Q1 2024 Ingevity Corporation Earnings Call

May 2, 2024

Okay.

Got it.

Okay.

Stay holding announcement could be in jeopardy, first quarter 'twenty 'twenty School earnings webcast, who will begin in approximately one minute Todd. Thank you.

Operator: This is a holding announcement for the Ingevity First Quarter 2024 earnings webcast. The call will begin in approximately one minute's time. Thank you. Good morning or good afternoon, all.

Operator: [music].

Operator: Okay.

Adam: Good morning, Good afternoon, welcome to the <unk> chip to your first quarter 2020 full earnings webcast. My name is Adam and I'll be your operator for today.

Operator: Welcome to the Ingevity first quarter 2024 earnings webcast. My name is Adam, and I'll be your operator for today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing the star followed by one on your telephone keypad.

Operator: I'd like to ask a question during the Q&A portion of today's call you may do so progressing star followed by one on your telephone keypad now.

Operator: I will now hand the call to John Nypaver to begin. So John, please go ahead when you are ready. Thank you, Adam.

Adam: On the call, but as it begins to jump. Please go ahead when you're ready.

John E. Nypaver: Thank you Adam good morning, and welcome to <unk> first quarter 2024 earnings call.

John E. Nypaver: Good morning, and welcome to Ingevity's first quarter 2024 earnings call. Earlier this morning, we posted a presentation on our investor site that you can use to follow today's discussion. It can be found on ir.ingevity.com under events and presentations.

John E. Nypaver: 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 in jeopardy, dot com under events and presentations.

Operator: Also, throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute, 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 most recent 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 those projections, as further described in our earnings release.

John E. Nypaver: Also throughout this call we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable GAAP measures.

Operator: <unk> of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our most recent Form 10-K.

Operator: 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 those projections as further described in our earnings release.

Operator: Our agenda is on slide three our speakers today are John Fortson, our president and CEO and Mary Dean Hall, our CFO.

Operator: Our agenda is on slide 3. Our speakers today are John Fortson, our President and CEO, and Mary Dean Hall, our CFO. Our business leads, Ed Woodcock, President of Performance Materials, Rich White, President of Performance Chemicals, and Steve Hulme, President of Advanced Polymer Technologies, are available for questions and comments. John will start us off with some highlights for the quarter.

Operator: Our business leads Ed Woodcock President of performance materials, Rich White President of performance chemicals, and Steve Hume President of advanced polymer technologies are available for questions and comments.

Speaker Change: John will start us off with some highlights for the quarter Mary will follow with a review of our consolidated financial financial performance in the business segment results for the first quarter.

Operator: John will then provide closing comments and discuss 2024 guidance with that over to you John.

Operator: Mary will follow with a review of our consolidated financial performance and the business segment results for the first quarter. John will then provide closing comments and discuss 2024 guidance. With that, I turn it over to you, John.

John C. Fortson: Thanks, John, and good morning, everyone. Turning to slide four, we had a good, strong start to 2024. Revenue and EBITDA were both up strongly, and the segment generated margins close to 54%. Exceeding Expectations and Executing Well.

Operator: Thanks, John and good morning, everyone turning to slide four we had a good strong start to 2024.

John C. Fortson: Florence materials revenue and EBITDA were both up strongly in the segment generated margins close to 54%.

John C. Fortson: <unk> expectations and executing well.

John C. Fortson: This performance is the result of a lot of hard work by the PMT. Volumes were up from a year ago, and the business benefited from higher pricing, improved throughput, and lower input costs. APT performed relatively well this quarter. While revenue and EBITDA were down versus a year ago, they are being measured against a tough comparable period, because first quarter 2023 was the last quarter before the stocking began.

John C. Fortson: This performance is a result of a lot of hard work by the PMT volumes were up from a year ago and the business benefited from higher pricing improved throughput and lower input costs.

John C. Fortson: <unk> performed relatively well this quarter, while revenue and EBITDA were down versus a year ago. They are being measured against the tough comparable period first quarter 2023 was the last quarter before Destocking began.

John C. Fortson: However, positively, they have now posted two quarters of sequential volume improvements, and this is hopefully a good sign of a gradual recovery in their end market. Importantly, despite these lower volumes, Performance Chemicals is tracking in line with our expectations for our repositioning strategy. The first quarter is a seasonally light quarter before the paving season really kicks in. It is also being negatively impacted by the cost we are paying for crude oil. Our savings targets remain on track.

John C. Fortson: Positively, though they have now posted two quarters of sequential volume improvements and this is hopefully a good sign of a gradual recovery in their end markets.

John C. Fortson: Importantly, despite these lower volumes they maintained strong margins in the quarter.

John C. Fortson: Performance chemicals is tracking in line with our expectations for our repositioning strategy.

John C. Fortson: First quarter is a seasonally light quarter before the paving season really kicks in and it is also being negatively impacted by the cost we are paying for crude tall oil.

John C. Fortson: Our savings targets remain on track to transition to reduce our reliance on CTO is moving forward as we completed the shutdown of our deridder side during the quarter and we are increasingly using our <unk> based products coming out of our cross the facility in existing end markets like pavement and lubricants.

John C. Fortson: The transition to reduce our reliance on CTO is moving forward as we complete the shutdown of our Derrida site during the quarter, and we are increasingly using oleo-based products coming out of our CrossFit facility in existing end markets like pavement and lubricant. In a few moments, I'll review our 2024 guidance and provide some perspective on expectations for the rest of the year. But before that, let me turn it over to Mary for more details on the quarter's results. Thanks, John, and good morning, all. Please turn to slide 5.

John C. Fortson: In a few moments I'll review, our 2020 for guidance and provide some perspective on expectations for rest of the year, but before that let me turn it over to Mary for more details on the quarter's results.

Mary: Thanks, John and good morning, all please turn to slide five.

Mary Dean Hall: First quarter sales of $340.1 million were down 13% due primarily to our repositioning actions and performance chemicals, which included a plant closure and our exit from certain low-margin end markets. Also contributing to lower sales were continued weakness in China and certain industrial end markets that negatively impacted sales in our APT segment and industrial specialties product line, more than offsetting a 3% increase in performance materials sales. For the quarter, we had $64.8 million of restructuring charges and $26.5 million of CTO resale losses related to the performance chemicals repositioning. These charges led to a GAAP net loss of $56 million.

Mary: First quarter sales of $341 million were down 13% due primarily to our repositioning actions in performance chemicals, which included a plant closure and our exit from certain low margin end markets.

Mary Dean Hall: Also contributing to lower sales, where continued weakness in China and certain industrial end markets that negatively impacted sales in our <unk> segment and industrial specialties product line more than offsetting a 3% increase in performance materials sales.

Mary Dean Hall: For the quarter, we had $64 $8 million of restructuring charges and $26 $5 million of CTO resale losses related to the performance chemicals repositioning.

Mary Dean Hall: These charges led to a GAAP net loss of $56 million, we've excluded the impacts of the restructuring charges and the CTO resale losses in our non-GAAP disclosure and our discussion for the remainder of this presentation.

Mary Dean Hall: We've excluded the impacts of the restructuring charges and the CTO resale losses in our non-GAAP disclosure and our discussion for the remainder of this presentation. A reconciliation of our non-GAAP measures to GAAP is in the appendix to this deck and also in our earnings release and Form 10-Q, which will be filed later this evening. Our adjusted gross profit of about $120 million declined 19%, and our adjusted gross margin was down 260 basis points.

Mary Dean Hall: A reconciliation of our non-GAAP measures to GAAP in the appendix to this deck and also in our earnings release and Form 10-Q, which will be filed later this evening.

Mary Dean Hall: Our adjusted gross profit of about $120 million declined 19% and our adjusted gross margin was down 260 basis points.

Mary Dean Hall: 35.2%, primarily due to the combination of lower sales in performance chemicals and APT and CTO spend that was significantly higher year over year on lower purchase volumes. Adjusted SG&A improved 6% year over year. For the quarter, we realized a total of approximately $20 million of savings related to the performance chemicals repositioning and the other corporate actions taken last year. Of the $20 million in savings, about $5 million is reflected in SG&A and about $15 million in COGS.

Mary Dean Hall: To 35, 2%.

Mary Dean Hall: Due primarily to the combination of lower sales in performance chemicals, and a P T and CTO spend that was significantly higher year over year on lower purchase volumes.

Mary Dean Hall: Adjusted SG&A improved 6% year over year.

Mary Dean Hall: For the quarter, we realized a total of approximately $20 million of savings related to the performance chemicals repositioning and the other corporate actions taken last year.

Mary Dean Hall: Of the $20 million in savings about $5 million is reflected in SG&A and about $15 million in Cogs.

Mary Dean Hall: We are on track to realize our target of $65 to $75 million in annual savings. Our diluted adjusted EPS and adjusted EBITDA declined on lower earnings, but we still delivered a strong adjusted EBITDA margin of 22.6%, reflecting the underlying strength of the company's core portfolio as we complete the repositioning of performance chemicals and exit certain lower margin products and end markets. We estimate our 2024 tax rate will be between 23 and 25 percent, slightly higher than last year. Turning to slide 6.

