HOUSTON, April 29, 2020 /PRNewswire/ -- Kraton Corporation (NYSE: KRA), a leading global sustainable producer of  specialty polymers and high-value biobased products derived from pine wood pulping co-products, announces financial results for the quarter ended March 31, 2020.

FIRST QUARTER 2020 SUMMARY

• First quarter 2020 results reflect the benefit of geographic and end-market diversification, with no material impact associated with COVID-19 during the quarter. Our plants continued to operate at normal capacities, and our supply chain remained largely intact, with adequate availability of key raw materials.
• First quarter consolidated net income of $209.0 million, compared to $13.6 million in the first quarter of 2019.
• Included in consolidated net income is the gain on disposition of our Cariflex™ business of $175.2 million. See further discussion within Cash Flow and Capital Structure.
• First quarter consolidated Adjusted EBITDA⁽¹⁾ of $77.9 million, down 12.9% compared to the first quarter of 2019.
• Polymer segment operating income of $17.9 million, up 93.8% compared to the first quarter of 2019, and Adjusted EBITDA⁽¹⁾ of $51.2 million, up 6.3% compared to $48.2 million in the first quarter of 2019.
• Stable unit margins across all product lines and lower fixed costs due to fixed costs management initiatives and timing.
• Chemical segment operating income of $10.3 million, down 60.1% compared to the first quarter of 2019, and Adjusted EBITDA⁽¹⁾ of $26.7 million, down 35.3% compared to $41.3 million in the first quarter of 2019.
• Unit margins were lower compared to the first quarter of 2019, primarily in the Crude Sulfate Turpentine chain.
• Sales volumes were up 6.3% for the first quarter of 2020, due to increased sales of raw materials, compared to constrained raw material availability for the first quarter of 2019, and to increase sales of Tall Oil Rosin upgrades.
• In connection with the sale of our Cariflex business on March 6, 2020, during the first quarter, consolidated debt was reduced by $378.8 million. Consolidated Net Debt⁽¹⁾ excluding the effect of foreign currency was reduced by $484.6 million.
• $350 million of liquidity at quarter end, comprised of $150 in cash and approximately $200 million of borrowing availability under the $250 million ABL Facility.

"Our first core value at Kraton is Safety," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer. "In today's COVID-19 world, we have taken extraordinary steps to ensure the health and safety of all our employees globally.  Approximately half our colleagues today continue to work remotely, while those essential to operate our polymer and chemical plants and innovation centers globally are taking additional cautious measures to mitigate any possible exposure to the coronavirus. We are grateful that because of these actions we undertook, first in China, and later extending across our global network, we have had very few confirmed COVID-19 cases. Moreover, our dedicated colleagues continue to keep our global business fully operational, supplying customers in all regions, in many cases with chemical and polymer raw materials essential to slow the spread of the virus, or that are sadly needed to respond to increased demand in vital medical supply chains," added Fogarty.

"As for our overall first quarter 2020 results, we are very pleased to have delivered $77.9 million of Adjusted EBITDA, especially considering this to be against a backdrop of such a uniquely challenging global operating environment. Kraton's results for the quarter reflect the benefit of our broad geographic and end market diversification, evidence of the sustainability of our business model. During the quarter we saw positive demand trends in a number of end markets, including medical applications such as IV bags and in personal care and hygiene products. We also saw growing sales into adhesive markets, driven by tapes and labels for packaging applications as well as construction adhesives used in applications such as medical gowns and masks. Our first quarter results also benefited from our disciplined approach to cost management, and we project we remain on track to deliver $20 million of run rate cost savings in 2020. As a critical supplier of key inputs into a wide range of products that are vital in the current market, our production facilities around the globe have continued to operate at normal capacities. Currently, we have adequate access to key raw materials, and we have had minimal disruption in our global supply chain and customer fulfillment capability. We are also very pleased to have completed the sale of our Cariflex business in the quarter, providing for a substantial debt reduction and improving our capital structure and liquidity position," said Fogarty.

