Kraton Corporation
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Good morning and welcome to Kraton Corporation’s First Quarter 2017 Earnings conference call. My name is Vince and I’ll be your conference coordinator. At this time, all participants are in listen-only mode. Following the company’s prepared remarks, there will be a question and answer session. If you would like to ask a question, please press star, one on your touchtone phone. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I’ll now turn the call over to your host, Mr. Gene Shiels, Director of Investor Relations. Thank you, you may now begin.

[Gene Shiels:]

Thank you, Vince. Good morning and welcome to the Kraton Corporation first quarter 2017 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 yesterday’s news release is available in the Investor Relations section of our website, as are copies of the presentation we will review this morning. Before we look at the first quarter 2017 results, I’ll draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in our presentation this morning and in the earnings press release issued yesterday. 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 could 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’re made and we have no obligation to update such statements in the future. Our 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 website. With regard to the use of non-GAAP financial measures, a reconciliation of EBITDA and adjusted EBITDA to net income and operating income, our gross profit to adjusted gross profit, as well as a reconciliation of net income attributable to Kraton to adjusted net income was provided in yesterday’s earnings release and also included in the presentation material this morning. Lastly, a reminder that all references to full-year 2016 financial results for the chemical segment are from January 6, 2016, the date of acquisition, through December 31, 2016 excluding the stub period January 1 through January 5. For that stub period January 1 to January 5, sales volume for the chemical segment was approximately 3.3 kilotons and revenue was approximately $6.9 million. Following our prepared remarks, we’ll open the line for your questions. With that, I’ll turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thanks Gene, and good morning everyone. Our first quarter results reflect a solid start to the year. First quarter 2017 adjusted EBITDA was $65.6 million, at the high end of the guidance that we provided in our fourth quarter earnings call in late February. Demand fundamentals in the quarter were generally in line with our expectations. Our sales volume for the polymer segment was up 2% and sales volume for our chemicals segment was up 15% compared to the first quarter of 2016. As we discussed at the end of February, the cost of our raw materials in our polymer segment increased significantly in the first quarter, particularly in the case of butadiene where the North American contract price more than doubled, going from $0.54 per pound in December to $1.10 per pound in March. Although we implemented price increases to address this hyperinflation in raw material costs, inherent delay in realizing the full amount of the increases translated into an adverse impact on margins in the quarter. To be clear, we view this margin pressure as temporary. We expect polymer margins to normalize in the second quarter both on further price realizations and given the sharp reversal in butadiene costs that we have seen so far in the second quarter. Due to the magnitude of the raw material price headwind in the first quarter, we anticipated that first quarter 2017 adjusted EBITDA for the polymer segment would be down compared to the first quarter of 2016, which in contrast to the first quarter of 2017 was a quarter in which we saw a margin benefit associated with the decline in average raw materials costs through the fourth quarter of 2015 and into the first quarter of 2016. Given these margin pressures, adjusted EBITDA for the polymer segment was $32 million for the first quarter of 2017, down compared to $52 million in the first quarter of 2016. I’ll add that to a lesser extent, the reduction in first quarter 2017 adjusted EBITDA is also a reflection of the incremental pricing pressure on SIS polymer grades compared to the first quarter of 2016. For our chemical segment, as mentioned, sales volume was up 15% compared to the first quarter of 2016. We saw double digit volume growth in all four chemical businesses, with the largest volume increase occurring in our performance chemicals business, which we formerly referred to as our chemical intermediates business. Sales volumes for performance chemicals was up 15% compared to the first quarter of 2016 as we developed new and alternative market outlets. Although sales volumes increased in the chemical segment, market conditions in the first quarter of 2017 for our adhesives and performances businesses remained very similar to those which prevailed in the second half of last year, particularly as it relates to the adverse impact of low-cost C5 hydrocarbon alternatives on pricing for our rosin ester products and with regard to overall pricing levels in the quarter for TOFA and TOR products. In late February, we did announce a global price increase for our TOFA products based upon improved market outlook, but that price increase was effective as of March 15. As such, the announced price increase had minimal impact on segment results for the first quarter of 2017. In summary, while we saw nice volume growth for the segment in the first quarter, the volume growth was offset by lower average margins, and as a result adjusted EBITDA for the chemical segment was $35.8 million, a decrease of $5 million compared to the first quarter of 2016. During the quarter, we continued to execute on our cost reduction and synergy capture programs. In the quarter, we realized $13 million of incremental cost reductions and synergies, bringing life-to-date progress under the polymer cost reductions to $33 million and total G&A reductions and operational cost improvements associated with the Arizona Chemical acquisition to $48 million. Start-up activities at our Mailiao 30 kiloton new HSBC production facility continue to proceed. As many of you know, we expect to rebalance our overall HSBC manufacturing footprint throughout 2017 and ’18 to take full advantage of the state-of-the-art capabilities we now have in Taiwan. With regard to our capital structure, I note that in addition to the re-pricing of our term loan in January whereby we reduced the effective interest rate by 100 basis points, in late March we successfully issued $400 million of 7% senior notes. Proceeds from the notes offering were used to reduce outstanding amounts under the term loan. With that background, I’m going to turn the call over to our Chief Financial Officer, Steve Tremblay to provide a deeper review of our first quarter results. Steve?

