Q2 2023 Ingevity Corporation Earnings Call
Thank you for your patience in today's call will begin shortly.
We entered the queue for a question. Please press star followed by one of your telephone.
Telephone keypad cool will begin in approximately one minutes on.
[music].
Good morning, or good afternoon, and welcome to the <unk> second quarter 2023 earnings call and webcast. My name is that nobody Robertson for today, if you'd like to ask a question in the Q&A portion of today's call you may do so by pressing star one on your telephone keypad now.
I hand, the floor to John <unk> to begin to John . Please go ahead, when you're ready.
Thank you Adam good morning, and welcome to <unk> second quarter 2023 earnings call.
This morning, we posted a presentation on our Investor site that you can use to follow today's discussion can be found on IR dot <unk> dot com under events and presentations.
Also throughout this call we may refer to non-GAAP financial measures, which are intended to supplement substitute for comparable GAAP measures definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our Form 10-K.
We may also make forward looking statements regarding future events and future financial performance of the company during this call.
Caution you that these statements are just projections and actual results or events may differ materially from those projections as further described in our earnings release.
Our agenda is on slide three.
Our speakers today are John Fortson, our president and CEO and Mary Hall, our CFO .
Our business leaders, Ed Woodcock President of performance materials, and rich White President of performance chemicals are available for questions and comments, Steve Hume President of advanced polymer technologies is away on business travel So John will field any questions.
John will start us off with some highlights for the quarter.
<unk> will follow with a review of our consolidated financial performance and business segment results for the second quarter.
John will then provide an update on guidance followed by closing comments.
Over to you John .
Thanks, John and Hello, everyone on slide four you can see our highlights for Q2.
The team delivered double digit revenue growth, while maintaining mid twenty's EBITDAR margins a great outcome in this environment.
Three of our four business lines performed well.
Performance materials had double digit growth from last year, and we saw a sequential growth as well.
We were excited to see that next year the company in which we invested $60 million last year as announced an agreement to supply silicon anode material to Panasonic.
One of the worlds leading battery companies.
Additionally, overnight maxion issued another press release announcing their intention to build a manufacturing plant in Korea as well as a supply agreement with OCI next.
<unk> Silicon based anode solution can increase the energy density of lithium ion cells by up to 50% increasing vehicle range and reducing charging time. This agreement validates the promise of <unk> technology and its progress and development. We are continuing our joint development work with <unk> to include.
Our activated carbon in their solution. This is a great step forward in our multi pronged approach to finding alternative users for our carbon.
The advanced polymer technologies team continues to manage that business efficiently and effectively increasing margins into the twenty's, even with sluggish economies in Europe , and China Apt's two largest markets.
While volumes were down in lower margin areas like footwear, we saw volume growth in our strategic areas, we identified at our Investor day.
Bioplastics and automotive applications, such as paint protection films.
Increasing recognition for the sustainable nature of our technology is supporting growth in Bioplastics.
Just recently, we added to our growing list of biodegradable certifications when our cap of thermoplastic products were awarded the <unk>, Austria soil certification for providing biodegradable solutions for agricultural and horticultural applications.
Results in our performance chemical segment reflect two very different business environments.
And I, both will focus on walking you through what is transpiring.
Our pavement technologies business delivered a record quarter, even excluding the addition of Ozark road markings or legacy payment business had their highest sales quarter ever.
The payment team is executing the strategy, we shared at Investor day. The team is expanding our footprint globally and generating higher volumes in Europe , and South America due to technology adoption.
The UK is quickly converting to having one of the highest warm mix adoption rates in the world, which means less energy use and lower emissions when using our flagship product <unk>.
In Brazil, Petrobras payment plant is converting an entire refinery to include EBIT firm.
This is a terrific development is only 12% of existing public roads in Brazil are made from asphalt today.
And we are also adding new products and technologies to keep expanding our portfolio both in warm mix and payment recycling to meet the evolving needs of customers around the world.
Our industrial specialties business in performance chemicals, however, had a challenging quarter and faces a tough environment as.
As we have discussed crude tall oil or CTO is the key raw material for this business and the cost of CTO remains near record highs when.
When we refine CTO, we get equal parts tall oil fatty acid or tofu and Roger while <unk> demand remains solid the headwinds we highlighted in our Q1 call remain namely a taper China recovery and continued destocking are very slow restocking by customers, particularly.
Our rosin based products such as adhesives.
We are also seeing some adhesives customers shift to lower cost alternatives.
