Kraton Corporation
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Good morning and welcome to the Kraton Performance Polymers Inc. First Quarter 2015 Earnings Conference Call. My name is Sheryl 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.

[Gene Shiels:]

Thank you Sheryl. Good morning and welcome to Kraton Performance Polymers first quarter 2015 earnings call. With me on the call this morning are Kevin Fogarty, Kraton's President and Chief Executive Officer; and Steve Tremblay, Kraton's Vice President and Chief Financial Officer. A copy of yesterday's news release and this morning's presentation is available in the Investor Relations section of our website. Turning to pages 2 and 3 of the presentation, I will draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures 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 does 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 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, all references to adjusted EBITDA, adjusted gross profit and adjusted earnings or adjusted earnings per share in this call and in the presentation material exclude the impact of the spread between FIFO and estimated current replacement cost or ECRC. A reconciliation of EBITDA and adjusted EBITDA to net income or loss and a gross profit to adjusted gross profit as well as a reconciliation of net income or loss attributable to Kraton to adjusted net income is provided in our earnings release and is included in the presentation material this morning. Following our prepared remarks, we will open the line for your questions. I will now turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thanks Gene and good morning everyone. As reflected in yesterday's earnings release our results for the three months ended March 31, 2015 reflect significant year-over-year improvement and adjusted EBITDA and adjusted earnings per share. I will review the highlights and then ask Steve to provide more in depth commentary on our financial results for the quarter. First quarter 2015 adjusted EBITDA was $49.2 million, up 31% compared to the $37.9 million we posted in the same period one year ago and represents the second highest first quarter adjusted EBITDA in the company's history. Sales volumes was unchanged compared to the year ago quarter. Revenue for the first quarter 2015 was $261 million, down $50 million compared to the first quarter 2014. The year-on-year decrease reflects a $23 million adverse impact from currency movements as well as lower average selling prices associated with lower raw material costs. Solid business performance and margin expansion drove the improvement in our first quarter results and we were able to more than offset the effect of unfavorable currency movements which adversely impacted adjusted EBITDA by $2.5 million and reduced adjusted earnings by $0.07 per share. Adjusted gross profit was $1,075 per ton, $185 per ton above the first quarter 2014 and well above our longer term objective of $1,000 per ton. The continued decline in butadiene prices which began in mid 2014 was a contributor to our first quarter margin expansion. North America contract butadiene dropped to $0.29 per pound in February and March of 2015 and average $0.32 per pound for the first quarter of 2015, well below the $0.62 per pound average for the first quarter of 2014. As we discussed during our fourth quarter 2014 call in late February, these price levels presented very different operating environment for Kraton, and one that benefits us in terms of both its implication for the absolute price for Kraton's product offering and for the way customers view, pricing performance relative alternative materials. Our record results in the quarter adjusted earnings were $0.76 per diluted share and this compares to $0.33 per diluted share in the first quarter of 2014. Also during the quarter we repurchased 663,000 shares of our common stock at an average price of $19.41. Through March 31, 2015 we have repurchased a total of 1.7 million shares at an average price of $18.97, this represents a 5% reduction in our total share count. We could now, let's turn to page 5 for a review of the first quarter results for our three product groups, starting with Cariflex. First quarter 2015 revenue for Cariflex was $34.8 million compared to $35.4 million in the first quarter of 2014, a decrease of $500,000 or 1.5%. Excluding the adverse impact from currency moves of $2 million revenue would have increased 1.5 million or 4.3% compared to the first quarter of 2014. Cariflex sales volume increased 3.6% compared to the first quarter of 2014. As I mentioned in our fourth quarter earnings call 2014 was a very good year for Cariflex with sales volume up 28%. We expect that sales volume for Cariflex for continued increase driven by the demand for higher quality synthetic alternative to natural rubber latex but not at the exceptional rate of growth experienced in 2014. We continue to believe more representative rates of volume growth for Cariflex are in the low double-digit range. Demand for Cariflex continues to grow despite relatively low prices for natural rubber which are approaching five year loads. We believe this can only be explained by the specialty nature of Cariflex, its performance characteristics and value in the marketplace as an alternative to natural rubber. Looking at the right side of the slide, medical applications such gloves, condoms and medical stoppers represent 93% of Cariflex revenue for the TTM period ending March 31, 2015. Additionally, Cariflex revenue is largely concentrated in Asia given the fact that the majority of surgical gloves and condoms are manufactured by our customers in countries such as Thailand and Malaysia and are then shipped to the worldwide market. For the trailing 12 month period ending March 31, 2015, 17% of Cariflex revenue is represented by innovation product [grades] and the balance is represented by differentiated product [grades]. Turning now to Specialty products on slide 6. First quarter 2015 revenue for Specialty Polymers was $91.7 million, down $16.7 million of 15.4% compared to $108 million in the first quarter of 2014. Currency accounted for $5.5 million of the revenue decline. In addition, average selling prices were lower reflecting lower average raw materials costs and sales volume decreased by 4.8% compared to the first quarter 2014. The decline in