Kraton Corporation
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good morning and welcome to the Kraton Performance Polymers Inc. Second Quarter 2013 Earnings Conference Call. My name is Julienne and I will be your conference facilitator. At this time, all participants are in a listen-only mode. Following the conference 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 conference over to Mr. Gene Shiels, Director of Investor Relations. Sir you may begin.

[Gene Shiels:]

Thank you, Julienne. Good morning everyone and welcome to Kraton Performance Polymer’s second quarter 2013 earnings call. With me on the call this morning are Kevin Fogarty, our President and Chief Executive Officer, and Steve Tremblay, our Vice President and Chief Financial Officer. A copy of the news release issued yesterday is available on the Investors Relations section of our website, as are copies of the presentation we will review this morning. Before we review our results for the second quarter, I’ll 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 this 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 may make today. 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 Form 10-K, 10-Q and other regulatory filings that are available in the Investor Relations section of our website. With regard to the use of non-GAAP financial measures, a reconciliation of EBITDA, adjusted EBITDA, adjusted EBITDA at ECRC to net income and a gross profit at ECRC to gross profit as well as the reconciliation of net income attributable to Kraton to adjusted net income was provided in yesterday’s earnings release and is included in the appendix to the material that we'll review in 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:]

Thanks, Gene and good morning everyone. I'll begin on slide four to look at financial highlights for the second quarter. In yesterday’s earnings release, we reported second quarter 2013 revenue of $334.5 million, on sales volume of 77.5 kilotons. Second quarter sales volume was below the level we anticipated at the time of our first quarter earnings call in early May. This was largely due to weaker than expected sales volume in our paving and roofing end use. Cold and wet weather in both Europe and North America during the first quarter translated in to the slow start to the paving and roofing season. As we discussed during the first quarter call, these weather conditions extended through April and continued to have adverse effect on paving and roofing sales. Our expectation at the time was that as weather improved, activity would accelerate. Unfortunately, the demand softness continued for a few weeks longer than expected, leading to weaker than expected paving, roofing sales during the quarter. Outside of the paving and roofing end use, sales volume for advanced materials was up year-on-year, offsetting a slight decline in volume for both, Adhesives, Sealants & Coatings as well as Cariflex, with the end result being that sales volume was up modestly compared to the 77.2 kilotons we reported in the second quarter of 2012. Second quarter sales revenue of $334.5 million was down 11% or $41 million compared to the $375.8 million we reported in the second quarter of 2012. The revenue decline is principally due to lower sales prices associated with reductions and average raw material cost. For the second quarter 2013, we reported adjusted earnings per share of $0.15 and this compares to $0.46 per diluted share we reported in the second quarter of 2012. Steve will review the income statement and components impacting earnings per share in more detail in his comments. But to put the quarter-to-quarter change in adjusted EPS in context, I believe it is important note that the spread between FIFO and ECRC adversely impacted second quarter 2013 EPS by $0.08 per diluted share, while the spread between FIFO and ECRC provided a benefit of $0.32 per diluted share in the second quarter of 2012. Adjusted EBITDA current replacement cost or ECRC, which excludes the impact of changes in monomer pricing was $32 million for the second quarter of 2013, up $1 million from $31 million in the second quarter 2012. During the second quarter monomer prices were relatively stable, the spread between FIFO and ECRC was an expense of $2.3 million, recall that we had estimated the negative impact to be no more than $3 million in the quarter. Monomer prices decreased in July, but the August nomination is down sharply, the August decline for North American contract butadiene is $0.25 and the North American contract price now stands at $0.43 per pound a level we have not seen in four years. As outlined in our press release yesterday as a result of this sharp decline for butadiene we now expect our third quarter results will reflect a negative spread between FIFO and at ECRC of approximately $25 million. Net cash provided by operating activities was $16.3 million in the second quarter of 2013 and this was up $3.7 million from the $12.7 million generated in the second quarter of 2012. During the quarter we liquidated inventory that was built in the first quarter to bridge demand during the second quarter turnaround at Wesseling, Germany facility. And turning to slide 5, I'd like to review second quarter results for end use markets beginning with Cariflex. Sales revenue for Cariflex was $29.2 million down about $600,000 or approximately 1.9% compared to the second quarter of 2012. average selling prices were up year-on-year excluding the $1.5 million negative impact on revenue are rising and changes in foreign currency revenue would have been up approximately 3% year-on-year. Sales volume for the second quarter of 2013 was down slightly compared with the year ago quarter, this was due primarily