Kraton Corporation
Q4 2013 Earnings Call Transcript

Published: 27 Feb 2014

[Operator:]

Good morning and welcome to the Kraton Performance Polymers, Inc’s Fourth Quarter and Full Year 2013 Earnings Conference Call. My name is Troy and I will be the 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 also being recorded. If you have any objections, you may disconnect at this time. I would now turn the call over to Mr. Gene Shiels, Director of Investor Relations. You may begin.

[Gene Shiels:]

Thank you, Troy. Good morning everyone and welcome to Kraton’s fourth quarter and full year 2013 earnings call. With me on the call this morning are Kevin Fogarty, our President and CEO and Steve Tremblay, our Vice President and Chief Financial Officer. A copy of the news release issued yesterday is available in the Investor Relations Section of our website as our copies of the presentation we will review this morning. Before we review the results for the fourth quarter, I will draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures that are in the presentation this morning and in the press release yesterday afternoon. 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 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 Forms 10-K, 10-Q and other regulatory filing available in the Investor Relations Section of our website. With regard to use of non-GAAP financial measures, a reconciliation of EBITDA, adjusted EBITDA, and adjusted EBITDA at ECRC, the net income or loss, and a gross profit at ECRC to gross profit as well as a 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. With that, I'll turn the call over to Kevin Fogarty.

[Kevin Fogarty:]

