Q1 2020 Earnings Call
Ladies and gentlemen, thank you for your patience and please stand by the Ingevity Conference call will begin momentarily again, we thank you for your patience and please standby the Ingevity conference call will begin momentarily.
[music].
They did Sheila.
Writing.
The first quarter earnings conference call and webcast at this time all participants are they listen only mode. A question answer session will follow the formal presentation. If he would like to queue for question. Please press star one on your telephone keypad.
If anyone should require operators systems. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Dan Gallagher Vice President of Investor Relations. Thank you Mr. Gallagher you may begin.
Thank you Jesse good.
Good morning, everyone welcome to Ingevity his first quarter 2020 earnings conference call.
On slide number do you see earlier this morning, we posted a presentation on the Investor section of our website.
You haven't already done so.
I heard you to download the file system called along with the fall.
You can find it visiting IR dot ingevity, dot com and or events and presentations.
For participants who are logged out or webcast dislodge should be visible in the online viewing pain and also available to download.
On slide two you'll 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-K at our most recent form 10-Q.
Ingevity undertakes no obligation to publicly released any revision to the projections and forward looking statements made during this call or do update them to reflect events and circumstances occurring after the date of the call.
Throughout the call we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable GAAP measures.
<unk> 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 right Relations section of our website.
Our agenda is on slide three.
With me today, our Rick Nelson Chairman of the board, an interim president and CEO.
John Fortson Executive Vice President and CFO, Mike Smith, President of performance chemicals, and add what Cox president of performance materials.
First Rick will comment on the highlights the quarter and then discuss some of the actions we've taken related to the Corona virus.
Then my can add will review the performance of our do segments.
John will discuss our current financial status.
And then Rick will make some remarks about our outlook for the rest of 2020 and John will review, our revised annual guidance and the one time special guidance, we provided for the second quarter given the unusual nature of the current environment.
Brick wall for some closing thoughts and then we'll open the call for QNX.
And with that it's my pleasure to turn the call to Rick Nelson.
Thanks, Dan.
And good morning to everyone. Thank you for joining us. This morning, we appreciate your interest in Germany.
If you turn to slide four you'll note some highlights for the quarter.
Ingevity delivered strong first quarter, despite initial impacts from the Corona virus or cobot 19.
The effects of the Corona virus on the first quarter financial results were not as severe as we had expected in mid February clearly the reduction in Chinese auto demand impacted our performance materials results.
To the extent, we expect however, most other covert 19 related impacts and the performance chemicals appears to have been delayed as John and I will discuss later, we expect the effects of the Corona virus more significantly begin in the second quarter.
Overall revenues in the first quarter were 288 million up 4% when compared to the previous years quarter. Despite weakness in China. The performance chemicals performance materials segment grew respectively in the quarter.
Sales in the performance chemicals segment were essentially flat as increases in pavement and oilfield technologies and the addition of the engineered polymer business were offset by weakness in the industrial specialties application.
With respect to earnings adjusted EBITDA were $92 million up $9 million or 10% from the previous years corridor.
And for the fifth consecutive quarter, we achieved an adjusted EBITDA margin of 30% or more at 32% up 180 basis points versus the prior year.
For the quarter, we generated outstanding free cash flow up 41 million.
Versus the previous years quarter of minus 36 million.
This enabled us to reduce our leverage which now stands at 2.7 times net debt to adjusted EBITDA.
As I said earlier, we posted these solid results despite impacts on the Corona virus and if you turn to slide five I'd like to review some of the steps we've taken in relation to the pen and demick.
From the beginning.
Ingevity recognize that the current Corona virus had the potential impact.
Potential to impact the global economy in took steps early.
Our facilities in China, It took swift and efficient steps at the outset, we have made sure we learn from their actions and you did the proper precautions on a global scale.
And I'm happy to report that currently we're not aware of any ingevity employees.
Domestic or international who has tested positive for cobot Nike.
We have taken what I believed to be a wide and appropriate set of measures which are listed on this slide we activated our business continuity team a task force to coordinate all of our efforts, we developed positive test scenarios and tools and enhanced employee communications.
In terms of employee health.
We've implemented work from home and social distancing initiatives limited traveling visitation provided pretty tele health services to employees and dependent and are taking temperatures at all production facilities.
