Q2 2021 Ingevity Corp Earnings Call
[music].
Hello, and welcome to the in Jeopardy, Q2 earnings Conference.
This call and webcast at this time all participants are in a listen only mode. They paid them. Once you require operator assistance. Please press star zero under the telephone keypad.
A question and answer session will follow the formal presentation.
As a reminder of this conference is being recorded its now my pleasure to turn the call over to Bill Hamilton Treasurer.
The President of Investor Relations. Please go ahead Sir.
Thank you Kevin.
Good morning, everyone. Welcome to you in Jeopardy of second quarter 2021 earnings conference call.
This morning, we posted a presentation on our Investor site that you can use to follow todays call. It can be found.
And on IR dot in jeopardy, dot com under events and presentations.
Any projections or goals. We may include in our presentation today are likely to involve risks we've detailed net earnings release or SEC filings and the forward looking statement you see on slide 2.
I'll also refer you to our earnings release and presentation for disclosures and reconciliations of non-GAAP measures, we use when discussing our results.
Our agenda is on slide 3.
With me today are John <unk>, President and CEO.
Mary Hall.
All of CFO Ed.
<unk> President of performance materials, and Mike Smith President of performance chemicals.
First John will comment on the highlights of the quarter.
And Mike will review the performance of our 2 segments.
John will briefly take a look back at our performance this quarter compared to <unk>.
King.
Mary will comment on our current financial status and John will discuss our revised guidance for the year.
With that I'll turn the call over to our CEO John Fortson.
Thanks, Bill Good morning, everyone. Thank you for joining us and we appreciate your continued interest and in Germany.
If you turn to slide for.
9 to note some highlights for the quarter.
We had a strong second quarter and finished the first half of the year in a terrific position demand improved across the board in all of our businesses sales in the second quarter rose, 32% of $358 million compared to the previous year of second quarter.
Our results were driven by volume.
For the order by price increases across both segments and performance materials automotive based activated carbon sales were up sharply compared to the second quarter of 2020. It was affected by industry shutdowns in North America, and Europe, even though this quarter's results were tempered by the ongoing negative impact of the global Microchip shortage.
And so for engineered polymers saw increased volumes in Q2 for all product lines and this business has demonstrated significant growth over the first 2 quarters of the year.
Our industrial specialties business also delivered a very good performance on increased demand in the North American paving season is off to an excellent start.
<unk> with respect to earnings our adjusted EBITDA and adjusted EBITDA margin, both rebounded sharply from second quarter last year, driven by volume gains and price mix improvement, which more than offset an increase in SG&A due primarily to labor related expenses, including investment in growth and innovation resources.
I want to thank the entire <unk> team for all of their continued hard work this quarter our supply chain team has done a terrific job and the state out in front of transportation and raw material cost pressures. Our commercial teams have done a great job, making sure we realize the value of our products and recouping increased logistical and production costs.
Our plants across.
Ross the globe are running hard to meet demand and they are operating safely every day in what continues to be challenging circumstances.
I was at our cross it and the rigor of facilities earlier this week and they are matching up again in the Louisiana.
The incredible efforts of these employees are the reason we are performing so well.
I'll now turn the call over to Ed to discuss second quarter performance materials.
Results.
Thanks, John.
As you can see on slide number 5 sales for the segment were up 49% at $126 million.
We saw strong sales of our activated carbon products used in gasoline vapor emissions control systems compared to the second quarter of 2020.
That was affected by industry shutdowns in North America and Europe.
The microchip shortage continues to impact automotive production on a global scale.
China light vehicle production declined almost 5% versus the prior year quarter.
Excluding second quarter 2020 production.
North America vehicle production in Q2 was at its lowest level since Q3 of 2011.
At the same time Q2, North American production remains at a favorable mix of 80% trucks and Suvs the 20% sedans.
This truck.
Level of CV mix has been in this range since the beginning of the year as the Oems are directing their limited microchip volume to their most profitable vehicles pickups and Suvs.
These vehicles are also beneficial for <unk> as they typically have larger canisters and multiple honeycombed.
As part of their evaporative emissions control system.
U S light vehicle inventories in June were down $2.5 million vehicles compared to June 2019, pre pandemic levels.
