Kraton Performance Polymers' Investor Day & Innovation Expo (Transcript)

Aug. 4.12 | About: Kraton Performance (KRA)

Kraton Performance Polymers (NYSE:KRA)

Investor Day & Innovation Expo Call

August 2, 2012 8:30 AM ET


Gene Shiels – Director, IR

Dan Smith – Chairman

Kevin Fogarty- President and CEO

Steve Tremblay – VP, CFO

Michael Oberkirch – VP, Advanced Materials

Richard Brennan – VP, Cariflex Polyisoprene Business

Prakash Kolluri – VP, Sales and Marketing, Asia Pacific

Damian Burke – VP, Corporate Development

Mark Siebert - VP, President of Adhesive, Ceilings and Coatings


John Roberts – Buckingham Research

Katie Gordon – Cazenove Capital

Gene Shiels

Good morning. I am Gene Shiels; I am Director of Investor Relations, Kraton. And I’d like to welcome you to Kraton’s 2012 Investor Day, in fact our first Investor Day. Also want to offer of you joining us on the webcast, those of you who are here present today. As you came in, you had to opportunity to see a number of exhibits that are outside this conference area and hope you had a little bit of an opportunity to speak to some of the Kraton representatives out there. We have some time built into the schedule today. We have a scheduled break at just after 10’Oclock and then certainly during our lunch period, we certainly encourage you to go out and look at the exhibits and visit with the Kraton people. We’ve done a little color coding for you so the Kraton reps are the ones with white name tags and they should be easy to find. So feel free to ask questions and seek us out. We really want you to spend some time actually getting to know the Kraton leadership team. So please take advantage of that.

We have a pretty exciting schedule this morning. I think some great things to show and tell. Due to the webcast, we got a fairly rigorous schedule that we need to adhere to. So I would ask to the degree possible, we’re going to reserve all of our questions for the end of the session to the degree that we have some time within the presentations to entertain the question, we’ll do that. But generally, we like to hold the questions to the end and we’ll have a formal Q&A session.

Couple of housekeeping items. There is no planned fire drill today at the hotel. So if you hear an alarm, it’s probably the real thing. The best way for you to exit the building is the way you came in, past the desk where you signed in. also the rest rooms are located down the hallway just on the other side of that desk as you came in.

Brian if you could hit the next slide for me. Just a few comments this morning on forward-looking issues over the course of the presentations today, we’ll probably touch on a number of topics, some of which may be considered as forward-looking statements. Some of these statements are subject to a number of risk factors and over the course of the presentation today in the format may not permit a full disclosure or discussion of those associated risk factors. So I encourage you to refer to our Form 10-K, 10-Q and other regulatory filings available on our website for a full discussion of those risk factors.

We also may touch on some non-GAAP financial measures over the course of the presentation today and we’ve got some reconciliations of those in the relevant presentation, so I want to focus your attention on that.

At this point, I have the opportunity to introduce Dan Smith. Dan for many of you probably doesn’t need any explanation; many of you know Dan from his time in the industry over the past number of years. But Dan joined Kraton in 2008 as Chairman. And again, most of you know him from his long and distinguished career as he was CEO and Chairman of Lyondell chemical company. So with that is a little bit of a brief introduction. I’d like to turn the podium over to Dan.

Dan Smith

Thank you very much Gene and I’d like to add my welcome to all of you. I think you’re in for a real treat today. This is a unique opportunity to learn a lot more about what I think is one of the more exciting opportunities in the chemical industry. I’ve told many of you before that I’ve been well acquainted with Kraton for many years, back to the years that Kraton was really affiliated shoe soles and a little more than that. Although, what you didn’t know at that point in time was there was a lot of technology being worked behind the scenes that never seemed to go anywhere? But happily since I joined about the same time that, or exactly the same time that Kevin moved up to the CEO Job, we’ve seen a tremendous transformation in this company. And I think if you take the opportunity here to talk around and visit with the members of management who are here, and see more of what’s going on in the company, you’ll appreciate what I thought since my joining that is these people are the most dedicated and the most talented and the most accomplished people at moving something that always had a lot of potential but never seem to realize it to one that’s realizing it in real time in the marketplace.

Now, the backdrop for the last five years has not exactly been kind. I think we’d all agree that the turmoil and economic situation around the world has probably been unprecedented in most of our lifetimes. On top of the ordinary cyclical challenges that we face in some of the feedstocks. So this management team over the last five years has learned to surf as well as to develop new products and get those products out into the market By surfing I mean, trying to stay in anticipation of what’s happening in the feedstock world and they’ve done it everywhere except learning how to change the perceptions that come from inventory accounting which as you get into the guts of what goes on here is perverse and it makes the earnings look very poor when indeed the cash is looking very good. So, as we get through some of this may be lunch time a little bit more of that that but really spend the time today to understand the people, the talent that we’ve got moving this forward, the innovation going on in this company and the bright, bring future that we face in the future. So again, thank you for your attendance today and please take advantage and learn all you can.

Now with that, let`s turn it over to our leader, Kevin Fogarty, who has been driving this change for the last five years.

Kevin Fogarty

Good morning everyone. I want to welcome those in attendance today and of course those participating via our webcast. It is a true honor to host our very first investor day for Kraton. We’re now a public company for going on 2.5 years. We spent, I believe, quite a bit of time with investors to outline and share our business strategy, our vision for growth and I think this is the next evolution of that discussion such that we can take the time and share with you more detail, answering many of the questions, in particular around our product portfolio today and where we believe it will go to in the next five years that you’ve asked of us. And I’m looking forward to sharing that perspective with you.

I’m also equally pleased that you’re going to get the opportunity to hear directly from the people in Kraton, the leaders that are making it happen in the global marketplace, day in and day out. I think many times we get around needless to say in our roadshows investor presentations and you hear from myself and you hear from Steve and Gene, but you’re going to hear firsthand from our business leaders today and our innovation leaders that are doing this each and every day living and breathing with the passion we describe as verve at Kraton to really drive portfolio change at Kraton which is exactly how we describe our business strategy.

I think as both Dan and Gene said, we have a loaded agenda and our goal is to keep that agenda on time so that people, if they have to choose to be selective in terms of what they want to listen in on or later go back and listen to what was said, we’re going to stay on that agenda and then decide whether or not we can allow questions during the session or whether or not we’ll just use the Q&A session at the end in its entirety for that wrap up.

I’d also encourage you because we’ve taken the time to also include a number of our market development and innovation managers to be present here and we prepared exhibitions of our key end uses and our key innovation platforms take the time during the breaks, during the lunch hour session and meet with these people because at the end of the day again, they are the ones that are the brains and the know-how behind the innovations. They are working with our customers and our innovation partners to again commercialize, to make this strategy real and they are very excited to share and talk about these innovations and I would not be remissive as a matter of fact and not emphasizing to you to take the time to do that because I think you’ll learn a lot about the things that we’ve been talking about over the last couple of years.

So the next slide, growth through innovation and differentiation, I mean at the end of the day, that’s how we summarize who we are and if you want to try to blow down that strategy into four buckets of priority activities in Kraton, we try to listen here for you. Building a platform for future growth is absolutely essential to our business strategy. You all know about our HSBC expansion plans in Asia, our Vice President of Corporate Development, Damien Burke will walk you through that in the session after lunch, that where we are on that project with more detail on the actual project itself.

The ongoing isoprene rubber latex expansion plans that we have, as many of you know, last year we completed the conversion of isoprene rubber manufacturing capability in Belpre, Ohio which was absolutely essential and then we also at the same time started up an expanded latex plant down in Brazil. Both of those projects were done on time and on budget and absolutely key to the businesses’ performance. But that’s not enough. We have to continue to expand that latex business in support of the very attractive customer growth that Richard Brennan, head of that business unit will talk about, I believe right after lunch. And in that regard we are now doubling the size of our capacity availability in Japan with our manufacturing partner in Japan.

We have to build a pipeline for future innovations, you’ll hear of course about the platforms that we’ve been speaking a lot of today and how we believe those projects will commercialize over the next five years but that’s not enough. We have to continue to build on that innovation pipeline to ensure that we have those types of platforms evolving for many years to come and a great deal of the innovation teams work at Kraton is of course commercializing what we’re working on today is a high priority at which you know of but there is a lot of work going on behind the scenes in terms of the ideas that are generated that we expect will be talking about to investors for many years to come as this innovation vision just is an evergreen almost in terms of the project activity at Kraton as we drive that core metric which we call Vitality Index.

And then from time to time we will evaluate M&A opportunities that we believe would be a great tack on for the business with just two caveats of course. One is we are focused on things and activities or projects that we believe would be very complementary to the existing business strategy, they just have to be. They have to fit our innovation vision for Kraton. And of course be accretive in a way in which investors, you the investors would believe the opportunity that we’ve working on and developing makes the most sense for the company ultimately to increase shareholder value. So the platform for growth is clear. We have dedicated teams working on each of those endeavors and I’m very excited about the progress that we’ve made to date and the products we expect to be making over the coming three or five years.

Address business environment is a core topic is not driven necessarily by anything we’re doing but we are a consumer of a very volatile raw material and that’s caused us to behave in such a way in the marketplace in reaction to that volatility and we’ve talked a lot with investors about how that volatility and raw material pricing has translated into in many cases some volatility or unpredictability in our volume trend. We are working on ways in which to try to trim that volatility. Of course the bottom line there is as I like to say, we want to try to make that butadiene and to some extent isoprene pricing model that exists in the marketplace today that we have again no control over. But we want to try to make it less and less relevant. And of course the easiest way to make that less and less relevant is to have margins and a portfolio of margins that are large enough that these quarterly or monthly moves on the part of this key raw material don’t have the meaningful effect and more importantly, the customers are going to have to continue on buying Kraton products in a more ratable way because the product itself is so unique to their business model that we have made enough sense the butadiene volatility less and less relevant and that’s something that we work tirelessly on. I would say that one of the questions that came up yesterday even in the earnings call about how we can think about our pricing model, that might actually aid in eliminating or dampening that volatility and volume is something also that we are working on an and I am talking about real-time pricing here.

The expansion of our customer base in the geographical regions that we serve, needless to say, a company like Kraton where Asia and the developing markets of Brazil and even Eastern Europe are so relevant to our business growth strategy, we spend a lot of time in those regions literally in each of end users. Those regions do have some main uses that are more applicable for example Asia certainly is an HSBC innovation priority for Kraton has been and will continue to be but nevertheless the great thing about Kraton in that market leadership position we have as have heard us say, is we’re able to provide products both today and innovation grades in the future that can serve pretty much any need our customers have unlike anybody else in the industry.

Accelerate key innovation platforms. We’re going to talk about those today. You are going to hear a lot about them for us the name of the game is commercializing faster. What are we doing to commercialize faster? We for example in the case of our NEXAR development are very proud that this was a milestone year in terms of the first real commercialization of an innovation project that’s been almost five years in the development and you’re going hear about that on specifically today and we encourage you to visit with the NEXAR team out in the lobby at the bridge to learn more about that very unique first commercialization but that’s not it, we see still great opportunity for not just in the area of performance apparel but in industrial applications like water purification as well as their unique approach to HVAC to dress today’s very real sustainable needs of the industry.

Ultimately through that successful commercialization of innovation, we will achieve the kind portfolio shift that we are going to outline for you today that is our expectation, that is what we work on, that’s what we believe and we are going to share with you where we are today in terms of the overall portfolio and for each of the end uses and we are expected to take them in the next five years.

And then we are establishing some financial goals that we held ourselves accountable to and it starts clearly with beginning with Vitality Index. We are going to walk you through how we are going to take our Vitality Index from today’s level and almost double it over the course of the next five years. We believe that through that process we’ll be able to generate at least 10% compounded annual growth rate in adjusted EBITDA, driving both therefore the bottom line performance of the company and at the same time we’re very sensitive as you know to the types of margins that should be indicative of the portfolio that we offer our customers and that that standard benchmark of expecting to have sustainable mid-teen EBITDA returns is certainly not only our objective but we believe very feasible.

Now the agenda for today to take you through all that material again. It’s pretty aggressive agenda. You’re going to hear from a lot of our business leaders. We are going to try to again stay on schedule. Effectively what we are going to do is start with Steve Tremblay taking you through some financial measures of the company, then we are going from there directly to innovation, you’ll hear from our Head of Research and Development, Dr. Lothar Freund. Before Lothar will be Holger Jung, our Head of Commercialization to give you a market update and then we’ll take you through the innovation. And I’ll walk you through each of the end users and I think that is a great flow that will then lead into ultimately a discussion around our innovation platform primarily NEXAR or Cariflex in the afternoon as well as the project itself.

The team that you’ll see here today about half of my leadership team is presenting for you specifically this afternoon and I’m not going to walk you through them, they’re going to introduce themselves as they go through their own presentation materials but in addition to that you’ll hear from our end use leaders who are actually again driving each of end users on a day to day basis and I think that is the first time you probably heard directly from these individuals and I think you’ll find their knowledge of their end uses to be not only excellent, but their outlook and their vision for the businesses are what we’ll betting on here and we’re very excited that they are here to present for you.

So with that, let me turn the discussion to the first agenda item and I call on our Chief Financial Officer, Steve to take you through the financial section of the deck. I look forward to wrapping up with you at the end of the session after lunch. Thank you very much.

Steve Tremblay

Good morning. I want to extend my welcome as I welcome all of you to Kraton’s first investor day. Were certainly very excited at the level of interest you all shown in our company since going public here at the end of 2009. The team that Kevin just introduce for you is going to take you through a number of exciting initiatives we been working on for some time on. Those of you that have followed the company for some time are familiar with some of these initiatives. Others will be will be new to almost everybody here in attendance.

Want I want to do in the financial overview was spend a little bit of time taking a look at where we were in 2007 and where we are today and the reason I want to do that is because it provides a nice foundation for the next transformation of Kraton. When Kevin took over the leadership team back in 2008 the business needed to be fixed and the fix was the implementation of our price right strategy. Now I’m going to take you through what the price right strategy did to transform the business, but from 2007 to where we are today clearly we’ve been faced with some pretty tremendous challenges.

I joined 2008; I assure you I was not the cause of the raw material volatility that we’ve been living through for that period of time. But we have managed through it and we managed through it by being steadfast to our stated strategy to continue to provide innovative products to the marketplace and therefore are constantly reaching the overall portfolio resulting in an expansion of overall margins and we continue to do that day in and day out and that will continue to be one of the cornerstones of the strategy that we’re going to talk about later on today.

An example of that that innovation back in 2008, our Cariflex business which Richard Brennan heads up, the IR and IRL business one of the highest margin pieces of our business and our portfolio, full year 2008 the revenue in that business was $35 million dollars. We’re currently running that business at over $100 million in annual revenue and we’re going to share with you some plans to continue to grow that business over this midterm.

On a similar vein we continue to focus on invasion grades primarily in our HSBC product portfolio and you also are going to hear from Prakash Kolluri who is going take you through some significant penetration of HSBC and HSBC innovation grades especially in Asia which ties in nicely to our plant capacity expansion that Damian Brooks is going to take you through later on in the day.

So with that as a little bit of the background let me take you through first one measure of the price right strategy as we talk about the overall portfolio left. There’s probably three principles that support the price right strategy and two of them were as follow. One, across the board price increases in 2008 that were commensurate with the value and use that Kraton’s product brings to our customers. We found that we were in fact underselling our innovation and underselling overall portfolio. So that was step number one.

Step number two was in absolute diligent pasture of raw material prices when raw material prices move upward. The business had not done that on a diligent basis prior to 2008 and I’ll show you some information later on that will illustrate that we’ve clearly been able to do that through this unprecedented movement in raw materials. Those two the across the board price increases and then maintaining the diligence when raw materials move, aggregated $479 million of selling price increases. I think that’s a significant number in absolute terms but off a $1.1 billion revenue base in 2007, I think it clearly illustrates the power of the price right strategy in resetting prices. Now a subset of that $579 million price increase is $200 million which is above and beyond the inflation of raw material. That is clear margin enhancement and I’ll show you some metrics later on that will illustrate the magnitude of that margin enhancement.

