Attached files

file filename
8-K - FORM 8-K - Kraton Corpd8k.htm
Business and Financial Overview
March and April 2010
Exhibit 99.1


Disclaimers
2
Forward-Looking Statements
This
presentation
may
include
“forward-looking
statements”
that
reflect
our
plans,
beliefs,
expectations and current views with respect to, among other things, future events and financial
performance.  Forward-looking statements are often characterized by the use of
words
such
as
“believes,”
“estimates,”
“expects,”
“projects,”
“may,”
“intends,”
“plans”
or
“anticipates,”
or
by
discussions
of
strategy,
plans
or
intentions.
All
forward-looking
statements
in this presentation are made based on management's current expectations and
estimates, which involve risks, uncertainties and other factors that could cause actual results to
differ materially from those expressed in forward-looking statements. Readers are cautioned
not to place undue reliance on forward-looking statements. We assume no obligation to update
such information. Further information concerning issues that could materially affect financial
performance related to forward-looking statements can be found in our periodic filings with the
Securities and Exchange Commission.
GAAP Disclaimer
This presentation includes the use of both GAAP (generally accepted accounting principles)
and non-GAAP financial measures. The non-GAAP financial measures are EBITDA and
Adjusted EBITDA. The most directly comparable GAAP financial measure is net
income/loss. A reconciliation of the non-GAAP financial measures used in this presentation
to
the
most
directly
comparable
GAAP
measure
is
included
herein.
We
consider
EBITDA
and Adjusted EBITDA important supplemental measures of our performance and believe
they are frequently used by investors and other interested parties in the evaluation of
companies in our industry. EBITDA and Adjusted EBITDA have limitations as analytical tools
and
should
not
be
considered
in
isolation
or
as
a
substitute
for
analysis
of
our
results
under
GAAP in the United States.


3
Investment Highlights
Leadership
Clear leader in the fast growing, attractive SBC market
Scale
Approximately twice the size of our largest competitor in each of our end-use
markets
The only producer with a global footprint and service capabilities
High
Barriers to
Entry
Patented technology, custom designed product, process excellence, global reach
and customer relationships create strong competitive position that cannot be
matched by existing or potential competitors
Kraton, therefore, commands price premiums in the market
Innovation
Most-productive innovator of new SBC products, often engineered to meet a specific
customer need
Earnings
Growth
Driven by cost initiatives, economic recovery, return to normal customer inventory
levels and new product introductions
Meaningful operating leverage
Experience
Strong leadership team demonstrating continuous improvement in productivity,
innovation and margin improvement even in a difficult macroeconomic environment


4
Experienced Management Team
Name
Title
Previous Experience
Years
Industry
Experience
Dan Smith
Chairman of the
Board
Lyondell
40
Kevin Fogarty
President & CEO
Koch (Invista)
18
Steve Tremblay
Chief Financial
Officer
Vertis
9
David Bradley
Chief Operating
Officer
General Electric (Lexan)
17
Lothar Freund
Research &
Technical Services
Hoechst AG (Invista)
20


5
Kraton
Overview
We design and manufacture customized
SBC neat resin and compound solutions
to meet our leading customers’
specific
innovation needs
We currently offer approximately 800
products to more than 700 customers, in
over 60 countries
We are organized around four distinct
markets, or end-uses, providing industrial,
consumer and geographical diversification
second to none
We employ approximately 800 people in
15 locations in all major regions of the
world
2009 operating revenue of $968 million
and 2009 Adjusted EBITDA of $91 million
(1)
Sales revenue excludes by-products sales
(2)
Adjusted EBITDA is GAAP EBITDA excluding sponsor fees, restructuring and related charges, non-cash expenses, and the gain on
extinguishment of debt. A reconciliation of net income or loss to EBITDA and Adjusted EBITDA is presented in the Appendix.
2009
Sales
Revenue
(1)
by
End-Use
2009
Sales
Revenue
(1)
by
Geography
North and
South
America
Europe,
Middle
East &
Africa
Asia Pacific
Paving and
Roofing
Adhesives,
Sealants and
Coatings
Footwear and
Other
Emerging
Businesses
Advanced
Materials
We are the world’s leading innovator of
Styrenic
Block Copolymers (SBCs)


