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spk00: Good morning and welcome to the Craydon Corporation first quarter 21 earnings conference call. My name is Dale and I will be your conference facilitator. 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'd like to ask a question, please press star 1 on your touch-tone phone. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'll now turn the call over to Mr. Gene Shields, Director of Investor Relations. Sir, you may now begin.
spk03: Thank you, Dale. Good morning and welcome to the Craton Corporation first quarter 2021 earnings call. With me on the call this morning are Kevin Fogarty, Craton's President and Chief Executive Officer, and Athanasia Tanisov, Craton's Executive Vice President and Chief Financial Officer. A copy of the first quarter news release and the related presentation material that we'll review this morning is available in the investor relations section of our website. Before we review results for the first quarter, I'd like to draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures, which is included in the presentation this morning as well as in yesterday's earnings release. During the call, we may make certain comments that are not statements of historical fact and thus constitute forward-looking statements. Investors are cautioned there are risks, uncertainties, and other factors that may cause Craton's actual performance to be significantly different from the expectations stated or implied in 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 that are available in the investor relations section of our website. Finally, with regard to 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 release and also in the appendix of 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?
spk01: Thanks, Gene, and good morning, everyone. Over the course of the first quarter, we saw continued improvement in global demand trends, and this contributed to solid results we posted for the first quarter of 2021. These favorable demand trends translated into strong volume growth for our polymer segment. Specialty polymers volume was up 24.5% compared to the first quarter of 2020, driven by demand recovery in China and broader Asia, and we also saw demand improvement in North America and Europe. In addition, sales volume for performance products was up 6.5% compared to the first quarter of 2020, on higher sales into paving and roofing applications in Europe in anticipation of an upcoming strong paving season. The favorable demand fundamentals in the first quarter also contributed to improved results in our chemical segment. with overall sales volume for the chemical segment up 1.3%. Now, versus the first quarter of 2020, core sales volume was up almost 3% on higher demand for rosin esters, TOFA, and TOFA derivatives. As a result, we had a more favorable sales mix with lower sales of raw materials than the year-ago quarter. Strong demand for rosin esters, TOFA, and TOFA upgrades drove higher operating rates in our refineries during the first quarter, which, in conjunction with favorable price trends, led to improved profitability for the segment, despite pressures associated with rising energy and raw material costs. Overall, we are very pleased with the financial results we delivered in the first quarter, given costs associated with our turnaround at Bayer, and particularly in light of some specific and challenging structural market conditions during the quarter. As you are no doubt aware, thus far in 2020, we have seen significant increases in raw material and energy costs, and this impacts both our polymer and chemical segments. In response, we have implemented price increases in both segments to address these inflationary pressures. However, as we've experienced in the past, the magnitude and trend of raw material price increases, particularly in our polymer segment, resulted in some timing-related margin pressure during the first quarter, which we expect will be recovered over the course of the second and third quarters. In other words, we remain confident in our ability to manage these raw material cost trends and preserve target margins through our price-right strategies. Of course, the significant constraints in global transportation and logistics channels was also a factor in the first quarter, both in terms of cost inflation and because of the limited availability of ocean vessels, and coupled with the imbalance in shipping containers and ice retainers, put further pressure on supply chains to further complicate our customer fulfillment processes. While we were able to mitigate the impact of transportation and logistics constraints to a large extent, it was not without significant effort on the part of our teams. We expect demand for our products to continue the positive trend. We also recognize that logistics are likely to remain tight in the near term. In this reality, we require more focus on advanced lead times and the need for further creativity as we move forward. In addition, as you all well know, during the first quarter winter storm URI, impacted the petrochemical and refining infrastructure in the Gulf Coast region and disrupted activity at a number of mills from which we sourced CTO and CST and plants from which we sourced raw materials such as styrene and isoprene. As a result, there were limitations on availability of key raw materials with many suppliers declaring force majeure. And this limited sales in the quarter, particularly for CST products in our chemical segment and for SIS product grades in our polymer segment. On a more positive front, during the quarter, we continue to work through the approval process for BIAXIM. And as you have hopefully seen by now, on April 21st, the Environmental Protection Agency approved an emergency exemption for the states of Utah, Minnesota, and Georgia to allow Delta Airlines to utilize BIAXIM for specific applications in those states. We believe this is an important step in validation of BIAXIM's efficacy, safety, and durability, and we intend to pursue broader regulatory approvals that may provide for further deployment of this unique technology. Lastly, during the quarter, we remain focused on sustainability and our numerous ESG-related objectives. We continue to see positive demand and market response for the Revolution and Circular Plus platforms we have discussed in previous quarters. We also continue to position Craton for further opportunities in the growing biofuel space. I'll talk more about these later in the call. But for now, I'll turn the call over to our Executive Vice President and Chief Financial Officer, Athanas Atanasoff, who will provide more specifics on our financial financial results for the second quarter of 2021. Athanas.
