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Kraton Corporation Second Quarter 2020 Earnings Presentation July 30, 2020
Disclaimers CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Some of the written and oral statements and information in this presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often characterized by the use of words such as “outlook,” “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans,” “anticipates,” “foresees,” “future,” or by discussions of strategy, plans, or intentions. The statements in this presentation that are not historical statements, including, but not limited to, all matters described on the slide titled “Outlook - Second Half 2020” and on the slide titled “Business Outlook by geography and end use application”; statements regarding our expectations as to the continued impact of the coronavirus (“COVID-19”) pandemic (including governmental and regulatory actions relating thereto) on demand for our products, on the national and global economy and on our customers, suppliers, employees, business and results of operations; projections of annual run rate cost savings; expectations of our financial flexibility, balance sheet strength and liquidity; projections for debt reduction and the achievement of associated leverage ratios; the impacts of our sustainability initiatives; the strength of our geographic and end market diversification and ability to position our product portfolio; actions regarding our future capital deployment and capital spending; our expectations about the market outlook for our products and application including but not limited to tires, paving, automotive, oilfield, and lubricant additives; the impact of crude pricing decline and CST pricing on our business and results of operations; and our expectations regarding the future of the global market and economic strength, are forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this presentation. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements include, but are not limited to the factors set forth in this presentation, in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other filings with the Securities and Exchange Commission (the “SEC”). Many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 pandemic. There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. In addition, to the extent any inconsistency or conflict exists between the information included in this presentation and the information included in our prior presentations and other filings with the SEC, the information contained in this presentation updates and supersedes such information. Forward-looking statements are based on current plans, estimates, assumptions and projections, and, therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events. Kraton Second Quarter 2020 Earnings Call 2
Disclaimers GAAP Disclaimer This presentation includes the use of non-GAAP financial measures, as defined below. Tables included in this presentation reconcile each of these non-GAAP financial measures with the most directly comparable GAAP financial measure. For additional information on the impact of the spread between the FIFO ("First-in First-out") basis of accounting and estimated current replacement cost (ECRC), see our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. We consider these non-GAAP financial measures to be important supplemental measures in the evaluation of our absolute and relative performance. However, we caution that these non-GAAP financial measures have limitations as analytical tools and may vary substantially from other measures of our performance. You should not consider them in isolation, or as a substitute for analysis of our results under GAAP in the United States. EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin: For our consolidated results, EBITDA represents net income (loss) before