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Kraton Corp (NYSE:KRA)
Q3 2020 Earnings Call
Oct 29, 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 Third Quarter 2020 Earnings Conference Call. My name is Kirby I'll be your conference facilitator for today. At this time, all participants are in listen-only mode. Following the company's prepared remarks, there will be a question-and-answer period. [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.

Gene Shiels -- Director of Investor Relations

Thank you, Kirby. Good morning, and welcome to the Kraton Corporation Third Quarter 2020 Earnings Call. With me on the call this morning are Kevin Fogarty, Kraton's President and Chief Executive Officer, and Atanas Atanasov, Kraton's Executive Vice President and Chief Financial Officer. A copy of the third quarter news release and the related presentation material we will review this morning is available in the Investor Relations section of our website. And before we review the results for the third quarter of 2020, I'd like to draw your attention to the disclaimers on forward-looking information and the use of non-GAAP measures included in our 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 may cause Kraton's actual performance to be significantly different from the expectations stated or implied by any forward-looking statements we make today. Our 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. Regarding 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 press release and in the appendix of the presentation we review this morning. Following our prepared remarks, 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

Thanks, Gene. Good morning, everyone. For the third quarter overall, we continue to effectively manage our business despite COVID-19 having an ongoing effect on global demand fundamentals. During the quarter, we benefited once again from our diverse end market exposure and specifically from improved demand fundamentals in delivering solid operational and financial results. With COVID-19 continuing to have an impact across the globe, the health and safety of our employees, customers and the communities in which we operate remained our top priority. During the quarter, many of our employees continued to work remotely, while our manufacturing facilities operated safely and efficiently, including undergoing planned maintenance and turnaround activities we referenced in our second quarter earnings call. In addition, we did not experience any significant disruption in logistics or in our supply chain within the quarter.

From a high level, improved demand in the third quarter, in conjunction with the benefit of our diverse end market exposure, contributed to solid volume growth in both our Polymer and Chemical segments. Geographically, demand in China and broader Asia continued to improve in the third quarter, and we saw sequential improvement in North America for consumer durables, medical and automotive applications in our Specialty Polymers business. In our Performance Products business, we saw solid demand in paving and roofing applications. While in our Chemical segment, we experienced a notable sequential rebound in demand across all major product lines with the exception of oilfield where weaker demand conditions continued.

In the third quarter, as experienced over the course of the year, we have seen continued stability in unit margins in both our Polymer and Chemical segments. However, as mentioned in the third quarter, we did incur costs associated with the timing of maintenance and turnaround activities and our financial results also reflect the fixed cost absorption impact associated with the inventory drawdown, both of which we anticipated in our second quarter earnings call. Cash generation was favorable in the third quarter, providing for a $75.5 million reduction in consolidated debt and a $25.8 million reduction in consolidated net debt, excluding the effect of foreign currency. However, we have maintained ample liquidity with $205 million of availability on our ABL facility and approximately $63 million of cash at quarter end.

In terms of execution on key priorities, while we continue to reduce outstanding debt during the third quarter, debt reduction itself remains a primary objective. We expect further cash generation in the fourth quarter that should provide for additional debt reduction this year as we continue to target a consolidated net debt ratio of approximately three turns. During the quarter, we also maintained our focus on operational efficiency, including the implementation of various cost reduction initiatives that we believe will result in approximately $20 million of run rate cost savings by year's end. And perhaps most importantly, with an eye to the future, we continue to position Kraton to benefit from organic growth opportunities, particularly as we work to leverage our sustainable innovation portfolio, including our recently introduced REvolution family of Rosin Esters formulations, our CirKular polymer grades, and most recently our BIAXAM sulfonated polymers. I'll provide an update on these platforms later in the call. For now, at this point, I'm going to turn the call over to our Chief Financial Officer, Atanas Atanasov, who will provide more specifics on our financial results for the third quarter. Atanas?

Atanas H. Atanasov -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Kevin, and good morning, everyone. As we turn to Slide 5, I'll review the financial highlights for the third quarter. The demand improvement and margin stability Kevin noted were key contributors to strong financial results for the third quarter. And as a result, we reported consolidated adjusted EBITDA of $60.3 million. While this was down $19.8 million compared to the third quarter of '19, a significant factor in the decrease was the sale of our Cariflex business in March of 2020. In addition, the decrease reflects lower average selling prices in our CST chain and for Rosin Esters, which were largely offset by higher Chemical segment sales volume. Excluding Cariflex, consolidated adjusted EBITDA would have been down $6 million compared to the third quarter of 2019. This $6 million decline is attributable to higher fixed costs associated with timing of maintenance and turnaround activities postponed from the first half of the year due to COVID-19 as we indicated in our second quarter earnings call, and also due to the lower absorption of fixed costs associated with an expected drawdown of inventory we had built in the first half of the year and we also referenced during our second quarter 2020 earnings call. Overall, we're pleased with the third quarter results. On a consolidated basis, adjusted EBITDA margin was 16.1% compared to 19.2% in the third quarter of '19. Here again, the decrease in margin reflects the factors I just mentioned, the sale of Cariflex as well as higher fixed costs associated with the timing of maintenance and turnarounds and less favorable fixed cost absorption associated with inventory liquidation.

