Kraton Corporation
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good morning and welcome to the Kraton Corporation Third Quarter 2018 Earnings Conference Call. My name is Kirby, and I'll be your conference facilitator. At this time, all participants are in listen-only mode. Following the company's prepared remarks, there'll be a question-and-answer period. [Operator Instructions] Today's conference is being recorded. If you have any objections you may disconnect at this time. I will now turn the call over to Mr. Gene Shiels, Director of Investor Relations. You may begin.

[Gene Shiels:]

Thank you, Kirby. Good morning everybody, and welcome to the Kraton Corporation Third Quarter 2018 Earnings Call. With me on the call this morning are Kevin Fogarty, Kraton's President and Chief Executive Officer; and Steve Tremblay, Kraton's Executive Vice President and Chief Financial Officer. A copy of the third quarter news release and the related presentation material we'll review this morning is available on the Investor Relations section of our Web site. Before we review results for the quarter, I'll draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in the presentation this morning and in yesterday's earnings press release. During the call, we may make certain comments that are not statements of historical fact and thus constitute forward-looking statements. Investors are cautioned there are risks, uncertainties, and other factors that may cause Kraton's actual performance to be significantly different from the expectations stated or implied by any forward-looking statements we make today. Our forward-looking statements speak only as of the date they are made, and we have no obligation to update such statements in the future. The business outlook is subject to a number of risk factors. As the format of this morning's presentation does not permit a full discussion of these risk factors, please refer to our forms 10-K, 10-Q and other regulatory filings available in the Investor Relations section of our Web site. Regarding the use of non-GAAP financial measures, a reconciliation of each used non-GAAP financial measure to its most comparable GAAP financial measure was provided in yesterday's earnings release and is included in this morning's presentation material. Following our prepared remarks, I'll open the line for your questions. I'll now turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thanks, Gene, and good morning everyone. Before I begin and talk about our results for the third quarter, I want to address the impact of Hurricane Michael on our plant in Panama City. Having seen the devastation of Panama City firsthand last week, it is difficulty to adequately convey to you the impact the hurricane has had on the people and infrastructure of Panama City. Our thoughts are with our employees and everyone in the region who are working through the aftermath of the hurricane. As it appeared likely that Hurricane Michael was headed our way our top priority was and still is for the safety of our employees. Thankfully our employees remain safe, however the damage to many employees' homes range from minor to total losses. We are working to support and provide assistance to our employees that have been impacted. While Panama City itself was spared from the storm surge and the flooding that hit areas to the west, our plant was damaged by high winds. Thankfully, our plant in Pensacola, Florida, was not significantly affected by the hurricane, and it resumed operations on October 11. Likewise, our warehouse in Marianna only sustained minor water damage and we resumed shipments from our warehouse on October 19. I want to commend our Panama City team, not only for their efforts in shutting down and securing the plant in advance of Michael making landfall, but also for their ongoing efforts despite personal adversity as they work to restore operations at the plant. Initial high-level assessments of damage include loss of power to the site, damage to two cooling towers, damage to a fractionation column, and roof and sliding damage to numerous buildings. Over the past few days, we have been able to restore power to a number of areas at our site, but portions still remain without power. Demolition of the damaged cooling towers is underway, and temporary cooling towers are now on site. We're in the process of completing a full and detailed assessment of critical plant components and site infrastructure. We will need to complete this assessment in order for us to determine when full plant operations can be restored. In parallel with this, we are working to minimize, of course, the impact on our customers through inventory on hand. And