As supply chain and parts of disruptions began to correct, we expect automakers.
Occurs to ramp up production to fill the significant pent up consumer demand and eventually begin refilling their heavily depleted dealer inventories.
We expect our volumes to benefit as the microchip supply recovers.
Lastly, U S and Canada tier 3 implementation.
<unk> ongoing as some model year 2022 platforms were delayed by the pandemic.
Remaining tier 3 implementations should be complete by the end of the year or in early 2022.
Based on IHS data, we estimate the Q2 impact to endeavour.
<unk> of microchip related production losses to be about 17% to $23 million in revenue.
We expect the microchip supply issues to continue throughout the rest of 2021 and into early 2022.
But as supply issues begin to correct, we expect to see strong <unk>.
Corresponding global production increases and continued OEM focus on truck and SUV production in North America.
Segment, EBITDA was $61 million up 163% versus the prior year period.
Segment, EBITDA margin increased to almost 49%.
Primarily by our year over year of volume gains and their positive impact on both revenue and capacity utilization.
With that I'll turn the call over to Mike to review the results for performance chemicals.
Thanks, Ed.
On slide 6 you'll see our performance chemical segment sales in the second quarter.
During the $232 million.
Up almost 25% versus the prior year period.
Across all our businesses, we realized growth of the adoption of the many sustainable solutions, we offer customers.
Sales to payment technology applications were up 6% compared to the previous year quarter that.
<unk> slightly impacted by the pandemic.
This was a record second quarter and first half of the year for our payments team.
Driven by the continued adoption of our environmentally friendly cold recycling technology.
Industrial specialty sales rose 32%.
Sales growth in packaging adhesives.
It was always ex Copa disbursement lubricants and oilfield all exceeded 30%.
The business implemented additional price increases for our Tullow rosin and title of fatty acid products and we saw some of the benefits come through in the quarter.
Chinese gum rosin prices continue to be higher.
The levels seen in the last 5 years and supply demand dynamics, and rosin based products and fatty acids remains strong.
During the quarter, we saw continued sales of soy based fatty acid derivatives.
And also had our first sales of non CTO based fatty acid in July.
This.
This is another important step as we expand our product portfolio and potential end use applications by adopting raw material feedstocks beyond CTO.
Okay.
Further we are seeing growing sales in the publication, Inc. Customers via continued adoption of our new sustainable phenol and for.
For now the whole high free product offerings.
Additionally, in the second quarter, we delivered the first commercial sales of our new dual function dry tall oil based of multiplier.
For the oilfield chemical market.
We're also pleased to see demand for our engineered.
Palm of products continue to grow.
Quarterly sales in engineered polymers were up more than 41% due to improved volume for all product lines across the globe, particularly in Europe.
And markedly higher demand in automotive.
In apparel and industrial equipment applications.
We realized strong technology.
And the sales growth and electronics and EV batteries.
In addition to our sales in the bioplastic applications. We're encouraged by the growth of our sustainable solutions like high performance solvent free coatings, using our cap of technology.
Performance chemicals segment EBITDA for the second quarter.
<unk> was $56 million.
Up almost 29% versus the prior year quarter.
Due to higher volumes and price mix, partially offset by elevated cost for raw materials logistics and SG&A.
I would like to turn the call back over to John the comment on our results compared to 2019.
Thanks, Mike.
We recognize the second quarter of 2020 is not the typical comparable quarter.
So we felt it was important to briefly look back on the second quarter of 2019 and compare our results of this quarter to a more normalized period.
As you can see on slide 7 our sales are slightly higher than Q2 of 2019 largely.
Improved price mix we.
We saw strong price improvement in our performance materials segment. Despite the drag on volume from the Microchip shortage as Ed mentioned.
In performance chemicals, we continue to see growth in our pavement technologies business due to market adoption for our sustainable performance enhancing solutions.
The steady consistent growth of the payment business through economic cycles was demonstrated again from 2019 to 2021.
Industrial specialities experienced significant declines in oilfield chemicals and publication of <unk> beginning in the second half of 2019 and into 2020.
But of successfully grown other product.
