Kraton Performance Polymers, Inc. Announces Second Quarter 2016 Results

HOUSTON, July 27, 2016 /PRNewswire/ — Kraton Performance Polymers, Inc. (NYSE: KRA), a leading global producer of styrenic block copolymers, specialty polymers, and value-added specialty products primarily derived from renewable sources, announces financial results for the quarter ended June 30, 2016.

2016 SECOND QUARTER HIGHLIGHTS

“Our second quarter 2016 results reflect strong sales volume growth in our Polymer segment and a sequential improvement in profitability in our Chemical segment. Sales volume in our Polymer segment was up nearly 18% compared to the second quarter 2015, with increased sales volume for each product group: Cariflex was up 30%, Specialty Polymers was up more than 10%, and Performance Products was up 19%, with a notable improvement in paving and roofing sales volumes compared to the year-ago quarter. This strong overall sales volume growth in our Polymer segment was a significant contributor to improved profitability for the segment, with second quarter 2016 adjusted EBITDA of $39.2 million, up from $25.1 million in the second quarter 2015,” said Kevin M. Fogarty, Kraton’s President and Chief Executive Officer. 

“In our Chemical segment, adjusted EBITDA for the second quarter 2016 was $53.5 million, with an associated margin of 29%, reflecting a sequential improvement of 31% compared to the first quarter of 2016. We continue to experience success in creating new flexible outlets for various streams in our Chemical Intermediates product group, with core volume up 11% compared to the first quarter of 2016,” said Fogarty.

“As previously stated, 2016 can best be described as a year of execution for Kraton. Specifically, integrating our transformational acquisition of Arizona Chemical, and this includes capturing a significant portion of the cost-based synergy target of $65 million. For our Polymer segment, we are making meaningful progress on several key strategic initiatives considered essential to realize the remaining $50 million of our 2018 target of $70 million. Overall, we are very pleased with our progress for the first half of 2016. We expect to realize at least $21 million in Arizona Chemical acquisition synergies in 2016.  Moreover, in the process, we have successfully integrated all major functions, including executive and manufacturing leadership, finance, information technology, legal and human resources. We are equally very pleased with the response this combination has received from our global customers, particularly those with whom we have long-standing commercial relations across both segments. While cross-selling was not highlighted as targeted synergy in a direct sense, as 100% of the $65 million target is truly cost-based, we believe with time our combined innovation focus will lead to accelerated sales and market development,” added Fogarty.

“Regarding our Polymer segment initiatives, including a targeted $50 million inventory reduction by 2018, we continue to make good progress, including the planned direct coupling of our Cariflex latex manufacturing with polymerization on site in Brazil, expanding our USBC manufacturing capability in France, and preparing for the start-up of our new state-of-the-art 30 kiloton HSBC plant in Taiwan. Lastly, regarding the HSBC facility specifically, we are very pleased to announce that we now expect the capital cost to be approximately $185 million, well below our initial estimate of more than $200 million,” Fogarty added. 

 

 

Consolidated Results

Q2 2016 VERSUS Q2 2015 RESULTS

Revenue was $454.6 million for the three months ended June 30, 2016 compared to $255.9 million for the three months ended June 30, 2015, an increase of $198.7 million or 77.7%, of which $184.5 million relates to our Chemical segment. The positive effect from currency movements increased revenue by $1.9 million. The remaining $12.3 million increase was attributable to our Polymer segment, which showed an increase of $45.6 million due to higher sales volumes, partially offset by lower average selling prices amounting to $33.4 million, driven by lower average raw material costs. 

Gross profit was $131.9 million for the three months ended June 30, 2016 compared to $47.4 million for the three months ended June 30, 2015, an increase of $84.5 million or 178.1%, of which $64.7 million relates to our Chemical segment.

Research and development expenses were $10.1 million for the three months ended June 30, 2016 compared to $7.8 million for the three months ended June 30, 2015, an increase of $2.3 million or 29.7%, of which $2.9 million related to our Chemical segment. 

