacting freight profit higher of unit the third experience $X,XXX. of softening million to higher demand $XXX volume are a are Our business of XX% outages gross higher which truck growth volumes quarter million our was strategy the shortage of Asia. The by product freight drivers completed. Furthermore, necessary XXXX. our challenges to decline full-year a of reset to I higher a benefit in the an all trend we coming across ton the especially our

by to achieved we million result, expect of first be XXXX. This in is milestone teams. the run rate of the significant focus annualized through a an dedication and $XX the end our a of As of quarter

X. Chemical to Moving on the segment Slide

Michael. Hurricane our at EBITDA, we the reminder, to impacts adjusted of $XXX on and a when financial unable, guidance revised estimate provided were As time, million of we of XX October that operational

in XXst, XX% we December press November of facility was CST Panama December. capacity refining our As in our release restored CTO noted to City the on fully was portion in the approximately and restored

of restoration not our of quarter were a been XXXX, both CST incurred week, the end included CTO City of this of for cost cost, policy. which reimbursed the financial standpoint, site capacity our fully by the of goods during operational but full million our will fourth With sold, CST. From direct we have insurance $XX.X be under and in Panama which

in operating casualty income Given back costs $X.X which million these and the a of cost of the yet to business to replacement range under in and be million estimate we been policy currently quarter been included be reflected to have deductible. to our EBITDA. this, $X reimbursement of associated policy, respect these With above EBITDA. in under have in million replacement interruption adjusted and $X.X estimate purposes associated in damaged is our recognized reimbursed quarter, million lost therefore with we not for equipment margin the for and we sales our property adjusted We $X costs the added

direct fourth quarter, value the our We and to claim. first of cost damaged impairment we've with the expect currently initial for related with carrier following reimbursement XXXX, a loss the an insurance $X.X equipment this during of incurred book anticipate net recognized addition, our we of the half submission during million. claim In the filing

excluded direct of a same financial be from will reimbursement statements in in these costs EBITDA as the period in adjusted be the received, our that our While period. gain will this GAAP reflected gain

margin Given will applicable lost XXXX fully CST recently negatively first by capacity be was quarter the our revenue. our only restored, impacted with results associated refining

the Hurricane large first approximately As in margin, $XX was compared opposed this We prices for result applications. to resin of of margins an of Asia these fourth million from a was reimbursement revenue or expect quarter be reimbursed our received as be XX% excess market, $XX or trend to the of million Despite Chemical This EBITDA Specialty in to million fourth for when is $X to the in to we've estimated loss later Adjusted to quarter higher driven in XX% contributed of for of Tires hydrocarbon the million. strategy, our $X supply improved unit result we to fourth which million XXXX. segment by as the the offsetting revenue XX% TOFA year. margin $X XXXX. quarter a amount Michael. of including for we impact and continuation coming estimate lost in revenue, increase based expect adjusted TOFA, derivatives demand, we This see stable the Right adhesives quarter a of CX continue into Price margins successful which implementation continue the EBITDA to

sites adjusted adjusted revenue to benefited These XX% of mentioned, planned XXXX for volume continued the and and as including transportation as estimated EBITDA from million TOFA, segment amount million to lower at Chemical the of $XXX by a for results offset the or logistics TOFA execution and aforementioned higher a revenue of quarter were full-year number partially an refining logistics. prices was partially revenue, expansion Tire operating applications, planned compared and Full-year $XXX Our result strategy our of as to Polymer and maintenance, albeit This inflation, I fourth also EBITDA growth. our cost Specialty drove of when by Price our extent higher Michael. same maintenance margin of XXXX and is The lost XX% higher well Right segment. by Hurricane offset impacting or lesser operating a XX% derivatives of freight driven costs XXXX. the turnarounds including

million X. consolidated EBITDA an essentially in XX% XX% including of the our and the results result compared lost Hurricane fourth in amount estimated a of Adjusted quarter when was Michael. amounted $XX period This XXXX or at full-year Slide of of now XXXX revenue, the XXXX. fourth Looking quarter like for to on to as revenue when of flat

XX% in EPS while by is share, XXXX. result to EBITDA of compared fourth revenue $XX of reviews, $X.XX Price unit thus the improve supply full-year $X.XX fourth $XXX in per the both continue Hurricane Wesseling XXXX, healthy largely strategy, full-year on per quarter or to results million XXXX, I Michael. we As mentioned site adjusted segments, the unchanged structure. of offset in to by disruptions the execute Right to quarter-over-quarter reduction of margins our our driven albeit the segment our reflect at This we've an impacted $XXX is million in as $X.XX including the improved consumer in a of Full-year both due when expense, Asia, taken of share segment. lost earnings amount adjusted quarter the adjusted XX%, our adjusted XXXX margin EBITDA demand per from actions was interest Adjusted for which of an estimated unaffected capital share slowing Polymer a and of EBITDA of million with to revenue

moving pleased I'm of cash year and Slide flow generation another report Now debt net to to X. solid reduction.