sales volume was primarily due to lower sales in lubricant additives and to a lesser extent personal care applications. With these decreases partially offset by higher sales into protective film, medical adhesives and coatings as well as cable gel applications. Excluding the decrease in lubricant additive sales, overall sales volumes for Specialty Polymers increased 1.6% compared to first quarter of 2014. And with respect to lubricant additive applications specifically, the decrease compared to the first quarter of 2014 reflects reduced purchases from a major customer which we believe is due to an active change in approach to inventory management and an effort to reduce overall inventory levels. We expect this inventory reduction to reduce our sales into lubricant additives by approximately 5 kilo tons in 2015 with approximately two-thirds of this sales impact to occur in the first and second quarters of the year. Throughout the year we expect to replace a majority of this volume with increased sales in other higher value applications such oil gels and medical applications. While sales into personal care applications was down compared to the first quarter of 2014, this decline reflects the comparison against prior quarters relative to the trend that began in the third quarter of 2013. As a reminder and as we have discussed in recent quarters we believe the impact on our personal care sales volumes, especially polymers, which is related to a [customary] shift to lower cost materials is largely behind us. In fact sales volume in the personal care applications for Specialty Polymers increased sequentially from the fourth quarter of 2014 for the first quarter of 2015. And as well we will see in a moment with this shift to lower cost materials results for performance polymers reflects higher sales of USBC product grades into personal care applications. Lastly a breakdown of geographic and end market revenue for the trailing 12 month period ending March 31, 2015 is shown on the right hand side of the slide. In addition we reflect the portfolio composition within specialty materials. For the TTM period ending March 31, 2015 73% of revenue was drive from innovation and differentiated rates. Let's now turn to Performance Products on slide 7. First quarter 2015 revenue for Performance Products was $135 million, a decrease of $33 million or 19.7% compared to the revenue of $168 million in the first quarter of 2014. The revenue decline was due to a $15 million adverse impact from currency movements and lower average sales prices associated with lower raw material cost partially offset by the contribution from 1.5% higher sales volume. Looking at the components of sales volume increase as I mentioned earlier we saw continued growth into personal care applications principally in Europe, reflecting a move from HSBC to lower cost materials including the USBC grades we offer. In addition North American paving volumes increased compared to the first quarter of 2014. Sales volume also increased into packaging and industrial adhesive and flexible printing plate applications. Overall volume growth for Performance Products was partially offset by lower paving sales into South America and this reflects project delays and lower demand in Brazil which is due in large part to the alleged corruption scandals well noted in the press. With regard to overall sales volume and particularly for SBS sales into paving and roofing applications in which butadiene is a significant component, the recent downward trend in butadiene prices has provided no incentive for customers to build inventory in advance of the summer paving and roofing season. In contrast, butadiene prices were trending up in the first quarter 2014 and this presented a different opportunistic demand fundamental. Although crude prices have rebounded from recent lows, they remain well below the $100 range. And while asphalt prices have decreased, the decrease is not on the same order of magnitude as crude oil, in part due to refiners increasing throughput of light shale crudes resulting a lower asphalt yield and contributing therefore to limited supply in the asphalt market. We remain optimistic that marginally lower asphalt prices combined with resolutions in some state such as Texas to add tax revenue for infrastructure spending will lead to increased activity. However the biggest impediment to a rebound in the US remains the lack of long-term funding commitment at the federal level that will provide states an appropriate level of comfort and enable them to commit to a longer term paving spending projects. With regard to Europe, we are now just entering into the summer paving and roofing season. And based on current activity we fully expect to more normal paving and roofing season compared to the second quarter of 2014 in which demand was below expectations due to adverse weather conditions. Lastly, while the strengthening of the dollar against the euro has created headwinds in terms of currency translation, from a business standpoint it is improving the competitive dynamics of our plants in Europe relative to Asian producers who are exporting into Europe. A few comments now about Kraton's overall portfolio on page 8. The continued growth in our Isoprene Rubber and IR Latex products, Cariflex revenue for the trailing 12 month period ended March 31, 2015 now represents 12% of overall sales revenue which is up 10% from the trailing 12 month ended March 31, 2014. Specialty polymers now accounts for 34% of TTM revenue, an increase of 200 basis points from the similar period ended March 31, 2014. Looking at geographical split, Asia now accounts for 25% of TTM revenue and this is up from 22% for the trailing 12 month period ending March 31, 2014. With our continued focus on portfolio shift, the combination of innovation and differentiated product rates accounts for 57% of overall Kraton TTM revenue March 31, 2015 and this is up from 54% for the trailing 12 months ended March 2014. Our focus remains on increasing the portfolio composition of our innovation and differentiated product rates and we intend to achieve this through continued growth in Cariflex and other specialty product rates through our continued commitment to innovation. With those comments I will turn the call back to our Chief Financial Officer, Steve Tremblay for more in depth review of the financial results. Steve?

