Kraton Corporation
Q4 2015 Earnings Call Transcript

Published: 24 Feb 2016

[Operator:]

Good morning and welcome to the Kraton Performance Polymers Incorporated Fourth Quarter 2015 Earnings Conference Call. My name is Michelle 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, Michelle. Good morning everyone and welcome to Kraton Performance Polymers’ fourth 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 is available in the Investor Relations section of our website those are copies of the presentation we’ll review this morning. Before we review our fourth quarter 2015 and full-year results, 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 that 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, 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 was provided in yesterday’s earnings release and is also included in the material we’re going to review on this call. Following our prepared remarks, we’ll open the line for your questions. I’ll now turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thank you Gene and good morning everyone. Overall, our fourth quarter provided a strong finish to what was for Kraton our second best year ever in terms of adjusted EBITDA. I’ll touch on the highlights for the fourth quarter and full-year now. Fourth quarter 2015 sales volume of just, under 75 kilotons was up 3.8% compared to the fourth quarter of 2014. This is the highest fourth quarter volume we’ve had since 2007, a year in which we sold significantly more volume into paving applications than we do today. Fourth quarter sales volume was up for all three of our polymer businesses led by Cariflex where sales volume was up nearly 25% compared to the fourth quarter of 2014. Our fourth quarter sales volume, was up, fourth quarter revenue of $248 million was down $28 million from $276 million in the fourth quarter of 2014. Given the higher sales volume, the revenue decrease was a function of lower average sales prices associated with lower raw material cost and the adverse effect of currency booms. Adjusted EBITDA was $50 million in the fourth quarter of 2015, an increase of $18 million or almost 58% from the $31.7 million reported in the fourth quarter of 2014. This is the highest fourth quarter posted in the company’s history. Fourth quarter adjusted earnings were also up significantly. Q4 2015 adjusted earnings were $0.74 per diluted share, up $0.58 compared to $0.16 per diluted share in the fourth quarter of 2014. Looking at highlights of our full-year 2015 results, sales volume was 306.5 kilotons up modestly compared to 2014, despite the loss of 7 kilotons of sales volumes related to previously discussed operational issues in the second quarter of the year. Full-year 2015 revenue was $1.03 billion, down $196 million compared to $1.23 billion in 2014. Of the $196 million decrease, approximately $112 million is related to lower average sales prices associated with lower raw material cost and $89 million reflects the adverse impact of currency moves, partially offset by the revenue contribution from slightly higher sales volume. Full-year 2015 adjusted EBITDA was $166.8 million, up $19.6 million or 13.3% compared to $147 million in 2014. This is the second highest adjusted EBITDA posting in the company’s history eclipsed only by 2010, in which we saw strong volume demand and margins driven by restocking following the 2008/2009 downturn. Adjusted earnings for the full-year 2015 were $2.02 per diluted share, an increase of $0.86 or 74% compared to $1.16 per diluted share that we reported in 2014. In conjunction with these strong financial results, we generated $104 million in cash from operating activities. And this was up almost $74 million compared to 2014. In addition, we achieved $19 million of cost reductions in 2015 as part of our three-year $70 million cost reset program, 6% ahead of our $18 million target for 2015. We expect to realize an incremental $6 million to $9 million of cost reductions in 2016 as we move toward our targeted $70 million of cost reductions by year-end 2018. I’ll turn now to slide 6, for highlights of fourth quarter and full-year results for our trade product groups starting with Cariflex. Cariflex revenue was $40.8 million in the fourth quarter, an increase of $6.8 million or 20% compared to revenue of $34 million in the fourth quarter of 2014. The revenue increase was driven by 24.7% increase in sales volume driven primarily by increased sales in the surgical glove applications. Currency adversely impacted revenue by $1.1 million compared to the fourth quarter of 2014 and average selling prices were modestly lower compared to the fourth quarter of 2014 as well, reflecting our lower cost for isoprene monomer. Looking at full-year 2015 results for Cariflex, sales volume was up 10.2% compared to 2014, and this reflects the continued trend of growth and surgical of applications as well as good traction in newly developed markets such as condoms and transparent rubber compounds. Full-year 2015 revenue for Cariflex was $142.9 million reflecting the contribution from higher sales volume partially offset by a $7.7 million negative impact from currency moves and lower selling prices associated with lower isoprene costs compared to 2014. As seen in the right-hand side of the slide, especially nature of the Cariflex portfolio is evident. And