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spk01: Good morning and welcome to the Crayton Corporation 4th Quarter 2020 Earnings Conference Call. My name is Dale and I will 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'd like to ask a question, please press star 1 on your touchtone phone. Today's conference is being recorded. If you have any objection, you may disconnect at this time. I will now turn the meeting over to Mr. Gene Shields, Director of Investor Relations. Sir, you may now begin.
spk06: Thank you, Dale. Good morning and welcome to the Craton Corporation fourth quarter 2020 earnings call. With me on the call this morning are Kevin Fogarty, Craton's President and Chief Executive Officer, and Atanas Satanasov, Craton's Executive Vice President and Chief Financial Officer. A copy of the fourth quarter 2020 news release with 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 fourth quarter, 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 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 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 as well as the presentation material 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.
spk07: Thanks, Gene, and good morning, everyone. I hope you're all being safe and staying healthy. As you well know, 2020 was a year like no other, given the unprecedented challenges posed by the global COVID-19 pandemic, especially the adverse impact of demand in many end markets and geographies, We are extremely pleased, not only with our financial results for the fourth quarter and the year overall, but in terms of how our entire organization responded to an altered operating environment. With the safety of our employees, our customers, suppliers, and the communities in which we operate our top priority in 2020, we responded quickly early in the year with enhanced safety protocols in our operating locations, and we successfully transitioned to a remote work environment for a significant number of our employees around the globe. I'm proud of the way our organization has continued to work almost seamlessly to preserve business continuity and the efficiency of our supply chains so that we are able to continue to serve the needs of our customers. This past year was also a good year to prove the resiliency of our business model and the benefits of our broad end market and portfolio diversification. While COVID-19 had an adverse impact on global demand in the first half of 2020 in particular, As evidenced by weakness and then markets such as automotive oil field and consumer durables. We saw favorable demand trends that translated into growth in other areas such as adhesive businesses in medical and personal care applications and in paving and roofing markets. As a result, despite demand disruption associated with coven 19 in 2020 crate on delivered growth and sales volume for both our Palmer and our chemical segments. As a further measure of the resilient performance of our core business, excluding the results for the Careflex business, which we sold in the first quarter of 2020, adjusted EBITDA for 2020 would have been down approximately 5% compared to 2019, despite a challenging market environment associated with COVID-19, particularly in the second quarter of 2020. Of critical importance, while we were focused on navigating the near-term challenges of 2020, we continue to position Craton for the long-term. Over the past year, we successfully advanced our sustainability objectives, which are broad-based and include initiatives such as responsible procurement and supply chain improvements, enhanced operational efficiency, advancements in diversity and inclusion, as well as bio-based certification and commercialization of products that address the world's growing need for sustainable alternatives. Key examples of these products are our revolution family of low-color rosin esters, and our circular plus polymer technology that can facilitate expansion of the circular economy via processing more post-consumer plastic waste streams. And with our ongoing commitment to R&D, we have now achieved commercialization of our IMSS technology in automotive with the Buick GL6 launch in China. And we look forward to further translation of this technology into other automotive applications. I'll speak more about our forward vision and how we are framing our strategy on sustainability in just a few minutes. On a more tactical front, in a year like 2020, cost management and strengthening of our capital structure were paramount. During the year, we took action to deliver approximately $20 million of run rate cost savings, and we expect to deliver additional cost efficiencies this year. The sale of our Caraflex business in the first quarter of last year unlocked significant value accretion for our shareholders, and it contributed to a significant delevering of the Crate Don balance sheet, improving our overall leverage profile. We maintain a healthy liquidity position throughout the year and were able to refinance our ABL facility through December 2025 while reducing pricing. In addition, we successfully refinanced our 7% senior unsecured notes, reducing the coupon to 4.25%. Going forward, this will provide for meaningful cash interest savings. I'll now happily turn the call over to our Executive Vice President and Chief Financial Officer, Athanas Atanasoff, who will provide more specifics on our financial results for the fourth quarter and the full year in 2020.
