Q3 2021 Ingevity Corp Earnings Call
Greetings and welcome to the <unk> do you have any third quarter earnings report.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I'll now turn the conference over to Bill Hamilton, Treasurer, and head of Investor Relations.
Now begin.
Thanks, Rob and good morning, everyone welcome to <unk> third quarter 2021 earnings Conference call.
This morning posted a presentation on our investor site.
He used to follow todays call. It can be found at IR dot.
<unk> Dot com.
The events and presentations.
Any projections or goals. We may include in our presentation today.
I am going to involve risks detailed in our earnings release.
Our SEC filings and the forward looking statement you see here on slide two.
I'll also refer you to our earnings release and presentation for disclosures and reconciliation of non-GAAP measures, we use when discussing our results.
Our agenda is on slide three.
With me today are John Fortune, President and CEO.
Mary Hall, our CFO Mike.
Mike Smith, President of performance chemicals, and Ed Woodcock President of performance materials.
First John will comment on the highlights of the quarter.
Mike and Adam will review the performance of our two segments.
Mary will comment on our current financial status and lastly, John will discuss our revised guidance for the year.
With that I'll turn the call over to our CEO John Unfortunately.
Thanks, Bill and good morning, everyone. Thank you for joining us if you turn to slide four you'll note some highlights for the quarter.
Overall, I'm really proud of the way in Germany has performed this quarter.
We continue to grow in many of our current businesses in the face of raw material inflation and supply chain headwinds, while also advancing our new product initiatives.
Sales in the third quarter of 2021 rose, 14% to $377 million compared to the previous year's third quarter.
Third quarter results were driven by significantly higher performance chemicals volumes in engineered polymers and industrial specialties and were supported by price increases across the segment.
Engineered polymers saw increased volumes in Q3 for all product launch this business has demonstrated robust growth throughout 2021.
Our industrial specialties business also delivered very good performance on increased demand in <unk>.
Sales of our payment technology products are slightly ahead of the prior year's third quarter.
The prolonged impact of the global Microchip shortage continued to depress automotive production, which negatively impacted sales of our activated carbon products in our performance materials segment.
As a result performance materials sales and adjusted EBITDA were down compared to 2000, Twenty's third quarter, which is a tough comparable period. This was the quarter last year when demand in production rebounded sharply from pandemic boats.
With respect to in Japanese consolidated earnings both our adjusted EBITDA and adjusted EBITDA margin were down from third quarter 2020, due to margin compression caused by the impact of lower sales in our performance materials segment.
However, when compared to the more normal year of 2019 margins were essentially flat on EBITDA. They grew almost 5%.
Well hear more from Mike and Ed we continue to advance important initiatives across the companies that are positioning us for long term sustainable growth.
We had our first commercial sales of Tulsa ended the European biofuel market and application, we anticipate will represent a significant opportunity for us in the future.
We have obtained certification for biofuel sales in our north Charleston plant and the process to expand into Deridder and cross sell is well underway.
We are working to advance our soy based fatty acid production capacity at our crossett facility with a goal of significantly more capability in the second quarter of 2022, we are finding increasing market opportunities for this alternate feedstock.
We are also expanding our amount of our production capacity of caprolactam and Warrington to meet the higher levels of demand for our products and our plans to add polyol capacity. Our driller plan are on track for Q2 of next year.
Our products or even finding their way into the electric vehicle value chain.
Our industrial specialties team is selling product to support lithium mining operations and our engineered polymers capa products are used as critical performance enhancing materials in electric vehicle battery packs to dampen noise and protect the batteries. We are excited to be finding ways to add value in these growth markets fine.
Finally, we are continuing to see increased testing by utility fleets for our <unk> technology.
Beyond trucks testing of our large onsite storage tank is largely complete and we are operational with our methane capture and storage strategic partner Green gas USA.
You may have recently seen green gas announced a 10 year off take agreement with Viva. This is their second the first being with Duke University.