to timing of customer purchases and does not reflect the change in demand trends or our outlook for growth prospects for our IR and IR latex products. In fact second quarter of 2013 results reflect higher sales of innovation grades compared to the second quarter of 2012 lead by IR latex and during the quarter we saw further diversification of our sales in terms of both customers and geographies. Although second quarter sales volume declines slightly year-on-year for the six months ended June 30, sales volume was up 5% compared to the first half of 2012. We believe the second half of 2013 will continue to show growth in Cariflex sales and we will satisfy this growth with the additional latex capacity brought online in Japan earlier this year. Sales revenue for our advanced materials end use was $91.1million, in the second quarter down about $11 million or 10.8% compared to the second quarter of 2012. Excluding a $1 million adverse effect arising from currency, revenue would have been down $10 million or 9.8%. Sales volume was up 3.4% year-on-year and therefore the revenue decline largely reflects lower average selling prices associated with reduction in monomer prices primarily for butadiene. Although sales in the personal care applications increased year-on-year, during the quarter we continued to see pockets of softness reflective of a macroeconomic fundamentals in many of the markets we serve. And this limited overall sales into automotive industrial and wire and cable applications as well as into the compounding channel which serves a number of consumer and industrial applications. Looking specifically at sales of innovation grade, sales volume increased year-on-year with higher sales of innovation grades into personal care and consumer applications, which is partially offset by lower sales of innovation grades into wire and cable and our automotive industrial markets. Looking now at slide 6, sales revenue for our Adhesives, Sealants and Coatings end use was $126 million, down $8.8 million or 6.5% compared to the second quarter of 2012. We're again excluding the $900,000 adverse impact of foreign currency moves, revenue would have declined $7.9 million or 5.9%. Our sales volume was down a modest 1.1% year-on-year, the revenue decline was principally due once again to lower average selling prices associated with the reduction in raw material cost for both butadiene and isoprene. With respect to sales volume, the largest year-on-year decline was seen on pressure sensitive adhesive, elastic non-woven and lubricant additive applications. Second quarter sales under pressure sensitive piece of applications were impacted by two factors. First, sales and packaging tape and label demand was impacted by overall economic softness in industrial and consumer markets. As one might expect, this weakness was greatest in our European markets. In hygiene applications, although, we still see steady underlying demand, second quarter sales reflect an element of destocking associated with raw material price trends. Lower sales in the lubricant additives were solely a function of order timing and we expect the second half of the year to show increased sales into lub additives as well as cable, gel applications, the latter to be driven by increased infrastructure spending in China. Turning now to our paving and roofing end use, second quarter 2013 sales revenue was $87.8 million down $20.8 million or 19% compared to the second quarter of 2012. Sales volume was flat with the second quarter of 2012 and the revenue decrease was due to lower average selling price associated with reductions in the designing cost. The impact of the lower average selling price was partially offset by a $400,000 benefit associated with changes in foreign currency rates. As I said in my opening remarks, sales volume for our paving and roofing end use was below our expectations due to the later than expected start of the paving and roofing season which was a function of both weather and certain plan outages on the roofing side which had an adverse impact on our demand. Relative to our expectations, the largest volume short fall was in North America where we saw lower than expected sales in both roofing and paving applications. Overall sales volume in Europe was also below expectations, but the weakness was primarily in paving as roofing sales volume was up modestly year-on-year. Offsetting the weakness in North America and European demand, sales volume increased in the Asia Pacific region and South America primarily on higher sales of paving products. Looking at our innovation sales, sales volume increased year-on-year on higher sales of innovation roofing grades in both Europe and North America and to a lesser extent, increased sales of paving innovation grades in Europe. The paving roofing season is now ongoing. However given a fixed amount of equipment in [crudes], the industry had not configured to accelerate activity levels in order to make up delays from the second quarter. So I would caution you against making assumption around third quarter paving and roofing volumes that include make up of delayed Q2 volume. Our expectation is that work will continue as weather permits until the end of the season, given continued funding constraints, our expectation for North America paving activity remain low. As we look into third quarter however we expect activity in Europe, South America, and Asia Pacific for both paving and roofing to be consistent with normal seasonal demand trends. With this point, I am going to turn the call over to our Chief Financial Officer, Steve Tremblay to give you more detailed financial overview of the quarter and then I'll wrap up at the end of the call with some comments. Steve?

