Kraton Corporation

Good morning and welcome to Craton Corporation first quarter 2020 earnings conference call. My name is Kath and I'll be your conference facilitator. At this time, all participants are in a 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 1 on your touchtone phone. Today's 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 Shales, Director of Investor Relations. You may begin.

Thank you, Kath. Good morning and welcome to the Crayton Corporation First Quarter 2020 Earnings Call. With me on the call this morning are Kevin Fogerty, Crayton's President and Chief Executive Officer, and Athanas Satanasoff, Crayton's Senior Vice President and Chief Financial Officer. A copy of the First Quarter news release and the related presentation material we will review this morning will is available in the investor relations section of our website. Before we review first quarter results, I'd like to draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in the presentation this morning and in yesterday's 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 that there may be risks, uncertainties, and other factors that could cause Craton'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'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 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. With regard to the use of non-GAAP financial measures, the reconciliation of each non-GAAP financial measure we use to its most comparable GAAP financial measure was provided in yesterday's earnings release and in the presentation material for 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, Gene, and good morning, everyone. We certainly appreciate you taking the time to join our call this morning, and it is our sincere hope that you and those close to you have remained healthy and safe. Before we review our first quarter results, I want to share a few comments about how we are addressing the impact of COVID-19 on our company. At Craton, safety is our first core value. Accordingly, in the current environment, the safety of our employees, our stakeholders, our customers... and the communities in which we operate have continued to be our first priority. We've taken extraordinary measures to ensure the health of our employees, and because of these steps, first in China, as the COVID-19 crisis began, and then prudently in our other locations around the globe, we have fortunately had very few confirmed cases of COVID-19 within our company. Where possible, and with the exception of critical plant staff and our lab personnel, Our employees have been working remotely. I'm very proud of how our global organization has rapidly adapted and continue to work effectively and efficiently under this new model. I want to personally thank all our employees for their commitment and perseverance and their efforts on a daily basis to ensure that our company continues to operate and serve the needs of our customers. In response to the rapidly evolving environment, we have established a task force to oversee our global approach to challenges posed by COVID-19. Our multidisciplinary teams are following market developments in real time and collaborating on a daily basis to ensure operational continuity. We are complying with all federal, regional, and local protocols and are implementing our own internal processes and procedures to ensure the health of our employees, customers, suppliers, and the communities we operate. Today, Crayton is a critical supplier, not only in the context of the U.S. Department of Homeland Security definition or those other jurisdictions where we operate and conduct our business around the globe, whereby chemical companies are deemed critical infrastructure in terms of operating priority, but more importantly, in terms of the reality that Kratom provides essential inputs to a wide range of products that are vital in light of the current market needs. As a result, our plants have remained operational around the globe. We continue to have access to essential raw materials, and to date, we have experienced minimal disruption in our global supply chain or in our customer fulfillment capabilities. As we have maintained over time, but perhaps more in today's supply chain-constrained world, we believe Kraton's market and geographical diversity is a distinct advantage in our ability to serve our customers' vital needs, especially those who are supplying much-needed materials essential to fight this COVID-19 virus's spread. We believe we have a flexible production base, and we are positioning our portfolio to address real-time market needs. As an example, during the first quarter, we successfully commercialized a new HSBC polymer made in our state-of-the-art manufacturing facility in Maoyao, Taiwan, that is being used to manufacture face masks to improve wearing comfort. We expect sales to ramp up during the second quarter. Of critical importance in these uncertain times, we have a strong balance sheet and significant liquidity that we believe will provide us with the financial flexibility to manage our business in the current environment. We are focused on cash generation and cost control, and we will remain prudent in capital employment and flexible in our capital spending plans. Now, let's turn to the first quarter and discuss our results a little bit, beginning on slide five. Given the challenging global environment, we are very pleased with our first quarter results. As you will have seen in yesterday's press release, for the first quarter of 2020, we reported adjusted EBITDA of $77.9 million. which includes approximately $10 million of adjusted EBITDA, attributable to Caraflex, for our ownership prior to the March 6, 2020 closing sale date. In times such as these, when the global demand picture is evolving on a day-to-day basis, as just noted, Craton's geographic and in-market diversification is a clear strength. During the quarter, we saw resilience in many in-market applications, such as adhesives for tapes and labels, where we are deemed which are in demand given the increase in online shopping and home delivery. We have seen favorable demand trends in food packaging and in a variety of medical applications, including specialty adhesives used in medical gowns and masks. Overall, COVID-19 did not have a material impact on Kraton's results for the first quarter. Athanas will walk you through the full financial review of the quarter in just a few moments, but I want to highlight some key points relative to the quarter. First, our teams are intently focused on cash generation, cost management, and prudent deployment of capital, and our results for the quarter reflect active management of fixed costs and reduction in other costs such as third-party spending. As previously announced, we have targeted $20 million of annualized run rate cost savings, and we project we are on track to deliver this in 2020. During the first quarter, we completed the sale of our Caraflex business, and the transaction provided for a significant reduction in outstanding debt. As a result, during the first quarter, we reduced consolidated net debt by $485 million, excluding the effect of foreign exchange. Debt reduction remains a critical priority for Crayton. We currently expect further debt reduction for the balance of this year, and we believe we are making excellent progress toward our leverage target of approximately three turns. Of critical importance, we believe our balance sheet remains healthy with no scheduled maturities until 2025. In our view, we ended the first quarter with a very solid liquidity position comprised of $150 million of cash and $198 million of boring base available under our $250 million ABL facility, which only had $15 million outstanding at March 31. Further, as we announced two weeks ago, we've extended the maturity of the ABL facility for an additional two years to mature in January of 2023. Lastly, we are extremely pleased to announce that Craton was recently awarded a gold medal for its sustainability rating at Echovatus in recognition of our continuing commitment to a sustainable business model. Craton's point score by Echovatus put us in the 98th percentile in our industry. We are proud of this achievement. It serves as tangible evidence of our progress in promoting and expanding our sustainable business processes in the bioeconomy and in striving to enable a more sustainable future for our customers. At this point, I'll turn the call over to our Chief Financial Officer, Athanas Akhanasoff, who will review our financial results for the quarter, and I'll follow up to share some thoughts about our outlook as we move into the second quarter later on. Athanas.