Kraton Corporation Announces Second Quarter 2017 Results

HOUSTON, July 26, 2017 /PRNewswire/ -- Kraton Corporation (NYSE: KRA), a leading global producer of styrenic block copolymers, specialty polymers and high-value performance products derived from pine wood pulping co-products, announces financial results for the quarter ended June 30, 2017.

2017 SECOND QUARTER SUMMARY

• Second quarter consolidated revenue of $525.3 million, up 15.5% compared to the second quarter 2016
• Second quarter consolidated net income of $25.5 million was up from $7.4 million in the second quarter 2016
• Second quarter Adjusted EBITDA⁽¹⁾ of $101.5 million, up 9.4% compared to the second quarter 2016
• Polymer segment Adjusted EBITDA⁽¹⁾ of $62.8 million, with an associated margin⁽²⁾ of 18.7%, up $23.6 million or 60.2% compared to the second quarter 2016
• Polymer segment margin⁽²⁾ up 690 basis points sequentially, reflecting expected recovery following significant first quarter 2017 raw material cost inflation
• Chemical segment Adjusted EBITDA⁽¹⁾ of $38.7 million with an associated margin⁽²⁾ of 20.3%, up $5.1 million sequentially, with a 240 basis point improvement in associated margin⁽²⁾
• Sequential increase reflects improvement in tall oil fatty acid pricing, stabilization of market dynamics associated with hydrocarbon-based C5 alternatives, and incremental synergy capture
• Delivered incremental cost reductions and synergies of $13.3 million, expect full realization of $65 million of transaction synergies by year-end 2017, one year ahead of plan

"We delivered $101.5 million of Adjusted EBITDA in the second quarter 2017, which represents a margin of 19.3%. Both our Polymer and Chemical segments experienced solid end market demand fundamentals and sequential margin expansion. In addition, we delivered an incremental $13 million of cost improvement and synergy capture initiatives in the quarter, making the total for the first six months $26 million, well ahead of the plan we outlined at the beginning of the year. With a $37 million reduction in Kraton net debt in the last two months of the quarter, we remain on track to reduce Kraton net debt by $100 million to $150 million in 2017," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer.

Our Polymer segment posted strong results in the quarter, delivering Adjusted EBITDA of $62.8 million with an associated margin of 18.7%. This represents nearly $24 million of growth and over 400 basis points of improvement in margin, demonstrating the effective pass through of raw material cost inflation," said Fogarty. "Following the sharp increase in raw material prices in the first quarter 2017, raw material costs declined significantly in the second quarter and into July, returning to levels we believe are more indicative of structural market balances, and underlying energy costs. We expect relative stability in raw material costs and segment margins for the balance of the year," Fogarty added.   

"Our Chemical segment second quarter Adjusted EBITDA was $38.7 million, or 20.3% of revenue, which showed sequential improvement compared to the first quarter of 2017. Second quarter results for our adhesives business reflect stabilization of the market dynamics associated with the availability of low-cost C5 hydrocarbon alternatives. In addition we saw improved margins for tall oil fatty acid products, driven by previously announced price increases," said Fogarty. "In the quarter we saw continued success in delivering transaction synergies. Based upon our success to date, we now expect to deliver the full $65 million of transaction synergies associated with the Arizona Chemical acquisition by year-end 2017, one year earlier than originally planned," Fogarty said.

"We remain on track to deliver our planned $70 million of cost reductions for the Polymer segment by year-end 2018. Our conversion to the 'direct connect' process for our Cariflex business has gone extremely well, and we currently expect to complete our USBC expansion in France, by year-end 2017. The qualification process at our new HSBC plant in Taiwan continued during the second quarter and we saw the first shipment of commercial product grades from the plant. We look forward to the incremental contribution of the plant to our cost optimization efforts as commercial volumes expand in late 2017  and into 2018," added Fogarty.

Status of Synergies, Operational Improvement, and Cost Reduction Initiatives

We previously announced synergies and operational improvement initiatives associated with our January 6, 2016 acquisition of Arizona Chemical (the "Arizona Chemical Acquisition") and a cost reduction initiative targeted at lowering costs in our Polymer segment. Following is a summary of the status of these initiatives:

Polymer Segment

Q2 2017 VERSUS Q2 2016 RESULTS

Revenue for the Polymer segment was $335.1 million for the three months ended June 30, 2017 compared to $270.1 million for the three months ended June 30, 2016. Revenue increased in each of our product groups, which was attributable to higher average selling prices resulting from higher raw material costs. Sales volumes of 89.6 kilotons were essentially flat for the three months ended June 30, 2017 compared to three months ended June 30, 2016. Cariflex volumes increased 2.0%, Specialty Polymers volumes increased 3.7%, and Performance Products volumes decreased 1.6%. The negative effect from changes in currency exchange rates between the periods was $4.4 million.

For the three months ended June 30, 2017, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $62.8 million compared to $39.2 million for the three months ended June 30, 2016. The increase was due to improved unit margins, primarily driven by higher prices, including favorable product mix. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

Chemical Segment

The following results of operations for the Chemical segment have been included in our consolidated results since January 6, 2016.

