Ingevity Corporation Q1 2023 Earnings Call

Performance chemicals.

But the quarter also had its challenges the slower China recovery affected all the business segments in some way and we're still seeing some customers who have not restock to normal expected levels. Most acutely in the adhesives markets as.

As we have discussed CTO prices continuing to rise in the quarter offsetting gains we have made in reducing costs elsewhere.

When comparing to last year remember that Q1 2022 was a record for both revenue and EBITDA as demand was picking up and inflation hadn't quite peaked which allowed us to raise prices to offset higher input costs. It is a tough comp.

This is the first quarter, we get to share the details of the business line, formerly known as engineered polymers. The segment is now called advanced polymer technologies or <unk> for short.

The new name better reflects what we do today and where we're going we produce specialty camera lactone products with tremendously sustainable characteristics, including improved durability, and bio biodegrade ability and its end users.

By separating the segment you will be able to see the strength of this business and the growth opportunities and improved profitability, it's exciting stuff.

In the quarter, we continued a number of key strategic move to transition and better position our performance chemicals business for the future.

In Jeopardy has a long history of innovation and execution as market demands for CTO based products have evolved we are evolving to.

Hopefully everyone noticed our filings regarding the extension of our long term supply agreements for CTO from both Georgia Pacific and West Rock. These.

These agreements provide us with a certainty of supply to fully run our Charleston, and derivative plants well into the future. These.

These plants will continue to support our existing chemical customer base, while also entering the biofuels market.

In April we shutdown crossett to transition its production fully to alternate soy palm and canola fatty acids.

We expect the plant to be back up in the next few weeks.

These products will offer a broader array of alternatives to our existing customers, while also enabling us to enter new markets such as personal care.

This strategy should drive our plant utilization rates and resulting volumes up by over a third when we complete this journey I.

I am very proud of what has been accomplished so far but this transition of products and markets will continue through the remainder of the year. However, when complete we will emerge a stronger and better company with that I'll turn it over to Mary to discuss this quarter's financials.

John and good morning Hall, please turn to slide five.

Sales were up two 6% for the quarter as advanced polymer technology and legacy pavement had year over year revenue growth plus we had the benefit and including the Ozark credit marketing business in this year's numbers.

Adjusted gross profit was lower by 250 basis points as lower volumes and higher input costs, primarily for CTO outpaced price increases.

G&A was up about $7 8 million, excluding depreciation and amortization due primarily to employee related costs.

Adjusted EBITDA for the quarter was $103 9 million down 12, 7% as a result of the gross margin pressure and increased SG&A, but adjusted EBITA margin remained solid at 26, 5%.

Diluted adjusted EPS of $1 nine.

The margin pressure as well as the increased interest expense and DNA associated with the <unk> acquisition.

Turning to slide six you.

You will see that our free cash flow for the quarter was negative $20 million.

First quarter is typically a negative free cash flow quarter as it is usually our lowest earnings quarter of the year and we build working capital for the seasonal paving upswing.

120 to 2022 during COVID-19 for the exceptions to the norm.

Our net leverage and similar to year end and reflects the Q4 Ozark acquisition.

As we move into the second quarter, we expect to see our free cash flow pickup and leveraged to improve throughout the year towards our year end target of around two five times.

We remained active in share repurchases with $33 million of repurchases in the quarter.

Turning to performance chemicals on slide seven it was the next quarter.

Slight lower sales volume, primarily from raws and that is sold into adhesive.

Revenue was up over 7% to $186 million due to higher pricing across the segment and the addition of revenue from Ozark.

The lower volume led to lower capacity utilization and combined with higher CTO costs and increased employee related expenses negatively impacted segment, EBITDA, which was down 34% in the quarter.

And pavement technologies, we see that step up in revenue that is primarily related to Ozark. However, the legacy pavement business did grow year over year.

Legacy increase in sales was primarily outside of North America, and we continue to drive geographic expansion and Thats higher margin business, which should also help reduce that seasonality.

In industrial specialties.

Themes or a higher CTO costs and continued customer destocking, particularly in our adhesive product lines, which we attribute to a weak consumer packaging market.

We've talked for the last couple of quarters about higher CTO cost to put it in perspective in 2022, the price we pay for CTO increased by nearly 40% over 2021.

The price we paid for CTO in Q1 of this year was higher sequentially than Q4, and we expect Q2 prices to be significantly higher than Q1.