interest, taxes, depreciation and amortization. For each reporting segment, EBITDA represents operating income before depreciation and amortization, disposition and exit of business activities and earnings of unconsolidated joint ventures. Among other limitations, EBITDA does not: reflect the significant interest expense on our debt or reflect the significant depreciation and amortization expense associated with our long-lived assets; and EBITDA included herein should not be used for purposes of assessing compliance or non-compliance with financial covenants under our debt agreements since it calculation differs in such agreements. Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure. As an analytical tool, Adjusted EBITDA is subject to all the limitations applicable to EBITDA. We prepare Adjusted EBITDA by eliminating from EBITDA the impact of a number of items we do not consider indicative of our on-going performance but you should be aware that in the future we may incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, due to volatility in raw material prices, Adjusted EBITDA may, and often does, vary substantially from EBITDA and other performance measures, including net income calculated in accordance with U.S. GAAP. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of revenue (for each reporting segment or on a consolidated bases, as applicable). Adjusted Gross Profit and Adjusted Gross Profit Per Ton: We define Adjusted Gross Profit Per Ton as Adjusted Gross Profit divided by total sales volume (for each reporting segment or on a consolidated basis, as applicable). We define Adjusted Gross Profit as gross profit excluding certain charges and expenses. Adjusted Gross Profit is limited because it often varies substantially from gross profit calculated in accordance with U.S. GAAP due to volatility in raw material prices. Adjusted Diluted Earnings Per Share: Adjusted Diluted Earnings Per Share is Diluted Earnings (Loss) Per Share excluding the impact of a number of non-recurring items we do not consider indicative of our on-going performance. Consolidated Net Debt and Consolidated Net Debt excluding the effect of foreign currency: We define consolidated net debt as total consolidated debt (including debt of KFPC) less consolidated cash and cash equivalents. Management uses consolidated net debt to determine our outstanding debt obligations that would not readily be satisfied by its cash and cash equivalents on hand. Management believes that using consolidated net debt is useful to investors in determining our leverage since we could choose to use cash and cash equivalents to retire debt. Consolidated Net Debt, as adjusted for foreign exchange impact accounts for the FX effect on our foreign currency denominated debt agreements. Kraton Second Quarter 2020 Earnings Call 3
Second Quarter 2020 Highlights Strong results considering the context of broader market demand trends Safety of our on-site and remote employees has been priority – Currently, no significant COVID-19 related concerns End market and geographic diversity continues to be a strength in mitigating impact of economic downturn Differentiated product portfolio and favorable raw material sourcing contributing to high profitability in the Polymer segment Challenging quarter for Chemical segment given current market conditions, particularly in North America Continued focus on cost control and operating efficiencies Kraton Second Quarter 2020 Earnings Call 4