When we embarked on the price right strategy there was an expectation that ended up being fulfilled and one of the expectations was we probably have about 5% of our overall volume at risk as we made these across the board increases. And if you looked at our 2008 performance until the significant downturn in the overall economy in 2008 of first quarter, we were running at about 5% of volume degradation. If you take that volume degradation directly associated with price right and I’ll show you there was a great trade because the margin enhancement is absolutely crystal clear and accounts for about 20 kilo tonnes of lower volume from the peak 360,000 tonnes in 2007 to the 300,000 tonnes that we’re running today. So the first 20 kt was a planned culling of some of the lower margin piece of the business.

The second biggest driver of the volume decline was frankly some of our less differentiated grades. For those of you that followed the business for a long time, we started in footwear as Dan Smith mentioned. In 2007, we still had a piece of the business that was dedicated to footwear relatively low margin. As we look at our portfolio right now, there is virtually none of our portfolio is dedicated to the footwear business. So again, less differentiated grades of material has shifted out of the portfolio.

Then finally, infrastructure spending has been in a decline and that infrastructure spending has resulted in a fundamental decline in our paving of roofing volume. So we take the price right strategy and another pocket of differentiated grade reduction and infrastructure spending decline who essentially count for the decline in volume from the high watermark to where we’re running today.

On the right hand side of the slide you can see again, it was a pretty good trade. The effect of increasing selling prices and maintain those prices was around $140 of incremental EBITDA. So $140 million of expansion over EBITDA of $790 million in 2007 again of a high watermark of volume. So clearly the increase in price and the maintenance of those high margins has more than offset all the effects of the decline in volume. Speaks volume towards the high grading of the overall portfolio at the expense of some lower margin products. And that’s going to be a fundamental theme as we go through this. As the team talks about products like NEXAR and Cariflex, those products are going to carry less volume than a traditional say, paving and roofing product line. For example in our Cariflex business again, 7% of revenue but far less than 7% of volume.

So as Holger takes you through the supply demand dynamics of the industry later on in the presentation, we will continue to believe that the industry can grow at 2X GDP, but also this is going to be less on capturing volume as it has been today and more on capturing high margin, very profitable volume and again, NEXAR, we don’t even measure NEXAR in kilo tonnes, we measure it in grams.

You can’t do one of these without talking about raw material volatility. Surprise to say there’s been raw material volatility over the last number of years and again, we’ve been managing that with our price right strategy. Just a couple of data points here. The top is the spread between FIFO and estimated comp replacement cost but the real key here is on a chart at the bottom where we track raw material margin, but equally if there is some material in the appendix that addresses gross profit per tonne. On a gross profit per tonne basis, back in 2007, we were generating gross profit less than $450 a tonne. Today if you look at our gross per tonne trend over the quarter since 2007, we have numerous quarters on a count replacement cost basis where a gross profit per tonne is double the $450 per tonne that we generated in 2007. So again, the power of high volume even though we are producing and selling less volume to the market place.

To illustrate the pass-through of the raw material costs, we thought we’d share with you the spread between revenue and raw material costs and kind of replacement cost. So this is essentially the selling price today versus a replacement cost of the three basic raw materials. And here again, back in 2007 that was about a $1,700 per tonne raw material margin. We’ve expanded that by nearly 40% to over $2,300 per tonne through June 30 on a trailing 12 month basis and frankly we’d maintain that level after we had the reset margins in 2008. So again, we feel confident that we’re able to pass through raw material prices and at a base line margin, which we only believe will be enhanced by the flood of penetration and innovation, keep these margins in our portfolio.

So while we work diligently on the topline and while we work diligently on innovation to improve margins, we also need to take a look at the balance sheet and get that ready for the next stage of growth. We significantly reduced our net debt from where we were in 2007 from around $500 million at 12/31/07 to just over $260 million at the end of June. So significant delevering of the business.

And we’ve also been successful in changing the overall debt profile of the company. We have about $495 million of gross debt at June 30, significantly all of that mature is in 2015 and even more of it mature is at 2019. So we’ve got no major calls on a cash flow that we generate from operations except for to continue to invest in the business and seek out strategic opportunities.

Want to take a look at the most recent cash flow to give you a sense. We have a very, very strong cash flow dynamic in this business. We have a relatively low cost of debt, we successfully completed a tacked on offering of our senior, unsecured notes in the first quarter of this year to give us additional flexibility to grow including funding part of our Asia plan. So we benefit from that low cost debt, it’s in place now till 2015 and with respect to the bonds of 2019, and due to some tax planning strategies and the ability carried forward net operating losses, we benefit from a very, very low global tax rate and those two factors again, limit the claims on our cash allowing us to invest cash in growth CapEx and again, strategic initiatives. I will point out that one of the dynamics in our business is the amount of inventory we carry is higher than what may be expected for people in the chemical business. We feel as though it’s the right level. We challenge that level day in and day out and we’re reducing inventory today as we speak. But we have a service model that checks in on the globe and we manage that inventory to balance the cash needs of the company but also to not jeopardize that service model which is oh so important to our customers. But a period of declining model of prices, the cash flow dynamics are even greater than what’s shown here as we liquidate working capital that was otherwise tied up with high price monomers on our balance sheet. We believe these cash flow dynamics will be in place for the mid-term financial forecast that we’re going to share with you.

So taking you through where we have been in 2007. We are never satisfied. We’re certainly not going to deviate from our price right strategy as I think it’s unequivocal that it was a significant driver in getting this business right size and getting it ready to grow. We believe we’re going to stick to that strategy; we’re going to stick to the innovation of thrust. Kevin mentioned earlier, we’re going to double our Vitality Index in the mid-term, the team again is going to tell you how we’re going to get there and we’ve also got a balance sheet that’s going to support these growth initiatives. We have plenty of liquidity and frankly we have the ability with our capital structure right now to frankly raise additional capital if so needed.

So let`s take a look a little bit of where we see the business in the mid-term from a financial perspective. Again, we’re going to focus on differentiating the portfolio. If you look back at history again, I’ll give the Cariflex example again, that business is 3X where it was in terms of revenue back in 2008 and drive significantly higher margins than our US pc portfolio and drives higher margins in our HSBC portfolio. We’re going to continue to grow that. And then the team is going to cover off some of the really exciting initiatives including NEXAR also service applications and the like throughout the presentation.

We’re firmly committed to take our base business, maintain the base margins that we’ve been so successful to reset post 2007 and lay on top of that these innovation platforms. We believe that’s going to drive this business to a 10 plus compound annual growth rate and adjusted EBITDA. We believe that will generate also mid to high teens EBITDA margin which has been our target for some time. We clearly think that there is additional opportunity to reduce working capital and liberate cash. So you take the increase in earnings and some diligent management cash flow and you can see that the business would generate what we think is more than sufficient in our cash flow to fuel the organic growth opportunities that we have on the table today and certainly as Kevin mentioned earlier, pressure strategic alternatives down the road. I will tell you that with these forecasts do include the successful startup of our HAJV (ph) plant but they don’t exclude anything outside of that in terms of M&A.

So I am excited. I’ve been excited since 2008 when I joined this company. The strategy hasn’t changed. It frankly hasn’t changed because it seems to be working quite nicely. So with that, let`s get this really kicked off with the real exciting part of the day. I’m going to turn it over to my colleague. Dr. Holger Jung, who is going to take us through a marketing update and then Lothar, will take us through innovation.

Holger Jung

Well thank you Steve. Good morning ladies and gentlemen. My name is and Holger Jung and I’m responsible for Kraton Global Marketing and Sales. I joined Kraton in March 2011 from Invista a coal company. Where I was running various specialty businesses in the area of polyester and nylon.

I started my career in ‘99 as a young research scientist in Hoechst in Germany where I have seen basically throughout the years also the less differentiated side of the chemical industry which gave me a good flavor where I don’t want to be. So basically now in Kraton it is very exciting to be a part of the company which is operating in a world of almost unlimited specialization opportunity given the technology we employee with anionic block copolymerization.

We appreciate to be here in New York to share with you our investors, our strategy and expectation for future growth. As Kevin pointed out earlier, the key to success is continuous portfolio change and leveraging our innovation pipeline to grow these volumes. We have in place which is embracing our six core values and they are dedicated to drive value creation for our customers and shareholders. What we on Kraton call verve coupled with the customer relationships and the innovation pipeline is definitely our foundation for successful portfolio change going forward.

I would like to start with a brief introduction of styrene block copolymers, take a few minutes to talk about the competitive environment and how Kraton is differentiating from its competitors before leaving over to the individual end uses which will be introduced later by the Vice President in more detail.

This first slide is showing our basic product flow. We are purchasing three major raw materials styrene, butadiene and isoprene. The anionic polymerization, we can design in molecules very specifically tailored to the individual needs of our customers. One type of product we make is so-called un-hydrogenated styrene block copolymers or so called USBC. They are either SBS or SIS molecule. A good rule of some is, a typical SBS or SIS molecule contains about 70% of the flexible component butadiene or isoprene and 30% of styrene.

Kraton also produces hydrogenated styrene block copolymer or HSBCs. These are in general way more complicated to produce and require high technology assets and they are well distinguished in properties compared to USBC.

One of our most successful, fastest growing and highest value generating lines is isoprene rubber and because bonding isoprene rubber latex which we market as Cariflex. Isoprene rubber is basically produced polymerizing pure isoprene which is producing what we call solid rubber and then we either sell these solid rubber directly to some customers or we further convert it into isoprene rubber latex which we mainly sell into a medical end uses.

Kraton has also a great portfolio of compound solutions which we make it our Belpre, Ohio plant. In most of our compounds, HSBC is mixed together with various chemicals and polymers like polypropylene, so we can fully design enqueues (ph) for individual customer needs. The compounding step is a significant opportunity to add value and it gives us really the opportunity to leverage our innovative portfolio.

The four businesses we run are advance materials which is mainly an HSBC offering and one of our most dynamic businesses with regard to innovation. Mr. Michael Oberkirch is responsible for our business sitting back there. Then we have Cariflex, our fastest growing business reflecting almost 7% of our total annual revenue right now. We believe this business will expand significantly by the continuous replacement of natural rubber with our isoprene rubber latex. And also by the exploration of new end uses for solid IR and the Vice President who runs that business is Mr. Richard Brennen. Adhesives, ceilings encodings is the portfolio contained mainly of SBS and SIS molecules. As well as various HSBC offerings. This business is transforming more and more into a high value offerings incorporating HSBC. And the end use Vice President Mr. Mark Siebert will talk about this in more detail later. Our paving and roofing business is nearly 100% of USBC shock. It provides SBS block copolymers for modified asphalt which is used in road construction and various roofing applications. The box on the right side gives us a quick flash how Kraton is used in each of these end uses. In most cases you have to see about Kraton as an enabler of this side attribute. It is always mixes with other materials to create a distinct property for our customer.

The next slide shows Kraton relative market share versus its competition in the various end uses we participate. As you can see in 2011, we are holding the number one position in all our end uses. For those of you who are familiar with Kraton you have seen that slide quite a bit, but there is something new in it. It shows you our goal for 2017. And it gives you a first glance how we are intending to change our portfolio. Our goal for 2017 revenue allocation among the end uses is clearly different from the current state and it displays the anticipated growth areas within Kraton.

Looking at the overall market in the next several years we estimate the global annual compounded gross rate to be 4% to 5% for USBCs. Kraton’s goal for USBC is not volume growth. It is revenue expansion while maintaining relatively stable volumes which means a portfolio change to higher margin products that more differentiated and thus creating significant entrance barriers for our competition.

We estimate the HSBC growth rate to be about 7% on absolute volume in the coming years and here is where Kraton intends to expand volume and revenue mainly in the two end uses advance materials, and adhesive ceilings and coatings. We believe these end users will significantly expand their portfolio there leveraging our innovative pipeline and commercializing new product offerings.

This next slide shows volume and revenue development of the SBC market overall. It includes USBC, HSBC and it also includes the less differentiated footwear segment which we in Kraton exited a few years ago because there was clearly lack of value generation potential. If you look at the development of volumes you can see that sign of package Chinese companies surpass Kraton, however if you look at revenue, we remain the industry leader. Obviously this is directly linked to our price right strategy which Steve pointed out a little earlier which propelled Kraton to a significant different profitability in the markets in which we participate. We are very closely monitor our competition. They are credible companies in the world of USBC, you can talk about Sinopec, Dynasol and in the world of HSBC, Karriere and these are serious competitors with growing product offerings. What we see in the market is that in most cases, our competitors try to imitate a certain Kraton crate and we are aware of those trends and we know that this is a nature of innovation leader that others are going to try to imitate and our reaction has to be and it is, to innovate faster, fill the pipeline quicker to more than offset the trend to lower differentiation on the more mature Kraton crates. But not only innovation (inaudible) we also intend to create completely new spaces for SPCs, we will launch completely new product offerings which are driving our profitability going forward.

So what are the key elements how we distinguish ourselves in this markets from the other players? The fundament is clearly the press of our product offering. More than 200 polymers with over 4,000 SKUs. We are providing specially tailored structures utilizing the technical expertise of our chemists who are able to translate the desired customer need in to a polymer structure made of styrene butadiene or styrene isoprene and it will create the individual request a customer can make. We also provide selective compound solution and we believe we are the preferred provider for very innovative companies who often decide to utilize our portfolio in multiple divisions in the organizations.

We have long-term relationships with well diversified customer bases. If you think about the most innovative companies in the consumer goods industry, and you look at Kraton’s customer book you are likely to find them there. One of the major reasons we remain the market leader besides our innovative pipeline is our global footprint and the participation in every end queues. I will like to spend a few minutes now to discuss with you our manufacturing asset portfolio.

Our flagship plant in Belpre, Ohio is where we use SPS, SIS, as well as HSBC which are basically hydrogenated SPSs and SISs. We also completed as Kevin pointed out last year, a conversion of one of the lines to produce our solid isoprene rubber. This line has been operational now for almost one year delivering superior qualities. We also produced compounds in Belpre which we are serving to some direct end use customers. In polymer Brazil, we are manufacturing SBS and SIS all USBC. In addition Brazil produces the so-called isoprene rubber latex which his based on the IR product which we sourced from Belpre.

In Europe we have two plants, one in Wesseling in Germany which is producing SBS and one in Berre, France where we make SBS, SIS as well as various HSBC crates. In Kashima, Japan, we are operating a joint venture with JSR which produces SBS and SIS specialties to serve and support the local market. And we have announced the proposed construction of a brand new works scale HSBC plant in Taiwan. And if completed we believe we will be truly the only SBC to produce a truly global capacity. This proposed new plant which we’ll hear later a little more about, should boost our commercialization of newly developed butadiene and isoprene based HSBC crates for the various end users. Our global headquarters are in Houston, Texas. Our European headquarters are in Amsterdam, Europe and our main office in China is in Shanghai. Our Vice President, Technology Dr. Lothar Freund will point out our innovation centers in each of the regions which are key to support the local customers as well as our new innovation platforms.

Our patent portfolio is a major driver of our Vitality Index. We talked about imitations earlier. But by maintaining patent protections and intellectual property excellence, we are creating the entrance barriers which we are rigidly defend. And the top of the pyramid is our focus and R&D. we expect to spend nearly $32 million this year in R&D which we believe is more than our whole competition combined. This supports our focus on differentiation and where we believe we will boost our Vitality Index including providing the opportunity to come to market this total new product offerings.

Some innovations are listed here such as PVC replacement with compound solutions. Michael Oberkirch will give you a detailed view on our product in his presentation later. HiMA which stands for highly modified asphalt is our key innovation project for our paving and roofing end use and we will think it will play a major role in the transformation of this business boosting its Vitality Index and creating entrance barriers for competition while delivering total lower system cost for the end user.

Two complete new offerings are NEXAR and synthetic cement. You’ve probably heard by now our first commercialization of NEXAR and the textile end use at Columbia. A completely new technology for cooling down your body when you exercise and sweat is expected to launch in the retail stores in February of 2013. The initial feedback we received through the product introductions which are currently going all over in the US are very positive and we estimate that this will result in stronger demand for our NEXAR polymer in the coming years.

Lothar will discuss synthetic cement solutions in his presentation if you miss. This could be absolutely truly revolutionary for this industry when adopted. Our innovation goal is really consistently strive for unique solutions and also anticipate future market trends making sure we understand also megatrends going on in the industry right now.