Mary Dean Hall: We are on track to realize our target of $65 million to $75 million in annual savings.

Mary Dean Hall: Alright diluted adjusted EPS and adjusted EBITDA declined on lower earnings, but we still delivered a strong adjusted EBITDA margin of 22, 6%.

Mary Dean Hall: Selecting the underlying strength of the company's core portfolio as we complete the repositioning of performance chemicals and exit certain lower margin products and end markets.

Mary Dean Hall: We estimate our 2024 tax rate will be between 23, and 25% slightly higher than last year.

Mary Dean Hall: Turning to slide six.

Mary Dean Hall: The top left chart shows the key impact of the performance chemicals repositioning. As we exit the low margin and markets in PC, the performance materials segment becomes a larger percentage of total company sales, increasing to 43% of sales this quarter. As we discussed last quarter, our actions are improving the company's overall portfolio mix, making it more balanced, and improving the margin profile. Our first quarter free cash flow was negative $28.7 million compared to negative $20 million in Q1 last year.

Mary Dean Hall: Top left chart shows the key impact of the performance chemicals repositioning.

Mary Dean Hall: As we exit the low margin end markets MPC. The performance materials segment becomes a larger percentage of total company sales.

Mary Dean Hall: Increasing to 43% of sales this quarter as.

Mary Dean Hall: As we discussed last quarter, our actions are improving the company's overall portfolio mix, making it more balanced and improving the margin profile.

Mary Dean Hall: Our first quarter free cash flow was negative $28 $7 million compared to negative $20 million in Q1 last year.

Mary Dean Hall: Remember that negative free cash flow is more the norm for the first quarter as we're building inventory for the summer paving season. But this quarter's number also includes $19.8 million of cash losses on CTO resales and $7.3 million of cash spend associated with performance chemicals repositioning. While our net debt was lower year over year, our leverage ratio increased due to lower EBITDA.

Mary Dean Hall: Remember that negative free cash flow is more than norm for the first quarter as were building inventory for the summer paving season.

Mary Dean Hall: But this quarter's and this quarter's number also includes $19 $8 million of cash losses on CTO resales.

Mary Dean Hall: And $7 3 million of cash spend associated with performance chemicals repositioning.

Mary Dean Hall: While our net debt was lower year over year, our leverage ratio increased due to lower EBITDA, we anticipate leverage will peak in the second quarter before improving to around three times by year end, reducing our leverage is our number one priority for <unk>.

Mary Dean Hall: We anticipate leverage will peak in the second quarter before improving to around three times by year-end. Reducing our leverage is our number one priority for capital allocation this year. We are in compliance with all of our bank covenants and expect to remain so.

Mary Dean Hall: Capital allocation. This year, we are in compliance with all of our bank covenants and expect to remain so.

Unknown Executive: Turning to slide 7, you'll find results for performance materials. Sales were up 3% to $145.1 million, and EBITDA was up an impressive 12% to $78 million, with an EBITDA margin of almost 54%. Truly, the business was firing on all cylinders for the quarter. There were many drivers of this performance. Annual price increases went into effect, our activated carbon volumes were up in all regions, we had no scheduled nor unplanned downtime, and our talented engineers completed a series of debottlenecking projects that improved plant throughput. Additionally, input costs, such as energy and certain key raw materials, were lower year over year.

Mary Dean Hall: Turning to slide seven you'll find results for performance materials.

Unknown Executive: Sales were up 3%.

Unknown Executive: Two $1 $45 $1 million and EBITDA was up an impressive 12% to $78 million with an EBITDA margin of almost 54% truly the business was firing on all cylinders for the quarter.

Unknown Executive: There were many drivers of this performance.

Unknown Executive: Annual price increases went into effect our activated carbon volumes were up in all regions. We had no scheduled nor unplanned downtime and our talented engineers completed a series of Debottlenecking projects and improved plant throughput.

Unknown Executive: Also input costs, such as energy and certain key raw materials were lower year over year.

Unknown Executive: For the remainder of the year, the segment has scheduled downtime in at least one facility in each quarter. Thus, the benefit we saw this quarter from high utilization rates is expected to be lower going forward, and energy and other input costs can fluctuate significantly, as you know. On the positive side, auto production estimates are calling for higher production this year versus last year, despite softer than expected production numbers in Q1. This is a long-winded way of saying don't expect every quarter to post 54% EBITDA margins. As we always caution, quarters can be choppy. For example, last year, quarterly margins ranged from 44% to 51%.

Speaker Change: For the remainder of the year that segment has scheduled downtime and at least one facility in each quarter. So the benefit we saw this quarter from high utilization rates is expected to be lower going forward and energy and other input costs can fluctuate significantly as you know on the <unk>.

Unknown Executive: What sort of thought.

Unknown Executive: Auto production estimates are calling for higher production this year versus last year, despite softer than expected production numbers in Q1.

Unknown Executive: This is a long winded way of saying don't expect every quarter to pull up post 54% EBITDA margins as we always caution quarters can be choppy for example, last year quarterly margins ranged from 44% to 51%.

Unknown Executive: We continue to expect mid to high 40% full year margins for this segment. Turning to slide 8, revenue in APT was $48 million, down 27% due to primarily lower volumes, which we attribute to the continued global demand weakness in many of the segments and markets. As John mentioned in his earlier comments, APT had a strong Q1 last year, but end market demand weakness began in the second quarter last year. So the Q1 year over year comp is challenging. Demand in China, in particular, continues to be weak, negatively impacting one of our biggest end markets in China, which is paint protective film for autos.

Unknown Executive: We continue to expect mid to high 40% full year margins for this segment.

Unknown Executive: Turning to slide eight revenue in <unk> was $48 million.

Unknown Executive: Down, 27% due primarily to lower volumes, which we attribute to the continued global demand weakness in many of the segments and markets as John mentioned in his earlier comments a P. T at a strong Q1 last year.

Unknown Executive: With end market demand weakness beginning in second quarter last year. So the Q1 year over year comp is challenging.

Unknown Executive: China demand in particular continues to be weak negatively impacting one of our biggest end markets in China, which is paint protective film for autos.

Unknown Executive: While Chinese auto production is up, the film is an aftermarket purchase, and due to the economic slowdown, Chinese customers appear to have paused discretionary purchases on items like protective film for their cars. While China remains weak, we are encouraged to see two Quarters of Sequential Volume Improvement in APT Driven by Europe and North America. However, forward visibility is limited as customers continue to be cautious in their outlooks for the year.

Unknown Executive: While China auto production is up.

Unknown Executive: The film is an aftermarket purchase and due to the economic slowdown Chinese customers appear to have paused discretionary purchases on items like protective film for their cars.

Unknown Executive: While China remains weak we are encouraged to see too.

Unknown Executive: Quarters of sequential volume improvement in a P T driven by Europe, and North America. However forward visibility is limited as customers continue to be cautious in their outlooks for the year.

Unknown Executive: Based on discussions with customers and peers, we believe the recovery is likely to be more of a second half event. Despite lower volumes negatively impacting plant throughput, EBITDA margins remained a healthy 20 percent, supported by lower energy, logistics, and raw material costs, as well as improved SG&A as a result of cost-saving actions. Should the industrial recovery continue to be delayed, we are confident in the steps Steve and his team have taken to improve business operations. Please turn to slide nine for performance chemicals. Sales of $147 million were down nearly $40 million as we continued to execute the repositioning of performance chemicals and exited lower-margin products and markets.

Unknown Executive: Based on discussions with customers and peers. We believe the recovery is likely to be more of a second half event.

Unknown Executive: Despite lower volumes negatively impacting plant throughput EBITDA margins remained a healthy 20% supported by lower energy logistics and raw material costs as well as improved SG&A as a result of cost saving actions.

Unknown Executive: The industrial recovery continued to be delayed we are confident in the steps, Steve and his team have taken to improve business operations.

Unknown Executive: Please turn to slide nine for performance chemicals sales.

Unknown Executive: Sales of $147 million were down nearly $40 million as we continue to execute the repositioning of performance chemicals and exited lower margin products and markets.

Unknown Executive: We also experienced some softness compared to last year in certain industrial markets, such as lubricants and rubber. These end markets, along with ag chemicals and certain oil field products, are the primary and markets in which we continue to participate, and they represented roughly two-thirds of the $101.3 million of industrial specialty sales in the quarter. We believe this is a good proxy for quarterly sales for industrial specialties going forward in 2024. Remaining roughly one-third of industrial specialty sales this quarter were finished goods inventory into the end markets we are exiting.

Unknown Executive: We also experienced some softness compared to last year and certain industrial markets.

Unknown Executive: Chaz lubricants and rubber.

Unknown Executive: These end markets, along with AG chemicals, and certain oilfield products are the primary end markets in which we continue to participate.

Unknown Executive: And they represented roughly two thirds of the $101 $3 million of industrial specialty sales in the quarter. We believe this is a good proxy for quarterly sales for industrial specialties going forward in 2024.

