Kraton Corporation
Q3 2016 Earnings Call Transcript

Published: 27 Oct 2016

[Operator:]

Good morning and welcome to the Kraton Corporation Third Quarter 2016 Earnings Conference Call. My name is Martha and I will be your conference facilitator. At this time, all participants are in a listen-only mode. Following the Company's prepared remarks, there will be a question-and-answer period. [Operator Instructions] Today's conference is being recorded. 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. Sir, you may begin.

[Gene Shiels:]

Thank you, Martha. Good morning, everyone, and welcome to Kraton Corporation third quarter 2016 earnings call. With me on the call this morning are Kevin Fogarty, Kraton's President and Chief Executive Officer; and Steve Tremblay, Executive Vice President and Chief Financial Officer. A copy of yesterday's news release, as well as this morning's presentation are available in the Investor Relations section of our Web site. Before we review our 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 our presentation this morning and in yesterday's earnings press release. During the call, we may make certain comments that are not statements of historical fact and thus constitute forward-looking statements. Investors are cautioned 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 are 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 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 or loss or operating income, our gross profit to adjusted gross profit, as well as a reconciliation of earnings or loss per diluted share to Kraton to adjusted earnings per diluted share was provided in yesterday's earnings release and included in the presentation this morning. Lastly I'll remind our listeners that all references to year-to-date financial results for the chemical segment are from January 6, 2016 the date of acquisition through September 30, 2016 excluding the stub period January 1 through January 5. As we've discussed our first and second quarter earnings materials for the January 1 through January 5 stub period sales volume for the chemical segment was approximately 3.3 kilotons and revenue was approximately $6.9 million. And for the chemical segment 2015 financial figures referenced in our presentation this morning have been derived from the Arizona chemical historic operating results that are being included for comparative purposes only. Following our prepared remarks, we'll open the line for your questions. I'll now turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thanks Gene and good morning everyone. In terms of operational results third quarter 2016 for our polymer segment reflects growth and sales volume for all three businesses. As a result we delivered a solid quarter with adjusted EBITDA up 17% versus the third quarter 2015, and up 21% on a year-to-date basis. In our chemical segment, we delivered another quarter where adjusted EBITDA margins comfortably exceeded 20% despite a challenging market structure. During the quarter while total volume for our chemical segment was in line with the same period 2015, we continue to experience margin pressure and competitive conditions associated with continued availability of low cost C5 resin alternatives which impacted our adhesive business and lower prices for TOFA and TOR which principally impacted our chemical intermediates business. I’ll address these issues in more detail in just a few minutes. Looking at volume trends overall sales volume in our polymer segment was up 6% compared to third quarter of 2015 and another strong quarter of volume growth for Cariflex which was up 29% and for specially polymers which was up 10%. As mentioned sales volume for our chemical segment was essentially flat compared to the third quarter of 2015. Specifically adhesive volume was up 2% compared to third quarter of 2015 offset by lower volume and chemical intermediates in road to construction were down 1% and 3% respectively. On a consolidated basis third quarter 2016 adjusted EBITDA was $91 million. While below the expectations we had when entering the quarter, these results still represent an associated margin of 20% early indicative of the specialty nature of our market offerings across both our polymer and chemical segments. Adjusted EBITDA for our polymer segment was $49.6 million, up $7 million compared to the third quarter of 2015 the adjusted EBITDA margin improving to 18.2% from 15.8% in the third quarter of 2015. While our chemical segment third quarter 2016 adjusted EBITDA was $41.5 million, once again despite the margin pressures I mentioned earlier adjusted EBITDA margin was 23% in the third quarter which is in line with historical performance for the chemical segment. Strategically during the quarter 2016 Kraton continued to execute on key initiatives and we expect will deliver $70 million of cost reductions in our polymer segment by year-end 2018. As mentioned last quarter, our new HSBC plant in Taiwan has been undergoing commissioning and we expect commercial production this quarter. As we have previously indicated, we now expect the capital cost for the plant to be approximately $185 million substantially below our original cost estimate in large part due to the capabilities of our partner Formosa and the extraordinary efforts of our project team. Recently we completed an extremely successful preliminary product run in Polenia Brazil utilizing the commercial line on which we will deploy the direct couple process technology for our Cariflex business. The results for this important milestone serve to further validate the benefits we expect to realize upon completion of this important project. With regard to debt reduction since the acquisition of Arizona Chemical, we have reduced net debt by $147 million and we expect to end the year with a net debt of approximately $1.6 billion. And more importantly by the end of 2018, we still expect to reduce Kraton net debt by $500 million from the $1.73 billion outstanding at the closing of the Arizona Chemical acquisition. Let's turn to Slide 4 for a more detailed discussion of our segment results for the third quarter starting with the polymer segment. Third quarter 2016 revenue for the polymer segment was $273 million up 1.5% compared to the third quarter of 2015 resulting in year-to-date revenue of $786 million which was in line with 2015. Volume was up 6% in the third quarter and up 8% on a year-to-date basis. In both the quarter and on a year-to-date basis, selling prices were lower indicative of lower raw material costs, pressure on certain SIS product grades, and the effective changes in product mix. In the third quarter we continue to see strong volume growth in our Cariflex business with sales volumes up 29% in the third quarter and up 16% through the first nine months of 2016. Cariflex now represents 16% at polymer segment revenue compared to 13% in the first nine months of 2015. Third quarter and year-to-date results for Cariflex reflect the impact of continued conversion away from powder natural rubber latex surgical gloves. Our specialty polymer business also exhibited solid growth in the third quarter of 2016. Sales volume was up 10% on higher sales and to automotive and lubricant additive applications compared to the third quarter of 2015 and this was partially offset by lower sales in the [indiscernible] adhesive and coding applications. On a year-to-date basis, sales volume for specialty polymers was up 7%. As you may recall we sold certain compounding assets in the first quarter of 2016 and this impacts comparability of our third-quarter