Q3 2023 Ingevity Corp Earnings Call
Thank you for your patience <unk> third quarter 2023 earnings call and webcast will begin shortly.
[music].
Good morning, or good afternoon, and welcome to the <unk> third quarter 2023 earnings call and webcast. My name is Adam and I'll be your all parts of it today.
If you'd like to ask a question during the Q&A portion of today's cool images sopra pressing star followed by one on your telephone keypad.
Ill hand, the floor to begin to John Please go ahead.
Thank you Adam good morning, and welcome to <unk> third quarter 2023 earnings call.
Early this morning, we posted a presentation on our Investor site that you can use to follow todays discussion. It can be found on IR dot and do you have any dot com under events and presentations.
Also throughout this call we may refer to non-GAAP financial measures, which are intended to supplement not 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 and we caution you that these statements are just projections and actual results or events may differ materially from these projections as further described in our earnings release.
Our agenda is on slide three our.
Our speakers today are John Fortson, our president and CEO and Mary Hall, our CFO.
Our business leads Ed Woodcock President of performance materials, Rich White President of performance chemicals, and CPU President of advanced polymer technologies are available for questions and comments.
John will start us off with some highlights for the quarter and Mary will follow with a review of our consolidated financial performance and the business segment results for the third quarter.
John will then provide an update on guidance followed by remarks addressing our announcement last night regarding the repositioning of our performance chemicals segment and its expected impact.
With that over to you John.
Thanks, John and Hello, everyone, let's begin on slide four.
As you know we made an announcement last night to reposition and restructure the company and this includes the closure of our Deridder, Louisiana facility among other actions.
These decisions are consistent with our objective of being a top tier specialty chemicals company and a part of the execution of our long term growth strategy. We are committed to maximizing the profitability and earnings stability of the company and later in the call I'll go into detail about how these actions to get us closer to our goals.
But first a few comments on our third quarter performance.
To level set last year third quarter revenue and EBITDA were the highest ever for our company.
Our performance chemicals, and advanced polymer technology segments led the way last year with both posting record quarters in a very robust demand environment.
This quarter this year, our strongest performing segment was performance materials, which posted EBITDA margins north of 50% we.
We saw modest revenue growth and strong EBITDA drop through due to increased demand of our automotive activated carbon in both North America and Asia Pacific.
Impacts in the quarter from the auto industry strike were very limited. Additionally.
Additionally, the increased demand for hybrids over battery electric vehicles benefited the segment and bodes well for the segment longer term as well.
Advanced polymer technologies saw their volume drop in all business lines across all regions due to the continued industrial slowdown, but the team maintained their focus on profitability improving their EBITDA margins by nearly 1000 basis points.
The team is using this time to advance the adoption of our products and new economy markets like Bioplastics, where our capital products enable biodegrade ability in areas, such as packaging agriculture and sustainable fibers for apparel.
In performance chemicals payment had another great quarter as international expansion continues with strong adoption of our products progressing in South America.
I would say the number of projects the team saw in the U S was not as robust as we had hoped as funding from the infrastructure Bill was slow to make its way into local levels.
But we do expect those dollars will be put to work and our teams are ready to deliver solutions that use less energy during the paving process make roads last longer and improve safety for drivers and pedestrians through more reflective markings.
Industrial specialties continues to feel the impacts from the lack of rosin demand, particularly in the adhesives and markets and during the quarter. We also saw a slowdown in drilling activity, which resulted in weaker oilfield sales for.
The price, we're paying for CTO as expected increased in the quarter, reaching approximately 25% of the company's total cost of goods sold.
As a result, even with the addition of Ozark performance chemicals saw lower sales on a sharp drop in EBITDA I will speak more on these market dynamics and how we are responding after Mary finishes. Her review of Q3 financials Mary Thanks, John and good morning, All please turn to slide five.
Sales were down seven 5% versus last year as all segments experienced weaker volumes as compared to last year's record quarter.
<unk> volume was offset somewhat by better product mix in performance materials and the addition of Ozark sales within performance chemicals gross profit was down primarily due to higher CTO costs that impacted that performance chemicals segment.
SG&A, excluding depreciation and amortization improved to seven 6% of sales compared with 10, 8% in the prior year as we began to see the positive impact of cost savings actions taken earlier in the year.
Adjusted EBITDA for the quarter was down 21% to $110 $4 million, but we maintained adjusted EBITDA margin of 24, 8%, which is in the top quartile of specialty peers.
Diluted adjusted EPS of $1 21 is lower than the prior year due primarily to weaker results in performance chemicals as well as higher interest expense associated with the Ozark acquisition.