I'm trying to locations all resume full operation after the Chinese new year.
The performance chemicals sites are running normally we have scaled back operations at our performance material facilities and implemented temporary furloughs.
And we have delayed planned capital projects that Covington, Virginia, and Warrington new pit in the pet.
Financially speaking out of an abundance of caution we drew down $250 million from our revolver to ensure our Lou liquidity during the crisis and in fact expect to see certain savings as a result.
Lastly, we began a deep dive webinars series to provide investors with insights into the strategies of each of our businesses.
We believe there will be.
Taking all of the rights steps to keep our employees safe and healthy.
And we are working hard to be responsive to our customers and maintain a strong balance sheet.
And so its financial status.
If you turn to slide six you'll see the first quarter results or performance chemicals.
At this point I'll turn the call over to Mike Smith, President performance chemicals, Mike.
Thanks, Rick.
Segment sales in the first quarter for $167 million essentially flat versus the prior year period.
This includes the addition of the engineered polymers products.
Sales into industrial specialties applications and these include printing inc.'s adhesives agricultural chemicals lubricants and others.
Are down about $16 million, 17%.
Sales in this area were affected by weak demand in industrial markets and the exit of an unprofitable distributor agreement.
We continue to see an oversupply of alternate materials, particularly low priced summarizing that's compared to the prior years quarter.
We are beginning to see an uptick in prices for Chinese gum rosin since the beginning of year.
Generally however, we continue experienced pressure on rising markets.
Sales in performance chemicals products to oilfield customers were up about 3% versus the prior year.
This business as you would expect continues to whether through volatility.
Worldwide lots of inventory and depressed prices driven by reduced demand are negatively impacting the whole industry, including North America drilling and production.
According to Baker Hughes U.S. rig count at the ended the first quarter was down 8.4% versus the fourth quarter down 21% compared to the first quarter of last year.
However, since the end of March U.S. rig count has decreased further 36%.
Having said that we've had some success with new customers in the middle East in China.
These are initiatives that we began several years ago as part of our strategy to expand our geographic presence and are now beginning to develop.
Sales to payment applications were up 12% in the first quarter, which as you know is a seasonally slow quarter.
We are clearly experiencing a solid start the paving season, especially in North America.
We're also seeing increased business and some south American countries.
We continue to accelerate our innovation efforts in this business.
And we're seeing strong adoption and price improvement for Evolut R warm mix asphalt technology.
And the performance chemicals segment as I said, we had the benefit of the additional revenue from engineered polymers product line.
These results, though were 13% below prior years pro forma period, which assumes that we had owned the business for the full years 2019, and 2020 due to lower sales in Europe.
It's important to note that this was a tough comp meaning that a year ago first quarter was particularly strong for this business.
Sequentially this quarter, so a 16.3% improvement versus the fourth quarter 2019.
We are continuing to see increased sales of thermoplastics, especially North America for bio plastic applications as we continue to globalize this business and move towards more high value Derivatized products.
And as we reported before margins remained strong are holding up well for the engineered polymers.
Performing chemicals segment, EBITDA were $31 million down 4%.
Segment EBITDA as reported benefited from reduced spending were offset by lower volumes price mix and foreign currency exchange.
Segment, EBITDA margins fell slightly 19.3% 18.6 decline of 70 basis points.
With that I'll turn the call over to Ed Wood Cop President performance materials to review the results for the segment.
Ed.
Thanks, Mike.
Turning to performance materials as you can see on slide number seven segment delivered solid results and growth despite issues in the automotive industry driven by the Corona virus.
Dominantly in China for this quarter.
Segment sales in the second quarter for $121 million up 11% versus the prior years quarter.
Sales in China increased significantly in the year over year quarter as automakers there have essentially completed the implementation of the China six standard.
And our estimation Chinas auto makers were at an approximately 99% compliance rate.
That said the significant downturn in auto production in China caused by the Corona virus.
Impacted our sales sharply in February and muted what what could have been an extraordinarily quarter leap sales result.
Because of the shutdowns light vehicle production was down in China by 47% in the first quarter.
Fortunately Chinese automakers are now rapidly coming back online.
And in fact, we estimate that Chinese passenger vehicle retail sales for the first three weeks of April are only down 7% versus prior year period sales.
