Kraton Corporation
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good morning and welcome to the Kraton Performance Polymers Inc. Third Quarter 2013 Earnings Conference Call. My name is Stacy and I will be the conference facilitator. At this time, all participants are in 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 objection, 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, Stacy. Good morning everyone and welcome to Kraton Performance Polymers third quarter 2013 earnings call. With me on the call this morning are Kevin Fogarty, President, Chief Executive Officer and Steve Tremblay, our Vice President and Chief Financial Officer. A copy of the news release issue yesterday is available in Investor Relation Section of our website as are copies of the presentation we will review this morning. Before we review third quarter results, I will draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures including in our presentation this morning and in yesterday’s earnings release. During this call we may make certain comments that are not statements of historical fact and does constitute forward-looking statements. Investors are cautioned of their 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. 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 10K, 10Q and other regulatory filing available in the Investor Relation Section of our website. With regard to the use of non-GAAP financial measures, reconciliation of EBITDA, adjusted EBITDA, and adjusted EBITDA at ECRC, the net income or loss, and gross profit at ECRC, the gross profit as well as the reconciliation of net income or loss attributable to Kraton to adjusted net income or loss was provided in yesterday’s earnings release and is included in the appendix to the material we will review in this call. Following our prepared remarks, we will open the line for your questions. I will now turn the call over to Fogarty.

[Kevin Fogarty:]