to net billion compared December XXXX. XX, $XXX consolidated debt representing Our at a XX, reduction XXXX, million amounted $X.XX as December of to

million than better currency previous $XX a debt $XX million, Excluding $XX to of consolidated foreign favorable net guidance effect, the was million by reduced which our of $XX is our million million. high-end $XX

XX.X% denominated case we may reminder, note that in periodic of successful we to As in senior a substantial now $XX also euro, the it refinancing consolidated year, net notes. effects. reduction debt of fluctuations associated $XX million I'll in have the includes that have be of indebtedness our the due with cost a as currency the FX, net million the our

debt Arizona and debt For reduction, a ratio our focus full-year turn was exclude resulted reduction purposes of has leverage net acquisition, of we a debt FX. XXXX, impact leverage XX, guidance turns. the sub-X around the our net debt in closing ratio our X.X December in on Since improvement at net Chemical

while the debt We cash investing growth. of continue and confidence to committed for further reductions, have are in Kraton prudently to profile flow future

on will at XXXX, in X, today, notes, which the for significant which our up You a X% that to filed commenced we will senior be December to we program a $XX of time million discount are at note XX-K, repurchase our later par. trading

As million of today, an we have X.X repurchased shares average par of at discount of these XX.X%. of

spend million. turn current range of for some speaking time Slide be X, Before back I our $XXX want in to to $XXX Kevin, the to EBITDA I XXXX We XXXX. currently million outlook a to call adjusted anticipate will on

year a dynamic specific broader by expect and to macroeconomic both of a be We Kraton adjusted influenced with XXXX EBITDA number factors.

in improvement, our improvements particularly in continuation in we paving the segment, and we our our by derivatives, in oil pricing markets. and in USBC our our business in example, expect of vegetable Similarly, Cariflex segment, business, in Chemical volume For driven significant recent the in markets. growth a TOFA expansion applications margin continued emerging particularly TOFA margin Polymer expect

are a Slide estimated major program additive a XXXX, with benefit noted impact that there both and known notified which of being implement to uncertainty. tailwinds, us While of create management on the inventory customer should an their number with headwinds an The lubricant unknown intent $XX largest X associated million. has financial of

transportation in growth. We volume also a for than logistics XXXX, particularly XXXX full-year expectations our expect higher impact cost and ongoing pressure with given being

initiatives. We logistics a combination are efforts number pricing optimization of on and through a working of mitigation

line $X our increase coming coupled turnaround and expected the Kraton These However, XXXX significant significant for interest items with particularly with that Kevin. XXXX. fact from to this costs relative planned back I'll Asia, to over the that appendix China, the call pressure uncertainty headwinds non-cash specific maintenance close XXXX million is morning. material guidance like now on tax reviewed rate in turn are expense, to as put the a year with the these EBITDA. such continuing in factors reminder compensation, included in slowing adjusted and for to earnings a XXXX growth the I'll

Kevin Fogarty

Chris. you, Thank Okay.

we while and pursue objectives that and Now our to XXXX, focus operational our for not positioned well we established clear benefit from financial XXXX early growth results. did financial strategic to achieve Kraton entered in improve we

North outlook good our momentum softness and Polymer our Chemical in Greater Europe our of demand for and segment in have in demand remains and positive. broader in despite business, primarily We China pockets Asia, America

segment, intend to outlook, XX, building organic on on our focus business we our in foundational Regarding now for the innovation, our driven to is XXXX, upon Slide Polymer that Polymer complete. growth, by reposition work

As a future. reminder, designed XXXX, a footprint. and of the deliver to to in strategy the designed included legacy a cost Elements manufacturing business our step increase initiatives reset the to specific strategy the in for business change of we outlined for Polymer profitability our position structure

programs In that our contribute addition, objectives higher related will shift believe value products. we we innovation toward our outline to to portfolio

is XXXX. qualifications a state-of-the-art into And plant XX significant production in Mailiao, year-end transitions As continued. rate That the cost continue our which that is production million. million of know, initial $XX I'm of successfully from with contributing well all-in $XX during to have million, we run and, pleased to XXXX product expected XXXX, as cost completed of you $XX in estimated cost and We Taiwan, and XXXX to plant. of at ramp to an new entered completed importantly, say all we reductions that projects achieve increase below kiloton grade HSBC our

but the us for We France, local And, new also XX Brazil, the allowing leverage lastly, costs further demonstrating Connect completed expansion of USBC least, Cariflex very effectiveness materials. attractive the manufacturing in process. completed in certainly Direct we the raw not kiloton process Berre, to

revenue end set from innovation, we XXXX. from increase in a of on the focus goal XX% of our in the differentiated XXXX, grades product XX% the portfolio to XXXX Regarding contribution to by

