Kraton Performance Polymers' CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Kraton Performance Polymers, Inc. (KRA)
by: SA Transcripts

Kraton Performance Polymers, Inc. (NYSE:KRA)

Q1 2014 Earnings Conference Call

April 30 2014 9:00 AM ET

Executives

Gene Shiels - Director of IR

Kevin Fogarty - President and CEO

Steve Tremblay - VP and Chief Financial Officer

Analysts

Brian Maguire - Goldman Sachs

John McNulty - Credit Suisse

Mike Sison - KeyBanc

Jason Freuchtel - SunTrust

John Roberts - UBS

Christopher Butler - Sidoti & Co.

Edward Yang - Oppenheimer

Alex Yefremov - Bank of America, Merrill Lynch.

Operator

Good morning and welcome to the Kraton Performance Polymers, Incorporated First Quarter 2014 Earnings Conference Call. My name is Angela and I will be your conference facilitator. At this time, all participants are in a listen-only mode. Following the company's prepared remarks there will be a question-and-answer period. (Operator Instructions).

Today's conference is also being recorded. If you have any objections, you may disconnect at this time. And I would now turn the call over to Mr. Gene Shiels, Director of Investor Relations.

Gene Shiels

Thank you, Angela. Good morning everyone and welcome to Kraton Performance Polymers first quarter 2014 earnings call. With me on the line this morning are Kevin Fogarty, our President and Chief Executive Officer and Steve Tremblay, our Vice President and Chief Financial Officer. A copy of the yesterday's news release is available in the Investor Relations Section of our website, as our copies of the presentation we will review this morning.

Before we review the results for the first quarter, I will draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures including in our presentation this morning and in yesterday's earnings press release. During this call we may make certain comments that are not statements of historical fact and does constitute forward-looking statements. Investors are cautioned that there are risks, uncertainties and other factors that may cause Kraton's actual performance to be significantly different from the expectations stated or implied by any forward-looking statements we make today.

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 filing available in the Investor Relations section of our website.

With regard to use of non-GAAP financial measures, a reconciliation of EBITDA, adjusted EBITDA, and adjusted EBITDA at ECRC, the net income or loss, and a gross profit at ECRC to gross profit as well as a reconciliation of net income or loss attributable to Kraton to adjusted net income was provided in yesterday's earnings release and is included in the appendix to the material we will review in this call.

Following our prepared remarks, we will open the line to your questions. I'll now turn the call over to Kevin Fogarty.

Kevin Fogarty

Thanks, Gene, and good morning everyone. Our results for the first quarter 2014 reflect a number of positive developments. During the quarter, we saw continued growth for our Cariflex isoprene rubber and isoprene rubber latex products. As a result we remain optimistic about a long-term potential we see with the ongoing expansion of our IR and IR latex products into new markets. In addition, overall Kraton innovation sales volume was up 70% compared to the first quarter of 2013. During the quarter, we broke ground on the construction of our 30 kiloton HSBC plant in Mailiao, Taiwan. We achieved start up of our recently completed semi-works facility in Belpre, Ohio and we continue to make progress towards securing regulatory approvals for our proposed combination with the SBC business of LCY Chemical Corporation.

However, as discussed in our fourth quarter and full year 2013 earnings call on February 26, during the first quarter we experienced production down time which was a result of unprecedented 20 year weather event at our plant in Belpre, Ohio and a fire in Berre, France which although small resulted in a material disruption and plant operations. Our both plants have returned to normal operation, our production outages unfortunately hinder our ability to fully satisfy demand for certain product grade in the quarter in our paving and roofing and adhesive sales and coatings end user market.

As we turned now to Slide 4, I'll touch upon the financial highlights for the first quarter 2014. Our first quarter sales volumes at 74.4 kilotons and 3.8 kilotons or 4.9% from 78.2 kilotons in the first quarter of 2013. As we will see in our review of our four end uses, the largest decrease in sales volume as compared to the first quarter of 2013 was in our paving and roofing end use. First quarter sales revenue was $311.7 million, down $28.5 million or 8.4% from $340 million posted in the year ago quarter. Due to lower average selling prices which reflect lower raw material cost compared to the year ago quarter and to a lesser extent lower sales volume. First quarter net loss attributable to Kraton was $7.9 million or $0.24 per diluted share and this compares to a net loss of $3.7 million or $0.12 per diluted share in the first quarter of 2013. However, Steve will cover in more detail in the call. On an adjusted basis EPS improved in the first quarter of 2014 to $0.46 per share from $0.07 per share in the first quarter of 2013. Adjusted EBITDA at estimated current replacement cost or ECRC was $37.5 million in the first quarter of 2014, up $8.3 million from the first quarter of 2013 where adjusted EBITDA at ECRC was $29.2 million.