Current Environment - Overview Plants operating at normal capacities Operations & Raw materials advantaged and readily available No disruptions Strict measures for employee safety Supply Chain Very few recorded cases of COVID-19 Mixed impact – Solid demand trends in medical, personal care, Demand & adhesives and infrastructure Market diversity Markets Q2’20 results reflect COVID-19 impact on an advantage demand, primarily in North America $137 million in cash Strong liquidity Liquidity $208 million available under ABL Facility position Intend to liquidate inventory in H2’20 Debt reduction remains priority Continued focus Current Executing on innovation pipeline on organic Increased focus on sustainability initiatives Priorities growth & cost Fixed cost management to deliver $20 million run rate savings expected by year end Kraton Second Quarter 2020 Earnings Call 5
Second Quarter 2020 Financial Highlights ▪ Consolidated net loss of $7.1 million ▪ Polymer segment operating income of $16.8 million GAAP Results ▪ Chemical segment operating loss of $3.9 million ▪ Consolidated debt of $1,021.0 million at 6/30/2020 vs. $1,390.7 million at 12/31/2019 Consolidated ▪ Q2 2020 Adjusted EBITDA(1) of $69.5 million, down $32.5 million vs. Q2 2019 ▪ Adjusted EBITDA margin(2) of 19.6% vs. 20.6% in Q2 2019 Results ▪ Revenue of $355.7 million, down $139.6 million vs. Q2 2019 Polymer Adjusted ▪ Q2 2020 Adjusted EBITDA(1) of $53.8 million, down $6.3 million vs. Q2 2019, reflecting sale of CariflexTM business (1) EBITDA ▪ Adjusted EBITDA margin(2)(3) of 26.4% vs. 20.2% in Q2 2019 ▪ Q2 2020 Adjusted EBITDA(1) of $15.7 million, down $26.2 million vs. Q2 2019 Chemical Adjusted ▪ Adjusted EBITDA margin(2) of 10.3% vs. 21.2% in Q2 2019 EBITDA(1) ▪ Decline relfects lower sales volume, including COVID-19 impact, lower CST and TOR pricing and the timing of sales to a significant customer ▪ Consolidated Net Debt of $883.6 million at 6/30/2020 vs. Consolidated Net Debt of Debt Reduction & $1,355.6 million at 12/31/2019(1) Liquidity ▪ Ongoing financial flexibility supported by $137 million of cash and $208 million of availability under $250 million ABL Facility 1. See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure. 2. Defined as Adjusted EBITDA as a percentage of revenue. 3. For the three months ended June 30, 2020, Adjusted EBITDA margin adjusted for the Isoprene Rubber Supply Agreement ("IRSA") would be 25.6%. Kraton Second Quarter 2020 Earnings Call 6
Polymer Segment - Q2 2020 and YTD Results Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change ($ In millions) Volume (kT) 75.5 80.2 (4.7) 146.3 154.0 (7.7) Revenue $ 203.9 $ 297.9 $ (94.0) $ 444.2 $ 558.9 $ (114.7) Operating income $ 16.8 $ 35.0 $ (18.2) $ 34.7 $ 44.2 $ (9.5) Adjusted EBITDA(1) $ 53.8 $ 60.2 $ (6.3) $ 105.0 $ 108.3 $ (3.3) Adjusted EBITDA margin(2)(3) 26.4 % 20.2 % 620 bps 23.6 % 19.4 % 420 bps Note: May not foot due to rounding. Q2'20 vs. Q2'19 H1'20 vs. H1'19 ▪ Adjusted EBITDA(1) down 10.5% vs. Q2'19, reflecting the sale of ▪ Adjusted EBITDA(1) down 3.1% vs. H1'19. Excluding Cariflex, Cariflex. Excluding Cariflex, Adjusted EBITDA would have been up Adjusted EBITDA would have been up 13.4% vs. H1'19. 17.7% vs. Q2'19. ▪ Excluding Cariflex, sales volume would have been flat with H1'19 ▪ Excluding Cariflex, sales volume would have increased 2.5% vs. ▪ Specialty Polymer sales volume down 6.5%, reflecting weaker Q2'19 demand in North America (COVID-19) and lower lubricant ▪ Specialty Polymer sales volume down 14.7%, reflecting lower additive sales. COVID-19 impact in Asia largely offset by sales into lubricant additive applications, and the impact of higher demand in medical applications. COVID-19, primarily on sales into consumer durables (North ▪ Performance Products sales volume flat with H1'19, with America) and global automotive applications higher sales into adhesive applications largely offsetting lower ▪ Performance Products sales volume up 6.7% vs. Q2'19, sales into paving and roofing applications principally reflecting higher sales into European roofing applications and strong demand in adhesives and personal ▪ Gross Profit of $126.6 million and Adjusted Gross Profit(1) of care applications $1,056 per ton in H1'20, compared to $1,049 per ton in H1'19 ▪ Gross Profit of $57.8 million and Adjusted Gross Profit(1) of $1,040 per ton in Q2'20, compared to $1,075 per ton in Q2'19 1. See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure. 2. Defined as Adjusted EBITDA as a percentage of revenue. 3. For the three and six months ended June 30, 2020, Adjusted EBITDA margin adjusted for the Isoprene Rubber Supply Agreement would be 25.6%.and 22.8%, respectively. Kraton Second Quarter 2020 Earnings Call 7
