Kraton Corporation
Q4 2014 Earnings Call Transcript
Published:
- Operator:
- Good morning and welcome to the Kraton Performance Polymers Incorporated Fourth Quarter 2014 Earnings Conference Call. My name is Diane and I will be your conference facilitator. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, there will be a question-and-answer period. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. Now, I would like to turn the call over to Mr. Gene Shiels, Director, Investor Relations.
- Gene Shiels:
- Thanks, Diane. Good morning, everybody and welcome to Kraton Performance Polymers fourth quarter 2014 earnings call. With me on the call this morning are Kevin Fogarty, Kraton’s President and Chief Executive Officer and Steve Tremblay, Vice President and Chief Financial Officer. A copy of yesterday’s news release is available in the Investor Relations section of our website as our copies of the presentation we will review this morning. Before we review our fourth quarter and full year 2014 results, I will draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in our presentation this morning and in yesterday’s earnings press release. During the call, we may make certain comments that are not statements of historical fact and does constitute forward-looking statements. Investors are cautioned that there are risks, uncertainties and other factors that may cause Kraton’s actual performance to be significantly different from the expectations stated or implied by any forward-looking statements we make today. Our forward-looking statements speak only as of the date they are made and we have no obligation to update such statements in the future. Our business outlook is subject to a number of risk factors and as the format of this morning’s presentation does not permit a full discussion of these risk factors, please refer to our Forms 10-K, 10-Q and other regulatory filings available in the Investor Relations section of our website. With regard to the use of non-GAAP financial measures, all references to adjusted EBITDA, adjusted gross profit and adjusted earnings or adjusted earnings per share in this call and in the presentation material exclude the impact of the spread between FIFO and estimated current replacement cost, or ECRC. A reconciliation of EBITDA to adjusted EBITDA to net income or loss and a gross profit to adjusted gross profit as well as a reconciliation of net income or loss attributable to Kraton to adjusted net income was provided in yesterday’s earnings release and is included in the presentation material we will review in this call. Following our prepared remarks, we will open the lineyou’re your questions. I will now turn the call over to Kevin Fogarty.
- Kevin Fogarty:
- Thanks, Gene. Good morning, everyone. Before we discuss our fourth quarter and full year 2014 results, I want to comment on the change in our reporting structure, which you may have seen in yesterday’s earnings release. Over the past few months, we have made significant progress in refining our go-forward strategy, which is outlined in October 2014 comprises three elements
- Steve Tremblay:
- Thank you, Kevin and good morning. I would like to start with a recap of fourth quarter sales volume and revenue which is appearing on Slide 10. This fourth quarter represents the second consecutive year in which we have posted fourth quarter volume of above 70 kilotons and was only 2 kilotons less than the strong Q4 2013 which was our highest fourth quarter sales volume since 2007. The effective and improved mix of sales volume despite lower overall volume is evident in the revenue bridge at the bottom of this slide. Specifically in terms of revenue the 13.8% volume improvement in Cariflex and the 18.4% volume increase in Specialty Polymers more than offset the decline in revenue that resulted from weakness in paving, roofing and certain adhesive applications within Performance Products. As a result nearly all of the net decrease in revenue from $290 million in Q4 2013 to $276 million in Q4 2014 was driven by differences in foreign currency exchange rates. Moving on to Slide 11, our full year 2014 sales volume was 305.6 kilotons, down 7.9 kilotons or 2.5% compared to 313.5 kilotons of sales volume in 2013. In our Cariflex business, volume improved 24.1% compared to 2013 and the Specialty Polymers product group posted a 4.6% year over increase in sales volume. These volume gains were more than offset by lower sales in the paving, roofing and adhesive applications, which collectively led to a 6.2% decline in volume in Performance Products. Indicative of the falling raw material prices in 2014 compared to 2013, total revenue declined nearly $62 million, of which $51 million was driven by decline in raw material costs and $11 million was driven by currency. Here again, even though total sales volume declined year-over-year, the improved mix resulted in a favorable impact on year-over-year revenue. Slide 12 illustrates our adjusted gross profit. Adjusted gross profit amounted to $58.9 million or $816 per ton in Q4 2014 compared to $66 million or $888 per ton in Q4 2013. Despite the improved sales mix in the fourth quarter of 2014 compared to the fourth quarter of 2013, adjusted gross profit was negatively impacted by an increase in turnaround costs of $3.2 million and $2.7 million associated with unfavorable currency translation. On