Q4 2019 Earnings Call
Good morning, and welcome to the Great Corporation fourth quarter.
<unk> earnings Conference call. My name is Danny and I will be your convention.
At this time all participants are in listen only mode. Following the company's prepared remarks, there will be a question and answer period.
You asked the question. Please press Star one you touched on filling today's conference is being recorded if you have any objections you may disconnect. At this time I'll now turn to call over to Mr. gene Shiels director of Investor Relations.
Thank you any good morning, everyone and welcome to the Great time Corporation fourth quarter 2019.
With me on the call. This morning are Kevin So greedy write downs, President and Chief Executive Officer.
Dennis Panasonic rates on senior Vice President and Chief Financial Officer.
A copy of the fourth quarter news release and the related presentation material. We will review. This morning is available in the Investor Relations section of our website.
Before we review the results for the fourth quarter and full year 2019, I'd like to draw your attention to the disclaimers on forward looking information and the use of non-GAAP measures included in our presentation. This morning and in yesterday's earnings press release.
During the call we may make certain comments that are not statements of historical fact, and thus constitute forward looking statements.
Investors are cautioned that there are risks uncertainties and other factors that could cause great times actual performance to be significantly different from the expectation stated or implied by any forward looking statements we make today.
Our forward looking statements speak only as of the daycare made and we have no obligation to update such statements in the future.
Our business outlook is subject to a number of risk factors.
As the format of this mornings presentation does not permit takes full discussion of these risks risk factors. Please refer to our forms 10-K in Q and other regulatory filings available in the Investor Relations section of our website.
With regard to the use of non-GAAP financial measures a reconciliation of each non-GAAP financial measure we use to its most comparable GAAP financial measure was provided in yesterdays earnings release as well is the presentation will review this morning.
Following our prepared comments, we'll open the line for questions I'll now turn the call over to Kevin Fogarty, Kevin.
Thank you Jane and good morning, everyone. Today, 2019 was clearly a challenging year for many industrial companies, including as a great job.
Well, we had entered the year with lower expectations for our business activity in China.
Even trade and tariff tensions between the U.S. in China.
And volume headwinds with regard to our lubricant additives portfolio sales to a certain customer to a significant customer.
That was implementing inventory reduction program in general for the rest of our business, we had expected a reasonable year.
As it turned out despite the weather related impact of our paving and roofing business first half 2019 global demand trends were generally in line with our expectations.
However, in the second half of the year, we experienced even weaker overall demand in China compound and certainly by escalating impact of tariffs and trade negotiations with the U.S.
As China demand contracted further there was a ripple effects or other economies of the region. We also saw lower demand in Europe associated with factors, such as weaker automotive and consumer demands.
In addition, as we discussed during the third quarter call in the third quarter of 2019, we saw significant reduction in gum rosin gum turpentine prices that translated into incremental margin pressures for a chemical segment for the balance of the year.
The resulting effects on our crude sulfate turpentine markets in particular will recognize to be the most relevant in the fourth quarter.
Given these weaken weakening weakening market fundamentals fourth quarter 2019, adjusted EBITDA was $49 million down $36 million compared to the fourth quarter of 2018.
In line with our updated guidance has provided during our third quarter call.
It's worth, noting however that fourth quarter 2019 was a heavy quarter for planned maintenance and turnarounds for us fixed costs associated with turnarounds increased by approximately $4 million compared to the fourth quarter 2018.
In addition.
The production impact of turnarounds and planned maintenance as well as lower operating rates and other facilities in response to softer market demand resulted in an adverse impact of $15 million associated with less favorable absorption of fixed costs.
For approximately 19 million or more than half of the decline in the fourth quarter. Adjusted EBITDA was driven by turnarounds and oil production rates and plans given these market conditions.
In terms of segment results polymer segment adjusted EBITDA was 29.5 million in the fourth quarter down $14.8 million compared to the fourth quarter 2018.
Once again of this decline 10.7 million or 72% relates to higher fixed costs associated with turnarounds unplanned maintenance and the associated fixed cost absorption impact of lower production rates.
Of note average unit margins for the polymer segment remained stable compared to fourth quarter 2018, and so the balance of that claim adjusted EBITDA was the result of 4.7% decrease in sales volume largely a reflection of softer market demand.
Chemicals segment adjusted EBITDA was 19.5 million in the fourth quarter and this was down 21.3 million compared to the year ago quarter.
The decline in the adjusted EBITDA 8.1 million or 38% was also associated with higher fixed cost for turnarounds and planned maintenance and associated FCTA impact of lower production rates.
Sales volume was up modestly versus the fourth quarter of 18, but as mentioned we experienced increased margin pressure in our CSD interchange, resulting from third quarter 2019 decline in market prices for gum turpentine and gum Rosen.
As discussed in our third quarter 2018, or excuse me two third quarter 2019 earnings call.
As a result full year 2019, adjusted EBITDA of $320.6 million was down 57.5 million or 15, 2% compared to 2018 within the updated guidance range for adjusted EBITDA, We've provided in the third quarter earnings call.
Despite the challenging fourth quarter environment within with our ongoing focused on cost control and working capital optimization cash generation was favorable during the quarter, we reduced consolidated net debt by 66.5 million or 8.5 million, excluding the effect of foreign currency on a full year basis, we reduced consolidated net debt by 125.