As a result, we have slowed down plant run rates to manage the inventory build in rosin, which has negatively impacted plant throughput and the availability of tofu for sale.
The difference now is the step change in inflated CTO prices, which we expect to linger for some time.
On an annual basis, we expect this to be a $200 million increase in the cost of CTO to what we paid last year.
We knew that these costs would increase over the course of the year and have built that into our initial forecast and guidance. However at that time, we anticipated we would be able to offset this cost pressure to a large extent through price increases as we expected end market demand to continue to be strong following the trend we saw in.
Late last year.
As we all know no industrial end market demand has weakened throughout this year, particularly in our rosin end markets, but also in many other markets.
As a result performance in industrial specialties has deteriorated and we are not seeing the offsetting strength in <unk> in performance materials that we anticipated.
To mitigate these pressures we initiated significant cost reduction actions across the company at the end of second quarter, which Mario will discuss in more detail.
Economic environment, we will only recover roughly $100 million of the increased cost structure during the year.
Our ultimate fatty acid or <unk> transition is critical to offsetting higher CTO costs over the long term and it continues full bore.
We continue to expand production and expect to surpass historic CTO run rates across the facility by this time next year.
<unk> are currently being used in our existing products within payment technologies in oilfield business lines. In fact, we are building new storage tanks to utilize more assay and our payback production.
And we are making inroads with potential customers on products that are new to in Germany.
We are also investing in talent to support this transition, adding a lead commercial officer to help accelerate our entry into these new markets.
Mario will provide more details on our quarterly performance and I will cover the expected impacts for the remainder of the year and beyond when we discuss our game our guidance later in the call with that I'll turn it over to Mary Thanks, John and good morning, All please turn to slide five sale.
Sales were up almost 15% as a result of stronger pricing across all segments and higher volumes in the performance materials segment and pavement technologies business line and the addition of Ozark, which we acquired in Q4 of last year.
<unk> excluded sales were still up versus prior year. These positives more than offset the impact of volume declines in the industrial specialties business line and the <unk> segment.
<unk> profit was up slightly year over year, but adjusted gross margin was down about 440 basis points due primarily to higher input costs, particularly CTO and the impact on plant throughput of lower volumes, particularly in industrial specialties.
SG&A, excluding depreciation and amortization improved to nine 5% of sales compared with 11, 2% in the prior year.
Adjusted EBITDA for the quarter was $127 million flat to last year with an adjusted EBITDA margin of 25, 1% a very solid result, given the challenges we faced in the quarter.
Diluted adjusted EPS of $1 41 is lower than prior year, due primarily to higher interest expense and DNA associated with the Ozark acquisition and higher effective income tax rate driven primarily by higher U K earnings and this year's increase in <unk>.
UK corporate tax rates.
19% to 25%.
Turning to slide six you'll see that our free cash flow of $27 million for the quarter was a bit lower than usual for our Q2, reflecting significant working capital increases in the quarter, particularly for inventory of rosin based products and CTO as demand for Rod.
And based products continued to be weak in the quarter and in response, we dialed back processing and CTO.
During the quarter, we repurchased about $59 million of shares, bringing our year to date total to about $92 million and while we continue to be opportunistic with share repurchases, we expect to focus on reducing leverage in the second half of the year, while remaining disciplined.
And our capital allocation decisions.
Also as a result of web fonts announcement in May that they will be closing the paper mill co located with our performance chemicals, North Charleston plan, we expect to incur some additional cash costs and expenses as we transition previously west rock managed shared.
Services, such as utility to our solely used.
For this year, we expect those costs to be between 15% and $20 million most of which will be incurred in the second half.
But continue to continuing to evaluate the ongoing impact on our operating costs.
As John mentioned in his comments, we are taking actions to reduce costs across the company to better align our cost structure with the business environment and we expect to see annualized savings from the actions we have already taken to be approximately $35 million with $20 million expected to be <unk>.
<unk> in 2023 DS.
These actions include head count reduction renegotiating supply contracts and a tight rein on discretionary spending including travel.
Turning to performance chemicals on slide seven as John said it was a tale of two business lines.
Payments had a strong quarter, a big piece of the year over year increase in sales is the addition of those dark, but our legacy pavement business alone posted a record quarter driven by growth not only in the U S. But also in Europe and South America.
Strong demand for our sustainable products gave the team pricing power across all regions.
Industrial specialties volume was down in the quarter, primarily as a result of macroeconomic trends seen throughout the industry, namely continued customer destocking weak demand for rosin based products in particular and the slower China recovery.
