Q4 2019 Earnings Call
Ingevity fourth quarter and full year of webcast and conference call.
At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
Ill now turn the conference over to our hosts Jack Mohr Vice President Communications. Thank you you may begin.
Thank you Diego good morning, everyone welcome to Ingevity use fourth quarter 2019 earnings conference call.
You appreciate your flexibility in joining us on short notice.
My name is Jack Mohr and I'm standing in this morning for Dan Gallagher, who is traveling this week.
If you have any questions. After this morning's call you can reach out to me my contact information is included on this morning's news release.
Earlier. This morning, you posted a presentation onto the investors section of our website.
You haven't already done so I would encourage you to download. This file. So you can follow along on the call you can find it by visiting IR thought ingevity dot com under events and presentations.
All participants who are logged into our webcast slides should be visible in the online viewing pain and also available to download.
On slide number two of that deck, you will see our disclaimer that todays earnings call may contain forward looking statements relevant factors that could cause actual results to differ materially from these forward looking statements are contained in our earnings release and in our SEC filings, including our form 10.
Okay, and our most recent form 10-Q.
Ingevity undertakes no obligations to publicly release any revision to the projections and forward looking statements made during this call or to update them to reflect events or circumstances occurring after the date of this call.
Throughout this call we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable GAAP measures.
Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures are included in our earnings release and can be found on the Investor Relations section of our website.
Our agenda is on slide three.
With me today, our Michael Wilson, President and CEO, and John Fortson, Executive Vice President and CFO.
First Michael will comment on the highlights of the quarter and full year and review the performance of our two segments.
I will then discuss our automotive gasoline vapor emissions control business and steps, we're taking to maintain our leadership position in this application.
John will discuss our current financial status.
Then Michael will return to discuss how we performed this year versus our commitments and provide some perspectives and guidance for 2020.
We'll then open the line for questions, Mike Smith, President of performance chemicals, and Ed Woodcock President of performance materials, who joined the call with you in AG.
With that I'll turn the call over the Michael.
Thanks, Jack Good morning, everyone. Thank you for joining us. This morning, we appreciate your interest Ingevity before we dive into the results just a heads up that our prepared remarks. This morning will be a bit longer than usual as we have a lot of ground, we would like to cover.
With that if you'll turn to slide number four you'll note some highlights for the quarter.
As expected we finished the year with strong performance in the fourth quarter. Despite continued macroeconomic pressure, particularly industrial applications. We've benefited from growth in end use applications, there driven more by regulation technology adoption and infrastructure spending.
Overall revenues in the fourth quarter were $303 million approximately 9% when compared to the previous years quarter. This includes the benefit of additional revenue and earnings from our acquired engineered polymers product line.
For the acquisition of the Kappa capital Aktone business per store holding Avi.
We delivered significantly improved profitability in the quarter adjusted EBITDA were $91 million up $18 million from the previous years quarter and for the fourth consecutive quarter, we achieved adjusted EBITDA margin of 30% or more.
370 basis points versus the prior year.
Our core EPS DNA costs were down 6% and for the quarter, we generated strong cash flow of $50 million.
For the full year sales were up 14%, including the addition of engineered polymers business. Adjusted EBITDA were 397 million up 24% above the midpoint of our most recent guidance and within less than 1% of the midpoint of the guidance. We gave at the beginning of the year.
On a pro forma basis, which assumes we had only engineered polymer business for the full year in 2018, and 29 team sales were down eight tenths of a percent adjusted EBITDA were up 4%.
Our strong free cash flow enabled us to significantly de lever throughout the year.
After closing on the engineered polymers acquisition first quarter net debt to adjusted EBITDA was 3.4 times.
Company ended the year with a leverage ratio of 2.8 times.
Turning to slide number five you will see the fourth quarter results for Q4 performance chemicals.
Generally speaking sales in the performance chemicals segment was negatively impacted by weak market conditions, especially in industrial applications and specifically in Europe, and Asia segment sales for the fourth quarter were $175 million up 5% versus the prior year period.
On a pro forma basis, again, which assumes we had only engineered polymers business for the full quarter in 2018 sales in the segment were down 13%.
Sales into industrial specialties applications. These include printing inc.'s adhesives agricultural chemicals, lubricants and others were down about 19%.
This decline was led by the ongoing secular decline in demand for printing Inc.'s. In addition from the top line. It also reflects our decision to exit unprofitable distributor agreement beginning in the fourth quarter of 2019.
While having a negative impact on our revenue decision has benefited our margins.
What's more during the quarter the price of Chinese gum, Rosin, which typically is the price center for all rosin based products in Asia continued to run along the road floor.
This resulted in demand weakness were underwritten ties rosin and export markets for the year industrial specialties revenues declined 13%.
Sales of performance chemicals products, the oilfield customers were down 18% in the quarter versus the prior year due to reduced drilling activity in North America, but this was less than the year over year decline in U.S rig count of 26%, owing to our beneficial exposure to oil production and growth opportunities.
Outside the us.
For the full year sales were down only slightly approximately 3%.
Sales to payment applications were a bright spot of 16% and what is seasonally a slower quarter driven by excellent growth in North America, which were up 17%.
We also saw increased sales in China, and South America, which were offset by declines in other export countries.
For the year sales of this application, we're up only modestly the 10% growth in North America was largely offset by lower export sales.
We also continue to see strong adoption in price improvement for our Eva Therm Ward mix asphalt technology, which was up 22% in the quarter and 13% for the year.
In the engineered polymers product line sales were 14% below the prior years pro forma period.
The most significant driver was reduction in monomer sales in Europe, due to softer demand and increased competition.
Higher value derivative product sells capital Aktone, Polyols and thermoplastics relatively stronger as a result gross margins remained strong.
Excluding the impacts to revenue of the transition services agreement with per store discussed last quarter in which we are we which we now have behind us pro forma annual revenue was down 12%.
We continue to believe very strongly in the long term potential this business and as I'll discuss later in the call. We expected to returned to solid growth in 2020.
Performance chemicals, EBITDA were $32 million up 7% for the quarter, our pro forma basis segment EBITDA were down 28% in the quarter.
Segment EBITDA as reported benefited from reduce plant spending and improvements in price and mix were partially offset by unfavorable foreign currency exchange.
For the full year, where pro forma basis revenues were down 11% and segment EBITDA was down 13.
