Kraton Corporation
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good morning and welcome to the Kraton Performance Polymers Incorporated Third Quarter 2017 Earnings Conference Call. My name is Luigi and I will 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 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. Please go ahead.

[Gene Shiels:]

Thank you, Luigi [ph]. Good morning and welcome to the Kraton Corporation third 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 our third quarter news release and the related presentation material we will review this morning is available in the Investor Relations section of our website. Before we review the results for the third 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 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. With regard to 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 earning release and is also included in the presentation what we’ll view this morning. Lastly, I’ll remind our listeners that all references to 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 1st to January 5th. For the January 1st to January 5th stub period sales volumes 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. I’ll now turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thank you Gene and good morning everyone. Our third quarter results reflect the continuation of the positive momentum we experienced in the second quarter. And our polymer segment, favourable margins and growth in sales volumes up nearly 7% compared to the third quarter of 2016 resulted in adjusted EBITDA for the quarter of $77.1 million. To put this in perspective, this was up nearly $28 million or 56% compared to the third quarter of 2016 and reflects sequential growth and adjusted EBITDA of $14.6 million compared to the $62.8 million we reported last quarter. This quarter marked the highest adjusted EBITDA posted for the polymer segment in our company’s history. Likewise, we saw positive trends in our Chemical segment where third quarter adjusted EBITDA was $44.3 million up nearly 7% compared to the third quarter of 2016. The third quarter 2017 represents the second sequential quarter of improvement in adjusted EBITDA for the chemical segment and a return to an adjusted EBITDA margin of over 22%. Key contributors to the third quarter performance for this segment included continued price and margin recovery for both the base products and a 3.3% increase in sales volume compared with the volume in the third quarter of 2016. As a result for the third quarter of 2017, we reported consolidated adjusted EBITDA of $121.7 million. In light of our third quarter and year-to-date results we now anticipate that our full year 2017 adjusted EBITDA will be approximately $375 million. Last quarter we shared our expectation that we would deliver the $65 million of transaction synergies at operational cost improvements for our chemical segment by year end 2017 versus our initial target at year-end 2018. I am very pleased to say that all actions deliver the $65 million were completed as of September 30. With regard to the cost reset initiatives in our polymer segment we completed our Cariflex conversion in Polenia Brazil and our USBC expansion project in Bayer, France remains on track. By year-end we expect to have achieved approximately $50 million of our targeted $70 million cost reset goal for this segment, but the balanced we realized in 2018. In terms of our capital structure and focus on debt reduction we made significant progress during the quarter. As expected cash generation improved through the third quarter and as a result we reduced credit on net debt by $87.3 million despite the charges associated with re-financings. During the third quarter we issued a euro tranche under our term loan facility and we repriced our U.S. dollar tranche. In aggregate these actions are expected to save approximately $13 million a year of interest expense. On a full year basis we now expect to reduce credit on net debt by $125 million to $150 million despite incurring $16 million of financing fees during the year. Now with that background, I’ll now turn the call over to our Chief Financial Officer, Steve Trembley for a more in-depth financial review of the quarter. Steve?

[Steve Trembley:]