Looking at segment results, it was a solid quarter for the Polymer segment, where third quarter adjusted EBITDA was $31.9 million. While this was down $18.4 million compared to the third quarter of '19, the decrease is largely associated with the sale of the Cariflex business. Excluding Cariflex, adjusted EBITDA would have been down only $4.6 million with the decrease largely a function of timing of maintenance and turnaround activities and the fixed cost absorption impact associated with the planned inventory draw down I referenced earlier. Third quarter 2020 results for the Chemical segment showed significant sequential improvement, and adjusted EBITDA was $28.3 million, down only $1.4 million compared to the third quarter of '19, principally due to lower pricing of our CST chain following the decline in gum turpentine prices in the second half of last year, and a lower pricing on Rosin Esters, largely offset by higher sales volume, which was up 18.7% compared to the third quarter of 2019. During the third quarter, we reduced consolidated net debt, excluding the effect of foreign currency by $25.8 million. Our liquidity position remains strong with $62.8 million of cash at quarter end and $205 million of availability under our ABL facility.

I'll now move to Slide six for a review of the Polymer segment results. Polymer segment revenue for the third quarter of 2020 was $198.5 million, and this was down $63.1 million compared to the third quarter of 2019. The revenue decrease reflects the sale of our Cariflex business and lower average selling prices associated with lower average raw material costs, partially offset by the revenue contribution associated with higher sales volumes in both Specialty Polymers and Performance Products compared to the year ago quarter. As reported, Polymer segment sales volume was down less than 1% compared to the third quarter of 2019. However, excluding Cariflex, sales volume would have been up 8.4%. In our Specialty Polymers business, sales volume showed considerable sequential improvement, and sales volume in the third quarter was up 23% compared to the third quarter of 2019. This increase reflects higher sales into lubricant additives due to timing as well as demand recovery in China and broader Asia. Performance Product sales volume was up 3.3% in the third quarter, and this principally reflects higher sales volumes into paving and roofing applications.

Third quarter adjusted EBITDA for the Polymer segment was $31.9 million versus $50.3 million in the third quarter of 2019. However, excluding Cariflex, adjusted EBITDA would have been down $4.6 million compared to the third quarter of 2019, with a decrease largely due to higher fixed costs including the timing associated with maintenance and turnarounds and lower absorption of fixed costs associated with inventory liquidation in the third quarter of the year. As a result, the third quarter 2020 adjusted EBITDA margin was 16.1% compared to 19.2% in the year ago quarter, which did include the results of Cariflex and the lower relative fixed costs, including the timing of costs associated with the maintenance and turnarounds. These largely timing factors also impact third quarter adjusted gross profit, which was $733 per ton compared to $947 per ton in the year ago quarter. However, on a year-to-date basis, adjusted gross profit is $947 per ton, which we believe is a more normalized view, given the impact of fixed costs and timing of maintenance and turnaround activities in the third quarter.

On a year-to-date basis, the Polymer segment revenue of $642.8 million was down $177.7 million versus the first nine months of 2019, primarily reflecting the disposition of Cariflex and lower average sales prices associated with lower average raw material costs. Specialty Polymers sales volume was up 1.9% for the first nine months of 2020, with higher sales volume in Asia, partially offset by the impact of COVID-19 on demand in North America, particularly in the second quarter. Performance Product sales volume was also up nearly 1% on a year-to-date basis on higher sales into adhesive applications and stronger paving and roofing demand. As a result, the year-to-date adjusted EBITDA for the Polymer segment was $136.9 million with an associated margin of 21.3% compared to 19.3% for the same period last year. Excluding Cariflex, adjusted EBITDA would have been up 5.5% compared to the first nine months of 2019. As noted earlier, our market diversity has led to stability in our Polymer segment, even in current market conditions. Now looking at the results of the Chemicals segment on Slide 7, our Chemical segment revenue of $174.9 million for the third quarter of 2020 was down $7.7 million compared to the third quarter of 2019. The modest decrease reflects lower average selling prices in the CST chain following the decrease in gum turpentine pricing in the second half of last year from the record levels in the first half of 2019 and lower average prices for Rosin Esters, largely offset by the benefit of higher sales volume. Overall, third quarter sales volume was up 18.7% versus the third quarter of 2019 despite demand headwinds associated with COVID-19.

