Q1 2021 Kraton Corp Earnings Call
[music].
Good morning, and welcome to the Crayon Corporation first quarter 'twenty One earnings Conference call. My name is Dale and I will be your conference muscle theaters. At this time all participants are in listen only mode. Following the company's prepared remarks there'll be a question and answer period, if you will.
Like to ask a question. Please press star one on your Touchtone phone.
Today's conference is being recorded.
You have any objections you may disconnect at this time.
I'll now turn the call over to Mr Gene Shiels.
Director of Investor Relations.
Sir you may now begin.
Thank you Danielle good morning, and welcome to the Great Ton Corporation first quarter 2021 earnings call.
With me on the call. This morning are Kevin Fogarty, <unk>, President and Chief Executive Officer, and <unk>, <unk> Executive Vice President and Chief Financial Officer.
A copy of the first quarter news release and the related presentation material that we'll review. This morning is available in the Investor Relations section of our website.
Before we review results for the first quarter I'd like to draw your attention to the disclaimers on forward looking information and the use of non-GAAP measures, which is included in the presentation. This morning, as well as in Yesterdays earnings 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 there are risks uncertainties and other factors that may cause <unk> actual performance to be significantly different from the expectations stated or implied in any forward looking statements we make today.
Our forward looking statements speak only as of the day, they're 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 a full discussion of these risk factors. Please refer to our forms 10-K, 10-Q and other regulatory filings that are available in the Investor Relations section of our website.
Finally, 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 yesterday's earnings release and also in the appendix of the presentation material. This morning.
Following our prepared comments, we'll open the line for your questions I'll now turn the call over to Kevin Fogarty, Kevin. Thanks.
Thanks, Jane and good morning, everyone.
Over the course of the first quarter. We saw continued improvement in global demand trends and this contributed to solid results, we posted for the first quarter of 2021.
These favorable demand trends translated into strong volume growth for our polymer segment specialty polymers volume was up 24, 5% compared to the first quarter of 2020, driven by demand recovery in China and broader Asia and we also saw demand improvement in North America and Europe. In addition sales volume for performance products was up six 5% compared to the first.
Quarter of 2020 on higher sales into paving and roofing applications in Europe in anticipation of an upcoming strong paving season.
Total ran fundamentals in the first quarter also contributed to improved results in our chemical segment with overall sales volume for the chemical segment up.
One 3% versus the first quarter of 2020 core sales volume was up almost 3% on higher demand for rosin esters telephone until for derivatives. As a result, we had a more favorable sales mix with lower sales of raw materials than the year ago quarter straw.
Strong demand for rosin esters telephone total upgrades drove higher operating rates in our refineries during the first quarter, which in conjunction with favorable price trends led to improved profitability for the segment, despite pressures associated with rising energy and raw material costs.
Overall, we're very pleased with the financial results, we delivered in the first quarter given cost associated with our turnaround at Behr and particularly in light of some specific and challenging structural market conditions during the quarter.
As you are no doubt aware, thus far in 2020, we have seen significant increases in raw material and energy costs and this impacts both our polymer and chemical segments. In response, we have implemented price increases in both segments to address these inflationary pressures.
However, as we've experienced in the past the magnitude and trend of raw material price increases, particularly in our polymer segment.
Resulted in some timing related margin pressure during the first quarter, which we expect will be recovered over the course of the second and third quarters in other words, we remain confident in our ability to manage these raw material cost trends and preserve target margins through the through our price right strategy.
Of course, the significant constraints in global transportation and logistics channels was also a factor in the first quarter. Both in terms of cost inflation and because of the limited availability of ocean vessels and coupled with the imbalance in shipping containers in Asia Tenors, but further pressure on supply change to further complicate our cut.
<unk> fulfillment processes, while we were able to mitigate the impact of transportation logistics constraints to a large extent it was not without significant effort on the part of our teams.
We expect demand for our products to continue the positive trend. We also recognize the logistics are likely to remain tight in the near term and this reality require more focus on advanced lead times and the need for further creativity as we move forward.
