Q4 2020 Ingevity Corp Earnings Call
Greetings and welcome to indemnities and fourth quarter and year end earnings webcast and conference call.
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I would now like to turn the conference over to your host Jack Moore Senior Vice President Public Affairs and Investor Relations. Please go ahead Sir.
Thank you Brock.
Morning, everyone and welcome to them and Japanese fourth quarter, and full year, 'twenty and 'twenty earnings Conference call.
Earlier. This morning, we posted a presentation onto the investors section of our website.
And you haven't already done and so I would encourage you to download. This file so you can follow along during the call.
You can find it by visiting IR, Doc and Gemini Dot com under events and presentations.
For participants who are logged into our webcast the slides should be visible and the online viewing pane 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 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, and our most recent form 10-Q.
And do you have any undertakes no obligation to publicly release any revision to the projections and forward looking statements made during this call or to update them to reflect events or circumstances occurring after the date of this call.
This call we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable GAAP measures GAAP.
Conditions 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 of performance chemicals.
And what cock president of performance materials Eric.
Eric Ripple.
And innovation Officer, and Bill Hamilton, Vice President financial planning and analysis and Treasurer.
First John will comment on the highlights and the quarter and full year.
And Ed will review the performance of our two segments.
John will review some key accomplishments in 'twenty, and 'twenty and discuss our and Gemini 2.0 strategy.
Eric will provide an update on some focus areas for growth and innovation.
And I will comment on our current financial status and lastly, John will review, our and 'twenty and 'twenty, one outlook and guidance.
With that I'll turn the call over to our CEO John Unfortunately.
Thanks, Jack and good morning, everyone and thank you for joining US. We appreciate your continued interest and in Germany.
If you turn to slide four you'll note some highlights from the quarter.
Overall, we delivered excellent fourth quarter and full year results our businesses were resilient despite challenging conditions.
Revenues in the fourth quarter were $326 million up 7% when compared to the previous year's quarter. Despite the continued economic impacts from COVID-19.
And Japanese fourth quarter results were driven by strong automotive production and sales in China, and a highly favorable truck and SUV shifts and the U S and Canada.
We also benefited from increases in sales for engineered polymers and slight growth and North American paving sales.
These positives were partially offset by reduced revenues and the oilfield and printing and margins and international Navy sales all of which were highly affected by the Covid weekend economic environment.
With respect to earnings adjusted EBITDA were $111 million almost 22 per cent from the previous year's quarter. We continued to benefit from the mid year cost reduction actions that we put in place.
And our margins are holding up well across the board and as a result, our adjusted EBITA margin from the fourth quarter rose to 34%, which is a fourth quarter record.
For the quarter, we generated free cash flow and 122 million due to our strong operating performance and excellent working capital management.
Enabled us to reduce our leverage to 2.45 times, which returns us to our targeted range of between two and two and a half times.
I wanted to thank everyone on the <unk> team for all their work over the last year as we navigated the ups and downs from both of our segments, especially our manufacturing employees.
They've figured out how to work productively, despite the constraints of operating and a COVID-19 safe environment. Our performance. This quarter is a testament to the efforts of these employees across the company.
If you turn to slide five you'll see the fourth quarter results for performance chemicals and at this point and I'll turn the call over to Mike Smith Alright. Thanks.
Thanks, John.
Performance chemicals segment continues to be impacted by weak economic environment due to Covid 2019.
And the fourth quarter. However, we drove improved results for engineered polymers and benefited from solid global paving activity.
And I'm slightly but still robust given the circumstances.
Overall segment sales and third quarter 165 million down almost 6% versus prior year period.
As I mentioned sales to payment technology applications were slightly lower than the prior year and what is essentially a slower period.
Asia, and North America was up slightly or sales and China, Latin America, and Europe were down modestly.
Sales for engineered polymers products were up more than 10%, you would improve demand and industrial equipment Bioplastics and automotive applications.
Sales decreased and industrial specialties applications.
And demand weakness for printing inks and other end use applications, such as rubber and sterile.
This was partially offset by strengthening volumes for rosin products, and adhesives, and paper chemicals and improved pricing for tall oil fatty acid.
We are encouraged that the Chinese gum rosin and export price has increased over 25 per cent during the last three months positive signal and improving supply demand dynamics.
Also we continue to see positive potential and our agricultural chemicals business dynamics.
Where are all the stick and ultrasound technologies for sustainable agricultural applications.
Are progressing and our infield stage trials with a number of our major customers.
We also made strong progress and converting our ink customers to new highly sustainable products, which our phenol and formaldehyde free.
In 'twenty and 'twenty. These products represented 25 per cent of our sales and inks from essentially zero and the prior year.
Additionally, sales to oilfield technology customers continue to reflect weakness and north American drilling activity.
According to Baker Hughes, and North American rig count at the end of the fourth quarter was down 56% versus the fourth quarter and 2019.
That said, we continue to see wins in China, and the Middle East as you work to diversify and geography and this business.
Performance chemicals segment EBITDA in the fourth quarter were $27 million down 18% versus the prior year quarter due to lower volumes and price mix.
This was partially offset by improved plant throughput and some foreign currency exchange benefits.
We continue to control costs and generate a good mix of our higher profitability products, which resulted in our adjusted EBITDA margin hold respectively at 16% and the fourth quarter and 21 per cent for the full year.
With that I'll turn the call over to Ed Woodcock to review the results for performance materials.
Thanks, Mike and.