the aggregate therefore, these two items resulted in $81 per ton decline in gross profit in the fourth quarter of 2014 compared to the fourth quarter of 2013. As a result, if you exclude the impact of these two items, gross profit would have been nearly $900 per ton in the fourth quarter of 2014. For the full year, adjusted gross profit amounted to $257 million compared to $260 million in 2013. On a full year basis, adjusted gross profit includes an increase in turnaround cost of $3.1 million and a similar effect of currency translation also $3.1 million or an aggregate negative impact of $20 per ton. Even with these headwinds, adjusted gross profit per ton improved from $830 per ton in 2013 to $842 per ton in 2014 indicative of the volume growth in higher margin Cariflex and Specialty Polymers. As we turn to Slide 13, a few comments on adjusted EBITDA and earnings per share for the fourth quarter as well as the full year 2014. First, the fourth quarter, adjusted EBITDA amounted $31.7 million in Q4 2014 compared to $35 million in the fourth quarter of 2013, which was a very strong quarter. And on a full year basis, adjusted EBITDA improved 4.5% to $147.2 million from $140.9 million in 2013. Although total volume was lower in the fourth quarter and on a full year basis, the improved sales mix was accretive to EBITDA in both of these periods against the comparable 2013 periods. In addition, the aforementioned increases in turnaround costs and the negative effect of currency translation negatively impacted the fourth quarter adjusted EBITDA by $5.2 million or the equivalent of $72 per ton and negatively impacted the full year adjusted EBITDA by $5.6 million or just under $20 per ton. The resulting adjusted EPS amounted $0.16 in Q4 2014 and $1.16 for the full year. Relative to the full year, the growth in EPS attributable to the increase in adjusted EBITDA was more than offset by non-cash comp depreciation and a modest increase in the overall tax provision. We will take a look at the balance sheet and cash flow data on Slide 14. We look back we begin the year with a sizable operating cash flow deficit in the first quarter owing largely to the timing of cash disbursements. We generated more than $81 million of operating cash flow in the second half of 2014, which more than offset the deficit from the first quarter. Relative to overall inventory levels, we ended December 31, 2014 at 84 kilotons, which is an increase of 8 kilotons from the beginning of the year. We did that to ensure we have inventory on hand for the upcoming turnarounds, which I plan to cover in more detail within the context of 2015 discrete estimates. I would also like to mention on this slide we have indicated the split between Kraton and the joint venture cash flows, specifically the operating cash flow for the total company includes an operating cash flow deficit of $11 million associated with pre-startup activities at the JV as well as $44.3 million of CapEx at the JV, which was effectively funded by JV cash on hand. Our current expectation is that the remaining CapEx associated with the plant construction will be funded by debt at the JV level. And finally, fourth quarter and full year 2014 total cash flows include the funding for the previously announced share repurchase program, which is outlined on the next slide. On October 28, 2014, we announced that our Board had approved a 2-year $50 million share repurchase program. Through this program, we were authorized to make purchases in the open market at prevailing market prices through privately negotiated transactions or through 10b5-1 trading programs. Through February 23, 2014, we have purchased a total of 1.3 million shares of our common stock at an average price of $18.91 per share for a total cost of $25 million. This 1.3 million share repurchase to-date represents a 4% reduction in the total share count since September 30, 2014. As is our usual practice, I will close with a review on Slide 16 of selected guidance items for 2015. We currently expect full year 2015 research and development expenses will be approximately $32 million and we are expecting on a non-GAAP basis or excluding specific items, SG&A cost to be $91 million. This results in a combined selling, admin and research or SAR cost expectation of $123 million compared to the comparable 2014 SAR cost, which amounted to $121 million. This slight increase reflects the estimated impact of inflation and statutorily mandated compensation increase nearly offset by a portion of the overall $18 million in cost reset initiatives, which Kevin outlined earlier. We are currently expecting 2015 depreciation expense to be in line with 2014 or approximately $66 million. Full year 2015 interest expense is expected to be approximately $24 million with the full year tax provision estimated to be $7 million. We are currently estimating 2015 CapEx, excluding CapEx for the joint venture in Taiwan and excluding capitalized interest to be in the $60 million to $65 million range. As we look longer term, we currently anticipate a post 2015 base level CapEx budget in the $50 million range. And relative to the new plant in Taiwan, we expect 2015 CapEx will be in $130 million to $140 million range. And again, we fully expect that to be funded with the capital structure, the debt structure that we raised locally in Taiwan. I want to spend