that 100% of Cariflex revenue comes from differentiated product grades. In 2015, 94% of Cariflex sales were directed in the medical applications such as surgical gloves, condoms and stoppers and 6% of revenue into industrial applications. Cariflex sales revenue is highly concentrated into Southeast Asia where the majority of surgical gloves and condoms are manufactured. Turning now to specialty polymers of slide 7, fourth quarter 2014 revenue was $87.6 million down $7.3 million compared to $94.9 million in the fourth quarter of 2014. Once again lower average selling prices associated with lower raw materials accounts for $6.4 million of the revenue decrease and the negative effect of currency moves accounts for $3.7 million of the revenue decrease. These impacts were partially offset by the revenue contribution from higher sales volume. Fourth quarter volume was up 3.2%, the biggest drivers being increased sales in the medical, industrial, consumer and cable gel applications. On a full-year basis, revenue for specialty polymers was $351 million, down $62 million or approximately 15% from the $412 million reported in 2014. The lower average selling prices related to lower average raw material costs accounted for $27 million of the revenue decrease, or the adverse effect of currency moves drove almost $20 million decrease in revenue. But the balance of the revenue decline driven by lower sales volume. Specialty polymers sales volume decreased 3.4% compared to the full-year 2014 primarily due to lower sales in the lubricant additive applications associated with an inventory reduction program undertaken by significant customer and to a lesser extent lower sales into personal care applications. These decreases were partially offset by increased sales in the medical, cable gel and consumer applications, again, as compared to 2014. End use diversification and revenue concentration for specialty polymers is shown on the right-hand side of the slide. In 2015, 72% of specialty polymers revenue was derived from differentiated product grades. The change from 76% in 2014 reflects the shift in HSBC personal care sales volume to other chemistries including Kraton USBC grades as well as the lower sales in 2015 into lubricant additives to the inventory management program of a significant customer that I just mentioned. Looking at highlights for our Performance products, on slide 8, fourth quarter revenue for Performance products was $120 million down $27 million or 19%, compared to $147 million in the fourth quarter of 2014. Performance product sales volume was up 2% compared to the year-ago quarter driven by higher sales into European paving and roofing applications and personal care applications partially offset by lower sales into packaging and industrial adhesives. The component of the revenue decline, the components of the revenue decline were lower average selling prices associated with lower raw material costs, amounted to $19 million of the revenue decrease and the adverse impact of currency movements which accounted for $12 million of the revenue decline. These factors were partially offset by the revenue associated with the aforementioned increases in sales volume. On a full-year basis, revenue for Performance products was $541 million, down $138 million or approximately 20% with $82 million of the decrease driven by lower average selling prices associated with lower raw material cost, primarily for butadiene and $62 million of the decrease explained by the adverse impact of currency moves. These factors were partially offset by a modest increase in sales volume. Sales volume was up modestly compared to 2014 despite the production issues in our Bayer, France, which resulted in 7 kilotons of lost sales volume into paving applications in the second quarter of 2015. In terms of overall sales volume, volume was up in the North American paving applications and in personal care applications, with these increases largely offset by reduced sales into adhesive and roofing. Summing up the Kraton portfolio on slide 9, Cariflex now represents 14% of total revenue, up from 11% at year-end 2014. Our specialty polymers business accounted for 34% of consolidated revenue, relatively unchanged compared to 2014 and Performance products accounted for 52% of revenue down from 55% in 2014. Looking at the geographic balance of our revenue at year-end, the Americas accounted for 38% of revenue. EMEA accounted for 33% and Asia accounted for 29% in total, of which 8% was in China. As we discussed previously, a significant portion of our Asia Pacific sales are driven by our Cariflex business, with sales of our isoprene rubber latex into Southeast Asia. Overall, sales volume in Asia was up 4.1% in 2015 with sales volume in China up over 6%. A significant portion of our sales in China are HSBC based directed to specialty polymer applications, much of which is ultimately exported to the worldwide markets. Overall, our sales of differentiated product grades accounted for 58% of 2015 revenue and this is up 100 basis points from 57% of total revenue in 2014 continuing our stated strategy to portfolio shift our overall sales mix to higher value-added offerings. With that summary, I’m going to turn the call over to our Chief Financial Officer, Steve Tremblay for further details on our fourth quarter. Steve?

