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Kraton Corp  (NYSE:KRA)
Q1 2019 Earnings Call
April 25, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Kraton Corporation First Quarter 2019 Earnings Conference Call. My name is Jake, and I'll be your conference facilitator. At this time, all participants are in a listen-only mode. Following the Company’s prepared remarks, there will be a question-and-answer period. (Operator Instructions) Today's conference is being recorded. 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, Jake. Good morning, and welcome to the Kraton Corporation first quarter 2019 earnings call. With me on the call this morning are Kevin Fogarty, Kraton's President and Chief Executive Officer; and Chris Russell, Kraton's Vice President, Chief Accounting Officer and Interim Chief Financial Officer. A copy of our first quarter news release and the related presentation material we'll review is available in the Investor Relations section of our website.

Before we turn to our first quarter results, I'll 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 are 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 used non-GAAP financial measure to its most comparable GAAP financial measure was provided in yesterday's earnings release and included in the presentation we will review this morning. Following our prepared remarks, we'll open the line for your questions.

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

Kevin Fogarty -- President and Chief Executive Officer

Thanks, Gene, and good morning, everybody. Overall, our first quarter 2019 results were very much in line with our expectations in terms of business performance and with regard to market conditions, including the effect of anticipated headwinds we discussed in our fourth quarter earnings call in late February.

Consolidated adjusted EBITDA in the first quarter was $89 million, up modestly versus the first quarter of 2018 on improved profitability and a higher adjusted EBITDA posting for the Polymer segment, largely offset by slightly lower adjusted EBITDA contribution from our Chemical segment. Polymer segment adjusted EBITDA for the first quarter of 2019 was up 7.6% compared to the first quarter of 2018. Continuing the growth trend we saw in 2018, Cariflex sales volume was up 5% in the first quarter with improved profitability driven by significantly higher utilization of our direct connect capacity in Paulinia, Brazil.

Sales volume for Specialty Polymers was down 20% compared to the first quarter of 2018 with an expected decrease in lubricant additive sales associated with the inventory management program of a significant customer and on softer demand in China and broader Asia reflecting weak consumer sentiment and the impact of tariffs on ongoing trade negotiations. Volume in our Performance Products business was relatively unchanged compared to the year ago quarter with growth in SBS grades, particularly in paving applications but slower sales of SIS reflecting continued competitive conditions in adhesive markets.

Despite the lower specialty polymer sales volume, overall profitability for the Polymer segment increased although higher sales of Cariflex was a contributor. You may recall that in the first quarter of 2018, we were bringing the USB expansion at our site in Berre, France online. In addition, we were in the early stages of production ramp up in Mailiao, Taiwan and we were not fully benefiting yet from our direct connect capacity down in Brazil. Given the higher production rates of all these three plants, the improvement in plant utilization and operating metrics was also a contributing factor in the increase in adjusted EBITDA margin to 18.4%, up 290 basis points versus the first quarter of 2018.

Turning to our Chemical segment, late in the first quarter, we restored full operational capacity to the CST refinery at our Panama City site and we are working to return to normal production rates. You will recall that in our fourth quarter call in late February, we anticipated that our first quarter 2019 results could reflect the timing impact arising from lost revenue due to Hurricane Michael that would likely not be offset by reimbursement under our insurance policies in the first quarter. However, our insurance provider did approve an additional advance prior to the filing of our formal claim. That being the case, the timing issue did not materialize and Chemical segment adjusted EBITDA was $41.3 million in the quarter, including the aforementioned gain on insurance proceeds that offset the margin loss resulting from lost revenue in the quarter.

Our adjusted EBITDA was down $2.6 million compared to the first quarter of 2018. The decrease is due largely to lower rosin and rosin derivative sales volumes. Adjusting for the lost revenue in the quarter, the adjusted EBITDA margin was 20.2%, in line with the 20.6% posted in the first quarter of 2018. Now overall, unit margins in the first quarter were as expected and thus far in 2019, raw material price movements have been manageable. We expect these trends to continue in the second quarter. As such, given our expectations for cash generation and an absence of a working capital bill associated with inflation and raw material costs, on a full-year basis, we're still anticipating a reduction of consolidated net debt of between $170 million and $190 million, subject of course to any cash consumed to buyback our stock pursuant to our announced $50 million plan.

With those comments, I'm going to turn the call back to Chris Russell for a more in-depth financial review of the results. Chris?