[Stephen Tremblay:]

Thanks Kevin and good morning everyone. Sales volume was 74.4 kilo tons in the first quarter 2015 which was unchanged compared to the first quarter of 2014 despite the headwind in lub additives which Kevin discussed a moment ago. First quarter 2015 revenue amounted to $261.4 million compared to $311.7 million in the first quarter of 2014. The decline in revenue reflects lower raw material costs and approximately $23 million associated with foreign currency exchange rates. Moving over to gross profit. On an adjusted basis, gross profit of $80 million exceeded Q1 2014 by 21%. The improvement in adjusted gross profit reflects increased unit margins across each of the product groups resulting in adjusted gross profit per ton $1,075 per ton in Q1 2015, an increase of 21% compared to adjusted gross profit per ton $890 in the first quarter of 2014. I will note here that the negative effect from currency on adjusted gross profit was $3.9 million in the quarter or more than $50 on a per ton basis. Slide 10 shows first quarter adjusted EBITDA and adjusted earnings per share. Adjusted EBITDA amounted to $49.2 million in Q1 2015, an increase of 31% compared to roughly $38 million in the first quarter of 2014. The first quarter of 2015 represents a record Q1 adjusted EBITDA on the strength of higher unit margins. The increase in adjusted EBITDA was realized despite the currency headwinds of approximately $2.5 million as well as higher variable compensation, consulting and turnaround costs the latter of which were aggregated $4.7 million. Adjusted EBITDA margin was a solid 19% in the first quarter of 2015. As a result of the foregoing adjusted net income increased to $13.2 million the $24.2 million in the first quarter 2015 from $11 million in the comparable quarter in 2014. The weighted average share count for purposes of calculating adjusted EPS declined by 1.1 million shares, the 31.4 million shares in Q1 2015 compared to 32.5 million shares in Q1 2014, reflecting the share repurchase program which commenced in Q4 2014. Adjusted EPS therefore amounted to $0.76 per share in the first quarter of 2015 more than 2x of $0.33 posted in the first quarter of 2014 despite a currency headwind on adjusted EPS which amounted to approximately $0.07 per diluted share. I am going to spend a moment on slide 11 to update you on the status of the first phase of our cost reset initiative. We targeted $18 million of cost reduction actions in 2015 of which 12 million were targeted reductions in manufacturing costs and the remaining 6 million were reductions in selling, admin and research costs. I am happy to report that we are on target to deliver the $18 million of cost reductions in 2015 having realized 2.5 million of those cost savings in the first quarter of 2015. Slide 12 shows some relevant date on cash flow and debt. Operating cash flow was a deficit of $6.5 million which is not atypical for the first quarter given the seasonal nature of portions of our business exacerbated by the pre-start of cash outflows at our JV in Taiwan which accounted for nearly 30% of the consolidated operating cash flow deficit. With the low raw material cost environment however this first quarter represents an improvement in operating cash flow of $47 million compared to the first quarter of 2014. In the first quarter financing activities include the continuation of our share repurchase program with approximately 663,000 shares repurchased in the quarter at a cost of $12.9 million. As of March 31, 2015 on a life to-date basis approximately 1.7 million shares have been repurchased at an aggregate cost of $31.5 million or approximately $19 per share. As is our usual practice, I want to close with a review of some selected guidance items for 2015. As is our reporting practice we exclude non-cash compensation expense in determining adjusted EBITDA to aid in modeling, therefore we are providing our estimates for SG&A and R&D costs excluding non-cash compensation expenses. On this basis, we currently expect full year 2015 SG&A and R&D expenses to be $87 million and $31 million respectively. We expect depreciation expense for 2015 to be $63 million, this is about $2 million lower than our earlier expectations, largely driven by movements in foreign currency rates. We continue to estimate our turnaround activities to remain at $12 million in 2015. I will point out that a significant portion of the 2015 turnaround costs will be incurred in Q2 '15 such that we expect those costs to be $7 million largely associated with the activities underway at our facility in Berre, France. This will result in an expected quarter-over-quarter increase in turnaround cost of $6 million compared to Q2 2014 and an increase of $5 million compared to the turnaround expenses incurred in the first quarter of 2015 which amounted to just under $2 million. Full year 2015 interest expense is expected to be approximately $25 million and we remain on target for our full year tax provision at approximately $7 million. I do want to update you on our current view of the impact of foreign currency movements. The dollar continued to strengthen in the first quarter of 2015, we now expect that the negative effect of currency on adjusted EBITDA on a full year basis will be [$15] million, this is up from earlier estimates of $6 million to $10 million. Based upon our current market view and our outlook for raw material costs, we believe our full year of 2015 results will reflect adjusted gross profit of $900 to $925 per ton which is an increase of $56 to $81 per ton compared to $844 generated in 2014. This expected range takes into consideration higher turnaround cost as I previously mentioned, the additional currency headwinds associated with the strong US dollar and lower average selling prices associated with lower raw material prices principally due to dyeing. Although we are expecting a more stable raw material environmental as we move through the year, we would still have the tail effect of the downward moves in raw material costs which occurred during Q1. As such we are expecting a negative spread between FIFO and estimated current replacement costs of $10 million to $15 million in the second quarter of 2015. And finally we are reaffirming our $60 million to $65 million CapEx estimate for full year 2015. With that I would like to turn the call back over to Kevin for his closing comments.

