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Kraton Corp (NYSE:KRA)
Q4 2019 Earnings Call
Feb 27, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Kraton Corporation Fourth Quarter 2019 Earnings Conference Call. My name is Annie and I will be your conference facilitator. [Operator Instructions]

If you have any objections you may disconnect at this time. I will now turn the call over to Mr. Gene Shiels Director of Investor Relations.

H. Gene Shiels -- Director of Investor Relations

Thank you Andy. Good morning everyone and welcome to the Kraton Corporation Fourth Quarter 2019. With me on the call this morning are Kevin Fogarty Kraton's President and Chief Executive Officer; and Atanas Atanasov Kraton's Senior Vice President and Chief Financial Officer. Copy of the fourth quarter news release and the related presentation material we will review this morning is available in the Investor Relations section of our website. Before we review the results for the fourth quarter and full year 2019 I would like to draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in the presentation this morning and in yesterday's earnings press release. During the call we may make certain comments that are not statements of historical fact and thus constitute forward-looking statements.

Investors are cautioned that there are risks uncertainties and other factors that could cause Kraton's actual performance to be significantly different from the expectations stated or implied by any forward-looking statements we make today. Our forward-looking statements speak only as of the date they're made and we have no obligation to update such statements in the future. Our business outlook is subject to a number of risk factors. As the format of this morning's presentation does not permit a full discussion of these risk factors please refer to our forms 10-K 10-Q and other regulatory filings available in the Investor Relations section of our website. With regard to the use of non-GAAP financial measures a reconciliation of each non-GAAP financial measure we use to its most comparable GAAP financial measure was provided in yesterday's earnings release as well as the presentation we'll review this morning. Following our prepared comments we'll open the line for questions.

I'll now turn the call over to Kevin Fogarty. Kevin?

Kevin M. Fogarty -- President and Chief Executive Officer

Thank you Gene and good morning everyone. 2019 was clearly a challenging year for many industrial companies including us at Kraton. While we had entered the year with lower expectations for our business activity in China given trade and tariff tensions between the U.S. and China and volume headwinds with regard to our lubricant additives portfolio of sales to a certain customer to a significant customer that was implementing inventory reduction program. In general for the rest of our business we had expected a reasonable year. As it turned out despite the weather-related impact of our paving and roofing business. First half 2019 global demand trends were generally in line with our expectations. However in the second half of the year we experienced even weaker overall demand in China compounded certainly by escalating impact of tariffs and trade negotiations with the U.S. As China demand contracted further there was a ripple effect through other economies of the region.

We also saw lower demand in Europe associated with factors such as weaker automotive and consumer demand. In addition as we discussed during the third quarter call in the third quarter of 2019 we saw a significant reduction in gum rosin and gum turpentine prices that translated into incremental margin pressures for our Chemical segment for the balance of the year. The resulting effects on our crude sulfide turpentine markets in particular were recognized to be the most relevant in the fourth quarter. Given these weakening market fundamentals fourth quarter 2019 adjusted EBITDA was $49 million down $36 million compared to the fourth quarter of 2018 in line with our updated guidance as provided during our third quarter call. It's worth noting however that fourth quarter 2019 was a heavy quarter for planned maintenance and turnarounds for us. Fixed costs associated with turnarounds increased by approximately $4 million compared to the fourth quarter of 2018.

In addition the production impact of turnarounds and plant maintenance as well as lower operating rates and other facilities in response to softer market demand resulted in an adverse impact of $15 million associated with less favorable absorption of fixed costs. Therefore approximately $19 million or more than half of the decline in the fourth quarter adjusted EBITDA was driven by turnarounds at lower production rates at plants given these market conditions. In terms of segment results Polymer segment adjusted EBITDA was $29.5 million in the fourth quarter down $14.8 million compared to the fourth quarter of 2018. Once again of this decline $10.7 million or 72% relates to higher fixed costs associated with turnaround and planned maintenance and the associated fixed cost absorption impact of lower production rates. Of note average unit margins for the Polymer segment remained stable compared to the fourth quarter of 2018 and so the balance of the decline in adjusted EBITDA was a result of 4.7% decrease in sales volume largely a reflection of softer market demand.

Chemical segment adjusted EBITDA was $19.5 million in the fourth quarter and this was down $21.3 million compared to the year-ago quarter. Of the decline in the adjusted EBITDA $8.1 million or 38% was also associated with higher fixed costs for turnarounds and plant maintenance and associated FCA impact of lower production rates. Sales volume was up modestly versus the fourth quarter of 2018 but as mentioned we experienced increased margin pressure in our CST and TOR chains resulting from third quarter 2019 decline in market prices for gum turpentine and gum rosin as discussed in our third quarter excuse me the third quarter 2019 earnings call. As a result full year 2019 adjusted EBITDA of $320.6 million was down $57.5 million or 15. 2% compared to 2018 within the updated guidance range for adjusted EBITDA we provided in the third quarter earnings call. Despite the challenging fourth quarter environment with our ongoing focus on cost control and working capital optimization cash generation was favorable. During the quarter we reduced consolidated net debt by $66.5 million or $88.5 million excluding the effect of foreign currency.

On a full year basis we reduced consolidated net debt by $125 million also in line with our updated guidance provided in our call. As a result from the date of the Arizona Chemical acquisition through the end of 2019 we have reduced consolidated net debt by $443 million. We still expect the Cariflex sale to close in the first quarter of this year. And as we have said previously we intend to apply the sales proceeds primarily to further reduce outstanding indebtedness. At the closing of this call I will share more insights with regard to our 2020 strategic priorities including innovation sustainability cost reduction and prevailing market realities in particular coronavirus effect the coronavirus effect on our business outlook.