Million dollars also in line with our updated guidance provided in our third quarter call.
As a result from the date of the Arizona Chemical acquisition through the end of 2019, we introduce consolidated net debt by $443 million.
We still expect the Cariflex sales to close in the first quarter of this year and as we have said previously we intend to apply the sales proceeds primarily to further reduce outstanding indebtedness.
At the conclusion of this call I will share more insights with regard to our 2020 strategic priorities, including innovations sustainability cost reduction and prevailing market realities in particular car visor SEC krona buyers effect on our business outlook.
But for now I'm going to turn the call over to our Chief financial officer at than Us.
Thomas off for a more in depth financial review of the third quarter happiness.
Good morning, everyone.
Slide five.
Fourth quarter.
Results for it.
Revenue.
200.
Right.
Increased $40.9 million.
For 2018.
Revenue decrease reflects lower average cost of raw materials, lesser extent lower sales volume.
Fourth quarter 2000.
The negative effects of changes in foreign currency.
4 million.
The revenue decline, which was fully offset by favorable effects of foreign exchange on our cost of sales.
Total sales volume for the polymer segment was down 4.7% compared to fourth quarter 2018.
Sales volume for specialty polymers was down 8.1% and this was due to lower sales into lubricant additive applications and continued demand weakness in China.
Other Asia and Europe.
These factors were partially offset by higher innovation based.
Sales volume in North American.
Performance product sales volume was down 2% compared to fourth quarter of 2018.
And this was.
Primarily due to lower relative once or fill sales into paving and roofing applications, partially offset by higher esas sales into adhesive applications.
Following a strong third quarter for Cariflex and wood sales volume was up nearly 19%.
Fourth quarter sales volume for Cariflex was down 12%.
Through the fourth quarter 2018.
The slower sales volume is largely due to production constraints at our third party toller.
These production limitations of continues into the first quarter of 2020.
Fourth quarter 2019, adjusted EBITDA for the polymer segment was 29 that half million dollars and this was down $14.8 million were 33.4% compared to the year ago quarter.
As into third quarter fourth quarter 2019 average margins for the polymer segment remained stable compared to fourth quarter 2018.
Therefore, the decline in adjusted EBITDA was principally the result of lower sales volume and high cost associated with one maintenance and unfavorable fixed cost absorption.
During the fourth quarter plants, and bear visually and moly out under one plant turnarounds.
In the case of vessels. This was a significant statutory turned around that occurs approximately.
Five years. These turnarounds resulted in two and a half million dollar increase in fixed costs compared to fourth quarter 2018.
The turnarounds and lower plant operating rates largely a function of more sluggish demand also resulted in lower fixed cost absorption, which added an incremental $8.2 million of headwind.
Adjusted gross profit was $801 per ton in the fourth quarter 2019, compared to 1020 per ton in the fourth quarter 2018.
This decrease is due to the impact of turnarounds and FC favorability.
Excluding these costs in the quarter adjusted gross profit would have been approximately $972 per ton.
Likewise, the hard cost how to dilute effect on adjusted EBITDA margin, which was 12.7% into fourth quarter 2019.
Fair to 16.2%.
In the year ago quarter.
Excluding the 11.3 million of turnaround costs and fixed cost absorption impact in the quarter.
Adjusted EBITDA margin for the quarter.
Fourth quarter 2019 would have been 17.5%.
Now turning to full year results for polymer segment.
Full year 2019 revenue for the polymer segment was $1.05 billion down a 168, and a half million or 13.8% compared to 2018.
The 2019 as a whole average unit margins for specialty polymers performance products and Cariflex businesses were up modestly compared to 2018.
As such revenue.
The revenue decrease reflects lower average selling prices associated with lower average raw material costs as well as lower sales volume.
Additions the negative impact of changes in currency accounts for $25.7 million of revenue decrease and this was materially offset by the favorable foreign exchange impact on cost of sales.
$2.2 million.
In terms of sales volumes specialty polymer sales volume was down 11.1% compared to 2018 with the primary drivers being lower sales into lubricant additive applications and weaker demand in China, rather Asia, and Europe, partially offset by higher innovation based sales volume in the United States.
Performance product sales volume was down 7% compared to 2018 and as we discussed this was largely due to the adverse impact of whether on paving and roofing volumes in the second quarter.
2019, and the hangover effect of high customer inventories in the third quarter 2019.
It looks volume was up 1.8% versus 2018 on higher latex sales into surgical love applications.
For the 12 months ended December 31, 2019 polymer segment adjusted EBITDA was $188.2 million.
And this was down $26.6 million were 12.4% compared to 2018.
The decline in polymer segment adjusted EBITDA is largely attributable to sales volume specialty polymers and performance products, partially offset by modest increase in Cariflex volume.
Favorable SGN a cost versus 2018.
For the full year 2019, the polymer segment adjusted EBITDA margin was 17.9% relatively unchanged versus the 17.6% in 2018.
In addition on a full year basis, adjusted gross profit was $969 per tonne modestly below the cells in $17 per ton of 2018.
I'll now turn to slide six for review of the chemicals segments results, beginning with the fourth quarter.