This is the second highest first quarter adjusted EBITDA at ECRC in Kraton's history. Eclipse only by the $39.6 million we reported in the first quarter of 2012. Looking now at results for our four end user markets starting with Cariflex. Our Cariflex end use continues to deliver favorable results in the first quarter. Revenue for isoprene rubber and isoprene rubber latex product was $35.4 million, up $8.3 million or 30.8% compared to $27 million posted in the first quarter of 2013. The increase is attributable to a 35.6% increase in sales volume resulting from higher sales in the surgical gloves and to lesser extent other medical and innovative base products. Our reach of our end uses, we have provided an update on revenue by geography and revenue by end use application, for the TTM period ended March 31, 2014. In addition, we have provided updated at TTM revenue by portfolio composition. As seen in the chart at the bottom of the page reflecting of specially nature of our isoprene rubber and isoprene rubber product offerings, for the trailing 12 month period of March 31, 2014, 27% Cariflex revenue was derived of innovative grade but the balance of our Cariflex portfolio coming from differentiated product grade.

Turning now to Slide 6. First quarter 2014 revenue for Advanced Materials was $82.7 million, down $13.9 million or 40.4% from $96.6 million in the first quarter of 2013. Excluding a modest currency benefit revenue would have been down $14.4 million or 14.9%. The revenue decrease reflects lower sales volume and lower average selling prices due to reduction in raw material costs primarily butadiene. Looking at specific end use market applications, the overall decline in volume was driven by lower sales in the consumer applications and to a lesser extent into personal care application. For the past two quarters we have discussed growth and demand for innovative grades of USBC polymers for use in personal care applications as an alternative for certain grades of HSBC. This trend continued in the first quarter of 2014. As I said last quarter, it remains to be seen whether this is a long-term trend. While the USBC solutions are less expensive, it did not have the same performance characteristics of HSBC base polymer. Ultimately, the outcome may be determined by the willingness of end use consumers to trade performance for lower price. Within the advanced materials innovation portfolio, innovation sales volume were up significantly compared to the first quarter of 2013 driven by growth in USBC based polymers for the personal care market and by higher sales into SBC alternative applications.

Looking at the portfolio configuration on the lower right hand side -- lower right hand part of the slide, for the trailing 12 months period ended March 31, 2014, 28% of advanced materials revenue came from innovative grades, up 26% for the 12 months ended December 31, 2013.

Sales revenue for Adhesives, Sealants and Coatings was $123.3 million, down $8.2 million or 6.3% compared to the first quarter of 2013. Excluding currency movements revenue declined $7.4 million or 5.7%. The revenue decrease was due lower sales volume and lower average selling prices which reflect lower raw material cost than in the first quarter of 2013. The majority of the reduction in sales volumes for adhesives, sealants and coatings was due to lower sales into industrial applications. Principally in the Asia Pacific region and lower sales in the pressure sensitive adhesive applications, partially offset by higher sales into lubricant additives. The decline in sales volume for the pressure sensitive adhesive applications is partially attributable to our first quarter production downtime which limited our ability to supply certain grades of SIS in the quarter. Portfolio composition for the adhesives, sealants and coatings end user was unchanged compared to the 12 month ended December 31, 2013, was 6% of end use revenue coming from innovative grades and 43% coming from differentiated grades.

Looking now at Slide 8. First quarter sales revenue for Paving and Roofing end use was $70.3 million down $14.4 million or 17% compared to the first quarter of 2013. The revenue decrease is attributable to the 7.9% decline in sales volume compared to first quarter of 2013. And lower average sales prices associated with lower cost for butadiene. Volume decrease was primarily due to lower sales volumes in paving applications principally in Europe and to the lesser extent in North America, our lower paving sales partially were attributable to our production outages and limitations on our ability to fully satisfy customer demand. The declines in paving volumes were partially offset however by increased sales into European roofing applications. And the TTM period ending March 31, 2014, 11% of paving and roofing revenue was from sales of innovative grades, 19% of sales from differentiated grade. Wrapping up end use discussion with the view of Kraton's total portfolio composition for the trailing 12 month period ending March 31, 15% of revenue was from sales at innovative grade and 38% was from sales of differentiated grade.

