Kraton Corporation Investor Presentation December 2019
Transcript of Kraton Corporation Investor Presentation December 2019
Kraton Corporation Investor Presentation
December 2019
Kraton Overview 2
DisclaimersForward 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 thatreflect 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 our expectations regarding all matters described on the slides titled “2019 ModelingAssumptions” and “2019 Outlook”, or the sections titled “Plan for 2019 and Beyond”; as well as our expectations for targeted debt reduction, 2019 Adjusted EBITDA, growth expectations, capacity additions, operational reliability, ourshare repurchase program and the actions pursuant to, and results from our strategic plan, including but not limited to a potential sale of our Cariflex business.
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 actualresults 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 relatedto: 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; natural disasters and weather conditions and other factors of which we are currently unaware or deem immaterial. Readers are cautioned not toplace 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.
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, 2018.
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 asanalytical 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 operatingincome 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 orreflect 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 underour 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 issubject 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 thefuture 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. Inaddition, 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 AdjustedEBITDA 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 defineAdjusted 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 materialprices. Certain amounts reported in the prior periods have been reclassified to conform to the current reporting presentation.
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 and Consolidated 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 Kraton FormosaPolymers (KFPC) joint venture 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 debtobligations. Consolidated Net Debt, as adjusted for foreign exchange impact accounts for the FX effect on the Euro Tranche of our Term Loan.
Consolidated Net Debt Leverage Ratio: The consolidated net debt leverage ratio is defined as consolidated net debt as of the balance sheet date divided by Adjusted EBITDA for the twelve months then ended. Our use of this term mayvary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.
Kraton at a Glance
Kraton Overview 4
4
Our innovations
improve the quality of
countless everyday
items that enhance
your way of life.
Baby DiapersOur innovations provide
the excellent recovery to
withstand repeated pull
up-and-down cycles along
with stretch, fit and
breathability so young
ones can continue
to be on the move.
Roads Kraton innovations allow for the
development of highly modified
asphalt designed to withstand
extreme hot or cold weather as well
as high traffic.
A longer lasting road and shorter
reconstruction time allow for a safer
driving experience while reducing
carbon footprint.
Fiber Optic Cables In a constantly connected world, we
rely on fiber optic cables to keep our
cellphone data and internet lines
running.
Kraton polymers protect the cable’s
fiber by reducing the likelihood of
water penetration, allowing for fast and
continuous contact with everyone
around you.
Wood CoatingsA protective layer of alkyd-
based coating or varnish will
protect your wooden floors
and stairs while keeping
them looking new.
Kraton – A Part of Your Daily Life
Kraton Overview
Our Products
Our SBC polymers are a class of
thermoplastic elastomers, which is
a plastic material that behaves like
rubber, delivering both strength
and elasticity.
Our biobased pine chemistry enables
numerous industries to replace non-
renewable resources with high-
performance, sustainable
alternatives.