If we flip to the next chart, you probably see a chart, you often ask us about. How is your portfolio looking? So how much is more standard, what is innovation, what is differentiation? So if you look at that pie chart, you’ll basically see the green portion is our innovation crates. It’s very clearly defined within Kraton. New products for new end users are belonging to our innovation packet. But after five years, we are holding our self-responsible to always fill the pipeline. These innovation crates are falling mainly in the differentiation crate. So what does differentiation mean? Differentiation probably contains products which just came off the innovation metric. They are just a little over five years but mainly they are generating superior margins. They have high entrance barriers against competition, mainly our products are spec’d in either directly from the customer or even through completely value chain and again, the major portion of this differentiation crates are delivering superior margins. Standard crates is where we see the most significant contribution. And the lowest premiums we get paid by our customers. This will be a continuous change through the years, but the key message this year that we in Kraton want to be exposed less than 30% to this so-called standard packet going forward. The target is to grow our total contribution matching dollars significantly with this unique offerings. Our goal is to be about 50% higher by 2017 versus 2012 in absolute dollars.

This next and my last slide is summarizing the key strategies for each individual end use which will be the same over the next couple of hours in which the individual end use Vice President will give you significant more details and insights and also introduce distinct projects within their respective markets. Before we start the end use revenues, I would like to as Lothar Freund to come up here to present to you one of our core strengths in Kraton where is innovation, which is driving the successful value generation we provide to our customers and shareholders. This will include the focus on our top two innovation opportunities which are synthetic cement and of course NEXAR.

Lothar, if you would join?

Lothar Freund

Good morning ladies and gentlemen. So let me introduce myself. Unfortunately I am the second chairman who presents today so I think you can deal with that one. I am 23 years in the chemical industry. I worked the first 15 years with companies like Hoechst, Invista, and Koch. Actually we have a joint career in the first 10 years Holger and myself. And I joined Kraton seven years ago and it’s really a pleasure to work with this company for and I’m intentionally drive for one reason, while I worked a lot in the commodity business like polyester and nylon and I turned this company you’re really dealing with specialty polymers and there is not a week or month where I come across a styrene block copolymers I never have seen before. And that really is amazing and we will continue this trend. So it’s a pleasure for me to talk to you about our innovation strategy and I have to talk about our innovation capabilities and especially the core capabilities with widest innovation strategy and later on I will give you also an update on some of our key technology platforms like NEXAR and also chemicals.

So let`s start with our innovation strategy with you all aware, we named it vision 20/20. For those of you doesn’t know, the first 20 stands for 20% of our revenue will come from new products not older than five years and the second 20 stands for contribution margin premium. So we know that those products we are commercializing will generate a superior market above our base business. So we believed that the set of unique testing capabilities which I’ll explain a little bit later, really price differentiation and innovation. And therefore our innovation strategy is based on three components. The first is, we have a lot of technology platforms who will drive our core portion our end uses and some of them are end use the piece it gives you later on, and more detailed update how we call the business there.

In addition, we have long standing and strong customer relationship as Holger mentioned, there’s top innovators in the industry. And we use those relationships to collaborate with them to deliver tailor made solution for their needs and markets and I think they are quite successful there. Secondly, I want to go first to the third point, we’re going to grow our base business via technology translation that is when you translate one technical success and commercial success from one region to another because there are sometimes differences in the region and we want to run application development. Application development is a very fast development because you are not developing polymers, you are taking polymers from our wide portfolio and you are trying to develop a greater solution for customer needs.

And last but not least in the center, we will continue what we have done for 50 years. We will use our polymer design capabilities which I will talk a little bit later to create totally new markets and applications for styrene block copolymers. Those are totally the markets really have unique value and use properties and therefore very sophisticated margins.

Let`s go to the next one. I just want to remind you my colleague already started to explain SBCs but I want to remind you styrene block copolymers are highly engineered polymeric materials. All of our USBC and HSBC are never use need. They are performance enabler and performance enhancers. What I mean by this they will be added to other polymerase systems to generate certain property profiles and therefore value and use. Now I will give you some examples there. The only product we are selling which is going into neat applications as Cariflex, IR Latex and rubber. Again, all others will be edit for example polypropylene or polyethylene to generate basically three core properties. The first one is, impact strength especially at low temperatures. To give examples there are food containers but also things like (inaudible). I mean you can imagine a puncture resistant and those are (inaudible) integrity right. You don’t want to have disk brakes breaking right? And one key ingredient there is our HSBC.

The second property or characteristics we’re always upgrading and boosted performance is elasticity. Actually we use HSBCs in the early 90s to create together one of our customer’s elastic films for diapers. You can imagine there is a typical diaper. They are few elastic components in this diaper like the ear tips, like the waist band in the back and also here, this is based on elasticity of SBCs. And this doesn’t show the true potential of elasticity. If you modify (inaudible), I will show you one example, (inaudible) is an ordinary chemical mix of lot of different components. Doesn’t really a great performance but if you add 10 to 15% of SBCs and you get such a bond, you will see great elasticity and what scientists hysteresis. So this is (inaudible) the 15% SBC. So you see the elasticity, the same performance you can add to lot of different stuff including paving and roofing. This will come back to us in a virtual form and that is what we call hysteresis. So that’s the same like diaper. We have elasticity, you stretch it, you want to have it coming back otherwise stuff will fall down, right. In think some mothers will write complains about it.

So in the last criteria we are really adding to some of the products’ softness. SBCs can be formulated over a wide range, they have different (inaudible). So for example it started with soft grips in tools and then toothbrush and razors. Latest developments are those golf grips, so very nice, touchy feel influence to haptics. But the one I like the most is and we are very successful lately is in mattresses. So I encourage you, I will put the spec to the exhibition. You see this gloom here that is softness, it’s basically a mixture of SBCs plus oil and this is very unique application growing very nicely right now. Okay, now we put it back down there. I also encourage you really our key strengths of styrene block copolymers is the very wide versatility of applications. So please use the time, look outside to see some extenders and you will be amazing in what different applications you see every day those products are in and boost the performance of those products.

Last but not least, styrene block copolymers, belong sort of into rubber field. So while there is a key difference. Our products are physically cross-linked via polystyrene while ordinary is chemically cross-linked. So why is this important? Very simple. Our stuff can be recycled and if you see a cross-linked rubber like tiers, you can’t recycle them. They are done. In addition, most of our products, our FDA approvals and a lot of time of all the medical class six have proved in the US.

Let`s go to next one. So as I mentioned in the beginning, our innovation strategy is based what we believe the unique set of core questionable capabilities and we’re using those capabilities to create a solutions but we believe all of those capabilities together really build the sustainable competitive advantage and in some cases is really a high area of competition.

So let me go to some of them and give you some explanations. So we are using them really tight differentiation via technology. My colleague already mentioned that one of the pod is product portfolio, we have very unique polymer design capabilities, we have a long experience in application development and know how. We have a very unique set of process technology whichever is called a little bit later and of course we have diversified patent portfolio and Dr. Freund already mentioned we are the only producer in the SBC industry, we have really a global innovation footprint.

So let me start with product portfolio. My colleague already mentioned we have over 200 polymer USBC and HSBC, we have more than 40 compounds and why is this important? I mean if a customer approaches us with important looking for new application, we have not developed all this in new polymer. We will go to those polymers and we will find ways to deliver creative solutions. Quite often, those solutions will contain two or three or even polymers. So there is really the value of a product portfolio is. I give you one example you will see outside protective films. Protective films are made by co-extrusion. There is a small little thin layer of adhesive layer. That adhesive layer is a compound of two or more of our polymers to deliver tailor made clear strength and adhesion build up. Very important that TIS for then application.

I am sorry, there has to be a company, there has to be a little bit of chemistry, right? So styrene block copolymers area made by NAR polymerization. And the first step, you can buy use USBC basically a sub (inaudible) of SBS, little block is butadiene, SIS, middle block is isoprene or mixture of both and then you can hydrogenate them to convert them to HSBC who offer much higher value and they are much more stable but they are also, I’ll say always it looks fairly simple on this piece of paper. I will tell you a little later on, it’s very complicated and sophisticated process where we believe reflects a very high inference barrier. For example, if you look at the competitive landscape, there are not more than five or six HSBC producers, while there are like 25 or 30 for this very simple step going from SBS to SEBS, on a piece of paper, very easy, in reality very complicated.

But you need SEBS, really that they use anionic polymerization which is a very, very precise polymerization. And you combine it with two totally different polymers, on one hand the highest strength polystyrene on the other hand the rubber segment. So you basically get a test of both polymers and you can make this anionic polymerization a very precise molecule who can deliver exactly what a customer is looking for or can deliver through new application you think it as value.

We’re going to next one. The next one is I think a very impressive slide who gives you an idea how scientist and developers work. So let me start on the right side. So a customer for example looks for certain value. I mean you can pick or chose, you want to have the special adhesion. So our scientist they developed, they know what property they have to change but knowing what property has to be changed, they can go back and really make a design polymer to deliver on that and that is really the strengths of those SBCs. You can’t do this. You have a lot of other polymers in the world of polymeric materials.

So there was polymer design capability but you know that we know only invented the styrene block copolymers over the last 50-60 years we could have added every space for them. And it started with footwear. I mean needless to say that’s a business we are not participating anymore but it was the first one and shoes as well sneakers. But after that, we basically created this consistent modification of motor oils, adhesives applications, paving and roofing and in the 90s, really HSBC took off in consumer goods like over molding grips and so on. And we will continue this trend and we will specifically talk about some of those key technology platforms later on. So I will talk about NEXAR and oil field but Holger will talk about HiMA technology which is highly modified (inaudible) soft skin, Michael will talk about soft skins which is a very unique set going in for the industry and we have the base application like clubs, condoms and medical stuff here using a specially our third component of innovation strategy to call their presence via application developer. We are seeking new applications. One example would be coal seal applications in critical food packaging and Richard Brennan will talk about this after lunch.

So these technical capabilities combined with the diversified patent portfolio make us believe that they have sustained a competitive advantage. So truth to bear we have a diversified patent portfolio. On the one hand we will always patent if possible our polymers via a composition of matter patents but in addition we will also try to patent the application to get maximum for him to practice.

There has been in use actively patent strategy, I would not say negatively but we are not patenting our both those technology and we will patent certain aspect of the (inaudible) technology at all, why? Because we don’t want to give other people a chance to reengineer our (inaudible) which is basically on the lower right hand. Again, piece of paper, looks simple, it’s a block chart but the wheel know how is in those two boxes. Those two boxes is nothing else than after hydrogenation where you get to SEBS or HSBC products you have to remove the catalysts. This simple step is very sophisticated and very complicated and again, only a few companies in the world are able to do this and a lot of companies including ourselves paid a lot of money to get that experience.

So Holger already explained to you that we are the only SBC producer as a global network to support our customers. So we have basically innovations in this all over the global areas where there is the highest growth. So those applications develop or innovation centers they will focus on application development to support regional customers in a very fast and sufficient way. In case of polymers point application or there is a new megatrend where new polymer can add value, we will go back to Amsterdam use their way of polymer development capability and then decide the polymers to deliver on those requirements. And needless to say polymer development is much more expensive and a little more time that’s the reason we focus this in two innovation centers.

In last year’s we are continuously looking to upgrade our capability and improve further. And one of the key components of how can we accelerate our innovation. So especially in last two years and currently we are undergoing some significant investments. First of all, we added a new innovation center in Shanghai. We had a small one there but we really installed a state of the art innovation center because as you know, Asia is the highest growth region and the distribution where we have the highest Vitality Index. So we have state of the art innovation center nearly double the resources. In addition to all the accelerate to grow our base business via application development, we added significant resources of application engineers in each region. As I mentioned before, application development is a very fast way to deliver to the bottom line of the company.

And last but not least, one of our biggest core capabilities is of course developing polymers. We are experts there. We know what not we have to turn and one tool we missed we had product line in the past what we really missed was the semi-works line. The semi-works is basically sort of a semi production right between left and production units. So we are kindly investing $35 million to build the semi-works in Belpre, Ohio. This semi-works will allow us to deliver much faster to customers because are independent from our manufacturing side. But it will also our customers to commercialize faster because they will get fit for purpose sized samples to deliver this much faster to their customers for qualification. Needless to say if you have such a semi-works use scale up risk going to the product lines there’s much lower and their cost savings associated to this one.

So let me go back to our innovation strategy and I will focus on the center packet and will talk about new technologies for new markets like oil field and NEXAR and again, our end use vice presidents will give examples about key technology platforms in their areas and their business lines. What I would like also to add and we don’t have a slide here, but we use common state of the art innovation processes like stage gate like portfolio balance, like idea management really to manage this innovation pipeline. So we are running a very well balanced approach between market pull which is typically project in our end uses, as a certain trend or as a certain need of customers and we will deliver creative situations to that one. But we also dedicated 20 to 30% of our resources to, we call it technology push but actually is a mix of market pull and technology boost because we will look at new trends, we will look at our capability and how can we create those new spaces for styrenic block copolymers. And I think you saw this target chart and I will talk about we have been quite successful there and I am highly confident that we will aim to deliver more of those new opportunities for styrene block copolymers.

So last but not least. Kevin mentioned this in the beginning. Why? One of my key focus areas is not only to make sure that we deliver together as a commercial organization of those platforms and opportunities but if you are a true innovator, you really need to defeat the front end of the innovation pipeline. So you have to generate ideas internally together with customers, together with external networks and I spent quite significant time on just this aspect of innovation. So I always say you need 100 ideas to get one good project or very good project, but you need 1,000 ideas to get a game changer like NEXAR. But again, I focus very much on this one, I think we have a nice pipeline. Of course I cannot talk about those pipelines today but I am sure in one of the next investor days there will be other opportunities like NEXAR, like oil field or PVC replacement to be preceded in this form.

So now let me give you some update on new markets, new technologies like oil field. So oil field chemicals or we call it oil field chemicals. I think is a very large market. It’s much very much diversified and we are starting to supply to this market. On the left hand side, you see basically application side, oil based fluids or high temperature fluid loss. Kraton used as an (inaudible) can improve viscosity control and temperature stability. That are two really means in that market segment. One of our key focus areas basically the modification of cement. Actually they are two areas. One is to improve drilling cement, the other one our self-sealing cement in the areas of cement we are also selling products. They key variable decision we are delivering days of our polymerase get downhaul where as a crack in the cement our polymer less oil with a bit of soft to oil expense and seal correct. So that’s the key value we are adding to that application.

The other one is really delivering a tentative synthetic cement and this is a perfect example that we deliver really in a polymerase, we deliver a tailor made solution. So what we have developed is basically a mixture, a two component solution. We have a mixture of our polymerase of other chemicals and we have a cure in package. This goes to a big, the combined and we pumped onto the whole day mute this very high strength synthetic cement. The uniqueness there that we are securing package, you can simulate basically to reaction kind and the kinetics because you can imagine if you go down 4,000 to 5,000 meters there are different pressure, there are different temperature so the reaction with this will change all the time and we are able to deliver depending how deep you go to drive the actual mixture. We are working there with a couple of EP companies but we’ve got also very, very promising feedback from the major service companies in that field. I’m very confident and we believe that that is a very unique set of opportunities coming up in the near future.

The last one that is just an exploration water treatment. Lot of you guys know that kindly also if you talk about shale gas and oil gas, a lot of water used to get to those resources and this water is highly contaminated by soil, by factors, by oil whatever. So people need to clean up the way. So actually what the need are membranes and we are currently exploring to see a play for next time in that field and maybe we can report next year something about that one.

NEXAR, talking about NEXAR. I think we talked for last two or three years about NEXAR and I am really happy, you saw already the announcements last month but I am really happy to really percent to you the latest commercialization. So what is NEXAR? Again, coming back to our uniquely signed capabilities. On the lower right side you see basically NEXAR molecule. It’s a penta-block. After traditional styrene block copolymers, we have a modified polystyrene block at each end. Then you have a rubber space and then you have polystyrene which is subsequent fulminated in the penta-block. While this is a unique, you still got the properties of styrenic block copolymers but now you got functionality sitting in the center part of the molecule. And that really makes it unique. Of course it delivers. You still have mechanical strength and integrity. You have chlorine and chemical systems but it delivers transfer properties. So it shows a very, very high water flux and vapor transferred and that is a new unique step of qualities. We are kindly working in areas like membranes for water application, we will talk about performance factors and also Kevin mentioned already Energy Recovery Ventilation.