Turning to slide six you'll see we generated free cash flow of $73 million for the quarter.
Slower capex spending and improved accounts receivable turnover offset the inventory challenges, we continue to have with CTO and rosin.
The free cash flow generated we prioritized debt repayment and we're able to hold leverage flat to last year, even though EBITDA is lower.
Last quarter, we announced cost saving actions expected to result in $35 million in annualized.
Annualized savings with $20 million expected to be realized this year and we are on track to reach this target.
Turning to performance chemicals on slide seven revenue was down four 3% as the volume drop in industrial specialties was only partially offset by the addition of Ozark and higher pricing in pavement.
Segment EBITDA was down 62, 4% as you see on the waterfall the impact of the lower volume was mostly offset by price, but we were unable to recoup the higher cost of CTO.
Similar to last quarter lower volumes are the result of global weakness, primarily in rosin based end markets, and particularly adhesives, but also printing inks.
We attribute approximately two thirds of the decline to demand weakness and the remaining one third to product substitution.
On the telco side, we began to see weakness in oilfield with lower drilling activity during the quarter.
Legacy payments sales were up as a result of higher prices and increased technology technology adoption in South America and Ozark continues to have good results with their paint portfolio, Although theyre thermo plastics business line was slower than expected as competitors gain.
Share through price concessions, our sales teams are taking the steps necessary to drive thermoplastic growth as we head into next year's paving season.
Turning to slide eight.
Sales for our advanced polymer technologies were down 38, 4% on lower volume the volume drop was across all end markets and all regions as John mentioned.
We estimate 70% of the decline is attributed to lower end market demand as customers do not appear to be restocking inventory.
The remaining 30% we estimate is a combination of lower priced product substitution in certain end markets like footwear, and and competitors moving into our end markets, where they normally don't participate, but then pivoted to in order to move their product.
We believe these are temporary headwinds and as industrial demand picks up we will see a rebound in volumes. In fact, we have seen incremental improvements since the middle of Q3, which gives us some hope we've seen the bottom however, customer order patterns are such that we don't have visibility longer than a few weeks.
<unk>.
Even with lower revenue segment EBITDA was flat, resulting in margins of 26, 2%, a 990 basis point improvement over last year. The improvement is primarily due to pricing and lower energy and raw material costs, but also includes <unk>.
Benefits from the cost savings actions announced earlier this year.
Steve and his team have done a terrific job improving the profitability of this segment and we expect as volumes pick up that they will be able to sustain mid twenty's margins over the long term.
On slide nine Youll find results for performance chemicals performance materials.
Revenue was up one 6%, while EBITDA increased 21, 7% benefiting from improved product mix and cost savings actions.
We're pleased with the margins we do not expect this segment will maintain 50 plus percent margins on a consistent quarterly basis will likely have to settle for margins only in the mid to upper four days, which is a nice problem to have.
The quarter benefited from an improved sales mix of our higher margin activated carbon into auto applications.
As we track battery electric vehicle adoption rates. It does appear that hybrids are becoming more preferred from a consumer standpoint.
In Europe for every <unk> registered there were $2 two hybrids registered similarly in the U S. There are nearly nearly one three hybrids sold for every B E.
This trend benefits in <unk> since hybrids contain our activated carbon if these trends continue this will reaffirm our position, which we articulated at Investor day that the path to all electric vehicles is through hybrid and this business has a long runway.
Results in Asia were strong in the quarter as auto production stabilized and exports increased from China and Korea, while in North America, the auto industry strikes or not meaningful to our third quarter results.
Given the recent positive developments in the negotiations we currently expect nominal impact of the strikes on our Q4 results.
And I will now turn the call back over to John for an update on guidance and for more detail on our repositioning of performance chemicals.
Thanks, Mary Please turn to slide 10.
We do not expect industrial markets to recover in the fourth quarter. Therefore, we are lowering 2023 full year EBITDA guidance to between 375 and $390 million free cash flow to between 75 and $85 million and a net leverage target to remain near these Q3 levels.
Directionally, we are seeing our normal Q4 seasonality amplified by the weaker economy.
We did see very limited impact of the UAW strike in October it is possible that these will be made up over the rest of the year, but it could be in Q1 of next year.
The paving season in the northern hemisphere, and as the weather turns cold.
If this fourth quarter plays out as last year's did we expect performance chemicals, and APG customer buying patterns to slow as we move into the year end.
While specific impacts of our restructuring actions will be very limited in the quarter and begin in earnest in Q1 of 2024, we will be selling excess CTO in the quarter and expect losses on those sales as we as we rebalanced, our inventories and manage our working capital.