Additionally, we published our 2020 sustainability report update last week the highlights in jeopardy. His ongoing commitment to operating sustainably, bringing high performing customer focused solutions to the market and playing an important role in the global race to lower emissions.
Our renewable raw materials, and the significant environmental benefits of our technologies give us a competitive edge.
Courage you to read the update which can be found on the homepage of our investor site.
I want to thank the entire in Germany team for their continued hard work in these challenging times.
Continue to be impressed by the drive and determination of our entire team, particularly the operations and supply chain employees, who work smart and safely day in and day out under these trying market conditions.
I was able to get to our engineered polymer site in the UK. This past quarter to thank them for what has been a remarkable story.
A recovery in our existing markets and advancing new technology adoption. We are all excited about the opportunities they have in their future.
With that I'll turn the call over to Mike to review the results from foreign to chemicals. Thanks.
Thanks, John.
On slide five you'll see our performance chemicals segment sales in the third quarter were $259 million.
Most 38% versus the prior year period.
Across all our businesses, we realized growth through the adoption of the many sustainable high margin derivative solutions, we offer customers.
We're incredibly pleased to see demand for products across our engineered polymers portfolio continuing to grow.
Quarterly sales in engineered polymers rose over 100% to an all time record level due to improved volume for all product lines across the globe and markedly higher demand in automotive and industrial equipment applications.
Automotive realized strong technology adoption and sales growth in protective coatings and electric vehicle battery pads.
In addition, our sales into bioplastic applications continued to show growth and we are encouraged by the increasing number of customers who are using these capa solutions to meet their sustainability goals.
In addition to volume growth, we also realized strong price improvement in engineered polymers, which has been important to offset the inflation and raw material costs.
Industrial specialty sales rose 47%.
Sales growth in adhesives, oilfields, and lubricants were all up over 60%.
Adhesive sales growth was robust in both packaging and eases and safety Road strike.
We saw the benefit of Q2 price increases come through in the third quarter and the business also implemented additional price increases across all rosin title fatty acid products, which are in effect for the fourth quarter.
And he's gum rosin prices continue to be higher than levels seen in the last five years supply demand dynamics for rosin based products and fatty acids remained strong.
During the quarter, we saw continued sales in soy based fatty acid derivatives straight soy based fatty acid.
These are important steps as we expand our product portfolio and potential end use applications.
Shopping raw material feedstocks beyond CTO.
We also had our first commercial sales of telephone into European Biofuels and expect demand for this application to grow significantly going forward.
Sales to payments technology applications were up slightly compared to the previous year quarter, driven by continued adoption of our environmentally friendly whole recycling technology.
Outside of North America, we realized strong sales growth in Europe, but that was offset by a reduction in sales in China, which we attribute to temporarily reduce local government infrastructure spending leading to curtailed paving activity.
Performance chemicals segment EBITDA in the third quarter.
$63 million up 34% versus the prior year quarter due to higher volumes and prices, partially offset by continued inflation of raw materials and logistics costs.
I'll now turn the call over to Ed to discuss third quarter performance materials results.
Thanks, Mike as you can see on slide number six sales for the segment were down 18% at $118 million.
Sales of our automotive activated carbon products were down compared to the third quarter of 2020 reduced by the shortage of microchips that continues to negatively impact global vehicle production.
The microchip shortage is disrupting the automotive industry worldwide in the quarter North America light vehicle production declined 27% and has been sequentially declining quarter over quarter since the prior year's Q3.
North American production remains at a favorable mix of 81% trucks and Suvs to 19% sedans.
This truck and SUV mix has been in this range since the beginning of the year as Oems are directing their limited microchip volumes to their most profitable vehicles pickups and Suvs.
These vehicles are also beneficial fringe IBD as they typically have larger canisters and multiple honeycomb as part of their evaporative emissions control systems.
U S light vehicle inventories as of the end of September fell 64% to less than 1 million vehicles.
Compared to $2 7 million vehicles in inventory in September 2020.
The decline is even greater when compared to the pre COVID-19 inventory of $3 6 million vehicles in inventory in September 2019.