In addition, as you all well know during the first quarter Winter storm, Yuri impacted the petrochemical and refining infrastructure in the Gulf Coast region and disrupted activity at a number of mills from which we source CTO in CST and plans from which we source raw materials, such as diarrhea nausea free.
As a result, there were limitations on availability of key raw materials with many suppliers dose declaring force majeure and this limited sales in the quarter, particularly for CSD products in our chemical segment and for SaaS product grades in our polymer segment.
On a more positive front during the quarter, we continue to work through the approval process for <unk> and as you have hopefully seen by now on April 21, the environmental Protection Agency approved an emergency exemption for the states of Utah, Minnesota, and Georgia to allow Delta airlines to utilize by axiom for specific applications in those states. We believe this is an important.
Step and validation of <unk> by accident ex.
Efficacy safety and durability, and we intend to pursue broader regulatory approvals that may provide for further deployment of this unique technology.
Lastly, during the quarter, we remain focused on sustainability and our numerous ESG related objectives.
We continue to see positive demand and market response for the Revolution and circular plus platforms. We have discussed in previous quarters. We also continued to.
To position <unk> for further opportunities in the growing biofuel space.
I'll talk more about these later in the call, but for now I'll turn the call over to our executive Vice President and Chief Financial Officer, <unk>, <unk>, who will provide more specifics on our financial results for the second quarter of 2021 assets.
Thanks, Kevin and good morning, everyone as we turn to slide five I'll review, the first quarter 2021 financial highlights.
Growth was a solid quarter and a great start to the year on a consolidated basis revenue increased $10 million compared to the first quarter of 2020 with higher sales volumes in both segments and the positive impact of changes in currency rates more than offsetting the revenue decline associated with the disposition of our care flex business.
Despite the first quarter market conditions that Kevin mentioned.
Adjusted EBITDA, we book, the adjusted EBITDA of $67 7 million.
While this was down $10 $2 million compared to the first quarter of 'twenty.
You'll recall back in the first quarter of 'twenty, we had a $10 3 million adjusted EBITDA contribution from our care flex business.
While we did have higher costs in the quarter associated with a bare turnaround excluding the effect of the careful ex sale alone adjusted EBITDA would have been up modestly versus the year ago quarter.
With regard to raw material inflation in the first quarter, while we have actively implemented price increases in response.
Two increased raw material cost the trajectory of raw material price trends results in a lag effect and realization of price increases, particularly in our polymer segment and to a lesser extent in our chemical segments.
As a result, there was some inherent but we expect transitory margin pressure in the first quarter and we expect this dynamic to normalize in the second quarter with further realization of price increases already announced and implemented in.
In addition, and as previously disclosed during the first quarter, we began a significant statutory turnaround at our Bayer, France location, which is required approximately every six years.
We estimate the total cost of this turnaround to be approximately $15 million.
During the first quarter, we incurred approximately $3 million of costs related to the turnaround which were reflected in our first quarter 'twenty, one adjusted EBITDA of $67 7 million.
We expect the majority of the remaining turnaround costs will bear to be incurred in the second quarter GAAP.
These factors are consolidated adjusted EBITDA margin for the first quarter of 'twenty, one was 15, 5%.
Level that in our view is not representative of more normalized business performance certainly excluding the impact of major turnarounds and in a more benign raw materials environment.
In terms of debt reduction liquidity and overall capital structure during the first quarter of 'twenty, one consolidated net debt increased by $18 1 million or <unk> $38 3 million, excluding the favorable impact of foreign exchange.
This increase is largely associated with working capital and funding the seasonal inventory build in advance of the paving and roofing season.
Debt reduction remains a key priority and as the year progresses, we expect further reduction in outstanding debt. We believe we have significant financial flexibility as evidenced by our strong cash position at quarter end and $200 million of available borrowing base under the ABL facility.
I will now move to slide six for a review of our segment results starting with our polymer segment.