Higher CTO prices were the main driver of the EBIT EBITDA drop in performance chemicals in the quarter.

We do expect pricing to level off CTO pricing to level off towards the end of the year, but it will be a challenging year for industrial specialties and CTO as their key raw material.

That said as John mentioned, we reached a major milestone in our strategy to diversify raw material feedstocks.

By consolidating CTO processing in our director and North Charleston sites.

And dedicating our cross at site to run 100%.

<unk> CTO feedstocks, such as soy canola and palm oils to produce alternative fatty acids or <unk> beginning in Q1, we more than tripled our use of these non CTO raw materials and products that we sell so we're well on our way to mitigating the higher cost of.

CTO, but it will take some time to ramp up both for production and for customer adoption of <unk> products.

We execute this transition we expect results in this business will be choppy.

Turning to slide eight here you see our new segment advanced polymer technologies or <unk>, formerly our engineered polymers business within performance chemicals.

They had a great quarter that kicked off the year revenue was up 6% and our focused management of prices and costs resulted in a 430 basis points improvement in EBITDA margin from last year, with particularly strong sales in auto and Bioplastics great job by <unk>.

And the team.

This segment has a diverse geographical mix of sales, which was important in the first quarter as different regions had different paces of recovery for instance, in the Americas Auto and Bioplastics were strong partially offset by weakness in Europe , and Asia, particularly China.

As we have discussed in prior quarters, we added polyol capacity to our Louisiana site last year in order to meet the growing North America demand for capital products and to better serve these customers.

In Q1, we saw a perfect example of this as a large U S company needed product in a very short time, and because we had U S capacity, we were able to fulfill the order within the customers required timeline.

Turning to slide nine Youll find results for performance materials of all the business segments. This one has the largest exposure to China and China is slower than expected recovery resulted in lower revenue and EBITDA compared to last year, which was a good Q1, so a tough.

Tom.

It should be noted that this quarter's revenue is still one of the highest ever for this segment, primarily due to price increases.

While China was slow sales in North America were the highest in three years as auto show signs of life.

<unk> EBITDA was down 10% to $70 million, primarily as a result of unplanned downtime at our China plans as we look to control inventory due to the market softness there.

Even with the lower EBITDA margins were still 49%.

In summary in Jeopardy continue to produce top quartile specialty chemical margins, even in the face of unprecedented cost increases for a key raw material. We can deliver this performance because of our unique technologies and each business segment, serving a wide range.

At the end markets across the Globe. In addition, we are taking the strategic actions necessary to diversify our raw material and increase the operating flexibility of our fixed assets, while developing new markets for our products.

We saw the changing market dynamics and CTO coming.

And began our assay transition about two years ago, and our and our execution plan is well underway, while the timing is perhaps not ideal given the uncertain state of the global economy. We're confident we are setting the foundation for continued long term.

Growth at attractive margins and I will now turn the call back over to John for an update on guidance and closing comments. Thanks Mary.

We've made the decision to lower our revenue and EBITDA guidance for 2023, we continue to see increased CTO costs in our strategy to deal with this has been explained to you. However, as Mary described the CTO inflation is not insignificant and we expect it to continue to sequentially increase each quarter over the course.

The year, albeit at a slower pace in the back half of the year.

Our decision to lower our guidance, though is really being driven by softness that has materialized over the last few months in several of our other core markets.

We do expect the paving season to be strong however, the broader global economy appears to be weakening and this is particularly true in China, where we have not seen the level of recovery that was expected to even a few months ago.

These trends are impacting both our advanced polymer technologies and performance materials segments.

Lack of robust restocking and its impact on sales volumes indicates a softer next several quarters. However, we expect both of these segments to grow and increase margins, but not at the rates we had previously forecasted.

We are adjusting our full year guidance to sales between $1 75, and one point maroon $5 billion and adjusted EBITDA of between 450 and $480 million. We will also reduce our capital expenditures in this environment and focus on debt reduction.

To the extent, we do see some acceleration of an economic recovery in China or in the U S. We would obviously be a beneficiary of that.

Let me end by forming inviting all of you to our Investor Day on Monday May 20, <unk> in New York City.

John or Mirative can ensure you have an invitation and all the details we're excited about what will be our first investor day in over five years.

Senior management from across the company will present and showcase many of our technologies.