we are assessing how we can leverage our other refinery infrastructure until full operations at Panama City are restored. At this time we cannot estimate when full operations of the plant will be restored, and therefore is not possible at this time to estimate what impact the Panama City outage will have on our fourth quarter results. We do have appropriate levels of property, casualty, and business interruption insurance. Work is underway in Panama City. And going forward, we expect there'll likely be some timing differences between the incurrence of the cost in Panama City and the receipt of insurance proceeds. Now, let's turn to our third quarter results. Although unit margins in both our Polymer and Chemical segments were favorable and generally as we had anticipated, our overall results for the third quarter did fall below our expectations. During the quarter, we saw weaker than anticipated demand in our Polymer segment. In addition, our third quarter results were impacted by short-term unplanned outages and by higher operating costs, including higher transportation and logistical costs, which Steve will discuss in more depth in just a few moments. As a result, our third quarter adjusted EBITDA was $98.7 million, down $23 million compared to the adjusted EBITDA of $121.7 million we reported in the third quarter of 2017. Of the $23 million decline, $20 million is associated with our Polymer segment. Despite the impact of these factors on overall profitability in the quarter, unit margin trends for both segments remained favorable. Unit margins in our chemical segment were up compared to the third quarter of 2017 on higher prices for TOFA, TOFA derivatives, and other high value products. On a year-to-date basis, sales volume for our chemical segment is up 1.6%, and adjusted EBITDA is up over 5%. In our Polymer segment, unit margins were in line with our expectations for the quarter, specifically unit margins in our Performance Products business were consistent with the third quarter of 2017, as we had anticipated. Unit margins in our Specialty Polymers business were lower than the third quarter of 2017, and this was largely reflective of differences in raw material pricing and timing, which Steve will speak to in just a few minutes. As we look to the balance of the year, we remain cautious about global demand fundamentals and the potential for trade negotiations and tariffs to impact overall demand trends, particularly in China. More specific to our fourth quarter outlook as well, we expect our fourth quarter results will reflect a post-turnaround startup delay at our Wesseling, Germany site associated with unusually low water levels on the Rhine River that are impacting availability of raw materials. While resolution of raw material access is ultimately a function of weather, we are working with our supplier to arrange alternative logistics at the site. And as of this time, we're anticipating that production in Wesseling may be curtailed by approximately three weeks. Based on our third quarter results and in light of these other factors, including our near-term outlook for global demand fundamentals, continued inflation in transportation and logistical costs, and delayed startup of the Wesseling site, we now expect our full-year 2018 adjusted EBITDA will be approximately $380 million. This view excludes any impact associated with our Panama City outage and any further or incremental impact associated with the Wesseling, Germany outage, should startup be later than we currently estimate. While factors including inflation in logistics costs, the impact of third quarter outages in our Polymer segment and the delayed start of Wesseling are contributing to our revised guidance for the full-year 2018. We still believe core fundamentals, however, in our business remain sound, as evidenced by our ability to maintain target unit margins through our Price Right strategies. Considering the longer-term trends and in light of our continued execution under our stated strategies, our Polymer segment has been delivering solid growth in sales volume and improved profitability since the first quarter of 2017. And since the first quarter of 2017, we have seen improved unit margins in our Chemical segment. We've had challenging quarters before, but I assure all investors we are, and we remain focused on longer-term objectives, which are of course to grow with sustainable innovation and generate cash flow to de-lever the balance sheet, which I'll speak to more about in a few minutes. At this time, however, I'd like to turn the call over to our Chief Financial Officer, Steve Tremblay, for a more in-depth review of the financial results. Steve?