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Kraton Overview 6
Kraton’s History - 50+ Years of Innovation and Growth
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Kraton Overview 7
Kraton At a Glance
Revenue
$2.0 Billion
Adjusted EBITDA (1) Margin
18.8%
(1) See our earnings releases, available under the Investor Relations tab of our website at www.kraton.com, for reconciliations of GAAP financial measures to non-GAAP financial measures.(2) 2018 Revenue
Polymer Segment
$1.2 Billion(2)
Cariflex (15%)▪ Surgical gloves & condoms
▪ Medical Applications
▪ Coatings
▪ Specialized footwear
Specialty Polymers (33%)▪ Consumer products
▪ Wire & cable insulation
▪ Diapers & personal care products
▪ Lubricant additives
▪ Medical applications
Performance Products (52%)▪ Paving & roofing
▪ Packaging & Industrial adhesives
▪ Printing plates
▪ Personal care
Chemical Segment
$790 Million(2)
Adhesives (36%)▪ Tapes & labels
▪ Assembly
▪ Packaging
▪ Pavement marking
Performance Chemicals (58%)▪ Coatings
▪ Fuel additives
▪ Metalworking fluids & lubricants
▪ Oilfield chemicals
▪ Mining
▪ Paper sizing & spot markets
Tires (6%)▪ High performance tires
▪ Winter tires
▪ All-season tires
Segment Highlights
Kraton Overview
Kraton Corporation | December 2019 Kraton Overview 8
Organic Growth
Portfolio Management
Operational Excellence
Capital Discipline
Kraton’s Strategic Focus
▪ Targeted Innovation
▪ Continued Portfolio Shift
▪ Commercialization of New Products
▪ Disciplined approach
▪ Best owner mentality
▪ Cost Competitiveness
▪ Capability & Process Improvement
▪ Total Quality
▪ Bench Strength
▪ Work safely
Expand
Specialty
Portfolio
▪ Focus on cash generation and debt reduction
▪ Maintain Prudent Capital Structure
▪ Geographic and End-market Expansion
▪ Application Development
▪ Leverage Capacity Expansions
Kraton Overview 9
Wesseling, GermanyManufacturing Facility
Berre, FranceManufacturing Facility
Belpre, OHManufacturing Facility
Paulinia, BrazilManufacturing Facility
Mailiao, TaiwanKFPC JV Manufacturing Facility
Kashima, JapanJV Manufacturing Facility
Dover, OHManufacturing Facility
Savannah, GAManufacturing Facility
“BLS” acidulation capabilities
Pensacola, FLManufacturing Facility
Panama City, FLManufacturing Facility
“BLS” acidulation capabilities
Niort, FranceManufacturing Facility
Sandarne, SwedenManufacturing Facility
Oulu, FinlandManufacturing Facility
Gersthofen, GermanyManufacturing Facility
Kraton refineries located in close proximity to some of the world’s largest kraft pulp supplies
Kraton’s Global Footprint
Kraton’s Innovation Focus
Kraton Overview 11
Best-in-class positions across markets, supported by
focus on innovation
Best-in-class margins across our segments
• Polymer margins >$1,000 per ton
• Chemicals margins of 15-20%
Our innovation process is driven by inside-outand outside-in approaches
• Develop breakthrough technologies
• Joint development programs
• Mega trends focus
$40+ million annual R&D investment
Global R&D footprint
• Houston, Savannah, Amsterdam, Shanghai
210 R&D scientists, engineers and staff members worldwide
Approximately 1,400 patents underpinning robust proprietary technology in specialty chemical portfolio
Kraton Overview 12
42%
34%
24%
Polymer Segment -Target Growth Markets
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Oil Gels IV Bags, Tubing Protective Films Oilfield Chemicals Soft Skins
ADDRESSABLE MARKET
▪ Fiber Optic Cable
▪ Post-tensioning
gel opportunity
being validated
in various regions
▪ Health & Beauty
Gels: Global
strategy in
development for
market
penetration
▪ Defining
NextGen
polymer for IV
films to manage
competitive
market
▪ Large market
share in high peel
segment
▪ Polymer solution
delivers unmet
market needs vs
acrylics & other
competitive HSBC
polymers
▪ New polymer
development for
medium peel PF
underway
▪ New synthetic
suspension
additives
application
▪ GM-PATAC
program on
track for launch
▪ Additional IMSS
programs
▪ 2nd Generation
IMSS technology
improvements
Protect and Promote Growth- Satisfy Unmet Needs
▪ Innovation in stable/
light color rosin
esters to meet future
market
requirements: Best in
Class Biobased Rosin
Ester
▪ Biobased
certification provides
transparency and
credibility to our
customers
▪ Kraton DX0222 for
Reactive, Higher
Temperature
Resistance Adhesives
Applications
Adhesives
Kraton Overview 13
42%
34%
24%
Chemical Segment - Target Growth Markets
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Adhesives Roadmarking Tires Dispersions Coatings
▪ Kraton with leading