U S and Canada vehicle sales were down 13% in the quarter, reflecting both the lack of vehicle production and the availability of vehicles for consumers to purchase.
Additionally, China light vehicle production in the quarter was down 15% and sales were 14% lower versus the prior year quarter.
Based on IHS data, we estimate the Q3 impact to <unk> micro chip related production losses to be about $22 million to $28 million in revenue.
We expect the microchip supply issues to continue through the rest of 2021.
And into 2022.
Lastly, U S and Canada tier three implementation is ongoing as some model year 2022 platforms were delayed by the pandemic.
Remaining tier three implementations should be completed by the end of the year or early in 2022.
Segment, EBITDA was $56 million down 30% versus the prior year period.
Despite lower revenue, we maintained strong segment EBITDA margins at 48% in the quarter.
Yeah.
In mid September we announced our intention to challenge an adverse jury verdict in the U S District Court of Delaware.
We don't anticipate an immediate impact to commercial sales and are aware of a competing certified or tested honeycomb that can replace sales of Japanese products immediately.
Multiyear automotive design cycles of Oems and tier one suppliers.
This decision has no bearing on our 649 patent family obtained in the U S Europe, and China to reduce emissions and advanced low purge engine technologies like start stop turbo and some hybrid variations.
That we believe could apply to anywhere from $25 to 60% of future near zero fuel system designs.
Also in September the U S patent trial and appeal board recognize the validity of our patents and our newer <unk> 649 portfolio.
Following a post grant review that was initiated by a competitor challenging certain claims within the patent related to the use of our standard and specialized honeycomb products.
This win is a great outcome for in Jeopardy, as we continue to add to the next generation of emissions control technologies in our performance materials IP portfolio.
It recognizes our ongoing investment in research and development of automotive emissions control solutions, using specialty honeycomb and canister design.
As the World leader in this space, we're committed to continuing to leverage our expertise in complex low purge engine innovations to help our OEM customers meet increasingly stringent emissions targets.
I'll turn the call over to Mary for further detail on our Q3 financials and metrics.
Thanks, Pat and good morning, Please turn to slide seven.
<unk> seen a healthy increase in revenues, which were up almost 14%. However, you also see the decline in both gross margin and adjusted EBITDA margin due to the reduced sales in performance materials and the significant mix shift in revenue versus Q3 of last year with performance chemicals revenue.
<unk> up 38% and performance materials revenue down 18%.
In addition, our SG&A was up year over year, as we resumed more normal commercial operations, including hiring to fill open positions increased travel and investment in growth and innovation resources. We remain focused on prudent cost management, while ensuring we can meet the rebound in business activity.
Yeah.
Net interest expense for the quarter was 11 6 million up a bit from last year as we replaced our floating rate revolver borrowing in the fourth quarter of 'twenty 'twenty with a fixed rate bond with an eight year maturity our tax provision on adjusted earnings was $16 million for the quarter a decrease.
This year over year, reflecting lower earnings and also our earnings mix across different geographic location. Our adjusted tax rate in Q3 was 19, 8% and we estimate our full year 2021 adjusted tax rate will be in the range of 22% to 24%.
Diluted adjusted earnings per share of $1 62 or down from the $1 79 in Q3 last year, reflecting a lower margin.
Turning to slide eight you'll see we generated solid free cash flow of approximately 75 million in the quarter as we remain focused on disciplined working capital management, we did see inventories in performance materials tick up somewhat in Q3, and some forecasts for auto production.
And throughout the quarter, and we're managing plant operations to optimize production and the inventory as we navigate this dynamic environment.
As we previously stated we will continue to be opportunistic with share repurchases in Q3, we repurchased about $32 million of shares and year to date repurchases totaled about $100 million or one 3 million shares. This pleased approximately three <unk>.
<unk> 12 million available on our share repurchase authorization.
Our leverage ratio that's actually adjusted EBITDA was two one times at the end of Q3 points sequentially and down from two seven times at the end of Q3 2020.
Our average cost of gasoline approximately three 6% and we have no meaningful debt maturities until August of 2023.