First quarter 2021 revenue for the polymer segment was $241 $2 million essentially flat versus revenue of $240 4 million in the first quarter of 2020.
With the benefit of.
From a five 6% increase in segment sales volumes, largely offset by a $36 9 million period over period revenue decline associated with a tariff flex divestiture.
The positive impact from changes in currency between the periods was $10 $9 million.
The significant improvement in global demand fundamentals compared to the first quarter of 2020 contributed to sales volume growth of five 6% for the polymer segment and adjusting for the sale of care Flex sales volume for our core specialty polymers and performance products businesses would have been up 13, 1% compared to the first quarter of 2020.
The specialty polymers improved demand in China, and broader Asia, particularly in consumer durable applications and in North American and European automotive applications contributed to 24, 5% growth in sales volume sales volumes with performance products increased six 5% compared to the first quarter of 2020 largely.
Due to higher sales into European paving and roofing markets, which we believe reflects positive customer sentiment and positive expectations for the 2021 paving season farmers.
Pharma segment adjusted EBITDA for the first quarter of 2021 was $37 5 million a decrease of $13 7 million compared to $51 2 million reported for the first quarter of 2020.
Of this decrease $10 3 million relates to the adjusted EBITDA contribution from <unk> prior to its sale.
And $3 million relates to the first quarter 2021 cost associated with the turnaround that our Bayer France location. In addition, as mentioned earlier given the sharp increase in raw material and energy costs in the first quarter of this year, we expect some margin pressure in the polymer segment associated with the inherent lag.
And the price increase realization.
These factors had an impact on adjusted EBITDA margin of 15, 5% for the first quarter and thus they also were a factor in the adjusted gross profit per ton of $819 for the first quarter of 2021.
In terms of the decrease in adjusted gross profit per ton from the 1070 <unk> reported in the first quarter of 2020, roughly half relates to the sale of care reflects with a balanced largely associated with the impact of turnaround costs and the impact of raw materials inflation.
We continue to believe an appropriate expectation for the polymer segment adjusted gross profit per ton is in the $900 range, excluding factors such as fixed costs associated with the significant turnaround there the majority of which will be realized in the second quarter.
Now turning to slide seven for a look at our chemical segments results.
Improved global demand fundamentals in the first quarter of 2021 also benefited our chemical segment.
Revenue for the chemical segment was $196 $1 million in the first quarter of 'twenty, one and this was up $9 2 million versus the first quarter of 2020.
Adjusted EBITDA for the chemical segment was $33 million and this was up 13, 3% versus the first quarter of 'twenty with high core volumes associated with improved demand fundamentals, particularly in rosin esters sofa and total derivatives sales volume for the chemical segment was up one 3% compared to the first quarter of 2020.
Sales volume from adhesives was up 10, 8% compared to the first quarter of 2020 on strong overall global demand fundamentals aided by rosin supply limitations, which drove improved rosin ester sales. In addition volume in our <unk> business was up approximately 15% on improved demand and higher innovation based <unk>.
<unk>.
Although sales volume for performance chemicals was down three 5% versus Q1 'twenty we have.
Higher sales of Copa until for derivatives offset by lower sales of raw materials, and CSD product upgrades due to supply limitations and logistic constraints mentioned earlier.
All of which taken together ultimately resulted in positive sales mix higher sales volume higher sales of core volumes in our first quarter also increased refinery operating rates and lowered overall fixed costs compared to the year ago quarter.
These factors were partially offset by higher raw material and energy costs, we continue to address cost inflation through proactive pricing strategies. The adjusted EBITDA margin from the chemical segment was 15, 4% up 110 basis points versus the first quarter of 2020, reflecting improved sales mix from <unk>.
<unk> demand and lower fixed costs.
Turning to slide eight for a summary of our consolidated results for the first quarter of 2021.
Q1, 2021, adjusted EBITDA of 60 767 million compares to $77 9 million for the first quarter of 2020 with the decrease largely associated with the sale of our <unk> business as.