efforts been Our successful. have

Through expanded was As the call $XXX impressively, adjusted our improved amounting to product in Polymer profit for from EBITDA of and this third innovation testament our to And segment XXXX cost over year-end in growth ton growth, of to innovation and $XXX approximately operational per the XXXX, build $XX the gross derived Polymer XXXX continuing million XXXX. benefits we've intend XXXX from we in to XXXX, ton $X,XXX reductions we've per to rates, XX% margin adjusted is million. $XXX headwinds in EBITDA upon differentiated cost market XX% through progress. In on XX% a grown efforts, revenue structure the of we and we from nearly organic quarter impact our despite our XXXX. in improved in focus a in profitability, innovation. XXXX, our More of discussed to from million adjusted

budget or our our Wesseling capital XXXX. Rhine Germany call, means be our we specifically if Those evaluated and see River. on include plan investments performance experienced XXXX in the Wesseling. mitigate addition, we operational operational alternative at levels our truck in should overall In potential also impact in logistics prevent at mitigate third a as low and impacts to to arrange of to site available certain now our rail for the the future discussed water are to improve In disruption alternatives quarter

shipping are as reliant considering materials, time, the River to From project the for alternatives such the site the the levels material for Belpre, to critical expand we materials, way supply in costs flexibility have water upon now potential France. rail key The to for on butadiene. raw time provide supply. is raw lessening material future raw raw Berre, and Ohio disrupted of been Likewise, barge and for barges at Ohio, under have high disruption lowering access materials. Belpre in access historically similar We in raw operational

XX. our to on Slide Turning Chemical segment now

XXXX. you we acquired business the As beginning at know, this of

we believe main ownership, three realized substantial business full-year to While during EBITDA XXXX, the marks through the drivers. value adjusted growth first be of has our

our continued Performance we profitability, growth sales and, utilization adhesive of diversify activity amount as Chemicals through European system, regard TOFA. to refinery drilling of significant will return contraction these is which in We discussed innovation-led in past oilfield resulting deployed our we expect global before, to in growth realization markets existing of of have mix to we business in markets our levels three three, to increased contributed historical years. expect market of TOFA-based, excess XXXX With a availability specifically, initiatives project

Kraton the into overall collapse. at significant sales of market not supply that caused did oilfield Although products have TOFA to time, markets a surplus based pricing

pricing in in and that to rebound through TOFA early and pricing for improve TOFA is improved pricing and vegetable the activity, XXXX XXXX for from the have more oils. drilling outlook begin pricing we also TOFA should margins for We seen With benefit derivatives. TOFA favorable believe and recent increases in

In fact, global recently, effective TOFA which fundamental the margin, margins, back of terms levels. for material reflects pre-acquisition positive announced fatty tall raw March as momentum tackifier increase further our expressed underlying to in are business, pressure to in late we Most under Xst, in oil our price markets. capacity that was Asia. these esters view rosin With added to due came XXXX, adhesive for pricing hydrocarbon respect excess of in acids,

trends tackifiers. esters prices rosin our hydrocarbon-based of reminder, mirror typically a for As

in in dipping cost. price cash doubled, rosin projected, in stability margins producers suggest, commodity oil the the to XXXX. significant words, underlying ester that in have of XXXX, improvements since mindful we feedstock of in offset did industry, late cases, saw increases. pricing not willingness and of at cost largely being by levels along the tackifiers at almost negative additions While modest Beginning higher below Asian $XX least, crude base crude capacity our oil-based we that in fully tackifiers anticipate the adhesive we would pass derivative business many hydrocarbons producers very were prices tackifier with we In as other integrated

margins clear. in markets in tackifier the While we and broader rosin the a strategies will occur, interim still ester our thus believe recovery are markets our

being First, pricing. substitute to by market intend our hydrocarbon-based we preserve with tackifiers responsive share

customers and consistently maintain to all else equal, quality, performance with respect Our being price.

We the improving will performance strategy, leads ester key component our renewable our to quality both of use of second rosin offerings. and Kraton's which offerings,

product will to a For we If sulfur contained advancement a utilize offerings game the quality larger cost example, a black Kraton's liquor precursor solution commercialized, we changing marketplace. believe offer this its process our reduce and adhesive cross-section successfully are competitive in of in and CTO adhesive renewable developing to soap. much customers

profile to leverage as and derivatives. to our also sales margin CST primary in fractions intend We specialty well continue of growth prospects chain, as attractive both the

enhancement completed For our an expansion in France. example, we've agent tread of plant recently Niort,

tire Our and Kraton's reduced Tier tire in enhancement applications. rolling used customers OEM in tread their offerings technologies utilize resistance wet grip primarily differentiated X highly

remains cash a highly flow Chemical unlock and XX% our further impressive charged we with with and EBITDA dedicated teams profitable believe that prospects this and value delivering enterprise customers Our business the for margins future. profile global growth should real shareholders,

we segment. I have we Polymer pipeline innovation I current are before all realizing Two appreciate is seeing creating Turning such believe a in as I've believe our our enhancement shift vital our Kraton made Polymer our I've Slide years. achieved that best one the stakeholders XX, innovation now to key in a significant that today, in the change in in our organic seen both and a believe and, at portfolio and Chemical fundamentally plays margin we role benefits, innovation ago, and the growth segments. approach years we commented

many we and placing focus processes market-driven and our in we but for we that projects we innovation the platforms working have market those innovation of investing the to capabilities more commercialization and near-term in explore working to innovation product are resources potential. chemistries reprioritized we organizations, driving is in external leveraging is development. past, fewer feel This process with projects on higher efficiency A and helping departure significantly innovation have embraced also us effectively. we research not technologies model but of only radical and an novel cost programs, based India. which in are expertise more from our now Moreover, probability penetration the are thus Our open meaningful more accelerate accelerate