Turning to slide.
12, we will go into more detail on the repositioning of performance chemicals, and what it means to endeavor as a whole.
I will start by saying that these actions do not change the strategy, we have articulated and that has to be a best in class specialty chemical company as the business is being impacted by significant structural changes we are accelerating our execution to refocus on our performance chemical segment.
On our most profitable markets.
By taking these actions we are focusing our resources on our higher margin higher growth products and less cyclical markets. These products include our pavement technologies business, both our legacy payment, but also our road markings business and certain industrial and oilfield markets.
We are exiting non specialty more commoditized markets that have proven to be very cyclical and price sensitive.
Many of which are rosin based such as printing inks in adhesives, but also certain oilfield markets.
The margins of the PC business have been under significant pressure by making these changes we can improve these margins back to the mid teens as <unk> sales ramp up.
We are reducing our dependence on CTO.
This raw material, while integral to our past has undergone dramatic structural cost changes due to its use in the regulatory driven European biofuels market.
Step function changes in demand and its effects on pricing are not going away.
Ironically, the tofu from CTO has become so expensive that its use in Biofuels is very limited right now because they have cheaper alternatives.
Still this has driven up CTO prices to inefficient levels that can't be supported in lower margin chemical markets.
We do believe CTO prices will come down from today's levels, but we will but we do believe also that they will remain high by historical standards and the pricing will remain volatile.
Only select products can absorb this new cost structure and remain high margin.
By closing Deridder, we will operate a two plant network with dual feedstocks, we will operate the Charleston refinery on CTO for narrow and crossover on an hour.
Draw a distinction between our refinery and other options to produce products for payment and other markets in Charleston.
The derivatives Asian capabilities to support our target markets exist in Charleston, independent of the refinery of CTO.
Our ability to expand production at both sites and croisette in particular insurers, we have capacity to address both the recovery in our target markets, but also to grow as demand for our products grows both will be focused on these specialty markets and will support the customer with chemistries from a variety of feedstocks optimized based.
On costs and availability.
If and when it becomes economic for us to enter the Biofuels market, we have the capability to do that.
The cost savings, we expect to realize from our actions are significant.
$65 million to $75 million of annual savings beginning in 2024.
Exiting a facility a door inner size takes time and we expect to cease operations in the first half of next year.
I was in Deridder yesterday afternoon, and I would like to take we'd like to take a moment now to say the deridder was an integral part of <unk> history.
Operating since $19 47.
They are a terrific group of people and we thank them for their service to <unk>.
As we move into 2024, we will continue to assess our plant network and our cost structure to ensure we best support our specialty businesses.
The end result of these actions is a stronger more focused in Germany.
We will be able to focus our capital and resources on our most profitable growth markets, including exciting growth opportunities in performance materials and APG.
Full company EBITDA margins will improve to the upper 20% range as a part of these moves we are streamlining in Germany overall in restructuring our business and support functions to align with our new focus on specialty markets.
On slide 13.
You will see the breakdown of the company by segment and business lines.
We expect the repositioning in performance chemicals will result in approximately $300 million less revenue in the industrial specialties business line.
We will remain as a company with a revenue mix. It is dominated by our higher margin businesses like performance materials Apta and pavement.
We will be smaller on the topline, but more nimble and profitable going forward because of this better mix of businesses.
This is a significant restructuring and Japanese head count has been reduced by almost 20%.
With the derivative closure, we expect to incur charges of approximately $280 million with approximately $180 million of the total chart of the total charges to be noncash.
The majority of the noncash charges and 50% to 60% of the cash charges are expected to be recognized by the end of the first half of 2024.
Slide 14 is our roadmap to the future state of performance chemicals.
It includes a streamlined manufacturing footprint fed by multiple raw materials. These.
These sites will focus on producing high margin high growth specialty products.
In addition to payment in road markings, we will continue growing the <unk> market.
And ASI markets, including personal care home cleaning and animal feed.
We will not support low margin cyclical markets like inks and most of the users. The remaining RASM. We do produce will be used in higher margin adhesive products blend with blended with assays to go into substitutes for Copa.
Or used in road markings.
One of the costs associated with this restructuring will be balancing our future CTO needs with the excess we will receive from our contractual obligations.
With one less plant to run CTO, we will be long CTO for some time, we will sell this excess CTO in the market to both manage inventory and convert to cash.
We do expect at least initially to take a loss on these sales and estimate it to be between $30 million to $80 million next year.