As previously noted sales volume was up in both segments in the first quarter of 'twenty, one would improve profitability in the chemicals segment. However, first quarter 2021, adjusted EBITDA was burdened by the cost associated with the <unk> turnaround as well as the timing related margin pressure associated with raw material cost inflation.
These factors along with the disposition of <unk> Flex and Q1 of 2020 largely accounts for the 270 basis point decrease in adjusted EBITDA margin from 18, 2% from the first quarter of 2020 to 15, 5% in the first quarter of 2021 first.
<unk> first quarter 2021, adjusted earnings was $1 two per share and this compares to $6 47 per share in the first quarter of 2000.
Which reflects the gain on sale of the careful ex business adjusted diluted earnings were <unk> 53 per share in the first quarter of 'twenty, one and this compares to <unk> 27 per share in the first quarter of 'twenty.
Now turning to slide nine a few comments about our balance sheet and capital structure as.
As noted earlier during the first quarter, our consolidated net debt.
Increased 18, 1% to $18 1 million forgive me was $38 3 million, excluding the favorable impact of FX.
This increase reflects the normal seasonal inventory build associated with the paving and roofing season. Overall, we anticipate further debt reduction through cash generation. This year, which will also benefit from the interest savings associated with the refinancing of our 7% senior unsecured notes with four in a quarter sooner.
Unsecured notes completed in December of 2020.
The continued improvement in our capital structure and credit profile has been reflected in the recent improved credit outlook of crate down by standard force to positive.
I'll now turn the call back to Kevin Kevin.
Thanks Adnan.
As we turn to slide 10, a few comments on our near term market outlook.
And our view global demand trends continue to improve through the first quarter of 2021 and into the second corner the demand improvement in the first quarter was broad base benefiting all major regions demand trends in China and broader Asia continued to strengthen in the first quarter and this benefited sales volume for specialty polymers, particularly in consumer durable applications day.
In North America, and Europe also continues to improve the first quarter was also a relatively strong quarter for performance products with sales up six 5% on higher sales into paving and roofing markets in Europe in anticipation of a strong paving season.
As noted earlier, although adhesive demand is currently strong our sales of SaaS into adhesive applications. We're somewhat limited in the first quarter by the raw material constraints imposed by winter storm hurry.
We are anticipating a good paving season this summer with weather always being a conditional factor and we believe the longer term outlook for our paving and roofing business remains favorable passage of a U S infrastructure bill could be a positive factor and paving sales however, given timing associated with appropriations and project planning at the state level it would likely be.
More of a benefit in 2022 and in 2021 rigs.
Regarding our chemical segment, specifically as I noted in late February our chemical segment portfolio continues to benefit from positive market trends from the first quarter demand for adhesives drove higher sales of rosin esters as we had higher sales into road, marking applications strong global market demand in conjunction with tighter supplies of gum rosin.
As contributing to our positive results and favorable pricing trends for rosin esters. Furthermore, the favorable peripheral market conditions are expected to continue into the second quarter benefiting from strong demand as well as increasing prices for alternative vegetable oils.
Turning now to slide 11, a few comments related to our ongoing focus on sustainability.
As we have shared with you over recent quarters. We believe we are seeing the benefits of our efforts in directing our innovation focus towards mega trends to address key societal needs.
Our revolution low color rosin ester formulations in our circular plus polymer technology are examples of recently commercialized innovation successes that we believe will serve as growth platforms for the future. We also believe our Biaxin polymer technology has broad based application, particularly in the medical arena that can be a great benefit to society.
However, our focus on sustainability extends well beyond product development portfolio offerings, we have continued to drive sustainable business practices throughout our manufacturing organization.
<unk> reductions in air emissions and improving water quality in parallel we've been adopting practices to improve efficiency through our supply chain.
Regarding human capital. We have also been intently focused on advancing diversity inclusion at great Dawn, our second core value integrity underscores our DNI commitment with a fundamental expectation that we treat each other with dignity and respect always are.