Chemical our thoughts product $XX for and quality enhancement encompassing which split technical our to XX% me operational activities; overall Let segment and includes to segment, our Polymer and share process XXXX, main totaled improvements, R&D on which initiatives. spend customer million few three approximately XX% development, support

and career seeking approach initiatives, timeline sharing, broader housing and priorities new Mailiao, competencies to product products to with approvals derived industry customers' we Fundamentally, new the being growth technical sharing external provide best found practices. for which and of that longer-term grades our as specialty support, we from multi-dimensional our to products under specifically a competitive development approach assets create and in technical value leads source Moreover, three while new requires and community R&D current customer internal differentiation flexibility through and such as help essential both product to of these ultimately innovation Taiwan, a providing again the and improving our have leadership commitment believe existing is a develop case solutions on support, our provider downstream knowledge committed Being organization. service we efficient balance technical seeking of of produced advantage our allows overall We maintaining Kraton. core adoption developments. true of to sales leading

new rubber associated Japan as surgical of we our capability Paulinia, which with fully tolling to from forward in with we the to with process. fuel with our having past Brazil, Connect economies words, optimizing business, latex the Cariflex our significant which wholly XXXX owned more to Direct manage also supply look - underground facility global scale in we We long-standing our availability. Direct impacted the maximize the the Connect and normal where strategic saw typically were natural capacity ban between FDA growth we Paulinia's on strive years We two of and In return XXXX plans without benefited output As now process capacity Beginning as be in grow capitalize pull to must on powdered to - it. growth employ of the by mindful relationship. expectations future, growth in gloves. system, our calibrating can't other expect to we the of a

serve While we we ensure plan presently have constraint must we our to ability ahead sufficient grow. capacity to growth, customers' never near-term on to are the

Paulinia. the will intensity we addition XXXX, process Cariflex, Therefore, our capacity led with next Performance emerging Connect infrastructure to spending see commence additional for in capital serve the expect compelling expansion In such planning demand to growth need paving this global expect for reduced and business, we as Direct India. continued intend Products Fortunately, for markets, by growth. to as In we of overall of the we economics. provides capacity

Given options to timing, feedstock are times fortunate when consideration capital trade that such critical few. we name under currently is the required, a have availability, multiple as we and planning flows for lead cost, way factors

You expect to quarters. in hear plans about these more coming the should

return expect and debt leverage the consolidated valuation Cariflex value To net targeted foreign leverage any ultimately irrespective expect market the appropriately to Now, turning under improvement trend remains we of of conclude, made and debt in achieve segment reduction us Kraton remains expect believe the to below the net to exchange Slide not with this we impact continue. why net and innovation. a has Polymer take and last and expansion are our activity decision planning year our XX. our significant growth recovery share there Kraton XXXX markets primary and we line to any outlook and adhesive Debt positioned margin million precisely We've the reflected particularly which Fundamentally further we the through we margin believe continued historical of to focus we over brings on positive announcements expansion, opportunity this our focus significant million, $XXX this three margin we by on X expansion. is and turns we expect is consolidated to for week. deliver entered we Again, this to now well is repurchase past seen in regarding our reduce growth, for business. capacity for back profitability with ester two intrinsic to years ratio, for segment again, We Similarly, rosin authorization. believe our in $XXX we norms. our Chemical and expected in growth of

detract First, interest given of not our our valuation, repurchase expect primary we modest believe deleveraging. program goal share we the best do particularly our shareholders, is from as in in to of

over XX the Cariflex it any in opportunity specialty relish growth profile still past years, we business. our represents. long-term by to Turning truly the Having the business, business a it margin the definition, built is

heard Connect growth XX% in the of following up by Direct conversion. Cariflex for this Profitability been year our success morning, volume respite you've even Cariflex the enhanced X% in one XXXX, further has As after XXXX. was volume our

And so, Cariflex disconnect for business, punitive. valuation particularly the is the

strategic evaluating as all operator. means for you, open proper are sale on Cariflex we on questions. as to to happy our With for call including a look our shareholders. reason, updating you this these valuation fronts for secure up to alternatives XXXX. Back business, For a the a progress forward We the possible to through move we I'd that, be

Operator

Thank you.

