Kraton Gets Its Bounce Back

Kraton Performance Polymers enjoyed more than four decades of stability as the elastomers subsidiary of Shell, one of the world’s largest oil companies. But set loose on its own in 2001, the styrene block copolymer (SBC) specialist encountered a decade of ups and downs as its new owners struggled to find the right strategy.

Chief Executive Officer Kevin M. Fogarty says Kraton finally found the path forward by reacquainting itself with the formula that made it a market leader to begin with: innovating in SBCs and coming up with applications that are new to the world.

SBCs feature a soft “mid-block” of polybutadiene or polyisoprene between hard blocks of polystyrene. The length and composition of the rubber mid-block—which sometimes includes comonomers such as ethylene, propylene, and maleic anhydride—determine how the polymer chain will fold and bend on itself. The mid-block is the main factor in yielding applications as varied as soft-touch handles for tools, asphalt enhancement, and modification of other plastics.

According to the Houston-based consulting firm Chemical Market Resources, global SBC consumption is about 1.6 million metric tons per year. Kraton is the market leader. Major competitors include China’s Sinopec; Taiwan’s LCY Chemical; the Dynasol joint venture between Mexico’s Kuo and Spain’s Repsol; and Asahi Kasei and Kuraray, both of Japan. CMR forecasts that the SBC industry will grow at a 3.7% annual rate over the next five years.

Kraton has a strong leadership position—34% of the market versus 11% for the nearest competitor—in high-end hydrogenated SBCs, the market research firm says. It also has a commanding presence in styrene-isoprene-styrene SBCs, with a 46% share of manufacturing capacity.

According to CMR, Kraton has been at the forefront of SBC product development, which is not surprising considering that it pioneered the industry.

Kraton is rooted in Shell’s purchase of a synthetic rubber plant in Torrance, Calif., from Uncle Sam in 1955. In the 1960s, Shell scientists were trying to improve the properties of isoprene rubber for tires and found that introducing styrene created materials that could be molded and did not require vulcanization. The company was granted a patent on the materials in 1966 as they were taking off in applications such as shoe soles.

By 2000, however, Shell was looking to divest its specialized polymers businesses to focus on basic petrochemicals. It sold Kraton to the private equity firm Ripplewood Holdings for $520 million in 2001. Ripplewood then sold it to two other private equity firms, TPG Capital and J.P. Morgan Partners, for $770 million two years later.

Although Kraton thrived in its early years on its own, it eventually found itself struggling with a strategy of trying to undercut competitors on the commodity end of the business. According to Fogarty, 2007 marked the “bottom” of a period in which customers were concerned about the company’s waning focus on product development. That year, the company lost $44 million on $1.1 billion in sales.

There was a shake-up at the top. Fogarty, who had been recruited from Koch Industries’ Invista unit three years earlier, was named CEO in January 2008, replacing George B. Gregory. Around the same time, the company tapped former Lyondell Chemical CEO Dan Smith as chairman.

A theme for Fogarty’s tenure has been to focus on specialty SBC products instead of more commoditized ones. “To be a true market leader,” Fogarty says, “we probably have to give up from time to time on the low end of the portfolio in order to advance the overall sales mix.” He calls it “sweetening” the mix.

Kraton is also trying to get leaner. The company cut nonmanufacturing fixed costs by about 15% during the recession. It also made structural changes to its manufacturing base, closing its isoprene rubber plant in Pernis, the Netherlands, last year and converting an SBC unit in Ohio to make isoprene rubber.

The company has also been adding new capacity. It is expanding its new isoprene latex plant in Brazil and evaluating four Asian locations for a major new hydrogenated SBC plant.

The strategy seems to be working. In 2008, Kraton earned $28 million on $1.2 billion in sales. In 2009, in the midst of the economic turndown, it broke even on $920 million in sales. The company has rebounded during the first nine months of this year, with $86 million in profits from $940 million in revenues. “The performance that we are generating today is much more indicative of who Kraton is,” Fogarty says.

The turnaround helped set the stage for Kraton to become one of the chemical industry’s newest publicly traded companies. It raised about $138 million in an initial public offering (IPO) last December that trimmed the private equity firms’ ownership stake to about two-thirds. The owners sold nearly $250 million in shares in a secondary offering in October, reducing their holdings to about one-third.

Since the IPO, the company’s stock price has more than doubled. Michael J. Sison, a stock analyst with KeyBanc Capital Markets, is optimistic about its prospects. Kraton, he recently wrote, “is an attractive turnaround story with good growth potential.”

Fogarty says new product development is a priority, although Kraton’s $21 million in R&D spending in 2009 was down from the year before. He says the firm has the right amount of spending, for now. “The level of R&D that we have ongoing supports the scale of our market development activities,” he says. “It may well be that we’ll have to upscale that R&D budget just to reflect what we think is a great pipeline of growth for Kraton.”

One big initiative for the company is its Nexar sulfonated block copolymers, which debuted last year. Fogarty says the polymers can have 10 times the water permeability of other membrane polymers on the market. Nexar has technical advantages over other materials, CMR reports, and so far is doing well in the market.

With the material, Kraton is targeting sectors that it has never been in before, such as water purification and breathable textiles for athletic apparel. Nexar might also be suitable for use in filtration systems in air conditioning units. Nexar films would strip water molecules out of the air. Without the moisture, the air flowing from the membranes would be easier for the compressors to cool, saving energy.

Another opportunity for Kraton is supplanting flexible polyvinyl chloride in applications such as medical fluid bags and wire and cable coatings. “Today, there are several alternatives to PVC,” Fogarty says. “And we like to think that one thing that those alternatives all have in common is the use of styrene block copolymer.”

Organic-growth initiatives such as new products and the Asian plant are a priority for the company, Fogarty says. But the IPO has made Kraton’s balance sheet healthier than it has ever been, and the equity markets have opened up a potential source of capital to pursue options beyond internal ones. “Maybe even an acquisition one day,” Fogarty says.

Still, he insists Kraton doesn’t need an acquisition to hedge its bets. The wealth of applications for SBCs already makes the company more diversified than a lot of other firms with a billion dollars in sales.

“We like to think of ourselves as a bellwether of the plastics industry in general because we touch the personal care business, we touch the medical industry, we touch consumer goods, we touch durable goods, and we touch automotive,” Fogarty says. “You name it, we touch it.”