[Stephen Tremblay:]

Thank you, Kevin. Good morning. I’ll begin our financial review on Slide 5 with a look at first quarter 2017 operating results for our polymer segment. First quarter sales volume of 76.6 kilotons was up 2.1% compared to the first quarter 2017. Our Cariflex volume was up 2.1%, especially polymers volume was up 8.1% compared to Q1 2016, while volume for our performance products was essentially flat compared to the year ago quarter. First quarter revenue was $270.9 million, up from $243 million in the first quarter 2016, and this reflects higher average sales prices associated with increased raw material costs and the contribution from higher sales volumes. Currency was a modest $2.4 million headwind in the quarter compared to Q1 2016. First quarter 2017 adjusted EBITDA for the segment was $32.1 million compared to $52.2 million in the first quarter 2016, which was an unusually strong quarter for our polymer segment. Comparability was impacted by the diverse raw material cost environment where in Q1 2016 raw material costs were declining, allowing for margin expansion which is in contrast to Q1 2017, where raw material costs escalated precipitously, thereby lowering unit margins commensurate with the lag in implementing our selling price increases. I’ll stress that that lag, we believe, is definitely a temporary lag, strictly timing related. In addition, the competitive pressure on SIS products which largely began in the second half of 2016 resulted in lower EBITDA in the polymer segment when compared to the first quarter of 2016. Let me move now to our chemical segment on Slide 6, where you’ll see sales volume at the chemical segment was up a healthy 15% compared to the first quarter 2016, with volume in our performance chemical business up 15.2%, adhesive volume up 14.3%, volume for tires up nearly 25%, and roads and construction volume up 10.8%. Chemical segment revenue was $187.2 million for the three months ended March 31, 2017 compared to $176.9 million for the three months ended March 31, 2016. This increase reflects the significant increase in sales volume which was partially offset by lower selling prices, as well as a $3.5 million currency headwind. First quarter 2017 adjusted EBITDA for our chemical segment was $33.5 million compared to $40.9 million in the first quarter of last year. The decline was largely due to lower margins which in part were due to the continued impact of low-cost C5 hydrocarbon alternatives and pricing pressures for TOFA and TOR products which served to offset the 15% increase in overall sales volumes. On a consolidated basis, revenue amounted to $458 million for the first quarter 2017 compared to $420 million in the first quarter of 2016, and first quarter 2017 adjusted EBITDA was $65.6 million compared to $93.1 million in the first quarter of 2016. The latter included a very strong Q1 in our polymer segment and was not yet hampered by the C5 dynamics and the SIS headwinds that began to impact us materially in the second half of 2016. Clearly these influences drove down the first quarter 2017 adjusted EBITDA margin to 14.3%, which we expect to be the low point of the year. Although the quarter was below the first quarter of 2016 for the reasons mentioned, largely raw material dynamics, the results in the quarter exceeded the $60 million to $65 million range we provided in February. On an adjusted basis, EPS was a loss of $0.15 per diluted share in the first quarter, indicative of the lower adjusted EBITDA. Moving onto the cost reductions, we continue to remain on track to deliver the cost reduction and transaction synergies which are expected to provide $40 million of value in 2017. Our first quarter exceeded our internal expectations but some of that was timing in nature; as such, we are not changing our full-year view, but we do now anticipate that the savings will be closer to balanced in the first half to second half. In February, we indicated that the savings would be 40% in the first and 60% in the second half. Equally as important, we remain on track to deliver the $135 million of total benefit from these initiatives by 2018. As Kevin mentioned, in the first quarter we addressed the cost of our term loan by successfully re-pricing the loan from LIBOR plus 500 basis points down to LIBOR plus 400 basis points. Shortly after that transaction, we revised our capital structure to shift a portion of the debt from the term loan to long-dated unsecured notes. This $400 million offering lowered the term loan facility from $1.278 billion to a better sized sub-$900 million level. As such, we eliminated all scheduled maturities under the term loan and our mix of debt improved to 49% notes at March 31, 2017 from 26% notes at December 31. The increase in Kraton net debt was in fact in line with our expectations after giving effect to the $8 million increase from the notes offering, and we continue to expect total 2017 reduction in Kraton net debt of $100 million to $150 million. Clearly this range is highly dependent on number of factors, especially depending on where raw material costs settled at year end and the associated impact on working capital. Let’s move now to our outlook. In terms of modeling assumptions, in addition to my comments on the expected improvement in net debt, we are sticking to our adjusted EBITDA call of $350 million for the full year 2017. The only other modeling change is that we’ve updated our interest assumption to take into account the effect of the bond financing completed in the first quarter as well as the repayment of the term loan. With that as a financial overview, I’d like to turn the call back to Kevin for his closing comments.

