........................ Public company profiles
Kraton Corp., a chemical and polymer company, went relatively unnoticed for years, but it suddenly doubled in size in a late 2015 acquisition and became the region’s top performer in the Chronicle 100 ranking.
Kraton makes chemicals, rubbers and adhesives that go into roads, medical equipment, cars and daily hygiene products, and the company bet big when it bought Arizona Chemical for $1.37 billion in cash about 18 months ago. Now, Kraton, which went public in 2009, is solidifying its standing as a major global player in specialty chemicals.
“Many people probably have never heard of Kraton, but they probably touch Kraton in any given day,” said Kraton’s chief executive, Kevin Fogarty.
Kraton’s specialty polymers and chemicals range from synthetic rubbers on pens and razor blades to asphalt ingredients that make roads longer lasting. They make diapers stretchier, adhesives stronger and plastic automotive parts more flexible and durable.
Historically, Kraton’s products are petroleumbased, but the Arizona deal diversified its portfolio into pine wood pulp materials and chemicals that still serve a lot of the same markets and customers.
The acquisition made Kraton’s debt load exceed the value of the company at first, so a lot of investors were skittish. However, Kraton is outpacing its timing to cut $135 million in annual costs, said Jason Freuchtel, an analyst with SunTrust Humphrey Robinson investment bank in Atlanta, and it is more than following through on its promises.
“They have executed well so far and shown signs of proving the naysayers wrong,” Freuchtel said.
Kraton’s stock price jumped more than 70 percent from the beginning to end of 2016, and it’s continued to rise this year. Kraton’s annual revenues jumped nearly 70 percent, while its 2016 net income of $107 million compared to a 2015 loss of $10.5 million.
Freuchtel sees additional value and potential in Kraton because of its growth through substitutions. Essentially, Kraton products are replacing
those made from other materials. For instance, he sees Kraton’s products that go into synthetic latex gloves in the health care sector replacing the natural rubber latex gloves that can cause allergic reactions.
Kraton opened a $200 million polymer plant in May in Taiwan. Most of its plants are overseas and in the Midwest. It doesn’t have any plants in Houston. Out of 1,900 global employees, only 140 of them are in the Houston headquarters and a local research center. It’s that research and development that Fogarty touts for making products that are cheaper, better-performing and more environmentally sustainable.
“We grow by finding new applications that don’t exist today,” Fogarty said. “We want to create growth and that’s not easy to do. Most of the opportunities we’ll serve are being served today by something else.”
Kraton’s origins date back to the U.S. government constructing facilities to make synthetic rubber for tires of military vehicles during World War II. After the war, Royal Dutch Shell bought some of the facilities and created its Kraton division named for Kratos, the Greek god of strength. Kraton eventually specialized in so-called thermoplastic elastomers that use heating techniques to make synthetic rubbers and other polymers like the soles of shoes.
Opting to get out of some of the speciality chemicals niche, Shell sold Kraton in 2001 and the business bounced around under the ownership of various private equity groups until finally going public in late 2009.
Bill Hyde, senior director of olefins and elastomers at IHS Markit, said Kraton has found success in a specialty chemicals niche that requires a lot of customer service and technical expertise. It’s not easy for a company to just jump in, he said.
However, Kraton suffered from September through February from surging costs of its top raw material, butadiene, courtesy of a temporary blip of production outages, climbing Chinese demand and wild speculative trading. Since normalizing again, specialty chemical companies like Kraton are seeing their profits rise again.
Now that Kraton is back in a growth mode again, the challenge is getting customers to embrace change, Fogarty said.
“The biggest barrier we have is the risk aversion to change,” he said. “It’s not that they’re against it, but boy do they test the heck out of it before they adopt new technology.”
Our people lose plenty of sleep and hair before getting new products approved, he joked.