Q3 2020 Ingevity Corp Earnings Call
[music].
Greetings and welcome to the third quarter 2020 earnings webcast and conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator interest during the conference. Please press star zero on your telephone keypad. Please.
Please note this conference is being recorded.
Now I'll turn the conference over to your old Jack Mark you may begin.
Thank you Sir Molly good.
Good morning, everyone.
Welcome to Ingevity is third quarter 2020 earnings conference call.
Earlier. This morning, we posted a presentation on to the investors section of our website.
Haven't already done so I would encourage you to download this file so you can follow along during the call.
You can find it by visiting IR dot ingevity dot com under events and presentations.
Well 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'll see our disclaimer that today's earnings call may contain forward looking statements relevant.
Relevant factors that could cause actual results to differ materially from these forward looking statements are contained in our earnings release and in our FCC filings, including our form 10-K, and our most recent form 10-Q.
Ingevity undertakes no obligation to publicly release any revision to the projections or forward looking statements made during this call or to update them to reflect events or circumstances occurring after the date of this call.
Rob 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.
With me today are John Fortson, President and CEO and interim CFO.
Mike Smith, President performance chemicals and.
And wouldn't talk president performance materials, and Bill Hamilton, Vice President of financial planning and analysis and Treasury.
First John will comment on the highlights of the quarter and our impressive results. Despite the cold would weaken Department then I can add will review the performance of our two segments Bill.
Bill will discuss our current financial status and our recent senior note offering.
Then John will comment on our revised guidance and provide an overview of what were calling ingevity to point out a strategic approach to growth under his leadership as CEO.
With that I'll turn the call over to our CEO John Fortson.
Thanks, Jack good.
Good morning, everyone. Thank you for joining us. This morning, we appreciate your continued interest in Ingevity.
If you turn to slide four you'll note some highlights from the quarter.
Overall, this was a great quarter, particularly when compared to the challenges we faced in the second quarter.
Revenues in the third quarter were 332 million down only 8% when compared to the previous year's quarter. Despite the economic impact.
[music].
Japanese third quarter results were driven by strong rebounds, or automotive sales and production worldwide versus a weak second quarter, along with continued strong paving activity in both North America and internationally.
Cost reduction actions and strong execution also has helped set several records in our performance.
These positives were partially offset by weakening economic environment due to total, particularly impacted our performance chemicals businesses with the exception of payment technologies, which held up fairly well in this environment.
With respect to earnings adjusted EBITDA were 128 million up almost 12% from the previous year's quarter. This was an all time quarterly record.
The cost reduction initiatives, we put into place that resulted in a leaner cost structure and our ability to effectively execute helped partially offset the declines in volumes on a consolidated basis.
Our adjusted EBITDA margin for the company was 38.5%, which was also an all time quarterly record.
For the fourth quarter, we also generated strong free cash flow of 73.5 million.
I want to thank everyone on the Ingevity team for all their work over the last six months, we have navigated the ups and downs in both of our segments.
The team in Waynesboro, GA, where we produce our honeycombs traversed continues to set production records.
Recently, some leadership team and I, just wonder are de Rigueur, Louisiana Pine chemicals facility.
They have not missed a beat despite having to deal with two hurricanes and tropical storm and an eight week period.
The plant continues to run even as many of our employees were without power at the residence inns for several weeks.
Our performance this quarter is a testament to their efforts across the company.
Turning to slide five you'll see the third quarter results for performance chemicals at this point I'll turn the call over to Mike Smith Alright. Thanks.
Thanks, John.
As mentioned our performance chemicals segment with the exception of our payment technology business was particularly impacted by weakening economic environment due to COVID-19 over.
Overall segment sales in the third quarter were 188 million down.
Down 18% versus the prior year period.
Sales to payment technology applications were slightly higher than the prior year set a quarterly record.
Well paving sales in North America, we essentially flat.
In China, and Europe, Middle East Africa, EMEA were up sharply, albeit from a smaller base.
Projects planned by the majority of state departments of transportation and he less continues to proceed as planned or expected to progress on schedule for the remainder of the paving season.
China sales growth also benefited from low temperature recycling technology, we've been promoting there over the last two years and growth in Europe was driven by our payment preservation technology adoption in a number of countries.
Sales for engineered polymer products were down due to reduced industrial demand globally.
Where in medical device sales were also down sales to bio plastic customers continue to show growth.
I am plastic growth was particularly strong in North America as customer used to have a base thermoplastics specialty paper coatings utensils.
We anticipate improved sales to footwear and medical device applications, where the impact of COVID-19, retail sales and medical procedures of age.
We continue to be successful in sales of our Derivatized Polyols and thermoplastics in this business.
In fact in the quarter Polyols and thermoplastics accounted for approximately 80% engineered polymers revenue.
Margins continue to remain strong given our raw material petrochemical link the benzene, we're realizing some benefits into lower input costs.
