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| 8-K - FORM 8-K - Kraton Corp | kra1025178-kxearningsprese.htm |
October 25, 2017
Kraton Corporation
Third Quarter 2017
Earnings Presentation
Kraton Third Quarter 2017 Earnings Call 2
Disclaimers
Forward Looking Statements
Some of the statements and information in this presentation contain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. This presentation includes 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 identified by words such as “outlook,” “believes,”
“estimates,” “expects,” “projects,” “may,” “intends,” “plans”, “on track” “on trend”, or “anticipates,” or by discussions of strategy, plans or intentions,
including all matters described on the slide titled “2017 Modeling Assumptions” and our expectations for targeted debt reduction, cost reductions,
G&A synergies and operation cost improvements.
All forward-looking statements in this presentation are made based on management's current expectations and estimates, which involve known and
unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed in forward-looking
statements. These risks and uncertainties are more fully described in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item
1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other
filings with the Securities and Exchange Commission, and include, but are not limited to, risks related to: the integration of Arizona Chemical (now,
AZ Chem Holdings LP); Kraton's ability to repay its indebtedness; Kraton's reliance on third parties for the provision of significant operating and other
services; conditions in the global economy and capital markets; fluctuations in raw material costs; limitations in the availability of raw materials;
competition in Kraton's end-use markets; and other factors of which we are currently unaware or deem immaterial. Readers are cautioned not to
place undue reliance on our forward-looking statements. Forward-looking statements speak only as of the date they are made, and we assume no
obligation to update such information in light of new information or future events.
Kraton Third Quarter 2017 Earnings Call 3
GAAP Disclaimer
This presentation includes the use of non-GAAP financial measures, as defined below. Tables included in this presentation reconcile each of these non-
GAAP financial measures with the most directly comparable GAAP financial measure. For additional information on the impact of the spread between
the FIFO basis of accounting and estimated current replacement cost (“ECRC”), see our Annual Report on Form 10-K for the fiscal year ended December
31, 2016.
We consider these non-GAAP financial measures to be important supplemental measures in the evaluation of our absolute and relative performance.
However, we caution that these non-GAAP financial measures have limitations as analytical tools and may vary substantially from other measures of our
performance. You should not consider them in isolation, or as a substitute for analysis of our results under GAAP in the United States.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin: For our consolidated results, EBITDA represents net income (loss) before interest, taxes,
depreciation and amortization. For each reporting segment, EBITDA represents operating income before depreciation and amortization, disposition and
exit of business activities and earnings of unconsolidated joint ventures. Among other limitations, EBITDA does not: reflect the significant interest
expense on our debt or reflect the significant depreciation and amortization expense associated with our long-lived assets; and EBITDA included herein
should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements since it calculation
differs in such agreements. Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative
measure. As an analytical tool, Adjusted EBITDA is subject to all the limitations applicable to EBITDA. We prepare Adjusted EBITDA by eliminating from
EBITDA the impact of a number of items we do not consider indicative of our on-going performance but you should be aware that in the future we may
incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items. In addition, due to volatility in raw material prices, Adjusted EBITDA may, and often
does, vary substantially from EBITDA and other performance measures, including net income calculated in accordance with U.S. GAAP. We define Adjusted
EBITDA Margin as Adjusted EBITDA as a percentage of revenue (for each reporting segment or on a consolidated bases, as applicable).
Adjusted Gross Profit and Adjusted Gross Profit Per Ton: We define Adjusted Gross Profit Per Ton as Adjusted Gross Profit divided by total sales volume
(for each reporting segment or on a consolidated basis, as applicable). We define Adjusted Gross Profit as gross profit excluding certain charges and
expenses. Adjusted Gross Profit is limited because it often varies substantially from gross profit calculated in accordance with U.S. GAAP due to volatility
in raw material prices.
Adjusted Diluted Earnings Per Share: Adjusted Diluted Earnings Per Share is Diluted Earnings (Loss) Per Share excluding the impact of a number of non-
recurring items we do not consider indicative of our on-going performance.
Net Debt: Net debt for Kraton is total debt (excluding debt of KFPC due to its own capital structure) less cash and cash equivalents. Consolidated net
debt is Kraton net debt plus debt of KFPC less KFPC’s cash and cash equivalents. Management believes that net debt is useful to investors in determining
our leverage since we could choose to use cash and cash equivalents to satisfy our debt obligations.