results. Specifically nearly $8 million of the decrease in specialty polymer revenue compared to 2015 is attributable to the sale of these assets. On a pro forma basis revenue would've been up modestly to the improved sales volume, the impact of which was offset primarily by lower average selling prices related to lower average raw material cost. Performance products sales volume was up 3.2% compared to the third quarter of 2015 was offset by the impact of lower raw material costs on average selling prices, oil prices for certain SIS adhesive polymer grades and the effect of changes in product mix. Though overall market conditions in the U.S. remain favorable for paving activity in the quarter, our third quarter paving sales were ultimately limited by the impact of an ethylene crack range at our key supplier in Europe, a constraint supply of butadiene late in the second quarter. Our expectations as we entered into the quarter, was that we would be able to manage our production schedule but our ability to offset the impact was ultimately limited by lower than expected production at our other manufacturing locations. We now estimate the impact on paving sales in the third quarter was approximately 4 kilotons. Although our third quarter sales volume was below our expectations, the combined second and third quarter of 2016 sales volume and the paving applications was up 9.2% year-over-year indicative a relatively robust season is predicted going into the summer. On a year-to-date basis revenue for performance products was $403 million on higher sales volume and as we saw on the third quarter the impact of the higher year-to-date sales volume was more than offset by lower average selling prices and the effect of changes in sales mix. Turning now to our chemical segment, third quarter and year-to-date 2016 revenue was $181 million and $543 million respectively. Total sales volume in the third quarter was comparable with third quarter 2015 and on year-to-date basis sales volume was down 2%. In terms of specific product groups within the chemical segment and adhesive price pressure including the effect of lower cost C5 hydrocarbon alternatives is a trend which became evident in the second quarter and one which is incremental impact in pricing and margins in the third quarter offsetting the 2.4% volume gain we realized in the third quarter versus the third quarter of 2015. While we do expect this margin pressure to continue into the fourth quarter, in few minutes I will share some perspective which we believe in each stability albeit in a lower competitive pricing environment. For the third quarter 2016 and since the closing of the Arizona Chemical acquisition adhesive revenue was $61 million and $187 million respectively. Once again all sales figures are indicative of lower average selling prices reflecting this increase competitiveness I just spoke. However as mentioned volume for adhesive business actually increased 2.4% in the third quarter compared to the third quarter of 2015 flowing back some of the client experience in the first half of 2016. Revenue for roads and construction was $14 million in the third quarter of 2016 down from the third quarter of 2015 largely due to lower average selling prices. Year-to-date basis revenue was $41 million down slightly versus the comparable period of 2015 with the benefit of higher sales volume offset by lower average selling prices. Looking at our tire business, third quarter 2016 revenue was in line with third quarter of 2015 and for the nine months ended September 30, 2016. Revenue was down $1.8 million primarily due again to lower average selling prices. Turning now to our chemical intermediates businesses. We see significant long-term growth opportunities for our chemical intermediates business. We were encouraged by the progress we've made in the second quarter as we showed solid sequential progress to the first quarter of this year. Our focus areas for continued improvement in the chemical intermediates business include improving customer relationships that were historically streamed by moved to a distributor network and developing new sales outlets to offset the implications of structural on TOFA market. In the third quarter given the TOFA markets in general remain fundamentally long there was no meaningful pricing leverage. At the same time crude prices were moving higher and this therefore had a bearing on our input costs for crude TOR oil. This resulted in incremental margin pressure during the quarter. Third quarter sales volume for chemical intermediates was down 1.3% compared to the third quarter 2015 and 2.8% on a year-to-date basis. Third quarter revenue was $96 million down $18 million compared to the third quarter of 2015 and from January 6 through the third quarter revenue was 285 million down $57 million compared to the nine months period in 2015. The revenue decline in both periods reflect lower selling prices including the effects of excess TOFA and TOR supply in the markets we serve, lower substitute material pricing and to a lesser extent reflecting the lower sales volume. Fairly one of the factors contributing to the long TOFA market has been a significant reduction in oilfield drilling activity as TOFA is a key component in drilling fluids. We estimate that the decline in TOFA demand resulting from the lower drilling activity is equivalent to approximately 67% of total TOFA supply. While the rig count did improve directionally in the third quarter, overall drilling and oilfield activity is not increased enough to alleviate the oversupply of TOR. These market conditions leveraging our international presence we will continue to focus on developing new markets for TOFA which we're not currently serving as we did successfully in the second quarter. Turning now to Slide 6, a few comments about the impact and availability of C5 resin alternatives is having in portions of our chemical segment. The increased availability of low cost C5 resin in conjunction with decline in crude prices has intensified competition in adhesive portfolio. And even in our roads and construction business was C5 resin alternatives. This chart presents pricing trends for C5 hydrocarbon resin alternatives. First crude prices which are reflected in the black line as you know have declined significantly since mid-2014 and this is a bearing on overall market prices for C5 resin alternatives. But we have also seen excess capacity and lower-than-expected demand growth in Asia. Prices for C5 resins reflected by the orange line have been in decline since 2014 but most recently have appeared to have stabilized. In terms of U.S. import prices for C5 resin reflected by the blue and the green lines, in early 2014 we see a divergence in pricing between product serving the higher end of the market or applications such as specialized adhesive tapes and label applications, shown by the blue line and prices for more commoditized applications such as inks and road marking applications shown by the green line. You would expect pricing for more specialized product offerings has held up more better and for lesser differentiated offerings. We believe we are at or near - or very near the bottom for pricing pressure in North America. Crude prices settling a higher level should help alleviate some of this competitive downward pressure. Needless to say given these market trends we must continue to focus on expanding sales of our differentiated products. With that summary I’m now going to turn the call over to our Chief Financial Officer, Steve Tremblay for a more in-depth review. Steve?

