Kraton Corporation

Good morning and welcome to the Creighton Corporation second quarter 2021 earnings conference call. My name is Kirby and I'll 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 would like to ask a question, please press star 1 on your touchstone phone. Today's conference call 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.

Thank you, Kirby. Good morning and welcome to the Crayton Corporation second quarter 2021 earnings call. With me on the call this morning are Kevin Fogarty, Crayton's president and chief executive officer, and Athanasia Tanisov, Crayton's executive vice president and chief financial officer. A copy of the second quarter news release and the related presentation material that we'll review this morning is available in the investor relations section on our website. Before we review the second quarter results, I'd like to draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in our presentation this morning, as well as 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 may be risks, uncertainties, or other factors that could cause Craton's actual performance to be significantly different from the expectations stated or implied by any forward-looking statements we make today. Our forward-looking statements speak only as of the date they're made, and we have no obligation to update such statements in the future. Our business outlook is subject to a number of risk factors. As the format of this morning's presentation does not permit a full discussion of these risk factors, please refer to our Forms 10-K, 10-Q, and other regulatory filings available in the investor relations section of our website. 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 release and in the appendix of the presentation material we'll look at 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?

Thank you, Gene, and good morning, everyone. The positive momentum in global demand that we experienced earlier this year continued throughout the second quarter, benefiting results for both our polymer and chemical segments. While we incurred substantial costs for the planned statutory turnaround at our Bear France site, and although we faced continued inflation and raw material costs, the impact of these factors was largely as we had anticipated. As a result, we are pleased with our financial results for the second quarter as they were in line with our internal expectations. As reported in yesterday's earnings release, Adjusted EBITDA for the second quarter of 2021 was $61.8 million. While this was down $7.7 million compared to the second quarter of last year, the decrease is attributable to three primary factors in our polymer segment that we believe are transitory in nature and that mask the underlying positive momentum underway in the quarter, particularly in our chemical segment, that we believe is setting the stage for positive full-year 2020 results. Specifically, polymer segment sales volume was up 10.9% compared to the second quarter of 2020, driven by broad-based demand growth across all regions for our specialty polymers business and higher sales into paving and roofing and adhesive applications within our performance products business. In our chemical segment, we saw significant gain in sales volume, which increased over 32%. compared to the second quarter of last year, during which time COVID-19 had had a pronounced impact on demand, while organic growth and favorable market dynamics provided for further expansion in unit margins. As a leader in the pine chemical industry, Creighton remains focused on expanding innovation-led growth and consistently encouraging adoption of truly sustainable pine chemical solutions to our customers to replace hydrocarbons for the benefit of all key stakeholders. In terms of the specific factors accounting for the decline in consolidated adjusted EBITDA versus the second quarter of 2020, during the quarter we successfully completed the significant statutory turnaround at our Bear France site, which occurs approximately every six years. And as such, in the second quarter, we realized $16.9 million of costs associated with this turnaround. Excluding the turnaround costs alone, adjusted EBITDA would have been up $9.2 million, or approximately 13% compared to the second quarter of 2020. In addition, the raw material environment in the second quarter of this year was the inverse of what we experienced in the second quarter of 2020. So far this year, we have seen significant inflation in raw material and transportation costs. In contrast, in the second quarter of last year, Butadine declined to a historically low price level, which had allowed for significant margin uplift. While the inflationary pressures have continued into the third quarter, I should note that based upon improved pricing we have achieved thus far in the third quarter, and with continued price actions we expect to take, we are anticipating margin expansion in the second half of the year. Now for those of you who have been following the company over the years, you will appreciate that periodic raw material inflation is inevitable in our polymer segment. We understand this. And more importantly, our commercial teams know how to correspondingly respond in the marketplace with pricing actions. We have always maintained a critical element of our price-right strategy has been to consistently pass along inflation in a manner that our customers can actually predict our behavior. That is what market leaders do. Nevertheless, while there is an inherent lag in price realization that can result in near-term margin pressure, I would again remind you that when the inflation turns to deflation, Our pricing discipline typically also allows us to expand margins for a period of time, much like we did in 2017. Finally, with regard to polymer segment results, as discussed in our second quarter earnings call last year, we elected to leverage the extremely low butadiene prices through a strategic inventory build, which also contributed to an adjusted EBITDA margin of 26.4%, given the benefit of favorable fixed cost absorption on quarterly segment profitability. In terms of key strategic priorities, debt reduction remains a focus area. During the second quarter, we reduced consolidated net debt by $11.5 million, including $6.3 million of unfavorable impact from currency translation. And as we have discussed previously, through the seasonal working capital release associated with our paving and roofing business, we historically generate the majority of our cash in the second half of the year. Therefore, we expect meaningful debt reduction over the next two quarters. Atness will provide more insight into our expectations for debt reduction and balance sheet metrics in his comments. As evidence of our continued commitment to a global circular economy by driving a sustainability-focused mindset throughout our company, we are extremely pleased to be awarded a platinum-level sustainability rating by Ecovatus in recognition of our efforts to integrate sustainable principles in our business and management systems. The Platinum rating is the highest distinction in the Echovata Sustainability Rating Structure, which places Kraton in the top 1% of the universe of approximately 75,000 companies evaluated. In addition, our Circular Plus family of performance-enhancing products recently received critical guidance recognition from the Association of Plastic Recyclers for our series C2000 and C3000 polymers for high-density polyethylene bottles. This recognition further highlights Craton's ongoing commitment to providing sustainable solutions in packaging design and our efforts to facilitate expansion of the broader circular economy. Lastly, while we do not have the specifics we can share at this time regarding our progression towards broader commercial opportunities for BIAXA, during the second quarter we continued our efforts in the pursuit of a Section 3 approval from the U.S. Environmental Protection Agency that we believe will provide for broader commercial applications for BIAXA. We continue to believe there are significant market application opportunities for our BIAXIM technology. We're also very pleased to announce that Jeff Mathers has recently joined Crayton to lead our BIAXIM platform development. Jeff has substantial relevant experience in the antimicrobial space. He will oversee and manage all activities associated with BIAXIM, including evaluation, development of potential market applications, and oversight of the requisite regulatory processes. I'm now going to turn the call back to our Executive Vice President and Chief Financial Officer, Adnas Athanasoff, who will provide more specifics on our financial results for the second quarter of 2021. Adnas.