Disclaimers
Kraton Third Quarter 2017 Earnings Call 4
Third Quarter 2017 Highlights
Chemical segment
Cost outs and
synergy capture
▪ Delivered $65 million of transaction synergies and operational improvements as of
September 30, 2017
▪ Expect to achieve approximately $50 million of Polymer segment cost reductions by FYE'17
▪ Estimated cost to achieve transaction synergies and cost reductions reduced from $145
million to $108 million
Debt Reduction
▪ Reduced Kraton net debt by $87.3 million Q3'17
▪ Expect full year 2017 reduction in Kraton net debt of $125-$150 million, despite incurring
$15.5 million in refinancing costs
Polymer segment
▪ Adjusted EBITDA(1) of $77.4 million, up $27.8 million or 56.0% vs. Q3'16
▪ Q3'17 Adjusted EBITDA margin(2) of 24.6%, up 650 basis points
▪ Strong unit margins following the second quarter raw material price declines
▪ Sales volume up 6.9%
(1) See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(2) Defined as Adjusted EBITDA as a percentage of revenue.
(1)
▪ Adjusted EBITDA(1) of $44.3 million, up $2.8 million or 6.8% vs. Q3'16
▪ Q3'17 Adjusted EBITDA margin(2) of 22.5%
▪ Second quarter of sequential improvement
▪ Continued price and margin improvement for TOFA products
▪ Sales volume up 3.3%
▪ Consolidated net loss of $4.0 million and Adjusted EBITDA(1) of $121.7 million compared
to net income of $15.6 million and Adjusted EBITDA(1) of $91.1 million in Q3'16
▪ Q3'17 Adjusted EBITDA margin(2) of 23.8%
Consolidated
highlights
Kraton Third Quarter 2017 Earnings Call 5
(1) See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(2) Defined as Adjusted EBITDA as a percentage of revenue.
Consolidated Financial Results - Q3 2017
Three Months Ended September 30,
2017 2016 Change
($ In millions, except per share amounts)
Revenue $ 510.9 $ 454.1 $ 56.8
Net income (loss) attributable to Kraton $ (4.0) $ 15.6 $ (19.6)
Diluted earnings (loss) per share $ (0.13) $ 0.49 $ (0.62)
Adjusted EBITDA(1) $ 121.7 $ 91.1 $30.6
Adjusted EBITDA margin(2) 23.8% 20.1% 370 bp
Adjusted diluted earnings per share(1) $ 1.51 $ 0.63 $ 0.88
Polymer Chemical
Adjusted EBITDA
QTD'17 QTD'16
$77.4
$49.6
$44.3
$121.7
$41.5
$91.1
Polymer Chemical
Operating Income
QTD'17 QTD'16
$17.8
$28.7
$23.7
$41.5
$22.1
$50.8
Kraton Third Quarter 2017 Earnings Call 6
Polymer Segment Financial Results
(1) See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(2) Defined as Adjusted EBITDA as a percentage of revenue.
▪ Sales volume up 6.9% vs. Q3'16
▪ Performance Products sales volume
up 11.1%, with paving volume up
35.7% vs. Q3'16
▪ Excluding effect of sale of
compounding business, Specialty
Polymers sales volume unchanged vs.
Q3'16
▪ Cariflex volume essentially flat with
Q3'16
▪ Revenue increase vs. Q3'16 reflects higher
sales volume and higher average selling
prices
▪ Adjusted EBITDA(1) up $27.8 million or
56.0% vs. Q3'16
▪ Adjusted Gross Profit(1) was $1,148 per ton
in Q3'17, compared to $848 per ton in Q3'16
Adjusted EBITDA
Margin(2) 24.6% 18.2%
($ In millions, except volume)
Revenue and Sales Volume (kT)
Q3'17 Q3'16
91.9 85.9
$314.2 $273.0
(1)
Operating Income Adjusted EBITDA
Operating Income and Adjusted EBITDA
Q3'17 Q3'16
$17.8 $28.7
$77.4
$49.6
Kraton Third Quarter 2017 Earnings Call 7
Operating Income Adjusted EBITDA
Operating Income and Adjusted EBITDA
Q3'17 Q3'16
$23.7 $22.1
$44.3 $41.5
Chemical Segment Financial Results
(1) See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(2) Defined as Adjusted EBITDA as a percentage of revenue.