[Steve Tremblay:]

Thanks Kevin. Let's start with a review of the consolidated results for the third quarter where we posted revenue of $454 million, an increase of $185 million driven by the chemical segment revenue of $181 million. The balance was due to $23 million volume driven increase in our polymer segment which is more than offset by lower average selling prices, driven by the year-on-year decline in raw material costs, coupled with the competitive SAS dynamics and some sales mix chips. Currency had a positive effect on consolidated revenue of $3.8 million in the quarter. Adjusted EBITDA of $91.1 million represents a margin of 20.1% which is 430 basis point improvement from Q3 2015 driven by the strong margin profile of our chemical segment and the improvement in adjusted EBITDA margin our polymer segment to 18.2% in the third quarter. Polymer adjusted gross profit per ton improved $125 per ton to $848 per ton compared to Q2, 2016. Polymer segment adjusted EBITDA of $49.6 million is up 17% compared to Q3 2015 driven by the increased sales volume and continuation of lowering costs. Chemical segment adjusted EBITDA was $41.5 million in Q3 representing a margin of 22.9% continuing the trend of above 20% margins in this segment. The third quarter however represented a sequential decline from the $53.5 million generated in Q2 2016 primary due to some unfavorable cost absorption, an increase in turn around costs, and energy costs and the macro effects Kevin mentioned in his earlier comments. That said as we show on the next slide, the chemical segment has generated 25% adjusted EBITDA margin on a year-to-date basis. Third quarter EPS of $0.49 per share was up nearly 82% and adjusted EPS of $0.63 per share is an improvement of 31% compared to $0.48 per share in the third quarter of 2015. Moving to Page 8 for our full year results. Consolidated revenues of $1.3 billion is an increase of $543 million driven by the chemical revenue. In our polymer segment year-to-date 2016 revenue of $786 million is flat year-on-year with 8.3% volume growth offset by lower selling prices. Adjusted EBITDA of $276.9 million represents a margin of nearly 21% which is a 590 basis point improvement from the first nine months of 2015. The effect of the increase in sales volume and lower costs results in the polymer segment margin improving to 17.9% on a year-to-date basis and as I mentioned a moment ago, the chemical segment posted a healthy 25% margin which is accretive to overall adjusted EBITDA margins. The 20.8% increase in polymer adjusted EBITDA from $116.8 million in 2015 to $141 million in 2016 was the result of the improved sales volume and lower costs which more than offset the effect of lower selling prices. The cost actions which we've been implementing that preserve our adjusted gross profit per ton despite pressure on margins in certain polymer end use markets. 2016 EPS amounted $3.56 per share compared to a loss per share of $0.21 in 2015. Adjusted EPS of $2.07 per share is an improvement of 64% compared to $1.26 in 2015. On Slide 9 I want to provide more detail on our cost reduction initiatives starting first with the status of the $70 million targeted cost reduction and initiatives in our polymer segment. We continue to make excellent progress towards the 2018 target with more than $27 million life to date. This represents an incremental 2016 benefit of $8.4 million for the first nine months of 2016. With the successes to-date, we continue to expect to generate $28 million of cost savings by the time we end 2016 which would be at least $9 million of year-over-year benefit. Moving now to the integration related cost actions on Slide 10, first, from a G&A perspective we expect the 2016 savings will be $12 million to 15 million which is unchanged from earlier estimates in the year operational improvements are now anticipated to be up to $15 million which is an increase of $3 million from the last estimate. In the quarter we continue to proceed as per our original action plan capturing savings in the form of energy cost reductions, improved deals and lower logistics costs. In total therefore for the first nine months of 2016 we have captured integration related savings of $20 million and remain on target to achieve the $65 million in total year related synergies. Moving out of the capital structure on Slide 11. In Q3 we generated operating cash flow of $86 million and through September 30 we have generated $126 million of operating cash flow. Coupled with the proceeds from the sale of compounding assets, we've been successful in lowering Kraton debt from $1.73 billion at date of the Arizona acquisition to $1.58 billion at September 30. This represents a decline of $147 million in Kraton net debt since we closed the transaction and represents more than half a ton improvement in net leverage. As Kevin mentioned we are maintaining our expected end of the year 2016 net debt estimate of $1.6 billion and we remain firmly committed to achieving the $500 million reduction in net debt by the end of 2018. Looking at the key assumptions for the balance of the year on Page 12, let me start with the expectation for adjusted EBITDA. Our second half expectation call from modest growth in adjusted EBITDA over the $186 million delivered in the first half especially given the second quarter results in a trend in the cost reduction initiatives. Included in that view was an expectation of the third quarter adjusted EBITDA would be better than the consensus estimates. Our third quarter adjusted EBITDA however was less than expected principally due to the incremental margin pressure in our adhesives businesses, lower than planned sales of SBS into paving applications and the impact of lower pricing for TOFA and TOR in our chemical intermediates business. We do not expect the market conditions to reverse in Q4 and given the seasonal nature of the paving season, we are not expected to gain back the SBS volume shortfall in 2016. As such we currently expect Q4 adjusted EBITDA will be in the low $80 million range. The sequential change in adjusted EBITDA from Q3 includes the seasonal reduction in paving and roofing activity and the recent indicated potential increases in butadiene pricing. This fourth quarter estimate implies therefore a full-year 2016 adjusted EBITDA of approximately $360 million. I will mention here again, that we are maintaining a net debt expectation of $1.6 billion at December 31, 2016. The remainder of full year assumptions are largely unchanged from our prior guidance. So with that, I'll turn the call back to Kevin for some closing comments. Kevin?