Generally speaking our efforts to drive margin accretion in the segment are continuing to bear fruit. We ended the year, having achieved segment EBITDA margin of 22.9 present, representing a 230 basis point improvement over 2018.
Since 2016 performance chemicals team has delivered an impressive approximately 1000 basis point improvement and segment margins.
Turning to performance materials as you can see on slide number six this segment once again delivered exceptional performance.
Sales in the quarter were $128 million up 14% versus the prior to quarter.
Sales in China continued to fuel the segment's growth as automakers moved ahead with implementation of the China six national standard for gasoline labor emission control.
You know the China, six regulatory standard costs for evaporated admission canisters essentially equivalent to those or you asked EPA tier two.
In addition, according to the China Association of automobile manufacturers automotive light vehicle production in China was up slightly about 2.6% in the quarter.
As a result, our segment sales in China were up an incredible 270%.
In our estimation, China's automakers, where at least 90% compliant at 90% compliance rate as we entered 2020.
We're continuing to see strong sales of Ingevity patented us tier three and lift three gasoline vapor emissions solutions, particularly our honeycomb scrubber products in the U.S and Canada.
We estimate that the industry is likely above the mandated compliance rate of 80% for the 2020 model year.
Again speaking to the regulatory nature of this application sales increased despite a 10% decrease in North American light vehicle production in the quarter. According to awards.
In the quarter performance materials segment, EBITDA were $59 million up $16 million for 37% versus the prior period.
As discussed we saw impressive volume increases lowest solid price and mix gains in the segment. In addition, we experienced lower planned spending in part because we had few scheduled maintenance outages in the quarter.
These were partly offset by higher legal expenses associated with protecting our intellectual property.
Still segment EBITDA margins of 45.8% in the fourth quarter, which is an improvement of 770 basis points versus the prior year period.
For the full year, we grew revenues by 22% segment, EBITDA rose, 26% and margins accreted by 120 basis points.
Again this was despite lower global auto demand and a 10 million dollar headwind from higher legal expenses overall, an outstanding year for the segment.
To wrap up the commentary on 2019, I'd like to complement our team of employees in both segments and across the company for their execution like many other companies we are facing a difficult macroeconomic environment. This makes it even more important than we execute on what we can control against this backdrop our team of employees is delivered.
Margin accretion.
Lower core EPS DNA improved working capital outstanding cash flow and a stronger balance sheet.
Let's say the least I'm very proud of our team's execution.
Before I turn the call over to John and before pivoting to our 2020 outlook given the interest we have received to better understand our intellectual property position in performance materials and the surprising magnitude of the share price impact we have witnessed as a result of the most recent decision and our patent infringement actions I want to take some.
Time here to provide both a refresher and an update on this business. If you would turn to slide number seven.
Our strategy for performance materials is straightforward, we want to capitalize and build on our strengths.
We are the global expertise and technology leaders and evaporative gasoline emission control.
Period.
We are a valued resource for our customers and their customers and an integral part in the process of designing compliance systems for current and future vehicles.
Our applications expertise provides us the credibility to engage with regulators around the world as they seek to modify moderniser emission standards.
We turn our proven technology provide automakers, the most efficacious and lowest cost means by which to meet increasingly stringent regulatory standards.
We have and continue to invest in production and technical capabilities to meet the growing demand for our products that we help create.
We are actively developing new patents and innovating new products today with the technologies of Tomorrow's vehicles, and we are continually driving operational excellence in regard to manufacturing efficiency quality consistency and costs.
As shown on slide number eight there are fundamentally three levels of technology and use around the world today, all of which employs our unique activated carbons varying degrees in quantities.
United States first began regulating of averages admissions in the late 19th Seventys in early 19 eighties with a tier one canister designed to capture the equivalent of one day of parking emissions.
And the 19 nineties tier two technology designed to capture multi day parking emissions running losses and refueling vapors was adopted by the us.
And more recently, the U.S and Canada had been moving to a tier three technology, which for all intents and purposes is a zero emission solution.
As noted earlier use adoption of tier three technology is now greater than 80% and will gradually move to 100% compliance for 2022 model year vehicles.
China, the world's largest auto market by country began adopting tier two systems as part of the China six regulatory package last year, and we'll achieve 100% compliance during 2020.
We estimate that heading into the beginning of year approximately 90% of China's vehicle production was China Sox compliant.
Europe also move to a new regulatory standard 2019 standard known as Euro six D from an evaporative emissions technology point of view the standard still requires what is essentially a tier one technology.
Compliance was achieved by shifting from granular carbon to pelican carbon in a canister that was in large to capture two days rather than one of parking emissions.
The regulatory changes in these three auto markets have been the predominant drivers of our growth in this application over the past few years and we'll continue to VSOE through 2021.
Notably 45% of the world's new gasoline vehicles over 34 million vehicles are still being regulated to the equivalent of a 19 seventies us standard.
Only the U.S and Canada, representing less than 25% of the world's new gasoline vehicles sold annually on a near zero emission standards.
Moving to slide nine.
Based upon our engagement with regulatory bodies in auto producers globally, we are confident more countries and regions will move to increasingly stringent standards, providing a long runway for evaporative emissions regulatory driven growth.
There are two reasons for this first regulatory bodies widely recognized evaporated admissions as a major source of hydrocarbon admissions from vehicles and the solutions to eliminating those emissions are effective widely understood and low end cost.
And to as major auto markets move to more advanced technology, given the relatively low cost of the solution automakers to lower their own costs, which refer to harmonize their supply chains across geographies.
For example, beginning in 2022, Brazil has passed new regulations, requiring tier two standards, but which will in fact require a tier three solution due to additional requirements within the standard that was passed.
In China, and additional level of regulation will eventually become necessary to offset the environmental impact for the increasing number of vehicles there.
The next step will likely be to implement a tier three near zero regulation.
While the timing is such a move is unknown it is already being discussed within China.
Similarly in Europe regulators are actively discussing the use of an enhanced regulation and will likely require either a tier two system, we're adding more diurnal controls to the existing system.
Again as these countries moved to higher standards, the likelihood of platform harmonization increases, which had only bode well for our revenue growth.
As regulations become more stringent movement toward more advanced systems and larger canisters will continue to increase.
As noted on slide number 10, the state of the art solution is the tier three near zero emissions technology designed to meet us in Canadian standards for which we hold a bleed emissions patent.
We sometimes referred to this is our 844 patent.
This is a cancer system, Patton, which enables a canister to achieve near zero emission levels by significantly reducing diffusion emissions from the canister. After it has been purged with fresh air.