But for now I'm going to turn the call over to our Chief Financial Officer Atanas Atanasov for a more in-depth financial review of the third quarter. Atanas?

Atanas H. Atanasov -- Senior Vice President and Chief Financial Officer

Thank you Kevin and good morning everyone. Turning to slide five. I'll begin with the review of the fourth quarter and full year 2019 results for our Polymer segment. Fourth quarter 2019 revenue for the Polymer segment was $232.5 million a decrease of $40.9 million or 15% compared to fourth quarter of 2018. The revenue decrease reflects lower hedge costs of raw materials and to a lesser extent sales volume compared to the fourth quarter of 2018. The negative effect of changes in foreign currency accounts for $7.4 million but the revenue decline which was fully offset by favorable effects of foreign exchange on our cost of sales. Total sales volume for the Polymer segment was down 4.7% compared to fourth quarter of 2018. Sales volume for specialty polymers was down 8.1% and this was due to lower sales into lubricant additive applications and continued demand weakness in China broader Asia and Europe.

These factors were partially offset by higher innovation based sales volume in North America. Performance products sales volume was down 2% compared to fourth quarter of 2018 and this was primarily due to lower relative winter field sales into paving and roofing applications partially offset by higher SIS sales into adhesive applications. Following a strong third quarter for Cariflex in which sales volume was up nearly 19% fourth quarter sales volume for Cariflex was down 12.5% to the fourth quarter of 2018. This lower sales volume is largely due to production constraints at our third-party toller. These production limitations have continued into the first quarter of 2020. Fourth quarter 2019 adjusted EBITDA for the Polymer segment was $29.5 million and this was down $14.8 million or 33.4% compared to the year-ago quarter.

As in the third quarter fourth quarter 2019 average margins for the Polymer segment remained stable compared to fourth quarter of 2018. Therefore the decline in adjusted EBITDA is principally the result of lower sales volume and higher costs associated with line maintenance and unfavorable fixed cost absorption. During the fourth quarter our plants in Wesseling and Mailiao underwent plant turnarounds. In the case of Wesseling this was a significant statutory turnaround that occurs approximately every five years. These turnarounds resulted in a $2.5 million increase in fixed costs compared to fourth quarter of 2018. The turnarounds and lower plant operating rates largely a function of more sluggish demand also resulted in lower fixed cost absorption which added an incremental $8.2 million of headwind. Adjusted gross profit was $801 per ton in the fourth quarter of 2019 compared to $1020 per ton in the fourth quarter of 2018. This decrease is due to the impact of turnarounds and FCA unfavorability.

Excluding these costs in the quarter adjusted gross profit would have been approximately $972 per ton. Likewise the higher cost had a dilutive effect on adjusted EBITDA margin which was 12.7% in the fourth quarter of 2019 compared to 16.2% in the year-ago quarter. Excluding the $11.3 million of turnaround costs and fixed cost absorption impact in the quarter the adjusted EBITDA margin for the quarter for the fourth quarter of 2019 would have been 17.5%. Now turning to full year results for our Polymer segment. Full year 2019 revenue for the Polymer segment was $1.05 billion down $168.5 million or 13.8% compared to 2018. With 2019 as a whole average unit margins for our Specialty Polymers performance products and Cariflex businesses were up modestly compared to 2018. As such the revenue decrease reflects lower average selling prices associated with lower average raw material costs as well as lower sales volume.

In addition the negative impact of changes in currency accounts of $25.7 million of revenue decrease and this was materially offset by the favorable foreign exchange impact on cost of sales of $19.2 million. In terms of sales volume Specialty Polymer sales volume was down 11.1% compared to 2018 with the primary drivers being lower sales into lubricant additive applications and weaker demand in China other Asia and Europe partially offset by higher innovation based sales volume in the United States. Performance products sales volume was down 7% compared to 2018. As we discussed this was largely due to the adverse impact of weather on paid and roofing volume in the second quarter of 2019 and the hangover effect of high customer inventories in the third quarter of 2019.

Cariflex volume was up 1.8% versus 2018 on higher latex sales into surgical glove applications. For the 12 months ended December 31 2019 the Polymer segment adjusted EBITDA was $188.2 million and this was down $26.6 million or 12.4% compared to 2018. The decline in Polymer segment adjusted EBITDA is largely attributable to sales volume in Specialty Polymers and performance products partially offset by a modest increase in Cariflex volume and favorable SG&A versus 2018. For the full year 2019 the Polymer segment adjusted EBITDA margin was 17.9% relatively unchanged versus the 17.6% in 2018. In addition on a full year basis adjusted gross profit was $969 per ton modestly below the $1017 per ton of 2018. I'll now turn to slide six for a review of the Chemical segment results beginning with the fourth quarter. Fourth quarter 2019 revenue for the Chemical segment was $176.1 million up $1.7 million compared to the $174.4 million in the fourth quarter of 2018. Sales volume was marginally higher than reported volume in the fourth quarter of 2018. The negative effective currency impacted revenue by $5.5 million and this was more than offset by the $5.9 million favorable impact of foreign exchange on our cost of sales.