spk03: Athanas. Thanks, Kevin, and good morning, everyone. As we turn to slide five, I'll review the financial highlights of the fourth quarter of 2020. As Kevin pointed out, we're very pleased with our results for 2020, and more specifically to this discussion, our fourth quarter results. As in the third quarter of 2020, we continued to see sequential recovery in demand from the low levels in the first half of 2020 associated with the adverse impact of COVID-19. The improved demand fundamentals continued in the fourth quarter, providing for solid financial results as we closed out the year. In terms of specific financial highlights, fourth quarter 2020 revenue was close to flat, down $1.8 million versus 4Q19. This was largely a function of the disposition of our Careflex business earlier in the year, which had contributed approximately $45 million of revenue. Therefore, excluding Careflex, sales grew approximately 12% over the same period in 2019. The relative stability in margins and higher sales volume in both our polymer and chemical segments contributed to fourth quarter 2020 adjusted EBITDA of $54.4 million, which was up $5.4 million, or nearly 11% compared to the fourth quarter of 2019. Excluding the Careflex EBITDA contribution in the fourth quarter of 2019, adjusted EBITDA associated with the polymer and chemical businesses was up approximately $21 million versus the year-ago quarter. From a segment perspective, we delivered solid fourth quarter results in both our polymer and chemical segments, Polymer segment adjusted EBITDA for the fourth quarter of 2020 of $30.6 million was up 3.5% versus the year-ago quarter, and excluding Careflex would have also been up $17 million compared to the fourth quarter of 2019, while adjusted EBITDA for the chemical segment was up 22.3% compared to the fourth quarter of 2019. As Kevin just indicated, during the fourth quarter, we continue to focus on strengthening our balance sheet through debt reduction and improving our capital structure. During the quarter, we reduced consolidated net debt, excluding the effect of foreign currency, by $41.5 million. During the quarter, we also took proactive steps to enhance our financial flexibility. We refinanced our ABL facility, extending the maturity to December of 2025 and reducing the cost of borrowing. In addition, we completed a highly successful senior unsecured bond offering, effectively replacing our former 7% senior unsecured notes with four and a quarter senior unsecured notes due December of 2025. This refinancing will result in annual interest savings of over $11 million. We therefore ended the year with significant financial flexibility and strong liquidity position as evidenced by cash on hand of approximately $86 million and availability under our ABL facility of approximately $191 million. I'll now move to slide six for review of our polymer segment results. The polymer segment booked solid financial results in the fourth quarter. While revenue was down $17.7 million versus Q4 of 19, the decrease is mostly the result of the sale of the Caraflex business in Q1 of 20. Adjusted for Careflex revenues would have been up approximately $28 million versus the same period last year. As I just noted, polymer segment adjusted EBITDA for the fourth quarter of 2020 was up 3.5%, even without a contribution of Careflex to our fourth quarter 2020 results. Excluding the Careflex contribution in the fourth quarter of 2019, polymer segment adjusted EBITDA would have been up $17 million. The improved results are primarily driven by higher sales volumes, which were up 6% compared to Q4 of 19, which included results from the Careflex business. Specialty polymer sales volume was up 15.6% compared to fourth quarter of 2019, with demand recovery in all regions and recovering key end markets such as consumer durables and automotive applications. Our performance products business also saw fourth quarter 2020 sales volume growth of 7.4%, principally driven by stronger sales into paving and roofing and adhesive applications. Adjusted gross profit for the polymer segment was $767 per ton in the fourth quarter, and this compares to $801 per ton in the fourth quarter of 2019, a quarter which included results for Cariflex. We also saw 150 basis point improvement in polymer segment adjusted EBITDA margin at 14.2% compared to 12.7% in the year-ago quarter. Looking at full-year results for the polymer segment, for the full year 2020, polymer revenue was $857.6 million, a decrease of $195.4 million compared to 2019. The revenue decrease, however, was largely driven by the sale of the Kerriflex business as well as lower average selling prices associated with lower average raw material costs, partially offset by higher sales volume in our core business. Although reported sales volume was down 1.4% versus the prior year, this reflects the disposition of Careflex. Excluding Careflex, sales volume would have been up 5.5%. Specialty polymer sales volume was up 5.2% compared to 2019. Whereas demand trends in China and broader Asia weakened significantly in the second half of 2019, we saw improving demand as 2020 progressed. As a result, the increase in specialty polymer volume is largely associated with demand recovery in Asia. For performance products, 2020 sales volume was up 2.2% compared to 2019, driven by higher sales into paving and roofing and