As you can see on slide six revenues for the segment were a record up 25% at $161 million.
Strong automotive production and sales in China, and a favorable shift towards trucks, and Suvs and the U S and Canada continue to be a tailwind for our gasoline vapor emission control solutions.
The industry is still working hard to rebuild the vehicle inventory pipeline.
As in the previous quarter U S vehicle inventory remains at nine year lows and has been for each month since may of 'twenty and 'twenty.
With relatively strong vehicle demand Oems face the ongoing struggle compounded by the global semiconductor chip shortage to rebuild dealer lots and we estimate this will continue into the second quarter 2021.
And the fourth quarter, North American vehicle vehicle production was essentially flat with a 1% increase and.
Sales and the U S and Canada slightly declined by 2%.
The U S and Canada vehicle mix of light duty trucks, and Suvs versus cars continues to rise and hit a monthly record of 79% in December.
This truck SUV and vehicle mix has trended and high since April of 'twenty, and 'twenty and is favorable as these vehicles typically have larger canisters and multiple honeycombed as part of their evaporative emissions control systems.
This contributed to strong demand for honeycomb scrubbers used to meet regulatory standards and the U S and Canada.
And the team at our Waynesboro, Georgia facility continues to work hard and then response, they set new quarterly production and sales records for hunting comes.
In addition, we also set a quarterly sales volume record for our activated carbon products.
Production and sales and vehicles and China continue to post monthly year over year increases since may 2020.
The sum of data available for October and November shows vehicle production and sales, both up 9% and 11% respectively.
December and data is yet to be posted the team at our Shanghai facility also set a monthly production record in December.
Well there is no production data yet available for Europe, and the fourth quarter quarterly sales and the region were down 4%, we expect activity in Europe to continue to slow slightly.
Segment, EBIT were $84 million, almost 44% versus the prior year period.
Segment, EBIT margin increased 670 basis points to 53 per cent.
We saw record volumes across the segment that leveraged our low variable cost structure and in addition benefited from a strong price mix improvement and reduced legal expenses to defend our intellectual property.
In October we completed and kiln replacement outage at our Covington, Virginia facility.
Seven days ahead of schedule.
This completes the last four kill and replacements at that facility.
Also during the fourth quarter, we completed a cat capacity expansion project at our Zhuhai, China plant following significant debottleneck and.
And equipment upgrades.
These upgrades have effectively increased production capacity by an additional 15% to 20%.
Helping us to meet the high global demand for our premium high capacity pelletize carbon products and that country.
At this point and I'll turn the call back to John.
Thanks, Ed.
Turn to slide seven.
I'd like to take a moment to highlight and Japanese and accomplishments from 'twenty and 'twenty.
We are proud of what we got done this year. Besides our strong financial results. We have moved quickly and developed in Germany, and the future and our work is just getting started.
So and also of course of the year, we reduce costs and placed greater emphasis on organic growth and innovation and generated revenues that were 92% of our initial free COVID-19 guidance and adjusted EBITDA that we're 97 per cent of our initial pre COVID-19 guidance.
We ended the year with adjusted EBITDA fundamentally even to our 2019 performance and generated outstanding free cash flow and 270 million <unk>.
Actually we were able to take advantage of a favorable interest rate environment by securing an eight year $550 million on a fixed interest rate of 387 five per cent.
While also extending and amending our credit.
Tony.
We also bought back an impressive $88 million and shares and as I mentioned earlier and this brings us back to our targeted net debt ratio.
Both of our business segments delivered solid performance and a tumultuous year.
Our performance chemicals segment delivered mixed results from the face of Covid weekend demand was bolster overall by sales to pavement technology customers and North America and overseas.
We drove expanded sales and engineered polymers into Bioplastics and successfully completed the monomer production and glassware replacement project and our warranty and U K facility.
Our performance materials segment delivered yet another year of record revenue and earnings as the team adapted to the strong decline and then snapped back and global automotive production.
And I can tell you from firsthand experience the team at Waynesboro is working very hard to meet and incredible demand.
Our teams and Covington and Zoo high did great work and completing the necessary capital projects at those facilities.
We continue to be very optimistic about the long term potential for our performance materials segment.
Recent estimates and proclamations pertaining to the term electric vehicles have created a lot of confusion around the growth rate.
Electric vehicles the term electric vehicles typically includes.
And all battery electric vehicles, and plug in hybrid and electric vehicles full hybrid vehicles and plug in hybrid and electric vehicles, both use internal combustion engines and hybrid growth is exceeding that pure battery electrics and <unk>.
And 20 in Europe, and adoption of hybrid outpaced registrations and pure battery electric vehicles and ended the year with a market share almost three times that of pure battery electric vehicles and in China as part of their new electric vehicle or any D requirements. They are emphasizing greater use of low fee.
And consumption vehicles, which are hybrids to lessen and Oems nev credit quotient, thus, allowing the Oems to reduce their focus on battery electric vehicles in favor of hybrids.
As we study IHS and other data sources, we remain convinced we have a long runway for further growth both from our legacy automotive products, but also from other applications and as Eric will discuss in a minute. We are committed to maximizing the potential of all application for our carbon and high growth high margin products.
We rolled out in Germany to point out and organic growth strategy, but just reenergized approach to our vision and strategy will place greater emphasis on sustainability customer centricity and innovation and expect over time to significantly increase our revenues and result.
We continue to make progress and developing and commercializing our absorb natural gas where AMG technology.
We are continuing to work collaboratively with natural gas utilities Oems and other partners and validate this technology for light and medium duty trucks for which batteries are constrained.