<unk> pricing is in flux and there are a wide bid ask cinema market. So this number is hard to pin down now, but as the year progresses, we do expect CTO prices both for what we pay the purchase CTO and for what we sell it forward to decrease particularly in the back half of the year. Additionally.
Additionally, the amount, we deem access, meaning what we have to buy versus what we could use could change.
Needless to say, we expect to be sellers of significant volumes of CTO. In 2024. However, we view these sales as distinct from the core operations of this segment as market conditions change and impact CTO re sales we will update you all.
In conclusion, our strategy is to focus on end markets that utilize our higher margin higher growth specialty products diversify our feedstocks and optimize our manufacturing network, we will be transparent with you each quarter as this repositioning takes place, including sharing our charges and expenses as well as our CTO position.
And its financial impacts we are confident that we have a best in class specialty chemical business and we are making we are working to make it both more stable and profitable.
And 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 on your telephone keypad now extends into Q.
A quick question. Please ensure your Hudson muted locally.
Our first question today comes from Vincent Anderson from Stifel.
Your line is open. Please go ahead.
Yes, thanks, good morning, everyone.
Hello, John.
So.
Let's start with performance chemicals, I mean, the margins this quarter really werent too bad given pavement and oilfield mix was a bit lighter than we were hoping for I am just curious was this helped by like a longer tail of lower price CTO in the P&L.
And then transitioning that into <unk> and the negative guidance changed.
Some of the Cte excess CTO sales.
Guidance for 2020 for some of that also going to be impacting <unk>.
So what's on the page for <unk> is really a.
2024 number right.
You are correct that the segment and I think youre going to see this both in Q4 and in Q1.
You have to remember one thing.
We do not that segment does not benefit from the seasonality that's tied to the payment business on those quarters right.
So by definition those.
The quarterly patterns are lower than what you've seen in Q2 Q3, but it will also be aggravated by rising CTO cost that are to your point not in the P&L today right.
We do think those things those costs will level out at some point in the first half of next year slash start coming down, but I would be clear with everyone that Q4 and Q1.
We will be dealing with these issues.
Okay.
And then going back to the planned CTO sales for 2024, I mean, how much of that is just existing inventory given I thought under at least the public portion of your of your supply agreements you had out clauses for the closure of plants and I'm, assuming cross have been converted to assays would also qualify.
As a closure.
We do have out clauses.
But they do take time.
And we will not be we will be operating with the volumes that we have today through 2024 right or at least that's the that's what we're planning for right.
We will.
Be working to manage the situation what excess CTO, we don't need we will sell.
But we will be buying more CTO than we need.
Through 2024 and potentially into 2025, but.
Our expectation is is that we will try to manage that.
So just to add.
Certain contracts do.
Have what I'll call.
Our wind down based on plant closures based on plant closure, such that we're obligated to continue purchasing certain levels of CTO.
For up to a two year period.
And then.
We have more flexibility after that period, so even with the announced closure of Deridder, we are obligated to take a certain volume of material and that's why we're saying we will be long.
CTO in.
Certainly next year, and possibly up to two years and we will be doing these resales as needed to balance inventory and working capital.
Okay, So I'll put it out.
And then on.
On that page just to make sure that everybody is clear on this ride with represented an estimate between what we think would be the most punitive buying at a certain price selling at another.
That we could be dealing with over the course of next year.
And we do want to just reiterate too that we are continuing discussions with all of our CTO supplier to better align our existing contracts with our new.
Footprint, if you will.
But we are trying to as I mentioned in my prepared comments, we're going to be working very hard to manage that number down slash habit. Eventually go away right. This is over and distinct from what I would call. The operating performance of the sort of core businesses.
Whats what is hard to pen is exactly what the year will look like in this regard because as I mentioned, we do expect CTO prices to come down both in terms of what we will pay.
Alright, and then also that will in turn impact what we will sell it for right. So.
I think the first half of the year, we will be incurring these losses on the Cts sales.
We would like to thank by the back half of the year that we will be more imbalanced, but I don't want to over promise to that so hence we put up the numbers we have.
Okay.
Very helpful and I know that took a little while to get through but I wanted to ask.
Pretty good.
Got it.
And everybody to understand that.
So on <unk> maybe.
Maybe a long question with a short answer so.
Just pinning you down a bit on the ramp up you were running I think you said, 15% of our oilfield on assay target of $70 million of sales by year end and then full utilization on that call. It 175000 tons of capacity by mid next year and that gets you breakeven. So what I was hoping we could break all that down into us.
What $70 million and <unk> revenues equate to.
From an annualized exit rate for 'twenty, three and then roughly what kind of exit utilization would that look like that we know sort of what you are still going to be filling in the first half of next year.