adhesive applications. Alma segment adjusted EBITDA for the full year 2020 was $167.5 million. Although down 20.7 million versus full year 2019, the sale of Caraflex has a net impact of approximately $44 million on a period-to-period decrease. Excluding Caraflex, adjusted EBITDA would have been up 18% or $23.6 million compared to 2019. evidence of the strong performance of our core business in 2020, including the benefits of cost discipline. As we have discussed throughout 2020, we have seen notable margin stability in our Polymer segment. For full year 2020, the segment adjusted EBITDA margin was 19.5%, an increase of 160 basis points compared to the 17.9% in 2019, which included a full year of contribution from the Careflex business. Lastly, adjusted gross profit in 2020 was $903 per ton, and this compares to $969 per ton in 2019, which included the contribution of Careflex. The impact of the sale of Careflex and adjusted gross profit is approximately $100 per ton. Now turning to slide seven for a look at the chemical segment results. Chemical segment revenue for the fourth quarter of 2020 was $192 million, up $15.9 million versus Q4 of 19. Sales volume was up 20.3% compared to the year-ago quarter, including higher opportunistic sales of raw materials, OBID, with different pricing. Sales volume for adhesive was up 9% compared to the fourth quarter of 19 on higher sales of rosin esters, reflecting strong adhesives demand reflective relative to recent market needs. While performance chemical sales volume was up 25.6%, reflecting high opportunistic sales of raw materials, sales volume in tires was up 27.2% versus Q4 of 19, with healthy demand driven by growth in innovation applications. Fourth quarter 2020 adjusted EBITDA for the chemical segment was $23.9 million, with an associated margin of 12.4%, and this was up $4.4 million compared to the $19.5 million in the fourth quarter of 2019, in which the associated margin was 11.1%. On a four-year basis, chemical segment revenue was $705.6 million, down $45.9 million compared to 2019. The decrease was driven by lower pricing in the CST chain and lower average selling prices for rosin esters related to the oversupply of low-cost hydrocarbon tachyfires in Asia. The decrease also reflects lower pricing for TOFA upgrades, primarily due to the COVID-19 pandemic, partially offset by the revenue contribution associated with opportunistic sales of raw materials. Compared to 2019, chemical segment sales volume increased 6.8%. Sales volume for performance chemicals was up 9.2% with opportunistic sales of raw materials, partially offset by lower sales of TOFA and TOFA derivatives. That was largely due to market fundamentals, including the adverse impact of COVID-19, particularly in the second quarter. Sales volume for adhesives increased 2.7%, and this was a function of robust Rosemaster demand. The sales volume for tires was essentially flat, for the year as solid growth in sales volume in the first, third, and fourth quarters of 2020 was offset by a severe contraction in the second quarter demand as COVID-19 had a widespread impact on tire production and therefore demand for our products. For 2020 as a whole, the chemical segment reported adjusted EBITDA of $94.6 million, down $37.8 million compared to $132.4 million in 2019. Factors in the decline include lower average selling prices in the CST chain relative to the record levels of 2018 and the first half of 2019, lower pricing for rosin ester products, as well as the lower sales of TOFA and TOFA derivatives resulting from market conditions, including the impact of COVID-19. And this was partially offset by higher sales of raw materials. Slide 8 provides a summary of our consolidated results for the fourth quarter and full year 2020. For 2020 as a whole, consolidated adjusted EBITDA was $262.1 million, and this compares to $320.6 million in 2019, a decrease of $58.5 million. However, more than 75% of the decrease, or $44 million, relates to the sale of the Caraflex business, with a balance largely associated with the lower pricing in the CST and TOR chains, partially offset by lower raw material costs and higher sales volume in both segments. The consolidated adjusted EBITDA margin for 2020 was 16.8%, and this compares to 17.8% in 2019, which included Careflex and higher average pricing in the CST and TOR chains for the chemical segment. For the fourth quarter of 2020, adjusted diluted earnings were at $0.23 per share, and this compares to adjusted diluting earnings loss of $0.06 per share in the fourth quarter of 2019. For the 12 months ended December 31, 2020, we reported adjusted diluted earnings of $1.29 per share, and this compares to $2.94 per share for the 12 months ended December 31, 2019. The adjusted EPS decline is principally associated with the sale of the Careflex business and the decline in the CSD and rosin prices. Now turning to slide nine, during the fourth quarter of 2020, we reduced consolidated net debt, excluding the effect of foreign currency by $41.5 million. On a full year basis, during 2020, we reduced consolidated net debt by $541.4 million, excluding the effect of foreign currency. As we expect further debt reduction in 2020, we expect to achieve our target leverage ratio of approximately three turns this year, 2021. I will now turn the call back to Kevin for his closing comments. Kevin.