Adjusted EBITDA
Margin(2) 22.5% 22.9%
Revenue and Sales Volume (kT)
Q3'17 Q3'16
107.8 104.3
$196.8 $181.2
(1)
($ In millions, except volume)
▪ Sales volume up 3.3% vs. Q3'16
▪ Adhesives sales volume up 5.1% vs.
Q3'16
▪ Performance Chemicals sales volume
up 2.7% vs. Q3'16
▪ Tires volume up 12.3% and Roads &
Construction volume down 1.1% vs.
Q3'16
▪ Adjusted EBITDA(1) up $2.8 million or 6.8%
vs. Q3'16
▪ Pricing and margins for TOFA products
continued to improve in Q3'17
Kraton Third Quarter 2017 Earnings Call 8
Cost Reductions On Track -
Cost to Achieve Lower Than Expected
▪ Achieved $65 million of transaction synergies and operational improvements as of September 30,
2017 vs. original completion target of FYE'18
▪ These initiatives are expected to provide full-year benefit of approximately $28 million
compared to 2016
▪ Polymer segment cost reduction initiatives are expected to be approximately $50 million on a
life-to-date basis by year-end 2017
▪ These initiatives are expected to provide incremental benefit of approximately $17 million
in 2017
▪ Expect to realize the full $70 million(1) by FYE'18
▪ Total cost to achieve both tranches is estimated at $108 million vs. original estimate of $145
million
(1) Constant currency basis.
Kraton Third Quarter 2017 Earnings Call 9
Polymer Chemical
Operating Income
YTD'17 YTD'16
$95.6
$59.9
$66.9
$162.5
$40.9
$100.8
Polymer Chemical
Adjusted EBITDA
YTD'17 YTD'16
$172.2
$141.0
$116.5
$288.7
$135.9
$276.9
(1) See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure.
(2) Defined as Adjusted EBITDA as a percentage of revenue.
(3) Includes the Chemical segment results from 1/6/2016.
Consolidated Financial Results - YTD 2017
Nine Months Ended September 30,
2017 2016(3) Change
($ In millions, except per share amounts)
Revenue $ 1,494.4 $ 1,328.7 $ 165.7
Net income attributable to Kraton $ 27.9 $ 111.0 $ (83.1)
Diluted earnings per share $ 0.88 $ 3.56 $ (2.68)
Adjusted EBITDA(1) $ 288.7 276.9 $ 11.8
Adjusted EBITDA margin(2) 19.3% 20.8% (152 bp)
Adjusted diluted earnings per share(1) $ 1.88 $ 2.07 $ (0.19)
(1)
($ In millions)
Kraton Third Quarter 2017 Earnings Call 10
Net Debt
September 30, 2017 December 31, 2016
(In millions)
USD Tranche $ 500.0 $ 1,278.0
Euro Tranche 281.0 —
10.5% Senior Notes 440.0 440.0
7.0% Senior Notes 400.0 —
ABL — —
Capital lease 2.3 3.0
Kraton debt 1,623.3 1,721.0
Kraton cash 79.3 107.6
Kraton net debt 1,544.0 1,613.4
KFPC(1) loan 146.5 115.9
KFPC(1) cash 9.8 14.2
KFPC(1) net debt 136.6 101.7
Consolidated net debt $ 1,680.7 $ 1,715.1
(1) This amount includes all of the indebtedness of our Kraton Formosa Polymers Corporation (KFPC) joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and
consolidate within our financial statements.
Note: May not foot due to rounding.
▪ Kraton net debt reduced by $69.4 million since December 31, 2016
▪ From closing of the Arizona Chemical acquisition through 9/30/2017, Kraton net debt reduced
by $187.3 million, despite incurring $15.5 million of refinancing costs in 2017
Appendix
Kraton Third Quarter 2017 Earnings Call 12
2017 Modeling Assumptions(1)
($ In millions)
Non-cash compensation expense $10
Depreciation & amortization $137
Interest expense
Cash interest of approximately $108 million $132
Effective tax rate
Non-GAAP basis 20%-25% 10%
Capex (excluding joint venture) $94
Estimated fourth quarter 2017 spread between FIFO and ECRC ± $5
Reduction in net debt(2) $125 - $150
(1) Management's estimates. These estimates are forward-looking statements and speak only as of October 25, 2017. Management assumes no obligation to update or confirm
these estimates in light of new information or future events.
