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.

Thanks, Kevin, and good morning, everyone. Turning to slide six, I will begin with a look at the consolidated financial results for the first quarter. Consolidated revenue for the first quarter of 2020 was $427.3 million, down $29.1 million compared to the first quarter of 2019. The revenue decrease was principally driven by lower average selling prices in our polymer segment associated with lower average raw materials and lower sales volume, and lower pricing in the CST chain, and to a lesser extent, our TOR chain in the chemical segment. Changes in foreign currency accounted for 7.1 million of the decrease in consolidated revenue, largely offset by approximately 5 million favorable impact of foreign exchange on cost of sales. As Kevin indicated, we're very pleased to have delivered consolidated adjusted EBITDA of $77.9 million for the first quarter of 2020, including approximately $10 million of adjusted EBITDA attributable to Caraflex for our ownership prior to the March 6, 2020, sale date. Relative to the first quarter of 2019, consolidated adjusted EBITDA was down $11.6 million due primarily to lower margins for upgraded products in our chemical segment CSD chain. I would like to point out to your attention that our consolidated adjusted EBITDA of $77.9 million also includes $3.4 million of non-cash amortization related to the sale of Cariflex. Upon closing the transaction, we recognized a gap gain of $175.2 million, and as part of the consideration received, entered into a multi-year I-Supreme rubber supply agreement with Dalen. Since under the supply agreement terms, the product sales are at cost, we deferred the income recognition of approximately $181 million, which will be amortized into income over the life of the supply agreement. The associated income is non-cash as we already have received consideration for it as part of the purchase price. The $3.4 million is the portion of that amortization prorated or attributable to Q1 2020 for sales in the month of March after the March 6th closing date. In total, we expect to recognize approximately $19 million of amortization in our 2020 consolidated adjusted EBITDA. To be clear, the $19 million of amortization was not part of our 2020 consolidated adjusted EBITDA guidance of $200 to $220 million, which we discussed in February of 2020. The consolidated adjusted EBITDA margin for the first quarter was 18.2%, and this compares to 19.6% in the first quarter of 2019. For the first quarter of 2020, The segment-adjusted EBITDA was $51.2 million, up 6.3 percent compared to the first quarter of 2019. This increase reflects continued stability in margins across all polymer product lines, lower fixed costs, and increased sales of SIS product grades into adhesive applications, partially offset by lower sales into paving applications compared to the particularly strong first quarter 2019 sales into paving and roofing applications. The first quarter reported adjusted EBITDA margin for the polymer segment was 21.3%, up 290 basis points compared to the first quarter of 2019. First quarter adjusted EBITDA for the chemical segment was 26.7 million, and this was down 14.6 million, or 35.3%, compared to the $41.3 million in the first quarter of 2019. Lower pricing in the CST and Thor chains was the primary driver of the decrease, partially offset by higher sales volumes of raw materials and Thor upgrades. Given these pricing and margin pressures, the first quarter adjusted EBITDA margin for the segment was 14.3%, and this compares to 21.1% in the year-ago quarter. We're encouraged to note, however, that we have seen stabilization of both CST and, in particular, and tour margins since year-end 2019. A significant highlight for the quarter was also the debt reduction following the sale of the Careflex business. As a result of the sale, we reduced consolidated net debt by $495.3 million, where as Kevin indicated, $484.6 million adjusted for the effects of foreign exchange. Now let's turn to slide seven for a review of our Parliament segment results. Former segment revenue for the first quarter of 2020 was $240.4 million, a decrease of 20.7 million or 7.9% compared to the first quarter of 2019. The revenue decrease was driven by lower sales volume and lower average selling prices associated with lower raw material costs compared to the first quarter of 2019. The negative effect of changes in foreign currency accounted for $4.3 million of the revenue decline. which was partially offset by 2.1 million favorable effective foreign exchange on cost of sales. Polymer segment sales volume was down 4% compared to the first quarter of 2019, with a decrease driven by lower sales volume in performance products. Performance product sales volume was down 7.9% compared to the first quarter of 2019, principally due to the lower customer pre-buys of paving grades or winter fill sales relative to the first quarter in 2019, in which customer purchases in anticipation of a favorable 2019 summer paving