Kraton Corporation
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good morning and welcome to the Kraton Performance Polymers Incorporated Third Quarter 2015 Earnings Conference Call. My name is Riya 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, Riya. Good morning everyone and welcome to Kraton Performance Polymers’ third 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 Executive Vice President and Chief Financial Officer. A copy of yesterday's news release and this morning's presentation are available in the Investor Relations section of our website. Turning to pages 2 and 3 of the presentation, 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 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 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 in the presentation material. Following our prepared remarks, we’ll open the line for your questions. I will now hand the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thanks Gene, and good morning everyone. Thank you for joining us this morning. Reflecting on the third quarter I would say that many ways the quarter could be characterized as one of continued progression toward our full year objectives. In light of the current macroeconomic conditions and giving the fact that in many markets served by Kraton there is still room for fundamental improvement. Our third quarter results were in-line with our expectations. In our view, we continue to benefit from the specialty nature of our value added products from our end use and geographic diversity. Sales volume in North America was up 9% on strong paving sales. Our sales volume in Europe was down 3.7%, due to lower sales in roofing applications. Excluding roofing sales, our volume was down 25% compared to the strong roofing sales in the third quarter of 2014. European sales volume overall increased compared to the third quarter of 2014. South America, our sales volume was down nearly 10%, due to lower sales and packaging and adhesive applications, while paving volume was up 3%, reflecting an improvement compared to paving sales in the first half of the year. In Asia, sales volume was down 1.8% compared to the third quarter of 2014 and this as in large part reflects lower sales volume in our Cariflex business, which can be volatile as you know from quarter-to-quarter due to customer order patterns and longer lead times. For Kraton our business in China continues to perform reflecting our product and customer mix with more specialized and differentiated offerings. Third quarter 2015 sales volume in China was up nearly 17% year-on-year. The revenue was up 8%, compared to lower average selling prices, despite the lower average selling prices associated with lower raw material costs. Overall, our third quarter 2015 sales volume of 81 kilo tons was modestly above third quarter 2014. Specialty Polymers sales volume was up 2% and volume for Performance Products was up modestly compared to the third quarter of 2014. Sales volume of our Cariflex was down, it was down in comparison to the record Cariflex sales volume we posted in the third quarter of 2014. Our long-term growth trends for Cariflex remain unchanged and at this time we are looking at favorable order patterns for the fourth quarter. Looking at the numbers, third quarter 2015 revenue was $269 million, a decrease of $50 million, compared to the third quarter of 2014. With the decrease being driven by the impact of currency and lower average selling prices associated with lower average raw material costs, our revenue decreased year-on-year, adjusted EBITDA $42.4 million was up $3 million, compared to $39.4 million in the third quarter of 2014. Improved profitability drove higher adjusted earnings, which were $0.48 per diluted share in the third quarter of 2015, up $0.13 per share compared to the $0.35 per share we posted in the third quarter of 2014. The relative stability in raw material prices and our ongoing focus on working capital management is translating into strong cash generation for Kraton. Net cash provided by operating activities was $37.3 million in the third quarter of 2015 and for the first nine months of 2015 net cash provided from operating activities was $82 million, a net increase of $100 million compared to the net cash used in operating activities, first nine months of 2014. Lastly during the quarter, we repurchased 827,000 shares of stock, completing activity under our $50 million share repurchase authorization less than one year. For the program in total, we have repurchased a little more than 2.5 million shares at an average price of $19.58. Now if we turn to slide 5 for a review of our third quarter results, we will start with Cariflex. Cariflex sales volume in the third quarter of 2015 was down compared to the third quarter 2014 on lower sales into surgical applications, but the decrease is largely a reflection of the tough comparison against the record Cariflex sales volume we saw in the third quarter of 2014. Recall that in 2014, Cariflex volume was up a significant 48%. So our third quarter 2015 sales volume should be viewed in the context of the third quarter of 2014 marking an unusually high volume quarter for a business that does not have completely predictable order patterns. From a trend perspective however, growth for Cariflex continues. Last year’s sales volume was up 28% and on a year-to-date basis 2015 sales volume was up 5.2% compared to the first nine months of 2014. As mentioned on prior calls, the substitution of natural rubber by our Cariflex offerings continues at a very attractive growth rate. We successfully started up the latest expansion with our latex manufacturing partner in Japan to support our customers’ growth and work on the next expansion stage in our Paulina plant in Brazil. It is progressing as expected for a late 2016 start-up. Cariflex revenue was $34 million in the third quarter of 2015 and this compares to revenue