6
Before Kraton
After Kraton
Kraton
Makes Products Better
Product Issue
Stretch in legs only (Spandex)
Not a fitted garment
High leakage rate
Overall improvement in stretch
(where it’s needed)
Better fit
Low leakage rate
Kraton
market share: 47%
2001 –
2007 CAGR: 11.4%
Elastic Films for Disposable Diapers
Kraton
as
% of Diaper
cost: <2%
Phthalate plasticizers are used to
make PVC soft. However, plasticizers
can leach from finished products and
create health concerns
Limited recyclability
Vinyl Chloride polymers are unsafe
when burned or incinerated improperly
Fully recyclable
Kraton
imparts softness, toughness and clarity
Plasticizers & chlorine free
Product Issue
Kraton
as an alternative for soft PVC
Kraton
as % of finished
product cost: <5%


7
SBCs
Are a Growth Industry
SBC Industry Volume (KT)
(1)
SBCs
Grow Faster Than GDP
While SBC applications grow at
GDP, the adoption of SBCs
into new
applications leads to ~2x GDP
industry growth
Low cost relative to value add /
performance
Limited substitution risk
Rising incomes in developing economies
Innovation and new SBC product
introductions
End use application growth (e.g., cell
phone covers, PVC replacement,
IV bags)
Growing demand for green alternatives to
electronics, medical and baby care markets
(1)
Excludes
footwear
segment
in
which
Kraton
does
not
actively
compete.
Source: Management Estimates


8
Clear Leader in Attractive Markets
Market position
2009
Revenue
(1)
#1
64%
Adhesives, Sealants,
and Coatings
Advanced Materials
#1
75%
Paving and Roofing
#1
74%
Emerging Businesses
#1
100%
32%
31%
26%
7%
2.6x
2.2x
1.9x
6.1x
Source:
Management  estimates
(1)
Based on 2009 sales of $920.4 million (excludes by-product sales which are reported as other revenues)
(2)
Industry
growth
from
2001-2008;
however,
IR
Latex
growth
is
Kraton
growth
from
2007-2009
(3)
Management’s estimates vs. next largest competitor based on 2008 sales
#1 Market Position and Approximately Twice the Size of Our Closest Competitors
Top 4 market
share
Kraton
market
share relative to
#2
competitor
(3)
Growth
(2)
5.2%
8.0%
7.1%
28.8%


9
Unparalleled Global Manufacturing and Service
Capability
Location
Capability
Kraton
Capacity
Houston, Texas
Global Headquarters &
Innovation Center
Not applicable
Belpre, Ohio
Manufacturing
189 kt
Wesseling,
Germany
Manufacturing
95 kt
Berre, France
Manufacturing
87 kt
Paulinia, Brazil
Manufacturing &
Innovation Center
28 kt
Kashima, Japan
Manufacturing Joint
Venture
20 kt
Amsterdam, The
Netherlands
Innovation Center
Not applicable
Mont St. Guibert,
Belgium
Technical Service
Office
Not applicable
Shanghai, China
Customer Service &
Technical Center
Not applicable
Tskuba, Japan
Innovation Center
Not applicable
High quality customer base
Majority of top customers have 15+ year
relationship
Blue chip customer base in the consumer
products, packaging, medical supplies,
construction and textile industries
Several key customer relationships are sole
source
Well diversified customer base


10
Sustainable Competitive Advantages
Over 40 years of process know-how and
expertise
Performance-critical products and manufacturing
complexity
Technical
Barriers
Globally
recognized
brand
KRATON
®
Industry-leading R&D infrastructure
Global low-cost manufacturing footprint
Significant regulatory hurdles / barriers to new
manufacturing sites
Stable raw material base with multiple sources
of supply and contract / relationships
Infrastructure
Barriers
Superior and
Innovative Products
+
High Customer
Switching Costs
+
Long-Term
Customers
Relationships
=
Leading
Market Position
Products designed collaboratively to meet
specific customer needs / applications
Preferred partner based on manufacturing
consistency and process know-how
Ongoing technical service offering
100% of products offered on demand
High
Value
Added


Innovation-led Top Line Growth
Case Study:  IR Latex Revenue Growth
Key Attributes
Tremendous growth
Rapidly capture share from $2.2 billion natural
rubber latex industry
Margins well in excess of rest of business
Kraton
maintains 86% market share
Challenging process technology to replicate
for competitors and new entrants
IPO proceeds will help fund IR Latex
capacity expansion
20/20 Vision by 2011
20% of revenue from innovation
20% contribution margin premium
11
US $ in millions
$15
$22
$23
$35
$61
2005
2006
2007
2008
2009
6%
11%
13%
14%
12%
20%
2005
2006
2007
2008
2009
2011


Strong Diversified Innovation Pipeline to Drive Growth
12
Slush Molding
HiMA
Protective Films
PVC Replacement
Wire & Cable
PVC Replacement
Medical Applications