With that summary, I'll now turn the call to our -- over to our Chief Financial Office, Steve Tremblay for more in-depth financial review of the quarter. Steve?

Steve Tremblay

Thank you, Kevin. Moving over to Slide 10, sales revenue was $311.7 million on sales volume of 74.4 kilotons for three months ended March 31, 2014 compared to $340.1 million on sales volume of 78.2 kilotons for the three months ended March 31, 2013. The 3.8 kiloton volume decline resulted in a period-over-period decline of revenue of $9 million with a lower sales volume in certain consumer and personal care applications within advanced materials. Lower sales into industrial and adhesive applications within our ASC end use and lower volume in our paving and roofing end use. These volumes declines however were partially offset by healthy volume growth in our Cariflex end use and increased sales volume into lub additive within the adhesive, sealants and coating end use. I would also reiterate Kevin's comments that across the portfolio the production outages at Belpre and Berre facilities limited our ability to fully satisfy customer demand in the quarter for certain USBC product grade. More significant portion however of the period-over-period decline sales revenue was the nearly $19 million effective lower selling prices commencer with lower raw material costs.

Turning to the right hand side of the slide, first quarter 2014 gross profit $57 million compared to gross profit of $60 million in the first quarter of 2013. Excluding the effective inventory holding gains and losses driven by raw material price volatility, represent gross profit at estimated current replacement cost or ECRC which amount to $53 million through March 31, 2014 compared $60.4 million through March 31, 2013. However, excluding the negative effects of the production downtime, adjusted gross profit at ECRC would have been $65.5 million of Q1, 2014 compared to $60.4 million in Q1, 2013. An improvement of $5 million due to lower cost of good sold again primarily raw material costs which more than offset the associated decline in average selling prices. Excluding the $12.4 million associated with Belpre and Berre outages, adjusted gross profit per ton at ECRC $880 in the first quarter 2014 compared to $772 per ton in the first quarter of 2013. For reference purposes we have shown the trends in this gross profit per ton metric which is on Slide 17 of this material.

Turning to Slide 11. Adjusted EBITDA at ECRC was $37.8 million in the first quarter, 2014 with an associated margin of 12% versus $29.2 million for the margin of 8.6% in the first quarter of 2013. As previously mentioned in the discussion of the drivers in gross profit, the improvement in adjusted EBITDA at ECRC reflects the decline in selling prices of $19 million which was more than offset by lower cost to good sold for $26 million. Both the change in selling prices and the decline in cost to good sold were largely due to lower raw material input cost. In addition, run rate selling administrative and research declined $3 million quarter-over-quarter most notably due to lower staffing cost. We also have show here a bridge from EBITDA to adjusted EBITDA at ECRC, especially noteworthy in 2014 is the $23 million of charges which are comprise of the following items. $30 million associated with the production outages of which $12.4 million is included in cost of goods sold and $600,000 is a component of SG&A cost in our consolidated first quarter result. Secondly, $9.2 million was of transaction cost associated with the proposed combination with SBC business of LCY and finally an aggregate $980,000 of restructuring and related charges plus certain startup cost associated with JV in Asia.

Slide 12 shows our GAAP net loss of $0.24 per share in the first quarter, 2014 compared to a $0.12 per share loss in the first quarter of 2013. The adjustments I just noted in the EBITDA bridge principally the downtime effects and the transaction cost had an aggregate $0.70 per share dilutive effect on Q1, 2014 earnings per share. On a comparable basis charges incurred in connection with the 2013 debt refinancing lower first quarter 2013 EPS by more than $0.18 per share. As a result adjusted EPS amounted to $0.46 per share in Q1, 2014 compared to $0.07 per share in the first quarter of 2013.

Turning to Slide 13. A few comments on cash flow as well as well as cost structure. Due to the seasonal nature of portion our business largely paving and roofing we generally incur operating cash flow deficits in the first quarter. In fact, cash used in operating activities amounted to $53.6 million and $20.8 million in the first quarter of 2014 and 2013 respectively. The increase in cash use and operating activities was due to the timing of payments of current liabilities and the decline in earnings including the four mentioned effects of the production outages and transaction costs, all of which were partially offset by lower sales volume and revenue per ton and these factors result in a smaller increase in accounts receivable compared to where we ended March 31, 2013. At March 31, 2014, we had $230 million of availability under our ADL facility; this availability under our bank lines combined with cash of $42.6 million provided total liquidity of $256 million. I will note that these amounts exclude nearly $55 million of cash which is held by our HSBC joint venture and included in our consolidated cash on our balance sheet. As a result of all these net debt to net capitalization was 37.9% at quarter end and net debt to TTM adjusted EBITDA was approximately 2.5x.