of $40 million in the year-ago quarter. Of the $6 million revenue decrease, $3.8 million is primarily associated with lower sales volume and $2.1 million is attributable to negative effect of currency. Medical applications continue to account for the majority of Cariflex revenue or 93% of trailing 12-month revenue at September 30. Given the specialty nature of Cariflex for the TTM period ending September 30, once again 100% of Cariflex revenue is comprised of differentiated and innovative product rates. Turning to specialty polymers on page 6 or slide 6, third quarter 2015 revenue for Specialty Polymers was $87 million, down $12 million or 12%, compared to the $99 million in the third quarter of 2014. Looking at the drivers of the revenue decrease, $9 million of the decrease reflects lower average selling prices associated with lower raw material costs primarily betadine. The negative effect of changes in foreign currency rates accounts for $4.7 million of the decrease. Overall, sales volume for specialty polymers was up 2%, compared to the year-ago quarter. In terms of the components of the sales volume increase compared to the third quarter of 2014, sales volume was up in industrial consumer and cable gel applications, partially offsetting the growth in these areas as expected we saw lower sales into lubricant additive applications and this was a continuation of the trend we have discussed in the last two quarters that is associated with a significant customer altering their inventory management practices. An update on the end market, revenue breakdown for specialty polymers is shown on the right-hand side of the slide. For the TTM period ending September 30, lubricant additives still represents 15% of overall sales, personal care was 10% and medical applications were 9% of TTM revenue followed by adhesives and coatings applications and cable gels each at 7% of trailing 12-month revenue. And for the trailing 12-month period ended September 30, 71% of revenue is comprised of innovative and differentiated grades. This is down 73% in the TTM period of 2014, primarily due to lower sales of differentiated grades into individual lubricant additive applications. Now turning to slide 7, performance products revenue was $148 million in the third quarter of 2015, down $32 million or 17.8%, compared to the $180 million in the third quarter of 2015. Sales volume was up marginally compared to the third quarter of 2014 and the revenue decrease was largely a function, the negative effect of currency movements, which accounted for $17 million of the decrease and $15 million balance of the decrease was primarily associated with lower average selling prices associated with lower raw material costs. During the quarter, we saw strong demand for paving grades in North America, reflecting both share gains and higher sales of differentiated products including HiMA. To a lesser extent we also saw a growth in paving applications in Europe. Now, substantially offsetting the effect of strong paving demand in the quarter, sales into roofing applications was down compared to the third quarter 2014 in which roofing sales were particularly strong. In addition, we also had lower sales for lesser differentiated adhesive grades, primarily in sales, into packaging tape applications, which continue to be fairly competitive in the marketplace. For the TTM period ending September 30, 45% of performance products revenue was from the sales in Europe and 38% from North America, Asia accounted for 9% and Latin America accounted for 8% of TTM revenue. In terms of portfolio composition, 38% of performance products’ trailing 12-month revenue was derived from innovative and differentiated grades, up from 37% for the TTM period ending September of 2014. Turning now to slide eight for a summary of Kraton’s overall portfolio, Cariflex accounts for 13% of revenue for the TTM period ending September 30 and this is up from 11% for the TTM period ending September 30 in 2014. Specialty Polymers accounts for 34% of TTM revenue, Performance Products accounts for 53% of trailing 12-month revenue. Geographic standpoint, Asia accounted for 27% of TTM revenue, Europe accounted 34% of TTM revenue as did North America, and South America represented 5% of TTM revenue. From an overall portfolio composition standpoint, 57% of TTM revenue at September 30 comes from differentiated products, up from 55% for the TTM period ended September 30, 2014 and this is despite lower differentiated sales into lubricant additive applications for the first nine months of 2015, which have largely been replaced by other differentiated product sales, particular our low molecular weight grades which will be produced in our new plant under construction in Taiwan. Specifically, regarding the project in Taiwan, I want to provide you with an update on the status and timing for the 30 kiloton HSBC expansion. As a reminder, this plant is being constructed through a 50/50 joint venture with Formosa Petrochemical Corporation and the plant is located from Formosa’s world-scale site in Mailiao. With respect to the capital cost of the project, I am pleased to report that we have lowered our cost estimate from $215 million to a range of $200 million to $210 million with Kraton and Formosa previously invested approximately $42 million each to fund the project with the balance of the funding coming in the form of debt financing which we haven’t placed. With respect to timing, we anticipate the construction of plant commissioning process will be completed in the second half of 2016. We expect to supply commercial samples to our customers to initiate the qualification process in the fourth quarter of 2016. Volume ramp will occur in 2017 as we progress through our customers qualification processes. So at this time, I’ll turn the call over to our Chief Financial Officer, Steve Tremblay, for a more in-depth financial review of the quarter. Steve?