Fourth quarter 2019 revenue for the chemicals segment was $176.1 million up $1.7 million compared to the $174.4 billion in the fourth quarter of 2018.
Sales volume was marginally higher than reported volume in the fourth quarter 2018.
The negative effect of currency impacted revenue by five and a half million dollars and this was more than offset by the $5.9 million favorable impact the foreign exchange on our cost of sales.
Total chemicals segment sales volume was up 2.3% compared to the fourth quarter 2018 sales volumes for performance chemicals was down 4.2%, reflecting lower opportunistic sales of raw materials softer demand in oilfield applications and lower sales in tall oil Rosen.
Adhesive sales volume was up 15.7% principally with higher sales of rosin upgrades compared to the fourth quarter of 2018 in wood sales were constrained by the Panama City outage associated with Hurricane Michael.
Sales volumes with tires was up 22.1% versus the fourth quarter of 2018, which reflects both the effective the fourth quarter 18 outage in our CST refineries down the city and improved market demand, allowing us to leverage expanded capacity at our New York, France plant.
As a result in the third quarter as we discussed in the third quarter call. During the third quarter 2019 market pricing for gum, rosin fell, 20% and gum Turpin team declined 40%.
Although pricing trends for gum Rosen.
In gum turpentine stabilized in the fourth quarter, albeit at lower levels lower market pricing transmit and to further margin pressure.
In our tour and CST change.
In addition, fixed costs in the fourth quarter, 2019, or 1.4 million higher than the fourth quarter 2018, due to planned maintenance and turnaround activity, which also contributed to unfavorable fixed cost absorption of $6.7 million.
As a result, adjusted EBITDA for the chemicals segment was 19 in the half million in the fourth quarter down $21.3 million or 52.2%.
There to the fourth quarter 2018.
With a higher turn around cost and in fact of less favorable cost absorption accounting for $8.1 million or 38% of the decrease of adjusted EBITDA.
Fourth quarter 2019, adjusted EBITDA margin for the chemicals segment was 11.1% compared to 23.4% in the fourth quarter of 2018.
Excluding the $8.4 million, a fixed costs associated with turnarounds and if CA impact in the fourth quarter.
29 to adjusted EBITDA margin would have been 15.8%.
Looking at full year results for the chemicals segment revenue was $751.5 million down $38.6 million were 4.9% compared to full year 2018.
The decline is principally a function of lower sales volume and lower pricing in resin and wasn't end markets.
Changes in foreign currency rates accounts for $21.3 million of the year over year revenue decline largely offset by 20.4 million a favorable foreign exchange impacts on our cost of sales.
Overall chemicals segment sales volume was down 7% since 2019 performance chemicals sales volume was down 10.9% lower sales of raw materials and lower sales of four and Tofa.
In part due to constrain availability of our primary raw material CTL during the year.
He's if sales volume was essentially flat compared to 2018 and tire sales volume was up 6.5%, reflecting both the hurricane impact in 2018, an increase sales in 2019, as we leverage that had capacity to our plant in New York, France.
For the full year 2019 chemicals segment, adjusted EBITDA was $132.4 million.
Now $30.8 million from 19%.
Fair to 2018.
Decrease reflects lower sales volume and high raw material cost as well as lower pricing.
CST chain and toward chain.
The full year 2019, adjusted EBITDA margin for the chemicals segments was 17.6% and this compares to 20.7% in 2018.
Now turning to consolidated results on slide seven.
Consolidated revenue for the fourth quarter, 2019 was $408.5 million down $39.3 million versus the fourth quarter of 2018, primarily driven by lower sales volume in the polymer segment.
Changes in foreign currency accounted for $12.9 million of revenue declined more than offset by the 13.3 million favorable impacts of foreign exchange on our cost of sales.
Fourth quarter 2019, consolidated adjusted EBITDA was $49 million and this was down 36.1 million compared to the fourth quarter 2018.
As discussed in my segments commentary. This decrease reflects approximately $19 million discrete items in the fourth quarter.
Driven by higher fixed costs of approximately 4 million.
Principally associated with the aforementioned plant turnaround activity in both our polymer and chemical sites. In addition plant maintenance downtime and lower operating rates resulted in less favorable absorption of fixed costs.
With a fourth quarter 2019 impact of approximately $15 million.
These specific items in the fourth quarter adjusted EBITDA margin was 12%.
Excluding the impact of these timing related costs, the fourth quarter adjusted EBITDA margin would have been approximately 16.8%.
Fourth quarter adjusted the alluded loss was six cents per share and this compares to adjusted diluted earnings of <unk> 0.6 of 67 cents per share in the fourth quarter 2018.
The effective turnaround costs and less favorable fixed cost absorption in the fourth in the quarter equates to an impact of approximately 49 cents per share with the balance being primarily attributable to lower profitability in our chemical segments.
For the full year 2019 consolidated revenue was 1.8 billion down 207.2 million compared to the 2 billion a 2018.
As outlined in the segment comment to commentary lower sales volume was a significant driver of the revenue decrease along with lower average selling prices associated with lower raw material costs and the polymer segment lower resin pricing and the impact of raw material costs in the chemicals segment. In addition, the negative.