In summary, our balance sheet is strong we're balanced and disciplined in our capital allocation and we have ample liquidity to support our inorganic and organic growth initiatives and now back over to you John.
Thank you Mary on slide nine I'd like to review our updated guidance for 2021.
Our guidance for the remainder of the year reflects tempered expectations for performance materials and confidence in the continued strong demand for products in our performance chemicals portfolio in the fourth quarter.
Our updated guidance for the full year 2021 sales to be between 132, and $1 $3 6 billion and adjusted EBITDA to be between 405 and $420 million.
The rest of the year, we expect the ongoing shortage of microchips and continued logistics raw materials and energy inflation to be headwinds.
We're also watching for any other issues that can also impact automotive production.
We continue to monitor supply and demand in the market and will pass through cost to ensure we extract the optimal value for our products.
Despite these challenges our team is operating very effectively and we continue to execute on our strategy.
We are being aggressive in the market both on realizing value for our products, but also in finding new applications.
We are determined to take advantage of opportunities in this dynamic situation to maximize value today and in the future and our results reflect this.
Closing I appreciate the ongoing hard work and efforts of our employees worldwide and we think that we.
I hope you share our enthusiasm enthusiasm for <unk> at this point operator, we'll open up the call to questions.
Thank you at this time, we'll be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from the line of John Mcnulty with BMO capital. Please proceed with your questions.
Hey, Good morning. This is caleb on for John.
I just had a quick question on the pricing dynamics Youre seeing in P. C. In Q4, and maybe a little bit further out in to 2022, especially with what Youre seeing in Chinese gum rosin. Thank you.
Yeah. Thanks.
At this point, we are really optimistic that our ongoing price increases.
Continue to be successful.
The market is supporting it as you mentioned, we've got a supply demand situation on Chinese gum that remains quite favorable that's about as good as it's been in the last five years and so we fully believe we're going to continue to get additional price increases in the fourth.
Order and are certainly optimistic as we enter next year that we'll have further opportunities.
Okay. Thank you and then I was just wondering if you could provide an update on some of the longer term initiatives you're working around.
Regarding like methane capture and transportation and renewables and alike.
Well, we talked a little bit at the front of the conversation I mean, we're pretty excited about.
Work across all of our what I would call. It two point O initiatives right.
We did announce where you guys did announce two off take agreements, but the big one that happened recently is with in vivo them. They are a company that.
Wood pellets that are used as a <unk>.
Substitute for oil most of these pellets are sold in Europe, they generate methane will be off taking them at.
The good news also is that our technology the tank that we've been using is now been cycled through sufficient times, where we break that is being fully commercially viable. So we are out in the marketplace talking to a lot of different customers and a lot of different parts I'm sure the methane value chain.
We're going to continue to grow that and then with regards to the fatty acids, we talked a little bit about that as well our focus is on getting the soy processes in place next year. So we can start ramping sales, but we're also looking at other feedstocks.
While we're while we're focused on story in the near term.
Hopefully that answers your question.
Yes. Thank you.
Our next question is coming from the line of Jon <unk> with CJS Securities. Please proceed with your questions.
Hi, Good morning, everybody. Thank you for taking my questions.
I was wondering just on the the engineered polymer business how much room do you have to grow there given the demand and kind of before you have the capacity to come online over the next year.
We have ample capacity to meet any anticipated demand as you may have seen we recently announced the expansion of 20% at our Warrington site for monitoring production.
Have more polyol production coming on into greater next year that will represent about 35% increase in capacity for polyol and so we're super pleased with the growth of that business and the outlook for future growth and we're committed to ensure that we've got all the capacity we need to support it.
Okay, Great and then just on the automotive business I was just wondering in your discussions with customers do you see any relief coming anytime soon are they expecting it, especially as we go through Q1 and Q2 next year do you expect any kind of sequential increase in production as we had in Q4.
Yeah, you've probably seen this is ed you've probably seen and heard some of the announcements coming out of GM Volkswagen and Ford.