Thank you, Kevin. As we turn to slide five, I’d like to begin with an overview of the consolidated results for our third quarter. Third quarter 2017 revenue was $510.9 million compared to $454.1 million in the third quarter of 2016. Of the $56.8 million increase, $41.2 million is attributable to the polymer segment reflecting higher sales volume and higher average selling prices. The remaining $15.6 million of the revenue increase relates to our chemical segment which benefited from higher average selling prices and a 3.3% increase in sales volumes. The GAAP net loss of $0.13 per share in the third quarter of 2017 includes the impact of a negative spread between FIFO and ECRC of $36.7 million, a $15.6 million charge associated with financing activities and a $2.1 million of hurricane related charges. Excluding these and other items, which we’ve illustrated in the adjusted EBITDA reconciliation included in yesterday’s earnings release and in today’s presentation, third quarter adjusted EPS was $1.51 per share representing an improvement of 140% compared to $0.63 per share in the third quarter of 2016. Adjusted EBITDA of $121.7 million for the third quarter of 2017 represents growth of $30.6 million or nearly 34% over the third quarter of 2016 with the associated margin increasing over 370 basis points to 23.8%. With respect to hurricanes Harvey and Irma while none of our production assets sustained damage, the path of Irma did necessitate the shutdown of our Savannah and Panama city plans. While all locations resumed operations in short order, there may a lingering effects into Q4 the magnitude of which will be contingent upon demand fundamentals. That said, we currently are not expecting a material additional effect on full year operating results and cash flow. Moving now to the segment review, we’ll begin with the polymer segment results on slide six of the material. Sales volume of 91.9 kilotons for the polymer segment was up 6.9% compared to the third quarter of 2016 led by performance products we experienced strong 11.1% growth in sales volume driven by strong demand for paving applications particularly in the U.S. continuing the trend we saw in the second quarter of this year. Adjusting for the sale of the compounding business our speciality polymer sales volumes was flat compared to the third quarter 2016 and sales volume for Cariflex was down 1% compared to the third quarter of 2016. This in part reflects the residual impact of the 19% volume growth in 2016 driven by the ban on powdered natural rubber latex and a pull forward of demand in advance of our Polenia direct connect conversion. Through the first nine months of 20174 Polymer sales volume was up 2.9% with performance products up 3.2%, especially polymer is up 5.3% after adjusting for the sale of the compounding business and Cariflex is up 1%. Polymer adjusted EBITDA of $77.4 million was up $27.8 million or 56% compared to the third quarter of 2016. The associated EBITDA margin of 24.6% is indicative or improved unit margins driven by higher average selling prices and lower cost as well as a 6.9% increase in overall sales volumes. A significant increase in raw material prices in the first quarter of this year adversely impacted first quarter margins and adjusted EBTIDA particularly in our polymer segment. We implemented price increases to offset the increase in raw material cost with the tail of these price increases being realized subsequent to the first quarter. This is evidenced by the trends in adjusted gross profit per tonne which was $751 per tonne in the first quarter, $1005 per tonne in the second quarter and $1148 per tonne in the third quarter or $980 per tonne for the nine months ended September 30, 2017 versus $848 per tonne for the first nine months of 2016. The year-over-year improvement provides further evidence that our longer term target for sustained adjusted gross profit in our polymer segment of $1000 per tonne is clearly achievable. Moving to our chemical segment on slide seven, total sales volume was $107.8 kilotons in the third quarter of 2017 compared to $104.3 kilotons in the third quarter of 2016 representing an increase of 3.3% with an adhesive sales volume up a healthy 5.1% and performance chemicals up 2.7%. This takes volume to 327.5 kilotons for the first nine months of 2017 which is a year-on-year increase of 6.3% led by adhesive sales volume up 8.6% and performance chemicals up 5.6%. Third quarter adjusted EBITDA for the chemical segment was $44.3 million compared to $41.5 million in the third quarter of 2016. This 6.8% increase in adjusted EBITDA reflects higher sales volume with stable overall unit margins in part due to continued price in margin recovery for TOFA products. On a sequential basis, adjusted EBITDA was up $5.7 million or nearly 15% compared to the second quarter of 2017 and the third quarter of 2017 marks the second quarter of sequential growth and adjusted EBITDA and recovery and adjusted EBITDA margin for the segment since the first quarter of this year. Turning to slide eight for an update on the synergy capture and cost reduction initiatives. In our second quarter call late July, we said that we expected to achieve our $65 million transaction synergies and operational cost improvement target by year end 2017 which would have been one year ahead of schedule. We are now pleased to report that we actually achieved the $65 million target as of the end of September. As we move forward, we anticipate that our continued focus on Lean Six Sigma and effective CapEx deployment will serve as a catalyst for future operation of improvements within this segment. Relative to the polymer segment $70 million cost reduction initiative which we first disclosed in 2015, we are proceeding according to plan and expect to bank approximately $50 million of the targeted $70 million by the end of 2017 with the balance expected to be realized by the end of 2018. I do want to provide an update on the cost to achieve these benefits. Our original estimate was that the aggregate $135 million of savings associated with transaction synergies and operational cost improvements would cost approximately $145 million. We now expect the total cost achieved to be approximately $110 million resulting in a steady state payback of approximately 10 months. Overall, an excellent work by the entire team as we now expect to achieve our target savings at 75% of the original cost estimate. Turning to slide nine for a look at the year-to-date results. For the nine months ended September 30, 2017 adjusted EBITDA was $288.7 million and revenue of $1.5 billion yielding an adjusted EBITDA margin of 19.3%. This compares to adjusted EBITDA of $276.9 million for the first nine months of 2016 with an associated margin of 20.8%. Year-to-date consolidated adjusted EBITDA is up nearly $12 million compared to the first nine months of 2016 with polymer segmented adjusted EBITDA growth of $31.2 million or 22.1% serving to offset lower year-to-date results in our chemical segment. The year-to-date comparison is impacted by the strong second quarter of 2016 results for the chemical segment in which adjusted EBITDA was $53.5 million with an associated margin of 29% both of which benefitted from lower overall input costs for CTO. Turning to slide nine, discussion of our net debt, as we expected cash generation improved as we moved through the third quarter and this was driven by normal seasonal factors as well as the inventory liquidation and release of working capital following the first quarter spike in raw material prices in our polymer segment. In the third quarter of 2017, Kraton net debt was reduced by $87.3 million. Since the acquisition of our chemical segment in January 2016, we have reduced Kraton net debt by $187.3 million, despite incurring $15.5 million of refinancing costs. With that, I’d now like to turn the call Kevin Fogarty for his closing remarks. Kevin?

