Q3 2020 Kraton Corp Earnings Call
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Thank you for standing by the conference will begin momentarily until such time, you will hear music thinking please continue to standby.
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Good morning, and welcome to the creates one Corporation third quarter 2020 earnings Conference call. My name is Kirby Albequerque conference facilitator for today at this time all participants are in listen only mode. Following the company's prepared remarks, there will be a question and answer period. If you would like to ask a question.
Please press star one on your Touchtone phone todays conference is being recorded if you have any objections you may disconnect. At this time I will now turn the call over to Mr. gene Shiels director of Investor Relations.
Thank you Gabi good morning, and welcome to the Craig Hallum Corporation third quarter 2020 earnings call.
With me on the call. This morning are Kevin programming write Downs, President and Chief Executive Officer, Anatomists, Atimus off Craig Barnes Executive Vice President and Chief Financial Officer.
A copy of the third quarter news release and the related presentation material.
We will review this morning is available in the Investor Relations section of our website.
And before we review the results for the third quarter of 2020, 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 invest.
Investors are cautioned that there are risks uncertainties and other factors that may cause great Tom's actual performance to be significantly different from the expectations stated or implied by any forward looking statements we make today.
Our forward looking statements speak only as of the date. They are 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 morning's presentation does not permit a full discussion of these risk factors. Please refer to our forms 10-K, 10-Q, and other regulatory filings available in the Investor Relations section of our website.
Regarding 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 press release and in the appendix of the presentation. We review this morning.
Following our prepared remarks, we'll open the line for questions I'll now turn the call over Kevin Fogarty, Kevin Thanks, Jean Good morning, everyone.
For the third quarter overall, we continue to effectively manage our business. Despite COVID-19, having an ongoing effect on global demand fundamentals during the quarter. We benefited once again from our diverse end market exposure and specifically from improved demand fundamentals and delivering solid operational and financial results.
Equipment 19, continuing to have an impact across the globe, the health and safety of our employees customers and the communities in which we operate remained our top priority Jerry.
During the quarter many of our employees continue to work remotely while our manufacturing facilities operated safely and efficiently, including undergoing planned maintenance and turnaround activities, we referenced in our second quarter earnings call.
In addition, we did not experience any significant disruption or logistics or in our supply chain within the quarter.
From a high level improved demand in the third quarter in conjunction with the benefit of our diverse end market exposure contributed to solid volume growth in both our polymer and chemical segments geographically demand in China and broader Asia continued to improve in the third quarter and we saw sequential improvement in North America for consumer durables medical and automotive applications and our specialty.
Polymers business.
And our performance products business, we saw solid demand in paving and roofing applications.
While in our chemical segment, we experienced a notable sequential rebound in demand across all major product lines with the exception of oilfield where weaker demand conditions continued.
And the third quarter as experienced over the course of the year. We have seen continued stability in unit margins in both our polymer and chemical segments.
Like everyone as we turn to slide five I will review the financial highlights for the third quarter.
The demand improvements and margin stability, Kevin noted were key contributors to strong financial results for the third quarter and as a result, we reported consolidated adjusted EBITDA of $60.3 million.
While this was down 19.8 million compared to the third quarter of 19, a significant factor in the decrease was the sale of our Cariflex business in March of 2020.
In addition, the decrease reflects lower average selling prices in our CST chain and for rosin esters, which were largely offset by higher chemical segment sales volume.
Excluding cariflex consolidated adjusted EBITDA would have been down $6 million compared to the third quarter of 2019.
The $6 million decline is attributable to higher fixed cost associated with timing of maintenance and turnaround activities postponed from the first half of the year due to cold at 19, as we indicated in our second quarter earnings call and also due to a lower absorption of fixed costs associated with an expected drawdown of inventory we had built in the first half of the year.
And we also referenced during our second quarter 2020 earnings call overall, we're pleased with the third quarter results.
On a consolidated basis, adjusted EBITDA margin was 16.1% compared to 19.2% in the third quarter of 19.
Again, the decrease in margin reflects the factors I just mentioned the sale of Cariflex as well as higher fixed costs associated with the timing of maintenance and turnarounds and less favorable fixed cost absorption associated with inventory liquidation.