[Steve Tremblay:]

Thank you, Kevin, and good morning. As we turn to slide 9, first a few comments regarding revenue and gross profit in the third quarter. Revenue was $269 million in the third quarter 2015. The decline of $50 million from the third quarter of 2014 revenue of $319 million was a result of lower selling prices of $26 million driven by lower raw material costs and unfavorable foreign currency amounting to $24 million. Despite the lower sales revenue and a $2.4 million currency headwind, adjusted gross profit of $68.8 million in the third quarter of 2015 represents growth of $4 million or 6% compared to adjusted gross profit of $64.8 million in the third quarter of 2014. The improvement in gross profit was due to the benefit of the cost reset initiatives which amount to $3.7 million, lower turnaround cost of $1.6 million with the balance reflecting improved unit margins. As a result, adjusted gross profit per ton was $850 per ton in Q3 2015, an improvement of $47 per ton or 6% compared to the third quarter of 2014. Adjusting for currency, the expansion in gross profit per ton would have been $77 per ton or nearly 10%. Moving now to slide 10 for a discussion of adjusted EBITDA and adjusted EPS, adjusted EBITDA for the third quarter of 2015 was $42.4 million, an increase of $3 million or 7.5% compared to adjusted EBITDA of $39.4 million in the third quarter of 2014. The improvement reflects the increase in adjusted gross profit driven by the cost reset initiatives, the decline in turnaround costs and the margin expansion. In addition, cost reduction in SAR costs provided an additional lift of $1.6 million in adjusted EBITDA. Partially offsetting these positive items was an increase in variable compensation cost in the third quarter of 2015 compared to the third quarter of 2014. I want to note that in the aggregate the cost reduction initiatives provided a benefit of $5.3 million in the third quarter with $3.7 million included in cost of goods sold and $1.6 million included in selling, admin and research costs. And finally, the negative impact of foreign currency on adjusted EBITDA amounted to $1 million in the third quarter of 2015 when compared to the third quarter of 2014. Adjusted net income for the third quarter of 2015 was $15 million or $0.48 per diluted share, an increase of $3.4 million or $0.13 per diluted share compared to adjusted net income of $11.6 million or $0.35 per share in the third quarter of 2014. Of the $0.13 increase, roughly $0.02 was driven by a net reduction in our share count. On a year-to-date basis, slide 11, revenue for the nine months ended September 30, 2015 was $786 million, a decrease of $168 million or 17.6% compared to revenue of $954 million for the nine months ended September 2014. As Kevin mentioned, sales volumes for the nine months ended September 30, 2015 was 231.6 kilotons, down just under 2 kilotons compared to 233.4 kilotons for the comparable nine month period in 2014. I will note though that this change includes the loss of 7 kilotons of volume in the second quarter resulting from the previously disclosed operating issues. Absent the effect of this volume loss, sales volume would have increased 2% compared to 2014. The majority of this revenue decline was due to the effect of lower selling prices associated with raw material costs and foreign currency headwinds which amounted to $86 million and $73 million respectively with the remaining $9 million decline in revenue the result of lower sales volumes. Adjusted gross profit of $201.6 million represents an increase of $3.1 million compared to $198.5 million for the nine months ended September 30, 2014. Included in this period-over-period comparable was a $10 million negative effect from currency. Normalizing for this currency effect, adjusted gross profit would have improved year-on-year by more than $13 million or 6.5%. Despite the $10 million currency headwind and the $7.5 million effect of the Q2 2015 production issues, adjusted gross profit increased as a result of the cost reset initiatives which amounted to $7.5 million and improved unit margins partially offset by higher turnaround cost of $5 million. Year-to-date in 2015 adjusted gross profit per ton was $872 per ton, an improvement of $20 per ton compared to $852 per ton in 2014. Normalizing for currency, however, the expansion in adjusted gross profit would have been $63 per ton or 7%. Adjusted EBITDA for the nine months ended September 30, 2015 was $116.8 million compared to EBITDA of $115.5 million in 2014. The improvement reflects the benefit of the cost reset initiatives aggregating $11.9 million and the increase in unit margins which were partially offset by foreign currency of $5.7 million