Kraton Corporation
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

Good morning and welcome to the Kraton Corporation’s Second Quarter 2017 Earnings Conference Call. My name is Ashley and I’ll be your conference facilitator. At this time, all participants are in listen-only mode. Following the company’s prepared remarks, there will be a question-and-answer session period. [Operator instructions]. 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 Mr. Gene Shiels, Director of Investor Relations. Sir, you may begin.

[Gene Shiels:]

Thank you, Ashley. Good morning, everyone and welcome to the Kraton Corporation second 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 review the results for the second, 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 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 that 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’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. Following our prepared remarks, we’ll open the line for your questions. I’ll now turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thank you, Gene, and good morning, everyone. Kraton's second quarter 2017 results reflect solid demand fundamentals across the diversified end markets we serve and more importantly, sequential margin expansion in both our polymer and our chemical segments. We reported adjusted EBITDA of $101.5 million in the quarter and this was up from the $92 million of adjusted EBITDA we reported in the second quarter of last year. In terms of segment results, our polymer segment delivered a very strong quarter of adjusted EBITDA of $62.8 million up nearly $24 million compared to the second quarter of 2016. Higher sales of Cariflex and HSBC product grades combined with solid margin expansion and incremental benefit of cost reduction initiatives contributed to EBITDA growth in the 480-basis point expansion in the adjusted EBITDA margin, which increased 19.3% up from 14.5% in the year ago quarter. As discussed in our last earnings call, first quarter 2017 margins for the polymer segment were adversely impacted by a significant increase in raw material costs and the associated leg and a realization of increases in sales prices to pass through the higher raw material costs. Our second quarter results demonstrate the resilience of our polymer business and we manage -- as we manage through periods of this raw material volatility. Consistent application of our price right strategy combined with seasonally strong demand for our USBC offerings led to polymer unit margin expansion as expected. Second quarter results for our chemical segment also improved sequentially. Segment adjusted EBITDA was $38.9 million or 20.3% of revenue in the second quarter of 2017 up from $33.5 million or 17.9% of revenue in the first quarter. During the quarter, we realized higher pricing for tall oil fatty acid products and we saw a stabilization of market dynamics in our adhesive business. Regarding our adhesive business specifically, we saw an easing of the price pressure on our Rosin Esters products associated with the availability of lower-cost C5 hydrocarbon alternatives, which has exerted margin pressure on our adhesive business since the second half of last year. In the second quarter, we realized an incremental $10 million of transaction synergies and an incremental $3 million of cost reductions in the polymer segment. Year-to-date we've realize G&A reductions and operational cost improvements of $26 million ahead of our original estimate. Given the pace at which we have been achieving the G&A reductions and operational cost improvements, I am very pleased to say that we now expect to deliver the balance of our planned $65 million of transaction synergies by the year end of 2017 a full-year ahead of our initial plan. We do expect stronger cash generation in the second half of the year as well. The increase versus the first six months of 2017 should be largely driven by the working capital release associated with the decline in raw material costs in our polymer segment. With this view, we continue to target debt reduction of $100 million to $150 million on a full-year basis and so based on margin and demand trends in our polymer segment and the sequential improvement we have seen in our chemical segment, we had good momentum going into the third quarter and therefore we believe there's potential upside versus the original guidance for the full year we provided earlier to you this year. With that background and context, I'll turn the call over to our Chief Financial Officer, Steve Trembley for a more in-depth financial review of the second quarter results, Steve?