Secondly, their view is that this will continue throughout 2022.
Our view is that we're expecting the first half to be roughly equal to our Q3 and Q4 with improvements occurring in the back half.
Ultimately windows improvements occur will be meaningful but the market at this point is so opaque it's hard to really understand when those additional chips will come on in supply.
Okay got it and then if I could do one more just on the NGL off take agreement with your partner that you mentioned I was just wondering how big that was in terms of how much carbon you could sell to them to support those volumes.
Well for those particular situation, it's not that I wouldn't characterize it as material right.
I think the way we view it as a verification or validation that business model for methane capture.
Is a good one and a profitable one.
Will validate the technology that can then be used in a lot of different applications by a lot of different potential customers. So.
It's not going to be a big revenue push.
But it's a start.
Okay fair enough. Thank you guys.
The next question is from the line of Daniel Rizzo with Jefferies. Please proceed with your question.
Guys. Thanks.
Thanks for taking my questions. So given you know.
Obviously oil production slowdown and its effect on.
Performance materials I was just wondering why you you noted in performance chemicals that auto production is kind of helping drive growth recent engineered polymers.
Wondering why there's kind of a different so I figured that would be under pressure as well.
Yeah.
Thanks, Dan I think we've really got two very different situations.
Within performance chemicals.
It's really all about new technology adoption and so when you think about the new business, we have and it's really getting some great penetration in.
Protective films, it's coming from a very low base as customers.
Our aggressively adopting that technology, we've got a strong growth there and then on the other side.
Got.
Additional business in electric vehicles and so the.
The business for the micro cellular polyurethane.
<unk> type applications for electric vehicle battery pads is new.
<unk> sales continue to grow and we're really pleased that a number of customers are choosing to use capa technology in those growth areas within auto.
Okay. Thanks, and then something else. So you you indicated and it's obvious that S. U b cells or I think you said 81 per cent sedan, 19% and that's a lot of that some of that is because of the chip shortage leading automakers.
Automakers to make more trucks, because it's more profitable, but when the chip shortage eases could we see I guess, a shift back in and out like how much more so than sedans being produced because of ketchup and will that have some sort of impact on you guys.
Just a follow up.
Yeah, Dan This is Ed I don't think it's going to have an impact when that recovers, we supply canisters for Suvs trucks, and sedans and all of them based on the size of their fuel tanks should be relatively simmer, especially for North America.
It should be relatively similar content, you know, obviously, a little bit more content on the light duty trucks with with extra honeycomb on top of those.
But from our overall view is that that profitable mix. The Oems are going to try to hang on to it as long as they can.
Thank you very much.
Our next question comes from the line of Vincent Anderson with Stifel. Please proceed with your questions.
Yeah. Thank you Hmm, so when I'm looking at the plant capacity investments and biodegradable plastics like P. L. A for instance.
Obviously theres some good growth planned in the Western World, where you are now, but China's production projections are starting to get pretty aggressive. So I'm. Just wondering are you comfortable with your geographic footprint, you know relative to that kind of regional disparity in growth or do you feel like maybe there's an opportunity over the next couple of years to take what you learn from your U S investment here.
<unk> and pursue something similar in Asia.
Yeah, Thanks, and so yes, we are comfortable with our footprint.
And we're going to make sure that we can support the customers around the world now that said.
As you can already see we're continually evaluating.
We're the best new use of capital expenditure and capacity expansion should be.
We're making our first move by making the polyol production here in.
North America, and I expect that we will continue to diversify our capacity over time, but.
With working closely with our customers out of Warrington, we've been able to supply growth in Asia as well as North America, and we will.
We'll continue to balance and make the right investments in the right geographies to support the growth of the business I mean to be clear vision of where we expect to participate in that market.
And we will make sure that we are resource accordingly to support that.
Excellent. Thank you.
And then you know this was maybe a little a little left field, but you know when we think of batteries, we're usually thinking about graphite, but with some of these alternative chemistries that are that are coming out here, they're using what's called hard carbon but to me. It seems very similar to your activated product I'm just curious if you've done any work in <unk>.