Performance Chemicals sales volume was up 25.7% with higher opportunistic sales of raw materials and due to timing of purchases by significant customers, combined with improved adhesive demand, which was up 5.8% versus the third quarter of 2019, reflecting solid demand trends in the current environment. In our cars business, we saw sequential demand improvement as customer capacity that was idled in the second quarter due to COVID, resumed production. With this improved demand, tires volume was therefore up 14.2% compared to the third quarter of 2019. Adjusted EBITDA for the Chemicals segment was $28.3 million in the third quarter, down $1.4 million compared to the third quarter of '19 with higher sales volume across all business units, largely offsetting lower average selling prices in the CST chain and for Rosin Esters. The adjusted EBITDA margin of 16.2% for the third quarter was in line with the 16.3% posted in the third quarter of 2019.

On a year-to-date basis, revenue for the Chemical segment was down $61.8 million compared to the first nine months of 2019. Sales volume was up 2.4% versus the first nine months of '19. The decrease was driven primarily by lower average sales prices in the CST chain and for Rosin Esters as well as lower sales volume in TOFA and for TOFA upgrades. For the first nine months of 2020, sales volume for Performance Chemicals was up 3.9% on high opportunistic sales of raw materials, despite lower sales into oilfield applications and the overall demand impact of COVID-19. Adhesive volume was up 0.5% year-to-date and volume for tires was down 8.5% due to contraction in demand in the second quarter of this year with tire production off-line due to COVID-19. Chemicals segment adjusted EBITDA for the first nine months of 2020 was $70.7 million compared to $112.9 million for the comparable period last year. The decrease was driven by lower selling prices in the CST and TOR chains, a decline in TOFA and derivative sales volume due to COVID-19, and weakness in oilfield markets especially during the second quarter of this year, partially offset by growth in Rosin Esters and higher opportunistic raw material sales volumes.

Slide eight provides a summary of consolidated results for the third quarter and year-to-date. For the first nine months of 2020, adjusted EBITDA was $207.7 million, a decrease of $63.9 million compared to the first nine months of last year. As covered in my segment discussion, the decrease is primarily due to the sale of our Cariflex business, lower margins in the CST and TOR chains, and factors such as weaker demand in automotive and oilfield applications and the impact of COVID-19, partially offset by higher sales volumes. As a result, the consolidated adjusted EBITDA margin for the first nine months of 2020 was 18%, and this compares to 19.5% for the first nine months of last year, which included Cariflex and the higher overall CST and TOR margins in the Chemicals segment. For the third quarter of 2020, we reported adjusted diluted earnings of $0.49 per share, and this compares to $0.52 per share for the third quarter of 2019. On a year-to-date basis, we reported adjusted diluted earnings of $1.05 per share, and this compares to $2.99 per share for the first nine months of 2019. The adjusted EPS decline is principally the result of the sale of our Cariflex business, with the balance largely due to the decline in CST and rosin prices.

I do want to comment on one specific item noted in yesterday's earnings release. In conjunction with our annual long-term planning process, we performed an interim impairment test of goodwill as of September 30th. As part of the impairment test, we took into consideration factors including ongoing impact of low-cost hydrocarbon tackifiers in our Adhesives business, the current level of pricing and margins in our CST chain following the decrease in gum turpentine prices in the second half of 2019, and the demand impact associated with COVID-19. As a result, we have recorded a noncash impairment charge of $400 million for our Chemicals segment. Despite the impairment charge, we believe the longer-term outlook for the Chemicals segment is favorable. As noted previously, unit margins have been stable throughout 2020, and we have seen volume growth this year despite overall market conditions. As we turn to Slide 9, I want to highlight the progress we have made this year in strengthening our balance sheet. During the third quarter, we reduced consolidated net debt by $25.8 million and by approximately $500 million on a year-to-date basis, both amounts excluding the effects of foreign currency. We expect further cash generation and debt reduction in the fourth quarter of this year as we continue to progress toward our target consolidated net debt leverage of approximately 3 times.

I will now turn the call back to Kevin for his closing comments.

Kevin M. Fogarty -- President and Chief Executive Officer

Thank you, Atanas. Now if we could, let's move onto Slide 10 where we provide an update on our current business outlook by geography and end-use application. As noted, we saw improved demand in a number of areas during the third quarter. In our view, the demand picture in China and broader Asia continued to improve in the third quarter, while Europe as a whole remained stable. Importantly, following some weakness in North America in the second quarter, which we largely attribute to COVID-19, we saw demand recovery in the third quarter and we currently anticipate further near-term improvement. Specifically, we believe near-term demand in adhesives and packaging applications remain stable, while consumer durables as well as automotive applications are expected to show more improvement in demand, supported by current market trends.