[Steve Tremblay:]

Thank you, Kevin and good morning. Let’s take a look at second quarter and first half volume and revenue, which we have shown here on slide seven. In the second quarter, the decline in revenue reflects lower global selling prices associated with lower average raw material costs. For example, the average North American contract price for butadiene was nearly $1.40 per pound in the second quarter of 2012 versus approximately $0.80 per pound in the second quarter of 2013. As Kevin noted, volume was essentially flat in the second quarter of 2013 as compared to the second quarter of 2012, with improved volume in our advanced materials end use, essentially offset by lower adhesive, seals and coatings volume. So looking at the first half of the year, sales volume declined 11 kilotons or 7% compared to first half of 2012. Sales volume however on our Cariflex and advanced materials end uses were up 5% and 1% respectively. Adhesive, seals and coatings sales volume declined 4% and as Kevin mentioned more than half of that was due to the timing of sales into lub additive applications. So (inaudible)File8, 0

[Kevin Fogarty:]

Okay. Thank you, Steve. Reflecting on our second quarter results, we are disappointed that sales volume was below our expectations. As stated earlier the miss versus our expectation was largely in our paving and roofing end use and was a function of weather, slower than expected activity ramp and to a lesser extent planned outages in our roofing business. In addition, we saw pockets of softness in the number of markets we serve driven by many case by weakness in consumer or end market demand. Despite these factors, we noted improvement in sales momentum towards the end of the quarter. Based upon activity thus far in the third quarter, we remain optimistic about the balance of the year after few comments on raw material environment on order. While in the period of relative stability in butadiene prices, the August nomination has come down significantly. As we have experienced in the past significant drops in monomer pricing can have an impact on customer volume patterns. An obvious question is what might one expect or butadiene for the balance of the year? The current decline in worldwide butadiene prices is linked to demand for synthetic rubber, driven we believe by weaker tire demand. We have not seen butadiene prices at this level since 2009. At current levels butadiene is near or at crack value. In other worlds, it would be a reasonable assumption to believe we are near the bottom for butadiene prices. If so the relevant question is about the timeframe for supply demand to come into balance. I said before that I do not have a crystal ball, but if we are indeed near the bottom for butadiene and the path forward is for relative stability and perhaps pricing that moves rationally as the market comes into balance that is really not a bad scenario for Kraton. With respect to innovation we remain intently focused on driving volume growth in our innovation grades. For the trailing 12 months ended June 30 our vitality index was 14%. During the quarter we achieved our second commercial application for our NEXAR membrane technology and the energy recovery of innovation space and we continue to identify additional translational opportunities, where we believe we can apply the unique characteristics of NEXAR in new markets. We also continue to see encouraging results and growth in sales into oilfield applications. In addition, we are seeing increased opportunity to expand market penetration of our high offering into developing economies. With these developments we remain committed to and focused on our long-term strategy of driving innovation to shift our portfolio concentration to higher value and higher margin innovation grades. With respect to our innovation activities and the planned portfolio shift we outlined one year ago at our Investor Day, we are currently working to compile the data to provide you with an update of the portfolio configuration and we expect to share those results with you in conjunction with our third quarter earnings release. And with that Gene, I think we can open the call up to take some questions.

[Operator:]

(Operator Instructions). Our first question comes from [Alex Yefremov] from Merrill Lynch.

[Unidentified Analyst:]

I had a question on gross margin per ton trends, I think in the past when butadiene prices fell, you had experienced the expanding margins on ECRC basis. Do you think we can expect the same trends in the third quarter this time?