We are developing and areas of renewable natural gas or <unk> system as a way of even further enhancing its environmental benefits and as the recent announcement from Amazon and they are purchasing and increasing number of natural gas trucks and Vacates fleet owners represent part of the market, where our AMG technologies and player.
Paul.
Lastly, we also continue to make significant strides and the implementation of our inclusion and diversity and sustainability programs.
We published our first two reports outlining the greenhouse and greenhouse gas reduction.
Our new Char and Eagle's arm products.
Probably maintained our silver ready from Echo Matis and moved into the <unk> percentile and the Dow Jones sustainability index, all while continuing to better position ourselves to leverage the increasing importance from sustainability on a global level to drive organic growth into the future.
Turning to slide eight I'd like to take a closer look and what and Gemini two pointed out and will look like in 'twenty and 'twenty, one and beyond and.
And in particular, how we will grow our enterprise and drive business excellence to maximize value and drive increased profitability.
Our enterprise will grow by focusing on what we call our big six initiatives and Eric will discuss matched.
First we have an eye towards leveraging our activated carbon and expertise beyond the automotive industry and other high margin performance material markets.
With the commercialization of our AMG technologies for light duty trucks, we've already begun to leverage our long history and strong technical expertise and the capture and release from automotive papers we.
We are leveraging this expertise further and to provide innovative absorptions and technologies and areas such as the capture storage and transportation and Biomethane.
Additionally, we are looking at human health applications, like anti microbial and anti Virals and time release drug delivery.
We are also focused on the use and alternative feedstocks and our refineries to optimize our manufacturing assets and diversify our raw material sources beyond and CTO and expand our products and the new derivatives and adjacent end markets. One of these markets as Biofuels, which is expected to continue to grow rapidly Eric will provide more detail on both of these.
Initiatives, we are testing alternative materials now.
Third we remain committed to exploring and expanding the use of our horizons and diverse end markets, such as adhesives and other polymeric applications.
Additionally, we plan to drive continued growth and engineered polymers and addition to our focus on derivative harsh high margin products, we will capitalize from favorable trends and market needs, where our campus solutions are uniquely suited to solve customer challenges.
One such trend is the growing need for biodegradable and compostable plastic products, where our cap of thermo classics enabled plastic bags and utensils to breakdown fully and the carbon dioxide and water and be composted at home and industrial facility and fab.
Our revenues from these products and doubled over each of the last two years, we will continue to focus on growth and this application I'm encouraged by what we're seeing from engineered polymers, both and our fourth quarter, but also as we have begun 2021.
We continue to believe that as our customers work to decrease their carbon footprints, we have a differentiated and opportunity to profit from Saar was our chemistries and our initiative to evaluate the societal benefit of our significant product lines by 'twenty and 'twenty two is well underway and.
And we have also begun to embark on an aggressive certification program aimed at recognizing the renewable nature of our products by third party experts.
Lastly, we will keep working steadily become a truly global brand by increasing our international sales and strategically maximizing our presence worldwide particular.
Opportunities exist and the pavement oilfield and agricultural chemicals markets, increasing our presence overseas is just beginning.
We intend to remain a top quartile specialty chemical company as measured by EBITDA margin and ROIC.
And we will continue our commitment to driving increased efficiency and customer experience Rsi and PFS for digital transformation continues to progress on track.
We also continue to benefit from our focused efforts of our supply chain team to optimize logistics and reduce expenses and streamline operations and as we begin 2021. These efforts have been critical.
Our capital allocation strategy will focus on a balance of growth investments debt reduction and opportunistic share repurchases. We have returned to our targeted net debt range, which provides us additional flexibility and we will continue to take a disciplined approach to capital allocations, our repurchases and fourth quarter should indicate that we will buy shares and value.
As we find them attractive.
Now I'll turn the call over to Eric to discuss more specifically some of our growth initiatives and more detail. Thanks.
Thanks, John and good morning on slide nine and I'd like to provide and update on some focus areas for growth and innovation team and will help drive value as part of and Gemini to point out as John mentioned earlier, one of the three main drivers behind the re energized from approach to our strategy as a focused approach to innovation to this and we've established a dedicated.
And a growth and innovation team to lead this effort and today, we're pleased to highlight the initiatives developed over the last several months.
And to expand the use of our activated carbon and we were primarily interested in the areas of Biomethane and human health.
And the emerging field of Biomethane and renewable natural gas our RMG, we see opportunities to further leverage our activated carbon expertise. We believe we can provide innovative absorptive technologies to capture bio methane from landfills municipal wastewater treatment facilities and agriculture farms by handling the <unk>.
Your vacation storage and transport and bulk gas, we are developing external relationships to participate and unique business models that will further drive growth for and Gemini.
Next the field of human health and provide some attractive entry points for and jeopardy, including adding surface functionality to our carbon technologies, leveraging emerging chemistries that mitigate bacteria and viruses like COVID-19, and medical applications and time to release drug delivery and our activated carbon technology is already.
Being used commercially is a critical input into airborne COVID-19, killing applications.
In order to drive expanded uses of our legacy CTO and optimize our manufacturing facilities, we will focus on the areas of alternative feedstocks and biofuels today, soy and tallow or just two of the alternative feedstocks, we are evaluating and have completed extensive testing and our plants to better understand where the.
Attractive market opportunities exist for and Gemini.