Total Chemicals segment sales volume was up 2.3% compared to the fourth quarter of 2018. Sales volumes for Performance Chemicals was down 4.2% reflecting lower opportunistic sales of raw materials softer demand oilfield applications and lower sales in oil rosin. Adhesive sales volume was up 15.7% principally with higher sales of rosin upgrades compared to the fourth quarter of 2018 in which sales were constrained by the Panama City outage associated with Hurricane Michael. Sales volumes of tires was up 22.1% versus the fourth quarter of 2018 which reflects both the effect of the fourth quarter 2018 outage in our CST refinery in Panama City and improved market demand allowing us to leverage expanded capacity at our New York France plant. As a result in the third quarter as we discussed in the third quarter call during the third quarter of 2019 market pricing gum rosin fell 20% and gum turpentine declined 40%. Although pricing trends for gum rosin and gum turpentine stabilized in the fourth quarter albeit at lower levels lower market pricing translated into further margin pressure in our TOR and CSD chains. In addition fixed costs in the fourth quarter of 2019 were $1.4 million higher than the fourth quarter of 2018 due to plant maintenance and turnaround activity which also contributed to unfavorable fixed cost absorption of $6.7 million.

As a result adjusted EBITDA for the Chemical segment was $19.5 million in the fourth quarter down $21.3 million or 52.2% compared to fourth quarter of 2018 with a higher turnaround cost impact of less favorable cost absorption accounting for $8.1 million or 38% of the decrease of adjusted EBITDA. Fourth quarter 2019 adjusted EBITDA margin for the Chemical segment was 11.1% compared to 23.4% in the fourth quarter of 2018. Excluding the $8.4 million of fixed costs associated with turnarounds and FCA impact in the fourth quarter 2019 adjusted EBITDA margin would have been 15.8%. Looking at full year results for the Chemical segment revenue was $751.5 million down $38.6 million or 4.9% compared to full year 2018. The decline is principally a function of lower sales volume and lower pricing in and resin end markets.

Changes in foreign currency rates accounts for $21.3 million of the year-over-year revenue decline largely offset by $20.4 million favorable foreign exchange impact on our cost of sales. Overall Chemicals segment sales volume was down 7% in 2019. Performance Chemicals sales volume was down 10.9% on lower sales of raw materials and lower sales of TOR and TOFA in part due to constrained availability of our primary raw material CTL during the year. Adhesive sales volume was essentially flat compared to 2018 and tire sales volume was up 6.5% reflecting both the hurricane impact in 2018 and increased sales in 2019 as we leverage the higher capacity at our plant in New York France. For the full year 2019 Chemical segment adjusted EBITDA was $132.4 million down $30.8 million or 19% compared to 2018. The decrease reflects lower sales volume and higher raw material costs as well as lower pricing in our CST chain and TOR for chain. The full year 2019 adjusted EBITDA margin for the Chemical segment was 17.6% and this compares to 20.7% in 2018.

Now turning to consolidated results on slide seven. Consolidated revenue for the fourth quarter of 2019 was $408.5 million down $39.3 million versus the fourth quarter of 2018 primarily driven by lower sales volume in the Polymer segment. Changes in foreign currency accounted for $12.9 million of revenue decline more than offset by the $13.3 million favorable impact of foreign exchange on our cost of sales. Fourth quarter 2019 consolidated adjusted EBITDA was $49 million and this was down $36.1 million compared to the fourth quarter of 2018. As discussed in my segment commentary this decrease reflects approximately $19 million of discrete items in the fourth quarter driven by higher fixed costs of approximately $4 million principally associated with the aforementioned plant turnaround activity in both our Polymer and Chemical sites. In addition plant maintenance downtime lower operating rates resulted in less favorable absorption of fixed cost with the fourth quarter 2019 impact of approximately $15 million.

With these specific items in the fourth quarter adjusted EBITDA margin was 12%. Excluding the impact of these timing related costs the fourth quarter adjusted EBITDA margin would have been approximately 16.8%. Fourth quarter adjusted diluted loss was $0.06 per share and this compares to adjusted diluted earnings of $0.67 per share in the fourth quarter of 2018. The effective turnaround costs and less favorable fixed cost absorption in the fourth in the quarter equates to an impact of approximately $0.49 per share with the balance being primarily attributable to lower profitability in our Chemicals segment. For the full year 2019 consolidated revenue was $1.8 billion down $207.2 million compared to the $2 billion of 2018. As outlined in the segment commentary lower sales volume was a significant driver of the revenue decrease along with lower average selling prices associated with lower raw material costs in the polymer segment and lower rosin pricing and the impact of higher raw material costs in the Chemicals segment.

In addition the negative effect of foreign currency accounted for $47 million of the overall revenue decrease largely offset by the $39.6 million of favorable foreign exchange impact on our cost of sales. Consolidated adjusted EBITDA was $320.6 million for the year 2019. This was down $57.5 million compared to the $378 million of adjusted EBITDA in 2018. The consolidated adjusted EBITDA margin for 2019 was 17.8%. This compares to 18.8% in 2018. Full year 2019 adjusted EPS was $2.94 down $0.22 or 7% compared to the $3.16 in 2018. Drivers of the decrease included lower sales volume and lower profitability particularly in the Chemicals segment partially offset by lower interest expense lower SG&A costs and income taxes. Now turning to slide eight. On a full year basis we reduced consolidated debt by $176.5 million and consolidated net debt was reduced by $125.3 million excluding the effect of foreign currency and activity under our share repurchase authorization. This reduction falls within the guidance range we provided in our third quarter 2019 call of $120 million to $140 million.