[Steve Trembley:]

Thank you, Kevin and good morning. Shifting over to Slide 5, consolidated revenue amounted to $525 million in the second quarter of 2017 compared to $455 million in the second quarter of 2016. The $70 million increase in revenue was largely the result of increased selling prices in our polymer segment. Second quarter 2017 earnings per share amounted to $0.81 per share on a GAAP basis and $0.82 per share on an adjusted basis, the latter up $0.19 per share compared to the second quarter of 2016. We'll have more color on adjusted EBITDA when we move to the segment results, but on a consolidated basis, adjusted EBITDA of nearly $102 million is up $9 million or 9% compared to the second quarter of 2016, despite a challenging comparable quarter in the chemical segment. Adjusted EBITDA margin improved to 19% from 14% in the first quarter due to the improved polymer segment margins indicative of the successful implementation of selling price increases to recover from the first quarter raw material induced margin pressure as well as improved margin in the chemical segment, driven by a combination of increased selling prices and more favorable mix as well as lower costs. In the second quarter, we continue to make solid progress against our cost reduction goals, as Kevin mentioned earlier, generating an additional $13 million in the quarter, I do plan to provide some additional information on the status of the cost reduction initiatives, including our view for the balance of the year later in this material. In the second quarter, we began to see the cash flow trend move favorably, given the declines in raw material costs and improved underlying business performance. As such, we continue to expect the second half of 2017 will be a much stronger half from a cash flow perspective. Let's move on to the segment results, first starting off with the polymer segment where second quarter volume was unchanged from the 2016 second quarter with 90 kilotons of sales volumes at the high end of the historical range for second quarter sales volume in this segment. Compared to the second quarter of 2016, volume expanded in both the specialty polymers and Cariflex product groups. In performance products, we're off to a good solid paving season with paving volume up 26% compared to the second quarter of 2016, which was offset by lower roofing volume as we strategically placed SBS apply to serve the strong start to the SBS season. On a year-to-date basis, total volume is up approximately 1% with specialty polymers up a healthy 6% and Cariflex up 2%. Happy to report that the SIS Product Group within the performance products business, although it's been under pressure since the middle of '16 we did see margins begin to stabilize in the second quarter. Adjusted EBITDA for the polymer segment was $63 million, which represents nearly two times sequential growth compared to the first quarter of 2017 and improved by $24 million compared to the second quarter 2016. As expected, our price increases were fully implanted in the second quarter and we therefore recovered from the raw material headwind the negatively impacted first-quarter results. The price right strategy is clearly evidenced by the increase in adjusted gross profit per ton to just above $1,000 per ton for the second quarter of 2017 compared to $751 per ton in the first quarter, which equates to improved adjusted EBITDA of approximate $20 million. The first half 2017 adjusted gross profit per ton of $888 per ton is above the $873 per ton in the first half of 2016 as well as above the $868 per ton generated for the full year 2016. Adjusted EBITDA margin was 19% in the second quarter, which represents a 690-basis point improvement from the 12% of adjusted EBITDA margin in the first quarter of this year. Moving to our Chemical segment on Slide 7, total sales volume was 102 kilotons in the second quarter of 2017 compared to 109 kilotons in the second quarter of 2016. The decline in sales volume was largely due to a decline in sales of lower margin material within our Performance Chemicals