position for
renewable bio-based
Tackifiers
▪ Established and
continuously
growing market
▪ Kraton most
recently introduced
next generation of
Rosin Esters
▪ These products
combine proven
advantages of Rosin
Esters with superior
color
▪ Market with
attractive growth
rates
▪ Major drivers:
Safety, self-driving
vehicles, longevity
of Roadmarking
▪ Kraton pre-launched
a unique
Roadmarking
product combining
our Polymer and
Chemical
technologies
▪ Focus on Tread
Enhancement
Additives (TEA)
▪ Kraton with
leading position in
TEA market with
attractive growth
rates
▪ Kraton most
recently launched
our new
SYLVATRAXX 8000
series
▪ Market for water-
borne tackifier
dispersions continues
to grow
▪ Asia Pacific market
with highest growth
rates
▪ Kraton in final phase
to launch our first
Dispersions
manufacturing
facility in Asia
▪ Coatings markets
with increasing
demand for
sustainable products
▪ Our Pine based Fatty
Acids combine
excellent
performance
attributes & superior
sustainability
features
▪ New TOFA grades
with superior colour
in customer tests
Pushing the limits of where our established Chemical Products can be taken
ADDRESSABLE MARKET
Kraton Overview 14
Structural Trends in Asia Driving Future Demand for HSBC and USBC
Global
HSBC&USBC
Demand
Drivers
1
2
3
4
5
Infrastructure
Spending
Automotive
Market
Increase of
Living Standard
5G Networks
Pollution
Control
▪ New roads & highways across Asia, China Belt & Road
initiative
▪ India and SEA countries moving towards PMB
▪ Continued growth or regional automotive market
▪ New design of EV cars provides opportunities for SEBS
▪ Increased demand for higher quality food packaging
▪ Increase in medical & FDA standards requiring high
purity products
▪ Continued investment in optical fiber networks
▪ Increased demand for advanced printing plates
▪ Stringent solvent emissions standards driving hot melt
adhesives
▪ Increased plastic recycling targets
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SBS Paving
Grades
IMSS, LMW
Grades
SBS & LMW
Grades
SEPS, new
CCL
Technology
LMW Grades
Polymer Segment
Kraton Overview 16
Polymer Manufacturing - Overview
#1 Monomer Preparation & Polymerization
Styrene, Butadiene and Isoprene are monomers used in the Polymers segment. These
raw materials need to be purified before going to the reactor to start the polymerization
process. Polymerization is the process of creating a long chain of monomers which stay
in a solvent phase initially. A unique feature of Kraton polymers is their block structure.
There is a special category of Kraton polymer that is hydrogenated (Kraton G) and
functionalized (Kraton FG) – enabling enhanced characteristics in the final product.
#2 Polymer Recovery from Solvent
The solvent in which the polymer is dissolved is removed subsequently. By identifying
and mitigating loss spots, solvent recovery is optimized. This recovered solvent is
purified and then recovered back to the polymerization reactor. Process optimizations
that reduce the amount of energy required in the process reduces natural gas or oil
consumption.
#3 Drying & Final Packaging
New technologies can help prevent product losses over the manufacturing process.
Polymers can have different shapes and sizes, depending on the grade. The final step of
the process is the removal of water, after which packaging takes place and products are
prepared for shipping.
Kraton Overview 17
$147 $167 $183
$223 $215
12%
16%17%
19% 18%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
$-
$50
$10 0
$15 0
$20 0
$25 0
$30 0
$35 0
$40 0
2014 2015 2016 2017
Adj. EBITDA Adj. EBITDA Margin
Americas40%
EMEA32%
Asia Pacific 28%
Revenue by Geography
Specialty Polymers
33%
Performance Products
52%
Cariflex15%
Revenue by Product Group
Polymer Segment Overview
Kraton invented Styrenic Block Copolymers (SBCs), which are highly-engineered polymers used to impart specific properties to a wide
variety of end use products
Kraton remains a leading global producer of SBCs, and within the Polymer segment, produces three primary product families
Unhydrogenated SBCs Hydrogenated SBCs CariflexTM isoprene rubber and isoprene rubber latex
Strategically focused on enhancing portfolio profitability through application of R&D and portfolio shift to higher-value products and
execution of cost-reset initiatives, to deliver $70 million of cost reductions
(1) See our earnings releases, available under the Investor Relations tab of our website at www.kraton.com, for reconciliations of GAAP financial measures to non-GAAP financial measures.