13
Kraton
has Significant Growth & Profitability Opportunities
Project
Description
Estimated
Cost
Expected
Timing
Latex
Expansion
Capture additional market
demand
Up to $30 million
2011 -
2012
HSBC
Expansion
High-margin HSBC
capacity expansion
utilizing new technology
TBD
2012 +
Asia Plant /
Rationalize
Capacity
State of the Art HSBC
plant in Asia
Debottleneck existing
capacity
In Phases / TBD
2012 +
Isoprene
Rubber and
Isoprene Latex
Debottleneck
Capital advantaged latex
expansion at Paulinia
and
IR capacity replacement
$30 -
$35 million
2010 -
2011
We
Typically
Seek
Higher
Growth
Opportunities
with
Relatively
Rapid
Steady-State
Payback


$(10)
$13
$53
$35
Q1 09
Q2 09
Q3 09
Q4 09
2009 Financial Highlights
$178
$234
$270
$238
Q1 09
Q2 09
Q3 09
Q4 09
Adhesives, Sealants & Coatings,
Advanced Materials and Emerging
Businesses each posted revenue growth
in Q4 2009 versus Q4 2008
Sales Revenue
(1)
(US $ in Millions)
(1)
Excludes by-product revenue
(2)
Adjusted EBITDA  is GAAP EBITDA excluding sponsor fees, restructuring and related charges, non-cash expenses, and the
gain on extinguishment of debt. A reconciliation of net income or loss to EBITDA and Adjusted EBITDA is presented in the
Appendix
Q3 momentum continued into Q4
Q4 volume of 61kt up 16% versus Q4
2008
2009 volume of 260 kilotons versus
313 kilotons in 2008
Volume (kt)
47
71
81
61
61%
76 %
90%
Q1 09
Q2 09
Q3 09
Q4 09
116%
% of 2008
Q4 2009 adjusted EBITDA was up 21%
compared to $29 million in Q4 2008
Adjusted EBITDA margin percentage
yields 170 basis point improvement
versus Q4 2008
Adjusted EBITDA
(2)
(US $ in Millions)
14


2009 Financial Overview
(1)
Adjusted EBITDA is GAAP EBITDA excluding sponsor fees, restructuring and related charges, non-cash expenses, and the
gain on extinguishment of debt. A reconciliation of net income or loss to EBITDA and Adjusted EBITDA is presented in the
Appendix
15
US $ in thousands
2009
2008
2009
2008
Sales Volume (kt)
61
53
260
313
Total Operating Revenues
250,708
$         
231,636
$         
968,004
$         
1,226,033
$       
Cost of Goods Sold
189,840
182,665
792,472
971,283
Gross Profit
60,868
48,971
175,532
254,750
Operating expenses
Research and Development
6,098
5,920
21,212
27,049
Selling, General and Administrative
22,919
27,853
79,504
101,431
Depreciation and Amortization of Identifiable Intangibles
25,168
12,282
66,751
53,162
Gain on Extinguishment of Debt
-
-
23,831
-
Equity in Earnings of Unconsolidated Joint Venture
98
123
403
437
Interest Expense, net
9,179
8,999
33,956
36,695
Income (Loss) Before Income Taxes
(2,398)
(5,960)
(1,657)
36,850
Income Tax Expense
(882)
1,035
(1,367)
8,431
Net Income (Loss)
(1,516)
$            
(6,995)
$            
(290)
$               
28,419
$           
Earnings
(Loss)
per
Common
Share
-
Diluted
(0.07)
(0.36)
(0.01)
1.46
Adjusted EBITDA
(1)
35,043
$           
28,551
$           
91,359
$           
152,048
$         
Fourth Quarter
Full Year


Operating
Revenue
and
Adjusted
EBITDA
(1)
Walk
Fiscal Years 2008 vs. 2009
Operating Revenue FY 2008 vs. 2009
Adjusted EBITDA
(1)
FY 2008 vs. 2009
(1)
Adjusted EBITDA is GAAP EBITDA excluding sponsor fees, restructuring and related charges, non-cash expenses, and the gain on
extinguishment of debt. A reconciliation of net income or loss to EBITDA and Adjusted EBITDA is presented in the Appendix.
16
US $ in millions


Operating Revenue Q4 2008 vs. Q4 2009
17
Adjusted EBITDA
(1)
Q4 2008 vs. Q4 2009
Operating
Revenue
and
Adjusted
EBITDA
(1)
Walk
Q4 2008 vs. Q4 2009
(1)
Adjusted EBITDA is GAAP EBITDA excluding sponsor fees, restructuring and related charges, non-cash expenses, and the gain on
extinguishment of debt. A reconciliation of net income or loss to EBITDA and Adjusted EBITDA is presented in the Appendix.
US $ in millions


