HOUSTON, July 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 June 30, 2020.

SECOND QUARTER 2020 SUMMARY

• Strong Adjusted EBITDA result despite weaker demand environment associated with COVID-19.
• Second quarter consolidated net loss of $7.1 million, compared to consolidated net income of $43.4 million in the second quarter of 2019.
• Second quarter consolidated Adjusted EBITDA⁽¹⁾ of $69.5 million, down 31.9% compared to the second quarter of 2019.
• Polymer segment operating income of $16.8 million, down 52.1% compared to the second quarter of 2019, and Adjusted EBITDA⁽¹⁾ of $53.8 million, down 10.5% compared to $60.2 million in the second quarter of 2019.
• Excluding the Cariflex business, which was sold in early 2020, Adjusted EBITDA up 17.7% compared to the second quarter of 2019.
• Chemical segment operating loss of $3.9 million, down 118.6% compared to the second quarter of 2019, and Adjusted EBITDA⁽¹⁾ of $15.7 million, down 62.5% compared to $41.9 million in the second quarter of 2019.
• Decrease reflects lower sales volume due to market conditions and the impact of COVID-19, and lower average sales prices in the Crude Sulfate Turpentine chain, and to a lesser extent, for Tall Oil Rosin upgrades.
• Strong liquidity position at quarter end with $137.4 million in cash and $208.4 million of borrowing availability under the $250 million ABL Facility.

"As the global impact of COVID-19 intensified in the second quarter, Kraton continued to prioritize the health and safety of employees, customers, stakeholders and the communities in which we operate. During the quarter, our manufacturing sites and labs maintained normal operations under expanded safety protocols, with the majority of our employees continuing to work remotely," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer. "While the progression of COVID-19 adversely affected demand in many end markets, Kraton again delivered strong financial results with Adjusted EBITDA of $69.5 million, a testament to the resiliency of our broad market diversification and sustainability of our business model. During the second quarter we continued to see stable demand in many end markets including medical, personal care, adhesives and infrastructure," said Fogarty.

"While the current market environment creates significant uncertainty for the balance of the year, Kraton's long-term operating and strategic objectives remain unchanged and we remain optimistic about our long-term prospects. We will continue to execute on development of our innovation pipeline to drive organic growth and position Kraton for the future. Recently introduced innovations include our REvolution^TM family of biobased, low-color Rosin Ester formulations in our Chemical segment, and our CirKular+^TM family of polymers designed to address compatibilization challenges for plastic waste streams and facilitate recyclability and expansion of the circular economy, demonstrating our commitment to sustainability," said Fogarty. "With respect to capital allocation, debt reduction remains a primary focus, and we continue to maintain flexibility and rigor around capital spending. In addition, we continue to drive operational improvements throughout the company and remain on track to deliver $20 million of run rate cost savings by year-end."

Polymer segment Adjusted EBITDA for the second quarter of 2020 was $53.8 million, down $6.3 million or 10.5% compared to the second quarter of 2019.  Excluding the operating results for the Cariflex business that was sold in early 2020, Adjusted EBITDA for the second quarter of 2020 would have been 17.7% compared to the second quarter of 2019. Second quarter 2020 results for the Polymer segment reflect continued stability in margins and higher sales volume, compared to the second quarter of 2019. Sales volume for Performance Products was up 6.7% compared to the second quarter of 2019 on higher sales into paving and roofing applications and stronger sales of SIS into adhesive applications. Specialty Polymer sales volume decreased 14.7% due to lower sales into lubricant additive applications and the impact of current market conditions, including COVID-19, on sales into consumer durables, oilfield, and automotive applications, partially offset by higher sales into medical applications.

Second quarter 2020 Adjusted EBITDA for the Chemical segment was $15.7 million, down $26.2 million or 62.5% compared to the second quarter of 2019. The decrease in Adjusted EBITDA is associated with lower sales volume reflecting current market conditions and the adverse impact of COVID-19, lower average selling prices in our Crude Sulfate Turpentine chain, and to a lesser extent, lower pricing for Tall Oil Rosin upgrades, partially offset by lower raw material costs and lower fixed costs, primarily due to timing. Sales volume for Performance Chemicals was down 18.9% on lower sales into oilfield applications and fuel additives, as well as the impact of COVID-19 on other end markets.  Sales volume in Adhesives was down 7.9%, largely due to lower sales into road marking applications. Sales volume for Tires was down 39.5%, reflecting lower global automobile sales and the disruption in tire production associated with COVID-19.