The foreign currency accounted for $47 million of the overall revenue decreased largely offset by the 39.6 million.
Favorable foreign exchange impact on our cost of sales.
Consolidated adjusted EBITDA was $320.6 million for the year 2019.
This was down 57.5 million compared to the 378 million of adjusted EBITDA in 2018.
Consolidated adjusted EBITDA margin for 2019 was 17.8% this compares to 18.8% in 2018.
Full year 2019, adjusted EPS was $2.94 down 22 cents or 7% compared to the $3.16 in 2018.
Drivers of the decrease include lower sales volume and lower profitability, particularly in the chemicals segment, partially offset by lower interest expense lower as DNA costs and income taxes.
Turning to slide eight on a full year basis, we reduced consolidated debt by $176.5 billion and consolidated net debt was reduced by 125.3 million, excluding the effect of foreign currency and activity under our share repurchase authorization.
This reduction falls within the guidance range, we provided in our third quarter 2019 call.
$120 million to $140 million.
Given our full year debt reductions consolidated net debt at year end 2019 was $1.356 billion down $443 million from the 1.8 billion following the acquisition of Arizona chemicals.
As we now turn to slide nine I'll review, our outlook for the year 2020.
In light of the significant changes in market condition in the second half of 2019.
In the third quarter 2019, we took a more conservative approach in adjusting our guidance for the balance of 2019.
We'll talk to appropriately account for the risks, we face which was prudent as evidenced by the results. We now report.
We have taken a similar approach with our 2020 guidance reflect current market dynamics, but perhaps more importantly, and in the context of significant near term uncertainty guidance, we believed to be achievable.
As outlined in yesterday's press release, we expect that are 2020, adjusted EBITDA will fall within the range of $200 million to $220 million.
This outlook does not include any potential incremental impact for the Corona virus beyond the first quarter Twentytwenty.
Overall, we anticipate volume growth in 2020.
We expect increased margin pressure, resulting from market conditions and intensified competitive dynamics.
And our polymer segment, we expect that sales volume for specialty polymers and performance products will be up 5% relative to 2019.
But we anticipate that the continuation of fourth quarter 2019 market conditions in China, and voter Asia and disruptions associated with the Corona virus in the first quarter 2020 will negatively affect full year 2020, adjusted EBITDA by approximately $10 million.
In the case of our paving and roofing sales. We have every reason to believe will experience a normal summer season for paving and roofing business.
Markets, and we expect paving volumes to be up compared to 2019. However, we believe increased competitive pressures on the pricing and margins will wait against the sales volume growth.
And our specialty polymer business, we expect 5 billion impact associated with incremental inventory reduction measures of a significant deliberative additive.
Customer.
Looking or chemicals segment, we expect to grow volume by approximately 10% versus 29 team in which we experienced constraints and CTO supply or whether we see continued pressure.
In a certain markets given they are ready availability of low cost cfive hydrocarbon tackifiers and in light of the decline in gum laws in pricing in the second half of last year.
And into 2020.
Likewise with the decline in gum trip and seeing pricing, we expect lower margins in our CST chain in 2020.
Assuming no recovery and gum, raws, and then gum turpentine pricing and no change in pricing or availability of hydrocarbon tackifiers in 2020, we expect the aggregate impact of these factors relative to 2018 to be approximately $30 million, primarily in our CST chain and to a lesser extent torture.
Yes.
In 2020, we expect transportation logistics costs will increase by approximately $10 million.
This reflects rate increases in the market, including the impact of IMO 2020.
Lastly, we expect the Cariflex contributed approximately $54 million not 2018 adjusted EBITDA.
As we anticipated the Cariflex sale will close in the end of the first quarter this year.
Our full year outlook only includes adjusted EBITDA contribution through the data sale.
Due to the previously mentioned production constraints of the third party toller and based on expected timing for the closing of the sale. We expect that Cariflex will contribute approximately $7 million to the first quarter 2020 adjusted EBITDA.
Given our adjusted EBITDA guidance for the year, we expect that cash generated from business activities will provide a reduction of consolidated net debt of $40 million to $60 million, excluding the effect of foreign currency or any share repurchases. This also excludes any debt reduction associated with proceeds from the sale.
All of our Cariflex business and with this I'll now turn the call back to Kevin for his closing comments.
Thank you at Dennis now two months into 2020 as you just heard a remains very difficult to determine a timeframe for improvement in global markets.
So we're past the lunar new year in China, which is typically when we expect a robust surge in demand as Chinese businesses prepare for their new year.
While there has been some easing of tariffs that could provide positive momentum the disruption caused by the car Corona virus has mass visibility into near term demand fundamentals in China and broader Asia based on headlines alone. There is now growing concern that disruption from the krona virus is expanding geographically.
In Southeast Asia and Europe.
With potential for the disruption.
And the duration to linger well into the second quarter or beyond.
Nevertheless, as noted in yesterday's press release, despite the near term uncertainty, we believe the longer term outlook for both polymer and chemical segments remains positive the fundamental drivers for future volume growth for creatinine have not changed China and broader Asia will remain important markets for Creighton as will the Americas and greater Europe, and we continue to see potential for further expansion.
In the long term growth markets, such as India.