Currently exploring opportunities there or even had any conversations with potential.
Potential new suppliers in that space.
Yeah. Vincent this is Ed obviously anything that has the word carbon to it we try to look into the opportunities that are available for us we have looked at hard carbons.
Hum.
Well with them, we are looking at our car yeah, we have.
We continue to evaluate whether there is an opportunity for us to bring our technology into those applications.
Okay excellent if I could sneak one more in just really quick when I think about the soy oil investment I'm. Just curious are you producing enough here at this kind of proof of concept level to also start getting comfortable building commercial relationships for those products or is that not really going to start in earnest until you're fully up and running.
So we've begun to initiate the commercial.
Arrangements.
We've supplied.
Initial commercial quantities to a number of customers from.
From the product that we made here at our Charleston facility and so that work has begun and so we want to make sure that when the cross the facility has the capability to ramp up in the second quarter next year that we're ready to step up sales and production.
In both <unk>.
Supporting derivatives and four the destroyed they said, yes, it and over time that will continue to grow but we're not holding back in starting those initial commercial engagements to set ourselves up for next year and beyond.
Alright, Thanks, that's all from me.
Yeah.
Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your questions.
Great can you guys just maybe talk about I'm trying to think about the auto space in general.
Is there inventory of your product in the channel.
Has that all been.
Work through it and you know as the business starts to come back.
And when it does.
How long would it take for you to see a ramp.
And then also as we look into not just the fourth quarter you know what should we kind of expect as far as on the auto side.
Sales sequential third quarter. Thanks.
Yeah. Thanks, Ian I'll talk about the Q4, one if I can first if you look at IHS data.
Two three chip losses were around $3 5 million vehicles.
Looking into Q4 IHS is already protected one 6 million vehicles.
But they put a range as well on what the quarter will be anywhere from 2 million losses to four to five to 4.1 million losses. So.
Our our view for Q4 is that I think you're gonna surpassed two five relatively easily because we're one month into a three months period.
But I think we'll end up somewhere between that two and a half million and $4 million.
But ultimately you know as we talked about earlier beginning to improve in the first half of 2022, and obviously, we're monitoring what the Oems are talking about.
Just to get a feel of what how we'll take this market is we really.
Our.
Using IHS as the metrics that we look at but also kind of engaging with the Oems and our customers to get a better feel for when they feel demand will start to increase.
So if I could tag on to that sort of generally.
And.
Now add on it.
[noise] misspeak here, but Q.
Q4, similar to Q3, but we do have some outages.
Well kind of our normal outages that we taken in Q4, so we take our outages Oems take their holiday outages and there is some chatter around whether those might get extended or not too that gives us a little caution.
Is that fair.
Yeah.
Okay, and then as far as I'm, just looking at sales versus yourselves on the on the <unk>.
Material side against yourselves arguably some less than the industry. So just wondering if there is kind of inventory in the channel.
We've obviously continued to operate our facilities, we have increased inventory slightly.
I think.
All suppliers to the automotive industry, but kind of built inventories to be able to respond to any surge that can occur within the chip supply.
But ultimately we're going to manage our plants to optimize our inventory going forward and we'll just have to.
Make sure that we are.
Our inventories are in balance with what the automobile companies demand or some of the chewy and is mix right because as these is there.
Absolute volumes fall off their mix shifting too.
Continue to produce the Suvs and the trucks, which are bigger users of our carbon in Huntington's right. So that's.
When I look at it that's explaining a lot of the differential between ourselves our market Oems right.
And we also expect the Oems to build their inventories once the chip shortage alleviate routes as I've mentioned two so right.
Perfect. Thank you so much.
Our next questions come from the line of parents Hush mishap with married Baird. Please proceed with your questions.
Thank you good morning could you talk about Tuesday, the patent that is expiring next year as you get close to the March deadline, how are you seeing competitors, bringing on new capacity.
They could that'd be a risk for next year and I guess, that's what I'm trying to get to or not so much.