We attribute roughly 20% of the drop in volume to customers moving to lower priced substitutes such as hydrocarbons.
As John said due to the higher cost of CTO. We are on track to spend roughly $200 million more on CTO. This year versus last year. The team has done a good job of capturing price, but with market weakness continuing unlike last year when we can.
Covered the cost inflation, we now expect to cover only about half of this year is inflated CTO cost through increased price.
We want to emphasize that the major headwind for industrial specialties is on the rosin side not tofu.
Rather than end markets are more susceptible to economic slowdowns and those customers are more price sensitive since there are various substitute products available and we're as we're seeing with our packaging customers.
Demand for Copa is still strong however, we slowed down the refining a CTO in order to reduce the amount of umbrella of raws and inventory, we are building and thus had less seats.
Topher.
Our available for sale.
As a reminder, the transition to non CTO feedstocks, what we call our <unk> initiative.
Dresses this challenge since other oleo feedstocks do not produce rosin.
Turning to slide eight sales for advanced polymer technologies were flat year over year. However, the team did a great job of increasing prices and improving profitability more than tripling EBITDA year over year vol.
Volumes in North America were up for the quarter, but overall volumes were down primarily due to customers in Asia being reluctant to restock as a result of the uncertain demand outlook in the region and Europe ongoing industrial slowdown Asia and Europe represent roughly <unk>.
75% of Apt's sales therefore, the pace of those regions recoveries will impact the second half performance for this segment.
Our profit improvement initiatives, including pricing actions and product mix management, along with lower input costs more than offset the impact of lower volumes to generate 21, 8% EBIT margin.
<unk> benefited from increased demand and bioplastics and automotive applications, particularly paint petrofac protective film too.
Two key strategic growth markets that we discussed at Investor day in May we're seeing increased adoption of our cap of products as customers shift towards materials that have a more sustainable footprint, our new product and business development efforts are accelerating and we are seeing tangible.
Results with new customer additions, particularly in areas that support our growth strategy, such as Bioplastics apparel and auto.
On slide nine Youll find results for performance materials. We're pleased to see the continued volume growth in this segment not only year over year, but also sequentially. The global auto industry appears to be improving although more slowly than we had expected and results vary by region.
North America was our strongest region for the quarter.
And China was up from last year's extended shutdowns, while Europe was flat, we're cautiously optimistic North America auto production rates will remain steady, but the outlook for Asia and Europe is less clear margins were down slightly versus last year, primarily due to higher operating costs.
As we reduced plant run rates to manage inventory.
In summary, most of our business lines posted strong results for the quarter. Despite a cautious economic client climate and a sluggish recovery in China, our industrial specialties businesses business faces unique challenges as we transition away from CTO as a sole feedstock.
At the same time that a key product rosin is undergoing a cyclical downturn, we have implemented cost reduction actions to realign our cost structure and we will take further actions as needed. We remained focused on ramping up our <unk> output in sales, while maintaining strict cost.
<unk> and.
And now I will turn the call back over to you John for an update on guidance and closing comments. Thanks Mary.
You saw in our release, we are reducing our guidance for the remainder of the year.
When we provided our original full year guidance, we knew that elevated CTO prices would negatively impact their business, but we expected a more robust recovery in China, and a stabilizing Europe that will allow growth in our pavement technology business performance materials, and ADT to more than offset the shortfall.
When we reported our Q1 results in May it was clear the recovery in China is not going as planned and Europe is facing an industrial slowdown we.
We were one of the first companies to say this Andrew.
And remember China, along with the rest of Asia, and Europe represented roughly half of PM sales and nearly three quarters of <unk> sales.
Therefore, when we didn't see the boost from those regions, we realized we would not be able to offset higher CTO prices and we reduced our guidance.
Which brings us to where we are now.
We still have not seen significant improvement in China, or Europe general market weakness continues to suppress volumes in our industrial specialties business and the historically high CTO prices, we had expected to moderate have remained elevated.
We don't expect to see relief from these prices until 2024, which is why we are reducing guidance for the remainder of the year.
We are taking actions to mitigate our CTO exposure longer term consistent with the strategy that we laid out for you at our Investor day.
There are four variables, we manage in the performance chemicals segment, two of which are in our direct control.
Our industrial end markets will improve as the economy improves.
CTO cost should come down as the Biofuels market matures and rationalize.