[Kevin Fogarty:]

Hi Alex, it's Kevin. We're not going to obviously talk about what we expect to see in the third quarter, but I think that your general observation about with raw materials declines as our pricing strategy allows us to achieve some margin expansion associated with that, it is reasonable to assume that that would translate into some gross margin opportunity for Kraton.

[Unidentified Analyst:]

And Kevin on the NEXAR, could you give us an update on how things are trending was your first commercial application was Columbia and also maybe give us a inside into how big potentially your second commercial opportunity could be over the next couple of years?

[Kevin Fogarty:]

Starting first with the first opportunity which as you mentioned is with Columbia, I mean I think from Kraton's perspective again we're one step away from the market here in this case, but from Kraton's perspective, the first year rollout met our expectations as we were planning. But obviously if you think about rolling out of such a new technology in that performance of payroll market space, we're expecting to see that volume improvement on a more larger scale. And I think that share view of our customer in terms of how quickly it'll ramp in years two and three. As for the ERV space, that Energy Recovery Ventilation space, I don't think I can tell you exactly how it compares to where we think NEXAR is going to be because it's kind of on a different volume ramp, but again from the get go we said there is really three areas or three legs to this NEXAR commercialization. It's performance apparel, it's energy recovery for the heating and ventilation space and then lastly it's water purification and we're optimistic otherwise we wouldn't be spending as much time on it as we have been, because the potential is there the technology is real, it's validated it's all about rollout and commercialization and growing that volume to make it relevant.

[Operator:]

Thank you. Our next question comes from Andy Cash with SunTrust.

[Jason Freuchtel:]

Good morning, this is Jason Freuchtel sitting in for Andy.

[Kevin Fogarty:]

Hi, Jason.

[Steve Tremblay:]

Hi, Jason.

[Jason Freuchtel:]

(Inaudible) Materials today indicated that increased funding in last year's highway bill positively impact future demand, do you guys share that outlook? And also despite the fixed infrastructure and labor in the paving industry that you highlighted in your commentary do you believe that lower butadiene prices could potentially help in sales in the future for paving products we are purchasing managers previously indicated your product was too expensive relative to low grade asphalt?

[Steve Tremblay:]

I think you have two questions in there, I got to admit I have been a skeptic for some time what I hear about funding bills in the U.S. if you really do the research you'll find out that the pent up demand if you will because of the backlog of projects is immense and so when people talk about funding bills all they're really talking about is in the context of just preserving the levels that have been in place historically over last few years. But the real opportunity clearly is in the catch up and until we see that kind of momentum I don't think I would draw too many conclusions to what bills get passed here in the recent period. I think some of you may have caught a recent USA Today article that was published last week I think it was and it didn't paint a good picture that that we're seeing that kind of stimulus spending resulting in improvement in the overall infrastructure in this country. That all being said, we do see opportunities in other parts of the world and that's where we've been focusing all our attention and I think it's true to say that just about any other BRIC countries that are associating themselves with infrastructure development are looking at road solutions that do two things. One is clearly, allow them to get the most benefit they can from the precious investments they're making and we believe our (inaudible) technology is absolutely suited for that reason. And then there's just the underlying theme of infrastructure improvement that they are committed to. So we're focusing all our efforts in that regard and then the second part of your question which was butadiene pricing, I think that at the end of the day, there's nothing bad that can come from our product prices being lower but still preserving our margin expectation commensurate with the value. I don't think there's anything wrong with that in any of our market spaces clearly. But to the extent that it has a bearing or could have a bearing on paving and roofing polymer penetration, you're still talking about a fundamental bet here. When you add polymer to the asphalt, you are significantly increasing the cost of the asphalt but that is more than compensated by the value that's being created by extending that road life, and those economics are clear. So whether butadiene at today’s price level of $0.45 or something perhaps twice that amount, the value proposition is still very clear.

[Operator:]

Thank you. Brian Maguire from Goldman Sachs.

[Brian Maguire:]

Hi, good morning, guys.

[Kevin Fogarty:]

Good morning.