product group. Sales volume in adhesives in fact improved 7% in the second quarter 2017 compared to the second quarter of 2016. The volume trends for the first half of the year is moving clearly in the right direction with total sales volume improving 8% compared to the first half of 2016 with adhesives up 10% and performance chemicals up 7%. Second quarter adjusted EBITDA came in at $39 million representing a margin of 20%. The comparable second quarter 2016 adjusted EBITDA of $54 million represented a difficult comp as the negative effects of the C5 dynamics had not yet been realized and the second quarter of 2016 reflected lower input costs compared to input costs in the second quarter of 2017. More relevant and encouraging is the sequential improvement in adjusted EBITDA of more than 15% or approximate $5 million in the return to more than 20% adjusted EBITDA margin from the 18% adjusted EBITDA margin post in the first quarter 2017, reflecting selling price increase of certain products, favorable mix and lower overall operating costs. On Slide 8, the cumulative cost reductions derived from the polymer segment initiatives, the G&A synergies and the chemical segment operational improvements. In total, we've generated approximate $95 million since the inception of these initiatives with $26 million of additional benefit garnered in the first half of 2017, spread evenly in the first and second quarters. By year-end 2017, we expect to have successfully delivered on the transaction-related initiatives tolling $65 million. For context, this compares to a $63 million of expected benefit when we close the first quarter and compares to $58 million expectation earlier in the year. We also continue to estimate that by year-end 2017, $45 million of the $70 million polymer segment cost improvements will have been achieved. As I mentioned earlier, we've garnered $26 million of the 2017 benefit in the first half with an incremental $14 million now expected in the second half of 2017 to round out the full year expectation of $40 million of incremental savings. In summary, we remain committed to delivering the $40 million of savings in 2017 and we continue to expect to deliver the entire $135 million cost reduction package in 2018. On Slide 9, our first half results reflect adjusted EBITDA of $167 million on revenue of $983 million representing an adjusted EBITDA margin of 17% on a composite basis. Adjusted EPS reflects lower adjusted EBITDA, high depreciation expense, which is a result of the new HSBC facility in Taiwan as well as a higher effective tax rate year-on-year. I'd like to spend a moment on the capital structure. As a reminder, with the seasonal nature of portions of the business and the dramatic run up in raw material costs, credit on net debt increased from December 2016 to April 2017 as raw material cost turned and with the stronger underlying business performance, that trend reversed in May and June plus that in those two most recent months, we reduced credit on net debt by an aggregate of $37 million. Looking forward for the balance of the year, we currently estimate that with the more favorable raw material environment compared to earlier in the year and the positive underlying business momentum, we anticipate a reduction in net debt in 2017 at the mid-to-upper end of the previously stated range of $100 million to $150 million. Since the deal closed in January 2016, we've taken some actions to reduce our overall cost of capital and we reduced the pretax interest costs of our term loan and our tranches of notes by $4 million per year and we expect additional savings from the proposed launch of the refinancing announced this morning, which will be achieved through a combination of repricing the term loan and accessing the European debt markets. Finally, before turning the call back to Kevin, the appendixes material includes the traditional modelling assumptions, which are largely unchanged except for a reduction in our 2017 expected effective tax rate. So, with that, let me turn the call back to Kevin for his closing comments.