Sales decreased industrial specialties across all end use applications for products. In this area. These include adhesive printing inks lubricants rubber and paper chemicals.
In addition, we continue to experience price pressure or Tolo rosin products.
That said, we are encouraged that the Chinese government export price has increased over 10% during the last month.
A positive signal of improving supply demand dynamics.
Also we are seeing positive potential in our agricultural chemicals business, where all to stick and also saw technologies for sustainable agriculture applications are progressing and have advanced a field trials with a number of our major customers.
Additionally, sales the oilfield technology customers were cut sharply in line with reduced drilling in North America.
Sales in oil production applications were down moderately.
That said, we are continuing to see wins in China, and the middle East as we work to diversify the geography of this business.
Warmest chemicals segment, EBITDA for 47 million down 21% versus the prior year due to lower volumes.
Use volumes and plant throughput were partially offset by price mix impact and lower SG unit costs.
We continue to control costs and generated a good mix and higher profitability products, which resulted in our adjusted EBITDA margins remaining solidly in the mid Twentys.
We currently have an extended outage at Warrington UK facility freight planned monomer production glassware replacement project and an upcoming outage in Q4 at our North Charleston plant as opposed to this outage occurring in the third quarter of last year.
With that I'll turn the call over to Woodcock to review the results for performance materials.
Thanks, Mike.
As you can see on slide six revenues for this segment were up 10%.
Automakers, particularly in the U.S. and Canada rebounded sharply.
As such sales of our gasoline vapor emission control solutions have risen dramatically versus the second quarter.
The industry continues to work to refill vehicle pipeline in fact, U.S. vehicle inventory has been at a nine year low for each of the last five months.
With relatively strong vehicle demand Oems are struggling to refill dealer lots and we estimate that this will continue into Q4.
In the third quarter vehicle sales in the U.S. and Canada were down 8.7% and North American production was basically flat to prior year at plus 0.4%.
The U.S. mix of light duty trucks, and S. Yoo B's versus cars has been at a record high mix of 77% since April.
This high truck SCB mix is favorable as these larger vehicles typically have multiple honeycombs on their canister systems.
This contributed to strong demand for our honeycomb scrubbers used to need us and Canadian regulatory standards.
No matter when for Georgia facility continue to work hard and in response, they set a quarterly record for honeycomb production.
Sales of performance materials products in China continued to show strong growth sequentially and versus prior.
July and August vehicle sales and production continued to trend that began in April where both the sales and production are at or above prior year levels.
The light vehicle sales and production were up 13.8% and 18.3% percent respectively.
August continued year over year trend with sales and production also up 9.5% and 3.8% respectively.
Tempur data has yet to be posted.
Lastly, the implementation of China six standard has been completed.
Segment, EBITDA were $80 million up 48% versus the prior year period.
Segment, EBITDA margin increased 1400, 30 basis points to 55.9%.
We benefited from a strong improvement in volumes and volumes.
That leveraged our low variable cost.
Favorable price mix and plant spending.
And lower legal costs.
All of our facilities are back to running at their normal rates and we expect no furloughs for the remainder of the year.
In October we began a 35 day killed replacement outage at our Covington, Virginia facility.
This completes the last four kilner placements at that facility.
At this point I'll turn the call over to John.
Thanks, Ed many of you on the call I've met or spoken with Bill Hamilton, Our Vice President of FP and Treasury. Hopefully you also saw that last week, we price to high yield bond at 3.875%.
Also amended and extended our bank deal.
No. It was the architect of both of those transactions. So I would like him to speak to our capital structure at the end of Q3 and also what it looks like now going forward Bill.
Thanks, John.
I'd now like to discuss our capital structure, you will find on slide seven.
Our borrowing rate at the end of the quarter. Our revolver is LIBOR, plus 150 basis points and if I read rates of our term loans or LIBOR, plus 100, LIBOR plus 150 basis points.
Of the term loan 166 million has been hedged in euros to be fixed at 1.35%.
The rate of the senior notes issued in January 2018 remains fixed at 4.5%.
80 million dollar industrial revenue bond borrowing rate right.
Remains at 7.67%.
Results weighted average interest rate was approximately 2.6%.
Net debt as of September Thirtyth was 1.032 billion.
Our net debt ratio.
2.73 times, which is down from the second quarter when it was 2.96 times.
Trade working capital for the quarter decreased slightly from the previous sequential quarter to 273 million, which was 23% of sales.
With regards to our capital allocation given recent events and the impacts of the Corona buyers to our business priorities have shifted somewhat.
We are focused on returning to our long term target net leverage between 2.02 0.5 times that said, if and when the market stabilizes, we will be opportunistic share repurchases going forward.
Before the full scope of the Corona virus impacts are now in the first quarter, we did repurchase shares and we have 467.6 million remaining on our current share repurchase authorization.
