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spk00: Good morning and welcome to the Creaton Corporation third quarter 2020 earnings conference call. My name is Kirby. I'll be your conference facilitator for today. At this time, all participants are in 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 touchstone 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 Shields, Director of Investor Relations.
spk04: Thank you, Kirby. Good morning and welcome to the Craton Corporation third quarter 2020 earnings call. With me on the call this morning are Kevin Fogarty, Craton's president and chief executive officer, and Atanas Atanasoff, Craton's executive vice president and chief financial officer. A copy of the third quarter news release and the related presentation material we will review this morning is available in the investor relations section of our website. And before we review the results for the third quarter of 2020, I'd like to draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in our presentation this morning and in yesterday's earnings press 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 are risks, uncertainties, and other factors that may 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. Regarding the use of non-GAAP financial measures, a reconciliation of each non-GAAP financial measure we use to its most comparable GAAP financial measure was provided in yesterday's earnings press release and in the appendix of the presentation we reviewed this morning. Following our prepared remarks, we'll open a line for questions. I'll now turn the call over to Kevin Fogarty. Kevin. Thanks, Gene. Good morning, everyone.
spk01: For the third quarter overall, we continue to effectively manage our business despite COVID-19, having an ongoing effect on global demand fundamentals. During the quarter, we benefited once again from our diverse and market exposure and specifically from improved demand fundamentals in delivering solid operational and financial results. With COVID-19 continuing to have an impact across the globe, the health and safety of our employees, customers and the communities in which we operate remained our top priority. During the quarter, many of our employees continue to work remotely, while our manufacturing facilities operated safely and efficiently, including undergoing planned maintenance and turnaround activities we referenced in our second quarter earnings call. In addition, we did not experience any significant disruption in logistics or in our supply chain within the quarter. From a high level, improved demand in the third quarter in conjunction with the benefit of our diverse end market exposure contributed to solid volume growth in both our polymer and chemical segments. Geographically, demand in China and broader Asia continued to improve in the third quarter, And we saw sequential improvement in North America for consumer durables medical and automotive applications in our specialty polymers business. And our performance products business, we saw solid demand and paving and roofing applications. While in our chemical segment we experienced a notable sequential rebound in demand across all major product lines, with the exception of oil field where weaker demand conditions continued. In the third quarter, as experienced over the course of the year, we have seen continued stability in unit margins in both our polymer and chemical segments. However, as mentioned in the third quarter, we did incur costs associated with the timing of maintenance and turnaround activities, and our financial results also reflect the fixed cost absorption impact associated with the inventory drawdown, both of which we anticipated in our second quarter earnings calls. Cash generation was favorable in the third quarter, providing for a $75.5 million reduction in consolidated debt and a $25.8 million reduction in consolidated net debt, excluding the effect of foreign currency. Moreover, we have maintained ample liquidity with $205 million of availability on our ABL facility and approximately $63 million of cash at quarter end. In terms of execution on key priorities, while we continue to reduce outstanding debt during the third quarter, debt reduction itself remains a primary objective. We expect further cash generation in the fourth quarter that should provide for additional debt reduction this year as we continue to target a consolidated net debt ratio of approximately three turns. During the quarter, we also maintain our focus on operational efficiency, including the implementation of various cost reduction initiatives that we believe will result in approximately $20 million of run rate cost savings by year's end. And perhaps most importantly, with an eye to the future, we continue to position Craton to benefit from organic growth opportunities, particularly as we work to leverage our sustainable innovation portfolio, including our recently introduced Revolution family of rosin ester formulations, our circular polymer grades, and most recently, our biaxium sulfonated polymers. I'll provide an update on these platforms later in the call. For now, at this point, I'm going to turn the call over to our Chief Financial Officer, Athanas Atanasoff, who will provide more specifics on our financial results for the third quarter. Athanas.