Thank you Gene and good morning everyone. I will begin our remarks on Slide 4 to look at financial highlights for the quarter. Our third quarter sales volume reflects the positive business momentum. We observed and commented on in early August at the time of our second quarter earnings call. Q3 sales volume was 83.5 kilotons which was up by 0.3% year-on-year compared to the 79.3 kilotons we reported in the third quarter of 2012 and up 7.7% as compared to the 77.5 kilotons we reported in the second quarter of 2013. Our third quarter sales revenue was down $15.5 million or 4.5% compared to the 342.6 million were reported in the third quarter of 2012. This is principally due to lower sales prices associated with reductions in average material cost compared to the third quarter of 2012. Given the significant drop in butadiene prices in this past August we had guided to a negative spread between FIFO and ECRC of $25 million in the third quarter. The actual spread was negative $20.7 million. Also in the quarter we incurred $6.1 million of cost associated with turnarounds and related activities primarily at our Belpre, Ohio site. Of these costs $3.5 million represents the impact of production downtime in the quarter associated with the MACT-related replacement of our coal-burning boilers. We consider the specific cost to be nonrecurring and therefore added back when presenting adjusted results. Scheduled turnaround cost in the quarter which were not added back for purposes of presenting adjusted results were 2.6 million, $1.4 million higher than $1.2 million of turnaround expense recorded in the third quarter of 2012. The negative spread between FIFO and ECRC in conjunction with higher than normal turnaround cost therefore had an adverse impact on gross profit and as a result on a GAAP basis we reported a net loss of $5.6 million or 17 cents per diluted share. Adjusted net loss which excludes among other items by $3.5 million impact of production downtimes associated with the boiler replacement was $1 million or a loss of 3 cents per diluted share. Third quarter adjusted EBITDA at estimated current replacement cost or ECRC was $44.8 million. This compares to $50.8 million in the third quarter of 2012, quarter in which we saw margin expansion as butadiene prices continued to decline from second quarter 2012 highs. The trend in butadiene prices in the third quarter of 2013 did not present the same opportunity for margin expansion and therefore the third quarter of 2012 presents a difficult comparison. Nevertheless, adjusted EBITDA ECRC of $44.8 million in the third quarter was the third highest third quarter result in the company’s history. We are also very pleased to report that net cash provided by operating activities was $62.5 million in the third quarter of $29 million compared with the $33.5 million generated in the third quarter of last year and for the nine months ended in September 30, 2013 cash generated from operating activities was $58 million. So let’s now turn the Slide 5 and I will review third quarter results for our four end use markets beginning with Cariflex. Sales revenue for our Cariflex end use was $28.2 million in the third quarter of 2013, of $4 million or 16.7% compared to the third quarter of 2012. Excluding a $1 million adverse impact from currency movements in the quarter revenue would have been up $5 million or 20.8%. The increase in third quarter revenue was driven by a 28.6% increase in sales volumes are partially offset by decrease in average selling prices, which were largely associated with lower cost for isoprene monomer. Compared to the third quarter of 2012, the most significant increase in sales volume occurred in gloves and other medical applications. We also saw year-on-year growth in condom, industrial, and electronic applications. Consistent with our strategy for Cariflex during the quarter we continue to diversify our sales in terms of both customers and geographies and we are focused on driving growth in new end use applications such as condoms. You will note that this quarter we are providing some additional detail by end use reflecting geographical distribution of revenue for the trailing 12-month period ending September 30, 2013 as well as the breakdown of applications by end use. We are also providing an update of portfolio composition by revenue showing a breakdown of revenue from innovation, differentiated and standard product rates. As evidenced by our performance in the third quarter and as seen in the date on the slide, we have continued to drive growth for our differentiated Cariflex products. On Slide 6, third quarter revenue for the advanced materials end use was $81.2 million down $12.5 million or 13.3% compared to the third quarter of 2012. The revenue decline reflects a 7.3% decrease in sales volume and to a lesser extent lower average sales prices associated with lower average cost for raw materials such as butadiene. During the quarter sales volume continued to reflect slow consumer demand particularly in Europe and in Japan however, the decrease in sales volume was most pronounced in our base personal care volume specifically in sales and to lesser differentiated applications. With respect to the decrease in base personal care applications, over 75% of the decline occurred in North America. We have two platforms for personal care applications. One is based on HSBC chemistry and the other is based on the USBC chemistry. During the quarter we saw an increase in demand for the USBC based solutions and a slowdown in the HSBC portion of personal care portfolio. While we believe this is in response to market conditions, it remains to be seen whether this is indicative of a longer term trend. With respect to the advanced materials innovation portfolio, sales volume was up 27% led by sales of innovation grades into personal care and consumer applications. The growth of innovation sales into personal care applications relates to the increase in USBC applications that I just mentioned and this has been driven by our ongoing efforts to address specific customer requirements such as the need to minimize input cost as they change product specifications to address current market conditions. During the quarter, in the increase in innovation sales into personal care applications was partially offset by lower volumes into wire and cable, and medical applications. The slide also provides an update on revenue by geography and by end use for the advanced materials end use. Looking at the portfolio composition for the trailing 12-month period ending September 30, 2013 revenue derived from innovation sales has remained constant at 23%. Of all our end use market sales trends for the advanced materials tends to be most reflective of worldwide economic conditions. As reflected in the year-on-year revenue decline for the end use, there is no question that economic softness over the past year in key markets such as Asia has impacted growth in innovation and differentiated product rates. Nonetheless, we remain confident in the long-term opportunities for growth we see for our key innovation platforms such as PVC substitution for wire and cable applications and medical packaging. Turning now to Slide 7, sales revenue for adhesive sales and coatings was $117.6 million, up 1.1 million or 1% from $116.5 million in the year ago quarter. Excluding the impact of currency revenue would have been up 1.8 million or 1.5%. Sales volume was at 7.4% primarily due to the timing of sales and to lubricant additive applications and this was partially offset by lower sales into cable applications. The contribution from higher sales volume was partially offset by lower average sales prices which were associated once again with lower average cost for raw materials, primarily butadiene and isoprene. For the TTM period ending September 30, 2013, 5% of ASC’s revenue was comprised of innovation rates and 43% was comprised from differentiated grades. The portfolio remains basically unchanged driven by higher sales into standard SIS based applications such as pressure sensitive adhesives. Turning now to our paving and roofing end use, third quarter 2013 sales revenue was $99.7 million down $8.3 million or 7.7% compared to the third quarter of 2012. Revenue growth reflects a $2.1 million positive impact from currency movements. Sales volume for paving and roofing was up 9.1% compared to the third quarter of 2012 and therefore the revenue decline reflects lower average prices associated with lower average cost of raw materials, primarily butadiene. Global roofing volumes were up significantly led by Europe while global paving volume was essentially flat year-on-year. Sales volume of innovation grades was up 21.8% compared to the third quarter 2012, on higher sales of roofing innovations and paving innovations such as HiMA. Our focus on shifting our paving and roofing portfolio to higher differentiated innovation solution is bearing results as you can see, the lower right hand part of the slide. Innovation grades now account for 12% of paving and roofing sales and differentiated grades now account for 23% of revenue. I would like to round out our end use discussion with a look at the company as a whole on Slide 9. Looking at revenue for the TTM period ending September 30, 2013, Cariflex now accounts for 9% of revenue with advanced materials at 26%, ASC at 38%, and paving and roofing at 27%. From a geographical perspective for the TTM period, North America accounted for 34% of total revenue. Europe, Middle East, Africa accounted for 38%. South America was 6% of total revenue and Asia-Pacific accounted for 22% of revenue. From our portfolio composition view point, 14% of revenue for the trailing 12-month period was derived from innovation grades and 39% was derived from differentiated grades. The worldwide economic conditions and soft consumer demand have had an impact on progression in the portfolio over the year, we remain confident in the long-term growth potential of our innovation portfolio and we are committed to delivering the portfolioship to innovation and differentiated sales we outlined in our investor day in August 2012. With that summary, I would like to turn the call over to our CFO, Steve Tremblay for a more detailed review, Steve?

[Steve Tremblay:]