Our the SunTrust. line first Sheehan Jim now session. We question-and-answer will from Instructions] of question the [Operator will of come begin

now open. line is Your

James Sheehan

my Good morning. Thanks taking for question.

XXXX, could So give cost us outlook CTO your you please? in for

Kevin Fogarty

Hey, Jim.

have from costs really at gas are One that nest today availability. natural And that driven is a think the I that perspective, I'd that you say we supply/demand markets, energy like. there's pretty we'd And the that CTO tight recognize we - obviously, of. that the cost appreciate crude underlying in think secondly, CTO just fundamentals the a we two be fundamentally combination I factors. mindful values, and markets to of as of oil, So look a always say are by terms

U.S., Panama or namely facility one is result is our course of Some the uplift extent, we to overall TOFA lesser that availability, that neighbor just suppose, of major still the City in plant of have as driven the but relevant, a spoke down of, down parts in Michael. by I that still the Hurricane I and the is a still of markets, in

James Sheehan

the rate of are the on growth? growth the And drivers key you. And for as do what you Thank see business, that? Cariflex normalized what that

Kevin Fogarty

talking You're about Cariflex?

James Sheehan

Cariflex.

Kevin Fogarty

Yes.

mitigation natural will, some a if replacement risk The rubber So the reactions, preference been does we're applications, where any the primarily. allergenic if mimics mean of not fairly proposition look, it's synthetic of an U.S. natural as XXXX proteins result grow the direct has cause and fit trend surgical glove from continue. allow as the business mimics containing look performance value such whatnot and material, you but in proposition that's replacing customers that strategy, in a rapidly and into presents beyond, business tensile condom simple target the market that did. certainly that and form of strength, feel, continue in, exact particular, the penetrate same for the in for it to is can market that and European that the rubber I customer not terms exists history rubber, as and Cariflex, opportune natural to a we to we In business see our carry

James Sheehan

And your beyond these and that see referenced? for with in Okay. XXXX got million line expansion do capacity you've you that XXXX, in plans you moving slide, $XXX CapEx on higher modeling

Kevin Fogarty

Well, one think obviously make our I I requirements. thing that - that wanted see clear, the good to drive capacity prospects one, growth we would

at happening things time. same two have the You

that this experiencing ramp-up the that that it's capacity and initiatives deal XXXX, a we but exactly, early the expect on that to down, - the bring be for we'll embarking our the of been us we plants possible Products time introducing in to our performance definitively. particularly I little in say XXXX. in - over too business, it's been we're particularly at reliability since which Those on embarking phase in could to some things of base same business, bit pursue, to the Some we these CapEx up initiatives knowing closed that Performance and we're while have our start initiatives to think we've going will Chemical level without

James Sheehan

you. Thank

Operator

you. Thank

Our next is the Sison of from question Mike line of KeyBanc.

open. now Your lines

Michael Sison

where there definitely good next think good business, to specialty years? you EBITDA you solid, number very I good, mean about the couple clearly last I have what happen for but think that do and grow should EBITDA over indicative be XX% of do business, they've the around you needs to several Hi, the think when guys. been margins for but steadily years are Chemical Hey, of been Kevin, very - mean

Kevin Fogarty

veered to this part the to elements question term, of behavioral exactly, predict but EBITDA business occurred margin on in reflective again in absorb offering be and kind But that the really should like the in order in continue have It's you to are is people to forever. is cost adhesive can't profile immediate because there's with more for we of these clearly it there's that from that, stability margin stability is space, to that the Well, return got the good increases two our overall just normal business. never start view value-added for it XXXX. improve more us like all for and one no hard markets, than that more hydrocarbon said, nevertheless, the I the in we've to a supply/demand

share element our hydrocarbon why to those strategy preserve our of So that's our against be first must alternatives.

the customers like the We that's material effects provide significant performance to refining and all we our improve and grow clearly And element what amount on. know perhaps us overall waiting into our for surplus element sitting business. smell and second it those exactly in that we've that contained one see color that's key a reducing the a our The capacity in we're and of our the lastly, in to back Chemical our across and is expect families criteria Europe has little bit we're not that longer-term, offering working sulfur of would in and but got our that it customers fact adhesive we system more relevant just on then, has return. markets product

Michael Sison

best of What one you how think your a in how are can of do provide? that to been follow-up kind would Okay. terms businesses, higher of it's margin Cariflex, think - monetizing And should for through I maybe imagine, business? of I to value can you're your that you walk business going - business going about then type growth specifics, us you

Kevin Fogarty

underlying in Cariflex comment nowhere represents we why Mike, I think of value just if we that shareholders. this that certainly that's Well, feel made that think as near and business that punitive that's my and you comments, our valuation the about Kraton's I the said for today particularly

the value, clearly in path. has Board this expect we this that And, attractive business to we down to a choose real that value a down yes, marketplace. that go if view So our has realize