a moment with respect to raw materials. We do indeed continue to see prices fall through the first quarter of 2015. For example, Asia spot BD has declined from just under $1,420 per ton in September 2014 to $625 per ton in February 2015. As a point of reference, we have to look back to the first half of 2009 for a comparable Asia spot BD price. As a result of this downward trend in raw material prices, we expect the negative spread between FIFO and ECRC of between $30 million and $35 million in the first quarter of 2015. Before I turn the call back to Kevin, I did want to discuss the effect of three macro headwinds we are anticipating in 2015. First, as I mentioned in the review of our 2014 performance, turnaround costs increased by some $3 million in 2014 when compared against 2013 due primarily to the turnaround activities at our site in Wesseling, Germany. We are currently expecting a $3 million increase in 2014 over those 2014 levels primarily driven by the turnaround at our Berre facility in France. These statutory turnarounds were last performed in 2009 and therefore 2015 represents the peak of our turnaround cost cycle. As such, as we think forward to 2016, our current expectations of turnaround costs in 2016 will be roughly half of the 2015 estimate of $12.3 million that we have shown here. The second headwind is an expected increase in legacy pension cost currently estimated at $4 million due to changes in actuarial assumptions notably discount rate and revised mortality rate tables. And finally, we conduct our business in a number of different currencies. The primary non-U.S. dollar currencies being the euro, Japanese yen and the Brazilian real, which have been weakening against the U.S. dollar. We currently estimate that the strengthening of the U.S. dollar against our basket of currencies could have a negative effect on EBITDA of between $6 million and $10 million for the year. By way of sensitivity, the lower end of that range was predicated on a euro, the U.S. dollar conversion of 1.2 to 1, and the higher end of the range is predicted on the recent euro to USD exchange rate, which has been in the range of 1.15 to 1. So, in summary, we estimate there to be $17 million of macro headwinds in 2015 associated with the peak turnaround activities, legacy pension costs, and an estimated impact of currency movement. Across reset initiatives however which Kevin spoke to earlier will effectively serve to offset these anticipated headwinds. With that, I would like to now turn the call back to Kevin for his closing comments.
- Kevin Fogarty:
- Great. Thank you, Steve. Reflecting upon 2014, although we managed through a number of business challenges during the year, we closed the year with adjusted EBITDA of $147.2 million, the second highest result in company’s history eclipsed only by our posting in 2010. In addition with respect to our portfolio shift, we saw strong growth in our Cariflex business reflecting a continuation of the trend of its Kraton isoprene rubber and latex is replacing natural rubber to performance sensitive medical, surgical glove and condom applications. With the progress in a number of our innovation programs, we ended the year with a record vitality index of 17% and more importantly combined revenue contribution from innovation and differentiated product grades increased from 54% in ‘13 to 57% in 2014. For 2015, I remain very optimistic about the outlook and prospects for Kraton. We have started the year with good business momentum and although some markets we serve continue to experience some degree of softness, we see the prospect for continued growth in many parts of our business. As noted, we do expect a $30 million to $35 million FIFO versus ECRC inventory expense in the first quarter. However, we see the current energy and primary feedstock market environment as beneficial for both Kraton and our customers. For example, we have not seen butadiene prices at the current levels globally since 2009. As mentioned on previous occasions, unit margins should benefit from the decline in raw material costs despite the lower overall selling prices to reflect a substantially lower input cost. Moreover, we see evidence that our customers are again evaluating the merits of our innovative product offerings on the basis of true performance and relative value versus lesser performing olefin-based alternatives. Finally, to go without saying that against the backdrop of the favorable raw material environment and a good start to the year, we are excited and energized by the benefits we expect to see from our go-forward strategic plan, including our new business realignment. We expect the plan to provide significant benefits we moved through 2015 and beyond revitalizing organic growth, improving our competitive position, pursuing strategic acquisitions that will complement our existing portfolio ultimately allowing us to better serve our customers while generating attractive returns for our investors. We have mobilized significant creative talent that is focused on implementing the go-forward plan. And we look forward to providing more details at our anticipated mid-year Investor Day. And with that, I will open the call up to questions.
- Operator:
- Thank you. We will now begin the question-and-answer session. [Operator Instructions] Jason Freuchtel of SunTrust, your line is now open.