and higher turnaround cost of $5 million. In addition, our SAR cost increased due to increases in compensation cost including variable comp and certain consulting costs. Adjusted net income for the nine months ended September 30, 2015 was $39.8 million or $1.26 per diluted share, an increase of $6.3 million or $0.25 per share compared to adjusted net income of $33.5 million or $1.01 per diluted share in 2014. I’ll make note here again that the lower share count was accretive to adjusted EPS by approximately $0.04 per share through 09/30/2015. Let’s move on to a review of our cost reduction initiatives. Within the discussions of adjusted gross profit and EBITDA, I mentioned the benefits from the cost reduction initiatives which have been realized to date. With nearly $12 million included in the year-to-date September results, we remain on schedule to achieve the $80 million targeted for 2015. Let me move now to cash flow and debt on slide 14. We generated $81.6 million of operating cash flow through September 30 and that includes a nearly $6 million prestart up operating cash flow deficit at our JV in Taiwan. This consolidated operating cash flow is up more than $100 million compared to net cash used in operating activities of $18.8 million in the first nine months of 2014. This improvement is largely due to lower working capital which includes the positive effect of lower raw material costs. During the third quarter, we repurchased an additional 827,000 shares of our common stock at an average price of $20.77 for a total of $17.2 million and thereby completing activity under the $50 million share repurchase authorization. For the entire program, we repurchased a little over 2.5 million shares at an average price of $19.58 which served to reduce total share count by approximately 8% since September 30, 2014 when we announced the program. On slide 15 in accordance with our usual practice, I want to provide guidance with respect to certain items for the balance of the year – for the full year. First, with respect to adjusted gross profit per ton, we maintain our early estimates going for above $900 per ton for the full year 2015 but we are lowering the upper end of our range from $925 per ton to $915 per ton largely to reflect lower performance product sales volumes which negatively impacts fixed cost absorption rates. So as we see it now, our expected range for adjusted gross profit per ton is $900 to $915 per ton. With regard to SG&A with less than one quarter of the year to go, we’re trimming back our SG&A estimate from $87 million as of June 30 to $82 million for the full year 2015. Our R&D cost estimate remains flat at $31 million versus prior guidance. We are providing full year 2015 adjusted EBITDA estimate of $160 million. This implies Q4 adjusted EBITDA of $43.2 million, which would represent an improvement over Q4 2014 of $11.5 million. Fully $9.5 million of this improvement is from lower turnaround expenses and the additional benefit from our cost reset initiatives. The remaining P&L items are in-line with the guidance provided in the second quarter except for the impact of currency, which we believe will be an $8 million headwind, the change from prior estimates largely reflecting a stronger year. As we see raw materials today, our expected Q4 negative spread between FIFO and ECRC is $10 million, which will take us to a negative spread of approximately $50 million on a full-year 2015 basis. And our full-year estimate for CapEx is now in the range of $55 million to $60 million. Turning to slide 16, I’d like to close with a few additional comments about our full year view for adjusted EBITDA. To put the $160 million of adjusted EBITDA in context with the $147 million we posted in 2014, you have to consider a number of headwinds we faced in 2015, which we mentioned in our year-end 2014 update back in February. Coming off the statutory Wesseling turnaround in 2014, we complete the statutory Berre turnaround in 2015, which resulted in an increase in turnaround cost of just under $2 million. The impact of actuarial assumptions on our defined benefit plans is expected to result in an increased pension cost in 2015, of $4 million and as I mentioned in the guidance discussion the negative effect of foreign currency is an additional headwind of nearly $8 million. And finally we have the Q2 operational issues, which negatively impacted adjusted EBITDA by $7.5 million. So all told, these four items represent an aggregate negative impact on EBITDA of just under $21 million. We more than shielded these items with the cost reduction initiatives of $18 million and core growth of $16 million. I now like to turn the call back to Kevin for some closing comments. Kevin?