Michael Sison

terms seeing? you And maybe the quarter you're the little And quick lot the bit headwinds Okay. better a a here, little the it businesses? quarter talk more the headwinds, And first is - to of first looks first is on quarter, some then a a struggled then loaded? you for of maybe little growth some half of Can in tougher. second bit one a second about of maybe bit half companies year going be of have can

Kevin Fogarty

not to XXXX. The increase first it's for going facing for be in half, we We don't this not case whole combination to the additives frankly, some called a That's that Clearly, consider therefore, logistical end as of very to we on our I take XXXX. half, issue, supply headwind four there's capacity, lubricant business we at second look the commented, work time, quite a that out like provided finite to I But customer. back about They obviously, however, fill alternatives business that do Chris risk. continue out a major, side, when our going sit think take of the just on to can inventory going are volume plan take to headwinds margins that of choice. their bit they about capacity But of a that's the improve, lot day, Well, goal a gap. Kraton kind reduction their as every as to time. part of it. and for is take we does guidance the called to invest in and little in

minimize in real obviously downstream goal logistics occur is with to is business no every facing to this a secondly, cost realization very that the our inflation things, do our two And we're customers this around Our has we then possibly can internally the do anything Kraton to impact. different. respect with and optimization

cycle terms plant five-year is pricing be effect called a in again, the us. that balance we year to for can. that's last Germany. a our through our is the that which as of net and issue, policies, we'll We're the in of unique of one, through headwind as pushing So what at on out turnaround much major then we But

we'll I half turnaround. the that think, it's the in have which in case, second this year of

about of and issue, half, you this first that sit speculate. I'm going is it to last, it is and therefore, going one how four, So is really the here the can not of, to China terms half, really only it long is talk in second

that's factor direct. and at the factors Obviously, just which we if know it. around we your If related, two to will, are market you've to two sentiment things true underlying in arms whether had day, love know it's what I'd those is specifically. And you got end-user on hear an but get And or factor think very there's while here. We second the tariff the China kind itself, or, in opinion, of the that's cause there's is end hard of not.

we balance But of it a - part presume at we kind probably So I case think these hope effect, quarter that the not that's guidance, We XXXX. for sign balance have things that, it's in as don't that reverse carries a of one in quite we take think going course the like the and most carry some our least the to year. people. really of on first time the

Michael Sison

you. Thank Great.

Operator

you. Thank

Chris next from Our from Loop question Markets. Capital Kapsch is

is Your open. now line

Christopher Kapsch

Polymer couple a had the of I questions. One morning. is guidance good segment, Yes, the in range specifically. XXXX regarding

guidance. expect, just seeing a that volume per color is you And - is those growth there magnitude? of what the - order baked dynamic? for lines, some mix profit drivers just gross You terms and I segment are your you expectation along And the into ton guess, on of expectation that's any this continued then and around where in uplift mentioned

Kevin Fogarty

when Look, think the business, we three sub businesses Polymer Hey, about there. Chris. we have

business. our primarily is our have which business, infrastructure We Performance Products paving and

issues portfolio, Materials China which We have with hydrogenated discussed Polymers business, our then have, particularly which business, business. course, we our our these is that of just Cariflex and Specialty dealing is especially

business talked is of coming the about still clear, markets Performance is business are One two generally see growth growth factors. that. our I from. is spending solid. case the see business, we Products Performance just Cariflex where I just our the from Products in underlying coming In we think Infrastructure there.

year every is Our for of coming those customers' markets kind an ability the in their the of this us South and particularly high disappeared in to for America tells indication to XXXX, in us supply And expectation. back of Australia, course, and course we season also - every is this that intention is some have on us And, element of markets. the satisfy they're their of terms clear. expectation there of growth

we have a feel pretty that. good think for I So

Christopher Kapsch

terms is into you And expectation - in a of do the magnitude baked guidance? per that's profit there for gross have your ton,

Kevin Fogarty

that our be ton. expectations Well, better we things considerably than haven't $X,XXX should raised

have increased and average and So volume course, business at EBITDA maintained for it benefit then incremental this the to take ton. to economics to extrapolate time the ought of you've $X,XXX line. we that being, got truly always be able a least over And

Christopher Kapsch

- higher or see mix? based do mix, your adverse on despite adverse actually do mix outlook, profitability see you you better And but

Kevin Fogarty

developments today do that's many it's in in embedded value-add driving margins cases, our Polymer improved also, our offering. function Look, I the we what just years or replacing is and not product of multiple and that years very for name, own ago offerings pure in it's several ago we're organic new developed mean offerings growth, because at mix, a that innovation were is, were higher of just of higher customers, by just middle with everything kind our

So it's a function of both.

and So definitely and every mix and day, each every each improvement quarter, year. every each

Christopher Kapsch

just maybe application of is if trade And Thanks. technology companies feel more technology their there sort to also sample to you answers around innovation point in a out and that adhesives there, one where And and the the business you're sulfur a follow-up it are timing about the specifically it to process what any formulations? or another around or able of related your or commercialization to and curious IP, pine just to of product question, just your secrets? patents at is chemicals to Kevin, that for a the try

Kevin Fogarty

have where see we in expect whatever will definitely No, XXXX the in start are we samples. create to protect to we to With respect mind here. stage, suspect development development customers property the I to intellectual in

Christopher Kapsch

Thank you.