spk02: Thanks, Kevin, and good morning, everyone. As we turn to slide five, I'll review the first quarter 2021 financial highlights. Overall, it was a solid quarter and a great start to the year. On a consolidated basis, revenue increased $10 million compared to the first quarter of 2020, with higher sales volumes in both segments and the positive impact of changes in currency rates more than offsetting the revenue decline associated with the disposition of our Caraflex business. Despite the first quarter market conditions that Kevin mentioned, adjusted EBITDA, we booked adjusted EBITDA of $67.7 million. While this was down $10.2 million compared to the first quarter of 20, you'll recall that in the first quarter of 20, we had a $10.3 million adjusted EBITDA contribution from our Careflex business. While we did have higher costs in the quarter associated with a bear turnaround, excluding the effect of the Careflex sale alone, adjusted EBITDA would have been up modestly versus the year-ago quarter. With regard to raw material inflation in the first quarter, while we have actively implemented price increases in response to increased raw material costs, the trajectory of raw material price trends result in a lag effect in realization of price increases, particularly in our polymer segment and to a lesser extent in our chemical segment. As a result, there was some inherent but we expect transitory margin pressure in the first quarter and we expect this dynamic to normalize in the second quarter with further realization of price increases already announced and implemented. In addition, and as previously disclosed, during the first quarter we began a significant statutory turnaround at our Bayer France location, which is required approximately every six years. We estimate the total cost of this turnaround to be approximately $15 million. During the first quarter, we incurred approximately $3 million of costs related to the turnaround, which were reflected in our first quarter 21 adjusted EBITDA of $67.7 million. We expect the majority of the remaining turnaround costs will bear to be incurred in the second quarter. Given these factors, our consolidated adjusted EBITDA margin for the first quarter of 21 was 15.5%, a level that, in our view, is not representative of more normalized business performance, certainly excluding the impact of major turnarounds and in a more benign raw materials environment. In terms of debt reduction, liquidity and overall capital structure, during the first quarter of 21, consolidated net debt increased by $18.1 million, or $38.3 million, excluding the favorable impact of foreign exchange. This increase is largely associated with working capital and funding the seasonal inventory build in advance of the paving and roofing season. Debt reduction remains a key priority, and as the year progresses, we expect further reduction in outstanding debts. We believe we have significant financial flexibility, as evidenced by strong cash position at quarter end and $200 million of available borrowing base under the ABL facility. I'll now move to slide six for review of our segment results, starting with our polymer segment. First quarter 2021 revenue for the polymer segment was $241.2 million, essentially flat versus revenue of $240.4 million in the first quarter of 2020, with a benefit of a 5.6% increase in segment sales volumes largely offset by a $36.9 million period-over-period revenue decline associated with a Careflex divestiture. The positive impact from changes in currency between the periods was $10.9 million. The significant improvement in global demand fundamentals compared to the first quarter of 2020 contributed to sales volume growth of 5.6% for the polymer segment and adjusting for the sale of Careflex sales volume for our core specialty polymers and performance product businesses would have been up 13.1% compared to the first quarter of 2020. The specialty polymers improved demand in China and broader Asia, particularly in consumer durable applications and in North American and European automotive applications, contributed to 24.5% growth in sales volume. Sales volume for performance products increased 6.5% compared to the first quarter of 2020, largely due to higher sales into European paving and roofing markets, which we believe reflects positive customer sentiment and positive expectation for the 2021 paving season. Palmer segment adjusted EBITDA for the first quarter of 2021 was $37.5 million, a decrease of $13.7 million compared to $51.2 million reported for the first quarter of 2020. Of this decrease, $10.3 million relates to the adjusted EBITDA contribution from Careflex prior to its sale, and $3 million relates to the first quarter of 2021 costs associated with a turnaround at our Bear Friends