Q2 2017 VERSUS Q2 2016 RESULTS

Revenue for the Chemical segment was $190.2 million for the three months ended June 30, 2017 compared to $184.5 million for the three months ended June 30, 2016. The increase was primarily due to increased revenue in Performance Chemicals, attributable to higher selling prices. Total sales volumes were 101.6 kilotons for the three months ended June 30, 2017, a decrease of 7.3 kilotons or 6.7%. Adhesives volumes increased 6.6%, Performance Chemicals volumes decreased 12.7%, Roads and Construction volumes decreased 4.8%, and Tires volumes increased 7.4%. The negative effect from changes in currency exchange rates between the periods was $2.5 million.

For the three months ended June 30, 2017, the Chemical segment generated $38.7 million of Adjusted EBITDA (non-GAAP) compared to $53.5 million for the three months ended June 30, 2016. The decrease in Adjusted EBITDA was primarily due to lower margins indicative of the continued impact of low-cost C5 hydrocarbon alternatives and pricing pressure for TOFA and TOR products, and to a lesser extent decreased sales volumes. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

CASH FLOW AND CAPITAL STRUCTURE

During the six months ended June 30, 2017 (excluding borrowings under the Kraton Formosa Polymers Corporation (KFPC) Loan Agreement) we increased Kraton Corporation indebtedness by $7.5 million, while decreasing cash on hand (excluding KFPC cash) by approximately $10.3 million.

Summary of principal amounts for indebtedness and a reconciliation of Kraton debt to Kraton net debt and consolidated net debt (non-GAAP):

USE OF NON-GAAP FINANCIAL MEASURES

This press release includes the use of both GAAP and non-GAAP financial measures. The non-GAAP financial measures are EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Diluted Earnings per Share, and Net Debt. Tables included in this earnings release reconcile each of these non-GAAP financial measures with the most directly comparable U.S. 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 Management's Discussion and Analysis of Financial Condition and Results of Operations in 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 of our performance and believe they are frequently used by investors, securities analysts and other interested parties in the evaluation of our performance including period-to-period comparisons and/or that of other companies in our industry. Further, management uses these measures to evaluate operating performance, and our incentive compensation plan bases incentive compensation payments on our Adjusted EBITDA performance and attainment of net debt, along with other factors. These non-GAAP financial measures have limitations as analytical tools and in some cases can 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 U.S. 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. The calculation of EBITDA in our debt agreements includes adjustments, such as extraordinary, non-recurring or one-time charges, proforma cost savings, certain non-cash items, turnaround costs, and other items included in the definition of EBITDA in the debt 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, including the spread between FIFO and ECRC, 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 basis, if applicable). Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business.

Adjusted Diluted Earnings Per Share: We prepare Adjusted Diluted Earnings per Share by eliminating from Diluted Earnings (loss) per Share the impact of a number of non-recurring items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC.

Net Debt: We define net debt for Kraton as total debt (excluding debt of KFPC) less cash and cash equivalents. We define consolidated net debt as Kraton net debt plus debt of KFPC less KFPC's cash and cash equivalents. Management uses net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using net debt is useful to investors in determining our leverage since we could choose to use cash and cash equivalents to retire debt. In addition, management believes that presenting Kraton's net debt excluding KFPC is useful because KFPC has its own capital structure.

CONFERENCE CALL AND WEBCAST INFORMATION

Kraton has scheduled a conference call on Thursday, July 27, 2017 at 9:00 a.m. (Eastern Time) to discuss second quarter 2017 financial results. Kraton invites you to listen to the conference call, which will be broadcast live over the internet at www.kraton.com, by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page.

You may also listen to the conference call by telephone by contacting the conference call operator 5 to 10 minutes prior to the scheduled start time and asking for the "Kraton Conference Call – Passcode: Earnings Call." U.S./Canada dial-in 800-839-6511. International dial-in #: 210-839-8886.

For those unable to listen to the live call, a replay will be available beginning at approximately 11:00 a.m. (Eastern Time) on July 27, 2017 through 1:59 a.m. (Eastern Time) on August 16, 2017. To hear a replay of the call over the Internet, access Kraton's Website at www.kraton.com by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page. To hear a telephonic replay of the call, dial 800-328-8402 or 203-369-3247.

ABOUT KRATON CORPORATION

Kraton Corporation (NYSE: KRA) is a leading global producer of styrenic block copolymers, specialty polymers and high-value performance products derived from pine wood pulping co-products. Kraton's polymers are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants and lubricants, and medical, packaging, automotive, paving and roofing applications. As the largest global provider in the pine chemicals industry, the company's pine-based specialty products are sold into adhesive, road and construction and tire markets, and it produces and sells a broad range of performance chemicals into markets that include fuel additives, oilfield chemicals, coatings, metalworking fluids and lubricants, inks, flavors and fragrances and mining. Kraton offers its products to a diverse customer base in numerous countries worldwide.

Kraton, the Kraton logo and design, and Cariflex are all trademarks of Kraton Polymers LLC or its affiliates.

FORWARD LOOKING STATEMENTS

Some of the statements and information in this press release contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This press release 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," "target," "estimates," "expects," "projects," "may," "intends," "plans", "on track", or "anticipates," or by discussions of strategy, plans or intentions, including all matters described on the section titled "Outlook" including, but not limited to our expectations with respect to stability in raw material costs, segment margins, synergy capture, cost reductions, and operational improvements.

All forward-looking statements in this press release are made based on management's current expectations and estimates, which involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause actual results, performance or our achievements, or industry 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. There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information. 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.

For Further Information:
H. Gene Shiels 281-504-4886

SOURCE Kraton Corporation