KRA
#Not at all <UNK>.
We said it was both.
But if I were to weight it, it is more driven to the effective C5 hydrocarbon tackifiers and what that causes in terms of relative price pressure in the rosin ester business of our Pine Chemical business.
I mean I wouldn't even think about describing it as an impact that we see for 2017.
It is the current market fundamental associated with some new capacity particularly in Asia for C5 tackifiers.
But as I have always said in these businesses, the market tends to fix itself and that is why I indicated that some of the availability of those new streams of C5 tackifiers are potentially looking at the margin points and realizing it might not be the best place to be and we are already having conversations with customers that are starting to recognize that as a potential as well.
So I think it is fairly short-term.
And it is clear to us that the value proposition of Kraton's offerings, through its Pine Chemical business right now is still very real in the eyes of the customer both from a sustainability standpoint as well the fundamental underlying performance.
So this is a little bit of noise in our adhesive business, I get that.
And we are doing a great job working through it.
But there is just all kinds of different ---+ that is the beauty of this combination, now the diversification of our overall sales mix allows us to really potentially back stop some of the downside in one particular [saw] part of our business with a lot of the upsides we are seeing elsewhere.
No, no, we are not giving up any margin.
The value proposition is sound, <UNK>.
I think that like ---+ it is almost like when we talk about the business, we always say that you don't convert ---+ when it comes to surgical gloves, you don't convert a surgeon, you convert a hospital chain.
So it is step increase in demand growth; that is kind of the nature of the business.
This is kind of one of those examples only on a much more universal impact because of the regulation change.
And it kind of hit us a little bit by surprise I admit.
We didn't have that built into our plan.
So what I would say to you is stick with our counsel and guidance with respect to the 10% to 15% low double-digit growth rates.
That is how we plan our business.
But in the meantime obviously this is just another example of the great value of this product offering to the customer and to the marketplace and with Kraton being the leading supplier in the space, we are solving those supply issues and in this case, if it is a regulatory driver, that creates that supply ---+ or excuse me, that demand.
We will certainly be ready to satisfy.
No, there is nothing with respect to the latter.
This is all just an example furthermore of the value selling or as we call it as you know in Kraton, the Price Right selling but certainly as we have always said, our team at Arizona have done a tremendous job positioning the value-added products with the right customers in the right markets to really continue to expand the margin potential in the business.
And we just saw it clearly in the second quarter results.
So we are very pleased with that but as you heard in my comments, we just see tremendous opportunity to continue to expand the business.
No, it is completely based on ---+ and what we are referring to I assume is our performance products business so we talking about our unhydrogenated portfolio and it wasn't a pre-buying fundamental at all.
I mean it is just ---+ as I said going into the quarter, we didn't want to get ahead of ourselves but we can unequivocally say right now that this is a summer paving season particularly in North America that we have not seen for quite some time in terms of the positive fundamentals.
And it is driven by a couple of I think just real factors.
One is obviously there is money through the spending bill which we have talked about.
And then secondly with the low price points associated with the overall base of crude input costs and what that does to asphalt pricing, that just means in otherwise fixed budgets there ought to be more linear miles and with no more linear miles being paved or resurfaced, that means more business for our polymer segment.
Well, to be clear, when we talk about our polymer segment, we have three parts, three businesses.
Each one of them demonstrated pretty robust volume growth in the quarter but what you were asking about specifically lands within our performance products segment, which is the USBC portfolio excluding of course Cariflex.
I don't think I would tell you that think about a sequential growth outlook for the business.
We haven't owned it long enough for me to really be confident enough in talking about sequential growth Q1 to Q2.
I would say that in the Q1 results certainly we didn't get a great start to the calendar year in January, and then all of the things I talked about on my comments around what we were doing specifically in the chemical intermediates business to really capture back some of the share loss because of commercial strategies that prior management had and the tremendous work the team is doing at looking at new market outlets in places like, for example, Asia through Kraton's footprint in India, has started to pay off.
And that is just a great signal for the business and we are just going to keep doing more of that.
You know we run all these businesses clearly on a dollar margin basis.
I think that is fair to say.
From the standpoint of in examples where we have raw material cost increases, yes, we will certainly pass that through reflective of our Price Right consistent strategy and of course the value of the inherent product itself and whatever particular use we are dealing with in the marketplace.
So I think you should think about the business in that dollar margin way.
But all of that being said, I am not smart enough here to tell you what I think is going to happen to crude oil later this year or next year.
But we have a very robust pricing process internally and our customers understand it externally.
And we would consistently apply that pricing strategy in periods of raw material escalation should that occur.