Chemical Segment - Q2 2020 and YTD Results Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change ($ In millions) Volume (kT) 87.1 103.8 (16.7) 197.3 207.5 (10.2) Revenue $ 151.8 $ 197.4 $ (45.6) $ 338.7 $ 392.8 $ (54.1) Operating income (loss) $ (3.9) $ 21.2 $ (25.1) $ 6.4 $ 47.1 $ (40.7) Adjusted EBITDA(1) $ 15.7 $ 41.9 $ (26.2) $ 42.4 $ 83.2 $ (40.8) Adjusted EBITDA margin(2)(3) 10.3 % 21.2 % (1,090 bps) 12.5 % 21.2 % (870 bps) Note: May not foot due to rounding. Q2'20 vs. Q2'19 H1'20 vs. H1'19 ▪ Adjusted EBITDA(1) down 62.5% compared to Q2'19, reflecting lower ▪ Adjusted EBITDA(1) down 49.0%, reflecting lower pricing in the sales volume, lower pricing in the CST chain and to a lesser extent for CST chain and TOR upgrades, and lower sales volume, partially TOR upgrades, partially offset by lower raw material costs and lower offset by lower raw material costs and lower fixed costs fixed costs ▪ Sales volume decreased 4.9% on weaker market conditions, ▪ Sales volume decreased 16.1% on weaker market conditions, including the impact of COVID-19 including the impact of COVID-19 ▪ Performance Chemicals volume down 5.5%, with lower sales ▪ Performance Chemicals volume down 18.9%, due to lower sales into oilfield and fuel additive applications and the timing of into oilfield and fuel additive applications and the timing of sales to sales to a significant customer, partially offset by higher raw a significant customer material sales ▪ Adhesives volume down 7.9% reflecting a slow start in road ▪ Adhesives volume down 2.1% on lower sales into road marking activity marking applications ▪ Tires volume down 39.5%, reflecting global automotive trends and ▪ Tires volume down 18.3%, reflecting global automotive trends COVID-19 disruption on tire production. Sales volume for Tires and COVID-19 disruption on tire production. Sales volume represents less than 5% of total sales volume for the Chemical for Tires represents less than 5% of total sales volume for the segment. Chemical segment. 1. See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure. 2. Defined as Adjusted EBITDA as a percentage of revenue. 3. Accounting for lost sales associated with Hurricane Michael, Adjusted EBITDA margin would have been 20.7% for the six months ended June 30, 2019. Kraton Second Quarter 2020 Earnings Call 8
Q2 2020 and YTD Consolidated Results Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Change 2020 2019 Change ($ In millions, except per share amounts) Revenue $ 355.7 $ 495.3 $ (139.6) $ 782.9 $ 951.7 $ (168.7) Consolidated net income $ (7.1) $ 43.4 $ (50.5) $ 201.9 $ 57.0 $ 144.9 Diluted earnings (loss) per share $ (0.25) $ 1.28 $ (1.53) $ 6.20 $ 1.67 $ 4.53 Operating income $ 12.8 $ 56.2 (43.3) $ 41.1 $ 91.3 $ (50.2) Adjusted EBITDA(1) $ 69.5 $ 102.1 (32.5) $ 147.4 $ 191.5 $ (44.1) Adjusted EBITDA margin(2)(3) 19.6 % 20.6 % (100 bps) 18.8 % 20.1 % (130 bps) Adjusted diluted earnings per share(1) $ 0.30 $ 1.58 $ (1.28) $ 0.57 $ 2.46 $ (1.89) Note: May not foot due to rounding. $91.3 $191.5 $147.4 $56.2 $102.1 $41.1 $69.5 $12.8 1. See non-GAAP reconciliations included in the accompanying financial tables for the reconciliation of each non-GAAP measure to its most directly comparable GAAP measure. 2. Defined as Adjusted EBITDA as a percentage of revenue. 3. Accounting for lost sales associated with Hurricane Michael, Adjusted EBITDA margin would have been 19.9% for the six months ended June 30, 2019. Kraton Second Quarter 2020 Earnings Call 9