So.
Here's what I would say.
The.
The numbers that youre dealing with.
And we're not none of that has changed really were contemplated prior to.
The director closure right, we are working now.
To change slash accelerate the adoption of RFA into some of our more traditional legacy markets.
To offset or to reposition from tofu into these assays so.
I am not prepared to sort of change those numbers right now because we're still working on this and this is all being.
Contemplated as a part of these actions, but you can expect that as we move into next year that we will come to you with a better vision on that but clearly our strategy is going to be moving.
The ones that are profitable.
Away from <unk> into <unk>.
Okay. So no no change, but future change would probably reflect some attempts at an acceleration.
Well.
There will be more than an attack.
It's going to be more than that.
I don't want to put words I don't I know you don't want to promise anything but okay. Alright. Thank you very much.
Ill turn the call over.
The next question comes from Jon <unk> from CJS Securities. John Your line is open. Please go ahead.
Hi, Good morning. Thank you for taking my question. My first one is what utilization do you expect to have in the remaining CTO facility number one.
Number two.
Expect to keep the davita property or is that up for sale.
For some cash maybe just through your plans around facility after it obviously shut it down.
So we are John just to answer the first part the second part first.
We have looked at a pretty full range of options for that asset.
We continue to look at a range of options for that asset.
But right now today the decision is to shutter it down right.
To get to your other question.
What run rate, we choose to operate Charleston at will depend on the market environment going forward right.
Currently we're not actually running them or when we haven't been running the refinery, but we have been running the derivatives Asian plant right. So that's part of the reason we want to separate those two from.
Do you think about this.
Our expectation is as.
As we kind of move forward, we're probably not going to be running at maximum is right away because were managing inventories and we're going to have some inventories that are excess as we sort of exit deridder, but at some point, we certainly have.
We have the capability to run that back up to a full run rate.
Okay.
No.
As I said in my comments, we've kind of us okay.
We've since check this.
Sensitivity check this pretty hard and were pretty comfortable that we have the capacity that we're going to need.
Going forward to support the markets.
As they return to a more normalized economic environment right. What's critical to understanding that though is is that we're that we're exiting low margin cyclical stuff right. So as the markets recover.
We will be able to dial up our capacity both in direct or excuse me in Charleston and in profit.
<unk> focused on the markets, where we have the highest margin opportunities.
And John if I could add to that this is rich.
That Charleston plant has a north south plant one that one side of the refinery the other side of derivative, Jason So out of the refinery, where we're making products that feed our payment business and also within our paper size business than some of our molten adhesives as well as some of our rubber business those businesses are.
Providing us the margins today that we need to sustain the business going forward, but as John mentioned, we have the flexibility to ramp up that debt.
That refinery to produce even more products as the market.
So demand so right now the market has been in a low state as many of you can see and have heard from Marion John's comments on our right, our rosin drag and specific business, but the flexibility that we'll have in Charleston will allow us to toggle as the market demand.
<unk> decrease.
Great.
<unk> has the capacity to convert to <unk>. If the demand is there eventually if you don't sell that.
While we are exiting greater but.
The other is a refinery that is not.
We did it and process it could be done by us or someone else, but we are exiting director.
So I think it's important got it and then I know.
At this time.
Well, John I think let me say this and then as it doesn't get at your question, let us know.
Sometimes people think of our plants is just clones of each other but in fact, they each have unique capabilities and that deridder.
Plant the legacy was printing inks.
Originally and then when printing inks as an industry began to die out a couple of decades ago. The pivot was made to oilfield and adhesives.
As markets have evolved over time those are the end markets that are.
Lower margin for us.
And sometimes high volume, but lower margin and so that's why that decision was made to exit that deridder site the Charleston site.
Does derivatives nation and ads as rich mentioned as we grow the higher bar higher value.
That's for new products, we do have the capability to expand and ramp up and then expand Charleston.
And as we mentioned when we were together.
For Investor Day, I mean, we have the ability today to double the volume output across it right.
Alright.
No.
We feel comfortable we have the volume we have the volume ability to as I said.
Capture the recovery in our.
Markets, but also grow the business.
If you're asking why this is rich again, John as you're asking why with regarded to Ritter and the markets that we play in when you think about the CTO and the fractionation associated there with an adhesive product inks product is more than 90% based on ryzen, which as CTO heavy so as we see the inflation on CTO it.
Drags down the profitability significantly on those markets for us.
Understood. Thanks, I'll jump back in queue.
The next question comes from John Mcnulty from BMO capital markets. John Your line is open. Please go ahead.
