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Kraton Performance Polymers, Inc. Announces First Quarter 2011 Results

Thursday 05. May 2011 - Kraton Performance Polymers, Inc. (NYSE: KRA), a leading global producer of styrenic block copolymers, announces financial results for the quarter ended March 31, 2011.

2011 FIRST QUARTER HIGHLIGHTS
Sales volume increased 12% year-on-year to 81 kilotons
Sales revenue increased 26% year-on-year to $345 million
Net income was $22 million in the first quarter 2011, compared to $20 million in the first quarter 2010
GAAP earnings were $0.68 per fully-diluted share in the first quarter 2011
Restructuring and related charges, charges associated with evaluating acquisition transactions, costs associated with debt refinancing and costs associated with the secondary offering in the first quarter were approximately $10 million or $0.30 per share
Adjusted EBITDA(1) ( 2) was $56 million or 16% of sales revenue
LIFO to FIFO income (3) was $21 million, as compared to $7 million income in the first quarter 2010
“Kraton continued to deliver solid operational results in the first quarter of 2011, with sales volume up 12% year-on-year and sales revenue up 26% compared to the first quarter 2010. The increase in sales revenue reflects the impact of price increases implemented during the fourth quarter 2010 in response to rising raw material costs and other manufacturing inputs as well as higher sales volume compared to the first quarter 2010,” said Kevin M. Fogarty, Kraton’s President and Chief Executive Officer. “The trend of higher prices for many of our key raw materials continued throughout the first quarter, and in response we announced a number of additional price increases, many of which have been implemented already in the second quarter 2011,” added Fogarty. “During the quarter we continued our focus on expanding our innovation volumes and on moving new innovation projects toward commercialization. We are encouraged by the progress in our innovation programs, and on a trailing twelve month basis at March 31, 2011, our Vitality Index was 14%. We also completed a highly successful secondary offering at quarter end, which completed the sale of all remaining shares held by TPG Capital, L.P. and J.P. Morgan Partners, LLC. As a result, we enter a new chapter in Kraton’s history.”

Three Months Ended March 31,
(US $ in thousands, except per share amounts)

2011

2010
Sales revenue

$ 344,828

$ 272,732
Adjusted EBITDA(1) ( 2)

$ 56,018

$ 42,622
Net income

$ 21,877

$ 19,795
Net income per diluted share(4)