Balance Sheet and Liquidity (In millions) December 31, 2019 Change June 30, 2020 Maturity ABL Facility $ — $ 15.0 $ 15.0 Jan-2023 USD Tranche 290.0 (290.0) — Mar-2025 Euro Tranche 277.1 (86.4) 190.7 Mar-2025 7.0% Senior Notes 394.8 — 394.8 Apr-2025 5.25% Senior Notes 325.4 (0.1) 325.3 May-2026 KFPC(1)(2) loans 102.4 (8.1) 94.3 Jan-2022 Capital lease 1.0 (0.1) 0.9 Dec-2024 Consolidated debt $ 1,390.7 $ (369.7) $ 1,021.0 Cash (35.0) (102.4) (137.4) Consolidated net debt $ 1,355.6 $ (472.1) $ 883.6 Effect of foreign currency on consolidated net debt (2.1) Consolidated net debt excluding effect of foreign currency $ 881.5 Note: May not foot due to rounding. Available Liquidity at 6/30/2020 Cash $137.4 million ABL Facility $208.4 million Total $345.8 million 1. This amount includes all of the indebtedness of our Kraton Formosa Polymers Corporation (KFPC) joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and consolidate within our financial statements. 2. KFPC executed revolving credit facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the 5.5 billion NTD KFPC Loan Agreement. Kraton Second Quarter 2020 Earnings Call 10
Outlook - Second Half 2020 vs. First Half 2020 We expect that weaker demand related to COVID-19, and other factors including lower planned plant operating rates, the timing of turnarounds and maintenance activities as well as the absence of the H1’20 Cariflex contribution prior to the Q1’20 sale will have an adverse impact on our financial results for the second half of 2020, compared to the first half of 2020 ▪ Lower plant operating rates associated with H1'20 inventory build will result in less favorable fixed cost absorption ($20-$25 million) ▪ H2'20 is expected to include higher costs associated with turnarounds and maintenance ($5-$7 million) ▪ H2'20 is expected to include two quarters of COVID-19 impact vs. one quarter of impact in H1'20 ▪ We expect continued market weakness in our Chemical segment in H2'20 primarily due to the adverse impact of COVID-19 ▪ Financial results for H1’20 included approximately $10 million of Adjusted EBITDA associated with the Cariflex business, which was sold in Q1’20 Kraton Second Quarter 2020 Earnings Call 11
Business Outlook by Geography and End Use Application Well Diversified Portfolio Geographic Diversification Key End Uses Current Polymer Chemical Q1 Market Sector Market %revenue %revenue View View Region %Rev Outlook Adhesives & Packaging 20% 33% G Y Medical, Personal Care Americas 46% Mixed 12% -% & Hygiene G G Infrastructure 35% 6% G G Europe 37% Stable Consumer Durables 13% 6% Y Y General Industrial 9% 41% Y Y China/Asia 17% Improving Automotive/Tires 9% 9% R R Oilfield 2% 5% R R G Favorable Y Cautious R Weakness * Analysis based on Q2 TTM Revenues. Excludes Cariflex divested March 6th, 2020 Kraton Second Quarter 2020 Earnings Call 12
Kraton’s Focus on a Sustainable Future Creating Long-term Value In A Resource-constrained World Advancing our Sustainability Objectives Achieved alignment with United Nations Global Compact on Sustainable Development Goals Introduced Responsible Procurement Program Achieved Ecovadis Gold Rating Responsible Care Certification . Implemented ISO 14001 Joined Together for Sustainability Developing sustainable solutions to support the bioeconomy and connect the circular economy Committed to 12 Life Cycle Assessments by year- end 2020 See Kraton’s 2019 Sustainability Report https://kraton.com/sustainability/docs/2019Report.pdf Kraton Second Quarter 2020 Earnings Call 13
Appendix
Polymer – Revenue by Geography and End Use TTM June 30, 2020 Segment Revenue by Geography Segment Revenue by End Use Kraton Second Quarter 2020 Earnings Call 15