Unknown Executive: The remaining roughly one third of industrial specialty sales. This quarter were our finished goods inventory into the end markets we are exiting.

Unknown Executive: Road technology sales in Q1 were flat year over year, with Q1 being a seasonally low quarter. Wet weather delayed some projects that had been slated for the first quarter in Europe, but the strength of the North American market helped minimize the impact of those delays. We believe that this summer's paving season will be strong for both pavement and road marking. EBITDA for this segment was negative $10.6 million.

Unknown Executive: Road technology sales in Q1 were flat year over year with Q1 being a seasonally low quarter.

Unknown Executive: Weather delayed some projects that had been slated for the first quarter in Europe, but.

Unknown Executive: But the strength of the North American market helped minimize the impact of those delays, we believe that summer paving season will be strong for both payment and road markings.

Unknown Executive: EBITDA for this segment was negative $10 $6 million.

Unknown Executive: Due to a significant decline in gross margin, driven by higher CTO spend, which nearly doubled from last year, and unfavorable plant throughput due to continued weakness in industrial end markets, which is negatively impacting utilization rates at both the Charleston and CrossFit manufacturing sites. We expect second quarter CTO spend to be similar to Q1 and expect it will trend lower in the second half of the year. Based on the prices we see in our CTO contracts and on the spot market, we are adjusting our 2024 estimate of the losses on CTO resales from between $30 to $80 million to between $50 to $80 million. As a reminder, these losses are not included in our adjusted EBITDA but are reflected in free cash flow.

Unknown Executive: Due to a significant decline in gross margin driven by higher CTO spend which nearly doubled from last year.

Unknown Executive: And.

Unknown Executive: Favorable plant throughput.

Unknown Executive: Due to continued weakness in industrial end markets.

Unknown Executive: Which is negatively impacting utilization rates at both the Charleston, and cross at manufacturing sites.

Unknown Executive: We expect second quarter CTO spend to be similar to Q1 and expect it will trend lower in the second half of the year.

Unknown Executive: Based on the prices, we see in our CTO contracts and on the spot market. We are adjusting our 2024 estimate of the losses on CTO resales.

Unknown Executive: From between $30 million to $80 million to between $50 million to $80 million.

Unknown Executive: As a reminder, these losses are not included in our adjusted EBITDA, but are reflected in free cash flow. In addition, we still expect to spend.

Unknown Executive: In addition, we still expect to spend approximately $50 to $60 million this year in cash costs related to the repositioning, with about $7 million spent in Q1. As John mentioned, our repositioning of performance chemicals is on track. We have ceased production at our de Ritter site.

Unknown Executive: <unk> $50 million to $60 million this year in.

Unknown Executive: In cash costs related to the repositioning with about $7 million spent in Q1.

Unknown Executive: As Sean mentioned, our repositioning of performance chemicals is on track we have ceased production at our to Richard's site. We are realizing the cost savings from the actions. We took last year and we have improved the profitability profile of the company moving forward and now I will turn the call back over to John for an update on <unk>.

John C. Fortson: We are realizing cost savings from the actions we took last year, and we have improved the profitability profile of the company moving forward. Now, Mary, I'll turn the call back over to John for an update on guidance and closing comments. Thanks. Mary.

John: <unk> and closing comments.

John: Thanks, Mary Please turn to slide 10.

John C. Fortson: We reiterate our full-year guidance of between $1.4 billion and $1.55 billion dollars and adjusted EBITDA between $365 and $390 million dollars. Our first quarter results are encouraging. We expect the performance materials segment and the road technologies product line and our performance chemicals segment will both have very strong years. All the production that includes our material will remain robust as hybrid production increases. The road paving season is off to a good start, and our order book is strong.

John: We reiterate our full year guidance of between $1 4 billion and $1 five $5 billion and adjusted EBITDA between 365 and $390 million.

John C. Fortson: Our first quarter results are encouraging.

John C. Fortson: We expect our performance materials segment and the road technologies product line in our performance chemicals segment will both a very strong years.

John C. Fortson: Auto production that includes our material will remain robust as hybrid production increases the road paving season is off to a good start and our order book is strong.

John C. Fortson: These high margin, high growth businesses will anchor our performance this year and are at the center of our strategy going forward. Additionally, industrial recovery will primarily benefit our advanced polymer technology segment and sales into industrial specialties markets and performance chemicals. I agree with many of our chemical peers that the second half of the year should be better than the first half and that sequential signs of improvement are encouraging. However, many of our peers have yet to see sufficient enough demand recovery to call for a strong rebound, and we are in this camp as well. It is still early in the year, and it's an election year. We will see.

John C. Fortson: These high margin high growth businesses will anchor our performance this year and are at the center of our strategy going forward.

John C. Fortson: In industrial recovery will primarily benefit our advanced polymer technologies segment and sales into industrial specialties markets and performance chemicals.

John C. Fortson: I agree I agree with many of our chemical peers at the second half of the year should be better than the first half and that sequential signs of improvement are encouraging. However, many of our peers have yet to see significant enough demand recovery to call for a strong rebound and we are in this camp as well.

John C. Fortson: Early in the year and it's an election year, we will see.

John C. Fortson: We are cautiously optimistic about demand patterns and believe APT has upside opportunities to our outlook if we can continue to see sequential demand improvement. However, sales into the industrial specialties markets will remain challenged due to the high price of our CTO-derived products versus substitutes available in the market. By closing Derrida, we have exited many of our low-margin markets, but we do have some residual exposure. We are making significant progress in sales of our oleo-based materials, but the broader market's weakness is not helping us accelerate those efforts.

John C. Fortson: We are cautiously optimistic about demand patterns and believe a P. T has upside opportunities to our outlook. If we could continue to see sequential demand improvement.

John C. Fortson: Sales into the industrial specialties markets will remain challenged through the high pricing, our CTO derived products versus substitutes available in the market.

John C. Fortson: By closing Deruiter, we have exited many of our low margin markets, but we do have some residual exposure.

John C. Fortson: We are making significant progress in sales of our oil based materials, but the broader market's weakness is not helping us accelerate those efforts.

John C. Fortson: As we said last quarter, we will be very disciplined in cash management and are reducing capital expenditures and other capital allocation strategies while we focus on deleveraging to our more normalized historical levels by year end. As we move through the remainder of the year, we are focused on completing our business transformation and positioning the company for more stable and sustainable profitability. We will continue to adjust our footprint and cost base, if necessary, to respond to any adverse changes from our base case.

John C. Fortson: As we said last quarter, we will be very disciplined in cash management and are reducing capital expenditures and other capital allocation strategies, while we focus on deleveraging to a more normalized historical levels by year end.

John C. Fortson: As you move through the remainder of the year, we are focused on completing our business transformation and positioning the company for more stable and sustainable profitability. We will continue to adjust our footprint and cost base if necessary to respond to any adverse changes from our base case.

John C. Fortson: As I close, there are a lot of reasons to be excited about Ingevity in 2024 and beyond. As a management team, we are committed to delivering on the strategy we have laid out, especially as it pertains to performance chemicals repositioning. Our results in the first quarter show how we are tracking to those goals. We have also recently completed a comprehensive review of our APT business in the UK. We're excited about the opportunities that this business has. Bioplastics will continue to play a bigger role in packaging, including fibers, and we are participating in that growth.

John C. Fortson: As I close there are a lot of reasons to be excited about in Germany in 2024 and beyond.

John C. Fortson: As a management team we are committed to delivering on the strategy, we have laid out, especially as it pertains to performance chemicals repositioning.

John C. Fortson: Our results in the first quarter show, how we are tracking to those goals.

John C. Fortson: We also recently completed a comprehensive review of our APG business in the U K. We're excited about the opportunities that business has bioplastics will continue to play a bigger role in packaging and clothing fibers and we are participating in that growth.

Operator: Row Technologies is expected to continue its expansion outside of North America while building on its market-leading presence in the U.S., and Performance Materials will continue to be the market leader in gasoline-vapor emissions controls, reaping the benefits of the popularity of hybrids and consistently delivering strong margins and growth for us. With that, we'll turn it over to you for questions. As a reminder, if you would like to ask a question today, please press star followed by 1 on your telephone keypad now to enter the queue.

John C. Fortson: <unk> technologies is expected to continue its expansion outside of North America, while building on its marketing leading market leading presence in the U S and performance materials.

Operator: Materials will continue to be the market leader in gasoline vapor emissions controls reaping the benefits of the popularity of hybrids and consistently delivering strong margins and growth for us with that I will turn it over for questions.

Operator: As a reminder, if you would like to ask a question today. Please press star followed by one on your telephone keypad now.

Operator: When preparing to ask your question, please ensure you are unmuted locally. Now, our first question today comes from Vincent Anderson on behalf of Steve Hulme. Vincent, your line is open, please go ahead. Thanks. Good morning, everyone.

Operator: And your task question, please ensure you're on mute locally.

Operator: Our first question today comes from Vincent Anderson from Stifel. Vincent Your line is open. Please go ahead.

Vincent Alwardt Anderson: Thanks, Good morning Vincent.