[Steve Tremblay:]

Thank you, Kevin and good morning. Sales volume in the fourth quarter of 2015 was 74.9 kilotons, the highest fourth quarter from a sales volume perspective since 2007. Compared to Q4 2014, sales volume improved almost 3 kilotons or nearly 4%. Revenue in the fourth quarter 2015 was $248 million, compared to $276 million in the fourth quarter of 2014. The increase in volume amounted to $14.5 million increase in revenue. This increase was more than offset by lower average selling prices associated with raw material costs of $25.9 million and a negative impact of currency changes which amounted to $16.4 million. Fourth quarter 2015 adjusted gross profit was $77.5 million, or 31.2% of revenue. And this was up $18.5 million compared to $59 million or 21.4% of revenue in the fourth quarter of 2014. This significant increase reflects the volume growth and a favorable sales mix, the latter due to the increase in Cariflex sales volume as a percentage of total sales volume. On the cost side of the equation, gross profit in 2015 includes $5 million from the cost reset initiatives, $5.4 million of lower turnaround costs, lower overall spending and better absorption rates in line with the increase in sales volumes. As a result, adjusted gross profit was $1,035 per ton in the fourth quarter of 2015, an increase of $218 per ton or 27% compared to the $817 per ton we reported in the fourth quarter 2014 and this all despite currency headwinds of $6.5 million or the equivalent of $87 per ton. Turning to slide 11, a few comments on adjusted EBITDA and adjusted EPS. Fourth quarter 2015 adjusted EBITDA was $50 million, or just over 20% of revenue, an increase of $18.3 million compared to $31.7 million or 11.5% of revenue posted in the fourth quarter 2014. Our fourth quarter 2015 adjusted EBITDA of $50 million was the highest fourth quarter result in Kraton’s history. The increase in Q4 adjusted EBITDA was driven by sales volume growth, favorable mix, lower manufacturing costs including the decline in turnaround costs and the benefit from our cost reduction activities, latter equal to $7.5 million in the aggregate in the fourth quarter of which $5 million was in cost of goods sold and $2.5 million served to reduce selling, admin and research costs. Partially offsetting these positive factors was the adverse impact of currency movements which resulted in a headwind of approximately $5.3 million compared to Q4 2014. Adjusted net income in the fourth quarter 2015 was $22.8 million or $0.74 per diluted share up $17.7 million or $0.58 per share compared to the fourth quarter 2014, again, despite a currency headwind of 0.14 per share. Turning to slide 12, for a look at our full-year results. Full-year 2015 revenue just over $1 billion, down $196 million compared to revenue of $1.23 billion in 2014. The revenue decline was primarily a function of lower average selling prices directly associated with lower raw material cost which accounted for approximately $112 million of the decline as well as the adverse impact of currency movements which accounts for approximately $89 million of decline. Sales volume increased marginally despite the loss of 7 kilotons of sales volume in the second quarter of 2015 which was associated with the delayed startup following our significant turnaround in Bayer, France, and despite the decision by a major customer to implement an inventory reduction program over the course of 2015, which resulted in decline in sales volume of an additional 4 kilotons. Absent, these two discreet events aggregating 11 KT, sales volume growth would have been approximately 4% year-on-year. Adjusted gross profit in 2015 was $280 million or 27% of revenue, an increase of $21.6 million compared to adjusted gross profit of $258 million or 21% of revenue in 2014. The improvement reflects higher unit margins and lower operating costs due in part to a $12 million reduction in manufacturing cost achieved under our cost reset initiatives. Full-year adjusted gross profit was $912 per ton, up from $844 per ton in 2014. The 8% improvement in gross profit per ton was generated despite the negative effects of currency movements which amounted to approximately $54 per ton. Absent this, unusually large currency headwind, adjusted gross profit per ton would have expanded by nearly 15%. On page 13, a few comments about adjusted EBITDA and EPS. Adjusted EBITDA for 2015 was $166.8 million just over 16% of revenue, up from $19.6 million or 13.3% compared to $147 million or 12% of revenue in 2014. The increase reflects overall margin expansion including improved mix which benefited from increased Cariflex sales and lower operating costs including $19.4 million associated with the cost reset initiatives which as Kevin mentioned in his comments, exceeded our original $18 million target that we had established at the beginning of the year. The improvement in adjusted EBITDA was muted by the adverse impact of currency which amounted to approximately $11 million on full-year adjusted EBITDA. Full-year 2015 adjusted net income was $63.4 million or $2.02 per diluted share, and this compares to adjusted net income of $38.4 million or $1.16 per share in 2014. The currency headwind had a downward impact on EPS of a full $0.23 per share. Slide 14, shows relevant data on cash flow and debt of the 12 months ended December 31, 2015. We have provided a breakdown of consolidated data between Kraton on a standalone basis and cash flow items and debt associated with our KFPC joint venture through which we are constructing our 30 kiloton HSBC facility in Taiwan. Consolidated operating cash flow for the full-year 2015 was $103.8 million, including a $9.1 million operating cash flow deficit at KFPC. Kraton’s standalone cash generation therefore was $112.9 million for the year, a significant increase from the $40.5 million in cash generated on a standalone basis for the full-year 2014. Full-year 2015 CapEx was $128.7 million, which includes $69.1 million of CapEx associated with the KFPC joint venture. The Kraton debt at December 31, 2015 of $352 million was refinanced commensurate with the financing of the Arizona acquisition that I can provide some color later on in the material on the capital structure as of the close of that transaction. On slide 15, we’re providing guidance for 2016. For 2016, we’re expecting revenue for the combined Kraton and Arizona Chemical businesses to be approximately $1.9 billion. We also expect adjusted EBITDA to fall in a range between $370 million and $390 million. This range assumes modest organic growth in both the polymers and pine chemical businesses. For modeling purposes, I’ll highlight points to keep in mind. We expect non-cash compensation expense to be approximately $11 million. Recall, this is an add-back for adjusted EBITDA but not for purposes of determining adjusted earnings or adjusted EPS. Depreciation and amortization expense is currently estimated to be between $135 million and $145 million which takes into account the estimated step-up in value of the Arizona, PP&E and intangibles to their estimated fair value. Interest expense including non-cash amortization and the accretion of original issue discount aggregating approximately $17 million is estimated at $140 million in 2016. We expect the full-year tax provision of $10 million to $15 million which represents an effective tax-rate assumption of 15% to 20% in 2016. We would also expect that cash taxes to be in the same range as the book tax provision just mentioned. We expect CapEx excluding the $70 million required to complete the HSBC plant in Taiwan to fall in the range of $100 million to $110 million. The capital spending plan for 2016 includes the following items. $27 million associated with the cost reset initiatives, $7 million associated with the Arizona synergy package, $50 million to $55 million of health, safety, environmental infrastructure and maintenance projects, again that’s going to be across both platforms. And $16 million to $21 million of discretionary projects which we’re targeting at lowering costs and improving our innovation capabilities. We continue to expect the deal synergies and the cost reset initiatives will provide EBITDA of $20 million to $25 million, and $25 million to $28 million in 2016 respectively. In the first quarter of 2016 we currently expect a negative spread between FIFO and estimated current replacement cost in the range of $20 million to $25 million. We currently expect to exceed our earlier estimates for 2016 debt reduction by virtue of the $72 million of cash proceeds from the sale of our compounding assets which has been applied to reduce total indebtedness. We expect to exit the year with net debt of approximately $1.6 billion and we continue to expect net leverage to return to our targeted 2.5 turns by the end of 2018. This excludes estimated net debt at the KFPC joint venture which is expected to be $145 million at December 31, 2016. Before I turn the call back to Kevin, let me provide a brief summary of the post-acquisition debt capital structure as of the closing of the transaction. We entered into a $1.35 billion six-year senior secured first lien term facility which bears interest at LIBOR plus 500 basis points, subject to a flow over 100 basis points. We also completed private placement of $440 million of 10.5% senior notes which mature on April 15, 2023. And finally, we replaced our existing $250 million ABL with a new $250 million ABL facility, $37 million of which was drawn at close. I’d now like to turn the call back to Kevin for some of his closing comments. Kevin?

