Kraton Performance Polymers' CEO Discusses Results - Earnings Call Transcript

Kraton Performance Polymers, Inc. (KRA)

Q2 2012 Earnings Call

August 1, 2012 9:00 a.m. ET

Executives

Gene Shiels - Director of Investor Relations

Kevin Fogarty - President and Chief Executive Officer

Steve Tremblay - Vice President and Chief Financial Officer

Analysts

Edward Yang – Oppenheimer

John McNulty – Credit Suisse

Brian Maguire – Goldman Sachs

Kevin McCarthy - Bank of America/Merrill Lynch

Gregg Goodnight – UBS

Christopher Butler – Sidoti & Company

Mike Sison – Keybanc

Jay Brosnahan from WestPark Capital

Presentation

Operator

Good morning and welcome to Kraton Performance Polymers, Inc. Second Quarter Ended June 30, 2012 Earnings Conference Call. My name is Sherry and I will be your conference facilitator. (Operator instructions)

I will now turn the call over to Mr. Gene Shiels, Director of Investor Relations.

Gene Shields

Thank you, Sherry. Good morning, everyone, and welcome to Kraton Performance Polymers' Second Quarter 2012 earnings call. With me on the call this morning are Kevin Fogarty, our President and Chief Executive Officer, and Steve Tremblay, our Vice President and Chief Financial Officer.

Before we review results for the second quarter 2012, I want to focus your attention to the disclaimers on forward-looking information and the use of non-GAAP measures, included in our presentation this and in yesterday's earnings press release.

During our call this morning, we may make certain comments that are not statements of historical fact and thus constitute forward-looking statements. Investors are cautioned that there are risks, uncertainties and other factors that may cause Kraton's actual performance to be significantly different from expectations stated or implied by any comments that we make today.

Our business outlook is subject to a number of risk factors. As the format of this morning's presentation does permit a full discussion of these 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.

With regard to the use of non-GAAP financial measures, a reconciliation of EBITDA and adjusted EBITDA to net income was provided in yesterday's earnings release and is included in the appendix to the material we will review this morning.

Following our prepared remarks we'll open the line for your questions. With that, I'll turn the call over to Kevin Fogarty.

Kevin Fogarty

Thank you, Gene. Following record sales volume and revenue in the first quarter of 2012, we were challenged in the second by a number of headwinds. Within our paving and roofing venues we experienced a slow start to the North American paving season, which was due, in part, to the continued funding challenges for paving projects.

We also experienced wet weather in Europe which constrained roofing activity. In addition to volatility and (inaudible) prices that we saw in the first quarter continue throughout the second quarter and this had an adverse effect on customer-buying patterns. Compounding these factors, we observed a general weakening of demand across a number of markets in which we operate. Given these headwinds, our sales volume in the second quarter of 2012 was 77 kilotons. this was down 5 kilotons or about 6% compared to the 82 kilotons we reported in the second quarter of 2011.

However, taking in account our strong sales volume in the first quarter of this year, our sales volume in the first half of 2012 is still up 2% compared to the first half of 2011. Second quarter sales volume at 77 kilotons was lower than our expectation at the time of our first quarter earnings call in May.

As the constraints on our paving and roofing sales volume and the impact of declining raw material prices on customer demand developed throughout May and June.

With respect to raw material volatility, following the steep run-up in North American beaded iron prices from January through April of this year. We saw the price decline in May and then drop sharply in June and July. This volatility had an adverse effect on demand as many customers acted to minimize purchases in the declining raw material environment in anticipation of lower product prices in the future.

Second quarter 2012 revenue of $376 million is down $10 million or 3% compared to the second quarter 2011 due to changes in currency in which more than offset the net effect of improved pricing on lower sales volume.

A significant portion of the volume declined relative to the second quarter 2012 was seen in lesser differentiated grades of our portfolio with the majority of year-on-year volume decrease concentrated in our USBC product grades.

Second quarter of net income of $12.4 million or $0.38 per diluted share and this compares to $47 million or $1.44 per diluted share in the second quarter of 2011. Second quarter net income includes charges of $2.6 million after tax or about $0.08 per share associated with restructuring and a severe storm that resulted in shutdown of our Belpre plant.

Following the unplanned shutdown of the plant and an outage that lasted a number of days, we incurred costs related to start-up. Given our inventory position, however, the (inaudible) did not result in any significant disruption in customer fulfillment.

I would add that in evaluating our second quarter 2012 net income and earnings per share relative to the second quarter of 2011 is important to note that our second quarter results included a FIFO benefit of $14 million, which is significantly less than the $50 million FIFO benefit we recognized in the second quarter of 2011.

Adjusted EBITDA for the second quarter, 2012, was $45 million, including the $14 million FIFO benefit. This compares to adjusted EBITDA of $74 million in the year ago quarter in which we recognized a $50 million FIFO benefit. Net cash provided by operating activities was $12.7 million in the second quarter. For the first six months of 2012, net cash provided by operating activities was $69 million, a $55 million increase compared to the fist six months of 2011. A notable achievement given the fact that we have historically consumed working capital in periods of rising raw material costs.

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