Thank you Kevin. Turning to Slide 10, we are pleased with our third quarter sales volume with 83.5 kilotons as it is the highest third quarter sales volume since the third quarter 2008 where we generated volume of 89.6 kilotons. It also represents growth of 53% over our third quarter 2012 sales volume of 79.3 kilotons. A significant portion of the overall volume growth was driven by stronger volume in our paving and roofing end use. The volume was up 9% year-on-year. In addition, Cariflex volume was up over 28% and our advanced materials end use despite growth in innovation sales volume, total annual sales volume was 7% less than Q3 2013 principally due to the fact as Kevin mentioned, lower sales into base personal care and less differentiated applications. Third quarter sales revenue was $327.1 million down $15.5 million by 4.5% from $342.6 million in the third quarter 2012 due to lower average selling prices commensurate with lower raw material cost partially offset by the aforementioned volume growth. On the year-to-date basis, sales volume was 239 kilotons down 7 kilotons from the 246 kilotons boasted in the first nine months of 2012. The majority of the period over period of volume decline is due to lower paving demand principally in North America and Europe in the first half of 2013. As weather conditions adversely impacted the start of the paving season. Volume in our Cariflex end use was up 12% compared to the first nine months of 2012 due to increased sales volume surgical gloves and other medical and innovation applications. Sales volumes and advanced material in adhesive, sealants and coatings were modestly lower in 2013 compared to 2012. Sales revenue for the first nine months of 2013 was $1 billion down to 125 million or 11%. Looking at the revenue walk at the bottom of the page we can see that $37 million of the revenue declined is explained by lower sales volume, $79 million is the result of lower average sales prices largely due to the lower raw material costs and the balance of decline is related to unfavorable currency movements. I will turn now to Slide 11 for discussion of factors impacting gross profit on a quarter as well on a year-to-day basis. Reported gross profit for the third quarter was $47 million with a margin of 14.5% and this was up from $43 million with a margin of 12.5% reported in the year ago quarter. Excluding the headwind associated with raw material costs, gross profit on an estimated current placement cost was $68 million in Q3 2013 compared to $80 million in Q3 2012. Gross profit benefitted from higher sales volume which is more than offset by increased turnaround activity of $4.9 million including the $3.5 million associated with the boiler MACT legislation like Kevin mentioned earlier as well as unfavorable currency fluctuations of approximately $3 million and finally some increases in other operational costs. In addition, Q3 2012 results were favorably impacted by the dramatic fall in BD prices that began earlier in the year which outpaced changes in our unit selling prices resulting in margin expansion. As we move through the balance of 2012, overall unit margins return to more normal levels which we have sustained as we move to 2013. On a per ton basis, gross profit at ECRC was $858 per ton in the quarter. I would like to note here that in calculating the $858 per ton we have excluded the $3.5 million impact of the MACT related production downtime due to its non-recurring nature. As we mentioned earlier that butadiene dynamics in 2012 were much different than the relative titrating [indiscernible] we experienced in 2013 up to the recent drop in August. This makes the gross profit of $1000 per ton in Q3 2012 a difficult comp. Having said that though our third quarter 2013, gross profit per ton at ECRC of 858 represents the fourth consecutive quarter of improvement in this metric. On a year-to-date basis, gross profit was $167 million dollars or 16.7% of revenue for the nine months ended on September 30, 2013 compared to $192 million with a margin of 17% for the nine months in 2012. Gross profit at ECRC was $191 million or 19% of revenue for the first nine months of 2013, compared to $212 million or 90% of revenue for the comparable period in 2012. On Slide 12 we take a look at adjusted EBITDA and adjusted EBITDA at ECRC. Adjusted EBITDA for the third quarter 2013 was $24 million compared to $30 million in the third quarter of 2012. As you can see in the detail on the right hand side of the slide, in both periods we had a significant FIFO headwind $20.7 million in the most recent quarter and $37.6 million in the third quarter of 2012. The $20.7 million FIFO expense in the third quarter of 2013 was below our guidance of approximately $25 million principally due to the fact that butadiene prices did not continue to decline beyond a significant August drop. Adjusted EBITDA on our current cost basis was $45 million with a margin of 13.7% in Q3 2013, which compares to $51 million with a margin of 14.8% in the third quarter of 2012. Once again as Kevin shared earlier, neither of the $2.6 million of scheduled turnaround expense incurred in the third quarter of 2013 nor the $1.2 million occurred in the similar period in 2012 were added back for purposes of presenting adjusted results. The only adjustment associated with the turnaround activities was a $3.5 million of non-recurring MACT related costs. The EBITDA bridge illustrates $5 million EBITDA growth from the 4 kiloton improvement in volume. Cost of goods sold declined $20 million which includes the significant effect of lower raw material costs which were partially offset by increases in other production items. The average selling price declined compared to third quarter of 2012, was greater than the decline in cost of goods sold because of the aforementioned butadiene dynamics. Moving now to Slide 13, the nine months ended in September 2013, adjusted EBITDA ECRC was $106 million or 10.6% of revenue. This compares to $121 million or 10.8% of revenue for the nine months ended in 2012. On the year-to-date basis, the spreads between FIFO and ECRC was $23.5 million negative effect in 2013 and $20.3 million negative effect in 2012. The components of the period-over-period decreased in adjusted EBITDA at ECRC as shown at the bottom of this page. Year-to-date sales volume is down 7 kiloton and this accounts for $12 million of the period-to-period change. Reductions in average selling prices aggregated $79 million with the price reductions being driven primarily by lower average raw material costs. The decline total cost of goods sold reflects the decline in [indiscernible] set by increases in turnaround costs, the impact of production and efficiencies that we encountered earlier in the year and other increases in manufacturing costs and finally low selling administrative and R&D cost was primarily the result of lower personnel costs. Let’s move on to Slide 14 and EPS. Third quarter EPS was a loss of 17 cents per share compared to a loss of 48 cents per share in the third quarter of 2012. The third quarter 2013 was negatively impacted by the MACT downtime and other charges that aggregated 14 cents per share. So on an adjusted basis Q3 2013 EPS was a loss of 3 cents per share compared to a loss of 38 cents per share in the third quarter of 2012. Included in the Q3 adjusted EPS are the following items that also impact comparability. First, the after-tax effect of the spread between FIFO and ECRC was dilutive to EPS in the third quarter of 2013 and 2012 by 63 cents per share and a $13 per share respectively and secondly the tax accounting for net operating losses was diluted EPS in the third quarters of 2013 and 2012 by 11 cents per share and 30 cents per diluted share respectively. After eliminating the EPS effect of FIFO versus ECRC and the changes in evaluation allowances, the final decline in EPS was result of lower adjusted EBITDA and a higher normalized tax rate in 2013, the tax rate driven by the global mix of earnings. With the nine months end in September 2013. adjusted EPS amount in 19 cents per diluted share and this compares to diluted earnings per share of 57 cents in the first nine months of 2012. Here again, the spreads between FIFO and ECRC negatively impacted 2013 year-to-date EPS by 72 cents compared to a negative impact of 60 cents in the first nine months of 2012 and the change in evaluation allowance had a negative impact of 25 cents per share for the first nine months in 2013 compared to 29 cents per share for the comparable period in 2012. So on a comparable basis, the decline in EPS reflects the lower adjusted EBITDA a significant component being the lower first half sales volume in our paving end use, partially offset by lower interest, V&A and normalized taxes. On Slide 18 included in this material as well as in the press releases a reconciliation of our GAAP EPS to the adjusted EPS results. Moving on to Slide 15, I would like to make a few comments on cash flow and our balance sheet. For the three months ended on September 30, 2013 operating cash flow was a healthy $62.5 million and this compares with the operating cash flow of $33.5 million for the three months ended on September 30, 2012. As a result of the favorable cash flow performance in the third quarter our operating cash flow for the nine-month period ended on September 30, 2013 was $58.1 million. Changes in working capital provided $22 million of cash to the first nine months of 2013, albeit less than in the first nine months of 2012. Where high sales levels of raw material, inventories as well as the timing of the cash disbursements resulted in the change in working GAAP period-over-period. Since December 31, 2012 we have lowered our growth debt by nearly $110 million and at September 30, 2013, total liquidity amounted to $283 million with nothing drawn on the ABL and with respect to leverage net debt to trailing 12-month adjusted EBITDA was 2.7 turns at September 30, 2013. Slide 16 presents an update of specific P&L items for the full year 2013 which are essentially unchanged from our expectations in early August as communicated in our second quarter call. On a full-year basis interest expense is expected to be $31 million and this includes 5$.7 million charges associated with the first quarter 2013 refinancing. Our estimated full year R&D expense is $34 million with full year SG&A expenses estimated to be approximately $102 million. Full year D&A is expected to be 62 million and our CapEx continues to be expected to fall within a range of $80 million to $85 million and our investment in the HSBC joint venture continues to be estimated at $41 million for the full year 2013. And we also have updated our expectations for our fourth quarter tax provision, we are now expecting the fourth quarter provision to be approximately $3 million. Lastly, a few comments on outlook for raw materials. Following the significant downward movement in butadiene prices in August, we have seen an upward bias in pricing indicating that perhaps we did in fact reach a bottom for BD prices in August. The October North America contract was up nearly 3.5 cents to 46.5 cents and we now expect North America contract price for November to be up 8 cents per pound to 54.5 cents. This is a bit unusual as we typically see price weakness in the fourth quarter as companies work to reduce inventories for year end. Given our view of recent monomer price moves and taking into consideration the continued effect of the significant August decline, we are currently expecting our fourth quarter 2013 results to reflect a negative spread between FIFO and ECRC of approximately $8 million. I would like now turn the call back over to Kevin for his closing comments. Kevin.