spk07: Thank you, Agnes. As we have noted, demand trends in both our polymer and chemical segments improved in the second half of 2020. And while we remain mindful of the disruptive potential of COVID-19, thus far in 2021, market trends are encouraging, And we expect our diverse end market exposure to continue to benefit us in 2021. Therefore, we currently expect to grow our core business of four, five to 7% this year. On slide 10, we provide an update for our near-term outlook by key end use. In terms of major geographic exposures in the Americas, we anticipate strong demand fundamentals with continued recovery in consumer industrial applications. While in European markets, we currently see demand trends continuing to improve. Over the course of 2020, we saw demand trends in China and broader Asia also continuing to improve. Thus far in 2021, economic activity levels have been very encouraging. As China and broader Asia are key markets for our specialty polymers business, we enter 2021 well-positioned to address opportunities in these important growth markets. In terms of end markets for 2021, we anticipate a continuation of solid demand for key applications that prove critical in 2020 in addressing unique market needs. As highlighted in prior quarters, we have seen favorable trends in adhesive markets over the past year, driven by packaging demand and growth in e-commerce, as well as other applications such as masks and gowns and healthcare markets. In addition, we have also satisfied new market needs relative to COVID-19. An innovative HSBC grade manufactured at our facility in Ma Liao, Taiwan plant is being used in face masks to improve wearer comfort. In addition, with the development of vaccines to address COVID-19, our hydrogenated pot product grades are being used in insulation gels that are critical in temperature control distribution of vaccines. Now in our more traditional businesses, while still early in the year, we look forward to a favorable paving and roofing season. and further growth in automotive and consumer durable markets associated with further market adoption of innovation grades. In our chemical segment, we are currently seeing favorable trends in all three of our major product categories of TOFA, TOR, and our CST chain. In addition, for quite some time, Crayton has been active and a participant in the growing global market for biofuels and renewable diesel, and we see opportunities to expand our role in these applications in 2021 while remaining committed to our existing customers. As demand for biofuels grows, Crayton is well positioned with two refineries in the U.S. and two refineries in Europe, as this footprint enables us to participate as a global supplier. Moreover, we have proven expertise with all necessary certification requirements already in place. We have a strong and diverse CTO supply position, and we have well-established and proven supply chain capabilities with the ability to ship CTO and CTO derivatives as well as pitch from the U.S. into the European market. Turning now to slide 11, our participation in the growing biofuel market is but one example of how Crayton is working to address the growing global demand and need for bio-based, renewable and sustainable alternatives. Crayton has long believed that our future success is dependent upon sustainable business practices and meeting society's needs for sustainable products. We are committed to making a positive difference for all our stakeholders through safe, compliant, socially and environmentally sound operations. because we fundamentally believe that sustainable business practices are a prerequisite for meeting the expectations of all our shareholders and stakeholders alike today and into the future. Our commitment to sustainability is not just founded in words but in tangible evidence of our progress in deriving sustainable business practices across our entire enterprise. This commitment is demonstrated through our membership in the American Chemistry Council, the European Chemical Industry Council, and our participation in responsible care, the chemical industry's world-class standard for HS and ES management and performance excellence. If you have not had an opportunity to review our sustainability report, which is available on our website, I encourage you to do so. I'm proud of the progress that we have made to date in advancing our sustainability objectives. Turning now to slide 12. From our perspective, the global focus on sustainability intensified in 2020. The world's needs are evolving and Crayton and society as a whole must rise to the challenge. Our goal is to be an admired sustainable supplier of innovation-based solutions, whether it is through our chemical segment or our polymer segment. We believe that sustainable business practices create value for our customers and all our stakeholders. We embrace sustainability as a value driver and it shapes our strategy as we move forward. Of course, a commitment to sustainability is not a final destination, but a journey. And so we expect to continue to define long term objectives to safeguard our future as part of this process, we will also continue to identify short term tactics initiatives at every level of organization that are critical to delivering our longer term vision. Turning now to slide 13 through the groundwork we have already established, we are well on our way and driving sustainable business practices throughout our organization. As a member of together for sustainability, we remain committed. to responsible practices and continual improvement in procurement. In 2020, we were awarded a gold rating by Equivatus in recognition of our progress in implementing systems to ensure responsible procurement. In addition, we have adopted management systems that include policies and procedures relative to compliance, labor practices, and enhanced performance as it relates to HS&E. With safety as our first core value specifically, we continually work to ensure the safety of our employees, the communities in which we work, and all our stakeholders. We have long embraced diversity as evidenced by the composition of our Board of Directors, and in 2020 we adopted specific policies around the broader topic of diversity and inclusion, ensuring equal opportunities for all our employees. On an operational level, we are well on our way to meet our greenhouse gas intensity reduction target of 25% by 2030, and we will continue our work to reduce