Yes. Good morning, Thanks for taking my question. So one Eric one thing I just wanted to clarify so the $65 million to $75 million of annual savings beginning in 2004 is that the run rate at the end of 'twenty four or is that is that what you expect in 'twenty four and then actually the run rate would presumably be.
Higher as you end the year like how should we be thinking about that.
We expect those savings to be realized in 2024 fully realized.
We're taking actions now we expect.
Some amount of the savings to begin here in the last couple of months of the year.
But it's pretty de Minimis.
In total with the actions we took earlier this year of about $25 million.
But then the 65 to 75.
John will be fully realized in 2024 and going forward.
Okay. So if the if.
If some of these <unk>.
Fixes don't happen until the end of the first half of 2004 is there the presumption that things could be.
Even bigger in terms of savings as you look to 'twenty five is that things kind of normalize or is that maybe being too too optimistic.
That is possible, we've we've laid out internally the timelines and the expectations to the best of our ability and feel comfortable with the $65 million to $75 million number if.
Market dynamics and other factors go our way could the savings be greater if thats possible, but not we're not willing to commit to that today.
None of this is tied to a got it fair and economic recovery.
What I would characterize as for fixed cost save available controllable costs that we are.
Committed to committed to and sort of permanently restructuring out of.
Okay, No that makes sense and then just taking kind of a step back and maybe at a higher level look at it so.
You spoke to I think it was on slide.
Slide 13 about how the repositioning basically takes out whatever call it $300 million of revenue out of performance chemicals. So if we use whether it's 'twenty two or 'twenty three as a base that basically says the revenue.
The kind of normalized business is about $800 million of solid revenue and Youre looking for now wants to kind of the dust settles on on the cost saves Youre looking for a 15% to 20%.
EBITDA margins. So is it fair to think that again when the dust settles you generated all of the.
Savings that youre expecting that the EBITDA run rate for this business is $120 million to $160 million I mean, I know that's a little overly simplistic, but is that is that the right way to think about it at this point going forward.
Well it depends on what timeframe.
John I mean look I think.
We're not.
We're not given 24 guidance ancillary unclear.
What youre right in the sense that the business will lose about $300 million. So it's going to come to about $800 million of revenue right. We.
We believe that we can get the operating businesses into the 15% to 20%.
Range is the assay business ramps up over the course of next year into 2025.
Think to be realistic, though and we're trying to make sure that everybody understands this that is excluding the impacts of the CTO.
Until that situation abates itself.
Hey.
So.
<unk>.
If you look at it as a consolidated segment, including the CTO sales or re sales if you will.
To take a while to get to those margins, but at the operating businesses can get to those margins.
And then as the CTO situations remember unwind itself.
Youll see the segment margin get back to those levels.
So I want to be careful sort of saying that we're just going to spring back.
Those types of numbers.
I think the other thing that gets lost and John and rich.
Correct me if I.
The nuance right here, but.
<unk>.
You can't look at the <unk> the director of revenue loss.
That we've said is roughly 300 million you can't take the average PC margin and apply it to that correct what rich was.
Was saying is that the products and the markets that we sell into.
The product from the renter, the adhesives certain of the oilfield products. The printing inks those are the lower margin businesses within that segment and those are the businesses will be exiting.
That's what's helping to drive that margin improvement as the dust settles.
I would even take it a little bit further John just for everybody's complete understanding of the situation.
The EBITDA that will be generated in 2023 in the performance chemicals segment comes almost exclusively from the Charleston plant.
So by exiting the derivative plants that were removed from revenue, but you are not removing profit.
Got it okay.
That's hugely helpful. Thanks for thanks for the color.
The next question comes from Daniel Rizzo from Jefferies. Your.
Your line is open. Please go ahead.
Hi, Thanks for taking my question and I just wanted to change it up a little bit I know, there's a lot of interest in the restructuring, but but just in your performance materials segment. You mentioned strong hybrids are doing can you remind us have you said how much activated carbon goes into a hybrid car versus a maybe a traditional.
Ice car and also do hybrid scrubbers.
Yes, Dan this is Ed.
They do use activated carbon canisters typically larger because you've got a <unk>.
Pressurized fuel tank.
So to capture those emissions during refueling you will have somewhere around a two liter canister plus a honeycomb attached to it as well.
So I think in the past you said on <unk>.
UV in.
In the U S.
Or just any color I think its like 16 to $20 per.
For auto.
If im wrong that I was wondering how that compares to a hybrid.
Yes, you've got a little more content on the hybrid because <unk> got a pressurized fuel tank.
Okay.
Just one clarification.
It is important Dan and thank you really good question because we did you just say.