$ in millions
Revenue breakdown (2018) Historical Adjusted EBITDA(1) performance
2018
Kraton Overview 18
Unhydrogenated SBC’s
(SBS, SIS, SIBS)
Performance Products
(USBC’s)
Polymer modified asphalt,
tapes, labels non-woven
adhesives and industrial
adhesives
Hydrogenated SBC’s
(SEBS, SEPS)Specialty Polymers
(HSBC’s)
Soft Skin, Personal
Care, IV bags, Medical
Tubing,
Lubricant Additives
Isoprene rubber (IR)
and isoprene rubber
latex (IRL)
CariflexTMSurgical gloves, Condoms
Medical stoppers,
Cold seal adhesives
Monomers Products BusinessEnd Use
Applications
Butadiene StyreneIsoprene
Polymer Segment - Overview
Butadiene StyreneIsoprene
Isoprene
Chemical Segment
Kraton Overview 20
The Process from Pine to Product
#1 Tall Oil
Black liquor soap - a sidestream of the kraft pulp process - is converted to
crude tall oil. We capture the valuable substances contained in tall oil
and turn them into specialty chemicals in our biorefineries.
#2 Processing
The tall oil is pumped into our bio-refinery. Here it is distilled to extract
valuable materials. We produce tall oil fatty acids, tall oil rosin, distilled
tall oil and tall oil pitch. We call these fractions.
#3 Product Development
The fractions are refined and upgraded into a wide range of biobased
specialty chemicals. These are sold to customers who seek superior
product performance. By replacing fossil-based chemicals, customers also
achieve their sustainability goals. Our biobased products enable
customers to improve product performance, reduce GHG emissions and
enable the reuse of materials.
Kraton Overview 21
Americas46%
EMEA39%
Asia Pacific 15%
Revenue by Geography
Performance Chemials
58%
Adhesives36%
Tires6%
Revenue by Product Group
Chemical Segment - Overview
(1) See our earnings releases, available under the Investor Relations tab of our website at www.kraton.com, for reconciliations of GAAP financial measures to non-GAAP financial measures.
$ in millions
Through its Chemical segment, Kraton refines and further upgrades two primary feedstocks, Crude Tall Oil (“CTO”) and Crude Sulfate Turpentine (“CST”), into specialty chemicals. CTO and CST are wood-pulping co-products and as such, the Chemical segment’s product offering is based upon renewable resources
Kraton offers high value-added products in three target markets - Adhesives, Performance Chemicals and Tires - that offer strong potential for growth
Kraton has an advantageous feedstock position via a long-term supply agreement with International Paper
Kraton’s chemical business has a stable and diverse customer base with long-standing relationships in a broad array of end markets
Revenue breakdown (2018) Historical Adjusted EBITDA(1) performance
$192 $179 $171 $151 $163
20%
23%24%
20% 21%
10%
15%
20%
25%
30%
$-
$50
$10 0
$15 0
$20 0
$25 0
$30 0
$35 0
$40 0
2014 2015 2016 2017
Adj. EBITDA Adj. EBITDA Margin
2018
Kraton Overview 22
Raw Materials
FractionsSpecialty
ChemicalsEnd Use
Applications
Crude Tall Oil
(“CTO”)
Crude Sulfate
Turpentine
(“CST”)
Tall Oil Fatty
Acid (“TOFA”)
Dimer Acids
Polyamide Resins
Adhesives
Tires
Performance Chemicals
Distilled
Tall Oil (“DTO”)
Rosin Resins
Dispersions
Tall Oil
Rosin (“TOR”)
Upgraded Rosins
Insoluble Maleics
Pitch Terpene Resins
AMS Resins
Chemical Segment - Overview
Raw materials are a renewable resource,