[Kevin Fogarty:]

Okay, thank you Steve. Looking at our results year-to-date I’m personally encouraged by the performance of our polymer segment. Our Cariflex business has delivered strong volume growth this year. We've experienced good volume trends in our HSBC business. Even with the lower adjusted EBITDA guidance we provided in our earnings release, we expect 2016 we’ll deliver substantial growth compared to 2015. We remain on track with initiatives which we believe will further improve the operational performance and profitability of our polymer segment. We expect commercial production in Mailiao, Taiwan before year end as I mentioned earlier we had a very successful preliminary product run for Cariflex, in Polenia Brazil for our Cariflex direct couple process technology to be operational in 2017. In addition we remain on schedule for our USBC expansion in Bayer, France which will be completed later next year. With respect to our chemical segment having owned the business now for 10 months, our conviction in the long-term growth opportunities and profitability remain unchanged. The integration process has gone extremely well as you've heard this morning we're delivering on the synergy capture programs and in fact expect to delivering incrementally more in 2016 and originally planned. However the near-term impact of low cost C5 hydrocarbon resins along with excess capacity for SIS in our adhesive business and the impact of lower pricing for TOFA and TOR in our chemical intermediates business have resulted in margin pressure and lower than expected volume growth. As noted we see indications that some of the market pressures in our adhesive business maybe stabilizing we’re continuing to focus on product differentiation and the development of new markets in both adhesive business and our chemical intermediates business to projects that we expect will contribute to our results in 2017. Our chemical segment is truly a differentiated specialty chemical offering to our customers and therefore to our investors as evidenced by the impressive Q3 and year-to-date 2016 adjusted EBITDA margin profile of 23% and 25% respectively. We now have dedicated teams driving business and operational improvements and while dealing with a challenging period given oversupply and market dynamics, I am confident that their efforts will be evident in profit growth in the near future. Lastly as Steve just told you, we remain 100% focused on delivering the balance sheet given the impressive cash flow profile of combined company. We fully expect Kraton net debt at year’s end to be $1.6 million consistent with the operating plans all year and we remain committed to our goal of delivering $500 million debt reduction in Kraton by year end 2018 relative to the $1.73 million outstanding on the close of the Arizona acquisition. So with those comments, we’ll be happy to open the call up for some questions.

[Operator:]

[Operator Instructions] Our first question is coming from the line of Mr. Jason Freuchtel of SunTrust. Your line is now open.

[Jason Freuchtel:]

Hi, good morning. Can you remind us of the typical seasonality you expect throughout the year in both your polymer and chemical segments?

[Kevin Fogarty:]

Jason, good morning. The business has become somewhat less seasonal but it's still - first quarter and fourth quarter would be lower than the middle two quarters. The polymer segment interestingly has gravitated more towards an almost ratable EBITDA again subject to the usual variances in product mix which of course can drive unit margins. In the chemical business they are less than 25% historically in the fourth quarter. So number –as a portfolio certainly the fourth quarter is less than 25% of the year, it probably ranges in the mid 20% on average.