spk07: Athanas Atanasoff Thanks, Kevin, and good morning, everyone. As we turn to slide five, I'll review the financial highlights for the third quarter. The demand improvement and margin stability Kevin noted were key contributors to strong financial results for the third quarter, and as a result, we reported consolidated adjusted EBITDA of $60.3 million. While this was down 19.8 million compared to the third quarter of 19, a significant factor in the decrease was the sale of our Careflex business in March of 2020. In addition, the decrease reflects lower average selling prices in our CST chain and for rosin esters, which were largely offset by higher chemical segment sales volume. Excluding Careflex, consolidated adjusted EBITDA would have been down 6 million compared to the third quarter of 2019. The $6 million decline is attributable to high fixed costs associated with timing of maintenance and turnaround activities postponed from the first half of the year due to COVID-19, as we indicated in our second quarter earnings call, and also due to the lower absorption of fixed costs associated with an expected drawdown of inventory we had built in the first half of the year and we also referenced during our second quarter 2020 earnings call. Overall, we're pleased with the third quarter results. On a consolidated basis, adjusted EBITDA margin was 16.1% compared to 19.2% in the third quarter of 19. Here again, the decrease in margin reflects the factors I just mentioned. The sale of Careflex as well as higher fixed costs associated with the timing of maintenance and turnarounds and less favorable fixed cost absorption associated with inventory liquidation. Looking at segment results, It was a solid quarter for the polymer segment where third quarter adjusted EBITDA was $31.9 million. While this was down 18.4 million compared to the third quarter of 19, the decrease is largely associated with the sale of the CarriFlex business. Excluding CarriFlex, adjusted EBITDA would have been down only $4.6 million, with a decrease largely a function of timing of maintenance and turnaround activities and the fixed cost absorption impact associated with the planned inventory drawdown I referenced earlier. Third quarter 2020 results for the chemical segment showed significant sequential improvement, and adjusted EBITDA was $28.3 million, down only $1.4 million compared to the third quarter of 2019, principally due to lower pricing of our CST chain following the decline in gum turpentine prices in the second half of last year, and a lower pricing on rosin esters, largely offset by higher sales volume, which was up 18.7% compared to the third quarter of 2019. During the third quarter, we reduced consolidated net debt, excluding the effect of foreign currency by $25.8 million. Our liquidity position remains strong, with $62.8 million of cash at quarter end and $205 million of availability under our ABL facility. I'll now move to slide six for review of the polymer segment results. Polymer segment revenue for the third quarter of 2020 was $198.5 million, and this was down $63.1 million compared to the third quarter of 2019. The revenue decrease reflects the sale of our Caraflex business and lower average selling prices associated with lower average raw material costs. partially offset by the revenue contribution associated with higher sales volumes in both specialty polymers and performance products compared to the year-ago quarter. As reported, polymer segment sales volume was down less than 1% compared to the third quarter of 2019. However, excluding Caraflex, sales volume would have been up 8.4%. In our specialty polymers business, sales volume showed considerable sequential improvement and sales volume in the third quarter was up 23% compared to the third quarter of 2019. This increase reflects higher sales into lubricant additives due to timing, as well as demand recovery in China and broader Asia. Performance product sales volume was up 3.3% in the third quarter, and this principally reflects higher sales volumes into paving and roofing applications. Third quarter adjusted EBITDA for the polymer segment was $31.9 million versus $50.3 million in the third quarter of 2019. However, excluding Cariflex, adjusted EBITDA would have been down $4.6 million compared to the third quarter of 2019 with a decrease largely due to higher fixed costs, including the timing associated with maintenance and turnarounds and lower absorption of fixed costs associated with inventory liquidation in the third quarter of the year. As a result, the third quarter 2020 adjusted EBITDA margin was 16.1% compared to 19.2% in the year-ago quarter, which did include the results of Careflex and the lower relative fixed costs, including the timing of costs associated with the maintenance and turnarounds. These largely timing factors also impact third quarter adjusted gross profit, which was $733 per ton, compared to $947 per ton in the year ago quarter. However, on a year-to-date basis, adjusted gross profit is $947 per ton, which we believe is a more normalized view given the impact of fixed costs and timing of maintenance and turnaround activities in the third quarter. On a year-to-date basis, the polymer segment revenue of $642.8 million was down $177.7 million versus the first nine months of 2019, primarily reflecting the disposition of Careflex and lower average sales prices associated with lower average raw material costs. Specialty polymer sales volume was up 1.9% for the first nine months of 2020, with higher sales volume in Asia, partially offset by the impact of COVID-19 on demand in North America, particularly in the second quarter. Performance product sales volume was also up nearly 1% on a year-to-date basis on higher sales into adhesive applications and stronger paving and roofing demand. As a result, the year-to-date adjusted EBITDA for