Looking at segment results. It was a solid quarter for the polymer segment, where third quarter. Adjusted EBITDA was $31.9 million. While this was down $18.4 million compared to the third quarter of 19. The decrease is largely associated with the sale of the Cariflex business, excluding cariflex adjusted EBITDA.
Would have been down only $4.6 million, we did decrease largely a function of timing of maintenance and turnaround activities and the fixed cost absorption impact associated with the planned inventory draw down I referenced earlier.
Third quarter 2020 results for the chemical segment showed significant sequential improvement and adjusted EBITDA was $28.3 million down only $1.4 million compared to the third quarter of 19.
Principally due to lower pricing of our CST chain following the decline in gum turpentine prices in the second half of last year.
And on lower pricing and laws investors, largely offset by higher sales volume, which was up 18.7% compared to the third quarter of 2019.
During the third quarter, we reduced consolidated net debt, excluding the effective foreign currency by $25.8 million, our liquidity position remains strong with $62.8 million of cash at quarter end and $205 million of availability under our ABL facility.
I will now move to slide six for a review of the polymer segment results.
Polymer segment revenue for the third quarter of 2020 was $198.5 million and this was down $63.1 million compared to the third quarter of 2019.
The revenue decrease reflects the sale of our Cariflex business.
And lower average selling prices associated with lower average raw material costs.
Partially offset by the revenue contribution associated with higher sales volumes in both specialty polymers and performance products compared to the year ago quarter.
As reported polymer segment sales volume was down less than 1% compared to the third quarter of 2019, However, excluding cariflex sales volume would have been up 8.4% in.
In our specialty polymers business sales volume showed considerable sequential improvement and sales volume in the third quarter was up 23% compared to the third quarter of 2019.
This increase reflects higher sales into lubricant additives do timing as well as demand recovery in China and broader Asia performance.
Performance product sales volume was up 3.3% in the third quarter and this principally reflects higher sales volumes into paving and roofing applications third.
Third quarter adjusted EBITDA for the polymer segment was $31.9 million versus $50.3 million in the third quarter of 2019, however, excluding cariflex adjusted EBITDA would have been down.
$4.6 million compared to the third quarter of 2019, we will decrease largely due to higher fixed costs, including the timing associated with maintenance and turnarounds and lower absorption of fixed cost associated with inventory liquidation in the third quarter of the year.
As a result, the third quarter 2020, adjusted EBITDA margin was 16.1% compared to 19.2% in the year ago quarter, which did include the results of Cariflex and the lower relative fixed cost, including the timing of costs associated with maintenance and turnarounds.
This is largely a timing factors also impact third quarter, adjusted gross profit, which was $733 per ton compared to $947 per tonne in the year ago quarter. However, on a year to date basis. Adjusted gross profit is $947 per tonne, which we believe is a more normal.
His view given the impact of fixed costs and timing of maintenance and turnaround activities in the third quarter.
On a year to date basis, the polymer segment revenue of $642.8 million was down $177.7 million versus the first nine months of 2019 Prime.
Primarily reflecting the disposition of Cariflex and lower average sales prices associated with lower average raw material costs.
Specialty polymers sales volume was up 1.9% for the first nine months of 2020 with high sales volume in Asia, partially offset by the impact of gold at 19 on demand in North America, particularly in the second quarter.
Performance product sales volume was also up nearly 1% on a year to date basis on high sales into adhesive applications and stronger paving and roofing demand.
As a result, the year to date adjusted EBITDA for the polymer segment was $136.9 million with an associated margin of 21.3% compared to 19.3% for the same period last year.
Excluding cariflex adjusted EBITDA would have been up 5.5% compared to the first nine months of 2019.
As noted earlier our market diversity has led to stability in our polymer segment given in current market conditions.
Now looking at the results of the chemicals segment on slide seven our chemical segment revenue of $174.9 million for the third quarter of 2020 was down $7.7 million compared to the third quarter of 2019. The modest decrease reflects lower average selling prices in the CSD chain following the decrease in gas turbine.
Team pricing in the second half of last year.
From the record levels in the first half of 2019 and lower average prices for rosin ester is largely offset by the benefit benefit of higher sales volume.
Overall third quarter sales volume was up 18.7% versus the third quarter of 2019, despite demand headwinds associated with cold 19.