Thanks Gene and good morning everyone. I'll begin my remarks on slide four with a look at financial highlights for the fourth quarter and full year 2013. Our fourth quarter sales volume was 74.3 kilotons, up 10.6% compared to the 67.2 kilotons posted in the year ago quarter and the highest fourth quarter sales volume for Kraton in the past six years. Fourth quarter sales revenue was $290.4 million down $6 million or 2% from the $296.4 million we posted in the fourth quarter of 2012. The decrease is primarily due to lower average selling prices which reflect lower average raw material costs compared to the year ago quarter. Fourth quarter net income was $4.9 million or $0.15 per diluted share and this compares to a net loss of $29.5 million or $0.91 per diluted share in the fourth quarter of 2012. Adjusted net income for the fourth quarter of 2013 was $2.5 million or $0.08 per diluted share and this compares to an adjusted net loss of $12.7 million or $0.39 per diluted share in the fourth quarter of 2012. Fourth quarter adjusted EBITDA at estimated current replacement cost or ECRC was $35 million up $12.6 million from the fourth quarter of 2012 adjusted EBITDA ECRC of $22.4 million. And in the fourth quarter we generated net cash from operating activities of $47.4 million up $3.3 million from $44.1 million generated in the fourth quarter of 2012. Turning now to page five for a summary of full year 2013 results. Full year sales volume was 313.5 kilotons compared to 313.4 kilo tons for 2012. Strong sales volume in the second half of 2013 essentially offset weakness in the first half of the year that was driven by cool weather in our Paving & Roofing earnings. Sales revenue for the year was $1.3 billion down $131 million or 9.2% and as with the fourth quarter this primarily reflects a reduction in sales prices associated with lower average raw material costs compared to the prior year. Net loss for the 12 months ended December, 2013 was $618,000 or $0.02 per diluted share and this compares to a net loss of $16.2 million or $0.50 per diluted share in 2012. Adjusted net income for 2013 was $8.5 million or $0.26 per diluted share up from adjusted net income of $6.9 million or $0.21 per diluted share in 2012. For the full year 2013 adjusted EBITDA at ECRC was $140.9 million and this was down just $2.9 million from the $143.8 million we reported in 2012. Net cash from operating activities was $105.5 million for the full year 2013 and this compares to $146.3 million for the 12 months ended December 2012. Turning to slide 6, we will look at fourth quarter and full year results for our four end use markets beginning with Cariflex. Fourth quarter 2013 revenue for Cariflex was $31.5 million up $2.2 million or 7.7% compared to the fourth quarter of 2012. The revenue increase reflects an 18% increase in sales volume partially offset by a decrease in average sales prices largely associated with lower raw material cost. Changes in currency rates also adversely impacted revenue by $1.3 million compared to the fourth quarter of 2012. Consistent with our strategy for Cariflex fourth quarter 2013 results reflect continued expansion in customer base new geographic markets and driving growth into new end use applications. Full year 2013 revenue was $116 million up $10.1 million or 9.5% compared to 2012. Revenue growth was driven by 13.5% year-over-year increase in sales volume partially offset by a $4.7 million negative impact from currency moves. As seen in the upper right hand side of the slide, 90% of Cariflex revenue in 2013 was associated with medical applications such as surgical gloves and condoms and 10% was associated with industrial applications. By geography Asia Pacific accounted for 89% of Cariflex revenue in 2013 with 10% coming primarily from European markets. Cariflex innovation sales volume was up 12.9% in 2013 led by isoprene rubber latex product rates. This resulted in a 24.9% increase in innovation revenue. Looking at portfolio configuration for Cariflex 28% of 2013 revenue was associated with innovation grades up 4 points from 2012. Turning now to slide seven, fourth quarter revenue for Advanced Materials was $77.4 million down $4 million from $81.3 million posted in the fourth quarter of 2012. Given the 6.3% increase in sales volume compared to fourth quarter 2012 the revenue decrease primarily reflects lower average selling prices associated with reductions in raw material costs. As discussed last quarter and in the fourth quarter we continue to see an increase in demand for USBC based solutions in personal care applications and a corresponding offset in the HSBC grades. While this shift has been driven by our response to customer and market conditions it remains to be seen whether this is indicative of a longer term trend. With respect to Advanced Materials innovation portfolio sales volume was up 52.9% compared to the fourth quarter of 2012 led by the sales of USBC innovation grades for personal care applications. Innovation grades for consumer and medical applications also increased year-on-year and this was offset by lower innovation sales into wire and cable applications. Advanced Materials revenue for the full year 2013 was $346.3 million down $36.5 million or 9.5%. Sales volume was essentially flat year-on-year and the decrease in revenue is due to lower average sales prices which are again a reflection of lower feedstock cost. Adverse moves in currency rates also contributed to $1.8 million of the revenue decline. The right hand side of the slide shows full year revenue for Advance Materials by end use application and by geography. On the bottom right you can see that the innovation revenue increased to 26% of the advanced materials portfolio from 24% in 2012 while differentiated sales declined. This shift in part reflects the shift in some personal care applications from HSBC to USBC that I mentioned earlier. Turning to slide eight, fourth quarter revenue for adhesives, sealants and coatings was $102.6 million, a decrease of $6.9 million or 6.3%. Fourth quarter sales volume was essentially flat with the year ago quarter and reflects lower average sales prices driven by lower raw material cost. Full year revenue was $477.6 million down $33.2 million or 6.5%. As was the case in the fourth quarter, average selling product prices in 2013 were down compared to 2012, reflecting reductions in raw material costs. And this accounts for the more majority of the year-on-year revenue decline with currency movements adversely impacting revenue by the additional $5.1 million. Looking at portfolio composition, the 1% decrease in innovation revenue reflects the move of grades including reactive SBS for printing plates to differentiated. While the slight decrease in differentiated sales reflect lower sales in 2013 for product grades into poly chloroethene rubber replacement and certain non-woven applications. Slide nine, reflects results from our paving and roofing end use where fourth quarter 2013 sales revenue was $78.7 million, up $2.4 million or 3.2%. Sales volume increased 22.6% compared to the fourth quarter 2012 led by growth in European roofing and North American paving volumes. Lower average sales prices associated with reductions in raw material costs, served to partially offset the revenue contribution from the increase in sales volume. Fourth quarter innovation sales was up 17.1% compared to the year ago quarter and this reflects increased sales in innovation grades such as HiMA into South America and increased sales of innovation grades in roofing applications in North America. Looking at the full year 2013 revenue for paving and roofing was $350.9 million, down $70.5 million or 16.7%. Sales volume was down 1% compared to 2012 with strong volume in the second half of 2013, serving to offset volume weakness associated with adverse weather in the first half of 2013. Average selling prices were lower due to reductions in feedstock costs. And this accounts for the majority of the revenue decrease, while currency movements resulted in $2.3 million of revenue favorability compared to 2012. Looking at paving and roofing results for the year in more detail, 58% of 2013 revenues associated with paving and roofing grades accounted for 39% of 2013 revenue. Looking at portfolio composition, paving and roofing made good progress in 2013 with innovation grades such as HiMA increasing from 8% of P&R revenue in 2012 to 12% of paving and roofing revenue in 2013. I’ll round out the end use review with a quick look at Kraton’s total portfolio on slide 10. As I mentioned earlier, total sales volume was up 10.6% in the fourth quarter of 2013 compared to the year ago quarter. I’ll highlight that our fourth quarter sales volume for innovation grades was actually up 7.4% year-on-year. On a full year basis, our sales volume was unchanged. This is due in large part to the impact of adverse weather on paving and roofing activity in the first and second quarters of 2013. Revenue decrease is primarily due to lower average selling prices that I mentioned earlier. And this reflects reductions in raw materials. Innovation, adverse currency movements accounted for $9.3 million of the revenue decrease compared to 2012. Lastly, if you look at the lower right hand side of the slide, due in large part to the contributions of our Cariflex and paving and roofing end uses, our vitality index increased from 13% for the 12 months ended December 31, 2012 to 15% for the year ended 2013. I’ll now turn the call over to our Chief Financial Officer, Steve Tremblay to give a detailed financial review for you. Steve?