We are continuing to see strong sales of both our base automotive activated carbon products and our honeycomb scrubber products used to comply with U.S. EPA tier three left three gasoline vapor emissions standards.
We estimate that the industry is above the mandated compliance rate of 80% for the 2020 model here.
In the first quarter, we did not see the production downturn of the automotive industry as much as in China.
Though that now is changing.
North American vehicle production was down 11% through March.
Sales in the European Union and in other regions were essentially flat again, we will see a sharp impact in these regions in the second quarter due to the virus.
In the quarter performance materials segment, EBITDA were $61 million up $10 million or 20% versus the prior year segment EBITDA.
We experienced solid price and mix improvement in the segment.
We also saw reduced production costs.
Segment, EBITDA margins were 50.5% in the first quarter versus 46.9% in the prior year period.
At this point I'll turn the call over to John Fortson, Our executive Vice President CFO and Treasurer for a more detailed review of our financial status John.
Thanks, Ed good morning, everyone.
I will provide some additional color on our first quarter results and review our capital structure.
Ill, then turn the call back to Rick for some perspectives on the rest of 2020, then I'll return to discuss our revised annual guidance and our onetime second quarter guidance.
Turning to page eight as Rick from I can add have covered the revenue and EBITDA of the company and its segments I will begin at the ash in a line on the income statement.
Yesterday is essentially even with the previous year down 1.5% on.
On a percentage of sales basis, our total ash DNA is down 70 basis points and our core SGN area, which excludes the amortization of 8 million included in SDMA from acquisitions was down 170 basis points, reflecting our focus on cost discipline across the company, which is receiving extra attention and occur.
Our environment.
Net interest expense for the quarter was 10.9 million, which decreased almost 2% year over year. The provision for income taxes on adjusted earnings was 9.8 million for the quarter, our adjusted tax rate for the quarter was 17.2%. We expect our fiscal year 2020 estimated cash tax rate Jimmy and.
The range of 18% to 20%.
In order to adjusted earnings per share or $1.12 cents up 13% from a quarter a year ago.
Before the full impact so kind of ours were apparent repurchased 750000 shares at an average price of $43. An 18 cents approximately 468 million remains available for repurchases and our current authorization.
We generated outstanding free cash flow, a 41 million versus negative 36 million in the prior years quarter.
As a reminder, prior years quarter cash flow was negatively impacted by 31 million of costs related to the cap acquisition.
Adjusting for the prior year cap acquisition cash outflows, our free cash flow increased in the year over year period by over $45 million.
This is a great outcome in the first quarter as those of you who follow US no. We typically consume cash in our first quarter as we prepare for the paving season.
We appreciate the efforts across in Germany to work, both with our customers and suppliers and ensuring we manage our cash positions.
Turning to slide nine you'll see our current capital structure.
Our borrowing rate at the end of a quarter for our revolver was LIBOR, plus 150 basis points and the borrowing rates of arc home loans are LIBOR, plus 100, and LIBOR plus 150 basis points.
Well the term loans 166 million has been hedged in euros to be fixed and 1.35%.
The result weighted average interest rate was approximately 3.33%.
The rate on our senior notes remains fixed and 4.5% an 80 million dollar industrial revenue bond borrowing rate remains at 7.67%.
Net debt as of March 31st was 1.113 billion, our net debt to EBITDA was 2.7 times down from the fourth quarter of 2019 at 2.8.
Trade working capital for the quarter increased from the previous quarter to 272 million, which is 21% of sales versus 20% in the previous quarter.
In regards to our capital allocation given recent events in the impacts of the current virus to our business our priorities have shifted somewhat.
We are first and foremost taking necessary steps to ensure our liquidity and maintain a strong balance sheet.
We are focused on returning to our long term target of net leverage between two and at times.
And at the same time, if and when the market stabilizers being opportunistic with share repurchases as we did earlier in the first quarter before the full scope of the crown of Irish impacts were now.
While we continue to examine M&A opportunities we are weighing those in light of the preferred uses of capital is outlined previously.
Additional information will be available in our form 10-Q, which we expect to filed later today.
If you turn to slide 10, I'll turn the call over to Rick for some views in the rest of the year.