18
$17
$21
$17
$12
Culture of Continuous Cost Improvement
$67
2007
Belpre work process improvement
project
Offsite warehouse
Global office closures
2009
Berre fixed cost reduction
ERP project
Paulinia work process improvement
project
Global staff reduction, discretionary
spending reduction
2010
Pernis IR shutdown
2008
Pernis SIS shutdown
RTS and SG&A staff reductions
Freight forward contract
Belpre energy reduction initiatives
Annualized run-rate of cost savings
US $ in millions


Capital Structure Significantly Improved
Amend and Extend Cash Flow Revolver
Upsize to $80.00 million from $75.5 million
Two year maturity extension to May 2013
L+ 300 from L + 200
Reduced principal by $37.0 million
Realized gain of $23.8 million
Annual cash interest savings of $3.0 million
Senior
Subordinated
Notes
Bond
Buyback
IPO Results in Term Loan Reduction
Raised ~$137.8 million in IPO
Reduced Term Loan by $100 million
Created $25 million of leverage cushion
Annual
cash
interest
savings
of
$3.5
-
$5.0
million
Reduced debt by $190 million to
$385 million at December 31,
2009 from $575 million at
December 31, 2008
Liquidity improved to $149
million at December 31, 2009
from $127 million at December
31, 2008
Leverage ratio (as calculated
under the senior credit facility) of
2.88 at December 31, 2009
improved 26% from December
31, 2008’s 3.87
19


Indebtedness and Liquidity
Gross
Debt
Cash
Net
Debt
December 31, 2008
$
575
$
101
$
474
Bond buyback program
(37)
(13)
(24)
Proceeds from IPO
(1)
(100)
27
(127)
Debt services, net
(53)
(46)
(7)
December 31, 2009
$   385
$     69
$
316
Working capital produced $29 million of cash flow
Total
liquidity
(2)
increased
from
$127
million
to
$149
million
Revolver amended to increase availability from $75.5 million to $80.0 million and
extended maturity to May 2013
(1)
Proceeds
from
IPO
excludes
underwriters’
over-allotment
option
exercised
in
January
2010
yielding
additional
cash
proceeds
of
$11
million
(2)
Total liquidity is cash on hand plus undrawn revolver availability
20
US $ in millions


Outlook 2010
Capital spending
$50 to $55 million
Cash interest
$20 to $22 million
Cash pension contributions
$4 to $5 million
Cash restructuring
$10 million
Book tax rate
20% to 25%
Cash tax rate
15% to 20%
21


22
Recent Actions Have Established Strong Earnings Base
Source: Management estimates
(1)
Adjusted EBITDA adds back sponsor fees and expenses, restructuring and related charges, other non-cash expenses and the gain on
extinguishment of debt. A reconciliation of net income or loss to EBITDA and Adjusted EBITDA is presented in the Appendix.
(2)
LIFO Adjustment reflects the impact of the rapid price decline in feed stocks (which are subsequently rebounding) and its flow through
to EBITDA.
(3)
Announced and implemented cost savings not reflected in LTM December 2009 Adjusted EBITDA.
(4)
Higher
than
normal
regulatory
maintenance
in
Europe
YTD
December
2009
compared
to
same
periods
2006,
2007
and
2008.
$91
$18
$15
$12
$136
2009 Adjusted
EBITDA
LIFO   
Adjustment
Implemented
Cost Savings
Turnaround
Costs
Volume
Innovation
Margin
Potential
$(10)  Q1
$
13   Q2
$
53  Q3
$
35  Q4
(3)
(4)
(1)
Economic
Recovery
Stimulus
Package
IR Latex
Capacity
20/20 mix
Enhancement
Continuous cost
reduction
20/20
Introductions
NEXAR™
Slush molding
HiMA
Historical Adjustments
Growth Opportunities and Initiatives
ERP (10/09)
Pernis
(1/10)
(2)
US $ in millions


Kraton
2010 Business Priorities
Innovation-led Top-line
Growth
Vision 20/20
Vitality index at or above 14%
Demonstrate clear traction on step-out innovation projects
Capital Investment
PIR conversion to Belpre
Paulinia
IRL to 2,200 tons
DCS Phase II Belpre
Plan for semi works to increase innovation productivity
Earnings Growth
Return business to full year sustainable growth
Leverage
“smart”
pricing
to
maintain
target
margins
Continue focus on developing economies
Capture stimulus spending opportunities
Critical Capabilities
Leverage enhanced market development capabilities
Implement new sales and marketing incentive plan
Utilize SAP full functionality
Investor Relations
23
Flawlessly execute $50 - $55 million investment plan