"Following the sale of our Cariflex business in early March, we paid off the USD Tranche under our Term Loan Facility and paid approximately $84.7 million under the Euro Tranche. As a result, we reduced consolidated net debt by $495.3 million during the quarter. Furthermore, we ended the first quarter with liquidity of approximately $350 million, with cash of $151.5 million, and a borrowing base of $198 million under our $250 million ABL facility. In addition, and as announced on April 15^th, we have renewed our ABL facility, extending the maturity date until January of 2023," said Fogarty.

Polymer segment Adjusted EBITDA was $51.2 million in the first quarter of 2020, up $3.0 million or 6.3% compared to the first quarter of 2019. Lower fixed costs and continued stability in Polymer segment unit margins, as evidenced by Gross Profit of $68.7 million and Adjusted Gross Profit of $1,070 per ton, contributed to an Adjusted EBITDA margin of 21.3% for the quarter. Although sales volume for the segment was down 4.0% compared to the first quarter of 2019, the decrease was attributable to lower paving sales in our Performance Products business relative to the first quarter of 2019, during which customers built significant inventories in anticipation of a strong 2019 paving season,  which was partially offset by higher sales of styrene-isoprene-styrene ("SIS") grades into adhesive applications, particularly into medical products. Specialty Polymers sales volume was up modestly compared to the first quarter of 2019, largely due to the timing of sales to a large lubricant additive customer, and we did see encouraging signs that our Hydrogenated Styrenic Block Copolymer customers in China are working to resume production earlier than expected. With regard to our Cariflex business, we completed the sale to Daelim Industrial Co., Ltd. ("Daelim") in early March. As we did not own the Cariflex business for the entirety of the first quarter of 2020, Cariflex sales volume was down 9.8% compared to the first quarter of 2019.

Adjusted EBITDA for the Chemical segment was $26.7 million in the first quarter of 2020, down $14.6 million or 35.3% compared to the first quarter of 2019. Sales volume was up 6.3% compared to the first quarter of 2019 in which we experienced constrained availability of Crude Tall Oil. However, the impact of higher sales volume and lower average raw material costs was more than offset by lower selling prices and margins in our Crude Sulfate Turpentine chain, and to a lesser extent our Tall Oil Rosin chain. Sales volume for Adhesives was up 4.3% compared to the year-ago quarter, reflecting demand in packaging and construction applications. Performance Chemicals sales volume was up 7.5% compared to the first quarter of 2019, with lower Tall Oil Fatty Acid ("TOFA") and derivative sales more than offset by higher opportunistic sales of raw materials, while sales volume for Tires was up 1.3% versus the first quarter of 2019.

Polymer Segment

Q1 2020 VERSUS Q1 2019 RESULTS

Revenue for the Polymer segment was $240.4 million for the three months ended March 31, 2020 compared to $261.1 million for the three months ended March 31, 2019. The decrease was driven by lower sales volumes in Performance Products, and lower average sales prices resulting from lower raw material costs across all product lines. Sales volumes of 70.8 kilotons for the three months ended March 31, 2020 decreased 4.0% compared to the three months ended March 31, 2019. The 7.9% decline in Performance Products sales volumes was driven by higher relative pre-buy activity during the three months ended March 31, 2019, partially offset by stronger sales of SIS into adhesives applications. Specialty Products sales volumes increased 3.9% due to timing of purchases by a significant lubricant additives customer. Cariflex sales volumes decreased 9.8% due to the completion of the sale of Cariflex on March 6, 2020. With the completion of the Cariflex sale, the IRSA provided one kiloton of sales volume for the three months ended March 31, 2020. The negative impact from changes in currency exchange rates between the periods was $4.3 million.