Thanks, John.
Overall, we expect that the Corona virus and its subsequent effects on the global economy impact of a variety of our businesses in a variety of ways.
And generally we expect more significant impacts from the Corona virus to begin in the second quarter.
In performance chemicals, we expect Chinese gotten rosin prices to increase modestly, but not to a significant degree.
As such we are forecasting continued pressure on them.
And Mark.
Oilfield industry is likely to be bullets out through 2020 with sharp impact on North American drilling slightly offset by some opportunities we hope to capitalize on in international markets.
Paving business is expected to grow steadily this year, we're already seeing a normal growing paving season.
Sure the federal infrastructure build pass that would only serve as a tailwind.
We are expecting some.
Normality in the Chinese in European paving markets as we expand our geographic reach.
As for engineered polymers, we expect to see steady growth throughout the remainder of the year with strong result in certain markets such as bio plastics.
Report or performance materials. The picture is a little Merck years since we are much more dependent on the auto industry in that segment.
Our guidance assumptions reflect global auto sales in production.
That that continue to decline to floor in April.
However, if north America recovers in much the same manner as China, we will reach a 75% to 85% level of production.
We ended the year.
Lastly, we are seeing increased orders in Europe as some customers are coming to us.
As their automotive activated carbon provider.
So these are the fundamental assumptions, we've made to develop our revised guidance, which John will review.
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On slide 11, you'll see our revised guidance for the year.
To account for the uncertainty is related to cover 19, we are revising and broadening our guidance for sales to between 1.1 billion and 1.2 billion and adjusted EBITDA to between 310 million in 350 million.
We'll be controlling our capital expenditures and currently plan to spend about 85 million down from our previous guidance.
As such we expect free cash flow for the year to be between 130 in a 170 million.
Our revised guidance range really incorporate three potential outcomes for the year.
It is difficult to determine exact rates in which the auto consumer returned to buying in each region of the world.
China is current sales represent a rapid recovery from their shutdown.
However, it is difficult to know hey, if this will be sustained in China and see if this template will be followed in other regions of the world.
Therefore, we have developed three scenarios.
Low mid and high case, each reflective of assumptions around the rate of auto sales in North America, China, and Europe for the remainder of the year.
Scenarios represent our best current thinking on the markets we are facing.
It is important to note a significant assumption in all three scenarios, we do not forecast a full recovery of auto sales so 2019 levels.
But rather as Rick discussed that on a monthly basis the markets, we'll finish the year, a 75% to 85% of 2019 sales.
Our scenarios very when in the year these rates will be achieved in each region.
The first most punitive case assumes that oil prices remain in the high teens lower twentys dollars per barrel and at the auto consumer globally does not recovered to the 70, 585% level until sometime in the fourth quarter.
Our mid range scenario maintains the same assumptions regarding oil prices, but assumes that auto sales stabilize at these assume levels in the middle of the third quarter.
Our final hyun scenario assumes some stabilization of oil in the mid Twentys range and the auto sales market reaches the 75% to 85% level in the early part of the third quarter.
Currently we do not seen a recovery the auto market to 2019 levels until 2021 or be aren't.
We do reserve the right you adjust these ranges up or down over the course beer as we gain more clarity.
In addition, this morning, we provided special onetime information on the coming quarter ended buys that second quarter 2020 revenue will be down 25% to 30% and adjusted EBITDA will be down 35% to 40% versus the second quarter of 2019.
This guidance is driven by the shutdown of auto production in Europe, and North America as well as current sales estimates in China for the quarter.
These numbers assume north American and European manufacturers resumed production on the dates announced.
Reduced rate as estimated by us and other forecasts.
As the year progresses, there are variety of lovers, and we will be looking at implementing in order to enhance our financial performance included in these are further adjusting or delaying certain capital projects.
Furloughs beyond what we've already implemented and reduced corporate spending.
As we demonstrated in 2015 and 2016, we focused on controlling what cost we can and environments that are challenging.
With that please turn to slide 12, and I will now turn the call back over to Rick.
Thanks, John.
There are most certainly unprecedented times from business standpoint.
And while we have limited certainty on what the rest of the year will bring we've said the share with our investors. The best information we have in order to provide.
The level of transparency into what we believe the rest of the year hole.