[Kevin Fogarty:]

Okay, Thank You Steve. As a whole our third quarter results exhibit the business momentum and recovery from below trend line sales volume in the first half of the year that was largely due to weather related impacts on our paving and roofing end use. As I mentioned in my end use commentary, economic softness and associated weakness in consumer demand in key market such as Asia and Europe and at the structure spinning in China has been reflected in our year-to-date results. Particularly for advanced materials and adhesives, sealants and coatings end uses. However, our third quarter results for our Cariflex end use shall continue to grow particularly for innovation grades and although paving and roofing sales volume for the first half of the year was disappointing for the reasons already mentioned, third quarter sales volume was consistent with return to normal levels of activity. During the quarter we continued our focus on two significant projects that will support future growth for Kraton, the first of which is the construction of our semi-works facility, in Belpre, Ohio. I was recently in Belpre and had the opportunity to see firsthand the progress our team has made on the project. The semi-works facility will be instrumental in accelerating our innovation efforts and will result in more efficient utilization of our production assets. We look forward to the completion of this project by year end. The second project, construction of our HSBC expansion in conjunction with our joint venture partner for most [indiscernible] chemical company continues to move forward on schedule for mechanical completion in 2015. The plant will manufacture low-molecular weight HSBC product grades that will support continued growth in many of our key innovation platforms. As this project continues to progress, I believe the benefits of expanding our manufacturing footprint in Asia are becoming increasingly more evident. As we have said before, the region represents a significant opportunity for Kraton. We believe the plant’s efficient cost structure, the plan for availability of raw materials on-site, and the plant’s proximity to target markets in Asia will enable Kraton to expand its innovation sales and overall growth in the region. With those comments, we will be happy to turn the call over for questions.