So NEXAR is a membrane used in water separation and purification. What does it bring to the table? I mean NEXAR is able to filter out molecules by size because it has conductivity it will also filter out other materials if you just put current at the membrane. And so there is a large market there. There are a lot of needs and we are continuing to drive steadily. Energy Recovery Ventilation basically uses NEXAR’s capability to very fast transport humidity or remove humidity and what you really gain is, if you think about those systems that you exchange the inside, outside air of AC/DCs you really get a better home comfort and you get energy efficiency because you are removing humidity which is one of the most important parts of the energy used in that application. I just want to make one comment. We are selling NEXAR insulation or as film. So this is for example a NEXAR film which you would find in a member for water purification or in an ERV unit. Its only 10 to 20 micron. So you can imagine that material cost not really matters in that application which really the value and use and the performance. So that is the reason why Steve said, we are accounting NEXAR I would say in grams but I would say in kilograms. But tonnes doesn’t really matter. It’s really the value and use this membrane brings to the table and that drives basically also the price. You will see an ERV unit outside. It’s basically this membrane. If a career in several layers, very nice unique set. And both of those applications we are currently in the commercialization phase.

Last not but least we mentioned about this one together as one of our key operators, we find a very unique set of NEXAR which is the cooling effect. If you look at this picture and you see the blue dots. That are NEXAR molecules. So what we found together is that those molecules have the capability to absorb vapor and therefore cool down the skin significantly. And I cannot talk diligently enough. I think we will show video where you will get an impression from really end users and I hope you share my excitement.

(Video Presentation)

So I have a shirt here, so I encourage you to look at some of those shirts. You will see the dots on there. I mean you have seen cool mix and other areas a bit. They are really the cooling effect there is really generated by the big, how do you do the separate but this is really a physical chemical porters by the dots who really absorb those vapors and cool down your skin. Needless to say that we believe that we will translate these cooling effect to different areas like for example you can think about first responders. I mean people in heavy suits sweating a lot. While it might be would nice for them to get cool down or class. But there are also other areas where we’re missing NEXAR (inaudible) energy generation, gas separation that’s very early. I mean NEXAR is one of those typical technology platforms where you are trying to plan for it. You are finding some stuff but I am 100% convinced that there will be a lot of other applications coming which we are not aware of today.

So let me conclude my part of the innovation presentation before I turn it to the roadmap. Kevin and Holger already mentioned that our plan is to double the vitality index from currently 13% to almost 25% and you see basically the water flow chart. I want to highlight something there. You see the bar chart at 2012 which basically folds off in 2017 because that’s our five years innovation cycle. But this does not mean when we say vault to the base. They are not any more differentiated. They are just out of our innovation statistics. They are really differentiated because of most of those products are not only spec in but they are still spec more tactual. So and that really ensures that the margins for this differentiated buckets they are up.

So later on in the end use presentations, each of those end use will give you in flavor of what are the key technology platforms they are currently using to drive their growth. Like in paving, moving you will hear about highly modified asphalt, very unique project. You will see adhesive. We have protective film and key collaborations with customers are very, very important and as Holger said, I cannot tell you the names that you can assume some of the big consumer companies are working with us. Advance materials who has basically our end use where we use the most HSBC, several different platforms who are really driving their growth and their margin expansions.

And last but not the least, Cariflex. Truly a special polymer. I will always say it’s basically the man-made rubber, natural rubber. But gifted venture very, very clean and pure and that is really deciding processing the economy have.

So let me conclude here and again, I would like to encourage you guys, go out, make touch and feel, get some of those examples and be amazed. I am still amazed as a scientist how broad the application potential of the anionic copolymers are. Thanks very much.

(Lunch Break)

Unidentified Company Representative

Well ladies and gentlemen. Let`s continue our session. As Lothar said, we are not quite done with Germans here. So they have asked me for 15 more minutes. Unfortunately our end use leader, Mr. Bill Davis who is leading the paving and roofing segment cannot be here today. Mr. Davis joined Kraton in 2005 from Koch Industries and he has solid commercial and business development experience in the refining derivative markets.

For the paving and roofing segments, it’s basically all USBC which is small niches with regard to HSBC. The USBC is mainly SBS, with some innovative new small end users for moving SIS crates. Kraton is one of the leading suppliers worldwide and our materials are in many cases refereed and specified by the end users. Roads modified with SBS, they will be improving elasticity and durability and they are reduced significantly cracking and rotting which is a major cause of hydroplaning and therefore is a significant step towards safety. The trend is clearly to establish lower system cost to increase pressure on state and federal budgets. Recently the US senate approved the new transportation bill to provide funding until end of 2014 but spending levels are literally frozen at current levels.

Another growth area for the business is provided by the trend to effective warm mix technologies enabling a reduced temperature while preparing the polymer modified asphalt or we called it PMA. It allows contractors to extend the paving season more into the cooler months of the year and introduces the emission generated through the higher temperatures during the preparation of asphalt. We believe our new polymers will allow the lower viscosity and workability required to achieve the significant temperature reductions while preparing the asphalt.

The next slide shows the sales per region as well as the slit by paving and roofing and the revenue profile development from 2007 till June 30, 2012. As I mentioned earlier, in this end use our goal is not volume growth but rather differentiation on the highly competitive end of the portfolio to improve Kraton’s margins while providing total lower system cost for our customer.

In particular we have increased our focus upon developing regions where we are supporting the formation of new rule applications and which in most significant growth areas the new roads are built. This will expand our current scope well beyond the US and European regions, our dominant geographies today. We believe key relationships with strategic partners in Asia will give us a solid position in that region however the Asian market is still one of the most competitive in the world and in order to demand our price premiums you have to deliver specially tailored polymer solutions demonstrate reliable supply and the ability to solve specific problems faster than our competitors.

Both end uses paving and roofing have quite some similar challenges but we saw, we explain a little more in detail to you the individual strengths and needs in both areas. You see comfortability. In today’s world cost pressure is significant and customers try to use different crude variances but these different crude streams they are variable in quality as well so it requires very different formulation during the preparation and then there is impact resistance. Impact resistance is driven by the exposure to natural disasters like hail, hurricanes and tomatoes. I mentioned lower emissions. As pointed out earlier, mixing asphalt is modified as an elevated temperatures is exposing workers to fumes coming from the asphalt mixture. Environmental laws, exposure laws are already discussed in particular in Europe.

And then self-adhering. Self-adhering is a high growth segment for asphalt roofing adding the ease of application and eliminating the heat treatment step on the roof which is done with torching. Our key strategies to address those trends are to provide a differentiated portfolio addressing multiple needs with single customers and we also leveraging our SIS expertise for self-adhering requirements which we generated in our adhesives business. And then we use our chemistry knowledge which Lothar pointed out to modify our molecules to enable lower temperatures during the preparation thus generation lower emissions as well as better compatibility.

A major roofing applications is using blowing asphalt or so called oxidized bitumen which is under intensive discussions right now with regarding the carcinogenic potential. If certain rulings would be put in place, this whole segment would need to switch to an infinitive process and SBS modified bitumen is the most likely solution. This would generate a total new market for SBS and we are working with key customers in particular in Europe to more specially tailor molecules for the end use of oxidized bitumen.

Similar to roofing applications, rising raw material costs from asphalt and energy are significant challenge for the paving industry. Safer road authorities and contractors are seeking solutions that lower costs and deliver more durable roads to maximize their limited infrastructure budgets. In addition to segment this faces ever-increasing traffic loads leading to the cracking and rotting issues I mentioned earlier. The developed regions in Europe and in the US have shifted the spending focus totally to maintenance versus new build that leads to greater emphasis on innovative approaches requiring an SBS molecule to enable sine pavements with more durable performance. We believe we are well suited to deliver the solutions that addresses those needs.

Emerging regions on the other hand, they are building new roads and they are dedicating significant budgets driven by economic cross and also by sporting events such as world cup and Olympics. Countries like Qatar, Brazil and Russia are dedicating significant amount of money to building these new roads.

In addition we see the adoption of public private partnership building toll roads. In developing regions these companies, they make spending decisions which are both streamlined and value driven. And our message of improved durability, decreased contraction time and lower maintenance costs is resulting in more rapid adoption with our key partners. Our paving end use strategies are pretty similar to the roaches we have in roofing. We will continue to change the portfolio to bring new more differentiated grades to the market which clearly deliver an advantage to the customer and we will create specialties focusing on the maintenance efforts with emulsions for sine areas and we launch our next-generation pavement deciding enabler which we call HiMA, highly modified asphalt. To make this happen we changed our business model. The classical sales drought is an SBS to refine mix PMA based upon a DOT specification, sells to modified Asphalt to a contractor.

With newly developed polymers we immediately saw the benefit of focusing upon road design improvements with DOTs. We contacted private road owners and universities. We invested in test transactions and field trials while partnering with concessionaires and contractors to trigger a market pull through specification and performance which obviously has to be proven and tested. These activities brought HiMA to its current position.

We had trials on a test track at Auburn University which went extremely well. You have to imagine a 1.7 loop where highly loaded trucks are driven over segments of paving with testy signs to accelerate failure for quicker performance analysis. Our section paved with time of almost 20% thinner than typical asphalt pavements and up to three years as by far the best running performance of the tested technologies and it has shown no cracking at all. After one year of observing these results, the section next to us was sponsored by the state of Oklahoma and they saw a catastrophic failure of their solution and they saw our HiMA pavement right next to it, they decided in March to immediately adopt it and they paved a 40 section near Oklahoma City with HiMA. This is so far the quickest adoption speed we have seen.

Given these results we have marketed and published, we are realizing significant first commercial sales this year of our HiMA technology and more and more adoptions from states in the US and from customers in our target regions including Turkey and Brazil. We estimate the total market of polymer modified asphalt could consume approximately 20% of HiMA. Our goal is to grow HiMA to at least $50 million of revenue by 2017. The polymer technology is patented however we will make sure that we do a not any manner limit the penetration rates to enable the low-cost high-quality solution in all regions of the world.

In the next slide you see the global PNR portfolio change from 2012 to 2017. I explained earlier in my talk what it means innovation crate differentiation and standard crate and you can see that in the paving and roofing section today we are exposed relatively highly to standard crates which mainly spec’d in but competition is dying to imitate our crates so our HiMA solution will really propel us to a different level where we see basically into 2017 almost 50% of our complete PNR portfolio differentiated and with innovation place.

The volume growth is not the strategic play here as I mentioned earlier, rather than creating the high-entrance barriers with some new technologies supporting our strategy to maintain this business at absolute margins above market was a solid patent protection. The key plays are HiMA a new build, HiMA maintenance, SIS and roofing and new molecules which enable warm mix versus hot mix preparation of polymer modified asphalt. I think this should give you a good flavor of this business of paving and roofing is expected to change through coming years and we are very excited right now to rollout our new product offerings. We have a stand outside displaying our HiMA technology and I think you have visited already so at that point I would like to ask Mark Siebert Vice President of Adhesive, Ceilings and Coatings to give us a flavor of how the adhesive business will change in the next five years.

Mark Siebert

Thanks Holger, I appreciate it. Good morning. My name is Mark Siebert. I have the pleasure of leading adhesive sealants and coatings business. Just by way of a brief introduction after about a 20 year career with Dow Chemical I joined join Kraton in October of 2009 and I have the pleasure of working with an extremely talented team many of whom actually are joining us here today and hopefully if you haven’t had a chance to meet some of them you get a chance to meet them very briefly at the next break at some of the exhibits outside.

I do have the opportunity to share some background of the industries in which we participate, some context and trends that are influencing our growth, our strategy to capitalize on those trends, some current innovation successes and then afford you opposite how some of these platforms are really going to shift our participation in future.

Our customers purchase Kraton’s styrene block copolymers because they provide a functional back bone to the formulated industrial and consumer products that they produce around the world. We support a unique and continually evolving product line with global technical support along with a dedicated regional sales force that collaborates with our strategic customers providing tailored solutions in these key markets. As the first producer of styrene block copolymers for adhesive market about 30 years ago we have developed a reputation for quality and consistency that we parlayed into global market-leading supply position with the foremost formulators of pressure sensitive adhesives like Avery Dennison and 3M and the tape and label market as well as single (inaudible) and HB fuller for construction adhesive for diapers and adult incontinence products.

We’ve also entered in the acid etch resistant aerospace coatings as well as energy-efficient wife roof coatings markets and a protective films for auto appliance and electronics. We also participated in the clear sealants market and a couple of examples you’ve seen out there at the booth as well as digital printing plates and viscosity modifiers that are used to produce gels and lubricants used in oral modification creams and lotions and the production of fiber optic cables.

Our traditional business in tapes, labels and diaper construction adhesives makes up about 50% of our sales and is growing at about 1.5 times GDP with our multinational customers in the developed geographies of North America and Europe. Through these strong relationships, we’ve supported our customers in these applications as they expand in the high-growth markets and regions like Asia and South America which now represent about 22% of our geographic sales.

The diversity of our adhesives customers applications in the broad industrial segment which is about 17% of our sales represent a range of hot melt and solvent applications including automotive, appliance, furniture assembly, freezer packaging, bottle labeling and bookbinding with varied growth rates depending on the geography. And these applications are largely USBC based product technology. So SIS and SBS.

Our high-growth segments are flexible printing plates as well as lubricants in fiber-optic cable gels captured in the other category are growing at about 2 to 2.5 times GDP. The growth is really driven by the accelerated adoption of digital’s high-speed printing and the Asian expansion of automotive production and infrastructure build out. Our sealants and coatings segments as well as oilfield chemicals which you’ve seen examples of as well outside are included in the other segment and represent single digit percentages over our overall participation and a highly profitable growth niche markets for us.

While this segment is smaller in terms of volume it’s predominantly served by our hydrogenated or HSBC technology and the combination of the unique applications anchored by our core tape and label and hygiene business have enabled us to expand our revenue about 55% on a five year trailing 12 month basis. Our products and part functional performance like high tech, clarity, elasticity and strength to formulate it’s systems that can be tailored specifically depending on the requirements of the application.

Because of our products wide formulation latitude they are preferred technology in our core markets in tape and diaper construction adhesives. However, these markets not unlike maturing technologies continue to explore cost reduction alternatives that have favored alternative polymers like polyolefins. Polyolefins are based on different feedstock’s in fact they even had a discussion out there in the hall-way a few minutes ago but as I had mentioned previously they have some cost advantages but can’t be used really in all applications. Separate but related I mentioned our interest in expanding our participation in our smaller but differentiated position in coatings and not unlike adhesives, our customers combine our polymers with resins and additives to make a formulated product during this case of paint.

Our product performance is the preferred flexibility enhancer and metal protection but it typically has to be spray applied and our market exploration efforts have highlighted that in order to expand participation of our products they got to be sprayable in either low or no solvent. So we have learned through collaborative technology exchange with our current targeted customers that our products can substantially improve formulation performances in additive.

Now, this additive approach has the additional benefit of reducing formulation costs in most of the targeted applications. To maximize the performance benefits as an additive, our HSBC technologies are the preferred choice. This still enables our customers to combine the various ingredients as they optimize formulation and performance and provide their value add as we gain through the expanded growth with differentiated polymers in our targeted segments. So next we have incorporated these market learning’s and dynamics and refined those into several elements that really drive our strategy. Our emphasis has been really to focus on the attributes that make us unique versus competition and those include outstanding customer relationships, our ability and willingness to invest in products development with really an application oriented focus and the extension of that offering to support our targeted customers growth objectives really anywhere in the world.

Toward that end our energy continues to be spent on enhancing the depth of understanding and insight that drives our customers markets and then developing unique product solutions that accelerate growth for both them as well as us.

This high-level of customer engagement we call customer intimacy drives the selection of our target applications and ultimately our resource investment. Additionally, we recognize that this model has an acceleration effect when employed with our multi-national customer base. We remain focused on maintaining Kraton products as a technology of choice and we are going to leverage our HSBC product capabilities whether as an additive or in neat polymer to further differentiate formulation performance and in doing so we are going to shift the portfolio toward a higher percentage of HSBC sales.