[Kevin Fogarty:]

Okay thank you Steve. As I said in my opening remarks, our business is performing largely as expected in this current environment. Although there had been some puts and takes throughout the year, we expect full year gross profit per ton to be $900 to $915. This expectation is within our original guidance range and this implies adjusted EBITDA on a full-year basis approximately $160 million, despite the loss of sales in the second quarter resulting from our operational challenges and headwinds associated with higher turnaround costs, higher pension costs, the adverse currency impact arising from a stronger U.S. dollar. We’ve been able to offset the impact of these items through growth and continued execution and delivering $18 million of cost reductions this year. Kraton’s focus for the balance of 2015 is two-fold. From a business standpoint, we’re working to deliver on our operational and financial targets for the year. The negative effects from the operational challenges are behind us and we see currently favorable weather trends in North America and Europe and they support us via sales volume. From a strategic standpoint our focus is on two fronts, first is continued execution of the cost reduction and growth initiatives set out for Kraton back in June. We remain committed to delivering the $70 million of cost outs and achieving the $50 million working capital reduction by year-end 2018. A reach of the major components of our cost reduction plan, we have teams in place whose sole function is to manage and deliver on their specific objectives. Our management team reviews our progress on a weekly basis and we are therefore confident in our ability to execute on this plan. In parallel of course, we are working to complete the recently announced Arizona Chemical acquisition. Although aggressive, we are targeting at close by year-end. We’ve already started landing the ground work for the integration process. We’ve established an integration management office and have set up and interim steering committee comprised of both Kraton and Arizona executives. From the Kraton side, this team is separate from that working on Kraton’s standalone objectives. We have also enlisted the assistance of a third party to provide support to the integration team. We will maintain a structured approach as we move from close for the integration process. Our first priorities are to ensure that we maintain business continuity to minimize customer impact and capturing the $65 million of cost base synergies we have identified. As appropriate, we will initiate additional actions to capture value creating opportunities we believe exist in this unique business combination. Needless to say, we’re excited about the potential of the combined company going forward. We see tremendous opportunity to grow in the markets we share and to imply best practices of both companies as we move forward. While we have not quantified them we know that there will be compelling revenue synergies inherent in the combined organization. For the past two weeks, I’ve had the opportunity to visit with a number of Arizona employees in Town Hall meetings. Many of the Arizona employees are still learning about Kraton and they’re beginning to appreciate what the combination of Kraton and Arizona can be in future growth. As expected, I saw a professional engaged capable team that has done a tremendous job in building Arizona into the company that exists today. On behalf of the entire Kraton organization, we look forward to completing the acquisition and working with the Arizona team as together we build a bright future for Kraton. With that, I’ll turn the call back to the operator and we’ll open up the line to take some questions.

[Operator:]

We will now proceed with the question-and-answer session. [Operator Instructions] The first question is from the line of Mr. Jason Freuchtel of SunTrust. Sir, your line is open, you may proceed.