[Kevin Fogarty:]

Thanks Steve. We're encouraged by our progress in the first half of the year, despite the lower first quarter results in our polymer segment associated with the lag and passing through higher raw material costs, first half 2017 adjusted EBITDA for the segment is up compared to the first half of 2016. Of significance for the polymer segment, first quarter spike in raw material prices is now behind us. For the first quarter increase in butadiene was disruptive, it was also short-lived. Nevertheless, we remain confident in our ability to manage such an impact through our pricing actions and I believe our second quarter results provide tangible evidence of our success in maintaining our price discipline. The capacity outages that led to the first quarter increase in butadiene prices are now largely resolved. We expect North American contract prices for butadiene to increase, excuse me, to decrease, let me get that correct, to decrease by $0.05 to $0.08 per pound in August to around $0.40 per pound. This was basically -- this will basically put the U.S. into the most favorable butadiene position on a global basis at parity with Europe and below Asia. For the balance of the year, we project relative stability in butadiene prices in all regions. Overall, we expect demand fundamentals in our polymer segment to remain favorable, especially polymer second-quarter volumes was up nearly 4% reflecting continued progress in many of our innovation-driven platforms. Cariflex volume was up 2% on higher sales in the surgical glove applications. Given the significant volume increase in 2016, which was largely driven by the elimination of powder natural rubber latex gloves in the U.S., we continue to expect a more modest volume growth in 2017 in the single digit range. Lastly, while performance products volumes was down a modest 2% compared to the second quarter of last year, primarily due to lower sales of SIS product rates, consistent with our expectation for a strong paving season, paving volume was up 26% compared to the second quarter of 2016. The sequential improvement in financial results for our chemical segment supports our view that the first quarter 2017 may mark a low point for margins for the chemical segment. Announced price increases for TOFA, which went into effect on March 15, were a contributing factor in our second quarter results and we currently expect pricing in the TOFA markets to hold in the third quarter. You may have seen we announced a price increase for products in our adhesive portfolio effective July 1. So far, we've been successful in raising prices for our more differentiated product offerings. However, pricing for lesser differentiated products continue to reflect a very competitive market condition. Overall, our expectation is for adhesive margins to remain stable for the third quarter. The broader supply and demand dynamics relating to C5 tackifiers and other Ryzen products remain long as we have previously discussed. We're watching the oil and downstream derivative prices closely, but we do not currently see indications that would mean lower prices for the second half of the year. On a year-to-date basis, we have been able to capture more transaction synergies than originally anticipated and this is largely a function of timing. With regard to full year 2017 adjusted EBITDA as we enter the year, our initial view was that the second half of the year will be stronger than the first half. This view took into consideration the impact of the first quarter increases in butadiene prices that impact the first quarter butadiene prices would have in our polymer segment and also improving -- and also assumed improving fundamentals in our chemical segment in the back half of the year and a cost reduction and synergy capture plan that was backend weighted as well. To date, the underlying business performance in both segments has been in line with our expectations. However, through June, we have exceeded our initial plan on realizing G&A reductions and operational improvements in the chemical segment. Our original plan assume $40 million of cost reductions in 2017 approximately, 40% or $16 million of which we expected to realize in the first half of the year. Through June, we have each delivered $26 million or $10 million above our initial estimate and this has contributed positively to our first half results. It's been the case second half adjusted EBITDA will now benefit less from increment realization of cost reductions and delivery of a stronger second half will be more reliant upon core business performance. With regard to the status of the cost reduction initiatives themselves in our polymer segment, we continue to expect reaching our goal of $70 million by year-end of 2018. The startup of our HSBC production facility in Mailiao, Taiwan has gone well. We're working with customers to qualify product rates and during the quarter we saw the first shipment of commercial product from the plant. Our conversion to the direct connect process for our Cariflex business in Polenia Brazil is nearly complete and we still expect to complete our USB expansion in Bayer, France by the end of this year. While these two projects are not expected to contribute significantly to our 2017 results due to the timing of their completion, we look forward to their contributions to the bottom line in full-year 2018. And as I said in my opening remarks, with the margin and demand trends we see in our polymer segment and the sequential improvement we've seen in our Chemical segment, we're encouraged by the momentum we have gone -- we have going into the third quarter and we believe therefore there is potential upside versus our original full-year guidance that we provided you earlier in the year. In closing, I want to reiterate our commitment to focus on continued debt reduction. We continue to pursue options to improve our overall capital structure. You may have seen in this morning's press release, we intend to access a tranche of euro-denominated loans to produce outstanding debt under our term loan and concurrently we intend to seek a repricing of the remaining term loan balance to drive additional savings and interest expense. With all these remarks, now I would like to turn the call back to the operator and we'll be happy to open the lineup for some questions

[Operator:]

Thank you. We'll now being the question-and-answer session. [Operator instructions] Our first question comes from the line of Jason Freuchtel from SunTrust. Your line is now open.

[Jason Freuchtel:]

Hey. Good morning, guys.

[Kevin Fogarty:]

Hi Jason.

[Jason Freuchtel:]

Results seem impressive across the Board in the second quarter. I just want to make sure that I understand the drivers for EBITDA throughout the rest of the year. It seems like if you annualize the first half results, you still have approximately $14 million remaining in expected cost savings and synergies. There were potential margin benefits from TOFA pricing that you just started realizing in the second quarter and then it sounds like also potential margin benefit from butadiene continuing to fall at least through August. Are there any other tailwinds like FX or lower-than-expected costs or any headwinds that I am not thinking about in that bridge?

[Steve Trembley:]

No, I don't think Jason, you've captured the drivers very, very well there other than the timing of the cost reductions as Kevin just said in his comments, it’s pretty much in line with our -- with our earlier expectations of where the momentum of the business would be. The underlying demand is good, there are $1,000 a ton of our gross -- adjusted gross profit per ton in the polymer segment is our -- as you know our overall longer-term goal. $890-sh print for the first half is more in line with long-term averages for the business. I can answer -- I can specifically address currency, it was a bit of a headwind through the first half, under $4 million, $3.5 million to be exact with the trend in currencies of late. We actually of that $3.5 million, $2 million was in the second quarter. But we wouldn’t expect it to be a material headwind.