We continue to examine M&A opportunities, we are weighing those in light of the above preferred uses of capital.
Additional information will be available in our form 10-Q, which we expect to file later today.
Going to slide eight I'd like to provide some information regarding our updated capital structure.
Last week on October Twentyth.
Undertook a two part transaction and included an eight year $550 million senior unsecured notes offering.
3.875% and an amendment and extension of our revolving credit facility.
In evaluating our capital structure, which was heavily weighted towards secured debt 2020 to 2023 maturities.
I think this opportunistic approach and waited until unsecured debt at a rate below 4% was available to us.
The proceeds of the notes will be used to repay our inside term loan agreement human Twentytwenty, two and the remaining 170 million outstanding on our revolver.
Additionally, we downsized the revolving credit facility from 750 million to 500 million and extended it by just over two years to October 2025.
In aggregate these moves extended our debt maturity schedule to 5.8 years and extension of almost three years.
Well this transaction is slightly dilutive to earnings per share and secure low cost and flexible capital structure for the next several years. Additionally.
Additionally, we have a call on our existing 2026 senior unsecured notes in February 2021.
Hi, calling unfortunately these nodes, we can counteract some of the dilutive nature new issuance.
I will now turn the call back over to John.
Thanks, Bill turning to slide nine I'd like to review our revised guidance, we have narrowed our fiscal year 2020 guidance for sales from between 1.1, and 1.2 billion to between 1.15, and 1.2 billion and increased and narrowed our guidance for adjusted EBITDA from between 300.
10 to 350 million to between 355000 365 million.
This indicates we are above what we previously characterized as the high scenario of our guidance.
Porous material sales and margins will normalize in the fourth quarter. However, full year EBITDA margins for the segment will increase somewhat from last year.
This will be offset by weakness in the performance chemicals right.
Well be controlling our capital expenditures and still plan to spend about 85 million almost all that on maintenance.
As such we expect free cash flow for the year to be greater than or equal to 175 million. This.
This exceeds the free cash flow of 161 million that we achieved in 2019.
And we expect to end the year at a net debt to adjusted EBITDA ratio of less than or equal to 2.75 times, despite lower EBITDA for the year.
Remain we remain confident in our business through the end of the year, while we may see continued weakness on the revenue line given the cost controls, we have implemented and the favorable mix of sales across our segments, we expect our adjusted EBITDA and adjusted.
EBITDA margins to remain favorable.
And while uncertainty remains regarding global economic strength, we believe in the strength of our strategy and our team's ability to execute on the opportunities.
Turning to slide 10, I'd like to step away from the numbers for just a moment in order to provide some perspectives on our future share our plans for Ingevity 2.0, which is how we are referring to a refined approach to our growth going forward.
In order to understand what we mean by Ingevity 2.0, I think it's important for us to first understand what we've accomplished in the past or under Ingevity 1.0.
Since late 2015, we focused on executing our spinoff from West rock as a standalone publicly traded company in May of 2016.
And our first five years, we needed to ensure that we executed on the opportunity provided by the significant step up in automotive regulatory standards in both the us and Canada and then in China, and we did and the growth of our performance materials segment has been remarkable as a result, while at the same time on the chemical side, we've driven up margins for our performance chemicals business.
From 13% to 23%.
We've made substantial progress on organizing around our sustainable roots as a company are beginning to quantify the impacts of our products on the environment.
We believe that in our first phase as an independent company, we've established ourselves as a leading specialty chemicals company top quartile financial metrics.
Moving on Ingevity 1.0, we're not revising our fundamental vision mission values or strategy that said 2.0 represents a new way of approaching our vision strategy. We expect to do this by leveraging our inherent strengths and building technology based customer partnerships to deepen our relationships create greater value and drive.
Increased growth and profitability for our customers ourselves and our stakeholders.
We will continue to focus on high margin Derivatized products that provide outsize performance and value to our customers over our 100 year history of the business, we've developed a solid reputation for innovation.
We have the opportunity to build on this to drive organic growth and while we inherently notably our sustainable enterprise, we want to use sustainability as a competitive advantage and lastly, there are a number of macro trends that we believe are in our favor going forward. So turning to slide 11, let's take a look at those trends.
First we believe that the global focus on sustainability and quantifying company's total carbon footprint has only just begun.
While we have inherently known that we are sustainable company, we've not quantified or communicated that to the degree to the degree that we should either our customers more shareholders that will change.
77% of our products come from renewable resources.
That is a staggering number for chemical company.
Our customers work to do to decrease their carbon footprints, we have a unique differentiated opportunity to work with them to solve their issues with our chemistry.
Second more and more governments, both within the U.S. and internationally are looking to regulate around environmental health and safety issues and we believe our products in many instances are uniquely suited to solve those issues.
One example of these are the types of opportunities is in the area of Biofuels.