[Kevin Fogarty:]

Okay, thank you Steve. I believe our third quarter results reflect the longer term potential we continue to see for growth and margin enhancement in both our polymer and our chemical businesses. Although our polymer segment faced significant raw material inflation in the first quarter of this year, on a year-to-date basis the polymer segment has delivered solid growth on sales volume, margin expansion following these first quarter lows illustrating resilience of our polymer business and our continued price discipline. Third quarter results in the chemical segment improved both sequentially and relative to the year ago quarter, largely due to continued recovery in pricing and margins for tall oil fatty acid products. Tall oil rosin prices remained under pressure in the quarter and we expect weakness for toll pricing will continue through the fourth quarter; however we currently believe the first quarter of 2017 is most likely to draw for margins in our chemical segment. Looking at our year-to-date results overall, we are pleased with the progress we have made on all fronts. The polymer segment is having a solid year and for the past few quarters we have seen improving performance in our chemical segment. In fact, we remain confident in the long term vitality hub and the growth potential for our chemical segment. And with continued improvement in the base business, we should be in a positive position to leverage the full benefit of the cost improvements achieved to date. Furthermore in conjunction with delivering the $40 million of operational cost improvements since we acquired the chemical business, we have driven our culture of continuous improvement further in to the organization. As we move forward our focus will remain on operational efficiency and cost reduction as a key aspect of driving profitability. Finally we are unwavering in our commitment to reduce leverage. Thus far in 25017 we have worked diligently to improve our capital structure to reduce interest expense. These actions include issuance of a 7% notes, repricings of our term loan that have reduced interest by 200 basis points and the addition of a euro tranche to the term loan. The reductions in interest expense will benefit free cash flow and facilitate further reductions in outstanding debt. Our expectation for reduction in Kraton debt of $125 million to $150 million this year in conjunction with 118 million reductions last year puts us well on our way to achieving our desired leverage of less than 3 tons. And now we’d love to turn the call back to the operator and take some of your questions.

[Operator:]

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

[Jason Freuchtel:]

Hi good morning guys.

[Kevin Fogarty:]

Good morning, Jason.

[Jason Freuchtel:]

Can you elaborate on where you stand on the different pieces of your cost savings program including when you completed or expect to complete the construction of each of your global projects and also where capacity utilization is currently at each of the projects relative to where you expected to operate on a normalized environment?

[Kevin Fogarty:]

Steve, you want to jump in and take that one.