Given our full year debt reduction consolidated net debt at year-end 2019 was $1.356 billion down $443 million from the $1.8 billion following the acquisition of Arizona Chemicals. As we now turn to slide nine I'll review our outlook for the year 2020. In light of the significant changes in market condition in the second half of 2019. In the third quarter of 2019 we took a more conservative approach in adjusting our guidance for the balance of 2019 to appropriately account for the risks we faced which was prudent as evidenced by the results in our report. We have taken a similar approach with our 2020 guidance to reflect current market dynamics but perhaps more importantly and in the context of significant near-term uncertainty guidance we believe to be achievable. As outlined in yesterday's press release we expect that our 2020 adjusted EBITDA will forward in the range of $200 million to $220 million.

This outlook does not include any potential incremental impact for the Corona virus beyond the first quarter of 2020. Overall we anticipate volume growth in 2020 but we expect increased margin pressure resulting from market conditions and intensified competitive dynamics. In our Polymer segment we expect that sales volume for Specialty Polymers and performance products will be up 5% relative to 2019. But we anticipate that a continuation of fourth quarter 2019 market conditions in China and broader Asia and disruptions associated with the coronavirus in the first quarter of 2020 will negatively affect full year 2020 adjusted EBITDA by approximately $10 million. In the case of our paving and roofing sales we have every reason to believe we'll experience a normal summer season for our paving and roofing business market and we expect paving volume to be up compared to 2019. However we believe increased competitive pressures on the price and margins will weight against the sales volume growth.

In our Specialty Polymer business we expect $5 million impact associated with incremental inventory reduction measures of a significant lubricant additive customer. Looking at our Chemical segment we expect to grow volume approximately 10% versus 2019 in which we experienced constrained in CTO supply. However we see continued pressure in our markets given the ready availability of low-cost C5 hydrocarbon tackifiers and in light of the decline in gum rosin pricing in the second half of last year and into 2020. Likewise with the decline in gum turpentine pricing we expect lower margins in our CST chain in 2020 assuming no recovery in gum rosin and gum turpentine pricing and no change in pricing or availability of hydrocarbon tackifiers in 2020. We expect the aggregate impact of these factors relative to 2019 to be approximately $30 million primarily in our CST chain and to a lesser extent in our TOR chain. In 2020 we expect transportation and logistics costs will increase by approximately $10 million. This reflects rate increases in the market including the impact of IMO 2020. Lastly we expect that Cariflex contributed approximately $54 million in our 2019 adjusted EBITDA. As we anticipated the Cariflex sale will close in the end of the first quarter of this year.

Our full year outlook only includes adjusted EBITDA contribution through the date of sale. Due to the previously mentioned production constraints at our third-party toller and based on expected timing for the closing of the sale we expect that Cariflex would contribute approximately $7 million for the first quarter of 2020 adjusted EBITDA. Given our adjusted EBITDA guidance for the year we expect that cash generated from business activities will provide a reduction of consolidated net debt of $40 million to $60 million excluding the effect of foreign currency or any share repurchases. This also excludes any debt reduction associated with proceeds from the sale of our Cariflex business.

And with this I'll now turn the call back to Kevin for his closing comments.

Kevin M. Fogarty -- President and Chief Executive Officer

Thank you Atanas. Now two months into 2020 as you just heard it remains very difficult to determine a time frame for improvement in global markets. Although we're past the Lunar New Year in China which is typically when we expect a robust surge in demand as Chinese businesses prepare for their new year. And while there has been some easing of tariffs that could provide positive momentum the disruption caused by the coronavirus as mass visibility into near-term demand fundamentals Indiana and broader Asia. Based on headlines alone there is now a growing concern that disruption from the coronavirus is expanding geographically impacting Southeast Asia and Europe with potential for the disruption and the duration to linger well into the second quarter or beyond.

Nonetheless as noted in yesterday's press release despite the near term uncertainty we believe the longer-term outlook for both Polymer and Chemical segment remains positive. The fundamental drivers for future volume growth for Kraton had not changed. China and broader Asia will remain important markets for Kraton as will the Americas and Greater Europe. And we continue to see potential further expansion in long-term growth markets such as India. As always innovation remains a key driver for our differentiated growth. For 2020 specifically as Atanas has just spoke to we are expecting solid volume growth across both our Chemical and Polymer segments. For our Chemical segment this expected growth will be made possible by additional CTO supply to Kraton relieving constraints we experienced in 2019.

In our Polymer segment we have every reason to believe we'll experience a normal summer season with for our paving and roofing business. And with regard to our specialty polymers business we expect to continue to have excellent commercial traction into markets to drive HSBC sales growth. Offsetting this positive momentum however our guidance for 2020 prudently assumes the margin pressures we experienced in the second half of 2019 will carry forward. And in certain markets given competitive activity associated with direct or indirect substitution extend beyond it experienced in 2019. Therefore as with 2019 when in response to market conditions in the second half of the year we took prude steps to manage cost and optimize working capital. We have further targeted approximately $20 million of additional broad-based productivity enhancement initiatives for 2020. Bottom line will not ignore market reality and the margin pressures in our business.