As always innovation remains a key driver for our differentiated growth.
For 2020, specifically as Anthony just spoke to we are expecting solid volume growth across both our chemical and polymer segments.
For our chemical segment. This expected growth will be made possible by additional CTO supplied to create on relieving constraints, we experienced in 2019.
And our polymer segment. We have every reason to believe will experience a normal summer season with for our paving and roofing business and with regard to where specialty polymers business. We expect to continue to have excellent commercial traction in key markets to drive HSBC sales growth.
Offsetting this positive momentum all lever our guidance for 2020 prudently assumes the margin pressures we experienced in the second half of 2019 will carry forward and in certain markets given competitive activity associated with direct or indirect substitution extend beyond that experienced in 2019.
Therefore, as with 2019 went in response to market conditions in the second half of the year, we took prudent steps to manage cost and optimize working capital. We have further targeted at approximately $20 million and additional broad based productivity enhancement initiatives for 2020.
Bottom line will not ignore market reality in the margin pressures in our business. These actions are expected to be fully implemented throughout the second half of 2020.
Specific benefit in the second half of the year will likely be modest and given associated implementation costs, we expect to fully benefit from these productivity measures and be realized in 2021.
Simply stated our current goal is to effectively manage through the current environment will continue to position create on for the future.
Now as many of you know that know a key aspect of our long term growth expectations is the evidenced that our customers are facing increased demand for sustainable products and solutions.
We fundamentally believe Cray town is well positioned to participate as a solutions provider as the world demands a more sustainable circular future.
And while many customers remain skeptics still opting to focused on the pure bottom line rather than pressing for a sustainable competitive cost approach.
We see our roller creatinine as an enabler to their decision making process. We believe we are on the right side of this suicidal economic challenge and we will continue to provide compelling solutions an ever increasing just sustainable world, whether due to decrease greenhouse gas emissions or increase plastic recycling.
For example, as you know our chemical segment as a provider of bio based specialty chemicals that provide exceptional value to customers seeking alternatives to hydrocarbons hydrocarbon based products.
Through our focus on innovation, we have recently commercialized and new family of Rosin esters based upon our patented revolution technology.
We believe this novel offering will set the industry standard for color and stability and we see potential for favorable growth and expansion and applications that have historically been served by hydrocarbon based tackifiers.
Investment is already underway to scale up our production capability in late 2020.
The second and more real time example is in the year European Union were recently completed a second renewable energy director for the period 2020 to 2030, so called Red too.
Contained in this directive is a mandate to increase bio based components, including those from non foods sources in the diesel and jet fuel pools within the member states.
Without getting into all of the nuances of the regulations in the mandates. Let me just summarize machine that we see opportunities for create on to participate in this rapidly evolving renewable market outlet.
Likewise in a world rapidly moving from single use plastics and other non recycled materials toward a cyclical economy. Our polymer segment offers compelling alternatives to non recycled materials and lineage and use applications, including wire and cable medical and automotive.
Furthermore, we believe our polymers can play a key role as a compatible iser any effect, enabling the circular economy.
One of the largest issues facing the plastics recycling urgency in the world is how to co mingle otherwise non compatible polymers such as PDP with Polyolefins here again creatinine represents an enabler to solve this technical hurdles and in doing so will drive our innovation appetite will solving a very real seidl challenge.
These are clear examples of how we create on can make a positive difference in an otherwise resource constrained future world.
In closing and to reiterate our current priorities are to effectively manage through the current environment, while continuing to possess create on for the future.
Specifically, we remain fundamentally committed to debt reduction as we expect to generate cash through business operations to further reduce debt in 2020.
Finally, we expect to sale of the Cariflex business to occur before March 31, and as we've said consistently the primary use of these sales proceeds will be in debt reduction.
But those comments were happy to open the call up for questions.
Yes.
Thank you, we'll now begin the question answer session.
So when you ask your question. Please press star followed by the number one please UN mute your phone and when comes ahead. Please record your name and company for boats are required to introduce your question again and if I wanted to ask your question.
Sure.
Yes.
Our first question comes the line of Jim Sheehan from Suntrust Robinson Humphrey. Your line is now open.
Good morning could you talk about your.
Expectations for Capex in 2020.
It looks like with.
Demand uncertainty and some of the macro outlook.
Being up being impacted by krona virus.
That this is a difficult economic backdrop do you have any ability to flex down the capex.
And if so.
When we when would you expect to do so what would be the timing of making such a decision.
Well I.
I think Jim I I am I agree fully with your with your assessment of.
The need to make sure that as we spend you know shareholder capital and capital expenditures were doing so prudently taking into account market conditions and outlook that being said you know we balance the combination of the capital that's required obviously from the business continuity standpoint, including things that are associated with regulatory requirements.
With the need to make sure that we've got the necessary assets in place to deliver on the growth agenda that we still continue to work diligently on so do we have the ability to ramp down capital should we need to feel the need to do so all in any capital in case, we obviously have the ability to.
Move.
Some expenditures from one year to the next we will continue to monitor that and to the extent, we take down the number obviously, we'll update as we progressed through the year.
Thank you and regarding your Taiwan polymer plant.
What was the utilization rate of that plant.