Tim typical manifestation of this patent includes our highly engineered pelleted activated carbons and the primary part of the canister and one or two of our ceramic activated carbon honeycomb on the outlet portion of the canister.
This patent specifically applies to us in Canadian near Zero regulations. It does not apply and other regions in the world the regulated by older less stringent emission standards.
In the regions, where the patent does not apply we continued to be the pervert provider of granular impella activated carbon based on the quality and efficacy of our products are light vehicle performance history, and our experience of over 40 years in the application.
We are perceived as the safe low risk choice.
Our experience in China, and with the moved into China six regulatory standard is a great example of this the products required to comply with China six are not covered by our 844 patent yet our market share in China has moved from a majority share two are now being the preferred supplier on the vast majority.
Of all platforms in China today.
The 844 patent is set to expire in March of 2022.
Sometime after that date, we expect to see increased competition for the honeycomb scrubber component of our tier three solution.
Currently in our tier three evaporative solution has employed today talented carbon plus honeycomb scrubber.
Roughly 50% of the value content is in the pelted carbon and 50% is in the honeycomb scrubber.
While increased competition for the pellet and carbon as possible in the future. The patent expiry is not expected to have a direct impact on competition for the canisters pellets at carbon which shows the larger primary portion of the system.
We feel that for the same reasons that we earned the preferred supplier today for pellets in the canister, we will be the preferred supplier in the future.
Turning to slide number 11 that said there is still fair to ask how do we intend to defend our market position hosts the expiration of the 844 patents.
The answer is through a multifaceted approach elements of our strategy include capturing value from our unique elements carbons through price increases justified by the value proposition.
Supply agreements, both short term and long term valued by our customers.
New innovation and intellectual property development.
Enhancing our position as global experts with regulatory bodies.
And maintaining our reputation leadership with our customers by being the safe and unfailing supplier that we have been for over 40 years.
Because of our deep customer relationships with auto manufacturers enabled by our reputation as world experts and evaporative emissions. We have early insight into where future engine design is going and the challenges those designs create for evaporated emissions control.
This enables us and hockey parlance escape not where the bucket is but where it is going to go.
In terms of future internal combustion engine design that is toward low purge systems and that is where we have focused our product development and patent strategy.
Let me use our newest patent family specifically, our new 649 patents, which was issued in August 2017, as an example of how all of these advantages come together to further extend our market leadership.
The new patent because with our current bleed emission Patton is not the composition of matter Patton, rather a system based patents with performance windows. The performance window addresses canister diffusion emissions or low purge fuel systems that passed the near zero emissions test.
Low purge refers to engine designs, which bring less air flow into the engine.
Automakers are interested in doing this to improve engine efficiency and fuel economy.
However, the lower the air volume makes it more challenging for the canister to be effective.
Our new 649 patent family is designed to enable cancer systems to maintain near zero emission compliance under low purge conditions and reiterating what I said earlier low virtual systems are the future direction of internal combustion engines.
We've heard from some customers they consider our new patents to be broad reaching.
Our estimates are that the patent could apply to anywhere from 30% to 70% of future low purge engine system designs.
In 2020, we estimate that 15% to 20% of us in Canadian vehicles already fall under this patent.
And higher sales of the honeycomb scrubber designed specifically for this low for Jeff location over the past three years have grown at a CAGR of more than 30%.
I would also note that the six or nine patents does not depend on the same art as the 844 patents.
As these engine designs become mainstream we will be better able to understand the full impact on our business as world leaders in this technology, we will continue to innovate and develop new products that help our customers chat solve challenges just as we have successfully done for the past 40 years.
Continuing with the sports analogies equally as important to playing good offense is planned good defense. If you turn to slide number 12 will review the status of our IP litigation.
Beginning with a molecule case.
So what is it the molla has been doing.
They are adding proprietary material for certain auto platform designs in order to reduce or eliminate the amount of honeycomb scrubber needed.
However, it is our contention that their canister designs are infringing our 844 patent.
We believe that the model is infringing canister designs are in use on a relatively small number of vehicle platforms, perhaps 20 to 25.
And it is important to know the Molla remains one of our largest customers for both pelted carbons and honeycomb scrubbers.
In July of 2018, Ingevity filed suit against Molla and Federal Court in Illinois, alleging that Molla is infringing on our patents through marketing manufacturing and the sale of infringing canisters. We also petition to US International Trade Commission for ITC to prevent Mahler from importing activated carbon.
That are used to infringe ingevity patent.
Molla responded by challenging the validity of the four four patent through an inter parties review or IP are proceeding through the use patent office.
This challenge was denied by the US patent trademark in a billboard effectively upholding the validity of our patent.
Last week, however, and administrative judge for the ITC denied our request the band model as infringing importation of activated carbon.
The judge in reaching his decision found that for the limited purpose of considering the importation van the patent was invalid based on to narrow prior art claims.
One of these had already been rejected by the patent trial in Appeals board in the case that Ingevity want.
On the second we believe the judge misapplied the law.
Interestingly the judge found in favor of Ingevity on nearly all other matters that issue, including that model was infringing.
The patent was not unenforceable and Ingevity is not abusing its patent.
Perhaps the most important thing to remember is that the IP fees administrative judges determination does not in the validate our patent simply put he does not have the authority to do that and this ruling has no other legal impact on any other legal proceedings.
We are planning on appealing the ITC decision, but quite frankly, the ruling either way, we will not impact a patented legal and commercial viability.
As to our federal infringement case against Molla. It will remain stayed and believe it cases fully resolved. It is unlikely that the case will be heard before 2021.
And even more likely than appeals would be exists would be exhausted before the patent expiration in March of 2022.
In the interim and even during his build process. The patent will remain valid and enforce and any infringing party will be at risk of increasing monetary damages should the patent sale to the invalidated.
Turning to slide 13, the other actions taken with against DSS.
Ingevity suits against BSF valve in Federal Court in Delaware alleges that BSF is infringing ingevity Patton through premature development and marketing and product that would presumably compete with ingevity honeycomb technology.
However, we do not believe BSF solution is currently on any commercial platforms.
As expected vs F as filed counterclaims sinking to invalidate ingevity patents and alleging anti competitive behavior on the part of Ingevity.
We can expect multiple notions back and forth on these matters in the months to come.
This trial is scheduled for September of this year.
Final resolution of this case presuming a pills is not likely until late 2021 or early 2022, a few months before the patent is due to expire.