Christopher Russell -- Vice President and Interim Chief Financial Officer, and Chief Accounting Officer

Thanks, Kevin, and good morning, everyone. I will begin on Slide 5 discussing our Polymer segment first quarter 2019 results. Revenue was $261 million in the first quarter of 2019 as compared to $289 million in the first quarter of 2018. The decline in our first quarter revenue was driven largely by lower sales volumes in our Specialty Polymers product group as a result of the previously discussed inventory management program by a significant lubricant additives customer and to a lesser extent, continued weakness of sales into Asia, particularly China. Additionally, the revenue decline includes a $15 million negative impact associated with changes in foreign currency.

Turning now to adjusted EBITDA. Our Polymer segment adjusted EBITDA of $48.2 million is a 7.6% improvement when compared to the first quarter of 2018. Contributing to this period-over-period improvement, our Cariflex product group saw volume growth of 5% when compared to the first quarter of 2018, driven by higher latex sales into surgical glove applications.

While overall sales volumes in our Performance Products group were largely flat, we did see a return of paving customers in certain non-core markets such as Australia, along with strong demand in our core paving markets of North America and Europe ahead of the traditional busy paving season in the second and third quarters. Both of these factors contributed to paving volume growth of 6% when compared to the first quarter of 2018.

Finally, we continue to see strong unit margins across all three product groups which is evidenced by an adjusted gross profit per ton that was once again in excess of $1,000. The strong unit margins were also a contributor to the increase in our adjusted EBITDA margin to 18.4% or a 290 basis point improvement when compared to the first quarter of 2018.

Before I discuss the Chemical segment operating results, I want to take a minute to discuss the financial impacts from Hurricane Michael on our first quarter 2019 results. You will recall from our fourth quarter earnings announcement that we expected our first quarter 2019 results to be negatively impacted by between $5 million to $7 million as a result of lost sales and associated margin that would not be offset by insurance proceeds in the quarter. In fact, we estimate the margin associated with lost sales in the first quarter of 2019 to be $5.9 million. However, I am pleased to highlight that our insurance carriers notified us during the first quarter that they intended to provide an additional $10 million of advance reimbursement under our policies which we received on April 3rd. As a result, we have recorded a gain on insurance in our US GAAP financial statements of $11.1 million, which includes the $10 million advance and $1.1 million of proceeds received during the fourth quarter of 2018 but which were deferred and included on our balance sheet at year end.

For purposes of adjusted EBITDA, we have included $5.9 million of this gain as an offset to the lost margin. With the operational capacity restored at Panama City and as we continue to return to normal production rates, we do not anticipate significant further disruptions in the form of lost revenues or associated margin. We will continue to work with our insurance carriers to finalize our claim and final reimbursement of incurred cost and capital expenditures.

Turning now to the Chemical segment first quarter results on Slide 6. Our Chemical segment revenue of $195 million was lower by $18 million when compared to the first quarter of 2018. The decline was primarily attributable to the lost sales volumes for Hurricane Michael and the absence of opportunistic raw material sales that occurred in the first quarter of 2018 and to a lesser extent, timing of sales of our tall oil rosin and related derivatives. The lower revenues were partially offset by improved pricing for our TOFA and TOFA derivatives. Additionally, the revenue decline includes a $9 million negative impact associated with changes in foreign currency.

The Chemical segment generated adjusted EBITDA of $41.3 million in the first quarter of 2019, down $3 million or 6% when compared to the first quarter of 2018. As I previously mentioned, the Hurricane Michael impact was neutralized by the insurance gain. Thus the decrease in our adjusted EBITDA was largely driven by lower sales of tall oil rosin and related derivatives. While we continue to see strength in our TOFA chain, we also expect the demand fundamentals in our tall oil rosin chain to improve as our sustainable and innovative offerings gain attention in the marketplace. In addition, we continue to see a structural decline in gum rosin production in Asia, which is locally being replaced by hydrocarbon resin, keeping the market in relative balance and providing support for rosin ester pricing. The adjusted EBITDA margin of 21.1% in the first quarter of 2019 or 20.2% when adjusting for the revenue associated with lost sales is compared to a 20.6% in the first quarter of 2018.

Moving to Slide 7, our consolidated first quarter revenue of $456 million was down $46 million or 9.1% when compared to the first quarter of 2018. As I just discussed, the lower revenue was the result of volume declines in both segments, lost sales as a result of Hurricane Michael and the negative impacts associated with changes in foreign currency.