[Kevin Fogarty:]

Thanks Steve. As we look to the balance of the year, we will work to leverage the sales volume momentum we had in the first quarter. In terms of our expectations for margin improvement, following a significant increase in raw material costs in our polymer segment during the first quarter, we’re now seeing butadiene prices decline. Specifically, the North American contract price fell $0.17 in April and early indications are that May price nominations in North America may decline by $0.20 to $0.29, which would bring the contract price down from a high of $1.10 in March to somewhere in the $0.64 to $0.73 range in May. We continue to see downward momentum in Asian spot prices, which are a good leading indicator for the direction of European and North American contract prices. Given our longer term expectation that butadiene should trend towards a price on a cents per pound basis that approximates the price of crude oil on a dollars per barrel basis, we believe butadiene prices have more room to decline subject to the impact of capacity outages expected for the balance of the year. However, the fact that butadiene is now declining has not materially altered our full-year outlook for the polymer segment. As you know, we run the business on a dollar margin basis reflective of the valuing used for each polymer grade, thus we have typically experienced short-term margin compression when raw material costs increase rapidly, as in this past quarter, given the timing impact of our corresponding price actions. Conversely, when raw material costs decline rapidly, as we are seeing the second quarter, there exists potential for short-term margin expansion. Our overall planning presumes our dollar margins only expand structurally as we shift the sales mix to incorporate more differentiated offerings to arrive from innovation successes. As such, the impact of declining butadiene prices should not be viewed as additive to the full-year 2017 adjusted EBITDA guidance. From a market perspective, while the paving season in both North America and Europe has just begun, we are anticipating another good paving season in the U.S. supported by the highway spending bill, and this could benefit both our sales of SBS in the polymer segment as well as sales in the road and construction business in the chemical segment. However, offsetting this positive momentum in our performance products business, we still expect some competitive conditions in our SIS product grades globally, and related pressure on SIS margins that began in 2006 will likely continue as we don’t see market fundamentals changing in the near term. For our specialty polymers business with the butadiene short term hyperinflation pricing actions now stabilizing, we will be able to get back to 100% focus on driving organic growth via innovation, and we are encouraged by a number of commercialization initiatives that have been under development, some for multi years. Needless to say the timing fits extremely well, given the start up of Mailiao, thus both the capabilities of the new facility, including its specific design to make product grades such as our low molecular weight family, and the confidence it should provide customers for years to come in terms of product breadth and availability make the case for converting to a Kraton technology solution even more compelling. With regard to our Cariflex business, following last year’s strong 19% growth in sales volume, we are assuming modest growth in 2017. This is not entirely unusual given the exceptional growth that we experienced last year, especially considering a portion of that growth was unplanned as the U.S. market rapidly shifted from powdered natural rubber latex to Cariflex. We also now see indications, albeit difficult to quantify, that a lesser portion of the strong volume growth in 2016 may have reflected some customer pre-buying in 2016 in advance of our shift to the direct connect process in Paulinia, Brazil, perhaps to avoid any potential supply disruptions. For now, of course, we are entirely focused on the successful start-up and integration of this new process in Brazil. For our chemical segment, we are encouraged by the strong volume growth we saw in the first quarter. This volume expansion was realized in all four of our businesses, but in particular I want to commend the team in our performance chemicals business who continue to focus on developing new market outlets for TOFA and TOFA products. As discussed in our last earnings call, our view of TOFA markets has improved, and this is based on a number of factors including improved oilfield demand driven by an increasing rig count, which has tightened the global supply and demand balance for TOFA, as well as higher pricing for alternatives such as vegetable oils. Our recent price increase for TOFA is the first in quite some time, and our team has been taking a balanced approach with customers as we have rolled the price increase out into the marketplace. In general, demand trends across the varied end markets we serve remain positive. For our adhesives business specifically, we expect volume growth in 2017; however, the pricing pressure resulting from availability of low-cost C5 hydrocarbon alternatives will continue to be a factor as the year progresses. Strategically, we will continue to position our portfolio to leverage market opportunities where we can differentiate our product offering. One example of this differentiation can be seen in our Sylvalite 9000 tackifier, which was recently introduced to the market. Sylvalite 9000 is a rosin ester tackifier that offers low color and enhanced stability similar to some hydrocarbon-based tackifiers. In closing, as we move through the balance of the year, we expect margins to improve from the first quarter levels, and this will be driven by reductions in raw material costs in our polymer segment, by what we believe are improving fundamentals in aspects of our chemical segment, particularly for TOFA, and through continued execution of our cost reduction and synergy capture initiatives. At this time, I’m going to turn the call back to the Operator and we’re happy to take some questions.