[Steve Trembley:]

Jason, with the capital that we are deploying in Polenia which is what we refer to as our direct connect project which is to improve the overall capability of our Cariflex portfolio, that CapEx is deployed and we are currently in the process of continuing to transition customers to that new capability. The Asia facility, the construction on that Asia plant has been completed. We mentioned in our second quarter call that the capital for that facility which is going to a customer for applications as we speak is in the area of $180 million against that more than $200 million original estimates. The third large tranche of CapEx is some work that we have to do at our facility in Bayer, France and that is commencing currently and we expect it to be completed by the end of the first quarter of next year. And those are all on target and all part of the $110 million of overall cost to achieve which are indicated. Relative to utilization, you know the demand fundamentals as you can see by the volume posting for the first nine months of the year and frankly in both segments, pretty strong volume growth and that would indicate that our utilization is relatively high as we enter our fourth quarter in both segments. It’s actually one of the reasons that we commented on the storm related activity could have some lingering effect. The team, especially in the chemical business is doing a good job of trying to offset the impact of several days of outage to ensure that we have the capacity to meet our customer demands in the fourth quarter and then in to the first quarter of next year.

[Jason Freuchtel:]

Okay. And just as a follow-up to that answer. It sounds like you're still in the very early stages of ramping up the projects that are completed. It sounds like Polenia and the JV and Taiwan is completed, but you're kind of in early stages of that. Is that correct?

[Kevin Fogarty:]

I wouldn't say early stage necessarily. I mean early stage in terms of significant volumes, commercial volumes to customers. Yes. But the Cariflex opportunity in Polenia is much further along in the early stages where we got commercial product that's available for customers. Again, the CapEx is fully deployed. The facility in Taiwan, construction was completed in the first quarter. We’ve got a number of a great slates at that facility is going to produce which is our most demanding grades in our portfolio – on our HSBC portfolio. A number grades have already been supplied to customers. We’ve had very nominal commercial sales this year. We expect to have significantly more sales next year.

[Jason Freuchtel:]

Okay. And can you clarify in the quarter in which you announce the benefit of cost savings and synergies. Are those benefits progressed entirely through your P&L? Or is it possible that the benefits remain in inventory for some period of time?

[Kevin Fogarty:]

Relative to where we are to the nine months and the achievement of the $65 million of transaction-related benefits and relative to the $50 million expectation this year, none of those are hung up in inventory, those are all flowing to the P&L.

[Jason Freuchtel:]

Okay, great. And how should we think about the potential to refinance your 10.5% senior notes next year, as well as the ability to utilize your U.S. NOLs?

[Steve Trembley:]

I’ll take the last question first. The NOLs at the end last year were in the $260 million range in the U.S. They don't expire until mid to late 2020s, so they’re fully available to offset future U.S. taxable income for a number of years to come. And then your first question around the ability, maybe I'll say rather than ability but say desire to refinance those – that capital structure. If we look at the capital structure of the company in addition that Kevin said, our relentless pursuit to delever. We think we've done a reasonably good job of lowering the interest rates of our overall indebtedness where we can. We haven't been able to because of cost has been on the [Indiscernible]. Clearly that's the next tranche of the capital structure that's on our radar screen. The first call on those is October of next year, so we’re very, very keen to look at opportunities to do something with that piece of the capital structure and lower overall interest cost provided the paybacks there.

[Jason Freuchtel:]

Okay. And last question for me. What was the main driver of the 36% increase in paving volume and your polymer segmented in 3Q, 2017?

[Steve Trembley:]

Although Kevin add in some more color, but generally what we’re seeing is very, very nice infrastructure spending including some nice gains in South America especially with HiMA product offering.

[Kevin Fogarty:]

Yes. I would just say that, I think we’ve talked about it going into vote North America and Europe that we had pretty, although you never know because there's always an element of weather that needs to be taken into account. But we had pretty robust news going into the season just because of a project activity in the way in which we positioned our portfolio in those right markets. So, we had a pretty good expectation and I think we could say now that as we closing on the summer season it was a good season both for the industry, but certainly for Kraton.

[Jason Freuchtel:]

Okay. Thank you.

[Operator:]

Our next question comes from Chris Kapsch from Loop Capital Markets. Your line is now open.