[Kevin Fogarty:]

Okay, thank you Steve. Reflecting upon the year, we are encouraged that the results we were able to deliver in 2015. With good business momentum as the year closed our fourth quarter results reflect a favorable business mix and solid volume growth for all three of our polymer businesses. As a result, we will deliver full-year adjusted EBITDA of $167 million above our guidance range of $160 million, and 13% above the $147 million we reported in 2014. For 2016, our plan is to build upon our successes in 2015 and our priorities remain firmly centered around execution of the various initiatives under our strategic plan, which we believe will generate long-term value for our stakeholders. As you know, we closed the acquisition of Arizona Chemical in early January and we are now working diligently on the integration process. This year, we expect to deliver $20 million to $25 million of transaction synergies as part of the broader $65 million synergy package we announced. We are also continuing to work on the various projects under the cost reduction plans we outlined in our Investor Day last June that we expect will deliver an additional $70 million of cost reductions by year-end 2018. In that regard, we expect to achieve $25 million to $28 million of our $70 million target in cost reductions this year. As Steve mentioned, in late January we closed the sale of assets related to our compounding business for $72 million. Consistent with our commitment to rapidly reduce leverage incurred in the Arizona acquisition, the $72 million in cash proceeds were applied to reduce debt. We anticipate further debt reduction as the year progresses. Excluding debt of our KFPC joint venture, we are targeting net debt of approximately $1.6 billion by year-end. While we are cautiously optimistic about the business environment in 2016, we must acknowledge the uncertainty that exists with respect to the macro environment regarding overall demand and business climate our current expectation as for relative stability in the U.S. and Europe. We are seeing some weakness in South America, particularly in Brazil and looking to Asia and China specifically, we expect the specialty nature of our Cariflex products and our HSBC based polymers overall will continue to provide a measured differentiated performance relative to the market trends. Looking specifically at our individual businesses, in 2016, we expect our Cariflex business to remain on its growth trend driven by continued substitution for natural rubber latex and surgical gloves and condom applications. Barring any significant revisions to global GDP outlook, we expect trends in our adhesive businesses for both SBCs and pine based markets to remain stable with the solid growth pipeline in place. For our paving related businesses, both SBCs and pine base, we see positive trends that suggest potential upside this year as compared to 2015. And as you know, our specialty polymers business serves a number of end-use market applications that are linked to overall demand for consumer durable and disposable products. And so we would be closely monitoring trends in those markets. And lastly, with respect to our chemical intermediates business, GI serves diverse mix of end-use market applications that include coding, fuel additives, oil fuel chemicals and the mining industry. Demand trends vary in each of these target markets. However, there is an opportunity to decrease the performance and widen scope of the chemical intermediates business relatively quickly as we apply a first management perspective applying our successful market based price-right strategy approach and identifying in capturing new outlets for key products. We look forward to updating you on our overall progress of course as the year unfolds. And at that time, I’ll turn the call back to the operator. We’ll be happy to take some questions.

[Operator:]

[Operator Instructions]. Our first question comes from Mr. Jason Freuchtel of SunTrust. Sir, your line is open.

[Jason Freuchtel:]

Hi, good morning guys.

[Kevin Fogarty:]

Good morning, Jason.

[Jason Freuchtel:]

To start with your EBITDA guidance, I believe if you assume the earnings in both businesses are flat and exclude the non-recurring items, and then I guess also include your cost synergies and cost savings initiative. You get to the, I guess, kind of to the high-end of your guidance range. Is that the right way to think about the bridge from your 2015 results to your EBITDA guidance?

[Steve Tremblay:]

Yes, Jason, that’s absolutely correct.

[Jason Freuchtel:]

Okay. So, no other non-recurring items you would call out?

[Steve Tremblay:]

Well, any of the non-recurring items that we would incur would be the cost to achieve the synergies, exit activities. We’ve talked about in prior calls we are having some assistance from some consultants to work with us in integration. So there will be some one-time items but we’ve of course carved those out as our normal practicing given the adjusted EBITDA guidance. There will certainly be an impact on our 2016 cash flow which we factored in our debt assumptions for the end of the year. But again, in any non-recurring are excluded and there will be the similar traditional bridge from GAAP to adjusted results.

[Jason Freuchtel:]

Sure, sure, okay. And what is driving your expectations for higher volumes in both businesses?

[Kevin Fogarty:]

This is Kevin, Jason, can you repeat the higher volumes specifically what?

[Jason Freuchtel:]

Yes, I believe your guidance included expectations for modestly higher volumes in both businesses for 2016? Just curious, what was driving those expectations?

[Kevin Fogarty:]

Again, we continue to run our portfolio shift strategy and the really nice thing about, as we bring the, when we produced the chemical business and the polymer business together that’s Arizona Legacy Kraton. Certainly we see a very similar approach in terms of how do we go to market and the types of customers and the types of markets we want to serve. So, we see the potential for continued portfolio shift, more attractive markets and in the process of course through the innovation activities that we’re kind of founded on, we continue the organic growth trends that we’ve been on here in the past. In addition to that of course coupled with the strong view and positive view we have of our Cariflex business, I also noted in my comments that we are seeing some indications that the upcoming paving season could be a pretty good one, I think driven by a couple of things. One is, in the U.S. specifically of course just finally been some money allocated at the federal level long awaited. But beyond that I think the low price of crude oil and therefore the resulting low cart price for the inputs associated with paving activity including our polymers and including, asphalt itself allows obviously even those finite budgets to go further.

[Jason Freuchtel:]

Okay, great. I believe the Arizona Chemical EBITDA you reported in your pre-announcement release included some non-recurring plant closure cost. Do you expect any additional plant closure cost in that business in 2016 and is there any reason to expect the core Arizona Chemical business could decline next year?