And as I said before the patent will remain in effect through any such appeals.
DSS had also abroad challenges to invalidate Ingevity Patton through an IP our process like Molla DSM lost this challenge and also lost a rehearing challenge.
We recognize that many of you are working to try to understand what the revenue growth and earnings trajectory of our performance materials segment looks like post the full implementation of the current wave of more stringent regulatory standards in the U.S and Canada, the European Union and China.
And with the coming expiration of the 844 patents in March of 2022.
We believe we've given you the information necessary for you to develop your own model.
Typically we have conveyed our belief that the outcome of the current patent infringement litigation has no bearing on our forecast between now and the expiration of the April four patents in March of 2022.
We have provided the approximate value content of our products and tier one tier two and tier three systems.
We have told you where those regulatory standards applied by region and country and the corresponding number of gasoline vehicles sales in those markets.
And we have told you where we see the potential for new regulations by country in region and what we believe those regulatory standards choices will be over the next five years or so.
We have acknowledged that as we head into 2022, we fully expect greater competition for that honeycomb portion of our tier three solution.
But we have also explained how we intend to defend our leading market position and we believe that strategy is sound and our position is defensible.
Yes. It is possible that we could see some share in the honeycomb scrubber component of our tier three solution in the 12 to 24 months post patent expiration.
And we may see some price erosion as well.
However is our belief that these impacts will be more than overcome through improved pricing and other products.
The effective negotiated long term pricing in our existing supply agreements lower production costs as we drive operational excellence the application of our new 649 patent family and substantial new regulatory driven growth.
As a result, we remain very positive about the outlook for our performance materials business and we see continued revenue and earnings growth near term and long term.
I hope that we have answered most of your questions. If not we will pick them up in the today.
At this point I'll turn the call over to John Fortson, Our executive Vice President CFO and Treasurer for more detailed review of our financial status.
Thank you Michael Good morning, everyone I will provide some additional color on our fourth quarter results and review our capital structure.
Turning to slide 14, as Michael is covered the revenue and EBITDA of the company and segments I will begin at the M&A line on the income statement.
Especially in a is up from last year by approximately 14%, primarily reflecting the additional costs, both cash and noncash associated with the engineered polymers acquisition as well as increased legal expenses related to the defense of our performance materials intellectual property.
Number is up slightly on a percentage of sales basis.
As Michael noted our litigation expenses were around $15 million for the full year.
Our core SGN eight for the quarter, excluding litigation expenses of $5 million and amortization of 8.1 million included in last Una from the acquisitions was down 6.1%, reflecting our continued focus on cost discipline across the company.
Net interest expense for the quarter was $10.6 million.
33% as a result of the increased debt associated with the cap acquisition.
Our income taxes on adjusted earnings were $10.4 million for the quarter.
Our adjusted tax rate for the quarter was 18.3% and for the year was 21.5%.
Our estimated cash tax rate is 12%.
Diluted adjusted earnings per share were $1.10 cents up 3% from a quarter a year ago, we did not repurchase shares during the quarter as we focused on deleveraging as we committed in our third quarter call.
Approximately $389 million remain available for repurchases in our current authorization.
We generated outstanding free cash flow of 50 million up 5% versus the prior years quarter.
One might expect with an adjusted EBITDA increase of 24%, we should see a greater improvement in free cash flow. The reason our free cash flow was lower than previously guided is due to the timing of some fourth quarter accounts receivable collections that have since been rectified as well as or pre buy of capital expenditures.
This will simply resulting stronger first quarter 2020 cash generation.
Turning to slide 15, you'll see our capital structure and how that free cash flow has aided our net debt ratio.
Our borrowing rate at the end of the quarter for our revolver was LIBOR, plus 150 basis points and our borrowing rates of our current loans are LIBOR, plus 100, and LIBOR plus 150 basis points.
Of the term loans 141 million has been hedged in euros to be fixed at 1.41%.
The resultant weighted average interest rate was approximately 3.57%.
Under our senior notes remain fixed at 4.5% and $80 million industrial revenue bond borrowing rate remains at 7.67%.
We currently have $619 million available on our revolver.
Net debt as of end of year was 1.12 billion. Our net debt to EBITDA was 2.8 times. This is below our initial annual guidance of three times from the ended the year.
Trade working capital for the quarter fell from previous quarter to 264 million, which is 20% of sales flat compared to last quarter.
Additional information will be available on our form 10-K, which we expect to file at the end of February with that I'll now turn the call back over to Michael.
Thanks, John.
If you turn to slide 16, I'd like to take just a minute to summarize how we've delivered versus the commitments. We made the beginning of 2019 and from the time of our Investor day in 2018.
In 2019, we fell just short of our original guidance range for revenues.
Specific by $7 million, 4.5%.
The start of the year, it's clear we didn't anticipate the severity or the duration of the macroeconomic headwinds the global industrial manufacturers will be fighting against.
Despite this backdrop, we still delivered adjusted EBITDA within our guidance in fact within a percent of the initial midpoint of our guidance.
Given the business environment, we see this is strong execution.
We implemented our capital program as planned and we were on track to deliver our free cash flow target as John noted until the very end of the fourth quarter when some customers stretched our receivables. These receivables have since been collected.
Nonetheless, we were able to drive down our leverage from 3.4 times in the first quarter. After completing the engineered polymers acquisition. The 2.8 times at the end of the year.
Lastly, our segments are ahead of schedule scheduled toward meeting the revenue growth and adjusted EBITDA margin goals, we set for them at our Investor day in 2018.
So I said earlier, we're very proud of our team's performance last year, but all of that is now under rearview mirror as you know we aspire to do so much more our objective is to continue to be a leading specialty chemicals in materials company with atypical growth trajectory premium margins strong balance sheet and excellent returns in our short four year tenures upon.
The company, we've provided strong evidence of our ability to be just that.
Clearly, we need to continue to excel in our execution, which now brings us to our outlook and guidance for 2020, which will find on slide 17.
In our plan for 2020, we are assuming little to no improvement in the global macroeconomic environment.
However at the same time, we're assuming limited impacts from the Kuroda virus in China.
As you might expect this remains a very fluid situation as we sit here today, we are only anticipating a one week delay in the restart of our China operations post the Chinese lunar new year from February Threerd to February 10th consistent with China's extension of the holiday.
That said for the performance chemicals segment, we expect revenues to be flat to slightly down.