[Brian Maguire:]

Kevin, you mentioned that the August contract of butadiene will be down significantly, but we’ve already seen spot price pretty weak for several months now. So I was just wondering in the context of the relatively weak volumes in the second quarter, we do you think that destocking contributed to that and there were some pushing out or deferring of purchasing until after customer got the benefit of the lower butadiene prices and sort of related to that. How do you kind of assess customer inventory levels at this point?

[Kevin Fogarty:]

The fact of the matter is that that trend on destocking as you comment, we’ve been seeing that for quite some time and I don’t think in the second quarter per se it was a major part of the overall volume that we delivered in the quarter, I think we call those specifically in my comments that there were some indications of that in Adhesives, Sealants and Coatings. But the volume that we were looking for in the quarter and what we delivered is driven, as I said, almost entirely by paving and roofing. We were well into May before we started see in this summer season kick-in, which really mean you had little more than a month, month and half in the quarter at best relative to what you would have expected to see. And so that to me is the biggest difference between second quarter we were looking for in the second quarter we ultimate delivered and parts of our business, I mean the momentum is there.

[Brian Maguire:]

Okay. And then sort of a related question as we go to the third quarter here, and as we're trying to triangulate upside or downside of that $25 million FIFO estimate that you guided, I was just wondering what kind of an assumption you have or butadiene prices as we go through the quarter and as we end the quarter?

[Kevin Fogarty:]

I think I commented that it feels like and there's analytical data to support that, when I talk about the cocracking values at today’s level that we've got to be bottomed out here, I mean the last time we saw these kind of butadiene prices which was back in really 2009, the underlying value for crude oil was well below today's levels, I think probably closer to $50 a barrel as opposed to today’s levels of north of $100. So there is just a clear value if you will for the hydrocarbon precursor to butadiene as a feedstock to rerun ethylene cracking operations. At that point typically what history would show that is the bottom and it’s again supported analytically. So I don’t, never say never in the chemical industry just things can’t go lower, but I think the move in August was a reflection of what suppliers were trying to do which is get to the bottom and get to it quickly.

[Operator:]

Thank you. Next question is John McNulty from Credit Suisse.

[John McNulty:]

Just a question regarding your cash flows when I look at them year-over-year and at least year-to-date so far, they actually seem to have come in pretty light compared to the last year. So I guess what are the major drivers there given that it does look like you haven’t had maybe some of the inventory issues that you had in past years?

[Steve Tremblay:]

Yeah, John, good morning, its Steve how are you?

[John McNulty:]

Good, good.

[Steve Tremblay:]

Yeah, John, the first half of last year, we had the couple of things that actually improved cash flow but the biggest piece was the timing of our production runs and the timing of where raw materials move. We actually peaked in June at the highest level of non-interest bearing current liabilities largely accounts payable and the like which strictly by virtue of timing, we actually liquidated that in July. So the second quarter of last year was a bit an anomaly in terms of favorable cash flows. The first part of this year is trending more in line where the first quarter was a little bit of a cash flow deficit, given its seasonally low, pretty decent cash flow in the second quarter $16 million and there was an expectation that the business would cadence very similar to the prior years where the third and fourth quarter are the quarters where we generate significantly more cash flow. That really speaks to my comment in my prepared comments that on a TTM basis, we're still over $70 million of operating cash flow.

[Operator:]

Thank you. Our next question comes from John Roberts from UBS.

[John Roberts:]

Thank you. Can you hear me?

[Kevin Fogarty:]

Yeah, good morning, John.

[John Roberts:]

Can you give us any view of where the tax rate will eventually go back to, this year it's messed up, but as we look forward beyond this year, if you go back to the rate that we wrap at the first quarter impact to last year?

[Stephen Tremblay:]

Yeah. We would predict a long-term effective tax rate in a period of monomer stability and volume levels that we would expect on a sustaining basis to be in that 15% to 20% range, when you consider the mix, a normal mix of earnings around the globe, this year is an anomaly, because in periods where we do have some pretax pressure the rate does get a little bit unusual. Hence, the guidance on whole dollar for this year.