[Operator:]

Thank you. We are now ready to begin the question and answer session. (Operator Instructions) Our first question comes from Mike Susan of E Bank.

[Mike Susan:]

Hey Good Morning guys. In terms of, you know, the sequential trend for growth margin per ton that tends to dip a little bit in the fourth quarter versus the third quarter, can you give us a little bit of a feel of whether that is a similar type of trend you are expecting, it is going to be little bit less, little bit worse than what you may have seen in the past?

[Gene Shiels:]

Hey Mike, this is Gene. We will – as you know we are not giving specific guidance on things of that nature, but I just remind that as we have said before typically as you go from a higher volume third quarter to a lower volume fourth quarter you do have some fixed cost absorption impact that is reflected in the gross profit per ton.

[Mike Susan:]

And then last year you had a lot of hits to your growth profit per ton but what is the right sort of base to think about to work off on a year-over-year basis and you know given that you know, you have some improvements in mixing stuff, would you be able to have your gross profit per ton better year-over-year versus last year?

[Gene Shiels:]

You are talking about the fourth quarter, Mike, specifically or a full year basis?

[Mike Susan:]

Yes, fourth quarter 12.

[Gene Shiels:]

Yes, the fourth quarter 12, you are absolutely correct was a period where we had we began to see some of those production and efficiencies negatively impact the fourth quarter, you know in the comments earlier we – we got those behind us in the first half of the year, if I would echo Gene’s comments that it will be premature and inappropriate to talk about our expectations for the fourth quarter, but that said, you know, we are pleased at the A58 that we posted, it is a fourth quarter in a row, it is moving us towards a $1000 per ton, it will indeed be somewhat of the negative leverage associated with the seasonally low fourth quarter but also current expectation is that the run rate unit cost won’t be materially different than we were in the third quarter.

[Mike Susan:]

Okay and then last one based on your SG&A guidance looks like the fourth quarter is going to be up a lot sequentially 28 million to 29 million versus 21 to 23 in the third, any particular reason why it’s going up so much?

[Gene Shiels:]

The third quarter was a little bit light just because of some timing of some items, if you look at first couple of quarters of the year not significantly different than our expectation for the fourth quarter, you know really nothing unusual in there other than you know, some of the normal seasonal impacts that an impact the SG&A spend.

[Mike Susan:]

Okay, Great, Thank you.

[Operator:]

Our next question comes from Brian McGuire of Goldman Sachs.

[Brian McGuire:]

Hey Good Morning guys.

[Gene Shiels:]

Hello Brian.

[Brian McGuire:]

Kevin I was just curious whether you or the board has kind of entertained the thought of launching a stock repurchase plan and I just kind of telling you where I am commenting at, if my numbers are right, it looks like you are investing about 200, may be a little more than $200 million for 30,000 tons of HSBC in Taiwan and that is roughly almost $7000 a ton of replacement cost and look at you know your capacity as a company and where your enterprise value, it now looks like the market is running you know less than around half of the value of that to your current assets so just kind of wondering if rather than spending on some of the growth [indiscernible] it might make more case to put the cash back into you know the shareholder’s hands and try and get the market evaluation to a point where it is more effective than those replacement costs are?

[Kevin Fogarty:]

Look Brian, let me start by saying you know we are fully committed on our project to expand our HSBC footprint in Asia. The project is well underway. We are already beginning to see as I mentioned in my comments opportunities that perhaps even we hadn’t even thought about as we were beginning to plan for this –this investment over the last couple of years, so we are well on our way to that. Now as to your specific question with respect to share buyback, I can’t say definitively that that we have entertained this at the board level, but nevertheless I mean, as we have always said about what are we doing with our cash proceeds, first and foremost we believe we have investment opportunities, which are going to generate superior return for shareholders to improve the overall performance of the business and then beyond that than we start to look at the things that you mentioned associated with you know, whether or not we should be working through plans on be it share buyback or be it dividend, again, no commitments on any of those other than you know, we are fully aware of you know, the cash profile of Kraton, the attractive cash profile of Kraton and then the need to prioritize if you will, the use of those cashes for the beneficiary shareholder.

[Brian McGuire:]

Okay great, and then just a question on the volumes in the third quarter and the all of the course, you know, you just mentioned in the press release last night it is the best third quarter in five years and you know the best single quarter you had in almost two years. I just wondered what component of that is always hard to try and [indiscernible] what component do you think was restocking after the day peak stock, you know, earlier in the year and the weather related impacts, you know, kind of how of which you think was representative of other man versus just some purchase timing decisions and as we look into the fourth quarter is a normally is the pretty good seasonal decline but you think with butadiene having bottom you might get more of a restocking benefit, so you would have a less seasonality than normal.