[Kevin Fogarty:]

We’re not currently expecting any other exit costs to be incurred at this point in time Jason.

[Jason Freuchtel:]

Okay. And can you provide some detail on that business, what percent of Arizona Chemicals revenues tied to the energy end market. And have you seen I guess since the closing of the transaction, any trend of potentially losing market share to hydrocarbon based type resins?

[Kevin Fogarty:]

I’ll answer it this way Jason, we wouldn’t say any of the business of Arizona is tied specifically to energy other than the pitch sales that we make as a co-product which has a fuel value itself. But we’ve certainly commented that a lot of the products to which our prices offer i.e. the substitute products do have a tie in there for underlying energy, great example of course being in the adhesive space, the C5 and C9 to amplify alternative materials. And in that case obviously we’ve seen those price points come down. Therefore, in order to maintain our competitive position with our customers, our price points follow as well over a period of time. But I’ll remind you that the purchases of our key raw material, however is directly linked to energy costs, the way in which our vital CTO is purchased, it clearly has an energy index.

[Jason Freuchtel:]

Okay, great. And then lastly, you recently divested in non-core asset for nine times EBITDA. Are there any other non-core assets in your portfolio you could potentially monetize? And was there anything unique in terms of margins or earnings stability about that TPE compounding business that would differ from your other businesses in your HSBC portfolio?

[Kevin Fogarty:]

Yes, I’m not going to comment on other businesses that may or may not exist. I mean, needless to say we like the portfolio of what is the combined new Kraton. And we’re certainly learning a lot about the pine chemical business. And one area of focus for us clearly in the pine chemical business is the chemical intermediates part, which for the pine chemical side of the business represents over 50% of sales. And the combined company, call it in the order of 25% but nevertheless that’s a business that has had some declining trend in the last couple of years and certainly, our number one commercial priority is turning back the clock if you will in terms of capturing back opportunities and identifying new opportunities to increase total output. So, when I think about the comment you made specifically about the compounding business that we chose to divest, this is a business that we’ve been in for a long time as Kraton. The assets that aren’t really going to be included in the transaction, it’s really the business that was acquired by Poly 1, have been around in our portfolio for quite some time. And it’s a simple saying that we believed strategically speaking that our compounding partner of Poly 1 would be able to drive the business, drive the growth and of course most importantly serve the customers better than we as an e-polymer company. That way we can focus on our core capabilities, which is new polymer development and Poly 1 can focus on their capabilities which certainly is one of the market leaders in the compounding space. And together we should be able to grow this combined business.

[Jason Freuchtel:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from Mr. Josh Spector of UBS. Sir, your line is now open.

[Josh Spector:]

Hi guys, thanks for taking my call.

[Kevin Fogarty:]

Hi Josh.

[Josh Spector:]

Quick question on KFPC what’s, your expectations over there? I know you said you have about $70 million more to spend this year. When do you expect that to be a contributor and is there any timing change from a ramp-up on that side?

[Gene Shiels:]

Josh, this is Gene. What we’ve said with respect to that, we expect mechanical completions sometime around the middle of this year. Once we achieve mechanical completion, the process then becomes one of qualification where our customers and in some cases are customers’ customers have to qualify the material. To some degree we’re not completely in control of that timeline for that qualification process. The way you should think about it is really we start kind of ramping up the volumes in more of a 2017 type timeframe.

[Steve Tremblay:]

We are continuing to expect that facility to be when completed in the $200 million to $210 million range which we’ve been reporting throughout 2015 which was below original estimates.

[Josh Spector:]

Okay, thanks guys. And just one question on FX, I saw that the gross profit per ton took a hit of about 8% for fourth quarter if I’m calculating that right. What assumptions are you making in 2016 in terms of FX and what, if you could help pass through your exposure that would be helpful?

[Steve Tremblay:]

Perfect. We’re assuming, we assume current rates in fourth quarter rates, the biggest currency that we deal in outside of the USD is obviously the euro, the real and now with Arizona the Krona. Our assumption given that currency rates would not behave like they did in end of ‘14 and into ‘15, is that we would be back to a more benign in FX world than we were then. Putting that in perspective, the SBC business would generally run between breakeven and $4 million to $5 million of currency exposure year-in and year-out. And actually the Arizona business is even more balanced than that given where their production and their sales are. Our assumption therefore with our call for rates which are actually trending current rates are trending in line with where we expected when we provided that guidance, is the currency effect year-over-year should be much more like the benign periods prior to 2015, sort of $5 million to $8 million perhaps. And that’s been baked into these estimates. Nothing like what we saw if rates hold the way they are, nothing like what we saw in 2015.