For the three months ended March 31, 2020, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $51.2 million compared to $48.2 million for the three months ended March 31, 2019. The 6.3% increase in Adjusted EBITDA is attributed to lower fixed costs due to fixed costs management initiatives and timing, stronger sales of SIS into adhesives applications, and stable unit margins across all product lines, partially offset by lower volumes in Performance Products due to timing of pre-buy activity. Also included in Adjusted EBITDA is the amortization of non-cash deferred income of $3.4 million, which represents revenue deferred until the products are sold under the IRSA. The negative effect from changes in currency exchange rates between the periods was $1.9 million. During the first quarter 2020, COVID-19 did not have a material impact on our business and results of operations. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

Chemical Segment

Q1 2020 VERSUS Q1 2019 RESULTS

Revenue for the Chemical segment was $186.9 million for the three months ended March 31, 2020 compared to $195.4 million for the three months ended March 31, 2019. The decrease in Chemical segment revenue was primarily attributable to lower average selling prices for derivatives in our CST and TOR chains, partially offset by higher sales volumes. Sales volumes were 110.1 kilotons for the three months ended March 31, 2020, an increase of 6.5 kilotons or 6.3%, due to higher raw material and TOR sales in Performance Chemicals and Adhesives, partially offset by TOFA and TOFA derivatives. As a result, Performance Chemicals, Adhesives, and Tires sales volumes increased 7.5%, 4.3%, and 1.3%, respectively. The negative effect from changes in currency exchange rates between the periods was $2.8 million.

For the three months ended March 31, 2020, the Chemical segment generated $26.7 million of Adjusted EBITDA (non-GAAP) compared to $41.3 million for the three months ended March 31, 2019. The 35.3% decrease in Adjusted EBITDA was due to lower unit margins primarily driven by lower average selling prices, which adversely impacted pricing for derivatives in our CST and TOR chains. This decrease was partially offset by higher sales volumes of raw materials and TOR upgrades. The positive effect from changes in currency exchange rates between the periods was $0.3 million. During the first quarter 2020, COVID-19 did not have a material impact on our business and results of operations. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

CASH FLOW AND CAPITAL STRUCTURE

During the three months ended March 31, 2020, we reduced Kraton indebtedness by approximately $378.8 million, and  Consolidated Net Debt excluding the effect of foreign currency (non-GAAP) by $484.6 million. Further, we had approximately $350.0 million of available liquidity, comprised of $151.5 million of cash on hand and a borrowing base of $198.3 million largely undrawn on our ABL facility as of March 31, 2020.

On March 6, 2020, we completed the sale of our Cariflex business to Daelim for gross proceeds of $530.0 million, adjusted for incremental working capital of $5.8 million, less contractual capital contributions of $25.3 million. The transaction is subject to a customary post-closing working capital adjustment and a contractual capital contribution post-closing adjustment. Upon closing, we recognized a gain of $175.2 million, and as part of the consideration received, entered into a multi-year Isoprene Rubber Supply Agreement ("IRSA") with Daelim. As the IRSA product sales are at cost, we deferred approximately $180.6 million of revenue, of which $158.2 million and $22.4 million are recorded within deferred income and other payables and accruals, respectively, on the condensed consolidated balance sheet. The deferred income will be amortized into revenue as a non-cash transaction when the products are sold. In accordance with the IRSA, we will supply Isoprene Rubber to Daelim for a period of five years, with an optional extension for an additional five years.

We used the $510.5 million net proceeds from the transaction principally for repayment of the full outstanding balance of $290.0 million under the U.S. dollar denominated tranche (the "USD Tranche") of the Company's senior secured term loan facility (the "Term Loan Facility") and repayment in the amount of €75.0 million, or approximately $84.7 million, of borrowings under the Euro dollar denominated tranche (the "Euro Tranche") of the Term Loan Facility. We intend to use the remaining proceeds in accordance with the terms of the Term Loan Facility to make additional repayments of debt, invest in strategic assets of the Company, and/or pay transaction costs.