location. In addition, as mentioned earlier, given the sharp increase in raw material and energy costs in the first quarter of this year, we expect some margin pressure in the polymer segment associated with the inherent lag in the price increase realization. These factors had an impact on adjusted EBITDA margin of 15.5% for the first quarter, and as they also were a factor in the adjusted gross profit per ton of $819 for the first quarter of 2021. In terms of the decrease in adjusted gross profit per ton from the 1,070 reported in the first quarter of 2020, roughly half relates to the sale of CarriFlex with a balance largely associated with the impact of turnaround costs and the impact of raw materials inflation. We continue to believe an appropriate expectation for the polymer segment adjusted gross profit per ton is in the $900 range, excluding factors such as fixed costs associated with a significant turnaround of bear the majority of which will be realized in the second quarter. Now turning to slide seven for a look at our chemical segment results. Improved global demand fundamentals in the first quarter of 2021 also benefited our chemical segment. Revenue for the chemical segment was $196.1 million in the first quarter of 21, and this was up $9.2 million versus the first quarter of 2020. Adjusted EBITDA for the chemical segment was $30.3 million and this was up 13.3% versus the first quarter of 2020, with high core volumes associated with improved demand fundamentals, particularly in rosin esters, TOFA, and TOFA derivatives. Sales volume for the chemical segment was up 1.3% compared to the first quarter of 2020. Sales volume for adhesives was up 10.8% compared to the first quarter of 2020, on strong overall global demand fundamentals aided by rosin supply limitations, which drove improved rosin ester sales. In addition, volume in our tires business was up approximately 15% in improved demand and higher innovation-based sales. Although sales volume for performance chemical was down 3.5% versus Q120, we had higher sales of TOFA and TOFA derivatives, offset by lower sales of raw materials and CST product upgrades due to supply limitations and logistic constraints mentioned earlier, all of which taken together ultimately resulted in positive sales mix. Higher sales of core volumes in our first quarter also increased refinery operating rates and lowered overall fixed costs compared to the year-ago quarter. These factors were partially offset by higher raw material and energy costs. We continue to address cost inflation through proactive pricing strategies. The adjusted EBITDA margin for the chemical segment was 15.4%, up 110 basis points versus the first quarter of 2020, reflecting improved sales mix from stronger demand and lower fixed costs. Turning to slide 8 for a summary of our consolidated results for the first quarter of 2021. Q1 2021 adjusted EBITDA of $67.7 million compares to $77.9 million for the first quarter of 2020, with a decrease largely associated with the sale of our Caraflex business. As previously noted, sales volume was up in both segments in the first quarter of 21, would improve profitability in the chemical segment. However, first quarter 2021 adjusted EBITDA was burdened by the cost associated with the bear turnaround, as well as the timing-related margin pressure associated with raw material cost inflation. These factors, along with the disposition of Caraflex in Q1 of 2020, largely account for the 270 basis point decrease in adjusted EBITDA margin from 18.2% in the first quarter of 2020 to 15.5% in the first quarter of 2021. First quarter of 2021 adjusted earnings was $1.02 per share, and this compares to $6.47 per share in the first quarter of 20, which reflects the gain on sale of the CaraFlex business. Adjusted diluted earnings were 53 cents per share in the first quarter of 21, and this compares to 27 cents per share in the first quarter of 20. Now turning to slide nine, a few comments about our balance sheet and capital structure. As noted earlier, during the first quarter, our consolidated net debt increased 18.1 percent, 18.1 million, forgive me, or 38.3 million, excluding the favorable impact of FX. This increase reflects the normal seasonal inventory build associated with the paving and roofing season. Overall, we anticipate further debt reduction through cash generation this year, which will also benefit from the interest savings associated with the refinancing of our 7% senior unsecured notes with four and a quarter senior unsecured notes completed in December of 2020. The continued improvement in our capital structure and credit profile has been reflected in the recent improved credit outlook of Craton by Standard & Poor's to positive. I'll now turn the call back to Kevin. Kevin?