[Josh Spector:]

All right. Thanks guys. That’s really helpful.

[Operator:]

Thank you. Our next question comes from Mr. Jason Freuchtel of SunTrust. Sir, your line is now open.

[Jason Freuchtel:]

Hi, I just had a couple of follow-ups. I guess in terms of the incremental cost reductions you’re expecting in 2016. Can you provide some color on where you will be seeing those cost savings and also I guess could you highlight, was there anything specific that helped you exceed your cost savings expectations in 2015?

[Kevin Fogarty:]

We track the last one first so we can close off ‘15 and move on to ‘16. The $18 million target was a function of a number of projects that we had scheduled for our plants throughout the year as well as some SG&A reductions, some of which we had implemented at the end of ‘14 and others that we had thought we’d be able to implement in 2015. As it turned out, some of the projects returns were a bit better than we thought. Certainly the pull-through from the boiler project given where Nat Gas is a bit of a positive. And then candidly as we get into the back half of the year, there were some additional things in SAR areas that we were contemplating. And given the acquisition we decided to actually hold off on some areas that we wouldn’t - that we’re contemplating holding off on. It was a function of, so the Nat Gas effect on the boiler, all the other long list of operating projects largely timing of those projects. And then we just hit a little bit better in the SAR area than what we thought. Moving on to 2016, the incremental projects from the cost reset initiatives which is the continuation of the $19 million we generated in 2015, which we expect to become $70 million in 2018. Those projects, that increment is going to be largely, I mean, if not entirely in the areas of costs of goods sold, lower manufacturing costs. The single biggest benefit is going to be the full-year effect of the boiler project coming through which should provide $5 million to $6 million of incremental growth over the $19 million. And we will continue with that list of quick-hit cost reduction projects throughout our facilities. So that’s how we get to the incremental value to on the cost reset. Relative to the synergy package of $20 million to $25 million, that’s consistent with what we’ve been thinking since we announced the deal. And that’s going to be falling into the two buckets that we keep talking about too, part of it will be in the areas of G&A as we leverage the strengths of the two combined businesses. And then the balance of that will be a portion of the $40 million of operational cost improvements that we’ve been targeting again since deal announcement. To drive that $11 million, a big piece of it, the $7 million of capital that I mentioned earlier assigned to the synergies is targeted at getting at that $11 million subset of the $40 million total operational improvements.

[Jason Freuchtel:]

Okay. Also, what is your expectation for where butadiene prices will move over the course of the year that’s included in your EBITDA guidance? And when you, I guess when you report Arizona Chemicals results next quarter, will you report on an ECRC basis?

[Steve Tremblay:]

We’re expecting butadiene right now to be low and stable throughout the balance of the year which is what was in our assumptions with respect to our EBITDA guidance. You will recall however though for the SBC piece of our business when butadiene moves, we’re very successful at adjusting prices to preserve margins. That’s the cornerstone of our price-right strategy. But for purposes of the EBITDA assumptions, it’s basically a stable BD call throughout the year.

[Steve Tremblay:]

And your second question Jason was on ECRC for the acquired pine business. Our current expectation is we will report an ECRC number for them. Included in the range we’ve given is an ECRC basis for them but we’ll be providing the spread between FIFO and ECRC on a combined basis that is for the SBC portion of the business and the pine business. The spread that I talked about in the first quarter of $20 million to $25 million does take into account our current expectation of the spread on the SBC portion of the business as well as the spread on the pine chemical business. The latter one would expect to be less volatile because of the lower level of inventory in that business than what’s traditionally carried in the SBC business.

[Jason Freuchtel:]

Okay. And then my last follow-up, can you remind us how much lower should turnaround cost be in 2016 relative to last year?

[Kevin Fogarty:]

Let me tackle it in two buckets if you will, because we’ve been talking about the volatility and the high level of turnaround cost in the SBC business for some time. The turnaround cost in the SBC business was around $9 million in 2015, which was up modestly against 2014 although some volatility within the quarters. Actually that level of turnaround cost in ‘15 was a bit lower than what we had originally expected as we delay the project into 2016. And frankly we had better lower costs in our turnaround in Bayer, France. All that said though, we still believe 2016 turnaround cost would be less than 2015. Current expectations for 2016 turnarounds in the SBC business is more in the $6 million range which would be about $3 million less than 2015. Now when we switch over to the pine chemical business, our current point of view in 2016 is that turnaround costs in that business would be about $5 million. And that’s up from $2 million or an increase of $3 million in that business. They’ve got a little bit of choppiness in their turnaround activities, much like Kraton. So, all-in, we would expect our total turnaround cost to be about flat year-on-year, with a $3 million reduction in the SBC business offset by a $3 million increase all because of timing in our pine business.