[Jason Freuchtel:]

Okay. And I know that you mentioned that butadiene has moved to a level that you’ve used indicative of structural market balances. However, contract prices have continued to fall in July and August as you also mentioned. Do you believe the wave of ethylene capacity that's coming on is structurally changing the typical pricing dynamics of butadiene relative to other materials, given the additional supply of ethylene?

[Kevin Fogarty:]

Yeah. So just a word of caution on that. It is absolutely true that there is a wave as you call it of vessel ethylene capacity coming on in North America specifically. But do appreciate that the cracking of feedstocks that are going to supply that ethylene capacity are lighthearted carbons, which produces less typical amount of C4 and C5 coming out as co-product stream than would a typical liquid cracker formulation. That being said, the net amount of molecules is therefore going up. Therefore, by definition the net amount of molecules of C4 will go up, and I think it's too soon to say right now that that's a contributing factor, but we’re certainly thinking about that as we look at the future.

[Jason Freuchtel:]

Okay. And do you believe, lower isoprene pricing is also helping ease the pressure and the pricing pressure in the competitive C5 hydrocarbon tackifier resins?

[Kevin Fogarty:]

Well, lower isoprene in the context of our SIS business that can be helpful. But when it comes to obviously the lower C5 basis in the C5 tackifier stream that goes up against and competes against our Rosin Ester stream, it’s kind of has the opposite effect.

[Jason Freuchtel:]

Okay. And then aside from the TOFA market fundamentals that seem to be improving, what is driving your view that the fundamentals in the time-based material business will continue to improve in the second half of ’17?

[Kevin Fogarty:]

Well, when we think about our performance chemicals business, which is primarily built around the TOFA molecule, we had two things that we think have materially benefit our business certainly going into 2017. One would be of course just what we've spoken about in the past, which is that, in the increase in oilfield activity there is a net draw of TOFA going to that space, not so much by Kraton outlets, but probably by industry outlets, in other words our competitors, which therefore is healthy for industry structure supply/demand. But the second factor is really things that we control which is 2016 for us as we've spoken about was all about finding new outlets for TOFA that we hadn’t served historically and as a result of that we have uncovered opportunities to sell products in other parts of the world taking advantage quite frankly of some infrastructure Kraton had already in place to serve our polymer business and now we're using those resources obviously to serve our chemical business to drive some incremental sales growth and then other market segment specifically as well. So, the net result of that is a much more healthy look for the business in terms of volume outlet and I’d also say too that, we've had a relentless focus on the types of TOFA and TOFA derivatives that we’re selling. So, mix is absolutely vital because at the end of the day, that's the way in which we unlock the true specialty valuable of what we believe is our polymer, excuse me our chemical offering.

[Steve Trembley:]

Jason, just to put some context around that, I had mentioned in the chemical segment a real nice job in terms of volume to Kevin's point, the 8% first half growth for the composite business with adhesive up 10% and the performance chemical business up 7%.

[Jason Freuchtel:]

Okay. With that, I'll will jump back into queue. Thanks.

[Operator:]

Thank you. Next question comes from the line of Mike Sison from Keybanc. Your line is now open.

[Mike Sison:]

Hey guys. Congrats, a really nice quarter there. When you think about 2017, I think your prior guidance for EBITDA was $350 million, it looks like the second half could be even better than the second -- than the first half still with the way margins are going. Is that your thought, it is the second half is still a little bit better than the first half?