[Steve Tremblay:]

Thank you, Kevin and good morning. I am going to turn to slide 11 and show again the sales volume in the fourth quarter was 74.3 kilotons, up 7.1 KT or 10.6% compared to 67.2 kilotons that we reported in the fourth quarter 2012. Looking at the end uses, fourth quarter sales volume was up 22.6% for paving and roofing, 18% for Cariflex and 6.3% for advanced materials with adhesives, sealants and coating volume up marginally compared to the fourth quarter of 2012. This is the highest fourth quarter volume for Kraton in 6 years and it represents good business momentum in the second half of the year and a strong recovery from the first half of 2013 where if you recall, our sales volume was below our expectations due principally to poor weather conditions which limited paving and roofing activity in both Europe and North America. Our fourth quarter sales revenue of $290.4 million was down $6 million compared to the fourth quarter of 2012. As you can see in the upper right hand side of the slide 11, the decline is largely due to lower average selling prices associated with reductions in raw material cost compared to the year ago quarter which more than offset the revenue contribution from the higher sales volume. On a full year basis, 2013 sales volume was 313.5 kilotons, essentially flat when compared to 313.4 kilotons in 2012. Increased sales volume of 13.5% in our Cariflex end use essentially offset slightly lower sales volume in paving and roofing, while advanced materials and ASC sales volume were essentially flat with the prior year. 2013 sales revenue was $1.29 billion which is down a $131 million or 9% from 2012. As you can see in the lower right hand side, the largest driver of the revenue decrease was lower average selling prices associated with lower average raw material cost compared to 2012. Also note that changes in currency rates and other factors accounted for the remaining $11 million of the revenue decrease with mix rounding out the change which amounted $10 million of decline in revenue compared to 2012. Turning to slide 12 and look at gross profit for the fourth quarter and then on a full year basis. Our fourth quarter 2013 gross profit was $58.6 million with an associated margin of 20.2% and this was up $18.9 million or 48% compared to fourth quarter 2012 gross profit of $39.7 million with an associated margin of 13.4%. Increase in gross profit reflects the increase in sales volume compared to the year ago quarter as well as lower operating costs and the benefit of higher absorption of fix associated with the higher production volume compared to the fourth quarter of 2012. Adjusting for the $7.3 million negative spread between FIFO and ECRC in Q4 2013 and a negative spread of $10.2 million in the fourth quarter of 2012, gross profit on a current cost basis was $65.9 million in Q4 2013 with a margin of 22.7% compared to $49.9 million in the fourth quarter of 2012 with an associated margin 16.8%. On a per ton basis, gross profit in ECRC was $886 per ton in the fourth quarter of 2013 and this compares to gross profit per ton on a current cost basis of $743 in the year ago quarter. Gross profit for the full year 2013 was $225.8 million with a margin of 17.5% compared to $231.4 million with a margin of 16.3% for the full year 2012. The $5.6 million decrease is primarily reflection of incremental operating costs and changes in sales mix. Adjusting for the $30.7 million negative spread between FIFO and ECRC in 2013 and the negative spread of $30.5 million in 2012, gross profit on a current cost basis was $256.6 million in 2013 with a margin of 19.9% compared to gross profit of $262 million with a margin of 18.4% for the full year 2012. And on a per ton basis, we closed the year with a gross profit at ECRC of $830 per ton in 2013. Slide 13 provides some detail on EBITDA and adjusted EBITDA at ECRC for the fourth quarter 2013. Adjusted EBITDA at ECRC was $35 million in Q4 ‘13 with a margin of 12.1% and this was up $12.6 million from $22.4 million in the fourth quarter 2012 with a margin of 7.5%. Looking at the upper right section of the slide, we presented discrete items which bridge EBITDA to adjusted EBITDA at ECRC. And looking at the components of adjusted EBITDA at ECRC in Q4 ‘13, during the quarter we had non-cash compensation expense of $1.5 million. In addition we incurred other cost aggregating $7.7 million which includes $7.1 million of costs, largely professional fees associated with our announced plan to combine with the SBC operations of LCY Chemical and an additional $600,000 in other restructuring costs. These items in addition to the $7.3 million negative spread between FIFO and ECRC bridge you to adjusted EBITDA at ECRC of $35 million for the fourth quarter of 2013 from the reported EBITDA of $18.5 million. Looking at the year-on-year change in fourth quarter adjusted EBITDA at ECRC, a $7.1 million increase in sales volume contributed to $6 million of the $12.6 million increase. The aggregate impact of reductions in average selling prices largely associated with reductions in monomer costs was $32 million, but this was more than offset by a $42 million decrease in cost of goods sold. The decrease in cost of goods sold compared to the fourth quarter of 2012 reflects reductions in raw material prices, as well as operating, lower operating and turnaround costs and a favorable affect of fixed cost absorption when compared to the fourth quarter of 2012. And lastly our selling, admin and R&D costs, net of the add-backs, which are the fees associated with the LCY combination and other restructuring charges increased $4 million and the majority of that increase is associated with employee-related cost including the timing of incentive compensation. Turning to slide 14, adjusted EBITDA at ECRC for 2013 was a $140.9 million with a margin of just under 11% and this compares to a $143.8 million for the full year 2012 with an associated margin of 10%. As seen in the upper right hand side of the slide, full year adjusted EBITDA at ECRC reflects a $7.9 million adjustment for non-cash comp. An aggregate $13.5 million of other items which are comprised of $9.2 million of cost associated with the proposed combination with LCY’s SBC business, $3.5 million in production downtime associated with the MACT legislation earlier in the year and $800,000 in restructuring [dodges]. Finally, the negative spread between FIFO and ECRC for the full year amounted to $30.7 million. Looking at the change in adjusted EBITDA from 2012 to 2013, although sales volume was essentially flat year-on-year, a change in sales mix accounts for about $6 million of the change in EBITDA. Reductions in average selling prices associated with lower raw material cost navigated a $110 million which was more than offset by a reduction in cost of goods sold of $160 