Engineered polymers should delivered solid.
Middle single digit growth as monitor market stabilize and they use a derivatives grows and targeted applications spurt in part to new product innovation projects, we have in the pipeline.
What's more all of the transition related revenue impacts are behind us.
Payment technology should see continued solid growth also mid single digits led by North America any adoption of our even with our warm mix technology in global expansion.
Infrastructure budget seemed to be holding in the current environment, which results in a strong list paving projects.
This growth will likely be offset by continued pressure and industrial specialties and oilfield applications, both of which are likely to be down mid to high single digits.
We anticipate that performance chemicals segment, adjusted EBITDA margins will be flat to modestly down for the year impacted mostly by lower fixed cost absorption the legacy pine chemicals facilities, and modest crude call oil or CTO inflation.
We expect our performance materials segment delivered double digit revenue growth in solid accretion and adjusted EBITDA margins.
This will be based on continued regulatory driven growth in China, North America and other regions the world.
Relatively speaking gross should be fastest in the first two quarters in the year as automakers complete the transition to 100% compliance with China, six and as compliance with us EPA tier three California Lethargy standards continue the March to 100%.
Please also note that we have a significant outage to replace a till that are coming to facility in the spring.
From an earnings cadence perspective, we're not expecting any help from growth in auto production in these two regions and our margin accretion driven by volume and mix benefits will be tempered by continuing litigation costs.
It's worth emphasizing again at the recent initial determination by made by the administrative judge for the ITC nine Ingevity is request the band models importation of patent infringing activated carbon will have no impact on our outlook for the company's performance materials segment in 2020.
As a result, we established our 2020 fiscal year guidance for revenues to be between 1.3 billion $1.35 billion.
At the midpoint. This represents a 2.5% increase over 2019 actuals.
We expect adjusted EBITDA to be between 400 million and 420 million.
At the midpoint this represents a 3.3% increase.
The biggest factor moderating our growth is our assumption of a continuing very difficult industrial macro impacting performance chemicals. We believe this business is at the bottom of the cycle. The question is when does it start to turn and again our forecast does not include that for 2020.
Our capital expenditures will be modestly lower in 2020 major products include the kill replacement that I mentioned and we will also be implementing a digital transformation project for our businesses that will streamline and improve efficiencies.
As a result of earnings growth margin accretion improved working capital formulas and the lower capital expenditures, we expect free cash flow through improved significantly more than $200 million for the year.
This will enable us to reduce our debt to below 2.25 times, which is right in the sweet spot of the range, we always target.
This number does not account for any share repurchases for acquisitions, both of which remain an option.
Overall, despite challenging global macroeconomic conditions, we will deliver strong performance in 2020 any improvement the global industrial economy would serve as a wealthy tailwind.
In closing I appreciate the work in efforts of our 1700 employees 50 poise worldwide. They are distinct competitive advantage for us we continually very strongly in the long term potential for our company and we hope you share enthusiasm for Ingevity.
At this point operator, we'll open up the call to questions.
Okay.
Thank you.
Ladies and gentlemen at this time, we will conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation tonal indicate your line is in the question Q.
You May press star to give you would like to remove your question from the Q.
For participants using speaker equipment, they may be necessary to pick up there has not for pressing the star keys. Once again Thats a question press star one on your telephone keypad.
Our first question comes from Mike Tyson with Wells Fargo. Please state your question.
Hey, guys nice ended the year there.
In terms of.
Cap for 2020, you're looking for better growth can you maybe walk us through some of the improvement and timing of improvement you expect to see as the year unfolds.
Sure Mike again, I think in that business, we're expecting a return to growth in the mid single digit area and on the reflects that talk to some of the specifics.
Yes, Thanks, Mike.
Yes, we have some really exciting new pipeline.
Innovations coming and some.
New forecasts from our customers.
We've got side say one of the largest growth areas will be in bio plastics. So thats the thermoplastic polymers of within the cap of product line.
And also some really positive news from.
Adhesive customers.
Both in.
United States as well as Europe.
In respect to timing.
I would say that.
More positive comparable.
Likely to start in the second quarter of this year.
Got it and then as a quick follow up for performance materials.
When you think about that business beyond 2020.
I will let me just you a lot of lot of moving parts here right you've got.
A couple issues in the car it's you've got.
Some of these other.
Explorations of regulations on this that come on so.
With that in a bottom line what do you think the growth rate should be for the business post.
Post 2020.
Yes, Mike, we really havent given that specific guidance beyond 2020, but as I indicated in the prepared remarks, no our outlook, which we do have a longer term plan shows continued revenue and earnings growth in the years post 2020.
Really out through the.
The expiration of the patent in 2022, and then recognizing.
That beyond 2022 will likely begin seeing new regulatory driven growth at a faster pace, but I think in those intervening years.
So we won't have the momentum of these large regulatory adoption identical sharing we will still deliver growth year to year.
Great. Thank you.
[music].
Our next question comes from Jim Sheehan with Suntrust Robinson Humphrey. Please state your question.
Thanks, Good morning.
And your.
Discussion of leverage you talked about getting below two 2.25 times before but potential share buybacks are you considering allocating more more cash to share repurchases given that discounted valuation of your stock.
Yes, there was nothing we've taken a decision on but it is something that were strongly considering and John can correct me if I'm wrong, but I think we have an existing operations. The authorization of 300 8300 on Reighty 9.5 million outstanding and.
That's one thing I'd also like to add is no in our corporate tenure over the last four years on a couple of occasions. You know we've increased leverage outside our target range to have two to two and a half times in order to pursue value, creating acquisitions I consider a high return investment in our own coking the same way.
Terrific.
And what does the impact of the cummington, killing replacement on your EBITDA, and which quarter will that occur I think you said was in the spring.
And also what was that Killen replaced in.
Was that was another killing Covington replaced in 2016 and again in 2018, just wondering how many cans you have there and if they are there how many will be needing replacement over the next couple of years.
Yeah, Jim So your memory is good we actually have four channels that are coming facility and this is the fourth one.
That has to be replaced the is killing to get replaced on a 20 to 30 year cycle.
This outage will actually span.
Q2 of our Q1 and Q2.
So a little bit of the impact in both of those quarters.
In terms of the impact of that outage on first half versus second half is probably low single digit millions.
At an EBITDA levels.
Thank you and regarding the patent expiration in March 2022, do you expect your performance material EBITDA margins will continue to expand after that patent expiration and if so what will drive that.