derived from the Kraft pulping process
Adhesives
Tires
Performance Chemicals
Sustainability at Kraton
Kraton Overview 24
How We Create Value to Society
Kraton Overview 25
Broad Sustainability Focus
Kraton Overview 26
▪ Our biobased products provide renewable and sustainable solutions
▪ Sourced from responsibly managed forests
▪ Do not compete with land for food crops
▪ Product certification provides transparency and credibility
▪ Kraton has certified 31 product families that cover more than 100 products
▪ Our biobased products create value in many markets, such as adhesives, paints, books, tapes, fragrances, roofing materials, pavements, road markings, car tires, and fuel additives
Chemical Segment
Sustainable Bio-based Solutions
Kraton Overview 27
Universal solution for post consumer recycling and industrial waste streams
Features and Benefits:▪ Compatibilizer for PP, PE and Polar contaminants▪ Increases recycled content▪ Superior impact strength▪ Recyclable formulation▪ Cost-effective solution
Proven performance in multiple commercial applications:
▪ Consumer and Industrial Packaging ▪ Reusable bags▪ Luggage
Polymer Segment
Financial Highlights
Kraton Overview 29
(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) Accounting for lost sales associated with Hurricane Michael, Adjusted EBITDA margin would have been 19.3% for the nine months ended September 30, 2019.
Third Quarter 2019 - Consolidated Results
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 Change 2019 2018 Change
($ In millions, except per share amounts)
Revenue $ 444.2 $ 523.1 $ (78.9) $ 1,395.9 $ 1,563.9 $ (168.0)
Consolidated net income $ 20.9 $ 43.3 $ (22.4) $ 77.9 $ 51.2 $ 26.7
Diluted earnings (loss) per share $ 0.58 $ 1.31 $ (0.73) $ 2.26 $ 1.53 $ 0.73
Operating income $ 38.1 $ 72.4 (34.3) $ 129.4 $ 217.3 $ (87.9)
Adjusted EBITDA(1) $ 80.1 $ 98.7 (18.6) $ 271.5 $ 292.9 $ (21.4)
Adjusted EBITDA margin(2)(3) 18.0% 18.9% (90 bps) 19.5% 18.7% 80 bps
Adjusted diluted earnings per share(1) $ 0.52 $ 1.02 $ (0.50) $ 2.99 $ 2.49 $ 0.50
Note: May not foot due to rounding.
$38.1
$80.1
$292.9$217.3
$129.4
$72.4 $98.7
$271.5
Kraton Overview 30
Third Quarter 2019 - Polymer Segment 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(1) down $6.7 million or 11.8% vs. Q3'18
▪ Sales volume declined 10.0% vs. Q3'18▪ Cariflex volume up 18.9% on higher latex sales into
surgical glove applications▪ Specialty Polymer sales volume down 18.9% on lower
sales into lubricant additive applications and weaker demand in Asia and Europe, partially offset by innovation-led volume in N.A.
▪ Performance Products sales volume down 9.8% reflecting lower SBS sales into paving & roofing applications and lower SIS sales into adhesive applications
▪ Gross Profit of $58.5 million and Adjusted Gross Profit(1) of $947 per ton in Q3'19, compared to $981 per ton in Q3'18
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 Change 2019 2018 Change
($ In millions)
Volume (kT) 75.8 84.2 (8.4) 229.8 249.5 (19.7)
Revenue $ 261.6 $ 321.0 $ (59.4) $ 820.5 $ 948.2 $ (127.7)
Operating income $ 18.3 $ 44.9 $ (26.6) $ 62.5 $ 137.9 $ (75.4)
Adjusted EBITDA(1) $ 50.3 $ 57.0 $ (6.7) $ 158.6 $ 170.5 $ (11.8)
Adjusted EBITDA margin(2) 19.2% 17.8% 140 bps 19.3% 18.0% 130 bps
Q3'19 vs. Q3'18
Note: May not foot due to rounding.