[Kevin Fogarty:]

I think just comparing first half, second half, it's a comparison that takes -- you must take into account what happened in the first quarter. That was a dynamic that was pretty extraordinary and so, clearly as we think about the second half relative to where we are today, we think about it more in terms of what's happening from second quarter onwards. You mean -- you're right to annualize the first half number and then try to build a bridge from there, but first quarter was pretty extreme in terms of the margin pressure particularly in our polymer business. So that being said, yeah, we've got volume momentum, we've got good sequential margin momentum and that's what prompted us to kind of look at the second half and then therefore relative to that full-year guidance provided this year and make the comment that we've seen and have I guess a line of sight or see the potential for some upside. But look we talked in the past about the visibility of our business, the visibility of our order book. We always are conscious to that. You can rest assure that at Kraton here we're 100% focused across both our businesses at realizing every dollar of the upside that we're presented with and we do that the old fashion way by looking at our business in terms of the value-added sale that it represents, making sure that we're pursuing the full value through our price increase initiatives and our innovation initiatives. And then lastly, we're real pleased with the progress on the cost-out initiatives, especially when you think about getting the deal synergies to $65 million target amount done one year ahead of schedule.

[Mike Sison:]

Right. And then when you think about your longer-term, adjusted EBITDA goals that you had outlined, do you feel better about achieving those given how well 2Q has come in?

[Kevin Fogarty:]

Look, the way we think about it is again first quarter was a bit of an anomaly, not quite sure we're going to be able to explain what exactly happened with butadiene pricing. But that being said, I think second quarter more reflects the type of business that we're in and we're seeing clearly parts of our business some really nice tailwind in the context, for example our paving business. It's clear -- it's a pretty good paving season, both in North America and in Europe and that is -- that is certainly something that we had thought about going into the year because all the fundamentals were there. But I do believe with lower pricing for the inputs including things like in the case of our paving business asphalt inputs as well as our polymer inputs, that's all very helpful if you will to drive growth.

[Mike Sison:]

All right. And then if butadiene stays at these lower levels, what are the areas of opportunity to gain some share in competitive products that you butadiene is a little bit too high, was difficult to do that. Do you see any good volume momentum in any of the areas now that we've reset that input?

[Kevin Fogarty:]

I think that and I've said this before, I think that when we think about the innovation process in general, to drive market growth, it's very important especially when we're talking to customers, which we often do about substituting for something else and clearly the best win-win that we can offer our customer partners is as we offer them a product that has superior performance, but potentially either lowers their material costs or their system costs or both ideally. And therefore, for starting with a lower base price of butadiene therefore lower selling price of butadiene even with the margins that we're looking for to justify obviously the innovation development work that went into that market development opportunity in the first place than we think that that is a good situation for customers. If you contrast that with where we've been in the past, three four years ago, customers clearly were looking at butadiene as a volatile feedstock that they fully understand and then were therefore reticent to make that material conversion. Today the whole discussion is where it should be, which is around the performance of the molecule, the performance of the polymer in terms of what application is intended.

[Mike Sison:]

Great. Thank you.

[Operator:]

Thank you. Next question comes from the line of James Finnerty from Citi. Your line is now open.

[James Finnerty:]

Okay. Thank you. Good morning. Great quarter.

[Kevin Fogarty:]

Thanks.

[James Finnerty:]

On the term loan deal that you announced this morning, is there any debt reduction as a result of that or is debt neutral and separately, is there any covenant changes that are going to occur with regards to deal and could just highlight what the driver behind those covenant changes might be?

[Steve Tremblay:]

It'll be modestly lower total debt. It will allow us to move some cash more effectively back to the U.S. If the markets are receptive, clearly our business performance -- our momentum is clearly going in the right direction and the Q2 results were excellent. And the soft call ins ended last month, so our overall expectation for the big driver, the transaction was to continue to chip away at the overall cost of capital. There will be some other structural changes that we will likely seek as part of the transaction. Currently the schedule would be to have the deal priced on or about the 8 August with the closing in mid-month of August and at that point in time, we'll be able to give a sense of how successful we were in lowering the cost of capital as well as achieving some of the structural changes that help get the deal done.

[James Finnerty:]

Okay. Great. And then just on C5 topic, with regard to Exxon Mobil's C9, hydronated [TPCD] facility coming online in Singapore. Can you give us an idea of what the status of that is and what kind of impact that could potentially have on your business in the second half of '17 or in 2018, thank you.