Please the partially offset that decline.
And engineered polymer sales were up on volume and price mix seen a strong rebound as the industrial markets recover at the an extended period of softness.
It's interesting to note in the quarter.
Absent the effects of declines in oil for inks the performance chemical segment as a whole would have been.
Been up almost 9% and industrial specialties would've been up 3% compared to Q2.2019.
Our adjusted EBITDA is up almost 9% versus Q2, 2019, and adjusted EBITDA margins up over 200 basis points, driven primarily by improved price mix as we took aggressive actions to strengthen profitability.
<unk> is the business environment recovered.
Now I'll turn the call over to Mary for further detail on our Q2.2021 financials and metrics.
Thanks, John and good morning, all of them, please turn to slide 8.
And I'll cover Q2.2021, John added.
Covered revenue and adjusted EBITDA in some detail. So let me start with gross profit.
Wrong volume pickup you heard about benefited both revenue and Cogs as we have relatively high fixed costs related to our plant operations and the significant increase in volume helped leverage the fixed.
My boss.
These benefits in our improved product net flow through to gross profit, resulting in a gross margin improvement of 800 basis points year over year.
Our SG&A was also up year over year, due primarily to labor related expenses, which included filling.
Fixed compositions after delayed hiring in 2020 and investing in growth and innovation resources.
We remain focused on prudent cost management, while ensuring we can meet the rebound in business activity.
Net interest expense for the quarter was $12.2 million up a bit from.
<unk> open share as we replaced our floating rate revolver borrowing in the second half of last year with the fixed rate bond with an 8 year maturity.
Our tax provision on adjusted earnings of $16 million for the quarter, an increase year over year, reflecting increased earnings and also our earnings.
<unk> mix across different geographic location.
Our adjusted tax rate in Q2, with 25% and we estimate our full year 2021, adjusted tax rate will be in the range of 22% to 24%.
Diluted adjusted.
The <unk> per share of $1.55 up almost 2 and a half time from 63.
Q2 last year.
Turning to slide 9 you'll see our continued strong financial position that reflects our solid business performance combined with our discipline in managing.
The balance sheet.
We generated good free cash flow of approximately $42 million in the quarter due to our strong earnings even though we built working capital, particularly accounts receivable and inventory of sales picked up.
Our leverage continued to improve with the net debt to adjusted.
Earning but the ratio of 2.1 times at the end of Q2.
From 2.4 times at the end of Q1 and down from 3 times at the end of Q2.2020, our average cost of debt was approximately 3.7% and we have no meaningful debt maturities until August.
City of 2023.
As we previously stated we will continue to be opportunistic with share repurchases in 2021.
In Q2, we repurchased about $29 million of shares and year to date repurchases totaled about $68 million or.
Against the 184000 shares.
This leaves approximately $344 million available on our share repurchase authorization.
In summary, our balance sheet is strong we are balanced and disciplined in our capital allocation and we have ample liquidity to.
Our organic and inorganic growth initiatives and now back over to you John.
Thanks, Mary on Slide 10, I'd like to review our revised guidance for 2021.
Based on our solid performance from the second quarter and first half of the year.
And the continued robust demand for our.
The support we are increasing our full year of 2021 guidance for sales to between 132 and 136 billion.
And adjusted EBITDA to between $425.440 million.
We expect issues related to the availability and rising cost of logistics raw materials inflation and automotives.
Motive sector input disruptions the ore.
Ongoing headwinds throughout the rest of the year.
Paying close attention to supply and demand in the market and will pass through cost to ensure we extract the optimal value for our products.
These headwinds we believe performance materials will benefit in 2022 and beyond from the expected rebound.
Bound in the automotive production as a result of pent up vehicle demand. We also expect continued robust demand for our performance chemicals products and will pursue further improved pricing to offset higher raw material cost its good to see the team working hard to take advantage of these current market opportunities.
We continue.
Continue to execute on our 2 point of strategy.
The increasing sales of our new soy based fatty acid products, the rowing sale of Huntington homes into health and safety applications and our strategic partnership with RMG provider of Green gas USA that we announced in Q1 are just some of the ways. We are working to position in Germany for.