<unk> strategy will reduce our risk exposure and we will control our cost structure to ensure what we produce we can sell profitably.
Last two we control and we are aggressively taking actions.
Three of our businesses are performing well and will contribute to our overall performance auto.
Auto production is improving perhaps not at the rate, we would like and certainly not across all regions evenly but it is improving.
The adoption of hybrids, both here and in China seems to be gaining steam which is good for the PFS segment.
Our work on alternative carbon applications is progressing.
The payment team continues to both expand our global footprint and to enhance the growth we will see from government infrastructure funding in the United States.
Greater adoption of biodegradable materials, and consumer packaging and apparel as a secular tailwind for ADT. It should provide significant increased demand.
The Anthony transition directly addresses the biggest headwind, we have which is relying on a single raw material CTO to support our business segments.
We continue to ramp up capacity the impact of higher CTO prices will abate and we will have the flexibility to pivot to different raw materials to optimize cost with the added benefit of not producing RASM.
Finally, we will continue to constantly evaluate all options and adjust our business and cost structure to reflect the changes in our markets.
By levering all of these opportunities we will cover the gap from the increase in CTO costs.
We remain confident that we will emerge a stronger best in class performance chemical company that sustainably purifies protection and enhances our rolled around us with that I'll turn it over for questions.
As a reminder, if you'd like to ask a question today. Please press star followed by one telephone keypad since the cute syndrome.
Parents asked a question. Please ensure you're ahead, so it's really putting in on muted locally.
Our first question today comes from Vincent Anderson from Stifel.
Your line is open. Please go ahead.
Yes, thanks, and good morning.
So, let's just kind of start with CTO and here's what I think I know about CTO markets right now so spot as best we can tell is down there's no biofuel capacity that emerged out of the blue.
U S exports year to date through May are down 10% generally falling for the last two years export prices. There seem to have also peaked in March. So we don't have a lot to go off of but the only place that we're seeing prices stay elevated or the prices you pay and export prices to Sweden, and Finland, which is a little different given.
That has assets there. So I know your contracts are confidential, but is there anything you can unpack for us as to why we have this apparent disconnect and what gives you confidence that this won't be a persistent risks.
Yeah, So I'll kick it off I think you want to add anything rich please do but.
Listen we have tried to ring fence for you Vincent the impact right. So we've given you a number yet hopefully will help.
Navigate the margin or let everyone understand exactly.
What the issue is for us right with extreme transparency.
The problem that you are running into is this is not an efficient market.
The data that you see.
Whether it's rguest or elsewhere, it does not necessarily reflect exactly what's going on because as you identified.
Sometimes include certain exports don't include other exports.
Sometimes include the Biofuels market, sometimes don't include the Biofuels market.
They do not and just to be candid, we didn't even contribute our data to rguest until recently right. So that is not unfortunately and efficient or effective way to look at it now I will tell you that our pricing will tend to lag probably what you see by anywhere.
From three to six months right, but that works against us when prices are coming down and works for us when prices are coming up right, but even that.
You have to be careful with right. So we are aware of this problem from a market because I know everyone wants to be able to sort of forward predictor. So we're trying to give you.
The scope of the issue for this year right I mean, it's a $200 million hole for lack of a better term that we were able to claw back a recover about $100 million. So far we're going to do the best we can to continue those efforts, but that's what we're up against longer term I do think seat.
<unk> prices will come down I think that the market got ahead of itself on speculation for European biofuel inputs.
The European biofuel market has not materialized at the rate that people were anticipating and we went into a period of economic weakness. So you will see some CTO relief, but I cannot tell you exactly what that level will come too we have an idea of where it should land, but again this is not a totally efficient mark.
Right.
But I hope that gives you some more color Vince.
Yeah, No. That's that's helpful and very fair points.
Turning over to the demand side.
On the margin side of the equation could you give us a rough order of magnitude around what your mix impact looks like when you lose a rosin ester sale into something like an adhesive and have two instead drum that product incentives to the export spot market and Scott.
Okay.
While our merchant Rosin sale. This is rich Vince our merchant rosin sale for the most part abated, which is why we're building so much rather in inventory at the moment, but on the order of a magnitude of.
A rise in sales into the merchant market are significantly less on the order of 50% less than what we're doing in the in the derivatives market today.
The merchant the merchant.
Right.
Yes.
And if I could add compared to compared to the alternatives, whether it's hydrocarbons or gum rosin are merchant rosin pricing to date has been about 15% higher than a merchant rosin I mean, the gum rosin area and about 30% higher than the hydrocarbon market to date.