[Operator:]

[Operator instructions] Our first question is from Jason Freuchtel with SunTrust. Sir, your line is open.

[Jason Freuchtel:]

Hi, good morning. Nice job on the quarter.

[Kevin Fogarty:]

Thanks Jason.

[Jason Freuchtel:]

Is the strong volume in the pine business sustainable, and how should we think about the margin profile of the pine business going forward since you’ve announced price increases for TOFA and should realize synergies in the future? Would you say that margins have troughed in that business?

[Kevin Fogarty:]

Well I mean, we’ll only know if the margins have troughed in that business, call it a year from now as we look back, but generally it feels that way, Jason, particularly in the TOFA chain. But with respect to volumes, while it’s 15% growth, I think we talked all last year about the efforts that we have put forth to drive expanded volumes not just in terms of capturing back lost share from the past - that’s a part of it, but more importantly developing new outlets for TOFA sales that didn’t exist previously. One great example we’ve called out is taking advantage of what was legacy Kraton, so in other words our polymer segment capabilities in development markets like India to leverage relationships and develop new sales outlets. So we think that the volumes that we’re realizing in the first quarter indeed are sustainable.

[Jason Freuchtel:]

Okay, great. I believe you referenced higher CTO costs in your press release. I think one of your competitors has highlighted that they’ve started renegotiating CTO supply contracts lower. Could those renegotiated contracts have any implications on the pricing you pay outside of your supply contract with International Paper?

[Kevin Fogarty:]

I don’t think so. I don’t think so, Jason. Look, the reality is you reference International Paper - that’s a long-term contract, those contracted conditions are in place. With respect to the rest of our business, we’re as on top of this marketplace as anyone, and I don’t relate our price increase forecast in CTO to anything but what’s happening in the underlying energy drivers that are contained in those contracts.

[Jason Freuchtel:]

Okay. I believe a large amount of natural rubber supply is expected to come online in the near term. Can you discuss your view of the impact of additional natural rubber supply coming online to your business, and I guess specifically could it potentially impact butadiene prices, isoprene prices, and therefore also C5 hydrocarbon resin pricing?