But we recognize to succeed in the target markets, we must expand our Alaskan offering to include product options built around our current capability. We are going to continue to focus not only new polymers and develop within the SBCs but we are going to explore partnerships, we will look at alliances, we will look at ventures and then as well as strategic acquisitions were appropriate to expand our product offering predominantly as a raw material supplier in these target markets.

We have already had some commercial success in implementing these priorities and we have commercialized a set of compounds based on our HSBC product technology and actually Lothar mentioned this earlier that enables direct co-extrusion of adhesives onto a film for the production of removable protective films that go into the automotive appliance in electronics markets. Our polymers are formulated in that application to provide the improved adhesion and flow while controlling peel strength needed to remove the film from that protected substrate.

As a viscosity modifier many of which we have examples at our booth we polymers that impart the right balance of flow, feel and lubricity as functional characteristics and really three high-growth markets of fiber-optic cable gels, health beauty and creams and lotions and lubrication oils for industrial and automotive applications.

Our polymers flow under pressure, they eliminate water intrusion in the cables, they impart the soft feel that’s available in lotions and they could be mixed with a variety of oils to improve function or frictional performance. We’ve applied our customer intimacy model that I mentioned earlier learning more about the performance attributes our customers have attempted to develop and in just the last six months we match some of those market opportunities with our product capability to support the launch of a solid base waterproof coating with Rust-Oleum called leak seal it will be available in the fourth quarter in Home Depot as well as the cold packs formulated for unique freezable gels that are utilized to transport sensitive medical products.

We also have several product offerings that are on the cusp of commercialization and these products are been developed in collaboration with companies that have process capability to put our SBC’s in the water which we are going to leverage into open market opportunities for both of us. These emulsions are cost-effective alternatives that can be spray applied delivering hot melt adhesive like performance and we expect to sell these emulsions as well into coatings formulations and those products will be targeted for commercial launch in the fourth quarter of this year. To address the trend that I mentioned earlier toward lower system costs providing similar performance to SBC’s , we are working on olefin modification products with Kraton SBC’s as the additive to the formulations. Those new formulations currently under customer testing exhibits substantially improved performance and diaper construction, the unique solution is to be offered to our current customers as a formulating option for both SBC’s and olefins targeted for commercial launch by the end of the year.

So as we balance our R&D and commercial investment we are focusing on longer opportunities as well and we’ve got the potential to leverage the technology solution across multiple markets. Specifically our products had the ability to transform wave energy and heat that really dissipates pretty quickly, our polymers have been tested and performed as an adhesive layer between metal sheets and automotive and dishwasher construction and an entirely new system approach for adhering drywall and commercial construction. These characteristics improve standard rubber formulations as a modifier in addition to being a neat polymer, in line with that ability to improve rubber performance we are also currently exploring the opportunity to expand into insulating glass ceilings as a modifier.

These are entirely new market spaces for Kraton and they provide just kind of a glimpse of the potential that we can achieve through continued expansion and extension of our multinational customer relationships. So as we continue to expand our growth in our core applications and we support high-growth applications in Asia like fiber optic cables and protective films and then deliver against new and innovation opportunities we are going to continue to shift toward further differentiation of our product sales. HSBC polymers and compounds account for minority share of our product sales today by revenue. We believe HSBC sales will be moving more toward parity with our USBC sales over time. Over 80% of our HSBC sales today are differentiated while only 40% of our USBC sales fit into that category. We expect to improve our differentiation in our core segments particularly with the launch of olefin modifications and dispersions in the next five years. Should the longer-term platform potential opportunities commercialize that really represents upside for us.

The pending commercial opportunities combined with the incorporation of oilfield chemical sales we believe are going to expand our differentiation sales to about 60% of total revenue and in doing so we are going to have about a 30% improvement of overall margins over the next 5 years.

So we believe our focused investment in customer relationships is going to continue to yield market insights that can provide unique product solutions, those solutions are going to continue to drive differentiated performance producing higher and more importantly sustainable returns for us and I truly believe that we’ve only got begun to touch the areas of future opportunity in our diverse set of markets. Through the continued investment in our customers as well as in innovation I see continued expansion of our new opportunities in the future and I forward to answer any additional questions you have during the Q&A.

So with this it’s my pleasure to turn the microphone over to Michael Oberkirch.

Michael Oberkirch

Thank you Mark. Okay so I know I am standing in between you all and watch, so as much as I like to talk I am going to try to be as brief as I possibly can. Again my name is Michael Oberkirch and I am the global Vice President of our Advanced Materials and Use. I have been with Kraton since January 2007 where I joined Vice President of the Packaging and Films in use.

In early 2008, we merged the packaging and films in use with our personal care and compounding in uses with our personal care and compounding end users to form Advanced Materials.

Previously joining Kraton I spent 15 years in the olefins and polyolefins business with Amoco Chemical Company. After that I followed 10 years downstream in the flexible packaging industry, that’s time I came to Kraton.

So let’s talk about Advanced Materials, in the Advanced Materials the end uses is very diverse, as you soften the table outside we cover everything that is not pavement roofing or adhesives. In this diversions the products we sell to the markets that we serve. For this presentation I hope to provide you with an overview of some of the some of the significant opportunities we anticipate and how we intend to capitalize on them. Please note that we expect NEXAR to fold into Advanced Materials in the future and we have included that in our 2017 goals but I won’t speak about NEXAR today in this presentation and it’s already been covered by Lothar and Holger.

The first slide provides you with an overview of the Advanced Materials end use, first or foremost the Advanced Materials is primarily a primarily hydrogenated styrenic block copolymer business. Further Kraton is the only truly global supplier of HSBC serving advanced materials markets, we have a strong core market with a significant growth potential with both existing technologies as well as the new innovative solutions. Personal-care, personal hygiene is single largest market that we serve where we provide specialized polymers and compounds for elastomeric components for product such as diapers and adult and incontinence garments.

We also hold core business positions in auto, industrial as well as consumer product market spaces. In addition, to our historic core markets we are also expecting healthy growth in newer market segments such as medical and bedding and we anticipate significant growth for new and innovation platforms which I will discuss in greater detail later in the presentation.

Lastly we continue to make significant investments in Asia-Pacific, a geography which holds great promise for advanced materials. At the heart of our business strategy is growth through innovation. Our diversity and the creative nature of the markets we serve make opportunities for growth in the advanced materials end use and has historically continued to be a significant engine for Kraton.

Either when you consider Kraton’s strict definition of innovation sales, advanced materials has consistently delivered a viability index above 20%. As innovation volume matures and moves into our core portfolio, it is our challenge to continuously replace that volume with new innovative solutions. I think it’s also worth noting that the single most pervasive megatrend we see in advanced materials is the creation of greener alternative solutions to flexible PVC. Growing environmental concerns in chlorine chemistry, in certain plasticizers have encouraged many customers and in some cases entire markets to seek out qualified alternative chemistries.

Kraton enables a number of other polymers to fulfill those needs, opportunities exist not only in existing markets that we serve such as medical, baby care and wire cable but also new market spaces such as automotive interiors and faux leather.

The next slide continues our overview of the advanced materials end used by illustrating our 2011 break down by geography and end use market and our revenue progression from 2007 to 2012. As mentioned before advanced materials is primarily an HSBC business with a bulk of our business being in established geographies such as North America and Europe. However, our opposition continues to grow in Asia-Pacific, our fastest-growing region and even South America as these emerging markets become more sophisticated. In addition to HSBC we also have a small USBC business focused largely on packaging and personal care markets.

If you look at the multitude of markets that we serve and the size of positions we hold, it becomes clear that we are indeed a diverse end use. Over the last few years, we have expanded beyond personal care which is still a very important business for us and have developed significant positions in auto industrial, consumer, and polymer application spaces.

We are also growing quite rapidly in medical, wire and cable and other compounding channels which touch many markets. From a market perspective our largest segments include personal care elastics, as previously mentioned consumer products both durable and disposable, medical applications such as IV bags and tubing, jacketing and installation for wire and cable, auto industrial applications and a number engineered thermoplastic elastomeric applications in the power modification and compounded channel segments.

Lastly you will see the revenue growth chart at the bottom of the slide, while the revenue growth shown from 2007 and 2012 may not necessarily appear to be that impressive what you don’t see is a significant restructuring that has occurred over that period of time. As we implemented price right, we exited several businesses that no longer fit our strategy or met our margin requirements.

In doing so we became a leaner, more focused and higher margin business. The slide five illustrates the market drivers within the advanced materials end use as well as the overall business strategy, market drivers and advanced materials included environmental responsibility, mast reduction, system cost improvement, performance enablement, innovation and disruptive technologies. These drivers shape our business strategy around our core capabilities. In a nutshell as our mission to leverage our unique technological capability, market, leadership position as well as our core innovation competencies to grow not only in existing markets through customer driven innovation but to create entirely new space for proprietary styrenic block copolymer and compounds.

We must also develop new innovation platforms focused on environmentally responsible solutions with good cost performance benefit. We are competence in by identifying and professionally assessing new market opportunities, executing key customer projects that which we have many, enabling our team for rapid translation of proven innovation programs and driving our innovation platforms to commercialization.

Obviously this is much easier said than done but the depth and experience of our team and the established history success in growing innovation make this possible. Finally, we continue to invest heavily in markets such as Asia-Pacific, this region has been our fastest growing region over the past few years and we are investing in both commercial and technology personnel, research and technical service capability and now manufacturing.

This next slide illustrates a cover by established innovation growth spaces where we continue to be successful in expanding our position, resulting from our vast internal experience as well as using key tools such as product and technology road mapping, the advanced materials end use has identified a number of key things that enable us to continue to grow innovation in establish market/customer positions.

First and foremost we must always look at personal care, while these are largest existing segment it continues to offer opportunities for growth and differentiation. However, there are two parts, first it must stand up in current position by continually reinventing ourselves. We cannot allow our product portfolio to become tired or stale less our competitors will catch up in an attempt to challenge our leadership position. Therefore we must always be looking for means to upgrade existing products and applications.

Secondly we must find those new opportunities to grow in the multiple tiers within personal care that do not currently employee elastics. Most of the personal care and personal hygiene products applied into emerging economies today do not currently take advantage of the lasting properties for fit and function largely for economic reasons and this therefore offers a significant opportunity for future growth.

And on that basis we work closely with our personal care customers as well as key OEMs to explore new ways to accomplish lower system cost elasticity. Transparent compounds is another poor segment that continues to grow and reinvent themselves, from food and storage containers to toys and power tools. Kraton enabled solutions continue to find new applications were toughness and clarity are key requirements.

Other key market spaces that are aligned for significant innovation growth include medical, and comfort foam for bedding. In the medical segment customers looking for economic and more environmentally friendly solutions. This means all charges for glass, vulcanized rubber, silicon rubber and yes flexible PVC which is viewed negatively by many environmentally conscious organizations, governments and now a growing number of healthcare buying consortiums.

Kraton enables other polymer materials to fill these needs in many applications such as IV solution bags and tubing, stoppers, containers and other medical devices. Additionally, improvements in foam mattress quality and performance have occurred so has the popularity versus traditional mattress box spring construction. One of the key shortcomings of the original foam mattress was its inability to dissipate heat. Within introduction of styrenic block copolymer chemistry into that construction the major shortcoming is now been corrected. This is especially true for medical mattresses and mattress applications were patients lie in mobile for long periods of time and I have key example out on the table outside.

So while the previous two slide illustrate ongoing innovation activities, this last slide shows our main perspective innovation platforms or new business opportunities currently in development. These programs include slush skins for automotive instrument panels, coated fabric or faux leather for multitude of seeding and fabric applications and wire and cable. As you can see from the slide, the one thing that all three have in common is the megatrend that I mentioned earlier and that is greener alternative for flexible PVC. However, it’s not just about PVC and in the case of slush skins and coated fabrics our innovative solutions also have the potential to replace higher cost TPUs while providing improved haptics, durability and weight reduction.

Now early in the presentation, you heard me mention wire and cable as I currently serve market. The difference between what we do now versus the new platform is how we choose to go to market. Kraton over the past few years has sold a number of styrenic block copolymers to various compounders that develop first-generation compounds for the up-and-coming PVC free movement in wire cable. However, as the movement is grown and is projected to continue to grow, we have decided that in order to maximize our returns Kraton should be manufacturing and marketing finished compounds directly to cable manufacturers.

Therefore this new platform is focused on next-generation PVC free finished compounds for wire and cable. Having said that, the transition taking place in wire and cable is all about environmental impact of currently used materials. For wire and cable the environmental impact of end-of-life combustion of PVC coated wire has and will continue to be a major driver for new material development and create significant potential for Kraton.

While these platforms are in various stages of commercialization we have a goal of generating $70 of new revenue, with higher than average contribution margin over the next few years. However, as always automotive and high electronics applications have long qualification cycles.

But once you are in it’s very difficult for anyone to push you out. Our goal is to be first in with new advanced solutions. This slide summarizes our goal of continuing to shift advanced materials portfolio to more innovative higher margin products. It reflects our estimate of the impact of all the initiatives I have described in the previous slides. It also includes the estimated impact of NEXAR, which we described earlier Holger and Lothar as they indicated we have a goal in NEXAR alone of an estimated $100 million of new revenue by 2017.

All in and assuming successful execution of our initiatives, we believe that we should be able to increase our innovation based revenue from 23% of our portfolio to 34%. And with the goal of doubling contribution margin over that period of time. In summary, we believe advanced materials end use has set the stage and is poised for continued highly profitable growth. Our strategy of growth through innovation is at the core of our recent success and provides us with market opportunities and tools needed for future process. I look forward to any questions you may have in the question-and-answer session.

Kevin Fogarty

Okay thank you Michael, we have kind of reached the end of the agenda before lunch. So I’ll remind our listeners on the webcasts that we are going to break for lunch now. We are going to resume the program after lunch with a wrap up of the end-use review talking about our Cariflex end use and that will start at 12:45 Eastern, we will look then at our Asia-Pacific and have a little bit of a discussion about our Asia-Pacific HSBC expansion and then we’ll have an open Q&A session. So with that we will go ahead and break now for lunch and resume again at 12:45 Eastern.

(Lunch Break)

Richard Brennan

Good afternoon everybody, welcome back from Lunch and I am Richard Brennan, I am Vice President of Cariflex Polyisoprene Business as you may be able to tell from my accent I am based in London and I am very glad to be here to present you to the prospects for the Cariflex business.

Just briefly just give you a bit of background on who I am and what I do, I have been with Kraton since 1998 and I run several different businesses within Kraton including the adhesives business which is near and dear to my heart plus run the HSBC portfolio and various business development activities. So I really am pleased and proud to be managing the Cariflex business and to be able to share with you its future growth prospects.

So if we turn to slide three, so it really is I think an important point to make that Cariflex products are quite unique in the world polymer chemistry and this unique set of properties gives us the ability to access some very new innovative applications for Kraton. Now as Lothar mentioned the foundation chemistry of isoprene rubber and latex anionic polymerization and this gives us certain key properties, the base material as you probably saw on the samples outside is that shiny translucent rubber looks perfectly clear, high purity, but we also make a liquid version of that which is referred to as isoprene rubber and latex. Both the solid isoprene rubber and the liquid version are made of very high manufacturing tolerances and consistency and these manufacturing properties also offer some very important properties to our customers.

Now one of the important benefits of Cariflex is that it’s completely a 100% hypoallergenic and this is a very important feature because many of the applications of Cariflex involves skin or hand content as you can see from some of the sample’s outside. And in skin or hand contact applications, Cariflex can help our customers resolve the problems of natural rubber proteins and the consequent allergen reactions which can cause patient and individual safety problems. And as you think about the business of Cariflex, a lot of the base materials from which we are gaining market share are based on traditional natural rubber chemistry and Cariflex is therefore gaining ground on the basis of hypoallergenicity as well as the other properties.

Now some of these other properties that customers really demand are products that feel comfortable, flexible and natural feeling on the skin and I was discussing with several people earlier in the hall way that one of the reasons for surgical gloves for being such an important part of our business is the fact that the consequent latex that we make just feels great on the skin so the hypoallergenicity of our materials plus that natural skin feeling is a very sales driver for our materials.