[Chris Kapsch:]

Good morning and thank you for all the disclosure. And so just juggling call here this morning, but I had some follow-ups on your comments about the profitability in the polymer segment. And I guess given the volatility in rosin and butadiene in particular the way you described it, the gross profit per ton is a good way to look at it. And then if I -- but if I look at what you said about you nine months gross profit per ton reaching, I think it was 980 compared to roughly 8, 15 year ago. Does that 980 still a little bit inflated given the pricing versus ECRC raw material costs at this point? Or should that be thought of as kind of a normalized metric. And obviously there's improvement regardless what the answer to that question is and just wondering if you could just characterize what the addition to this structural improvements? How much benefit are you getting from your commercial efforts to ship the mix of the port -- the product portfolio toward more differentiated products?

[Kevin Fogarty:]

Well, Chris, thank you. You answer the first part of my response will be with the last question you asked which is around the sales mix itself and that's always our focus. I will say that that's just a part of what we do in terms of our commitment to innovating and growing with innovative base sales. And I think Steve made a comment about, for example, in paving, one of the positive this year for – in fact it was the penetration of HiMA product particularly in South America, and we came, met our team and the customers who were working with for allowing us to do that. So absolute that's our focus. But back to your real question, I mean, we look at that $1000 per ton gross profit performance metric and we’ve been talk about that now for the last, I don’t what Steve probably four years. Its kind of a good way to think about what we think we can take the portfolio long-term sustainable, not one quarter, not two quarters, but long-term sustainable. And I guess the point we want to make here is with the performance this year in light of what your reference is, an interesting year with respect to butadiene and how it evolved beginning in the year to where it is today and where we think it's going in the fourth quarter. We think that the results we achieved year-to-date two, three quarters is indicative fact that $1000 per ton gross profit long-term performance metric is certainly achievable in Kraton’s portfolio.

[Chris Kapsch:]

So, just as a quick follow-up, do you think that for the 980 obviously with above 1000 in the last two quarters, but well below in the first quarter given that's one when the real spike was in butadiene. Is that 980 sort of a normalized number at this point for the business for the first nine months?

[Steve Trembley:]

If you want to think of it as normalized number for the first nine months, I think that that's probably given the markets we found ourselves and the growth volume we hat it might be little bit on the low end.

[Chris Kapsch:]

Okay, good. And then just a follow-up on the pine chemical side, that’s encouraging comments around so far and the pricing momentum there. But I had question just if you could maybe describe a little bit more of the dynamic on the TOR pricing, obviously there is sort of a trough in the first quarter with the alternative C5 tackifiers over supply issue, you hinted that we thought – you thought that might be at trough on given sequential improvement in margins in that segment, I guess that corroborates that view, but just provide any more color or details around the involving dynamic with respect to competing with non-pine alternatives in the keys of rosin market? Thank you.

[Kevin Fogarty:]

Yes. I think the comment we made contain bolt-on in my comments as well as I think Steve reference it. We’re still feeling pressure in that space with respect to as you reference now in pine alternatives, so in another words, the C5 family. And our view is that probably going to continue for the balance of this year as you all know – I think some of you know, anyway there’s a major project in Singapore that is probably starting up now or we expected to start up through the end of the year and therefore we’re watching this very closely and making sure we’re staying very close with our customers. We believe our products not just the one we’re using today but the ones will continue to introduce part of our invasion commitment. We do create substantial value to our customers beyond just C5 alternative and the price point alternative that we compete against. But that being said, this is always a time where you have to stay close to your customers to understand those dynamics, to make sure that we continue to be viewed as a very competitive alternative. And I’ve plotted team. That’s exactly what they charge themselves to do and needless to say when you’re thinking about a business like our chemical business where you know the overall performance of the refinery is driven by the individual performance of each of the product lines were very sensitive to one we have very – what we called free robust demand in our TOFA stream are very sensible though what that means with respect to that TOR stream that is under a little bit more pressure and so we have watch those balances very carefully.

[Chris Kapsch:]

Thank you for the color.

[Operator:]

Our next question comes from Josh Spector of UBS. Your line is now open.

[Josh Spector:]

Hey, guys. Thanks for taking my question. Just a question on performance products, the paving growth was obviously very strong. If I look at the rest of the segments, I’d say, the rest of the segment must be flat to slightly down to balance out to around 11% growth. But you just talk about the other segments and where maybe there were positive or negative surprises for the quarter?