million and of that $160 million; the $120 million is the effect of lower raw materials. Finally, changes in currency and other items had a negative effect of approximately $3 million. Moving now to earnings per share on slide 15, we provided detail on our earnings per share and adjusted earnings per share for the fourth quarter and full year 2013. Fourth quarter EPS was $0.15 per share compared to a loss of $0.91 per share in the fourth quarter of 2012. To align that adjusted EPS in the fourth quarter of 2013, we eliminated the negative effects of the cost that I mentioned earlier, as well as other restructuring charges. And we eliminated the tax benefit in the fourth quarter, which was driven by a reduction in the actuarial value of some of our pension liabilities. The net of all these adjustments amounted to a $0.07 reduction in Q4 2013 EPS. And accordingly adjusted EPS of $0.08 per share in the fourth quarter of 2013 represents a $0.47 per share improvement over the adjusted $0.39 per share loss in the fourth quarter of 2012. I'll hear again on an EPS basis, the fourth quarter 2012 includes the after-tax effect of the $7.3 million negative spread between FIFO and ECRC, which had a $0.22 dilutive effect on earnings per share. In comparison fourth quarter 2012 EPS reflected a negative spread between FIFO and ECRC which reduce recorded earnings per share by $0.32 per share. For the full year 2013, net loss was $618,000 or $0.02 per share. This compares to the full year 2012 net loss of $16.2 million or $0.50 per share. Here again on an adjusted basis, 2013 EPS amounted $0.26 per share compared to $0.21 per share in 2012. On a full year basis, 2013 results also included $0.96 per share associated with the negative spread between FIFO and ECRC. And this compares to a negative spread of $0.95 per share in 2012. I want to call your attention to the press release and the material here, the details of the adjustments from reported net income and EPS to adjusted net income and EPS are included both in the press release and the appendix to this material. As a side note, although raw material movements and the related spread between FIFO and ECRC can significantly impact our reported results on a quarterly or annual basis, we tend to think of the spread is normalizing overtime. This is illustrated by the fact that the aggregate spread in 2012 and 2013 of just over $61 million essentially offset the positive spread between FIFO and ECRC of $66 million in 2011. On slide 16, a few comments on cash flow and the balance sheet. For the three months ended December 31, 2013, operating cash flow was $47.4 million which compares to operating cash flow of $44.1 million for the three months ended December ‘12. On a full year basis, operating cash flow for the year ended 2013 was $105.5 million with changes in working capital providing $53 million of cash flow for the year. This compares to operating cash flow of $146.3 million for the 12 months ended December 31, 2012 with sharply declining raw material prices contributed to a $90.5 million reduction in working cap. At year-end, we had $187 million availability under our ABL facility, This availability in conjunction with cash of a $109 million excluding the only $67 million of cash held at our [KFPC] joint venture results in total liquidity at year-end of a healthy $296 million. As a result net debt to net capitalization which again excludes the cash which is held by our JV was 32.1% at year-end and net debt to adjusted EBITDA was 2.2 turns at December 31, 2013. Take a moment to look forward into 2014 on slide 17, we’ve provided our current estimate for certain discrete items. First, our estimate for full year R&D expense is $36 million and our 2014 run rate SG&A expense is currently estimated to be $105 million. I do want to note that in that run rate SG&A number that excludes an estimated $15 million to $28 million of cost associated with the proposed combination, the SBC business of LCY. As is traditional, these costs will be excluded from adjusted EBITDA. And as such they were not included in the $150 million EBITDA view which we provided in January in conjunction with the material that we shared with respect to that proposed combination. Full year D&A is estimated to be $63 million. And our full year interest expense is expected to be $23 million. And then finally we expect currently our 2014 full year tax provision will be approximately $6 million. Looking at the balance sheet and CapEx specifically, we currently expect our full year CapEx will be $75 million to $80 million which excludes the spending at the Asia JV. With respect to that Asia JV spending, we anticipate the funding needs will be satisfied by a combination of the available cash at the JV and borrowings at the JV level which we expect to have closed sometime in the first half of 2014. Looking at the current view of where raw materials are shaping up, we currently expect our first quarter 2014 will have a spread between FIFO and estimated current replacement cost of a positive $3 million. We also feel that it may be helpful to share with you our current expectation for our scheduled turnaround cost or major maintenance for 2014 which we expense as incurred. We current estimate that these costs on a full year basis will be $10 million and we’ve provided what we currently expect to be the quarterly cadence on this slide. Excluded from all these estimates for 2014 are the effects of two items which we noted in our earnings release last night. Specifically, earlier this quarter, we experienced a weather-related downtime at our Belpre, Ohio site and we had a small fire at our Berre France site that also resulted in a disruption of operation. Happy to report that both sites have since returned to normal operations, we currently believe that these outages will result in loss production of approximately 5 kilotons primarily in HSBC products, I will pause here for a moment in our earnings release last night, we indicated at the 5 KT of production was primarily USBC material in fact it is HSBC material. From a 2014 sales volume perspective, we will seek to mitigate that 5 KT of loss production, largely through the safety stock inventory that we routinely carry within our finished goods inventory. From a P&L perspective the aggregate affect of those items that we just talked about is expected to have a $12 million negative effect in our first quarter. We will be excluding those items from adjusted EBITDA. And similarly with the LCY related costs because these are items that will be excluded from adjusted EBITDA and because we didn’t have an estimate of the cost when we reported the LCY combination that $12 million is not included in the $150 million due that we previously provided. At this point I’d like to turn the call back over to Kevin for his closing comments.