▪ Adjusted EBITDA(1) down $11.8 million or 6.9% vs. YTD'18
▪ Sales volume declined 7.9% vs. YTD'18▪ Cariflex volume up 11.4% on higher latex sales into
surgical glove applications▪ Specialty Polymer sales volume down 12.1% reflecting
lower sales in to lubricant additive applications and weaker demand in Asia and Europe, partially offset by innovation-led volume in N.A.
▪ Performance Products sales volume down 8.3% on lower sales of SBS into paving & roofing applications and lower sales of SIS into adhesive applications
▪ Gross Profit of $191.2 million and Adjusted Gross Profit(1) of $1,013 per ton in YTD'19, compared to $1,019 per ton in YTD'18
YTD'19 vs. YTD'18
Kraton Overview 31
Third Quarter 2019 - Chemical Segment 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.(3) Accounting for lost sales associated with Hurricane Michael, Adjusted EBITDA margin would have been 19.3% for the nine months ended September 30, 2019.
▪ Adjusted EBITDA(1) down $11.9 million or 28.6% compared to Q3'18
▪ Sales volume decreased 12.8 kilotons or 12.1% vs. Q3'18 ▪ Performance Chemicals volume down 15.0% on lower
TOR demand and TOFA upgrades into oilfield and mining applications
▪ Adhesives volume down 7.5% on lower demand for rosin upgrades into adhesive and roadmarking applications
▪ Tires volume up 2.4%
▪ Adjusted EBITDA margin(2) of 16.3% vs. 20.6% in Q3'18
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 Change 2019 2018 Change
($ In millions)
Volume (kT) 93.1 105.9 (12.8) 300.6 332.7 (32.1)
Revenue $ 182.6 $ 202.1 $ (19.5) $ 575.4 $ 615.7 $ (40.3)
Operating income $ 19.8 $ 27.5 $ (7.7) $ 66.9 $ 79.4 $ (12.5)
Adjusted EBITDA(1) $ 29.8 $ 41.6 $ (11.9) $ 112.9 $ 122.4 $ (9.5)
Adjusted EBITDA margin(2)(3) 16.3% 20.6% (430 bps) 19.6% 19.9% (30 bps)
Q3'19 vs. Q318
Note: May not foot due to rounding.
▪ Adjusted EBITDA(1) down $9.5 million or 7.8% vs. YTD'18
▪ Sales volume decreased 32.1 kilotons or 9.6% vs. YTD'18▪ Performance Chemicals volume down 12.9%, on lower
TOR demand, lower sales of TOFA upgrades and lower sales of raw materials
▪ Adhesives volume down 3.7% on lower sales of rosin upgrades
▪ Tires volume up 2.2%
▪ Adjusted EBITDA margin(2)(3) of 19.6% vs. 19.9% for YTD'18
YTD'19 vs. YTD'18
Kraton Overview 32
Note: May not foot due to rounding.
(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 consolidatewithin our financial statements.
(2) KFPC executed revolving credit facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the 5.5 billion NTD KFPC LoanAgreement.