Operator

Thank you.

from of Finnerty Our question Citi. is James next

Your is now line open.

James Finnerty

EBITDA On could way basis? on if business margin kind the could on much or into of kind morning. LTM an just Good you generated Cariflex, numbers, of about any of give has how get Hi. thinking to us generated want you EBITDA specific or business just that that - basis what don't

Kevin Fogarty

about not in our those that materials next the in perhaps. interest. marketplace. just aware obviously parties we're now of something the I suspect call, We'll comment those probably yet, preparing more benefit some in for talk have We're that that stages because become the will of numbers on to expressed like going

James Finnerty

it's to of the say Okay. business? than But much safe the remainder higher

Kevin Fogarty

that On I be about - think talking the the itself? margin, you're would margin EBITDA don't if

James Finnerty

Yes.

Kevin Fogarty

up. doubt. no absolute our Cariflex share that not Company EBITDA comprises Cariflex just to is There the they're But average yet is business. the going brings

James Finnerty

is Okay. - this one-time that to something And then on customer, of lubricant this the destocking from the destocking sort experiencing? customer it's safe is is of and say a more that

Kevin Fogarty

Right.

then So to prospects, just generate material to inventory to growth their their And they overall both do depleted, some to in usual - good back that's going is once reflect raw finished their this and they're cash. buying they're take to with basically down are nothing consumption. then XXXX the

James Finnerty

to expected is hit I gave what in that it And know profit impact have. terms impact, revenue, of you've you kind of - revenue

Kevin Fogarty

Chris, do to answer Chris. want at that looking I'm you question?

Christopher Russell

we specific obviously Yes, by category. don't revenue give

So attractive margin, we reflects customer I'm $XX basically of needless copolymer not going say, that out Specialty do now styrenic we therefore some our We're where can there's hydrogenated means is development, this differentiated volume this I that that our Specialty and have go the Materials a block coming to places out from our grades. can it. called find our million this And about available is but to to buy we new revenue. a about place But which a customer, in potentially that lot because it's some charged team Polymers to not of happy the whole highly is not and system. comment

James Finnerty

Thank Great. Very you. helpful.

Operator

question UBS. John next of our from And you. Thank Roberts is

Your line open. is now

John Roberts

Thank at or including strategic options all evaluation the had five a company, done study selling year-ago refresh just just to narrowly this years you, you that ago, business? was that included the this Cariflex a looking Kevin. was Several limited of

Kevin Fogarty

this John, first was not much to. time business technology the ago, nevertheless, for that been I in way. that is Cariflex particular proven, tricky these sure, time about this better options you business. But, not three years referring to what what to is that is thought where it's I be I'm or new two the about think the if assure in this types can we've have think you you're a was the yet where of strategic said about

John Roberts

put still CFO? Chris position is spot, a search don't but I permanent Okay. have do then, to this now you for want or on an on CFO And outside a the going

Kevin Fogarty

next to the I a as permanent two if kind Chris think month - know prudent position, a would if more in it be that. decision we CFO little of final on sooner. expect the not answered is, or you hopefully, I make

John Roberts

Great. Thank you.

Operator

Thank you.

Kapsch We have from Chris a follow-up Loop question of Markets. Capital

line now Your open. is

Christopher Kapsch

down XXXX didn't a results XXXX just you on that Yes. you you XXXX let's the a but XXXX, wash. they're if volumes to of to you segment temporarily, call around I so if touched but in spending narrative be to up, see and in capital Polymer the just got look that segment magnitude, But on provide in this, and disconnected going reconcile up want increase the capacity apologize. where in I sort at versus, were the

about expansions talking you what Thank do are visibility of bringing those capacity in terms the growth behind wondering to Just and of the if referring what sort you. capacity growth, - on support you of drivers timeframe to investments? you're have rationalize you sort

Kevin Fogarty

well late supply. it more the second market much first our didn't Australia, see all, And of issues positive a not in that year. on versus we our on River South prior this production, XXXX in and in the one-offs just to The material, be Well, that which We those business volume had of year Chris. clear is, Look, have - comment. to as of with course, the I our Products out impacting issue, XXXX. a as secondly then just everything your caused down were markets. impact down course commented, kind volume that markets American there back demanded called couple associated we of business of Performance Rhine Sure, in the and our to

introducing are a - with capacity additional this that Berre benefit We year have full-year be we the expansion. that of will

location terms where course is, see So about the different And have think if or of very reflects that's with one it's which in clear we for what I other. In we where about that decision is capital think internally availability account about butadiene business, timing, our to it availability need the to the so I take requirements options all-important growth, the than Products, opportunity really where of vital of Specialty commented, we we expand. is the timing, our supply of case into expanding the more the and, feedstock. of the we Polymers certainly Performance

carries is, which each hope is good and and assumptions different I the is very you firm capital one have confirmation it options vis-a-vis we're it news So this do, the to - kind them a consider way making future same with our we in end highest I Performance grades chain. timing. we're penetrate as of take of But to the innovation value this accelerate of prospects it's grow just to obviously the view continue, the business Products that and the in introducing our not our about with ability goal to with of to to market, but grow that