Performance chemicals sales volume was up 25.7% with higher opportunistic sales of raw materials and due to timing of purchases by significant customers combined with improved adhesive demand, which was up 5.8% versus the third quarter of 2019, reflecting solid demand trends in the current environment.
In our core business, we saw sequential demand improvement as customer capacity that was idled in the second quarter due to covet resumed production with this improved demand tires volume was therefore up 14.2% compared to the third quarter of 2019.
Adjusted EBITDA for the chemicals segment was $28.3 million in the third quarter down $1.4 million compared to the third quarter of 19 with higher sales volume across all business units largely offsetting lower average selling prices in the CSD chain and for rosin esters. The adjusted EBITDA margin of 16 point.
2% for the third quarter was in line with a 16.3% posted in the third quarter of 2019.
On a year to date basis revenue for the chemicals segment was down $61.8 million compared to the first nine months of 2019.
Sales volume was up 2.4% versus the first nine months of 19, the Dick the decrease was driven primarily by lower average sales prices in the CSD chain and for us in esters as well as lower sales volume in tofa and fulfill for upgrades.
For the first nine months of 2020 sales volume for performance chemicals was up 3.9% on high opportunistic sales of raw materials.
Despite lower sales into oilfield applications and the overall demand impact of cold at 19.
Adhesive volume was up half a percent year to date and volume for tires was down 8.5% due to contraction in demand in the second quarter of this year with top production offline due to cold at 19.
Chemicals segment adjusted EBITDA for the first nine months of 2020 was $70.7 million compared to $112.9 million for the comparable period last year the.
The decrease was driven by lower selling prices in the CST on toward chains, a decline and tofa and derivative sales volume due to cope with 19 and weakness in oilfield markets, especially during the second quarter of this year, partially offset by growth in rosin esters and high opportunistic raw material sales volumes.
Slide eight provides a summary of consolidated results for the third quarter and year to date for the first nine months of 2020, adjusted EBITDA was $207.7 million, a decrease of $63.9 million compared to the first nine months of last year.
As covered in my segment discussion. The decrease is primarily due to the sale of our Cariflex business lower margins in the CST and for chains and factors such as weaker demand in Automotives and oilfield applications and the impact of gold at 19, partially offset by higher sales volumes as a result, the consolidated adjusted.
Adjusted EBITDA margin for the first nine months of 2020 was 18% and this compares to 19.5% for the first nine months of last year, which included Cariflex and the high overall CST and for margins in the chemicals segment.
For the third quarter of 2020, we reported adjusted diluted earnings of 49 cents per share and this compares to 52 cents per share for the third quarter of 2019 on.
On a year to date basis, we reported adjusted diluted earnings of one dollar five per share and this compares to $2 or 99 cents per share for the first nine months of 2019.
The adjusted EPS decline is principally the result of the sale of our Cariflex business with the balance largely due to the decline in CST on rosin prices.
I do want to comment on one specific item noted in yesterdays earnings release income.
In conjunction with our annual long term.
Planning process, we performed an interim impairment test of goodwill as of September Thirtyth.
As part of the impairment test, we took into consideration factors, including ongoing impact of low cost hydrocarbon tackifiers in our adhesives business. The current level of pricing and margins in our CSD chain. Following the decreasing gun turpentine prices in the second half of 2019, and an end the demand impact associated with COVID-19.
As a result, we have recorded a noncash impairment charge of $400 million for our chemical segment.
Despite the impairment charge, we believe the longer term outlook for the chemical segment is favorable.
As noted previously unit margins have been stable throughout 2020, and we have seen volume growth. This year, despite overall market conditions.
As we turn to slide nine I want to highlight the progress we have made this year in strengthening our balance sheet during the third quarter, we reduced consolidated net debt by $25.8 million.
And by approximately $500 million on a year to date basis, both amounts excluding the effects of foreign currency.
We expect further cash generation and debt reduction in the fourth quarter of this year as we continue to progress toward our target consolidated net debt leverage of approximately three times I will now turn the call back to Kevin for his closing comments.
Thank you and us.
Now if we could let's move on to slide 10, where we provide an update on our current business outlook by geography and end use application.