[Steve Trembley:]

Well, if you think about our performance products of business it really encapsulate three pieces, because we still record the adhesive piece in our performance products businesses as a styrene block copolymers here. But from a customer's perspective we’re go into market is a combined rosin and styrene block copolymers offering, and you can imagine how that's important from a market perspective. But to your question specifically indeed we're still just like we are in our torching [ph] that I just spoke. We’re still seeing a rather competitive dynamic in the SIS which serves our adhesive space because of the availability of C5s and what that is done to the competitive alternative. And so we’re improving. I’ll give you that because the team has done tremendous job positioning the portfolio in the right markets to truly try not to seek out where we can differentiate ourselves, but nevertheless while the overall performance of the performance products business has been very good. Clearly you're correct and that there is one pocket which is the SIS sales associate with adhesive are continuing to be watch very carefully.

[Josh Spector:]

Great. And just similarly on specialty, I guess if you just broke it up in the kind of more consumer facing markets versus industrial was anyone significantly different up or down or were they both generally flat?

[Kevin Fogarty:]

Are you talking about our specialties?

[Josh Spector:]

Specialty polymers, yes.

[Kevin Fogarty:]

Yes. I think that one thing we’re proud of the work we’ve done to look at making sure that we got a pretty diverse sales base, but certainly and probably the one area that stands out is we serve a very important role in the viscosity modification markets associated with synthetic model roles and in that space we’ve maintain a very strong position and seen some very nice healthy growth, as well we’re also encouraged by what we've seen in some of our fundamental polymer modification segments that utilize the benefit of Kraton in a typical application where that Kraton is blended with another polymer substrate typically polyethylene, Polystyrene, polypropylene to improve the performance. And in the automobile segment we’ve had a couple of examples of where Kraton has grown at a rather nice clip the last couple years again through our innovation offerings.

[Josh Spector:]

Okay, great. And just last one on specialty polymers. I guess, volume growth for the quarter, is that in line with what your expectations where in terms of what you were thinking in terms of global growth and sales there? Or it was flat, a little disappointing?

[Kevin Fogarty:]

I think the quarter we’re comparing to -- it was pretty robust this time last year. So you always have a tough comp in that sense. But if I look at the business over the course of the calendar year where we’ve seen growth throughout the first nine months and certainly as we look at the projects laid for the market development activities that we are undergoing and as we think about next year, we’re encouraged by that pipeline. So, I don’t see any negative trend in that space at all. But for us as Steve mentioned earlier the startup of the new facilities in Mailiao or Taiwan are so vital to ultimately the success of the business, and that’s attract a lot of attention this year. And I’d also like to say that the work that our team has done has been tremendous in that like to make sure that we are getting these new products approved by our customers. We’ve got a whole handful of very important customers that have been very patience with us and helping us get through the startup in these product transitions to which we’re grateful because this asset is absolutely key to drive that growth in the future.

[Josh Spector:]

Great.

[Operator:]

Our next question comes from James Finnerty from Citi. Your line is now open.

[James Finnerty:]

Hi. Good morning.

[Steve Trembley:]

Hi, James.

[James Finnerty:]

Hey. Just on the leverage target, could you just reiterate what the target was and what time frame you expect to get there by?

[Kevin Fogarty:]

We've long targeted at leverage target of less than three turns. We look back at the leverage when we acquired the Arizona business. I'm speaking of the leverage excluding the debt that's at the JV which is supported by the JV. So Kraton debt alone, when we close the transaction we’re at about 5.4 turns of leverage and at that point we stated that our desire would be three or below. As we look at trailing 12 months of September, the deleveraging of $187 million if we taken off the balance sheet coupled with the improvement in EBITDA a leverage with stand at around 4.6 turns at 930. So about 80 points below where we started this journey back in January of 2016. So we have confident that we’re going to still get to a three turns. With that trajectory it will be beyond 2018, but it certainly in our very near-term planning to be three turns or below.

[James Finnerty:]

Great. And in terms of once you get would you look at M&A prior to getting to that leverage target if something came about and do you think just further room for consolidation in the hydrocarbon presence space?