[Kevin Fogarty:]

Thanks Steve. As we move into 2014, we will maintain our focus on innovation on accelerating commercialization of our key innovation platforms such NEXAR and our products for oilfield applications. And we will continue our drive or expansion in the new applications in geographical markets, building upon the momentum established for our Cariflex and Paving & Roofing end uses in 2013. Going forward we expect our innovation programs to benefit significantly from our new semi works facility in Belpre, Ohio. As planned the facility was mechanically complete at year end and we expect the facility to be in operation with first polymer production in mid March. The semi-works facility will shorten time to market for new innovation grades producing the risk of scale up and providing faster customer qualification time for new products. As Steve talked about 2014 will also be a significant year for our HSBC project. We have broken ground at Formosa’s (inaudible) site and fabrication of key components is underway, many of which are being manufactured onsite by Formosa. We are also on track for securing financings for the project in the first half of this year through a consortium of Taiwanese banks. And most importantly, we've been working diligently to complete our recently announced plan to combine with the SBC business with LCY. We currently expect to file our proxy in late March and we look forward to completing the combination as planned sometime in the fourth quarter of this year. And with those comments, we'll gladly open the phone call up for your questions.

[Operator:]

(Operator Instructions). Our first question comes from Mr. Jason Freuchtel. Your line is now open.

[Jason Freuchtel:]

Hey, good morning guys.

[Kevin Fogarty:]

Hi, Jason.

[Steve Tremblay:]

Good morning Jason.