- Jason Freuchtel:
- Hey, good morning.
- Steve Tremblay:
- Good morning, Jason.
- Kevin Fogarty:
- Good morning.
- Jason Freuchtel:
- It looks like three of the four North American butadiene producers nominated price increases for March, what is your view of the butadiene market in the next couple of months? Do you think this is a near-term blip or will pricing start to improve?
- Kevin Fogarty:
- Look at me I am not going to forecast where we think it goes. I mean, it just been proven wrong time and time again that it’s tough to forecast these markets. I will say obviously that butadiene is in the current price basis is more reflective of overall butadiene supply demand balance and then to a lesser extent the overall energy direction that underlying costs are kind of founded on. So, from my perspective, it’s possible I suppose that there is a little bit of positive momentum in butadiene, but I don’t think structurally things have changed materially.
- Jason Freuchtel:
- Okay. And as it relates to your positive commentary about the current feedstock environment allowing Kraton to compete more effectively with substitute products, have you started to see the positive impacts to volumes and margins in your 2015 results yet?
- Kevin Fogarty:
- Again, we are not going to talk about 2015 results specifically until we talk about the quarter directly, but it’s clear that the way customers are viewing the situation as they think about our products versus competitive lesser performing alternatives they are very encouraged to know that the relative value is what I spoke of is back in line with historical norms. And a period that we lived through where butadiene prices were incredibly volatile are relative to olefin-based alternatives was a difficult time for both our customers and of course Kraton trying to manage through that reversing our product, but that, that really caused us to have price points in the marketplace that customers therefore were a little concerned about clearly, especially if it was long-term. The trend we have been on and it’s been a trend that’s not just one or two months now, it’s basically a trend for the past several months, has been a positive one.
- Jason Freuchtel:
- Okay. And then in terms of the $18 million in cost savings, how much of the cost savings is expected to come from the investment from switching to natural gas power boilers here at Belpre, Ohio facility? And can you provide any additional detail around what’s included in the fixed cost portion of the savings?
- Kevin Fogarty:
- Steve, you want to answer that question?
- Steve Tremblay:
- Yes, Jason. We have targeted the boiler project given the timing of when it’s going to startup during the year in the $3 million range. As you recall, we have been talking about an annualized run-rate in the $10 million range when those boilers are in for full year. We would still stick with that on a run-rate basis, but in the $18 million, our call is $3 million associated with the boiler. The fixed cost reductions are as I mentioned in my comments regarding research and development and SG&A, there is some process improvement and streamline of activities that we expect to garner in 2015. In total of the $18 million, $3 million is the boiler as I mentioned and about $6 million is associated with cost that will result in lower SAR costs and the other $9 million is a function of improvements in the fixed cost structure at a couple of the operations as well as some improvements in activities that were lower variables.
- Jason Freuchtel:
- Okay. And how should we think about the cadence of those cost savings throughout the year? And I think you indicated this, this is kind of just the first level of cost savings, should we anticipate in an announcement of additional cost savings either later in ‘15 or sometime in ‘16?
- Steve Tremblay:
- I will take the first part of the question first and then come back to the second one. The only – of the $18 million that boiler is going to be in the back half of the year, call it a $1.5 million per quarter in the third and fourth and the remaining $15 million especially going to be ratably throughout each of the quarters. Those initiatives are effectively in place. So, soon the ‘15 is ratable per quarter. Relative to future plans, as Kevin mentioned, we are working diligently. Our current expectation would be in our midyear investor review. We would have some update on this $18 million as well as more importantly the overall strategy that Kevin has outlined for us.
- Jason Freuchtel:
- Okay. And lastly, it looks like you are halfway through your share repurchase program in just four months, is there specific time when you would be able to obtain a new authorization if you complete the $50 million plan before the end of the year?
- Gene Shiels:
- Jason, this is Gene. I think we will just – we will see where the Board’s headset is as we move forward. So, I don’t think we really have specific answer for you at this point.
- Jason Freuchtel:
- Okay. Alright, well I appreciate it.
- Operator:
- Mike Sison, KeyBanc, your line is open.
- Mike Sison:
- Hey, good morning guys. In terms of the new segments that you have talked about, I think at one time, the goal was to have a gross profit per ton maybe of 1,000 for the whole company and there were pockets when you hit that. Can you maybe talk about each of the segments and how that relates to that number and which one will really help drive you to get there over time?