Unknown Executive: So, good morning. Is it fair to infer that, you know, from the much smaller difference between your book losses on CTO resale versus your cash losses on CTO resale, your costs are converging towards that resale price? Uh, not exactly yet, but, as we mentioned in the call, I mean, we do expect to see our situation improve in the back half of the year. I mean, our estimated costs for Q2 are down slightly from where we were in Q1, but we do expect that. Yeah, we'll see similar results in Q2, but we'll see, you know, more acceleration or more of that convergence in the back half of the year.

Vincent Alwardt Anderson: Good morning so.

Unknown Executive: Is it is it fair to infer that from the much smaller difference between your book losses on CTO resale versus your cash losses on CTO refill that your costs are converging towards that resale price.

Unknown Executive: So not exactly yet but.

Unknown Executive: As we mentioned in the call I mean, we do expect to see our situation to improve in the back half of the year I mean, our estimated costs for Q2 are down slightly from where we were in Q1, but we do expect that.

Unknown Executive: Similar yeah, we will see similar in Q2, but we will see more acceleration or is that more of that convergence in the back half of the year.

Unknown Executive: Sure.

Unknown Executive: Sure, and I mean, I understand that a lot of that is contingent on volume actually pulling that cost through the P&L, but, you know, I assume that that's between the lines. And listen, as I mentioned in my closing remarks, I mean, we will continue to assess our options with regard to CTO and how that works, right? I mean, we are, as you know, pushing pretty hard on oleo-based chemistries

Unknown Executive: I understand that a lot of that is contingent on volume actually pulling that costs through the P&L, but.

Unknown Executive: I assume that that's right.

Unknown Executive: And as I mentioned in my closing remarks, I mean, we will continue to assess our options.

Unknown Executive: With regards to CTO and how that works right I mean, we.

Unknown Executive: As you know, Oregon are pushing pretty hard on oleo based chemistries, there's a reasonable likelihood that that should be 10% of revenue for that business next year or this year sorry.

Unknown Executive: There's a reasonable likelihood that, you know, that should be 10% of revenue for that business next year or this year, sorry. We're continuing to look at, you know, are there other ways for us to continue to service the markets that we're in with a different operational footprint. So all those things are on the table.

Unknown Executive: We're continuing to look at are there other ways for us to.

Unknown Executive: Continued of service to the markets that we're in with a different operational footprint. So all those things are on the table.

Speaker Change: Okay, but I do need to get back to your question I do think that crude.

Unknown Executive: Okay, but I do think that Crute oil prices and the pricing that we pay vis-a-vis what is, You know, sort of the secondary market or what have you will continue to improve over the course of the year, particularly in the back half. Sure, okay, fair enough. And then, just quickly, could you give us maybe an update or details that we didn't get into before on that paving agreement in Brazil?

Unknown Executive: Crude tall oil is the pricing that we pay this V. What is.

Unknown Executive: You know sort of the secondary market are at or what have you. We'll continue to prove improve over the course of the year, particularly in the back half.

Unknown Executive: Sure Okay fair enough.

Unknown Executive: Helpful.

Unknown Executive: And then just quickly could you give us maybe an update or details that we didn't get into before on that paving agreement in Brazil.

Unknown Executive: Like, is this that you've been spec'd in with a customer, and they'll market it, but sales still depend on adoption? You are digging around, aren't you there? Well, I mean, you turn that over to you. Hey, Vincent, this is Rich White.

Unknown Executive: You've been specced in with a customer and all marketing sales still depend on adoption.

Richard White: Nurture their winter.

Richard White: Well I mean, I'll turn it over to you.

Richard White: Hey, Vincent this is a rich white, yes, we are progressing well with this customer that you are you have uncovered in Brazil. They have transitioned one of their one of their sites totally over to our technology and we're happy with the progression that is being seen associated there with I mean, we've got obviously there.

Richard White: Yes, we are progressing well with this customer that you have uncovered in Brazil. They have transitioned one of their sites totally over to our technology. And we're happy with the progression that is being seen associated there with. I mean, obviously, there's competitive information, but what I will say is this is a very large opportunity with a very large company down there. It's very encouraging that they're looking at our technology predominantly because it brings a lot of, you know, not only performance attributes but also production advantages because you're doing this at warm versus high, high-temperature mix.

Richard White: It's competitive information events, but what I will say is this is a very large.

Richard White: Opportunity with a very large company down there.

Richard White: It's very encouraging that they're looking at our technology.

Richard White: Predominantly because it brings a lot of.

Richard White: You know not only performance attributes, but also production advantages because youre doing as of warm versus high temperature Mec. So that's a big opportunity and we will continue to work on it.

Speaker Change: Great and actually just a quick clarifying question on that one for when it shows up as Brazil, Brazil would be opposite season or is it more dependent on what on rain rather than temperature for them.

Unknown Executive: So that's a big opportunity, and we will continue to work on it. Great, and actually, just a quick clarifying question on that one for when it shows up. Is Brazil, would be the opposite season, or is it more dependent on rain rather than temperature for them? Yeah, that's a great question, Vincent. It's more dependent on the rainy season. You can really drive all year in Brazil, but it depends on how when the rainy season comes on their ability to pave the roads.

Unknown Executive: Yeah, that's a great question and it's more dependent on the rainy season, you can really pave all year in Brazil, but it depends on how and when the rainy season comes out on their ability to pay the road.

Speaker Change: Okay, all right. Thanks, I'll turn it over.

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

Unknown Executive: Okay. All right. Thanks. I'll turn it over to the next question. The next question comes from Daniel Rizzo from Jeffreys. Daniel, your line is open. Please go ahead. Good morning.

Unknown Executive: Thank you for taking my call. First, a clarification. Did you indicate, and I heard right, that industrial specialties should have a run rate of about 100 million sales per quarter for the year? Is that what was said, or did I hear that wrong?

Daniel Dalton Rizzo: Good morning. Thank you for taking my call just a first a clarification did you indicate that.

Daniel Dalton Rizzo: The industrial specialties should have a run rate of about 100 million in sales per quarter for the year as well.

Daniel Dalton Rizzo: Saturday I hear that wrong, no no Dan and.

Unknown Executive: No, Dan, and I probably was battling a cold, so maybe a little hard to understand. With 101 million sales in the quarter, and what I said was about two-thirds of that is the run rate that you should expect going forward for sales for InSpec, and the remaining one-third is largely due to selling off finished goods inventory in the markets that we're exiting. And that's completely done, the selling of the inventory. Hmm, there's some nominal amount left, but most of it in Q1. So you indicated you wanted to get to 10% sales from oleo-based products, but I think by the end of the year. I don't know if you can disclose this.

Unknown Executive: I'm, probably was battling a cold so maybe a little hard to understand with little of 101 million sales in the quarter and what I said was about two thirds of that is the run rate that you should expect going forward for sales for inspect that the remaining one third is largely.

Unknown Executive: Due to.

Unknown Executive: Selling off finished good inventory and the markets that we're exiting.

Unknown Executive: And that's completely done.

Unknown Executive: The inventory.

Unknown Executive: Hmm, there's some nominal amount left.

Unknown Executive: But most of that in Q1 that was the big slug.

Unknown Executive: So.

Unknown Executive: You indicated I think you wanted to get to 10%.

Unknown Executive: Sales.

Unknown Executive: From Ohio based products, but I think by the end of the year.

Unknown Executive: I don't know if you can disclose is that uplift from like 2% now where are we in that rig right now.

Unknown Executive: Is that up from like 2% now, or where are we right now? Well, you have to be careful with it because some of this product substitution versus sort of new market sales, right? So, you know, we are selling modest levels of oleobase stuff. We've got a lot of testing going on and certification, et cetera, right? But when you kind of roll it all up across all the businesses, you get to a number that's not too far from that.

Unknown Executive: Well I've got to be careful with the concern of his product substitution versus sort of new market sales right. So.

Unknown Executive: You know we are selling modest levels of oleo based stuff. We've got a lot of testing going on in certification et cetera, right, but when you kind of roll it all up across all of the business and as you get to a number that's not too far from that.

Unknown Executive: Okay.

Unknown Executive: Okay. And then, finally, just again, coming back to the PM EBITDA margin of 54%, I realize you said that you don't expect that every quarter. But I mean, high 40s and low 50s are now the norm. Because I thought I could be wrong here, like a few years ago, low 40s were kind of what we were hoping for. Now we've obviously moved well beyond that. Well, that's right. You're right. We used to say the low to mid 40s.

Speaker Change: Okay and then.

Unknown Executive: Finally, I, just again coming back to the PM EBIT margin of 54% I realize you said don't expect that every quarter, but I mean high.

Unknown Executive: <unk>.

Unknown Executive: <unk> is now the norm because I thought it could be wrong here like a few years ago low forties was kind of what we were hoping for and now we've obviously moved well beyond that.

Unknown Executive: Oh, that's right you're right, we used to say low to mid forties and I think we said Ah now now are at mid to upper 40 that is correct and we've always said Dan look.