[Kevin Fogarty:]

Okay, thank you Steve. So coming off our record first quarter of adjusted EBITDA for Kraton, we are excited and energized by the momentum we have going on in the second quarter. We believe there is no question that in terms of the raw material environment the tide has turned and after the significant disruption of 2011, '12 and '13 we are now seeing a return to pricing fundamentals for butadiene that are more representative of historical trends. This is a very positive environment for Kraton and a welcome change from the challenges over the last few years. As I said last quarter, the reduction in butadiene prices to current levels essentially closes and creates an absolute reduction in our product prices. And this essentially closes the historical price value of relatively some competing materials. In this environment in other words we believe the relationship between cost and performance or value and the use of Kraton's product offerings becomes much more compelling, this is a tailwind we have not experienced in quite some time. But we are always hesitant to project raw material prices looking forward at the supply demand balance as we believe there is a strong indication that butadiene prices could remain near these levels for some time. Taking into account current views on SBR demand and natural rubber prices and factoring in the incremental C4 that will come to the US market by virtue of cracker expansions and debottlenecks underway. It appears the market will be adequately supplied over the next year or so. There is no question that the declines in raw material prices contributed margin expansion in the first quarter. This positive effect on margins will ease as we go into the balance of the year, however as Steve said we still expect adjusted gross profit per ton to be above $900 for the full year, a significant improvement over 2014. We also expect continued portfolio shift resulting from growth in Cariflex and our Specialty portfolio will contribute to overall margin improvement. With an expectation for continued business momentum, the current raw material environment provides I am most excited about Kraton's strategic direction and the impact that key initiatives underway will have on our competitive position and our business overall. As previously announced we are implementing a three part strategy comprised of a focus on innovation and revitalizing of organic growth, a cost reset that we believe will improve our overall competitive position, and strategic acquisitions that should complement our current portfolio. Steve mentioned we have already taken steps that we expect will reduce our cost by $18 million in 2015. I have previously characterized this as the first phase of a broader cost reset. In other words, there is more to come replenishing details of our reset plan as well as other ways of our strategy at our 2015 Investor Day which will be held in New York on June 16th, we look forward to seeing you there. And with that, I will ask the operator to open the call up for some questions.