[Steve Trembley:]

Kevin can cover that off. I will say briefly though that you know our first use of free cash flow is clearly going to be to deliver the balance sheet, but at the same time we are mindful that of our other opportunities that may or may not be out there, but I’ll turn it over to Kevin in terms of longer-term M&A strategy.

[Kevin Fogarty:]

Thanks, Steve. From the beginning when we did this transaction we share with investors that are number one priority in 20 certainly in the case of 2016, 2017 and 2018 was an execution one. We had to consistently across the board integrate the new Arizona acquisition with Kraton which we believe has gone well. We’ve always still got a lot of work to do in areas that we want to focus on. But in terms of the cost targets with respect to synergy capture I think we’re very proud of the fact that we achieve those fully a year ahead plan, but also equally important is the cost recent initiatives that were part of the overall legacy Kraton portfolio that were actually vital to the businesses future and we’re well on track there as well and of course equally pleased as we talk about how we’re going to do that with substantially less cost to achieve than we had originally forecast. So, now we look to the future and still we have work to do in terms of the integration of these new businesses due to great potential here when tell you in terms of what we think we can do with the product line that we acquired in the Arizona business. We’re really excited about some of the innovations that are under development. I suspect some time in 2018 we’ll have a more robust information sharing session with our investors, we’ll be able to talk more directly about what some of those initiatives are, what they’re going to need for the business. So for the time being I think we’re pleased with what we’re working on. Never rule out the possibility of business coming along that might be a girlie good fit not on the scale, of course this one was – we never rule that possibility out, but our number one priority is execution and deleveraging and integrating this acquisition.

[James Finnerty:]

Okay, great. And just qualitatively, would it be more of a focus to be growing on the pine chemical side or the polymer side or would it depend on the situation?

[Kevin Fogarty:]

Yes. You can't generalize, it would dependent, although I will say that certainly the combination of these two great legacy businesses has really open the doors to a lot of new markets, lot of new customers that -- but we always thought [Indiscernible 40

[James Finnerty:]

Great. Thanks very much. Congratulations on the great quarter.

[Kevin Fogarty:]

Thanks James. Appreciate it.

[Operator:]

Our next question comes from Curt Siegmeyer from KeyBanc Capital Markets. Your line is now open.

[Curt Siegmeyer:]

Hey, good morning, guys.

[Kevin Fogarty:]

Hey, Curt.

[Curt Siegmeyer:]

Just to clarify on the leverage target, did you say what you thought you could get to by the end of 2018, I know you said, three is the long-term goal, but by the end of 2018 did you…?

[Kevin Fogarty:]

We’ve not provided any guidance on 2018, Curt, but I think to the first seven quarter post transaction with Arizona, I think that we've long stated that we have a firm conviction that these two combined great companies will throw up significant amount of cash flow. I think we’ve demonstrated that and there’s no reason to suggest that we can continue to do that, but we’ve not provided any specific 2018 guidance. I suspect as we think about our year-end report out in February we’ll be considering what kind of forward-looking guidance we give.

[Curt Siegmeyer:]

Got it. Okay. And then just on the chemical segment, as you think about margins there heading into 2018 you mentioned you obviously wrapped up your cost synergy targets well ahead of schedule, given where margins are relative to last year's level could it's sort of the puts and takes driving that. Do you think you could get back to 2016 EBITDA margin levels next year, and what would have to happen for that to occur?

[Steve Trembley:]

I’m not going to talk specifically about our 2018 targets at this point. We’re just trying to get through discussion in this quarter. But in a general sense you know that we are working diligently every day on margin expansion through it really three components; one is clearly that the differentiation that goes along with the types of sales that we seek outside, some of which is the mix of sales. Secondly, through our cost-out initiatives our team has done a tremendous job with respect to taking both variable and fixed costs are to drive real productivity and enhancement and seeing net flows at the bottom line is absolutely vital and we believe with stability in these markets as we continue to improve the base business we’ll be able to see those and recognize those fully. And then the last piece is which is at the end of the day perhaps a little bit less out of our control, but there’s also a market element too and clearly these markets have been a little bit impaired if you will because of competitive dynamic. First, we have the TOFA situation resulting from the over supply coming out of the oil field as well activity dried up for a period of time. We talked about how that's now in a fairly steady state of improvement. But then -- but we sill have fundamental issues associated with adhesive business which is driven by the availability of C5 and C5 alternatives we just spoke to earlier, so I’ll repeat myself, but those three elements drive the margin expansion. So we’re working diligently every day to do that, there’s no question.