At the reception you will have a chance to touch and feel our products and ask any questions of our leadership team that you might have we.

We consider this day an important milestone for investors.

Spike the near term challenges of the economic environment, We view the changes in our markets is tremendous opportunities.

We transitioned both our legacy pine chemicals and performance materials businesses over the next 18 months, we will emerge a stronger more customer focused company that offers a range of solutions to the end markets. We serve we will improve our position as a best in class specialty chemical company with industry, leading financial performance This investor day.

It will be our opportunity to show you our roadmap.

With that I'll turn it over for questions.

Thank you as a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad into the queue with the parents asked a question. Please ensure your headsets fully kicked in in a beachhead locally.

So a quick question.

And our first question today comes from Vincent Anderson from Stifel. Your.

Your line is open. Please go ahead.

Yes, thanks, and good morning.

So.

So, let's just spend a little bit of time on the guidance because there's a lot of moving parts, but.

How much of that.

Is kind of implying the carrying costs during the fixed costs any non capitalized expenses across the conversion.

Are you talking about transition related costs.

<unk> to the ASI.

Yes.

Okay.

We are.

Ultimately, we will plan to.

Pool, those costs together and decide how to treat them going forward, but.

The guidance that we presented today.

Does not reflect.

Largely cost related to the transition it is primarily related to our view.

That.

We are seeing softening in markets other than just the adhesives market as as reflected in volume softness really across the board other than in the pavement business.

Okay.

So if I, if I kind of what that with the CTO pressures.

<unk>.

As far as I can tell CTO prices are much different than where you set guidance.

When you last SEC guidance, but it sounds like you have a pretty heavy lag impact in your contract structures that you are expecting sequential increase throughout for example, youre looking at it the right way, yes, that's right.

Anything that geo market spot market is.

It was actually probably softening a little bit right.

<unk> taken the Biofuels market has been more muted this year because of just how fast its run up in costs, but there's definitely a timing lag in the nature of our contracts, which is why we said what we said.

Okay and the issue with guidance just to build on what Mary said I mean look we have pretty good line of sight as you know into what we're going to pay for CTO.

Over the course of the year right because of the nature of our contracts right now that is becoming a little bit more dynamic as it moves closer to sort of a true market price.

But what's really causing our guidance to be adjusted as what Mary alluded to as we went into the year, we were expecting probably more upside from our other businesses to offset the CTO inflation and it looks like.

It just looks a little shaky right now relative to where we are we're at the start of the year, China has not come back like we thought it would the U S is doing okay, but not <unk>.

Not crazy or or really all that great and we just have not seen the restocking on the adhesives.

This could change at some point.

The customer will have to start buying.

But I.

I personally think we want to be conservative and we're not going to over promise.

And we'll just see how the rest of the year shakes out.

And the way to think about the CTO contracts since you mentioned, perhaps a significant lag it's more like a quarter.

Lag was pretty typical in terms of contract pricing reset.

And when you look at kind of the trajectory of CTO prices in the market.

I think it makes sense that what we as we talked about significant tick up in Q2, when you look at.

Where the big escalation was in CTO prices in the market. It was in Q1, so we will feel that in Q2.

Okay, alright that makes sense.

If I could just ask a couple on crossing briefly so you mentioned soy and palm and canola fatty acids. Those are those are more longer chain oleo chemicals in the past.

Maybe acknowledged if not mentioned proactively opportunity for something a little bit shorter chain. So just curious if this decision is more of a stepping stone for your assay portfolio. If there are some other constraints to processing lighter oils across it.

No. It's a stepping stone and that May look like.

I believe that.

If you were to flash forward a couple of years from now youre going to see us offering a much broader array of both short and long chain I think what's happening is is that we've discovered in Avon.

Uncovered some really exciting opportunities with these sort of critical raws both.

Both in terms of product substitution for our existing customers, but also new market applications.

It lends itself.

To the way, we're kind of Reconfiguring cross it to kind of go after these three burst.

So it's pretty exciting stuff and we're going to feel it to Mary's point and in our prepared comments I mean, it's down in the month of April and will be up soon so we're not going to get that absorption that you normally see but.

This thing gains momentum over the course of the year.

It's a real volume opportunity for the company as Mary said going to be a little choppy as we cut over.

Okay, and then just Super quick on that because you did mention it recently.