Our assets our people and our facilities are uniquely positioned to look at a variety of feedstocks that could be used in this market as well as another traditional chemical applications.
And lastly, we're going to leverage the trends related to renewable gas.
And accelerate our work on absorb natural gas or Andrew technology to provide alternate sources of demand for our carbon outside of our traditional focus on internal combustion engines with that let's turn to slide 12, where I'd like to focus on the three areas, we will strategically focus our growth moving forward.
Placing greater emphasis on sustainability customer Centricity and innovation, we expect to grow our company's revenue and profitability.
For those of you have been following us over the last year, especially earlier this summer as part of our sustainability focused investor Webinars and the release of our latest sustainability report August you understand the sustainability isn't a new concepts of Ingevity.
We have a long history dating back to our predecessor companies of managing the business with environmental social and governance tenants Amar.
And its inherent just by the nature of the products. They make as I mentioned, 77% of Ingevity is revenue comes from sustainable products.
But more importantly, sustainability is woven into the fabric of our culture and our mission to purify protect enhance the world around us.
And we intend to continue to further quantify our brand promise the initial greenhouse gas impact studies, we recently completed for our new Char and Eagles arm products are only the beginning.
Our goal is to complete an initiative to quantifiably evaluate suicidal benefit of our significant product line by 2020 do we.
We intend to embark on an aggressive certification program whereby our products are recognized for their renewable nature by a variety of recognize third party experts we.
We believe this will be a value to customers. We also intend to take the success. We've had in performance materials around gasoline vapor emission control and expand our regulatory advocacy to the benefit of other product platforms, such as our paving applications.
In terms of customer Centricity, we expect to broaden and deepen our already strong customer relationships. When we work side by side with our customers on technologies that solve problems, we achieved a level of stickiness within our customers formulations and as the world emerges from 2020 and its challenges we see this as an opportunity to excel.
And the use of our engineered polymer products. We also have significant opportunities around the world. In addition to the use of caprolactam ones, but also for our oilfield and paving products, where we can expand and.
And we are already investing in an S&P Honda upgrades at best in class technology that will enhance the efficiency of our interactions and transaction for our customers.
Lastly, we will focus on innovation.
We're looking across our businesses and innovation opportunities as I said earlier, we're going to accelerate our efforts on AMC, but in addition, we're going to focus on identifying applications beyond automotive that can benefit from our activated carbons unique ability to capture at least favorite molecules. This is just one example, where we think opportunities exist across our portfolio.
We're not constrained by our current or historical products or customers understood that are looking at where technology regulatory and market changes are creating opportunities.
From a capital allocation standpoint, our focus remains on growth with more emphasis on extracting maximum value from our current assets. We intend to remain a high margin high free cash flow generating company that will provide us the opportunity to both invest in our future, but also return capital to shareholders of appropriate.
Hopefully this gives you better insight into what we need to say Ingevity 2.0, and where we intend to take this company our next phase of growth.
It's continued to be unprecedented times from a business standpoint, we are incredibly pleased with our performance this quarter and year to date.
More importantly, given our track record on guidance and meeting guidance, we remain optimistic and confident in our guidance for the full year.
We also believe that we're well positioned for value creation in the long term as a market leading global specialty chemicals company, we continue to leverage our technical expertise to the benefit of customers combined with a strong balance sheet and experienced management team. We believe in the soundness of our strategy and our ability to execute on the many opportunities in front of us.
In closing I appreciate the work and efforts of our 1800 50 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly in the long term potential for our company. We hope you share our enthusiasm for injectors at this point operator, we'll open the call up to questions.
Okay.
And at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question in queue. You May Press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before Christmas turnkey.
One moment, please while we poll for questions.
Our first question is from Ian Zaffino with Oppenheimer. Please proceed with your question.
Great. Thank you very much and thanks within this call.
Why because maybe focus on materials and I guess, we saw some really nice pricing there.
Where was that pricing moves what region. We saw that in maybe what was the driver of that and then I've a follow up thanks.
Hey, good question. Thank you.
This was a global mostly focused with our larger markets of NAFTA in China.
Okay.
And is that is that type of pricing has not now reached kind of a baseline is there additional opportunity.
We continue to take place there and then also if we were to look at the demand side of the equation.
How much of the demand or the volumes was let's just say, we feeling the pipelines versus underlying demand.
Yeah, I guess for your first question, we historically have been putting price into our products over over many years typically averaging anywhere from 2% to 5% on annual basis and.
We feel we'll continue to move price each year, and obviously try to capture price wherever we can around the globe.
From a demand perspective volume was increasing in China as they fully implemented China.
China six so we saw good year over year demand Oh.
In that region. In addition to the strong growth of sales that are happening in that region, and then NAFTA as well with the rebound from Q2, we saw good demand solid demand for our products and solid demand for the Oems products, which cascades down to us as well.
Okay. Thank you very much appreciate the color. Thanks.