spk01: Thanks, Agnes. As we turn to slide 10, a few comments on our near-term market outlook. In our view, global demand trends have continued to improve through the first quarter of 2021 and into the second quarter. The demand improvement in the first quarter was broad-based, benefiting all major regions. Demand trends in China and broader Asia continued to strengthen in the first quarter, and this benefited sales volume for specialty polymers, particularly in consumer durable applications. Demand in North America and Europe also continues to improve. The first quarter was also a relatively strong quarter for performance products, with sales up 6.5% on higher sales into paving and roofing markets in Europe in anticipation of a strong paving season. As noted earlier, although adhesive demand is currently strong, our sales of SIS into adhesive applications were somewhat limited in the first quarter by the raw material constraints imposed by winter storm URI. We are anticipating a good paving season this summer, with weather always being a conditional factor. And we believe the longer-term outlook for our paving and roofing business remains favorable. Passage of a U.S. infrastructure bill could be a positive factor in paving sales. However, given timing associated with appropriations and project planning at the state level, it would likely be more of a benefit in 2022 than in 2021. Regarding our chemical segment specifically, as I noted in late February, our chemical segment portfolio continues to benefit from positive market trends. In the first quarter, demand for adhesives drove higher sales of rosin esters as we had higher sales into road marking applications. The strong global market demand in conjunction with tighter supplies of gum rosin is contributing to our positive results and favorable pricing trends for rosin esters. Furthermore, the favorable TOFA market conditions are expected to continue into the second quarter, benefiting from strong demand as well as increasing prices for alternative vegetable oils. Turning now to slide 11. A few comments related to our ongoing focus on sustainability. As we have shared with you over recent quarters, we believe we are seeing the benefits of our efforts in directing our innovation focus towards megatrends to address key societal needs. Our revolution low-color rosinester formulations and our circular plus polymer technology are examples of recently commercialized innovation successes that we believe will serve as growth platforms for the future. We also believe our biaxium polymer technology has broad-based application, particularly in the medical arena that can be a great benefit to society. However, our focus on sustainability extends well beyond product development portfolio offerings. We have continued to drive sustainable business practices throughout our manufacturing organization, achieving reductions in air emissions and improving water quality. In parallel, we've been adopting practices to improve efficiency through our supply chains. Regarding human capital, we have also been intently focused on advancing diversity and inclusion at Crayton. Our second core value, integrity, underscores our D&I commitment with a fundamental expectation that we treat each other with dignity and respect always. But saying this is not enough. Like everything we do at Kraton, we know we must continually improve. Thus far in 2021, we have taken steps to promote diversity and inclusion at Kraton, and this includes specific training programs for employees globally. In addition, we have recently organized various open discussion forums. and we have announced a new commitment to support two full scholarship programs for minorities attending historically black colleges and universities studying within the all-important STEM field. Needless to say, sustainability is a journey, not a destination, and given the relevance of sustainable actions and products to Craton's future and to further promote a sustainable culture at Craton, we have recently appointed Marcella Boldrini, our Senior Vice President and Chemical Segment President, to the additional role of Chief Sustainability Officer. This appointment underscores the importance of a dynamic approach to sustainability in shaping Craton's future. Through the creation of this important role, we expect to ensure further alignment of our portfolio offerings and our R&D focus with the evolving needs of our customers and the markets we serve. In particular, we will continue to leverage the opportunities that exist in our bio-based chemical segment for key platforms such as Revolution and in capturing opportunities associated with the expected growth in the market for biofuels. As we continue on this journey to a more sustainable future, we intend to maintain an open dialogue with all of our stakeholders, and we recognize the importance of transparency with our customers, our suppliers, our employees, our shareholders, and the communities that we serve in. Transparency is important, and for our 2020 sustainability report, we expect our reporting to be aligned with SASB. While we await clarity on other frameworks, such as with the SEC or TS or TCFD, we will continue to manage available resources to address relevant material issues and the information needs of all stakeholders. Turning to our expectations for the year as a whole, the favorable demand trends of the first quarter thus far have continued into the second quarter. We have positive momentum in the chemical segment with solid demand across the portfolio in terms of pricing and margins. Likewise, in our polymer segment, the demand outlook remains favorable And while the first quarter results for the segment reflect some margin pressure associated with the pass-through of raw material costs, we expect our second quarter results to benefit from further realization of the price increases. Our more recently introduced innovation platforms, such as Revolution Circular Plus, continue to receive positive market reaction and are performing very much in line with our expectations. We're also extremely pleased, as you know, about the emergency exemptions granted by the U.S. Environmental Protection Agency on April 21st that will facilitate the deployment of our biaxium polymer technology in specific applications in the fight against COVID-19. While these particular approvals will not have a material impact on our near-term financial results, we view the approval as validation of the efficacy, safety, and durability of our biaxium technology. We believe the unique characteristics of biaxium could be beneficial in a number of potential applications, and we therefore will continue to pursue broader regulatory approvals which would allow for commercial deployment as an antimicrobial in the U.S. and abroad. In summary, our first quarter results are encouraging and a solid start to the year. Based upon our current outlook, we now expect adjusted EBITDA for 2021 to exceed $260 million, which represents at least 10% growth versus 2020, excluding the CARIFUX contribution in 2020 and adjusted for 2021 costs associated with the significant turnaround at our Bayer France facility. And this expected growth is up from the comparable 5% to 7% growth target we shared just in late February. We look forward to updating you on our progress as the year unfolds. And with that, we're happy to open the call up for questions.
spk00: Thank you for that. We 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, indicate your name, and company name clearly when prompted. Your name and company name is required to introduce your question. And if you want to cancel your request, you may press star 2. Our first question comes from the line of RISCAP from Luke Capital Market. Your line is now open. You may proceed.