I'm wondering if it's now a higher priority to to either come up with a plan for the rosin side of the crossing asset base.

Whether that's an alternative feedstock or just minimizing any stranded costs associated with that.

The beauty of those raw materials as they don't generate RASM.

Right, but you have assets associated with processing the rosin cuts.

Do but it is.

But they are not fixed or an individual site.

Gotcha, Okay, Alright, that's helpful I'll turn it over.

The next question comes from John Mcnulty from BMO capital markets. John Your line is open. Please go ahead.

Hey, good morning, this is <unk> on for Dan.

So just given kind of the expectations from the big jump in China autos for Q2.

Just kind of wondering how youre thinking about the trajectory in PM and how how steep do you think the ramp might be for the rest of the year.

Okay.

Yes. This is Ed scale.

Obviously Q1 was a little light in China is.

Was impacted to a large degree to the end of incentives in December .

Which pulled forward a lot of vehicles out of Q1 into Q4 so.

Q1 relatively light from a production standpoint, but we do expect that to continue to grow throughout the year as China gets into.

A better frame of.

Chip issues as well as supply chain issues and being able to increase the overall output in China for the year. So we have high expectations for them. We do feel that they will continue to crank out internal combustion engine vehicles.

And we are obviously in place to serve those vehicles with the products that they want.

Got you okay. Thanks, very much and then how should we think about the puts and takes for free type free cash flow for the rest of the year, given kind of spiking CTO, but volumes are off.

Yeah. So.

We are pretty normal pattern for free cash flow. This year again free cash flow is typically negative in Q1 excluding.

Excluding the Covid period, so so really no surprise there.

And and we look forward, we held the guidance I'm sure you noted on free cash flow and debt reduction and feel good about that and sometimes we get the question well what about the.

The recession does play out things continue to slow down how does that impact free cash flow and as you know in this business actually if we really got into recessionary scenario.

Free cash flow improves because then youre not building inventory youre not building it.

Counts receivable.

So we are holding steady on that free cash flow projection and feel good about it.

Thanks very much.

The next question comes from Jonathan One thing from CJS Securities. Your line is open. Please go ahead.

Hi, good morning, Thank you for taking.

My first one is on the APC business, which you guys are breaking out historically thats been a fairly high margin business and I know you have the price increases and maybe some weakness in China and some other places to start the year, but where do you see that ending the year just given the strength of demand and then what's your recovery expectations are from volume.

Within the net activity perspective.

As we've talked about it last quarter.

We'll talk more I guess during your Investor day.

But it is a hammer it is a high margin business with great secular tailwind behind it.

It did have some issues over the last year or so because of all the challenges that were going on in Europe .

It was Brexit or natural gas energy lot of different challenges freight and logistics.

Thank you can see in fourth quarter of last year in the first quarter of this year that it's gaining a lot of momentum.

We would like to see that business to be sort of in the mid <unk>, which is where we're headed.

We're on that journey, and I think youll see it manifest itself over the course of the year.

Okay, Great and then just a question on the on the non <unk> businesses that youre getting into or trying to swing over to are the margins better today than on your CTO based derivatives or.

If not can you can you describe the tests and economics are getting there.

The margins.

Our expectation is that the margins that we will produce from assay will be better or at the levels of what I would call sort of our normalized historical margins.

The margins today, obviously because of the CTO price escalations in our legacy products are under some pressure right but.

We believe that once we get the <unk>.

You get the plant fully utilize get the absorption costs get the pricing dynamics properly.

Beaten out into the market, we will find ourselves with a business Thats got margins comparable to what has been sort of our historical.

Normal margins.

And to add on Windows.

And if I could add on to that this is rich weight as you know in our historical business. It was all about derivative basins. So we've talked about fatty acids and going from soy with a year ago. We only talked about so we didn't talk about canola palm, but as we talk about all these short term or long chain fatty acids, it's really about when do we how we will derivative.

Ties those.

Get the value that we have come to know from our historical businesses.

Got it and when do you expect to complete that transition to the full 100%.

Usage of it.

We are as I've said in my comments right I mean, I think our goal is to sort of have this transition moving by the end of the year.

Whether we can get it up to full volumes at that point, we'll see but we're we're trying to we want this transition affected by the end of the year I mean, we've spent hundreds.

Product samples out we're working very rapidly.