Okay. So we're kind of past the negative mix impact of losing your higher value derivatives and were into really more just absolute volume demands when we think about.
And the way we demand in the back half of the year.
Okay.
And then just a really quick one and I'll turn it over.
Yes.
Primarily for northern American that before and not so much externally that outside of the U S. But yes.
It's tied to actual CTO costs, and then how much of it's tied to you just running at lower operating rates and kind of having to absorb that that fixed cost absorption. I guess can you can you help us to maybe bucket. These these kind of bigger categories.
So I'll start with the West rock impact that I mentioned in my remarks, it's really goes to cash costs and expenses, we will be kind of I think of it as carving those out from from the GAAP for adults so going for.
Forward and that impact would be excluded in our adjusted numbers, but it is still cash so.
If you note.
In the release or in the deck that we provided we also did reduce our guidance with respect to free cash flow coming down in a lot of that particularly second half of the year is related to the cash costs associated with the <unk> transition.
With respect to the EBIT decline that's more.
Again, CTO related and the inability both the inability to push enough price to recover those costs because their end markets are soft, but also the general economic slowdown, which is not permitting a robust recovery in P. M. R. A T.
To offset or mitigate that.
Costs in fact, right I mean, John it's difficult to separate CTO versus the end markets right. I mean, you have seen us go through cycles before where we have built raws in the law.
Last one really kind of occurred in 18 right.
The reason we're in this situation.
With the orders of magnitude is this.
Large hit to CTO, right, which is why we're trying to quantify it for you.
The numbers. So you can understand what the ramification is right.
When you when you look at the performance chemical segment writ large.
You can do the math on the on the margins.
<unk> tech piece of that.
And come to an annual number because it's really spread out mostly over Q2 and Q3 as you know and then you can kind of impute, what the ramifications are.
For industrial specialties, it's a large number I mean, they are absorbing $200 million of incremental cost of which we've been able to call across the company about 100 back so.
Would a better economic environment have helped that sure.
Had we stayed I mean, it's interesting because we've done a lot of internal analysis had the market environment stayed as it was last year.
Would have been able to bear the CTO inflation.
And I'd say that kind of across all of our businesses right not just <unk>, but we would've been able to absorb it is just the economic environment as weekend to the point, where this is the this.
As the put and take of those two right.
Okay. Okay.
Does CTO was high before and it seems like from a contractual side you probably had a rough idea of how those costs, we're going to play out this year. So is it.
At least when you gave kind of the prior guide so I guess, how should we think about the incremental thing that changed that's causing you to pull down the guide is it just.
With that much weaker.
The markets are weak or John I mean, I don't I.
I want to be very clear because I want everybody to understand.
The CTO it is true and I think sometimes people have missed that the cost of our CTO has been gradually escalating over the course of the year right. We talked about this at Investor day, but I don't know.
Q2 was more expensive than Q1 Q3 is going to be more expensive. In Q2, Q4 is going to be more expensive in Q3, it will level out going into 'twenty four okay. So.
And at that point, we will be more what I would call market, meaning that we will.
To the extent, we get some relief in CTO, we're going to really feel it right. It will help us quite dramatically next year, but.
What's causing the issue in the back part of the year is that the markets that we sell into have really really weekend with the exception of pavement technologies in oilfield and.
In particular these are rosin markets, it's very reminiscent to me of where we were back in <unk>, where we are having to basically slowdown rates because we cannot move the rosin and rosin is not selling.
That's what's happening.
We raised well maybe I can give.
Paul.
John before we raised prices last year in the industrial and specialty businesses.
Almost a quarter of a $1 billion actually over a quarter of a $1 billion right. So we were in position to absorb this right. The challenge is is that people are not buying.
Alright.
So <unk>.
Hopefully that's helpful.
Yes, no I think it is.
Just so just to make sure I've got this right is the weakness.
Weakness in the rosin market because the actual end customer and product demand is soft or is it just looked that they can't handle the price and so they're just they're just giving up on it and nothing else just so not buying John I mean, obviously price moves up and down and we will adjust price and we can adjust price and we obviously have a higher <unk>.
Cost structure.
But ultimately, they're not buying and they have the ability to substitute into lower cost alternatives.
And I did mention we.
We estimate approximately 20% of our customers have shifted to lower cost alternatives that may be rich do you want to add.