[Jason Freuchtel:]

Given the expected increase in butadiene prices over the next couple of quarters, are you still confident in the 2014 guidance of $1.25 billion in revenue and the 12% EBITDA margin you provided in conjunction with the LCY transaction announcement.

[Steve Tremblay:]

Jason, we're going to kind of just leave what we talked about in Q4 or rather in four weeks ago with the LCY transaction, just leave that as is, we're not giving revenue guidance specifically at this time so.

[Jason Freuchtel:]

Okay.

[Kevin Fogarty:]

But happy to talk to you Jason about just generally speaking the butadiene markets, because I know it’s probably on people's minds.

[Jason Freuchtel:]

Sure.

[Kevin Fogarty:]

We are seeing some movement in butadiene, in fact that's probably the increase in March is a little bit stronger than even we had anticipated, that all being said we look at this business very structurally. And we’re not seeing anything structural and I am talking about global demand, global supply that would suggest that our perspective earlier in the year for the balance of the year is still appropriate. And what that means is with the increase in butadiene we’re seeing a small probably FIFO benefit versus ECRC cost in the quarter that Steve referenced in his comments. But more importantly that’s causing us obviously to take price action in the marketplace.

[Jason Freuchtel:]

Okay, great. And are USBC prices typically a little bit more volatile than HSBC prices?

[Kevin Fogarty:]

I don’t have time to have that conversation on this call, because that there is different product grades and families within each of those actual market spaces. But generally speaking I would say that the USBC prices probably respond more appropriately more timely if you will to the feedstock movements. But as you know we have strived to work with our customers to ensure that from a real-time pricing perspective we’re consistent across all product families.

[Jason Freuchtel:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Brian Maguire from Goldman Sachs. Your line is now open.

[Brian Maguire:]

Good morning guys.

[Kevin Fogarty:]

Hi Brian.

[Steve Tremblay:]

Hi Brian.

[Brian Maguire:]

Beyond the plant operational issues that you mentioned in Belpre from the weather just wondering if you’re seeing any volume impact in the first quarter from the unusually cold weather especially here in North America and I think the Paving & Roofing business I know it’s a little bit earlier in the season, but I know your customers are maybe ordering ahead of some jobs to come. But just wondering if there is any deferral of activity delay during the year due to the weather?

[Kevin Fogarty:]

I haven’t heard of anything specifically like that. But you know at the end of the day, what we have seen historically and again it’s too soon to know if we’ll see it this year, but what we have seen historically is, because of the very tight and limited budgets, the states typically have to do infrastructure projects during those summer months, sometimes those budgets get a little bit depleted with respect to what happens in the winter months associated with things like storm removal and salt and overtime pay to take care of the roads as a result of harsh winter conditions. And I am not suggesting that that’s what we are going to see this year, but this was a harsh winter.

[Brian Maguire:]

Okay, great. And then for ‘13, I think the volumes for the year came in roughly flat, I think there were some weather related issues in ‘13 as well that might have held that down. But just thinking longer term about the potential growth rate here, I know you guys used to talk about 2X GDP for volume growth. Is that full year expectation or after a couple of soft years here, are we now think it might be a little bit lower going forward?

[Kevin Fogarty:]

No, I think that at the end of the day, we think about the businesses on with respect to the three product families we offer

[Brian Maguire:]

Okay, great. One last one if I could for Steve, I appreciate the color on the turnaround cost on slide 17. So I was wondering if you could give us the sense of the year ago numbers to see how those stack up year-on-year and what kind of a headwind that might be as the cadence for the year?

[Steve Tremblay:]

Brian, I don’t have the numbers right in front of me, but they are significantly different, other than, if you recall in 2013, we did have that $3.5 million of extraordinary turnaround that was associated with the MACT legislation. But this is not a terribly unusual year in overall turnaround activity. The increase that we’ll see in the back half of the year is a function of the turnaround of our Wesseling site.

[Brian Maguire:]

Great. Thanks so much.

[Steve Tremblay:]

But on a full year basis, the $10 million excluding the MACT is in the ballpark of where 2013 landed.

[Brian Maguire:]

Got it, thanks.

[Operator:]

Our next question comes from Mr. Mike Sison from KeyBanc. Your line is now open.

[Mike Sison:]

Hey guys, good morning.

[Kevin Fogarty:]

Hi Mike.

[Mike Sison:]

Nice quarter by the way. In terms of advanced materials, you talked about innovation sale volumes increasing 53% and then on the other hand it’s coming with more USBC based products, is that a positive or maybe walk us through what’s going on there, is it better to have this transition here or any reason customers have gone to USBC versus what we perceived as the higher margin stuff, the HSBC in this area?