Let's take a look at some selected items for the balance of the year which are on Slide 14. Generally these estimates are similar to the amounts that we provided on February 27 in our fourth quarter earnings call. I'll run through them here. Our estimate for full year R&D expense and SG&A cost are $35 million and $103 million respectively. The estimated SG&A cost exclude our current estimate of $15 million to $28 million of transaction cost associated with the proposed combination. Full year depreciation and amortization expense is expected to be $65 million and interest expense is expected to be $25 million. Our full year 2014 tax provision is currently expected to be approximately $7 million. Moving now to some of the other cash flow items. The full year CapEx range remained at $75 million to $80 million and this includes the spending at the Asia JV which is anticipated to be $110 million to $120 million in 2014. I can also say that we expect to close the joint venture financing sometime in the second quarter of 2014.

Given our expectations with respect to inventory levels in (inaudible) we expect to generate a positive spread between FIFO and estimated current replacement cost of $6 million in the second quarter 2014 which would compare to $2.3 million negative spread incurred in Q2, 2013.

And finally although the spending has shifted modestly, we still believe 2014 turnaround costs will be approximately $10 million which as reminder we expense these cost as incurred.

I would like now to turn the call back over to Kevin.

Kevin Fogarty

Okay, thank you, Steve. So in summary during the first quarter we continue to make excellent progress on a number of fronts. Positioning our innovation portfolio for further growth, executing on key projects that will be instrumental in supporting Kraton's future growth including the groundbreaking in Taiwan for our 30 kilotons HSBC joint venture facility with Formosa and start up of our semi-works facility in Belpre, Ohio. However, the operational challenges we experienced unfortunately limit our ability to deliver stronger results. In regard to these operational issues I would like to recognize our team Belpre and commend them for their extraordinary response and tireless efforts over the course of the first quarter.

In closing, I would like now to provide you with status update on our proposed combination with the SBC business of LCY Chemical Corporation. I am sure that number of you have detailed questions about the transaction which we will need to refer to our proxy which we are working to finalize and file very shortly. I can say that the shareholders of LCY have already approved the transaction and we are moving forward with our regulatory review processes. To date we have made our initial filings in the United States, China and Turkey and we expect to file our final jurisdiction Taiwan within a next several days. Based upon our progress to date, we are still targeting at close in the fourth quarter of this year.

And so this time, I'll turn the call back to the operator. We will be happy to take a few of your questions.

Question-and-Answer Session

Operator

Our first question is from Brian Maguire with Goldman Sachs. Go ahead your line is open.

Brian Maguire - Goldman Sachs

Hi, good morning, guys. Just question on advanced materials, as you look at slide 6, the volumes were down 9% year-over-year, it has been come in a little bit late the last couple of quarters I think Kevin you mentioned some trading down maybe from customers from HSBC, USBC trading off performance or price, I just wondering how you are reacting to that, or what kind of actions you are taking to either offset that with some improved performance or may be put yourself in a better cost position or maybe there is just some restructuring actions that you need to take the cost in line with the new level for expected demand there.

Kevin Fogarty

So I think it's a good question Brian. Okay, I don't think that we have completely convinced ourselves that the trend that we've seen we will maintain because on a lot of cases this translation if you will to USBC based innovation is in many respect still at the development and trial stages for the customers. But to the extent that happens of course, on the one hand we are pleased because the USBC sales in their own right also innovative based and you need formulations but clearly as you know the USBC margin profile is not as attractive as HSBC. And in my comments I made the statement about performance and we believe that is true, but we will work with the customers to -- the big brand and OEMs if that's what they want, that's what they see the future and we will work with them accordingly which means the challenge for us from an HSBC perspective particularly for those types of grades of HSBC we have to find out other outlets and grow with them and of course we do that our through our compounding channels primarily and we are working with our compounding partners in developing a markets in that regard.

Brian Maguire - Goldman Sachs

Okay and then just on the paving and roofing, also some sales decline there year-over-year and with the majority of that business being in Europe, I would have thought maybe you get some benefit from the relatively mild winter there. I just wanted to get the -- if that was not the case or what side of outages, do you expect any kind of negative impact from pull forward of demand from weather into the second quarter or you just really won't see any weather related impact there.