Demand in medical, personal care and hygiene markets has remained favorable, as has demand in infrastructure markets such as paving and roofing. Specifically, in our Polymer segment, in the third quarter we saw a rebound in demand in consumer durable applications, following a weaker second quarter on a more global basis. In addition, with the resumption of production at a number of tire manufacturing plants around the world as well as positive trends in automotive production in general, our outlook for automotive and tires has improved relative to the second quarter. We believe our portfolio and end market diversification, and specifically, our exposure to market segments that are particularly relevant in today's world, have contributed to our favorable results thus far in 2020. And while we remain mindful of the possibility that COVID-19 could continue to adversely impact near-term demand fundamentals, based upon the improved demand trends we saw in the third quarter and in light of what we have seen so far in the fourth quarter, we remain optimistic about the outlook for the balance of the year and into 2021. As mentioned, unit margins have remained stable for the first nine months of the year, and on a year-to-date basis, our sales volume trends are positive. This is a solid foundation for us to build upon in 2021.

As noted, our balance sheet continues to improve with further debt reduction and we are implementing cost savings that should also contribute favorably to our results in 2021. As we see the potential for continued volume recovery in 2021, we are energized by the prospect of further sustainable innovation-based organic growth at Kraton, which we believe may benefit from a number of recent product rollouts, specifically our REvolution Rosin Ester formulations and our CirKular family of polymers. As I mentioned in late July, we are encouraged by the reception we have seen for REvolution. We believe it is truly differentiated. It is a truly differentiated product that will set the standard for Rosin Esters. CirKular, regarding CirKular, we are hosting a series of technical webinars highlighting this technology, and have been very pleased with the interest level and participation of various industry players. We will continue to position the offerings for the recycling industry to provide our customers with tailored solutions for their particular applications. In a world driven by the need to advance a circular economy, we believe these two innovations will make a very positive difference.

I would like now to turn to a topic that I'm sure is very much in your minds and one that continues to garner significant interest in light of today's worldwide health challenges. In early September, we announced that we were seeking approval for our novel BIAXAM sulfonated polymer, specifically for use as a self-sterilizing antimicrobial. BIAXIM is part of a family of sulfonated polymers that Kraton has made and sold in other specific end markets over the years. These sulfonated polymers have unique characteristics, and a number of highly regarded organizations, including North Carolina State University, Boston University and the University of Texas Medical Branch in Galveston, have demonstrated the effectiveness of BIAXIM against SARS-COVID-2, MRSA and other microbes. We believe BIAXIM is unique given its both efficacy and its durability relative to other antimicrobial technologies in the marketplace. While the majority, if not all, of current antimicrobial technologies have a chemical basis as the active ingredient, BIAXIM is an otherwise inert polymer. We have the existing technology today to deploy BIAXIM and other sulfonated polymers in membrane form or in solvent-based coatings and sprays. While we are able to sell our sulfonated polymers today for other applications, I should note we are currently precluded from marketing or selling by exam for antimicrobial applications in the United States until we complete the required regulatory processes, including with the Environmental Protection Agency or EPA. We are working through these processes now, which require that we submit data to demonstrate efficacy, durability and safety, among other criteria. I'm sure you can appreciate that I can't speculate on the timeline for possible approval. As many of you may know, in terms of the EPA approval, there is a normal approval process, broadly referred to as the Section 3, and there is a possibility of approval under Section 18 or emergency exemption that could provide an expedited path for approval for specific applications. As you would expect, approval under Section 18 is of interest to Kraton. In parallel with our efforts to seek approval from the EPA, we are working outside of the United States, focusing on jurisdictions in which we believe there is significant interest in market potential and a clear regulatory path for approval in antimicrobial applications.

A question on many of your minds is likely how big is the potential market for BIAXIM? The work we have done to date suggests the antimicrobial market in 2020 is substantially larger than it was in 2019. We believe the potential applications for BIAXIM are extensive, but we believe we can -- because we believe we can demonstrate its efficacy and durability. But to comment on when BIAXIM might be commercial or if or when it could be material to Kraton's overall results would require speculation on the regulatory approval itself. Given the potential we see for BIAXIM, we are bringing significant resources to bear on market assessment and in working through necessary regulatory approvals. However, I do want to state that as an existing technology within Kraton today, we have production capacity available for the base HSBC polymer that BIAXIM is based upon. We do not anticipate any significant capital requirements that are going to be a robust level of demand if and when we receive regulatory approvals. And lastly, we feel our patent portfolio and our intellectual property position is quite strong around the use of sulfonated polymers and antimicrobial applications. We look forward to providing you with real-time updates on BIAXIM when we are in a position to do so.

And so with those comments, we're now happy to open the call up for some questions.

Questions and Answers:

Operator

Thank you. We will begin the question-and-answer portion. [Operator Instructions] Our first question is from the line of John Roberts of UBS. Your line is open.

John Roberts -- UBS -- Analyst

Thank you very much. Sorry, I was on mute. How much of the paving market is linked to either state budgets or gasoline taxes that's there? Obviously, both gasoline taxes and state budgets are going to have kind of a major shortfall as we get into next spring, that's there. So, is that expected to have any effect on it?