(2) We have not reconciled net debt guidance to debt due to high variability and difficulty in making accurate forecasts and projections that are impacted by future decisions and
actions. The actual amount of such reconciling items will have a significant impact if they were included in our net debt. Accordingly, a reconciliation of the non-GAAP financial
measure guidance to the corresponding GAAP measures is not available without unreasonable effort.
Note: Non-cash compensation expense is excluded in determining Adjusted EBITDA and included in determining Adjusted EPS.
Kraton Third Quarter 2017 Earnings Call 13
Polymer – Revenue by Geography and Product Group
TTM September 30, 2017
CARIFLEX PERFORMANCE PRODUCTSSPECIALTY POLYMERS
Revenue by Geog
raph
y
Revenue by Product Grou
p
Asia Pacific
93%
Americas
1%
EMEA
6%
Asia Pacific
31%
EMEA
24%
Americas
45%
Asia Pacific
8%
EMEA
45%
Americas
47%
Medical
94%
Industrial
6%
Other
30%
Lubricant
Additives
15%Polymod
13%
Medical
11%
Industrial
9%
Personal
Care
6%
Cable Gels
6%
Adhsv & Coatings
5%
Consumer
5%
Paving
37%
Personal
Care
18%
Roofing
18%
Pkg & Indust
Adhsv
11%
Other
10%
Industrial
6%
Kraton Third Quarter 2017 Earnings Call 14
Chemical – Revenue by Geography
TTM September 30, 2017
ADHESIVES TIRES
ROADS & CONSTRUCTION PERFORMANCE CHEMICALS
Americas
57%
EMEA
32%
Asia Pacific
11%
Americas
28%
EMEA
46%
Asia Pacific
26%
Americas
50%
EMEA
48%
Asia Pacific
2%
Americas
42%
EMEA
43%
Asia Pacific
15%
Kraton Third Quarter 2017 Earnings Call 15
Polymer Reconciliation of Gross Profit to Adjusted
Gross Profit
Three Months
Ended September
30, 2017
Three Months
Ended September
30, 2016
Nine Months
Ended September
30, 2017
Nine Months
Ended September
30, 2016
(In thousands)
Gross profit $ 66,733 $ 77,008 $ 241,092 $ 209,774
Add (deduct):
Restructuring and other charges (a) 1,028 743 6,528 785
Weather related costs (b) 760 — 760 —
KFPC startup costs (c) 2,342 — 7,662 —
Non-cash compensation expense 133 128 442 436
Spread between FIFO and ECRC 34,451 (5,001) (3,431) 5,807
Adjusted gross profit (non-GAAP) $ 105,447 $ 72,878 $ 253,053 $ 216,802
Sales volume (kilotons) 91.9 85.9 258.1 250.9
Adjusted gross profit per ton $ 1,148 $ 848 $ 980 $ 864
a) Severance expenses and other restructuring related charges.
b) Costs related to Hurricane Harvey and Hurricane Irma.
c) Startup costs related to the joint venture company, KFPC.
Kraton Third Quarter 2017 Earnings Call 16
Reconciliation of Net Income to Operating Income to
Non-GAAP Financial Measures
Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income (loss) attributable to Kraton $ (4,033) $ 15,560
Net loss attributable to noncontrolling interest (818) (717)
Consolidated net income (loss) (4,851) 14,843
Add (deduct):
Income tax expense (benefit) (2,165) 2,198
Interest expense, net 33,017 33,870
Earnings of unconsolidated joint venture (125) (94)
Loss on extinguishment of debt 15,632 —
Operating income $ 17,802 $ 23,706 41,508 $ 28,728 $ 22,089 50,817
Add (deduct):
Depreciation and amortization 17,342 16,965 34,307 14,977 17,000 31,977
Loss on extinguishment of debt (15,632) — (15,632) — — —
Earnings of unconsolidated joint venture 125 — 125 94 — 94
EBITDA 19,637 40,671 60,308 43,799 39,089 82,888
Add (deduct):
Transaction, acquisition related costs,
restructuring, and other costs (a) 2,240 61 2,301 7,216 530 7,746
Loss on extinguishment of debt 15,632 — 15,632 — — —
Weather related costs (b) 760 1,320 2,080 — — —
KFPC startup costs (c) 2,424 — 2,424 1,421 — 1,421
Non-cash compensation expense 2,219 — 2,219 2,141 — 2,141
Spread between FIFO and ECRC 34,451 2,272 36,723 (5,001) 1,879 (3,122)
Adjusted EBITDA $ 77,363 $ 44,324 $ 121,687 $ 49,576 $ 41,498 $ 91,074
a) Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.