Consolidated Net Debt June 30, 2020 December 31, 2019 (In millions) Kraton debt $ 926.7 $ 1,288.3 KFPC(1)(2) loans 94.3 102.4 Consolidated debt 1,021.0 1,390.7 Kraton cash 132.9 24.6 KFPC(1) cash 4.4 10.4 Consolidated cash 137.4 35.0 Consolidated net debt $ 883.6 $ 1,355.6 Effect of foreign currency on consolidated net debt (2.1) Consolidated net debt excluding effect of foreign currency $ 881.5 Note: May not foot due to rounding. 1. This amount includes all of the indebtedness of our Kraton Formosa Polymers Corporation (KFPC) joint venture, located in Mailiao, Taiwan, which we own a 50% stake in and consolidate within our financial statements. 2. KFPC executed revolving credit facilities to provide funding for working capital requirements and/or general corporate purposes. These are in addition to the 5.5 billion NTD KFPC Loan Agreement. Kraton Second Quarter 2020 Earnings Call 16
Revenue by Product Group Revenue by Geography Group TTM June 30, 2020 30, Group June TTM byGeography Revenue Product and – Polymer CARIFLEX SPECIALTYPOLYMERS Kraton Kraton Second 2020 Quarter Earnings Call PERFORMANCEPRODUCTS 17
Chemical – Revenue by Geography and Product Group TTM June 30, 2020 ADHESIVES PERFORMANCE CHEMICALS TIRES 36% of TTM Revenue 58% of TTM Revenue 6% of TTM Revenue Chemical Segment Revenue Kraton Second Quarter 2020 Earnings Call 18
Polymer Segment Reconciliation of Gross Profit to Adjusted Gross Profit Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (In thousands) Gross profit $ 57,845 $ 78,866 $ 126,576 $ 132,752 Add (deduct): Transaction, acquisition related costs, restructuring, and other costs — 491 387 491 Non-cash compensation expense 114 131 285 330 Spread between FIFO and ECRC 20,575 6,749 27,320 27,964 Adjusted gross profit (non-GAAP) (a) $ 78,534 $ 86,237 $ 154,568 $ 161,537 Sales volume (kilotons) 75.5 80.2 146.3 154.0 Adjusted gross profit per ton (a) $ 1,040 $ 1,075 $ 1,056 $ 1,049 a. For the three and six months ended June 30, 2020, adjusted gross profit and adjusted gross profit per ton, adjusted for the IRSA, would be $74.7 million and $147.3 million and $1,008 and $1,024, respectively. Kraton Second Quarter 2020 Earnings Call 19
Reconciliation of Net Income to Operating Income to Non-GAAP Financial Measures Three Months Ended June 30, 2020 Three Months Ended June 30, 2019 Polymer Chemical Total Polymer Chemical Total (In thousands) Net income (loss) attributable to Kraton $ (7,968) $ 41,208 Net income attributable to noncontrolling interest 887 2,190 Consolidated net income (loss) (7,081) 43,398 Add (deduct): Income tax (benefit) expense 6,659 (6,846) Interest expense, net 13,466 19,339 Earnings of unconsolidated joint venture (128) (140) Loss on extinguishment of debt 141 — Other (income) expense (251) 417 Disposition and exit of business activities 25 — Operating income $ 16,762 $ (3,931) 12,831 $ 34,979 $ 21,189 56,168 Add (deduct): Depreciation and amortization 12,948 18,394 31,342 14,343 17,561 31,904 Disposition and exit of business activities (25) — (25) — — — Other income (expense) (16) 267 251 (618) 201 (417) Loss on extinguishment of debt (141) — (141) — — — Earnings of unconsolidated joint venture 128 — 128 140 — 140 EBITDA (a) 29,656 14,730 44,386 48,844 38,951 87,795 Add (deduct): Transaction, acquisition related costs, restructuring, and other costs (b) 1,551 468 2,019 2,395 166 2,561 Disposition and exit of business activities 25 — 25 — — — Loss on extinguishment of debt 141 — 141 — — — Hurricane related costs (c) — — — — 6,944 6,944 Hurricane reimbursements (d) — — — — (7,500) (7,500) Non-cash compensation expense 1,897 — 1,897 2,190 — 2,190 Spread between FIFO and ECRC 20,575 493 21,068 6,749 3,321 10,070 Adjusted EBITDA $ 53,845 $ 15,691 $ 69,536 $ 60,178 $ 41,882 $ 102,060 a. Included in EBITDA is a $7.5 million gain on insurance for the three months ended June 30, 2019, a reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael. Also included in EBITDA are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $3.9 million for the three months ended June 30, 2020, which represents revenue deferred until the products are sold under the IRSA. b. Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges. c. Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. d. Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds. Kraton Second Quarter 2020 Earnings Call 20