[Jason Freuchtel:]

Okay. That mid 20% was for the - did you say that was for the chemical segment only?

[Kevin Fogarty:]

That would be for the composite.

[Jason Freuchtel:]

Okay. Got you And in terms of butadiene pricing what’s been the primary driver of the - I guess higher recent butadiene prices and if butadiene prices were to decline to levels experienced in 3Q what type of EBITDA impact would that have on the polymer business?

[Kevin Fogarty:]

Well the first question, the answer really is it's Asia driven and it’s Asia supply driven. Particularly with one major producer in Asia who has had some operating problems literally for most of the calendar year. We thought that they had solved those problems but there has been another recent outage that has put some strain on the supplies. So that is the primary driver and it is a question in our minds to be honest about whether or not this is a sustained price momentum especially as we think about going into the New Year. Clearly there is some short term supply interruptions that are causing some spot momentum that has caused the U.S. contract producers to raise price but it's a question in our minds that how long that will last. With respect to the impact I think we talked about this before in terms of the business again subject to of course how we move pricing in concert with the butadiene price movements but you can take your volume assumptions pretty much across the Board with the exception of Cariflex and presume that about 70% of the weight in a polymer sale is comprised from butadiene.

[Jason Freuchtel:]

Okay. And then on the C5 chart you provided it appears the C5 pricing is roughly the same level it was when crude hit its low earlier this year. Do you have a view of the cost structure or profitability levels for the C5 tackifier resins producers at current crude price levels or do you have any view of why C5 pricing has remained low despite the recovery in crude pricing?

[Kevin Fogarty:]

It’s a great question. Certainly we’re trying to study this one closely. It’s our sense that with the run up in crude and the lower prices that you see is evidenced on the slide we showed, that the so called incremental producers of C5 tackifiers should be closer - the C5 precursor should be close to break even. And that's a pretty good sign Jason. But nevertheless at the end of the day we are dealing with some fairly large and integrated producers in Asia and I’ve been in the chemical business and polymer businesses a long enough time to know that from time to time theoretical breakeven on a piece of paper doesn’t necessarily match up with the behaviors so we’re watching this closely but the stability is evidenced by particularly both the green and the orange line - green, blue and orange lines in the slide is a good telling sign and I don’t think it hurts at all that the crude oil price has moved up over that period as well.

[Jason Freuchtel:]

Okay. And then lastly, did you experience the pricing pressure in your TOFA sales in any particular region or do you think the lower prices were broadly experienced across the industry and I guess with that would higher crude prices help alleviate the weaker TOFA prices?

[Kevin Fogarty:]

I don’t think I could say it’s one region specific because we certainly seen evidence of that pressure in all three of our major regions. Clearly again crude price notionally, directionally going up is helpful in this regard but again we're dealing with over supply and that’s why we thought it would be helpful to kind of call out how we see the impact of oil field as an outlet for TOFA and how that impacts the overall market. And of course I’ll remind you too that given the fact that Kraton is a smaller percent of the overall oil field, the impact to the suppliers, the other suppliers our competitive suppliers of TOFA relative to that market number that we quoted of 6% to 7% is probably larger.

[Jason Freuchtel:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question is coming from the line of Mr. Mike Sison of KeyBanc. Your line is now open.

[Mike Sison:]

Hi, guys. In terms of the chemical segment when you think about chemical intermediates in total, when you think about the fourth quarter and kind of where oil and everything is sort of laying out. Do you expect the fourth quarter to be kind of the bottom for in terms of the - for that business?

[Kevin Fogarty:]

Mike, I'm not going to predict, if it's bottom for the business. Clearly, we're dealing with a fourth quarter that on top of what I talked about vis-à-vis specifically C5 pressure and TOFA pressure within our business. You've also got a broader I think macroeconomic backdrop if you will that our customers are very sensitive to because their customers are pushing back on them. So we need to watch this very closely. Generally speaking I don’t have any reason to believe that the challenges we've had over the last quarter now two quarters are going to materialize into something worse because where we’re feelings things have stabilized as noted in some of the data that we shared. But this is kind of - this is the fourth quarter and we never want to draw conclusions about what happens in the fourth quarter as a basis for what's going to happen in the following calendar year.

[Mike Sison:]

Right, I understand. Then certainly difficult environment these days when you think about 2017 and I know it's little bit early maybe to give distinct outlook, but can you maybe just help us understand what the positives are, you got a lot of synergy, lot of cost savings and maybe some highlights of what - where you think we can generate some growth in polymers and the chemical segments?