the polymer segment was $136.9 million with an associated margin of 21.3% compared to 19.3% for the same period last year. Excluding Caraflex, adjusted EBITDA would have been up 5.5% compared to the first nine months of 2019. As noted earlier, our market diversity has led to stability in our polymer segment given in current market conditions. Now looking at the results of the chemical segment on slide seven, our chemical segment revenue of $174.9 million for the third quarter of 2020 was down $7.7 million compared to the third quarter of 2019. The modest decrease reflects lower average selling prices in the CST chain following the decrease in gum turpentine pricing in the second half of last year from the record levels in the first half of 2019 and lower average prices for rosin esters largely offset by the benefit of higher sales volume. Overall third quarter sales volume was up 18.7% versus the third quarter of 2019, despite demand headwinds associated with COVID-19. Performance chemical sales volume was up 25.7% with higher opportunistic sales of raw materials and due to timing of purchases by significant customers, combined with improved adhesive demand, which was up 5.8% versus the third quarter of 2019, reflecting solid demand trends in the current environment. In our tires business, we saw sequential demand improvement as customer demand capacity that was idled in the second quarter due to COVID resumed production. With this improved demand, tires volume was therefore up 14.2% compared to the third quarter of 2019. Adjusted EBITDA for the chemical segment was $28.3 million in the third quarter, down $1.4 million compared to the third quarter of 2019. with higher sales volume across all business units, largely offsetting lower average selling prices in the CSD chain and for rosin esters. The adjusted EBITDA margin of 16.2% for the third quarter was in line with the 16.3% posted in the third quarter of 2019. On a year-to-day basis, revenue for the chemical segment was down $61.8 million compared to the first nine months of 2019. Sales volume was up 2.4% versus the first nine months of 2019. The decrease was driven primarily by lower average sales prices in the CST chain and ferrosin esters, as well as lower sales volume in TOFA and FOTOFA upgrades. For the first nine months of 2020, sales volume for performance chemicals was up 3.9% on high opportunistic sales of raw materials. despite lower sales into oil field applications and the overall demand impact of COVID-19. Adhesive volume was up half a percent year to date and volume for tires was down 8.5% due to contraction in demand in the second quarter of this year with tire production offline due to COVID-19. Chemical segment adjusted EBITDA for the first nine months of 2020 was $70.7 million compared to $112.9 million for the comparable period last year. The decrease was driven by lower selling prices in the CST and tour chains, a decline in TOFA and derivative sales volume due to COVID-19, and weakness in oilfield markets, especially during the second quarter of this year, partially offset by growth in rosin esters and high opportunistic raw material sales volumes. Slide eight provides a summary of consolidated results for the third quarter and year to date. For the first nine months of 2020, adjusted EBITDA was $207.7 million, a decrease of $63.9 million compared to the first nine months of last year. As covered in my segment discussion, the decrease is primarily due to the sale of our Careflex business, lower margins in the CSTA and Tor chains, and factors such as weaker demand in automotives and oil field applications and the impact of COVID-19 partially offset by higher sales volumes. As a result, the consolidated adjusted EBITDA margin for the first nine months of 2020 was 18%, and this compares to 19.5% for the first nine months of last year, which included Careflex and the high overall CST and TOR margins in the chemical segment. For the third quarter of 2020, we reported adjusted diluted earnings of 49 cents per share, and this compares to 52 cents per share for the third quarter of 2019. On a year-to-date basis, we reported adjusted diluted earnings of $1.05 per share, and this compares to $2.99 per share for the first nine months of 2019. The adjusted EPS decline is principally the result of the sale of our Caraflex business, with the balance largely due to the decline in CST and rosin prices. I do want to comment on one specific item noted in yesterday's earnings release. In conjunction with our annual long-term planning process, we performed an interim impairment test of goodwill as of September 30th. As part of the impairment test, we took into consideration factors including ongoing impact of low-cost hydrocarbon tachyfires in our adhesive business, the current level of pricing and margins in our CST chain following the decrease in gun turpentine prices in the second half of 2019, and the demand impact associated with COVID-19. As a result, we have recorded a non-cash impairment charge of $400 million for our chemical segment. Despite the impairment charge, we believe the longer-term outlook for the chemical segment is favorable. As noted previously, unit margins have been stable throughout 2020, and we have seen volume growth this year despite overall market conditions. As we turn to slide nine, I want to highlight the progress we have made this year in strengthening our balance sheet. During the third quarter, we reduced consolidated net debt by $25.8 million and by approximately $500 million on a year-to-date basis, both amounts excluding the effects of foreign currency. We expect further cash generation and debt reduction in the fourth quarter of this year as we continue to progress toward our target consolidated net debt leverage of approximately three times. I will now turn the call back to Kevin for his closing comments.