carbon emissions and energy intensity throughout our manufacturing organizations. As we look downstream, we will continue to leverage the bio-based nature of our chemical segment and our R&D capability as we develop and commercialize products that address our customers' needs for sustainable solutions. In this regard, during 2020, we made solid progress in commercialization of key platforms. On slide 14, one of these platforms that has garnered significant interest from our adhesive customers is our revolution rosinester technology, which we believe has established the industry standard in terms of color and stability. As a bio-based offering, and given its performance and product attributes, Revolution is a compelling alternative to hydrocarbon-based tackifiers for our adhesive customers. Customer response has exceeded our initial expectations, and given our positive expectations for global adhesive demand and our customers' evolving needs for sustainable inputs, we think Revolution is positioned for continued share growth. Turning to slide 15. As you all well know, societal sentiment with respect to hydrocarbon-based materials and single-use plastics continues to evolve. And while it is true that our polymer segment utilizes hydrocarbon-derived raw materials, through the versatility and recyclability of our SBC chemistry, we are able to address growing market needs for sustainable solutions. One example is our Circular Plus technology, which is providing the industry with technology to facilitate growth in the circular economy. by enabling more efficient recyclability of post-consumer plastic waste streams. As an additive in the processing of waste streams, circular is effective as a compatibilizer, allowing increased use of multi-resin waste streams, providing broader use and end functionality as well as productivity. And now on slide 16, our most recently commercialized innovation, our injected molded soft skin or IMSS technology. We are extremely excited at this development as we've been working for some time to commercialize this technology that provides significant system-level cost savings in large injection molded automotive parts such as dash and door panels compared to slush molding processes. Other notable features of IMSS technology allow for lighter weight, recyclability, improved haptics and look and feel, and improved aging performance with reduced VOC emissions and odor. This technology has been commercialized in the Buick GL6 and the fast-growing Chinese market. We look forward to translation into other vehicle platforms in the future. Lastly, given our continued enthusiasm for its potential in the fight against COVID-19 and other applications, I will be remiss in not acknowledging that we remain in the regulatory approval process for BIAXIM. While I don't have any specific update to provide at this time, I can assure you that we have remained focused on both the opportunities under Section 18 referred often to as the EPA's emergency exemption, and the broader Section 3 approval. We look forward to providing specific updates as soon as they become available. In closing, we enter 2021 energized by the solid performance we delivered in 2020 despite challenging market conditions. The positive momentum as we close the year has continued into early 2021, and as I said, we currently expect our base business this year to grow 5 to 7 percent. We are positioned to benefit from further upside in our various end markets, and if the opportunity for further growth exists, you know we will pursue it. With those comments, we're happy to open the call up for your questions.
spk06: Dale, can we move to the Q&A session, please?
spk01: Sure. Thank you so much. Participants will now begin the question and answer session. If you'd like to ask a question, you may press star followed by the number one. Please unmute your phone and record your name and company name clearly when prompted. Your name and company name is required to introduce your question. To cancel requests, you may press star too. Speakers, our first question comes from Chris Katch from Loop Capital Markets. Sir, your line is now open. You may proceed.
spk05: Yeah, hi, good morning. I was juggling multiple earnings conference calls this morning. So if this has been addressed, I apologize. But one thing I'm curious about is in the Pine Chemicals business, you came into 2021 with some price increases targeted at TOFA on the table. And then most recently you introduced an across-the-board price initiative. So I'm curious about the visibility of regarding the traction of these price increases and the magnitude of the traction. Is the effort here really just to offset some higher raw material costs, or is there the opportunity to also capture extra margins given what seems to be sort of a healthier end market demand scenario vis-a-vis probably supported by some alternative materials? So just some color around that would be helpful.
spk07: Sure, Chris. Thank you. Well, first of all, indeed, we have announced two price initiatives, and I would certainly say that those initiatives encapsulate both the need to make sure that we're covering any cost inflation that we may feel, but as well, the backdrop of our businesses, as I said in my commentary about all three product grades have positivity, reflects the fact that you know, we're addressing that through our price initiative. And, you know, we've often said in our chemical business a lot of the pricing is a combination of both, you know, competitive factors within the pine chemical space as well as the very real, you know, price-setting mechanisms and competitive factors in the intramaterial space. You know, we're seeing certainly in the case of the intramaterials, you know, certainly inflationary, pressure in that regard as well. So our price increase initiatives certainly benefit from that backdrop.
spk05: Yeah, Kevin, and I think you're referring to maybe there's an updraft clearly in gum, rosin, also hydrocarbon. So the fact that, and those are products that compete with TOR. So for the first time we've, at least in a while, visible evidence of trying to introduce pricing into So I'm just wondering if that also underscores strengthening in demand for TOR. Is it really just the competitive set in terms of the market pricing dynamic? I'm just curious because obviously it would be helpful for the overall economics of your refiners to be able to produce more TOR if there's demand for it.