[Jason Freuchtel:]

Hi good morning.

[Kevin Fogarty:]

Hey Jason.

[Steve Tremblay:]

Hi Jason.

[Jason Freuchtel:]

When you stated earlier that your indications for your specialty Cariflex sales appear favorable for 4Q 2015, was that comment relative to the stronger volume trends that you’ve seen year-to-date, can you just provide a little context around that comment?

[Kevin Fogarty:]

The comment I made was around strength in volumes we see in the fourth quarter specifically. Is that what you’re asking Jason?

[Jason Freuchtel:]

Yeah. And I think you previously indicated that you typically have a decent amount of visibility around your Cariflex sales, is the correct?

[Kevin Fogarty:]

Yeah. And that comment was specific to Cariflex. When you say decent amount of visibility, we typically have a pretty good visibility into the following quarter for Cariflex. I mean that’s the nature of the business where there’s obviously very important supply chain planning that goes on, but I do comment of course and we said it many, many times that quarter-to-quarter, volumes can look a little bit irregular and that’s a function of just the type of order patterns our customers use as they run their own respective supply chains and so we always are focused as you know on long-term trend line, that’s what we use in order to designing our capacity to make available for the future growth of the business.

[Jason Freuchtel:]

Okay. So with just two months left in 2015, is there anything you see that could potentially impact your demand expectations in any of your segments?

[Kevin Fogarty:]

Well, again everything is relative because visibility that I just commented on with respect to our Cariflex business certainly doesn’t apply with respect to our Performance Products business, which many ways has particularly for the road and roofing parts on weather dependency that’s a good example of two ends of the spectrum, but that being said we are seeing some indications of some favorable weather trends that give us some confidence as we look at the fourth quarter outlook as well.

[Jason Freuchtel:]

Okay. Great, and can you remind us, in 2016 should we expect turnaround cost to normalize to 2014 level or maybe even below?

[Steve Tremblay:]

Yeah, Jason, it should be below 2014. Our 2015 turnaround costs were a peak so without those statutory turnarounds we’ll be back to a more normal run rate.

[Jason Freuchtel:]

Okay. And you did say that was below the 2014 level?

[Steve Tremblay:]

Yes.

[Jason Freuchtel:]

Okay. Great, and then in terms of the complexity reduction program you highlighted your Investor Day, have those actions impacted your cash flow at this point and if not when would we expect to see those actions begin impacting your free cash flow?

[Steve Tremblay:]

They haven’t impacted our free cash flow in 2015 yet Jason. They’re going to be longer dated into the end of 2016 and into 2017. At the end of the day our point of view as we discussed during the earnings call at the Investor Day was, in our cumulative 2015 to 2018 we’d be able to receive that benefit. That’s going to largely be towards the closer to beginning in 2017, 2018 timeframe. We are working diligently as we – as you may recall, there is a lot that has to be accomplished in terms of customer qualifications and overall supply chain to achieve that but the teams are working on it and we continue to be confident that we can deliver.

[Jason Freuchtel:]

Okay, great. Thanks for your time.

[Operator:]

Thank you. The next question is from Mr. Roger Smith of Bank of America Merrill Lynch.

[Roger Smith:]

Thank you very much and good morning.

[Kevin Fogarty:]

Hi, Roger.

[Roger Smith:]

Are you still contemplating refinancing the 6.75 of 2019 as part of the global financing of Arizona Chemical or perhaps would you wait till they step down and call price on March 01 should you do the Arizona financing earlier than that?

[Steve Tremblay:]

Our current planning Roger is to refinance those 6.75 as part of the refinancing with the acquisition financing.

[Roger Smith:]

Got it. And what would the timing be on that acquisition financing, have you discussed that yet?

[Steve Tremblay:]

It will be prior to or concurrent with the closing of the M&A transaction which the latter would be depending upon regulatory and other normal closing conditions. We haven’t seen anything yet that would suggest we would deviate from what we discussed previously which was shooting for a late 2015, early 2016 close so the financing will be and latched up with the M&A transaction.