spk01: Thank you, Athanas. Now, if we could, let's move on to slide 10, where we provided an update on our current business outlook by geography and in-use application. As noted, we saw improved demand in a number of areas during the third quarter. In our view, the demand picture in China and broader Asia continued to improve in the third quarter, while Europe as a whole remained stable. Importantly, following some weakness in North America in the second quarter, which we largely attribute to COVID-19, we saw demand recovery in the third quarter, and we currently anticipate further near-term improvement. Specifically, we believe near-term demand in adhesives and packaging applications remain stable, while consumer durables, as well as automotive applications, are expected to show more improvement in demand, supported by current market trends. Demand in medical, personal care, and hygiene markets has remained favorable, as has demand in infrastructure markets, such as paving and roofing. Specifically in our polymer segment in the third quarter, we saw a rebound in demand in consumer durable applications following a weaker second quarter on a more global basis. In addition, with the resumption of production at a number of tire manufacturing plants around the world, as well as positive trends in automotive production in general, our outlook for automotive and tires has improved relative to the second quarter. We believe our portfolio and end market diversification and specifically our exposure to market segments that are particularly relevant in today's world have contributed to our favorable results thus far in 2020. And while we remain mindful of the possibility that COVID-19 could continue to adversely impact near-term demand fundamentals based upon the improved demand trends we saw in the third quarter and in light of what we have seen so far in the fourth quarter, We remain optimistic about the outlook for the balance of the year and into 2021. As mentioned, unit margins have remained stable for the first nine months of the year, and on a year-to-date basis, our sales volume trends are positive. This is a solid foundation for us to build upon in 2021. As noted, our balance sheet continues to improve with further debt reduction, and we are implementing cost savings that should also contribute favorably to our results in 2021. As we see the potential for continued volume recovery in 2021, we are energized by the prospect of further sustainable innovation-based organic growth at Craton, which we believe may benefit from a number of recent product rollouts, specifically our Revolution rosin ester formulations and our circular family of polymers. As I mentioned in late July, we are encouraged by the reception we have seen for Revolution. We believe it is a truly differentiated product that will set the standard for rosin esters. Regarding circular, we are hosting a series of technical webinars highlighting this technology and have been very pleased with the interest level and participation of various industry players. We will continue to position the offerings for the recycling industry to provide our customers with tailored solutions for their particular applications. In a world driven by the need to advance a circular economy, we believe these two innovations will make a very positive difference. I would like now to turn to a topic that I'm sure is very much in your minds and one that continues to garner significant interest in light of today's worldwide health challenges. In early September, we announced that we were seeking approval for our novel biaxium sulfonated polymer, specifically for use as a self-sterilizing antimicrobial. Biaxium is part of a family of sulfonated polymers that Craton has made and sold in other specific end markets over the years. These sulfonated polymers have unique characteristics, and a number of highly regarded organizations, including North Carolina State University, Boston University, and University of Texas Medical Branch in Galveston, have demonstrated the effectiveness of biaxium against SARS-CoV-2, MRSA, and other microbes. We believe biaxium is unique given its both efficacy and its durability relative to other antimicrobial technologies in the marketplace. While the majority, if not all, of current antimicrobial technologies have a chemical basis as the active ingredient, biaxium is an otherwise inert polymer. We have the existing technology today to deploy biaxium and other sulfonated polymers in membrane form or in solvent-based coatings and sprays. While we are able to sell our sulfonated polymers today for other applications, I should note we are currently precluded from marketing or selling biaxium for antimicrobial applications in the United States until we complete the required regulatory processes including with the Environmental Protection Agency or EPA. We're working through these processes now which require that we submit data to demonstrate efficacy, durability and safety among other criteria. I'm sure you can appreciate that I can't speculate on the timeline for possible approval. As many of you may know in terms of the EPA approval there is a normal approval process broadly referred to as the Section 3 and there is a possibility of approval under Section 18 or emergency exemption that could provide an expedited path for approval for specific applications. As you would expect, approval under Section 18 is of interest to Kratom. In parallel with our efforts to seek approval from the EPA, we are working outside of the United States, focusing on jurisdictions in which we believe there is significant interest in market potential and a clear regulatory path for approval in antimicrobial applications. A question on many of your minds is likely how big is the potential market for biaxium? The work we have done to date suggests the antimicrobial market in 2020 is substantially larger than it was in 2019. We believe the potential applications for biaxium are extensive, but we believe we can demonstrate its efficacy and durability. But to comment on when biaxium might be commercial or if or when it could be material to Craton's overall results would require speculation on the regulatory approval itself. Given the potential we see for biaxin, we are bringing significant resources to bear on market assessment and in working through necessary regulatory approvals. However, I do want to state that as an existing technology within Craton today, we have production capacity available for the base HSBC polymer that biaxin is based upon. We do not anticipate any significant capital requirements in order to meet a robust level of demand if and when we receive regulatory approvals. And lastly, we feel our patent portfolio and our intellectual property position is quite strong around the use of sulfonated polymers in antimicrobial applications. We look forward to providing you with real-time updates on by XM when we are in a position to do so. And so with those comments, we're now happy to open the call up for some questions.