Lastly, our CTO chemistry positions us well to participate and the global transition from fossil fuels to more sustainable biofuels like renewable diesel. This fast growing segment has a full range of options for and Germany, including selling and jeopardy products as feedstocks or leveraging our manufacturing.
<unk> to upgrade other suitable fuel precursors here. We've also developed external partnerships to explore other innovative business models, and which we can participate and or invest.
As you can see we build a diverse and robust pipeline of opportunities that will form the foundation of our future growth. We look forward to continuing to provide regular updates on our progress and the impact of our efforts.
Now I'll turn the call over to Bill Hamilton to discuss our financial position.
Thanks, Eric I'll now briefly discuss our financial summary, which you'll find on slide 10.
Before I dive into the numbers I'd like to draw attention to the overall strength of our financial position.
Healthy summary, D C and this slide has been achieved with purposeful execution and clearly reflects the numerous efforts our team made in 2020.
And the fact that we were able to return to our targeted net debt levels and 24 months. After the Capa acquisition is a testament to our ability to generate strong cash flow, even amidst a challenging economic environment.
And our borrowing rate at the end of the quarter from a revolver and our term loan was LIBOR plus 150 basis points.
The rate on the senior notes issued in October 2020, and January 28.
Remains fixed and three 875 and four 5% respectively.
And $80 million industrial revenue bond borrowing.
It remains fixed and 767%.
And the results weighted average interest rate was approximately three 2%.
Net debt as of December 31 was $974 8 million.
Net debt ratio was 245 times, which is down from the third quarter was $2 73 times.
Trade working capital for the quarter decreased sharply from the previous sequential quarter to 233 million, which is 19 percentage of sales.
Well, our working capital typically spikes during the first half of the year as we prepare for paving season.
Main focus on maintaining an optimal working capital moving forward.
As we stated earlier in 2020.
Continue to be opportunistic share repurchases.
And the quarter, we repurchased 60 million of shares, bringing our total 2020 repurchases to $88 million.
We have $407 6 million remaining and our current share repurchase authorization additional.
And information will be available and our form 10-K, which we expect to file next week.
I'll now turn the call back over to Jim.
Thanks, Bill on slide 11, and I'd like to review, our guidance and outlook for 2021.
We've announced our fiscal year 2000, and 'twenty one guidance for sales between one and two five and $1 3 billion and adjusted EBITDA between 400 and $420 million.
Our guidance reflects growth versus 2000 Twenty's performance. Despite continued economic pressure from COVID-19.
And the uncertainty around potential impacts from global trade due to tightness across the transportation modes worldwide.
While the business environment and feels pretty good as we speak today a lot of uncertainty remains.
On the performance chemicals side, we anticipate improved conditions for merchant rosin.
And these will be slightly offset by weakness in printing ink and paper chemicals. We also expect growth and agricultural chemical dispersions, we should benefit from moderate growth and demand for payment technologies based on strong paving project backlogs and continued EBIT therm warm mix technology adoption and.
And engineered polymers, we expect increased demand for thermal classrooms and.
And lastly, we do expect to see continued weakness and the also and industry.
Corporate force materials, we expect the segment to deliver double digit revenue growth. Despite the absence of any significant regulatory standards being adopted globally.
This growth will occur largely due to continued industry efforts to retool the vehicle inventory pipeline.
We are wanting to get into semiconductor situation and the auto industry closely.
Based on the most recent data we expect about one five per cent impact on global auto production and the first quarter as a result, and the chip shortage. This would translate to and impact of $5 million to $10 million and revenue and two in Germany, which we expect to make up and the back half of the year to the extent our perspective changes, we will adjust as necessary we expect.
Demand for trucks, and Suvs to continue to expand and our litigation spend will be as expected and around $50 million for the year.
In terms of capital expenditures, we spend and we plan to spend between 101 hundred $20 million.
And your capital projects from 2021 include the continued expansion of our Covington, Virginia activated carbon facility.
<unk> Aps for harm a digital transformation project, and an increase and growth and renovation capital with the increased capital spending and stabilized working capital levels, we expect free cash flow per the year to be at or above 200 million we.
We also expect to keep our net debt to adjusted EBITDA ratio to between two and two and a half times absent any acquisition.
Overall, we will deliver strong results and 2021 and despite the challenging global macroeconomic conditions and increased capital expenditures.
And 2020, we've demonstrated our ability to be flexible and drive performance through consistent execution and interest rate uncertainty and.
And we will continue this in 'twenty and 'twenty one we.
We believe deeply and the strength of our Reenergized and Germany to point out and our teams ability to execute on the opportunities ahead.
These continue to be unprecedented times from a business standpoint, yes, we are incredibly pleased with our performance and the fourth quarter and for the year.
Given our track record of both maintaining and meeting guidance, we remain both optimistic about the year and confident and our guidance for 2021.
So I believe we're well positioned for value creation and the long term.
As a market leading global specialty chemicals company, we continue to leverage our technical expertise and the benefit of our customers and.
And with a strong balance sheet and experienced management team, we believe and the soundness of our strategy and our ability to execute on the opportunities in front of us.
Before we end the call I am pleased to share and then Mr. Preparing another webinar series from the first half of 'twenty and 'twenty four and we will.
I'll provide additional information on the topics and timing and the coming months and I expect more to come.
In closing I appreciate the work and efforts of our 70 and 150 employees worldwide.
And as a competitive advantage for us we continue to believe very strongly and the long term potential for our company and we hope you share our enthusiasm for and Japanese.
At this point operator, we'll open the call to questions.