season were particularly strong. The year-end effect of lower relative paving sales was partially offset by higher sales of SIS grades into adhesive applications in North America and Europe in the first quarter of 2020, reflecting positive demand fundamentals in packaging applications such as labels and tapes. Looking at specialty polymers, sales volume increased 3.9% compared to the first quarter of 2019, and this was primarily a function of timing of sales to a large lubricant additive customer. However, during the quarter, we did see encouraging signs that our HSBC customer base in China was working intensively to ramp up production against again after the prolonged outage following the Chinese New Year and the COVID-19 outbreak. As mentioned, the sale of our Careflex business closed on March 6th. Sales volume for our roughly two months of Careflex ownership in the first quarter of 2020 was down 9.8% compared to the full three months of results for the first quarter of 2019. Continued margin stability in the polymer segment and lower fixed costs were the drivers of the increase in adjusted gross profit per ton of $1,070 in the first quarter of 2020 compared to $1,021 in the first quarter of 2019. Turning to the chemical segment results on slide 8, chemical segment revenue for the first quarter of 2020 was $186.9 million. and this was down 4.3% compared to the first quarter of 2019. Given that sales volume was up 6.3%, the revenue decrease was primarily associated with lower average selling prices for CST chain upgrades, and to a lesser extent, lower pricing in the rosin chain compared to the first quarter of 2019. You will recall that gum turpentine and gum rosin pricing declined significantly in the third quarter of 2019, adversely affecting pricing in our CST chain. and to a lesser extent, our TOR upgrades. While pricing is below the first quarter 2019 levels, we're encouraged by overall pricing dynamics in CSD stabilizing since the end of 2019. In addition, the negative effect from changes in foreign currency accounted for $2.8 million of the revenue decrease, and this was fully offset by the favorable impact of currency changes in cost of sales. Overall chemical segment sales volume was up 6.3%. with lower TOFA and TOFA derivative sales volume, offset by higher TOR volumes and higher opportunistic raw material sales, with the latter reflecting the absence of CTO constraints, which we faced in the first half of 2019, in part associated with disruptions from Hurricane Michael. Adhesive sales volume grew by 4.3% compared to the first quarter of 2019, reflecting solid demand in tapes, and labels for packaging applications, as well as good demand for construction adhesives, including those used in medical applications such as gowns and face masks. Performance chemical sales volume was also up 7.5%, driven by high opportunistic sales of raw materials. Sales volume for tires was up 1.3% in the first quarter. However, given what has transpired in automotive markets, and with many tire manufacturers announcing temporary plant shutdowns, we expect some weakness for our tires business beginning in the second quarter. Tires represents approximately 6% of the overall chemical revenue, and therefore the impact of the overall chemical segment on the overall chemical segment is not expected to be material. Turning to slide 9. Debt reduction remains a critical priority for Craton. As mentioned, the sale of Careflex during the first quarter facilitated a significant reduction in outstanding debt. During the first quarter, we paid off $290 million outstanding under the U.S. tranche of our term loan and reduced the Euro tranche by $90 million. As a result, during the quarter, we reduced consolidated debt by $368.1 million and consolidated net debt was reduced by $485 million, excluding the effects of foreign currency. The first quarter debt reduction has significantly improved our consolidated net debt leverage ratio, taking us from 4.2 turns of leverage at year end 2019 to 2.8 turns based upon 12-month training consolidated adjusted EBITDA as of March 31. Excluding Careflex adjusted EBITDA for the March 31 12-month trailing adjusted EBITDA, our consolidated net debt leverage ratio would be approximately 3.5 turns. Clayton enjoys a strong liquidity position. We entered the first quarter with over $150 million of cash with borrowing base availability of approximately $200 million. I should note that historically, usage of the ABL facility has been minimal, with light usage generally in the first quarter to bridge timing of cash receipts and disbursements. As previously announced, in mid-April, we extended the maturity of the ABL facility for two years, with it now maturing in January of 2023. Finally, while we have not changed our view with respect to the planned capex of $90 million for the full year of 2020, we remain flexible to reassess in response to market conditions as the balance of the year unfolds. And with this, I'll turn the call back to Kevin for his closing remarks.