Saying this is not enough like everything we do at <unk>. We know we must continually improve thus far in 2021, we have taken steps to promote diversity inclusion of <unk> and this includes specific training programs for employees globally. In addition, we have recently organized various open discussion forums, and we've announced a new commitment to support two full scholarship programs.
Minorities, attaining historically black colleges and universities studying within the all important stem field.
Needless to say sustainability is a journey not a destination and given the the relevance of sustainable actions and products to create tons future and to further promote a sustainable culture at <unk>. We have recently appointed Marcelo <unk>, our senior Vice President and chemical segment President to the additional role of Chief Sustainability Officer.
This appointment underscores the importance of a dynamic approach to sustainability in shaping <unk> future through the creation of this important role we expect to ensure further alignment of our portfolio offerings in our R&D focus with the evolving needs of our customers and the markets. We serve in particular, we will continue to leverage the opportunities that exist in our bio based <unk>.
Chemical segment for key platforms, such as revolution, and capturing opportunities associated with the expected growth in the market for Biofuels.
As we continue on this journey to a more sustainable future, we intend to maintain an open dialogue with all of our stakeholders and we recognize the importance of transparency with our customers our suppliers our employees our shareholders and the communities that we serve in <unk>.
Transparency is important and for US 2020 sustainability report, we expect our reporting to be aligned with Sotheby's.
While we await clarity on other frameworks such as with the SEC. Our TFS are Tcf day, we will continue to manage available resources to address relevant market issues.
Kidney relevant material issues and the information needs of all stakeholders.
Turning to our expectations for the year as a whole the favorable demand trends of the first quarter thus far.
That continued into the second quarter, we have positive momentum in the chemical segment with solid demand across the portfolio in terms of pricing and margins. Likewise in our polymer segment the demand outlook remains favorable and while the first quarter results for the segment reflect some margin pressure associated with associated with the pass through of raw material costs, we expect our second quarter results to benefit.
From further realization of the price increases.
Our more recently introduced innovation platforms, such as Revolution circular plus continue to receive positive market reaction and are performing very much in line with our expectations. We're also extremely pleased that you know about the emergency exemption granted by the U S. Environmental Protection Agency in April 'twenty one.
That will facilitate the deployment of our Biaxin polymer technology and specific applications in the fight against COVID-19.
While these particular approvals will not have a material impact on our near term financial results. We view the approval as validation of the efficacy safety and durability of our backs and technology. We believe the unique characteristics of <unk> could be beneficial in a number of potential applications and we therefore will continue to pursue a broader regulatory approvals which would.
Allow for commercial deployment as an anti microbial in the U S and abroad.
In summary, our first quarter results are encouraging and a solid start to the year based upon our current outlook. We now expect adjusted EBITDA for 2021 to exceed $260 million, which represents at least 10% growth versus 2020, excluding the <unk> contribution in 2020 and adjusted for 2021 costs associated with the significant turnaround at our <unk>.
Bayer France facility and this expected growth is up from the comparable 5% to 7% growth target. We shared just in late February we look forward to updating you on our progress as the year unfolds and with that we're happy to open the call up for questions.
Sure.
Thank you for that.
We will now begin the question and answer session if.
If you'd like to ask a question you May press star followed by the number one please.
Please mute your phone and record your name and company named <unk> from <unk>.
Your name and company name is acquired introduce your question.
And if you want to cancel your request you May press star two.
Our first question comes from the line of price caps.
From loop capital markets. Your line is now open you May proceed.
Yes, hi, good morning.
Thank you for taking my question.
I had an overlapping conference call. So I apologize if you addressed this in your formal remarks, but one question about the margins in the Pine chemical segment.
It looks like you benefited a little bit from mix and maybe fixed cost absorption, but it doesn't appear that there was much net benefit from pricing over raws. Despite the fact that you have had some price increase announcements in the updrafts and some from the <unk>.
Turning to <unk>.
Products and competitive products. So could you just comment on what your expectations are for net pricing.