Selling, general, and administrative expenses were $43.2 million for the three months ended June 30, 2016 compared to $23.6 million for the three months ended June 30, 2015, an increase of $19.6 million or 82.9%, of which $16.1 million relates to our Chemical segment and $4.9 million relates to increased transaction and acquisition costs. Selling, general, and administrative transaction synergies of $3.7 million were realized during the three months ended June 30, 2016.

Interest expense, net was $33.7 million for the three months ended June 30, 2016 compared to $5.7 million for the three months ended June 30, 2015, an increase of $28.0 million. The increase is primarily due to additional indebtedness related to the Arizona Chemical Acquisition.

Net income attributable to Kraton was $7.4 million or $0.24 per diluted share for the three months ended June 30, 2016, an increase of $13.0 million compared to net loss of $5.6 million or $0.18 per diluted share for the three months ended June 30, 2015. Adjusted diluted earnings per share (non-GAAP) was $0.63 for the three months ended June 30, 2016 compared to $0.02 for the three months ended June 30, 2015. See a reconciliation of GAAP earnings (loss) per diluted share to non-GAAP adjusted earnings (loss) per diluted share below.

YTD 2016 VERSUS YTD 2015 RESULTS

Revenue was $874.6 million for the six months ended June 30, 2016 compared to $517.3 million for the six months ended June 30, 2015, an increase of $357.2 million or 69.1%, of which $361.4 million relates to our Chemical segment. The negative effect from currency movements reduced revenue by $1.8 million. The remaining $2.4 million decline was attributable to our Polymer segment, which experienced lower average selling prices amounting to $53.5 million primarily driven by lower average raw material costs, partially offset by an increase of $51.1 million due to higher sales volumes.

Gross profit was $225.7 million for the six months ended June 30, 2016 compared to $94.0 million for the six months ended June 30, 2015, an increase of $131.7 million or 140.1%. The increase includes gross profit of $92.9 million from our Chemical segment, which includes $24.7 million of higher costs of goods sold related to the full amortization of the fair value adjustment in purchase accounting for inventory.

Research and development expenses were $20.7 million for the six months ended June 30, 2016 compared to $15.7 million for the six months ended June 30, 2015, an increase of $4.9 million or 31.4%, of which $5.6 million relates to our Chemical segment. 

Selling, general, and administrative expenses were $93.1 million for the six months ended June 30, 2016 compared to $50.6 million for the six months ended June 30, 2015, an increase of $42.5 million or 84.1%, of which $36.8 million relates to our Chemical segment and a $10.2 million increase in transaction and acquisition costs. Selling, general, and administrative transaction synergies of $5.4 million were realized during the six months ended June 30, 2016.

Interest expense, net was $67.6 million for the six months ended June 30, 2016 compared to $11.8 million for the six months ended June 30, 2015, an increase of $55.8 million. The increase is primarily due to additional indebtedness related to the Arizona Chemical Acquisition.

Income tax benefit was $85.2 million and income tax expense was $1.1 million for the six months ended June 30, 2016 and 2015, respectively. Following the completion of the Arizona Chemical Acquisition, we reassessed the need for a valuation allowance against our U.S. net operating loss deferred tax assets and released $86.6 million of the previously recorded valuation allowance.

Net income attributable to Kraton was $95.5 million or $3.07 per diluted share for the six months ended June 30, 2016, an increase of $110.5 million compared to net loss of $15.0 million or $0.48 per diluted share for the six months ended June 30, 2015. Adjusted diluted earnings per share (non-GAAP) was $1.44 for the six months ended June 30, 2016 compared to $0.78 for the six months ended June 30, 2015. See a reconciliation of GAAP earnings (loss) per diluted share to non-GAAP adjusted earnings (loss) per diluted share below.

 

 

Q2 2016 VERSUS Q2 2015 RESULTS

Revenue for the Polymer segment was $270.1 million for the three months ended June 30, 2016 compared to $255.9 million for the three months ended June 30, 2015, an increase of $14.2 million or 5.6%. The increase was due to higher sales volumes of $45.6 million, partially offset by lower average selling prices amounting to $33.4 million, which were primarily driven by lower average raw material costs. Sales volumes were 89.8 kilotons for the three months ended June 30, 2016, an increase of 13.6 kilotons or 17.9%.