Kevin M. Fogarty -- President and Chief Executive Officer

Well, I think at the end of the day, the state budgets, some of the state budgets receive a lot of their funding federally from and through the gasoline tax. And I don't know that we are in a position to comment on how it's going to impact potentially the funding of those budgets next year, given I'm presuming you're referencing a view that the gasoline tax is in decline. But I think at the end of the day, I could make the same discussion and argument perhaps about what's going to happen with respect to an infrastructure spend package and how that might offset any holes in state funding. So, these things are speculative. But certainly, what we've seen this year in terms of market demand is a healthy, robust year, and I think reflective of the fact that there is still pent-up demand in this country and around the world. And again, a polymer modified solution that we bring to the table solves long-term infrastructure needs.

John Roberts -- UBS -- Analyst

And then secondly, are you aware of any Chinese producers making sulfonated polymers for antimicrobial use in China? I mean they might not be beholden to some of the patents and so forth that you have around the technology.

Kevin M. Fogarty -- President and Chief Executive Officer

No. I'm not aware of any such. And I think in other examples in the past, unrelated to our sulfonated portfolio, we take our intellectual property very seriously and we defend our position when needed.

John Roberts -- UBS -- Analyst

Thank you.

Operator

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

Vincent Anderson -- Stifel -- Analyst

Yes. Thanks. Nice job on the quarter. Specifically, the volume growth in Pine Chemical adhesives was impressive. Can you parse out maybe what you saw in terms of any destocking headwinds in the more consumer end-use areas versus what would have outweighed those headwinds, if there were any?

Kevin M. Fogarty -- President and Chief Executive Officer

I think the way to think about it, remember, the way this year unfolded, early in the year we called out that adhesives were strong probably, as much as anything because of concerns people had about supply chains with a COVID disruption. And that kind of then led to -- when there wasn't such disruption, that led to kind of perhaps a destocking in and of itself. And that is, of course, more in terms of what we talked about B2B to the second quarter. I think what today reflects is, much more balanced market, sustainable market in terms of demand, and everything we see indicates positivity with respect to how customers are viewing for example the adoption of our Revolution family.

Vincent Anderson -- Stifel -- Analyst

That's helpful, thanks. And just sticking on pine chemicals, I know it's just a timing difference, but that was a pretty sizable move in the FIFO to ECRC adjustment. So, I'm just wondering if we can read anything -- read into that, anything on the raw material standpoint. I don't -- just because I don't think we've ever really seen it move by this much.

Kevin M. Fogarty -- President and Chief Executive Officer

Yeah, I think that at the end of the day, I mean, we talk about that spread often. And because from quarter-to-quarter there can be moves, but it all washes out, if you will, in the end. And no, I don't think you should read anything into it at all in terms of how that reflects through our consistent reporting of operating results.

Vincent Anderson -- Stifel -- Analyst

Okay. Fair enough. And just briefly on the bio side of polymer development, my somewhat limited understanding of chemistry has always painted sulfur as a pretty difficult chemical to work with. So, I'm wondering, would you attribute your success in incorporating it into a styrenic block copolymer as maybe feeling unique to SBCs? Or does it really, does the credit really go more toward your process R&D on that front?

Kevin M. Fogarty -- President and Chief Executive Officer

How do I want to answer that? I think the reality is there's a considerable amount of know-how and intellectual property behind obviously the development of this material. And it is, in our case, specific to our Penta Block family of polymers, which are highly stable and we think absolutely perfect for this antimicrobial application. But I don't want to mislead you. This is very complex chemistry, and it requires a lot of our key R&D knowledgeable people as well as our sulfonation partners in the marketplace to work hand-in-hand to make sure that this technology is working as a combined supply chain system. And for those reasons, at the end of the day, this is not an easy marketplace for someone who wants to try to replicate that to get into a combination of know-how and of course supporting intellectual property. A lot of years went into this development, as you well know, and that's just a reflection of who we are at Kraton.

Vincent Anderson -- Stifel -- Analyst

Excellent. Thanks.

Operator

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

Chris Kapsch -- Loop Capital Market -- Analyst

Yes. Good morning. I had a question on the profitability in the Polymer segment. And I guess given the pass-through of feedstock costs, maybe margins isn't the best way to look at that, so I appreciate you providing the gross profit per ton metrics. And if you look at that in the quarter, it was down, but that was affected by this abnormally high maintenance or deferred maintenance cost as well as the absorption variance issue that was a sequential issue that you've discussed. So, what I'm wondering, though, is the $947 year-to-date, I think, is the metric, is that sort of a normalized gross profit per ton metric for the Polymer segment to think about on a go-forward basis? Or is it -- is the profit in the third quarter still kind of overly penalized given these aforementioned issues? And I was also curious, just along those lines, I was also curious, we obviously had a pretty big paving volume. So, I'm wondering if there's some adverse mix associated with those volumes that's also depressing the gross profit per ton metric in the quarter?