These actions are expected to be fully implemented through the second half of 2020. While a specific benefit in the second half of the year will likely be modest given associated implementation costs we expect to fully benefit from these productivity measures and be realized in 2021. Simply stated our current goal is to effectively manage through the current environment while continuing to position Kraton for the future. Now as many of you know a key aspect of our long-term growth expectations the evidence that our customers are facing increased and for sustainable products and solutions. We fundamentally believe Kraton is well positioned to participate as a solutions provider as the world demands a more sustainable circular future. And while many customers remain skeptics still opting to focus on the pure bottom line rather than investing for a sustainable competitive cost approach we see our role at Kraton as an enabler to their decision-making process.

We believe we are on the REIT side of this societal economic challenge and we will continue to provide compelling solutions and ever-increasing to a sustainable world whether due to decreased greenhouse gas emissions or increased plastic recycling. For example as you know our Chemicals segment is a provider of bio-based specialty Chemicals that provide exceptional value to customers seeking alternatives to hydrocarbon based products. Through our focus on innovation we have recently commercialized a new family of rosiest ERS based upon our patented revolution technology. We believe this novel offering will set the industry stand for color and stability and we see potential for favorable growth and expansion and applications that have historically been served by hydrocarbon based tackifiers. Investment is already under way to scale up our production capability in late 2020.

A second and more real-time example is in the European Union where I recently completed a second renewable energy Director for the period 2020 through 2030 so-called Red 2. Contained in this directive is a mandate to increase bio-based components including those from nonfood sources in the diesel and jet fuel pools within the member states. Without getting into all of the nuances of the regulations and the mandates let me just summarize by saying that we see opportunities for Kraton to participate in this rapidly evolving renewable market outlet. Likewise in a world rapidly moving single-use plastics and other non recycled materials toward a cyclical economy our polymer segment offers compelling alternatives to non recycled materials in many in applications including wire and cable medical and automotive. Furthermore we believe our Polymers can play a key role as a compatibilize in effect enabling the circular economy.

One of the largest issues facing the plastics recycling urgency in the world has had a co-mingle otherwise noncompatible Polymers such as PET with polyolefins. Here again Kraton represents an enabler to solve this technical hurdle and in doing so will drive our innovation appetite while solving a very real societal challenge. These are clear examples of how we at Kraton can make a positive difference in an otherwise resource contained future world. In closing and to reiterate our current priorities are to effectively manage through the current environment while continuing to position Kraton for the future. Specifically we remain fundamentally committed to debt reduction as we expect to generate cash through business operations to further reduce debt in 2020. Finally we expect the sale of the Cariflex business to occur before March 31. And as we said consistently the primary use of these sales proceeds will be in debt reduction.

With those comments we're happy to open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question from the line of Jim Sheehan from SunTrust Robinson Humphrey. your line is now open.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Morning, Could you talked about your expectations for capex in 2020? It looks like with demand uncertainty and some of the macro outlook being impacted by coronavirus that this is a difficult economic backdrop. Do you have any ability to flex down the capex? And if so when would you expect to do so what would be the timing of making such a decision?

Kevin M. Fogarty -- President and Chief Executive Officer

Well I think Mike I agree fully with your assessment of the need to make sure that as we spend shareholder capital and capital expenditures. We're doing so prudently taking into account market nations and outlook. That being said we balance the combination of the required obviously from the business continuity standpoint including things that are associated with regulatory requirements with the need to make sure that we've got the necessary assets in place to deliver on the growth agenda that we still continue to work diligently on. So do we have the ability to ramp down capital? Should we need to feel the need to do so? In any capital case we obviously have the ability to move some expenditures from one year to the next. We'll continue to monitor that. And to the extent we take down the number obviously we'll update as we progress through the year.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

And regarding your Taiwan polymer plant what was the utilization rate of that plant before the coronavirus impact started? I'm just wondering how you're ramping up that capacity?

Kevin M. Fogarty -- President and Chief Executive Officer

Well we don't talk about specific utilization rates of any of our facilities. We consider that to be pretty sensitive information for obvious reasons. But I will tell you obviously that the impact of China caused us to kind of slow the facility down as part of the comments that happens commented on with respect to the overall market demand scenario particularly in the second half of the year. But from an overall business planning standpoint the plant is ramping up ramping up as we had expected in our project economics.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay. And you talked about having more access to CTO supply in 2020. What's your outlook for CTO prices?

Kevin M. Fogarty -- President and Chief Executive Officer

Well I mean I think you kind of think about CTO prices in the context obviously of what your assumption would be with respect to the key energy inputs. So that's obviously the major driver of CTO value in the marketplace.

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Vincent Anderson from Stifel. Your line is now open.

Vincent Anderson -- Stifel -- Analyst

Yes, thanks. So where your shares are trading I can probably state your capital allocation priorities will be after deleveraging with Cariflex. But I'm thinking about the longer-term strategy for your portfolio your exposure to adhesives customers. Have you given any thought to looking downstream into pressure-sensitive and hot melt adhesives just to capture the incremental margin on your tackifier and SBC sales into that market?

Kevin M. Fogarty -- President and Chief Executive Officer

Well I mean look we're always looking at the overall value chain that we participate in. But the chances that you'll see Kraton step downstream is very low. I mean we see our role as being a material supplier to our customers. And at the end of the day when you're asking customers to work with you on innovation developments or in the case of what I talked about during the call which is think about their raw material portfolio of supply in the context of the sustainable offering Kraton now has available to them. We're not going to be a competitor to a customer.