[Kevin Fogarty:]

Well, I think the impact on C5, we’ve been very clear is more driven by the fact that there has been tremendous build in that overall tackifier resin chain, and that’s led to what I would call breakeven pricing pretty much along each and every step of that chain, which manifests into pretty competitive pricing alternatives that we compete against downstream. But certainly what we’ve seen historically, anyway, as natural rubber availability increases, that drives overall pricing for therefore natural rubber and the substitutes, which is a synthetic material made from primarily butadiene and isoprene, those prices down. I would guess that given the fact that the futures are indicating significant decline in natural rubber prices, that that should, if you will, complement our view of what overall prices for butadiene ought to be trading at relative to underlying energy costs.

[Jason Freuchtel:]

Okay, great. Lastly, you did a nice job managing your working capital in light of the surge in butadiene prices in 1Q. Was the drag from the higher raw material prices on inventory levels a lower impact than you were expecting, and did you benefit in working capital from other actions such as reducing your SKU count?

[Stephen Tremblay:]

We haven’t had--not a material impact in the first quarter on the SKU count. Clearly a drag in working capital associated with the dramatic run-up, which you can see manifesting itself in about a $57 million increase in our overall inventories. That was really price driven, there wasn’t a lot of volume effect in that. Frankly, the first quarter was pretty much in line with our expectation in terms of overall cash flow. We expected kind of a breakeven change in net debt in the first quarter. We’re up about $8 million at the Kraton level, excluding the JV, and we would attribute that in summary really associated with the refinancing. We issued $400 million of notes, and after fees we paid down the term loan by $392 million, and that’s effectively the change in debt.

[Jason Freuchtel:]

Okay, great. Thanks.

[Operator:]

Our next question is from John Roberts with UBS. Your line is now open.

[John Roberts:]

Thank you, good morning. Your volumes were higher than end consumption trends in most products, which I think is normal when prices are rising; but in paving and roofing with performance products, it looked like volumes were weaker. Were there timing issues there related to the warm winter last year or something like that? That seemed to underperform some of the other segments.

[Kevin Fogarty:]

No, I wouldn’t call out any specifically. You’re dealing with first quarter. To be honest, it’s very tough for us to know exactly how the customers will pre-buy and what pre-buy decisions they’ll take. They have a lot of different elements as part of that decision process, so it’s certainly true that given the fact that we were dealing with a much higher raw material environment in 2017 than we were dealing in 2016, that probably played a factor as you reference, but I wouldn’t read anything into it. As I commented in my prepared remarks, we have a lot of confidence in where our paving and roofing business is in terms of going into the summer season, for the factors I just described.

[John Roberts:]

Then I think butadiene went up more than anyone could really account for by a supply-demand bottle or oil prices, and you talked about them coming back down to oil price parity again. What do you think about the odds of them actually over-correcting to the downside the same way couldn’t predict how high the upside was, that we actually have a downside correction here that’s bigger than expected?

[Kevin Fogarty:]

You’re not going to get me to predict something that specific in terms of where we look at the markets directionally. Clearly directionally we saw that increase, what I’d characterize as hyper increase solely as a result of outages, both planned and unplanned. As the market gets back to a more stable supply-demand, there’s enough supply out there that warrants butadiene ought to be trading at effectively its energy alternative plus the cost to extract it.

[John Roberts:]

Thank you.

[Operator:]

Thank you. Our next question is from Mike Sison with Keybanc. Your line is now open.

[Mike Sison:]

Hey guys, nice job hitting your expectations in a tough quarter. When you think about the volume growth you had in chemicals, what needs to happen as we go forward to get that to generate some EBITDA growth? Can we see some growth in 2Q, or do we need to wait a little bit as the environment unfolds?

[Kevin Fogarty:]

Well look, the business is driven by two primary factors

[Mike Sison:]

Okay, and then when you think about the polymer segment, your EBITDA was down $20 million roughly. Is that representative of the squeeze from the rise in butadiene, and do we get that back as soon as 2Q because of the rapid decline, or does it kind of phase into the next couple quarters to get that squeeze back?