By entering adjacent growth markets, where our assets and technologies give us a competitive advantage.
I am pleased that we are seeing increased interest in our products across our businesses as customers continue to look for sustainably sourced materials.
I'm also pleased to share the earlier this month, we created our first.
First equity inclusion and diversity officer role to maximize total organizational performance.
This role will be instrumental in elevating our equity inclusion and diversity strategy awareness and advocacy efforts.
And welcome to the attitude the team.
Before we end the call I'd like to encourage you to attend the fourth webinar series.
For investors and analysts this year, which occurs on Wednesday August 20, <unk> debt.
We will focus on the outlook for pine chemicals, and rosin industry dynamics.
In closing we continue to believe deeply in the long term potential of our company and we hope you share our enthusiasm for <unk> at this point operator, we'll open up the call for questions.
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Before pressing star 1.1 moment. Please open the poll for questions.
The first question today is coming from John Mcnulty from BMO capital markets. Your line is now live.
Hey, good morning, Thanks for taking my questions.
So I guess the first 1 would just be on the performance chemical business. The margins came in really strong and I know there.
There is seasonality, but it looked like it looks like the improvement was kind of bigger than the usual seasonal norm and that's I guess, despite some planned downtime. So I guess can you help us to understand.
What drove that or what were some of the some of the fundamentals are the kind of gave you that margin lift and how we should be thinking about the margins as they progress into into.
At the Q.
Yes sure John.
I think primarily it's a an increase of positive mix within the business as you could see you know the engineered polymer business had another terrific quarter.
And then we've got the payment business, which continued to grow in.
Into 3 way, we anticipated it so so that's naturally going to be delivering that the ongoing positive margin, that's very consistent with our overall strategy to optimize the results of the segment.
And should the margins be higher as we go into <unk> without the without the downtime that you that you had in <unk>.
<unk>.
I think that the.
The margin in Q2, Q3, probably reasonably similar it's a little bit hard to answer.
The pace of at that time, but you know.
Second quarter third quarter margins are generally strong and we expect debt both the engineered polymers and payment business will continue to have a very robust Q.
Q3, and throughout the rest of the year.
Got it and then just as a follow up when we look at the the free cash that you've been generating I mean, the the leverage looks like it's going to be down to 2 times by the end of the year, maybe even a little bit below that I guess can you speak to the capital uses and if we can see maybe more cash.
They are into M&A or into buybacks I guess, how it how would you characterize that now that you're getting toward the the low end of your of your kind of debt targets.
John.
We're well within our target debt ratio of the <unk>.
The 2 and a half time.
And as I said, we will continue.
Going either domestic with the share repurchases as we have done already this year, but our focus is growth and we have a good healthy M&A pipeline that are that we're looking at.
Uh huh.
Hope to.
To make strategic investments where appropriate.
Great. Thanks, very much for the color.
Thank you. The next question today is coming from Mike Sison from Wells Fargo. Your line is not of life.
Hey, good morning, guys nice quarter.
I appreciate the comparison with 2019, and if I think about the outlook for performance material.
To be up in 'twenty, 1 versus 2019 in total the margins of EBITDA look like theyre going to be.
A higher given the lower.
Build rates so.
Just curious if if you think about the potential of the build rate to ramp back up.
And then.
Materials of the mix that you were talking about being the heavier cars doing little bit better how does that sort of shake out as we head into 'twenty..2 in terms of mix is that will that still be of plus or does that maybe.
Maybe a little bit of a headwind.
Yes, Mike This is Ed.
Kind of reflecting back to 2019 Q2 period that was the period when China.
China was actually implementing.
Or VR.
The mix at that time was shifting from let's say granular carbon star higher value Pelleted carbons.
Looking forward, though.
Obviously, we're a.
Working through the global Microchip issue.
We believe Q2 is the trough for the year of.
Our expectation is that it will continue to improve incrementally over the next 4 quarters.
Great and then.
And you the materials continues to improve.
Pretty well.
Year versus last year and sequentially.
How do you see that.
How do you see the second half sort of unfolding for that business were there any raw material shortages that impacted that in and what type of growth do you think where we're gonna be ongoing.
The sword.
On a normalized basis with the.