Investment Highlights
Leadership
Clear leader in the fast growing, attractive SBC market
Scale
Approximately twice the size of our largest competitor in each of our end-use markets
The only producer with a global footprint and service capabilities
High
Barriers to
Entry
Patented technology, custom designed product, process excellence, global reach
and customer relationships create strong competitive position that cannot be
matched by existing or potential competitors
Kraton, therefore, commands price premiums in the market
Innovation
Most productive innovator of new SBC products, often engineered to meet a specific
customer need
Earnings
Growth
Driven by cost initiatives, economic recovery, return to normal customer inventory
levels and new product introductions
Meaningful operating leverage
Experience
Strong leadership team demonstrating continuous improvement in productivity,
innovation and margin improvement even in a difficult macroeconomic environment
24


Appendix


SBCs
are Engineered to Meet Customer Needs
Primary Raw
Materials
Products
Customer Value
End-Use Applications
Styrene
Unhydrogenated
SBCs
SBS
SIS
SIBS
Butadiene
Isoprene
Hydrogenated
SBCs
SEBS
SEPS
Isoprene Rubber
and Latex
Compounds
Paving
Roofing
Personal Care
Tapes
Formulators
Labels & Printing
Compounds
Packaging
Auto
Lubricants
Medical
Stretch
Soft-Touch
Adhesion
Strength
Durability
Thickening
Compatibility
Clarity
Recyclability
Kraton
is the only provider of these value components across
all products touching a wide array of applications


SBCs
Enhance Performance Attributes
Durability
Elasticity
Impact
Soft Touch
Clarity
Adhesion
We are a Highly Engineered, Performance Materials Business


Reconciliation of Net Income/(Loss) to EBITDA and
Adjusted EBITDA
(1)
The EBITDA measure is used by management to evaluate operating performance. Management believes that EBITDA is useful to
investors because it is frequently used by investors and other interested parties in the evaluation of companies in our industry.
EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income (loss) as an indicator of operating
performance or to cash flows from operating activities as a measure of liquidity. Since not all companies use identical calculations, this
presentation of EBITDA may not be comparable to other similarly titled measures of other companies. Additionally, EBITDA is not intended
to
be
a
measure
of
free
cash
flow
for
management's
discretionary
use,
as
it
does
not
consider
certain
cash
requirements
such
as
interest
payments, tax payments and debt service requirements.
(2)
Adjusted EBITDA is EBITDA excluding
sponsor fees, restructuring and related charges, non-cash expenses, and the gain on
extinguishment of debt.
US $ in thousands
Three months Ended
Three months Ended
Twelve months Ended
Twelve months Ended
12/31/2009
12/31/2008
12/31/2009
12/31/2008
Net Income (Loss)
(1,516)
$                     
(6,995)
$                     
(290)
$                          
28,419
$                      
Add(deduct):
    Interest expense, net
9,179
                       
8,999
                       
33,956
                        
36,695
                        
    Income tax expense
(882)
                         
1,035
                       
(1,367)
                         
8,431
                          
    Depreciation and amortization expenses
25,168
                      
12,282
                      
66,751
                        
53,162
                        
EBITDA
(1)
31,949
$                    
15,321
$                    
99,050
$                      
126,707
$                     
EBITDA
(1)
31,949
$                    
15,321
$                    
99,050
$                      
126,707
$                     
Add(deduct):
    Sponsor fees and expenses
500
                          
500
                          
2,000
                          
2,000
                          
    Restructuring and related charges
2,144
                       
4,189
                       
9,677
                          
13,671
                        
    Other non-cash expenses
450
                          
8,541
                       
4,463
                          
9,670
                          
    Gain on extinguishment of debt
-
                           
-
                           
(23,831)
                       
-
                             
Adjusted EBITDA
(2)
35,043
$                    
28,551
$                    
91,359
$                      
152,048
$                     
Restructuring and related detail:
Cost of goods sold
440
                          
355
                          
6,747
                          
355
                             
Research and development
-
                           
129
                          
-
                             
2,430
                          
Selling, general and administrative
1,704
                       
3,705
                       
2,930
                          
10,886
                        
Total restructuring and related charges
2,144
$                      
4,189
$                      
9,677
$                        
13,671
$