Vincent Anderson -- Stifel -- Analyst

Fair enough. And then just with regards to your 2020 outlook you have some pretty aggressive volume growth assumptions despite not anticipating much of a demand recovery. So if I try to understand that strategy a bit better are you attempting to regain market share in any particular channel where you've given up some? Or is this mostly motivated by just getting your plants back up to a better operating rate?

Kevin M. Fogarty -- President and Chief Executive Officer

What I would say is some of it is structural. The fact of the matter is that we were constrained on for example CTO supply last year. And we know for various factors we called out throughout the year. But the fact of the matter is is that we're taking on additional supply that was part of our original arrangement with our strategic raw material supplier. And so if you think about the CTO markets don't think of it in terms of additional CTO supply think of it in terms of additional CTO supply to Kraton. And that means that that puts the responsibility in us obviously to look at where we're positioning the output of the CTO fractions in the marketplace to be as disruptive as we can but we thought it would be prudent as we called out for you in our guidance we thought it would be prudent to assume that not much recovery and in some cases a little bit more erosion in the overall market scenario.

But it's not a gain share kind of strategy as much as it is a structural change in supply for to when it comes to the polymer side of our business. Again we're seeing volume growth. But here we're presuming a relatively normal paving year as an example obviously we thought we were dealing with some weather challenges in the first half of last year and there's no reason for us to believe that's the case this year. In fact if anything the weather fundamentals for example in Europe right now look positive relative to when we would have expected to start the season.

Vincent Anderson -- Stifel -- Analyst

I appreciate. That's very helpful. And on the topic of paving if I'm reading India's fiscal '20 budget correctly it looks like they've issued some pretty favorable increases in their highway paving. But can you just remind us of your exposure in that market and how you're positioned there? Any conversations that you've had recently since the budget has been released.

Kevin M. Fogarty -- President and Chief Executive Officer

So I'm glad you raised India. I mean we have been working hard on India for about five years now. And obviously whenever you enter a market and a relatively unknown you've got to kind of prove yourself and we spent a lot of time developing both people in the ground capability and most importantly seeking the regulatory approvals we need to make sure our material is in the marketplace. So for example I mean when you think about all the new having infrastructure we absolutely see what you're speaking to in terms of India's commitment to do so. Our technology that we've talked about Hima which is the high-modified asphalt technology we think is absolutely suited for the end market that's building new airports and building new roads. And we've got these materials approved in India and specified in and are now real-time being consumed in the market.

Vincent Anderson -- Stifel -- Analyst

Excellent, thank you.

Operator

Thank you. The next question is from the line of John Roberts UBS. Your line is now open.

John Roberts -- UBS -- Analyst

Thank you, Your guide for coronavirus impact doesn't go beyond March but it sure sounds like you're expecting some impact beyond March. Could you just go through some of the key Asian exposures and particularly in Specialty Polymers? Is it a volume issue? Or is it pricing concern? Because I'm sure the low end of the market is being impacted. I don't know if leaking into that your higher-end products there in terms of pricing pressure.

Kevin M. Fogarty -- President and Chief Executive Officer

The thing about now what's happening particularly when you think about China and even other parts of Asia now it's not like a trading down to a lower quality material in the marketplace. The marketplace is effectively shut down. Material is not moving. Customers are not ordering. They're not even at work in some cases. So it's literally a standstill approach. And so you're correct in our assumption we're only in our guide and taking into account what we know and what we're able to see through the better part of two months into the calendar year. So yes that guidance is based on what we believe for the first three months of the year. And beyond that it's impossible for us to forecast. I'm seeing the same information. I'm sure you are.

John Roberts -- UBS -- Analyst

And is there a secondary effect coming from the latex market in Asia being impacted by China's issues because they can't slow down their production or adjust?

H. Gene Shiels -- Director of Investor Relations

Are you talking about Latexes and Cariflex?

John Roberts -- UBS -- Analyst

No I'm talking about natural based Polymer products and so forth that sometimes have some downward pressure on your markets.

Kevin M. Fogarty -- President and Chief Executive Officer

I don't think I would differentiate between the natural or the synthetic in this case.

John Roberts -- UBS -- Analyst

Okay, thank you.

Operator

Thank you. Our next question is from the line of Chris Kapsch from Loop Capital Markets. Your line is now open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah, good morning. If I look at the guidance range of 200 to 220 I guess if the coronavirus tend down slows over beyond March that's maybe a potential source pushing that. And today results were at the low end of the range. Is there other variables that you see that could add downward risk to that range? And then what are some of the developments that you anticipate that could push toward the high end of the range at this point?

Kevin M. Fogarty -- President and Chief Executive Officer

Well clearly I mean what we try to do this year with the guidance is give you as much visibility as we hope you can appreciate into explaining that guidance relative to the 2019 performance. So you kind of see what the drivers are. And then clearly if our assumptions on those drivers are incorrect in some cases then it would drive down toward the lower end of the range. On the other hand I think some of the questions here were the first question at least was focused in on it with respect to the margin assumptions in that guidance. In a marketplace like this it would be pretty difficult for Kraton to forecast that we're going to take margins where they ended 2019 and enter 2020 and just presume that conditions would improve and those margins would expand. To the extent that happens obviously that would drive us to the upper end of the range clearly.