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One moment, please while we poll for questions.
Our first question today comes from John Mcnulty of BMO capital markets. Please proceed with your question.
Yeah. Good morning, Thanks for taking my question and congratulations on some really really solid numbers.
So I guess the first question would just be on the on the guide for the performance chemicals business I mean, it looks like Youre looking for EBITDA and kind of be flat to up ish is what you're indicating it when you look at all the all the positives and negatives it certainly looks like Theres more and the positive camp with like with resin price War.
And at least merchant pricing starting to push higher it sounds like some of the derivative pricing, maybe maybe starting to follow that as well and then you have a handful of end markets it'll be better and only offset by a couple of it maybe get marginally worse. So I guess is there something else that we're missing on that whether it's raw materials or or something else that we should be thinking about that gives us kind of that.
It gives a little more credence to the to the to the Conservative guide.
Yes, John I appreciate it and thanks for the question we are taking a.
And conservative posture sitting here and as I said in the prepared remarks, and I listen it feels pretty good sitting here today, but.
We do think we're going to see some raw material pricing pressure.
Across a lot of different parts of our businesses.
We are seeing freight and problems right like a lot of industrial companies.
We are stuck up and sort of the global transportation.
Freeze that's occurring.
We're optimistic but I think we want to be balanced we're sitting here in February and everyone knows what sort out played out last year, while we don't expect a big Covid resurgence, we think it's going to take a little while to kind of work through the spend back up right. So.
It was good but we will see how it plays out.
Fair enough and then and I guess.
Question on the performance materials side I think in the in the release around your guidance.
There was a comment we expect to kind of see margins get back to more normal levels.
Admittedly. This is a this is a pretty volatile business when it comes to the margins and we've seen them push higher because of increased content et cetera, I guess, what do you view as a normal March and environment for for this business, how should we be thinking about that well right and you look we.
As I as we tried to allude to and our remarks I mean.
And if there's one thing 2020 show and it showed what this company and do when it's under pressure right due to.
No macro issues that are kind of beyond its control ultimately we were able to really crack down on working capital we were able to run the company and the business with extreme levels of efficiency.
It candidly is not something that you can do on an ongoing basis as the business returns to more normalized levels.
We think those margins will come down into the mid Forty's, which is more appropriate for what we would describe as long term margins for that business right.
Don't want to take away from the achievement and I know investors are always forward looking but.
And it does show you what this company can do when its under pressure.
And we're very proud of that performance, but as we go forward and we're gonna have to operate the business and a more normalized manner and get back to growth investing and expanding working capital and meet customer needs et cetera, right. I mean, we've got and we can't.
Our inventories are and are very tight.
Tight position and we'd like to have a little more cushion.
And our position and auto chain.
Got it it makes it makes sense, maybe I can squeeze one last one and two just on the in jeopardy to point out growth initiatives. I mean first of all it was helpful and kind of in and walking through kind of the four big ones that you are that you guys are excited about it I guess, just one stand out to you as being closer and closer to commercialization and I guess can you can you help to frame free.
And maybe the one that you're the most excited about right now.
Go ahead Eric.
I'd say, the one on bio bio methane and renewable natural gas natural gas is the one that we're most excited about and the one that were closest to commercialization.
For a lot of reasons, we like it because it fits with our activated carbon business and provides a really good point of leverage and to.
To get into that industry.
I would tell you too John I'm also really excited about the work that's being done on the performance chemicals side with regards to alternative feedstocks right. I mean this is a.
A business that has been through a lot. The last few years as you guys know it is.
<unk> historically been very levered to sort of one very very very critical raw material that we fortunately have locked up and long term supply agreements but.
The work that they're doing to diversify our feedstocks to drive utilization of our facilities.
We will also move into new products that will be developed as well as the ability to reformulate some of our current products. So it's pretty exciting stuff and there were a lot of smiling faces around here earlier. This week as we had some successes and that so both of those initiatives I think curve.
Stay tuned and Youre going to hear more from us I don't want to over promise as to when and how this will uptake, but we feel like we're making progress on moving forward.
Great. Thanks, very much from the color.
Okay.
The next question is from Ian Zaffino of Oppenheimer. Please proceed with your question.
Hi, I'm, just kind of moving on to build upon that quite last question on the a and G side.
You know, how the pilots going and any kind of new news to report on additional fleets that D E and G has been adopted in.
And what should we expect from that business.
Yes, and this is a great great question.
A little early for us to be talking about.
The opportunities that are that come through I think that'll be a Q2 or Q1 coverage force.
And we've got a number of irons and the fire. The one that I can talk about is our own fleet that we have that we use as demonstration vehicles around the U S.
And then we have basically and converted them to the use of our LNG renewable natural gas and.
And that is the only fuel that has a negative carbon intensity and we feel that that's a great pathway in combination with our AMG vehicles to continue to grow.
And that platform.
Yeah.
Okay. Thanks, and then I guess it would be up.
I guess the other question would be you know it's free.
And shipments and what you're seeing on the OEM side you know.
Inventories at a very very low.
D. Oems right now is there a push to ship more or is this going to be.
And more restocking on there and or are we just sort of in mind and your shipments are in line with just vehicle production.
Just trying to get a sense of what happens there. Thanks.
Yes, John talked about we do expect to see sell and impacted Q1, and maybe some in Q2 and obviously.
All the Oems and their suppliers and working hard to get as many chips as they can.
Not sure whether you saw the GM press release, there was an interesting component to it and that they are producing vehicles without the chips and.