And I expect that they will either.
Continue to create or at least to hold and I think.
The reasons for that are in many of the thing is set in the prepared remarks.
Taking advantage of the opportunity we have to capture value.
Better value for our pelleted carbons, which are unique.
Our efforts as we continue to lower costs through operational excellence initiatives and just the growing demand and volume for our products.
I think it's a combination of all of those factors that I talked about in defending our market position.
Thank you.
Our next question comes from John Mcnulty with BMO capital markets. Please state your question.
Thanks for taking my question with regard to the performance chemicals business I guess when I'm looking at a revenue outlook. This flat to down slightly I'm, a little bit surprised to see the margins coming down, especially considering you've got kappa and paving kind of be or the road paving businesses being the ones that should be showing up growth.
And yet they are also the highest margin businesses. So I guess can you help us understand kind of the dynamics that are going on there and and and when we might be able to see the margins actually start to tick up for that segment as we look forward.
That's a great question, John I had the same question.
What's really impacting the margins and again, we're saying there will still be flat to slightly down is really within the legacy pine chemicals clean Kappa side because of some of the demand hits, we have lower.
Production, which is leading to lower fixed cost absorption and then we also have some slight of inflationary pressure on CTO. So it is mostly a cost related issue.
I think about pricing across the key components of pine chemicals, and I looked at 2019, I think tofa pricing was up about 4% broaden pricing was down about 4%, we see both of those at a relatively volume so I'm not expecting a lot of year over year pricing decline I think is mostly a volume story and I think the good news there.
Areas is once we do get that turn in the industrial macro which again, we're not calling for some other people may be.
We'll see volumes go up and then we're getting a lot of benefits from that both in cost absorption and back on track improving margins, but the increased percentage of mix that kappa and asphalt to your.
To your question, we'll continue to help improve margins as we go forward not just in 2020, but in the years ahead.
Okay.
Got it thanks for the color and then maybe with regard to to capital deployment and I guess the potential for for maybe more on the buyback front.
Would you consider enhance our at this point given how much your stock has come down like how should I should we think about your you're kind of appetite for for buybacks and this kind of environment at these kind of levels.
Yes, as I indicated earlier at some of something we're seriously considering all options are on the table John.
Great. Thanks, very much of the color guys.
Our next question comes from Jon Tanwanteng with CJS Securities. Please state your question.
Good morning, gentlemen, thank you for taking my questions and also during the call earlier, just kind of in front of investors.
My first one is do you know how much business you might have lost due to molly's actions.
Second our they still investing in that business given the litigation and.
There are other products, even as good as yours in terms of performance.
So to answer your first question, it's really impossible to know John and part of the reason for that is.
Cause of the ITC action.
As we indicated the federal Court action has been stayed and that includes discovery. So until we get passed the ITC and get back to.
The Federal Court action, we're not going to have that information ultimately.
[music].
As good as a win win and if and when we prevail with the suit.
All that information will be provided and we of course will be looking to try to.
Recovered damages that we've incurred from these platforms have been commercialized.
But at this point, it's really the bit impossible to.
Exactly what those are as I said, though we think it's on a limited number of platforms 20 to 25. So you think the total number of vehicle platforms Nielsen Canada. It's a relatively small percentage also as I indicated model remains one of our top five customers today.
A large customer both for our pelleted products and for the honeycomb products.
In terms of efficacy, we believe our products are superior in the future technology that we're bringing to the market will be superior as well.
Okay. Thanks.
Sorry go on.
I Miss your Middle question.
Right and that covered are they still investing in the business I guess with the other question, but if you just.
Just.
Okay. Great question, So you know.
Part of the actions we took legally are to defend our IP first and foremost we have an obligation to do that.
For our customers and for the marketplace.
Part of it is ultimately to recover damages that we've been encouraged because of infringing products, but the rest of it is really to put everyone on notice from competitors the Oems to tier ones to testing houses that this patent is out there that it's in force.
In a remains valid today and I do think that both.
Actions, both Molla Mbss I've had the intended effect of slowing down the infringing activity has stopped a completely we won't know that again until we get into the trial phase of both of these.
Fair enough and then just one question on the outlook.
Just wanted to clarify you only have a single week of the of a direct corona virus impact.
Reflected in your guidance or.
Do you contemplate a broader impacts that both the Chinese economy.
In order demand on the on the chemical the material side in there.
The week has to do at our own.
Plant operations, we were scheduled after the lunar new year started on the 27th to restart actually yesterday on the third.
But the Chinese government as you know extended the lunar holiday and so we're now scheduled to come back up on the 10th we are monitoring that every day in terms of.
The availability of our employees, having them back to July unchanged year, respectively, our ex pats coming back et cetera, and as of today.
We are on plan and scheduled to restart on the 10.
That obviously can change and I think a couple of weeks here and one way or another can make a difference. Unfortunately, we we needed to pull this call forward in order to address some of the issues. We address days I don't I don't have the benefit of another couple of weeks as the other thing plays out so at this point, we're going with.
The forecast.
The plan that we put together in late December with our board that was prior really to the current environment. So I would say relative to purposes not baked in but.
But again, we also have a vacant anything from improving industrial outlook in the second half of the year.
Okay got it and just to be Supercars does one week of downtime no change to what you forecast as your end demand for China for the year.
That's correct got it okay. Thank you.
Our next question comes from Chris cash with the capital markets. Please state your question.
Yes. Good morning turn your formal comments you had mentioned.
The the fact that the gum rosin industry is oversupplied has been oversupplied and is.
Adversely affecting pricing on tour and then towards the end of your formal comments you mentioned that you thought that the pine chemicals business or industry more generally.
At or close to the bottom of cycle. So what I'm curious about is how much of this.
There is a dynamic where the curtailment of of gum turpentine production or the pursuit of gum turpentine production could.
Okay.
Good.
Caused the gum rosin industry to produce less rosin and create an inflection.
In the dynamics around that business I'm, just wondering if based on prior cycles, how long that typically.
Takes place and if you see that playing out and is do you have any visibility along those lines at this juncture.
Yes. It is a great question, Chris you know the gum turpentine pricing sort of corrected itself over the second and third quarters of last year, and we saw gum rosin pricing really reach a bottom I would say mid to late third quarter and the pricing has just been bumping along.
The bottoms and I think those up the harvest season ended in the third quarter, but.
This element is the situation of elevated price of.