spk07: In our view, absolutely. It reflects increased demand trends for the TOR molecule, including the derivative rosin ester. And so, yes, that provides that positive impetus. But at the same time, I'll also remind you that vegetable oil markets, the underlying vegetable oil markets, are certainly relevant when it comes to the price-setting mechanisms that our TOFA chain competes in. And that's also provided for that positive backdrop I spoke of. Just a reminder.
spk05: Okay. And then I did have also one focused on biaxium. And the... twofold, really. One, appreciate your suggesting that you're obviously focused on the Section 3, Section 18 approvals. I guess I think it's public knowledge that in the Federal Register, there's an application by Delta Airlines for the emergency use authorization. It looks like for their hubs in Salt Lake City and Minneapolis. for the use of this product. And there was an open comment period that concluded, I think, last night. So I'm just curious with that open comment period having concluded for that emergency use request, if you have any color on how that process might play out from here in terms of timeline and if, in fact, that gets traction.
spk07: Sure, Chris. And might I just say that, I don't mean to correct you, but The applications for emergency exemption actually come from the states. And, you know, obviously Delta being the relevant partner with the states, but the state, the applications are actually filed by the states themselves. And you referenced two of the states. I would also add that the all-important state of Georgia, where the hub of Atlanta resides, is also now a subsequent filer to that Section 18 application. But with respect to the process, you know, I think I've said all along that, you know, we have had very positive discussions with the EPA in the case of, you know, our desire to receive, you know, full Section 3 authorization for our new active ingredient, biaxial. And, you know, this is, you know, any Section 18, which we think is helpful, obviously, because of the urgency in the marketplace to fight COVID-19 is a good step forward towards that ultimate objective, which is the Section 3 blanket approval for the active ingredient. But I would say that, you know, clearly, you know, the fact that it's one of those stories where, you know, the bad news is we have a new active ingredient. So from an EPA perspective, they need to understand about it because the performance is certainly worth noting. But on the same time, too, the fact that it is a new active ingredient in a polymer form, that's what makes it truly novel and unique. And we think is going to allow us, obviously, to take advantage of this superb technology, not just now to fight COVID-19, but, you know, in the future as well, because we're thinking beyond just, you know, this one time in our world's obviously pandemic-led priorities. We think it also has applications in the healthcare field and also in building construction. beyond the public transportation reference in this Section 18 filing. So it's a very robust process we're undergoing, and we're quite grateful for the level of cooperation that we receive from the EPA because they are certainly, in regards to their desire to see new compelling technologies come to market, they've certainly done all they can through their own, obviously, work processes.
spk05: The one follow-up on that one, too, With this request, I understand it's from the states, but probably on the urging from Delta in this case. If this were to go through, even under an emergency authorization, it seems like a strong testimonial for the relevance of this product in the intended use in this particular application. Is it safe to say that this Would serve as a testimonial maybe catalyze the greater likelihood of a section three approval and and yeah is there. Does you think that if, in fact, the the The adoption for addressing coven becomes a reality if it if it helps the likelihood of this being a relevant product and some of those other non coven opportunities that you address. Thank you.
spk07: Well, Chris, I mean, it goes without saying that we wouldn't be pursuing a Section 18 without a line of sight towards Section 3 because a Section 18, as we said, is very specific to a specific application. And, you know, our vision for where by accident we think can be very beneficial to society goes well beyond that. Now, do I also believe that a Section 18 is a good indicator of a Section 3? Well, presumably, yes. the reverse would be a negative indicator, I'm sure. So yeah, I feel like it's a good step towards validation of the technology in the eyes of the EPA. But again, they have their process they need to work through. And I'm just here to say that from my perspective, it's been a priority of them to find a way to make this new active ingredient, biaxium, a reality to fight COVID-19. That's certainly been a priority of the EPA.
spk05: Thank you.
spk09: Thank you so much.
spk01: Our next question comes from the line of Vincent Anderson from Stifel. Sir, your line is now open. You may proceed.
spk02: Yeah, thanks. Good morning and congratulations on the new HSBC application in automotive. I know it's been a long time coming Um, I wanted to start on pine chemicals. You know, if my memory serves you historically had been pretty lukewarm on the prospect of CTO as a preferred feedstock under red too. Um, so I was just curious, you know, what, what has changed in the market that is, you know, maybe shifted your view there and how you're participating right now, whether it's, you know, selling TOFA or selling excess CTO to other biorefiners.