Unknown Executive: And I think we said, now we're at mid to upper 40s. That is correct. Okay, we've always said Dan, look, we will do everything in our power to maximize the profit of that business every quarter. But you have to understand that it has some lumpiness to it, based on when we take outages, you know, when Chinese New Year comes and when they pre-buy, there's just a lot of moving parts. So you can't take one quarter's margin and extrapolate it across the year, good or bad, right?

Unknown Executive: We will do everything in our power to maximize the profit of that business every quarter you have to understand that it has some lumpiness to it.

Unknown Executive: Based on when we take outages when Chinese new year comes in when they pre buy Theres just a lot of moving parts. So.

Unknown Executive: Can't take one quarter's margin and extrapolate it across the year, good or bad right. So.

Unknown Executive: So we set ourselves a long-term target of being in the high 40s, and we'll do better than that when we can. All right, thank you guys. The next question comes from John McNulty from BMO Capital Markets. John, your line is open. Please go ahead.

John Patrick McNulty: We set ourselves a long term target of being in the high forties.

John Patrick McNulty: And we will do better than that when we can.

Unknown Executive: Okay.

John Patrick McNulty: Great. Thank you guys.

John Patrick McNulty: Thanks, Dan.

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

John Patrick McNulty: Yeah. Thanks for taking my question so.

Unknown Executive: Yeah, thanks for taking my question. So I guess, first one, you know, we heard from the EPA kind of a new PFAS kind of level going forward. And some of the solutions, at least early on, look like from a water table perspective, they're going to be tied into activated carbon, or carbon in general. Can you speak to the conversations that you're having there?

Unknown Executive: So I guess the first one.

Unknown Executive: <unk> heard from the EPA kind of a new P fast kind of level going forward.

Unknown Executive: And some of the solutions at least early on it looked like from from a water table perspective, it's going to be tied into activated carbon or carbon in general I guess can you can you speak to the conversations that you're having there and if it's resulting in any early demand flow or is that something more on the come as we kind of look through whenever the end of this year into next year.

Ed Woodcock: And if it's resulting in any early demand flow? Is that something more on the horizon as we kind of look through whatever the end of this year into next year? Yeah, John, this is Ed. You know, obviously, as you mentioned, it's a big deal around the country at this point with PFAS and PFAS. Each carbon that's used for these has unique chains and molecules.

Ed Woodcock: Yes, John this is Ed.

Ed Woodcock: And so you really have to test the product first to see whether it's got efficacy for the particular PFAS or PFOS or PFAD that you've got in the system. And so You know, it's a We see that opportunity as something for us to do with our powdered activated carbon products. But, you know, we're really trying to make sure that we maximize the sales rate as well as the profitability as we go into those markets.

Ed Woodcock: Obviously as you mentioned, it's a it's a big deal around the country at this point with <unk> and PFS.

Ed Woodcock: Each carbon that's used for these have unique.

Ed Woodcock: Chains and molecules and so you really have to test the product first to see whether it's got efficacy for the particular P faster P. Foster P. Fad that you've got in the system and so.

Ed Woodcock: It's.

Ed Woodcock: We see that.

Ed Woodcock: <unk> opportunity is something for us to do with our powdered activated carbon products.

Ed Woodcock: But.

Ed Woodcock: We're really trying to make sure that we maximize the sales rate as well as the profitability as we go into those markets.

Speaker Change: Got it okay.

Unknown Executive: Okay, no, makes sense. And then just a question on the PM business. Can you speak to the pricing environment that you're seeing and how much that contributed to the margins just first, you know, running without downtime? Because again, we've seen periods when we haven't had much downtime, and we haven't seen margins quite like this.

Speaker Change: Makes sense.

Unknown Executive: And then just a question on the PM business.

Unknown Executive: So just wondering how much pricing might have contributed to that. Yeah, John, you know, for us, it's we look at it for year over year, year over year opportunities for us. And so we continue to add prices in the mid single digits as we move forward throughout the year. Sometimes it will be lower or higher, but we try to make sure that we're continuing to capture the value that our products add. And when you think about it, most of that price increase really sits on the activated carbon itself and not so much on the honeycomb.

Unknown Executive: Can you speak to the pricing environment that youre seeing and how much that contributed to the to the margins just first.

Unknown Executive: Running without without downtime because again we've seen.

John: We've seen periods when you haven't had much downtime and we haven't seen margins quite like this so just wondering how much pricing might have contributed to that.

Speaker Change: Yeah, John as you know for US, it's we look at it for year over year year over year opportunities for us and so we continue to add price mid single digits as we move forward.

Unknown Executive: Throughout the year.

Speaker Change: Sometimes it will be lower or higher, but we try to make sure that we're continuing to capture the value that our products.

Speaker Change: Due from the products that we had when you think about it most of that price increase really sits on the activated carbon themself and not so much on the hunting com. So as Youre building. Your models and you can think about that I think prior quarters I'll chime in here prior quarters, we were talking.

Unknown Executive: So if you're building your models, John, you can think about that. I think prior quarters, I'll chime in here, prior quarters, we were talking about process purification when auto production was a bit depressed. Now auto production's on the rise, so you're getting that mixed benefit as well from process purification applications to activated carbon for autos. And a good piece of that margin upgrade is related to that mixed upgrade. John, I would actually encourage you to do it.

Unknown Executive: About process purification when auto production was a bit depressed now auto production's on the rise so youre getting that mix benefit as well from process purification application into the activated carbon for autos and a good piece of that and.

Unknown Executive: Margin upgrade is related to that next upgrade.

Unknown Executive: I would actually encourage you so as I was driving in this morning, I was listening to CNBC and they were talking about Ford's I.

John C. Fortson: So as I was driving in this morning, I was listening to CNBC, and they were talking about Ford. I guess they were talking about either monthly or quarterly sales numbers, right? And, you know, the headline numbers like, well, ICE is down, traditional ICE is down, and EVs are up, right? But ICE was down some percentage, EVs were, all electric EVs were up some percentage, but hybrids were up 59%, right? And a hybrid is, for us, basically another internal combustion engine.

John C. Fortson: And those were sales, right? And then they came and actually talked about it, because you could argue that a lot of Ford's EVs, so all electric sales, were them trying to clear inventories by cutting prices on the Lots to get the Mustangs and all that stuff moving, right? So we look at, obviously, what drives us is production, right? But you can look through, and I would encourage you as you guys think about this to understand that dynamic, because I thought that was a very telling set of statistics, right?

John C. Fortson: I guess, either monthly or quarterly sales numbers right and the headline numbers like well ices down traditional ice is down and evs are up right.

John C. Fortson: This was down some percentage.

John C. Fortson: You mean for all electric Evs are up some percentage, but hybrids or up 59% right on a hybrid is for us basically another internal combustion engine. So.

John C. Fortson: And as were sales right and then they came in actually talked about because you could argue that a lot of fords EV. So all electric sales with them trying to clear inventories by cutting price on.

John C. Fortson: Lots to get the Mustangs and all that stopped moving right. So we look at obviously at what drives US is production right, but you can look through and I would encourage you as you guys think about this to understand that dynamic because I thought that was a very telling set of statistics right, you've got EV sales up but they're clearing high price.

John C. Fortson: You've got EV sales up, but they're clearing high-priced stuff, cutting prices, trying to clear their inventory, where they're building are hybrids. And that is very, very encouraging for us. And we expect that trend to continue and not just at Ford. Right, right. So. Got it. No, that's very helpful. Call it. Thanks very much.

John C. Fortson: Stop cutting price trying to clear their inventory, where they are building are in hybrids and that is very very encouraging for us and we expect that can trend that trend to.

John C. Fortson: We continue and not be just at Ford.

Speaker Change: Right right so.

John C. Fortson: Got it no that's very helpful color, thanks very much.

John C. Fortson: Yes.

Unknown Executive: The next question comes from Ian Zaffino from Oppenheimer. Ian, your line is open, go ahead. Hi, great. Thank you very much.

John C. Fortson: The next question comes from Ian Zaffino from Oppenheimer. Your line is open.

Unknown Executive: I wanted to ask you, I guess, on the previous question on the hybrid side. What you're seeing in the market pretty much actually reflects what you guys are saying about hybrids doing much better. But when you talk about it being, let's just say, similar to an ICE vehicle, I think those are yours or something similar, do we, is that because the OEs are using common parts for both ICE and hybrid, or basically, why is that happening? Because I thought the understanding was that hybrid vehicles would have smaller tanks and, therefore, a lower need for activated carbon.

Ian Alton Zaffino: Hi, great. Thank you very much.

Unknown Executive: Wanted to ask you I guess on a previous question on the hybrid side is.

Unknown Executive: What youre seeing in the market pretty much accurately reflects what you guys are saying about hybrid is doing much better.

Unknown Executive: But when you talk about it being let's just say similar to an ice vehicle I think those are yours or something similar.

Unknown Executive: Do we is that because the oes are using common parts for both.

Unknown Executive: And hybrid.

Unknown Executive: Or basically why is that happening because I thought the understanding was that hybrid vehicles that have smaller tanks and therefore lower.