The turpentine persisted for quite some time. So I think there was a significant amount of gun rosin inventory that was built often but I think you see happening now is just.
The pricing sort of bumping along the bottom until that inventory is consumed and we then begin to see that upward inflection point.
Yes, right now as we don't really see that into the beginning of the second quarter and then I think we just have to see.
You know how it trends from there, but that's something that we track week to week.
And so your guidance assumes for the full year assumes at this point no recovery in that no inflection that dynamic.
Thats correct.
Okay, and then just one quick follow up on on the litigation front given that as you put the.
Theres greater awareness throughout the supply chain because of these actions that youve taken against Malian.
So is there any instances where the OE could be on the hook for for damages for potentially potential infringement and how are you managing those conversations with ultimately.
Those customers were expecting in via maybe a tier one or two or two supplier. Thanks.
Yes, Oems have likely in some cases likely our infringing both directly and perhaps indirectly.
And we have had communications with those Oems, making sure that they are aware of the patent situation.
And.
The potential for for damages I think in some cases I don't know this refresh but I think in some cases.
They are tier one suppliers that are infringing may be indemnifying them.
But we'll have to find out as all those progressive.
Okay. Thanks for the color.
Thank you are next question comes from Encino with Oppenheimer and company. Please state your question.
Hey, guys can more than just mark on for Ian Thanks for taking your questions on just a quick one in terms of the I guess your petition process with the U.S. ITC, what's the estimated timeline off.
Attention on when do you guys expect to see a response or resolution.
Sorry business I guess coincide with the feathering.
Interest to you guys mentioned for early 2021. Thanks.
Yes in terms of the ITC action, we need to file our request for review of the administrative law judges decision by February 10th.
If the ITC Commission.
Decides to go.
Go forward with review they need to complete all of that by May 28.
Of this year.
In terms of the schedule of other items. The infringement case against BSF is scheduled to go to court in September of this year and the court date for Molla has been stayed pending the outcome of all the work with the ITC. So it's not likely that coordinate even gets set.
Before the second quarter this year and it will likely be sometime in 2021.
Okay got it thank you guys.
At the early.
Okay.
Thank you.
Our next question comes from.
Paretosh Misra with Berenberg. Please state your question.
Thank you and your performance chemicals business, how much had been are you factoring in from a raw material inflation.
Hi, it's not something that I want to really quantify for competitive reasons, but.
Yes, as far as probably high single digit millions to little higher.
Got it fair enough.
And then just a clarification on the comments on your Capa engineered polymers business. I think you said mid single digit growth is that on a pro forma basis, our as reported basis.
I'll now be on a pro forma basis year over year.
Okay.
Lastly on new your free cash flow is the cash tax rate pretty much the same as the book argument.
Mike different.
It's different.
Little bit lower so I would think of it as being in the sort of 17, 18% range Josh.
Got it.
Thanks, that's all that.
Thank you.
Thank you are next question comes from Daniel Rizzo with Jefferies. Please state your question.
Hi, guys.
Mentioned opportunities I think in oilfield offshore I was just wondering where that's coming from.
It's largely in the middle East.
So so how should we are drilling.
Hey, guys.
It is a growing at a significant clip or is it.
Mike you want to comment on that business that we've gained yeah I'd say that passed it is nowhere near the level inside that we have in North America, but as a percentage of of the business.
It can have a nice improvement.
Could be 5% at some point during next year of our total.
Oilfield business in terms of growth.
Over 29.
Okay, you would hope that as a.
Potential.
Partial offset of what we expect to be.
Lower North American drilling in 2020 based on the forecast, we're getting from our current customers.
Okay, and then you mentioned as one of the one of the ways you're in defending your physician in performance materials is just with the length of supply agreements I was just wondering if you can.
Provide color on how long how long the lesson that just and any details on how it helps.
Oh workload competitors.
Yes, im going to be.
We've been very careful what I'd say here because again for competitive reasons.
It really don't wanting to get into the nature of those but we have supply agreements that are both short term and long term in nature across various products.
Alright, alright. Thanks.
Yes.
Thank you.
Our next question comes from Vincent Anderson with Stifel. Please state your question.
Yes. Thanks, So just quickly what what exactly is driving the CTO inflation, especially if you're going to be buying west outside of your long term supply agreements on these lower utilization rate.
That's really just of supply and demand for CTO to some degree supply of CTO was reduced during the course of 2019.
As of paper manufacturers for packaging Board.
Containerboard had reduced need they produced less Paul purposes.
Produced less CTO and that created some some tightening.
Tightening of the supply and demand for CTO.
Okay.
And then as we look at evil Thermon cap and its derivatives growing share in performance.
Is there some additional SG in any of that we'll have to come along with that or should we should we start counting on a pretty good amount of SGN a leverage ahead of us there.
Not significant additional us DNA I think.
We expect margins in both of those areas to grow over time.
Great if I could sneak in one more.
I was curious if you are willing to breakout.
How much of your Tofa value chain is going into export markets or or other places where I may benefit from this pretty significant increase in feedstock costs for other fatty acids.
[laughter].
Like doing to come into the.
Now lets the amount of Tofa for export is is really quite modest.
Out of our Tofa portfolio.
It's.
Probably in the neighborhood of 10% Thats export.
And rosin side.
And on the rosin side of the business, it's around 20% of our rosin that gets exports.
Okay. Thanks, and I'm just a clarification on rising does that include aster derivatives or is that just just RASM.
That's the entire rosin portfolio, both derivatized and straight merchant rosin.
Great. Thank you.
Thank you.
Just a reminder have you'd like to ask the question at this time press star one on your telephone keypad a confirmation totally indicate your line is in the question Q you May Press Star followed by the number two if you would like to remove your question from the Q.
Call participants do you think speaker equipment and may be necessary to press pick up your handset before pressing the star keys, we'll pause for a couple of momentous you are there any questions. Thank you.
Our next question comes from Roger Smith with Bank of America. Please state your question.
Thanks, Good afternoon on.
Last quarter, you said that Chinese gum rosin prices were below 2400 can you give anymore.
Specificity about it sound like you said earlier this call that it really troughed around in Q3, what price level. They taught that where they now we're at eight at the beginning of 2019 just to give us some sense.
Sure first of all I think theres, a miss quotation and that the the $2400 per ton number probably related to a dumb turpentine.
Which had fallen from somewhere in the mid $5500 a ton to 23 $2400 a ton.