Our progress that we've made is pretty stunning actually.

And honestly youll see at the Investor day, and this can be somewhat controversial in our company.

Just because of our history, but some of these products like the canola fatty acid.

Honestly better than some of our legacy fatty acids, right and because canola.

As a more transparent raw material if you will.

We have big expectations for that over the long term right.

Big opportunities, it's just going to take us a little time to get you know anytime you cut over something and it just takes a little time.

Understood and just to clarify that end of year is that just.

Changing of the facility itself was that including quality that was facility will be cut over and hopefully by the end of this month right, but in terms of getting volumes back up to.

A more normalized level, where we can get the absorption for the plant, it's probably going to take to reply to the end of the year.

Perfect. Thank you so much I'll jump back in queue.

The next question comes from Chris <unk> from Loop capital markets. Chris. Your line is open. Please go ahead.

Yes.

Hey, good morning, I had a couple just wanted to make sure I understood the guidance reduction, you're attributing that to incremental softness that either materialized or sustain.

<unk> and <unk> segments.

And some of that also attributable to incremental softness and its used its within hi, Ken.

It includes the incremental definitely includes adhesives graduate.

It's.

I would characterize it as sort of incremental softness across.

All of our businesses with the exception maybe of payment technologies right.

Versus when we okay.

Yes.

Okay.

Right and not not attributable to incremental inflation and CTO correct.

Well, we do look I mean, we've been pretty open.

The difference between this year and last year. The CTO inflation is definitely a part of it but we've been able to factor that in from day, one what's changed from.

Quarter ago is just the sort of weakness that we've seen in the other markets right.

<unk> market like I said earlier, if anything actually may look a little bit better from where we were a quarter ago.

But it's still not enough to move the needle the issue here is.

Around the other markets, we just have not seen the recovery in China and the U S market remains.

Pretty muted.

Got it and then on the CTO inflation can you just remind us.

<unk>, where you can you would.

Try to push along pricing I'm, assuming the biggest challenge is in the or.

Or rosin side are you able to get pricing through on south antelope derivatives or is that becoming also challenging given the macro.

Yes, Chris we still are seeing good pricing in October and fatty acid markets as well as the merchant and the river that ties products.

We will continue to push that as we see fit but know that there certainly will be up eliminated as on anything else. We haven't really dropped rosin pricing. It's just when you look at and you can see this in our waterfalls I mean, it's just been more of a volume.

We've seen we've seen some degradations in volumes.

Okay got it and then if I could ask a question about the.

The press releases that came out with west rock listening to shut the mill there North Charles Young does have a fence line relationships if I looked at their materials. It looks like the overall mill capacity may just represents less than 4%. So I don't know if thats.

A commensurate level look at it that way Chris.

The contract as we mentioned in our.

Press release.

The contract with West rock with regards to crude tall oil remains unchanged right. So they're shutting this mill down will not impact us with regards to crude tall oil. There is another product lignin that we do get from this mill, but we have alternate sources, which we won't be able to.

Replace that through other providers.

What will impact us, though is there are a number of what I call shared services, So think utilities power steam water.

Waste manage wastewater that.

We will have to cut over.

Two independent stand alone use we have done this.

Many times.

Wickliffe at one point.

There was a paper mill down the road right, we co locate today with Covington and Virginia.

If you go to cross it and as the Georgia Pacific Mill down half a mile away. So we know what we're doing here. We just it's just going to cost some incremental costs to do it but it's not going to impact our operations at the site at all.

So it doesn't change anything logistically in terms of sourcing feedstock, that's just about some incremental costs because.

Location, rather than the lignin.

<unk> ligand from third party providers, but yes, it's just the logistics cutover costs.

Okay, and I'm, assuming given that.

A decision to do this as for August that you knew this was happening and therefore these incremental costs are also had been baked into guidance.

Is that fair.

So the answer is we look.

We have been an independent company from from West Rock since May of 2016, we obviously have a shared heritage and we have been co located right. So we have been watching and been aware of that mill performance and opportunities and challenges for a long period of time the decision to do something.

That is not ours it belongs to the restaurant.

But we've always had to plan and be thoughtful around that this could happen. This is again as I said earlier not a new phenomenon in this industry. So we've.

The time is here and we're now going to have to execute on the plans that we have.

Gotcha.

Thanks, John I appreciate the comments.

<unk>.