spk00: Thank you. We will begin the question and answer portion. Please press star followed by number one on your touch-tone phone and record your name when prompted. To cancel your request, please press star followed by the number two. Our first question is from the line of John Roberts of UBS. Your line is open.
spk05: Thank you very much. Sorry, I was on mute. How much of the paving market is linked to either state budgets or gasoline taxes that's there. Obviously, both gasoline taxes and state budgets are going to have kind of a major shortfall as we go into next spring that's there.
spk01: So is that expected to have any effect on the... Well, I think at the end of the day, the state budgets receive a lot of their funding federally from and through the gasoline tax. And, you know, I don't know that we're in a position to comment on how it's going to impact potentially the funding of those budgets next year, given I'm presuming you're referencing a view that the gasoline tax is in decline. But I think, you know, at the end of the day, it could make the same discussion and argument perhaps about what's going to happen with respect to an infrastructure spend package and how that might offset any holes in state funding. in state funding. So, you know, these things are speculative. But certainly what we've seen this year in terms of market demand is a healthy, robust year. And I think reflective of the fact that there is still pent up demand in this country and around the world. And again, a polymer modified solution that we bring to the table solves long term infrastructure needs.
spk05: And then secondly, are you aware of any Chinese producers making sulfonated polymers for antimicrobial use in China? They may not be beholden to some of the patents and so forth that you have around the technology.
spk01: No, I'm not aware of any such. I think in other examples in the past, unrelated to our sulfonated portfolio, we take our intellectual property very seriously and we defend our position when needed.
spk03: Thank you.
spk00: Thank you. Our next question is from the line of Vincent Anderson of Stifel. Your line is open.
spk02: Yeah, thanks. Nice job on the quarter. Specifically, the volume growth in pine chemical adhesives was impressive. Can you parse out maybe what you saw in terms of any destocking headwinds in the more consumer end-use areas versus what would have outweighed those headwinds if there were any?
spk01: I think, you know, the way to think about it, remember the way this year unfolded, you know, early in the year, we called out that adhesives were strong, probably as much as anything because of concerns people had about supply chains with a COVID disruption. And that kind of then led to when there wasn't such disruption, that led to kind of perhaps a destocking in and itself. And that is, of course, you know, more in terms of what we talked about vis-a-vis the second quarter. I think what today reflects is much more balanced market, sustainable market in terms of demand. And, you know, everything we see, you know, indicates positivity with respect to, you know, how customers are viewing, for example, the adoption of our Revolution family.
spk02: That's helpful. Thanks. And just sticking on pine chemicals, I know it's just the timing difference, but that was a pretty sizable move in the FIFO to ECRC adjustment. So I'm just wondering if we can read anything in, you know, read into that, anything on the raw materials standpoint. I don't, just because I don't think we've ever really seen it move by this much.
spk01: Yeah, I think that, you know, at the end of the day, I mean, we talk about that spread often, and because it's from quarter to quarter, there can be moves, but it all washes out, if you will, in the end. And, no, I don't think you should read anything into it at all in terms of, you know, how that reflects through our consistent reporting of operating results.
spk02: Okay, fair enough. And just briefly on the biocidal polymer development, My somewhat limited understanding of chemistry has always painted sulfur as a pretty difficult chemical to work with. I'm wondering, would you attribute your success in incorporating it into a styronic block copolymer as maybe something unique to SBCs, or does the credit really go more towards your process R&D on that front?
spk01: You know, how do I want to answer that? I think, you know, the reality is there's considerable amount of know-how and knowledge of property behind, obviously, the development of this material. And it is, in our case, specific to our pentablock family of polymers, which are highly stable and we think absolutely perfect for this antimicrobial application. But I don't want to mislead you. This is very complex chemistry, and it requires, you know, a lot of... a lot of our key R&D knowledgeable people, as well as our sulfonation partners in the marketplace, to work hand-in-hand to make sure that this technology is working as a combined supply chain system. And for those reasons, at the end of the day, this is not an easy marketplace for someone who wants to try to replicate that to get into a combination of know-how and, of course, the supporting intellectual property. A lot of years went into this development, as you well know, and, you know, that's just a reflection of who we are at Greta. Excellent. Thanks.
spk00: Thank you. Our next question is from Chris Kapsch of Blue Capital Market. Your line is open.