Thank you, Athanas. Now, as we turn to slide 10, I'll share with you our outlook and expectations for the balance of the year. As noted, we are pleased with our first quarter results and particularly the role that our broad portfolio diversification plays in buffering the impact from significant contraction in any particular end market. Through April, we are seeing demand in most of our markets that is consistent with our expectations, and as mentioned, we have seen encouraging signs that activity in China is picking up. While COVID-19 did not have a material adverse impact on our first quarter results, we must acknowledge the spread of COVID-19 throughout Europe and North America began later in the first quarter. These are important markets for Craton. While it might be reasonable to assume that we will see more of an impact from business contraction and consumer pullback in these markets in the second quarter, because of the distinct market diversification that we have created at Craton through our commitment to leading through innovation and our global supply system, as the chart on the right-hand side clearly indicates, the majority of our sales today are directed towards markets that we believe are either resilient to macroeconomic slowdown or the global reaction to COVID-19 has resulted in increased demand. For example, our adhesive business benefited in the first quarter from increased demand in many applications, including tapes and labels for packaging applications and construction adhesives used in medical applications. Crayton's sales into adhesive and packaging applications accounts for approximately 21% of polymer segment revenue and over one-third of the chemical segment's revenue. We are seeing good market traction for our Revolution technology, which is the new family of Rosinester formulations, that provide a compelling and sustainable alternative to hydrocarbon-based resins. During the first quarter, we also saw strong demand in both food packaging and for printing plates used in printing of labels in food packaging applications. Similarly, sales into medical, personal care, and hygiene applications accounts for approximately 11% of polymer segment revenue, and we believe these key end-use markets are generally not impacted by economic cycles. Moreover, as noted, in today's COVID-19 world, We are seeing indications of increased demand in certain sectors of these markets. In terms of infrastructure, sales into paving and roofing applications represents approximately 35% of the polymer segment revenue, and sales into road marking applications accounts for approximately 6% of chemical segment revenue. Given stay-at-home orders around the world, road traffic is down, and we believe it is an opportune time to accelerate paving projects. In addition, given the decline in crude pricing, we expect the cost of inputs such as asphalt are very attractive. We're also watching for additional economic stimulus, which might specifically include new commitments to invest in infrastructure. Sales into a wide variety of consumer doable products accounts for approximately 12% of polymer segment revenue and 5% of chemical segment revenue, while sales into broader industrial applications accounts for 9% of polymer segment revenue and 33% of chemical segment revenue. These sales are well distributed geographically. At this time, demand is largely in line with expectations. However, we are watching developments closely. At the same time, we do expect automotive demand will remain weak, and we project this will have an impact on our polymer sales into automotive components and sales of tread enhancement agents for tires in our chemical segment. Weaker automotive sales and the near-term reduction in road miles driven as people are not traveling or commuting to work may adversely also impact our lubricant additive sales and sales into fuel additives. Collectively, these end markets account for approximately 10% of polymer segment revenue and 15% of chemical segment revenue. We also expect a further weakening in oil field demand, and while these account for less than 2% of polymer segment sales and approximately 6% of chemical segment sales, the contraction in oil field demand has the potential to impact not only demand for TOFA, but it could have an impact on TOFA pricing as other manufacturers redirect product sales in response to decline in drilling activity, as we saw in 2017. While we believe our portfolio and diversified in-market exposure provide a meaningful measure of stability, the progression of COVID-19 across the globe, and specifically the prospect for further demand contraction in Europe and North America in the second quarter and beyond, results in significant uncertainty for the balance of the year. As we noted in yesterday's press release, we do not believe it is possible to determine the magnitude or duration the progression of COVID-19 will have on global markets for the balance of the year. Moreover, while we can make general assumptions about overall demand, predicting specific customer behavior is even more challenging. As a result, it is difficult, if not impossible, to synthesize varied planning scenarios into a reasonable, accurate financial forecast. Therefore, at this time, we are not providing specific guidance for full-year 2020 adjusted EBITDA. I want to emphasize, however, that we do not intend this to reflect any specific concerns or adverse market developments we have for our business at this time. I want to assure you that we will take appropriate steps as we navigate through the balance of the year. Cost reduction measures are underway with the $20 million of annual cost efficiencies we plan to deliver this year. We believe our balance sheet is in good shape with no near-term maturities, and we view our liquidity position to be sound. Should market conditions dictate, we will take appropriate additional measures related to costs or capital deployment. We believe the recent decline in crude pricing should help us, not only on the raw material cost side, but also in terms of energy inputs at our manufacturing locations. In our chemical segment, we project margin pressure resulting from the decline in gum turpentine pricing in the latter half of last year has stabilized. In our polymer segment, and based upon what we have seen over the last several quarters, we expect unit margins to remain stable. We realize that in absence of specific guidance at this time, continued transparency regarding market developments and demand trends is of utmost importance, and we expect to provide updates when possible as we move forward. With those comments, we'll now be happy to open the call up for questions. Back to the operator.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your touch-tone phone and record your name and company name clearly when prompted. Your name and company name is required to introduce your question. To cancel your request, press star followed by the number two. One moment, please, for incoming questions. Our first question is from Chris Kapsch of Luke Capital Markets. Your line is now open.