Ed Woodcock: Is that not the case? And if that's not the case, kind of give us a little detail on what's going on there. Yeah, Ian, it's Ed. With hybrids, you have a relatively small vehicle with a small gas tank as it comes around to fill up those gas tanks. You have to kind of depressurize the system, and so you need that same amount of activated carbon on that fuel tank. As they depressurize the fuel tank, it rapidly goes into a canister system where the activated carbon captures it.

Ed Woodcock: Our activated carbon.

Ed Woodcock: Or is that not the case and if that's not the case kind of give us a little detail on whats going on there.

Ed Woodcock: Yes.

Ed Woodcock: Ed.

Ed Woodcock: With with hybrids, you've got relatively small vehicle with small gas tanks.

Ed Woodcock: As it comes around to fill up those Gulf coast gas tanks.

Ed Woodcock: You have to kind of de pressurize the system and so you need that same amount of activated carbon on that fuel tank.

Ed Woodcock: Deep pressurized fuel tank it rapidly goes into a canister system, where the activated carbon capture site. So it's almost from.

Ed Woodcock: So it's almost, you know, from my perspective, we also have some honeycombs and carbon in those systems depending on the mechanism that each individual OEM is trying to do for those vehicles. So, you know, I still like the hybrid vehicle. It's really gaining share. You know, if you look across Q1, plug-in hybrids and hybrids were up 320 basis points. And so you see kind of just the, the, the, as people are looking for what they're going to buy next, they're really excited about the hybrids and the plug-in hybrids.

Ed Woodcock: From my perspective, we also have some honeycombs and carbon on those systems, depending on the mechanism that each individual OEM is trying to do for those vehicles. So.

Ed Woodcock: I still like the hybrid vehicle, it's really gaining share. It's up if you look at cross Q1 plug in hybrids and hybrids were up 320 basis points.

Ed Woodcock: And so you see kind of just the.

Ed Woodcock: The Ardmore.

Ed Woodcock: As people are looking for what Theyre going to buy next Theyre really excited about the hybrids in the plug in hybrids. When you think about it in a hybrid it represents a very good solution for most consumers right I mean I use myself as an example.

Ed Woodcock: When you think about it, a hybrid represents a very good solution for most consumers, right? I mean, I use myself as an example. I live about 10 miles from the office, so I can go back and forth from work running the electric, right? But when I need to take the long trip to take my kids somewhere or whatever, right?

Unknown Executive: Then you have that flexibility, and it removes that range anxiety. So, you know, but 95% of the time it's running electric, right? And so, you know, I think consumers, when you look at that versus the relative price point of these things, right? Consumers are saying, well, this makes the most sense, right? And we're just benefiting. Understandable. Okay. And then, you know, on the AFA push, I know there's a lot of testing certifications; maybe he could give us an idea of how that's going, maybe versus expectations or success rates or anything along those lines, as far as just color on how that's going. It's just a, Ian, it's just a very, Unknown Executive, Richard White, Garo Norian, and Ingevity Corp. control it, right?

Ed Woodcock: A little about 10 miles from my office right. So I can go back and forth.

Unknown Executive: From work running the electric right, but when I need to take the long trip to take my kids somewhere or whatever right. Then that you have that.

Unknown Executive: Flexibility and it removes that range anxiety so.

Unknown Executive: But 95% of the time, it's running electric alright, and so I think consumers when you look at that versus relative price point of these things.

Unknown Executive: Right consumers are saying well this makes the most sense right and we're just benefiting from that.

Unknown Executive: Understood, Okay and then.

Unknown Executive: On the D E F a push.

Unknown Executive: I know, there's a lot of testing certification, maybe he gives us an idea of how thats going maybe versus expectations or success rate or.

Unknown Executive: And along those lines as far as just color on how about scholarships just a and it's just a very.

Unknown Executive: Slow process right.

Speaker Change: We unfortunately don't <unk>.

Unknown Executive: It's one of those few variables that we can't really control. We have a very active dialogue with the regulators. We're talking to them almost continuously. So, you know, what we are doing is we're continuing to work with customers, to try and engage and get them interested and to test. And then we obviously put these things into the certification process.

Speaker Change: Control it right. It's one of those few variables that we can't really control.

Unknown Executive: We have a very active dialogue dialogue with the regulators, we're talking to them almost continuously.

Unknown Executive: So you know we are what we're doing is we're continuing to work with customers.

Unknown Executive: To try and drive and get them interested in test and then we don't obviously put these things into the certification process, where we're having the most success.

Unknown Executive: Where we're having the most success. It really, frankly, is some in our, mostly in our pavement technologies business, some other commercial, you know, industrial applications, oilfields, and others, but it's encouraging because, as these certifications and we're able to clear them, I think we're going to see us be able to have more success. But look, we're managing it, we're going as fast as we can, and we feel good about the progress relative to, you know, what we can actually do. Okay, great. The next question comes from John Tanwanteng from CJS Securities. John, your line is open. Please go ahead.

Jonathan E. Tanwanteng: It really frankly is somehow some of them are mostly in our pavement technologies business. Some other commercial industrial applications oilfield and others, but.

Jonathan E. Tanwanteng: It's encouraging because.

Jonathan E. Tanwanteng: As these certifications and we're able to clear I mean, I think we're going to see us be able to have more success, but look.

Jonathan E. Tanwanteng: But we're managing it we're going as fast as we can and we feel good about the progress relative to what we can actually do.

Jonathan E. Tanwanteng: Okay, great. Thank you very much.

Unknown Executive: The next question comes from Sean <unk> from CJS Securities.

Jonathan E. Tanwanteng: Please go ahead.

Jonathan E. Tanwanteng: Hi, good morning, and thank you for the questions and congrats on a nice zone carbon materials quarter.

Unknown Executive: Hi, good morning, and thank you for the questions. And congrats on a nice Carbon Materials Quarter. I was wondering if you could talk a little bit more about the mixed shift toward hybrids and possibly away from large trucks and SUVs, where I think you've traditionally had more content. Has that factored into what you've seen in the quarter, and are the ASPs on the hybrids comparable to the content, excuse me, the content levels there comparable to what you saw in those larger vehicles?

Unknown Executive: I was wondering if you could talk a little bit more about the.

Unknown Executive: Mixed shift towards hybrids, and possibly away from large trucks, and Suvs, where I think you've traditionally had more content.

Unknown Executive: Is that factored into into what you've seen in the quarter and are the asps on the hybrid is comparable to the content of excuse me the content levels comparable to what you saw.

Unknown Executive: And the larger vehicles.

Speaker Change: Yeah. So.

Unknown Executive: Yeah, so you know, we love F-150s and full-size trucks. We have a significant amount of content on them because they have large fuel tanks and generate a lot of vapors coming out of them. But that being said, even with smaller vehicles, the heat of the vehicle can drive more emissions coming out of the fuel tank as well.

Unknown Executive: We love F 150 <unk>.

Unknown Executive: Love full size trucks, we have significantly come out of content on them because they have large fuel tanks and generate a lot of vapors coming out of them.

Unknown Executive: But that being said even with smaller vehicles.

Unknown Executive: The heat of the vehicle can drive more emissions coming out of the fuel tank as well. So it depends really on the type of vehicle and the design that they've got and the space that they have to have.

Unknown Executive: So it depends really on, you know, the type of vehicle and the design that they've got and the space that they have to have. And, you know, in a lot of cases, they have to put additional content in a canister with additional honeycombs so that they can meet the requirements that the EPA has in place. Okay, got it. And then just a quick question on the industrial specialties business. I was wondering if you could comment on the profitability of that on two-thirds of that hundred million. If you're making any money on that, if it's relatively neutral, it worked against us. We would have been better if we didn't have it.

Unknown Executive: A lot of cases, they have to put additional content on a canister with additional honeycomb so that they can meet the.

Unknown Executive: Our requirements that the EPA has in place.

Speaker Change: Okay got it and then just a quick question on the industrial specialties business I was wondering if you could comment on the profitability on that on the two thirds of that $100 million.

Unknown Executive: The sore subject here, John. [inaudible] You're talking about the one-third or the two-thirds, Jonathan? No, the two-thirds. I know the one-third isn't so great. Yes, the two-thirds is the stuff that's making money. Yeah, right. Yes. Right. Sorry about that. Make sure you got that straight. We would have preferred, although, you know, we can't do it through a jury. What's that?

Speaker Change: If you are making any money on that it was relatively neutral at worst against us.

Unknown Executive: We would've been better if we didn't have it.

Unknown Executive: The sore subject here John.

Unknown Executive: Fair to say, it's loss, making them.

Unknown Executive: Yep Yep.

Unknown Executive: Well the two thirds.

Unknown Executive: The one thing that you're talking about the one third of the two thirds.

Unknown Executive: Another one third of the business so great.

Unknown Executive: Yes, the two thirds is the stuff, that's making money, yes, right, yes, right sorry about that.

Unknown Executive: Make sure you got a strike.

Unknown Executive: If we were to <unk>.

Unknown Executive: Quantified.

Unknown Executive: Yes.

Unknown Executive: What's that.