Consolidated adjusted EBITDA was a modest -- was up a modest $800,000 to $89.4 million in the first quarter of 2019 with an adjusted EBITDA margin of 19.6% or 19.2% when adjusting for the revenue associated with lost sales. This as compared to 17.6% in the first quarter of 2018. First quarter 2019 adjusted earnings per share was $0.88, up $0.30 from the first quarter of 2018 driven primarily by lower interest expense as a result of previously executed refinancings and repricings.

Turning now to Slide 8, our consolidated net debt amounted to $1.53 billion at March 31st, 2019, representing an increase of $46 million when compared to December 31st, 2018. Excluding a $12.5 million favorable foreign currency effect, our consolidated net debt increased by $59 million. As is typical, we generally see a modest seasonal increase in our net debt during the first quarter of each year. This first quarter seasonal increase was in line with our expectations.

Finally, you may have noticed that our current portion of long-term debt was $120.3 million at March 31st, 2019. This is entirely related to the indebtedness of our joint venture in Mailiao, Taiwan. This debt began amortizing in 2016 and has a five year amortization period which matures on January 17, 2020. However, we expect to extend the maturity date to January 2022.

Lastly, as it relates to full-year 2019 guidance for both net debt and adjusted EBITDA, we continue to anticipate a reduction in our consolidated net debt of between $170 million and $190 million in 2019, again, excluding the effects of foreign currency and excluding any activity under our previously announced share repurchase program. We have included in the appendix additional modeling assumptions, which are largely unchanged from our February estimates and we continue to anticipate full-year 2019 adjusted EBITDA will be in a range of $370 million to $390 million.

With that, I will turn the call back to Kevin.

Kevin Fogarty -- President and Chief Executive Officer

Thanks, Chris. As you just heard, our first quarter results were consistent with our overall expectations and therefore serve as a good start toward delivering on our financial objectives for the year. As we entered 2019, we were mindful of specific headwinds, market-based and otherwise, and their expected impact on full-year results. In terms of market trends, the softening of demand in China is one that we and others in our industry are following carefully. So far in 2019, we have yet to see any hard evidence suggesting that demand fundamentals in China and broader Asia have improved. The softness we observed in China in the fourth quarter of 2018 and into this year is broad-based across many end use markets ranging from consumer and industrial to infrastructure linked and medical applications. Once again, we believe these current demand trends reflect short-term weakness in consumer sentiment and the impact of ongoing trade negotiations, including, of course, tariffs. Our mid and longer-term outlook for specialty sales into Asia remains unchanged. We remain optimistic given the expected growth rates for our tailored polymer solutions. For example, the adoption of 5G technology presents a new opportunity for our cable gel product grades, which are essential in protecting the fiber optic cable infrastructure.

Regarding Europe, while we have not seen a significant deterioration in overall demand, we believe this relates to our broader end market diversification and by definition, lower concentration to specific markets of near-term weakness such as automobiles -- excuse me, automotive-related demand. That being said, we are mindful that others in the chemical and polymer space have cautioned about possible signs of slowing growth in greater Europe in 2019.

In summary, for now it appears that demand trends remain in line with our base assumptions for 2019. We believe first quarter unit margins in both our Polymer and Chemical segments were solid and from our current perspective, raw materials price moves are expected to be marginal and should therefore be readily manageable. Our Cariflex business continues to show strong growth potential with first quarter sales volume up 5% and we continue to evaluate options for further capacity expansions to support future growth. And while we've seen a bit of a delay to the start of the paving season in our core North American and European markets due to poor weather conditions in April, based on market assessments and conversations directly with our customers, we're still anticipating a strong paving season in 2019 as weather permits of course, perhaps weighted more to the third quarter, given the slower start in April.

For our Chemical segment, we continue to see good demand and pricing fundamentals for TOFA and TOFA derivatives as evidenced by the global price increase we implemented in March. We believe adhesive markets have stabilized and have -- and are having restored -- and having now our restored operational capability at Panama City, we are continuing to return to normal levels of production, particularly in our higher value CST chain. We, therefore, believe this segment is positioned to deliver improved results in 2019.

Before we turn the call back over to you all for questions, I want to turn to Monday's announcement that Atanas Atanasov will be joining Kraton as Senior Vice President and Chief Financial Officer on May 6. We believe Atanas' background is well suited to help Kraton execute on our innovation-led growth strategies and deliver value for our shareholders and other stakeholders. We look forward to having Atanas on board and to introducing him to you in the near future.