Consolidated Net Debt
September 30, 2019 June 30, 2019 December 31, 2018
(In millions)
Kraton debt $ 1,401.0 $ 1,456.6 $ 1,441.6
KFPC(1)(2) loans 104.3 109.9 125.5
Consolidated debt 1,505.4 1,566.6 1,567.1
Kraton cash 77.0 58.7 79.3
KFPC(1) cash 6.2 5.2 6.6
Consolidated cash 83.3 63.9 85.9
Consolidated net debt $ 1,422.1 $ 1,502.7 $ 1,481.2
Effect of foreign currency on consolidated net debt 32.3 3.8
Consolidated net debt excluding effect of foreign currency $ 1,454.4 $ 1,506.5
Effect of share buyback program (10.0) (5.0)
Consolidated net debt excluding effect of foreign currency and share buyback program
$ 1,444.4 $ 1,501.5
Appendix
Kraton Overview 34
34
Raw Materials Fractions Major Upgrades / Derivatives Markets
Terpene
Fractions
AMS
Adhesives
▪ Packaging
▪ Tapes
▪ Labels
▪ Assembly
▪ Pavement Marking
▪ Paving
▪ Roofing
Tires
▪ Winter & All-
Season
High Performance
Tires
Performance
Chemicals
▪ Fuel Additives
▪ Oilfield Chemicals
▪ Mining
▪ Coatings
▪ Metalworking
Fluids &
Lubricants
▪ Inks
▪ Flavors &
Fragrances
Adhesives Tires Performance Chemicals
TOFA
DTO
TOR
Pitch
Lighter
Heavier
Refining
Refining
Crude Tall Oil
(“CTO”)
Crude Sulfate
Terpentine
(“CST”)
Pulp
Mills
Dimer AcidsPolyamide
Resins
Rosin Resins
Upgraded
Rosins
Insoluble
Maleics
Terpene Resins
AMS Resins
Dispersions
Pine Chemicals - Overview
Kraton Overview 35
Polymer – Revenue by Geography and End UseTTM September 30, 2019
Segment Revenue by Geography Segment Revenue by End Use
Kraton Overview 36
Polymer – Revenue by Geography and Product Group TTM September 30, 2019
CARIFLEX PERFORMANCE PRODUCTSSPECIALTY POLYMERS
Rev
enu
e b
y G
eogr
aph
yR
even
ue
by
Pro
du
ct G
rou
p
Kraton Overview 37
Chemical – Revenue by Geography and Product Group TTM September 30, 2019
ADHESIVES35% of TTM Revenue
TIRES6% of TTM Revenue
Chemical Segment Revenue
PERFORMANCE CHEMICALS59% of TTM Revenue
Kraton Overview 38
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In thousands)
Gross profit $ 58,478 $ 90,205 $ 191,230 $ 281,482
Add (deduct):
KFPC startup costs (a) 3,019 — 3,019 —
Non-cash compensation expense 159 149 489 457
Spread between FIFO and ECRC 10,103 (7,771) 38,067 (27,711)
Adjusted gross profit (non-GAAP) $ 71,759 $ 82,583 $ 232,805 $ 254,228
Sales volume (kilotons) 75.8 84.2 229.8 249.5
Adjusted gross profit per ton $ 947 $ 981 $ 1,013 $ 1,019
Polymer Segment Reconciliation of Gross Profit to Adjusted Gross Profit
(a) Startup costs related to the joint venture company, KFPC.
Kraton Overview 39
Reconciliation of Net Income to Operating Income to Non-GAAP Financial Measures
Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income (loss) attributable to Kraton $ 18,693 $ 42,349
Net income attributable to noncontrolling interest 2,222 928
Consolidated net income (loss) 20,915 43,277
Add (deduct):
Income tax benefit 2,311 8,334
Interest expense, net 19,214 20,143
Earnings of unconsolidated joint venture (102) (100)
Other income (expense) (4,235) 740
Operating income $ 18,269 $ 19,834 38,103 $ 44,899 $ 27,495 72,394
Add (deduct):
Depreciation and amortization 14,982 19,822 34,804 17,554 17,563 35,117
Other income (expense) (502) 4,737 4,235 (958) 218 (740)
Earnings of unconsolidated joint venture 102 — 102 100 — 100
EBITDA (a) 32,851 44,393 77,244 61,595 45,276 106,871
Add (deduct):
Transaction, acquisition related costs, restructuring, and other costs (b) 1,672 244 1,916 689 (177) 512
Hurricane related costs (c) — 2,220 2,220 — — —
Hurricane reimbursements (d) — (13,841) (13,841) — — —
KFPC startup costs (e) 3,019 — 3,019 — — —
Sale of emissions credits (f) — (4,601) (4,601) — — —
Non-cash compensation expense 2,659 — 2,659 2,495 — 2,495
Spread between FIFO and ECRC 10,103 1,337 11,440 (7,771) (3,456) (11,227)
Adjusted EBITDA $ 50,304 $ 29,752 $ 80,056 $ 57,008 $ 41,643 $ 98,651
(a) Included in EBITDA is a $14.3 million gain on insurance, a reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.(b) Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.(c) Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an additional $1.4 million of costs incurred
during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and will not continue into the fourth quarter of 2019.