Hey.
We expected that a hybrid vehicle might be a bit less profitable for us because of the amount of carbon.
Given how hybrid structural structures have evolved and as Ed mentioned.
<unk> pressurized tank, we've had to evolve our carbon.
To meet the needs of that different tank structure and so the value. We can get for that now is at least equivalent to what we were getting on just an ice vehicle previously leg of that clear our legacy ice yes correct.
No.
Okay. That's actually that's amazingly helpful. Thank you.
And with thermal plastics, you mentioned competitive pricing kind of like make.
Making a more difficult market.
Making sure are you guys lowering your prices to match that or just kind of giving it up and waiting for things to more normalize.
We've been holding in price, but I think we're beginning to.
We're seeing some price degradation, we've done and I don't think we're all that dissimilar from a lot of other.
Chemical we've been holding price pretty firm, but candidly and I think as.
We move forward in a cycle oil price will come down a little bit as volume start resuming that helps drive volume so.
Our focus really and I am very proud of what those guys have done over there.
It's really on the margin.
They have done a great job of getting that business back to.
Levels of profit are you talking about <unk> or you're talking about continuing to tomo road markings.
Yes.
Are you talking about other dark and Ryan markings or are you talking about thermoplastics in AP.
I was talking about thermal plus an apd, but I will take the answers.
Alright.
Listen I think they've done an incredible job over there working very very hard.
To get those margins back up.
And what I'm most encouraged by is that they continue to work they've used this period.
To really be aggressive in product development, and making sure that as the markets to sort of normalize that we'll get the drop through that you would expect.
Okay. Thank you very much.
The next question comes from Chris <unk> from Loop capital markets. Chris. Your line is open. Please go ahead.
Hey, good morning, a follow up on the on the PFS segment.
John I know, you've been saying hybrids for many years.
And now for a while the macro sentiment was enamored by EV. So you've probably had some feeling some validation that the sentiment has shifted.
The world kind of anti <unk>.
Certainly less and I'm just running our business currently with it that we're just running the business.
I don't know.
So the question on the follow up there is a lot of different hybrid <unk>.
Lexicon out their mild hybrid plug in hybrid hybrids with range extender.
Our content per vehicle.
Is that.
So you don't see a lot of different acronyms out there.
Your.
Your content per vehicle lift in hybrid can you just.
Explained where that's relevant and also.
The data I looked at it actually well everybody talked about EV penetration in China.
It looks like about a third of the.
Quote unquote bvs in China, our hybrid so curious if you're content lift in hybrids is also relevant to China.
Yes look I'll start off and then Ed you churn because.
Yes, we do feel a little validated but.
The truth of the matter is we're not sometimes and believe it or not there are some organizations out there that includes start stop technology is a variant of a hybrid right because.
When you stop it or stopping lot and then you turn the engine turns off it runs on your battery and then it when.
When you take your foot off the brake it kicks back on right.
Basically if it involves an internal combustion engine right in some way shape or form it has our technology on it right and the traditional hybrid that most people think of which is a you know.
It has an internal combustion engine and then a battery motor or a larger battery pack right as Ghana and vault, where its switching between the two right.
It's going to require our technology and as we said earlier.
We're relatively agnostic between if it's only an ice or if it's got a nice on an electric motor next to it.
So and I don't know if you want to add anything to that from an overall look at the market in China. We've got data across three years that you show basically.
What I call Classic S curve right. So you've got battery electric vehicles going up and then you've got this plateau of.
<unk>.
Battery electric vehicles, but underneath of that you have a growing.
A rapidly growing plug in hybrid.
Hybrid platforms in China.
And that's getting upwards of 25% to 30% and if you think of who is the primary manufacturer of those it's BYD and so we do kind of.
Like like what's happening in China, but it's also happening elsewhere in Europe, It's in North America, and Youre seeing a.
A lot of people walking away from full battery electric vehicles for what is a more simpler program with plug in hybrids and mild.
Mild hybrid I also think it's a question of affordability.
The.
Electric vehicles and electrification is here to stay we fully built.
Believe that right. It's just when you think about our consumer.
And you can kind of look at it by geography right.
It's been interesting even in the European market to see the number of Chinese vehicles that are finding their way into the European Western European markets right.
And it's because of affordability.
Right and these vehicles are so expensive relative to what it particularly with interest rates, where they are relative to what a consumer can pay a hybrid it actually is a great solution right you can drive on electric power to and from your job eight to 10 miles each way, but when you want to take the road trip.
You can flip over to gas engine so.
Yes, we're very encouraged by all this.