With the Capa.
Okay.
Generic polymers got it okay. Thanks, Mike Yeah.
We feel really good about sort of a very positive reset with the first half of the year and believe that's going to continue throughout this year.
For the end, if you had a chance to listen to the webinar that we.
We did a few months back we see very solid consistent growth going forward from you know mid to high single digits on an ongoing basis and the and we believe that.
That should also be.
Benefits.
Year it through ongoing improved mix as we are really focusing on the highest value of applications.
Great. Thank you.
Thanks for the next question today is coming from Ian Zaffino from Oppenheimer. Your line is kind of life.
Hi, Good morning, guys. This is mark on for Ian Thanks.
For taking our question so maybe just digging into the industrial specialties business at the more can you guys just give a sense of which end market users really drove the strength.
It's like you know how the sort of thing to think about that going into the second half of the year.
Related to the cause of that business can you just also give a sense of how oilseeds.
Benefit.
That business trended and then maybe like you know how to like how I guess like how you're trying to maybe on the sequential basis.
Thank you.
Sure Mark.
Well as you may have heard the strength.
For an industrial specialties was really very broad based.
Really.
Really good growth in packaging adhesives, dispersants lubricants oilfield.
So we look we feel very bullish about those businesses continuing to grow.
As we have continued to focus on we believe are the sustainability aspects.
<unk> of our portfolio not just from the raw materials standpoint from a from a customer solutions standpoint.
Really excellent. So we think that theres going to be continued adoption from a from a sustainability standpoint.
Specifically within the within oilfield.
The the oilfield business grew quite significantly.
The oilfield business compared to Q2 last year, which was quite low as sales were up over 40% within that within that business unit as of now in industrial specialties. So so that was very positive.
And I say that level of growth.
Was significantly higher than the increase in rig count.
Be compared to the Q2 Q2 of last year. So.
We believe that our oilfield business has had a nice rebound in the and believe it should be steady and hopefully sequentially on a positive path going forward.
Got it that's very helpful and.
Can leave maybe a follow up Bob you know this.
All good pricing and volumes in the quarter, maybe can you give a sense for that business all of them, how much pricing versus volume kind of how we should think about directionally between the 2 as we move through sort of second half of the year and then I guess looking.
Into 2022 ex.
And then just well.
Not going to specifically break down volume versus price as you can see and as we discussed the they were both.
Quite positive in the second quarter, what I will say is that.
Especially on the price side, we see pricing to further improve in the second half.
Half of the year.
The market dynamics remain very strong. So in addition to the <unk>.
Significant increase that we've seen from a demand standpoint that resulted in those volume increases you referred to.
We are very optimistic that the second half and second half price realization will be even higher.
And then what we delivered in the second.
The quarter.
Okay, great. Thank you guys so much.
Thank you next question today is coming from John kind of a pain from CJS Securities. Your line is live.
Hey, good morning, and nice quarter guys. My first question is.
I think you talked about the semiconductor.
Limiting your revenue in autos.
The tune of 17 to 22.9 headwind.
And I think I heard the someone said that that might improve incrementally as the year progresses. I was wondering where do you see that GAAP as you exit Q3, and Q4 doesn't shrink or does it actually get bigger.
Yes, John this.
The shortage. Unfortunately, we really don't have much clarity to the overall chip supply market. So it does make it difficult for us to be able to predict.
Based on IHS, what we hear from.
Around the semiconductor chip manufacturers is that they are responding to the shortage.
And do expect as I kind of stated earlier that over the next 4 quarters.
It should continue to improve on top of that obviously, you've got increasing production following up in the back half or beginning in 'twenty early 2022 in early 'twenty.
Back.
Half of 2022, as well and so we expect to see continued growth from this period forward and especially in 2022.
Okay, Great and then just in terms of the the rest of the supply chain and logistics.
Where do you see the biggest headwind right now where things improving.
Or is it mostly stable I'm, just wondering how youre thinking of the that going forward and if pricing outpaces debt as you as you progress through the year.
Okay.
Logistics challenges on the number of Hong.
Share in trucking.