Other demand drivers for our material include the extreme purity requirements of our customers and particularly in the medical markets where we sell into medical closures or stoppers or vial closures, these are all same interchangeable words in the trade. Extreme purity of medical closures is absolutely demanding requirement which we were able to fulfill. Product consistency is also extremely important to our customers especially when our materials used in high-speed continuous production processes where small deviations and the physical properties of the materials that we supply can cause problems downstream for our customers and the consistency of our material also allows our customers to produce a high quality of finished goods and dependable performance so this consistency that we derive from anionic chemistry is an extremely important property in the medical market.

So as a result of these physical properties and the hypoallergenicity that I mentioned we have grown to become a leading supplier of our latex product in the high growth surgical glove business as well as a leading supplier of solid isoprene rubber in the medical market segment. Now if you turn to slide four, there is probably a little bit of a surprise here, when you look at the geographic spread of our business compared to the other businesses that you saw, you can see that over 80% of our business is focused in Asia-Pacific with the balance then unevenly split between North America and Europe. Now this unusual split reflects the fact that we have a majority of our customers making gloves, condoms and our medical stoppers in Southeast Asia where the large majority of our customers have their manufacturing lines. The customers that we currently sell to a predominantly North American and European medical multinationals but the manufacturing lines are based in Southeast Asia.

Now the primary focus of this business until recently has been heavily focused on growth in the medical market where we have very clear connection between the features and benefits and the demand drivers for our products. So consequently when you look at the sales by end use you can see that the medical market is far and away the large majority of our applications. Now within this medical segment key applications that we include are surgical gloves, condoms, medical stoppers and small medical device components. So all of those materials are included in the medical stopper segment.

Now also interesting and I think surprisingly probably for some people in the audience you can see that there is an industrial market segment as well as a very small volume of adhesives and electronic applications. These currently represent niche markets where we see high growth prospects and I am going to spend a little bit of time lately describing why we think these opportunities for growth will become very attractive for us.

And I think the key message from this slide as you can see from the revenue growth whereas you heard from Kevin earlier, we have grown by over a 100% in terms of revenues over the past five years is that the key properties, features and benefits of the Cariflex range of products are driving tremendous customer interest and consequently demand in revenue growth for this technology.

Now if we turn to slide five, here we just have a brief snapshot of the key properties and applications in which the Cariflex products are currently involved and you can see in the medical market there is a whole range of applications where we successfully meet the range requirements beginning with the absence of natural rubber protein so we offer a fully synthetic version replacing the classical original natural rubber chemistry, very high purity and consistency and these properties are now with interest to a wider range of customers. And an example of this that could be a little surprising is the adhesives market.

Companies involved in packaging sensitive food products are looking for alternatives to the original classical natural rubber and solvent chemistries that are being used to laminates or seal the plastic layers of film that surround candy bars or chocolate bars. The original natural rubber and solvent formulations are falling out of favor and companies want synthetic alternatives and as companies look through the range of alternatives they think about Mr. Seibert’s classical hot melt adhesive and they find it in practice some categories of food are very sensitive to heat for example if you buy expensive chocolates, that white or blooming that you see on the surface of the chocolate is often caused by excess heat during storage or even on the packaging line. We offer downstream customers the opportunities to cold seal, meaning that a thin of glue based on isoprene rubber solid or latex can be used to seal the film lines and it produces a very high quality room temperature sealed that preserves the integrity and quality of the food, so this is a significant demand driver in the adhesives market and this growth in the adhesives market is something that I am personally very committed to pushing given my previous history in the adhesives market and some of the connections and understandings we have there.

Now the ultraclean nature of both the solid and the liquid latex is also a demand driver in the electronics market and one of the features of our product compared to natural and other synthetic polymers is the amazingly low level of impurities in the finished product. We supply an extra-ordinary clean engineered polymer. In the electronics industry metal impurity is really an important driver of demand, very small amounts of metal can badly effect electronics process an example of that would be for example encapsulating a printed circuit board where you want to protect an expensive fully finished integrated circuit board by dipping it into material that will prevent dirt and other contaminants effecting that circuit board. Tiny amounts of metal will basically short-circuit the board so that’s a very clear value proposition derived from purity to electronics market and now since surprising and interesting opportunities and this is a current focus area for the Cariflex market.

Also the soft touch strength and elasticity of Cariflex the most useful in the surgical glove and condom market where the balance of these properties produce finished goods with class leading properties and I was discussing the several people in the hall way that the default choice for surgical gloves which are all relatively expensive, high-end products in the range of gloves available in the medical market and the condom business. the default choice is normally natural rubber and latex with the balance of properties that I described customers meaning surgeons and nurses find that surgical gloves have got the best fit, feel and hand comfort and that’s the real driver for success that our products solve the problem which is natural of the protein allergen but then also bring benefits in terms of hand feel and comfort and that’s a really important factor for the downstream customers of these materials.

Now as the surgical glove business is been emphasized on several occasions as a key growth driver of Cariflex business, I thought it will be useful to share some data with you just to describe that what’s the composition of the market, where do we fit into the market and how do think about future growth prospects in this business. Now for me this is a really interesting and exciting picture as a leader of this business, you can see that the total surgical glove business and bear in minimum we are talking here about surgical gloves not the vast expanse of other gloves available in the market comprises 1.6 billion pairs of gloves sold annually across all technologies, the current share enjoyed by Cariflex is only 6% so despite the impressive revenue growth that you saw earlier in which surgical gloves have played a key part in that growth story, we are still only 6% of a very large market which gives us great room for growth given all of those attracted demand drivers that I mentioned earlier.

Another interesting characteristic from the dates that we have gathered is that together the U.S. and European markets are approximately 40% demand off that 1.6 global pair business. So those two markets, the U.S. and Europe are only 10% of the world’s population but they drive 40% of demand. So similar to other classical emerging growth stories we would expect that Brazil, Russia India, China and the other newly industrialized countries are going to grow in terms of consumption of surgical gloves as their domestic medical systems enjoy a more sophisticated growth and investment and we will see growth in those newly emerging economies. We also expect now I will share the data in a little while that we are going to see growth within the U.S. and European markets shift away from natural rubber latex strongly in favor of Cariflex isoprene rubber latex.

So I think within that total market 1.6 billion pairs again the key message is we have a very small relative share despite strong growth over the past several years and very good growth prospects in the future. Now return if we turn to slide seven, this maybe needs a little bit of explanation, here is the summary total of all the U.S. surgical glove sold over the past several years, this is quarterly data heading back several years and what you see here is basically the growth in Cariflex which is the green line so this is objective consultant management data showing rapid growth in terms of units of pairs of glove sold based on Cariflex.

You can also see the descending line based on the classical natural rubber latex technologies showing very clearly the Cariflex is taking away market share from the traditional natural rubber latex technology and there are other alternatives in the market to Cariflex, other synthetic latex technologies which are basically flat, so the growth is moving in favor of Cariflex. So it’s very encouraging to see that data and some of the work of the past several years is that in this specific market in North America our Cariflex customers enjoy 25% share of the North American market, which I think is a good testimony to the work invested by the Cariflex team but more importantly by our customers.

Now we see a similar growth trend in Western Europe for the same reasons substitution of the old natural rubber latex chemistry in favor of the modern Cariflex chemistry and it gives us confidence that over time we are going to see a similar growth trend in the emerging economies or the BRIC economies. Now if we turn to the next slide, I wanted to spend a little bit of time on the medical stopper market, several of you commented looking at the display items outside in the hall, those little grey stoppers and vials look pretty simple products but in fact our customers develop some very highly engineered solutions for very specific drugs. Regulations regarding drug packaging in general are becoming ever more stringent and aggressive and countries outside of North America and Europe are generally upgrading their regulations to match at least North American and Europe regulations standards.

Another megatrend in this market is that the requirements for high quality low impurity containing polymers are becoming more demanding as drugs become more reactive and more effective so these drugs become more sensitive to impurities in the packaging including the closures or the stoppers. So as we as patients gain from ever more effective drugs so the drug manufacturers and stopper closures have to match the reactivity of the drugs with improvements in the quality of the closure packaging and our Cariflex isoprene rubber grades due to their exceptional purity, our excellent materials for use in stoppers, needle shields and other items that come into direct contact with drugs. Insulin for example is unfortunately a drug that is growing in demand as diabetes moves out of North America and Europe into the emerging economies demand for Insulin treatment is growing, our material is an excellent material for use in insulin packaging.

So again maybe for unfortunate reasons relating to demand for insulin diabetes we can forecast good growth for the use of Cariflex isoprene rubber stoppers in the international markets. And once you have packaged the drug inside the dispensing system, the whole package needs to be sterilized and our material has got superior resistance to the standard gamma ray sterilization process used in the test protocols. Now what this means in practice is after undergoing gamma ray sterilization our material degrades less and maintains the key mechanical properties needed by the stopper manufacturers more effectively than other materials and these set of reasons the mechanical properties of Cariflex are encouraging growth and are very important demand driver for the future.

I also wanted to share a few more subtle properties as I have been talking to the medical stopper manufactures you learn a lot more about some of the very subtle balance of features and benefits that drive choices and one of the features that we demonstrated in practice is that the force needed to force a needle through this syringe by nurse or doctor is lower and more consistent than alternative stopper materials and this reduces the frequency of needlestick which is a technical term meaning needle sliding up the stopper basically penetrating the skin of the nurse or doctor which is a nurse or doctor safety issue and that’s a very important safety factor.

So low consistent force needed to push a needle through the stopper is something that is tested and is an important feature and benefit that we can meet for our customers. In other circumstances where drugs are used in multi-used vials so you have a large container where the needle is used repeatedly to extract samples or doses from the vial, once the needle is withdrawn from the stopper, ideally the hole left behind as the needle withdraws should close up just at the same rates as the needle is withdrawing. If you leave a hole inside that stopper bacteria and viruses can get in which is obviously very bad so the drug becomes contaminated or in other cases these very reactive drugs can leak out through the stopper and potentially affect the patient or practitioner safety. So it’s a very important safety feature that the closure can close up as the needle is withdrawn and we’ve demonstrated that our material has got an excellent ability to close up as the needle is withdrawal which is one of the reasons the customer ‘s favor our technology.

In addition to that particular feature it’s another very important safety criteria and that as the needle is withdrawn it must not leave a tunnel or a shoot behind through which particles of rubber can fall into the drug. If you have a situation where you have a vial of reactive drugs the little particles of rubber floating into it that’s going to be bad for me drug interaction position and again our material has got excellent physical coring characteristics as this phenomenon is known.

So again that’s potentially long explanation but it’s an it’s an example of where these subtle balances of features and benefits valued by customers in stopper business are driving growth in the Cariflex business. Now if we turn to the next slide, as we look to the next five years from prospects of this business I strongly believe we are on a very positive growth curve. Most growth strategies that I have come cross can basically be simplified to sell more products to more people and more countries and that’s basically the strategy that we are following for the regular business.

Our core strategy is to maintain a high degree of differentiated sales within or portfolio while increasing sales with our existing customers set. There is also a mutli-niche plan within markets related to the known medical and industrial business for example medical catheters where we believe we can build new market segments with new customers building on the known features and benefits. There are also multiple new opportunities that we are working on now in novel adhesives and industrial markets which we anticipate will help us drive growth.

In addition, we anticipate that the BRIC markets will also become adopters of Cariflex technology over time as the health systems in these countries evolve and we’ve also seen the phenomenon in other technologies where these emerging markets move from old to best in class technology in one lead, which is a situation where Cariflex can help particularly in the surgical glove business.

We are also aware that we are going to have to introduce new products to the market and I think Dr. Freund alluded to that earlier, so we are actively working now in the development of new products to meet anticipated needs and certainly to need needs of our current customers. So as a consequence of this pretty wide range of growth activities you can see the revenue goals anticipate a shift from 70% differentiated product sales today to 85% over the planning period.

And with the more than doubling the total contribution margin dollars over the same period, so in summary I believe this business will be able to sustain its strong performance in the future years, supported by the data that I shared earlier and develop a much bigger base of business in the future. Now at this point given the importance of Asia Pacific to Cariflex but also to the other business groups that you have heard from I would like to introduce Mr. Prakash Kolluri who has joined us from Shanghai and Prakash is going to illustrate some of his plans and activities of the Asia-Pacific region, so Prakash welcome to the stage.

Prakash Kolluri

Thank you Richard. Good afternoon ladies and gentlemen, my name is Prakash Kolluri, and I’m the Vice President of Sales and Marketing for Kraton in Asia. I joined a little bit of introduction about myself, I joined Kraton in 2006 and prior to my current assignment I managed the advanced material business, as a regional business manager for Kraton in Houston, prior to joining Kraton I worked for couple of chemical companies Asahi and Bayer in roles that were both in application development as well as commercial.

I am currently based out of our regional headquarters in Asia in Shanghai and as you have heard repeatedly today Asia is our highest revenue growth region and in last year outside of all the announcements about our HSBC plant we have made an announcement that we are expanding Cariflex manufacturing capacity in Asia, also we opened a new innovation center and added that gave us the ability to actually double the number of technical staff that we have in China over the last 18 months. So we have really invested a lot in Asia to support the future growth, we continue to committed to our customers in China and Asia Pacific region and will continue to expand our presence by in terms of service offerings as we work with our customers to meet their needs to help them grow.

I work extremely closely with a four end use Vice President that you heard from today to help development and execute our Kraton’s end use strategy in Asia. Today I’d like to take some time to give you an idea of the business profile that Kraton has in Asia, I would like to provide some context with regards to key drivers that will influence growth for Kraton in Asia over the next few years.

As you can see Kraton has delivered some robust revenue growth, primarily we have a very positive end use mix in Asia that is higher percentage of our revenues in Asia are derived from advanced material in Cariflex and our sales of HSBC and Cariflex are much higher in Asia as compared to our global profile. We have delivered robust revenue growth over the last five years by basically increasing sales and market mix towards differentiated polymers. Our focus in Asia has been on innovation but at the same time we have closed on new applications at new customers towards the worst geography in Asia. Kraton has a very solid customer base that is we have a good mix of both multinational as well as local customers both of whom leverage our diverse product portfolio as well as translation opportunities from the west back into the region.

With regards to vitality index as you can see already right now the trailing 12 months period our vitality index is about 20%, now I want to go over a couple of key drivers that influence that in Asia. The region has a tremendous amount of entrepreneurial spirit that wants to get out of the more competitive market segments. For Kraton that translates absolutely to quicker conversion, quicker adaption, quicker qualification time that helps us tremendously.

Public policy as an example the use of PVC alternatives in medical in China has been a key driver for HSBC innovation for Kraton in Asia. Two technical factors Lothar talked about both in Japan as well as in Shanghai capabilities in terms of assets and people help us deliver technical solutions and deliver market success at a much faster rate. For us the vitality index in Asia for our products is driven primarily by Cariflex as well as HSBC.

Next slide, I want to address a little bit of revenue growth prospects going forward. We believe that improving standard of living in developing Asia it will continue to drive HSBC growth for basically consumer medical high performance films as well as automotive applications, increased infrastructure spending in developing Asia and developing world will continue to drive growth for our optical fiber gel business.

Our new Kraton HSBC plant will help support the future growth in Asia. Cariflex as Richard just mentioned will continue to deliver high growth both in gloves and condoms and actually grow more in industrial and other medical segments. Our differentiated polymers, our manufacturing foot in Asia as well as unique technical capabilities all support Kraton’s position as a global market leader for styrenic block copolymer. Ladies and gentlemen we believe that we are very well positioned to deliver on the growth in Asia with that I would like end my presentation and invite actually Damian Burke who is our Vice President for Corporate Development and he is going to go in-depth and talk about our HSBC plan. Thank you.

Damian Burke

Okay last presentation of the day. Thank you Prakash. Good afternoon my name Damian Burke and I am the Vice President for Corporate Development for Kraton. This is a final presentation before Kevin’s closing remarks (inaudible) and I hope informative day, so I promise to sink into the point.

The purpose of this presentation is to provide you with a brief update and some additional color on our plans and progress to build a planned state-of-the-art HSBC plants in Taiwan. As you hopefully see from the presentations today, we believe that we have tremendous opportunities to grow our business organically and expand margins through the introduction of new innovative and higher margin products. We believe a significant portion of these products will be based on our HSBC technology and occur in Asia and to support our growth plans we will need additional HSBC capacity. We considered several options all in Asia before entering into a framework agreement with Formosa Petrochemical Corporation to explore the formation of a joint venture and construction of a plant at the Mailiao, Taiwan facility.