[Steve Tremblay:]

Thank you, Kevin, and good morning. On slide five, we can start with a review of the Polymer segment financial results. Our third quarter Polymer segment adjusted EBITDA amounted to $57 million, compared to $77.4 million in the third quarter of 2017. Our sales volume in the quarter was lower than the third quarter of 2017, but this was confined predominantly to paving and roofing volume sold into Australia and South America, which can be choppy based on overall supply and demand fundamentals, and particularly in the case of South America there are geopolitical dynamics. We believe, however, overall demand fundamentals for global paving volume remain intact, evidenced by a 3% year-to-date sales volume improvement in core North American and European markets. Likewise, on a year-to-date volume for Specialty Polymers and Cariflex were also up. Our third quarter unit margins do in fact remain intact with our expectations. As we expected, however, we faced a tough year-over-year comp in the third quarter. This is specifically evident in our Specialty Polymer portfolio, while margins were consistent with our historical levels; they did post a decline when compared to the third quarter of 2017. The Q3 2017 unit margins benefited from a sequential decline in the average purchase price for butadiene of approximately $660 per ton. I'll contrast that with a sequential increase in average purchase price for butadiene of approximately $100 per ton in the third quarter of 2018. This margin lag effect is illustrated at the bottom of the slide where Q3 2017 margins ticked up as feedstock cost [technical difficulty] fell, then normalized to more longer term levels thereafter. The slide also illustrates our ability to recover from increases in raw material costs. So in summary, our Price Right strategy continues to deliver core unit margins that are consistent with our historical and longer term sustainable levels. Our operating cost in the quarter, as Kevin mentioned, were above Q3 2017 with a portion driven by global inflation in logistics and transportation cost. In addition, we were negatively impacted by outages at our site in Ohio, which negatively impacted the site for seven days. And in France where we were forced to take one line for eight days and a second line down for 10 days due to the quality of feedstocks we received from a supplier. The impact of these outages was confined to the third quarter with no lingering effect shifting into the fourth quarter. So the decline in polymer segment adjusted EBITDA in the third quarter can be summarized therefore as selective lower paving volume outside of core markets, the timing effect of changes in raw material costs, and the effect of unplanned downtime and high logistic spending. Through the first nine months of 2018, polymer segment adjusted EBITDA amounted to $170.5 million or 18% of revenue versus $172.2 million or 18.7% of revenue through September 30, 2017. Improved segment core unit margins and higher specialty polymer sales volume mitigated to a large degree lower sales volume in performance products and the effects of the unplanned downtime and inflation in logistics cost. Despite some operational challenges, we continue to make progress on the cost reset initiatives delivering another $4 million of benefit in Q3. As of the end of 2018, we expect to have realized more than $60 million of the savings. And equally as important, we have implemented all the steps necessary to realize the full $70 million of benefit from these initiatives which we first outlined in 2015. Moving out of the chemical segment, on Slide 6, adjusted EBITDA amounted to $41.6 million in the third quarter of 2018 compared to $44.3 million in the third quarter of 2017. The third quarter 2018 sales volume was essentially in line with third quarter of 2017 as were our core unit margins, which includes the successful implementation of pricing improvements for fatty acids. The decline in adjusted EBITDA reflects higher operating cost including planned maintenance and same logistics and transportation inflation that I mentioned in -- that was impacting our polymer segment. Adjusted EBITDA margin was 20.6% in Q3 2018 compared to 22.5% in Q3 2017, but showing a sequential improvement from 80.4% posted in the second quarter of this. Looking now at our year-to-date performance, 2018 chemical segment results represent a 5% improvement in adjusted EBITDA with the year-to-date 2018 adjusted EBITDA of $122.4 million or 19.9% of revenue compared to $116.5 million or just over 20% of revenue in the first nine months of 2017. The increase was largely due to our success in improving pricing in Performance Chemicals. Partially offsetting this margin improvement were higher cost including maintenance and turnaround activities at a number of our sites. Our consolidated results for Q3 and for the nine months of the year are reflected on Slide 7, on a consolidated basis adjusted EBITDA in the third quarter of 2018 amounted to $98.7 million or 18.9% of revenue compared to $1.21 million or 23.8% of revenue in Q3 of 2017. As I mentioned in the segments reviews, the quarter-over-quarter results reflect healthy core margins as we continue to focus on Price Right in both of our segments and reflect generally good sales volume. These positives were offset by the change in raw material, environment we experienced in the polymer segment and higher operating costs. Through the first nine months of 2018, adjusted EBITDA is $292.9 million with an adjusted EBITDA margin of 18.7% compared to $288.7 million or 90.3% of revenue through the first nine months of 2017. Adjusted EPS was $1.02 per share in the third quarter 2018 compared to $1.51 per share in the third quarter of 2017. In the first nine months, adjusted EBITDA -- adjusted earnings per share improved from $1.88 per share in 2017 to $2.49 per share in 2018 largely due to the reduction in interest expense driven by the actions we have taken to improve the capital structure and to a lesser degree a lower effective tax rate. Relative to the tax rate on an adjusted basis, our ETR was 21.3% through the first nine months of 2018. Moving to Slide 8, consolidated net debt amounted to $1.56 million at September 30, 2018. And our consolidated net debt leverage ratio has improved to 4.1 times. We are revising our full-year net debt reduction from a previous range of $75 million to $100 million to our current estimate of $50 million to $60 million. This estimate continues to exclude the effects of foreign currency and includes $53 million in cost associated with the refinancing completed in the second quarter. Compared to the previous high end expectation, the change reflects our revised adjusted EBITDA guidance and an increase in inventory. The higher inventory includes an assumed increase in polymer raw material costs and an increase in polymer finished goods. The latter resulting from a decision by [indiscernible] to shift the turnaround from the fourth quarter of this year to the first quarter of 2019, which necessitates an inventory build so we can meet sales demand in 2019. The current net debt expectation excludes the presently unknown cash requirement associated with returning the Panama site to its full operating capacity. Given our revised adjusted EBITDA and ending net debt expectations, we currently anticipate leverage at December 31, 2018, will be approximately four turns. In the appendix of this material, we have included the other modeling assumptions which are effectively unchanged since the second quarter. And with that, I would like to turn the call back over to Kevin.