Maybe on a go forward basis.
The 2021 and suits.
So thanks, Chris and the answer is that.
Through these pricing actions just like I said again in the remarks, Theres always a delay effect in terms of the impact of pricing and the timing through which they flow through relative to the timing in which we get to enjoy the cost increases coming from our raw material suppliers. So they're a little bit of a lag effect there, but certainly we do expect that given the market conditions in the alternative value of substitute.
Materials that.
That pricing backdrop.
Backdrop will lend itself to margin expansion over time in our chemical segment.
Okay, and then given it does seem like there's an inflection in the b.
The overall complex.
When you acquired the business.
Cash was it four years ago now.
And maybe more bulk there've been some yeah, maybe okay theres been obviously margin compression that's been more pronounced I guess on the <unk>.
Towards side, what are your thoughts about you know.
<unk>.
Normalized margins for this business and the ability to get there over time, if that's still something that's achievable.
And what would be the drivers to restore margins.
Well I mean it starts with are we are we feeling the right trends and we talked as you recall last year about feeling like we are reaching volume, particularly on the tour side of our of our pine chemical business as you well describe which is where most of the margin pressure has been let's face it.
And the trend now is as positive indeed and.
Look I think that the combination of the fact that the marketplace recognizes.
In <unk> offering applying chemistry, we're talking about a true sustainable offering.
That coupled with the.
The.
The economic backdrop of our substitute materials, particularly gum rosin.
And then a demand overall in the space has created an impetus for margin recovery and so to the extent. If your question is really directed towards will we get back to where we were at the pre acquisition levels. I mean, it's too soon to talk about that type of recovery, but certainly the direction is the right one right now.
Okay, and then if I could just one on the polymer segment and focused on margin also as you pointed out on slide six in your presentation. The gross profit per ton of $8 19 versus over 1000, not really a fair comp Kevin.
<unk> and Orange is.
And a lag in raw material cost recovery, so what might I guess in the second quarter that youll still have.
You'll have incremental costs associated with the bear turnaround, but but if you exclude that what might be a more normalized.
Year over year comparison per the gross profit in that business, assuming you're recovering some of the.
Recent volatility in raw material costs.
As Atmos as we indicated in our prepared remarks, we think more normalized adjusted gross profit per ton is in the ZIP code of $900.
Correct correctly noticed a difference year over year, but.
The factors that we outlined explained that so 900 is what I've been looking at.
There was the over 1000, a year ago that was.
If not better care flex would that have been more like nine 900.
Good.
Good observation yes.
With the disposition of care reflects overall.
Overall margin slightly declined as we've always been indicating that so thats why that.
<unk> plus is more like in the ZIP code of 900 now.
Okay. Thank you.
Thank you for that.
Next question comes from the line of John Roberts from UBS. Your line is now open you May proceed.
Good morning, This is Matt Skowronski on for John.
How should we think about the polymers volume sequentially given it looks like the majority of the turnaround we will fall into the second quarter.
Right Yeah, that's turnaround in terms of manufacturing is not going to affect our sales volume.
Okay, Alright, that's helpful and with regards to the comments on the timing of the price versus raws.
In the polymer segment should we think about pricing catching up by the end of second quarter or will this be more of a third quarter type of tie.
Timing.
It's an interesting question because it just depends on what happens with raw materials, because we're obviously.
In the rears in terms of raw material costs that get implemented instantly when theyre announced versus our timing of our price increases. So I guess, you could say if raw material costs.
We're going to continue through the second quarter into the third quarter. Then we would be continuing to look at a kind of a circa two to three month lag.
Thank you.
At this time, we don't have any question in queue.
Speakers you May proceed.
Alright, well. Thank you Dale we appreciate everyones.
Interest in <unk> and the questions. This morning I'll just note that there is a replay of the call available later this morning and that replay may be accessed by dialing one 800 500 180083 that concludes our comments. Thank you very much.
This concludes the great on Corp, first quarter 2021 earnings conference call.
You may now disconnect.