spk07: Well, um, You know, we've been following this, obviously, for quite some time, and it's just not as simple as just, you know, diverting certain volumes of TOFA to a new customer base. There's also a qualification process we need to go through. And so, you know, we view it as, you know, an extension of the TOFA platform in every sense of the word. I mean, the nice thing about our TOFA platform, as we've talked about, is it's got already a very diversified set of market alternatives that we serve. And this just adds to that diversification. So we think that's a very positive direction for the business. And, you know, we've said for some time that that's been one of the challenges in our Tor chain, clearly, which is, you know, just the opposite, which is it's been a very, you know, singular, for the most part, diversification in terms of where, you know, Tor molecule ultimately ends up. So, you know, this is a, you know, a positive trend in the industry, obviously. But we've got, you know, alternatives. And I guess the point I just want to make is, you know, Craycon is well situated to serve this growing biofuel market. And, you know, I think we all have to agree that given the world that we're in and the desire for sustainability and renewability in the marketplace, despite the fact this is a if you will, an EU directive that's driving this growth. And we believe it's here to stay. I mean, we don't see this thing going backwards at all. So, clearly, we need to adapt our ability to serve this growing market.
spk02: Understood. Thank you. So, in the context of some of these biorefiners in Europe processing CTO for direct biofuel production, I completely respect that you're not willing to discuss specifics of your feedstock supply arrangements, but how firm are your CTO commitments in Europe for those assets? Are they similar to your U.S. contracts? Or worst case, do you have excess offtake under your U.S. contracts to supply your European assets if CTO were to become tight over there?
spk07: One thing we've always prided ourselves on, Vincent, is our relationship with our CTO suppliers. long-standing, strong relationships. You know, we've always had a vision that given, you know, the nature of our pine chemical business, it's in our best interest to be very, if you will, engaged in CTO relationships on a broad-based level so that, you know, at the end of the day, depending on market circumstances, we're in a position to, you know, process more CTO or if we need to, we can sell CTO from time to time. in an opportunistic way. This is all kind of a part of our business makeup. It's a real strategic advantage for Craton and certainly an advantage when we have this new outlet in the form of biodiesel.
spk02: Okay, perfect. No, I appreciate that. If I could ask one more, I just, I want to try to dig into price versus raws and polymers for a minute. So, you know, in the fourth quarter price mix, you know, looked like it was implied to be you know, down year over year. I know we had some pretty drastic feedstock price increases off the lows late in the quarter, and those are typically passed through. And then you announced a price increase in HSBCs around the start of the year. So can you just maybe refresh us on that price over RAS dynamic, and was that HSBC price increase adequate to cover feedstock cost inflation in those contracts that are non-raw material linked?
spk07: Well, anytime, you know, and I can say this unequivocally because we've been doing this a long time in our polymer business, our price-rate strategy is real clear when it comes to, you know, raw material pressure we see. You know, we're going to get in front of this. We're going to move the price up to reflect at least that raw material increase that we know of and perhaps even raw material prices that we're anticipating in our price moves. From time to time, you know, that could result in, you know, some margin left in our business. Of course, that's all part of a price right strategy in itself because it typically goes both ways.
spk02: All right. Thank you. Good luck on the rest of the year.
spk00: Thank you so much. The next question comes from the line of John Robertson from UBS.
spk01: Sir, your line is now open. You may proceed.
spk04: Thank you. Since IMSS was launched in China, is that made in Taiwan? And is that something that Sinochem and LCY can do as well? Or do you think the competition is going to be primarily other materials?
spk07: So, you know, ultimately the part is a compound. And we work with our partners to make the compound. but obviously the compound is founded on Kraton polymer. I'm not going to say whether or not it's specifically a polymer that is made at only one location, but I will tell you in the case of this material, yeah, it was made in Taiwan.
spk04: And then on the biodiesel opportunity, if the industry continues to grow, do these guys become competitors for CTOs? eventually against you, rather than just the opportunity for you to sell some materials?
spk07: Well, there's kind of two channels to get to the biofuel. There's, you know, a CTO direct channel, which some employ, and then there's a, you know, hydrogenation of the fatty acid channel. So I guess, you know, at the end of the day, it's one of those questions that depends. And I think, you know, like everything us chemical, whether you're biodiesel or a biorefiner do, you always look for the most efficient way to satisfy the market need. And our view is without knowing where this industry is going to evolve to, the hydrogenation of the fatty acid looks to be a very attractive way for people to satisfy the Red 2 requirements while at the same time being truly optimal in the value chain and the supply chain.
spk09: Thank you. Thank you so much.
spk01: The next question comes from the line of Chris Capps from Loop Capital Markets. Sorry, your line is now open. You may proceed.