But it bodes very well for our business over the long term.
Right.
Alright, just to.
The Devil's advocate on that that cost argument in.
Yeah.
Some would say I totally get I'm watching closely.
EV is trying to get to parity with Ice's, but one might also say, though that true hybrid has dual drivetrains and that sort of expensive and complex overtime. So as the variant of hybrid that.
Where you are youre not youre not really truly on two drivetrain does that require your.
You mentioned abatement.
You have to have an internal combustion engine.
Chris that's the best way I can think about it right. If you have an internal combustion engine in there in any way shape or form youre going to have our technology on there right.
Listen I appreciate and we obviously look very carefully at the cost curves.
And the argument that eventually evs are going to come down et cetera, et cetera, but I also think hybrids will continue to come down.
Because the electric piece of the hybrid will come down right and what they're up against is the sunk cost it's already been all the development and all the infrastructure of supporting ice right. So I would not underestimate a hybrid <unk> ability to bring its cost down as the EV.
This is going to be competitive and it's going to come down to consumer sentiment.
Fair enough.
Just one real quick one on the transformation on PC.
And the actions you are taking some sorry, so as I understand it going forward.
Does does cross it now become a swing plant with the ability to do <unk> and GTO or is it still dedicate process crossover will remain as an assay facility.
Right.
I mean listen.
<unk> got it theoretically we could convert it back to a tall oil rosin CTO running facility, but I do not see that.
Right now the plan is to run it on assay.
That's right. John This is a rich Chris that that that cross that we took the April 1st as you know we transition that that transition is complete I would think that before we would transition cross it back to CTO that we would consider doing something different at Charleston, or somewhere else.
Got it thank you.
And the ability to listen I know, it's something you need to understand and Mary made this point earlier, which I think is important.
People think of these plants are sort of these monolithic.
General purpose very similarly structured each one of these plants was optimized for different capabilities right and.
We're trying to optimize the network it would be if we were to decide to.
Expand our CTO purchasing and broaden that there are a number of options available to us at Charleston.
And those are separate and away from the refining piece or the derivative piece the refining of separate from the derivative. So we are in a plant optimization.
It's going to be driven by focusing on the higher margin products and we will meet the demands of the higher margin products higher growth opportunities.
And we have the footprint to make that happen.
Got it and the pathway there is rationalizing some tour product, but also some.
Topher based product that are below that's right because average TOBA has value Chris I mean, it has a lot of value it's problem today as its value.
You have to look at crude tall oil versus the value of telfer and ryzen right and.
And right now the rosin is despite really elevated TOEFL prices the rosin is very.
Very very low priced frankly this is inhibiting its use in taupe is used in the biofuel market, because it's making it an affordable relative to what other options. They have like used cooking oil.
The beauty of <unk> is it does not generate rosin, but this doesn't mean a wholesale exit however, I wanted to be upfront.
If these market conditions persist.
And.
It is uneconomic to operate crude tall oil a refinery of crude tall oil not necessarily the products, but our refining of crude tall oil then we will reassess our plant position.
Yes.
Got it thank you.
We have a follow up from Jon <unk> from CJS Securities Jones. Your line is open. Please go ahead.
Okay.
Hi, Yes, just a quick one.
On next year and I know, it's early but would you expect EBITDA to be higher or lower just directionally given how you frame the contribution from Charles.
Not going to get in the clinic.
Listen I know that's noncore.
Right I mean look I'm, not going to get into 2020 four right.
I will say is as you know we have a great performance materials business that is continuing to grow we have an <unk> business that is continuing to grow and while it's having some macro issues and to the extent the macro economy improves its got a great bright future right. We've laid out for you the roadmap the ROE path for performance.
Chemicals I do think what's critical for you to understand is and you've touched on it.
As.
We believe the operating assets of the performance chemical or the core business of the performance chemicals segment, we have made more attractive right.
And as the economy recovers that business will will do very well, we will have to manage through the CTO resales for some period of time.
Know that Theres, a two year sort of term on the unwind from Deridder.
But theres a lot of dynamics at work in there.
And that is in our view sort of separate in a way so.
That's where we want you to that's what we want you to focus on.
Okay, Great do you know what the <unk> impact is going to be more frontloaded or backward or just impossible to predict at this point.
It's hard to say, but I will say that we are going to be knowing what we've done.
We are going to be pretty aggressive sellers of CTO through the first half of 2024.
Right.
Okay, great. Thank you guys.
We have no further questions, so I'll hand back to.
John.
Some concluding remarks.
Thanks, Adam.
That concludes our call. Thank you for 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.
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Yes.
Yes.