b) Costs related to Hurrican Harvey and Hurrican Irma.
c) Startup costs related to the joint venture company, KFPC.
Kraton Third Quarter 2017 Earnings Call 17
Reconciliation of Net Income to Operating Income to
Non-GAAP Financial Measures
Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income attributable to Kraton $ 27,941 $ 111,048
Net loss attributable to noncontrolling interest (5,178) (1,792)
Consolidated net income 22,763 109,256
Add (deduct):
Income tax benefit (expense) 2,907 (83,024)
Interest expense, net 101,766 101,450
Earnings of unconsolidated joint venture (370) (274)
Loss on extinguishment of debt 35,370 13,423
Disposition and exit of business activities — (40,001)
Operating income $ 95,572 $ 66,864 162,436 $ 59,936 $ 40,894 100,830
Add (deduct):
Depreciation and amortization 50,439 51,601 102,040 45,199 48,714 93,913
Disposition and exit of business activities — — — 40,001 — 40,001
Loss on extinguishment of debt (35,370) — (35,370) (13,423) — (13,423)
Earnings of unconsolidated joint venture 370 — 370 274 — 274
EBITDA 111,011 118,465 229,476 131,987 89,608 221,595
Add (deduct):
Transaction, acquisition related costs,
restructuring, and other costs (a) 11,493 (509) 10,984 19,255 7,773 27,028
Disposition and exit of business activities — — — (40,001) — (40,001)
Loss on extinguishment of debt 35,370 — 35,370 13,423 — 13,423
Effect of purchase price accounting on
inventory valuation (b) — — — — 24,719 24,719
Weather related costs (c) 760 1,320 2,080 — — —
KFPC startup costs (d) 9,664 — 9,664 3,280 — 3,280
Non-cash compensation expense 7,366 — 7,366 7,272 — 7,272
Spread between FIFO and ECRC (3,431) (2,771) (6,202) 5,807 13,788 19,595
Adjusted EBITDA $ 172,233 $ 116,505 $ 288,738 $ 141,023 $ 135,888 $ 276,911
a) Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.
b) Higher costs of goods sold for our Chemical segment related to the fair value adjustment in purchase accounting for their inventory.
c) Costs realted to Hurricane Harvey and Hurricane Irma.
d) Startup costs related to the joint venture company, KFPC.
Kraton Third Quarter 2017 Earnings Call 18
Reconciliation of Diluted EPS to Adjusted Diluted EPS
a) Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.
b) Costs related to Hurricane Harvey and Hurricane Irma.
c) We had higher costs of goods sold for our Chemical segment related to the fair value adjustment in purchase accounting for their inventory.
d) Startup costs related to the joint venture company, KFPC.
e) Reduction of income tax valuation allowance related to the assessment of our ability to utilize net operating losses in future periods.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2017 2016 2017 2016
Diluted earnings (loss) per share $ (0.13) $ 0.49 $ 0.88 $ 3.56
Transaction, acquisition related costs, restructuring, and other costs (a) 0.05 0.20 0.25 0.72
Disposition and exit of business activities — — — (0.82)
Loss on extinguishment of debt 0.32 — 0.72 0.28
Weather related costs (b) 0.04 — 0.04 —
Effect of purchase price accounting on inventory valuation (c) — — — 0.63
KFPC startup costs (d) 0.04 0.02 0.16 0.04
Valuation allowance (e) — — — (2.77)
Spread between FIFO and ECRC 1.19 (0.08) (0.17) 0.43
Adjusted diluted earnings per share (non-GAAP) $ 1.51 $ 0.63 $ 1.88 $ 2.07