As noted we saw improved demand in a number of areas during the third quarter and our view of the demand picture in China and broader Asia continued to improve during the third quarter, while Europe as a whole remains stable importantly, following some weakness in North America in the second quarter, which we largely attribute to COVID-19, we saw demand recovery in the third quarter. We currently anticipate further near term or near term improvement.
Specifically, we believe near term near term demand in adhesives and packaging applications remained stable, while consumer durables as well as automotive applications are expected show more improvement in demand supported by current market trends.
Demand in medical and personal care and hygiene markets has remained favorable and head and as demand.
In infrastructure as has a demand and infrastructure markets, such as paving and roofing.
Specifically in our polymer segment in the third quarter, we saw a rebound in demand in consumer durable applications. Following a weaker second quarter on a more global basis. In addition, with the resumption of production at a number of tire manufacturing plants around the world as well as positive trends in automotive production in general outlook our outlook for all.
Automotive and tires.
Has improved relative to the second quarter.
We believe our portfolio and end market diversification and specifically our exposure to market segments that are particularly relevant in today's world have contributed to our favorable results thus far in 2020.
And while we remain mindful of the possibility that COVID-19 could continue to adversely impact near term demand fundamentals.
Based upon the improved demand trends, we saw in the third quarter and in late we had and in light of what we have seen so far in the fourth quarter, we remain optimistic about the outlook for the balance of the year and into 2021 as.
As mentioned unit margins have remained stable for the first nine months of the year and on a year to date basis. Our sales volume trends are positive. This is a solid foundation for us to build upon in 2021.
As noted our balance sheet continues to improve with further debt reduction and we are implementing cost savings that should also contribute favorably to our results in 2021.
As we see the potential for continued volume recovery in 2021, we are energized by the prospect of further sustainable innovation based organic growth at Cray, Don which we believe may benefit from a number of recent product Rollouts, specifically, our revolution rosin ester formulations, and our circuit our family of polymers.
As I mentioned in late July we are encouraged by the reception we have seen for Revolution. We believe it is truly differentiated it is a truly differentiated product that will set the standard for rosin.
Esters.
Circular.
Regarding circa we're hosting a series of technical Webinars, highlighting this technology and have been very pleased with the interest level and participation of various industry players we will continue to position.
The offerings for the recycling industry to provide our customers with tailored solutions for their particular applications.
In a world driven by the need to advance a circular economy. We believe these two innovations will make a very positive difference.
I would like now to turn to a topic that I'm sure is very much in your minds and one that continues to garner significant interest in light of today's worldwide health challenges.
In early September we announced that we were seeking approval for our novel Biax himself unaided polymer specifically for use as a self sterilizing anti microbial.
Hi, axiom as part of a family of self funded polymers that create on has made and sold and other specific end markets over the years. These self unaided polymers have unique characteristics and a number of highly regarded organizations, including North Carolina State University, Boston University, and University of Texas Medical branch in Galveston have demonstrated the effectiveness of by action against.
Hires covert to Mark.
Marsa and other microbes we.
We made by accident as unique given its both efficacy and durability relative to other anti microbial technologies in the marketplace.
While the majority if not all of current anti microbial top technologies have a chemical basis as the active ingredient by exome is an otherwise in our polymer we have we have the existing technology today to deployed by acts and other self unaided polymers and membrane form or in solvent based coatings and sprays.
While we are able to sell our softened aided polymers today for other applications I should know we are currently precluded from marketing or selling by exome for anti microbial applications in the United States until we complete the required regulatory processes, including with the environmental protection agency or as well.
We are working through these processes now which require that we submit data to demonstrate efficacy durability and safety among other criteria I'm sure. You can appreciate that I can't speculate on the timeline for possible approval.
As many of you may know in terms of the EPA approval. There is a normal approval process broadly referred to as the section three and there is a possibility of approval under section 18 or emergency exemption that Cooper could provide an expedited path for approval for specific applications. As you would expect approval under sections 18.
He is of interest to creatinine.
In parallel with our efforts to seek approval from the EPA, we're working outside of the United States focusing on jurisdictions in which we believe there are significant interest and market potential and a clear regulatory path for approval and anti microbial applications.
A question on many of your mind is likely how big is the potential market for by Axa.
The work we have done to date suggest the anti microbial market in 2020 is substantially larger than it was in 2019.
We believe the potential applications for by axiom, our extensive but we believe we condemned because we believe we can demonstrate its efficacy and durability.
