Kraton considers divestment of Cariflex business

HOUSTON—Kraton Corp.'s Cariflex polyisoprene products unit is a strong and growing business, the company said in its 2018 financial statement.

And that is part of the reason why Kraton is thinking about selling Cariflex.

"By any definition, Cariflex is a specialty business," Kevin M. Fogarty, Kraton CEO and president, said during the Feb. 28 teleconference discussing Kraton's fourth-quarter and full-year 2018 financial results.

In 2018, sales volume for Cariflex rose 8 percent after minimal growth in 2017, according to the company.

"Based on our current outlook for Cariflex, we believe we have an opportunity for further expansion," Fogarty said.

However, on Feb. 19, Kraton said it was reviewing strategic alternatives for Cariflex, including a possible sale. Fogarty reiterated this Feb. 28.

The company wants to concentrate on its core businesses going forward, and Cariflex is essentially a stand-alone business with little revenue or cost overlap with Kraton's main polymer and chemical segments, Fogarty said.

"For this reason, we believe this segment could be a strong strategic fit with several players which are better positioned to realize valuable synergies associated with it and unlock its full value," he said.

During the teleconference, Fogarty said that Cariflex's profits were up 18 percent in 2018, thanks largely to resolving certain production issues, with adjusted gross profit of more than $1,000 per ton.

According to the Kraton website, Cariflex polyisoprene products "are ideal for applications that demand extreme purity, comfort, exceptional protection and consistent high quality."

Because it is free of the allergy-triggering proteins in natural rubber latex, Kraton said it is an excellent alternative for NR latex in products such as surgical gloves, medical stoppers, and physiotherapy and tourniquet bands.

Overall, Kraton had fourth quarter consolidated net income of $19.7 million and full year income of $70.5 million for 2018, the company said. This compared with fourth-quarter 2017 income of $69.9 million and full-year income of $92.6 million.

Fourth quarter 2018 income was in line with Kraton's expectations, given lower sales volume in polymers thanks to production disruptions at its facility in Wesselring, Germany, caused by historically low levels in the Rhine River, according to Fogarty.

Demand fundamentals remained strong for the quarter, and profitability improved in the chemicals segment despite continuing post-hurricane recovery at Kraton's Panama City, Fla., facility, he said.

Kraton's full year adjusted earnings before interest, tax, depreciation and amortization for 2018 was $378 million, compared with $374 million for full-year 2017. This represented the first full year of adjusted EBITDA improvement since Kraton acquired its chemical segment in 2016, Fogarty said.

Adjusted full-year EBITDA in chemicals totaled $163 million, up 8 percent from 2017. Sales volume in that sector rose "modestly," according to Fogarty, despite the effects of Hurricane Michael in the fourth quarter.

Improved pricing for TOFA, TOFA derivatives and other high-value products, including sales into tire markets, strengthened the chemicals segment throughout the year, according to Fogarty. "We expect these favorable market trends to continue into 2019," he said.

Adjusted full-year EBITDA in polymers was $215 million, down $8 million from 2017, according to Kraton.

The polymers sector faced several problems in 2018, including "production challenges" in the second half, lower sales volume in non-core paving markets, lower overall demand in China, weakness in North American automotive applications and higher transportation and logistics costs, the company said.

Nevertheless, profitability in polymers was in line with Kraton's longer-term objective of achieving adjusted gross profit of more than $1,000 per ton, according to Fogarty.

"Moreover, we believe underlying business fundamentals, across both our performance products and specialty polymers businesses, in both the Americas and Europe, remain vibrant as we transition from 2018 to 2019," Fogarty said.

"Only in China, and by extension greater Asia, do we see more immediate-term indications of markets continuing to pull back."