Polymer Segment

Q2 2020 VERSUS Q2 2019 RESULTS

Revenue for the Polymer segment was $203.9 million for the three months ended June 30, 2020 compared to $297.9 million for the three months ended June 30, 2019. The decrease was driven by the divestiture of our Cariflex business in March 2020, lower average sales prices resulting from lower raw material costs, partially offset by higher sales volumes in our Performance Products product line.

Sales volumes of 75.5 kilotons for the three months ended June 30, 2020 declined 5.9% compared to the three months ended June 30, 2019, largely due to the aforementioned divestiture of our Cariflex business. Performance Products sales volumes increased 6.7% due to stronger paving and roofing demand with improved weather conditions and stronger sales of SIS into adhesives. Specialty Polymers sales volumes decreased 14.7% primarily from lower purchases by a significant lubricant additives customer and weaker market fundamentals, including COVID-19, which negatively impacted sales into consumer durables and oilfield applications, primarily in North America, and global automotive applications. These declines were partially offset by sales into medical and other compound applications. The IRSA provided $8.7 million of sales revenue for the three months ended June 30, 2020. The negative effect from changes in currency exchange rates between the periods was $3.3 million.

For the three months ended June 30, 2020, the Polymer segment generated Adjusted EBITDA (non-GAAP) of $53.8 million compared to $60.2 million for the three months ended June 30, 2019. The decline in Adjusted EBITDA was largely due to the divestiture of our Cariflex business. However, on a comparative basis, excluding the operating results of our Cariflex business, Adjusted EBITDA (non-GAAP) would have been approximately $8.0 million higher. The higher pro-forma Adjusted EBITDA (non-GAAP) is driven by the factors described above. The positive effect from changes in currency exchange rates between the periods was $1.3 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

Chemical Segment

Q2 2020 VERSUS Q2 2019 RESULTS

Revenue for the Chemical segment was $151.8 million for the three months ended June 30, 2020 compared to $197.4 million for the three months ended June 30, 2019. The decrease in revenue was attributable to lower average sales prices in terpene refinery upgrades and rosin esters driven by a decrease in gum turpentine price and excess hydrocarbon supply compared to 2019 levels, combined with lower sales volumes in TOFA refined products and TOR upgrade products as a result of COVID-19, primarily in North America.

Sales volumes were 87.1 kilotons for the three months ended June 30, 2020, a decrease of 16.7 kilotons or 16.1%, due to market fundamentals, including the decline in oilfield demand, and the impacts of COVID-19, primarily in North America, largely within applications such as tires, automotive, and road markings, and timing of purchases by significant customers. The negative effect from changes in currency exchange rates between the periods was $1.4 million.

For the three months ended June 30, 2020, the Chemical segment generated $15.7 million of Adjusted EBITDA (non-GAAP) compared to $41.9 million for the three months ended June 30, 2019. The decrease in Adjusted EBITDA was primarily driven by lower sales volumes and sales prices as a result of market fundamentals and the impacts from COVID-19, primarily in North America. The positive effect from changes in currency exchange rates between the periods was $0.1 million. See a reconciliation of GAAP operating income to non-GAAP Adjusted EBITDA below.

CASH FLOW AND CAPITAL STRUCTURE

During the six months ended June 30, 2020, we reduced Kraton indebtedness by approximately $369.7 million, and  consolidated net debt excluding the effect of foreign currency (non-GAAP) by $474.1 million. Further, we had approximately $346.0 million of available liquidity, comprised of $137.4 million of cash on hand and a borrowing base of $208.4 million largely undrawn on our ABL facility as of June 30, 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 the multi-year 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) and consolidated net debt excluding the effect of foreign currency (non-GAAP):

OUTLOOK

During the second quarter of 2020 the progression of COVID-19 had an adverse impact on market demand in various end markets, particularly in North America, and the outlook for the second half of 2020 remains uncertain. For the second half of 2020, we expect that weaker demand related to COVID-19, and other factors including lower planned plant operating rates, the timing of turnarounds and maintenance activities as well as the absence of the first half 2020 Cariflex contribution prior to the first quarter 2020 sale, will have an adverse impact on our financial results, compared to the first half of 2020.

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 (Loss) per Share, Consolidated Net Debt (including as adjusted to exclude the effect of foreign currency), Adjusted Gross Profit, and Adjusted Gross Profit Per Ton. 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 and Consolidated Net Debt excluding the effect of foreign currency: 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, July 30, 2020 at 9:00 a.m. (Eastern Time) to discuss second 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 July 30, 2020 through 1:59 a.m. (Eastern Time) on August 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 888-562-6891 (toll free) or 203-369-3496 (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, REvolution and CirKular+ 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), our ability to execute our innovation pipeline and our plans for operation improvements, our expectations with respect to debt reduction, capital spending and run rate cost savings for 2020 and the information and the matters described under the caption "Outlook," 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