This slide is a quick recap for the project, the plants capacities it at least 30KT (ph), we executed a framework agreement with our FPCC approximately a year ago to explore the formation of the joint venture that construct own and operate the plants in Taiwan. Today we have made significant progress in negotiating definitive legal agreements on the engineering phase of the project is progressing to plan. As previously disclosed, we estimate the capital cost of the project will be in excess of $200 million and that the plant will start up in 2014 with commercial production beginning in 2015.

Given the plant products slate, we expect that the plant will be accretive to EPS and EBITDA in 2014 and increasingly accretive as plant production ramps up in subsequent years. Finally also as previously disclosed the viability of the project is dependent on receiving the requisite permit approvals including environmental permits. This can be a lengthy and arduous process and we continue to work diligently towards gaining approvals with our joint venture partner. On July 25, 2012 we received notification of conditional approval for the environmental permit that’s required to operate the plants.

We are working with our FPCC and the relevant regulatory bodies to ascertain the specifics of the conditions to which the approval is subject. Next slide, this slide illustrates Kraton’s unique global reach with respect to the manufacturing capacity and capability. The addition of HSBC capacity in Taiwan runs out our global HSBC footprints providing a geographic balance to our existing capacity in Berre, France and Belpre, Ohio.

Location in the new plant in Asia was an obvious choice for us as it provides close access to our fastest-growing markets, geographic balance to our existing manufacturing assets and construction and operational cost advantages. Within Asia we opted for Taiwan as we believe it provides the best balance of a developed and stable economy, familiarity with global business practices, better IP protection and the availability of a well-educated and trained workforce.

Next slide, so this is an aerial view of Mailiao facility, as you see it’s very large and very complex. It’s approximately 12 square miles in size and FPCC has invested approximately $20 billion in this facility since its inception in the mid-1990s. Consequently it offers several significant benefits for the joint venture. First and foremost given the recent raw material challenges the success is the access to the ample supply of raw materials, butadiene, isoprene and hydrogen will be source via pipeline from adjacent production units and be at competitive pricing. Another key benefit is the existing and very good site infrastructure and utilities. As I mentioned on the last slide, ready access to a skilled workforce is another valuable benefit although the workforce will receive additional plant specific training as part of our overall execution plan.

As you can see by the scope and scale of the Mailiao facility, FPCC is a large and sophisticated operator with significant large project experience which we believe will help to mitigate project execution risk. They’ve already proven to be a valuable partner in the early stages of the engineering phase and we believe that they will provide significant expertise in the procurement and construction phases of the project. Finally the complex provides future expansion options with vacant land adjacent to our plant should we decide to pursue expansion strategy in the future. Slide, this slide shows a preliminary 3D rendering of the proposed plan.

It will utilize proven state-of-the-art manufacturing technology to produce several types of low molecular weight HSBC products. The capacity will be focused on higher-growth, higher-margin products and support a number of key innovation programs. A few examples include consumer and personal care such as elastic films, vibrant fabrics and medical applications and IV bags and tubing, PVC replacement and electronics and wire and cable. Discussing modification for gels and creams and protective films for application such as a new cars and electronic screens.

One of the key reasons we are building a plant in Asia is that we anticipate faster growth in this region than in other parts of the world, it should be noted however that the Asian plant will be integrated into our network of plants and will be capable of servicing the European and Americans markets as needed. The plant will be designed with a lean, flexible and reliable process design and will be more versatile with less equipment.

We anticipate the operating cost will be the lowest in the Kraton network due to raw material supply and low steam and electricity costs in addition to lower effluent flows. Some additional highlights include higher production quality with lower residuals and improved pellet and polymer uniformity, lower variable costs as I have already to talk to, an excellent HSE design, a versatile plant with diverse packaging options and a lean design that will allow for fast type changes and use a minimum of critical equipment. Finally the proposed plan will have a positive environmental impact with VOC and water emissions offset two to one resulting in a net reduction of the Mailiao environmental footprint.

This slide provides some highlights of the proposed JV, FPCC is a significant and sophisticated manufacturer in Asia with considerable access to resources. With 2011 sales of approximately 26 billion it is the largest group within Formosa Plastics Group which itself had revenues of approximately $75 billion in 2011. Kraton has negotiated to retain 100% of the marketing rights for production and return for certain of the considerations. And we expect to be able to create a favorable capital structure with up to 70% debt financing at attractive rates.

Kraton share of equity is expected to be approximately $45 million to $50 million forty five to cover capital cost, working capital and other costs such as startup costs. Given the structure of the JV, and Kraton’s control of marketing rights, we expect to have to consolidate the joint venture for reporting purposes and as previously stated we expect the project to be EBITDA and EPS accretive in 2015 once commercial production begins.

This final side ends the presentation where I began with some abbreviated highlights for the project which I won’t speak to again. So at this point I would like to turn the microphone over to Kevin Fogarty our CEO for some closing comments.

Kevin Fogarty

Thanks Damian. I appreciate a long day, I appreciate your patience and attention to exactly what we are working in at Kraton and driving in a nutshell go to the next slide, portfolio shift between 2012 and 2017, it’s what we work on every day at Kraton.

The key themes that you heard today in terms of what we have to deliver on are embraced by our end use leaders, our innovation leaders and of course the market development leaders that you hopefully had a chance to talk to in the hallway.

We absolutely have a focus on accelerating our innovation efforts, we expect to see HSBC and Cariflex and NEXAR being a larger part of our overall sales portfolio mix in the future as we drive towards this five-year plan commencing or been completing in 2017. We need commercialized in NEXAR not just for what you saw and heard about in terms of the company opportunity which we are very excited about needless to say but also in the important market development areas of HVAC as well as water purification. Drive growth in emerging markets, you heard us talk about Asia we have very large plans needless to say to grow our business in the region as well as support it with the project that Damian just gave you a nice summary on.

And then of course as Richard talked about Cariflex a remarkable opportunity to continue to penetrate and substitute for natural rubber and what is today a very large market but we think a very large and growing market for surgical gloves, condoms and all the other myriad of opportunities, industrial uses that Richard spoke of specifically.

What that will eventually do is drive the portfolio to where it is today to where we expect to go to tomorrow. We are today, 50% of our sales approximately are in the category of innovation or differentiated but we believe that will grow to 2/3rds of the portfolio by 2017 which would drive contribution margin dollars in the company going up by at least 50% over that same time frame and that is a huge challenge for us as a company but is one that we believe in, it’s the one that we are working on every day, we are staffed hopefully you feel the same way I do about the caliber and capability of this team in delivering this impressive plan.

The growth strategies for each of the -users I think what you heard in comment of each of them was the theme of managed the base business, portfolio shift associated with innovation to drive estate in the future that looks even different than today and I can assure you that each of these end users have gone through serious portfolio shift as we have embark on our turnaround strategy since 2008 as well.

And then looking forward into the future NEXAR and oilfield that’s two very attractive categories for platform growth at Kraton to drive further that overall portfolio mix by 2017.

We’ve talked a lot about vitality index, you heard about it today. We expect to double our vitality index measure from today’s performance of approximately 13% – 25% by 2017. I have talked before to many of you about why that’s so important at Kraton. Vitality index is a metric that we chose in terms of identifying the year-over-year improvement of our portfolio coming and our sales coming from innovation. In many ways it’s arbitrary that we selected five years during the earnings call yesterday I called out specifically that despite the fact that our vitality index had dropped 1 point from 14% to 13% TTM period, I also make mention of the fact that because of the arbitrary nature of house we selected five years we have products that roll-off after the five-year period of been commercial. They are still highly differentiated in fact in the three categories that we just reviewed, you will see that they were dropped from the innovation category to the differentiating category, but the point is including even that level of volume that dropped off just this past year would have had our vitality index are retracking at 17%.

So we know that we can improve the portfolio despite the fact that we already have this market-leading position that you have heard us talk about so much today and that’s pretty exciting when you consider a company that’s been around in this industry as long as it has and pretty much invented every category for styrenic block copolymer that we said just today.

We often say at Kraton you have heard us talk about it, that we don’t grow and we don’t grow profitability as we are finding new applications for Kraton that that don’t exist today, that’s in the category of why we work on innovation within the end use and innovation through these platform developments. A very exciting time for our company, we hope you will agree.

So in summary we thought we will give you one page which is just kind of the key takeaways. You have heard us talk about and time and time again today is what we believe in. Accelerate portfolio shift, I will say the word accelerate, portfolio shift is a concept but we got to accelerate that effort through what we do, how we make it happen faster. HSBC growth is supported not just to the new project but also in new market areas that Michael talked about in specifically in advanced materials. Cariflex that Richard talked about and all the exciting opportunities, NEXAR that we are just at the infancy of commercialization and then oil fill applications which is one of my personal favorites because I know the capability of Kraton and this is a market space that I think we should excel in. The new HSBC plant, the largest capital endeavor in the history of the company and certainly in history this management team and we are very excited about it because it is absolutely key to our future. Doubling the vitality index is a good measure to show how our portfolio has changed and will improve over time can only mean a greater competitive advantage in the marketplace with longer and sustainable margins that truly reflect the value that we are creating for our customers are going to allow us to drive towards that 50% overall contribution margin expansion over five years here at Kraton.

The mid-term financial goals that I spoke off when I began, we talk about expansion of adjusted EBITDA by at least 10% per annum compounded growth through 2017 and of course we believe that mid-teen EBITDA margins are commensurate with not just benchmarking in propylene and specialty chemical industry but more importantly truly reflective of the value we are creating for our customers.

I think today you have heard some data that you’ve been asking for in terms of an outlook in the portfolio today and where we think it can go tomorrow, more detail around some of these innovations to help with your models and understanding what the future profit potential of Kraton is, we needless to say we worked many hours in preparation for this, a lot of people put a lot of time and effort into making sure that these messages were crystal clear and for that I want to thank them personally. I think the next step here would be to listen and answer some of your questions which I always relish because it is my favorite part of these sessions because it really lets me understand what’s on your mind as well. So I think Gene I am not sure what the protocols going to be but we are ready to take that next step here.

Gene Shiels

Okay Kevin we are going to, as you say turn it over to Q&A, we will entertain questions both from the audience here and I think we have the capability of taking questions from those who are on the webcast as well. So what I think would be beneficial for those online, if a question is asked here in the audience or even online I guess would be a good idea to repeat the question for the benefit of everyone listening and so at this point why don’t we start with questions here in the room and we’ll see what comes in from the webcast

Kevin Fogarty

And I’ll invite of course any of our speakers to come up and help answer these questions because I think one of the benefits of today has been and you get to hear firsthand from the people as I said earlier are really making it happen day to day in the marketplace.

Question-and-Answer Session

Unidentified Analyst

Kevin, I know this is more of a technology and R&D day but maybe a clarification on the guidance particularly EBITDA growth of 10% plus, what’s the base line for that because is it the trailing 12 month off of the 152 that you had in one of your slides but the EBITDA is down year-over-year, this year so is it a higher level and how do you jive that with margins in the mid to high teens because if I use a 15% margin assumption for example I get EBITDA 225 million or so which would be a lot higher than up 10% year-over-year.

Kevin Fogarty

I am going to let our CFO answer the first part of your question but there is one clarification I do want to make and I am glad you raised it, that as we embark on this portfolio shift, I think it’s important people recognize that there’s a higher emphasis clearly on volume growth in the HSBC Cariflex, NEXAR categories of our platforms. The strategies you heard from paving and roofing as an end use and from the unhydroginated part of our adhesives, seals and coatings end use means that there is a more heavy emphasis on not volume growth but margin expansion to drive topline and there is bottom-line.

So I think you have to take that into account in terms of just overall growth rate for the portfolio but in terms of the question itself what’s baseline, Steve for the EBITDA calculation.

Steve Tremblay

Yes the baseline is in fact the 152 you mentioned in our trailing 12 month June. We use the term 10 plus so there is range of company growth rates and 10 is more in the low end of what our true targets will be. Critical to that course is getting to those mid-to high-teen margins which our plan coming off 152 at June over this midterm, satisfies both of those criteria. It’s really all one the gentlemen I had the pleasure of having lunch with today asked about what’s really driving those growth assumptions and very, very succinctly it’s the big project that Kevin mentioned. When you take a Cariflex business that’s our highest margin business today and grow it meaningfully and then lay on top of that a $100 million of NEXAR sales, $50 million of oil fields, $70 million of expansion in AM at much higher margins in our current portfolio you can see yourself to an EBITDA profile that grows meaningful from the 150 through June.

Our assumption with respect to raw material was a relatively flat, we always planned for relatively flat raw material environment and trying to get a revenue call to support this margin to sales percentage. We looked back and did a three year average EBITDA styrenic isoprene model and we based a revenue assumption off that. So that will help you maybe build out your total revenue and from that you should be able to see yourself through to mid-to-high teens EBITDA margins.

Unidentified Analyst

If I could just have a quick follow-up on Cariflex as well, I thought you were just targeting the high end of that market, so you know your market share is actually a lot higher at least in the market that you are targeting than the 25% that you are talking about today, so can you continue to grow Cariflex at the rate you have been historically if you are still targeting just that high end where I think your market share is probably about 50% and if you do decide to move away from the high end and go a little bit more low end, does that mean you have to cut prices or just margin assumptions.

Steve Tremblay

Well Richard said in his presentation, when he talks about the 1.6 billion units or pairs of surgical gloves, he is talking about surgical he is not talking, he is not talking about the gloves that you get in a box or if you go in the examining room when the doctor pulls gloves out wears them for about 12 seconds and then throws them in the garbage, we are talking about that’s just surgical gloves category and the answer is that 6% share is, I think we had talked about our main customer when we embarked on this strategy thinking they could probably get to a 10% share of the surgical glove market and I think if I remember correctly when we were on the road show for the IPO we talked about been less than half way there.

So you can see we kind of crossed that half-way point now it’s 6% but there is no end in sight as far as we are concerned terms of how much more penetration there can be. Now that one challenge that we have needless to say and I have always said this is the demand growth in that business is rather lumpy in a good way and this doesn’t mean we convert a surgeon, we convert a hospital chain when our customer successfully lands a new account. So we find that and we have been in the past a little bit of a limitation to successful growth because we didn’t have capacity available to serve that growing market. And our goal is not to let that happen again and that’s why we are investing in new capacity so much in front of where we are today in terms of market share penetration.

Unidentified Analyst

Okay just final question, Michael had a slide on PVC replacement and I know on the consumer side Procter & Gamble last year had an announcement where they said they will go PVC free and that’s an ongoing move in that industry. On the medical side you really, have you seen any movement to go PVC free in the U.S., I know that was a big opportunity for you and you have seen some shifts in Europe and Asia but what about in the U.S.

Steve Tremblay

Movement is a relative word, movement is in this case slow in our view the U.S. medical history, Michael, where is Michael, want to come up and answer that specifically? Which before he finishes speech the opportunities as far as we are concerned it’s going to happen in our view.

Michael Oberkirch

Right so if you look at the PVC market in the U.S., just in this last year there have been two announcements by two major buying consortiums for hospitals that have been they are going PVC free. So the buying consortium is not actually an industry movement but when buying consortiums and hospitals raised their hands they were going PVC free that’s movement in the right direction, but Kevin it’s extremely slow, there is no legislation that dictates it but we see that’s all upside.

Steve Tremblay

And I think I have told the story before that as far as think about China and how it’s evolved in this category where glass is the current technology deliver IV if anybody happened to find themselves in a medical institution, where hospitals in China are changing from glass to plastic they are skipping to PVC step entirely and going right to a Kraton formulated polypropylene packaged solution.

Michael Oberkirch

Correct, so if you look at and I like to use Baxter, Baxter launched their Aviva PVC free bag seven, eight years ago it’s really only getting traction the last 12 to 24 months and we are starting to see demand going forward, just goes slow.

Unidentified Analyst

But once converted there is never say never but once converted this is a technology that’s going to be around.

Steve Tremblay

Yes I don’t view it as negative, I view it as the substitution potential is still in front of us.

John Roberts – Buckingham Research

John Roberts, Buckingham Research, you gave your market share in total SBCs, what’s your market share in HSBCs?