And our next question is from Jon Tanwanteng with CJS Securities. Please proceed with your question.
Yes, good morning, it's Pete Lucas for Jon.
Just one on the pavement side, how dependent are you on federal stimulus shoring up state budgets are in terms of your outlook for 2021 there.
Well go to the federal spending clearly a very important and there has been a a one year continuation on that and you know like a lot of areas of the federal government. There's certainly some uncertainty in terms of the the priorities and execution as.
As we get into next year, but we're very optimistic that with all of the focus on infrastructure projects across the board of federal government that are they're going to get behind further increasing infrastructure spending and I think that you know in time that should be continue to be a favorable.
A tailwind for our payment technology business.
And just one more from me in terms of the outlook for oil field at this point, how that figures into your margin or earnings growth story over the next year or so.
Yeah. So Pete you at this point you know we are like most people just looking at what the industry experts are indicating for future oilfield pricing and the level of drilling activity in his current weak demand market. So we.
We are not at this point projecting a significant turnaround in that you know until we start to see overall global demand pick up for for oil or the oil linear oil industry. So it will come but we're not we're not calling the timing of that yet.
Great very helpful. Thanks, and congrats again on a great quarter.
Thanks. Thanks.
And our next question is from Mike Sison with Wells Fargo. Please proceed with your question.
Hi, this is record on for Mike.
Hello, Richard.
Hi, yes.
Yes, so a great performance on the margin side this quarter.
Just wondering if you can give some color on.
Performance materials and the stuff is still 6% margin how.
How much was that related to the return of facilities back online versus cost.
Cost cuts.
And then price and mix and how does that play into it.
Yes.
Richard as I talk during my script and there's a.
Good mix of vehicles in North America, right now that is driving additional honeycomb demand.
So we're also seeing.
Good trucks ltvs with multiple honeycombs, helping.
Helping to push that price mix for us.
And then the other the other mixes again in China, where they are implementing that China six standard and previously with the mud.
Much smaller canister with lower content of a granular carbon in those canisters shifting to a higher content higher volumes and also shifting the pellets. So we had a good strong mix change there as well.
But the thing Richard I think you should but sometimes I think investors don't full.
Fully appreciate is just a high fixed cost nature of this business right and when you compare sort of Q2 to Q3, it's a great window into the nature of that right. I mean, this is a business that was down four independent.
Depending on how you think about it six to eight weeks of a global auto shutdown kind of had 25% margins are pretty good but.
By the standards of that business you can see how it took a hit but the inverse is when you get a quarter like Q3, where everybody's going fool gang busters.
And you don't really have any big shutdowns or any big outages in that quarter, you can see what the potential is right. It's just the benefit of the high fixed cost nature.
And that's why we right look at margins in this business on a year to year basis, rather than on a quarterly basis, that's right, but keep in mind in Q4 that we you know there will be some outage time in Q4, and and you know it's always doing that outlook looks good you know, we do expect it to somewhat normalized but to have segment margins accrete year.
Over a year in an environment, where we were down for six or eight weeks globally is pretty remarkable.
Definitely but I guess in terms of longer term what would you say are normalized margins or is any of that cost reduction coming back next year of a 41% was margin last year, but.
We're not really giving 21 guidance yet right, but what we have said and yes, we've got some sort of unusual shocks running the system in 2020, So I don't want to necessarily compare 2021 to 2020 or what have you, but you know over the horizon, we expect our margins to continue to accrete. So.
We're not ready to talk about 2021, you know, but but if you look at us as and when we started this journey in 2016, we have kind of shown a pretty consistent move.
Movement up into the right and we don't see that necessarily falling off over the next couple of years, just recognizing that 2020 system kind of unusual right.
Okay got it and then on performance chemicals, obviously still seeing some weakness.
Engineered polymers and industrial specialties.
How much of this was covered related specific.
Is there any way to quantify that.
Yeah, Thanks, Richard well I don't have an exact quantification of it but the cobot impact on those two business has been very significant I mean, just take each of them a little bit because there are somewhat different I think in engineered polymers, we saw a particular.
Really kind of large drop off in the third quarter as there was a lot of inventory removed I think throughout the value chain from our customers and their customers. We didn't see anywhere near the drop off in the second quarter as a lot of businesses did when we first got hit and that said you know.
Were optimistic the recent so orders as we exited September and got into October on engineered polymer side or a really trending positively in a in a good direction. So we.
We look forward to that continuing.
In industrial specialties, the cobot impact has been broad in lot of areas. We have general industrial weakness and then we have certain areas and I'll just bring up inks as a specific example, where the cobot impact on the retail market and malls being down and therefore.
Companies not printing up circulars that use the types of things that we have has been extremely dramatic you know in the second and third quarter. So as a as that situation abates and people get out to a more normalized life you know that situation will be nearly as a as dramatic.
Great. Thanks, guys.