Kevin Fogarty

So just to be clear, if I understood you correctly you said that majority of the businesses in Europe, that's not really the case for us. It's a pretty balanced portfolio of North America and Europe for paving and roofing. But your comment about weather particularly if you compare North America to Europe is absolutely accurate. And I think that we always have a little bit of challenge particularly as we articulate the business results to you and the investment community about how much of the quarter particularly in the non-summer quarters, the non-- in another words first and forth about what types of businesses is really the traditional kind of pull forward winter -- including winter feel activity and I think that in the first quarter of this year we just didn't see as much of the winter feel activity perhaps as we had seen previously in the traditional first quarter and that might be reflective of a fact as you might recall that in the fourth quarter we had pretty good activity in paving and roofing. And then there was the element which the reality of our production issues which caused us to kind of tamper sales a little bit particularly while we were going through the actual operational upsets early in the quarter. And by the time we got to March when the weather was really looking good we were in fairly good shape to supply customer demand but I think that all of these factors kind of had a view of the quarter being down little bit in paving and roofing but that doesn't -- as I said time and time again in the past that doesn't reflect how the whole year will shape out because customers don't necessarily make the distinction about when they buy from us whether it is March or April as an example.

Brian Maguire - Goldman Sachs

Okay, just last one if I could. Do you guys expect to do $130 million of EBITDA for the year excluding $30 million of weather related outages in the first quarter?

Kevin Fogarty

So we have answered this question a few times and we are not going to comment on that with respect to giving guidance as we do not give guidance particularly with respect to EBITDA guidance score, did gave you some guidance on some discrete items but and we share that $150 million as the basis for the materials that we have represented to our Board in terms of the forecast relative to LCY forecast as we looked at putting this deal together and that's when I answered that question.

Operator

Our next question is from John McNulty with Credit Suisse. Go ahead your line is open.

John McNulty - Credit Suisse

Yes, good morning. Thanks for taking my question. So I guess a question on the advanced materials side because you are showing in the chart for the first quarter of 2014 how innovation improve or the innovation component of your mix improved with it sounds like it is tied to the USBC side. So I guess how should we be thinking about the overall profitability and how that kind of is changing if it is at all between the innovation segments, the differentiated segments and the standard segments because it sounds like it may be not quite as intuitive as we would think it would be?

Kevin Fogarty

Well, as I just mentioned a minute ago in Brian's question, the reality is that the USBC sales translation that's happening in our personal care versus HSBC is in itself an innovation because these are grades that are specifically designed for that personal care elastic film application. We fall back and we embrace it and if that's the way the customers want to go then of course we will work with them in that regard then our challenges going to be look at the HSBC capacity becomes available as a result of that move and place it in another market applications and work with our customers to do so. So it is kind of I guess the way I would describe it John it is a little bit of double edge sword and that it is taken away from HSBC sales but it's innovation in its own right and that's reflects why the advanced materials innovation of overall sales continues to be very attractive.

John McNulty - Credit Suisse

Okay, fair enough. With regard to working capital, I know seasonally first quarter it is normally a pretty decent headwinds. So it is a little surprise to see it as high as it was specially considering the outages where we would have assumed you were kind of burning to maybe more inventory than normal so I guess what's driving that and can you walk us through how should we be thinking about kind of working capital progression throughout the year?

Steve Tremblay

Yes, good morning, John. I still adhere to what we traditionally guided to in terms of working capital. We like to think in terms of percent of revenue. And we are in general over a 12 months period we will get to around 25% to 27% of working capital excluding cash as a percent of revenue. So still remains in pretty good metric. There is nothing that was systemic in the first quarter, we were looking at -- although inventory quantities were bit lower than what we have targeted for the year because of the outages, we were targeting inventory builds to get us ready for the turnaround if you refer to the guidance and turnaround cost, you will see the cost increased during the year as we were expecting, some outages later on, so we were building, we did build inventory quantities actually even though we were out and coupled with the fact that that we saw raw material rising which manifest itself again in that FIFO got (inaudible). So it is a really a function of - we did build inventory less than we thought, rising raw material costs and then we would in - that couldn't be offset by the effect of lower receivables. But again nothing systematic in our working capital position, no major changes in our terms or terms of our vendors.

Operator

Our next question is from Mike Sison with KeyBanc. Go ahead your line is open.

Mike Sison - KeyBanc

Hey, good morning guys, nice start to the year given the headwinds. Can you give us your thoughts on Cariflex? Do you expect volumes there to continue in those levels as the year unfolds?