Good morning. Thank you for all the color. A couple questions. One, and I'm not sure if I caught it, but did you say how much EBITDA the Careflex business contributed to the first quarter?

Yes. The Careflex business contributed approximately $10 million of adjusted EBITDA to the Q1 results. Okay, thanks. And I also clarified in my remarks that then we have an additional $3.4 million related to the Careflex sale, but purely Careflex operations is $10 million.

Right, got it. And then I get the suspension of guidance, totally get it. But you also suggested that, you know, in first quarter, minimal disruption from COVID-19, We're one month into second quarter. Does it sort of feel like overall, you know, sort of business as usual? Obviously, there's some of your end markets, there's some shutdowns, like, for example, auto and tires, but other of your businesses are performing well. So can you just characterize kind of like the business cadence, even if qualitatively, thus far in the second quarter?

I think you summed it up very well. yourself, Chris, as we look at it today, just like I said in my comments, the decision to not continue providing guidance was not based on anything other than prudency given the uncertainty of where this is all going, not reflective of what we see today in our business.

Yeah, got it. That's helpful. And then, so the other last question I have just, so Gum rosin prices are recovering, presumably on just reduced tapping of trees in Asia. And so are there any signs yet that that's affecting the oversupply of the gum turpentine market? And then in that context, given we now know that there was elevated margins for that tranche of the business, what's a good way of thinking about what should be, I guess, normalized EBITDA margins for the chemical segment? And when do you think... unfair, but like is, you know, in a whatever the new normal might look like, what might sort of normalize EBITDA margins for that segment look like? Thank you.

The answer to your first question is, yes, we are seeing, you know, as a result of, you know, the combination of the gum turpentine steep decline in the second half of last year, coupled obviously with COVID-19 causing less tea traffic, tree tapping to happen this year that we are seeing a decline in overall rosin output. And that is turning into some incentive, obviously, for a price rise in rosin. And we've seen evidence of that in China being the habit. With respect to your second question around margins, I think consistent with what we've said all along, you know, especially business like our chemical segment or our polymer segment, there's no reason to believe that we won't be, you know, able to achieve high teen sustainable margins when things stabilize truly. Okay. Thank you very much.

Thank you. Our next question is from Jim Sheehan of SunTrust Robinson Humphrey. Your line is now open.

Thank you. Good morning. Just first, following up on gum resin pricing expectations, You previously indicated that lower prices would be about a $30 million headwind for the full year. What is your updated view on that, given just what you've seen with pricing recently?

Yeah, I think that was related to the turpentine side. And, you know, at the end of the day, I mean, the projection we had in that first quarter as a headwind versus 2019 results I think still holds.