And our next question is from John Mcnulty.
Wouldn't be emo capital markets. Please proceed with your question.
Hi, Thanks for taking my question. So you know you highlighted that the strong cash flows that you guys have really generated kind of does put you in a in a position to actually kind of refocus capital maybe away from debt reduction any eat into either M&A or buybacks again, I guess can you speak to if you.
I have a preference at this point I mean, obviously your stock's been under a lot of pressure yet at the same time, there does seem to be a focus by the market on growth and growth can come inorganically as well as organically. So can it can you speak to kind of how you're how you're thinking about that capital deployment and also can you give us a little bit of color as to as to what you see in terms of in terms of the M&A.
Pipeline that he may have been developing.
Yeah, So John.
I appreciate the question right I mean look.
It doesn't take a rocket science just took on to sort out that we will probably be in our target.
Two to two and a half times.
Leverage ratios at some point early to mid next year right. We are on that trajectory right. I think we do view ourselves as a growth company.
We are looking at growth opportunities I would sort of suggest that in this environment there more internally organically focused.
Then M&A you can never stop looking at M&A, but I think in this environment.
The challenge is trying to get a buyer or seller to agree on a five year forecast and then also figure out what multiple you are going to pay right I I just think.
The types of typical sort of deal flow that you see is just it's pretty hard right now right and most of the deals I think you're seeing being announced or stuff. That's been in the works for a while right.
So you know what I saw I think you know look I kind of view are swapping out a little bit of money that might otherwise have gone for M&A being more cloud into our internal organic growth. We do obviously have the flexibility to buy back shares.
We have demonstrated that we will buy contributors.
We have the authorization you know it's always on the table when we kind of look at our cash generation versus other.
Places to deploy it but we've always said from the beginning that if we don't have a use for it that we'll get a return that capital so.
Both things are being looked at pretty carefully.
Got it fair a fair enough and then I guess you know on on one of the the trends that you're looking for in terms of growth opportunities. One of the one of the comments you put down was on the natural gas containment side is.
Is that tied into some of that some of the I believe you were running a couple of pilot programs for fleets that type of thing around using natural gas vehicles is that kind of what youre getting out and can you give us an update as to as to how some of those pilot programs are working it. If we can see this actually start to start to really kind of ring. The cash register as we look out over the next 12 months or so.
Hi, John This is Dan Youre correct, we do have a number of pilot programs underway, principally a number of them going on in Pennsylvania based on some credits and a big credits are available for natural gas vehicle conversions.
Those credits I mean, those Oh pilot programs are expanding and I don't want to get a head of the business itself, but we see good demand.
Good good efficacy of the product as a whole and we continue to.
Look at that whole business is favorable for creating another business segment for us over the long run.
In the short term, we still have investments to do and we're continuing to drive greater commercialization across the platform.
Just a little early to kind of declare success on it but we feel it's got Oh, great legs in front of us.
Got it and if I can maybe ask one just last question you know I.
In terms of some of the big focus from an EPS perspective from the regulators. It does seem like things have kind of accelerated at a at a pretty quick clip over the last six to nine months and a lot of stimulus is tied to more green initiatives things like that I guess when you look at when you look at the opportunity for new gasoline vapor.
Emission standards do you have any greater confidence in terms of in terms of potential new standards coming in whether it's in Europe or China or look at the two is it too early to tell at this point can you just can you speak to that for us.
Yes, not a problem you know we talked about this a little bit over our webinars over the summer we do see regulatory changes.
Impacting us over the next five to seven years.
Obviously, Brazil's has already been promulgated and they'll be moving forward with that starting around 2022 2023.
China I'm looking at a China, seven which would be more tier three like with the U.S.
Likely around 25, plus or minus a year.
And then Europe as well looking at regulatory requirements, where they would start controlling refueling emissions.
You know there was a large outcome from coded as they looked at the environmental issues in Europe. When the industry was shut down Nox increased substantially.
But vo sees increased substantially in those videos Cds were basically caused by all the gasoline using vehicles that were sitting around idle and having multiple days of parking emissions going into the atmosphere. So it's.
We feel it's kind of driven the European organization to take some actions to capture those views season, we feel its going to drive an additional regulatory component into that market.
Great. Thanks, very much for the color guys.
And our next question is from Dan.
Daniel Rizzo with Jefferies. Please proceed with your question.
Good morning, guys. Thanks for taking my questions you.
You mentioned pick that cut technologies too low in China in Europe I was just wondering how much of the how much of the.
How much of sales are from that region within that sub segment.
So in general we've got 80% are still in North America, and so you know the remainder 20% is largely from from from Europe, and obviously Asia and within Asia, China is the largest piece of that.
This is it will turn helping drive the growth in those regions or is it just more just more traditional products.
Actually in in the global markets are evil from.