Before the Corona virus impact started I've, just just wondering how you're ramping up that capacity.
Well.
We don't talk about specific a utilization rates of any of our facilities, we consider that to be pretty sensitive sensitive information for obvious reasons, but I will tell you obviously that the impact of China caused us to kind of slow the facility down as part of the comments that Atlantis commented on with respect to.
The overall market demand scenario, particularly in the second half of the year.
But from an overall business planning standpoint.
The plant is wrapping up ramping up as we had expected in our project economics.
Okay, and you talked about having more access to CTO supply in 2020, what's your outlook for CTO prices.
Well I mean, I think you tend to think about CTL prices in the context, obviously have a of what your assumption would be with respect to the key energy inputs. So that's obviously the major driver of CTL value in the marketplace.
Thank you.
Thank you. Our next question is from the line of mentioned Anderson from Stifel. Your line is now open.
Yes. Thanks.
So with where your shares are trading I can probably guess what your capital allocation priorities will be after de leveraging cariflex, but if I'm thinking about the longer term strategy for your portfolio.
Closure due in Houston customers have you given any thought to looking downstream into pressure sensitive and hot melt adhesives, just to capture the incremental margin on your tackifier and SBC sales into that market.
Well I mean look we were always looking at the overall value change that we participate in but you know the chances that you will see create on step downstream is is very low I mean, we see our role as being a material supplier to.
Customers and at the end of the day.
When it when when you're asking customers.
To.
Worked with you on innovation developments or in the case of what I talked about during the call, which as you know think about their raw material portfolio of supply in the context of the sustainable offering great on now has available to them.
We're not going to be a competitor to a customer.
Fair enough.
And then just with regards to your 2020 outlook you have.
Some pretty aggressive volume growth assumptions, despite not anticipating much of a demand recovery. So if if I try to understand that strategy a bit better are you attempting to regain market share in any particular channel where you'd given up some or is this mostly motivated by just getting your plants back up to a better operating right.
What I would say some of the structural.
Back to the matter is is that we were constrained on for example, CTO supply last year and we knew it for various factors we call though at very.
The year, but back to the matter is is that we're taking on additional supply that was part of our original arrangement with our strategic raw material supplier.
And so if you think about the CTO markets.
Don't think of it in terms of additional CTO supply think of it in terms of additional CTO supply to create.
And.
That means that you know that puts the responsibility and us obviously.
Two.
Look at where we're positioning the output of.
The CTO fractions in the marketplace to be is disruptive as we can but we thought it would be prudent as we called out for you in our guidance, we thought to be prudent to assume that theres not much recovery in some cases, a little bit more rose in the overall market scenario, but it's not it it's not a it's not a gain share kind of strategy as much as a structural change in.
In supply for CTO when it comes through the Uh Huh.
The polymer side of our business again, we're seeing good volume growth, but here, we are presuming a relatively normal paving year as an example, obviously we thought we were.
Dealing with some weather challenges in the first half of last year and there's no reason for us to believe.
That's the case this year in fact, if anything the weather fundamentals for example in Europe right now look look positive relative to when we would've expected to start to season.
I appreciate that it's a very helpful.
And on the topic of paving if I'm reading Indias fiscal 20 budget correctly, it looks like Dave.
Issued some pretty favorable increases in their highway paving budget can you just remind us of your exposure in that market and higher position there.
Any conversations that you've had recently since the budget has been relief.
So I'm glad you raised India I mean, we have been working hard on India for about five years now and obviously whenever you enter a market I know relatively unknown you've got to kind of proved your cellphone. We spent a lot of time developing both people in the ground capability and most importantly, seeking the regulatory approvals, we need to make sure our material is in them.
Marketplace. So.
For example, I mean, when you think about all the new paving infrastructure, we absolutely see what you're speaking to in terms of India's commitment to do so.
Our technology that we've talked about high model, which the highly modified asphalt technology. We think is absolutely suited for the into market that's building new airports and building new roads.
And we've got these materials approved in India and specified in and are now real time being consumed in the market.
Excellent. Thank you.
Thank you. The next question is from the line of Gen. Bob.
Your line is now open.
Thank you your your guide or color on a virus in fact, wasnt dopey on March but it sure sounds like you're expecting some impact beyond March could you just go through some of the key Asian exposures and particularly in specialty polymers.
Volume issue or is it all pricing concerned because I'm sure the lowest.
The low end of the markets being impacted I don't know thats leaking into that your higher any thoughts there in terms of pricing pressure.
Think about John what's happening, particularly when you think about China and even other parts of Asia now it's.
It's not like trading down to a lower quality material in the marketplace the marketplace effectively shut down.
Material is not moving customers are not ordering they're not even at work in some cases, so it's literally a standstill approach and so you're correct in our assumption that were only in our guidance taking into account, what we know and what we're able to see through the better part or two months into the calendar year. So yeah that and guidance is based on what we believe for the first three months of the.
We are and beyond that it's impossible for us to forecast.
I'm seeing the same information I'm sure you are.
And is there a secondary effect coming from the latex market in Asia being impacted by China's issue that they can't slow down their production or adjust.
Are you talking about late Texas in Cariflex.
No I'm talking about Nashville based.