We would emphasize the guidance means yes that guide.
Based on the experience of our business leaders. We believe these are reasonable estimates and we're going to try our very best to meet them.
We're working from a position of financial strength.
And we're working to control, what we can control and tumultuous environment.
We are largely reliant either way on conditions in our key in use application.
Dick usually the automotive industry as automotive Oems and customers in other industries important to ingevity recover.
We will be prepared in a solid positions a bounce back with them.
But I would also like to remind the investment community of the differentiating factors are long term investment thesis behind Yemeni.
We believe we're well positioned for value creation.
As a market leading global specialties opening we continue to leverage our technical expertise to the benefit of customers combined with a strong balance sheet and experienced management team we believe.
Soundness of our strategy and our sharp execution mourns continued investment in in Ingevity in the long term.
Lastly, as I mentioned earlier, we have started a series of webinars to provide investors with insight.
Into the growth strategies for our businesses. Our next Webinars, we're focused on engineered polymers on May 28, and I encourage all of you to join US if you can.
In closing I appreciate the work and effort of our 1850 employees worldwide.
They are distinct competitive advantage for us.
We continue to believe very strongly in the long term potential for our company, we hope you share.
For Ingevity at this point operator, we'll open the call for questions.
Thank you we will now be conducting the question and answer session. If he would like to ask your question. Please press star one on your telephone keypad.
Confirmation indicate that your line is and the question Q. You May proceed start if you would like to remove your question from Q.
For participants you can speak our equipment it may be necessary to pick up your handset before pressing the star keys, one moment. Please poll for questions.
Okay.
Thank you. Our first question comes from John Mcnulty with BMO capital markets. Please proceed with your questions.
Yeah. Good morning, Thanks for taking my question glad to hear what he's doing a doing well and help from too.
So in the performance materials segment, I guess, how should we think about how much inventory maybe in the system, either you or with your customers.
Because I guess the Asia pick back up looks like it may sequentially, we feel pretty meaningful I guess I'm wondering if you're going to feel feel all of that part of that how should we be thinking about that.
Yes, John This is Ed, yes, obviously with it almost zero demand in AMEA and in North America over the past several weeks months seems like.
We have obviously taken.
Temporary downtime at our facilities and temporary furloughs of the employees to try to adjust our inventory.
From an inventory perspective with our customers are within their system, there's probably a couple weeks and that obviously the shutdowns of the Oems, but some of the suppliers and positions of having products that they were stuck with four waiting for production to restart.
So we expect somewhere around maybe two to three weeks of lag of inventory in the system globally.
Got it now that's helpful. And then just just to be clear in terms of terms of some of the color that you gave on the on the auto industry, returning to 75% to 85% level I assume that's that's volume metric autos, it's not it's not a revenue forecasts for posteriors business I know you do.
You have some year over year benefits rolling in from some of the regulatory regulatory.
New product demand. So can you, but can you just.
From that one way or the other.
Yes, John that's correct. We're speaking about prior year numbers of vehicles sold in each region.
Got it Okay, and then a and then I guess the last just last question is maybe a little bit of and Nitty gritty question, but on the on the performance chemicals decline that you saw.
What portion of that have that 17% I think it was was tied to the just the distributor.
Business being cut out and how much of it was just actual weakness at the end markets, how should we think about that.
Yes, John this is Mike.
Out $5 million.
Of the industrial specialties decline was the.
Attributed agreement that we we backed out of.
Got it thanks very much for the help.
Welcome.
Thank you. Our next question comes from Jim Sheehan with Suntrust. Please proceed with your question.
Good morning, Thank you.
Curious about their performance materials EBITDA margins topped 50% for the first time.
Wondering what drove that and whether you think thats sustainable for the rest of the year.
Yes, I first to your last question I don't think it's sustainable for the rest of the air but it was a very good first quarter for us our production facilities really outperformed in the quarter.
We also had if you think of China's Q1 of last year, there was relatively little China six compliance in that Q1 and today, we're sitting on near near a 100% implementation rate in China.
But I'd also say, we we had to our honeycomb had a very good year are good quarter in NAFTA as well.