Unknown Executive: Is it possible to quantify or ballpark the degree of profitability on themselves.

Unknown Executive: Is it possible to quantify or ballpark the degree of profitability on those sales? No, we don't. We don't get into EBITDA at the product line. And it's too convoluted, John.

Unknown Executive: No no we don't we don't get into EBITDA.

Unknown Executive: At the product line and convoluted gone I mean look the best way to describe it is that the two thirds that we kept.

Unknown Executive: I mean, look, the best way to describe it is that the two-thirds that we cap or that Mary's referring to is stuff that we continue to be, and we expect to be recurring. These are markets that we're going to continue to participate in. The one-third that came out of Derrida's winding down was effectively loss selling because we were exiting those markets. And as we talked about, we're exiting markets that are lower margin, not things that we consider attractive going forward, right? But you're going to have a hard time with that, John, in this quarter because, you know, this is the first quarter before things get rolling.

Unknown Executive: Our marriage, referring to stop that we continue to be we expect to be recurring and these are markets that we're going to continue to participate in the one third that came out of the red or wind down was effectively loss selling because we were exiting those markets and as we've talked about we're exiting markets that.

Unknown Executive: Our lower margin.

Unknown Executive: Things that we consider attractive going forward right.

Unknown Executive: But youre going to have a hard time with Exxon in this quarter because this.

Unknown Executive: This is the first quarter before things get rolling.

Unknown Executive: Right, and I understand that the performance chemicals results for the next couple of quarters will, you know, be hard to see in spec because paving season kicks in, and you've got Rogue Technologies and their profitability profile kicking in. But, you know, really all we can say is the two-thirds that we capped, we kept it because it's making money. Right. Thank you. The next question comes from Mike Sison at Wells Fargo. Mike, your line is open. Please go ahead.

Speaker Change: Right and I understand that.

Michael Joseph Sison: The performance chemicals results for the next couple of quarters.

Unknown Executive: Will.

Michael Joseph Sison: Hard to see ins back because paving season that kicks in and you've got road technologies.

Michael Joseph Sison: And their profitability profile kicking in.

Michael Joseph Sison: But you know.

Michael Joseph Sison: Really all we can say is that two thirds that we kept we kept it because it's making money right.

Michael Joseph Sison: Fair enough. Thank you.

Unknown Executive: Okay.

Michael Joseph Sison: Next question comes from Michael So I saw that Wells Fargo. Mike. Your line is open. Please go ahead.

Unknown Executive: Hey, nice start to the year. I guess for performance chemicals, the way to look at it is if you add back the 26 and a half million lost to EBITDA, and that net number is kind of what the ongoing entity is sort of producing. So it's kind of a, you know, 10% EBITDA margin for Q1, but that should scale up as real technologies kick in gear in 2Q and 3Q. But I don't think that's the way to look at it. I mean, I would argue the other way.

Michael Joseph Sison: Hey, nice start to the year.

Unknown Executive: I guess for performance chemicals is.

Unknown Executive: Is the way to look at if you add back the $26 5 million loss to EBITDA and.

Unknown Executive: That net number.

Unknown Executive: Kind of what the ongoing entity has started producing so it's kind of a 10% EBITDA margin for Q1.

Unknown Executive: That should scale up as rail technologies kicks in gear and <unk>.

Speaker Change: I don't think Thats the way to look at it right.

Unknown Executive: I would argue the other way.

Unknown Executive: Meaning that if you wanted to look at it from a cash base, the business lost about $30 million this quarter, right, the negative 10 of what we think is a more reasonable price. So you're gonna see that run through as sort of a non-cash charge that will fall through, not in the EBITDA, but in the other income and expense, right, and also in the statement of cash flow, right?

Unknown Executive: Meaning that if you wanted to look at it from a cash basis.

Unknown Executive: Right the business lost about $30 million this quarter right the negative 10 of.

Unknown Executive: Even though cost plus right.

Speaker Change: Alright, Yeah, plus <unk>.

Unknown Executive: Right.

Speaker Change: We are and you'll see this in the 10-Q and our full pirate's incredible disclosure, but.

Unknown Executive: We are the excess CTO that we are buying we are going ahead and marketing back to market or what we think is a more reasonable price.

Unknown Executive: So youre going to see that run through as sort of a non cash charge that will fall through.

Unknown Executive: And the EBITDA, but in the other income and expense right and also on the statement of cash flow right. The CTO that were running through we're running through our cost and that's going to impact the profitability.

Unknown Executive: The CTO that we're running through, we're running through a cost, and that's gonna impact the profitability of the segment, right. So you just have to kind of look at those when I when I look at it, right, we and then we offset that with the sales, right, the CTO that we do. So you look at this quarter, we had kind of $20 million of cash losses.

Unknown Executive: The segment right. So you just have to kind of look at those when I when I look at it right and then we offset that with the sales right. The CTO that we do so when you look at this quarter, we had kind of $20 million of cash losses. That's a function of the hit that we are paying to our supplier.

Unknown Executive: That's a function of the hit that we were paying to our supplier offset by the sales that we were able to make in the market, and they were not one for one. So, in the quarter, we, you know, lost $20 million on that sort of netting. And then on top of that, there was about a $6.8 million adjustment as we took the right down on the excess that we're still holding to bring it down.

Unknown Executive: <unk> by the sales that we were able to make in the market and they were not one for one so.

Unknown Executive: But in the quarter.

Unknown Executive: Last $20 million on that sort of netting out and then on top of that there was about a $6 $8 million adjustment as we took the write down on the excess that we're still holding.

Unknown Executive: So going forward, through our P&L and our statement of cash flow, to the extent we do resales now, and we get better than where we've marked it to, you know, it'll be up or down, but it'll be less volatile, right? But you need to understand that we're going to continue to be taking excess CTO for a while. So you're going to see that run through.

Unknown Executive: To bring it down so going forward through our P&L in our statement of cash flow to the extent, we do do re sales now and we get better than where we marked it to.

Unknown Executive: No it will be up or down, but it'll be less volatile right, but you need to understand that we're going to continue to be taking <unk>, our CTO for awhile, so youre going to see that run through right.

Unknown Executive: We don't, from an EBITDA perspective, you know, these are not our ongoing primary operations, so it's not included in the EBITDA. This is not our business that we're in. Right, right, and I understand. And then I apologize if I missed this, but for performance materials, what do you think the sales goal is going to be this year? Well, we don't break it out by, but you know, I mean, I think we expect sales when you can look at the first quarter, you can look at what we did last year, you know, we expect our sales to continue to grow at a pretty healthy clip, right? Maybe not as strong as last year, but certainly from high to auto production, and we did that improving, right? And Q1 actually was a little bit softer than had been originally expected.

Unknown Executive: Okay.

Unknown Executive: We don't from an EBITDA perspective. These are not our ongoing primary operations. So it is not included in EBITDA. This is not our business that we're in.

Unknown Executive: Right.

Speaker Change: Right right no I understand.

Unknown Executive: And then I apologize if I missed it but for performance materials, what do you think the sales coast its going to be this year.

Unknown Executive: Well [laughter].

Unknown Executive: We don't break it out by.

Unknown Executive: But you know what I mean.

Unknown Executive: We expect sales I mean, you can look at the first quarter you can look at what we did last year, we expect our sales to continue to grow at a pretty healthy clip right, maybe not as strong as last year, but.

Unknown Executive: Certainly from my daughter.

Unknown Executive: Production at <unk>.

Unknown Executive: That occurred in.

Unknown Executive: In Q1 actually auto production was a little bit softer than it had been originally expected. So so ed's results definitely benefited from that price increase that we talked about as well going forward.

Unknown Executive: So Ed's results definitely benefited from that price increase that we talked about as well. Going forward, you know, the auto estimates are expected to strengthen throughout the year. Production is expected to strengthen throughout the year, and we should see the benefit of that. I mean, we sort of, you know, we've said this before, Mike.

Unknown Executive: You know the.

Unknown Executive: The auto estimates are expected to strengthen throughout the year with production expected to strengthen throughout the year and and we should see the benefit of that I mean, we sort of we.

Unknown Executive: This before Mark I mean, we sort of Directionally track IHS right now, we obviously look at a lot of different sources banks economists customers customers being the predominant.

Unknown Executive: I mean, we sort of directionally track IHS, and we obviously look at a lot of different sources, banks, economists, and customers. Customers being the predominant input, right?

Unknown Executive: And then we look at a calculation of, you know, ice slash hybrid production by region, right? And then that kind of gives you a direction of what we think things are going to look like. Got it. And then the last one in APT, do you think we've bottomed here and will start to get some sequential improvement in sales? Or do we still have a little bit, a little bit of a headwind in 2Q before, hopefully, things get better in the second half?

Unknown Executive: Input right.

Unknown Executive: And then we look at our calculation of ice flash hybrid production.

Unknown Executive: By region right and then you have that kind of gives you a direction of what we think things are going to look like.

Unknown Executive: Right.

Speaker Change: Got it and then last one on <unk> do you think.

Unknown Executive: We think we bottomed here and start to get some sequential improvement in sales or we still got a little bit a little bit of a headwind until Q before hopefully things get better in the second half.