[Kevin Fogarty:]

I can go through each one of our four businesses and give you a very nice view of the things that we are working on that are going to drive growth. And I'm quite optimistic about each and every one of them. Certainly with respect to our specialty polymers business were highlighted of course by what we're doing in Cariflex and the momentum in Cariflex. And I can't tell you how pleased we are as a company with test run that we had that demonstrate the new capability of our direct couple technology to serve market growth in that space. But clearly with respect to our hydrogenated material our customers have been waiting patiently and I appreciate that in saying that for our new technology -- our new capacity to start up in Taiwan, because you know that was geared towards the most technically advanced formulations in our offering which is the low molecular weight grade family. And this is something that you know we have planned for of course over the last several years, but our customers also have built some innovation platforms around that expansion and we're going to be very pleased to serve that. So you can imagine that in our view is a very the highlight for 2017 in our specialty polymer offering. With respect to our performance products business, we don't see any reason why the trends we've seen this year in terms of paving will continue into next year from the standpoint of good momentum. And the reality is that we have spent as you know a great deal of time working on developing particularly in the world of the infrastructure development market outlets beyond the traditional markets we served. And so we're seeing good momentum in places like India, especially for the more recent technology developments that we've been offering, such as highly modified asphalt technology. And I also remind you too that it's quite helpful to have the crossed selling capability now that exists between our chemical and polymer division particularly when you think about infrastructure improvement projects around the world. The market position Kraton has customer relationships the end-user relationships, we think is their help tremendously accelerate technologies that were offered by our chemical division, but they didn't have the market presence to really drive the penetration rates. So that's going to be a net positive for us. And moving now to our chemical division clearly our chemical intermediates business, everything we've done this year is about positioning for the future. To correct some of what I would call some of the misjudgements of the past i.e. the decision on the distributor, but also to develop new outlets that perhaps the company had served years prior but it not really paid attention to in the past two or three years and we've gone back and revisited some of those businesses and have actually landed some new business that we hadn't seen relationship within quite some time that's a good trend and that's exactly what we want to customers to realize they have in this new combined company Kraton. And then lastly with respect to our Adhesive business I'm really excited about we're going with from the standpoint of technology in that business. The team has developed new capabilities in a certain aspect of adhesive space that we haven't participated in the past and its through growth and I think that the capabilities we have and the relationships we have with our customers are going to allow us to capitalize on that.

[Mike Sison:]

Okay, great. And then one quick follow-up for butadiene prices, as you call in the past you’ve had pretty strong or better surgical pricing abilities when costs go up. They do continue to go up through let's say the fourth quarter into 2017. Is it at the level where there could be some demand destruction or are we still at a pretty benign level that you're not really worried about that part of the issue?

[Kevin Fogarty:]

Yes. Mike, you were - later the way you describe it, I mean the reality is that we have talked about in the past with respect to butadiene inflationary price pressure is twofold. One is needless to say we've got to be diligent passing through, preserve our margin and we will watch this very closely. That's why I made the comments earlier about is short lived or not because that's something obviously we need to be very sensitive to as we embark on our own pricing strategies. But the second point that you made which is around the absolute price of butadiene and what that does to the competitive raw material in the eyes of the marketplace. I would tell you right now that butadiene even with this increase we expect to see in November puts the price point of butadiene relative to the crude oil as an alternative pretty much in line with history before the big run ups we saw three or four years ago. It's not unreasonable in terms of where that butadiene price point is. And what's important to us is how does it affect or how is it compared to the rest of the Polymer chain with respect to hydrocarbon underlying value and again the price points we're seeing today are not unreasonable. I think you're justified. Let me clear that. I'm not sure you are justified that remains to be seen, but from the standpoint of reasonable is relative to underlying crude oil and Naptha cost. That's my comment.

[Mike Sison:]

Great. Thanks Kevin.

[Operator:]

Thank you. The next question is from Bill Hoffman of RBC Capital. Your line is now open.

[Bill Hoffman:]

Yes, thanks and good morning. Kevin can you just talk a little bit more about the intermediates, you talked about some of these opportunities. Have you guys will be end in new businesses this year and as you are looking to 2017 or the things like discretely that you can point to where you're moving product out of distribution in the direct sales?

[Kevin Fogarty:]

Well, Bill I'd be happy to give specifics, but I really just want to share that I don't think our customers would appreciate it and I'm guessing our competitors probably would appreciate it and that’s not really something I want to share, but I can tell you, yes, the answer is we have landed business, a combination of new business and capturing back business from the past. And again there's nothing magical about this as we spent a lot of time with some of our key customers that we’re in the past a little disappointed. That's probably putting it mildly about the way in which the Company had decided to manage their business and we were able to put our best foot forward with the existing team and the new leadership team to let people know that we're missing for the long haul, we can be the supplier that you want us to be. And in some cases which was the fortunate given the nature of this the types of businesses we serve there were common customers people that we had already done business with in great time you can imagine it was just a matter of convincing them that future of the combined company should be mirrored against the past that they were used to dealing with in break on a supplier. It's all going very, very well I mean these are say that the challenges that we're facing in terms of the pricing environment in the supply environment to be honest that's the time when you know we can demonstrate the capabilities of this combined company best to these customers. And you know it really it's very easy in periods of tight market supply which I'm sure will come one day you know to demonstrate capability to a customer but it's in the periods like this when you can truly build that relationship for the future.

[Bill Hoffman:]

Yes, I guess what I was trying to get to is just not specific customers but more or like you know if you look at the GDP growth rate of you know whatever call 2%. The volume metrically for you guys you are the two times GDP growth potential line next year or is it even more interesting on it.