Atanas will assume the CFO role from Chris Russell who has served as Kraton's Interim Chief Financial Officer. Many of you have had the opportunity to meet and interact with Chris over the last six months. On behalf of our Board of Directors, I want to thank Chris and recognize him for his commitment and numerous contributions in his capacity as Interim CFO and in his continuing role as our Chief Accounting Officer. Chris' leadership ensured continuity not only from an internal perspective in all of the financial functions of a public company, but in interactions with our shareholders, debt holders, rating agencies, and insurance providers, just to name a few. Chris remains a valued member of our senior leadership and most importantly, a trusted thought partner to all of us here at Kraton.

With that, I'll turn the call back to the operator for some questions.

Questions and Answers:

Operator

Certainly. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mike Sison from KeyBanc. Your line is open.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Hey, guys. Nice start to the year.

Kevin Fogarty -- President and Chief Executive Officer

Thanks, Mike.

Michael Sison -- KeyBanc Capital Markets -- Analyst

In terms of the Polymer segment, volumes were down, but EBITDA did grow which is impressive there. Can you maybe walk us through how you've got the growth there? And then when you think about the remaining quarters, is there volume potential recovery and when do you think that will happen, as I suspect that that would drive even more EBITDA leverage?

Kevin Fogarty -- President and Chief Executive Officer

So, Mike, if you think about our Polymer business specifically, Cariflex had impressive growth, so we had nice growth in terms of overall volume, but more importantly we had much higher utilization of our new technology down in Brazil, which was certainly a driver in the overall results for our Cariflex business and thus overall company EBITDA. Certainly, as I called out, I mean, the headwinds associated with our Specialty Polymers business were not insignificant to the results. They were significant. And we certainly gave you that heads up in our last call recognizing we had a big headwind associated with that inventory drawdown by a key customer, coupled with, of course, events in China. The impact in the quarter was approximately balanced between the two.

I don't think that we're -- we're not changing our view in terms of the inventory drawdown, that's a stated program for the calendar year. But with respect to the overall market change, I mean, we're doing everything we can to identify other opportunities potentially for market outlets in China and greater Asia in our Specialty Polymers business. Do we believe that if there is any macro benefit to a trade deal that will spur customer -- or excuse me, consumer confidence and drive demand? I think the answer to that is, yes. But until that happens, at the end of the day, we need to be just cautious in our outlook.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Got it. And then, I guess, I wanted to get a better feel for the Chemical segment. A lot of noise with the hurricane impacts. So when you -- as you head into 2Q and I think you mentioned that paving season is going to be a little bit sluggish, I mean, do volumes start to recover in 2Q or is it going to take a little bit longer given I think the world is kind of sluggish as you and several others have noted?

Kevin Fogarty -- President and Chief Executive Officer

Well, we're not noticing -- I mean, if you will, the world's sluggishness that you've just said, that's certainly more driven by our Polymer business. In our Chemical business, the volume issues that we saw particularly in our rosin and rosin derivative chain were kind of isolated to the quarter. And then to your point, of course, as we get the full ramp up from the post Hurricane Michael world in Panama City at our plant, we think that we're going to see improvement in the second quarter for those reasons.

Michael Sison -- KeyBanc Capital Markets -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Josh Spector of UBS. Your line is open.

Joshua Spector -- UBS -- Analyst

Yeah, hey, guys. Maybe just another one on the drawdown at specialties, particularly with the lube additive customer. I guess, I understand it's a full-year program. I guess, if you say half the impact was due to this in terms of the volume decline in specialty, do you expect a similar impact in 2Q? And does that -- when do you think things start to normalize, does it normalize like mid this year or is that going to be a similar impact as you go through the whole year this year?

Kevin Fogarty -- President and Chief Executive Officer

With respect to your question specifically on lube additives, we are going to see it over the course of the year just as we called out.

Joshua Spector -- UBS -- Analyst

Okay. So you expect roughly then a similar impact then on a quarterly basis?

Kevin Fogarty -- President and Chief Executive Officer

I mean, the volumes aren't exactly rateable quarter-to-quarter, but it would be imprudent for you to presume that things are going to improve as the year goes on, because that volume characterization in terms of the inventory drawdown was specific and finite and depending on their order pattern from last year, will determine the impact in any particular quarter this year.