[Operator:]

Thank you. The next question Edward Yang from Oppenheimer.

[Edward Yang:]

Just talking about pricing in raw materials moves in this big drop in butadiene prices, what's that can do to your pricing and typically your pricing lags raw materials moves. Are you going to proactively shorten that lag to prevent customers just sitting on the sidelines? And then follow-up to that, on the cost side, is there any component in your SG&A that's tied to selling prices or revenue as a whole because I would think if your revenues to come down you should be able to lower your SG&A somewhat as well if its tied to commissions and so on or is that more fixed? Thank you.

[Kevin Fogarty:]

Let me take the first question and then I'll turn it over to Steve on the second one with respect to SG&A cost. If I understand that question correctly but the first question Ed you know, it’s a balance, that's all I can say, always has been and always will be when you are dealing in polymers which is we would certainly look to make sure that we are balancing the right level of volume and volume expectation versus the reality of hires expectation that they are going to see some price release commensurate with that. We caution people as we always do that a bold move like this or large move like this to get to the bottom if you will can only mean that in the view of suppliers by getting to the bottom they can perhaps as I commented in my earlier comments that they can then start to look at pricing more commensurable with real market demand and so that's just might infer that butadiene prices could begin to rise again. So we caution people that if all we did is translate that price decline to their price that they pay for our products that might be very short lived. So I would say it’s a balance and in our case right now, we don't want to ever leave any customer with the impression however that they should be sitting on the sidelines and waiting, just the opposite rather. We want to make sure we give them a price point that allows them to run their business as they see; they need to run the business and not be trying to just play the inventory game. Steve?

[Steve Tremblay:]

Thanks, let me touch on the SG&A question that when we reported our fourth quarter of last year and the first quarter of this year, our guidance for SG&A spend on a full-year basis was $109 million. When I noted the update, where we currently see 2013, I reduced that down $100 million, a portion of that is a function of modifications to any invariable comp not strictly necessarily tied to revenue but there is a component of variable comp attached to certain metrics and that’s been ratcheted down as well as more review of certain discretionary items in light of the volume environment.

[Operator:]

Next question, Christopher Butler from Sidoti.

[Christopher Butler:]

The results that it seems pretty easy to look back to last year in a similar situation with butadiene falling, some of these numbers we have as far as inventory holding loss and SG&A but as you look through the P&L for the third quarter, anything standout as might be significantly different from where you were in the third quarter of 2012?

[Steve Tremblay:]

Chris, I think we missed the first part of your question. There was an audio issue. So if you wouldn’t mind kind of rephrasing that might…

[Christopher Butler:]

Sure, of course. As I look through the third quarter of this year, it’s easy to compare it to the third quarter of last year where we had butadiene falling and going through the P&L, some of these numbers, we have such as the inventory holding loss that you expect this year versus last year but any of the other numbers in the P&L standout as significantly different from what you expect to see from where we were in the third quarter of last year?

[Steve Tremblay:]

I think you got to look at the relative price of butadiene to begin with, but that all being said, I mean, I don’t think that you could I don’t know have that translate to anything other than what we talked about these are the FIFO and ECRC spread of $25 million expenses we call it and then it comes down to the impact of ‘07 in volume and as I commented there was momentum at the latter part of the second quarter and that momentum is carried forward so far in the third quarter. So that’s our view in the situation and by them I mean volume momentum.

[Operator:]

Thank. Our next question Sumit Rocham from KeyBanc.

[Sumit Rocham:]

Just quick question, given kind of where this year is coming in and kind of our sense for what operating rates are, can you give us your thoughts on any potential for any type of major restructuring to maybe bring down overall cost structure of Kraton?