[Kevin Fogarty:]

Well, there is a lot in what you ask Brian but let me just start with as we view the third quarter results, you know, I just said in my comments again, you know, our view is those results reflect us getting back to where trend line indicates we should have been. Clearly, it was not a good start to year particularly in the paving and roofing business because of weather but nevertheless as I said in the comments I believe in the earlier conference call this year that it’s difficult to really think about catch up in the context of this business simply because you just do not have assets to run at a 150%. You can only do so much road construction in the course of the season, so the results that we see in the second quarter are more indicative of getting us back in terms of the trend line that we would expect to be on. Now, as we look forward, again, you know, we do not give guidance per se, but I will call out the fact that, you know, what’s happening in butadiene prices as Steve commented is a little bit irregular in the context of butadiene prices going up in this fourth quarter. Needless to say it’s probably not too surprising giving the low point they achieved in the third quarter, but there is clearly spot momentum across the globe right now in terms of butadiene and if you’re a customer and you’re thinking about, you know, how do you want to balance your end inventories versus 2014 demand and you butadiene prices rising, you know, you do not feel that you’re taking on as much risk I suppose if you make purchases in the fourth quarter if you assume that prices are not going to be dropping in the future and with these butadiene prices at its low point certainly relative to crude oil it’s difficult to envision that.

[Brian McGuire:]

Right, thanks very much.

[Operator:]

Our next question comes from Edward Gein of Oppenheimer.

[Edward Gein:]

Hi, good morning

[Kevin Fogarty:]

Hey.

[Edward Gein:]

Quick question on the plant turnaround costs excluding the MACT cost, it was still up year over year 2.6 million versus 1.2 million, maybe some color on that?

[Kevin Fogarty:]

That’s correct. You have the numbers squared away. Really it was a function of – as you turn around the different lines, there is a more complexity one line versus another line. It was simply a situation of – if you will the mix of the lines that would turn around will more expensive recurrent cost than what they were last year.

[Edward Gein:]

Okay, got you. And you know what’s you outlook on pricing, you know, BD prices on a contract basis with November up should be up about 25% from the end of the third quarter. When I look at Asian spot prices, you know, they are up 50% to 80% just from a few months ago but obviously from a very low base, but at the same time you’re also guiding towards at ECRC impact as well which I was surprised by. So how is your outlook on pricing with those different puts and takes, do you expect pricing to be up sequentially, you also have a mixed benefit as well?

[Kevin Fogarty:]

This is Kevin, I mean this is the most consistent answer I think we have given over the last four years in terms of our pricing strategies are, and what I am talking about of course is our price right strategy where you know given the fact that it’s two parts. Part one is making sure we get a price right initially and part two which is really gets to your question is making sure that to the extent we are in environments of raw material increases that we are responsive. Now I guess I want to be clear, remember what most of our production assets are today, we are not exposed to what’s happening to the Asia spot price per se, indirectly yes but not directly. So we are watching North American Europe very closely, looking at it from not distant standpoint of it, it is just a month long fundamental in terms of these contract price increases that Steve talked about or do we see it continuing on in 2014 and then positioning ourselves accordingly, again consistent with that price right strategy. So I have no problem saying to you and to everyone on the phone I mean our price right strategy has not changed and will not change.

[Edward Gein:]

I guess just to better understand how pricing is going to progress from the third quarter levels? Was you third quarter price that you realized did that reflect all the decline in BD you saw in the previous month so that is including baseline and we should think about how it moves from that level or is there any leftover impacts from the prior quarter BD decline to come?

[Kevin Fogarty:]

Well, it’s true to say that when we talk about rising prices commensurate with feedstock prices, we always about the lag discussion. There is not much of a lag discussion when you have declining raw material prices and how the customers correspondently expect our movements, so I guess that answer to your question is yes.

[Edward Gein:]

Okay, and just a question on the volume again, you know, volume momentum, it does sound like Kevin with you answer on the prior question that with butadiene prices moving up there is a less of a customer incentive to stay on the sidelines maybe get back into the market and re-order product. But at the same time, I have heard from other companies that they saw some sort of slowdown in September and you know the macro environment is a little bit weaker so maybe balance some of those comments.

[Kevin Fogarty:]

Look, I think I can say that I agree with both of what you said that you know momentum from the standpoint of raw material costs or the direction of raw material cost is as comment on a minute ago is there but at the same time I do not think anybody is completely confident in what is happening in the economies that they participate in and so while we are seeing some very positive trends in parts of our business, yet you can also see the trepidation in people and there are conversations with customers are about, you know really thinking about 2014 because you got to remember a lot of people when it comes to Q4, it is not about Q4 demand, it is really setting themselves up for the 2014 you know calendar year in business plans and what they expect to see in terms of the overall annual growth and they want to make sure they end the year and go into the year with the right levels of inventory. So everybody is balancing all that but on a whole I guess that’s the only comment I want to make which is it just a different market environment when you have you know butadiene actually showing some positive momentum upwards going into the quarter.

[Edward Gein:]

Hey, thank you.

[Operator:]

Our next question comes from Andrew Cash of Suntrust.

[Andrew Cash:]

Hi, good morning. I have housekeeping questions and couple of business questions. On housekeeping, do you happen to have what the vitality index was you know for the quarter?