[Kevin Fogarty:]

I can't comment on the status of other that we certainly know about it's pending if you will start up just like the rest of the market does and probably at the end of the day, that's the one outlier out there that we're keeping a very close eye on with respect to market implications. And again, it's a project in a plant that's been in the works for quite some time. So, there is not no news here, but you're correct, our assessment is that it's a startup I guess late this year.

[James Finnerty:]

Okay. Thank you. And just lastly, with to the guidance for full-year '17 maybe a prior $350 million, now you saying the new guidance officially would be $350 million or slightly better, is that sort of the way to phrase it?

[Steve Tremblay:]

We're not providing quote unquote “new guidance”. The comment I just made is that we -- given all these fundamentals we spoke of, good momentum in the business, good sequential margin improvement, we see the potential for upside relative to that prior guidance yes.

[James Finnerty:]

Okay. Great. Thanks so much.

[Operator:]

Thank you. Our last question comes from the line [indiscernible] from UBS. Your line is now open.

[Unidentified Analyst:]

Hey guys. Just a question on the performance products segment within polymers. You noted repaving was up substantially, but the segment as a whole was down modestly. Was anything -- what was down in the rest of this segment? I know you noted roofing was a little bit weaker. Was anything else down to offset that and was that different than your expectations?

[Kevin Fogarty:]

So first of all, I think I commented that paving as you point out was up quite significantly, which was I think 26%, but you're right, the overall performance product business did not reflect 26% growth and that's primarily because of the other two markets that we serve. One is the SIS market into adhesives for all the factors we've talked about in the past in terms of the competitive nature of the business. And then from the standpoint of roofing, it was really by choice. When we saw the potential for the summer season, clearly, we directed as much SBS as we could into that space and therefore was what I would call a very profitable trade-off given the overall outlook for our paving business.

[Unidentified Analyst:]

Okay. Thanks. And then I know it's not a major segment for you guys, but in specially and performance, can you comment on personal care? We've seen some mix results so far what are you guys seeing in terms of growth in those markets and is anything significantly different by region?

[Kevin Fogarty:]

For us, personal care historically speaking, used to be all about our hydrogenated business, but we've obviously gone down that path of seeing that business being if you will migrated away from hydrogenated formulations in the elastic film space to more unhydrogenated in the case of our customers in our relationships. And so, in this case, it's about primarily SBS and the trends are positive from our perspective and not only just trends in terms of volume, but trends in terms of innovation and the types of qualities customers are looking for to drive their growth. So, for us, it's a very positive development that while we lost certainly the fine sales in our hydrogenated business and I'm going back now two or three years ago, a lot of that's been replaced by very attractive innovation-based materials in our SBS business.

[Unidentified Analyst:]

Okay. And I guess just regionally for the performance products and specialty polymers, is anything different between America's EMEA AP or is growth generally pretty evenly spread?

[Kevin Fogarty:]

Historically speaking and I'm speaking in the last couple of years clearly, Asia has been a very high growth region for us, but we don't necessarily just target Asia as a growth region. We have a number of customers in Europe and the U.S. that are vital to particularly our innovation, both innovation growth a success and I am encouraged by the results that we've achieved, the projects that we have underway for driving growth. And clearly the startup of the Mailiao plant in 2017 is very timely in order to support a lot of those growth initiatives and that plant was designed specifically around the types of innovation products that we felt like we're going to be our future and I am talking about a family of low molecular weight grade HSBC that really drives some very what I would call high technically demanding soft formulation.

[Unidentified Analyst:]

Okay. Great. Thanks guys.

[Operator:]

Thank you. Our last question comes from Jason Freuchtel of SunTrust. Sir your line is open. Mr. Freuchtel, please check your mute button.

[Jason Freuchtel:]

Sorry about that. Thanks for taking a couple of follow-ups. Are you expecting any market share gain in 2017 from your Sylvalite 9000 product offering or is that still in the early stages of being launched?