spk03: Yeah, good morning. I had a question on the profitability in the polymer segment, and I guess given the pass-through of feedstock costs, Maybe margins isn't the best way to look at that, so I appreciate you providing the gross profit per ton metrics. And if you look at that, you know, in the quarter, it was down, but that was affected by this abnormally high maintenance or deferred maintenance costs as well as the absorption variance issue that was a sequential issue that you've discussed. So I'm wondering, though, is the 947 year-to-date, I think is the metric, is that sort of a normalized gross profit per ton metric for the polymer segment to think about on a go-forward basis? Or is the profit in the third quarter still kind of overly penalized given these aforementioned issues? And I was also curious, just along those lines, I was also curious, we obviously had a pretty big paving volume. So I'm wondering if there's some adverse mix associated with those volumes. It's also depressing the gross profit per ton metric in the quarter.
spk06: Yeah. Thank you for your question. This is Atlas.
spk07: I think you're right. What you are seeing in the polymer segment with respect to adjusted gross profit is largely a function of the timing of maintenance and fixed cost absorption. As you recall, last quarter, what we had indicated is that for the second half of the year, we were looking at approximately 20 to 25 million of negative headwind on account of fixed cost absorption and 5 to 7 million of maintenance. Well, incidentally, we're exactly on top of that. When you look at it, about half of that impact was incurred in the second half of, in the third quarter. And so when you look at our adjusted gross profit margin, that zip code of 950 to 1,000 reflects a more normalized view of the business. Historically, we've been over $1,000. Of course, we don't have Careflex anymore, so that will have some impact. But again, to the extent that we're in that $900 to $1,000 adjusted gross profit per ton, we feel very, very comfortable and happy With respect to any other impacts on account of mix within the paving and roofing, I would say that it's not material. It's largely those two factors, FCA and maintenance. And remember, timing, because on a year-to-date basis, our margins are still very much within expectation of that COVID-950 per ton zip code.
spk03: Okay, that's helpful. Thanks. And then on the chemical side, on the more than 18% volume growth year over year, I appreciate some of the end markets are recovering, normalizing, however you want to characterize it. But part of this is also got to be tied to just your greater availability of CTO feedstock this year owing to the contractual obligation of your key supplier. So I'm wondering if And you did reference some opportunistic, I think, raw material resales, the way you characterized it. So I'm wondering how much of that volume gain is really tied to maybe reselling CTO at a profit to other players in the industry that now need it versus true underlying demand with your customers and in markets.
spk06: Yeah, that's a great question.
spk07: About half of that volume growth that you saw, 18%, 19%, is due to the opportunistic sale of raw materials. And I think this is very consistent with what you've seen in the past, I think the year before last. And so last year, as you correctly pointed out, we were CTO constrained. This year, we're not. Given the demand headwinds in the first half of the year with COVID, I think all we're doing is we're balancing supply and demand. And so to the extent that we can balance it through raw material sales, we're doing that. And of course, those sales come at a profit, albeit not as high as some of the rest, but we're very happy to have those volumes.
spk03: Do they come with lower than average, segment average sort of profitability?
spk07: It depends. Of course, it depends on the mix. And so sometimes the mix is such that it could, and sometimes it could be lower. But obviously, we have a very strong CTO position that we leverage. And again, this is not something that we're unhappy about, that we have raw material sales. It just shows you the leverage. of how we're able to balance supply and demand. And like I said, we're happy with that.
spk03: Okay, that's fine. And then I guess my third tranche of questions, if you will, focused on innovation. And Kevin, you mentioned three, you know, different sort of potentially needle moving innovations. I assume that they're potential needle movers. And because you mentioned these three, I'm assuming these are the ones you're sort of most enthusiastic about. I'm just wondering, maybe you could rank those in terms of enthusiasm and then specifically on VIAXIM. I'm just curious. I understand it's way too difficult to try to quantify the uptake or what the opportunity really is until you get some applications, I guess, and some commercial sales. But how are you thinking? I know this is a technology that was effectively on the shelf that has this unique applicability to this. microbe application, but I'm wondering how you think about your capacity for this. I believe that the sultanation step could happen at a toller, so maybe there's not really much capital needed to expand the capabilities to delivering if this market materializes. Just wondering how we should think or how you're thinking about the ability to ramp volumes should this be approved and should there be commercial uptake? Thanks.