Sarah you know the supply chain disruptions in certain areas and in chemicals have continued as well not just chip shortly the chip shortage issues. So as I think John mentioned in his comments, we see those headwinds.
Continuing and the pace at which they.
The pale off is the is yet to be determined, but we're confident in our ability to to.
To address those challenges.
Okay, great 1 more if I could just on the coffee business I see you had your.
Appeal deny of which I think was most of the expected.
I guess the question.
Are your competitors now of qualifying of shipping more products at all in the carbon.
And markets.
Yes, John I would say I mean, our competitive issues are still the same nothing really has changed based on the outcome of that.
The.
Patent of trial, obviously where discipline.
They're doing it but you know we are effectively 7 months away from the exploration of that anyway. So I just don't feel that we're going to see any.
Impact of the businesses of whole because of the rule.
Okay, great. Thank you.
Thank you the next.
At the point in today is coming from Daniel Rizzo from Jefferies. Your line is that line.
Just to follow up on the question that was previously you mentioned the free and supply chain issues. I was wondering if the labor issues for something that's affecting you and also affecting the company your customers and if that's something that could ease of potentially in the fall with the changing of the macro.
The environment.
Yeah, Hey.
John Unfortunately, I mean look at it as like everyone.
We are dealing with what I would characterize of sort of increased labor cost environment right.
We're managing through it.
Because of of.
What.
What we've all been through over the last 18 months or so and we are re looking how we do things how of the company operates who works from home who returns. They office obviously the guys in the plants are.
Going out at full bore.
Regardless so.
It is a very dynamic environment.
As Mary alluded I think we're doing a great job sort of managing those costs and working our way through it.
And what we wanted to take advantage of this opportunity commercially and we're not going to shortchange ourselves we're in a great environment.
You can see it in our numbers you can see how hard our people are working and we want to take.
The advantage of that so is there some op could there be an opportunity to do a little better in the back half of the year it might normalize but.
It's hard to put a finger on when that's going to be and right. Now. We're just we want to take advantage of the market opportunity.
Okay. That's helpful and then I think Mary.
You mentioned the up pretty active M&A pipeline.
Was just wondering if if I guess your focus on M&A is still the same if you're still folks from the same areas or what what's the exciting now for potential consolidation is looking for.
I don't.
Thanks.
Our capital allocation priorities have not changed.
Yeah.
I think the M&A environment.
Theres a lot out there we continue to look at a lot of stuff.
My own view is it feels like valuations are starting to get a little more reasonable and we might benefit from that as we sort of move through the back part of the year into next year.
But we're still focused on identifying opportunities.
To grow the company right and we've been pretty upfront with everyone about where we're looking to do that and where the areas of focus are.
And I think we'll find some opportunities, but we're going to take our time and we're going to do it the right way and.
We do have a balanced mix of opportunities that are sort of organic versus inorganic right.
And that creating that kind of tandem of work I think is actually how we will create long term value for for our shareholders.
Alright, Thank you very much.
Thank you as a reminder of that Star Wars the place in the question queue.
Our next question today is coming from per ton from Israel from Baird. Your line is that line.
Thanks, Good morning, I guess, that's the follow up to last question I realize it's too early to think about next year's Capex, but given your.
Out of.
Working on several growth initiatives.
Any larger internal investment opportunity that you have identified.
That looks attractive.
Yes, so of the way I think about it.
We obviously flushed it on down last year, right prioritize right and we're returning.
Earnings for more normalized level I think this year.
We will and we are looking at capacity expansions in both segments of our businesses.
I would characterize them as sort of incremental production or efficiency improvements some larger than others, but it's.
Were going to happen in both sides of the.
The business.
And some of those are related to growth of lot of it actually is related to growth.
But we're also doing some cleanup if you will just to make sure that we take care of our facilities, but I don't see any.
Sort of dramatic uptick if thats what youre looking.
True the asking for as we move forward.
Got it Okay, and then in engineered polymers, so what was the.
Bigger gross driver or was it pricing or volumes.
It was volumes the the team has really done a.
Great job moving price.
They are raising private assets, so, especially as there has been inflationary pressure on cyclohexanone, specifically, so so they're doing a terrific job on price but.
The higher proportion of that significant over 40% sales growth was driven by volumes across.