[Curt Siegmeyer:]

Great. Thank you.

[Operator:]

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

[John Roberts:]

Good morning, guys and nice quarter.

[Kevin Fogarty:]

Thanks, John.

[John Roberts:]

Steven, the appendix on the 2017 modeling assumptions, the fourth quarter estimated spread between FIFO and ECRC is only $5 million. It's normally a small number when raw materials are stable, but they’ve been anything but stable. Are you assuming they continue up in that 5 million estimate which I think is what the consultant forecast are? Or is it just that you're assuming they’re flat and they kind of just average in the fourth quarter kind of where they averaged in the third quarter. Even though they were moving down I think until the hurricanes moving up since then?

[Kevin Fogarty:]

Hey, good morning, John. We did we did talk about a plus or minus $5 million in the modeling assumptions provided in the material plus or minus $5 million. What we've been seeing is a decline in raw material prices, but that the client began to stabilize into September and frankly we’re little bit of a potential peak began in October slightly and then our expectation is that it will kind of roll down into November and December and does the effect therefore including the effect of the tail which is in the September balance sheet is going to be a pretty benign plus or minus $5 million expectation for Q4.

[John Roberts:]

Thank you.

[Operator:]

Our next question comes from Jason Freuchtel from SunTrust. Your line is now open.

[Jason Freuchtel:]

Hi, guys. Thanks for talking my follow-ups. First I was under the impression that the new C5 capacity that’s coming online in Singapore is very specialized maybe more so than the typical C5 offerings, your adhesive products typically price in here. Is that correct? And if so could the specialty nature of the capacity ultimately result in a fairly minimal impact on your adhesive margins?

[Kevin Fogarty:]

Yes. That’s a great question Jason, and certainly do see it the way you just described it in terms of the very nature of that new facility. But until we see how that makes its way through the marketplace I think I just want to put it out there is as a potential impact and no more no less, I mean, we’re not assuming its going to be a major effect the way in which some of the other capacities that were introduced over the last couple years certainly were -- but it is a marker out there, if you could say it that way.

[Jason Freuchtel:]

Okay. And also given the Cariflex volumes in 2017 are facing difficult comps due to some pull-forward of demand that occurred last year. Do you believe normalize Cariflex volumes will resume at double digit growth rates after we lapped the impact of 2016?

[Kevin Fogarty:]

Certainly, we describe it very well. There’s a difficult comp when you consider we had a kind of growth in 2016 that some of it came somewhat unexpectedly because of the elimination of power latex in the marketplace, which may benefited from. So yes, that made for 2017 being if you describe it a difficult comp. But that being said, we still look at the business is a nice growth business whether it's kind of a low double-digit or high single digit. We think that the key to that is really the impact on how quickly these markets now shipped to new economies just specifically in this case Europe which is certainly a target market for our customers and we’re doing everything we can to support them in that regard, because the U.S. has achieved the fairly healthy saturation rate of use mainly because of that acceleration that occurred last year in Cariflex material. So with hopefully very successful market development activities on the part of our customers that we can get back to those types of growth rates that we all have enjoyed in the past, but at a minimum this business should still continue to have multiple of GDP growth.

[Jason Freuchtel:]

Okay, great. Thank you and good luck next quarter.

[Kevin Fogarty:]

Thanks Jason.

[Operator:]

We show no further questions at this time.

[Kevin Fogarty:]

Thank you, Luigi [ph]. We want to thank all of our listeners and in particular the participants who ask questions this morning. A replay of this call will be available later this morning and can be accessed through our website at kraton.com under the investor relations section. There’s also a telephonic replay that will be available and the number to access that is 800-551-8152. That concludes our remarks this morning. Thank you.

[Operator:]

This concludes Kraton Performance Polymers Incorporated third quarter 2017 earnings conference call. You may now disconnect.