Kevin Fogarty

Sure, Mike. I don't think I would characterize that a 30 plus percent volume growth in the quarter. It's something that I would be advocating on forward going basis necessarily, although certainly we work on in our lot of market development and translational opportunities that we believe will accelerate growth over time. That all being said, we stand by our kind of comment on attractive double digit gross for the end use because all the prospects in front of us look very good.

Mike Sison - KeyBanc

Okay. And in the other segments, could you give us a little bit of an update on the (inaudible) of volume near term, lot of folks have said March was a lot better and as weather didn't hit them as they got into April things looked little bit better. Should we start to see better volume growth as the year progresses for the other segments?

Kevin Fogarty

Well, if I look at Kraton overall and recognizing that Cariflex as a volume relative to the overall portfolio is a smaller percent number, attractive obviously pricing and margin but different volume profile. I think we are down about little under 4 KT for the quarter year-on-year and I contribute a good deal of that obviously to the weather related incidents. So it's not weather impacting demand, it was weather impacting our production ability to satisfy demand. So maybe we had a different kind of outlook and profile versus other names if you look at. That all being said, these markets are still looking very robust for us. And we are optimistic about how the year will unfold and the production issues are thankfully behind us due to the great work of our operating team to get us back on line and the plants are running real well. And again we are really encouraged with the trends we are seeing particularly as you look at in the way in which our innovation portfolio is continued to evolve.

Mike Sison - KeyBanc

Great, and then when you think about the ECRC gross profit per ton for the first quarter excluding the items little above 900, you are again sort of in that striking distance for that $1000 goal that you have talked in the past. Are you feeling better as you looks for the rest of the year that something that may be you can hit in a quarter or may be even potentially for the full year looking longer term.

Kevin Fogarty

Never going to say never because obviously we are striving new accomplish here but clearly with the portfolio shift and the innovation and the effect of Cariflex all reflecting some positive momentum, that's the key to continuing to see our gross profit per ton evolve towards our goals. And it is good start to the year as you comment.

Operator

Our next question is from Jason Freuchtel from SunTrust. Go ahead, your line is open.

Jason Freuchtel - SunTrust

Hi, good morning. Looks like on adjusted basis cost to goods sold and SG&A came down relative to last year. Are these levels are sustainable? And are you starting to term cost ahead of your acquisition and JV coming online?

Steve Tremblay

Couple drivers there, the lower raw material cost is certainly a big influence on our cost to goods sold and relative to the SG&A and R&D, we are always looking for things that we can do to -- do better in those support functions. So I would refer you to on a full year basis for this year, refer you to the guidance that we gave with respect to R&D and SG&A for the full year, that will-- that's our best call for where you see those corresponding out for the year and I like Kevin discuss all matters relate to LCY combination.

Kevin Fogarty

Yes and the short answer is we are not taking actions needless to say to reflect the new operating model once this deal closes. But by the same view needless to say we won't be adding any cost or resources because we are in a bit of holding pattern right now from the standpoint of wanting to needless to say subject to all the proper regulatory authority and I wanting to think about transition and the resulting cost structure and of course we call out synergy goal that we expect to achieve and needless to say that's one of the prime drivers for the transaction.

Jason Freuchtel - SunTrust

Okay, great. And with the butadiene price increasing in the quarter sequentially and expectations for the price to continue to increase. Do you feel like demand driven by pre buying as present in the market place?

Kevin Fogarty

Butadiene always continues to present challenges and opportunities for us I guess the best way to say it. Right now the dynamic is we've got kind of North America and Europe call a flat after having some increase in the first quarter on a monthly basis. I am not talking about relative to first quarter of last year. I am just talking relative to sequentially in the months. Whereas Asia has been I guess I could say best flat to down and that's driven by a lot of factors nothing to do with obviously TTE and so we have to manage us very closely for example as butadiene was trending up in North America and Europe, we have to pass through that raw material cost. And did so with our pricing rules as we always do, consistent with price rate. But at the same time we have to be reflective of the fact that the competition from Asia did not have the same BD underline driver for cost. And so certainly our customers pointed that to us more than one occasion. So it is not a dynamic that we have seen in 2011 and 2012, clearly where we just saw nothing but upwards into the rate. In terms of BD pricing but we have to be very conscious of the fact that there is, it appears to be two different drivers on BD pricing. And so the customers to get to your question, the customers look at that as well and I don't think that they are taking a view that even though there are some short-term upward movement in North America, in Europe, driven primarily by production outages on the part of butadiene suppliers and that in itself should be a kind of an opportunity for them to get ahead of that pre buy now and get ahead of that increase because they know what is happening with butadiene in the East and that typically is forward indicator and what's going to happen to overall global prices.