And then price being a key component as well for it. So I think all those nicely lined up to generate a very high EBITDA margin quarter for us. This is obviously an unusual year jam right, but as you know and we talked frequently you cannot look at this business quarter on quarter like that actually happen to his first quarter of last year. If you recall we.
Put up a very high number every year is different because of downtime production schedules as we've said in a normalized environment the margins in that segment, while continuing to accrete. When you look at it on a year over year basis, but.
It's a long winded way of saying don't get too excited over that.
Sounds great margin.
Okay, and then can you talk about some of that patent suits and intellectual property challenges you have around the honeycomb scrubbers. They have any updates on any the any of the litigation.
But there's not really an update.
I mean.
You know the ITC, we did appeal.
Third decision not to do take up our protest but.
That appeal.
Decided to uphold the ruling at the lower judge which is not a surprise to us in any way shape or form so there's nothing really new to report.
Assuming that things stay on schedule the trial should start in the fall, but we'll see if that.
In this environment, who knows.
Okay and in performance chemicals can you talk about the competitive dynamics of that industry in a low oil price environment.
Are you seeing seeing more competitive intensity aside from the gum rise in issues you already mentioned and also in engineered polymers.
You can talk about how the low oil price environment affects your profitability there.
Okay sure Jim.
First you know as of this point.
The low oil industry oil price really has not impacted the overall performance chemical business.
We're going to have to be carefully monitoring.
The.
The tofa price in particular, given the downturn in oil field, but.
We've moved a lot of that business to more specialty derivatives. So.
We are very focused on maintaining those margins and.
And doing our best to maintain the the price improvement that we've.
Achieved over the last few years.
In terms of engineered polymers first I'd say that you know this is a is a highly specialty application the the pricing in performance within that business is driven by the hi, This solution value that it it brings to a wide degree of customers. So.
We do not anticipate significant swings either way related to the to the oil industry will will certainly be mindful of any competitive pressure.
And we likely will see some tailwinds from a raw material standpoint.
In that business and so we'll be working hard to.
Keep that in our pocket as you will.
Given the specialty nature of that business.
Thank you very important it's pretty important to note.
Worked at that that chemicals segment team has done when you think back to where that business was in 15 16.
And when oil went from sort of 100 box down to the Thirtys as to where we are today that businesses on a very different place they've done a lot of work reformulating they've taken a lot of costs out and it's in a very different cost position. So.
No. It's part of why our margins have expanded so much in that segment, but it's also why we're just in a different spot than we were back then.
Very helpful. Thank you very much.
You're welcome Jim Thanks.
Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.
Good morning, guys and thank you for the for the questions and the time nice quarter and also for providing guidance on a lot of companies not not doing that.
First can you talk about the breakdown for for the Q2 revenue and EBITDA guidance kind of if you go by segment or by business line or region, where you see that most areas of most weakness or even relative.
Yes, I mean as you as you know down we don't.
Provide typically that sort of guidance in the quarter as we've tried to lay out.
But the bulk of the challenge really is related to North American and European Auto shutdowns, right, which I'm sure you're following some of them are going to come back up next week. Some of them are coming up little bit later in two weeks. After that then you have to make some assumptions around what rates, they're going to start coming back at and what the.
Slobodan line looks like right. So that's how we've gotten to those numbers.
Okay Fair enough and then.
As governments and automakers are pressured around the world do you expect any changes at this point to either emissions regulations that are on the books or maybe planned for the future.
Have you been hearing anything like that.
Yes. This is Ed John you don't update I mean, Brazil is still on track for their 2022 implementation that will run through 2025.
We are seeing not necessarily regulatory changes, but we are seeing harmonization and really it's more of an optimized canister mix for.
Automotive Oems effectively they have three canister designs, one being for the U.S. Canadian markets for the tier three left three.
The next canister design is an RV our canister for China.
And then the third one is euro six de canisters and so instead of having multiple different canisters, we are seeing particularly the Asian manufacturers working towards simplifying their canister mix designs to that those three types of canisters.
Having euro six DBS common platform across the world is helpful for us because it also increases the size of the canister in it shifts more towards pellets less from granular.
Got it. Thank you and then finally, just any update on the CEO search I don't have you mentioned that earlier at all.
This is Rick.
We have been engage a search firm and we in the search firm or screening internal and external candidates as part of the process we're moving.