As we described day a variety of end uses and the technology adoption that we've really been working on in the last few years.
Okay.
Got it thanks, guys. That's all I had.
Thank you for the next question is coming from Chris <unk> from loop capital markets for line is that right.
Yes. Good morning, So a question I guess kind of around the potential tensions between the currently strong demand environment and your pine chemicals business and the strategic interest in accessing and feeding alternative feedstocks through your system. So I'm just wondering if you could speak to that I think the the.
The.
The interest in alternative feedstocks reflect some.
Secular strategic commercial opportunities, but maybe also speaks to what you thought it Ben.
Maybe in the under absorption of your asset footprint, but I'm just wondering what the what the headroom is for ramping alternative feedstocks.
Does this have.
Has anything to do with your structural ability to access CTO did you are you having any constraints. There. If you could just remind us of your strategy and as you evolve the business. Thanks for all.
I'll start off gross and then.
Mike can chime in where theres any holes in the answer but.
Where we are.
We are determined to take advantage and generate the highest returns on our assets and our investments that are possible right. So you want to have these plants running at the highest level of capacity utilization you can.
We are.
Fortunate.
Our engineers have done a lot of great work, where we can run our alternate feedstocks today.
Somewhat in parallel at 1 of our facilities with ongoing.
T O consumption right. So.
At least for the foreseeable future.
But we may expand capacity as that market grows and do something different but the plan today is to be able to run them in parallel right and so it would be incremental capacity to what we're doing today.
We do see these as both offensive and defensive opportunities for the company.
Company.
It is offensive and that we do believe that these products that come from bio based feedstocks, whether it's the CTO or other sofa et cetera.
Are going to be an increased demand.
As the world moves away from.
Petroleum based Chemistries, we think theres opportunities there right.
So we do see this as an offensive strategy. It is also defensive in the sense that if we see price escalation in CTO, which we do anticipate.
But we will.
Have the opportunity to be able to flex between the 2 raw materials to help mitigate inflationary pressures that we might find but I would not characterize the.
The moves today as a result of any CTO inflation today CTO of while it is inflating.
As mood within the bands of where we've kind of have predicted it would be this year.
I don't know, Mike if there's anything out of the only thing I would add just to make sure that.
We still have available capacity within our 3 plant network. Obviously, we are very pleased with.
Turnaround of demand and the technology adoption and the increase in growth of our pine chemical business.
But as John alluded to we want to push the utilization of those plants to every extent that we can and use of the technology that we have and so we have some available capacity to do that.
And if and when we need more and incrementally add to get that capacity, we have options to do so.
And just as a follow up this is there any constraint.
Again, either either structurally.
Or or temporarily in terms of your ability to access the PTO.
No. We can access CTO of I think you know we have a.
The long term supply agreements in place and like others, we have a a portion of our product that we need to go out and absorption of the market on an annual basis and that's exactly what we intended it.
Got it and then I guess I was kind of surprised that hasn't been asked already but.
Just on the on the IP litigation there was the ruling that I'm sort of backed up the ITC determination and and I'm I don't know maybe this is you know becoming mood is where you know we're into.
So for your 2022 cars at this point just wondering what your what next steps is there an appeal process or is there actually Chris It was asked earlier.
And as Ed alluded to that ruling that came out was not a surprise to us it was anticipated.
Yeah.
We're obviously disappointed because we believe in our legal position, but it doesn't really change anything from a commercial perspective, because we're basically 7 months away from the patent exploration of already.
What is is there a.
Licensing is that of possible outcomes.
The modeling on that patent at this point no. There's no licensing I would clarify as well, though we have additional patents that will provide future support for us in the marketplace and you know obviously disappointed in the ruling but we still feel like we're in a very good spot. Yeah. I mean, the reality is of course licensing is always out of Arizona option, but it's not a strategy that we're pursuing.
We don't need it.
Got it okay. Thank you.
Thank you we reached out of our question and answer session I would like to turn the floor back over to bill for any further of closing comments.
Thank you everyone for your time and interest this morning, we remain incredibly positive about our.
Long term business outlook, and we look forward to talking with you again next quarter.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.