Operator

Our next question is from John Roberts with UBS. Go ahead your line is open.

John Roberts - UBS

Good morning. Is there anything you can tell us how LCY's business has been performing, I realize just probably only limited commentary but are they at least meeting their plans or anything public to give us a sense of how they are performing.

Kevin Fogarty

John, this is Kevin. We won't be talking about LCY's business and how they are performing

John Roberts - UBS

And they had any operational issues since the deal was announced?

Kevin Fogarty

Again, I am not going to comment on LCY performances, this is not appropriate right now.

John Roberts - UBS

And then secondly, your periodic operational issues that you had post deal, will you be able to deal with those better? Will be there more back up of the plans, will you be able to work for some of your maintenance outages and so forth and coordinate that a little bit better so that you have smooth your earnings.

Kevin Fogarty

I think adding facilities and therefore adding footprint and adding diversification and the supply portfolio is always good and I suppose you could say that in the event that there are other outages that would mean that we would have some backup supply alternatives but I don't really want to look it at that way because we are not going to really plan for outages. I look at in more terms of the opportunity it creates in terms of serving customer need more cost effectively.

Operator

Our next question is from Christopher Butler with Sidoti &Co. Go ahead your line open.

Christopher Butler - Sidoti & Co.

Hi, good morning, everyone. If we are looking at your volumes in the first quarter, how much was the outages and winter, how much did they clip from your volumes?

Kevin Fogarty

Again the weather related issue was -- it caused our operating issues. And I think that we would categorize that in our adhesive, sealants and coating business it could be upward of 2 KT were impacted and in our paving and roofing business 1 KT more or less but paving and roofing is a little harder to view because as I mentioned in a few minutes ago you have always got the dynamic of how customers are processing relative to their winter feel need as well and then it is on the back of pretty strong fourth quarter. So we are characterizing it somewhere around 3 KT in combination of two end uses.

Christopher Butler - Sidoti & Co.

And looking forward with the semi-works plant, up is that something has an impact in the second quarter? When do we start to see positive results from that and how do we see that in volume and gross profit per ton, all of the above.

Kevin Fogarty

Well, I think that the primary purpose of the semi-works line is clearly to advance our innovations capabilities and that means primarily being able to produce a smaller lots for customers more timely. So at the end of the day we believe it will accelerate our innovation efforts. Where it helps on the production side is clearly that it kind of eliminates the requirements for us to be producing test volumes on our production lines for the benefit of customer approvals. So that should manifest over time in additional capacity for just real production, real sale as well as of course the working capital that would be associated with producing on production lines in test volumes which is just large and efficient and semi-works line makes us more efficient in that regard.

Christopher Butler - Sidoti & Co.

And so going back to butadiene, it sounds like we have a global market that's moving in different directions to date and understanding that Asia is out in precursor to prices here. Could you talk to that a little bit more specifically with in light of rubber prices coming down significantly and as data precursor as well?

Kevin Fogarty

Yes, look I think that there is several fundamentals that are causing Asian butadiene dynamics, there is the combinations of on supply side, additional supply but clearly from the demand perspective indeed the natural rubber alterative are also-- I don't know if they are historical lows but certainly in cycle lows, tyres business I don't think is stellar right now so it is not pulling a lot of material. I see all of these kinds of factors together at the same time and clearly that it is putting downward pressure on the butadiene market particularly in Asia.

Operator

Our next question is from Edward Yang with Oppenheimer. Go ahead your line is open.

Edward Yang - Oppenheimer

Hi, good morning. The strong performance in Cariflex, Kevin you mentioned not to -- not necessarily to extrapolate that level of growth but to understand what happens in the first quarter, were there any hospital systems you converted? I know that business tends to be somewhat lumpy.

Kevin Fogarty

I don't think I am going to say specifically was linked to any conversion in terms of an uplift in demand. I think a function of it quite frankly was some of our glove customers looked at the business that were planning for calendar year 2014 and beyond and wanted to make sure that they were in a position to satisfy the growth that they were looking at. And obviously that was -- and that translated into a really nice volume uplift for us but once these conversion happen the business is real. It doesn't go back. And think about this way too which what our team feels very optimistic about is that happening replacing natural rubber at a time when natural rubber prices to my point a minute ago are at such a low point.