Unknown Executive: So we did see two quarters actually enter in a row sequential improvement.

Unknown Executive: So we did see two quarters, actually, in a row of sequential improvement. So we are hopeful that, you know, we are at the bottom. I'd like to see another quarter or so and see that momentum continue.

Speaker Change: So we are.

Unknown Executive: Hum.

Unknown Executive: Hopeful that are you know we are at the bottom.

Unknown Executive: To see another quarter or so and see that momentum continue.

Unknown Executive: But clearly, they did take a hit from the global slowdown and industrial demand weakness. Nevertheless, they have been able to generate two quarters of sequential improvement. Right. And the other thing I would say is that we are very proud of the margin. Because we have these kinds of fall-offs in volume, getting your cost structure to reflect that and get your margin in position is not a simple undertaking. Now, obviously, they were benefiting from energy, but I would argue that might have been an artificial, you know, negative a year ago, right?

Unknown Executive: But clearly they.

Unknown Executive: Did take.

Unknown Executive: Hit from from the global slowdown in industrial demand weakness, but.

Unknown Executive: They have been able to generate two quarters of sequential improvement, but I would tell you is we are very proud of.

Unknown Executive: The margin.

Unknown Executive: Maybe I'll just kind of falloff in volume.

Unknown Executive: Getting your cost structure to reflect that and get your margin and position is not a simple undertaking now obviously they were benefiting from energy.

Unknown Executive: But I would argue that might've been an artificial.

Unknown Executive: Negative a year ago, right, so but for them to be able to kind of grapple with us and keep their margin percentages, where they are.

Unknown Executive: So, but for them to be able to kind of grapple with this and keep their margin percentages where they are, that's, it took a lot of hard work. With regard to the industrial economy, we look at it and we're encouraged, as Mary said, but we're also just not going to call it until we see a little more time, right? It's been fragile. It's been bouncing around the bottom.

Unknown Executive: It took a lot of hard work.

Unknown Executive: With regards to the industrial economy.

Unknown Executive: We look at it we're encouraged as Mary said, but we're also just not going to call. It until we see a little more time right. It's been fragile it's been bouncing around the bottom looks good feels good but we're not we're just not going to call until we get a little more time under our belt and it was volume.

Unknown Executive: Looks good, feels good, but we're just not going to call it until we get a little more time under our belts. And there was volume improvement, which is what we've been keying off of to try to assess whether we're seeing a healthier demand environment going forward. Got it. Okay. Thank you. The next question comes from Chris Kapsch from Loop Capital Markets. Chris, your line is open, please go ahead.

Christopher John Kapsch: <unk>, which is what we've been keying off of to try to assess whether we are seeing a healthier demand environment going forward.

Christopher John Kapsch: Got it okay. Thank you.

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

Christopher John Kapsch: Yes, good morning, I have a couple of follow ups first on inspect so.

Unknown Executive: Yeah, good morning. I have a couple of follow-ups. First on InSpec. So the business that you're exiting, I understand the losses and, obviously, the ability to get pricing there is just not, not great. And it's probably the most competitive.

Christopher John Kapsch: Business that you're exiting understand the losses.

Christopher John Kapsch: Obviously, the the ability to get pricing there.

Christopher John Kapsch: It's just not not great.

Christopher John Kapsch: And it's probably the most competitive but could you just characterize your ability to get pricing in the inspect business that you'll be sticking with.

Unknown Executive: But could you just characterize your ability to get pricing in the InSpec business that you'll be sticking with? You know, because you still have this CTO inflation. Yeah, so I mean, the biggest issue really centers around Roslyn pricing, right? Chris, and you know rosin, as you know, our rosin is mostly in sort of what I would call industrial applications and highly vulnerable to substitution, right? It doesn't help that some of our competitors in traditional crude tall oil rosins have a better cost structure than us, but we have to respond to that, you know; we have to deal with that, right?

Unknown Executive: Because you still have the CTO inflation.

Unknown Executive: Yes, so I mean, the biggest issue really centers around rosin pricing right.

Unknown Executive: Chris and Rosin as you know our rosin is mostly in sort of what I would call industrial applications.

Unknown Executive: Highly vulnerable to substitution right.

Unknown Executive: It doesn't help that some of our competitors.

Unknown Executive: In traditional crude tall oil based raws and have a better cost structure than us, but we have to respond to that.

Unknown Executive: And that's because of the CTO. But most of the stuff that we exited, and this is predominantly a function of Derrida. Derrida was really run as a rosin site, and that's really where it made its money, and then it also had the advantage of selling some TOFA into the oilfield markets because it was obviously producing TOFA. But when you look at that in the aggregate, you have to kind of ask yourself, when you run a ton of CTO and where it's in the markets or positions, does it make economic sense for the enterprise?

Unknown Executive: Now we have to deal with that right.

Unknown Executive: And that's because of the CTO.

Unknown Executive: The <unk>.

Unknown Executive: Most of the staff that we exited and this is primarily a function of we.

Unknown Executive: <unk> was really run as a RASM side right I mean, that's really where it made its money and then it also had the advantage of selling so I'm told for into the oilfield markets right because its pharmacy producing tofu.

Unknown Executive: But when you look at that in the aggregate you have to kind of ask yourself. When you run a ton of C. T O and where its end markets are positioned doesn't make economic sense for the enterprise right.

Unknown Executive: We feel like the footprint that we have today is more in balance. That's predominantly because the Charleston plant's primary end market is road technologies. And so those are the markets that it's serving. It does have some rosin that comes out that isn't needed in those markets, but things like Ozark help with that because they use rosin, right? But, generally speaking, it makes that Rosin problem a lot smaller relative to the value that you get from TOEFL.

Unknown Executive:

Unknown Executive: We feel like the footprint that we have today is more in balance right.

Unknown Executive: That's predominantly because the Charleston plant primary end market is road technologies right.

Unknown Executive: So those are the markets that its survey it does have some horizon that comes out that aren't needed in those markets, but things like Ozark help with that because they use RASM right but.

Unknown Executive: Generally speaking it makes that rosin problem, a lot smaller relative to the value that you get from a telephone.

Unknown Executive: That's the best way to describe it. Yeah, I understand it makes sense. And then the follow-up to the PM segment was around the hybrid discussion. I'm just curious if, you know, to the extent that you're getting mixed lift.

Unknown Executive: What's the best way to describe it.

Unknown Executive: Yeah, I got it makes sense and then the follow up on the PFS segment was around the hybrid discussion I'm. Just curious if you are to extent youre getting mixed lift.

Unknown Executive: Is there any way to characterize how much benefit you're getting from your products for the new technology where you have IP, the low purge engine technology that I think that's at play both in hybrids as well as maybe just, you know, advanced modular platforms? Thanks. What percentage of your sales are covered by a new patent? Yeah, within North America, there's a high level of patent protection across those right as it's a tier three requirement, right, which you're looking to get extremely low levels, and the canisters themselves with activated carbon help, but you need, in a lot of cases, honeycombs, some of those honeycombs vary on their content and efficacy, helped design And that's important, Chris, because most of this hybrid push is in North America today. Yeah, with China 7 coming along, eventually, we'll benefit in China, right?

Unknown Executive: Is there any way to characterize.

Unknown Executive: How much benefit youre getting from your.

Unknown Executive: Products for the.

Unknown Executive: New technology, where you have IP, though the low purge engine technology that I think that that playbook and hybrids as well as maybe just advanced small year platforms.

Unknown Executive: What percentage of your sales recover on new patent Tonight.

Unknown Executive: The best way to go.

Unknown Executive: Within North America, there is a high level of patent protection across those right.

Unknown Executive: Tier three requirement right, which youre looking to get extremely low levels.

Unknown Executive: The canisters themselves with activated carbon helped but you need.

Unknown Executive: And a lot of cases honeycombed.

Unknown Executive: Some of those honeycombed very on their content and efficacy and we help the Oems and the tier ones too.

Unknown Executive: Helped design the canister system that Theyre looking to.

Unknown Executive: Put our products into right. So thats important Chris because the higher most of this hybrid pushes in North America today, yes.

Unknown Executive: Yet with China, Southern coming along and eventually we will benefit in China right.

Speaker Change: Appreciate the color. Thanks.

Unknown Executive: I appreciate the color. Thanks. We have no further questions, so I'll hand the call back to John Nypaver for closing remarks. Thanks Adam.

Unknown Executive: We have no further questions. So I'll hand, the call back to Joe Papa for closing remarks.

John E. Nypaver: This concludes our call. Thank you all for your interest in Ingevity, and we'll talk with you again next quarter. This concludes today's call. Thank you very much for your attendance. You may now disconnect your line. Well, this concludes our call. Thank you all for your interest in Ingevity.

John E. Nypaver: Thanks, Adam.

John E. Nypaver: Concludes our call. Thank you all for your interest in in Jeopardy, and we will talk with you again next quarter.

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

John E. Nypaver: [music].

John E. Nypaver: This concludes our call. Thank you all for your interest in <unk>.

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