$ 0.68

$ 0.64
Net cash used in operating activities

$44,137

$ 72,836

(1) A reconciliation of Adjusted EBITDA to Net Income is included in the accompanying financial tables.
(2) Adjusted EBITDA is EBITDA excluding restructuring and related charges, non-cash compensation expenses and loss on the extinguishment of debt.
(3) The spread between the first-in, first-out (FIFO) basis of accounting and the last-in, first-out (LIFO) basis of accounting resulted in a decrease in cost of goods sold of approximately $21.0 million and $7.3 million for the three months ended March 31, 2011 and 2010, respectively.
(4) First quarter 2011 net income includes restructuring and related charges, charges associated with evaluating acquisition transactions, costs associated with debt refinancing and costs associated with the secondary offering of approximately $10 million or $0.30 per share. First quarter 2010 net income includes a benefit of approximately $1 million or $0.02 per share associated with restructuring activities.
First Quarter 2011 versus First Quarter 2010 Results
Sales revenue in the first quarter 2011 was $345 million, an increase of approximately 26% compared to the first quarter 2010. The increase in sales revenue compared to the first quarter 2010 was primarily the result of higher sales volumes and the impact of price increases implemented in response to rising raw material costs and other factors. Sales volume in the first quarter 2011 was 81 kilotons, up 12% compared to the first quarter 2010.
Adjusted EBITDA in the first quarter 2011 was $56 million, or 16% of revenue, compared to $43 million, or 16% of revenue in the first quarter 2010. The spread between the LIFO and FIFO basis of accounting had a positive impact on first quarter 2011 Adjusted EBITDA of $21 million and a positive impact of $7 million in the first quarter 2010.
First quarter 2011 net income was $22 million or $0.68 per diluted share, compared to first quarter 2010 net income of $20 million or $0.64 per diluted share. First quarter 2011 earnings per share were negatively impacted by approximately $0.30 per share associated with restructuring and related charges, charges associated with evaluating acquisition transactions, costs associated with debt refinancing and costs associated with the secondary offering. First quarter 2010 net income includes a benefit of approximately $1 million or $0.02 per share associated with restructuring activities.
Cash Flow
During the first quarter 2011, net cash used in operating activities was $44 million, compared to net cash used in operating activities of $73 million in the first quarter of 2010. Net capital expenditures in the first quarter 2011 were $17 million compared to $8 million in the first quarter 2010.
END USE MARKET INFORMATION
Revenue in our Advanced Materials end use market increased $19 million or approximately 21% to $111 million in the first quarter 2011 compared to the first quarter 2010.
“Revenue in our Advanced Materials end use increased in all markets, including HSBC-led growth in emerging markets,” said Fogarty. “We continued to see positive momentum for innovation product sales, which include personal care applications such as diapers and adult incontinence products, and in PVC-free alternatives for wire and cable applications such as computer data and power cords and for medical applications such as IV bags and tubing.”
Revenue in our Adhesives, Sealants and Coatings end use market increased $18 million or approximately 19% to $110 million in the first quarter 2011 compared to the first quarter 2010.
“Revenue growth in our Adhesives, Sealants and Coatings end use market was led by Europe and North America, and was primarily due to higher pricing,” said Fogarty. “European sales increases were driven by the non-woven and industrial applications, as well as by innovation sales in health and beauty applications. North American sales were driven by specialty tape and printing plate applications.”
Revenue in our Paving and Roofing end use market increased $33 million or approximately 53% to $94 million in the first quarter 2011 compared to the first quarter 2010.
“Sales growth was led by Europe, where we saw increased pricing and volumes in both paving and roofing markets. In North America, sales growth was driven by higher pricing in both the paving and roofing markets, and by higher volume in the paving market. During the quarter we also extended our sales into emerging markets such as India and Russia,” said Fogarty. “We estimate that North American and European sales volumes in the first quarter included approximately 7 kilotons associated with accelerated purchasing, above the typical level of pre-season inventory accumulation, as customers built inventories in advance of expected price increases.”
Revenue in our Emerging Businesses end use market increased $6 million or approximately 47% to $20 million in the first quarter 2011 compared to the first quarter 2010.
“The growth in revenue in our Emerging Business end use reflects continued volume growth in our Cariflex(TM) isoprene rubber latex business in applications such as surgical gloves and condoms, as well as Cariflex solid isoprene rubber in medical and coatings applications,” said Fogarty. “We are also pleased to announce that we have completed the isoprene rubber latex expansion project at our facility in Paulinia, Brazil.”
FIRST QUARTER 2011 DEVELOPMENTS
On April 6, 2011 Kraton announced the closing of a secondary offering entailing the sale of 9,988,072 shares of Kraton’s common stock held by affiliates of TPG Capital, L.P. (“TPG”) and J.P. Morgan Partners, LLC (“JPMP”), which represented all of the shares of Kraton’s common stock held by TPG and JPMP, at a price to the public of $37.75 per share. Prior to the sale, TPG owned approximately 18.80% of our outstanding common stock, and JPMP owned approximately 12.53%. Kraton did not receive any proceeds from the secondary offering.
On February 11, 2011 Kraton issued $250 million in 6.75% senior unsecured notes due 2019. In conjunction with the notes offering, Kraton entered into a new senior secured credit facility with a syndicate of banks, comprised of a $150 million term loan facility and a $200 million revolving credit facility. Proceeds from the 6.75% notes offering and the new senior secured term facility were used to retire the company’s outstanding 8.125% senior subordinated notes due 2014 and amounts outstanding under the company’s previous bank term loan facility.
Kraton continued its process of evaluating options for the 30 kiloton hydrogenated styrenic block copolymer plant it proposes to build in Asia. As this process includes an in-depth review of significant project variables such as proposed transaction structure, commercial terms, operating agreements and feedstock availability as well as an analysis of the impact these criteria have on overall project economics, the company now expects to be in a position to communicate site location in the second half of 2011.
Operations at Kraton’s Kashima, Japan, chemical complex were shut down on March 11, 2011, as part of a complex wide emergency procedure in response to the recent earthquakes. Although the facility was not damaged, it has been confirmed that there has been damage to the broader infrastructure at the Kashima Petrochemical Complex as a result of the earthquake and tsunami. Operations at the facility remain suspended due to a lack of monomers and utilities. Currently, it is impossible to give an accurate estimate of when the facility will be back in operation. The company continues to monitor the situation closely and is working with its joint venture partner and other business counterparties to expedite returning the facility to normal operations. At the present time, the company is able to meet its customers’ forecasted demand from existing inventories and the company has initiated contingency plans to provide its customers with products from its other global manufacturing sites to mitigate any supply disruptions.
OUTLOOK
“During the first quarter of 2011, prices for our key raw materials increased and we currently expect this trend to continue as evidenced by the cumulative April and May North American butadiene contract price increase of $0.38 per pound or 36%,” said Fogarty. “With respect to sales volume, we believe there was approximately 9 kilotons of first quarter 2011 sales volume attributable to advanced purchases, particularly in our Paving and Roofing end use, as customers pulled volume, primarily from the second quarter, into the first quarter. As such, we currently anticipate that our second quarter 2011 sales volume will be between 84 and 87 kilotons, within the range of historical volume progression from the first quarter to the second quarter, after taking into account the 9 kilotons of advanced purchasing in the first quarter 2011.”