Next question comes from Ian Zaffino from Oppenheimer. Your line is open. Please go ahead.

Great. Thank you.

Just to follow up on that West rock.

Question, I mean, do you see any incremental cost pressure.

In the overall CTO market coming from this disclosure or not.

Not really I mean, they're there to the global market, there's obviously going to be some reduction, but it's pretty minimal right. This plant did not produce a lot of CTO.

<unk> CTO in was less than a percent of the total market, but coming out of that coming out of that plant, but let me be clear it will not impact our relationship with restaurants.

Okay.

And then on the <unk> transition when that's all said and done how much of the raw materials and that would be.

From <unk> versus CTO, and then what is sort of the goal over I don't know if you look the next 12 18 months as far as mixing of raw material between let's just say CTO and a F.

This is important.

I'll answer this and rich can chime in too but.

When you look historically over the last four or five years set aside financial performance.

Art.

Pasadena asset utilization was really running around two thirds right. So.

We had put another way.

About a third of our raw materials will be non CPO related and about a third of our sales will be non CTO related a third of our profitability will be non CPO related.

That's the goal, but it will also be a third bigger right than it is today because right now we're at that capacity has been sitting unused.

Okay understood. Thank you very much.

Okay.

As a reminder, if you'd like to ask a question today. Please press star one.

Your telephone keypad.

Question comes from Michael <unk> from Wells Fargo.

Please go ahead.

Hey, good morning.

You know when Youre, taking a look at your outlook for the year for <unk>.

You hear a lot about destocking and you talked about a little bit but are there any other risks that you see.

That outlook for the year.

I think look I mean, one of the advantages of resetting guidance.

You got to reset guidance.

I mean, we've tried to.

B already.

And sort of we saw.

Sit here today, and we see weakness right and we have the advantage I guess of reporting earnings maybe a little bit later than some of the other companies or what have you.

But we and it was <unk>.

Financial we're pretty conservative right. So.

In our minds, we've reset this to numbers that sitting here today, we think will meet right.

Now if new Crane evolves under World War, three or something.

If something happens in Taiwan or are there other geopolitical issues I mean that could change things or the debt default I guess.

Listening to that today on CNBC. Those are those are <unk> things that are not factored in our guidance but.

Current and anticipated weakness in the economy is in our guidance.

Got it and then fourth materials.

Are you still looking for some growth in auto builds this year and I guess that.

China continues to recover the second half will be stronger than the first half of parts and materials.

Yes, Mike This is Ed.

As you listen to the Oems and as they talk about chip shortages and issues still in the first half.

Our expectation and I think what we see in the marketplaces that youre expecting the chip issues will be in a much better position in the back half of the year.

And so we're planning to.

Run at full rates based on what we've got coming up.

Back half of the year.

Yeah.

Got it and then.

Follow up on advanced polymer technologies business, our customers yes.

We want to innovate potentially.

We'll see that activity in this environment and is that is that some upside potential as the year unfolds for that segment.

And Thats a good point.

The answer is yes, we do continue to see.

A lot of innovation and development going on.

<unk>.

You still there Mike.

Yeah, I'm here sorry.

Sorry that was the big.

They can cut out in here, but.

We continue to see a lot of innovation and work being done we're really excited about sort of the nextgen applications that are associated with this.

We have great expectations and aspirations for that business and there probably is some upside.

Assuming that the economy.

Continues on as we forecast it.

Got it great. Thank you.

Thank you.

The next question comes from Daniel Rizzo from Jefferies. Your line is open. Please go ahead.

Hey, Thank you just a couple quick questions have you ever in history. How do you go to the spot market for CTO is that something that.

Occasionally crops up.

Go ahead.

Thanks, Dan, Yes, we procure about 15% of our CTO.

From the spot market on an annual basis have been doing that for some time now.

This is by the way.

Sorry.

I would just say and this is rich white answering your question.

Oh, yeah, Okay. Thank you and then.

Importantly, just something a little different.

What's your best polymers, how much of that is tied to the auto end market versus.

Elsewhere.

Steve do you want to take that or.

Yes, I can say.

The automotive market is always thing.

And then pulp market for this business.

And with the growth of the first.

The films.

Lastly, before we will become more important so.

We've kind of seen growth of about 25% of the business.

With the sale.

I'm, sorry, 25% was the lesson you Sir.