[Jason Freuchtel:]

Okay. And then just for clarification, I think there is an additional maybe plant closure cost for the Arizona Chemical piece that wasn’t included in that turnaround cost number, is that right?

[Steve Tremblay:]

No, the numbers I just gave you for the pine business are the routine run rate turnaround activities that would flow through EBITDA. So, you don’t, what we should expect relative to the site closure that you’ve been referring to Jason is, we are expecting about $4.5 million lift in adjusted EBITDA because that site was effectively exited in December. And the cost therefore are now gone will be accretive to 2016, to be accretive to 2015 results by an order of magnitude of $4 million to $5 million. But we don’t expect any unusual exit costs in 2016. And the numbers I gave for turnaround do not include non-recurring exit activities for the pine business.

[Jason Freuchtel:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from Mr. Curt Siegmeyer of KeyBanc Capital Markets. Sir, your line is now open.

[Curt Siegmeyer:]

Good morning guys.

[Kevin Fogarty:]

Hi, Curt.

[Curt Siegmeyer:]

Hi, just couple of quick ones. One; last year at your Analyst Day you talked about sort of mid single-digit kind of volume growth which I recall included M&A. And now that you’ve done the big deal, just wanted to kind of get your thoughts longer term sort of that same time period through 2018 what you kind of think is a realistic expectation for volumes over the next several years given seems like the bulk of the M&A is probably already in the past. And then, secondly just how you kind of think of the long-term margin profile now of the combined business sort of post integration?

[Kevin Fogarty:]

This is Kevin. So, let me start with the first question with respect to volume. We certainly did talk in June about low single-digits kind of volume business. I wouldn’t categorize that as part of, and would come from the M&A part of the strategy that was kind of the organic view of the business. And if you recall, what we talk about it, that is in the context of our differentiated sales which as we just comment on 2015, we wrapped up at 58% of the mix. So, we should be able to achieve good organic growth profile in that differentiated part of the mix and then the challenge for us on the undifferentiated side of the business is, to preserve and protect through our cost position which needless to say some of the actions we’re taking through our cost reset initiative should help us do that. With respect to margin in the combined business from a target perspective, certainly, Kraton as a polymer division, certainly - we certainly believe we’re well in line to achieve our stated target of sustaining a $1,000 per ton gross profit view. And certainly 2015 took us towards that objective. I don’t think we’re ready yet to comment on what we think is the right level to target long-term for the pine chemical business, simply because we’re still learning a lot about the business. And most importantly as I commented on earlier, the number one commercial priority is to get our chemical intermediate business performing at a level that we think is certainly indicative of the value that we’re creating in the marketplace for customers.

[Curt Siegmeyer:]

Okay. And then, maybe just a follow-up on Cariflex, you mentioned your positive outlook for that in 2016. Past quarter, some have been kind of lumpy, so I guess, one - first is that, the product category you guys are most optimistic about this year and then do you expect fourth quarter obviously volumes up over 20% was extremely strong. Should we expect double-digit volume growth to continue this year? Would you expect it to maybe moderate to some degree?

[Kevin Fogarty:]

No, I mean, first of all, I’m not going to even suggest that the choppiness is going to go away. The choppiness is kind of part of the business model, just it is what it is in terms of the way in which the older patterns, the production patterns are realized. That being said, we certainly stand behind our view that this is a low kind of double-digit growth business given the substitution nature of our superior value product offering to our customers. And I suppose it’s true to say that while Cariflex represented I think the number was 14% of sales in 2015, as a combined company Kraton, that will go down. But that doesn’t change anything with respect to how we think about that business and the focus we have on it.

[Curt Siegmeyer:]

Got it, thanks.

[Operator:]

Thank you. At this time, there are no questions on the queue. I would now like to hand the call back to Mr. Gene Shiels for any closing remarks.

[Gene Shiels:]

Okay. Thank you, Michelle. Well, we certainly want to thank all of our participants and our listeners this morning. There will be a replay of this call beginning about 11

[Operator:]

Thank you. And this concludes the Kraton Performance Polymers Incorporated fourth quarter 2015 earnings conference call. You may now disconnect.