Joshua Spector -- UBS -- Analyst

Okay. Thank you. That helps. And just on Chemicals, I guess, I mean you're pretty clear that you're saying you're expecting growth in that business this year versus last year. I guess, if you had to split that between volume and margin, how do you think about that? I guess, I look at chemicals in the $350 to $400 kind of EBITDA per ton range for the past couple of years. Does it kind of break out of that this year with some of the pricing and some of the supply demand dynamics being more favorable?

Kevin Fogarty -- President and Chief Executive Officer

Well, certainly we're expecting margin improvement in the business overall, particularly in the TOFA and TOFA derivative chain, and that's evidenced by the price increase moves that we made in March that really take effect in the second quarter. And then there are clearly some volume benefits that come from the full ramp up of our production capabilities down in Panama City post the Hurricane Michael issue and then this comment we made on rosin and rosin derivatives in the quarter, we think that was isolated to the first quarter as well.

Joshua Spector -- UBS -- Analyst

Okay. Thank, guys.

Operator

Thank you. We also have a question from Jim Sheehan of SunTrust. Your line is open.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thanks. Good morning. Regarding Cariflex and the timing around that, could you describe the process and why it will take till the end of the year to update investors on your strategic review?

Kevin Fogarty -- President and Chief Executive Officer

Sure, Jim. Well, the process is the kind of typical process you would expect where we're obviously inviting interested parties to make their interest known as part of that overall strategic assessment. So it's a very typical process. I just don't want to handicap the timing, it's that simple. I do believe -- I think we said later in the year in our press release; when that is, third quarter, fourth quarter, it's just hard to handicap right now. Obviously we have all the incentive in the world from the standpoint of the business, from the standpoint of overall planning just to move as rapidly but of course as efficiently as we can.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Are you ready to disclose the last 12 months EBITDA for Cariflex at this point?

Kevin Fogarty -- President and Chief Executive Officer

No, we're not ready to break that out for you just yet. Obviously, there will be a need to do so if anything comes of the process.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay. And given your confidence that the sell process will be successful, how are you thinking about share buybacks prior to a potential divestiture?

Kevin Fogarty -- President and Chief Executive Officer

So, I think we made it very clear when we announced the transaction that the majority the proceeds would be to take down our -- pay down our debt as part of our continuing deleveraging process and this just obviously accelerates that.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of John Roberts of UBS. Your line is open.

John Roberts -- UBS -- Analyst

Hi, guys, thanks. A couple of raw material questions. Could you talk a little bit about the impact of butadiene in the quarter and what your outlook is going into the second quarter here?

Kevin Fogarty -- President and Chief Executive Officer

Butadiene is relatively benign in the quarter and our outlook is for more or less the same trend. There's just not any significant driver in the market, be it on the supply or demand -- supply or demand side is going to change things. So our view is fairly stable.

John Roberts -- UBS -- Analyst

And similar question on crude tall oil. So with crude oil moving higher here, should we expect tall oil to follow and will there be any sort of timing price raws lag that we might experience as you're going into the second quarter as well?

Kevin Fogarty -- President and Chief Executive Officer

I guess, again, we're looking at fairly flat CTO costs going from first quarter to second quarter. I guess, you could make an argument that says, if you think that crude oil is going to really drive itself up in the marketplace more than what it already is forecasted to do, then there could be a CTO resulting price response. But at this point we are looking at fairly flat. And of course you got to remember too, it's not just crude oil, there's also a natural gas component and that's the opposite trend.

John Roberts -- UBS -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Vincent Anderson of Stifel. You may begin.

Vincent Anderson -- Stifel -- Analyst

Yeah, thank you. So I just wanted to go back to the capital allocation question that came up earlier. I mean, given the interest you've seen so far in the Cariflex assets, would you consider curtailing your deleveraging this year and potentially redirecting capital toward some of the growth initiatives you've outlined previously?

Kevin Fogarty -- President and Chief Executive Officer

Well, the growth initiatives and I assume you're speaking specifically to our organic growth initiatives and at the end of the day, the cash flow of the Company is more than sufficient to manage both our commitment to reduce debt as well as obviously invest where we believe there is good growth potential. A specific good example of course is our Cariflex business. So there's -- whether we pursue the ultimate decision on Cariflex or not, as that will be determined through this process we're on, we always had in mind in our business to continue to pay down debt with the healthy cash flow that the business generates and in addition to that, support what is required to underwrite the growth particularly in the businesses where we know we'll need some capacity.