Atanas H. Atanasov -- Executive Vice President, Chief Financial Officer and Treasurer

Yes. Thank you for your question, this is Atanas. I think you're right. What you were seeing in the Polymer segment with respect to adjusted gross profit is largely a function of the timing of maintenance and fixed cost absorption. As you recall, last quarter what we had indicated is that for the second half of the year we were looking at approximately $20 million to $25 million of negative headwind on account of fixed cost absorption and $5 million to $7 million of maintenance. Well, incidentally, we're exactly on top of that. When you look at it, about half of that impact was incurred in the second half of -- in the third quarter. And so, when you look at our adjusted gross profit margin, that zip code of $950 to $1,000 reflects a more normalized view of the business. Historically, we've been over $1,000. Of course, we don't have Cariflex anymore, so that will have some impact. But again, to the extent that we're in that $900 to $1,000 adjusted gross profit per ton, we are -- we feel very, very comfortable and happy. With respect to any other impacts on account of mix within the paving and roofing, I would say that it's not material. It's largely those two factors, FCA and maintenance. And remember, timing. Because on a year-to-date basis, our margins are still very much with an expectation of that, call it, $950 per ton zip code.

Chris Kapsch -- Loop Capital Market -- Analyst

Okay. That's helpful, thanks. And then on the Chemical side, on the 18, more than 18% volume growth year-over-year, I appreciate some of these end markets are recovering, normalizing, however you want to characterize it. But part of this has also got to be tied to just your greater availability of CTO feedstock this year owing to the contractual obligation of your key supplier. So, I'm wondering if -- and you did reference some opportunistic I think raw material resale was the way you characterized it. So I'm wondering how much of that volume gain is really tied to maybe reselling CTO at a profit to other players in the industry that now need it versus true underlying demand with your customers and end markets.

Kevin M. Fogarty -- President and Chief Executive Officer

Yes. It's a great question. About half of that volume growth that you saw, 18%, 19% is due to the opportunistic sale of raw materials. And I think this is very consistent with what you've seen in the past. I think the year before last, and so last year as you correctly pointed out, we were CTO constrained. This year we are not. Given the demand headwinds in the first half of the year with COVID, I think all we're doing is we're balancing supply and demand. And so, to the extent that we can balance it through raw material sales, we're doing that. And of course, those sales come at a profit, albeit not as high as some of the rest, but very -- we're very happy to have those volumes

Chris Kapsch -- Loop Capital Market -- Analyst

Do they come with lower than segment average sort of --

Kevin M. Fogarty -- President and Chief Executive Officer

It depends. Of course, it depends on the mix. And so sometimes the mix is such that it could, and sometimes it could be lower. But obviously, we have a very strong CTO position that we leverage. And again, this is not something that we're unhappy about that we have raw material sales. It just shows you the leverage of how we're able to balance supply and demand. And like I said, we're happy with that.

Chris Kapsch -- Loop Capital Market -- Analyst

Okay. That's fine. And then I guess my third tranche of questions, if you will, focused on innovation. And Kevin, you mentioned three different sort of potentially needle-moving innovations. I assume that they are potential needle movers. And because you mentioned these 3, I'm assuming these are the ones you're sort of most enthusiastic about. I'm just wondering, maybe you could rank those in terms of enthusiasm. And then specifically, on BIAXIM, I'm just curious, I understand it's way too difficult to try to quantify the uptick or what the opportunity really is until you get some applications, I guess, and some commercial sales. But how are you thinking -- I know this is a technology that was effectively on the shelf that has this unique applicability to this microbe application. But I'm wondering how you think about your capacity for this? I believe that the sulfonation step could happen at a toller, so maybe there's not really much capital needed to expand the capabilities to delivering if this market materializes. I'm just wondering how we should think or how you're thinking about the ability to ramp volumes should this be approved and should there be commercial uptake. Thanks.

Kevin M. Fogarty -- President and Chief Executive Officer

Thanks, Chris. So, the answer to the last part of your question, volume issues, you can imagine, obviously, is very important and is actually kind of part of our discussions with regulatory agencies, too. And we feel really good about our ability to ramp up the supply chain and obviously putting a priority on that effort as well from a planning perspective. In terms of the three notable innovations that you called out, I'm not going to force rank them. I'd say that we've got resources dedicated on each one of those. It's not a trade-off discussion. We've got our Chemical innovation team is focused, obviously, on REvolution. We've got our Polymer innovation teams focused on delivering CirKular and making the market more aware of what that brings to the table. And then, of course, BIAXIM has its own separate team here at the company. But let me just say about the first 2, the CirKular and the REvolution, what I love about them is, again, it's all in keeping with the spirit of Kraton's commitment to sustainability and growing our sustainable business model. These two solutions answer the industry issues around driving a circular economy. REvolution obviously, is from the trees. It's from the tree solution. We believe it can replace hydrocarbons in the marketplace. We believe that our customers have a choice and we want to make that choice very difficult for them with our REvolution family in terms of quality and performance.