Steve Tremblay

Did we break that out?

Kevin Fogarty

We can give in terms of revenue, the globe is off the total market size for this polymer about 19% of it globally including us, about 19% globally is HSBC material. Currently we are 33% of our revenue so we are 10 points with us in the average, we are 10 points above the average. So we are clearly the dominant player from a capacity stand point in terms of HSBC.

John Roberts – Buckingham Research

And then do you think you move beyond surgical gloves at some point into the broader glove market and how big is that relative to surgical gloves?

Richard Brennan

That’s a very good question. I think with the current technology that would be a very difficult challenge simply from a cost base view point but that’s one of the future projects that we want to work on and in terms of market size, you are talking about orders of magnitude larger than the surgical glove business. So as and when we have the technology fit for the market, that’s going to be another tremendous market potential. But to be blunt at this stage that’s early days in terms of thinking of the technology stage.

Kevin Fogarty

To be very clear, what he saying there is not with the current Cariflex but it would be a technology shift on our part first to address that potential market. Question here?

Unidentified Analyst

Yes two questions one with your current balance sheet and looking at the capital spending plans you’ve laid out including Belpre, and Taiwan, it looks like you are still overcapitalized with the amount of cash and the debt you have on your balance sheet, do you have any thoughts on that or would we expect further heavy capital investment two or three years out?

Kevin Fogarty

We haven’t given much by way of beyond 2012 capital plans but broadly speaking the business this year we will spend about $70 million to $80 million in CapEx, last year we spent in the $55 million, $60 million range. I wouldn’t expect though in given a couple projects that we have talked about publicly the least of which is not the completion of the (inaudible) plant which will start this year, it’s a $35 million in total, the lion share of that spending will be in 2013.

And we have an environmental spend at our flagship site in Ohio associated with air emission standards that have changed, if you maybe are familiar with the Boiler MACT legislation, that’s a $50 million spend, they will need to take place over 2013 and ‘14 as well. So there is some lumpy CapEx that will preclude us from getting back down to the south of that $50 million range.

So there is a capital appetite that’s out there for the next couple years, we look at our balance sheet we have $220 million on the balance sheet at 100 of that just came from that’s the opportunistic capital raise in the first quarter that was really targeted general corporate purposes of course but we also targeted that towards the equity infusion that we are going to have to make in the JV and as well as pre-funding of the CapEx which gets back to your other question, what do we do with the cash.

As Damian said, we don’t have the environmental permits yet for the plant in Asia and if there is a $50 million equity investment, if it continues to be a JV which is the preferred course of action we are not workout given our appetite for HSBC capacity, we will likely go ahead and do that on our own.

So we are talking at a minimum 2x that equity investments, so as we think about excess cash we are really being very guarded until we learn exactly what the capital structure that plant is going to be. Longer term, we think there’s a lot of opportunities internally, we talk -- Kevin has talked a little bit about looking for strategic adds to our business which round out the portfolio, get us further away from the BD molecule and then after that if you we continue to generate the cash flow job which I am confident we will, if the right thing to do after that is returned to shareholders and we will certainly build-in mechanisms to do that. But as of right now we are taking a little bit of a shorter term view with the primary variable being the status of plant.

Unidentified Analyst

And then secondly on the Cariflex business if I understand it correctly in the condom market you are making a lot of progress there but you still don’t have penetration into some of the major manufacturers, could you just give us an idea of what’s holding back people from offering a Cariflex product in that product line?

Richard Brennan

I am not sure, we are selling to the two of the leading condom manufactures in the world and they have created a brand around our product and the samples are out there actually, so I am not quite sure how you pick that point up from our presentation and if you did we need to change whatever we said in the presentation. We are dealing with the market leaders, the one thing we know about condom markets is that only a sliver of the condoms used in the world are quite frankly paid for, most condoms used in the world are given away.

So will say those aren’t what we would characterize as high end discerning brands. Our customers needless to say target the higher end discerning customers who are willing to pay up and when in fact one of those brands was originally marketed it was marketed exactly the same way the surgical gloves are marketed which is superior form to feel but A-Synthetic therefore hypoallergenic and would not contain the proteins that could cause the hypoallergenic reaction. Very quickly their customers liked the product for its feel more so than they really paid attention to the fact that it was natural rubber free and what that meant is they actually rebranded the product is something that I think the tagline is something like feels like nothing on, or feels like skin and that’s why the brand is what it is out there.

So I think we are dealing with the leaders and the business I am not sure it’s doubling each year in terms of our sales volume over a smaller base as we continue to grow into this business but it’s very healthy growth and Richard said in his presentation I will reemphasize, surgical gloves provides the base for our Cariflex business, everything else we are doing in Cariflex beginning with condoms and then the medical examples he gave is really to look at the differentiation of the sales portfolio Cariflex to do what? Do just exactly what we are doing in Kraton which is improve the portfolio mix but actually do it in Cariflex as well. It’s a good problem for us to have.

Unidentified Analyst

(Inaudible) Credit Suisse, couple of quick questions on NEXAR, is the agreement Columbia Sportswear exclusive for the application or can we potentially see other athletic wear producers partner with you?

Kevin Fogarty

We are not in a position to talk about our agreement with Columbia under agreement with Columbia but we are very pleased with how the development is going with Columbia so far and next years in going to a very important market launch year, I think Jim talked about probably see it the retail store, retail outlets here in the U.S. sometime in February and March and we will cross that bridge in terms of how we take that to other markets and may be apply the similar technology but not in a performance apparel maybe look at it in terms of other market segments that might benefit from this really creative technology as well.

But for right now, we are focused on just getting this Columbia thing, this Columbia opportunity really off the ground and it’s an exciting time as you can imagine and we know Columbia is spending a lot of time, effort and money getting ready to launch this into the marketplace.

Unidentified Analyst

Great and then on the $100 million revenue target, I guess how should we think about its progression through 2017, is it more front end loaded as Columbia ramps up or more back-end loaded.

Kevin Fogarty

It’s actually in that particular case I think it’s relatively a pretty stable growth over that five-year period, it’s in other words it’s not a hockey stick. Anybody else? Anybody on the webcast? Question over here.

Katie Gordon – Cazenove Capital

Katie Gordon, Cazenove Capital. I just had a question on the paving side of the business and the slow-down that you saw in Q2, specifically just looking on the U.S. side, one of the reasons that you had given was the continuing funding challenges and I was just curious because Q2 was a pretty massive departure from the seasonality you saw in previous years and it’s my understanding that the funding challenges have been going on since around 2007.

So I was just wondering if you could talk a little bit more about what was specific about this quarter and while we saw such a massive shift.

Lothar Freund

You might recall that our first-quarter was record sales and paving and roofing was a major driver and we had extremely strong demand there and customers used the opportunity to fill their inventory there and we saw that to a certain effect in the second so there was a little balance shift between the two quarters so you really need to take the view of the first six months to reflect the really demand but I mentioned that funding is the biggest challenge here and that’s exactly why we are launching the (inaudible) technology because ultimately that’s will lower the total system cost and in Europe we had a channel with weather this year, remember last year we had an extremely strong sort of force which we have never seen on the paving and roofing side because weather was very good in Europe. This year in England it was just raining until fortunately last two weeks when the Olympics started, so they are continuing now always paving the roads.

So there is a shift to a more even distributions throughout the year in this business.

Katie Gordon – Cazenove Capital

And just a quick follow-up, if you were to rank the impact on this business in this quarter between the funding challenges, the Betadine volatility or competitive pressures, how would you rank those three?

Lothar Freund

Put a volatility is definitely the biggest issue for our customer this year, there is a funding challenges they are dealing with it, they are reformulating, they are taking last falls, they utilize the new Kraton grades which gives them better performance but the Betadine volatility is the biggest challenge there.

Unidentified Analyst

What would be your base line expectation for the plan in Taiwan as far as what would be reasonable in your view build from startup to year one either sales level or utilization into the first couple of years.

Steve Tremblay

I think we have I think the ramp is over for a four year period, is that right, and year one is going to be to be honest year one is probably going to be more of an optimization in terms of moving some grades from the plants by that time in Belpre and France that will be fairly well loaded to the new plant to kind of put some relief in the plants that we will be relying on to get us to that point.

So it’s tough to say exactly what it would be but I think in our own project planning we allow it for about a four year end.

Michael Oberkirch

But even in that ramp up as Damian illustrated in his material, if the first full year, were based on current time it turns for 2015 and even though would not add full capacity because what Kevin just as noted it’s still in that first year of operations that less than full capacity will still be EPS accretive.

Unidentified Analyst

What kind of further progress can you make on your pricing strategy to help limit your correlation with the volatility in Betadine.

Kevin Fogarty

I think that similar question that came up yesterday during the earnings call was directed same as what you are asking right now and we talked about going to more real-time pricing. We think that’s a portion of the issue but it’s not going to solve the issue entirely I wouldn’t want to suggest it is. For those people that haven’t been associated with Kraton that long you have to appreciate where we came from was a business model that a lot of pricing was done annually here. We realized as we embarked on our transition, our turnaround strategy in 2008 that had to stop. So we went from literally from 12 month high pricing to something that was you know absolutely unheard-of as far as many of our customers were concerned, we just used to go to this 30 day model and that worked very effectively as you can see in our results but now we are in a situation where the Betadine increases or decreases monthly looked like a tough year three years ago and so all over the team are thinking more and more about real-time pricing with customers particularly in places like Europe, I think Asia for the most part is already there, really China but that doesn’t necessarily mean that it is going to change their behavior in terms of what they think about what’s happening with raw materials, right? So they can have a current price reflective of current raw material cost in the present month but if they think next month’s raw material cost is going to go down yet again that’s still going to kind of probably emphasize the same behavior or of course the reciprocal is true in periods of raw material rise.

So the challenge for us is the comment I made at the beginning which is how do we find a way to make that Betadine issue less and less relevant. Clearly making margin expansion, success will make Betadine in its terms of its monthly movements less and less relevant in itself. But also some of the market development options that we consider don’t even involve Betadine. Everything we are doing in Cariflex is a great example.

So we have got these two opportunities or these two means to address that fundamental, one is probably more in immediate the term, one is more longer-term as we embark on this portfolio shift strategy but the volatility I think I commented in my earnings call comments, the volatility that we saw in 2011 which we thought was extreme, we saw the first six months of 2012.

And now we’re sitting here and telling you through our best view of the consultants that we deal with that we are looking for the most part, flat pricing for the remainder of the year and if that’s the case then we will get back to business as usual with customers.

Unidentified Analyst

Next store has been in development for approximately five years if I am not incorrect?

Kevin Fogarty

Yes I think probably the chemistry developed a little bit sooner than that but we really committed ourselves to it probably about years Walter.

Unidentified Analyst

Can you elaborate on just how much R&D spend has been made on NEXAR over the course of that time?

Kevin Fogarty

I know we know, does that include all the management review times.

Unidentified Analyst


Steve Tremblay

It’s probably 5 million for me, I am kidding, I don’t have the exact number but what I can tell you is I think Columbia will spend this year more marketing than we underdevelopment in whole polymer but be serious if you look at it for such a new technology in a platform, you are talking about double digit millions over the course of 5-6 years.

We are really intensifying the investment in last two years and support our application development there.

Kevin Fogarty

Needless to say it’s been one of the largest consumers of our technical talent. Anyone else?

Gene Shiels

I think we may now a couple questions coming in from the webcast, perhaps we can just show those on the screen and we will address them.

Kevin Fogarty

What do you mean by contribution margins going up by 50%? Okay, Steve.

Steve Tremblay

One of our very, very metrics that we watch among other is very, very closely is contribution margin, in our world contribution margin is selling price and the material plus the current cost of the raw material and less variable cost, it’s essentially the price book if you. Revenue moves up and down with Betadine, isoprene and styrenic, so we focus on that margin above variable true variable cost and again it’s really our price book.

So when each of the presenters showed an index of contribution margin dollars, it was that variable margin dollars in each of the business units growing by in Michael’s case growing by two much more of paving and roofing because of the portfolio shift we are letting some business trade out and that right in the middle for the adhesive seals and coatings end use.

It’s one of the most critical measures we don’t talk about the metric in its per tonne because it is proprietary but the closest gap measure to the contribution margin is gross profit per tonne which we was spent a lot of time being transparent about that about that metric because we have a fixed cost base that is in fact fixed and we currently don’t plan to meet SG&A cost or R&D dollars to drive the value the best way to think about in terms of what it means to valuation is that change in contribution margin dollars should flow to the bottom line in terms of the EBITDA.

Kevin Fogarty

The next question?

Dan Smith

Number two Kevin.

Kevin Fogarty

Yes I read it, I think the answer is we did today by giving you the category of differentiated for the first time and I don’t know yet if we are going to break that out each quarterly call because I just don’t think that we will have that level of make that level of detail every quarter but my guess is we will update you as we do these innovation days, investor days in the future so that you can get a sense for how we are doing relative to this five year plan.

Hygiene and chemicals, Eastman Chemical just announced the new 50KT JV (inaudible) of produce hydrogen registered up to 2014 to support their legal right product. Can you speak to your (inaudible) with Eastman and the potential opportunity this represents for your Asian expansion, Greg, good night.

Well I actually Mark should answer this question because Mark is closest to our relationship with Eastman but I will tell you is it really doesn’t have a lot to do with us at all directly, although from time to time I think we have used legal rate in or portfolio if I remember correctly.

Mark Siebert

We do actually we have a collaborative relationship with Eastman on both the buy and sell side as well as the development side it’s been long standing relationship that we have had, predominantly because our products are used in collaboration with theirs kind of on a symbiotic relationship with very similar customers in similar markets. All this investment relates to is not unlike our investment and focus on high-growth areas where as their opportunity to take advantage of those growth opportunities with their existing products and extending that into the Asia region.

So other than our historic participation with them where we have kind of beneficial sales together in common markets is really not going to substantially make a dramatic change versus what we have done historically.

Kevin Fogarty

Thank you Mark, our NEXAR our goal with an exclusive agreement with a smaller sportswear company instead of opening up to all companies and how you plan to sell NEXAR into the other two segments, again I am not going to comment on whether or not there is an exclusive agreement or is an exclusive agreement. I have learned a long time ago that when you work diligently with a partner to bring to market a new commercialization that you have made a commitment to one another one way or the other and I’ll just leave it at that terms of our relationship with Columbia.

The one thing I will tell you is they are heavily committed and we think they have tremendous capability make this NEXAR commercialization as first one, a success. As far as the next two let’s see how do you plan to sell NEXAR in two segments, I assume we are referring there is the HBAC segment as well as the water purification segment so I am going to ask over.

Steve Tremblay

Well I think Kevin it’s the same concept and we are working with CRV (ph) companies very closely together and we are expecting the first commercialization also this year, there is two different partners there which we will not name today and in the water segment we are already on track, there is a company in Europe to get that commercialized and Lothar is working intensively with )companies in the U.S. as well.

So it’s the same concept, the followed with Columbia.

Kevin Fogarty

And I don’t mind saying that I think in various investor meetings I always assumed just based on the way in which I thought this three, call it the three horse race or the three different platforms for NEXAR commercialization that the ERV or HVAC if that will be the first to commercialize but it’s going to be I think a pretty close second.

Steve Tremblay

Kevin I want to add a comment, the water market is very, very much fragmented and a lot of different implications so there is not a single or two customer leads, so we work with lot of customers simultaneously to qualify next their application markets and needs.

Kevin Fogarty

And then lastly I thought this was a question about the real-time pricing which I would say we already talked about this a little bit different, how will it be positive or negative compared to how your competitors prices and so I am going to love to answer this question. Simple answer is I can’t predict the behavior of our competitors, I certainly can’t historically and I doubt I will be able to in the future. We don’t base our pricing behavior on now on how we think our competitors will respond that will be their business, we just do what’s right for our business, our customers and of course our shareholders and if we adapt a more rigorous real-time pricing in view of the business then that will be because we believe it’s in the right interest of our company. Is that it from the…

Dan Smith

I think that’s it.

Kevin Fogarty

Okay well once again we thank you all for your time, I think it’s been a great day, good questions as always. Hopefully you get a better feel for the direction Kraton and if you have any further follow on questions just contact Gene and we will be sure to try to get an answer for you. Thank you once again for just participating.

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