Great. Thanks. And then a question related to your debt reduction goals. Are you expecting that free cash flow will be positive this year, even with what you're kind of looking at as a downside scenario? And what levers can you pull to preserve cash generation if necessary?

Yeah, this is Atlas. Yeah, our expectation is that cash flow will remain positive. And there's a number of levers that we can Obviously, we're very, very prudent, as you can see, with the management of our working capital. Obviously, we have some flexibility when it comes to the deployment of CapEx and capital allocation. And as Kevin indicated on the call, we have also embarked upon a cost reduction program, which we expect to deliver approximately $21 million of run rate cost savings. So fiscal discipline with respect to cost, working capital, management, and CapEx rationalization if necessary.

Thank you.

Thank you. Our next question is from Matthew Skowronski of UBS. Your line is now open.

Morning. So on slide 10, you have the outlook by region. Just for clarification, what timeline is this on? Is this 2Q or for the full year? And then secondly, you got into CapEx. Thank you for that. Is this a normalized level going forward? Or if not, how should we think about CapEx in future years?

I'll answer the first and then turn the second over to Adam. That's how we see the situation today. Again, going back to the comments we made about what's in store for us into the second half of the year. With everything happening, I hope you can imagine, it's just very difficult for, I think, any company, let alone Craton, to have a view. But as we sit today, that's what we see.

With respect to CapEx, if you look historically, Craton spent about $100 million to $110 million of CapEx annually. This year, we're within that ballpark. We're at 90 million, but as I said, we're watching how the events unfold very closely, and we remain very flexible. Going forward, I assume, you know, that $100 million zip code seems reasonable to assume.

Very helpful. Thank you.

Thank you. Our next question is from Vincent Anderson of Stifel. Your line is now open.

Yeah, thank you and good morning. So, I was just curious, kind of given where gum rosin prices stand right now, you know, if we have enough demand destruction and toward derivatives in particular where, you know, your choice came down to pulling back on operating rates or kind of just drumming excess crude rosin and exporting it, you know, would you expect that, you know, where the current market is, you would continue to run the plants at normal rates pretty much almost regardless of demand this year?

Yeah, I think, you know, anytime you get asked this question, we have a balance to consider. We have both, you know, we don't make a total decision in isolation without considering total implications and vice versa. So it's difficult for me to suggest, you know, what would be our decision with respect to any particular product line depending on what happens with demand. As I commented in my statements from an adhesive perspective, you know, this has been a good start to the year and, you know, clearly attributable in many cases to demand in certain COVID market outlets. But I would also say that, you know, at the end of the day, the team is presenting our adhesive business in a much different light in the marketplace. This new technology that I mentioned, the revolution technology, is just the first indication of that. More to come in my opinion.

Great. It kind of leads me into my next question anyways. You know, is it possible yet to put a rough number on kind of the share of your pine chemical sales that are winning primarily due to the favorable environmental footprint? Can you repeat that? I'm not sure I followed you, Vincent. Yeah, I apologize. So is it possible yet to put a number around kind of the share of your pine chemical sales that are winning business primarily because of their bio-based footprint?

Oh, I see where you're going with that. You know, I think that, you know, you'd be looking at where we're winning in rosin esters versus hydrocarbons. And as I've commented in probably the last two calls, I don't think that we're seeing many examples yet where, you know, big OEM consumers are making decision to use a biochemistry solution versus a hydrocarbon solution because of its environmental footprint benefit. Those situations are not as frequent as I believe they will be with time as more and more awareness starts to drive that purchasing behavior. Our view is, of course, very clear. We are not looking at this any way other than all else being equal in terms of performance, in terms of quality, in terms of cost. We think a sustainable solution wins. It's the right thing for the world. It's the right thing, obviously, for the environmental footprint and the sustainable business model that Craton espouses, but we think customers are every bit as... as supportive of that model as we are.

That's very helpful. If you don't mind, I just want to ask one more on turning to CST. Just curious if your CTO contracts or your CST contracts are very similar to your CTO contracts or directly linked. And then on the demand side, you know, how much are you sending into cleaning products and how is kind of the volume shaped up for demand for the cleaning product applications in CST versus the rest of the portfolio?