[Gene Shiels:]

Yes, Andy, this is Gene. It was 14% on TTM basis.

[Kevin Fogarty:]

Please ask him for the quarter, we’re not going to give it….

[Gene Shiels:]

We do not give the quarter but on a TTM.

[Andrew Cash:]

TTM is fine, okay. Thanks. Second question, you said that we consumer markets and you know I thought of your consumer markets are fairly stable, so it’s curious if you could you know maybe tell us a little bit more about what’s going on there, you know, was there competitive issue, was it is the order delay, just what’s happening?

[Kevin Fogarty:]

I think personal care the one that we call out specifically and you there is a lot of competitive activity going on in personal care all over the world. If you are happened to be a consumer of personal care products like baby diapers, you will see that there is just a lot more offerings than the typical branded products that you probably known for 20 years or so and as you can imagine that means that the big OEMs are looking at cost and looking at technology differentiation to improve cost and performance and so I think that’s what that reflects and that’s why we called out for you that you know we see different trends in the USBC part of innovation portfolio as we do on the HSBC side of the base legacy if you rule personal care business.

[Andrew Cash:]

So do you think that you are actually losing some market share there or is it just more of a pricing issue?

[Kevin Fogarty:]

Well, I think that at the end of the day there could some momentum shift from more of the legacy HSBC sales that we participate in whereas people are getting attraction on the USBC innovation sales because we know that un-hydrogenated project is cheaper just in terms of base price but nevertheless you knot it performs differently, so that’s the tradeoff that some of these OEMs are really into.

[Andrew Cash:]

Nice. The last question I had for you was, you know, recognize what you say the four quarters of you know gross profit are improving on ECRC basis. It is kind of hard to tell at least from my perspective this sort of cyclical improvement or could you say there are some company specific actions that you guys have taken to improve that number and will help you move that $1000 number?

[Kevin Fogarty:]

Oh, I do not think that we are going to get the market to reward us to get us to the $1000 number. Andy, I think it’s going to all of our actions in terms of our price right strategy or portfolioship strategy and then of course let’s not forget you know focusing on cost and brining on this new Asia Capacity.

[Andrew Cash:]

Okay, so it is nothing, it’s more cost related than it is, you know, new product and higher prices, is that fair?

[Kevin Fogarty:]

I just say, it is a combination of all of those things. I mean they all work in tandem with one another. I mean those are the things we work on here and you know this is a process that we are going to, you know evolve over time towards that $1000 per ton goal.

[Andrew Cash:]

Okay, thank you.

[Operator:]

Our next question comes from John Roberts of UBS.

[John Roberts:]

Thank you, can you hear me?

[Kevin Fogarty:]

Yes, that’s okay.

[John Roberts:]

Any insights into the channel inventory in paving and roofing as you are ending the season here with weather has I think been pretty good across the country, so we probably the channel relatively bare at the end of the season?

[Kevin Fogarty:]

Yes, I think that at the end of the day the one thing we are recognizing is that there is not really people making inventory related decisions yet. What we are seeing right now is still reflective up to your comment that, you know, pretty favorable weather conditions for the most part. Particularly – I guess that’s particularly true in Europe as well if you are following some of the weather trends there.

[John Roberts:]

Okay, and could you give us an update on butadiene supply situation from a longer term structural perspective? How much is now coming from refineries versus naphtha crackers and do you think we have enough international naphtha cracker and refinery expansion activity to rebalance the market over time?

[Kevin Fogarty:]

I think, directionally, I do not think that I would surprise anybody that we believe that butadiene will be, you know, relatively balanced to tight if you will market from supply perspective, but no question there are some changes happening structurally if you have been tracking, of course, butadiene you know that many of the fundamental structural changes have happened here in North American associated with the late cracking fundamental and how that has caused butadiene supply to be in decline. But we would say that you know after almost four years of that conversion happening in the US cracker base to light feedstocks, most of that is for the most part behind us, so it’s really set at a new baseline of supply if you go to North America and then with all of the additional olefin capacity that is under development, you know, that should add molecules of butadiene to the supply base albeit at a smaller yield versus ethylene. But then if you look on a global basis, I mean, there has been a tremendous amount of investment activity particularly in Asia in butadiene extraction and I think as much as anything the combination of that new supply coupled with what has been I think slowdown in overall tire demand because remember a very percentage of butadiene, you know, makes its way into the tire industry and I think that new supply in Asia coupled with that slowdown has caused what we have seen here over the past few months of 2013 to see butadiene prices contract, but just long term you know none of us are assuming that the relationship that used to exist between say naphtha or crude oil and butadiene five years ago will revert back to that level and I think we think butadiene is an important raw material in terms of availability and competitive pricing dynamics and that’s one of the reasons that one we sought our project Asia. We wanted to make sure we aligned ourselves in the right location and in this case with the right partner who had access to suitable butadiene feedstock for our project.

[John Roberts:]

And then just two quick housekeeping questions Steve. If butadiene remains flat through the rest of the quarter would there be some FIFO headwind that would carry over into the first quarter?