[Kevin Fogarty:]

I would answer it as kind of a double-edged sword, Mike. And both of them are kind of positive.

[Mike Sison:]

Right.

[Kevin Fogarty:]

But it’s trend. One of them is, needless to say that we’ll take innovation from our customers in any of our product families, because that’s who we are. So thinking about this transition which we’ve called out for you now in couple of successive quarters, it really reflects the uniqueness of Kraton’s product offerings. And in the case of the personal care market specifically referenced, I think it directly reflects the fact that we have been involved so heavily in the past in HSBC personal care applications that it gave us kind of obviously the leading edge position to be working with customers to look at USBC solutions. The second part of it that is positive from our perspective is just by virtue of that transition clearly, I’m not going to sit here and tell you USBC margins traded HSBC margins, because they don’t. But on the other hand if you are able to lower your customers’ overall cost profile, in a way which satisfies their innovation needs associated with product performance, then you really have done a win-win for both them and us, we’re growing in innovation which is what we want to do and they’re able to do the proverbial productivity cost out activities that allows them to continue to grow and prosper. So yes, we would love to be presenting more HSBC growth at not of the expense of USBC but look at, it reflects the dynamic portfolio of Kraton and our capability.

[Mike Sison:]

Okay, great. And then just wanted to understand Gene’s comments on sort of the outlook for ‘14, you guys had highlighted close to $46.9 million in terms of net income for 2014, the LCY presentation, is that still where your comfort zone is for the year?

[Steve Tremblay:]

Well Mike, I’ll just say that that’s what we talked about on January 28.

[Mike Sison:]

Right.

[Steve Tremblay:]

And I’m not going to make any further comments about what we said then.

[Mike Sison:]

Okay. And then what type of -- maybe give us a feel for what type of kiloton growth or volume growth that would underpin that forecast, would you need to grow volumes to get there?

[Kevin Fogarty:]

Yes Mike, we’re not giving guidance on volume.

[Mike Sison:]

Okay.

[Kevin Fogarty:]

And we kind of stop doing that a couple of years ago for a lot of reasons and we’re going to stick to that theme. Needless to say, I mean I will comment that momentum that we saw build up in the fourth quarter is something that is something that we’re very optimistic about as we carry forward into the New Year.

[Mike Sison:]

Okay. And last one just, it’s only been a month, but do you still feel pretty excited, feel pretty good about the LCY transaction? You might have learned a little bit more about the business over the last months. Any update thoughts there?

[Kevin Fogarty:]

Well Mike, again the proxy is going to be filed in what we say mid March, late March.

[Mike Sison:]

Okay.

[Kevin Fogarty:]

And obviously there will be a lot more description and detail there, but we thought long and heard about the strategic combination. And I’ll tell you I have just spent the last several weeks going around, talking to our people about it globally. And yes, I’m very pleased with where we are. And obviously, we’ve got a lot of work to do to get this over to finish line this year, but that’s our priority.

[Mike Sison:]

Right. Thank you.

[Operator:]

Our next call comes from Mr. Edward Yang from Oppenheimer. Your line is now open.

[Edward Yang:]

Hi, good morning guys.

[Steve Tremblay:]

Hey, Ed.

[Edward Yang:]

Just on the 2014 EBITDA, $150 million, did that include the $10 million in turnaround cost or is that incremental?

[Steve Tremblay:]

No that’s all included in the $150 million that’s a normal ops for us.

[Edward Yang:]

Okay, got you. And Kevin you mentioned March [DD] being nominated almost 13% from every that might have been a bit ahead of your expectations. But qualitatively is that still manageable from your perspective in terms of customers be acting with destocking or restocking I mean typically when DD prices have gone up it’s actually led to some restocking activity?

[Kevin Fogarty:]

Yes. You said 13%, I am not -- the reason I am not going to be confirming the 13% other than I know it’s north because there is you might know that there is, it’s all over the map in terms of some of these nominations for this March increase.

[Edward Yang:]

Sure.

[Kevin Fogarty:]

That all being said, at the end of the day if there is one thing you’ve learnt about us over the last few years is how we approach the business is such that we have to be consistent with respect to passing those raw material costs on. This time last year we were talking to you about the implementation of more real time pricing approach with customers, educating that effect and then applying it on a consistent basis across our product portfolio, so that exactly what our commercial team is doing right now.

[Edward Yang:]

Okay. And obviously very nice to see the almost 11% increase in volume, what’s your sense of customer inventory levels at this point?