You can imagine the CST contract conditions is highly sensitive, and I think I'm just going to leave it at that. But, you know, like everything that we do in Craton, whether it's polymer or chemicals, there's an energy component that comes into play, and obviously today's energy world is a much different picture. With respect to your second question, I'm sorry, you have to remind me again what that was? Yeah, no problem. I got reminded. So, cleaning is, I think it's a small portion. I think we called it out as being perhaps 1% of that overall chemical segment sales on the slide 10 for you. And it shows up in probably a couple of different places. One in our in our flavors and fragrance demand as well as probably also in our, you know, fatty acid business generally speaking as it goes into, in those cases as it goes into surfactant demand. Okay, very helpful. Thank you.

Thank you. Our next question is from John Roberts of UBS. Your line is now open.

Yeah, thank you. And I realize, Kevin, that you don't want to talk about feedstock contracts, but is there any conceptual way you can help us think about how your chemical feedstocks will respond to the WTI movement?

Well, I think it's pretty much what you'd expect, John, that to the extent there's energy components, obviously, you know, with some delay or lag, if you will, in the contract design, you know, we'll see that flow into, obviously, our raw material costs.

And we think about a monthly average. I mean, obviously, the daily volatility is incredible right now.

Yeah, it's not a daily pricing. I can assure you of that. In some cases, it's monthly. In some cases, it's quarterly.

Okay. And then the bottom end of the barrel coming out of your refinery is not worth as much either. Can you run the refinery in a different mode that's there to, you know, either shift the mix significantly given, I guess you always want to make higher value products, but I In this environment, is there anything else you can do?

All we can do there is think about the components in CTO feedstock where we have a choice and where we run it in which region. At the end of the day, the chemical makeup, the constituent component makeup of the CTO is predetermined. So, no, we don't have the ability to, you know, it would be nice what you described, but we don't have the ability to, you know, promote one fraction versus another.

Thank you. Thank you. Speakers, there are no questions in QFS time. Again, as a reminder for other participants, if you would like to ask a question, please press star followed by the number one in your phone and record your name and company name clearly when prompted. To cancel your request, press star followed by the number two. We have another question from Ken Elohen of GSF. Your line is now open.

Sorry. Hi, guys. Thanks for the presentation. I just have two quick questions. So DRT, I don't know if you guys are familiar with that, was recently sold. I was just wondering if you guys had a look at that business for sold to trade and if you did or not, what you thought of the multiple there. And then I'm just relatively new to Crown as well. So just the – why, just given the fall in oils, do we not think the hydrocarbon stuff looks a lot more attractive now relative to what you guys do? Thanks.

So I'm not going to comment too much on DRT. Certainly we are familiar with the DRT transaction. We are familiar that it was in the market being sold by its sponsor owner previously and, of course, very familiar with who acquired the business. I don't think there's officially a number out there, so I'm not going to speculate on the multiple reference you had, but we do hear it was a healthy one. Now, with respect to the second part of your question, I guess let me try to answer it in the context of our overall business. Well, with crude oil in decline, obviously hydrocarbons in general are going to have a lower cost base as well. But I would remind you that when it comes to the types of businesses we compete against hydrocarbons, That's coming from our CTO pool, and our CTO pool obviously has, just like the previous question was asked, a connection to that energy input cost as well. So I don't know that there's any distinct difference between their energy, you know, new cost structure than ours. Everything we've dealt with in the past several years with respect to the competitiveness of hydrocarbons versus our rosin offering is much more driven by supply-demand than it was driven by underlying energy cost advantage.

Got it. Okay. No, thank you.

Thank you. Speakers, there are no questions. Thank you. That's fine.

Okay. Well, thank you, Kath. We'd like to take this opportunity to thank all of our participants this morning for their interest and for their thoughtful questions. I will note there's a replay of this call. It will be available later today, and you may access the replay by dialing 888-566-0418. That concludes our prepared remarks. Thank you.

This concludes the Cradon Corporation First Quarter 2020 Earnings Conference call. You may now disconnect.