- Kevin Fogarty:
- So Mike this is a question that gets to the heart of what we are working on which is overall portfolio shift to drive margin expansion and that’s what we do. And by calling out these product segments the way we have, I think we are able to demonstrate pretty clearly that in the case of Cariflex and our Specialty Polymers business there is underlying growth. And that growth is driven by our innovation and thus we have the improvement of overall innovation and differentiated metrics. We have been talking for several quarters now about the challenges facing the base part of our business, clearly the Performance Products our business vis-à-vis competitive headwinds and of course the cost structure. The cost structure issues, is why we have identified that as one leg to this three legged strategy. We have got to clearly look at those costs in relation to the overall competitive position of Kraton as in the marketplace today and identify not just incremental cost improvements, but real step change improvements that are going to position us differently on the cost curve to compete and grow. And then therefore by setting up these three distinct products – business units it gives us a much clearer line of sight to where we need to work on to get those margin improvements with portfolio shift and the focus of that margin improvement in the area where we think we have leverage. And I think as we as we unfold more and more of the cost reset plan for investors, you will see clearly how we are thinking about the business. We want to make sure we have got the right R&D and technical resources focused on where we know there is growth, we want to make sure we are working hard diligently on the cost reset to improve the competitive part of our business where we are obviously not meeting those margin requirements.
- Mike Sison:
- Okay. And then when you take a look at the mix between Performance Products and Specialty and Cariflex it’s a little bit more Performance Products than the other two, can you – is that a mix that can help you get to your 1000 – the gross profit ton goal of 1,000 or do you need to do a little bit more obviously you want to grow the other two, but are there ways to rationalize Performance Products to improve the mix, to improve the profitability?
- Kevin Fogarty:
- Well, I think it’s difficult for us to envision that Performance Products can have, we are looking for an overall portfolio that has an average $1000 per gross profit - $1000 per ton gross profit. I think it’s difficult for us to envision that each of these three distinct units would have that, particularly Performance Products group. But that doesn’t mean there is not improvement opportunities which it what we are working on.
- Mike Sison:
- Okay. And then when you think about 2015 Steve some macro headwinds you talked about and then you got the cost saving can you talk about whether the gross profit per ton should improve in ‘15 versus ‘14 given all the moving parts and does that assume a degree of volume growth in ‘15?
- Gene Shiels:
- Mike, this is Gene. We – as you know our practice is not to provide that kind of specific guidance. So I think consistent with what Kevin has said over the long-term with cost improvements and growth in the percentage of the overall portfolio from Cariflex particularly Specialty Polymers we ought to be moving up on the profitability scale, but I don’t want to give any timeframe for that.
- Mike Sison:
- Okay. And then last question on volumes then, do you have any insights given the better cost and value relative to olefins, are you going to be able to drive some volume growth in ‘15 versus ‘14?
- Kevin Fogarty:
- Look we are always trying to create that volume growth, obviously but we do have margin expectations as well. If we can work on our cost position clearly which is what we have identified for you that puts in a better position to compete and grow volumes on the Performance Products side of the business. But at the same time it’s exactly what Gene just said the portfolio shift itself causes the margin expansion that we are looking for. But I don’t want – and I call it out in my comments I think it’s just it’s the reality of our business that even when we are margin indifferent if not perhaps some margin expansion given this raw material environment, we have the ability obviously to present a much more competitive price alternative to our customers versus what they were accustomed to see in say 2 years ago. And I call that out because it is being recognized in the marketplace as more indicative if you will of historically how we have grown our business.
- Mike Sison:
- Great. Thank you.
- Steve Tremblay:
- Thanks Mike.
- Operator:
- John Roberts, UBS, your line is now open.
- John Roberts:
- Good morning guys. Nice progress in the quarter. Back to the question on butadiene that was asked earlier. The tire industry is much more important to the butadiene supply demand balance and is butadiene cheap enough now that the tire industry is switching from natural to synthetic rubber that might put some upward pressure back on butadiene or is natural rubber still so cheap that it’s not coming into play yet?