[Kevin Fogarty:]

Thanks, Steve. And as I said, although our third quarter results were lower than we expected and despite overall factors contributing to rise expectation for full-year 2018 adjusted EBITDA now approximately $300 million, we remain confident in the long-term growth potential of our polymer and our chemical segments. The cost reductions we have delivered in our polymer segment in conjunction with the price discipline and continued focused on portfolio shift has resulted in high teens adjusted EBITDA margin target we established for the polymer business in our Investor Day three years ago. Unit margins and overall margin trends for the polymer segment are solidly in line with our expectations. And on a year-to-date basis, segment adjusted gross profit is $119 per ton, also consistent with the forward expectations we shared three years ago. Importantly, our composite basis to polymer segment has been demonstrated the GEP plus growth in sales volume that we expect. Contributing to the positive outlook for the polymer segment is the process we are -- is the progress that we are making in our R&D efforts. And as I mentioned last quarter, I believe this product development pipeline for the segment is as robust as I have seen in years. This is key to the long-term value creation we expect to deliver to our stockholders. Looking at our chemical segment, the trend in overall unit margin improvement continued in the third quarter of 2018 driven by higher pricing for TOFA and TOFA derivatives and other value product streams. To-date, price improvements for Tall Oil Rosin and related products in Adhesive portfolio has been modest, but the upside potential still remains. Overall, margin trends for the segment have been improving since the first quarter of 2017. And we believe demand fundamentals remain intact. And on a year-to-date basis, sales volume for our chemical segment is up 1.6% compared to the first nine months of 2017. As we mentioned earlier, we remain cautious about the implications of neat-term global demand fundamentals, the impact of tariffs in China specifically the general effects of tariffs on demand in China. Relative to global demand overall, we continue to believe that geographic end market diversification of our portfolio positions as well for the long term. For the third quarter of 2018 -- though the third quarter of 2018 was affected by a confluence of events that caused the results to not meet our expectations, our team has demonstrated a professionalism and commitment in meeting these challenges that is truly commendable. And with that, I'd like to open the call up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Jim Sheehan of SunTrust. Your line is now open.

[Jim Sheehan:]

Thank you. Good morning.

[Kevin Fogarty:]

Hi, Jim.

[Jim Sheehan:]

Could you talk about the Panama City outage that you've experienced to date and quantify what impacts you've had just from the downtime you experienced so far in the quarter?

[Kevin Fogarty:]

Well, I think I was quite descriptive in terms of what we're dealing with in Panama City here in the immediate term. But with respect to the quarter, as I said, it is really just, Jim, too early for us to speculate on what impact it's going to have on the business. I have had numerous conversations with our people in terms of how we're dealing with our customers. I will tell you our customers are extremely cooperative in terms of understanding the implication of such a catastrophic extreme event on our business. And of course, this is where the relationships that we hold near and dear in the marketplace really do come to fruition. And needless to say, as we learn more, should we be able to give more definitive views on the impact of the quarter we'll certainly try to do so, and not wait of course until we talk about the quarter next year. But again, this is still very much a process in flux. And we need, for example -- just to give you a little example, we need the power to be restored on the site holistically for us to get a full assessment of what we're dealing with.

[Jim Sheehan:]

And when you report future quarters how will you be reporting results in Chemicals, will you have an adjusted EBITDA figure that includes insurance proceeds, or how do you expect to do that?

[Steve Tremblay:]

Yes, Jim, we'll certainly be carving out for adjusted EBITDA incremental operating cost and the like. As you can imagine, most of the spending is going address replacing the assets themselves. We will not be making an adjustment for mainly loss volume, we don't think that'd be appropriate, but we'll certainly be able to quantify the effects of lost sales volume that affected the business. And we'll clearly be able to carve out specifically the amount of the insurance proceeds. Again, some of those insurance proceeds will be addressed to helping us rebuild the site. And as you can imagine, we do carry normal and customary business interruption insurance.