No it is not ---+ are you talking about the expansion, <UNK>, the capital cost.
No, you shouldn't think of it as being currency exposed anymore that it is frankly today.
And as you know in our business globally, currency whether it is transaction or translation is a relatively benign number with sort of a $4 million impact in the year to date results.
So we don't have any significant concerns in where we are acquiring the assets to build that plant outside of Brazil.
We of course put hedging in place to avoid currency risk.
Well, what I said I talked about it in the context of regions.
I am not going to talk about it in the context of certainly specific markets and customers because we want to keep that obviously proprietary.
But with respect to regions, clearly Asia and predominantly India has played a key role.
And what is really good about it is clearly we have got tremendous market knowledge and insights through our existing employee base.
But here we are able to take full advantage of Kraton, legacy Kraton if you will footprint in these regions and relationships that our people on the ground had to work together with colleagues across the new combined business to generate these outlets.
And to me that is one of those things that you can't put a value on going into it but we knew it was there so that cross-selling opportunity has been already demonstrated.
I would say it is more in terms of traditional outlets that perhaps the market ---+ the business hadn't served in quite some time.
We have gone back and revisited some of those accounts.
From a competitive standpoint.
So you know clearly what the driver is is the availability of C5 tackifiers.
And as you know, our price setting mechanism effectively is pricing relative to those C5 tackifiers in the marketplace.
And in periods when tackifiers are in significant short supply, that is highly beneficial to our business.
And in periods when there is new capacity being introduced at relatively lower costs because of the underlying energy building block value, then that is what has caused C5 tackifiers therefore to come down.
But I want to be very clear about something.
At the end of the day, we have ---+ we serve a part of the market, we have served a part of the market historically and we will serve that same market in the future.
So it is not a question about whether customers decide to use our material for rosin ester or a C5 tackifier.
This is just a discussion around pricing because we are preserving our position with our key accounts.
And I would say that that is very consistent with any of the businesses that we run and even our legacy when there is competitive dynamics.
With again part of our Price Right strategy is just to make sure we position our products well to satisfy customer needs but recognizing there is market dynamics that always need to be taken into account.
Well, I am not going to answer that question per se.
But it is pretty clear to us that this business historically and currently and certainly as we look at the outlook for the balance of the year that other than what I called out in terms of some of this adhesive pressure, there is ample opportunity for us to continue to improve the business both on a volume basis and obviously attacking more attractive market outlets in the process.
So this is a business that can and will generate 20% plus EBITDA margins and that is why we were attracted to it in the first place and that is why we are certainly attracted to the growth it is going to demonstrate for the combined Company in the future.
Yes, I think so.
What was fascinating about the two quarters in the first quarter obviously polymers was stronger than chemicals and in the second quarter chemicals was stronger than chemicals which again speaks to the uniqueness now this combined Company portfolio.
But as we look into the future, I wouldn't distinguish the two.
There might be some quarterly differences as we just had but overall the trend line and the run rate should be comparable especially in the immediate term.
Right.
And as I just said a few minutes ago, I think a similar type question was asked maybe a little bit differently.
Adhesives in general, if I were to weight it I would weight it more to the pine side than the polymer side.
So, again we characterize it as no more than or up to $10 million for the year of which some of it we have already seen in the second quarter.
On the polymer side, what is the ---+ is it raw material or is it supply-side.
I would say probably in the case of pricing pressure that we are seeing, it is going to be more on the supply side.
It is not significant but there has been a couple.
And if you are starting up new capacity what is the first think you are going to do.
You are going to look for who the market leader in the space is and go attack what is the lowest value added part of their product offering.
And that is why I said that it is not in the differentiated part of our sales mix, it is really in what we refer to as the more highly competitive part of our sales mix.
And we face this from time to time and we will face it again.
But nevertheless, it is ---+ it is really a fundamental in the immediate term because of that availability of new supply.
This is not a structural change by any sense at all.
Yes, those plans are unchanged.
Yes, <UNK>, I will hit the first one first.
On your observation on the cost reset initiative, the $70 million in the legacy polymer business, we do expect the back half of the year on a year-over-year basis, the benefits to decline somewhat because that boiler project did come online in the second half of last year.
But that is not to say that the team can't come up with some quick hits between now and the end of the year.
On the synergy side, your observation is a good one there as well.
Is there upside to the $12 million to $15 million.
I would say, yes, there is upside.
And collectively the three areas of cost, which is the $70 million cost reset initiative in polymers, the $25 million of G&A which spans both segments and then the production optimization focused on driving cost out of the fine chemical segment, quite easily the third and fourth quarter could mirror in total what we generated in the second quarter which was approximately $10 million.