Hey, good morning, guys.

Alright.

Okay.

To sum up.

So is it fair to say that a lot of the growth or a lot of the performance of that business is just coming from auto restock cycle is that kind of accurate I don't know if I agree with that because a lot of what he is doing is new product application right. So.

One of the things that the picture that was on the slide is a protective film that.

Is pretty popular in Asia in particular, China rights and aftermarket application that.

Does their roads are a little tougher than in western Europe , and the United States a lot of the people will put the <unk> on their car because it helps avoid the Danes.

Dash is that you would get from rox or other things that are on the road right that's really a.

Technology or product development as opposed to just being tied to builds right. There also.

There's a lot of work being done with the applications were tied to electric vehicles in terms of these.

Basically balanced choice, which are think of them as sort of rubber shock pads the batteries sit on.

Dan So, yes, it's benefiting but I think it's more a function of.

Its move into new applications I think for the next few quarters, what what I would add to that is again, if we see a China bounced back and stronger recovery <unk> because of the auto exposure, particularly those products that John referenced in China.

We will see a stronger bounce back as well.

Okay. Thank you very much.

Okay.

And just a final reminder, about stopping to take one on the telephone keypad to ask a question today.

We do have a follow up question from Jon <unk> from CJS Securities. Please go ahead. Your line is open.

Hi, guys. Thanks for taking my fault.

So just any thoughts on sequential expectations in Q2, and a payment it usually up.

Maybe you can from China improvement, but maybe that's more than offset by the CTO transition you've got going on can you help me understand the puts and takes on what's your numbers.

This year.

Yeah, I mean look.

It's.

I think we've tried to describe it as best we can and John I mean at the end of the day, we are dealing with some pretty significant CTO inflation.

And the legacy inspect markets, we were anticipating growth in oilfield, which we are seeing some growth in oilfield some great growth.

But we're also seeing from a negative side pressure on the adhesives that are sort of more than offsetting.

Opportunities that sit in the other legacy inspect markets, it's unfortunate, but that's kind of what we're seeing pavement technologies I think we'll continue to have a very robust year, it's a very strong business.

It had great performance last year. It will have great performance. This year, it's off to the races with really strong start in this quarter.

And they've been working really hard I think we feel good about that business. When you look at advanced polymer technologies.

The type of growth that you saw in Q1, I think is probably what we would sort of expect for the year with some potential for upside, but obviously, we're sensitive to it's sort of a broader economic exposure and as Ed has kind of alluded to.

The auto business.

Has is going to be up from last year, but probably not as up as it could've been in a better economic environment in that.

We alluded to in our prepared remarks, that's really the issue both apta and performance materials are going to grow and our margins are going to improve just probably not as much as would otherwise have been in a more normal environment right. So those are really the puts and takes and if I could tack on just it just.

Second point I wanted to mention.

Earlier, when we talk about the pavement business now of course, we have Ozark as part of that as well.

It did appear that that.

Some of the analysts and others that we have talk to Nick perhaps underappreciated the seasonality of Ozark as well I mean again, we're talking.

As fault paving in road markings and when you got to put it snow on the ground in the northern half of the United States here Youre not doing road work.

So again the seasonality that we've always talked about with respect to pavement applies to that hole.

Business line now includes Ozark. So just keep that in mind is as people are doing your modeling.

Great. Thank you and then if I could switch gears a little bit.

Could you just give us a little bit more of an update on next year and how that investment is doing it hasnt been doing that I've seen a lot of it.

<unk> is receiving a lot of funding offtake contracts can you talk about where they're scanning.

Progress with their with the development of customers funding and then getting into new applications.

Yes, John this is Ed.

Nexsan is a privately held company and we respect that obviously, but they are continuing to test our products and.

As we continue to work with them, we're going to help them.

With their overall projects.

<unk> is what we consider to be the leader in silicon based composite anode materials.

And as we want to integrate with them, we are working hard to evaluate different samples and we.

We expect.

To see something in the next.

At four to five years from an activity standpoint.

But.

In the meantime, we continue to work with them to develop new products for their applications.

Great. Thanks, Ed.

Okay.

You have no further questions at this time, so I'll turn the call back to the management team for any concluding remarks.

That concludes our call. Thank you for your interest in <unk> and we'll talk to you again next quarter.

This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.

Yeah.

You may now disconnect your lines.