[Kevin Fogarty:]

I think that the good news about what we’re seeing as we ended the year and even as we’re looking at the business today is, consistent with the way most customers have been running their business here is they’re not looking beyond the coming months or so in terms of their volume planning. But for of course what happens in Paving & Roofing with respect to the typical winter stock that occurs which is kind of normal this year, we are just seeing a lot of customers looking at business opportunities and growth prospects and that reflects in the volume trends, coupled with of course everything we’ve done there, try to commercialize some of this activities on innovation which also reflects the fact that our vitality mix is up two points from ‘13.

[Edward Yang:]

Okay, perfect. Thank you very much.

[Operator:]

Our next call comes from Mr. Christopher Butler from Sidoti. Your line is now open.

[Christopher Butler:]

Hi, good morning, guys.

[Kevin Fogarty:]

Hey Chris.

[Christopher Butler:]

I just wanted to get a little bit on the outages, just to be clear, you are saying with the utilization of inventory that you had 5 kilotons loss and you are going to try to mitigate some of that with inventory or there was more loss and you are going to mitigate it down to 5 kilotons?

[Kevin Fogarty:]

The aggregate loss is 5 KT, Chris and that 5 KT is which is the number that we are going to see to reduce, it remain to be seen how the full year shapes up, how much of that 5 KT we can actually cover, but that is the gross amount of the loss production.

[Christopher Butler:]

And if we’re looking at the $12 million of added expenses, could you break that out as far as just loss production versus the cost of fixing or anything else that you need to do?

[Kevin Fogarty:]

The loss production was by far the smaller piece of it; it’s like 70% to 80% actual cash out of pocket operating cost and the rest is the effect of the production.

[Christopher Butler:]

And shifting gears to Paving & Roofing, I know that you got a slow start to the year with volumes down 1% for the full year, it sounds like you made up some of the difference in the back half, but not all of the difference from the slow start. Is that a good view on it?

[Kevin Fogarty:]

Yes. And I think that cycle back to some comments we talked about last year that the reality is a slow start to the year, people seek to try to catch up, but there is only so much infrastructure out there and they can only do so much road work over the course of the summer season. And so we caution that anybody while there is pent-up demand that doesn’t necessarily translate into pent-up business just because of those very real limitations on the system. The other thing I would say though is, and we -- this is not by accident of course we’ve been positioning ourselves in this regard which is always nice to be, it will see the results, but South America is an important market to us. And we really are sure that our market presence down there reflects the innovation portfolio of Kraton in Paving & Roofing and how that can be very helpful if you will to the infrastructure investment that’s going in that part of the world. And some of the results needless to say reflect that positive swing in the innovation part of the overall Paving & Roofing sales in the fourth quarter. Our direct result of obviously the attention we played on that market. And some of it of course is driven by a lot of activity associated with great things happening in Brazil associated with the World Cup and then the Olympics in two years from now, but nevertheless we think that the HiMA technology in particular is well suited for that market.

[Christopher Butler:]

And I can appreciate that especially in North America you can’t regroup the lost sales immediately, but as we look to 2014 with deteriorating streets especially here in New York and the highway bill that’s been talked about in Washington your view, good volume growth this year out of Paving & Roofing from this?

[Kevin Fogarty:]

Please don’t ask me to respond on -- I think was the $300 billion (inaudible) number that's been ventured about in Washington DC and the probability of that coming to fruition. But I will tell you that yes we are sensitive too as you are in terms of the opportunities that exist in this country for infrastructure improvement. I will call your attention to a press release we made, can’t remember, it was the end of last year or early this year, with respect work that we did specifically in the city, using our innovative technology and we think that that is a good trend.

[Christopher Butler:]

But I can tell you that First Avenue is one of the few streets in New York that still looks pretty good. So, thank you for your time.

[Steve Tremblay:]

Thanks Chris.

[Kevin Fogarty:]

Thanks Chris.

[Operator:]

This does conclude today’s question-and-answer session. I’d like to turn the call back over to Mr. Shiels for closing comments.

[Gene Shiels:]

Thank you, Troy. We would like to thank all of our participants this morning for their thoughtful questions. Just want to indicate that there is a replay of this call will begin at 11 AM Eastern time today. And it will run through March 11th. You can access that replay on our website by going to the events’ section of the Investor Relations website. You can also listen to a telephonic replay, dialing 1800-839-2290 and international callers may dial 203-369-3607. And that concludes our call this morning. Thank you.

[Operator:]

Thank you. This concludes the Kraton Performance Polymers Inc. fourth quarter and full year 2013 earnings conference call. You may disconnect at this time.