[Kevin Fogarty:]

I think it’s going to be a blend. There’s going to be certainly some of our markets that are responding very quickly back to where they should have been, just because of the squeeze as you referenced, and then it will take perhaps a little bit longer for other markets. But certainly this is not a year fundamental, this is a quarter or two at the most. But overall our margins ex-the effect of that butadiene hyperinflation are in line with where we expect them to be, and as I referenced again in my comments, Mike, this is all--especially for our performance products business, this is all about repositioning the sales mix to reflect higher value-added innovation and the differentiated sales mix in our specialty polymers business has continued to improve, and that’s why we’re very pleased to be starting up our new Mailiao facility because that’s going to help us continue to accelerate the growth in those differentiated sales.

[Mike Sison:]

Okay. I know you don’t like to give specific quarterly guidance, but just in terms of--

[Kevin Fogarty:]

I was waiting for your question, Mike.

[Mike Sison:]

Well no, in terms of the remaining three quarters, given some time you need to gain the margin, is it more even as the year unfolds because typically Q1 is the strongest, right, historically, so does it kind of work its way up throughout the year versus 2Q being the strongest and working its way down?

[Kevin Fogarty:]

Well look, the reality is two things. One is we do still have to continue to unwind the impact of the first quarter cost increases in our polymer segment - that’s clear, I think we just talked about that. But on the other hand, clearly second quarter and third quarter are always helpful with respect to our performance products business, specifically obviously the paving sector, so that’s also very helpful in terms of the improvement. Then the last piece, which Steve talked about, is the timing of our cost-out initiatives, which are more--perhaps not as back end weighted as we thought, and that’s a credit to the fact that we’re capturing them earlier, but nevertheless it’s still on the whole a little bit more back end weighted in the calendar year. So we see the business improving, needless to say, going from $65.6 million of adjusted EBITDA to $350 million for the year. Obviously that’s the way we see the calendar unfolding.

[Mike Sison:]

Great, thank you.

[Operator:]

Thank you. Our nest question is from James Finnerty with Citi. Your line is now open.

[James Finnerty:]

Thank you, good morning.

[Kevin Fogarty:]

Good morning.

[James Finnerty:]

Just getting back to the C5 impact, in terms of the capacity that’s been added, is there--it’s a thin C5 separation units and C5 resin capacity, and just in terms of the amount that’s been added, if you’d give us any kind of percentage change in capacity additions, that would be helpful.

[Kevin Fogarty:]

You know, the analysis we’ve looked at is we’ve seen as much as two years of--literally two years of growth added all at once that came into the market last year, so that kind of gives you a sense for the timing of how we think with reasonable growth, it should be consumed. But to your point, it was absolutely up and down the value chain, and what we’re seeing dramatically is the integration effect as well that hadn’t kind of existed historically; in other words, the people that are producing the tackifiers themselves are back integrated into the primary feedstocks, and looking at the system cost if you will as almost a cost advantage, which we believe is kind of flawed economics long-term but clearly they’re going to take short-term actions to benefit from that.

[James Finnerty:]

So therefore two years of demand growth added, meaning just assuming steady state growth we should be through this, grow into this capacity by the end of ’18? Is that the way to think about it?

[Kevin Fogarty:]

I think a little bit sooner than that. I mean, look, we saw most of that new capacity being introduced last year, so we’d been working through it in 2016 and we’ll be working through it for probably 2017 as well. But shall we say that the supply-demand fundamentals based on our analysis for two years growth should mean 2018 structurally should improve, but these things are kind of hard to qualify. We have as good of a look as anybody can, given the fact that we participate in these markets, but behavior is something that’s very hard to judge. You can look at the steel in the ground and the capacity utilization in terms of the data, but behavior also plays a factor and that’s probably the thing that we missed in our forecast last year as we looked at that business. But over time, needless to say, supply-demand will rule.

[James Finnerty:]

Given what’s happened in that market, is there further capacity coming online in ’17 and ’18, or is that pretty much done?

[Kevin Fogarty:]

I think there is additional, but not to the surge that we saw in that 2016 introduction of new capacity.

[James Finnerty:]

Great. Then on the polymer side of the business, the prices for butadiene went up relatively quickly and now they’re expected to come down. If it comes down in the same fashion, is that a headwind for you in terms of getting the price increases that you’re seeking? Would it be easier if prices come down sort of at a more gradual pace?