But the comment on went by Axa might be commercial or if or when it could be material to create tons. Overall results would require speculation on the regulatory approval itself.
Given the potential we see for by accident, we are bringing significant resources to bear on market assessment and in working through necessary regulatory approvals. However, I do want to state that has an existing technology within Creighton today, we have production capacity available for the base HSBC polymer that by accident is based upon we do not anticipate any significant capital raise.
Carmen surgery me, a robust level of demand if and when we receive regulatory approvals.
And lastly, we feel our patent portfolio and our intellectual property position is quite strong around the use of softening to polymers and anti microbial applications.
We look forward to providing you with real time updates on buybacks and one we are positioned to do so.
And so with those comments were now happy to open the call up for some questions.
Thank you Matt.
We will begin the question and answer portion. Please press the star followed by number one on your Touchtone phone and record your name when prompted to cancel your request. Please press the star followed by the number two.
Our first question is from the line up John Robert W. Baird. Your line is open.
Thank you very much Sars on mute.
How much of the paving market is linked to either state budgets or gasoline taxes added obviously, both gasoline taxes Tet gasoline taxes and state budgets are going to have a major shortfall as we go into next spring. That's there. So is that expected have any effect on the.
Well I think at the end of the day the state budget some of the state budget to receive a lot of their funding federally from and through the gasoline tax.
And I don't I don't know that we are in a position to comment on how it's going to impact potentially to the funding of those budgets next year, given I'm presuming you're referencing.
A view that the gasoline taxes in decline, but I think you know at the end of the day I could make the same discussion and argument, perhaps about what's going to happen with respect to infrastructure spend package and how that might offset any any holes in state.
In state funding. So these things are speculative.
But certainly what we've seen this year in terms of market demand is a healthy robust year and I think reflective of the fact that there is still pent up demand in this country and around the world and again, a polymer modified solution that we bring to the table.
Solves long term infrastructure needs.
And then secondly are you aware of any Chinese producers, making soften needed polymers for anti microbial use in China. They may not be beholden to some of that patents and so forth that you'd have around the technology.
No I'm not aware of any such and.
I think in other examples in the past unrelated to our soften aided portfolio.
We take our intellectual property very seriously and we are and we and we defend our position when when needed.
Thank you.
Thank you. Our next question is from the line of Vincent Anderson EPS Stifel. Your line is open.
Yes, thanks, nice job on the quarter.
Specifically the volume growth in Pine chemical adhesives was impressive.
Can you parse out maybe what you saw in terms of any destocking headwinds and the more consumer end use areas versus what what would have outweighed those headwinds if there were any.
I think you know the way to think about it remember the way this year unfolded early in the year, we called out that adhesives were strong probably as much as anything because of concerns people had about supply change with a cold the disruption.
And that kind of man led to when there wasnt such disruption that led to kind of perhaps a destocking in and itself.
And that is of course much more in terms of what we talked about vis-a-vis to second quarter I think what today reflects is much more balanced market sustainable market in terms of demand and.
Everything we see indicates positivity with respect to how.
Customers are viewing for example, the adoption of our evolution family.
Thats helpful. Thanks, and then just sticking on Pine chemicals, I know, it's just a timing difference, but that was a pretty sizable move in the FIFO to CRC adjustment. So I'm just wondering if we can read anything in.
Read into that.
Anything on the raw materials standpoint ill, just because I don't think we've ever really seen it move by this much yes, I think that at the end of the day I mean.
We talk about that spread.
Often and because it's from quarter to quarter, there can be moves, but it all washes out if you will in the end and not don't think you should read anything into it at all in terms of how that reflects through our consistent reporting of operating results.
Okay fair enough and just briefly on the Biocidal polymer development.
Somewhat limited understanding of chemistry is always painted solve for as a pretty difficult chemical to work with so.
I'm wondering would you attribute your success and incorporating it into Styrenic block copolymer, as maybe something unique to sbcs.
Or does it really does the credit really go more towards your process R&D on that front.
How do I want to answer that I think the reality is there is concern about them now handles property behind obviously development of this material.
And it is in our case specific to our penta block family of polymers, which are highly stable and we think absolutely perfect for this anti microbial application but.
But I don't want to mislead you. This is a very complex chemistry.