Gum rosin prices sort of bottoms up around 1300, the 1300 $50 a ton Mike and then give a little color so where they are today and where they were a year ago sure. So I. The there in that 1300 dollar per ton neighborhood and they've actually been there for approximately six months.
That level and the current level is approximately 25% below the 2018 average for Chinese gum rising.
And I give you an idea I think first quarter last year was only about 1500 50 or Steve Yes, yes, because it was it was 1800 on average and then it.
Was gradually going down and has stayed stable at around 1300 since July.
I think a more reasonable.
No longer term benchmark for gum, rather than has been 17 to $1800 upon.
And thats consistent with the 2018 average.
Thank you and my other question is can you give us any insight and on top of Latam monomer volumes.
For the full year, what were the volumes for just a monomer down by.
If you can telesat.
The agenda level detail, Mike but.
Yes, the monomer volumes were down approximately 30%.
Pro forma basis.
And the cap of business and I think we said overall on a pro forma basis, if you back out the impacts of the revenue.
Impacts on the personal transition that on a pro forma basis overall capital was down 12% so that means that the derivative products.
Down very little.
And again I understand you said demand was was was down on the monomer, but is there any color you can give on the drivers of that.
Monomer demand decline.
While there are yet to impacts first we had a Japanese competitor who.
Had their plant out for a fire and they entered the market earlier in 2019 and regained their share position.
And so that happened and we see that happens really.
In the second quarter of last year and that level have remained fairly stable.
Throughout the course of 2019 and as we start this year.
And then the second point would be I'd say, just the general overall industrial challenges a lot of that monomer those to Europe. The industrial economy. As you know in Europe has been very weak so between the competitive regaining share and indest weak industrial market. So that's the driver for the monomer decline.
Thank you very much.
Our next question comes from Garo Norian with Palisade capital management. Please state your question.
Hey, guys I know you touched a little bit about the a innovations and cap on talked about one of the area staying bio plastics.
You know from the.
Big picture, the plastics world seems to really be focused on.
Improving the Biodegradability in Recyclability of classics with some guys playing some big targets out for 2025, and such and I was just curious from.
That perspective, and your capacity that you have in cap it today and looking out over the next few years is there a likelihood that you'll actually have to expand capacity in order to potentially meet that type of demand.
I think for capital Actos into bio plastics.
It is from a relatively small base, but it's growing rapidly more than 20% per year and just so that.
People understand one of the alternatives.
So traditional plastics or polyglot tide chemistries.
But the reason people don't like probably like ties as they don't have many of the characteristics of traditional polymers with respect to rigidity in thermal stability and those kinds of things and so how cap is used is in the poly lacks I'd chemistry to impart those characteristics.
That given the product for the feel that the consumer is used to so.
It is a very exciting area for development I think.
So as we stand right now we are.
Debottlenecking of the Kappa facility, along with the glassware replacement project, we've talked about so we're going to get additional capacity from that.
And in terms of future derivative capacity.
Again as we've mentioned previously we're doing a lot of work to see if we could actually use some of our existing.
Capability and capacity on the timetable side to produce the downstream polyols and thats looking more and more encouraging so.
We will continue to monitoring the capacity side of it I don't see any you know really large capex outlays for that at this point.
Great. Thank you.
Our next question comes from Vincent Anderson with Stifel. Please state your question.
Yes, thanks for entertaining a couple more I was just wondering is there anything that you can do proactively right now to driver utilization rates backup and pine chemicals, whether it's more Esther derivatives nation on the tour side or something along the value Aspen side.
Yeah, I guess a couple of days first of all you may remember that from the operating philosophy standpoint, we run for rosin demand.
Because when you look at the product value chain theres more value there than on the toughest side, it's pretty easy to to move tofa into the marketplace as a substitute for other fatty acid that we wanted to.
But again when you when you fractionated CTO, you get rosin, and Tofa and relatively fixed proportion. So one thing that we don't want to do is to overproduced rosin oversupplied impact the pricing dynamics. So.
The one thing that we are intent on doing is making sure that supply matches demand being relatively that makes for a healthier industry.
So youre not capacity constrained on on a derivative where there would be an option to push more products on the towards side.
Absolutely not no.
Okay. That's great and then just one other one I don't know how big of a business. It is for you, but I would imagine agriculture has what are hopefully some easy comps the last year in North America.
Are there some destocking still left to do in certain certain products, but I would imagine you're expecting some year over year recovery included in your AG products.
Yeah, I would say like what performance materials, Unlike pavement and some of our other markets are our growth is really being driven more by the adoption of our technology that we're providing a disbursement of that is considered superior so it's being substituted.
For existing Chemistries that Michael if you want to comment on that situation overall, I'd say or your characterization is accurate.
We have had.
Very strong growth high single digit growth in our AG. This person business and we expect that to continue long term than we actually see the glee globalization of that that technology. As you also mentioned AG business in 2019 was challenged and there are there likely as some destocking.
To be done in the beginning of the year.
Great any any chance, we could get a rough share of performance chemicals or is that.
Much detail.
I don't know better share standpoint, what would the size of this application for US is 20 520000 going on about $25 million for the AG part, yes, we also have disbursements for dies.
Okay perfect. Thanks, so much.
Thank you. Our next question comes from Ryan Bloom with the Hartford. Please state your question.
Yes, Scott good morning, I I, just want to understand better the transition to the 649 family of patents.
That's a really required under regulatory standards for that technology to use the public's going forward or can there be some relative delay if the economics of the legacy patents are cheap enough.
To delay that uptake.
Now what what's going to drive.
That that patent.
Into coverage is the change in engine technology, the move to these low purge systems and naturally being driven by automakers.
In order to control evaporative emissions under that low Herge technology.
You would probably be operating.
At least we think 30% to 70% designs under under the teaching them our path.
Could you comment a little more or less and again, it's it's based on the long term shift from a higher purge engine to low purge engines and as those low purge engines become more mainstream.
Dose it falls into the the to solving the purging in the emissions structure of that canister system, our six or nine patent really enables them to meet zero zero emissions.
With a much more challenged engine environment.
Okay. Thank you.
Thank you, ladies and gentlemen, there no further questions at this time I'll turn it back to Michael Wilson for closing remarks.
Well. Thank you everyone for your time and interest I hope that we were successful in the clearing up a lot of things there might have been confusion about.
It goes without saying, we remain very positive about this business and we look forward to talking to you soon take care and have a great day.
Thank you. This concludes today's call all parties may disconnect have a great.