Polymer products and so forth that sometimes have some downward pressure on your markets I don't think I would differentiate between the natural other synthetic and ask Asia.
Okay. Thank you.
Thank you. Our next question is lineup caps.
All markets. Your line is now open.
Yeah. Good morning, if I look at the guidance range of 200 did see 20 I guess if.
The Corona virus pandemic.
Builds over beyond March that that's a maybe a potential source pushing that.
Anticipated results towards the low end of the range is there other.
Variables that you see that could.
Downward drift to that range and then what does some of the development that you anticipate that.
Could push towards the high end of the range at this point.
Well clearly I mean.
We tried to do this year with the guidance is give you as much visibility as.
We hope you can appreciate.
Into explaining that guidance relative to the 292019 performance. So you kind of see what the drivers are clearly if our assumptions on those drivers are incorrect.
In some cases than it would drive down towards the lower into the range on the other hand, I think and I think some of the questions. Here were the first question lease was focused in on it with respect to you know the margin assumptions in that guidance.
In a marketplace like this it would be.
Pretty difficult for create on to forecast that we're going to take margins, where they ended 2019 and enter 2020, and just presume that conditions would improve and those margins would expand to the extent that happens obviously that would drive as to the upper end of the range clearly.
Okay, well on if I, if I might add too given great on as you know us I mean, we are and we consider ourselves to be you know at the end of the day a leader in price setting in the marketplace because of our practices the way in which we go to market the way in which we you know lead.
And are not afraid to lead when it comes to making sure that our price right strategy is applied consistently in the marketplace. So when raw materials move we move with it you know at the end of day when market conditions present opportunity to increase prices were going to do that and I'll give you. An example, right now I mean and Mike I think in our press released last night.
We talked about you know for the first time in several years since we've owned the chemical business, we're starting to see the vegetable oil family and the and the other fatty acid families move up and a lot of that's driven by what's happening in the biodiesel world. There is a very positive trend, obviously for our fatty acid side of the business and we're watching that very closely.
Got it and then just on Kevin on your response to that as you talk about the margin profile.
Exiting fourth quarter entering this year one of the drags on the margins was the absorption the the unabsorbed overhead so the fixed cost absorption that you referred to it and so.
I'm just wondering what given that you have expectations for volume recovery.
Five and 10% respectively for the two segments, where does the assumption for.
Sta for the full year baked into that guidance range, yes. So we're not we're not assuming obviously were.
I have that fixed cost absorption drag in 2020.
I'm, sorry, you're saying that you're not you're assuming we assume we will not have that drag.
Got it.
And then if you could you touch on some of the innovation that your enthusiastic about some of this is you know a long cycle commercial development and I'm. Just wondering if that is at this point you could any way to put some parameters around the Tam associated with.
The the one adhesives project and then maybe the sustainable Palmer's recycle Palmer opportunity and automotive any way to listen parameters on what that opportunity isn't over what time.
Well, we work yeah sure Thats. Good question, we work on these projects because we do think that you know if they're successful when they're successful and when they're fully implemented in the marketplace. Obviously, we'll find ourselves.
We will find ourselves.
Having these these innovations mean being meaningful.
To our overall sales mix, so they're not insignificant projects and they're all right now if your question is more of a what's the impact are going to have this year, well clearly I mean.
On one hand, I can tell you that in the both examples I cited meaning the the example about the revolution, new Rosin Esther material and in the case of using our polymers for compatible innovation.
Otherwise on compatible commingle polymers. These are real commercial.
Materials today customers are testing in some cases customers are embracing the technology and we certainly expect maybe commercial this year, but really you know at the end of the day from before they're meaningful you're talking probably about two years.
Okay. Thank you.
Thank you. Our next question from the line of Roger Spitz from Bank of America. Your line is now open.
Hi, good morning.
For Roger.
In terms of pricing level.
Or any other products you Scott.
Yeah.
I guess, how the pricing has changed in the past quarter, and how does that compare quarter over quarter here yeah.
From the key Charles.
I want to make sure I answer your question appropriately if you're asking about whether or not we're seeing as a result of obviously, China slowing if not in standstill right now a decline in.
Market pricing generally speaking, there's not enough commercial activity, even answered the question, but that being said.
Specifically mentioned CTO CTO is not produced in China.
If anything from time to time see deals might get consumed in China, but the interesting new launch of our pine chemical business is the production for.
Joe and therefore, the production that we employ a two fractionator that see deal and make it into components is in us in Europe.
Okay. Thanks.
Thank you for the next question is from the line of James Finnerty from Citigroup. Your line is now opening.
Hi, Good morning, just on many Cariflex sale.
Specs to close this quarter, what's the tax impact again on their sale and and we should we assume that the vast majority that proceeds would be used for debt reduction there would that be a probably the term loan.
Yeah. Thank you for your question or assumption as we've previously indicated with respect to taxes, we anticipate minimum tax leakage obviously.
That will get finalized 30 to 60 days after we close the transaction, but we are we continue to.
To anticipate minimum tax leakage with respect to the.
Seats as we've indicated previously principally they go down to.
Down debt.
We have a couple of different options that were currently.
Discussing internally, obviously, we have the option to pay down our term loans.
We also have a our notes, but as I said, we have not made a final decision suffice to say that was going to go down significantly.