(d) Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.(e) Startup costs related to the joint venture company, KFPC.(f) We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.
Kraton Overview 40
Reconciliation of Net Income to Operating Income to Non-GAAP Financial Measures
(a) Included in EBITDA is a $32.9 million gain on insurance, fully offsetting the lost margin in the first quarter of 2019, and reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael.(b) Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges.(c) Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an additional $14.2 million of costs incurred
during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and will not continue into the fourth quarter of 2019.
(d) Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.(e) Startup costs related to the joint venture company, KFPC.(f) We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.
Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
Polymer Chemical Total Polymer Chemical Total
(In thousands)
Net income attributable to Kraton $ 72,569 $ 49,491
Net income attributable to noncontrolling interest 5,356 1,743
Consolidated net income 77,925 51,234
Add (deduct):
Income tax (benefit) expense (1,881) 8,743
Interest expense, net 57,494 74,835
Earnings of unconsolidated joint venture (363) (357)
(Gain) loss on extinguishment of debt (210) 79,921
Other income (expense) (3,559) 2,960
Operating income $ 62,498 $ 66,908 129,406 $ 137,930 $ 79,406 217,336
Add (deduct):
Depreciation and amortization 43,296 54,934 98,230 52,914 52,719 105,633
Other income (expense) (1,547) 5,106 3,559 (3,600) 640 (2,960)
Gain (loss) on extinguishment of debt 210 — 210 (79,921) — (79,921)
Earnings of unconsolidated joint venture 363 — 363 357 — 357
EBITDA (a) 104,820 126,948 231,768 107,680 132,765 240,445
Add (deduct):
Transaction, acquisition related costs, restructuring, and other costs (b) 4,781 808 5,589 2,062 (963) 1,099
(Gain) loss on extinguishment of debt (210) — (210) 79,921 — 79,921
Hurricane related costs (c) — 15,025 15,025 — — —
Hurricane reimbursements (d) — (26,561) (26,561) — — —
KFPC startup costs (e) 3,019 — 3,019 897 — 897
Sale of emissions credits (f) — (4,601) (4,601) — — —
Non-cash compensation expense 8,158 — 8,158 7,620 — 7,620
Spread between FIFO and ECRC 38,067 1,294 39,361 (27,711) (9,371) (37,082)
Adjusted EBITDA $ 158,635 $ 112,913 $ 271,548 $ 170,469 $ 122,431 $ 292,900
Kraton Overview 41
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Diluted Earnings Per Share $ 0.58 $ 1.31 $ 2.26 $ 1.53
Transaction, acquisition related costs, restructuring, and other costs (a) 0.04 0.02 0.13 0.03
(Gain) loss on extinguishment of debt — — (0.01) 1.89
Hurricane related costs (b) 0.15 — 0.55 —
Hurricane reimbursements (c) (0.44) — (0.83) —
KFPC startup costs (d) 0.04 — 0.04 0.01
Sale of emissions credits (e) (0.14) — (0.14) —
Spread between FIFO and ECRC 0.29 (0.31) 0.99 (0.97)
Adjusted Diluted Earnings Per Share (non-GAAP) $ 0.52 $ 1.02 $ 2.99 $ 2.49
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) Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. As we finalized our claim for reimbursement of incremental costs incurred, we have identified an
additional $14.2 million of costs incurred during the nine months ended September 30, 2019. Additionally, we incurred direct costs due to the impacts of Hurricane Dorian of $0.8 million which are recorded in cost of goods sold. The Hurricane Dorian direct costs are limited to the three months ended September 30, 2019 and will not continue into the fourth quarter of 2019.
(c) Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds.(d) Startup costs related to the joint venture company, KFPC.(e) We recorded a gain of $4.6 million in other income (expense) related to the sale of emissions credits accumulated by our Swedish Chemical legal entity.