When we look at the overall demand in industrial specialties, particularly on the rosin products and you're talking about adhesives rubber paper sizing. We know many mills are shutting down.
And printing inks, but when we look at the demand that we've seen this year marries correct, 20% is related to two reformulation to hydrocarbons or some other type of gum rosin, but 80%, 40% was related to Destocking and another 40% was related to demand destruction and thats pretty much what we've seen across the.
Entirety of a run.
Offering.
Got it.
That's helpful. Thanks.
Alright, thanks for the color.
The next question comes from Jon <unk> from CJS Securities. Your line is open. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Mary just to jump on the back of that one of the prior questions.
You guys have explained that the CTO and rosin fits pretty well what is the reduction in the guidance in the PM and <unk>.
The APG businesses how much.
Lessons that contribute this year compared to what you have.
I thought maybe three months ago.
Okay.
Yeah I think.
Versus our last call probably not too much change, but I think certainly when we set the initial guidance, we expected a more robust recovery in China.
And again that the.
Solid underlying economic trends that we had seen heading into the year when continue.
And it really is a tale of North America, holding up and.
And looking pretty good.
But Asia sluggish and in Europe , frankly struggling.
And on the <unk> front.
And in Europe , so the lack of a rebound in China.
And Europe , showing essentially no pick up at all.
Has reduced our expectations for that business as well.
Not certainly not to the extent of the industrial specialties, but versus what we had expected but that having been said I mean.
The growth rates for those businesses. When you look at them on an annualized basis are still pretty robust and healthy compared to.
Other segments or other businesses right that we're looking at I mean, whether you look at PM or you look at ADT or you look at pavement.
They're all growing pretty healthily in this environment right. It's not so much an opinion and not so much on the revenue side, but certainly on the profitability side.
He has really done a great job of moving their margins up again, not so much on the revenue, but more on the profit side from where they were last year and payments, having a great year. So it's.
It's certainly down from where we were last year.
I wouldn't say they've moved a whole lot going to be a little bit but not a lot.
Understood. Thank you and then you started the call out.
Really nice bright plane, which is the nexium.
<unk> to Panasonic and and in Korea.
Can you help us understand kind.
Of the quantity of commercial sales and Nexsan is that going to be doing kind of when you expect to be in the supply chain planning that material and if there's any change from your traffic conditions.
We are really excited by their success.
And it's validating a lot of the work that we did is we analyzed and assessed our opportunities in that market.
But our view is that it's really something that we will play a bigger role in the middle of the decade and beyond right and Thats really what we want we have lots of great opportunity in our core businesses.
And we think that you know.
Our our position and our opportunity where we're focused is as they've generate next generation or as they develop next generation technologies at I don't know if you want to expand on that John I would say that <unk> put a press release out in the last 24 hours and that should be able to answer a fair amount of your question.
On their pathway, particularly in the near term yes.
Okay, great. Thank you and then just last quick one from me how is the ASP changes and progressing from a demand perspective are you still have the capacity to bring on line kind of where you expect to do by the end of the year, there, especially yes look nothing has changed.
But John I think it's an important point right because.
No.
While we've got these three businesses are doing well, we've got one business that has some some secular or structural changes to it and.
<unk> is a critical part of our strategy to go forward.
Economy will improve we talked about that we have those four variables.
CTO prices will abate, but they will come down but over the long haul the right answer is to offer our customers fatty acids that solve for their technology needs right and the advantage of <unk> is that it is an alternate.
More regionally sourced raw materials.
And it does not produce RASM right. So we are very focused on it it remains on track.
We mentioned in our prepared comments that the volumes, we anticipate producing out across that next year will equal the CTO volumes than we've traditionally run through that plant.
We continue to work and our customers are being receptive to the re formulations necessary as I mentioned earlier. It just takes time, we cannot there are processes.
Testing et cetera that we have to go through.
But ironically, hi, CTO prices.
Help make that sale to the customer.
You need an alternate right.
And so we remain on track and very focused on this.
Okay, great. Thanks, guys.
The next question is from Ian Zaffino from Oppenheimer. Your line is open. Please go ahead.
Great. Thank you very much.
I guess the CTO prices.
Continuing to think they are.
How much of your production do you think you'll actually.
If the anthem versus CTO.
And how long would that actually take.
Well.
Again, so if you kind of think backwards back of the envelope. We've had three plant network right one of those plants.
It is going to move to solely right. While it has moved to running solely IFA and we've said that next year will be producing volumes.
Okay, and then as far as the questions about the comments about being able to.