How are gaining traction and starting to be adopted is not really significant yet like it is in North America. You know, it's an area that we are really optimistic about in the coming years to promote those those benefits.
But as yet the growth that we are demonstrating here are more from the traditional products, mostly on the pavement preservation side or some of the most fire technology, that's been adopted for for China in oversight.
Alright, Thanks, and then just one final question you mentioned, some some killed replacements and some outages I think in in the third quarter and I don't know if this is so before I was wondering how much of that if any is pull forward from 23, one, whereas you're doing now because of the current environment and it won't be necessary for next year or the year after.
Yes, Dan we actually had that killed outage at our Covington facility scheduled for Q2 and due to Covance, we delayed into Q4.
So that would be as we talked about the last kiln outage for that facility. So we effectively got 15 to 20 more years before we have to replace killed at that plan.
And then on the chemicals side the Warrington.
Upgrade for Glassware project was originally planned for Q2 due to covert we've moved that and that's underway currently and the outage in the North Charleston plant has always been a Q4 planned outage. It seems a little counterintuitive, Dan, but I mean part of the challenge. These obviously two different situations each segment, but.
Code environment, where you've got contractors running around her plants.
Interacting with your people yes.
It slows things down a little bit right.
But you.
No that doesn't make sense now alright, thank you guys.
And our next question is from Chris Kapsch with <unk> capital markets. Please proceed with your question.
Hey, good morning.
For questions focused on the PNC you mentioned lower legal costs is one of the contributors to the higher margins in the quarter. So I'm curious I assume its right to assume that 100% of the patent litigation costs are allocated to the PBM segment and wondering if from the lower legal expense in threeq or does that reflect any shift in strategy or.
Merely just the timing consideration quality to the.
Dispute board them I guess the process timeline the litigation process online.
Yeah, Chris This is Ed it's more around the timeline of litigation, we are expecting a little bit higher legal costs in Q4, as we get to a trial occurring in Q1.
Okay.
And then I guess you know this is a button.
Dispute over.
No the the IP, that's expiring I guess a couple of years now.
With respect to when those patents expire and then speaking this is focused on were the patents around the honeycomb application for tier three emission standards you provided some scope about how you know if you extrapolate what the automotive end market is going to look like in that you know a few.
Years now, there's the shift towards low purge engine technology.
And that could comprise be covered under new patterns, maybe I think I think the metric is as much as two thirds of of.
Auto sales just at this point, it's if we're still going in that right that if the automotive oh, either slow going in that direction, you probably have some visibility on that platform. So I'm just wondering if theres any sort of visibility on updating Muslim if in fact that anticipated shift to these.
Turbocharge low purge engines isn't is indeed happening, which would therefore make you less vulnerable to a post patent environment. If you if you end up getting competition.
Yeah, Chris we do see that trend continuing towards our new lower OPAP purged patents.
A particular product we sell kind of gives us a good indication of need for capturing.
Do you see emissions from the canister and low urge environments and we still think that those low Burj, Canada Latin systems are going to capture anywhere to 30% to 70% of the vehicle market.
But you know as you stated is we continue to see go through each month and each quarter, we're continuing to see greater use of a particular products of ours that indicate that that low purge strategy is coming into effect.
Okay and then just finally, one one quick one on on the the fourth quarter preferred killing turnaround in Kentucky to just is there anyway to quantify the impact that may have on the read on that segment in the fourth quarter in terms of cost.
Yeah, Chris we estimate somewhere between four to 5 million.
Got it okay. Thank you guys.
And our next question is from.
Baritone some issues with Bamberg. Please proceed with your question.
Thank you. Good morning can you just remind us as to where we are in terms of U.S. tier three adoption that is that is there any incremental.
That's left for next year and then also what's the latest that you are hearing on the new regulations in Brazil.
Yeah, Eric Thomas for for U.S., we they are effectively required to have 100% implementation by 2022 model year.
And so if you think about theyre actually making those 2022 model years out.
So we're seeing you know continued continued kind of purchase.
Purchases of Honeycombs, but also completions of platforms, so that they'll sit.
Should finish it up within the next several months.
Got it Okay and then just a quick follow up on the outage at Covington can you remind me what exactly you make there and why that factories down are you can you make those volumes out here or are you just the inventories in anticipation.
Yes, I know, we built into inventory in anticipation of that outage. It was a cold outage for basically 35 days.
And so as that plant comes back online will obviously be restocking or inventories.
Understood and last one from me I guess, how are you affected by exchange rate is <unk> dollar a good thing for you.
Yeah, well, we feel big dollars better for us.
Got it thanks.
And again it all.
All right.
The next question is from Jonathan in Love with Eagle Capital Partners. Please proceed with your question.
Hey, guys. Thanks for taking my question and first of all John Congrats on the new role I think the board made a great decision name you CEO.
Thank you. Thank you.
So my first question.