And that requires.
So a lot of.
A lot of our key R&D knowledgeable people as well as our sulfonation.
Our partners in the marketplace to work hand in hand to make sure that this technology is.
Is it.
Is working.
Working as it as as as as a combined supply chain system and for those reasons you know at the end of the day. This is not an easy marketplace for someone who wants to try to replicate that and to get into a combination of know how and of course to supporting intellectual property a lot of years. When it is development as you well know and.
That's just a reflection of who we are greater.
Excellent. Thanks.
Thank you. Our next question is from Chris Kapsch up loop capital market. Your line is open.
Yeah. Good morning, I had a question on the profitability in the polymer segment and I guess given the the pass through.
Feedstock costs, maybe margins isn't the best way to look at that.
You, providing that gross profit per ton metrics and if you look at that.
In the quarter was.
Down, but that was affected by that.
Abnormally high maintenance or deferred maintenance costs as well as the absorption variance issue that was the sequential issue that you that you've discussed but wondering though.
The 947 year to date I think that the metric is that sort of a normalized.
Gross profit per ton metric for the polymer segment to think about on a go forward basis or is it is it is the the the.
The profit in the third quarter still kind of overly penalised given.
After mentioned issues and I was also curious about just the longer that I'd also curious, we obviously had a pretty big paving volume. So I'm wondering if there is some adverse mix.
Associated with those volumes, it's also depressing.
The gross profit per ton metric in the quarter.
Yes. Thank.
Thank you for your questions as Atanas.
I think you are.
I think you're right.
What you are seeing in the polymer segment with respect to adjusted gross profit is the is largely.
A function of the timing of maintenance and fixed cost absorption as you recall last quarter. We had indicated is that for the second half of the year. We were looking at approximately 20 to 25 million of negative headwind on account of fixed.
Fixed cost absorption in $5 million to $7 million of maintenance well.
Incidentally were exactly on top of that when you look at it about half of that impact was look.
Look was incurred in the second half of <unk>.
In the third quarter and and so.
When you look at our adjusted gross profit margin that ZIP code of 950 to a 1000 reflects a more normalized view of the business.
Historically, we have been over $1000 of course, we don't have cariflex anymore. So that will have some impact, but again to the extent that were in that 900 to $1000.
Adjusted gross profit per ton we are.
We feel very very comfortable and happy.
With respect to any other.
Impacts on account of mix within the.
Paving and roofing I would say that it's not it's not material. It's largely those two factors FCTA and maintenance and remember timing because on a year to date basis. Our margins are still very much would an expectation of that call. It 950 per ton Zip code.
Okay. That's helpful. Thanks, and then on the chemical side on the the 18 more than 18% volume growth year over year I. Appreciate some of the end markets are.
Recovering normalizing however, you want to characterize it but part of that is also.
Got to be tied to just your greater availability of CTO feedstock this year owing to the.
Contractual obligation of your key supplier so I'm wondering if.
In the <unk> you did reference some opportunistic.
I think raw material resell the way you characterize so I'm wondering how much of that volume gain is really tied to maybe reselling CTO at a profit to other.
Players in the industry that now needed versus true underlying.
Demand with your customers and markets.
It's a great question.
About half of about half of that volume growth that you saw on June 18, 19% is due to the opportunistic sale of raw materials and I think this is very consistent with what with what you've seen in the past I think the year before last and so.
Last year as you correctly point pointed out we were CTO constrains this year were not.
This is a technology that was effectively on the shelf that that has this unique applicability to this microbe application, but I'm wondering how you.
Think about your capacity for this I believe that the sulfonation step could happen at a at a toll or so maybe there's not really much capital needed to expand the capabilities to delivering if this market materializes just wondering how.
We should think or how you're thinking about the ability to to to ramp volumes should should this be.
Sure the CE approved and should there be commercial uptake. Thanks, Thanks, Chris So to answer the last part of your question volume issues.
You can imagine obviously is very important and there's actually kind of part of our discussions with regulatory agencies to.
And we feel really good about our ability to up to two to ramp up the supply chain and obviously, putting a priority on that effort as well from a planning perspective into.
In terms of the three nodes.
Notable and innovations that you call out I'm not going to force rank them.