And if I might add too given Kraton as you know us I mean we are and we consider ourselves to be at the end of the day a leader in price setting in the marketplace because of our practices the way in which we go to market the way in which we lead and are not afraid to lead when it comes to making sure that our price right strategy is applied consistently in the marketplace. So when raw materials move we move with it. At the end of the day when market conditions present opportunity to increase prices we're going to do that. And I'll give you an example right now. I mean in my I think in our press release last night we talked about for the first time in several years since we've owned the chemical business we're starting to see the vegetable oil family and the other fatty acid families move up and a lot of that's driven by what's happening in the bio-diesel world. This is a very positive trend obviously for our fatty acid side of the business and we're watching that very closely.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. And then just on Kevin on your response to that as you talk about the margin profile exiting fourth quarter interim. This year one of the drags on the margins was the absorption the unabsorbed overhead so the fixed cost absorption FCA as you refer to it. And so I'm just wondering what given that you have expectations for volume recovery 5% and 10% respectively for the two segments what is the assumption for FCA for the full year baked into that guidance range.

Kevin M. Fogarty -- President and Chief Executive Officer

Yes. So we're not assuming obviously. We're going to have that fixed cost absorption drag in 2020.

Chris Kapsch -- Loop Capital Markets -- Analyst

I'm sorry you're saying that you're...

Kevin M. Fogarty -- President and Chief Executive Officer

Not assuming. We assume we will not have that drag.

Chris Kapsch -- Loop Capital Markets -- Analyst

Got it. And then if you could you touched on some of the innovation that you're enthusiastic about some of this is long cycle commercial development. And I'm just wondering if at this point you could in any way to put some parameters around the TAM associated with the one Adhesives project and then maybe the sustainable Polymers recyclable Polymers opportunity in automotive anyway to put some parameters on what that opportunity is and over what time?

Kevin M. Fogarty -- President and Chief Executive Officer

We work on yes sure. It's a good question. We work on these projects because we do think that if they're successful when they're successful and when they're fully implemented in the marketplace obviously we'll find ourselves having these innovations being meaningful to our overall sales mix. So they're not insignificant projects in their own right. Now if your question is more about what's the impact they're going to have this year well clearly I mean on the one hand I can tell you that in both examples I cited meaning the example of the revolution new rosin material and in the case of using our Polymers for compatibilization and otherwise uncompatible comingle Polymers these are real commercial materials today. Customers are testing in some cases customers are embracing the technology and we certainly expect them to be commercial this year. But really at the end of the day before they're meaningful you're talking probably about two years.

Chris Kapsch -- Loop Capital Markets -- Analyst

Okay, thank you.

Operator

Thank you. Our next question is from the line of Roger Spitz from Bank of America. Your line is now open.

Antonio -- Bank of America -- Analyst

Hi, good morning. This is Antonio[Phonetic] for Roger. So I just have a question in terms of the pricing level of CTO FTEs or any other products you've discussed in the past in China. I guess how the pricing has changed in the past quarter? And how does that compare quarter-over-quarter year-over-year or from the peak Charles perspective?

Kevin M. Fogarty -- President and Chief Executive Officer

I want to make sure I answer your question appropriately. If you're asking about whether or not we're seeing as a result of obviously China slowing if not in standstill right now decline in market pricing. Generally speaking there's not enough commercial activity to even answer the question. But that being said you specifically mentioned to CTO is not produced in China. If anything from time to time CTL might get consumed in China. But the interesting nuance of our pine chemical business is the production for CTO and therefore the production that we employ to fractionate that CTO and make it into components in U.S. and Europe.

Operator

Thank you. The next question is from the line of James Finnerty from Citigroup. Your line is now open.

James Finnerty -- Citigroup -- Analyst

Hi, good morning, Just on the Cariflex sale expected to close this quarter what's the tax impact again on the sale? And should we assume that the vast majority of the proceeds would be used for debt reduction? And would that be probably the term loan?

Atanas H. Atanasov -- Senior Vice President and Chief Financial Officer

Yes. Thank you for your question. Our assumption as we've previously indicated with respect to taxes we anticipate minimum tax leakage. Obviously that will get finalized 30 to 60 days after we close the transaction. But we continue to anticipate minimum tax leakage with respect to the proceeds as we've indicated previously principally they go down to pay down debt. We have a couple of different options that we're currently discussing internally. Obviously we have the option to pay down our term loans. We also have our notes. But as I said we have not made a final decision. Suffice to say is that debt was going to go down significantly.

James Finnerty -- Citigroup -- Analyst

Okay. So there's flexibility in terms of using the proceeds to various parts of the capital structure?

Atanas H. Atanasov -- Senior Vice President and Chief Financial Officer

Yes. Got it. Correct.

James Finnerty -- Citigroup -- Analyst

Okay. Thanks very much.

Operator

Thank you. The next question is from the line of Vincent Anderson from Stifel. your line is now open.

Vincent Anderson -- Stifel -- Analyst

Yeah, thanks, Maria. Again, I was just curious roughly how much of your U.S.-based TOFA and TOFA derivatives do you send to the export market?

Kevin M. Fogarty -- President and Chief Executive Officer

I'm just thinking aloud here. Our we shipped some CTO across the pond to our European CTO fractionation centers in Scandinavia. But in terms of the actual output of product it's very little. I guess one example would be where we're making some roseter and we plan to ship them to our manufacturing facility of manufactured dispersions but it's a relatively small volume.

Vincent Anderson -- Stifel -- Analyst

So TOFA it mostly stays in the U.S. and then so are you supplying the end market?

Kevin M. Fogarty -- President and Chief Executive Officer

Absolutely.

Atanas H. Atanasov -- Senior Vice President and Chief Financial Officer

Absolutely. Yes.