Summary of principal amounts for indebtedness and a reconciliation of Kraton debt to Consolidated Net Debt (non-GAAP):

OUTLOOK

While our first quarter results were not materially impacted by COVID-19, the progression of COVID-19 may result in significant disruption in global demand fundamentals for the balance of 2020. As it is not possible to determine the magnitude or duration of the impact that COVID-19 may have for the balance of 2020, we are not providing full year 2020 Adjusted EBITDA guidance at this time. This decision is based solely on our inability to effectively determine likely outcomes from COVID-19 progression, or to translate a wide range of possible scenarios into an accurate financial forecast, and is not a reflection of any specific concerns or known adverse developments in our business.

We will continue to monitor the potential impacts of COVID-19 on customer demand and we intend to maintain transparency around demand trends and market developments and our expectations for their impact on our business results as the year progresses.

USE OF NON-GAAP FINANCIAL MEASURES

This press release includes the use of both GAAP and non-GAAP financial measures. The non-GAAP financial measures used are EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Diluted Earnings per Share, Consolidated Net Debt (including as adjusted to exclude the effect of foreign currency), and Adjusted Gross Profit. Tables included in this earnings release reconcile each of these non-GAAP financial measures with the most directly comparable U.S. GAAP financial measure. For additional information on the impact of the spread between FIFO and ECRC, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

We consider these non-GAAP financial measures to be important supplemental measures of our performance and believe they are frequently used by investors, securities analysts, and other interested parties in the evaluation of our performance including period-to-period comparisons and/or that of other companies in our industry. Further, management uses these measures to evaluate operating performance, and our incentive compensation plan based incentive compensation payments on our Adjusted EBITDA performance and attainment of net debt reduction, along with other factors. These non-GAAP financial measures have limitations as analytical tools and in some cases can vary substantially from other measures of our performance. You should not consider them in isolation, or as a substitute for analysis of our results under U.S. GAAP in the United States.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin: For our consolidated results, EBITDA represents net income (loss) before interest, taxes, depreciation, and amortization. For each reporting segment, EBITDA represents operating income (loss) before depreciation and amortization, and earnings of unconsolidated joint ventures. Among other limitations EBITDA does not: reflect the significant interest expense on our debt or reflect the significant depreciation and amortization expense associated with our long-lived assets; and EBITDA included herein should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements, which can vary from the terms used herein. The calculation of EBITDA in our debt agreements includes adjustments, such as extraordinary, non-recurring or one-time charges, proforma cost savings, certain non-cash items, turnaround costs, and other items included in the definition of EBITDA in the debt agreements. Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure. As an analytical tool, Adjusted EBITDA is subject to all the limitations applicable to EBITDA. We prepare Adjusted EBITDA by eliminating from EBITDA the impact of a number of items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC, but you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, due to volatility in raw material prices, Adjusted EBITDA may, and often does, vary substantially from EBITDA and other performance measures, including net income calculated in accordance with U.S. GAAP. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenue (for each reporting segment or on a consolidated basis, if applicable). Because of these and other limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business.

Adjusted Gross Profit and Adjusted Gross Profit Per Ton: We define Adjusted Gross Profit Per Ton as Adjusted Gross Profit divided by total sales volume (for each reporting segment or on a consolidated basis, as applicable). We define Adjusted Gross Profit as gross profit excluding certain charges and expenses. Adjusted Gross Profit is limited because it often varies substantially from gross profit calculated in accordance with U.S. GAAP due to volatility in raw material prices.

Adjusted Diluted Earnings (Loss) Per Share: We prepare Adjusted Diluted Earnings (Loss) per Share by eliminating from Diluted Earnings (Loss) per Share the impact of a number of non-recurring items we do not consider indicative of our on-going performance, including the spread between FIFO and ECRC.