I'd say that we've got resources dedicated on each one of those it's not a it's not a trade off discussion we've got our our chemical innovation teams focused obviously on revolution, we've got our polymer innovation teams focus on delivering circular and making the market more aware of what that brings to the table and then of course my axiom has its own separate team here in the company, but let me just say about that.
First to the circular in the Revolution, what I love about them is again, it's all in keeping with the spirit of Cray tons commitment to sustainability and growing our sustainable business model.
These two solutions answer the the industry issues around driving a circular economy.
Revolution, obviously from the trees, it's a from the trees solution. We believe it can replace hydrocarbons in the marketplace, we believe that.
That our customers have a choice and we want to make that choice very difficult for them with our revolution family in terms of quality and performance and when I say performance I'm talking about stability in the case of circular again that was designed as a technology with sustainability in mind, because there is a really.
A fundamental infrastructure problem with with plastic recycling being commingled and we take that problem off the table with our circuit are offering and allowing therefore polymers to be commingled and then that allows customers to focus on the application for the recycled material and help solve this problem of single use.
Plastic waste around the world.
And then lastly of course, you side by accident by accident at the end of the day.
Is a is a is a technology that we certainly think has relevance to today's gold world.
But it goes beyond that in our thinking.
I think I mentioned in my talking points about how we think.
So by X. I'm also will be an effective anti microbial against things like Murcia bacterial types infections. So naturally we are thinking about it as a potential.
Offering in the healthcare industry, we're looking at public transportation as another potential market space for where by act and complete a role and of course and building and construction I think you yourself anybody if they really stop and thought about it just think about touch surfaces and how material.
Material that can be used on a touch surface.
Could therefore.
Eliminate health risk for the public, but let's not get ahead of ourselves. Our first step is the necessary regulatory approvals both in the U.S. and around the world.
And.
In the meantime.
Hi, I'm very encouraged by the interest that.
The even our announcement has generated in terms of market opportunities and on that allows us to have very very.
Solid conversations with development partners.
And it did exactly what it's done in terms of it encouraging people to share their thoughts about how by action could be applied in the marketplace and thats exactly what we were looking for.
Thank you.
Thank you. Our next question comes from the line of John Roberts Qbs. Your line is open.
Thank you.
When you get approval for buybacks.
Next our inventory be sold as buybacks and the jumpstart those sales right away or are there other subtle differences between the products that wouldn't allow them to be interchangeable.
I'm not going to comment too much on this specific to your question, but we do have inventory that would satisfy today.
In addition to what I talked about visa visa supply chain, yes.
Okay, and then your lube additives sales have been very lumpy.
With this September quarter, a recovery to normal or or did it go above normal or any insights into what normal is and what the fourth quarter might look like well, it's lumpy in the context of how we run our operation in terms of planning for those production runs it's not lumpy in terms of at the end of the day.
Customer consumption and so I think I suppose you might say that that's our own doing but that's just the nature of.
Specialty application itself and of course, the batch process to produce it.
What I would tell you is generally speaking.
Even in a world today, the cold with World, where obviously automotive has been impaired in the early part of the year coming back now, yes, and mileage in the road just coming back as well driving miles I'm talking about.
We would say that you know that we're going to end the year probably with.
That segment of our sales pretty much in line with what our expectations were going into the year, which is remarkable in and itself and I think reflective of the.
The quality offering we present.
Thank you.
Yes.
Thank you. The next question would come from the line of Vincent Anderson of Stifel. Your line is open.
Yes. Thanks, just a couple things the clarify first just going back to the lubricant.
Hi, Matt.
In the past you have mentioned a major customer that caused some noise with their inventory management, so you're saying that this this quarter wasn't.
Impacted by them, either restocking or moving towards a more normalized demand level.
No just to be clear you are right on both fronts. Indeed, we've had the inventory de stocking issue that kind of change the dynamic in terms of the volume we sold to this customer through the period of 19 and 20 relative to the prior year. That's still the case, what I'm, saying is however, when it comes to supplying the need they need.
It's really a function of have when we produce that material in our facilities, which can cause that quarter to quarter Choppiness. That's why I always encourage people look at the annual number.
Okay perfect. Thank you and then just real quick to go back to pavement I'm, just trying to parse out slide 13.
You have you're right you referenced stronger paving demand.