And when I say performance, I'm talking about stability. In the case of CirKular, again, that was designed as a technology with sustainability in mind because there's really a fundamental infrastructure problem with plastic recycling being commingled. And we take that problem off the table with our CirKular offering and allowing, therefore, polymers to be commingled, and then that allows customers to focus on the application for the recycled material and help solve this problem of single-use plastic waste around the world. And then lastly, of course, you cite BIAXIM. And BIAXIM, at the end of the day, is a technology that we certainly think has relevance to today's COVID world. But it goes beyond that in our thinking. I think I mentioned in my talking points about how we think BIAXIM also will be an effective antimicrobial against things like MRSA, bacterial types infections. So, naturally, we're thinking about it as a potential offering in the healthcare industry. We're looking at public transportation as another potential market space for where BIAXIM could play a role. And of course, in building and construction. I think you, yourself, anybody, if they really stopped and thought about it, just think about touch surfaces and how a material that can be used on a touch surface could therefore eliminate health risk for the public.

But let's not get ahead of ourselves. Our first step is the necessary regulatory approvals both in the U.S. and around the world. And in the meantime, I'm very encouraged by the interest that even our announcement has generated in terms of market opportunities. And that allows us to have very solid conversations with development partners. And it did exactly what it's done in terms of encouraging people to share their thoughts about how BIAXIM could be applied in the marketplace, and that's exactly what we were looking for.

Chris Kapsch -- Loop Capital Market -- Analyst

Thank you.

Operator

Thank you. Our next question will come from the line of John Roberts of UBS. Your line is open.

John Roberts -- UBS -- Analyst

Thank you. When you get approval for BIAXIM, can NEXAR inventory be sold as BIAXAM to jump-start those sales right away? Or are there subtle differences between the products that wouldn't allow them to be interchangeable?

Kevin M. Fogarty -- President and Chief Executive Officer

I'm not going to comment too much on this specific to your question, but we do have inventory that would satisfy today in addition to what I talked about B2B to the supply chain, yes.

John Roberts -- UBS -- Analyst

Okay. And then your lube additive sales have been very lumpy. Was the September quarter a recovery to normal or did it go above normal? Any insights into what normal is and what the fourth quarter might look like?

Kevin M. Fogarty -- President and Chief Executive Officer

Well, it's lumpy in the context of how we run our operation in terms of planning for those production runs. It's not lumpy in terms of, at the end of the day, customer consumption. And so, I think -- I suppose you might say that that's our own doing, but that's just the nature of the specialty application itself and of course, the batch pot process to produce it. What I would tell you is, generally speaking, even in a world today, the COVID world where obviously automotive has been impaired in the early part of the year, coming back now, yes. And mileage in the roads is coming back as well, driving miles I'm talking about. We would say that we're going to end the year probably with that segment of our sales pretty much in line with what our expectations were going into the year, which is remarkable in and of itself and I think reflective of the quality offering we present.

John Roberts -- UBS -- Analyst

Thank you.

Operator

Thank you. The next question would come from the line of Vincent Anderson of Stifel. Your line is open.

Vincent Anderson -- Stifel -- Analyst

Yes. Thanks. Just a couple of things to clarify. First, just going back to that lubricant comment, in the past you have mentioned a major customer that's caused some noise with their inventory management. So, you're saying that this quarter wasn't impacted by them either restocking or moving toward a more normalized demand level?

Kevin M. Fogarty -- President and Chief Executive Officer

No, just to be clear, you're right on both fronts. Indeed, we've had the inventory destocking issue that kind of changed the dynamic in terms of the volume we sold to this customer through the period of 2019 and 2020 relative to the prior year. That's still the case. What I'm saying is, however, when it comes to supplying the need they need, it's really a function of when we produce that material in our facilities which can cause that quarter-to-quarter choppiness. That's why I always encouraged people to look at the annual number.

Vincent Anderson -- Stifel -- Analyst

I see. Okay. That's perfect. Thank you. And then just real quick, to go back to pavement, I'm just trying to parse out Slide 13. You have -- you referenced stronger paving demand, but the mix share would seem to indicate that at least the dollar sales were down. So, I don't know, maybe these product prices just adjust much faster to raw materials? Or is there any consideration for asphalt prices as an alternative roofing material? I'm just trying to figure out exactly how to think about it.

Kevin M. Fogarty -- President and Chief Executive Officer

It's very linked to raw material, almost a perfect index. So, when we're dealing with raw material costs, particularly butadiene, which were probably a 10-year low in the second quarter, you can imagine what that does to selling price.

Vincent Anderson -- Stifel -- Analyst

Okay. Perfect. Thank you.