spk01: Thanks, Chris. So the answer to the last part of your question, volume issues you can imagine obviously is very important and is actually kind of part of our discussions with regulatory agencies too. And we feel really good about our ability to ramp up the supply chain and obviously putting a priority on that effort as well from a planning perspective. In terms of the three notable innovations that you called out, I'm not going to force rank them. You know, I'd say that we've got resources dedicated on each one of those. It's not a trade-off discussion. We've got our chemical innovation teams focused, obviously, on revolution. We've got our polymer innovation teams focused on delivering circular and making the market more aware of what that brings to the table. And then, of course, Biaxum has its own separate team here in the company. But let me just say about the first two, the circular and the revolution, what I love about them, is again, it's all in keeping with the spirit of Crayton's commitment to sustainability and growing our sustainable business model. These two solutions answer the industry issues around driving a circular economy. Revolution, obviously, is from the trees. It's a from-the-trees solution. We believe it can replace hydrocarbons in the marketplace. We believe that our customers have a choice, and we want to make that choice very difficult for them with our revolution family in terms of quality and performance and when I say performance I'm talking about stability in the case of circular again that was designed as a technology with sustainability in mind because there's a really a fundamental infrastructure problem with with plastic recycling being commingled and we take that problem off the table with our circular offering and allowing therefore polymers to be commingled And then that allows customers to focus on the application for the recycled material and help solve this problem of single-use plastic waste around the world. And then lastly, of course, you cite Biaxum. And Biaxum, you know, at the end of the day, is a technology that we certainly think has relevance to today's COVID world. But it goes beyond that in our thinking. I think I mentioned in my talking points about how we think You know, biaxium also will be an effective antimicrobial against things like MRSA, bacterial types infections. So naturally, we're thinking about it as a potential offering in the healthcare industry. We're looking at public transportation as another potential market space for where biaxium could play a role. And of course, in building and construction, I think, you know, you yourself, anybody, if they really stop and thought about it, just think about touch surfaces and how, you know, a material that can be, you know, used on a touch surface, you know, could therefore eliminate health risk for the public. But let's not get ahead of ourselves. Our first step is the necessary regulatory approvals, both in the U.S. and around the world. And, you know, in the meantime, I'm very encouraged by the interest that that even our announcement has generated in terms of market opportunities. And that allows us to have, you know, very solid conversations with development partners. And it's did exactly what it's done in terms of encouraging people to share their thoughts about how by action could be applied in the marketplace. And that's exactly what we were looking for.
spk03: Thank you.
spk00: Thank you. Our next question would come from the line of John Roberts of UBS. Your line is open.
spk05: Thank you. When you get approval for Bioxin, can Nexar inventory be sold as Bioxin to jumpstart those sales right away, or are there subtle differences between the products that wouldn't allow them to be interchangeable?
spk01: I'm not going to comment too much on this specific to your question, but we do have inventory that would satisfy today in addition to what I talked about vis-a-vis the supply chain, yes.
spk05: Okay. And then your lube additive sales have been very lumpy. Was the September quarter a recovery to normal, or did it go above normal, or any insights into what normal is and what the fourth quarter might look like?
spk01: Well, it's lumpy in the context of how we run our operation in terms of planning for those production runs. It's not lumpy in terms of, at the end of the day, customer consumption. And so I suppose you might say that that's our own doing, but that's just the nature of of the specialty application itself and, of course, the batch process to produce it. What I would tell you is, generally speaking, even in a world today, the COVID world, where obviously automotive has been impaired in the early part of the year, coming back now, yes, and mileage in the roads is coming back as well, driving miles I'm talking about. We would say that we're going to end the year probably with that segment of our sales pretty much in line with what our expectations were going into the year, which is remarkable in and of itself, and I think reflective of, you know, the quality offering we present.
spk00: Thank you. Thank you. The next question would come from the line of Vincent Anderson of Stifel. Your line is open.
spk02: Yeah, thanks. Just a couple things to clarify. First, just going back to that lubricant comment, You know, in the past you have mentioned a major customer that's caused some noise with their inventory management. So you're saying that this quarter wasn't impacted by them either restocking or moving towards a more normalized demand level?
spk01: No, just to be clear, you're right on both fronts. Indeed, we've had the inventory to stocking issue that, you know, kind of changed the dynamic in terms of the volume we've sold to this customer through the period of 19 and 20 relative to the prior year. That's still the case. What I'm saying is, however, when it comes to supplying the need they need, it's really a function of when we produce that material in our facilities, which can cause that quarter-to-quarter choppiness. That's why I always encourage people, look at the annual number.
spk02: I see. Okay, that's perfect. Thank you. And then just real quick, to go back to pavement, I'm just trying to parse out slide 13. You know, you have, you referenced stronger paving demand but the mixed share would seem to indicate that at least the dollar sales were down. So I don't know, maybe these product prices just adjust much faster to raw materials, or is there any consideration for asphalt prices as an alternative roofing material? I'm just trying to figure out exactly how to think about that.