[Steve Tremblay:]

If we were flat in the fourth quarter – we did talk about the fourth quarter versus the third quarter because it may be surprising that we are still having some raw material headwinds given what we talked about in the fourth quarter. Dynamics would be that’s precisely what you have just mentioned and that’s the hangover effect from the third quarter rolling into the fourth.

[John Roberts:]

But then fourth to first of those when I am asking so went sideways from here through December 31st or into early January would there be carryover further into the first quarter because again the fourth quarter is pretty large and so I do not know if there is the likelihood of carryover even if we have a stable market.

[Steve Tremblay:]

We need to have stability for sort of four months or so in a row would create complete or neutrality between FIFO and current replacement cost and the reason that this kind of a nice metric to think about is because we generally carry around four months of total finished goods inventory, so again four months of stability should result in neutrality all other things being equal.

[John Roberts:]

Then lastly, are there any insights into the 2014 tax rate at this point? Is it you think it is going to be normal?

[Steve Tremblay:]

At this point, we are not prepared to talk about 2014. We will do that when we release our annual earning. Historically, however though, when you strip out the changes in the valuation allowances, tax rate – normalized tax rates in the 15% to 20% range, lower than statutory rates because of the ability to use those [indiscernible]. So there is nothing structural that we are seeing that would materially change that but it is a bit early to be talking about 2014’s ETR.

[John Roberts:]

Thank you.

[Operator:]

(Operator Instructions) Our next question comes from Christopher Butler of Sidoti & Company.

[Christopher Butler:]

Hi, good morning guys.

[Kevin Fogarty:]

Hay Chris.

[Christopher Butler:]

Could you talk about new products and successes that you have had there over the last three months and maybe tie in how lower butadiene may have helped you or government shutdown debt ceiling issues have hurt you as far as customer slowdown and that process?

[Kevin Fogarty:]

We do not really talk typically about, you know, innovation in the last three months because it would be great if we had innovation cycle that was only three months but our innovation cycles are much longer than that but there is no question that you know we know we continue to make progress on the key platforms that we discussed with you. There is good evidence in terms of our performance in a [indiscernible] use that you can see that is not just about surgical gloves anymore that we are really diversifying the portfolio with innovation grades to serve things like growing condom market worldwide and that has been a key focus area for us, no question about it. The other that I probably can call your attention because again these are projects that we have been working on for quite sometime but we are starting to see the fruits of that labor. You think about the LMW portfolio of our HSBC portfolio where we are able to modify things mainly like polypropylene for flexible films that go into medical packaging and that’s a trend that’s – that’s truly a global trend for us and we are really excited about our position in that, so we made good progress on that, particularly this year and then lastly going back to the comments I made in the earning call, you know, HiMA has been a real winner for us in 2013, real proud of out of our paving and roofing team globally for presenting to customer around the world why this technology is going to offer, you know, countries and states and municipalities the ability to get performance roads, but do so with lower cost inputs, and so what certainly indicative of some of that performance if you thinks about what we are calling out now is the new standard for paving and roofing in use percent of innovation sales and differentiated sales driven clearly by HiMa primarily.

[Christopher Butler:]

And looking at maintenance again as we look to next year is your third quarter typically, the quarter that you performed maintenance and is 2.6 million or 1.2 million the more number that you would expect on average going forward?

[Kevin Fogarty:]

I think Steve jumped in here, but I mean, clearly there is always a cadence and I am not sure we are ready to say yet whether or not that’s going to be third or fourth quarter next year but there will be some turnaround needs are always is every year in our business.

[Christopher Butler:]

And which number is the more typical number?

[Kevin Fogarty:]

I’m sorry, in terms of which quarter because I do not think we have gone to that level of detail yet in our plan, but we will share with you when we come up with our fourth quarter results in the first quarter what that is. I think that this year though the number that we posted if we compare to the following year, we are $1.2 million 2012 in the third quarter of turnaround expense and this year it went up to $2.6 million for the reasons Steve talked about. I do not – you know I do not think we are prepared to say whether or not that is the right level or not at this point. I mean again that’s planning one year ahead and we will monitor and if we have a change and be able to give you a little bit more guidance on it, we will do so.

[Christopher Butler:]

And should we expect any more costs for, you know, MACT boiler regulation turnover?

[Kevin Fogarty:]

Well, there is a capital cost itself and I think if I remember correctly when we were through that project there is probably going to be another maybe not quite as significant shutdown, some point I am not sure if it is going to be in 2014 or 2015 as we get closed to the project tie-in, but there will need to be another shutdown facility as the utility then ties into the new gas fired generator, and I do not know if it compares to $3.5 million of downtime we had this year but again once we definitively decide when that’s going to occur we will be sure to give that guidance.

[Christopher Butler:]

Thank you for your time.

[Operator:]

As shown, no further questions, I would like to hand the call back to Mr. Gene Shiels for any closing remarks.

[Gene Shiels:]

Thank you Stacy. I would like to thank all of the callers this morning for their participation and their thoughtful questions. Just to let you know a replay of this call will be available on our website in the investor relation section kraton.com and you may access the telephonic replay through November 15th. Toll free number is [phone] and international callers may dial [phone].

[Operator:]

This concludes the Kraton Performance Polymers Inc. third quarter 2013 earnings conference call. You may now disconnect.