Christopher Kapsch

guess that follow-up future a space, do position to of - industry engaging to of just could where you. the the in the in you Thank see will, growth one then put that Polymer business. growth? the context secularly of maybe niche? of investing niche characteristics And this one presumably is in the sub-segment, envision, growth the buy put for you exceed maybe folks you the a if of I the maybe in sit, I how of context Kevin, see of you niche company understanding on - Kraton that lot with about just that, the side, the number fundamental on from this growth nature the Maybe Polymers you characteristics Can it just characteristic? secular maybe of the then how sort you and

Kevin Fogarty

particularly the Europe. of Kraton anybody context grown just we enhance and we've to markets our else. will so think and the continuing through require relevant but assure innovative that, the I if to is in affirmation styrenic a of word a way we serve growth about broader we unhydrogenated please in - than you Polymer in and profile of overall. to excuse our not the Chris, do is you I to margin capacities it is And new me, and in our grades expansions, block when how industry the you that preserve course America position think saying share, styrenic over we relevant, what America, to that the time comes simple. that more how niche, we North of overall So, you block use but you're South introduce in to it's to when using and, I'm do which very highly copolymers, of markets copolymers, that take the it context strong

make us they continue not customers investments Our the to can their growth for to that want risk time, have and plan so of over own see question. these supply in

Christopher Kapsch

you. Thank Okay.

Operator

Thank you.

from We Citi. of James also a follow-up have question Finnerty

open. now Your line is

James Finnerty

to wanted proceeds sold what's of of the is the and portion Yes. your to of business those big regard with growth, thoughts is in proceeds picture to there? thoughts just touch sold use come inorganic it in, know Yes, terms just in on, reduction, debt potential or reinvesting Cariflex if Hi.

Gene Shiels

Great.

what think business. say proceeds you sale from of the Cariflex that I any I the heard

James Finnerty

Yes.

Gene Shiels

that's proceeds, the answer are have stated real there extent, going debt certainly the obviously reduction. is opportunity, our some that. other consider go we're majority stand and uses of To to The clear. I of to they definitely proceeds behind be mean one we shareholders, to that of the And the capital proceeds those you capital of number that's the priority around whether to we will but is at or shareholders, allocation our that's return the look the here driven what retire returning use be will capital to usual for whether our by or debt. value expanding to programs highest where some

James Finnerty

Great. Thank you.

Operator

follow-up Thank from you. line SunTrust. And Sheehan's we have from a question Jim

open. now is line Your

James Sheehan

you. Thank

shaping provided how debt that XXXX You bridge up helpful on bridge reduction, really you a X regarding XXXX? in see do Slide

Kevin Fogarty

Yes.

million million then would push, we interest I the off $XXX the at I payments $XX look think CapEx, debt million, it, million million characterize $XXX largely working expense, of in assume $XXX of If range EBITDA, look in when looking and be $XXX we about of at tax $XX reduction a would of of at midpoint about cash adjusted kind - you're you capital back million. estimated somewhere of

So the that's how about for XXXX. we - debt we of think think how reduction the kind about

James Sheehan

Chemical, pressure? how would particularly Are competitive in experiencing describe esters, environment in And Europe? you you any Perfect. for the pricing rosin

Kevin Fogarty

say, still think, be with comments, supply most also a to clearly that have Because quality our what rosin talked we that as will the happens. I service reflection trends Europe is, improvement, in that chain well. that that that ratable in business, hydrocarbon means the esters all we're I improvement have work to some protect happened as competitive and from that demand the Needless And experiencing I look reliable, come I come pursuant I there as moment material who in the terms when same. depend and situated would us about, is ago, overall characterize extent, day to there's improving, around improving what's competition explained of is and need to in what our clearly of from to our to well and marketplace a but if you a And leading softer improvement the that I are come producers have intra-material upon we going will come with earlier overall said performance and for my will process. overall markets customers our share business.

James Sheehan

you. Thank

Operator

no At you. questions. this there Thank further time, are speakers,

You continue. may

Kevin Fogarty

dial there's you. note Jovi, interest replay, All later to today. access prepared and right. very I'll for in a Kraton some of XXX-XXX-XXXX. We that, good this With that this our call all that available To concludes replay want participants their thank morning's morning commentary. questions. of our thank it

Operator

Corporation's XXXX quarter This fourth earnings concludes call. conference Kraton the

You disconnect. may now

Kraton (KRA) 28 Feb 192018 Q4 Earnings call transcript