Reconciliation of Net Income to Operating Income to Non-GAAP Financial Measures Six Months Ended June 30, 2020 Six Months Ended June 30, 2019 Polymer Chemical Total Polymer Chemical Total (In thousands) Net income attributable to Kraton $ 200,118 $ 53,876 Net income attributable to noncontrolling interest 1,821 3,134 Consolidated net income 201,939 57,010 Add (deduct): Income tax benefit (29,893) (4,192) Interest expense, net 30,927 38,280 Earnings of unconsolidated joint venture (229) (261) (Gain) loss on extinguishment of debt 14,095 (210) Other (income) expense (578) 676 Disposition and exit of business activities (175,189) — Operating income $ 34,687 $ 6,385 41,072 $ 44,229 $ 47,074 91,303 Add (deduct): Depreciation and amortization 26,295 36,220 62,515 28,314 35,112 63,426 Disposition and exit of business activities 175,189 — 175,189 — — — Other income (expense) 39 539 578 (1,045) 369 (676) Gain (loss) on extinguishment of debt (14,095) — (14,095) 210 — 210 Earnings of unconsolidated joint venture 229 — 229 261 — 261 EBITDA (a) 222,344 43,144 265,488 71,969 82,555 154,524 Add (deduct): Transaction, acquisition related costs, restructuring, and other costs (b) 11,699 1,230 12,929 3,109 564 3,673 Disposition and exit of business activities (175,189) — (175,189) — — — (Gain) loss on extinguishment of debt 14,095 — 14,095 (210) — (210) Hurricane related costs (c) — — — — 12,805 12,805 Hurricane reimbursements (d) — — — — (12,720) (12,720) Non-cash compensation expense 4,745 — 4,745 5,499 — 5,499 Spread between FIFO and ECRC 27,320 (1,973) 25,347 27,964 (43) 27,921 Adjusted EBITDA $ 105,014 $ 42,401 $ 147,415 $ 108,331 $ 83,161 $ 191,492 a. Included in EBITDA is an $18.6 million gain on insurance for the six months ended June 30, 2019, fully offsetting the lost margin in the first quarter of 2019, and reimbursement for a portion of the direct costs we have incurred to date related to Hurricane Michael. Also included in EBITDA are Isoprene Rubber sales to Daelim under the IRSA. Sales under the IRSA are transacted at cost. Included in Adjusted EBITDA is the amortization of non-cash deferred income of $7.2 million for the six months ended June 30, 2020, which represents revenue deferred until the products are sold under the IRSA. b. Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges. c. Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. d. Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds. Kraton Second Quarter 2020 Earnings Call 21
Reconciliation of Diluted EPS to Adjusted Diluted EPS Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Diluted Earnings (Loss) Per Share $ (0.25) $ 1.28 $ 6.20 $ 1.67 Transaction, acquisition related costs, restructuring, and other costs (a) 0.05 0.06 0.31 0.09 Disposition and exit of business activities 0.02 — (4.94) — (Gain) loss on extinguishment of debt — — 0.34 (0.01) Tax restructuring (0.09) — (2.03) — Hurricane related costs (b) — 0.22 — 0.40 Hurricane reimbursements (c) — (0.23) — (0.39) Spread between FIFO and ECRC 0.57 0.25 0.69 0.70 Adjusted Diluted Earnings (Loss) Per Share (non-GAAP) $ 0.30 $ 1.58 $ 0.57 $ 2.46 a. Charges related to the evaluation of acquisition transactions, severance expenses, and other restructuring related charges. b. Incremental costs related to Hurricane Michael, which are recorded in cost of goods sold. c. Reimbursement of incremental costs related to Hurricane Michael, which is recorded in gain on insurance proceeds. Kraton Second Quarter 2020 Earnings Call 22