Yes, Josh this is Ed we don't look at it as a risk we've been anticipating the $8 four patent to expire in March FERC for 20 years.
But also well prepared for it at this point, we do not see a competitive product certified or tested honeycomb that could replace the sales of our hunting comes immediately.
And again, primarily due to the multi year design cycle, but also the fact that it takes a lot of work and effort to get a product certified.
So again at this point, we just don't see any competitive product out there at this point that would.
Impacting our revenue going forward.
Thanks for that and then one of your competitors in Pine chemicals was recently acquired so just curious if you're anticipating any changes in the landscape because of that or is that largely a neutral event for you.
Well I mean look car, Josh I mean, we have to approach it as a neutral that but.
Obviously, we're always looking for opportunities in the marketplace and to the extent there was any disruption that might occur as a result of that transaction, we intend to be there to take advantage of it.
Got it so maybe a last one I think you mentioned some electric vehicle products.
From your performance chemicals segment.
Our products have an aftermarket that smell or it's primarily an OEM business.
The OEM business.
Primarily.
There is.
Can we talk about.
Protective films.
That's our people and some in the U S at least talk about wrapping their cars.
For protection that that could be considered.
And aftermarket applications for both Tvs were internally perforating any car that you.
If you choose to wrap a lot of them are choosing to be ramp very very early as soon as they are.
Before they're getting sold and others are.
Choosing to.
Put that protective coating on.
After their purchase power.
Joshua we called it out because it's an example.
New applications I think the performance chemicals segment were broadly has done a great job of being very aggressive in trying to find new markets and new applications.
Obviously ebay set aside its relationship with performance materials. These are attractive high growth markets.
We've got multiple entry points across that segment right inspectors working on lithium mining capa working on applications for their automobiles.
And we're going to keep looking for areas, where we can participate in that market right.
Got it got it thanks, guys good luck with everything.
Thank you.
Our next question comes from the line of Michael Sison with Wells Fargo. Please proceed with your question.
Hi, This is Richard on for Mike.
First question.
You did a great job in terms of pushing price increases to more than offset raw.
Raw material cost inflation can you just.
Maybe give some color in terms of where you're seeing the impact.
Impacts on our raw material side as well as on the availability and logistics.
And how we should think about that.
Has it gotten worse heading into fourth quarter stabilize we're not seen it.
[laughter] I mean, that's a tough one to answer.
Segment has its own set of issues right, but.
The reality is is that we're seeing it we're seeing raw material.
She had headwinds across the board right I mean transportation costs everyone's aware if you turn on the news at night. She all the ships that were.
Paying more.
And our raw materials across the border are really kind of getting on site and show them. What we're working hard to offset that we're no different than any other company out there.
Keep doing what we need to do.
Okay, Great and then.
On performance chemicals, maybe if you could talk a little bit about within industrial specialties.
Oilfield technologies.
I think last quarter, you had mentioned it was up 40% year over year are you still seeing continued growth there and what's your outlook for that for the rest of the year into 2022.
Yeah, Yeah and in fact, we saw really strong growth in the third quarter doubt it.
It's important to remind ourselves that the third quarter of last year. It was was quite low for oilfield, but that was an application within industrial specialties, where sales growth was up above 50%.
As we look forward and we look at the outlooks that get projected by industry experts.
The outlook for drilling activity here in North America and in the next number of years, it looks to be growing and quite a solid manner. So we are.
Going to ensure that we support that business.
As well as the ongoing work we've got we've had two in.
And expand our geographic footprint beyond North America.
Especially in Middle East and China, two markets that PREPA.
Represent good opportunities for us to utilize our oilfield technology.
Great and then just finally on payment technology is that it was relatively flat versus prior year, but maybe you could talk about how we should think about the growth for that business.
For the next 12 months.
Okay.
Our pavement technology business over time has demonstrated solid mid to slightly higher topline growth.
This year, it frankly and even in this quarter if it hadn't been for this.
This downturn in China, we would be talking about growth rates that were similar to that so I think we've got great opportunity continue the technology adoption and payments, we've got increasing opportunities to more fully globalized.