And then storing and vehicles and then adding and the chips as they come in so.
Demand for us that is being put on the vehicles, even though theyre not completed finished so I would expect to see that at some other Oems as well so that they can optimize their production and start refilling the vehicle pipeline versus solely stopping.
Production of vehicles.
And to some extent any and we're this is help them from an operational perspective, because we need the time to get our sort of inventory and a cornerstone currently right and we were running really really tight but the point is you are probably going to see a little bit of a disconnect in terms of our production and where auto production.
And as recorded as from Q1.
Okay, great. Thank you very much.
Yeah.
The next question is from Vincent Anderson of Stifel. Please proceed with your question.
Yeah, Thanks, and good morning, so a lot of interesting things and here to unpack.
When you start stacking up the amount of bio and renewed renewable diesel capacity coming online and the U S and what it's doing divest of oil prices definitely inclined to agree that it looks like we could see GAAP and feedstock availability sooner than later Youll have you already started to have discussions with potential customers that want to get tophus certify.
And as a feedstock for RIN generation.
Getting our carbon intensity score calculated for the California carbon credits are we not really that far along yet yes.
We're absolutely having those conversations with several customers and.
Just to add on the comment on.
So far we have our facilities are registered and certified to supply into the biofuel market in Europe. So we believe over time that that's going to be and increasingly valuable outlet for biofuels and that'll become part of our sort of tovah and market application focus.
Excellent. Thank you and and when you think about the economics there.
And it's tough to pin down exactly where total pricing is.
You know as you stack it up against biodiesel feedstock prices at their current levels.
If you could sell and set market today would it be a positive mix impact or is this kind of getting out ahead of where the market might be going and the future.
And so so at this point.
It's not a really significant positive mix impact for us for telephone when it comes from a pricing standpoint, but if we look out the next year or two we believe that that demand increase.
And we'll probably move the needle such that we've been moving some of our telephone and over two into that market compared to some other export opportunities that we currently serve and industrial space.
Excellent and if I could sneak one Ron just following that Chinas sought.
When you referenced slope alternative or low carbon intensity alternative feedstocks and thank you mentioned some existing biodiesel feedstocks, but are there more opportunities left and the pulp value chain like additional lignin processing or maybe getting into stumped processing.
That's not as far as the lignin goes on the on the pulp side not really an area that.
We're putting much focus on and there is potential and and always some true.
Technology from pyrolysis.
And could eventually feed that market, but that's not really something that we're putting.
A lot of a lot of current focus on we think that there are some some better options that suite, both our assets and our technology as well as sort of the and market and derivative nation that our plant assets and our technology team can provide.
Excellent. Thank you very much.
Yeah.
The next question is from John and Dan One thing Rob C. J S. Securities. Please proceed with your question.
Good morning, gentlemen, great great quarter, and thank you for taking my question.
My first one is can you give an update on the competitive environment and the materials business and whatever maybe an update on the legal avenues youre taking and.
That business given the.
You bet.
Situation that you and.
Yes, the competitive environment is roughly the same as it has been for the past couple of years, obviously, we have a legal issue with ASF relative to their entrance into the marketplace with a competing technology.
Outside of that we.
We do have a competitor in China.
Yes.
At the end of the day that's.
And of.
The lay of the land for competitors that we see and the auto sector.
Okay great.
Maybe a question for John and that now that your leverage is down to your target level.
Is there a preference for share repurchases or M&A and if it's the latter how do you see that playing out are you actively engaged and are there a lot of targets of opportunity out there.
Well it certainly gives us a lot of flexibility right.
Jonathan I don't see these things and as mutually exclusive I think we have the ability to.
Maintain our leverage within a ratio that we're comfortable while concurrently making growth investments and also buying back shares if the need be or we feel like it's the right thing to do so.
We're going to continue to look at lots of different opportunities and I think they are out there. We are as we alluded to there's a part of 2.0 looking at different avenues, and some of that will involve particularly investments but.
I think from where we said we had.
And flash forward to where we were a year ago or flash backwards, a year ago. They rely on a concern around our leverage and the timing of the capa acquisition et cetera and.
We feel like as a company, we have put that behind us and we.
And we're back and are positioned to be offensive in terms of.
Growing the business and maximizing value.
But if I could go back and talk about that.
Just one more time.
Can you just give us an indication of how much content you have and a dollar terms that maybe and SUV hazard and hybrid has these days or maybe even a hybrid SUV and kind of you know how that plays and to what youre seeing and in terms of growth and units from the future.
Yeah. This is Ed it's really determined on the region and so if you think of a European content for us and think of it as maybe $3 of content on a vehicle.
China with larger canisters and and some some use of additional scrubbers youre looking at a cost or a content level of six to $8 of content.
And then the U S.
And.
Spread somewhere between 15 and $35 a vehicle.
We like big trucks.
Yeah.
Got it thank you very much guys.
Alright.
The next question.
Western is from Daniel Rizzo of Jefferies. Please proceed with your question.
Good morning, guys.
You mentioned that the <unk> 40.
45% price improvement and Chinese gum, Rosin and said it was because of supply demand and favorability I was just wondering if that's because supply is being reduced by the Chinese or its just a rebounded demand during what is economic recovery.
Yes, that's it's primarily a reduction in our supply and in China, you know they they had a lot of inventory built up.
And that inventory has now been worked out of the system and and Chinese overall supply and production of gum Rosin and has gone down and so we've got a I'd say reasonably steady and and maybe modestly improving demand.