Edward Yang - Oppenheimer

That's great point. On the some of the lost sales that you had related to the production outages, it was my understanding in the past that you carried quite a bit of inventory because of the more real time nature of the fulfillment. Has that changed at all in the last year or so? I know butadiene prices have been volatile so may be you reduced inventory somewhat but as a little surprise that you can have that inventory on a hand to smooth out some of those disruptions.

Kevin Fogarty

Well, everything is little bit relative when it comes to as you call inventory on a hand to smooth out some of those disruptions. It put stress on our system; there is no question about it. And but we always have a business model that we believe is competitively advantage and that our service capability is one of the selling features of the overall Kraton offering. And including in that is obviously having the inventory in place to meet customers requirements and so when we have short-term operating issues and we rely on obviously inventory in the short term, we are also planning for things like in the case of paving and roofing in the upcoming summer season and then I think Steve Tremblay mentioned earlier we also planning for turnaround. So all of these factors kind of come into play but I would say that on a relative basis if I could say that way that we have worked diligently over the years to produce inventory tonnage relative to days on hand for supplying customers and certainly first quarter was a challenge and that's why made the comments that I did about all in the Kraton team stepped up and mitigated and minimize the effect.

Edward Yang - Oppenheimer

Okay, understood. And just finally, are there any updates in terms of your efforts to shorten your pricing contracts to more match fluctuation of raw materials real time and may be on the sourcing side of raw materials and butadiene in particular, any progress in terms of securing more stable supply or longer-term supply.

Kevin Fogarty

We could secure a lot of butadiene if we needed to right now. So we are not too concerned about that but in the context of the first point you made, pricing of our products relative to the timing of butadiene moves, you recall that was a major thrust for us in 2013 to get more real time in the pricing model. And I think we are pleased with where we got to. I just think that this pricing dynamic we saw in the first quarter while we clearly saw cost increase in North America and Europe. Clearly the market place was going that against, what was happened with Asian butadiene prices at the same time and we worked with our customers as we always do. But where we needed to pass that through we did.

Operator

(Operator Instructions) Our next question is from Alex Yefremov from Bank of America, Merrill Lynch. Go ahead your line is open.

Alex Yefremov - Bank of America, Merrill Lynch

Good morning everyone. Kevin, I think you just touched on part of my first question but can you talk about your pricing on a sequential basis, have you raised prices in the first quarter and will you be raising prices in the second quarter, across the portfolio on average?

Kevin Fogarty

If I go back to the end of the fourth quarter, October timeframe onwards, we have seen sequential increases in butadiene and certainly started the year off that way and well again I am talking about North America and Europe so yes we passed it through. Now beyond that right now we are looking at -- and I might be ahead of myself a little bit but it looks like May is turning into the kind of rollover situation for butadiene cost in North America and Europe and that's kind of still I think we are talking about -- still kind of fluid situation but every indication are looks like it's going to be rollover so to the extent that's the case coupled with what I talked about in terms of the butadiene situation in Asia. Whether there has been indications of downward movement, I mean I don't see that translating into a price increase requirement on our part to pass any further cost through given the fact that we have already been successful doing so in the first quarter.

Alex Yefremov - Bank of America, Merrill Lynch

Great, thank you. And then second question I realize you cannot talk about LCY specifically but you are player in even USBC market to some degree or may be have visibility into them. Can you tell us what's been going on in Asia, in USBC over the last may be quarter, whether you are seeing sort of better margins, volumes and pricing.

Kevin Fogarty

Well, I am just going to answer this Kraton. I want to be clear I am answering this for more Kraton season in terms of what's happening in Asia and China in particular. I think that it is no secret particularly in the un-hydrogenated part of the business, the short term dynamics typically trade around cost drivers and with the negative momentum at butadiene and the prospects for continued may be not further negative momentum but no real upward momentum shall I say. Customers are just very vary and I think that's translated into slower start to the year in the USBC part of the business. But for us, for Kraton, remember we are mostly about HSBC and Cariflex in Asia and that particular respect I mean we haven't really seen any trend changes, it is kind of business as usual.

Operator

(Operator Instructions)

And we are showing no questions at this time.

Gene Shiels

Well, Angela, if there are no further questions at this point, we would like to thank all of our participants this morning for their interest in Kraton and their thoughtful questions. A replay of this call will be available in the Investor Relations section our website starting later today. As well as telephonic relay will be available starting today and will run through May 14. You may access the telephonic replay toll free by dialing 800-879-6113. And international callers may dial 402-220-4741. That concludes our conference call. Thank you.

Operator

That does conclude today's conference call. Thank you for participating. You may disconnect at this time.

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