But the mix share would seem to indicate that at least the dollar sales were down.
So I don't know maybe these product prices just adjust much faster to raw materials or is there any consideration.
For asphalt prices as an alternative roofing material just trying to figure out exactly how to think it's very linked.
To raw material.
Almost a perfect index.
So.
So when we're dealing with raw material costs, particularly Buda dine, which were probably a 10 year low in the second quarter you're.
You can imagine what that does to selling price.
Okay perfect. Thank you.
Thank you. The next question is from the line of Chris Kapsch absolute capital market.
Your line is open.
Yes, a follow up on two end markets that are important and to the extent you have visibility on the on the paving market so last year range.
Ran like Hell for.
Rain a lot in the spring and that affected activity and they are its surplus volume.
Almost throughout the year and then this year with a pretty darn good weather.
And so good volumes good activity. So I'm wondering if you have any sense for what the inventories are for that.
In the channel you know.
That was.
So in other words, regardless of what sort of infrastructure spending or what the gasoline tax might look like next year I'm just wondering if that portends a good 2021 inventories are low.
But you know I think at the end of the day.
Our view is that inventories are low.
And corvid, while it didn't affect necessarily ultimately you know the amount of paving activity that went on it probably affected planning as much as anything for people because they had some uncertainty going into the year earlier on in the season. The other thing I'd point out to you know as I look at this business over the years one of the key criteria to look at is the relative raw material cost between.
Lean North America, Europe, and Asia going into the winter, which is typically the inventory building season.
And right now you have the Buda dine price in Asia that is currently at a premium to North America, Europe, which you know if you just kind of play that out what that means is as the Asian producer, obviously has higher costs if they want to.
Build and export material to North America, and Europe, we think thats favorable.
It can change as you know raw materials can change quickly, but for the time being it looks like.
So that as we move into the summer.
What is referred to as the winter Bill season, we are doing so in a way in which the raw material trends are favorable to us.
Interesting and that dynamic in the path that resulted in you getting sort of maybe a more than your fair share of volumes in Europe I believe so.
I think thats, what you're suggesting it could play out if it's.
It's that.
Raw material feedstock cost disparity per said well it I mean, I'm not going to be so bold as this make that statement Chris does.
That would be kind of a little bit forward leaning, but suffices to say that the clearly if Asian feedstock costs are higher their cost therefore to export to our backyard markets is higher.
Okay and then the other end markets I was interested in was the tire in market where you.
You had 14% higher volumes at least on the polymers I think was the polymer segment and.
I was just wondering if.
If any sense if that reflected some sort of restocking of inventories as these tire and auto plants kinda reopened and got back into production well.
Well I think you know they've they were extraordinary in terms of ceasing production during the call. The crisis and then at the end of the day.
Coming back very fast and everything we see right now is that.
The tire production rates are back to the types of levels were encouraged to see and obviously that reflects on our volume trends.
All right and last question on the 20 million in cost take out that you referenced that you expect to have.
I think.
I want to mischaracterize it but.
Good bye.
On an on a run rate basis exiting 2020 is that to suggest that you expect.
$20 million year over year benefit from those cost Takeouts and 2021 all else equal.
Where did you get some benefit will you have gotten some benefit this year.
We will have gotten the benefit this year and we expect to get the full benefit in 2021, we're very much on track.
So the but I'm just wondering order magnitude the net benefit if you've got some of the benefit this year. The net benefit next year might be something less than two one.
That's correct.
Because some of the benefit would have come in this year. So the incremental benefit you're 100% is not going to be 20 year over year, because some of it was already captured this year for sure.
Okay.
Jan you could sort of split that out roughly yeah, we're not going to do that doing during this call and we will give you more fulsome view as next year unfolds, but suffice it to say that we have captured a portion of that this year and we feel very confident that on a run rate basis. This will be fully reflected in the.
Our results in 2021.
Thank you.
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We have no further questions on queue Mr. Shields, you may continue.
Thank you Kirby we want to thank all of our listeners this morning, and all of our participants for their thoughtful questions. There.
There will be a replay available.
Later, this morning, and that can be accessed either on our website or by dialing one 880 793386.
This concludes our remarks this morning. Thank you.
Thank you. This concludes the credit Corporation third quarter 2020 earnings Conference call you may now disconnect.
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