As expeditiously as.
We think prudent but the key is to get the right person. So we're doing this the right way.
It will.
Progress.
Oh, probably a wrap up sooner as opposed to later, but you know how these things are.
Got it thank you very much.
Yes.
Thank you. Our next question comes from Ian Zaffino with Oppenheimer. Please proceed with your question.
Hi, great. Thank you I'm I hopped on a little bit late but he is give us an update on what's happening over a kappa.
Also as far as breaks it how your how you're preparing and what you've got maybe seen there. Thanks.
Hi in a this is Mike.
Yeah, we're quite pleased with how Kappa business are engineered polymers.
Has continued to progress.
Certainly met our expectations in the first quarter.
As you can see sequential strong increase from the fourth quarter in the second half.
Of last year on on a top line basis. So so I think thats all quite positive and we're going to continue to work on the development of new applications.
Depending on when you came in we had noted that we've had some good success in the thermoplastic area, especially due to new demand for bio plastics. So so thats a quite quite positive.
Thank you very much.
Thank you. Our next question comes from the line of Chris caps with <unk> capital markets. Please proceed with your question.
Yeah. Good morning, I have a couple of follow ups just on the performance materials segment and the impressive margin in the margin improvement.
You explicitly mentioned manufacturing costs also mentioned a mix benefit and some pricing you didn't mention the the bleeding off of higher costs inventories that you had built in China ahead of the adoption over there. So I'm just wondering if that contributed also or if that's something that's still to benefit the business as we ramp in China.
No.
No I appreciate that inventory was largely gone at the end of last year right. So we didn't really see that it really did not play a role if anything it was the other way we're trying to work to manage the inventory as the Oems have had shutdowns.
Got it Okay, and then I appreciate the.
Details on the scenario analysis and with respect to the gradual ramp.
Timing uncertain to the sort of 75% to 80% levels for auto builds.
Whether its and exiting this year or beyond.
I'm just curious if that if that magnitude of that level of production is that for North America and China is a comparable or is there do you expect one region to be stronger. The other reason I ask because obviously chinas auto builds prior to coded had been out of.
Sales I should say had been down probably what 15 months consecutively before the pandemic. So.
Yeah, Chris This is Ed I'd answer the China, one that we're actually seeing them, rather quick V shaped recovery in China today.
Yes, I think part of it is due to reticence to use mass transit so you're seeing consumers buying vehicles. So they can basically have a safer way of getting to wherever we are there going office et cetera.
I do expect a man NAFTA have a much more U shaped recovery.
They've got their just now beginning to.
Restart that restart is going to be gradual likely be single shift oriented and really they've got to get their logistics chain working as well. So I think it's going to take time, it's very complex a may in NAFTA also source parts from outside of their home region, So, but the whole transit Ocean transit issue.
Who is also going to be complex as far as getting that the system back up and operating.
We're also kind of heading into July which is typically a model changeover period. So I think thats an opportunity for the Oems as well to take a look at their inventories, but also they're going to reevaluate where they introduced new vehicles or continue to operate with the older platforms and and generate some cost savings bye bye.
Not have an issue the new one so.
I think Q2 is really going up.
Kind of be a little bit of a swag up.
But I think starting in July will have a better feel for consumer demand as well as how the Oems are able to get their production back up to a more normalized rate.
Got it that's very helpful. And then just one quick follow up nuanced around the oilfield business you mentioned little surprised I think probably people where that sales were up.
And you mentioned the international so curious if that business you saw was that sort of like a onetime spot sale in nature or is that business, it's actually been specked into projects that that should therefore.
You know have some sustainable aspect here. Thank you.
Hi, Chris This is Mike no we anticipate that.
Business should be sustainable.
As we mentioned its business that we've been working on for a few years.
To have had some gains there and we hope to continue to participate strongly outside North America.
Great. Thank you.
Thank you. Our next question comes from Daniel Rizzo with Jefferies. Please proceed with your question.
Hey, guys just one quick question.
Can you just remind us how you protect intellectual property in China, and how that dynamic may change, if and when or I should say when China goes to a higher standard two tier three center, which may require some type of scrubber.
Yes, Dan this is Ed.
844 patent, which is the one that expires in March of 2022, we do not have that patent.
In China.