[Kevin Fogarty:]

Yeah, I am not going to comment on market share gains specifically, but I will tell you that the adoption by a handful of key customers has been quite encouraging. And that was certainly our expectation because of the advancement of this technology and it's too early to tell whether or not that's market share gain in an absolute sense, but we are very encouraged by the volume progress in that technology.

[Jason Freuchtel:]

Okay. Great. And then I guess just lastly, can you highlight what areas drove the benefit from a cost savings and synergies in 2Q '17 and what are the main cost savings buckets you expect to realize throughout the rest of '17 and then into '18?

[Kevin Fogarty:]

Sure Jason. What we're not changing is the expectation on the polymer segment, which continue to believe that that is in-line with the original cadence of $45 million of total benefit life to date through the end of 2017 with the balance coming -- or $25 million coming 2018 as we get the full-year effect of the work we're doing in Brazil and we begin to garner the fruits of the labor in our facility in France. So, it's really around the $65 million of synergies. I mentioned that our original expectation was we get $58 million or so of that $65 million this year. We then as we move into the first quarter up that to the mid-to-low 60s and now with the outstanding effort by the entire team, we now believe we'll get the entire $65 million this year. We've not changed the cadence materially or the expectation on the G&A. Most of that is run rate from what we began to generate in the fourth quarter. Where we're seeing the tremendous success is in the operational improvements, which is what's driving the change. One may ask if we exceeded the first half expectation with respect to that operational improvements? Why are we still holding to $40 million for the full year? It truly is timing, for example, some of it was moving, some of the projects forward to garner some cost outs. But as we've continued to mention part of the overall transaction-related benefits with things like upgrading the refinery and the ability to upgrade products and you only get to recognize that synergy when you A, complete the initiative and B, sell the product. So very much a joint effort with the operations team setting the table and then the commercial team being able to place the product. So that can create some lumpiness which is largely why some of the backend has shifted into the first half of the year. I will mention in closing, as we think about moving forward although $65 million, we're thrilled that we were able to A, get the results and B. get them earlier. The real fundamental change has been made which we believe will continue to accrue benefits long out to 2017. We've effectively embedded a cultural change within the business and we may declare victory on the $65 million but I think more importantly is that ongoing we should expect to see efforts to continuing to lower cost in that segment.

[Jason Freuchtel:]

Okay. Great. Thank you.

[Operator:]

Thank you. And for the last question, we have John Roberts of UBS. Sir, your line is now open.

[John Roberts:]

Thank you. And I apologize I've to jump on a little bit late, but could you update us on the timing where you may be able to refinance some of the high coupon debt that you have in the balance sheet still?

[Kevin Fogarty:]

Hey John. How are you? We did announce this morning a launch that we expect to concurrently issue some euro debt, which is lower cost currently than what we can finance here in the U.S. as well as it creates a nice edge against where we generate a significant amount of our cash flow that is in Europe. So, we'll be able to fund debt denominated in Euro with the Euro cash flow, which eliminates the pressure to move money back to the U.S. So that is -- will be underway. Again, we announced this morning, I think you may be referring to the 10.5% tranche of notes that were incurred as part of the transaction, currently the cost prohibitive to do anything with that tranche it's in our -- it's in our crosshairs of things to do, but the economics of that just don't work today.

[John Roberts:]

Okay. Thank you.

[Operator:]

Thank you. There are no further questions on queue. I'll now hand the call back to Mr. Gene Shiels for closing comments.

[Gene Shiels:]

Thank you, Ashley. I would like to thank all of our participants this morning for their interest in Kraton and their thoughtful questions. I want to just you let you know there's a replay of the call available and it will be available about an hour from now. You can access the replay telephonically by dialing 800-328-8402 and that replay will be available through August 16. With that, we'll conclude our call this morning. Thank you.

[Operator:]

Thank you. And this concludes the Kraton Corporation Incorporated second quarter 2017 earnings conference call. You may now disconnect.