[Operator:]

Thank you sir. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Mr. Jason Freuchtel of SunTrust. Sir your line is open.

[Jason Freuchtel:]

I think you said in the past, the buyers are typically more locked and so purchasing prices are going down and begin increasing purchases when pricing starts to stabilize for raw materials. Can you speak to the benefits either market related or company specifically that helps you maintain volumes in 1Q and what type of volume trends you would expect in 2Q if raw material prices are starting to stabilize?

[Kevin Fogarty:]

I think Jason where we see this in particular are in the more seasonal related businesses like our SBS business serving [which is] the modification for paving and roofing. If you think about it, if customers are therefore because of that raw material trend not taking advantage of opportunistic buying in the traditional winter months, and therefore just mirroring or matching purchases with consumption and then as you move into the typical summer season it's just difficult even if there is a raw material incentive it is just difficult for them to build the kind of inventories they would have done so in the off season. So I think in both cases you basically see volume more matching with consumption itself.

[Jason Freuchtel:]

Okay, that was in the first quarter angling forward or is that just driving the first quarter?

[Kevin Fogarty:]

Certainly that was the case in the first quarter as I characterized in my comments and then again as we're here in the second quarter, we're not going to comment on the quarter specifically. However the reality is again as I said generally speaking it's difficult in the summer season when the businesses obviously accelerating consistent with all the activity in the marketplace, the construction projects and what not, it's just difficult to [bill] inventory on the part of the customers.

[Jason Freuchtel:]

Sure, okay. And just the 900 million to 925 million gross profit per ton guidance assume any increase in volumes over 2014 or any additional cost savings beyond the 18 million announced last quarter?

[Kevin Fogarty:]

No additional cost savings per se above the 18 million but if you want to reiterate that we do expect to fully realize that, in my comments Jason I mentioned that about 2.5 million of the 18 million was in the first quarter, would you expect that to ramp up as we move into the year with the implementation of the projects. And of course some of that 12 million of the full 18 million will be in cost of goods sold. So we are expecting in that 900 to 925 to have the benefit of the cost reductions. I also can't walk away from the conversation to gross profit per ton without mentioning though, that the currency headwind is a big deal for us like everybody else. And with where the euro was in the first quarter, the currency headwind of 50 bucks or so on gross profit per ton in Q1, we expect that to be north of that the balance of the year. With respect to volume expectations, we think we've given a fair amount of modeling guidance and I am going shy away from giving any expectations at this point in time relative to where we see volume for the balance of the year.

[Jason Freuchtel:]

Okay. And Cariflex volumes look like they continue to increase nicely, are you doing anything specific internally with your sales force and marketing to help drive sales in Cariflex or is that just more of a market reaction to realizing the benefits of that product?

[Kevin Fogarty:]

The answer is we are certainly doing things to drive sales, clearly with respect to the foundational businesses like surgical gloves and condoms, you know the substitution effect continues and that's what our customers focus on replacing natural rubber. And then again just to remind you that natural rubber replacement in an environment where natural rubber prices are at historical lows, so that's just another commentary on the superiority of the product offering. But certainly with respect to our market development team, yeah we are looking at sales diversification in that space, where, where in the market place do we see other opportunities that we would be able to present customers with a real compelling alternative to natural rubber in other uses. And I would say that in most cases those are going to be medical related but because of the quality requirements there but we think that's a good thing.

[Jason Freuchtel:]

Sure, that's great. And I believe your inventory position looks like improved a little bit in the quarter, I know you discussed in the past, you would look for ways to improve your inventory position, was there anything specific that you found so far, is the beginning of an improved outlook for your inventory position?

[Kevin Fogarty:]

The lower inventory Jason on the balance sheet is more raw material cost driven than just quantity, actually we're up a little bit in the quarter relative to where we ended 2014 to get, make sure that we're prepared to serve the market given the turnaround activities at our facility in France. But speaking more broadly in longer we are actively looking in our strategic planning and opportunities to further reduce inventory on a more structural basis and I am pretty confident we're going to be able to share some of that information when we get together in June.