[Jim Sheehan:]

Great. And could you talk about competing chemistries for pine chemicals. Are you noticing any impacts on the pricing level in the market from either gum resin or palm oil price declines in Asia?

[Steve Tremblay:]

Well, clearly we watch, Jim, those alternative price -- if you will, alternative materials from a pricing standpoint to remain competitive. It's fair to say that as -- we acquired this business, as you know, three years ago. And we certainly looked at a lot of history when we acquired this business, and the relationship of those inner materials have on the pricing for our products. And in particular, the relationship that crude oil had on some of the downstream derivative products. In the short-term -- or excuse me, in the current period we've seen crude oil price clearly go up. And for our non-TOFA-related products we haven't really seen the corresponding price adjustment that we had expected. We do believe that that's a direct function, particularly in the resin [ph] chain of over-capacity in the hydrocarbon space, which we've talked about at great length. We have seen some indication, however, that given the fact that crude oil has now been trending up for quite some time, we have started to see some, if you will, movements in the hydrocarbon price models which we believe, therefore, will have a benefit to our business over time. I'm not suggesting we're going to get back to the historical relationship just yet, but at least we're starting to see indications that economics do prevail and the underlying cost basis for hydrocarbon resins has obviously gone up commensurate with that crude oil increase.

[Jim Sheehan:]

Thank you.

[Gene Shiels:]

Kirby, we'll take the next question.

[Operator:]

Thank you. The next question is from the line of Chris Kapsch of Loop Capital Markets. Chris, your line is now open.

[Chris Kapsch:]

Yes, good morning. So just looking at the volume comparison in the Polymer segment for the quarter, I think it looks like it was down 8.5% roughly. Just wondering if you could parse that out by these issues that you've seen in terms of the caving markets in Latin America, and then the outages, I guess, in Ohio, and in France. And then also just, since these are transient in nature, just wondering if you have a sense for how much, if any, of this sort of volume weakness can be extrapolated into '19? I guess a bigger question-mark presumably for the paving end markets in Latin America, vis a vis the outages.

[Kevin Fogarty:]

Yes, so with respect, as you quoted, the Polymer segment volume decline was entirely in our Performance Products business, which is our traditional paving and roofing end use markets. And as Steve commented, in our core markets of North America and Europe we actually saw growth in the quarter. Where we saw the decline were in what we would call, not necessarily unattractive markets, but say more non-core markets like some parts of South America, particularly Argentina, and even Australia where we've seen from time to time opportunistic purchase -- or buying opportunities by certain customers on the basis of their own needs to satisfy infrastructure development. And of course, that's a function of a lot of things, including, by the way, when we think about places like Argentina, what's happening in the government and the ability to fund some of these projects. So, last year at this time, we obviously benefited from some good trends in that regard. This year we obviously did not. And again, I want to make sure it's very -- you understand, Chris, that from our standpoint we view these markets typically in an opportunistic sense. Whereas our core markets, North America and Europe, quite stable, good demand outlook. And even when you think about Europe, weather trends in Europe have been quite interesting because it's been a very warm summer. And now even extended warm fall, and of course that's kind of had a double effect on the negative for us, needless to say because of this Rhine Rive effect and its low water levels. But nevertheless, from a paving perspective everything remains intact.

[Chris Kapsch:]

Right. But looking at the -- also on the dynamic on the unit margins, the weakness, it was most acute in the Performance Products. Then did that have the affect of shifting or benefiting the overall segment margins in the quarter such that you had lower sales of presumably lower margin Performance Products, whereas the Specialty volumes held in there? And I'm just asking because I want to kind of try to -- I think in this environment, and you guys obviously had some very Kraton-specific issues in the third quarter, the hurricane, obviously. But I'm trying to understand like kind of from a more normalized sort of big picture. What sort of trends we should really be extrapolating into '19, because I think given what's happened with the stock I think people are going to be focused on what's a realistic number for in terms of EBITDA generation for '19. Because, frankly, the stock price is factoring in seems like a substantial reduction in estimates. Whereas if what you're saying is a lot of this stuff is really confined to third quarter and then some spillover into fourth quarter, notwithstanding a sharp global recession next year, the numbers for '19 might be relatively -- and I don't want to say unscathed because of the run rate implications of what we're seeing in third and fourth quarter, but might not be as severe as what's implied in the stock price today.