spk05: Yeah, hi, good morning, and thank you for taking my questions. I had an overlapping conference call, so I apologize if you address this in your formal remarks, but one question about the margins in the pine chemical segment. It looks like you benefited a little bit from mix and maybe fixed cost absorption, but it doesn't appear that there was much net benefit from pricing over ROS, despite the fact that you've had some price increase announcements and the updraft and some of the alternative products and competitive products. So could you just comment on what your expectations are for net pricing maybe on a go forward basis as the rest of 2021 ensues?
spk01: So, thanks, Chris. And the answer is that, you know, through these pricing actions, just like I said, again, in the remarks, there's always a delay effect in terms of the impact of pricing and the timing through which they flow through relative to the timing in which we get to enjoy the cost increases coming from our raw material suppliers. So there's a little bit of a lag effect there, but certainly we do expect that given the market conditions and the alternative value of substitute materials, that pricing backdrop will lend itself to margin expansion over time in our chemical segment.
spk05: Okay. And then, you know, given it does seem like there's an inflection in the, you know, the overall complex, um, when you acquired the business, gosh, was it four years ago now? Um, and maybe more, um, you know, there's been some, yeah, maybe five. Okay. There's been, you know, obviously margin compression that's been, um, more pronounced, I guess, on the tour side. What are your thoughts about, you know, normalized margins for this business and the ability to get there over time if that's still something that's achievable? And what would be the drivers to restore margins?
spk01: Well, I mean, you know, it starts with are we feeling the right trends? And we talked, as you recall, last year about feeling like we were reaching, particularly on the tour side of our pine chemical business, as you well described, which is where most of the margin pressure has been, let's face it. And the trend now is positive indeed. And look, I think that the combination of the fact that the marketplace recognizes in Craton's offering of pine chemistry, we're talking about a true sustainable offering. That coupled with the economic backdrop of our substitute materials, particularly gum rosin, and then of demand overall in the space has created, you know, an impetus for margin recovery. And so, you know, to the extent if your question is really directed towards will we get back to where we were at the pre-acquisition levels, I mean, that's too soon to talk about that type of recovery. But certainly the direction is the right one right now.
spk05: Okay. And then if I could just one on the polymer segment and focus on margin also. As you point out on slide six in your presentation, The gross profit per ton of 819 versus over 1,000, not really a fair comp given apples and oranges and a lag in raw material cost recovery. So what might, I guess in the second quarter, you'll still have incremental costs associated with the bear turnaround. But if you exclude that, what might be a more normalized sort of year-over-year comparison for the gross profit in that business? Assuming you're recovering some of the recent volatility in raw material costs.
spk02: Yeah, this is Atmos. As we indicated in our prepared remarks, we think more normalized adjusted gross profit per ton is in the zip code of $900. I think you correctly noticed the difference here over here, but, you know, the factors that we outlined explain that. So $900 is what I'd be looking at.
spk05: So was the over 1,000 a year ago, that was, if not for Careflex, would that have been more like 900?
spk02: Yeah, good observation, yes. With the disposition of Careflex, overall margins slightly declined, as we've always been indicating that. So that's why that 1,000 plus is more like in the zip code of 900 now.
spk05: Okay, thank you.
spk00: Thank you for that. The next question comes from the line of John Roberts from UBS. Your line's now open. You may proceed.
spk04: Good morning. This is Matt Skowronski for John. How should we think about the polymer's volume sequentially, given it looks like the majority of the turnaround will fall into the second quarter?
spk01: Right. Yeah, that's turnaround in terms of manufacturing. It's not going to affect our sales volume.
spk04: Okay. All right. That's helpful. And with regard to the comments on the timing of the price versus raws in the polymer segment, should we think about pricing catching up by the end of second quarter or will this be more of a third quarter type of timing?
spk01: Well, it's an interesting question because it just depends on what happens with raw materials because, you know, we're obviously – in the rears in terms of raw material costs that get implemented instantly when they're announced versus, you know, our timing and our price increases. So I guess you could say if raw material costs were to continue through the second quarter into the third quarter, then we would be continuing to look at a kind of a circa two- to three-month leg.
spk04: Thank you.
spk00: At this time, we don't have any questions in queue. Speakers, you may proceed.
spk03: All right. Well, thank you, Dale. We appreciate everyone's interest in Crayton and the questions this morning. I'll just note that there's a replay of the call available later this morning, and that replay may be accessed by dialing 1-800-518-0083. That concludes our comments. Thank you very much.
spk00: This concludes the Crayton Corporation's first quarter 2021 earnings conference call. You may now disconnect.
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