Yet we are still the preferred provider of products for the China markets. So I think it speaks well to the quality of our products and the efficacy that they have to have the last life for the vehicle.
We do have new patents.
Our next round of patent protection in China, as well, so China looks it doing regulatory change that's likely going to be a positive tailwind for us with the patents that we hold.
Okay. Thank you and then you mentioned this briefly I think in your prepared remarks, we're all about maybe just pulling back a little bit on M&A, but I was wondering.
When you first cut into the into the copper business. You mentioned that there is some adjacent seasonal are very attractive I was wondering if you still find at very attractive maybe not next three months given the current environment, but if we look out longer term.
Nothing Dan and the long term thesis has changed right. We continue to view Kappa is a very strong.
Company and business that fits in our portfolio.
We remain interested in growing that business, both internally and externally.
The only caveat is in this environment when you look across how you would deploy capital.
Theres, just not alarmed opportunities nor wouldn't necessarily be the right thing to do right now.
As we kind of navigate through the current uncertainty, but nothing's changed with regards to the long term.
Strategy.
Thank you very much.
Thank you as a reminder, ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad.
Our next question comes from the line of Mike Tyson with Wells Fargo. Please proceed with your question.
Hey, guys glad to hear everybody safe and sound.
When you when you think about maybe rebuilding earnings power.
For you guys and I understand it's quite a tough environment right now, but you think of more of a normalized.
Financial Yeah. The restart it gets back to your initial guidance over time or is it back to 19 levels and.
It sounds like sense, if auto builds come back your sort of there is that you can you maybe just walk us through how we sort of get back to a higher earnings power once things, yeah sort of normalize over time.
Hi, Mike you're thinking about it the right way right Maine.
Ultimately.
To the extent the global auto consumer returns to more normalized buying patterns, we clearly we'll be sort of back on track and that business right.
And likewise I think.
You are correct I think the performance chemicals segment, and I think as you.
Including cap up.
It is going to ride the storm pretty well and might surprise some people with the stability that they have.
So my point earlier, it's just a different business than it was.
The last 15 16, not nearly as geared are levered. If you will all prices it still there's a relationship but not like it used to be.
So just some general.
Improvements in the broader macro and I think you'll see performance chemicals continued to grow I mean, we are not that far away from where.
Both Kappa and the asphalt businesses are really driving that segments sort of future right and they are gaining scale as the economy improves I think you'll just see that accelerate.
Right and then in terms of cap I think appetite in English dramatize.
More of the monomer.
Yes, given things are slow to say to lease but.
Is this is this a opportunity to get in to clients.
Quicker off more often I know the shop, there how might be difficult but.
To showcase you know what you guys can do and help them during this time period.
Mike This is Mike we're continuing to do whatever we can do engage with customers.
And we're doing that through video conferencing and zoom I'd, just like we were doing internally and I've been.
In very impressed with our commercial and technical organizations to try to stay engaged so I don't think that our approach to it is that much different it's always been the direction and strategy of that business too to add value to customers and give them, so solutions, which generally come through those derivatized products and.
During this period, we're continuing to do our best wherever we can.
In order to to make that kind of progress there, maybe a little bit less that at that some of our customers can actually do in their laboratories at this time, but.
People working on doing whatever we can.
[noise] got it well I hope you guys are okay, but one quick follow up in terms of the.
Having a high fire drill here, so I'm going to keep your new asking the question.
Hi.
In terms of pine chemicals, or I mean, it doesn't appear that the olefin competitive products will be helpful prices will come down.
And I know you mentioned earlier question that you didn't think lower oil would be an issue, but are there are pockets of the portfolio that.
Could have issues, what would those olefin alternatives or overall do you think the portfolios balance announced that it won't be sometimes a secular negative.
Yes, we unfortunately are gonna have to exit this building is.
Yep.
We will we didn't say, we're not going to have any impacts Mike we're definitely going to have some impacts is just not as amplified isn't was the last time around but what we'll try and do as we speak with you guys on the calls the rest of the afternoon.
Mohan answer any follow up questions.
Sorry about this and.
We appreciate you guys down into our call.
[noise] do thank you.
Ladies and gentlemen, we thank you for your participation on today's event you may disconnect your lines at this time.
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