Transitioning to toggle back and forth between different assay as CTO.
Flexible.
And to your question come back down.
But it is our intention over the next 24 months to have that plant fully moving on <unk>.
Offering alternatives.
Okay. Thank you very much.
The next question is from Daniel Rizzo from Jefferies. Your line is open. Please go ahead.
Good morning, Thanks for taking my question just just to follow up on assay is there anything in the production process or is there an input that could cause the price of producing ethylene prices to kind of spike similar to different product was something similar to what we saw with CTO in the way and with Robbins and things like that.
Well to answer your questions. Like this is the reason why we want to use multiple feedstocks right.
Because of the biofuel market and it's it's it's not only affecting CTO, it's affecting a lot of the oleo chems.
Particularly those that are non food based right or those that don't go into the food chain right.
They you know people who follow those commodities.
Who may be on the call know that they kind of ran up in 'twenty. One 'twenty two and then ran down they are typically more cyclical.
How much biofuel, they put in and out of their mix based on the price that the end consumers in Europe might pay right. So those are that's going to move around too. It will eventually we think over the next two years or so.
Stabilize out as that market matures and all the feedstocks.
Come into place that's one of the reasons, we think CTO will come down from a pricing perspective right.
Look at it they are out ahead of that market it will come down.
But we want what we like about multiple feedstocks as we can move between these as they you see different spikes in different.
Our feedstocks and let me, let me tag on to that so soy canola. For example, then much much bigger and more liquid market than CTO and unlike CTO remembers CTO only made by paper mills, so their sales of <unk>.
<unk> are episodic if you will they're putting chunk since the market.
You were purchasing when they have product available et cetera, there a different dynamic and as soy canola tie.
Type of market again, because of the size the liquidity of the market. So our ability to control the timing of our purchases and perhaps hedge our purchases because again there are cost curves there well established the size of the market et cetera puts that purchasing dynamic in a very different framework.
And what we now have with <unk>.
That's helpful. That's very helpful. Thank you and then.
Is there any way I mean.
Are you thinking about.
Look at cutting cost are you looking at any way to I don't know optimize your footprint on our own.
The plants are closed.
Yes.
Let me put it this way at.
All options are on the table.
Right.
As you know there's lots of different.
Levers that can be played when you're optimizing our footprint, but all options are on the table.
Okay alright, thank you.
As a reminder, the standalone so ask a question today.
Our next question comes from <unk> <unk> from Wells Fargo. Your line is open. Please go ahead.
Hey, good morning.
So the $100 million gap that you have this year from <unk>, how do you get that back next year is it just simply.
Youre going to get more pricing I assume this year that flows into next year have you do you need demand to sort of come back.
And then you get the pricing through.
Our intention is to try and get it back through continued growth in our other businesses and through continued escalation of sheet of assay sales and through reduced cost structure right.
Certainly improvement in market conditions.
Or reduced CTO pricing would help us in that right. So we have to look at all of those influences.
Influences or market factors to try and manage this we control two of them right. So we will do what we can to control, but obviously to the extent the market does improve our CTO pricing improves that's going to make our job easier and certainly as China again, Jon's comment about industrial I'll cover.
Certainly China will pick up at some point certainly I believe the economy will begin to tick up.
Better than it has today so so again.
Even rosin and rosin markets have shown a history of taking a deep digging a deep hole and then coming back quickly when they do turn.
When John is discuss those we're not waiting for all of those things to happen. We believe they will but we don't control the timing of those market dynamics. So the actions that we're taking are to better position us so that in those products and feedstocks, where we have where we're at where we're at the mercy.
<unk>.
<unk>.
You know the markets the markets or certain.
Very tightly controlled feedstocks that we are taking actions to put ourselves in a better position long term.
No I understand and then.
But if you think about the price that these products are at now if you do raise the price further or is it does that.
A problem relative to.
Maybe an olefin based product that you are kind of sort of tapped out and your ability to raise the price or.
Or is there any demand comes back you can get the price.
Okay.
And then as far as materials a lot of demand.
If demand comes back Mike, we would expect to be able to at least hold prices.
Now.
With demand, where it is even with some pricing concessions costs certain customers are able to find lower cost alternatives.
We believe that as we make this move.
We will be able to offer lower priced alternatives, while maintaining slash improving our profitability because some of these other raw materials are not nearly as expensive on a relative basis to crude oil today.
Got it got it okay. So if I if I kept performance materials sort of my outlook.