Vincent Anderson -- Stifel -- Analyst

Okay. And then just really quick and I apologize if I missed this in the prepared remarks. But did you touch on Finland's pulp and paper labor issues? Was that resolved quickly enough to prevent any impact on your CTO supply there?

Kevin M. Fogarty -- President and Chief Executive Officer

It did not have an impact on us because we're in a new position which is what I just referenced about our ability and we continuously do always we moved some of our CTO to Europe. So it did not impact us. It did have an impact in the marketplace. There were some I think some supply shortages that were requiring some allocations if not force majeure declarations by some of our competitors we were obviously a unique position to fill that gap.

Vincent Anderson -- Stifel -- Analyst

Okay. So those exports of tower course of business?

H. Gene Shiels -- Director of Investor Relations

Yes. But I would also suggest to you that at the end of the day that we see well it's no secret. We see our ability to export more of this additional CTO we have this year. We're in a unique situation in the marketplace that because of that excess CTO and the fact that we got fractionation capacity in Europe. We intend to utilize that capacity that way.

Vincent Anderson -- Stifel -- Analyst

I think that's very helpful. Thank you. That's all for me.

Operator

Thank you. Our next question from the line of Chris Kapsch from Loop Capital Market. Your line is now open.

Chris Kapsch -- Loop Capital Market -- Analyst

Yeah, A couple of follow-ups. One the is the increased availability of CTO you have this year is that alone address the fixed cost absorption negative variance that you experienced in 2019?

Kevin M. Fogarty -- President and Chief Executive Officer

Well to the extent we're producing more this year than we produced last year then it will have a positive effect from a fixed cost and chart standpoint because we're not increasing our fixed cost.

Chris Kapsch -- Loop Capital Market -- Analyst

So I mean I'm saying will that alone basically alleviate the entire drag from the unabsorbed fixed costs last year?

Kevin M. Fogarty -- President and Chief Executive Officer

I want to ask Atanas this one.

Atanas H. Atanasov -- Senior Vice President and Chief Financial Officer

That will be a portion of that. But I would remind you that in 2019 part of the fixed cost absorption the fixed cost absorption issue that we had was really more of a fourth quarter issue which is primarily timing and we made that very very clear. One of those was a significant portion of that was related to vessel which is mandatorily is mandatory happens approximately every five years. But again the fixed cost absorption that you saw in the year 2019 was mostly a fourth quarter issue.

Chris Kapsch -- Loop Capital Market -- Analyst

Okay. And then just then one question about the pine Chemicals because one of the since the Arizona deal several years ago now there was you might have at one point or a couple of points maybe over the last few years we might have thought that the conditions we're troughing and now obviously what circumstances influencing the business. But with the downdraft in CST prices which were elevated so not normalized or certainly not trough. There's a downdraft in margin profile of the business. Any thoughts on the overall industry normalizing obviously there's not visibility in the first half of this year it sounds like but maybe beyond the first half do we start to think about some sort of normalization as we exit 2020 into 2021? Any thoughts on that?

Kevin M. Fogarty -- President and Chief Executive Officer

Look let's talk let's take it's a very very fair question. Let's take them as three parts. We have our fatty acid side. We have our TOR or rosin side and then we have our turpentine side. That's kind of the big three buckets of our pine chemical business. Taking an order from a fatty acid standpoint from our perspective momentum is good. I told you about the backdrop in terms of vegetable oil and other fatty acids driven by biodiesel as well as our own interest potentially in participating in biodiesel in Europe as a new market of it. So the momentum there is good. When it comes to our CST chain the turpentine chain at the end of the day as I described it there was a two 2.5-year of what I would call supply driven outages that led to market expansion of the margin profile of that product line that corrected it corrected like very fast in the third early in the third quarter. And really we're back to normal. We're back to the kind of normal level of profitability that existed prior to that run up. So if anything at the end of the day that's stable if not stable with perhaps a positive outlook in the context of just the growth that underlies that attractive product portfolio. Then you come to the TOR business.

And the TOR business is one that we've admittingly been and have had the most difficult and trying to understand the driver and the relationship between the whole aquifer side of the equation. The willingness on the part of the tackifier side of the equation to pass-through fundamental raw material costs and what that does to the substitute economics and the purchase price our selling prices. That's been a tough one to forecast. As you well know but today as we sit as Atanas has called out we're not expecting to see a lot more decline in the rosin chain in 2020. And we've kind of used the jump-off point from 2019 as a proxy for our 2020 plan. And as I sit right now almost two months of the year I think we're happy with that assumption.

Chris Kapsch -- Loop Capital Market -- Analyst

Thanks to that, Kevin.

Operator

Thank you. We no longer have any questions on queue

H. Gene Shiels -- Director of Investor Relations

Thank you Annie. And we'd like to thank our participants this morning there will be a replay of this call available later this morning. For those willing to or wanting to access the replay the number is one (800) 688-2171. That concludes our prepared remarks. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

H. Gene Shiels -- Director of Investor Relations

Kevin M. Fogarty -- President and Chief Executive Officer

Atanas H. Atanasov -- Senior Vice President and Chief Financial Officer

Jim Sheehan -- SunTrust Robinson Humphrey -- Analyst

Vincent Anderson -- Stifel -- Analyst

John Roberts -- UBS -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

Antonio -- Bank of America -- Analyst

James Finnerty -- Citigroup -- Analyst

Chris Kapsch -- Loop Capital Market -- Analyst

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