[Roger Smith:]

Perfect. The lubricant customer was adjusting inventory, does that anniversary itself in Q1 2016 and have they stopped adjusting inventory and what we’ve really been seeing for the past couple of quarters is simply the year-over-year negative comp or they doing more?

[Steve Tremblay:]

So, Roger, certainly the inventory plans they had lined out for us clearly affected our 2016 planning and I’ll remind you that I give my credit to the great Taiwan team that we filled that gap pretty nicely overall and especially polymers portfolio. But needless to say it was a significant gap, it need to be filled but again the resilient of a specialty portfolio where there is underlying growth driven by the innovation activities is exactly what we do at Kraton. Now that being said, this is fourth quarter and you’re always working with customers on volume plans for the upcoming calendar year. So I would say it will be premature for me to comment yet on where we are with that customer and how that inventory plan if you will has translated into their stated objective. So we are doing that now and obviously we’ll update the investors really in the New Year with that envelope for the coming calendar year.

[Roger Smith:]

Thank you very much.

[Operator:]

Thank you. And the next question is from Edlain Rodriguez of UBS. Your line is open.

[Edlain Rodriguez:]

Good morning. Thank you guys, just one quick question on the gross profit per ton expectation. Is the employ increase in 4Q mainly will result expected higher sales volumes for Cariflex? So that’s what driving the higher price expectation?

[Steve Tremblay:]

The expectation for the quarter is - does include an expectation that the mix will be improved which is not typical in the fourth quarter. The Performance Products business generally slows down a bit unless there is appetite for a winter fill in advance for the first quarter of the following year in the paving business. So there is a natural margin enhancement with Cariflex and our specialty products becoming more of a significant piece of the portfolio then let’s say the second and the third quarters.

[Edlain Rodriguez:]

Yeah, that’s what I suspected. And one last one in terms of volume, you gave guidance for many deferred items but now that the quarter is almost over what does volume look like sequentially or versus last December quarter?

[Steve Tremblay:]

We are going to stick to our prepared comments on the level of guidance and not provide any enhancements with respect to volume guidance. It’s one of the earlier callers had a question and Kevin answered there is a fair amount of visibility in our Cariflex business, specialties and then you’re down to some of the Performance Products the visibility gets a little bit more cloudy. So we’re going to stick with what we talked about in the prepared comments which is gross profit of $900 million to $915 million throwing off EBITDA of $116 million for the year.

[Edlain Rodriguez:]

Okay that makes sense. Thank you very much.

[Kevin Fogarty:]

Thank you.

[Operator:]

Thank you. Next question is from John Roberts of UBS, your line is open.

[John Roberts:]

Good morning guys. Have you been given an update on Arizona’s latest results and anything there you could share with us?

[Steve Tremblay:]

Nothing to share at this time.

[John Roberts:]

Okay. EnGevity has filed and has a segment that competes with Arizona, how comparable is that segment with the Arizona business?

[Kevin Fogarty:]

John, it’s Kevin. In deed we are reading those filings just as you are to understand what the comparison is. There wasn’t a lot of information out there. our sense is that there is not a – while they are both applying chemicals and they compete in the same spaces, our sense is this is the breakdown of different market segments that are served is probably a little bit different between the producers and is that by choice or is that by design, is that by feedstock makeup that’s part of the certainly the fact finding them we’ll be looking at as well in comparing our results versus new public comp that are just there.

[John Roberts:]

Thank you.

[Operator:]

Thank you. As of this time, we don’t have any further questions on queue. I would now like to turn the call back over to Mr. Gene Shiels for closing comments.

[Gene Shiels:]

Thank you, Riya. Well, we want to thank everybody for participating in the call this morning. For those interested, there is a replay of the call that will be available over the internet through our website kraton.com. You can navigate to the Investor Relations link and select the events page. You can also hear a telephonic replay by dialing 866-554-3817. This concludes our remarks for this morning, again thank you for participating.

[Operator:]

This concludes the Kraton Performance Polymers Incorporated third quarter 2015 earnings conference call. You may now disconnect.