Two last quarter and I think a lot of companies have.
So felt pretty good about the auto outlooks for the second half of the year.
And then it sounds like <unk> will be.
Amy.
Maybe slightly lower it kind of implies Florida, chemical's takes a pretty big dip.
Third quarter to fourth quarter.
It is March.
Why is that the right way to think about it.
Okay. So think about it it's mostly fourth quarter right I mean, when you think about performance chemicals.
You've got this you know.
High profit high performing business, that's really generating in Q2, Q3, and those businesses really abate in Q1 and Q4 right. So.
We don't we don't provide quarterly guidance, but when your calendar arising at you you need to understand that Q3, we will continue to benefit from asphalt and payment sales, but in Q4. Those sales don't exist. So Q4 performance chemicals is going to take a hit the challenge.
<unk>.
Okay and then when we think last question when you think about 'twenty four.
For performance chemicals, we should get a portion of that $100 million back based on what Youre doing on.
The things you are within your control.
And a CTO comes down you could actually get the other remaining to be a plus $100 million next year.
It's possible I mean, it just depends on my own view, Mike because I don't believe the CTO I don't believe we're going to get all $200 million at CTO back I, just want to be completely clear to everyone right.
But if the gap is $100 million.
Right, what do we do well we've got those four things that work how much cost can we take out.
Right.
How much can we sell right what kind of market improvement do we get right. So I mean, we actually feel like 24, while.
<unk> is going to be challenged we've got levers to right, but it's a little early for me to gauge where the market and the CTO is that what we're working on are the other two.
Because those we control.
Got it okay, great. Thank you.
We have a follow up from Vincent Anderson from Stifel.
Please go ahead your line is open.
Yes. Thanks.
So John I, just I wanted to go back and clarify some of the comments.
Comments is there a target volume for nextera across it.
Basically equivalent to the full phase one that you outlined are you implying more like two thirds of that when you draw that CTO comparison.
Well so the way I would think about it Vincent is we should be by the by this time next year, so the middle of the year.
Running at full run rates, which would be about 125000 tons give or take right.
So when you when you weigh that over the course of the year it won't be the full 125, right because we will be ramping up in the first half of the year right. We may do better than that but thats where were sitting here right now right.
Okay.
And then.
As much as you're willing to comment on it with that alone would be enough to cover fixed costs at the plant and maybe even potentially contribute positive standalone margins.
Well.
The goal as you know Vincent the more rerun it the more we cover our fixed costs right, which is why we want that thing running.
As quickly as possible at those run rates right I, just think realistically when you think about <unk>.
Product certifications and all the complexities we talked about.
Yeah.
It just takes time right.
To the extent, we're able to find a new market customer that doesn't need those certifications, we can accelerate that and we've hired a person to help us do that right.
To the extent we can.
Continuing to accelerate customer certifications that we can accelerate that so.
That's what that's our planning today.
Okay, and then just last one promise.
Great products.
What is your ability to accept lower grade products, whether it's just the base crude vegetable oils or even some of the <unk> stuff that you don't even really that pricing.
Yes. This is rich yeah, we have the ability to take some of the lower grade stuff in our processes and that the and also are already sourcing some of that low grade material today.
Using it because that facility right now.
Excellent alright. Thank you that's all from me.
Yes, before you go John I've, just been reflecting a little bit Mike system on your.
Thinking through the quarters and how the rest of the year will unfold because like I say, we don't guide quarters, but I do think it's important to understand the timing and the sequence. When you think about our new guide right for this revised guidance.
Think about the earnings power, that's coming out of it I mean Q3, we talked about right now.
We got all those businesses firing right P. T P M. A P T right.
And in the fourth quarter, you got three of the four basic well you got two of the two of the four right basically you've got <unk>. So our guide really is all about.
P M. A P T and pavement, continuing the trajectory that they're on but we are de risking from a guidance perspective.
What's happened with <unk> right so when.
When you think about this I mean, you are correct in fact in Q3 and particularly in Q4, when you'll see it there.
Chemical segment is going to underperform, but we were trying to derisk that from our guidance right. So going for the upside in the sort of downside, but we think hopefully more upside is really tied to those three core businesses right.
Alright.
Thank you Jonathan Eye-popper alright.
Thanks, everyone that concludes our call and appreciate your interest in <unk> and we'll talk to you again next quarter.
This.
Today's call. Thank you very much for your attendance you may now disconnect your lines.
[music].
Yeah.
[music].
Hello.
Yeah.