spk05: Yeah, so my question, my follow-up question was about the guidance, initial guidance for 2021. You have a number of price increases on the table in the chemicals business, a stronger demand environment. In the stoplight chart on page 10, it looks like you've sort of improved the market outlook for sectors that comprise maybe almost half of sales. So I'm wondering if that's what's translating into this base business of up 5% to 7%. It just seems like given the easy comparisons associated with COVID, given some of the momentum and some of the traction on some of these new commercial innovations that maybe we could be upside. So just wondering how you thought about, you know, providing that guidance. If you go back a year ago, you guys initial guidance pre-COVID for 2020 was, I think, 210 and you'd ended up doing 262. So are you just, are you, you know, trying to take a posture similar to what you did a year ago, presumably? Any color on that process would be helpful. Thanks.
spk07: Well, there's a lot of things we do around here, Chris, you know, as part of our business model. But, you know, forecasting the next 12 months is one of the most difficult things to do, as you well know. So, you know, we have a very robust process where we, you know, decide how we're going to look at, you know, the number of variables, the risks, the opportunities to come up with, you know, the requisite guidance that we try to provide. So, you know, what's unique, of course, about the way in which we approach 2021 is, You know, there's a couple of things that need to be, you know, factored in. One was, of course, the Caraflex stub period, which need to be removed from last year's performance and looking at this year's full year performance. And the second thing is this pretty extraordinary turnaround we do every six years in Bayer. And so we want to call that out for investors to understand that. But beyond that, yeah, I mean, we're feeling like at the very least we ought to be able to deliver 5% to 7% business growth. Now, I'll just say it, of course, if the positive trends that, you know, we're all feeling right now, in our business will remain intact over the course of the year. I think, you know, there's an opportunity to improve on that yet more, but we're not ready to say that yet. It's still February.
spk05: Okay. And then the other question I had was, and we've asked you this in meetings with investors. So, but you know, the world's evolving to want to get a current view, but in terms of your innovation platforms, which of the, and there's, there's seemingly needle moving kind of opportunities that you're starting to get traction on. Just wondering if you could sort of rank what the, what the in order, what the ones you're most excited about.
spk07: Well, I'm excited about them all because I understand the implications to, you know, each of our businesses, uh, from the standpoint of, uh, of, uh, of, uh, you know, uh, driving our business growth objectives. But, you know, I mean, each one has their own story. Um, Clearly, biaxium is potentially a platform in and of itself, and that's the way we're viewing it. That's the way we're staffing it. That's the way we're developing the potential for this biaxium polymer. In the case of the innovations in the business, look, I mean, we're in a world where sustainability is becoming absolutely critical to people's business models. And when you look at what revolution is from the trees to begin with, And then addressing the very shortfalls in the quality kind of challenges we've had in the past, having now closed that loop and closed the color gap and closed the stability gap, that's a very good thing for us. And I couldn't be more proud of our team for bringing that to the market. And it continues to exceed our expectations in terms of customer adoption. And then the circular plus technology, I mean, if there's one thing we hear about, if you're participating in the plastics industry, is single-use plastics and the problem that's caused in a societal sense. And here we have a technology which not only can it advance the use of plastics for recycling, but it increases the productivity of the people, the very people that are trying to reuse plastics so that they don't have to separate otherwise unlike polymers. We address that fundamentally with CircuitPlus. So, yeah, I can't help but be very excited about the potential of these innovations. And then you referenced IMSS. Yeah, we've been working on this for quite some time. I'm sure you've heard from other people that, you know, try to innovate in the automobile sense. There's a long approval process. They're typically a very risk-adverse, if you will, community. But at the same time, it goes both ways once we are settled in a technology that gives us some assurance that we're going to be able to build on it to grow further.
spk05: All right, that's helpful. And then this, while not an innovation, I believe you have a polymer product that's used in telecom wiring cable. And so I'm wondering if some of my companies I follow are benefiting from this 5G, this burgeoning 5G super cycle. And just wondering if you're similarly benefiting in your product sales into the wire and cable industry. And if you see that as a, as a driver here over the next couple of years. Thanks.
spk07: Yeah, I mean, 5G conversions and the need for cable gels as installation, particularly in big subsea cables, that's a very good business for us. We kind of put that, quite frankly, in our established business bucket because we've been kind of leading in that space for many years.
spk09: Thank you.
spk01: At this time, speakers who don't have any questions in queue, you may proceed.
spk06: Thank you, Dale. Well, we want to thank everybody this morning for their time and their interest in Craton. And for our question and answer session, thanks for your thoughtful questions. There will be a replay of this call available later this morning, and you may access the replay by dialing 866-358-4515. This concludes our prepared comments this morning. Thank you.
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