[Kevin Fogarty:]

In certain parts of the business where we're capturing back business from the past it should accelerate relative to GDP.

[Bill Hoffman:]

Okay. Thank you. And then just can you talk a little bit about operating rates in the chemicals business sort of where about you might be at this point you know pre-transition in some of these new business opportunities?

[Kevin Fogarty:]

So operating rates are - there not the most relevant data in this space simply because this is a business as you know that is based on CTO availability, CTO processing capability.

[Bill Hoffman:]

Right.

[Kevin Fogarty:]

Not necessarily just capacity to refine. And so we watch this as you might imagine very closely. Right now I would say that because there is length in the TOFA markets as we talked about you can presume that means that people are not running perhaps as much material as they perhaps could. So there should be in that instance probably is some classical definition some oversupply or overcapacity in the industry. But we look at it much more simplistically because it is really above where the CTO is coming from, who has it and then you extrapolate that through the refinery model to determine where they're positioning the big four outputs into the markets.

[Bill Hoffman:]

Okay, thank you. And just final question it is more for Steve just from a working capital standpoint, one that was good cash release, more capital last quarter. As you look into Q4, do you expect to the overall release more cash from working capital and could you put that in a context of what you‘re hearing from others is just software order patterns in Q4 and potential downstream destocking.

[Steve Tremblay:]

I would expect John that the business in the third quarter is where we generate a significant piece of our operating cash flow given that seasonal nature of that we spoke about earlier so we are not a large cash flow generator in the fourth quarter. We’re little bit below $1.6 billion of net debt at September 30 that’s still our call for the full year, you can given where we see EBITDA. As far as inventory levels, you were referring to inventory levels that our customers I assume.

[Bill Hoffman:]

Yes.

[Steve Tremblay:]

Yes, we are not hearing that.

[Bill Hoffman:]

Okay. Thank you.

[Operator:]

Thank you. The next question is from the line of Mr. John Roberts of UBS. Your line is now open.

[Josh Spector:]

Hi guys, this is Josh Spector on for John. Just had a question in the performance segment. Can you characterize what you're seeing in terms of demand between Americas and EMEA there is any differences, any strength and weaknesses within the different segments.

[Steve Tremblay:]

When it comes to performance products, I think the both Asia, Middle East we’re not particularly when it comes to traditional SPS for bitumen modification that’s not a core market for us, never has been and although my sense is that with you butadiene prices being elevated in those markets relative to the butadiene price in these markets, that's the price increase pressure we are feeling or the cost increase pressure. My sense is that probably means that market seeing that improve local SPS prices. With respect to our markets, North America and Europe constitutes looking at speed now, easily 80 plus percent of our SPS sales and those in the market we focus on and I said earlier it's been a pretty good robust summer paving season.

[Josh Spector:]

Is it too early that start thinking about what that might look like in 2017, do you guys have any kind of view to what that might look like?

[Steve Tremblay:]

We're saying the paving business, you never more than two quarters from second and third quarter but probably little bit early for us to make comment on. We’ll certainly comment on it as we announced the fourth quarter results early in the New Year to give you some sense of how we are looking at it. But again based on everything we’re hearing in terms of discussions with customers and what not, we don’t think there is any reason to believe that trend that we’ve seen this year whether depended of course and crude oil dependent because the crude oil it goes back to $100 in a very short period of time that puts a lot of pressure obviously on that supply chain but otherwise I think people are still thinking that trends we’ve seen this year should continue.

[Josh Spector:]

Okay, great. And then the just within chemicals, I think sequentially volume was down around 4%. I was wondering if you could help us understand kind of where that was within the segment, if it was within one more than others or kind of broad based.

[Steve Tremblay:]

In the quarter as we cited adhesives was up little bit over 2% and that was offset by little bit of volume down in CI and the roads and construction business.

[Josh Spector:]

Was that year-over-year or sequential?

[Steve Tremblay:]

That was year-over-year versus Q3.

[Kevin Fogarty:]

Sequentially really the same factors that we called out, we had some weaknesses in adhesives because of the C5 dynamics that Kevin and we've been speaking about for some time.

[Josh Spector:]

Okay great. Thanks guys.

[Operator:]

Thank you. The next question is from Jason Freuchtel of SunTrust. Your line is now open.

[Jason Freuchtel:]

I have a few follow ups. First I wanted to follow up on your butadiene pricing view. Is your view that prices could remain at current levels based on a skeptical view that the shell capacity will come back online?

[Kevin Fogarty:]

When you say current prices you mean before the price increase Jason?

[Jason Freuchtel:]

No I am sorry, assuming the price increase that you assumed for 4Q.

[Kevin Fogarty:]

I am just saying that what's driving the price increase momentum right now is clearly the spot market in Asia as a result of that outage and dependent upon the timing of that outage, we’ll really determine whether or not it’s sustainable. I don’t know enough about the outage to tell you how quickly it's going to be back on or not but the mere fact that it’s caused by an outage and not necessarily anything associated with demand tells me that if that supply resumes itself then my guess at worst it will hold that level but no more.