Operator

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

Chris Kapsch -- Loop Capital Market -- Analyst

Yes. A follow-up on two end markets that are important and to the extent you have visibility. So, on the paving market, so last year, it rained like hell for -- it rained a lot in the spring, and that affected activity and there was surplus volumes almost throughout the year. And then this year, we've had pretty darn good weather and, so, good volumes and good activity. So, I'm wondering if you have any sense for what the inventories are for that in the channel. So in other words, regardless of what sort of infrastructure spending or what the gasoline tax might look like next year, I'm just wondering if it portends a good 2021 if inventories are low.

Kevin M. Fogarty -- President and Chief Executive Officer

I think at the end of the day, our view is that inventories are low and COVID, while it didn't affect necessarily, ultimately, the amount of paving activity that went on, it probably affected planning as much as anything for people because they had some uncertainty going into the year earlier on in the season. The other thing I'd point out, too, as I look at this business over the years, one of the key criteria I look at is the relative raw material costs between North America, Europe and Asia going into the winter, which is typically, the inventory building season. And, right now, you have the butadiene price in Asia that is currently at a premium to North America, Europe. Which if you just kind of play that out, what that means is the Asian producer, obviously, has higher costs if they want to build and export material to North America and Europe. We think that's favorable. It can change. As you know, raw materials can change quickly. But for the time being, it looks like that as we move into the summer, what was referred to as the winter build season, we're doing so in a way in which the raw material trends are favorable to us.

Chris Kapsch -- Loop Capital Market -- Analyst

Right. Interesting. In that dynamic in the past that's resulted in you getting sort of maybe more than your fair share of volumes in Europe, I believe. So I think that's what you're suggesting could play out if that raw material feedstock cost disparity persists?

Kevin M. Fogarty -- President and Chief Executive Officer

Well, I mean, I'm not going to be so bold as to make that statement, Chris, because that would be kind of a little bit forward leaning. But suffice to say that clearly if Asian feedstock costs are higher, their costs therefore to export to our backyard markets is higher.

Chris Kapsch -- Loop Capital Market -- Analyst

Okay. And then the other end market that I was interested in was the tire end market where you had 14% higher volumes, at least on the polymers, I think it was the Polymer segment. And I'm just wondering if any sense if that reflected some sort of restocking of inventories as these tire and auto plants kind of reopened and got back into production?

Kevin M. Fogarty -- President and Chief Executive Officer

Well, I think they were extraordinary in terms of ceasing production during the COVID crisis and then at the end of the day, coming back very fast. And everything we see right now is that the tire production rates are back to the types of levels were encouraged to see. And obviously, that reflects on our volume trends.

Chris Kapsch -- Loop Capital Market -- Analyst

And last question, on the $20 million in cost take outs that you referenced that you expect to have, I think, I don't want to mischaracterize it, but have achieved by -- on a run rate basis exiting 2020. Is that to suggest that you expect a $20 million year-over-year benefit from those cost take-outs in 2021, all else equal? Or did you get some benefit? Will you have gotten some benefit this year?

Atanas H. Atanasov -- Executive Vice President, Chief Financial Officer and Treasurer

We will have gotten a benefit this year, and we expect to get the full benefit in 2021. We're very much on track.

Chris Kapsch -- Loop Capital Market -- Analyst

So then -- but I'm just wondering, order of magnitude, the net benefit. If you got some of the benefits this year, the net benefit next year might be something less than 2020?

Atanas H. Atanasov -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct. Because some of that benefit would have come in this year. So, the incremental benefit, 100% is not going to be 20% year-over-year because some of it is already captured this year, for sure.

Chris Kapsch -- Loop Capital Market -- Analyst

Okay. Any chance you could sort of split that out roughly?

Atanas H. Atanasov -- Executive Vice President, Chief Financial Officer and Treasurer

Yes, we're not going to do that during this call. I mean, we'll give you a more fulsome view as next year unfolds. But suffice it to say that we have captured a portion of that this year. And we feel very confident that on a run rate basis, this will be fully reflected in our results in 2021.

Chris Kapsch -- Loop Capital Market -- Analyst

Thank you.

Operator

We have no further questions on queue. Mr. Shiels, you may continue.

Gene Shiels -- Director of Investor Relations

Thank you, Kirby. We want to thank all of our listeners this morning and all of our participants for their thoughtful questions. There will be a replay available later this morning, and that can be accessed either on our website or by dialing 1-800-879-3386. This concludes our remarks this morning. Thank you.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Gene Shiels -- Director of Investor Relations

Kevin M. Fogarty -- President and Chief Executive Officer

Atanas H. Atanasov -- Executive Vice President, Chief Financial Officer and Treasurer

John Roberts -- UBS -- Analyst

Vincent Anderson -- Stifel -- Analyst

Chris Kapsch -- Loop Capital Market -- Analyst

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