Supply that is is now coming much more in line with that which is a.
Tightening up the market and making it more in balance and and getting that price rebound to a more acceptable level.
Okay. Okay.
And then on the litigation surrounding your intellectual property I was wondering if you could provide color I mean or how far away from a resolution.
And just two years away.
Yes, we've got easily another year to go with the various aspects of our.
Suits and legal issues, so I wouldn't expect it to be resolved until let's say late late.
And early Q1 2022 alright.
Alright, Thank you very much.
Yeah.
The next question is from Mike <unk> of Wells Fargo. Please proceed with your question.
Hi, This is Richard got to turn on for Mike.
Our first question is on performance materials.
Double digit revenue growth for this coming year I was just wondering how much of that is from volume improvement versus price.
And also just.
And how have you incorporated your expectations on higher hybrid demand and to that or lower and you'd be demand and says well.
Yes, and this year I don't think any impact for evs is going to materially affect the business.
From a.
From a price mix standpoint, we historically continue to put price and every year and we will continue to do that this year.
Volume is going to be favorable if you think of all the volume that was lost globally in Q2 or early Q1. If it was China that was lost over the year that volume should return obviously, some muted impact with the global chip issue, but the Oems are still in a position of having very little inventory.
On dealer lots and need to start refilling those dealer lots. So we do feel that we'll have a good year over year increase on an annual basis of vehicles produced.
Great and then my follow up on.
On the.
Renewables initiatives.
You know how much the capex this year is towards.
That if any.
And the R&D expense increase and then in terms of.
And incorporating that into your mix are you going to have to retrofit existing plants are just going to use existing manufacturing.
Facilities.
Well the goal is to use existing manufacturing facilities as much as possible.
I think it would be.
<unk>.
We are not going to be shy in terms of.
Investing in those facilities, if we believe that we can get an appropriate return, but obviously, that's more favorable than either doing something greenfield or or doing an M&A type of strategy and to enter these markets right. So we're going to do it the most capital efficient way and I would tell you that when you kind of look at our Capex guide.
And it's going to be variable, depending on whether some of these investments sort of materialize over the course of the year, but you know you.
You can expect that we're going to spend maybe 20 million and that on and what I would call sort of growth capital oriented around these initiatives.
Could be a little higher and be a little lower I mean, some of it is related to we're not going to spend and towards the right time to spend it and we're not going to spend and it was the right thing to do so.
Sounds good thank you.
The next question is from paradox from Israel up Ehrenburg. Please proceed with your question.
Thank you. Good morning can you provide some more color on your activated carbon and applications and carbon capture technology.
Especially what kind of changes you might need to make to this existing activated carbon product that you're selling to the automotive industry and is there any are there different specifications such as the.
D J and working capacity or is that a different process.
Pretty much the same.
That's one of the attractive features of this opportunity is we don't have to change the activated carbon that were using for capturing renewable gas.
The aspect, it's really important that applies to our automotive automobile business as well is that our carbon as a catch and release carbon and so it can be used over and over again and not being thrown away where other carbon so like coconut ore or coal based carbon and we call catch and throw away so use it once and throw it away.
Ours can be used over and over again and that's exactly what you need and these situations, where you're capturing gas off of a landfill and then getting that transported to our pipeline and then using that activated carbon and repeat that process over and over again. So we don't have to make any changes to and it actually works perfectly from the application.
Thanks.
Very interesting and then as a follow up in your pine chemicals business.
Sorry, if I missed that but what's the reason for wanting to reduce reliance on C. D. O. S. Feedstock is that because you think CTO prices will go higher and and will you need to make adjustments to your bio refinery to take these alternative feedstocks.
Well look the.
The answer is we have.
A remarkable amount and capability with our current.
Facilities and assets to work with different feedstocks, we may as I said earlier and to make some modest investments to.
Further facilitate or make it more efficient but.
Alright, Josh when you when you look back I mean, we've always been and in fact there've been investors and the past that have been.
Nervous or shy around and investing and in Germany because of our reliance on what is really sort of one critical raw materials right and when you look at and <unk>.
<unk> more broadly.
And there's a finite number of suppliers.
Come from and industry. The pulping industry that is effectively a GDP plus industry right. So we've always felt this diversification.
And could make some sense for us.
Just because you don't want to be so reliant, but we actually now and feel like we have a real business opportunity right because of what's going on with.
Biofuels and the use of other feedstocks of a renewable nature and there's real.
<unk> for US this is where we know we have a company full of great Spark hardworking engineers.
And all of our facilities and we have an opportunity to sell other or grow our product portfolio. If you will.
But by having these different feedstocks and we can also you know reformulate some of our products and give ourselves some derisking the CTO I guess right.
Right. Thanks, Sean and are looking forward to learning more on some of these interesting initiatives. This year. Thank you.
Thank you.
The next question is from Chris Capps of loop capital markets. Please proceed with your question.
Yes. Good morning, Thanks for taking my question.
I'm curious about the traction you're getting on the total net price increases.
Could you elaborate on the magnitude of success and.
And really more curious about that.
And getting pricing I'm curious about is it a function of.
Yes, it's tight.
So from a supply demand conditions.
Because obviously you have this backdrop of oilfield.
Which is one key outlet with itself by being so weak.
So as the supply demand and tight.
And to support the pricing and and if that's the case is that a function of just the industry ratcheting back on that utilization rates are.
And that to.