With respect to revenue for the Polymer segment product groups:

For the three months ended June 30, 2016, the Polymer segment operating income was $17.3 million compared to $0.6 million for the three months ended June 30, 2015.

For the three months ended June 30, 2016, the Polymer segment generated adjusted EBITDA (non-GAAP) of $39.2 million compared to $25.1 million for the three months ended June 30, 2015. The negative effect of currency fluctuations was $1.5 million. Adjusted EBITDA (non-GAAP) increased $14.1 million, or 56.0%, as a result of increased sales volumes and lower costs, partially offset by lower unit margins, including the effect of product mix. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below. We continued to execute our strategic cost reduction program and we realized an additional $3.1 million of cost reductions.

YTD 2016 VERSUS YTD 2015 RESULTS

Revenue for the Polymer segment was $513.2 million for the six months ended June 30, 2016 compared to $517.3 million for the six months ended June 30, 2015, a decrease of $4.2 million or 0.8%. The decline was primarily due to lower average selling prices amounting to $53.5 million, primarily driven by lower average raw material costs, partially offset by an increase of $51.1 million due to higher sales volumes. Sales volumes were 164.9 kilotons for the six months ended June 30, 2016, an increase of 14.3 kilotons or 9.5%.

With respect to revenue for the Polymer segment product groups:

For the six months ended June 30, 2016, the Polymer segment operating income was $31.2 million compared to an operating loss of $3.0 million for the six months ended June 30, 2015.

For the six months ended June 30, 2016, the Polymer segment generated $91.4 million of adjusted EBITDA (non-GAAP) compared to $74.4 million for the six months ended June 30, 2015. The negative effect of currency fluctuations was $2.7 million. Adjusted EBITDA (non-GAAP) increased $17.1 million or 22.9%, as a result of increased sales volumes and lower costs, partially offset by lower unit margins, including the effect of product mix. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below. We continued to execute our strategic cost reduction program and realized an additional $6.8 million of cost reductions.

Chemical Segment

The results for the Chemical segment are included in the consolidated financial statements for the period January 6, 2016 to June 30, 2016.  The 2015 amounts have been derived from the Arizona Chemical historical operating results and are being included for comparative purposes only. 

 

 

Q2 2016 VERSUS Q2 2015 RESULTS

Revenue for the Chemical segment was $184.5 million for the three months ended June 30, 2016 compared to $209.5 million for the three months ended June 30, 2015, a decrease of $25.0 million or 11.9%. Sales volumes were 108.9 kilotons for the three months ended June 30, 2016 compared to 110.5 kilotons for the three months ended June 30, 2015, a decrease of 1.6 kilotons or 1.5%.

With respect to revenue for the Chemical segment product groups:

For the three months ended June 30, 2016, the Chemical segment operating income was $29.5 million.  

For the three months ended June 30, 2016, the Chemical segment generated adjusted EBITDA (non-GAAP) of $53.5 million. The positive effect of currency fluctuations was $0.2 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

YTD 2016 VERSUS YTD 2015 RESULTS

Revenue for the Chemical segment was $361.4 million from the date of the acquisition to June 30, 2016 compared to $413.5 million for the six months ended June 30, 2015, a decrease of $52.1 million, or 12.6%. Sales volumes were 203.7 kilotons for the period from January 6, 2016 through June 30, 2016 compared to 210.6 kilotons for the six months ended June 30, 2015, a decrease of 6.9 kilotons or 3.3%.

With respect to revenue for the Chemical segment product groups:

From the date of acquisition to June 30, 2016, the Chemical segment operating income was $18.8 million.  

From the date of acquisition to June 30, 2016, the Chemical segment generated adjusted EBITDA (non-GAAP) of $94.4 million. The negative effect of currency movements aggregating $1.6 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

CASH FLOW AND CAPITAL STRUCTURE

In connection with the Arizona Chemical Acquisition, we entered into a $1,350.0 million six-year senior secured first lien term loan facility and issued $440.0 million in aggregate principal amount of 10.5% senior notes due 2023.  In addition, we entered into a $250.0 million five-year asset-based revolving credit facility, of which $30.0 million was outstanding as of June 30, 2016.  We applied a portion of the acquisition-related proceeds to prepay our previously issued 6.75% Senior Notes ($350.0 million principal amount plus fees and expenses of $8.0 million) and fund $57.6 million of debt issuance costs. 