That business. So we're certainly looking to pursue that.
And.
You've got a keen eye on.
Infrastructure and highway Bill spending.
We certainly hope that significant investment will be placed there and while we're not sort of counting on that to be any near term major inflection. It can only be very positive tailwind for that business. So a great business and I think for the opportunities to continue to grow it.
Are quite solid.
Great. Thank you.
Thank you.
Our next question is from the line of Chris Capps with loop capital markets. Please proceed with your question.
Yeah, Hi, good morning. So my question is on the taupe itself the European biodiesel market.
Curious are these in lieu of other Tau pet sales volumes are incremental in nature and assuming the latter is there any way.
You could quantify the magnitude of it.
Really getting at is you know.
Are these volumes enough for you to sustainably run your domestic refineries at higher rates, and which would I guess with them in turn allow allow you to produce more tour, which seems to be in short supply given the you know the situation in China.
And I guess that would also help unit cost so looking for some color there.
I'll start it but then Mike Jim.
What are the current situation allows us to run our refineries at very high rates, regardless of what's going on in the biofuel market right, but what I think happened Chris on it it's.
Really.
As that market evolves and it would become something that would be.
Valuable from a profit perspective relative to other places in my part of the car. The tofu then it's kind of become a larger market, but I would not say that we need that production to run our plants.
At higher utilization levels today.
Oh, John that check out where we're going to we have to balance the bra isn't until for production I think it's very encouraging to have a new significant source of demand for telephone.
So over time, I think that can only bode well for supply demand for telephone and therefore pricing.
Our execution path will be to optimize the profitability of the business and if the European biofuel opportunities pricing represents the best opportunities for agility, that's what put the TOBA.
If there are other markets that are better we will continue to do that but we wanted to make sure that from a logistic and customer relationship standpoint that we were well set up to supply.
That market so.
That's what we did and we got our first sales to do a large significant customer in the third quarter for tofu.
And we'll see how that.
Progression going forward.
That's helpful and just as a follow up if I'm interpreting your response it sounds like the just the the fundamentals in Chinese gum rosin have allowed you to increase rates to get more toward product I'm just.
If there's if there's any governors on your utilization rates in the refineries such as the availability of CTO or should we expect kind of at least near term.
An upward bias in those utilization rates with.
The strength in overall demand.
Well I think that we have an outlook, where we're going to continue to see some growth.
Going forward.
But as we've also said.
CTO availability.
Can become constrained and we're always making sure that whatever CTO that we purchase.
On the market and from on a spot basis, we can take that and turn that into profitable business.
We have secured enough CTO at this point to achieve our planning for next year. So I think we're in good shape from that perspective, and so between the inputs and the good bit output demand will.
Obviously continue to run the business.
And optimize the profitability for it.
I mean, just to be clear crisp we.
We have our CTO secured for next year. So we are not going to be CTO constrained part of the long term strategy around sofa is that right.
Running these processes in parallel we will actually get incremental yield and if we can substitute sofa and some of our products. We will actually have more trophy to sell in the marketplace right. So what we're trying to do is actually enhanced the yield overall the networks of the bias would be.
Upward.
And your lexicon relative to what we know is secured CTO.
I appreciate the color. Thanks.
Thank you. Our next question is a follow up from the line of John Kim with hang with CJS Securities. Please proceed with your questions.
Hi, Yeah. So I was wondering if you could just talk about your ongoing legal expenses and kind of what's your outlook is for that just in terms of strategy and litigation costs for iPhone.
Yes, John this is Ed we're likely to return to a more normalized level. So think of it about a third of what we had been spending.
Okay. My impression was that was roughly $5 million ish a quarter is that about right.
Yes, so 15 on an annual basis, so 5 million going forward.
That's what hurt us per year.
Got it okay. Thank you so much.
Thank you at this time, we've reached the end of the question and answer session.
I'll turn the call over to Bill Hamilton for closing remarks.
Thank you for your time. This morning, do you remain incredibly 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.