Diminishing with supply or you're starting to see maybe not your system, but from other players and movement on this demand for telco for the biodiesel and Europe.
Yeah. Thanks, Chris.
No.
And we've got traction on a telephone pricing and I would say that our progress and 5% to 10% price increases.
And is quite reasonable for the most part.
And we're doing is mix optimizing because as you are inferring the supply.
And overall is not growing and we do have the reduction, especially as we look at first quarter oilfield demand last year versus this year.
So we're essentially.
Having an opportunity to compete in industrial and export markets, where alternative vegetable oils pricing has gone up quite significantly and some of those markets such as overseas coatings markets that have the.
<unk> ability to change between fatty acids, and we're taking advantage of utilizing <unk> tovah to do that and and increased price accordingly versus other fatty acid substitutes.
Got it so based on that and it sounds like you have some headroom based on what some alternative the pricing for some alternatives, but does that also.
Provide an opportunity to place more volume and if you were to.
Crank out the crank up the utilization rates at your refineries a bit we're not so much. Thank you.
Yeah, well and as I think we generally have discussed previously and we focus our refinery run rates based on the demand of our rosin products. So as.
And as long as the raws and demand is healthy and and we can be profitable selling it and <unk>.
Essentially that will.
Provide us an amount of Copa and we will sell into the marketplace and then we take that telephone and obviously move it to the most profitable markets starting with the derivatives markets and then we have other profitable straight top of markets and lastly, some of the overseas and industrial markets that that substitute.
Between other different a different fatty acids.
Totally makes sense and I guess that that with that idea then.
The opportunity yet to come up with.
Additional tour and markets and as part of your.
You know the growth initiatives.
As you know.
Nice opportunity. The extent then you could also get more total volume. So I'm just can you just update on what the timeline of such developments on the alternatives per door would be thank you very much.
And thanks a lot.
We are always seeking to promote our tour.
And demand and lots of different applications. We think that there is an ongoing opportunity as a sustainable substitute for hydrocarbon based products.
And especially in adhesives, we have actually seen even in some other markets such as the oil market that use of.
Products that contain rosin and for province in and sand coatings, and so we are and continue to push the.
Positive sustainability attributes, whether it be and packaging into eases safety road striping versus hydrocarbons, and then seek to broaden applications like we always do for the use of.
A tour and its derivatives.
Thank you.
The next question is from Vincent Anderson of Stifel. Please proceed with your question.
Yes. Thanks for humour me here I wanted to wanted to take a couple more of the two Plano comments, specifically on the activated carbon and anti microbial and pharmaceutical applications.
Would this really just serve as a carrier for and active compound.
And is this unique to your hardwood carbon or can we all already kind of go out and and find some specialty grades of carbon use and these applications today.
Yes, yes to both of your questions first and it is acting as a carrier and.
Secondly, it's.
And it's about the functionality of our carbon compared to other carbons is what we're trying to leverage and that market.
Alright, that's great and then.
And I could squeeze and.
And capa.
Trailing mix of derivatives product is really quite impressive just curious if thats on.
On a trailing basis or if that's adjusted for more normalized demand, where we might see a larger mix of monomer come back.
No.
We think that D.
80% that we've achieved is very sustainable and in fact, if we look at the growth opportunities are.
And.
We're seeing even as we enter this year. They are much more based on the derivative products. We've got thermoplastics as we've mentioned before with a very high.
You know opportunity with.
And for biodegradable Bioplastics and also our polyol products across a broad suite of industrial applications for high functional and specialty polyurethane applications are really where we're seeing the positive growth. So I think that that 80% or advertise.
<unk> portfolio is.
And is very solid and in fact, you know overtime true.
And even further based on the the focus we put on it behind innovation and some of those higher growth areas.
I would just tell you Mike Yeah go.
Go ahead.
And I was going to go back a little bit on the and.
From Michael anti microbial and anti viral and we don't really.
We don't like to over hype as you guys, probably know, but I will tell you that we are even as we speak producing filters that are being used and devices.
Gonna be sold commercially.
As COVID-19 filtration, and killing devices, right and I wouldnt characterize them as being hugely material.
And I wouldn't say that are material to our results right now, but the point is is that that's because we're capacity constrained right. I mean, we are we are making these things now and waynesboro and Theres a huge opportunity there and we will just sort of flex our production as we sort of seek what is the best.
And highest margin highest value product.
So it's probably a little further along and then you guys might necessarily appreciate but I wouldn't characterize it as material to our results right now.
No that's helpful and I told myself those could be my last question, but the comments on Capa Teed me up perfectly.
One more.
Given the success and polyol right.
Have you given any thought to maybe just the balance sheets looking good, but maybe thinking about bolt ons and something like a polyurethane system house or two to just pull and a little bit more of that value and increase accelerated commercialization and even further for for the cap of Polyone.
Yeah. So.
We are on the lookout for bolt on acquisitions for the engineered polymer business, whether it involves potentially going downstream or adding sort of adjacent.
Products.
And two engineered polymers and.
And you sort of profitable part of the polyol.
Product mix those are on the table, we'll continue to evaluate those opportunities and and hope over time that will be successful and and.
And adding inorganically to that business as well as the.
The success that we foresee and org.
Organic growth aspect and that business.
Alright. Thank you very much good luck this year.
Thank you. Thank you.
There are no additional questions at this time I'd like to turn the call back to Jack Marr for closing remarks.
Thank you everyone for your time and interest. This morning, we remain very positive about our long term business outlook and look forward to talking with you again next quarter.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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