And maybe if you could just talk a little bit about the competitive environment and performance materials are you seeing anyone knew or any new emerging competitors.
The U.S. or more importantly in China.
Yeah.
Jonathan This is Ed I'd say, it's kind of relatively the same as it has been over the last five years. So no no new entrants and current current players or are still in the marketplace.
Okay, Great and John I was hoping you.
You could talk a little bit more.
About the ability for ingevity to use sustainability as a competitive advantage is it something you know what specifically are you trying to address there and that's something that customers are coming to you or is this your own initiative, how does it benefit yes.
Yeah, No I mean look if you if you think about it right and take a step back I mean, our products come from an oil right. It's not crude oil right, but it's an oil that you know.
It comes from trees, right and historically, we've always competed really in the marketplace based on price and performance characteristics right, Oh versus hydrocarbon well based products and a lot of instances right there kind of substitutes and we obviously also compete against glamorizes than others, but you know at least for the first time and.
My professional career.
Clients and customers are now starting to ask questions around.
The renewable nature of the inputs because if they want to reduce their own GHG footprints. They have to use raw material inputs that are renewal right and.
We're just in a lot of ways, we're kind of at the right place right time with regards to our products.
Because of where they come from right and we've always known that what we've learned though to Johnson is that.
If you don't go through the processes of certification.
Really get the credit in the market place because as we kind of alluded to in our prepared comments to me, it's kind of intuitive right you can walk around here and right next to a paper mill and as products come from sawdust, but all that's great, but you don't get the credit in the market place. If you don't go ahead and get those official certification.
Right. So we're in the process of doing that that will allow and they're not really expenses are old time consuming but.
But that will allow us to have more engage conversations with our customers around the sort of benefits and doing a lot of ways I think you're going to see.
For lack of a better term the renewable nature become one of the performance characteristics, which they might evaluate products right versus snow and so.
As coloration et cetera, right some of the other things that that they evaluate on so we're pretty optimistic about or opportunities really across a lot of different products.
Perfect seems like a nice tailwind. Thank so much taking my question.
Okay.
And again I'd remind you we have any questions you May press star one on your telephone keypad. Our next question is from Chris Kapsch from <unk> capital markets. Please proceed with your question.
Yeah, I had a follow up and focused on the pine chemicals side more you.
You mentioned that Chinese gum rosin prices to.
I have.
The increase in the last month, and they had increased a little bit when.
Sort of after turpentine prices normalize and so the producers weren't going after that turpentine. So production came off a bit I'm just wondering.
This latest improvement in gum rosin prices do you have a sense for if its more supply driven like is there are fewer trees being tapped because of coated or is it that turpentine dynamic or is this more a function of improving demand just any sense for what's driving the improvement there.
And.
And any sense for the sustainability of that that improvement. Thanks.
Yeah sure Chris.
It is a primarily supply driven there has been a reduction in production in China and you know that has been an ongoing trend as you know the the that work of going out and tapping trees is highly labor intensive.
And Ah you know well turpentine prices were high there was an incentive to do that and now that that supply has been curtailed and also you know they had you know there was a lot of inventory I'd say throughout the chain either of these the resin or or the rosin.
You know that's been worked through and we've actually seen you know quite a nice increase it's actually over six weeks, it's 15% and the pricing is now back to levels. We have not seen since the end of 2018. So it's been in a kind of a long slog in them and we're quite encouraged with the turnaround.
We do know that you know Brazilians are also out and competing in that market and so we're hopeful that the you know the entire market will get back in on the train of getting back to those more acceptable prices and you know there is given that they are.
These current prices are more consistent with prior long term trends.
You know I wouldn't view these as a sustainable price improvements and that's what we hope habits and any type of demand improvement as we move out of coded and more normalized and the overall pricing environment should certainly be a or b optimistically.
<unk>.
Got it and then the follow up I guess would be just you know extrapolating on those comments is this environment.
Where those conditions is enough to to anticipate and maybe an upward bias and then what's been an otherwise sort of beleaguered you know poor rising price environment over the last couple of years. Thanks.
Yeah.
The you know the the tour market you know at this point, it's still still tough, but the the the Chinese gum rosin has always been a pressure on this market and we can see that from our customers and if Chinese gum rovs in prices stay high Oh, we should be able to.
To get that pricing turned around and may not be instantaneous, but you know we're going to we're.
We're we're working on it now a conditioning the market and as we get into next year and that with an ongoing and sustainable supply demand picture are we hope that as we get into next year by Middle of next year that you know that market should be hopefully turnaround get in a positive direction.
Thank you.
And we have reached the end of the question and answer session and I will now turn the call over to Jack Marr for closing remarks.
Well. Thank you for dialing in everybody. We appreciate your interest this morning.
We remain very positive about our long term business outlook and look forward to talking with you again next quarter.
This concludes today's conference and you may disconnect. Your line at this time. Thank you for your participation.
Good bye.