[Kevin Fogarty:]

That’s an answer that I can argue both sides of it, to be honest. I thought you were going to ask a different question with respect to the timing of price declines. I guess at the end of the day, given the fact that we don’t see this as a structural supply-demand change, we just saw it as very temporary, let’s just get the market back to where it should trade at and then we can run our business accordingly. So in that case, I’d like to see it happen as soon as possible, because I think the Q1 increases, as we reflect on it, they weren’t logical.

[James Finnerty:]

Great, thank you.

[Operator:]

Thank you. Our last question is from Jason Freuchtel with SunTrust. Your line is open.

[Jason Freuchtel:]

Hi, thank you. I just had a few follow-ups. Can you comment on how successful you’ve been in terms of achieving some of the TOFA price increases that were announced, I guess concurrent with last quarter’s earnings?

[Kevin Fogarty:]

Well, I used the word specifically balanced in my approach, because at the end of the day we do have to be mindful of the fact that in certain situations, we have to still absolutely be competitive and maintain our share because we wouldn’t want to take that a volume growth and see it erode as a result of these pricing actions. But overall, the market conditions do support those price increases, so we’re being pretty aggressive in making sure that those price increases go through. At the same time too, I’ve been involved in many chemical and polymer businesses in my past, and an announced price increase doesn’t necessarily mean when you do all the averaging across all markets, all sales, all product lines, that we get that exact amount. So I think 70%, 80%, maybe a little bit more is probably reasonable when all is said and done.

[Jason Freuchtel:]

Okay, understood. Within your performance chemicals business, can you comment on areas where Kraton has benefited from switching from a distribution sales model to selling directly, and have you expanded share in any specific end markets?

[Kevin Fogarty:]

I’m not going to give away anything in terms of where that’s occurred, but I can certainly confirm it has occurred and there are a number of customers that we in our history at Kraton had had wonderful legacy relationships with that were also customers of Arizona, and in some cases were the recipient of Arizona’s historical strategy to move to a more distributor approach. So those discussions, which happened over a year ago with those important customers, were quite successful in moving back to direct sales business. In terms of market segments, I think we do see the potential in oilfield particularly where, while it’s not a large outlet for us, it’s one in which we see growth potential clearly, so we’re working directly with most of those OEM accounts now.

[Jason Freuchtel:]

Okay, great. I believe you indicated last quarter that inflationary and currency costs could potentially add roughly $25 million in expenses this year. Did you see any impact from those items in the first quarter?

[Stephen Tremblay:]

Currency, Jason, in terms of EBITDA was insignificant in the first quarter, and that was a small piece of that 25. The other piece of the inflation that we called out was largely compensation related, and those of course would take place as planned, so nothing materially deviating from that in the quarter.

[Jason Freuchtel:]

Okay. Then I guess lastly, how should we think about how synergies are being allocated across your two segments, because I guess in some instances, the cost synergies could benefit your polymer business, is that right?

[Stephen Tremblay:]

Absolutely. The three areas that we’re targeting, the first area that we outlined back in 2015 was the cost reset initiatives, including the direct connect and certainly the HSBC balancing with the new plant coming online. That, as you probably recall, was $70 million in the aggregate by 2018. That’s going to be all in the polymer segment. In the synergy related benefits, $40 million of that was operational improvements within the chemical segment, and that would therefore be attributable entirely to the chemical segment, which by the way that’s where we exceeded our expectations in the first quarter, was in that area. We’re really proud of the activities by the team. Then on the G&A, that’s roughly a 50/50 split, perhaps a little more skewed to the chemical business, but generally about 50/50 split.

[Jason Freuchtel:]

Okay, great. Thank you.

[Operator:]

Thank you. There are no further questions in queue at this time. I would now like to turn the call back to Mr. Gene Shiels for any closing remarks.

[Gene Shiels:]

Thanks Vince. We want to thank all of our participants this morning. I’ll note that there’s a replay of this call. It will be available on our website later this morning, and you can access that through the Investor Relations tab on our website at kraton.com. There will also be a telephonic replay and you can access that by dialing 800-839-2290, and that replay will be available through May 11. With that, we’ll conclude our call this morning. Thank you.

[Operator:]

Thank you, sir. This concludes the Kraton Corporation First Quarter 2017 Earnings conference call. You may now disconnect.