[Operator:]

Our next question comes from Mr. [indiscernible] of UBS. Sir your line is open.

[Unidentified Analyst:]

Thank you. Good morning guys. A quick question. Any concern that with the uptick in crude oil prices that producers might be successful in implementing sort of price increase that they are trying to get in butadiene. Or do you think the market like sufficiently lose that or balance that prices probably won't be growing higher from where they are right now?

[Kevin Fogarty:]

You know we think that -- generally speaking, we think that there is stability in butadiene driven by the lower scale if you will of the crude oil cost inputs, so in other words, not at the $100 level, it's down in the $50, $60 level today. But also there is just the reality of the supply demand fundamentals that exist for butadiene and as I commented you know where is butadiene being consumed in what markets and the strength of those markets relative to the supply availability which clearly has increased over the years given the attractiveness butadiene presented to producers. So that being said, it's possible I suppose that butadiene will tick up a little bit relative to underlying energy cost ticking up but I think you know we feel pretty confident in the statement that we see stability in general. But on that note Europe for, we have to really remember what's happened with European currency that we are seeing butadiene prices in Europe slip up a bit and I think as much as anything that reflects the currency moves.

[Unidentified Analyst:]

Okay, that make sense. And other question, I mean you've talked about like the shift of the portfolio towards that more differentiate products, now you have 68%, like how high can this number get and how quickly you can get there?

[Kevin Fogarty:]

That will be a great discussion for our Investor Day in June to give you an update on where we think we're headed but at the end of the day I think it's fair to say too we're long way from where we want to be.

[Unidentified Analyst:]

Okay, that’s perfect. And then one last one on share repurchase, you're more than half way through the existing program, I mean do you anticipate completing the 50 million this year?

[Kevin Fogarty:]

We targeted a two year window on that $50 million. So we're going to continue to be, we'll continue to be in the market as appropriate and we'll give you updates quarterly.

[Operator:]

Our next question comes from Mr. Kurt [indiscernible] of KeyBanc Capital Markets. Sir, your line is open.

[Unidentified Analyst:]

Hey, just a couple on butadiene. Has the fall in prices made your products more competitive in the market place?

[Kevin Fogarty:]

Absolutely, you know the reality is that, and I've said this many times that even if we remain margin neutral, in other words, the decline in raw material costs translate immediately to selling prices, and that's not necessarily cases evidenced from what happened in the first quarter, but even if we were margin neutral it puts us in a position where indeed our prices and I am speaking about inter-material competition our prices therefore relative to the value we create, given the technology we employ put us in much more compelling position in the eyes of the customer.

[Unidentified Analyst:]

Okay, and if the prices go back up, will the spread from FIFO the ECRC be a positive, has that dynamic changed at all or?

[Kevin Fogarty:]

Well I mean nothing will have changed with respect to how the accounting of our inventory results in a GAAP P&L impact be it with increasing raw materials or declining raw materials the same feature there, although as Steve commented earlier and certainly as part of the things that we intend to discuss in June at the Investor Day in terms of our overall strategy and planning to the extent we are able to take out absolute days of inventory, then the impact of the spread between FIFO and ECRC in either pricing scenario will be mitigated.

[Unidentified Analyst:]

Okay, okay. And I thought I recall, you provided a negative for 2Q, 10 million to 15 million negative spread, I was wondering if there is a way to quantify that on the EPS impact?

[Kevin Fogarty:]

Well, we've given you the tax provision estimate of $7 million which includes the effect of that negative spread in the tax. So.

[Unidentified Analyst:]

Yeah, got it.

[Kevin Fogarty:]

It's pretty, you know our tax rate is pretty benign, so this is pretty heavy pull through in EBITDA to net income.

[Operator:]

There are no more questions on queue, sir.

[Gene Shiels:]

Okay, well, thank you Sheryl. We would like thank all of our participants this morning for their interest in Kraton and for the questions you had. A replay of this call will be available starting about an hour after the call concludes. You can access that replay through a link on the Investor Relations section of our website. You can also access a telephonic replay of the call and you may dial 888-566-0691 for that replay. This concludes our call. Thank you.

[Operator:]

This concludes the Kraton Performance Polymers, Inc. first quarter 2015 earnings conference call. You may now disconnect.