Okay. So there's there's flexibility in terms of using the proceeds to various parts of the capital structure. Okay. Great. Thanks very much.
Thank you. The next question is from the line of Vincent Anderson from Stifel. Your line is now open.
Yeah. Thanks, Good morning, again, I'm, just curious roughly how much of your U.S. space Tofa until for derivatives do you sense the export market.
I'm just thinking out loud here.
In our business, we shipped some CTO across the pond to our European CTO fractionation centers in Scandinavia, but in terms of the actual output of the product. It's very little I guess, one example would be.
Where we're making some rosin esters and we plan to ship them.
Two to our new manufacturing facility manufacture dispersions, but it's a relatively small volume.
So so tofa.
Mostly stays in the U.S. and so are you surprised.
Okay.
Yes.
Okay.
Then just really quick and I apologize if I Miss in the prepared remarks, but did you touch on Finland pulp and paper labor issues was that resolved quickly enough for that prevent any impact on your CTO supply there.
It did not have an impact on us because we're in a position which is what I just referenced but our ability and we continuously do always remove some of our CTO to Europe. So it did not impact us. It did have an impact in the marketplace. There were some I think some supply shortages.
That were up requiring some allocations if not forced mature declarations by some of our competitors. We were obviously a unique position to fill that gap.
So those those exports of CTO were normal course of business.
Yeah.
I would also.
But I would also suggest to you that you know at the end of the day that we see.
Well, it's no secret, we see our ability to export more of this additional CTO we have this year.
You know we're in a where now a unique unique situation in the marketplace that because of that excess CTO and the fact that we got fractionation capacity in Europe, we intend to utilize that capacity that way.
I see that's very helpful. Thank you that's all for me.
Thank you. Our next question is from the line of credit perhaps from <unk> capital markets. Your line is now open.
Yeah, a couple of follow ups. One the is the increased availability of CTO. You have this year is that alone address the the fixed cost absorption that negative variance that you experienced in 19.
Well to the extent, we're producing more this year than we produced last year, then it'll have a positive effect from the fixed cost absorption standpoint, because we're not increasing our fixed cost.
So I mean, I'm, saying will that alone basically alleviate the entire drag from the.
The unabsorbed fixed costs last year.
What else Catherine this is on.
That will be a that will be a portion of the but I would remind you that in 2019 part of the fixed cost absorption. The fix cups absorption issue that we have it was really more of a fourth quarter issue, which is primarily timing and we've made a very very.
Very clear.
One of those was a significant portion of that was related to vessels, which is mandatorily.
It is mandatory Athens, approximately every five years, but again fixed cost the fixed ops cost absorption that you saw in the year 2019 was mostly a fourth quarter issue.
Okay and then.
Just one question about the pine chemicals into because one of since the the Arizona deal several years ago now there was.
You might have.
At one point or a couple points maybe over the last few years, we might have thought that the conditions were troughing in now obviously lot of circumstances influence in the business, but with the downdraft in CST prices, which were elevated so not not normalize or certainly not trough.
Theres a downdraft in the margin profile of the business.
Any thoughts on you know the overall industry normalizing obviously, there is not visibility in the first half of this year it sounds like but maybe beyond the first half is we start to think about some sort of normalization as we exit 2020 into 2021 any thoughts on that look let's let's take.
It's a very very fair question, let's take them has three parts.
We have our fatty acid side, we have our tore or raws inside and then we have archer printing side, that's kind of the being three buckets of our pine chemical business.
Taking them in order.
From a fatty acid standpoint from our perspective momentum is good.
I told you about the backdrop in terms of vegetable oil and other fatty acids, driven by biodiesel as well as our own interest potentially in participating in biodiesel in Europe as a new market outlet.
So the momentum there is good when it comes to are.
CST chain that turpentine chain you know at the end of the day as we'll have that as I described that there was a two two and a half year of what I would call.
Supply driven outages that led to market expansion of the margin profile of that product line.
That corrected corrected like very fast in the third early in the third quarter and really we're back to normal we're back to the kind of normal level of profitability that existed prior to that run out. So if anything you know at the end of the day that stable if not you know stable with perhaps a.
Positive outlook in the context, and just the growth that underlies that attractive product portfolio.
When you come to the tour business and the tour business is one that we've had meeting leap in you know and have had the most difficult and trying to understand the driver in the relationship between the whole tackifier side of the equation the willingness on the part of the Tackifier side of the equation to pass through fundamental raw material costs, and what that does to the substitute economics and.
Our purchase price or selling prices, that's been a tough one to forecast as you well no.
Today as we said you know as absent this called out we're not expecting to see a lot more decline in the rosin chain in 2020.
And we kind of use that to jump off point from 2019 as a proxy for our 2020 plan.
And I know as I sit right now almost two months here I think we're happy with that assumption.
And thanks to that Kevin.
Thank you we no longer have any questions on Q.
[noise] well, thank you Annie and we'd like to thank our participants.
This morning.
This call available later this morning I'm for those willing to are wanting to access the replay number is one 806.
We won seven one.
Since our prepared remarks.
Okay.
This concludes the Kaman Corporation fourth quarter 2019 earnings Conference call you may now disconnect.