During the first quarter of 2016, we applied the $72.0 million of proceeds from the sale of assets relating to our compounding business to lower term loan indebtedness, which was partially offset by an aggregate of $36.0 million of cash outflows associated with transaction and integration costs, payment of variable compensation earned in 2015, and costs to achieve synergies. In the second quarter Kraton net debt was reduced by an additional $47.9 million.

Summary of principal amounts for indebtedness and net debt:

 

 

OUTLOOK

In the second quarter 2016, we began to see increasing signs of weakness in the global adhesive markets, which we believe will impact our results for our adhesive sales in both our Polymer and Chemical segments for the remainder of the year. In our Polymer segment, the combination of abundant global SIS capacity and increased availability of low cost isoprene, in absence of alternative market outlets has intensified pricing pressure for certain of our SIS product grades. In our Chemical segment, an increased supply of low cost C5 based hydrocarbon tackifier resins has also created price pressure for our pine-based adhesive products. As a result of these market conditions, we are modifying our 2016 Adjusted EBITDA range to $370 – $380 million from our earlier guidance of $370 – $390 million.

We continue to expect Kraton net debt to be approximately $1.6 billion at December 31, 2016.

We currently estimate that our results in the third quarter 2016 will reflect a positive spread between FIFO and ECRC of less than $5 million.

We have not reconciled adjusted EBITDA guidance to net income (loss) because we do not provide guidance for net income (loss) or for items that we do not consider indicative of our on-going performance, including, but not limited to, transaction and acquisition costs and costs associated with dispositions, business exits, and production downtime, as certain of these items are out of our control and/or cannot be reasonably predicted. Accordingly, a reconciliation of the non-GAAP financial measure guidance to the corresponding GAAP measures is not available without unreasonable effort.

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, and Adjusted Net Income attributable to Kraton (or earnings per share). Tables included in this earnings release 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 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, 2015.

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, 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 GAAP in the United States. For EBITDA, which represents net income before interest, taxes, depreciation and amortization, these limitations include: EBITDA does not reflect the significant interest expense on our debt; EBITDA does not 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; and Adjusted EBITDA may, and often will, vary significantly from EBITDA calculations under the terms of our debt agreements and should not be used for assessing compliance or non-compliance with financial covenants under our debt agreements. 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. Finally, we prepare Adjusted Net Income attributable to Kraton by eliminating from net income (loss) the impact of a number of items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC. Our presentation of non-GAAP financial measures and the adjustments made therein should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, and in the future we may incur expenses or charges similar to the adjustments made in the presentation of our non-GAAP financial measures.

CONFERENCE CALL AND WEBCAST INFORMATION

Kraton has scheduled a conference call on Thursday, July 28, 2016 at 9:00 a.m. (Eastern Time) to discuss second quarter 2016 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 800-857-6511. 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 28, 2016 through 1:59 a.m. (Eastern Time) on August 11, 2016. 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 800-945-7832.

ABOUT KRATON

Kraton Performance Polymers, Inc. (NYSE “KRA”) is a leading global producer of styrenic block copolymers, specialty polymers and high-value performance products derived from renewable sources.  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 chemical intermediates 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 the “Giving Innovators their Edge” tagline are all trademarks of Kraton Polymers LLC.

FORWARD LOOKING STATEMENTS

Some of the statements 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 characterized by the use of words such as “outlook,” “believes,” “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 outlook for SIS product grades and adhesive product offerings, full year 2016 guidance for adjusted EBITDA, expectation of Kraton net debt at December 31, 2016 and third quarter 2016 guidance on the positive spread between FIFO and ECRC.

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, 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.

For Further Information:
H. Gene Shiels
Director of Investor Relations
(281) 504-4886

 

 

 

 

 

 

 

 

 

We reconcile Earnings (Loss) Per Diluted Share to Adjusted Earnings Per Diluted Share (non-GAAP) as follows:

 

 

 

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SOURCE Kraton Performance Polymers, Inc.

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