- Kevin Fogarty:
- Look, John if you go back to when the if I could use that often overused expression perfect storm existed with respect to butadiene really three fundamental drivers there was strong growth in tires clearly particularly in China. There was that trend to lightning up feedstocks late in the cracker capacities in the U.S. and then of course to your point natural rubber, which was priced at an all-time high. Every one of those three trends are different today, particularly the trend of supply of butadiene in other parts of the world. And I would say that this current natural rubber price environment the fact that most of the I mean I can’t say definitively all, but best we can determine most of the light cracking conversions that went on as a result of fracking basically are in the rearview mirror if you will. And so the shift to lighter feedstocks doesn’t have the material impact it has on supply. So you know you are talking about structurally a lot of things differently, those three things I called out particularly. And from our standpoint, whether the tire industry starts to pick up demand or not but the reality is natural rubber prices are low. There is lots of ample supply including on purpose supply that’s sitting there right now because of lower price points will create some kind of a ceiling for butadiene. So there is just a fundamentally structural difference in butadiene supply today as it was 2 years or 3 years ago. And that’s what gives us confidence that we are dealing in much different markets today while for our primary feedstocks that allows us to build more focus with our customers and what we want to focus on which is innovation and driving growth.
- John Roberts:
- Okay. And then as a follow-up Steve on Slide 12 where you have the adjusted gross profit per ton at $816 and I think it’s close to $900 excluding foreign exchange. So it’s roughly flat year-over-year on a local currency basis on an adjusted basis. It seem like the mix was pretty favorable year-over-year that you would have maybe picked up more mix benefit than what seems to be there in the numbers?
- Steve Tremblay:
- Yes. Your observation is correct. It would have been right around $900 a ton. I will just make a clarifying point that’s currency and turnaround stripped out, not just the effect of currency. What offset that that mix effect to some degree John was the effect of the lower volume on overall absorption rates throughout – in the operations. We have traditionally talked about in the fourth quarter was generally lower volume which means that unit cost per ton tends to rise and if you take that 2 KT or so decline in overall volume that’s got a degrading effect on overall gross profit per ton, which modestly offset some of the improvements.
- John Roberts:
- Okay, thanks. I will get back in the queue.
- Operator:
- Bill Hoffman, RBC Capital Markets. Your line is open.
- Bill Hoffman:
- Thanks. Good morning. Kevin maybe I know this question has been asked a number of times, but just going at may be a different angle, with the lower butadiene prices and costs and expectation that this may be sustainable for a longer period of time, just wondering if you could talk through a little bit about what you might see from a demand pull side. I mean I would assume that on the Performance Products being the shorter timeframe you might get more demand pull relative to the specialties. And how you think about managing and balancing your capacity to fulfill potentially higher demand because of these lower prices on a sustained basis?
- Kevin Fogarty:
- Well, anytime you talk about higher demand and balancing capacity, that’s usually a good story, but nevertheless we are very sensitive to ensuring that when customers are looking to buy our products, we have that product available to them. But back to the point I was making earlier, which is the relevant point. If you look at where we compete in the marketplace, especially for new market development opportunities, oftentimes those technologies are olefinic-based in some form. They are founded on propylene. They are founded on perhaps some kind of a C3 technology. And if you go back over the last 4, 5 years and just look at the evolution of butadiene prices relative to olefin prices, you can pretty quickly convince yourself that clearly butadiene prices moved up a factor of what two or three times at some point to olefin costs. Now, we have been – and I think investors have seen that we are very diligent in terms of the way in which we price our product to reflect those raw material cost increases and therefore our margins have stayed for the most part at or above historical levels, but the absolute price is what I am talking about. So, if today we are looking at selling at lower prices at equal to or even expanded a little bit margins associated with that raw material decline, it just puts us in a more competitive position when customers are looking at olefinic-based alternatives. And there is no secret that when it comes to particularly alternatives that have elastic requirements that our material is – the performance of our material is much stronger than olefin alternatives. And so if the price issue is now off the table, technology they know is superior, it just – at least what I said in my comment, it just makes the decision in terms of which technology to adopt that much more easy for the customer and we are sympathetic to that, because we know that our prices relative to where we are today have been a lot higher.
- Bill Hoffman:
- Thanks. It’s helpful. And then just with respect to that from just operating capacity utilization standpoint, how do you feel about your system – this is ex-Formosa at this point, current system capabilities to meet incremental demands of what percent makes sense this year?