Consolidated Net Debt: We define Consolidated Net Debt as total consolidated debt (including debt of KFPC) less consolidated cash and cash equivalents. Management uses Consolidated Net Debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using Consolidated Net Debt is useful to investors in determining our leverage since we could choose to use cash and cash equivalents to retire debt. We also present Consolidated Net Debt, as adjusted for foreign exchange impact accounts for the foreign exchange effect on our foreign currency denominated debt agreements.

CONFERENCE CALL AND WEBCAST INFORMATION

Kraton has scheduled a conference call on Thursday, April 30, 2020 at 9:00 a.m. (Eastern Time) to discuss first quarter 2020 financial results. Kraton invites you to listen to the conference call, which will be broadcast live over the internet at www.kraton.com, by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page.

You may also listen to the conference call by telephone by contacting the conference call operator 5 to 10 minutes prior to the scheduled start time and asking for the Kraton Conference Call – Passcode: 8680118. U.S./Canada dial-in 800-857-6511. International dial-in #: 210-839-8886.

For those unable to listen to the live call, a replay will be available beginning at approximately 11:00 a.m. (Eastern Time) on April 30, 2020 through 1:59 a.m. (Eastern Time) on May 13, 2020. To hear a replay of the call over the Internet, access Kraton's Website at www.kraton.com by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page. To hear a telephonic replay of the call, dial 888-566-0418 (toll free) or 203-369-3043 (toll).

ABOUT KRATON CORPORATION

Kraton Corporation (NYSE: KRA) is a leading global sustainable producer of specialty polymers and high-value biobased products derived from pine wood pulping co-products. Kraton's polymers are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants and lubricants, and medical, packaging, automotive, paving and roofing applications. As the largest global provider in the pine chemicals industry, the company's pine-based specialty products are sold into adhesives and tire markets, and it produces and sells a broad range of performance chemicals into markets that include fuel additives, oilfield chemicals, coatings, roads, construction, metalworking fluids and lubricants, inks, and mining. Kraton offers its products to a diverse customer base in numerous countries worldwide.

Kraton, the Kraton logo and design, are all trademarks of Kraton Polymers LLC or its affiliates.

FORWARD LOOKING STATEMENTS

This press release contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that reflect our plans, beliefs, expectations, and current views with respect to, among other things, future events and financial performance. Forward-looking statements are often characterized by the use of words such as "outlook," "believes," "target," "estimates," "expects," "projects," "may," "intends," "plans," "on track" or "anticipates," or by discussions of strategy, plans, or intentions. The statements in this press release that are not historical statements, including, but not limited to, statements regarding our expectations as to the continued impact of the COVID-19 pandemic (including governmental and regulatory actions) on demand for our products, on the economy and on our customers, suppliers, employees, business and results of operations (including full-year 2020 Adjusted EBITDA) and our expectations regarding run rate cost savings for 2020 are forward-looking statements.

All forward-looking statements in this press release are made based on management's current expectations and estimates, which involve known and unknown risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially from those expressed in forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those expressed in forward-looking statements is contained in our most recently filed Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and in other filings made by us with the U.S. Securities and Exchange Commission (the "SEC"), and include, but are not limited to, risks related to: our ability to repay or re-finance indebtedness and risk associated with incurring additional indebtedness; our reliance on third parties for the provision of significant operating and other services; the impact of extraordinary events, including health epidemics or pandemics such as COVID-19 (including governmental and regulatory actions relating thereto), natural disasters and other weather conditions and terrorist attacks; conditions in the global economy and capital markets; fluctuations in raw material costs; limitations in the availability of raw materials; competition in our end-use markets; fluctuations in global tariffs and logistics costs; and other factors of which we are currently unaware or deem immaterial. Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic. To the extent any inconsistency or conflict exists between the information included in this press release and the information included in our prior reports and other filings with the SEC, the information contained in this press release updates and supersede such information. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements contained herein speak only as of the date of this press release, and we assume no obligation to publicly update or revise such forward-looking statements in light of new information or future events.

For further information:

H.Gene Shiels - (281) 504-4886

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SOURCE Kraton Corporation