[Kevin Fogarty:]

So, Chris, let me just comment on a couple of things you said. I'm glad you raised this issue. First of all, with respect to a clarification, vis a vis, the margins. What we said is with respect to our Performance Products business, our traditional paving and roofing business, our margins were intact. There was no margin erosion in the third quarter. Our margins, in fact, were very much as we had expected. With respect to our Specialty Polymers business, as Steve talked about, that's where we had quote unquote margin erosion versus the third quarter of last year. But that was as a result of in the third quarter of last year, as Steve commented, we had this very rapid and significant decline of raw material cost going into the quarter, which needless to say, through our Price Right strategy we were able to preserve and protect and therefore generate margin expansion in the third quarter last year. We knew that was going to be a tough comp, and we talked about it at the time. Now, looking forward this year, it's kind of had the opposite effects, where we've actually seen rising raw materials, yet we've still been able to preserve our margins in line with our long-term planning rates in the third quarter for especially Polymer business. We view that as a very positive outlook for the business, particularly when we also generated volume growth in the quarter. So overall, I would echo your words from our standpoint. We had some isolated incidents, clearly, in the quarter that were unique to Kraton in terms of our costs and our operating predictability which, needless to say, is unacceptable to us. And we're working on directly making sure that doesn't happen again. But in terms of the underlying business itself, subject to just making sure that we make investors aware of -- there are some things out there that everybody's speaking about that we can't predict what that does. From our standpoint, our business remains very much intact, and we continue to drive our growth through the innovation and differentiating that has got us to this point already.

[Steve Tremblay:]

Chris, if I can add to that, the underlying fundamentals despite these higher costs, to Kevin's point again about core unit margins, our third quarter of 2018 standalone third quarter gross profit per ton was $980 per ton despite these challenges. Looking at it though on a longer-term, year-to-date, again Kevin mentioned it; we're over $1,000 per ton, which continues to be the long-term target for this business. It's actually up over 3%. That is, gross profit per ton is up 3% compared to where we were last year at this time. So we think we're working on the right things clearly in the marketplace. And like Kevin said, again, a number of operational issues and challenges here of late, but underlying fundamentals remain strong.

[Chris Kapsch:]

All right, guys, thanks for the extra color.

[Operator:]

The next question is from the line of Mike Sison of KeyBanc. Your line is now open.

[Mike Sison:]

Hey guys. And I apologize if I missed this, but when you think about the $20 million EBITDA change in guidance from 400 to 380, is most of it the Wesseling plant, and to a lesser degree the global uncertainty commentary?

[Kevin Fogarty:]

So if you just break it down it's round around -- there's more of it in the third quarter that we've already seen than we believe in the fourth quarter. And something of the order of, call it, 60-40, 65-35 in that regard, third quarter versus fourth quarter. And then when you think about it, the fourth, clearly the largest drivers we see it is this, again as what I would characterize as this isolated weather event in terms of Wesseling and the low river water causing our delay to restart the plant, post to turnaround to be delayed by three weeks, as we called it.

[Mike Sison:]

Got it. And then when you think about '19, and granted I understand it's a little bit early to give specific guidance, but maybe, Kevin, qualitatively where do you see the potential to grow EBITDA next year. And maybe talk about some of the headwinds that you might have because clearly every year chemical seems to get a lot of headwinds for us. But just maybe give us a feel for where you feel good about growth next year.

[Kevin Fogarty:]

Well, Mike, as I sit here today, and I think Chris make a comment a minute ago, subject to some kind of global economic slowdown that is unforeseen, as I sit here today, our business model is intact. We are continuing to drive our growth through innovation, differentiation. We hadn't talked about in a while, for example, our Cariflex business. I mean, again, we don't want to talk too much about 2019, but we've already had conversations with our customers. Cariflex is one of those businesses where our customers do play a year ahead. And so far the discussions have been quite positive, quite compelling for our business. So that's an example of -- and again, we are heavily weighted to healthcare in that respect and that's, we think, a good place to be. So from our perspective, our business is intact, and we see growth through differentiation. Look at our Chemical business. I mean, our Chemical business continues to improve EBITDA. This year, it's proving EBITDA overall performance of the business. And there's no reason why we don't believe this recovery doesn't continue.