- Kevin Fogarty:
- Look, first of all, I don’t want to really say too much about our absolute capacity utilization, because I would be telling too much to the external competitors, but I would tell you that we are always conscious of diligently managing our capacity availability making sure that we are being as optimal as we can, but at the same time recognizing that we need to be planning for the kind of growth that we are working on through our innovation activity. So, the best example I can give you is in the case of Cariflex. Cariflex is a business that has wonderful growth profile and we are real pleased about it, but as I said time and time again that the worst thing we can do is not be in a position to satisfy that growth when those conversions from natural rubber occur. So, it’s a very important part of our business model to be looking at our capacity availability constantly and the same applies for our Specialty Polymers and Performance Products businesses today, because indeed we are planning for growth. And of course, the startup on the new 30 kiloton plant, HSBC plant in Taiwan with the technical capability that plant is going to have just a year away is going to bring a dimension to Kraton that we are very excited, but we know the customers will really benefit from as well.
- Bill Hoffman:
- Thanks. And then maybe just a shorter term question, this is more for Steve. Just with regards to the particular strategy and through the pass-through of your pricing versus the lower cost, how quickly does that happen like will we see the margin expense just in Q1 and then normalized by Q2 or is it over the next two quarters?
- Steve Tremblay:
- Well, we remain to be seen what the first quarter entirely plays out to be. So, I don’t want to get too specific with margin call for the first quarter or the first half, but as Kevin has said in the past that one of the most important long-term benefits of low butadiene is the attractiveness of our material against alternatives. We do certainly have an opportunity with the inventory levels that we have in periods like this that we try to maintain and if there is an opportunity to expand margins we certainly do. But I really would rather not give a guidepost because it’s very, very different depending on what products we are talking about whether it’s the different end users have different characteristics just hawking back to real big longer-term sustainable benefit is the inter-material benefit of lower selling prices for our product.
- Bill Hoffman:
- Thanks. And then just last question from working capital cash release you would – have you mostly gone through that at this point I know you are building inventory for the turnaround, but just curious about that?
- Kevin Fogarty:
- Well, we should see a benefit to working capital. We talked about the $30 million to $35 million negative FIFO charge in the quarter, the inverse of that is we will have a lower level of working capital on the balance sheet. So our expectation right now is there will be some favorable working capital dynamics here in the near-term. I would not say that they are through the chain because we do have as you know 4 months of inventory on a normal basis and we are carrying a bit more right now in advance of the turnaround. So the combination of lower raw material costs is a very real in near-term benefit that we are seeing and there will continue to be some of that benefit. Although it will be diminished if you assume that raw materials start to flatten, but we will be drawing inventory current expectation anyways we will be drawing inventory in the beginning in the second quarter commensurate with the turnaround activities in France.
- Bill Hoffman:
- Great. Thank you.
- Operator:
- Roger Smith, Bank of America, your line is open.
- Unidentified Analyst:
- Hey, it’s Roger. If it’s not already been asked on the call, would it be possible to break the 306,000 kilotons 2014 volume down between your three new segments?
- Kevin Fogarty:
- Our current intention is not to provide that volume level of detail for the similar reasons that in the past when we had the other end use structures we didn’t want to give volume information for those for competitive reasons.
- Unidentified Analyst:
- Understand. Thank you very much.
- Operator:
- And our last question comes from John Roberts, UBS. Your line is open.
- Kevin Fogarty:
- Hello John.
- Operator:
- Please check your mute button. I am showing no further questions.
- Kevin Fogarty:
- Okay. Diane, thank you very much. I would like to thank all of our participants this morning for their interest in Kraton. I would like to remind you that a replay of this call will be available beginning approximately 11.00 AM Eastern today and will be available through March 13. To hear the replay you may access it through our website at kraton.com by selecting the Investor Relations link at the top of the homepage and select Events from the menu on that page. To hear a telephonic replay you may dial 888-566-0401 and international callers may dial 203-369-3040. This concludes our call. Thank you very much.
- Operator:
- This concludes the Kraton Performance Polymers Incorporated fourth quarter 2014 earnings conference call. You may now disconnect.
Other Kraton Corporation earnings call transcripts:
- Q2 (2021) KRA earnings call transcript
- Q1 (2021) KRA earnings call transcript
- Q2 (2020) KRA earnings call transcript
- Q1 (2020) KRA earnings call transcript
- Q4 (2019) KRA earnings call transcript
- Q3 (2019) KRA earnings call transcript
- Q2 (2019) KRA earnings call transcript
- Q1 (2019) KRA earnings call transcript
- Q4 (2018) KRA earnings call transcript
- Q3 (2018) KRA earnings call transcript