[Steve Tremblay:]

What we have a Kraton is on the one hand a footprint that is absolutely suited to meet our global customer needs, so in terms of where we are but that also brings with that is a fixed cost component to operating the numerous plans we have that perhaps if we restarting over today and redesign, we might not have the same starting point, we might be a little bit more concentrated particularly in Europe. And we are always looking at that relative to the other priorities initiatives we have to drive growth and satisfy our customer needs, and some of you that have been part of Kraton for quite some time know that we haven’t hesitated in the past where we saw the opportunity which was to look at the consolidation of our manufacturing assets and of course largely example of that most recently was our Pernis, Netherland shutdown where we were able to take advantage of our capabilities and other facilities. So that we did not miss a bit with respect to serving our customer needs, but at the same time too we are able to take fixed cost out. And I think it is fair to say that we should be always be looking at that, I think any company that has our footprint like ours is always looking at opportunities to take cost out but nothing definitive that I can comment on at this time.

[Sumit Rocham:]

Okay, great. And looking at the $1000 per gross ton tough target, is that still the right earnings potentials to look at for Kraton as we look over kind of the mid to long term and can give us better idea of how you guys can get there?

[Stephen Tremblay:]

We do believe it is the achievable metric over the mid and long term and we are on way even on how we are going to get there, it’s the portfolio shift that we are committed to including next oilfield services and the like. And as Kevin mentioned we have our second commercialization of NEXAR in our way and we continue to focus on those, and those are the things coupled with prudent cost management that we still are committed to drive $1000 per ton.

[Operator:]

(inaudible)

[Unidentified Analyst:]

Thank you. Do you have any metrics that you look at to quantify channel inventory destocking downstream of you. I am thinking like order patterns whether the customer orders get smaller at their destocking or less frequently or anything like that?

[Stephen Tremblay:]

I think we have probably kind of visibility in terms of orders patterns out about 30 days typically. And we always compare that to the 30-day trailing order pattern and you can see, when you look at that whether or not, it appears people are buying to bill, buying to serve the present need or clearly in the destocking mode and it's not a common or it's not common across all customers, it's really customer and market specific, how people are dealing their own situation relative to what they think is going to be the relative cost of Kraton material tomorrow versus today. So I don't think there is a definitive formula, but we are always trying to understand that. Because at the end of the day, I think most of you appreciate our model here, which is we have to have the inventory in place to satisfy a customer order across the globe. And so we are always anticipating their future needs perhaps even sometimes before they are in order to ensure we can meet that service model expectation that we have built our business around.

[Operator:]

Thank you. Next question Andy Cash with SunTrust.

[Andy Cash:]

Hi, how much do you have currently drawn on your credit facility and what provisions need to met in order to take advantage of the accordion feature?

[Stephen Tremblay:]

We have nothing drawn at June 30. We had $40 million outstanding in March, which we repaid in the second quarter. The accordion feature would have to satisfy the same traditional security provisions that will be needed relative to where the receivables and inventory are located and the ability to protect the security interest as well as of course approval by the syndicate that's in the facility today, but there aren't any definitive financial hurdles if you will that would trigger or prohibit accessing that accordion should we need to do so.

[Operator:]

Thank you. John Roberts, UBS.

[John Roberts:]

Thanks. I actually had a follow-up on my earlier one. So based on your July order patterns relative to the June or May order patterns that you are observing, do you think destocking had a material effect on the June quarter and does it look new order patterns that it’s going to have a material effect on the September quarter?

[Stephen Tremblay:]

Again I'll go back to what I said John, the only indication we had on anything in the second quarter was a minor amount in our European traditional pressure sensitive adhesives as well as non-woven adhesive business. That’s the only indication we saw some indication of destocking. As far as looking the third quarter, again I will reiterate my statement which is there seem to be good volume momentum for us at the second -- in the latter part of the second quarter and that is still translated into the third quarter which gives us optimism in that sense.

[Operator:]

Thank you. I will now hand the call back over to Mr. Gene Shiels for closing comments.

[Gene Shiels:]

Thank you. We would like to thank all of our participants this morning for their interest in Kraton and for their thoughtful questions. A replay of this call will be available on our website at krayton.com. To access a replay select the Investor Relations link at the top of the home page and select Events from the Investor Relations menu. You may also hear a telephonic replay of the call and domestic callers may dial 888-566-0465 and international callers may dial 203-369-3049. This concludes our call.

[Operator:]

Thank you. And this concludes the Kraton Performance Polymers Incorporated second quarter 2013 earnings conference call. Thank you. You may disconnect at this time.