[Mike Sison:]

Great. Thank you.

[Kevin Fogarty:]

Thanks, Mike.

[Operator:]

Next question is from the line of John Roberts of UBS. Your line is now open.

[John Roberts:]

Thank you. On your three-week estimate for the impact of the drought in Germany, I don't think we are going get run off for the river until the spring snowmelt. So, based rail and trucking that you've got in place already, and if so, why the uncertainty about possibly extending longer if you have got alternative freight lined up?

[Kevin Fogarty:]

Well, I mean it's not just Kraton. You know enough about our situation in Germany that we rely heavily on our onsite landlord, if you will, and raw material supplier, very capable one at that. We are delighted to be where we are. But nevertheless, a lot of things have to come together. So far it looks good, John. That's why we categorized it as the three-week delay. But at the end of the day, we have to be prudent here and recognize that things can change. We don't see that happening right now. We've got a business to run. And those are the planning assumptions that we are using in our business model.

[John Roberts:]

And you are planning for alternative logistics through the winter I would suspect then and until sometime in the spring?

[Kevin Fogarty:]

I think at the end of the day, I would say it's more in terms of alternative logistics to get us through until the Rein can get to an acceptable level to manage the typical traffic.

[John Roberts:]

Okay, thank you.

[Operator:]

The next question is from the line James Finnerty at Citi. Your line is now open.

[James Finnerty:]

Thank you. Just going back to Mike's question on the guidance, just want to make sure I understood the explanation. So from the 400 to 380, you said 65% of that was due to what happened in third quarter, 25% in the fourth quarter. When you look at it from -- trying to buckle it [ph] between one-time issues versus quarter [ph] demand decline, how would you sort of split that up?

[Kevin Fogarty:]

In the third quarter, it was roughly the decline is approximately equal between what I would call the volume shortfall in our performance products business coupled with the operational issues that are isolated and unique to us.

[James Finnerty:]

Got you. And then in the fourth quarter, is that operational or is that onetime kind of items impacting you?

[Kevin Fogarty:]

Well, we certainly hope and believe it's onetime when you think about this River Rein issue, but if you want to categorize it as operational, that's fine with me. I don't know what category to put it under when we are dealing with these kind of record low water levels in the Rein River.

[James Finnerty:]

Right, exactly. So that's good too so I understand that better. And then just going back to raw material inflation and the movement, the price of hydrocarbons, what is the interplay between C5s and C9s, is there -- are they both moving up in a sort of similar fashion? Has there been any pressure or inter competition between C9 and C5?

[Kevin Fogarty:]

Why that's probably something I am not going comment on in terms of that intra-material pricing model. We compete against both depending on the application and requirement from the customer. And I'll just say it, whether it's C5 or C9, the underlying hydrocarbon building block cost is still subject to underlying crude oil value.

[James Finnerty:]

Okay. And lastly just on the debt side, I know you revised your net debt guidance. And that's just a reflection of your revised EBITDA guidance, is that what you think about it?

[Steve Tremblay:]

Yes, mentioned -- well, half of it was the EBITDA guidance and the other half is inventory and specifically in the polymer business, we have made provision that although butadiene is showing some signs of weakening of late, the forecast does assume that we don't get back to where we originally thought we would be in the mid-year. And we are also having to build some inventory because our landlord again has shifted a turnaround from the fourth quarter this year to the first of next. And what does that mean to Kraton? We will save a little bit of OpEx, but we'll have to build some inventory to make sure we have the USBC material on hand for the paving season next year.

[James Finnerty:]

Okay, great. Thanks so much.

[Operator:]

Thank you. I will now hand the call back to Gene Shiels. You may proceed.

[Gene Shiels:]

Thank you, Kirby. I would like to thank all of our participants this morning for their interest in Kraton. I do want to mention that there is a reply of this call. It will be available later on this morning. To access the telephonic replay, please dial 866-516-0665. This concludes our prepared remarks and the question-and-answer session. Thank you.

[Operator:]

This concludes the Kraton Corporation third quarter 2018 earnings conference call. You may now disconnect.