spk01: It's very linked to raw material, you know, almost a perfect index. So, you know, When we're dealing with raw material costs, particularly butadiene, which were probably a 10-year low in the second quarter, you can imagine what that does to selling price. Okay, perfect. Thank you.
spk00: Thank you. The next question is from the lineup, Chris Capps, Upload Capital Market. Your line is open.
spk03: Yeah, follow-up on two end markets that are important and to the extent you have visibility. So on the paving market, so last year, it rained like hell for – David Ensign, Rain a lot in the spring and that affected activity and there was surplus you know volumes almost throughout the year. And then this year we've had pretty darn good weather. David Ensign, And so good volumes and good activity. So I'm wondering if you have any sense for what the inventories are for that. David Ensign, In the channel, you know, not with this. So in other words, you know, regardless of what sort of infrastructure spending or what the gasoline tax might look like next year. I'm just wondering if it portends a good 2021 if inventories are low.
spk01: You know, I think at the end of the day, our view is that inventories are low. And, you know, COVID, while it didn't affect necessarily ultimately You know, the amount of paving activity that went on, it probably affected planning as much as anything for people because they, you know, had some uncertainty going into the year earlier on in the season. The other thing I'd point out, too, you know, as I look at this business over the years, one of the key criteria I look at is the relative raw material cost between North America, Europe, and Asia going into the winter, which is typically the inventory building season. And right now you have the butadiene price in Asia that is currently at a premium to North America, Europe, which if you just kind of play that out, what that means is the Asian producer obviously has higher costs if they want to build and export material to North America and Europe. We think that's favorable. It can change. As you know, raw materials can change quickly. But for the time being, it looks like that as we move into the summer, what is referred to as the winter bill season, we're doing so in a way in which the raw material trends are favorable to us.
spk03: Right. Interesting. And that dynamic in the past that's resulted in you getting sort of maybe more than your fair share of volumes in Europe, I believe. So I think that's what you're suggesting could play out if that raw material feedstock cost disparity persists.
spk01: Well, I mean, I'm not going to be so bold as to make that statement, Chris, because, you know, that would be kind of a little bit forward-leaning. But suffice it to say that – Clearly, if Asian feedstock costs are higher, their costs, therefore, to export to our backyard markets is higher.
spk03: Okay. And then the other end market that I was interested in was the tire end market where you had 14% higher volumes, at least on the polymers. I think it was the polymer segment. And I was just wondering if any sense if that reflected some sort of restocking of inventories as these tire and auto plants kind of reopened and got back into production?
spk01: Well, I think, you know, they were extraordinary in terms of ceasing production during the COVID crisis and then, you know, at the end of the day, coming back very fast. And, you know, everything we see right now is that, you know, the tire production rates are, you know, back to the types of levels we're encouraged to see. And obviously that reflects on our volume trends.
spk03: All right. And last question on the $20 million in cost takeouts that you referenced that you expect to have, I think, I don't want to mischaracterize it, but have achieved on a run rate basis exiting 2020. Is that to suggest that you expect a $20 million year-over-year benefit from those cost takeouts in 2021 all else equal? Or did you get some benefit? Will you have gotten some benefit this year?
spk06: We will have gotten the benefit this year, and we expect to get the full benefit in 2021. We're very much on track.
spk03: I'm just wondering, order of magnitude, the net benefit, if you got some of the benefit this year, the net benefit next year might be something less than 20.
spk06: That's correct. because some of that benefit would have come in this year. So the incremental benefit, your 100%, is not going to be 20 year over year because some of it is already captured this year for sure.
spk03: Okay. Any chance you could sort of split that out, you know, roughly?
spk06: Yeah, we're not going to do that during this call. I mean, we'll give you a more fulsome view as next year unfolds. But suffice it to say that we have captured a portion of that this year.
spk07: And we feel very confident that on a run rate basis, this will be fully reflected in our results in 2021.
spk00: Thank you.
spk07: Sure.
spk00: We have no further questions on queue. Mr. Shields, you may continue.
spk04: Thank you, Kirby. We want to thank all of our listeners this morning and all of our participants for their thoughtful questions. There will be a replay available later this morning, and that can be accessed either on our website or by dialing 1-800-879-3386. This concludes our remarks this morning.
spk00: Thank you. Thank you. This concludes the Cradle Corporation Third Quarter 2020 Earnings Conference Call. You may now disconnect.
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