[Jason Freuchtel:]

Okay. And I guess prices could fall potentially?

[Kevin Fogarty:]

Prices in our products?

[Jason Freuchtel:]

No, I am sorry, the price of butadiene could fall if this would…

[Kevin Fogarty:]

I am not so bold to predict that. One thing you might want to think about is I’ve always said this in the past but if I just think about the fundamental relationships, the price of butadiene historically speaking traded not too different on a cents per pound versus the price of crude oil on a dollar per barrel because it moves relative to naphtha historically speaking because of the underlying cost structure in ethylene cracker. But at the end of the day we definitely saw that relationship thrown out the window if you will during the period of the big butadiene run up in 2012. So I think that at the end of the day right now, carrying the kind of butadiene price points we have today even with this increase relative to today's crude oil market it’s not out of the realm of possibility but again more about supply demand and right now just the demand crunch in Asia, excuse me a supply crunch in Asia.

[Jason Freuchtel:]

Okay. And is there anything specific that has allowed you to exceed expectation so far for your cost savings and synergies in 2016 and could your 2016 and 2017 estimates for cost savings and synergies potentially be conservative?

[Kevin Fogarty:]

I think Jason we’ll be at the top end of the cost reset initiatives as we’ll probably land as perhaps a little of room there to the upside. I think on the G&A and the operational on the cost reset initiatives that impact polymer, the ranges that we showed in the slides. Again I think more likely to be at the higher end and as we think about 2017 the rangers that we provided in the material those continue to be where we see things now certainly between now and February we’ll be tightening those up.

[Jason Freuchtel:]

Okay. And what volume growth expectations for Cariflex is included in your 4Q guidance as your view of growth in Cariflex changed due to the FDA proposed ban on powered rubber surgical gloves?

[Kevin Fogarty:]

Jason I'd like not to get into individual operating unit growth assumptions within the guidance that we’ve provided. What we would continue to say is we’re definitely feeling positive momentum from what's going on in the glove market but we haven’t yet changed our long-term view that this business again long-term view is 10% to 15% volume growth year-over-year.

[Jason Freuchtel:]

Okay. And then lastly just wanted to clarify on the comments you made earlier about the seasonality, you would now expect for your business. Was that primarily relating to volume seasonality, earning seasonality and I guess again it sounded like 4Q was potentially lower than some of the other quarters. Could you just clarify the statements?

[Kevin Fogarty:]

Certainly. Volumetrically absolutely lower expectations historically for the paving and roofing end use markets in our polymer segment, as well as in the road marking and construction business of our chemical segment. So volumetrically absolutely and does that translate generally into an EBITDA quarter in the fourth quarter that’s lower than the third quarter. The volume change on a percentage basis is generally larger than the impact on EBITDA because the products that we're talking about that have the most seasonality are not the most high margin products in our portfolio.

[Jason Freuchtel:]

Okay. And that was on the polymer side?

[Kevin Fogarty:]

And the chemical side.

[Jason Freuchtel:]

And the chemical side, okay great . All right thank you.

[Kevin Fogarty:]

My earlier comments Jason around the less than 25% in the fourth quarter that specifically in terms of EBITDA.

[Jason Freuchtel:]

Okay, great. Thank you.

[Operator:]

Thank you. The next question is from John Roberts of UBS. Your line is now open.

[John Roberts:]

Thanks guys. John Roberts on for John Roberts. You report paving in both the polymers and chemical segments now and you've obviously got some other areas where both segments serve the same customers. Do you reorganize at some point lower term and have one paving segment, one adhesive segment for example or because of the assets you need to maintain the current reporting structure for a long time.

[Steve Tremblay:]

Well I would tell you that in specifically in the example you gave in terms of paving John, we go to market now as one face for the customer benefit. We report to you obviously through our financials reflective of the fact that one of the business is chemical sourced, the other business is traditional polymer sourced. But with respect to what's most important in terms of driving growth, the view of the customer is that this is now a newly extended off product offering to the customer face that comes from both our primarily road marking business in case of our chemical segment and our traditional bitumen modification in the case of the polymer business and the customers obviously view that as quite a positive development.

[John Roberts:]

So you have a matrix structure because you obviously have to report along your organizational lines I think by SEC requirements. So you must kind of have a head of chemicals and head of polymers that the paving folks report up to both of those segments, as well as report along some market segment as well.

[Steve Tremblay:]

We report externally based on how we allocate capital in the way Kevin makes decisions which in the segments of polymers and chemicals. We have a head of commercial who runs the commercial organizations and we’ve set up the commercial organization essentially around end use markets tuck with in each of the reporting segments and then we also run a global operational organization that ensures the plants whether they’re in the chemical or polymer segments are running optimally.

[John Roberts:]

Thank you.

[Operator:]

Thank you. At this time there are no further questions. I would like to hand the call back over to Mr. Gene Shiels for closing remarks.

[Gene Shiels:]

Thank you, Martha. I want to thank all of our participants this morning for their interest in Kraton and their thoughtful questions. There will be a replay of this conference call beginning at around 11

[Operator:]

Thank you for participating in today’s conference. You may now disconnect.