Vincent Anderson -- Stifel -- Analyst

That's helpful. Thank you. And just to stay on that, that capacity expansion topic, last quarter you pointed to paving demand for USBCs in India. Are you already selling your pine chemical paving products into India and so that that demand that you see is direct feedback from existing customers? Sorry, just if it's not, what makes an investment in India attractive, given the proximity to Asian supply of USBCs?

Kevin Fogarty -- President and Chief Executive Officer

So just to be clear, we're seeing the type of growth that you're, I think, referring to in our Polymer business. Now that's not to say we don't have growth in quote-unquote, paving applications in our Chemical business, but that's really limited to the road markings at this point. Our Polymer business is where we have focused a lot of our attention in developing markets such as India. With that being said, the question about capital allocation to that business and I'm talking specifically to the Polymer business, as we always do around here, we look at our existing footprint first to see where we can increase output and productivity as evidenced -- a good example is what we did in Berre, France last year in expanding the footprint there and taking advantage of raw material costs at the site. So we'll go through those options first and then look at that relative to our outlook and a positive outlook at that in terms of our demand growth and make sure we marry that up with where the most cost effective choices are for Kraton to expand capacity.

Vincent Anderson -- Stifel -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Jim Sheehan of SunTrust. Your line is open.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Thank you. You referenced tight feedstock CTO markets, what were your CTO costs in the first quarter? What was the inflation year-over-year in CTO, please?

Kevin Fogarty -- President and Chief Executive Officer

So we don't break that out. It's obviously very important confidential number in terms of our CTO costs. We talk about it more in terms of trends and we've certainly made comment the fact that the CTO cost particularly in North America are linked to those indexes that we just spoke of. So I'm not going to be able to give you that kind of input. But again what I said is that the cost inputs that we see is relatively benign in terms of quarter-on-quarter increases and unless there's some dramatic change in the outlook for crude oil two quarters, three quarters out, we don't see that changing.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay. And could you give us -- what are your expectations for working capital for the remainder of the year?

Kevin Fogarty -- President and Chief Executive Officer

Yeah. I mean, as I noted in my comments around net debt, obviously we saw the build in first quarter which is generally typical. On the polymer side, we're building inventory ahead of the paving season in second and third quarters. And then of course with Panama City coming back and ramping up, obviously we're building back feedstock there. So that build in inventory and in a way I think what you'll see is, we'll have a drawdown of inventory over the balance of the year and that's what then obviously enables us to reduce the indebtedness, that $170 million to $190 million that I discussed earlier.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay. And how much is your annual CapEx for the Cariflex business?

Kevin Fogarty -- President and Chief Executive Officer

Well, I mean, if you're talking about Cariflex in the context of ongoing capital, it's relatively minor. If you're talking about it in terms of potential growth options, we're not prepared to break that out yet because we're still exploring what the alternatives are.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Sure. Yeah, I'm just talking about the annual CapEx needs of the business that -- what have you been spending annually over the past few years?

Kevin Fogarty -- President and Chief Executive Officer

I think that would be something that would be part of the carve-out that we'd have to share with you at the appropriate time. As you can imagine, that's not a number that we talk about broad-based either.

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you.

Operator

Thank you. At this time, we don't have any questions on queue. I will now hand the call back to Gene Shiels for closing comments.

H. Gene Shiels -- Director of Investor Relations

All right, thank you, Jake. Well, we'd like to thank all of our participants this morning for their interest in Kraton and their questions. There will be a replay of this call available later this morning. The toll free number to access that replay is 800-455-0167. That concludes our prepared remarks. Thank you.

Operator

This concludes the Kraton Corporation first quarter 2019 earnings conference call. You may now disconnect.

Duration: 33 minutes

Call participants:

H. Gene Shiels -- Director of Investor Relations

Kevin Fogarty -- President and Chief Executive Officer

Christopher Russell -- Vice President and Interim Chief Financial Officer, and Chief Accounting Officer

Michael Sison -- KeyBanc Capital Markets -- Analyst

Joshua Spector -- UBS -- Analyst

James Sheehan -- SunTrust Robinson Humphrey -- Analyst

John Roberts -- UBS -- Analyst

Vincent Anderson -- Stifel -- Analyst

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